Articles

Created by: Martha Mills at 8/9/2016 12:05:06 PM | 0 comments. | 409 views.

The State of Louisiana is currently accepting applications for the head of the Geological, Engineering, and Petroleum Lands Division of the Office of Mineral Resources within the Department of Natural Resources. 


Position Available:                     Geology and Lands Administrator Position (Official Title “Geologist Administrator”)

Website to Apply for Position:   http://www.jobs.la.gov

Location:                                   Department of Natural Resources, Office of Mineral Resources

Baton Rouge, Louisiana

Application Deadline:                 August 12, 2016

Salary & Job Description:          Available at http://www.jobs.la.gov

 

Created by: Martha Mills at 7/14/2016 10:05:25 AM | 0 comments. | 513 views.

Is Louisiana Haynesville Setting-up for a Comeback?  

By Alan Lammey

In spite of an undoubtedly bearish oil and natural gas market, an increase in rig activity and natural gas production in Louisiana could be the beginning signs of a comeback in the Haynesville.  As natural gas prices have risen back above $2.50/MMBtu, some acreage in the Haynesville is likely looking attractive for development.  According to Baker Hughes, the Louisiana Haynesville rig count for week ending July 8th stood at 12 rigs operating.  That is a 25% increase in rig activity from week ending May 13th when rig counts in the Haynesville were at their lowest, 9 rigs operating.  Chesapeake Energy, one of the largest operators in the Haynesville, in their latest investor presentation, states they have 20-30 wells in inventory in the area that they plan to complete or turn in line by the end of 2016.  According to Chesapeake, that inventory potentially represents 11 Bcf in gas over the life of the wells.  So far this year Chesapeake has brought on-line approximately 20 wells.  Two other large Haynesville operators, EXCO Resources and BHP Billiton, intend to keep at least one rig operating in the area through the remainder of 2016. For the first 12 days of July dry gas production the Haynesville, LA has averaged 3.7 Bcf/d, an increase of nearly 100 MMcf/d from June 2016.  The last time production in the area was at 3.7 Bcf/d was October 2014.  As the market looks towards a surge in demand in the Southeast driven by LNG exports and given the potential constraints on Northeast pipeline capacity through 2017, the prospects for Haynesville seem to be improving.

Created by: Martha Mills at 5/10/2016 11:32:22 AM | 0 comments. | 576 views.

LOUISIANA LEGAL UPDATE

 

By Andrea K. Tettleton

Mayhall Fondren Blaize

 

Middleton v EP Energy E&P Co., LP, 50,300 (La.App 2 Cir. 2/3/16), 2016 WL 413583

In the Middleton case, the Third Circuit had to determine whether a mineral lease terminated for failure to produce in paying quantities. In November of 1982 and April of 1983, the landowners executed three identical mineral leases in favor of Marshall Exploration, Inc. (hereinafter referred to as the “Leases”) which leases covered the landowner’s interest in approximately 300 acres of land. The Leases provided for a primary term of three years and included a habendum clause requiring production of minerals or additional operations to maintain the Leases beyond the primary term. Thirty acres of land subject to the Leases were included within the exterior geographical boundaries of the PET RA SU45 unit in DeSoto Parish. The PET RA SU45; Keatchie Invest No. 1 Well was spud in 1984 on lands within the unit, but not subject to the Leases. The Leases did not contain a Pugh Clause; therefore, production and operations from the unit well maintained the Leases in effect for the entire leased property. The well ceased producing in 2011 and was plugged and abandoned in 2013.

In 2012, the plaintiffs made a demand on the lessees asserting that the Leases had terminated and sought a release of the Leases; however, the defendants would not release the Leases. The plaintiffs then filed a lawsuit in 2013 alleging that the Leases had terminated for failure of production in paying quantities for the periods of January 1990 through January 1994. During that time period, the well failed to produce 1,000 MCF of natural gas and fewer than 100 barrels of oil.

Plaintiffs then filed a motion for partial summary judgment alleging that from August of 1991 through December of 1994, the costs of the well exceeded the revenue from the well by $56,477.55 which constituted a failure of production in paying quantities. The trial court held that even if they relied upon the calculations provided by the defendants, the well made a profit of only $2,905.96 over the 41 month time period which was an average profit of $70.87 per month. The court held that operating a well at a loss or minimal profit for 41 months was not sufficient to induce a reasonably prudent operator to continue production. The court then granted the plaintiffs’ partial summary judgment and held that the Leases had terminated by their own terms on December 1, 994. Defendants appealed the judgment.

Defendants argued on appeal that the trial court erred to only evaluating the production that occurred during the 41 month period rather than considering the entire 17 years of production. Mineral Code article 124 provides that when a mineral lease is being maintained by production of oil and gas, that production must be made in paying quantities. Production is considered in paying quantities when production allocable to the total original right of the lessee to share in production under the lease is sufficient to induce a reasonably prudent operator to continue production in an effort to secure a return on his investment or minimize any loss. Comments to article 124 provide that even though production continues beyond the primary term, the lease term may expire and the contract be automatically dissolved if production is not in paying quantities; thus, cessation of production in paying quantities is a resolutory condition that automatically terminates the lease.

The Third Circuit first held that the defendants’ argument that the plaintiffs could not allege that the failure to produce in paying quantities occurred in the time period 20 years prior to the lawsuit being filed was unsupported by prior jurisprudence. The Third Circuit had previously considered a production period that had occurred approximately ten years before the date of the trial; thus, the defendants’ argument was without merit.

The defendants then argued that the Lease did not terminate in December of 1994, because a reasonably prudent operator would have continued production. The standard to determine paying quantities is whether or not under all relevant circumstances, a reasonably prudent operatory would, for the purpose of making a profit, continue to operate a well in the manner in which the well in question was being operated. The factors a court must consider include the depletion of the reservoir, the price at which the product can be sold, the relative profitability of other wells in the area, the operating costs of the lease and the net profit. Paying quantities also includes the ability to market the product. The comments to article 124 state that implicit in the term paying quantities is the requirement that the production on income exceed operating expenses.

The plaintiffs alleged that the Keatchie well failed to produce in paying quantities, because the total well expenses exceed the production revenue during the period from 1991 through 1994. Defendants countered by providing expert testimony from a petroleum engineer who testified that expenses for the Keatchie well included extraordinary expenses for the installation of a compressor and workover operations and that those expenses are not to be considered as operating expenses for the purpose of determining production in paying quantities. If those expenses were not taken into account, then the Keatchie well made a monthly profit of approximately $71 during the relevant production period. While the trial court determined that a $71 monthly profit amount was insufficient to provide for paying quantities, the Third Circuit held that the determination of paying quantities is a fact-intensive inquiry which requires the fact finder to consider several factors in addition to the profit amount.

The expert witness for the defendants stated that the market price for natural gas was relatively low in Louisiana during the 41 month period in question. During the downturn period, the then operator performed various reworking operations to increase production from the well, and said operations did in fact increase production from the well. The expert engineer opined that because the workover increased production, the operator could reasonably assume that the workover costs could be recouped from the continuous production. The trial court also failed to take into account that a nearby producing well was successfully producing at the lower market price. The trial court also held that production from the well did not increase during the relevant 41 month time period. However, contrary to the trial court’s findings, the record actually shows that production began to increase in March of 1994.

The Third Circuit held that in order to determine whether the Keatchie well produced in paying quantities, the fact finder will need to consider all of the factors that would influence a reasonably prudent operator to continue production. Those factors include the market price available, the relative profitability of other wells nearby, the operating costs, the net income and the reasonableness of the expectation of profit. Ultimately, the Third Circuit held that a genuine issue of material fact existed as to whether a reasonably prudent operator would have continued to operate the Keatchie well. The Third Circuit reserved the judgment granting the plaintiffs’ partial summary judgment.

The Middleton case is a reminder that profit is not the only factor when determining whether a well is producing in paying quantities. The other factors that must be evaluated include (1) market price available, (2) the relative profitability of other wells nearby, (3) the operating costs, (4) the net income and (5) the reasonableness of the expectation of profit.

Andrea K. Tettleton is a partner in the Baton Rouge, Louisiana office of Mayhall Fondren Blaize. Her practice focuses on oil and gas law in Louisiana, including drill site and division order title examination and contract negotiation. She graduated magna cum laude from Texas Christian University with a Bachelor of Science in Psychology. She earned her Juris Doctorate cum laude from the Paul M. Hebert Law Center at Louisiana State University in 2009. Ms. Tettleton is a member of the Louisiana State Bar Association, Baton Rouge Bar Association, and Louisiana Oil & Gas Association. She is currently serving on the Board of Directors and the Executive Committee for the Baton Rouge Association of Professional Landmen and on the Board of Directors for Women’s Energy Network.

 

 

Created by: Martha Mills at 4/13/2016 9:08:24 PM | 0 comments. | 656 views.

FROM THE PRESIDENT

By David Deville, CPL

 

The Dependent Contractor

This year has been a year of setbacks, struggles, valuable lessons and for some new beginnings. Some of us have weathered the storm finding strengths and talents we didn’t even know we had.  It’s been a season of discovery.  Opening doors to places that we’ve never dreamed of, finding ourselves forging on and finding new frontiers.  Boldly going forward and, along the trip, discovering talent within ourselves that we didn’t know we had.  Or finally putting some of those talents that we knew we had to good use. 

For me, I have learned the value working with others.  I have the good fortune to work with and for some of the most generous and caring people. When one of us is down, the others lift them with a smile or a word of encouragement.  It’s made me reconsider the term “independent contractor”.  This term is fine for describing whether or not you are considered an employee for tax purposes.  Ok fine.  But how misleading is the term?

Our livelihood is so very dependent on many factors.  There is the obvious commodity prices.  Then there is public demand, the relative temperature in winter, the willingness of our clients and potential clients to take certain risks, the landowners disposition towards our industry and on and on.  We are at the mercy of so many factors.  But I digress.  We are dependent on each other.  The office team.  The small volunteer groups.  The associations, local, regional and national.  There are so many examples out there of leadership and triumph.  I feel so very blessed to be a small piece of a large puzzle. 

Helen Keller is quoted saying, “Alone we can do so little; together we can do so much”. The great Michael Jordan said, “Talent wins games, but teamwork and intelligence wins championships.”  I’ve witnessed it within the ranks of LAPL time and time again.  If you’ve never volunteered to work behind the scenes for the LAPL you should consider it strongly and you’ll see what I mean.  Same goes for the SAPL. So much hope and desire. Sometimes the pace is fast and furious and decisions need to be made quickly but when it gets down to it you will witness a group working together for the greater good for all the 400 plus members. 

We are not independent.  Far from it.  It takes people working together, combining talents, skills and ideas to be successful.    Pete van der Veld, LAPL 1st Vice President, once stated in an article you can find on our website that stormy seas spawn skilled sailors. That is perfect for our times.  

God bless all of you.  Never give up.  Again, it’s been a year of setbacks, struggles and so forth but God has plan for each us.  He wants us to take care of each other--to depend on him and one another to get through the day.  With a thankful heart, it is an honor and privilege to serve as your President, but I take no credit.  It’s a team effort. Thank you for the opportunity to serve.

