Understanding Royalties and Division Orders

Now that some infrastructure has been put in place, mineral owners in the Ohio Valley are starting to see royalties from the oil and gas wells that have been drilled.  As a result, my office has seen a steady increase in the number of questions concerning how royalties and division orders are calculated.  I will try to address some of these questions in this column.

Who receives royalties from any particular well is determined by the pooling unit.  The pooling unit is created by the oil and gas company and consists of all of the property that the oil and gas company plans to drain from the existing well and any wells that they will drill in the same pooling unit in the future.  The Declaration of Pooling Unit is filed in the local land records office.

At some point after a well has been drilled, but before the well is placed online, the oil and gas company operating the well will send a Division Order to each mineral owner who will receive royalties from the well.  Typically the Division Order will be accompanied by the Declaration of Pooling Unit.

The purpose of the Division Order is for the mineral owner to certify their ownership interest in the well to third-party purchasers of the oil, natural gas, and natural gas liquids.  This is done through the calculation of each individual mineral owner’s decimal interest.  The decimal interest is calculated as follows:  Number of Acres owned by the Mineral Owner Contained in the Pooling Unit divided by the Total Number of Acres in the Pooling Unit multiplied by the Mineral Owner’s Royalty Rate.  For example, if you own 200 acres leased at 12.5% and 100 of your 200 acres are contained within a 600 acre pooling unit, your decimal interest for that unit is 100/600 x .125 = .02083.  That means that for every dollar of production that comes out of the pooling unit, you would receive 2.083 cents. You would not receive any royalties for the 100 acres that is not contained within the pooling unit.

Since you are certifying your ownership interest in the oil and gas well, it is important to understand the Division Order and be able to confirm your decimal interest in the pooling unit.  We recommend that mineral owners contact knowledgeable professionals to have your Division Order reviewed before you sign and return them to the oil and gas companies.