Oil and Gas Division Orders

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Oil and Gas Division Orders
and
Division Order Mathematics
BASIC LAND MEASUREMENTS:
1 Section =
640 Acres
= 5,230 Lineal Feet on a Side
1 Acre
= 43,560
1 Quarter Section =
Square Feet
160 Acres(Homestead)
1 Quarter-Quarter Section =
40 acres
1 Quarter-Quarter-Quarter Section =
10 acres
1 Quarter-Quarter-Quarter-Quarter
Section = 2.5 acres
36 Sections = a Township
LEGAL DESCRIPTIONS:
(a gift of the genius of
The Cadastral Survey System
Thomas Jefferson) divides the surface of the Earth into a
checkerboard of contiguous square-mile squares whose sides are
aligned, as nearly as possible, along straight lines
running true north-south and east-west.
These
"squares
on
the
checkerboard,"
legally
called
Sections, are further arranged into larger squares, legally
called Townships, which consist of 36 Sections arranged in a
6 Sections on a side and whose numbers
square consisting of
run in an "S"-shaped pattern from Section 1 in the upper
36 in the lower right-hand
right-hand corner to Section
corner.
These Townships are arranged, on the surface of the
Earth and in these United States
(with the very notable
exceptions of Texas and Louisiana), according to their
distance from predetermined and landmarked boundaries
established by the U.S. Geological Survey.
Thus, Section 36 in Township 2N(orth) would be located
6 miles
in the lower right-hand corner of the Township,
North of a baseline running East-and-West determined by the
U.S. Geological Survey.
Note that Townships are sometimes
called "Tiers" or are said to lie in "tiers" above or below
the Baselines running through a particular County in a given
State.
But
to
complete
the
location
of
Section
36,
it
is
necessary to establish an East-West co-ordinate on the map,
and this is done by reference to Meridian Lines, which run
North-and-South on the U.S.G.S. maps.
Thus, Section 36-2N-4W 6th PM is located in the lower
6 miles North of the
righthand corner of the Township,
Baseline and 18 miles West of the 6th Principal Meridian on
the U.S.G.S. maps.
Note that the locations of the Baselines and Meridians
are based on lines of Latitude (Baselines) and Longitude
(Meridians) as established on nautical and aviation maps by
celestial navigation with compass and sextant--tools used by
the Surveyor as well as the Navigator.
Also note that the distance between Baselines is
denoted by the number of the Township as it lies North or
South of a Baseline and the number of the Range as it lies
East or West of a Meridian line.
10
36-2N-4w 6th PM Carter
Thus, the Legal Description of
36, Township 2
County, Oklahoma would be read: "Section
North, Range 4 West of the
6th Principal Meridian, Carter
County, Oklahoma."
The designation of the State and County establishes the
numbers and locations of the Baselines and Meridians on the
U.S.G.S. maps for that County,
and the distances from them
give the exact location coordinates of the Townships by
position in the "tiers" North or South of the Baselines and
Ranges East or West of the Meridians. Since, again, the
Townships are 6 miles on a side (36 square miles) and can be
conceived of as being 6 miles "tall". and the Ranges are 6
miles "wide"--i.e. a measurement of the "width" of the
Township--then the three numbered designations in a Legal
Description--Section,
Township,
unique coordinates necessary
Section (and no other "Section
and State in question.
and Range--give
the
three
to locate that particular
36") on maps of the County
WELL LOCATIONS:
As described above in this text, the spacing for an oil and
gas well (that is, the minimum number of acres that a
drillsite for a well to be drilled to a given depth and to a
given geological formation must contain) is determined by
the area of the DRAINAGE of oil and gas from that formation
anticipated from that well without enchroachment on the
drainage of adjacent wells in the same formation. Spacing is
generally stated in terms of acres--running a scale from
as little as 10 or even 2.5 acres for shallow oil wells up
through 40 to 160 acres for deeper oil wells and from 160
acres to 320 acres for gas wells and up to 640 acres or
more for deep gas wells. This determination of acreage in
the
"spacing
unit"
(sometimes
called
the
"drilling
and
spacing unit") subdivides the Legal Description of the
(160 acres),
Section described above into quarter-sections
quarter-quarter sections
(40
acres),
quarter-quarterquarter sections
(10 acres), and quarter-quarter-quarter-
quarter sections
(2.5 acres).