Created by: Martha Mills at 4/13/2016 9:07:20 PM | 0 comments. | 649 views.

FROM THE LAPL GOLF TOURNAMENT CHAIRMAN / UL-LAFAYETTE PLRM DIRECTOR

Buster LeBlanc

 

Spring Is in the Air!

 

Put a smile on your face!  Enjoy the beautiful weather the Good Lord has bestowed upon us!  Maintain a positive attitude toward the global economy and that of our nation, oil and gas prices will rebound!  History is rearing its ugly head and reminding us we should not overindulge in life and prepare for the “down” times as well as the “triumphant” times in our industry.

 

An opportunity presents itself at the annual LAPL Crawfish Boil (Acadian Village) and Golf Tournament (Oakbourne Country Club) events to be held April 17 and 18.  These events provide all members and their guests an outing to network, enjoy some great crawfish, and have a little fun on a world-class golf course.  Ticket information for the Crawfish Boil and entry forms for the Golf Tournament are included in this March newsletter.  Please do not delay as the Golf Tournament is limited this year to 120 players.

 

I would be remiss in my position as Director of the PLRM Program here at UL-Lafayette without giving you an update on the well-being of our students.  The SAPL (student organization) remains active in attending and assisting with LAPL luncheons.  A trip to NAPE has just been completed and saw fourteen students in attendance.  These future land professionals were given a tough current status and outlook for the profession and comforted by the general theme of attendees stating “now was a good time to be in school with prices the way they are and keeping a positive outlook for the future”.  Students are currently organizing a visit by Melanie Bell, Executive VP of AAPL for a presentation to be held Monday, March 21 at 6 pm in the Student Union with a brief reception prior to her presentation on “The Importance Of Becoming and Maintaining One’s Status as an Educated Landman”.  This presentation qualifies for one (1) CPL / RPL / CE credit.  A blast email to LAPL members will be delivered within the next week and give further details on this event – the SAPL invites all LAPL members and their guests to attend.  Additionally, the student members are looking forward to assisting with the Crawfish Boil and Golf Tournament.  A special note of thanks for a job well done thus far is merited by Fernando Barboza (Pres), Mike Jones (VP), Jovan Dangerfield (Sec), and Jacob Willie (Treas), along with all Committee Members, for their service to the SAPL for the 2015-2016 school year.  Elections for the 2016-2017 term will be held in late April.

 

Please keep in mind our students when the opportunity arises as to internships.  Many qualified students are in need of this to complete the requirements of Management 475 which is an integral part of their curriculum plan to graduate.

 

Thanks for your interest in and support of the Crawfish Boil, Golf Tournament, and UL-Lafayette PLRM program.  I hope to see you at any of the events here in the Spring.

 

 

Created by: Martha Mills at 4/13/2016 2:36:44 PM | 0 comments. | 635 views.

LOUISIANA LEGAL UPDATE

 

By Michael J. Pantaleo

Randazzo Giglio & Bailey

 

Magee v. Worley, 163 So.3d 23 (2015)

 

In analyzing the extancy of a mineral servitude, a key factor is determining whether the prescription of nonuse has been interrupted by operations on and production from the lands burdened by the mineral servitude.  Prior to the adoption of the Mineral Code, Louisiana courts held that residential use of natural gas did not constitute production sufficient to interrupt prescription.  Pan Am. Petroleum Corp. v. O’Bier, 201 So.2d (La.App. 2 Cir.), writ ref’d, 251 La. 227, 203 So.2d 558 (1967).  With the adoption of the Mineral Code, the Louisiana legislature enacted La. R.S. 31:38 which provides, in part, that minerals need only be produced “in good faith with the intent of saving or otherwise using them for some beneficial purpose.”  La. R.S. 31:38.  This enactment opened the door for an interruption of prescription by residential use of gas.  As discussed in Magee v. Worley, 163 So.3d 23 (2015), it is not sufficient that the person merely have the right to use natural gas and/or that the person merely state that he is using natural gas, there must be actual use of natural gas.

 

In 1958, the Worleys’ ancestor in title sold a tract of land in DeSoto Parish to C.B. Magee (the Magee’s ancestor in title) and reserved all minerals, thereby creating a mineral servitude that burdened the tract of land.  Since 1958, multiple wells were drilled and produced on the tract of land, with the exception of the time period between November 1987 and October 1999.  The Magees, along with the Talleys, were the “surface” owners of the tract of land.  They brought suit seeking a declaration that the mineral servitude created in 1958 had been extinguished by prescription of nonuse during the period between November 1987 and October 1999.  The Worleys countered by offering evidence that C.B. Magee personally used gas from the Worley #1 Well for residential purposes in 1989 and continued to do so.  The evidence offered by the Worleys included three documents: (1) November 15, 1993, “Declaration of Adoption of Operations by Another,” executed by a trust officer at CNB and not signed by C.B. Magee, that stated that C.B. Magee “ran a small line from the well to his house” and used the gas for residential purposes since 1989; (2) March 31, 1994, affidavit signed by C.B. Magee to reclassify the Worley # 1 as a well for residential use; and (3) March 1, 1994, letter agreement signed by C.B. Magee agreeing to pay CNB $5.00 a month “so long as I take said gas from said well for residential purposes.”  Magee v. Worley, 163 So.3d 23 (2015).

 

At trial, both the Magees and the Worleys called witnesses to testify regarding the construction and use (or lack thereof) of a pipeline from the Worley #1 Well to C.B. Magee’s residence and C.B. Magee’s mental state on the date of the execution of the documents provided as evidence by Worley.  An expert surveyed the boundaries of the mineral servitude, the location of the Worley #1 Well, the location of C.B. Magee’s residence and the location of a pipeline running from a different well to C.B. Magee’s residence.  Further, a plumber testified that he dug a trench around the home and found no pipeline connecting the Worley #1 Well to C.B. Magee’s residence.  The District Court found that the documented evidence offered by the Worleys was not sufficient to interrupt the prescription of nonuse running against the land and only served as evidence of C.B. Magee’s right to use the well.  The District Court was not convinced that there was actual production and use. 

 

In Louisiana, a mineral servitude is extinguished by prescription of nonuse of 10 years, unless prescription is interrupted by good faith operations for the discovery and production of minerals.  La. R.S. 31:27(1) and La. R.S. 31:29.  Additionally, “under La.R.S. 31:38, ‘it is not necessary that minerals be produced in paying quantities’ to interrupt prescription, only that the by actually produced ‘in good faith with the intent of saving or otherwise using them for some beneficial purpose.’”  Magee at 29.  The Court held that, though the documentary evidence shows that C.B. Magee had the right to use gas from the Worley #1 Well for his own, residential purposes, there was insufficient evidence that C.B. Magee actually connected a pipe from the Worley #1 Well and actually used the gas produced from the Worley #1 Well.  As such, the Court of Appeal upheld the District Court’s decision that the prescription of nonuse running against the mineral servitude created in 1958 was not interrupted during the time period between November 1987 and October 1999 and had extinguished. 

 

Magee serves as a reminder that the adoption of the Mineral Code likely overruled prior jurisprudence holding that residential use of gas did not interrupt the prescription of nonuse.  Under La. R.S. 31:38, prescription of nonuse is interrupted by actual production and the intent to save and use the production for some beneficial purpose.

 

Fite Oil & Gas, Inc. v. SWEPI LP, 600 Fed.Appx. 239 (2015)

 

In 2012, the legislature overhauled La. R.S. 30:10, which, in the absence of a joint operating agreement, governs the relationship between the operator of a well and other leasehold interest owners in a compulsory unit.  Prior to 2012, the law and jurisprudence provided that the lessee (not the operator) is obligated to pay the lessor’s royalties and overriding royalties. The 2012 amendment added a cause of action in favor of the nonparticipating leasehold owner against the operator for payment of its lessor’s royalties and certain overriding royalties.  The Courts in Fite examined the law as it applied prior to the 2012 amendment.

 

Fite Oil & Gas, Inc. (“Fite”) acquired certain interests in mineral leases executed in the early 1960s by assignment in 2007.  SWEPI LP (“SWEPI”) acquired interests in other mineral leases within the HA RA SUK and proposed to drill a well on the unit.  SWEPI sent Fite a letter pursuant to La. R.S. 30:10(A)(2)(a), as enacted prior to the 2012 amendment, notifying Fite of its intention to drill the Don Robertson 23 Well #001.  Fite and SWEPI failed to contractually agree to Fite sharing in the risk and expense of the well and, accordingly, pursuant to La. R.S. 30:10, Fite did not participate in the well.  The well was spud in October of 2009, was completed in March of 2010, never paid out, and ceased production in November 2011.  Fite brought suit seeking, among other things, a determination that, under the La. R.S. 30:10 (pre-2012), SWEPI was required to pay the royalty and overriding royalty owners under Fite’s leases. 

 

The United States District Court relied on the holding in Gulf Explorer, LLC v. Clayton Williams Energy, Inc., 964 So.2d 1042 (La.App. 1st Cir. 2007) and related authorities and held that, under La. R.S. 30:10, as enacted prior to the 2012 amendment, the lessee (not the operator) owed the obligation to pay its lessors.  The District Court held that “the burden does not shift to SWEPI (the operator) under the facts in this case” and that Fite was required to pay its lessors with respect to the production at issue.  Fite Oil & Gas, Inc. v. SWEPI LP, Slip Copy 2013 WL 5935368.  Further, the District Court held that the “risk fee” penalty was applicable and that SWEPI was entitled to recover both Fite’s share of the well costs and a risk-fee penalty from proceeds of production prior to Fite being paid.  

 

Fite appealed.  On appeal, Fite again argued that it was not subject to the risk-fee penalty.  The Court of Appeals found that the risk-charge was a moot issue because the well had not paid out and had ceased producing.  Fite Oil & Gas, Inc. v. SWEPI LP, 600 Fed.Appx. 239 (2015).  Also, on appeal, Fite attempted to re-characterized its claims for royalty arguing that it sued not on its own behalf but on behalf of its lessors and that, as such, SWEPI was obligated to pay the royalty and overriding royalty owners under Fite’s leases (a cause of action now provided by the 2012 amendment of La. R.S. 30:10).  Because Fite had not plead this claim, the Court of Appeals rejected this re-characterization and concluded that the lawsuit was strictly a contest between Fite and SWEPI, which in no way brought the claims of Fite’s lessors before the District Court.  Nonetheless, the Court of Appeals examined the mineral owners’ right to bring a claim pursuant to the prescriptive periods under both an action to recovery royalty payments from a production of minerals (a three year period) and a ten year prescriptive period under a quasi-contract theory.  The Court of Appeals held that the mineral owners’ rights in an action to recover royalty payments from the production of minerals were limited to the three year prescriptive period and refused to extend that right of action to ten years under a quasi-contract theory.  As such, the Court of Appeals held that the mineral owners’ rights in an action to recover royalty payments had prescribed (though, the Court’s opinion is careful to note that this determination does not bind the lessors, who were not parties to the lawsuit).  Finally, the Court of Appeals held that based on the facts conceded by the parties in the lawsuit, “any determination of which company is to pay the lessors’ royalties is a moot point in this litigation.”  Fite at 245.  Though it did so for different reasons, the Court of Appeals reached the same conclusion, vacated the District Court’s holding, and remanded with the instructions that the complaint be dismissed.

