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Permalink Reply by PamelaC on December 21, 2010 at 7:18

smith1,

Thank you for posting this question. As a "newbie" in this whole NG area, the legality of some things is still a ??? to me. The Slowww X-Mas mail is killing my X-Mas spirit (waitint on DO's in the mail)

 

 

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Permalink Reply by Ben Elmore on December 21, 2010 at 10:01

In Texas, an operator can withhold royalty payments until it receives an executed division order, as long as the division order contains only the information specified in the Texas statutes.  Here is the applicable statute (relevant part is in bold and italics, particular subpart (c) and (e)).  According to the statute, DOs for oil payments can contain additional provisions that are not included in DOs for gas payments.  The statute provides a sample DO for oil payments.  :

 

Texas Natural Resources Code Sec. 91.402

 

(a)  The proceeds derived from the sale of oil or gas production from an oil or gas well located in this state must be paid to each payee by payor on or before 120 days after the end of the month of first sale of production from the well. After that time, payments must be made to each payee on a timely basis according to the frequency of payment specified in a lease or other written agreement between payee and payor. If the lease or other agreement does not specify the time for payment, subsequent proceeds must be paid no later than:  

(1) 60 days after the end of the calendar month in which subsequent oil production is sold; or  

(2) 90 days after the end of the calendar month in which subsequent gas production is sold.  

(b)  Payments may be withheld without interest beyond the time limits set out in Subsection (a) of this section when there is:  

(1) a dispute concerning title that would affect distribution of payments;  

(2) a reasonable doubt that the payee:  

(A) has sold or authorized the sale of its share of the oil or gas to the purchaser of such production; or  

(B) has clear title to the interest in the proceeds of production;  

(3) a requirement in a title opinion that places in issue the title, identity, or whereabouts of the payee and that has not been satisfied by the payee after a reasonable request for curative information has been made by the payor.  

(c) (1)  As a condition for the payment of proceeds from the sale of oil and gas production to payee, a payor shall be entitled to receive a signed division order from payee containing only the following provisions:  

(A) the effective date of the division order, transfer order, or other instrument;  

(B) a description of the property from which the oil or gas is being produced and the type of production;  

(C) 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;  

(D) 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;  

(E) the name, address, and taxpayer identification number of payee;  

(F) provisions for the valuation and timing of settlements of oil and gas production to the payee; and  

(G) a notification to the payee that other statutory rights may be available to a payee with regard to payments.  

 

(2) Such a division order does not amend any lease or operating agreement between the interest owner and the lessee or operator or any other contracts for the purchase of oil or gas.  

(d)  In the alternative, the provisions of Subsection (c) of this section may be satisfied by a division order for oil payments in substantially the following form and content:

DIVISION ORDER

TO:                               (Payor)           Property No.                            

______________________________________          ______________________________

______________________________________          ______________________________

                                             Effective                                

          (Date)

   The undersigned severally and not jointly certifies it is the legal owner of the interest set out below of all the oil and related liquid hydrocarbons produced from the property described below:

OPERATOR:

Property name:                                                                      

County:                                         State:                                  

Legal Description:                                                                    

..............................................................................

OWNER NO.                                     TAX I.D./SOC. SEC. NO. PAYEE          

DIVISION OF INTEREST

..............................................................................

.............................................................................

THIS AGREEMENT DOES NOT AMEND ANY LEASE OR OPERATING AGREEMENT BETWEEN THE INTEREST OWNERS AND THE LESSEE OR OPERATOR OR ANY OTHER CONTRACTS FOR THE PURCHASE OF OIL OR GAS.  

The following provisions apply to each interest owner ("owner") who executes this agreement:  

TERMS OF SALE: The undersigned will be paid in accordance with the division of interests set out above. The payor shall pay all parties at the price agreed to by the operator for oil to be sold pursuant to this division order. Purchaser shall compute quantity and make corrections for gravity and temperature and make deductions for impurities.  

PAYMENT: From the effective date, payment is to be made monthly by payor's check, based on this division of interest, for oil run during the preceding calendar month from the property listed above, less taxes required by law to be deducted and remitted by payor as purchaser. Payments of less than $100 may be accrued before disbursement until the total amount equals $100 or more, or until 12 months' proceeds accumulate, whichever occurs first. However, the payor may hold accumulated proceeds of less than $10 until production ceases or the payor's responsibility for making payment for production ceases, whichever occurs first. Payee agrees to refund to payor any amounts attributable to an interest or part of an interest that payee does not own.  

INDEMNITY: The owner agrees to indemnify and hold payor harmless from all liability resulting from payments made to the owner in accordance with such division of interest, including but not limited to attorney fees or judgments in connection with any suit that affects the owner's interest to which payor is made a party.  

