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F I S C A L I M P A C T R E P O R T

SPONSOR Jennings

DATE TYPED 2/10/2005 HB

SHORT TITLE “Division Order” In Oil & Gas Payments Act

SB 256/aSJC

ANALYST Aguilar

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Energy, Minerals and Natural Resources Department (EMNRD)

Commissioner of Public Lands (SLO)

SUMMARY

Synopsis of SJC Amendment

The Senate Judiciary Amendment changes the term “division order” to “reasonable division or-

der”, removes a provision that a division order would not relieve the lessee of any liabilities or

obligations under the oil and gas lease and provides applicability for division orders executed on

or after the effective date.

Significant Issues

The Oil Conservation Division (OCD) reports the original bill would have provided that a divi-

sion order "does not relieve the lessee of any liabilities or obligations under the oil and gas

lease." This provision had potentially far-reaching implications because there has been extensive

litigation in other states about the extent to which a division order may modify or supplement the

payment terms of leases or other instruments. Cases on this subject have reached conflicting

conclusions, and the law of New Mexico on this subject is unsettled. The amended bill would

leave this issue for later resolution by the New Mexico courts.

Senate Bill 256/aSJC -- Page 2

OCD further notes Section 70-10-5 NMSA 1978 provides that a party responsible for payment of

oil and gas proceeds is excused from statutory liability for interest and costs resulting from delay

in payment of an interest owner if the interest owner refuses to execute a "reasonable division

order." The amended bill would provide that the form of division order set forth in the bill

would constitute a "reasonable division order." However, the bill does not mandate the use of

the form provided.

Synopsis of Original Bill

Senate Bill 256 amends the Oil and Gas Payments Act to include a definition of "division order,"

to provide that a division order "does not relieve the lessee of any liabilities or obligations under

the oil and gas lease".

SB 256 further sets out an acceptable form of division order.

Significant Issues

The division order is an instrument that has been used for many years in the oil and gas industry

to confirm ownership and title to production from a well. In more recent times the division order

has been used as part of the legal debate between producers and royalty owners over proper

payment of royalties.

Division orders are prepared by the party responsible for disbursing the proceeds from the sale of

crude oil, natural gas or condensate, and set forth the exact percentage interest in the well owned

by each owner of any leasehold, royalty, overriding royalty or other interest in production from

the well. Each owner is required to sign a counterpart of the division order prior to receiving any

proceeds.

A portion of the legal debate over division orders is whether a division order can be used to ex-

plain, change or modify lease terms. The issue has been centered on what deductions (typically

for gathering and processing) may properly be subtracted from royalty payments. Division or-

ders may contain terms which are different than those contained in the underlying oil and gas

lease.

This bill is presumably intended to prevent oil and gas lessees from relying on provisions con-

tained in division orders signed by royalty owners to limit the amounts that royalty owners can

recover as royalties under the terms of the leases. SB 256 specifically provides that division or-

ders do not amend any lease or operating agreement.

TECHNICAL ISSUES

EMNRD notes the following as issues the legislature may wish to consider:

1. The bill states that a division order does not relieve a "lessee" of any liabilities or obligations

under an "oil and gas lease." This specific language may give rise to some uncertainty as to

whether it applies where the interest of the claimant arises from some instrument other than an

"oil and gas lease," for example an overriding royalty created by an assignment or contract.

2. While the bill expressly provides that if the division order overstates the claimant's interest,

Senate Bill 256/aSJC -- Page 3

the claimant is liable to refund the excess paid for that reason, it is unclear in its effect where the

division order understates the claimant's interest, i.e., where the claimant actually owns a greater

percentage interest in production than is reflected in the division order.

PA/rs:yr