 

               In 2012, La. R.S. 30:10 was amended to allow a nonparticipating leasehold owner to recover royalty and overriding royalty payments from the operator for the benefit of the royalty and overriding royalty owners.  La. R.S. 30:10 (A)(1)(ff).  The amendment also allows the royalty and overriding royalty owners to demand that the nonparticipating leasehold owner seek royalties on behalf of the royalty and overriding royalty owners from the operator.  La. R.S. 30:10 (A)(1)(ee).  In Fite, production from the well ceased in 2011, prior to the 2012 amendment of La. R.S. 30:10.  As a result, the District Court applied the pre-2012 statute and associated case law (Gulf Explorer, etc).  We note, however, that a well drilled prior to the effective date of the 2012 amendment and that continues to produce as of the effective date of the 2012 amendment presents a host of issues regarding retroactive application of law.  As of the date of this article, we are not aware of any reported decisions addressing application of the 2012 amendment to wells drilled prior to the effective date of the statute.

 

Michael J. Pantaleo joined Randazzo Giglio & Bailey LLC as an associate in 2015. After graduating from law school in 2009, Mike began his career as an Independent Petroleum Landman working in Louisiana and Texas.  As a landman, Mike has vast experience abstracting title, managing multiple oil and gas lease acquisition plays, managing pipeline right-of-way acquisition projects, and conducting all aspects of due diligence projects for multi-million dollar acquisitions and divestitures of oil and gas properties.  Mike’s legal practice is focused primarily on rendering oil and gas title opinions, counseling on transactional matters, and providing nuts and bolts operational advice.

 

Created by: Martha Mills at 4/13/2016 2:33:10 PM | 0 comments. | 868 views.

LOUISIANA LEGAL UPDATE

 

By Brett Venn

Jones Walker

 

The Louisiana Court of Appeal, Second Circuit, recently issued two opinions addressing the maximum terms permitted for mineral leases under Louisiana law, and the factors that district courts should apply to decide whether mineral leases have terminated due to lack of production in “paying quantities.”  The opinions are discussed below. 

 

Mineral Code Prevails Over Civil Code for Maximum Mineral Lease Term

 

In Regions Bank v. Questar Exploration & Production Corp., No. 50,211 (La. App. 2 Cir. 1/13/16), --- So.3d ---, 2016 La. App. LEXIS 36, the Court of Appeal, Second Circuit, considered whether mineral leases obtained in 1907 had terminated by operation of a Louisiana Civil Code article enacted in 2005.  The Court held that 99-year lease term limit set forth in Article 2679 of the Civil Code is inapplicable to mineral leases.  Instead, the applicable limit on mineral lease terms is provided by Article 115 of the Louisiana Mineral Code, which states: “a lease shall not be continued for a period of more than ten years without drilling or mining operations or production.”  The Court concluded that the 108 year-old mineral leases had not terminated.

 

Relevant Facts:

In 1907, three mineral leases (the “Stiles Leases”) were executed by W.P. Stiles, who was the plaintiffs’ predecessor in title, covering approximately 3,214 acres in northwestern Caddo Parish.  The “thereafter” or habendum clause of each lease provided that the lease was granted

 

for a term of ten years from date hereof and as much longer thereafter as gas or oil is found or produced in paying quantities….

 

In 1920, the mineral rights under the Stiles Leases were sold to Standard Oil Company, the predecessor of the defendant, Exxon Mobil Corporation (“Exxon”).  Thereafter, Standard, and later Exxon, to operate the leases.  

 

In their lawsuit, the plaintiffs claimed that the Stiles Leases had terminated under Article 2679 of the Civil Code because their terms had exceeded 99 years.  The district court disagreed with the plaintiffs and ruled in favor of Exxon on its cross-motion for summary judgment. 

 

Relevant Civil and Mineral Code Articles

Article 2679 of the Civil Code, which was enacted in 2005, provides in part that lease terms may not exceed 99 years:

 

The duration of a term may not exceed ninety-nine years. If the lease provides for a longer term or contains an option to extend the term to more than ninety-nine years, the term shall be reduced to ninety-nine years.

 

The Mineral Code, which was enacted in 1974, states at La. R.S. 31:115(A) that

 

The interest of a mineral lessee is not subject to the prescription of nonuse, but the lease must have a term. Except as provided in this Article, a lease shall not be continued for a period of more than ten years without drilling or mining operations or production. Except as provided in this Article, if a mineral lease permits continuance for a period greater than ten years without drilling or mining operations or production, the period is reduced to ten years.

 

The Mineral Code explains in Article 2 that its provisions supplement those of the Civil Code and apply specifically to mineral law, and that in the even to a conflict between the Code, the Mineral Code prevails:

 

The provisions of this Code are supplementary to those of the Louisiana Civil Code and are applicable specifically to the subject matter of mineral law. In the event of conflict between the provisions of this Code and those of the Civil Code or other laws the provisions of this Code shall prevail. If this Code does not expressly or impliedly provide for a particular situation, the Civil Code or other laws are applicable.

 

La. R.S. 31:2.

 

Court’s Analysis:

The Court noted in its opinion that most mineral leases expire as production ends before they reach the 99-year mark.  However, the Stiles Leases are 108 years-old.  The Court observed that the question presented by the plaintiffs’ claim “may be the first time the issue has arisen.”

 

The Court explained that, under the habendum clause of the Stiles Leases, the primary terms were ten years.  The secondary terms were “as much longer thereafter as gas or oil is found or produced in paying quantities,” which has been interpreted by Louisiana courts to mean that the lease continues as long a well is producing.  As such, assuming a well was drilled and tested or began producing during the primary 10-year term, the lease continued until such time as the well was no longer capable of producing in paying quantities.  

 

The applicable Mineral Code provision addressing the duration of mineral leases, La. R.S. 31:115(A), specifies that a lease term cannot be extended without drilling or mining operations or production. 

 

The Court concluded that 99-year term limit for general leases provided by Article 2679 cannot apply to mineral leases because mineral leases have their own maximum term provided by La. R.S. 31:115(A).  The Court found that the 99-maximum provided by the Civil Code “clearly conflicts” with the maximum term established by the Mineral Code.  Because La. R.S. 31:2 declares that, if there is a conflict between the provisions of the Mineral Code and the provisions of the Civil Code, those of the Mineral Code prevail.

 

The Court reasoned that, “[t]he habendum clause balances the interests of the lessor and lessee and above all ensures that the leased property is used for the development of the land through the production of oil and gas, and, if not, the lease terminates.”

 

For these reasons, the Court held that the district court properly determined that the Stiles Leases had not terminated because Article 2679 was inapplicable. 

 

Summary of Decision:

Louisiana mineral leases do not automatically terminate after 99 years, but they cannot be continued more than ten years without drilling or mining operations or production.

 

Multi-Factor Analysis to Determine “Paying Quantities” to Maintain Mineral Leases by Production

 

In Middleton v. EP Energy E&P Company, LP, No. 50,300 (La. App. 2 Cir. 2/3/16), --- So.3d ---, 2016 La. App. LEXIS 160, the Court of Appeal, Second Circuit, considered whether mineral leases terminated in December of 1994 due to lack of production in “paying quantities.”  The Court of Appeal held that, in determining whether production is in “paying quantities,” a district court should consider “all matters which would influence a reasonable and prudent operator.” 

 

Relevant Facts:

In 1982 and 1983, the plaintiffs’ predecessors in interest granted three identical mineral leases (the “Whorton Leases”) covering their interest in 300 acres of land in DeSoto Parish.  The Wharton Leases provided for a primary term of three years and included an habendum clause requiring production of minerals or additional operations to maintain the leases beyond the 3-year primary term.

 

The Whorton Leases were maintained in effect by a well that was spudded in 1984, ceased production in 2011, and plugged in 2013. 

 

The plaintiffs filed suit against the defendants in 2013.  The plaintiffs argued that the Whorton Leases had terminated in December 1994 for failure to produce in paying quantities.  The plaintiffs alleged that, during a 41-month period from August 1991 to December 1994, costs of the well exceeded revenue by $56,477.55. 

 

The district court agreed with the plaintiffs and granted a partial summary judgment in their favor.  The court concluded that the Wharton Leases had terminated by their terms on December 1, 1994.  The court found that the well made a profit of $2,905.96 over the period of 41 months, which averages to a profit of $70.87 per month.  The court determined that operating at a loss or minimal profit would not induce a reasonably prudent operator to continue production.

 

Relevant Mineral Code Article:

 

Article 124 of the Mineral Code provides in relevant part:

 

When a mineral lease is being maintained by production of oil or gas, the production must be in paying quantities.  It is considered to be in paying quantities when production allocable to the total original right of the lessee to share in production under the lease is sufficient to induce a reasonably prudent operator to continue production in an effort to secure a return on his investment or to minimize any loss.

 

La. R.S. 31:124 (emphasis added). 

 

The standard by which paying quantities is determined is whether or not under all the relevant circumstances a reasonably prudent operator would, for the purpose of making a profit, continue to operate a well in the manner in which the well in question was operated.  La. R.S. 31:124, cmt.

 

Where production has continued beyond the primary term of a mineral lease, “cessation of production in paying quantities, in the absence of drilling operations or some other means by which the lease is permitted to be maintained, automatically terminates the lease.”  La. R.S. 31:124, cmt.

 

Court’s Analysis:

On appeal, the defendant-operators first argued that the plaintiffs should be prohibited from claiming the Whorton Leases terminated approximately 20 years before the lawsuit was filed in 2013.  The Court disagreed and held that the plaintiffs’ attempt to prove lack of production in paying quantities from 1991 through 1994 was permitted. 

 

The defendant-operators next argued that the district court erred in finding that the Whorton Leases terminated because the evidence showed that a reasonably prudent operator would have continued production in the relevant time period. 

 

The Court agreed in part with the defendants-operators’ second argument.  It concluded that the district court’s judgment in favor of the plaintiffs was incorrect because issues of material fact exist as to whether a reasonably prudent operator would have continued production.  The Court remanded the case to the district court for further proceedings to resolve the factual issues. 

 

The Court explained that to determine whether production is in “paying quantities,” the test is whether there is a reasonable expectation of profitable returns from the well.  But the Court emphasized that profit alone is not determinative.  Rather, a trial court must consider “all matters which would influence a reasonable and prudent operator.”  Those factors include:

 

1)      the depletion of the reservoir,

2)      the price at which the product can be sold,

3)      the relative profitability of other wells in the area,

4)     the operating costs of the lease, and

5)      the net profit. 

 

The Court clarified that nonrecurring expenses are not considered as operating expenses for the purpose of determining “paying quantities.”  Examples of such expenses may include the costs of installation of a compressor and workover operations.

 

Summary of Decision:

Determination of production in “paying quantities” under Article 124 of the Louisiana Mineral Code is a fact-intensive inquiry that includes various factors in addition to the net profit. 