Note also the common division into halves (i.e. x 1/2)
for
of quarter-sections or quarter-quarter-sections
establishing spacing units for oil and gas producing
formations running in narrow bands north-south or eastwest. Thus, the N/2 SE/4 of Section 36 would contain 80
acres running east-west in a rectangle consisting of two
40-acre squares side-by-side; so, also, the W/2
SE/4 SE/4
of Section 36 would contain 20 acres running north-south in
a rectangle consisting of two 10-acre squares arranged one
atop the other.
11
Well locations often begin or end with numbers and
letters such as "330' FSL,
220' FEL." These indicate
that the well bore is 330 feet From the South Line
(the Southern boundary line of the Section) and 220
feet From the East Line
(the East boundary line of
the Section).
Spacing units and their determined acreage now leads
examination of the concept of Net Mineral Acreage:
to
an
NET MINERAL ACREAGE:
Since the ownership of the surface of land and the minerals
beneath it can be split apart--called "mineral severance" or
just "severance"--it is important to determine the ownership of
the minerals in a spacing unit in terms of Net Mineral Acres.
Net Mineral Acres describes the number of mineral acres
owned by each individual owner in a given spacing unit.
These Net Mineral Acres will either be leased or force
pooled into the spacing unit necessary to accommodate the
drainage area of the well to be drilled. The leasing (or
force pooling--which is a form of "forced" or governmentally
sanctioned leasing) of these Net Mineral Acres creates the
Leasehold
Estate--which
generally
divides
itself
into
Royalty Interests to be paid to the mineral acreage owners,
the Working Interests leased by and to be paid to the
Operator and Non-Operators,. and Overriding Royalty Interests
said to be "carved out of" the Working Interest often for the
benefit
of
intermediaries
such
as
Lease
Brokers,
Geologists, or Landmen, who may have acquired the lease
initially from the mineral acreage owners and then sold and
assigned it to the Operator.
The
determination
of
the
decimal
portion
of
all
production of oil and gas to be paid to each of the owners
of a Royalty, Working Interest, or Override leads to an
examination of Chaining the Leasehold Title to Derive the
Fractional Interests:
EXHIBIT "A"
Chain:
PAT.
USA
PAT.
Tract Index
1-401
7-2-04
NW 11-33S-31W
Bettie McLish
1-401
WD ......... 13-170
WD ........ . 72-13
WD ........ 101-32
WD 13-170
10-26-19
ALL
NMR
J. D. McWilliams
WD 72-13
11-22-29
ALL
NMR
G. Ward Stone
WD 90-181
6-12-52
ALL
NMR
Marvin W. Lepper & Oleta A. Lepper, Jt WRS u OGGL
270-43
WD 101-32 E/2 NW 11-33-31
4-15-62 Surface only
Charles E. Lepper
0. R. Whittaker
Whittaker Enterprises
13
1.
Chaining the Title to Derive the Fractional interests:
A.
The title examiner "chains"--that is, physically draws
a diagram much like an inverted tree--of both the
leasehold and mineral title, with the fee simple title
at inception—the PATENTS, abbreviated in the Tract
Index kept by the County Clerk as “Pat.”—representing
the roots of the tree, the subsequent conveyances of the
fee simple to each of the 160-acre, Quarter-Sections
intended as “Homestead,” or portions thereof listed in
the PATENTS representing the "trunk" of the tree, and
the surface and minerals constituting the major
"branches" of the tree. The mineral title, whether
leased or not, may further subdivide itself, by deeds,
Oil and Gas Leases or other conveyances placed of
record, into smaller branches which can be viewed
as fractions of the mineral title or net mineral acres
within the drilling and spacing unit. If these net
mineral acres are leased, then, as to those
acres so leased, there is created an oil and gas
leasehold "estate" or title, divided into royalty,
overriding royalty, and working interests. This
final subdivision of the mineral title may be viewed
as the smallest "branches" on the "tree", each one of
which ends in a single owner who may be viewed as
a single "leaf" on that same "tree". This "tree"
of title is inverted because time runs on an
axis down the page, and "branches" in the
title run horizontally across the page.
