Oil and Gas Division Orders

Oil and Gas Division Orders
and

Division Order Mathematics

BASIC LAND MEASUREMENTS:

1Section =640Acres

= 5,230Lineal Feet on a Side

1Acre= 43,560Square Feet

1Quarter Section =160Acres(Homestead)

1Quarter-Quarter Section =40acres

1Quarter-Quarter-Quarter Section =

10acres

1Quarter-Quarter-Quarter-Quarter

Section = 2.5acres

36Sections = a Township

LEGAL DESCRIPTIONS:

The Cadastral Survey System (a gift of the genius of

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 of36Sections arranged in a

square consisting of6Sections on a side and whose numbers

run in an "S"-shaped pattern from Section1in the upper

right-hand corner to Section36in the lower right-hand

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, Section36in Township 2N(orth) would be located

in the lower right-hand corner of the Township,6miles

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 Section36,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, Section36-2N-4W6th PM is located in the lower

righthand corner of the Township,6miles North of the

Baseline and18miles West of the6th 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.

Thus, the Legal Description of36-2N-4w6th PM Carter

County, Oklahoma would be read: "Section36, Township2

North, Range4West of the6th 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 are6miles on a side(36square miles) and can be

conceived of as being6miles "tall". and the Ranges are6

miles "wide"--i.e. a measurement of the "width" of the

Township--then the three numbered designations in a Legal

Description--Section, Township, and Range--give the three

unique coordinates necessary to locate that particular

Section(and no other "Section36") on maps of the County

and State in question.

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 as10or even 2.5acres for shallow oil wells up

through40to160acres for deeper oil wells and from160

acres to320acres for gas wells and up to640acres 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

Section described above into quarter-sections(160acres),

quarter-quarter sections(40acres),quarter-quarter-

quarter sections(10acres), and quarter-quarter-quarter-

quarter sections(2.5acres).

Note also the common division into halves(i.e. x1/2)

of quarter-sections or quarter-quarter-sectionsfor

establishing spacing units for oil and gas producing formations running in narrow bands north-south or east-

west. Thus, the N/2SE/4of Section36would contain80

acres running east-west in a rectangle consisting of two

40-acre squares side-by-side; so, also, the W/2SE/4SE/4

of Section 36 would contain 20 acres running north-south in

a rectangle consisting of two10-acre squares arranged one

atop the other.

Well locations often begin or end with numbers and

letters such as "330' FSL,220' FEL." These indicate

that the well bore is330feet 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 to an examination of the concept of Net Mineral Acreage:

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:Tract Index

USAPAT.1-401

PAT.1-401WD....13-170

7-2-04WD.... 72-13

NW 11-33S-31WWD...101-32

Bettie McLish

WD 13-170

10-26-19

ALLNMR

J. D. McWilliams

WD 72-13

11-22-29

ALLNMR

G. Ward Stone

WD 90-181

6-12-52

ALLNMR

Marvin W. Lepper & Oleta A. Lepper, Jt WRS u OGGL270-43

WD 101-32E/2NW 11-33-31

4-15-62Surface only

Charles E. Lepper0. R. Whittaker

Whittaker Enterprises

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 theQuarter-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

decimal expresses the portion of100% of production

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, overriding royalty and working interest owners;

(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,

calculate net mineral acreage first,then

leasehold(RI,ORI,WI)fractions, and calculate

them in this order:

STEP(1):Royalty: For example, Farmer A owns all

of the NW1/4of a Section.He signs a lease

covering this acreage that provides him a1/8th

royalty. A well is drilled by the lessee in the

NW1/4on a160acre drilling and spacing unit and

completed as a producer. These facts tell you:

(a)Farmer A's acreage position; expressed as160

acres(the number of acres he owns in the

NW1/4--i.e. all of it) divided by the number

of acres in the drilling and spacing unit

(i.e.160acres) 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

in the lease(i.e.1/8),or as the

calculation:

160/160 x 1/8 = .1250000 net revenue decimal

royalty interest OR

.1250000NRRI

(c)The lessee's gross working interest--which

will be important in calculating lessee's net

revenueworkinginterest--cannow be

calculated as follows:

Total acreage leased from the owner divided

by the totalacreage in the drilling and

spacing unit less the fraction of royalty

recited in the lease,

(160/160)-1/8= 7/8or .8750000Gross-WI

STEP(2):Overriding Royalties: For example,

modify the situation with Farmer A above by having

the lessee, Drillem, Inc., assign an overriding

royalty of1/8th of the7/8ths 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 Step2, Landman

Larry's net revenue overriding royalty is

calculated as follows:

(160/160) x(1/8x 7/8)= 100% x1/8x 7/8=

7/64= .109375net revenue overriding royalty

.109375NRORI

STEP3)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:

160/160x 7/8= .8750000gross working interest;

.875-(1/8x7/8)= .875- .109375NRORI =

.765625net revenue working interest

.765625 NRWI

Recapitulation of Net Revenue Interest Calculations:
Royalty:

Farmer A:160/160x1/8=.1250000NRRI

Overriding

Royalty:

Landman Larry:160/160x(1/8x7/8)= .1093750NRORRI

Working

Interest:

Drillem, Inc.:(160/160x 7/8)-

[160/160x(1/8x 7/8)]

7/8-(1/8x 7/8)

.875

TRACT CALCULATIONS:

- .109375 = .7656250 NRWI
TOTAL: 1.0000000

OR
100% of Production Payments

Starting with the example above, assume that Farmer

A's160acre ownership of the NW/4of the Section is now

included in a640acre 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:

160acres owned

------=1/4x 640acres =160net mineral acres

640acre drilling

and spacing unit

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( 1/8x7/8)= 1/4x 7/64

WI= 160/640 x[7/8 -(1/8 x 7/8)]=1/4

1/4x( .765625)= .19140625 NRWI

.03125000

.02734375

.19.140625

NRRI

=.02734375 NRORRI
x ( .875 -.109375)=

TOTAL:.25000000= 1/4= 160/640

If the same overriding royalty of1/8of7/8is 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 quarter-

sections?

RI= 160/640 x 3/16 =

ORRI = 160/640 x(1/8

WI= 160/640 x[13/16

TOTAL:

.04687500 NRRI

x 7/8)= .02734375 NRORRI

-(1/8 x 7/8)]= .17578125 NRWI

.04687500

.02734375

.17578125

.25000000=1/4 = 160/640

FORMULAS FOR CALCULATING NET REVENUE INTERESTS: ROYALTY:

Royalty owner's

net mineral acres in drilling and

spacing unit

------
total number of

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

and spacing unit

WORKING INTEREST:

fraction or

x% of royalty= net revenue

royalty interest

fraction ornet revenue
x % of override = overriding

royalty
interest

Working interest owner's net mineral acres

in drilling and spacing unit

------x[100%-royalty]-override= net

total number ofrevenue

acres in drillingworking

and spacing unitinterest