 

Brett Venn is a partner in the Jones Walker LLP’s Business & Commercial Litigation Practice Group and practices from the firm's New Orleans office.  Jones Walker also has Louisiana offices in Lafayette and Baton Rouge.  Brett’s practice focuses on a variety of business and commercial disputes, including energy, general contract, and shareholder derivative litigation. He has recently represented companies in disputes under the Louisiana Oil Well Lien Act, in construction lien and contract disputes, and in litigation arising out of the Bayou Corne sinkhole in Assumption Parish. He also has experience in investigations involving allegations of commercial kickbacks and conflicts of interest.

 

 

Created by: Martha Mills at 2/16/2016 9:37:45 AM | 0 comments. | 939 views.

 

LOUISIANA LEGAL UPDATE

By Mark Dore
Dupuis & Polozola

 


Hayes Fund for the First United Methodist Church of Welsh, LLC v. Kerr McGee Rocky 
Mountain, LLC, 2014-2592 (La. 12/8/15); — So. 3d –, WL 8225654


In December 2014, Mr. Thomas C. McKowen, IV introduced us to the Hayes Fund for the First United 
Methodist Church of Welsh, LLC v. Kerr McGee Rocky Mountain, LLC, No. 13-1374 (3rd Cir. 10-1-14, 
rehearing denied 11-12/14) case.  Almost one year later, on December 8, 2015, the Louisiana Supreme 
Court reversed the holdings of the Louisiana Third Circuit Court of Appeal, reiterating the manifest error 
appellate review standard and reinstituting the District Court’s decision.  Despite the fact that the 
Supreme Court vacated all of the holdings of The Court of Appeal, several unintended consequents may 
be in store, as the possibility exists that similar arguments that were persuasive to the 3rd Circuit Court of 
Appeal may one day be appealing to future trial courts. 


In order to discuss fully the implications of the Supreme Court’s opinion, we must first briefly revisit the 
facts of this case.  Simply put, royalty owners (“plaintiffs”) sued the mineral lessee and other working 
interest owners (“defendants”), arguing that the defendants imprudently operated two oil and gas wells 
sufficient to cause water and/or sand intrusion.  Therefore, it was argued that production prematurely 
ceased, thus causing the plaintiffs to lose millions in potential royalties.  This dispute arose from the 
drilling of two wells in Jeff Davis Parish.  Both wells were drilled in in 1999 and produced to 2004 and 
2008, respectively.  The plaintiffs alleged that the defendants acted in an imprudent manner when it 
allowed extraneous water and sand into the reservoirs, thus leaving valuable hydrocarbons 
unrecoverable.  This case was extremely technical and included the testimony and opinions of numerous 
experts, with the trial court judge hearing around 25 days of testimony.  The plaintiffs presented a single 
expert to prove that the defendants’ actions prematurely caused the production of water, while the 
defendants called nine witnesses, including five experts, to establish that the water production was not 
the result of unreasonable or imprudent practices.  The trial judge also received hundreds of pages of 
post-trial memoranda.  After post-trial briefings, the District Court ruled in favor of the defendants.  The 
court explained in written reasons that the plaintiff had not proved that the defendants had acted 
imprudently and had not shown that they incurred damages.  The plaintiffs appealed.  


A panel of the Louisiana Third Circuit Court of Appeal reversed the trial court’s ruling based on the legal 
principle that the trial court’s reasoning and judgment were “manifestly erroneous.”  In reaching its 
decision, the court of appeal took the rare step of essentially reevaluating the trial court’s factual findings 
through a detailed analysis of the factual record.  In addition to finding that the trial judge committed 
manifest error, the court of appeal also reversed on two (2) questions of law, namely, the applicability of 
the collateral attack doctrine and whether the damages provision found in the mineral lease created strict 
and absolute liability on the lessee.


The collateral attack doctrine is found at La. R.S. art. 30:12, and prevents a party from attacking a unit 
order from the Commissioner of Conservation other than by the ways prescribed therein.  In this case, the 
plaintiffs attempted to use the unit order of the Commissioner of Conservation to serve as the factual 
understanding of how large the subject reservoir was for purposes of calculating damages.  The 
defendants retorted that the Commissioner’s unit order, applied to this instance, was not the property 
measure of damages.  Essentially, plaintiffs were attempting to use the Commissioner’s unit order as a 
substitute for proving the facts of their claim on the issue of damages.  In every civil case, the party 
seeking damages must prove up their damages.  Here, the size of the reservoir was an exceptionally 
important component of damages, because of the importance of calculating unrecoverable oil and gas 
due to the actions of the defendant.  The defendants submitted proof that the Commissioner’s unit order 
was not reflective of the “geological” reservoir boundaries, which were smaller.  To use the collateral 
attack doctrine offensively and as a substitute for the actual proof of damages was not a step the trial 
court wished to take, considering all of the evidence before it.  However, 3rd Circuit agreed with the 
plaintiffs, and rejected the defendant’s arguments.


The 3rd Circuit also agreed with the plaintiff’s argument that the damages provision found in the mineral 
lease created strict and absolute liability on the lessee.  It appears that the lease read, “the Lessee shall 
be responsible for all damages to timber and growing crops of Lessor caused by Lessee’s operations…”  
In addition, the Appellate Court reviewed an Exhibit A attached to the lease, which provided that Lessee 
was responsible for all damages caused by Lessee’s operations “including, but not limited to damages to 
the surface of the land, timber, crops, pastures,…water wells and improvements…”  The court reasoned 
that the alteration to the boilerplate language found in most mineral leases known as an “all damages” 
clause, along with the inclusion of the language found on the Exhibit A, combined to expand rather than 
limit the responsibilities and liabilities of the defendants.  The 3rd Circuit acknowledged that the “absolute 
liability was initially limited to damages to timber and growing crops.  Those limitations, however, were 
struck from the lease…”  The plaintiff’s further contended, and the 3rd Circuit agreed, that the lessee was 
responsible for all damages to the surface, subsurface, and reservoir.  In doing so, the court of appeal 
removed the landowner’s burden of showing that the defendants were actually imprudent in operating the 
wells.  


Despite the forgoing, as stated above, the Supreme Court reversed all of the 3rd Circuit’s holdings, and 
painstakingly explained in a sixty-eight page decision why the manifest error standard was not met.  In its 
opinion, the Supreme Court took the opportunity to restate that it is the appellant courts role, based on the 
entire record, to determine whether a judge’s or jury’s fact-finding conclusions were reasonable, and not 
to determine whether the judge or jury were right or wrong.  To demonstrate this, Justice Knoll (herself a 
former member of the Third Circuit Court of Appeal) dug through the facts of the extensive record to show 
the reasonableness of the trial court’s decision.  Justice Knoll stated “the appellate court does not function 
as a choice-making court; the appellate court functions as an errors-correcting court...”  She emphasized:


Under a proper manifest error review, the analysis by the reviewing court 
should focus on whether there is clear error for lack of a reasonable 
basis in the conclusions of the factfinder.  Rarely should a district court’s 
choice of expert(s) be found clearly wrong because it is so difficult to find 
a reasonable basis does not exist for the expert’s opinion relied upon by 
the district court.


As such, the Supreme Court used this case as a guide for future courts to implement the manifest error 
standard. 
In its lengthy treatment of these facts, the Supreme Court did not specifically address the offensive use of 
the collateral attack doctrine as a substitute for proving damages, nor did it set forth a clear 
pronouncement on the damages provision in the lease.  Rather, its clear reversal on manifest error 
grounds will leave many to wonder whether the arguments on which the plaintiffs succeeded on in the 
court of appeal can be used to sway future trial courts.  With any luck, those courts will reject those 
arguments, but the possibility exists that we may see future rulings that will encourage and/or force 
operators to develop wells beyond their productive capacity or allow plaintiff’s attorney to create a new 
industry of litigation where defendants can be found strictly and absolutely liable anytime a well produces 
less than expected.
Mark A. Doré is an associate in the firm’s Louisiana office.  His primary focus is Louisiana mineral and energy law, 
including drill site and division order title examination, contract negotiation, due diligence in connection with the 
acquisition and divestiture of oil and gas properties, as well as providing advice and assistance to industry members 
in all phases of onshore exploration and production. Before joining Dupuis & Polozola, L.L.C., he worked as an 
Independent Landman from 2004 through early 2010 gaining hands on working knowledge of Louisiana 
mineral law.  He received a B.S. from the University of Louisiana at Lafayette in 2004, and a J.D. in 2009 
from Southern University Law Center.  In March 2008 while attending law school, he began operating his 
own oil and gas/real estate title company based in Lafayette; in doing so, he continued to work full time as 
an Independent Landman.  He was admitted to the Louisiana Bar on October 22, 2009.Mark is originally 
from Delcambre, but has made Lafayette his home for past 19 years.  He is a member various 
professions organizations, including the Lafayette Association of Professional Landmen, the Lafayette 
Parish Bar Association, and the Louisiana State Bar Association.

Created by: Martha Mills at 2/2/2016 1:49:47 PM | 0 comments. | 721 views.

Staying in the Game: 7 Tips for Independent Landmen

By Richard Hines, CPL

As an independent or staff landman in today’s market, you are trying to figure out if you are still in this game. Maybe you are wondering if you even want to be in the oil & gas land business anymore. Was your project discontinued? Were there major cut backs? Are you just worried that the future is bleak with all the bad news of layoffs and more?

Let’s face it, as a landman today, you are required to do more than you have ever done before. You must have a vast arsenal of talent and resources to stay relevant to an employer as well as the company that has hired them. This means that the typical landman needs to continue to be open minded about job opportunities, job performance, and going beyond what has been traditionally expected.

Landmen today should set in place a plan of action to help boost their confidence as well as organize their work habits. Here are 7 tips that can help you in this endeavor:

 


  1. 1. Remove your fears. Remember the landman is the energy team’s most innovative and motivational member, so confidence in your actions is key to making all deals a reality. Have confidence in your ability, education and work product. You have spent years learning and honing your skills to do the best job, so why not tell others that you are the best? Remember telling the truth about one’s skill set is not boasting!

  1. 2. Set goals and start with small steps. For example, let’s look at public speaking. If you are afraid to speak to crowds, start by speaking in front of a few friends then work to a larger audience. If you need help with using technology like some type of presentation software, start by asking the right people for assistance. This effort will assist you in attaining your goals one step at a time so you can continue to move ahead to the next set of goals you have identified for your professional growth.

  1. 3. Take action. Don’t hesitate or procrastinate, but move forward realizing that you can accomplish anything you put your mind to.  Make a plan, write it down and ACT on it. This is so important, as most people just think or talk about making a change.

  1. 4. Use and improve your skills. Just like in sports, practice makes perfect. The repetitious nature of research, agreement creation, and negotiations make them ideal for improvement. Remember that you may need help from others to improve these skills or maybe just a little practice to get better. If you find that you are lacking in some areas, take classes, ask mentors or find an article published on the subject and read as much as you can about it. Many training courses and seminars are offered, so take advantage of all you can.

  1. 5. Build a network. Whether it be locally or nationally, colleagues and friends can help you get the most out of your work. No matter if they are employed inside or outside of the energy industry, surround yourself with people who can help you succeed. Join groups or associations both in your home region and on the national level. Don’t be shy about introducing yourself and/or your achievements. Remember, everyone loves a winner.

