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Division Orders: Contract, Distribution Mechanism, and Curative Tool

David C. Knowlton, Harry S. Morrow, Oil and Gas Agreements (1983)

Purposes of Division Orders

When an oil and gas lease is executed, the lessor routinely reserves, in the form of a royalty interest, the right to receive a fraction of production from the leased lands. There may be many others who have an interest in production through ownership of overriding royalties, production payments, working interests, etc. Once production commences, all of the owners have a right, under the provisions of the instruments creating their interests, to their share of production. Interest owners who do not receive payment following production are understandably unhappy and may hold the lessee or purchaser of production, if they are not the same, liable for an accounting of the unpaid royalty. Also, when payments are not made the lessee or purchaser of production may incur liability to the various interest owners for conversion of their interest.1 Therefore, to maintain good relations and avoid litigation, it is necessary to devise a safe method for distributing royalty and other payments resulting from production. The party responsible for distribution of payments could attempt to make them without a formal written understanding between the parties by merely examining the relevant instruments affecting title, interpreting those instruments and making the [12-2] payments accordingly. However, this method of distribution carries a considerable r