How Did You Calculate My Horizontal Well Division Order Decimal?
You received a division order in the mail from a company and try as you might, you can’t figure out how they came up with the decimal credited to you in it. That you don’t understand why this company you never heard of should be sending you a division order we’ll talk about in a future blog post. But the decimal on this division order has you stumped.
Most division orders simply state a decimal, being either (1) your share of all of the total production from this well, or (2) your share of only what this company (issuing the division order) sells out of the well, which is less than 100% of all production from the well.
If the division order decimal is calculated based on (1), then you need to know the full calculation formula for how that decimal was determined. If the division order decimal is calculated based on (2), understand that the decimal is your share of 100% of the money received by the issuer of this division order, which means your decimal is “inflated” by the decimal share of total well production being sold only by this division order issuer.
Most wells drilled today are horizontal wells, and of those, a significant number are what is called “cross-section wells”, meaning the wellbore starts in one pooled unit and travels into another pooled unit, or even two more pooled units, before finally ending.
Usually, cross-unit wells are calculated by allocating a proportional share of the production to each of the original units involved based on the length of the perforated wellbore. This post explains calculations based on this allocation method. Another way of calculating proportional share of production involves what is called a Production Sharing Agreement (PSA), which would require another blog post someday to explain.
Now for some examples. Let’s use a Texas cross-unit well for these examples.
Under Scenario (1), let’s say your division order contains a decimal of 0.00078282 RI. Start with the facts you should already know: the number of acres in your tract, out to 3 decimal places, the royalty rate in your lease, and the percentage of mineral rights you own in the tract of land.
The only piece of information you don’t know is the exact number of acres in the pooled unit your well is producing from. You have to get that from either the Designation of Pooled Unit (Texas and occasionally Oklahoma) or Pooling Order (All states except Texas and occasionally Oklahoma).
The company issuing the division order will need to give you the total gross acres in the pooled unit, or you can look for the Designation of Pooled Unit filed in the county records where your land is located (Texas and occasionally Oklahoma). Or, you will need to find a copy of the Pooling Order signed by the state’s regulatory agency, often available on line with a little know-how (all states except Texas and occasionally Oklahoma). The number of unit acres should also be carried out 3 decimal places.
Let’s say your lease gives you a 1/5 royalty rate. You know that you own 25% of the mineral rights in the 40-acre tract you leased, because your brother and two sisters own the other 75% because your father owned 100% of the mineral rights when he passed, after your mother had already passed.
You call the issuer of the division order and ask for the exact number of gross acres in the pooled unit containing your lease. Next, you ask for a copy of the “As-Drilled” Unit Plat for the well that crosses from your unit up into the pooled unit directly above it that shares a boundary line with your pooled unit. The company is supposed to give that to you if you ask. If the division order analyst says no, ask to talk to the Land Manager. You’ll get your plat.
First, you must calculate your share of production coming only from the pooled unit that includes your lease. Let’s say that pooled unit is exactly 640.000 acres. Putting the pieces together, under Scenario (1) you have:
1/5 royalty X 25% mineral rights X 40.000 tract acres divided by 640.000 unit acres = 0.00312500 RI.
Now you turn to the As-Drilled Plat to see how many feet of perforated lateral are in your unit. There is 1,742 feet of perforated lateral inside your unit. The remaining 5,215 feet of perforated lateral are inside the pooled unit directly to the north of your pooled unit. That means there is a total of 6,958 feet of perforated lateral in this well.
Now you take the 0.000312500 you calculated earlier, and multiply it by 4,742/6,958, or 25.0503%. The result is 0.000312500 X 25.0503% = 0.00078282 RI. You are entitled to receive 0.00078282 RI out of the revenues paid from each month’s sales based on all production coming from the wellhead.
That decimal matches your division order. If it didn’t you would get back on the phone and talk to the division order analyst again. Find out what other information you don’t know—like maybe your interest is reduced by a piece of non-participating royalty interest (NPRI) owned by someone else, carved out of your royalty share.
Now under Scenario (2), you start with the same 0.00078282 RI you calculated in Scenario (1), except now you need to know how that decimal needs to be changed to give you the correct share of this payer’s (this division order issuer’s) share of gas or oil sales from this horizontal well. Let’s say that XYZ is entitled to sell 25% of the wellhead production each month to their own purchaser. Energy companies do this all the time.
If XYZ has inflated your decimal based on how much of the full wellhead production they are allowed to sell, the decimal in your division order should be 0.00078282 RI divided by 0.25. Why divided? Because in division order calculations, a division calculation means the same as “portion out of the whole”. So here, it’s like saying you are entitled to “a 0.00078282 portion out of the whole 0.25.” The decimal in your division order under Scenario (2) would be 0.00313128 RI.
Also, Scenario (2) presents a red flag for you. The division order you just received only accounts for 25% of the total royalties that are due to you? When are you going to receive the other one or more division orders setting out your share of the remaining 75%? Again, the division order analyst at this payer company can tell you the name of the well operator (who you should call). The analyst probably can give you the operator’s phone number. This analyst has no way of knowing exactly who currently owns entitlement to the other 75%.