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## Calculating the Lessor’s Percentage Interest on a Division Order

### How does a lessor calculate his percentage interest on a division order?

On a number of occasions, I have received a request from a client asking whether they should sign a division order received from their producer.  When this happens, I always request a copy of the division order. When I receive the division order, invariably, there is information missing that the lessor needs to determine whether the lessor’s percentage interest in a unit, as stated by the producer on the division order, is correct.

What is a division order? A division order is a form that a producer uses to have a lessor certify that his or her percentage interest (always in a decimal form) in the production from a unit is correct. The producer then utilizes the decimal interest to determine the amount of proceeds that the lessor will receive from the production in the unit. The problem is that when the lessor receives a division order, asking that the division order be signed and thereby certifying that the decimal interest stated on the division order is correct, invariably, the information that is needed to calculate the decimal interest is simply not there.  In other words, a lessor will receive a division order from the producer, asking the lessor to certify that his or her decimal interest in a unit is correct, but the information necessary to determine this is simply not there. When this happens, the producer is in essence asking the lessor to take it on faith that what the producer has calculated as the lessor’s decimal interest is correct. The lessor should not accept the producer’s decimal interest on faith. The producer could be wrong. If the producer is wrong, the amount that the lessor receives in royalties from the unit may be adversely affected. The lessor should have the information necessary to calculate his or her decimal interest and the lessor should have the formula that the producer uses to do so. The lessor can then determine for his or herself whether the producer’s decimal interest is correct.

In order to determine whether the producer’s decimal interest is correct, the lessor needs to know the total number of acres in the lessor’s unit, the number of acres of the lessor’s property that is in the unit, the lessor’s percentage ownership of the oil and gas under the lessor’s property and the lessor’s royalty. The lessor should also know the name of the unit in which the lessor’s property is placed; however, the name of the unit is not necessary for the calculation of the lessor’s decimal interest.

Once the lessor has the information, then the following formula is used to determine the lessor’s decimal interest: the number of the lessor’s acres in the unit divided by the total number of acres in the unit multiplied by the lessor’s ownership percentage in the oil and gas in the lessor’s acreage that is in the unit multiplied by the lessor’s royalty percentage equals the lessor’s decimal interest. To put it another way the formula is:

lessor’s acres in unit ÷ total number of acres in unit × lessor’s ownership interest × lessor’s royalty percentage = lessor’s decimal interest.

With the requisite information and using the formula, the lessor should be able to determine whether the producer’s decimal interest on the division order is correct. If it is, the lessor can sign the division order. Please note, however, that it sometimes happens that the lessor has all the necessary information and uses the formula correctly, but the lessor’s calculation does not match the producer’s calculation. If this happens, the lessor should contact the producer. The difference between the decimal interest that the lessor calculates and what the producer calculates may be due to several factors, e.g., there may be some factor that the producer has inserted into its calculation that is not ordinarily there, but this hasn’t been made known to the lessor, or the producer may have the lessor’s ownership percentage wrong, or the producer may have the wrong royalty percentage, etc. If the lessor’s calculation does not match the producer’s calculation, the lessor should contact the producer to ascertain what the discrepancy is.

Sometimes it occurs that the lessor does not know what his percentage interest is in the oil and gas underneath his or her property. If this occurs and the lessor cannot obtain this information from a source other than the producer, the lessor could have an oil and gas title search conducted, but this may be cost prohibitive. If so, then the lessor will have to rely on the producer’s number for his or her ownership interest.

One other item of note. It is not unusual to find in an oil and gas lease offer a provision that the lessor must sign whatever division order the producer sends to the lessor. Such a provision should be negotiated out of the lease. A clause deleting such a provision can be inserted into an addendum to the lease. If such a provision is not negotiated out of the lease, when the lessor receives a division order from the producer, the lessor will have a contractual obligation to sign the division order and thereby certify that the producer’s calculation of the lessor’s decimal interest is correct. In effect, the lessor will be accepting on faith that the producer’s figures and calculations are correct when in fact they may not be correct. This can result in adverse consequences to the lessor, i.e., less money than what the lessor should be receiving.

The lessor should not sign a division order, accepting on faith that what the producer has calculated as the lessor’s decimal interest is correct. The lessor should do his or her own calculation to determine whether the producer’s decimal interest is correct. The lessor should know the name of his or her unit, the number of acres in the unit, the number of the lessor’s acres in the unit, the lessor’s percentage ownership, and the lessor’s royalty percentage. The lessor can then do his or her own calculation.  If the lessor signs a division order without doing his or her own calculation, the lessor is accepting on faith that the producer’s decimal interest is correct when in fact it may not be.

If the lessor does not have all the information that the lessor needs to calculate his or her decimal interest, The lessor should contact the producer’s customer relations department in order to obtain the information that is needed.  The lessor can also have the lessor’s attorney do so. Whatever method is used, the lessor should not accept the producer’s decimal interest on faith.

If you have questions about oil and gas royalties or leases, contact us online or call (412) 338-1124.