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Horizontal Payout Wells: Initial BPO Division of Interest Basics

There are four basic types of data analyzed in order to create an initial revenue division of interest (DOI) for a horizontal well. This does not mean that there are only four types of data analyzed to create an initial revenue DOI, only that this week’s blog will focus on the four basic types that are necessary for every initial revenue DOI. That said, the reader will notice that no mention of the initial joint interest billing (JIB) DOI is made. This is because the JIB DOI (or “deck” as it is also called) should have been created before, or at the time, the well was spud. Pre-drilling and post drilling expenses will have already been billed to the BPO JIB long before the well is turned to sales and needs its revenue DOI created.

The four basic types of data analysis needed to set up an initial DPO DOI are (1) title ownership analysis, (2) contracts analysis, (3) marketing analysis, and (4) lease contract requirements or restrictions for royalty distribution.

Title ownership analysis begins with identifying the area of producing land, and depth, for the record title ownership to be included in the DOI. Ownership within that area normally is found in title opinions written by title attorneys that set out basic ownership reflected in record title. These opinions should include analysis and application of unsatisfied title requirements as set out by the title attorney. The analyst works closely with the landman and lease analyst responsible for the new well to confirm which title requirements remain outstanding. The owners with title requirements are placed in suspense in the revenue DOI until the title requirement is satisfied. Outstanding title requirements must be tracked so that follow-up attempts to satisfy the title defect can be made.

Contracts analysis involves first determining what contracts exist that apply to the producing area. These can include any joint operating agreement (JOA) and any other working interest related contract. Bear in mind that the BPO JIB deck should already contain the working interest owners participating in the well BPO, so the analyst refers to it in the analysis. The analyst is looking for which ownerships change after payout, especially looking for multiple payout levels.

Other contracts that might apply are the Declaration of Pooled Unit and ratifications by NPRI and unleased owners, if the well is producing from a pooled unit and is in Texas. If the well is not in Texas, the analyst will analyze any involuntary pooling order issued by the regulatory agency that will contain terms and conditions that may affect some of the ownership in the BPO DOI.

Marketing analysis for purposes of the BPO DOI focuses on post-production costs, if any, and how they will be deducted from revenues for each of the owners in the DOI. The division order analyst works with the lease analyst responsible for the well to determine if any of the leases involved have a no-deducts clause, also known as a cost-free clause. The royalty owners exempt from post-production costs must be properly coded in the BPO DOI, and linked to the working interest owner(s) that will absorb those costs on behalf of their royalty owners(s). The analyst usually obtains the specific post-production deducts affecting the well from the marketing department, so the BPO DOI can be coded properly.

The fourth basic type of data analyzed is found in the leases included in the production area. Specifically, the analyst looks for any provisions in the leases restricting or requiring a specific manner of royalty distribution. For instance, do any of the leases state no signed division order an be required before royalties are paid? In Texas, this clause means the owner must be placed in pay status without a signed division order. In Louisiana, however, state law prohibits withholding payment of royalties if a division order is not signed, unless there is a bona fide title defect needing cure before payments can be tendered.

Another provision a division order analyst looks for is an escalating royalty clause. Such a clause will impact the calculation of the royalty decimal in the initial BPO DOI, and the net decimal for the working interest owner(s) who own the lease.

As a final note, it is critical for the analyst to preserve, as part of the initial BPO DOI setup documentation, the records identifying the ownerships that will change once the well pays out. After payout, both the revenue DOI and JIB DOI must be updated effective with payout. Creating the APO DOIs should not require reinventing the wheel, so to speak.

Next week’s blog will be “Horizontal Payout Wells – Multiple Payouts DOI Basics.”

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