  1. 6. Ask for assistance. Don’t be afraid to ask for help. Everyone has asked someone for help at one time or another in their life. Understand that most people are very willing to lend a hand in solving a problem or two. They also don’t mind discussing their experiences, especially if it means that they can help someone achieve the same success they have achieved. Once you have succeeded don’t forget to say thank you and return the favor or pay it forward to the next person needing assistance. A good practice may be to look for a mentor, as there are many professionals that would love the opportunity to share their knowledge with a hard working fellow landman.

  1. 7. Use technology. Technology has come a long way in recent years. With mobile apps, computer programs, search engines and smart maps, today’s landmen have a wealth of information tools at their disposal. Don’t be afraid to ask the hard questions, as you will find that some companies are making claims they can’t support, and other companies are doing things nobody else is doing or has even thought of.  Just because it seems out of the norm doesn’t mean it is not the better way of completing the task. Don’t be afraid to try something new as the results might surprise you!

Richard Hines, CPL, is Vice President of iLandman.

 

Created by: Martha Mills at 2/2/2016 12:32:33 PM | 0 comments. | 633 views.

FROM THE LAPL PRESIDENT

David Deville, CPL

 

For those of you that do not know me, my name is David Deville, and I have the distinct honor and privilege of serving as your LAPL 2015-2016 President.  Being your President has enhanced my life in many ways, like making new friends in the short time that I have served.  I hope to meet many more in the coming months at our various functions.   I have worked with a wonderful, dedicated group of leaders and organizers.  When you see them out and about at a meeting or a luncheon, please take the time to say thanks.  I have had such a great time at the monthly meetings, luncheons, SAPL activities, Seminars, Safety Meetings, a successful Gulf Coast Land Institute in October, Love INC toy drive for Christmas, and we are only half way done!

A few things we hope to get done before June of 2016 include updating our LAPL by-laws and improving the functionality of our website.  There are some very talented and dedicated volunteers working diligently behind the scenes to make this happen.  I am proud to announce that despite the current state of our industry, our membership remains strong.  As of December 22, 2015, we have 448 members in good standing! That is very impressive and shows the resilience and dedication of our group.  

With the New Year rolling in, it’s time to start thinking about our main events coming in the spring of 2016.  The Executive Board and I have been working together on plans for the upcoming Annual Charity Crawfish Boil and Golf tournament scheduled for April 17th and 18th respectively.  We are bringing the crawfish boil back to Acadian Village and playing golf the following day at Oakbourne County Club.  My goals are simple: 1) Make the most money as possible for our chosen charity, 2) Give our sponsors the absolute most exposure as possible for their generosity and 3) Keep the cost as low as possible for our members so they can attend with their families.  I want these events to be memorable and I want as many people involved as possible! 

Check out all of the upcoming newsletters and emails regarding ongoing updates for these and other events and call to be a volunteer and/or a sponsor.  Once again, I am very honored to serve the LAPL.  Thank you for the opportunity and please call me anytime and I will be glad to answer any questions you may have.

Created by: Martha Mills at 2/2/2016 12:30:57 PM | 0 comments. | 673 views.

LOUISIANA LEGAL UPDATE

By Caleb Madere

Liskow & Lewis

 

Option or Obligation? The Louisiana Supreme Court’s Interpretation of “Option to Lease” Clauses

In the 2014 case Olympia Minerals, LLC v. HS Res., Inc., 2013-C-2717 (2014), 171 So. 3d 878, the Louisiana Supreme Court interpreted an “option to lease” clause in a seismic and lease purchase agreement. The primary issue before the court was whether the clause imposed an obligation on the grantee of the option to lease the property or if the clause merely gave the grantee the option to lease the property. Although it seems clear that an “option to lease” clause provides for a non-binding option rather than an obligation, the Louisiana Supreme Court was forced to take up the issue after the lower courts found that the clause imposed a binding obligation on the grantee to lease the property.

The dispute centered around an agreement between El Paso Minerals and El Paso Leasing (which later became Olympia Minerals, LLC, collectively referred to hereinafter as El Paso) on the one hand, and Aspect Resources, LLC and HS Resources Inc. on the other hand. El Paso held mineral rights in approximately 42,000 mineral acres in Southeast Louisiana. Under the agreement, Aspect and HS Resources were to conduct seismic operations on the property, and after conducting seismic, the agreement arguably provided that Aspect and HS Resources had the option to sublease at least 15% of El Paso’s interest. The relevant portions of the agreement are as follows:

[El Paso] hereby grants to HSR and ASPECT, effective August 1, 2000, a 12-month non-exclusive geophysical permit covering all interest of [El Paso] in the [El Paso] Lands described on Exhibits A-3 and A-4, and a 12-month exclusive option to sublease covering all interest of [El Paso] in the [El Paso] Lands, described on Exhibit A-3. Consideration for the option to sublease shall be $35 per net mineral acre (the “[El Paso] Option Consideration”). . . .

The exclusive option to sublease shall provide for a bonus consideration of $250 per net mineral acre to [El Paso] on which HSR and ASPECT elect to exercise their option to sublease (the “[El Paso] Bonus Consideration”), provide that the sublease will contain a 25% overriding royalty interest to [El Paso] as lessor inclusive of the royalty interest provided in the Lease, provide for a term of three (3) years, and $250 per acre rentals (“the fixed annual rental”), all in substantially the form attached to this Agreement as Exhibit C. HSR and ASPECT shall lease a minimum of 15% of the [El Paso] Lands subject to the exclusive option, and shall work jointly with [El Paso] to prioritize [El Paso] Lands that may be subject to prescription and actively manage the exploration program to maximize [El Paso]s preservation of its mineral interest. Id. at 14-15.

Olympia brought suit after the parties had a dispute over seismic data. In addition to the seismic data dispute, Olympia argued that Aspect and HS Resources had an obligation under the agreement to sublease at least 15% of El Paso’s interest. Olympia filed a partial motion for summary judgment arguing that the agreement imposed an obligation on Aspect and HS Resources to sublease. The district court initially denied Olympia’s motion, stating that “when [the agreement] is read in its entirety, the only logical conclusion is that [defendants] had a right to exercise an option to lease and if elected [were] required to lease a minimum of 15 percent of the El Paso Lands.” Id. at 6. Following the denial of Olympia’s motion the district court judge presiding over the matter retired.

After the appointment of an ad hoc judge, Olympia asked the court to reconsider the denial of its motion for summary judgment. The ad hoc judge found that the agreement did impose an obligation on the defendants to sublease and granted summary judgment in Olympia’s favor. The court reasoned that the use of the word “option” does not mean that it is a “pure option.” Instead, the court found that “it’s a provision which imposes certain obligations on people, and it’s quite clear that it was expected that HSR and Aspect would lease a minimum of 15 percent of the [El Paso] lands.” Id.

On appeal, the appellate court affirmed. The court stated that the provision did not provide for a “pure option” and instead “imposed an obligation on Aspect.” The court went on, stating that “Louisiana law contained no provision preventing the option from being exercised in this manner.” Id. at 9.

Aspect appealed to the Louisiana Supreme Court. The Court began by noting that contracts are the law between the parties, and that “the meaning and intent of the parties to a written instrument . . . is ordinarily determined from the instrument’s four corners.” Id. at 13. Looking at the relevant portions of the agreement reproduced above, the Court noted that the word “option” was used multiple times in the first paragraph. Turning to civil law principles of contract interpretation, the Court quoted Louisiana Civil Code article 2047, which states: “The words of a contract must be given their generally prevailing meanings. Words of art and technical terms must be given their technical meaning when the contract involves a technical matter.” Id. at 20. According to the Court, the word “option” has a “generally prevailing meaning” in Louisiana, indicated by the fact that the word is legislatively defined in Louisiana Civil Code article 1933 as “as contract whereby the parties agree that the offeror is bound by his offer for a specified period of time and that the offeree may accept within that time.” Id.

Olympia argued, however, that the second sentence of Louisiana Civil Code article 2047 applies here. Olympia contended that in the industry, landmen do not consider an “option” to have a non-binding effect. Instead, Olympia argued that landmen understand the word option to mean “[t]he right or power to choose; something that may be chosen.” Id. Olympia focused on the portion of the agreement that reads “ASPECT shall lease a minimum of 15% of the [El Paso] Lands subject to the exclusive option.” (emphasis added) Under this language, Olympia suggested that the parties intended for Aspect and HS Resources to be bound to sublease at least 15% of the interest, but that Aspect and HS Resources had the option as to which lands they wished to lease.

The Court correctly rejected Olympia’s argument. In doing so, the Court explained that when a term is legislatively defined, that definition will prevail over a definition developed through industry custom. Further, the Court refused to give meaning to the “shall lease” language while “ignoring the word ‘option’.” Id. at 23. Instead, the Court reasoned that the agreement must be viewed as a whole. Viewing the agreement as a whole, the Court found that the agreement gave Aspect and HS Resources the option to sublease the El Paso lands, and if they chose to exercise that option, then the agreement required them to sublease at least 15% of El Paso’s interest. Further, even though this issue was originally disposed of via summary judgment by the district court, the Supreme Court found that because the resolution of this issue substantially impacted the trial on the merits there were grounds to grant a new trial. However, in light of judicial efficiency, the Court decided that because the record was substantially complete the Court could enter judgment on the matter. Consequently, not only did the Court find that the trial court erroneously granted Olympia’s motion for summary judgment, the Court entered judgment in favor of Aspect and HS Resources finding that the agreement did not create an obligation to sublease.

This case makes clear that “option to lease” clauses contained in mineral agreements will not be construed to obligate the grantee to lease property, even if option clauses have been understood by those in the industry to have such an effect. However, the case also has broader implications. One could argue that this case stands for the proposition that when a term is legislatively defined, that definition will control regardless if the term has a different understood meaning in the industry. For this reason, drafters of mineral agreements should use caution when using terms that may be legislatively defined.

Caleb Madere is an associate in the firm’s Lafayette office, practicing in the areas of energy and natural resources law and energy litigation. Mr. Madere received his Juris Doctor from the Paul M. Hebert Law Center, Louisiana State University, where he graduated magna cum laude and was a member of the Order of the Coif. During his time in law school, he served as the Louisiana Law Review Senior Editor. Mr. Madere received his B.S. in Biology from Louisiana State University.

Created by: Martha Mills at 12/2/2015 1:53:22 PM | 0 comments. | 871 views.

Louisiana Legal Update

James L. Bullen

Dennis, Bates & Bullen, L.L.P.

 

Sanity and sound legal reasoning prevail!

 

McCarthy v. Evolution Petroleum Corp., No. 49,301 (La. App. 2 Cir 10/15/14), 151 So.3d 148; writ granted, 2014-2607 (La. 3/27/15), 161 So.3d 646; reversed 2015 La. LEXIS 2242 (La. 10/14/15), ___ So.3d ___.