B. By making
notations, at each branch of the "tree"
described above, of the.fraction of mineral acreage or
leasehold title being created or transferred, the title
examiner derives a series of fractions which, when
calculated together, yield a decimal component of 100%
of
the
acreage
contained
in
the
drilling
and
spacing unit for the oil and gas well in question.
These same decimals also constitute the net revenue
decimal interests which determine the percentage of
production proceeds to be paid to each owner of a portion
of the leasehold estate--be it royalty,
override,
or
working interest. This net revenue decimal interest will
also appear on the division order for verification by the
owner with his signature and his taxpayeridentification
number. This process of drawing a diagram much like
inverted “tree” described above, and making notes of the
fraction, of surface or minerals under the surface—or
both—of the Quarter-Section (160 acres—e.g. NE/4) or
portions of that Quarter-Section (e.g. NE/4 NW/4 = 40 acres;
NE/4 NW/4 SW/4= 10 acres) that are conveyed by deeds, to
subsequent owners, is called “Chaining” the Title.
C.
The title examiner can "chain" these assignments
together as a series of fractional divisions of the
working interest and any royalties and overrides
withheld.
These fractional interests--when divided,
multiplied, added and subtracted from each other in the
proper sequence--constitute the "fractional interest
calculation" which, when executed, results in the
decimal of ownership on the division order.
This
100% of production
decimal expresses the portion of
proceeds to which each owner of an interest in the well
will be entitled.
Setting up the fractional interest calculations of the
decimal
interests for the royalty,
and working interest owners;
overriding
royalty
(Peeling the onion apart one layer at a time.)
SUGGESTION: Always calculate decimal interests in
the same way and in the same order; that is,
then
calculate net mineral acreage first,
leasehold
(RI,ORI,WI)
fractions,
and
calculate
them in this order:
STEP (1) : Royalty: For example, Farmer A owns all
of the NW1/4 of a Section.
He signs a lease
covering this acreage that provides him a
1/8th
royalty. A well is drilled by the lessee in the
NW1/4 on a 160 acre drilling and spacing unit and
completed as a producer. These facts tell you:
(a)
Farmer A's acreage position; expressed as 160
acres (the number of acres he owns in the
NW1/4--i.e. all of it)
of acres
(i.e.
divided by the number
in the drilling and spacing unit
160 acres) or as the fraction:
160/160 = 1/1 = 100% of leasehold acreage
(b)
Farmer A's net revenue royalty interest
is
expressed as his fraction of acreage in the
drilling and spacing unit
(i.e.
160/160)
multiplied by the fraction of royalty recited
1/8),
in the lease
(i.e.
or as the
calculation:
160/160 x 1/8 = .1250000 net revenue decimal
royalty interest
.1250000
OR
NRRI
15
(c)
The lessee's gross working interest--which
will be important in calculating lessee's net
revenue
working
interest--can
now be
calculated as follows:
Total acreage leased from the owner divided
by the total
acreage in the drilling and
spacing unit less the fraction of royalty
recited in the lease,
OR
(160/160)
STEP
(2) :
-
1/8 = 7/8 or .8750000 Gross-WI
Overriding
Royalties:
For
example,
modify the situation with Farmer A above by having
the lessee, Drillem, Inc., assign an overriding
royalty of 1/8th of the 7/8ths working interest to
Landman Larry, after lessee gets the lease from
farmer A. Note that overriding royalty interests
are often described as being "carved out of" the
working interest.
