Division Orders 101

Operators will typically ask mineral owners to sign “Division Orders” (DOs for short). But what is a division order and what’s its purpose?

Operators will lease the mineral rights from the mineral owner, drill the well, and then have to pay a fraction of production to the mineral owner (the “lease royalty”). But with dozens or even hundreds of potential owners with a share in that well (often with complicated and convoluted title) it’s important that the operator pays the right person.

Enter division orders. Division orders are agreements between the operator and the payees directing the distribution of payments from the sale of oil and gas. The key idea is that the operator and payee agree what division of interest (“DOI”) the payee owns (e.g., 1%). Then, under the division order, the operator pays the payee 1% of the proceeds from the sale of oil and gas (less certain expenses). In other words, division orders memorialize the agreed upon division of interest and therefore how the payments are divided. Hence, “division” order.

The Real Purpose of Division Orders

So far so good! But there’s another purpose to division orders (perhaps even the main purpose).

First, the problem: If the operator pays the wrong person, then that operator is stuck trying to recoup the payments from Jane and Joe Smith. If Jane and Joe don’t want repay the money (or can’t), then the operator will have sue them, which is a slow and expensive process. Plus, it’s bad PR to be suing royalty owners.

Division orders offer up a simple solution to “protect” operators. By getting the payee to agree that they own such-and-such a DOI, the operator is protected from incorrect payments. Specifically, if the operator pays too little, then they are protected by the DO (“This is what you agreed to.”) If the operator pays too much, then the DO typically requires the payee to indemnify (i.e., cover the legal fees) and reimburse the operator for overpayment.

All of which is to say, make sure your division of interest DOI is correct on the division order. Because you’re the one paying for mistakes, not the operator.

Can I Refuse to Sign a Division Order?

Not if you want your money… At least in Texas, the operator can refuse to pay you if you don’t sign a division order that conforms to the statute (Texas Natural Resources Code sec. 91.402). As of the time of this blog post, a division order conforms to the statute if it contains only the following provisions:

  1. the effective date of the division order, transfer order, or other instrument;
  2. a description of the property from which the oil or gas is being produced and the type of production;
  3. the fractional and/or decimal interest in production claimed by payee, the type of interest, the certification of title to the share of production claimed, and, unless otherwise agreed to by the parties, an agreement to notify payor at least one month in advance of the effective date of any change in the interest in production owned by payee and an agreement to indemnify the payor and reimburse the payor for payments made if the payee does not have merchantable title to the production sold;
  4. the authorization to suspend payment to payee for production until the resolution of any title dispute or adverse claim asserted regarding the interest in production claimed by payee;
  5. the name, address, and taxpayer identification number of payee;
  6. provisions for the valuation and timing of settlements of oil and gas production to the payee; and
  7. a notification to the payee that other statutory rights may be available to a payee with regard to payments.

Operators will often use form division orders, such as the NADOA Form Division Order. But as long as it contains only those provisions, you have to sign it if you want your royalty payments.

What If it Contains Non-Standard Provisions?

In Texas, if an owner will not sign a division order because it contains provisions in addition to those provisions provided for in the statute, the operator may not withhold payment on that grounds alone. If they refuse to pay you unless you sign a non-confirming division order, you should consult an attorney about the best next steps.