 

In McCarthy v. Evolution Petroleum Corp., 151 So.3d 148, the Louisiana Court of Appeal, Second Circuit, held the lessors/plaintiffs’ petition stated a cause of action against the lessees/defendants to rescind the lessors’ sale of royalty rights to a lessee based on fraud by silence or fraud by misrepresentation. The Second Circuit’s decision was ably summarized in the Summer, 2015 LAPL newsletter which noted the Louisiana Supreme Court had granted a writ of certiorari to review the holding. The Supreme Court reversed the Second Circuit’s holding and dismissed the plaintiffs’ petition with prejudice and in so doing, further delineated the obligations imposed upon a mineral lessee by Mineral Code Article 122 and the absence of a statutory duty upon the lessee to reveal proprietary information obtained through operations in a transaction with its lessor.

 

A brief restatement of the facts will facilitate a summary of the Supreme Court’s holding. The plaintiffs are successors to the lessors’ interest in mineral leases granted more than 60 years ago; the defendants acquired 100% of the working interest in the plaintiffs’ leases and other leases in the Delhi Field Unit in 2003 for $2.8 million; in 2004, the defendants began seeking a purchaser for their Delhi Field Unit working interest for the purpose of employing CO2 enhanced oil recovery technology to increase and produce the recoverable reserves; in 2006, while in the process of selling its interest in the field, defendants made unsolicited written offers to purchase the royalty rights of certain lessors, including plaintiffs, for the exact amount of royalties received during the preceding 16 years and stated the sale must close soon while funding is still available; the plaintiffs sold their royalty rights to defendants for $41,773.00; at approximately the same time, the defendants agreed to sell their leasehold to Denbury Resources, LLC for a purchase price of $50 million dollars while retaining a 4.8% royalty interest and a 25% back-in working interest upon generation of $200 million of net cash flow to the purchaser. Plaintiffs subsequently sued defendants to rescind the sale of their royalty rights based on fraud by misrepresentation and/or fraud by silence.

 

The defendants estimated the enhanced recovery reserves to be 40 to 50 million barrels of oil at the time of the transaction with plaintiffs and subsequently increased the estimate, based on project performance, to be more than 60 million barrels. The plaintiffs were paid $41,773.00, while expert testimony estimated their royalty rights were worth $9,216,540.00 assuming a price of $90 per barrel of oil (50 million barrels x $90 x plaintiff’s unit revenue interest). 

 

The defendants filed a peremptory exception of no cause of action which means that even if every allegation in the petition is accepted as true and viewed in the light most favorable to the plaintiffs, their petition still fails to state grounds upon which the sale could be rescinded.

 

A sale of immovable property can be rescinded for inadequate consideration, known as “lesion beyond moiety”, but a sale of mineral rights (which is an incorporeal immovable) is not subject to rescission for lesion beyond moiety. (See La. Mineral Code Article 17). In addition, La. Civil Code Article 1953 provides: “Fraud is a misrepresentation or a suppression of the truth made with the intention either to obtain an unjust advantage for one party or to cause a loss or inconvenience to the other. Fraud may also result from silence or inaction.”

 

The defendants contend the sale could not be rescinded based on the price. However, the plaintiffs asserted the lessee’s superior knowledge regarding the imminent enhanced recovery project, the delay in commencing the project, the long term lessor-lessee relationship, the assertions in the unsolicited offer setting forth a price equal to 16 years worth of royalty and other details, all by their own lessee, constituted fraud.  In essence, the plaintiffs asserted their lessee used its superior knowledge to purchase their royalty rights for much less than their actual value. 

 

The plaintiffs’ claims were dismissed by the district court as constituting a claim for lesion beyond moiety disguised as a fraud claim, but the Louisiana Court of Appeal, Second Circuit, reversed holding the plaintiffs’ petition did state a cause of action for fraud by misrepresentation or silence. 

 

The Supreme Court noted the case hinged on Louisiana Mineral Code Article 122 which sets forth the lessee’s duty as follows: “A mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor. Parties may stipulate what shall constitute reasonably prudent conduct on the part of the lessee.” (Underline added.)

 

In ruling for the defendants, the Supreme Court stated that although “[f]raud may…result from silence or inaction,” in order to “…find fraud from silence or suppression of the truth, there must exist a duty to speak or to disclose information.” Id. Further, a mineral lessee’s duty “…to develop and operate as a reasonably prudent operator has no component of disclosing the information about which the plaintiffs complain…Certainly, the information of the lessee gained through geological data and technical developments involving the lease premises remains proprietary information.” Id.                 

 

The Supreme Court also noted the last sentence of Article 122 authorizes the lessor and lessee to stipulate what shall constitute reasonably prudent conduct on the part of the lessee if the lessor seeks to expand on the duties set forth by Article 122, which can include a duty to disclose information. Indeed, it is now fairly common for a lessor to require its lessees to disclose information gathered through operations on the leased premises.  Although dicta, the Supreme Court stated that a cause of action based on fraud by silence in a purchase of royalty rights by a lessee from its lessor might be sustainable if the mineral lease at issue required disclosure of pertinent information which was withheld.

 

The plaintiffs also asserted fraud by affirmative misrepresentation based on the fact the defendants made unsolicited offers which contained components intended to mislead the plaintiffs, such as offering to buy their royalty rights for the exact sum of all royalties the plaintiffs received during the preceding 16 years and asserting the sale must close quickly while funding is still available. The Supreme Court held this was simply a claim for lesion beyond moiety disguised as a fraud claim and dismissed the petition.

 

In summary, Louisiana law and the Mineral Code do not require a mineral lessee to divulge or provide information it has obtained through operations and production to the lessor, even when the lessee is buying the lessor’s mineral or royalty rights unless the particular lease form at issue requires the lessee to do so.   

              

New State of Louisiana Oil and Gas Lease Form :

 

The Louisiana State Mineral Board is in the final stages of adopting a new form of Lease for Oil, Gas and Other Liquid or Gaseous Hydrocarbon Minerals. The proposed form was submitted for public comment, revised based on the comments received, and re-submitted for public comment.  The second and probably final public comment period ends on Friday, December 4, 2015. 

 

The proposed new form may be viewed and downloaded from the Louisiana Department of Natural Resources’ website (dnr.louisiana.gov). Of particular note, the new form contains increased insurance requirements (see Article 15) and requires the lessee or its operator to provide financial security in accordance with LAC 43:XIX §104 for plugging, abandoning and site restoration obligations for each well drilled (See Article 4). 

 

The financial security requirements to obtain a drilling permit are set forth in LAC 43:XIX §104 and were amended this year to increase the amount of security required per well, which increased amount may be applied to existing wells.  Additionally, the amount of financial security required may be increased above the amount set forth in LAC 43:XIX §104 at the discretion of the Commissioner of Conservation.  Therefore, the new hydrocarbon lease form will impose increased costs upon the lessee and the Commissioner may increase the amount of security required above the base rate set forth in LAC 43:XIX §104 thereby further increasing the costs imposed upon the lessee. The form contains other revisions which are of concern to certain lessees as well.           

 

The public comments received through December 4, 2015 will be considered prior to adoption of the new lease form which is expected to occur early next year. 

 

James L. Bullen is a partner in the Lafayette office of Dennis, Bates & Bullen, L.L.P. and his practice focuses on the areas of oil and gas title, transactions, litigation and unitization, business law, general commercial and civil litigation, including personal injury, and wills, trust and successions. Contact info: bullen@dbblaw.net; 337-237-5900.

Created by: Martha Mills at 12/2/2015 1:51:42 PM | 0 comments. | 772 views.

Why Segments of Energy Oil and Gas Industry Do Not Want Continued Growth of its Commodity

by Senior Energy Markets Analyst, Alan Lammey

 

No matter what type of business you’re in, there’s one hugely important commonality that all businesses share in order to thrive, which is the need for growth.  But amazingly, there’s one niche of business in the U.S. (which has a large economic impact on the oil and gas economy); where various company shareholders throughout the industry no longer want to see any growth in their commodity.

The desire to be in business, yet intentionally ‘not want to growth’ sounds a bit like business blasphemy. But the U.S. natural gas industry has now entered into that exact scenario, and quite frankly, it’s maneuvered itself into a major pickle. Over 8 years of relentless drilling and fracking for the home heating and industrial fuel has risen production so immensely and in such a relatively short-period of time, that it has literally caused the industry to paint itself into a corner that sets-up the very real possibility of widespread bankruptcies among many companies throughout the natural gas sector. 

Smaller Commodity Price = Fewer Jobs, Less Tax Revenue

This is a very serious situation for Louisiana and Lone Star State because in addition to creating jobs, natural gas contributes hundreds of billions in revenue to the Texas and Louisiana economies each year, including product sales, royalties, and property, state, local and severance taxes.  In fact, natural gas companies pay five times more in state and local taxes on a per-job basis than the average company in both states. The taxes help support state and local services, such as first responders and hospitals, and provide funds that can be used to improve our schools, roads, and infrastructure. Workers, businesses, local charities, landowners, counties, cities, schools and municipal services all share in the revenues.

In terms of jobs, the ‘Gulf Coast natural gas industry’ has supported nearly 12% of total employment in the both states. That’s nearly 1.5 million jobs that are directly and indirectly related to developing natural gas.

Natural Gas Prices Collapse to Decade Lows

So, while the growth of the natural gas industry has been a blessing in recent years, it’s now become its own liability. Throughout all of 2015, U.S. natural gas wellhead production has been oscillating near ‘record highs’ between 81 to 83 billion-cubic-feet per day (Bcf/d), while natural gas ‘storage’ at the end of the seasonal April to November ‘refill season’  also reached ‘record highs’ of 4,009 Bcf.  The U.S. currently has a supply glut that has been the direct result of supply outpacing demand by a fairly significant margin.  

As a result of the overabundance of natural gas supply, ‘winter’ natural gas futures prices have recently collapsed down to lows not seen in over a decade with prices trading in a range of the $2-teens to $2.40s per million British Thermal Units (MMBtu). Cash or spot prices for natural gas throughout the U.S. have recently been trading for under $1/MMBtu, which is well below many regional break-even costs for the fuel.

Despite natural gas prices being under break-even costs, gas producers ludicrously continue to announce even more production projects and more supply coming online, which is killing producer stock prices throughout the industry. For example, Chesapeake Energy (CHK), which is the 2nd largest producer of natural gas in the U.S., stock price has collapsed from a high of $64.00 a share in May of 2008 to a low as $6.00 in 2015, marking a 90% drop in the last 7 years or so. And it’s not just Chesapeake that’s down in the dumps, as it’s the same dreary story for a multitude of natural gas companies throughout the entire industry.

Mountains of Debt Must Be Serviced

Investors and stockholders, for the first time ever are clamoring for publicly traded natural gas producers to cool their heels on the ‘growth’ of new production projects and new production in general.  Stockholders simply want the big players in the natural gas industry to just cease drilling and let the magic of ‘supply and demand’ due its thing to bring back some more favorable equilibrium to the market.  But the big problem is; producers can’t stop growing for essentially one main reason: debt and lots of it.

Exploration and Production (E&Ps) companies in the natural gas industry have become so enormously over leveraged in debt to the tune of hundreds of billions of dollars in the last 8 years that they must continue to pull as much natural gas molecules out of the ground as possible in order to sell it and have funds available to service its debt.

