Information about drilling activity, pipelines, etc. in Millwood Township.

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Oil and Gas Lease and Division Order Conflicts
By Kathleen Dotzel Knight, Attorney

"With the boom in natural gas wells, you can bet there will be as big a boom in oil and gas litigation. One area where increased litigation is expected is in disputes over the payment of royalties resulting from conflicts between the oil and gas lease and the division order. Because division orders are not issued until there is actual production, mineral owners and operators sometimes forget to address the particulars of division orders when negotiating a lease. This is a mistake.
Division orders are revocable contracts directing the distribution of proceeds from the sale of oil and gas. Using a title opinion as a basis, division orders set out the fraction of production each party is entitled to receive. Each interest owner will be asked to sign the division order before the first royalty check is issued. Sometimes the division order contains terms that are either not in the lease agreement or are different than the lease agreement and can be less favorable to the owner. The owner should carefully review a division order before signing it. If the owner signs the division order, it is a binding agreement and, while in effect, will take precedence over the lease.
If the owner refuses to sign the order, the operator may withhold royalties. In an attempt to avoid conflicts this situation creates, Texas passed a law that provides that a payee may be required to sign a division order as a condition to receiving payment if the payor 1) uses a form that contains only certain listed provisions or 2) uses the model division form set out in the statute.[ii] The producer cannot withhold royalty payment solely on the basis of an owner?s refusal to sign a division order that is not in compliance with this statute.[iii]
Although this law has provided some stability, open issues persist. While it states that a division order can never permanently amend or supplant a lease, case law exists that holds that the division order will control while in effect.[iv] Also, even though the law specifically states that any provision in the order that is contradictory to the lease is invalid to the extent of the contradiction, it then allows that the order may be used to ?clarify royalty settlement terms.?[v] So this leaves open to interpretation when something would be considered ?contradictory? vs. supplemental or clarifying.
The statute confuses things even more when it defines ?market value,? ?market price,? ?prevailing price in the field?or other such language when used as the basis of a valuation in the lease as "the amount realized at the mouth of the well by the seller of such production in an arms length transaction." The problem is that this definition is contra to Texas case law which consistently maintains that these terms are not the same. ?Proceeds? or ?amount realized? requires the royalty to be measured based on the amount actually received by lessee. By contrast a ?market value? or ?market price? clause bases royalties on the prevailing market price for gas irrespective of the actual sales price.[vi] So a division order, if interpreted in accordance with this statute, may well alter the valuation method agreed to in the lease.
Because of the ambiguity surrounding these issues, it would be wise to sort out these matters when negotiating the lease. At a minimum the lease should provide that 1) any division order issued will not change the royalty valuation method defined in the lease, and 2) that the signing of a division order that in any way alters the terms of the lease will not control nor temporarily amend the original lease.
If careful attention is given to setting out details of division orders at the lease drafting stage and the owner does a careful review of the division order before signing, these disputes can be avoided."

Here is the link to the National Association of Division Order Analysts Division Order Form:

http://www.nadoa.org/index-4.html

There really is a Santa Claus!  We received our first  Divison Order via Fed Ex on Christmas Eve!

Congratulations!

That is great!  What well unit are you in?  Been waiting for division orders from Fritz pad.  We have been told long ago that we should be expecting 1st royalties around Feb 1 2015.  Everything else they have told us has come to pass in the time frames they told us.  How far in advance of payment do you get the division orders?

The Hayes unit.  I would think that the the DO's for Fritz should be coming real soon.  Both units went into sales in November - so February is probably right for first royalty checks.

BTW - I know someone who has 1/2 acre in the Shugert Daddy unit and just got their first royalty check - for 2 days production in September.  The check was right at $100.  That equals $100 per day per acre.  Hope our numbers are at least that!

Thanks Jan

All I can say is I was told by someone who should know from Eclipse that the Fritz wells are "monster" wells

Congratulations!

I feel for ya, David.  I'm glad your property is gonna soon be drilled, but sad that it's Chesapeake. Sorry, but I've heard too many stories. You'll have to be on your toes, and be watching very close, or get a good attorney @ $200. per hour.  There are stories about them drilling under people and never sending them a division order. Then just sending them royalty checks, hoping they will be tickled with them and not question, just cash em. Then there are the tales about them sending out division orders, only with fine print in em that changes the lease agreements. You may only get 12.5% royalties instead of 20%! May take deductions out the a#$% when not suppose to. Hoping people would be so ticked with finally getting in a unit,that  they hurry up n sign the D.O. without reading all of it closely.  Good luck.

I have no idea what is going on Bo, I was told by Antero that they still hold our lease and nothing is happening with it. I even linked the ODNR map that shows the permitted leg.

I cant believe that a leg would be permitted without a unit being set up first or leases arranged in the properties along the permitted leg.

Who knows.

Truthfully, this is a burden, all of it, the oil companies pretty much treat us like crap, they don't care one whit for anybody individually.

I know money rules with them, but it is still hard for me to deal with this all.

I was excited to see the leg permitted under us but now I have reason to doubt the whole thing, because of Anteros response to my inquiry.

And dealing with Chesapeake is a burden, maybe in Ohio they will do better than they have done in PA where they have been quite terrible to their land owners.

I may not have read it.  Believe what ? I f we are permitted I would assume we are going to be drilled. If we are drilled there is an enforceable lease which dictates terms as far as royalties and payment schedules.

The only unknown for me is if we will be notified of anything prior to getting our first royalty check.

Whatever the case, I will do whatever is necessary to hold whoever drills and pays us to the terms of the lease we signed and executed with Antero.

At the end of all of this I am sure we will be fine, this is only another frustrating example of the low regard landowners are held in and the slipshod manner in which some of these outfits operate.

I don't feel like we are being cheated or are going to be cheated. I just feel left out of the loop, probably on purpose, I suppose these companies don't want to tell folks anything because they will only be furthered pestered by folks asking where their checks are every five minutes.

Listen. To her David. She can make the Supreme Court stutter

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