CPL CPL Division Orders & Revenue Distribution 2 — Questions and Answers
Question 1: How is the Net Revenue Interest (NRI) for a working interest owner calculated?
- NRI = Working Interest × Royalty Rate
- NRI = Working Interest × (1 − Total Royalty Burden) (Correct answer)
- NRI = Royalty Rate ÷ Working Interest
- NRI = Working Interest + Overriding Royalty Interest
Correct answer: NRI = Working Interest × (1 − Total Royalty Burden)
A working interest owner's NRI equals their working interest multiplied by one minus the total royalty burden, reflecting what they net after all royalty obligations are paid.
Question 2: What is an overriding royalty interest (ORRI) and how does it differ from a landowner's royalty?
- An ORRI is paid by the landowner to the operator; a landowner's royalty is paid by the operator to the landowner
- An ORRI is carved from the working interest and expires when the lease terminates; a landowner's royalty is reserved in the lease and runs with the land (Correct answer)
- An ORRI covers only oil production; a landowner's royalty covers gas as well
- An ORRI is a state-mandated minimum royalty; a landowner's royalty is fully negotiated
Correct answer: An ORRI is carved from the working interest and expires when the lease terminates; a landowner's royalty is reserved in the lease and runs with the land
An ORRI is an interest carved out of the working interest that bears no costs and expires with the lease, whereas a landowner's royalty is reserved in the mineral lease and runs with the land.
Question 3: When a working interest is assigned, the assignee typically receives:
- Only the royalty obligation, not the cost obligation
- A proportionate share of both revenues (NRI) and costs (WI) as defined in the assignment (Correct answer)
- All revenue interests but none of the cost obligations
- A fixed cash payment instead of an ongoing production interest
Correct answer: A proportionate share of both revenues (NRI) and costs (WI) as defined in the assignment
An assignment of working interest conveys the assignee's proportionate share of both revenues (expressed as NRI) and costs (expressed as WI percentage) per the assignment terms.
Question 4: What is 'revenue suspense' as used in division order administration?
- A court-ordered freeze on all production payments from a disputed lease
- Funds withheld by the purchaser due to unresolved title, missing payees, or unsigned division orders (Correct answer)
- An operator's right to defer royalty payments for six months
- The state's escrow of severance tax revenues
Correct answer: Funds withheld by the purchaser due to unresolved title, missing payees, or unsigned division orders
Revenue suspense refers to funds the purchaser withholds and holds in reserve because ownership is unclear, title is disputed, or an owner has not signed a division order.
Question 5: What is a 'title requirement' in the context of division order preparation?
- A state regulation specifying the minimum number of title examiners for each well
- A condition identified in the title opinion that must be satisfied before an owner can be paid (Correct answer)
- A requirement that the operator record all conveyances before production begins
- A clause requiring periodic re-examination of title every five years
Correct answer: A condition identified in the title opinion that must be satisfied before an owner can be paid
A title requirement is a curative condition specified in the division order title opinion that an owner must satisfy—such as recording a deed or probating an estate—before their interest can be paid.
Question 6: What does a 'run statement' provided to royalty owners typically show?
- The operator's drilling and completion costs for the well
- The volume of production sold, price received, deductions taken, and net payment for the period (Correct answer)
- The state severance tax rate applied to production
- A forecast of future production volumes and projected royalty income
Correct answer: The volume of production sold, price received, deductions taken, and net payment for the period
A run statement details the actual volumes produced and sold, the price received, any allowable deductions, and the resulting net payment to the royalty owner for the period.
CPL CPL Division Orders & Revenue Distribution 2
How is the Net Revenue Interest (NRI) for a working interest owner calculated?