The Mother of Negative Loops

This has created a seriously negative loop for the natural gas industry because if producers continue to grow production in an already hugely supply-glutted market, it will only result in a perpetually lower commodity price when there’s no equal amount of demand available to absorb the excess supply. This sets-up a situation where the commodity price falls unceasingly lower, so in order to maintain debt payments, companies have to produce even more of the commodity. Not only does this situation reduce company stock prices, but also notably lowers the value of the gas reserves still in the ground that have yet to be produced. 

 In the near to medium term, about the only saving grace that the U.S. natural gas industry has a way to turn this situation around is the ‘hope’ of a very cold 2015-16 winter creating enough heating demand to consume large amounts of supply.  And then there’s the launch of new liquid natural gas (LNG) ‘export’ facilities, that are presently under constructed throughout the nation, that will start to go on-line in early 2016 and beyond that will be exporting natural gas to destinations outside of the U.S.  This first LNG export facility to go online in early 2016 will be Cheniere Energy’s ‘Sabine Pass’ plant in Louisiana.

There is one positive to this scenario. For consumers of natural gas; such as electric utilities and industrial plants, this is a dream situation that couldn’t be better as natural gas costs and power rates are at never before seen lows throughout the region. But unfortunately for natural gas producers, it’s a financial nightmare that isn’t easily solved.

Alan Lammey has 18 years’ experience as an energy markets analyst and journalist. He can be reached via his website, www.TexasEnergyAnalyst.com or alammey@TexasEnergyAnalyst.com

 

Created by: Martha Mills at 12/2/2015 1:10:48 PM | 0 comments. | 742 views.

FROM A FORMER LAPL PRESIDENT

By Bill Justice, CPL

 

Volunteers are the lifeblood of the LAPL

 

Anyone reading this article is more than likely a member of the LAPL.  Let me first express thanks and appreciation for your support of your local association.  Your dues are important, of course, and absolutely necessary, but those dues don’t do anything until put into action by the volunteers that make the LAPL work.

 

Many readers have already experienced the behind-the-scenes world of the LAPL, but many have not.  I personally have been involved in various capacities for about 10 years now and have enjoyed every bit of it.  I look back fondly at my pre-involvement days when I looked in admiration at the various volunteers and Executive Committee members, having a real appreciation for what they accomplished—luncheons, newsletters, social and educational events, etc.  I was also impressed by the camaraderie that was so evident and hoped to be a part of something like that one day.

 

Over these past 10 years I guess you could say that I’ve been involved in virtually aspect of the organization in one capacity or another.  In so doing, I have had the pleasure of meeting and working with fellow volunteers.  It is so true that you really get to know a person by working on a project together.  As such I have developed deep friendships that I would otherwise not have had it not been for my involvement in the LAPL.

 

The purpose of this article is not to document what I have done, but rather to encourage the readers to get involved.  Any volunteer organization is always faced with seemingly-conflicting tasks.  On the one hand, controlled turnover is critical.  Anyone who has done board or committee work knows that the customary ‘shelf life’ of an individual in any one position is 3 years.  Boards and committees try to stagger terms so that about a third of the representation is replaced each year.  At the same time, ‘organizational memory’ is critical as well, so that important lessons learned in the past are not lost due to this same desired turnover.  I believe LAPL is structured in such a way as to balance the two opposing forces, but said balance only works when members are willing to step up and serve.

 

There are many ways to get involved.  All of the many committees need fresh ideas and energy.  Board and Executive Committee nominations are right around the corner as well.  I hope you will seriously consider getting involved.  To do so, contact David Deville at 237-1296 or Pete Van Der Veldt at 988-9256.

 

Created by: Martha Mills at 11/30/2015 5:03:23 PM | 0 comments. | 859 views.
Seeking a landman with substantial Mississippi experience for immediate placement. Must be located within driving distance of Lafayette, LA and maintain active AAPL membership. Please email resumes to hiring@tdoil.com and enter "Mississippi Landman" in the subject line. Candidates with no Mississippi experience need not apply. No phone calls, emails or direct messages please.
Created by: Martha Mills at 11/2/2015 7:12:11 PM | 0 comments. | 742 views.

Carol Trosclair Awarded Local Businesswomen's Award

Congratulations to Carol Troslair, independent landman, who was one of nine women in Acadiana receiving the 2015 Women Who Mean Business award today.  Carol's drive and personality make her a deserving recipient for such an award!
Created by: Martha Mills at 11/2/2015 6:27:11 PM | 2 comments. | 934 views.
FROM THE 1ST VICE PRESIDENT
Pete van der Veldt
I know everyone is working hard to stay busy these days, but stormy seas spawn skilled sailors, and I trust we will all weather the storm.  Given the current economic down turn in our industry, I anticipate we will be seeing more due diligence projects becoming available for the good and the bad. Therefore, I have compiled a short list of helpful websites most of don’t use on a regular basis .  You may have already utilized most of these sites, but hopefully I will provide you with at least one new resource. 


https://pacer.login.uscourts.gov :  Pacer provides public access to case and docket information from federal appellate, district, and bankruptcy courts.  You can check on the status of an open bankruptcy and view most of the latest filings. Registration is free and searches are charged at ten cents per page, but free if your total charges are under $15 for the quarter. 

http://www.sec.gov/edgar/searchedgar/webusers.htm :  Edgar is an online database from the SEC used by all publicly traded companies to transmit their quarterly reports, annual reports filings and other disclosure obligations.  Yep, there is usually more than is just on their webpage.   Also, if you have an unknown company in your play try performing a boolean search on Edgar. 

http://www.glorecords.blm.gov :  Can’t find your land patent in the courthouse? You may be able to pick it up on the Bureau of Land Management’s GLO records.  They also have historical survey plats similar to those found on the Louisiana Division of Administration’s Office of State Lands webpage at http://www.doa.la.gov/Pages/osl/Document.aspx.

http://www.fws.gov/wetlands/ :  Is the Corps of Engineers in your future?The US Fish & Wildlife Service’s wetlands mapper is a great resource accessible from your desktop.

http://www3.epa.gov/enviro/facts/multisystem.html : The EPA’s multisearch allows you to search multiple environmental databases from one platform by facility name or geographic area.

http://edms.deq.louisiana.gov/app/doc/querydef.aspx :  The Louisiana Department of Environmental Quality has an electronic repository of records created and received by the DEQ.  Even if you don’t perform any environmental due diligence, it’s always nice to know what’s close to home.



https://mycpa.cpa.state.tx.us/coa/coainst.html :  If you have ever used the Texas Secretary of State’s webpage you know there is a charge to conduct a corporate entity search.  However, if you regularly work in Texas you know the corporate address and officer information can be accessed from the Texas Comptroller of Public Accounts for free.



http://ullafayettefoundation.org/ :  Most importantly, and particularly if you found any of the above information useful, please help lend your support to the Moody College of Business Professional Land and Resource Management Program (PLRM Promise) by making a donation.  No donation is too small! Just use the link, click on make a gift, and select the College of Business in the drop down menu.  Fill out contact and payment information, then designate your gift at the bottom of the page in Gift Details: “to the Lafayette Association of Professional Landman fund”.  Let’s meet our goals for the Year!
Created by: Martha Mills at 11/2/2015 1:44:24 PM | 0 comments. | 3746 views.

LOUISIANA LEGAL UPDATE 

Amy Duplantis Gautreaux and David J. Rogers 

Gordon Arata, LLC 

 

Louisiana Water Bottoms and the “Freeze Statute” 

Those of us that have enjoyed the Sportsman’s Paradise that is Louisiana by hunting, fishing and exploring the great outdoors and those of us who have had the pleasure and good fortune to work as landmen running title in our great state have likely confronted the issue of determining whether a waterway is privately owned or public and/or who owns the bed or bottom and the banks of these waterways.  The changing course and/or widening of waterways in Louisiana, be it the Red River in Bossier and Caddo Parishes, Calcasieu Lake in Cameron Parish, Grand Lake-Six Mile Lake in St. Martin and St. Mary Parishes and even the Mississippi River present unique title issues to private landowners, the state of Louisiana, and oil and gas industry folks, including oil and gas landmen and title attorneys. In addition, coastal erosion has a similar effect on title and, therefore, mineral ownership.  These questions of ownership can create a nightmare for an exploration and production company trying to take leases near a waterbody in Louisiana and/or pay royalties on oil and gas leases covering the land in question. Therefore, we will address the basics associated with classification of ownership of a waterway in Louisiana and how that ownership, including mineral rights therein can change over time.   


In Louisiana, it is well settled that the state owns the beds or bottoms of all navigable waters in the state, whether lakes, rivers or streams, by virtue of its inherent sovereignty (See State v. Capdeville, 146 La. 94, 83 So. 421 (1919). The state of Louisiana owns only the land that is covered by water at its ordinary low water mark; the land lying between the ordinary low water mark and the ordinary high water mark is called the bank and belongs to the owner of the adjacent land.  Specifically, under Louisiana Civil Code Article 450, the waters and bottoms of natural navigable water bodies are declared to be public things owned by the state. But, the banks of navigable rivers and streams are private things subject to public use (See La. Civ. Code art. 456). Louisiana Code articles 499 and 500 discuss accretion and dereliction. Accretion formed successively and imperceptibly on the bank of a river or stream, whether navigable or not, is called alluvion. The alluvion belongs to the owner of the bank, who is bound to leave public that portion of the bank which is required for the public use. Alluvion and accretion can be used synonymously. However, accretion is defined as the act of growing to a thing; usually applied to the gradual and imperceptible accumulation of land by natural causes, as out of the sea or river. Accretion is the addition of portions of soil, by gradual deposition through the operation of natural causes. The term alluvion is applied to the deposit itself, while accretion denotes the act. (See Walker Lands v. E. Carroll Parish Police Jury, 38-376, p.8 n.13 (La. App. 2 Cir. 4/14/04).  Alternatively, dereliction is formed by water receding imperceptibly from a bank of a river or stream. The owner of the land situated at the edge of the bank left dry owns the dereliction (See La. Civ. Code art. 499). However, there is no right to alluvion or dereliction on the shore of the sea or of lakes (See La. Civ. Code art.  500). 

Water bodies that were navigable in 1812, when the state of Louisiana was admitted into the Union, and continue to be navigable are public things (See La. Civ. Code art. 450).  Conversely, water bodies that were non-navigable in 1812 and continue to be non-navigable are private things. Questions then arise as to the status of water bodies that have become navigable after 1812 or that have ceased to be navigable after that date (See 2 La. Civ. L. Treatise, Property § 4:2 (5th ed.)). Since the state (in its public capacity) generally owns only navigable bodies of water, and non-navigable waterbodies are privately owned, resolution of many of the issues raised with regard to the above hinge on navigability.  Generally speaking, a body of water is navigable in law if it is navigable in fact, and a body of water is navigable in fact if it is capable of being used for commercial purposes over which trade and travel are or may be conducted in the customary modes of trade and travel (See Walker Land, Inc., v. East Carroll Parish Police Jury, 871 So. 2d 1258; and Ramsey River Road Property Owners Association, Imc. V. Reeves, 396 So. 2d 873). Hence, navigability must be proven.  


