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Permalink Reply by little ole 1st grade teacher on July 14, 2009 at 4:20

We have been waiting for a Division Order since late January/early February 2009, and we have yet to see it.
It seems to be that these kind of papers sit on someone's desk and take forever to get processesd. We were promised last week that we should be getting it soon. However, we haven't seen it yet. Our question has been concerning the drilling and production of the well that this Division Order is attached to. We know that the well started producing from some time in July and produced until December at which time it was capped. We have no idea if, or how much, we would be receiving from the royalty on the well when this Division Order is set into place. Maybe, someone can answer this question for us: Once the well produces, no matter how small the production, are royalties paid immediately, or are their other expenses that have to be met before royalties are paid to the owner of the mineral rights.
I hope this makes sense because I am new to this and "have no idea what the formalities of all of this involves".

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Permalink Reply by The_Baron on July 14, 2009 at 5:24

As I saud, sometimes the title in the unit is difficult. Be patient, they say its coming, its coming.

They should be paying the severance taxes and putting all the money into some type of escrow account. The money will be distributed when the DO is signed. Sounds like you'll be getting a good first check.

Now, with royalties, you asked "Once the well produces, no matter how small the production, are royalties paid immediately, or are their other expenses that have to be met before royalties are paid to the owner of the mineral rights."

The answer depends: are you leased or not. If you are leased, you will not have any expenses other than severance taxes and processing (depends on your lease). If the royalties work out to a very small amount (say less than 10 bucks a month, depends on the operator) they may opt to pay you quarterly, but it again depands on your lease.

If you are not leased, you receive no money untill payout, then you will receive your pro-rata share of production less expenses.

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Permalink Reply by little ole 1st grade teacher on July 14, 2009 at 7:10

What are severance taxes and what does this mean as far as cost for us? Also, what do the processing costs include? We are leased ....... I am somewhat impatient with this whole ordeal (not really the correct word) ..... we've been leased since July 2007. Leasing again will come up next year.
Thanks for your help.

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Permalink Reply by The_Baron on July 14, 2009 at 7:23

Severance taxes depend on the state and the type of well. A horizontal well in LA, for example, is elligable for severance tax relief, if the operator has the brains to apply. Otherwise rfer to the folowing from LDR.

Type Rate
a. Full Rate - 7/1/2009 to 6/30/2010 [R.S. 47:633(9)(d)(i)] $.331 per MCF
b. Incapable oil-well gas [R.S. 47:633(9)] $.03 per MCF
c. Incapable gas-well gas [R.S. 47:633(9)] $.013 per MCF
d. Produced water-full rate 7/1/2009 to 6/30/2010 {R.S. 47:633.5(C)(2)] $.265 per MCF
e. Produced water-incapable oil-well gas [R.S. 47:633.5(C)(2)] $.024 per MCF
f. Produced water-incapable gas-well gas [R.S. 47:633.5(C)(2)] $.0104 per MCF

Oil/Condensate/Similar Natural Resources Per barrel of 42 gallons
Full rate oil/condensate 12.5% of value
Incapable oil rate [R.S. 47:633(7)(b)] 6.25% of value
Stripper oil rate* [R.S. 47:633(7)(c)] 3.125% of value
Reclaimed oil [R.S. 47:648.21] 3.125% of value
Produced water-full rate [R.S. 47:633.5(C)(1)] 10.0% of value
Produced water-incapable oil rate [R.S. 47:633.5(C)(1)] 5.0% of value
Produced water-stripper oil rate [R.S. 47:633.5(C)(1)] 2.5% of value

By the way, if you have a producing well, you are now HBP - Held By Production, no more leaseing from you, unless you have land released by pugh clauses.

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Permalink Reply by The_Baron on July 14, 2009 at 7:27

Prossessing can vary from nothing to substantial costs, we are talking about dewatering, H2S removal, compression, etc. will vary on the operator and quality and pressure of the gas at the wellhead. Also depends on what costs your lease allows to be passed on, and the arangment for selling the gas.

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Permalink Reply by Dion Warr, CPL on July 14, 2009 at 7:20

Group:

Division Orders are prepared based upon the results of two separate lines of action:

1) Abstracts of Title, which are work products consisting of the fruits of research of the public record (courthouse searches, patent searches, sometimes Secretary of State searches and/or outside records sources upon request from the examiner), are examined by a title attorney in order that ownership of tracts of land may be asecertained. The examining attorney writes a Title Opinion, which sets out the ownership of the property. He may also make requirements to satisfy title defects which may limit the accuracy of the examination (e.g., obtain Affidavits of Death and Heirship, Use and Possession Statements, obtain certified copies of instruments and/or have such instruments placed of record in the proper parish or county, etc.) In any event, this process is used by the company to set the ownership of each tract within the unit.