This means that the overriding
royalties must be deducted out of the gross
working interest (as calculated above at the end
of Step (1) (c), above. In this Step 2, Landman
Larry's net revenue overriding royalty is
calculated as follows:
(160/160) x
(1/8 x 7/8)
= 100% x 1/8 x 7/8 =
7/64 = .109375 net revenue overriding royalty
OR
.109375 NRORI
STEP
3)
Working
interest:
The
net
revenue
working interest is calculated by determining the
gross working interest, as in STEP
(1) (c),
above,
and subtracting from it the amount of overriding
royalty. In this case the calculations would be:
160/160 x 7/8 = .8750000 gross working interest;
.875 -
(1/8 x7/8)
= .875 - .109375 NRORI =
.765625 net revenue working interest
OR
.765625 NRWI
16
Recapitulation of Net Revenue Interest Calculations:
Royalty:
Farmer A:
160/160 x 1/8
=
.1250000 NRRI
Overriding
Royalty:
Landman Larry:
160/160 x
(1/8 x 7/8)
= .1093750 NRORRI
Working
Interest:
Drillem, Inc.:
(160/160 x 7/8)[160/160 x (1/8 x 7/8)]
OR
7/8 -
(1/8 x 7/8)
OR
.875 - .109375 = .7656250 NRWI
TOTAL:
1.0000000
OR
100% of Production Payments
TRACT CALCULATIONS:
Starting with the example above, assume that Farmer
A's 160 acre ownership of the NW/4 of the Section is now
included in a
640 acre drilling and spacing unit
encompassing the entire section.
In order to calculate Farmer A's net acreage position in
the drilling and spacing unit,
follow the formula set out
above, to wit:
160 acres owned
--------------- =
640 acre drilling
and spacing unit
1/4 x 640 acres = 160 net mineral acres
17
Also assume that each of the three other quarter-sections in
the
drilling
and
spacing
unit
are
owned
separately
by
Farmers B, C, and D, and are subject to three other leases-all of which provide for a 3/16ths royalty. How are the net
revenue decimal interests in the NW/4
to be calculated?
RI = 160/640 x 1/8 = 1/32 or .03125000
ORRI = 160/640 x
( 1/8 x7/8)= 1/4
NRRI
x 7/64
WI = 160/640 x[7/8 -(1/8 x 7/8)] = 1/4
1/4 x ( .765625) = .19140625 NRWI
=.02734375
x
NRORRI
( .875 -.109375)=
.03125000
.02734375
.19.140625
TOTAL:
.25000000
= 1/4
= 160/640
If the same overriding royalty of
1/8 of 7/8 is retained by
Landman Larry in all three of the remaining leases in the
three other quarter-sections, how will the net revenue
decimal interests be calculated in each of these quartersections?
RI = 160/640 x 3/16 =
ORRI = 160/640 x
WI = 160/640 x
.04687500 NRRI
(1/8 x 7/8)
[13/16 -
= .02734375 NRORRI
(1/8 x 7/8)]
= .17578125 NRWI
.04687500
.02734375
.17578125
TOTAL:
.25000000
=1/4 = 160/640
18
FORMULAS
FOR CALCULATING NET REVENUE
INTERESTS:
ROYALTY:
Royalty owner's
net mineral acres
in drilling and
spacing unit
----------------total number of
fraction or
x % of royalty
=
net revenue
royalty interest
acres in drilling
and spacing unit
OVERRIDING ROYALTY:
net mineral acres
subject to ORRI
in drilling and
spacing unit
----------------total number of
acres in drilling
fraction or
x % of override =
net revenue
overriding
royalty
interest
and spacing unit
WORKING INTEREST:
Working interest owner's
net mineral acres
in drilling and
spacing unit
----------------- x [100%-royalty]-override
total number of
= net
revenue
acres in drilling
working
and spacing unit
interest
19
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