Insights, Statutory Foundations, and Pitfalls—From a Board-Certified Oil & Gas Lawyer

What Is a Division Order?

Let’s kick things off with a simple question: What on earth is a division order? If you’re in the oil and gas industry in Texas (or just a curious cat), you’ve probably heard the term tossed around with the same frequency as “lease bonus” or “royalty check.” At its core, a division order is a written document executed by the parties entitled to receive proceeds from the sale of oil, gas, or minerals produced from a particular property. It spells out precisely who gets paid what—right down to the decimal point—and sets the stage for how those payments are made. In Texas, the division order is not just a helpful summary; it’s a statutory necessity for getting paid and avoiding headaches down the road.

Think of it as the oil patch’s version of a scorecard: who’s in the game, how big their slice of the pie is, and how the referee (a.k.a. the purchaser) is going to hand out the winnings. But as with any good scorecard, there’s fine print—and a few sneaky traps that can turn a winning play into a penalty flag. Let’s dig in.

Statutory Origins: Where Division Orders Come From

Statutory References and Compliance

You might be asking, “Is this just a local custom, or does the law actually require a division order?” The answer: Yes, Texas law specifically addresses division orders, and ignoring these statutes is a recipe for trouble.

The Texas Natural Resources Code, Section 91.401 et seq., lays out the rules. In particular, Section 91.402 is the heart of the matter, stating that a payor (usually the purchaser of the oil or gas) is not required to make payment until a division order is executed. The statute is crystal clear: while a division order is necessary, it cannot alter the substance of the underlying oil, gas, or mineral lease. In other words, it can clarify, confirm, and set forth payment procedures, but it cannot change the royalty rate (the fraction in the lease), the lease term (the number of years), or any other fundamental lease provision. Consider it the “rules of engagement” for payment, not a renegotiation of the game itself.

If a division order tries to sneak in new terms that contradict the lease, it’s invalid as to those terms. So, while you may be tempted to “improve” your deal through a creative division order, the law has already put the brakes on that kind of fun. Stick to the statute or risk getting benched.

Structure of a Division Order: The Essential Building Blocks

Required Information

Every division order in Texas should contain certain key pieces of information. Here’s a checklist to keep handy:

• Parties: Name and address of each owner entitled to receive proceeds.
• Property Description: Legal description of the tract (survey, block, lot, etc.).
• Decimal Interest: The fractional or decimal interest each party owns in the proceeds.
• Effective Date: When the division order kicks in—usually the date of first production or sale.
• Purchaser Identity: Who’s buying the oil, gas, or minerals? This is your payor.

Hint: You can find an example copy of the Division Order in Texas Natural Resources Code, Section 91.402(d).

Terms and Conditions

The division order is more than just a list—it’s a quasi-mini-contract with its own terms and conditions. These generally include:

• Payment Terms: Timing of payments (often monthly) and method (check, wire, carrier pigeon—okay, not really).
• Indemnity and Repayment Provisions: Requirements for owners to repay overpayments, and for purchasers to pay shortfalls.
• Termination Provisions: How and when a division order can be terminated (e.g., upon sale, transfer, or change in ownership).

These provisions are not just window dressing—they have real, practical effects. Miss one, and you might find yourself in a payment dispute or, worse, in court.

Hidden Traps: Watch Your Step!

Even seasoned oil and gas professionals can get tripped up by two common snares hidden in the division order: decimal interest calculation and indemnity/repayment provisions. Let’s shine a light on them.

Trap #1: The Decimal Interest Calculation

If you’ve ever stared at a division order and wondered, “Is this decimal right?” you’re not alone. Calculating the correct decimal interest is a bit like assembling IKEA furniture: it looks easy until you’re missing a screw. In simple terms, the decimal interest represents the owner’s share of production proceeds. But the calculation involves several moving parts:

1. Gross mineral acres owned by the interest holder.
2. Gross acres in the producing tract (the whole pie).
3. Royalty rate (from the lease).
4. Other burdens (overriding royalties, NPRIs, etc.).