2) Unit Survey: Each tract within the unit is surveyed within the framework of the established unit so as to determine the aerial extent of each tract within the unit. The results are computed generally to a minimum of two decimal places (typically three) so that the proportionate shares of cost(s) and revenue(s) can be attributed to each tract (in compliance with R. S. 30:10 and other portions of the Mineral Code and the applicable Field Orders, in LA).

Within the context of a geographic unit (of which is what the HS units currently in existence consist), the calculation of each Division Order Interest becomes academic. Each owner’s proportionate share is computed by dividing one’s surveyed tract acreage within the unit by the acreage total within the unit (obtained from the unit survey plat), multiplied by their proportionate interest within the tract (obtained from the title opinion).

In years gone by, is was very common for O&G companies (and their land departments and counsel) to prepare a Division Order which set forth all interests derived from all forms of ownership within the unit. Significant effort was made to obtain signatures of all parties affirming their interest, and this omnibus-styled instrument was assembled so as to show all signatories in a single instrument (or as few counterparts as the operator could muster). Later, as such fell out of practice, Division Order letters were sent out to each owner/party which outlined one’s calculated interest along with a manual calculation of how the interest was obtained (in essence, the company “showed their work”). In the days of computerized property databases, spreadsheets, and high powered oil and gas accounting software (SOGAS, Enertia, etc.), companies now send out mass mailings to individual owner/parties which consist of little more than your name, a partially redacted SSN / TIN (or a request for one under threat of ‘backup withholding’), the unit name, and your ‘interest’ cited as a decimal calculated to somewhere between seven and nine decimal places, and a request to sign and affirm your interest and a return address.

Practices as far as payment and timing vary from operator to operator. Many companies will want all title opinions to be complete, but are willing to pay royalties on an ‘estimated’ basis prior to the unit survey being completed, then ‘adjust’ the payment(s) based upon the unit survey by netting out the new royalty payout calculation against the previous estimates in the case of overpayment or simply advancing all royalty monies due to current in the case of underpayment. Others will ‘release’ certain tracts for payment as the title opinions come in. Still others will only commission abstracts and obtain Title Opinions on select tracts (e.g., large tracts, wellsite or wellbore tracts, etc.) and pay based on a limited search and opinion performed on the other tracts; this is usually done based upon factors such as abstract and title costs, and relative business risk.

While the O&G company is obligated to pay royalties due under the terms of the lease, many leases are mute as to timely payment of royalties. The owner has remedies to request such payments in this event, but generally the O&G company is afforded latitude so long as there is a valid reason for nonpayment (title examination and title defects are both generally considered valid reasons for nonpayment, and are the primary reasons that owners are not paid)

As to questions based upon royalties to be paid on wells which are no longer producing, it is imperative that you send a certified letter to the O&G company (if you are or were under lease, the owner of your lease; if you are or were unleased, to the operator of the well) stating the facts (your name, the well (include a serial number), the unit designation and field name, the county or parish in which your property is located, your interest (be specific, state that you own 40 acres (cite a property description, e.g,, survey number, section AND township and range), not that ‘you own a tract in Section 4’) and your specific request (payment for royalties due from this well according to the terms of your lease (cite book/page/entry number) if leased; information regarding your unleased interest (production statements, well costs (AFE, invoices, etc.) if unleased. State a deadline for them to respond (fifteen days, thirty days, etc.). The letter establishes your intent to discuss and or resolve any dispute in payments in timely fashion (as I recall, one’s ability to dispute payment of royalties or underpayment of royalties is three years). Cite that you will retain an attorney and follow up with a formal letter of demand or further legal action as required if they fail to respond, cooperate or provide the required information or payment(s) due to you. Follow up, and act (through your attorney) as necessary; if it comes to this step, remember the clock is ticking and details count. Losing one’s right to claim and recover any monies due can revolve failure to timely act, or act in a manner prescribed by law (sending a ‘demand letter’ not in proper form which a court rules is not considered a ‘demand letter’ of proper form was a basis for throwing out a claim, as I remember), and can be a bitter lesson learned.

Maybe it shouldn’t be that the landowner/lessor/mineral owner be charged to be diligent in pursuing his interest, but is certainly recommended. Know your facts, get in touch with the lessee or operator as necessary, be polite, but be assertive and stay informed. Work “within the framework” as long as the company is responsive. Asking to speak to the VP of Operations or Land for your one tract of land in one unit somewhere ‘because you want answers’ will not win admiration or cooperation from any line employee or company representative if you have not given them the chance to respond to your request, and chances are the executive officers are unable to speak specifically as to your situation anyway without the input of the people that you just bypassed.

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