This is a very frustrating experience for any royalty owner. You’ve learned that XYZ Company has drilled and completed a horizontal well and formed a pooled unit that includes your lease. You’ve heard rumors that it could be a barn-burner and pay out 100% of all costs in less than six months. Your royalties should be quite high!
But then you get the division order in the mail. Your heart sinks. You know you have 2-1/2 net acres in the 12-acre parcel you leased, and the lease gives you a 20% royalty. So how on earth did they come up with a decimal of 0.00054050? You’ve been told it’s a 640-acre pooled unit, and you know how pooling works, so 2.5 net acres divided by 640, then times 20% royalty, calculates out to 0.00078125 RI. Their decimal must be wrong!
But is it?
You need to contact the issuer of the division order (their name and contact information should be in the paperwork you received) and ask for the pieces of information you need in order to prove their calculation is wrong. The key pieces of information you need to have to correctly calculate your royalty decimal in a well are:
1. The amount of acreage in your parcel according to the survey done by the independent surveyor when the well was drilled. Modern surveying equipment measures land much more accurately than the survey probably done the last time the land was divided creating the 12-acre parcel, maybe 40 years ago.
2. The amount of mineral interest the company is crediting to you. This decimal, fraction, or percentage will be based on courthouse records, and hopefully determined by an independent title attorney who wrote a title opinion for the company stating 100% ownership in the 12-acre parcel, including your ownership.
3. The official size of the pooled unit. This will be shown on the official pooled unit plat, and if the land is in Texas, it will be stated in both the Designation of Pooled Unit filed in the courthouse and the Certificate of Pooling Authority filed with the Texas Railroad Commission on form P-12. You should be able to download a copy of the official P-12 form from the TRC website. The form will also list your 12-acre parcel, so you can verify the size of your parcel in the pooled unit.
4. Oil and gas lease royalty rate. This is stated directly in your lease and won’t change for the life of the lease.
5. A copy of the official, as-drilled plat for the new producing well. That plat will tell you exactly what land must be included in the revenue distribution decimals for everyone entitled to part of it. That, too, is public information, so you should be able to download a copy of that, too, from the TRC website but it might take up to 6 months for the TRC to scan it and load it into their system. The issuer of the division order is required to provide a copy to you if you ask.
The division order analyst at the company issuing the division order sends you all of the information and documents listed above for the well in your division order, except how much mineral rights you own. There’s liability attached to telling you that, but the division order analyst can tell you that you are credited with 2.371 net acres, not the 2.500 you thought you had.
You see from the P-12 form that your parcel contains 11.855 acres, not the 12.000 acres you thought it did. If the company is crediting you with 2.371 net acres, just divide 11.855 by 2.371 and you get a mineral interest of exactly 0.200, or 1/5. Then you remember that yes, you inherited 1/5 along with your four brothers and sisters.
Then you see that the pooled unit that includes your lease is 658.000 acres, not the 640 acres you thought it was.
Putting this altogether into a calculation, you get: 1/5 mineral interest x 20% royalty rate x 11.855 tract acres / 658.000 unit acres for a unit royalty decimal of 0.00072067. Next you look at the as-drilled plat to see what it shows. You find out that the new well is what is called a cross-unit well. It was drilled starting in your pooled unit, but ends in the pooled unit right next to yours, and you don’t own any land in that other pooled unit.
You will only be entitled to receive the % of production from the wellbore that comes from your pooled unit. Usually, the % of production is determined by lateral length. How much of the producing lateral (the part with holes, called perforations, in it) is inside your pooled unit?
Looking at the as-drilled plat, you see that the surveyor labels the distance from the first take point (FTP, first perforation) to the boundary of your pooled unit is 4680 feet. The distance between the FTP and the LTP (last take point, last perforation) is 6240 feet total. The 4680 divided by 6240 is 75%, so 75% of the producing lateral is inside your pooled unit. That means you are entitled to 75% of the 0.00072067 RI you have in your pooled unit, or 0.00054050 RI in all revenues for this well.
You’ve verified that the decimal in the division order you received is correct, but you needed the help of the division order analyst who issued it, to arrive at that conclusion.
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