Division Orders

More often than not, a single well or lease will have multiple owners. A Division Order is created as soon as the title has been confirmed, the well has been drilled, and production has begun.  A Division Order is a written document that directs the distribution of proceeds from the sale of crude oil, natural gas, and/or natural gas liquids (“NGL”‘s).  Among other things, the Division Order describes the specific property involved with its legal description (usually Section, Township, and Range); it specifies the royalty or working interest of individual owners, their most current address, and the request of their signature with social security number (“SSN”) or tax-payer identification number (“TIN”).  Until the Division Order is signed, any funds will be placed in suspense.  Occasionally the Division Order is referred to as a division of interest.

On the Division Order, there is a line for the owner to include their TIN or SSN. PDC needs this information to report to the IRS. If an owner does not wish to provide their TIN/SSN, there will be a withholding deduction of 24% as provided under IRS regulations.

Royalty owners can update their address directly on the Division Order by hand writing their new address and initialing next to the changes.  PDC then mails two duplicate copies of the Division Order; one to be signed and returned to PDC and one copy for the owner to retain for their own records.

PDC has to determine who owns legal title to the surface, the minerals, and any other interests (royalty, overriding royalty, and working) in the land prior to obtaining an oil and gas lease, drilling a well, or making payments.  PDC has to confirm it has the legal right to drill, and it has to know which parties have a legal right to the production or royalties. Title is typically determined by a title opinion written by an attorney based upon an examination of the real property records within the county where the land is located.

Royalties are payments made to the mineral owner based on the well production. The royalty interest is either reserved in an oil and gas lease or created in a mineral deed. The royalties will be paid to the owner once they have returned an executed copy of their division order that includes their signature and their SSN/TIN.

Interest types are represented by the following codes:

• Royalty Interest (RI) – The interest in production retained by the lessor in the royalty clause of an oil and gas lease. This is the mineral interest owner’s compensation under the lease for production. This interest is free from operating costs, but can be subject to various taxes and post-production expenses. This can also be referred to as Landowner’s Royalty or Lessor’s Royalty.
• Overriding Royalty Interest (OR) – A royalty interest carved out of the lessee’s leasehold interest. As with the Royalty Interest, Overriding Royalty is generally free from any operating costs but can be subject to various taxes and post production expenses.
• Working Interest (WI) – Working interest is the right to the mineral interest granted by an oil and gas lease. The owners of this type of interest are the parties responsible for operations on the property and who pay for the costs of drilling, completing, and operating the well. This can also be called Leasehold Interest or Operating Interest.

The proportionate share of production from a well is calculated by the net acres you own/contribute to the spacing unit (that was established for the well) and then multiplied by the royalty rate provided in your lease.

For example, if you own/contribute 20 net acres in a 640 acre spacing unit and your lease provides for an 1/8th royalty rate, your interest is a 0.00390625 decimal interest (20/640 x 12.5%).

PDC is required to pay royalties based on record title. Therefore, we ask that you send us a copy of documents that pertain to your mineral interest, recorded in the county where the well(s) are located.

Royalty payments are suspended for a number of reasons. A few examples are:

• Title Dispute
• Death of an owner
• Transfer of property
• Incorrect Address
• Estates not probated in the state where the well is located
• Unrecorded Deeds
• Unreturned or unsigned Division Order
• Stale dated checks

Due to the many variables involved in determining the estimated value of a property, PDC does notprovide such valuations.  An oil and gas land broker in the area where the property is located may be able to provide this type of valuation.

DISCLAIMER:  Each royalty interest is governed solely by the language in the individual written agreement between PDC Energy and the royalty owner.  Nothing in this document will amend the language in your written agreement concerning royalties or grant any rights to royalty holders.