By: J. Richard Emens & Heidi R. Kemp
It’s almost impossible to live in Eastern Ohio and not have been affected by the oil and gas boom the last few years – whether it’s dodging sand trucks or “superloads” or dealing with oil and gas companies regarding your own oil and gas interests. And, even though our local counties have been infiltrated by the oil and gas companies for some time, there are many landowners who are still confused by some of the steps in the leasing process and then the issues that are raised when production actually starts.
Many landowners are still being contacted to lease their oil and gas interests. It could be that those interests have never been leased or the initial lease expired. Usually, you will get contacted by a land agent. This agent may be an employee of an independent company who has been hired by the oil and gas company to collect leases. The land agent works with the landowners and acts as the go-between between the landowner and the oil and gas company; but the agents do not work directly for the oil and gas company who wants to lease the property. The land agent will present you with an oil and gas lease. Please know that this lease can be negotiated! The negotiation can encompass not only the amount of the signing bonus money and the percentage of royalties but also the terms of the lease. Often, the terms of the lease can be just as important as the money. Find an attorney knowledgeable about oil and gas and protect yourself and your land as much as you can.
Once an oil and gas lease is in place, you may not hear from the oil and gas company for some time. It depends on the drilling schedules for the company. Often, the next communication a landowner receives is called a division order. Division orders are sent out when the company is getting close to sending out royalty payments to the landowner. The division order contains some basic information like the landowner’s name and address, the property identification, and the landowner’s “owner number” which becomes extremely important to have if you ever need to contact the company. The division order also contains a decimal interest, also known as the net royalty interest (the “NRI”). It is important for each landowner to ensure that his or her NRI is correct. If it is not, the company will not pay the correct amount of royalties. The calculation for the NRI is as follows: (your acreage in the unit / total acreage in the unit) x royalty percentage in your lease x your ownership percentage. For example: (10 acres / 640 acres) x 20% x 50% ownership = 0.0015625. This is your percentage ownership of the unit.
And, what is a unit? The oil and gas companies create pooled units to most effectively develop their leased acreage. The companies pool landowners’ acreage together to create one large unit. A well is drilled under the unit and oil and gas is produced from the whole unit. A landowner in that unit gets paid their NRI on all of the oil and gas produced in the unit. Some companies send a document called “Declaration and Notice of Pooled Units” to the landowner with the division order. Other companies do not. However, these documents are recorded in the county recorder’s office. This document is critical when calculating your NRI. It will tell you how many of your acres are in the unit and how many total acres are in the unit. Please note that at least one oil and gas company does not send division orders to the landowners unless the landowner specifically requests them.
After the division orders, the next step in the process is the actual payment of royalties. Royalty checks and the accompanying statements can be extremely difficult to read and decipher. Yet, it is extremely important that the landowner review each check to make sure he or she is being paid appropriately. As with the lease and the division orders, an experienced oil and gas attorney can help review these statements.