Example: Let’s say Sally owns 10 acres out of a 100-acre tract. Her lease provides a 1/5 (20%) royalty. Her decimal interest is:

10 ÷ 100 × 0.20 = 0.02

But here’s the kicker: If the tract is pooled, or there are multiple burdens, the calculation gets more complex. Mistakes happen—sometimes the decimal is off due to bad math, missed title issues, or overlooked pooling. Confirming accuracy requires: reviewing title, the lease, all pooling agreements, and sometimes, a bit of detective work. Don’t just take the number at face value—do your homework!

Trap #2: Indemnity and Repayment Provisions

Here’s where things get spicy. Almost all division orders contain an indemnity or repayment clause, which says (in legalese): “If we pay you too much, you have to give it back. If we pay you too little, we’ll make it up later, or you have to go get it from whoever we overpaid.”

Practical Example: Sally gets paid on 0.02, but later, title is corrected and she should have been paid on 0.015. She’s now been overpaid, and the purchaser will demand the difference back. If Sally spent the money on a new truck, she’s got some explaining to do.

On the flip side, if Sally was paid on 0.015 but should have received 0.02, she’s entitled to the shortfall. But don’t expect instant reimbursement; the process can drag, and sometimes disputes arise over calculation or responsibility.

Bottom line: read these clauses carefully. Indemnity provisions are not just legal boilerplate—they can have real dollar consequences. 

Calculating Division of Interest: Vertical vs. Horizontal Wells

Texas oil and gas plays have evolved—so has the math behind division orders. Calculating interests in a traditional vertical well is straightforward (well, relatively). Horizontal wells bring new wrinkles. Let’s break it down.

Vertical Well Methodology

In a vertical well, production typically comes from a single lease, tract, or unit, and the division of interest is based on acreage within that tract.

Example:

• The Smith Lease covers 100 acres.
• John owns 25 acres with a 1/8 royalty.
• Decimal interest: 25 ÷ 100 × 0.125 = 0.03125.

Easy enough, right? The decimal matches John’s proportionate share based on his acreage and royalty rate. All interests are calculated similarly and plugged into the division order.

Horizontal Well Methodology

Horizontal wells, the darlings of the shale revolution, complicate things. These wells often cross multiple tracts, leases, or units. Interests must be calculated based on the “allocation” of production—sometimes using a “production allocation formula” based on the length of the productive wellbore within each tract or unit, or number of "take-points" within each tract.

Example:

• The Jones Unit covers 160 acres, but the horizontal wellbore runs 60% through Jones’s tract and 40% through Smith’s tract.
• Jones owns 32 acres, Smith owns 28 acres.
• Jones’s allocated share is based on wellbore length: 60% of production, then multiplied by Jones’s acreage and royalty rate.
• If Jones’s royalty is 1/5, his decimal is: 0.60 × (32 ÷ 160) × 0.20 = 0.024.

You can see how this quickly becomes a math exercise worthy of a spreadsheet—and why errors are common. Always verify both the allocation and the underlying title to avoid surprises.

Conclusion: Summary and Free Virtual Discovery Call

And there you have it—the Texas division order, deconstructed and (hopefully) demystified. We’ve covered statutory origins, structure, hidden traps, and the nitty-gritty of interest calculation. Division orders may look straightforward, but they’re loaded with legal and mathematical nuance. Miss a step, and you could end up with an unhappy person, a compliance headache, or a very awkward conversation with accounting.

As a board-certified oil and gas lawyer (and your trusty guide through this maze), my advice is simple: never sign a division order without understanding every term, confirming every decimal, and reading every indemnity clause. Need help? Let’s make it easy. Schedule a free virtual discovery call today, and let’s ensure your division orders are airtight—and your interests protected. Click here to book your call now! Your peace of mind (and your bank account) will thank you.