DISPUTE; WITHHOLDING OF FUNDS: If a suit is filed that affects the interest of the owner, written notice shall be given to payor by the owner together with a copy of the complaint or petition filed.  

In the event of a claim or dispute that affects title to the division of interest credited herein, payor is authorized to withhold payments accruing to such interest, without interest unless otherwise required by applicable statute, until the claim or dispute is settled.  

TERMINATION: Termination of this agreement is effective on the first day of the month that begins after the 30th day after the date written notice of termination is received by either party.  

NOTICES: The owner agrees to notify payor in writing of any change in the division of interest, including changes of interest contingent on payment of money or expiration of time.  

No change of interest is binding on payor until the recorded copy of the instrument of change or documents satisfactorily evidencing such change are furnished to payor at the time the change occurs.  

Any change of interest shall be made effective on the first day of the month following receipt of such notice by payor.  

Any correspondence regarding this agreement shall be furnished to the addresses listed unless otherwise advised by either party.  

   In addition to the legal rights provided by the terms and provisions of this division order, an owner may have certain statutory rights under the laws of this state.

    Signature of          Social Security/

Witness      Interest Owner          Tax I.D. No.              Address

______________      ______________          ______________              ______________

______________      ______________          ______________              ______________

______________      ______________          ______________              ______________

Failure to furnish your Social Security/Tax I.D. number will result in withholding tax in accordance with federal law, and any tax withheld will not be refundable by payor.  

(e)  If an owner in a producing property will not sign a division order because it contains provisions in addition to those provisions provided for in this section, payor shall not withhold payment solely because of such refusal. If an owner in a producing property refuses to sign a division order which includes only the provisions specified in Subsection (c) of this section, payor may withhold payment without interest until such division order is signed.  

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Permalink Reply by Ben Elmore on December 21, 2010 at 10:05

Also, Texas law provides that DOs are legally binding until revoked by either party.  However, that is tempered by the statutory language I set out in my last reply.  If you sign a division order and the decimal interest is incorrect to your detriment, you can go back and recoup the underpayments but you might be limited to four years back from the date of your discovery of the underpayment.  If the decimal interest is incorrect to your benefit, the operator likewise can sometimes come to you and recoup the overpayments. 

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Permalink Reply by FXEF on December 21, 2010 at 10:43

Ben,

I know you are a Texas attorney, but what are your thoughts on an O&G operator sending royalty payments without a DO in Louisiana?

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Permalink Reply by Ben Elmore on December 21, 2010 at 11:05

LA treats DOs differently, but I do not profess to understand it completely.  My initial thought is an operator runs the risk of improper payment claims without a signed DO.

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Permalink Reply by PamelaC on December 21, 2010 at 10:57

GoshDarn,

 

So, what are the chances of recieving a check with a DO??? It will be 120 days on the 24th. Just curious about mailbox $$$ for Christmas.

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Permalink Reply by Ben Elmore on December 21, 2010 at 11:08

I've never heard of an operator sending the first check with a DO.  They always require the DO to be signed first.  The statute reads "120 days after the end of the month of first sale" which does not necessarily mean 120 days from the first month the well produced.  It depends when the first sale was made.

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Permalink Reply by PamelaC on December 21, 2010 at 11:19

Ben,

 

Thanks. Schuck's... From the looks of it I won't get the DO's till Jan anyway. So mailbox $$ in Feb. Think dude lied about date they were mailed. Would .0027... be somewhere within a normal percentage range?? Trying to make plans.

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Permalink Reply by Ben Elmore on December 21, 2010 at 11:24

Depends on your royalty fraction in your lease, your net acreage in the unit and total unit acreage.  Use this formula:  your acreage in unit/total unit acreage x your lease royalty fraction.

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Permalink Reply by Mac Davis on December 21, 2010 at 12:30

Chesapeake sent out a royalty check before the division order was signed in Louisiana.  They did withhold federal income tax.  The check was sent out the next month if I recall correctly.   There was no discussion with CHK, simply a delay in getting the DO signed.

 

The DO I got says the DO can be cancelled at any time by either party, effective at the start of the next month, or 30 days, or some such.  I notice the Texas example above has similar terms.

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Permalink Reply by adubu on December 22, 2010 at 2:28

Mac Davis--Did you mean they withheld State Severance Tax ---Did not know any operator withholds Federal income taxes on royalty payments.

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Permalink Reply by Mac Davis on December 22, 2010 at 5:18

Federal income tax is withheld unless they have a social security number.  They didn't have one because the paperwork hadn't been processed. 

 

Note the section in the division order form listed above.  "Failure to furnish your Social Security/Tax I.D. number will result in withholding tax in accordance with federal law, and any tax withheld will not be refundable by payor."

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