CPL CPL Division Orders & Revenue Distribution 1 — Questions and Answers
Question 1: What is the primary purpose of a division order in oil and gas operations?
- To divide a leasehold into separate operating units
- To authorize the purchaser to distribute revenues according to each owner's decimal interest (Correct answer)
- To assign working interests among co-owners
- To establish royalty rates for newly drilled wells
Correct answer: To authorize the purchaser to distribute revenues according to each owner's decimal interest
A division order authorizes the oil and gas purchaser to pay each interest owner their proportionate share of production revenues based on their certified decimal interest.
Question 2: What does the 'decimal interest' stated on a division order represent?
- The working interest owner's share of drilling costs
- An owner's fractional share of gross production revenues from a specific well or lease (Correct answer)
- The royalty rate expressed as a decimal
- The operator's net profit interest after deducting expenses
Correct answer: An owner's fractional share of gross production revenues from a specific well or lease
The decimal interest on a division order represents each owner's fractional share of gross production revenues, calculated from their lease interest and applicable royalty provisions.
Question 3: Who is typically responsible for preparing division orders for a new well?
- The royalty owner
- The state oil and gas commission
- The operator or the first purchaser of production (Correct answer)
- The title attorney who examined the leasehold
Correct answer: The operator or the first purchaser of production
Division orders are typically prepared by the operator or the first purchaser of production, based on the division order title opinion and ownership research.
Question 4: What happens to revenue payments if an interest owner refuses to sign a division order?
- The owner forfeits all rights to past and future revenue
- Payments are suspended and placed in a revenue suspense account until the issue is resolved (Correct answer)
- The operator may reduce the owner's interest to zero
- Revenue is distributed equally among all other signing owners
Correct answer: Payments are suspended and placed in a revenue suspense account until the issue is resolved
When an owner refuses to execute a division order, the purchaser typically suspends that owner's revenue share in a pay suspense account pending resolution.
Question 5: What is 'pay suspense' in the context of division order administration?
- A clause suspending royalty payments during low commodity price periods
- Revenue held in reserve pending resolution of title issues or unsigned division orders (Correct answer)
- The operator's right to defer payment for up to 90 days after production
- A state-mandated escrow account for environmental remediation funds
Correct answer: Revenue held in reserve pending resolution of title issues or unsigned division orders
Pay suspense refers to revenues withheld by the purchaser and held in reserve until title issues are cleared or division orders are executed by all interest owners.
Question 6: A division order title opinion differs from a drilling title opinion primarily in that it:
- Is prepared before drilling to confirm lease validity
- Examines ownership down to current parties for the purpose of revenue distribution (Correct answer)
- Is filed with the state regulatory agency
- Reviews surface use agreements rather than mineral titles
Correct answer: Examines ownership down to current parties for the purpose of revenue distribution
A division order title opinion examines the chain of title to allocate production revenues to current owners, whereas a drilling title opinion confirms the right to drill before operations begin.
CPL CPL Division Orders & Revenue Distribution 1
What is the primary purpose of a division order in oil and gas operations?