Navigability is a question of fact that may require substantial evidence. Moreover, the peculiar geophysical conditions that prevail at the Gulf coast prevent the drawing of a bright line of demarcation between the sea, rivers, lakes, and other inland non-navigable bodies of water. Thousands of acres of marshlands are traversed by innumerable bayous that empty into lakes, bays, and inlets. Fresh water mixes with salt water on the way to the open Gulf and tides cause salt water to enter into bodies of water further inland and render them brackish. Salinity alone can hardly furnish the criterion for the classification of a body of water as sea or as an inland water body. Moreover, the rather frequent absence of a perceptible current renders difficult the classification of a body of water as a river rather than sea or a lake (See Judith PerhayLouisiana Coastal Restoration: Challenges and Controversies, 27 S.U. L. Rev. 149, 165 (2000). 


According to well-settled Louisiana jurisprudence, land that becomes part of the bed of a navigable river ceases to be susceptible of private ownership; it thus becomes a public thing, owned by the state in its capacity as a public person.  It is the same when lands are eroded by the waters of the sea or of a navigable lake and become sea-bottom or lake-bottom (See A.N. Yiannopoulos, Louisiana Civil Law Treatise, Property § 75, at 151-152 (3d ed. 1991); See also, La. Civil Code art. 500).  Thus, as private lands erode into navigable water bodies, that new water bottom becomes the property of the state. The state of Louisiana's interest in this eroded land is articulated in the Louisiana Constitution. (See Ryan M. SeidemannCurious Corners of Louisiana Mineral Law: Cemeteries, School Lands, Erosion, Accretion, and Other Oddities, 23 TulEnvtl. L.J. 93, 119 (2009).  As a result of the foregoing, it is pertinent to note that this change in ownership includes the mineral rights therein.  This is significant to oil and gas exploration and development in our state as it affects large amounts of valuable resources.  


In response to this transfer to the state of Louisiana of previously privately owned lands, the legislature enacted what is commonly referred to as the “Freeze Statue”.  Under Louisiana Revised Statute 9:1151 (hereinafter, the “Freeze Statute”), certain mineral rights in lands transferred to the state of Louisiana by the occurrence of erosion, accretion, dereliction, or subsidence may be protected, in that the mineral owner of said lands (prior to the change) and his lessee will retain those rights that are subject to a valid and outstanding mineral lease for as long as that lease is in effect. The Freeze Statute provides, in full, as follows: 


In all cases where a change occurs in the ownership of land or water bottoms as a result of the action of a navigable stream, bay, lake, sea, or arm of the sea, in the change of its course, bed, or bottom, or as a result of accretion, dereliction, erosion, subsidence, or other condition resulting from the action of a navigable stream, bay, lake, sea, or arm of the sea, the new owner of such lands or water bottoms, including the state of Louisiana, shall take the same subject to and encumbered with any oil, gas, or mineral lease covering and affecting such lands or water bottoms, and subject to the mineral and royalty rights of the lessors in such lease, their heirs, successors, and assigns; the right of the lessee or owners of such lease and the right of the mineral and royalty owners thereunder shall be in no manner abrogated or affected by such change in ownership. 

 
 

The Freeze Statute was first enacted by the legislature in 1952 and was later amended by Act No. 963 in 2001 to specifically include erosion and subsidence and the words sea or an arm of the sea.  The effect of the Freeze Statute is that (i) where a change of ownership occurs as a result of accretion, dereliction, erosion or subsidence, and (ii) a mineral lease is being maintained as to that land, said land is acquired subject to and encumbered by any oil, gas or mineral leases covering the property, and subject to the mineral and royalty rights of the lessor, lessee and royalty owners in said lease as long as the lease is maintained.  


The question of the constitutionality of the Freeze Statute is well settled. In State v. Placid Oil Co., 300 So.2d 154 (1973), the Supreme Court of Louisiana  plainly stated that the Freeze Statute is constitutional and rejected arguments that it is a deprivation of property without due process and an impairment of the obligations of a contract.  Additionally, in Cities Services Oil and Gas Corp. v. State (574 So.2d 455 (La. App. 2d Cir. 1991), writs denied, 578 So.2d 132 (La. 1991), reconsideration denied, 580 So.2d 663 (La. 1991), cert. denied, 502 U.S. 863 (1991), the Louisiana 2nd Circuit Court of Appeal, citing Placid and LSU Law Professor Lee Hargrave’s, “Statutory and Horatory” Provisions of the Louisiana Constitution of 1974 (43 La. Law Review  647, 661-662 (1983) explained: 


Nothing is taken from the riparian landowner who has gained land by accretion if he obtains the land without the mineral rights; he had no vested interest in the land to begin with.  Article IX, section 3 does not prohibit the state, which obtains land by dereliction, from obtaining less than full ownership, as no alienation or authorization of alienation [sic] has occurred.   


Cities Services Oil and Gas Corp. v. State dealt with the changing course of the Red River near the boundaries between Caddo and Bossier Parishes between 1966 and 1978.  The state of Louisiana asserted claims to ownership of land acquired by accretion in the Red River, and since the state had granted a lease on the former river bed (“State Lease 6002”), the state argued that the new bed was covered by this lease.  Two issues were present in this matter: (i) did the coverage of State Lease 6002 remain with the old river bed, change and provide coverage to the new river bed, or did it provide coverage to the old and new riverbed, along with the land formed between the two, and (ii) did the owner of the land formed by accretion have a right to the minerals underlying same under the Freeze Statute.   


On the first issue, the Cities court found that State Lease 6002 remained with the former riverbed and did not move to the new bed. The State Lease at issue contained language stating it covered land “now or formerly” constituting the riverbed owned by the state as of a specific date. Due to this language, the court found that State Lease 6002 did not follow the movement of the river.  On the second issue, the court (in agreement with the trial court) found the owners of the accretion formed due to the movement of the river were entitled to the mineral rights therein not subject to lease. Thus, the Cities court held that the Freeze Statute “clearly and unambiguously applies only when there is a change of ownership of land or water bottoms caused by the action of a navigable stream and there is in effect a mineral lease covering and affecting the lands or water bottoms.”  Furthermore, the Cities court explained “the statute does not require that there be actual mineral production from the leased land in order for the statute to be effective.” As such, under the Freeze Statute and the ruling in Cities, full ownership of land can be transferred as a result of accretion in the absence of a lease. However, if the relevant land is subject to an outstanding lease, then the rights of the lessee(s) and lessor(s) are protected as long as the lease is maintained. Upon termination of the lease, mineral ownership devolves to the owner of the land.  Note, just as the state can acquire land with less than full ownership as a result of accretion, dereliction, erosion, or subsidence by application of the Freeze Statute, a riparian (private) land owner can also take advantage of the benefits of the Freeze Statute. 

It is important to note that in order for the state to make a claim under the Freeze Statute, the alluvion or accretion formed would have to have formed after the relevant state lease was granted covering a water bottom at the time of the lease (See State v. Cockrell, 162 So.2d 361 (La. App. 1st Cir. 1964). 


Waterbodies throughout Louisiana and the Louisiana coast remain some of the most unique areas of the world.  These places bounding with beauty and abundant resources are our namesake.  We would all do well to understand the challenges involved in development and application of permanent legal rules for the management of these lands where constant physical change can lead to what is land today becoming open water tomorrow.  

 

 

 

 

 

Amy Duplantis Gautreaux is an attorney in the Lafayette office ofGordon, Arata, McCollam, Duplantis & Eagan LLC. Her practice is focused on oil and gas title examination and oil and gas transactions. Her experience encompasses drafting numerous curative and other legal documents, examination of land, mineral and leasehold title (including abstracts of surface, mineral, royalty, executive right, overriding royalty and leasehold titles and mineral history information), and writing legal opinions including drilling, division order and leasehold title opinions. Aiding her ability to provide an insightful and logical approach to title examination, Amy also worked as an abstractor and landman in South Louisiana after law school. Through her experience, she has developed and maintains great working relationships with many members of the local legal and oil and gas community.After graduating with honors from Catholic High School in New Iberia, Amy attended the University of Louisiana, Lafayette where she earned a Bachelor of Arts in Political Science Pre-Law, magna cum laude and was named Outstanding Graduate in Political Science in 2002.  In 2005, she earned her J.D. and B.C.L. from the Paul M. Hebert Law Center at Louisiana State University.  She is admitted to practice law in Louisiana.


Professional Affiliations: 


 Louisiana State Bar Association


 American Association of Professional Landmen (AAPL)


 Lafayette Association of Professional Landmen (LAPL)


 Houston Association of Professional Landmen (HAPL)


 Lafayette Parish Bar Association (LBA) 


 Baton Rouge Association of Professional Landmen (BRAPL) 


 Women’s Energy Network (WEN)- Board Member 


David John Rogers is an associate attorney in the Lafayette office of the firm Gordon, Arata, McCollam, Duplantis & Eagan LLC who focuses his practice in the oil and gas section focusing primarily on title examinations, oil and gas transactions and litigation involving oil and gas issues. He is a Registered Professional Landman (RPL) and has extensive experience as a project manager handling title opinions, abstracts, due diligence and mineral lease acquisitions in seven states, including Louisiana, Texas, Mississippi, Pennsylvania, Ohio, Colorado and Utah.

 

Professional Affiliations:


American Association of Professional Landmen (AAPL) 


Baton Rouge Association of Professional Landmen (BRAPL) 


Lafayette Association of Professional Landmen (LAPL) 


Houston Association of Professional Landmen (HAPL) 


Young Professionals of LAGCOE

 
 
 
 
 

Created by: Martha Mills at 10/6/2015 12:51:37 PM | 0 comments. | 818 views.
Winter Blues:  U.S. ‘Winter Natural Gas Prices’ are at Lowest Level in Over a Decade
By energy markets analyst, Alan Lammey
 
So here sits the U.S. natural gas industry knocking on the door of the month of October and prompt-month natural gas futures prices are wobbling between $2.50 and $2.70/MMBtu, which is either at or below break-even for many gas producers throughout the nation. Within the last few days, the ‘November gas futures’ has become the ‘front month’ futures contract and the industry is now officially trading the seasonal period when natural gas prices are historically transitioning into their highest levels of the year. However, what differentiates this year from multiple years gone by is that ‘winter natural gas’ prices are trading at 13-year lows and the coming winter months don’t look very pretty for the gas complex.
 
This sort of bearish scenario has been frequently repeated for the energy industry over the course of many decades. The oil and gas business in the U.S. has always tended to move in and out of periods of feast or famine with very little moderation in between. However, at this juncture, the industry is in a downright rut. Presently, U.S. wellhead natural gas production is sitting at all-time record highs of 82 billion cubic feet per day (Bcf/d), while total natural gas storage looks to finish the summer ‘refill season’ at a record high amount of 3.9 trillion cubic feet (Tcf) or perhaps higher as of November 1, 2015. As such, with such  a major glut of supply, natural gas producers across the country are financially struggling big time to keep their heads above water and natural gas futures traders are pulling their hair out attempting to scrounge-up any sort of gains with the daily spreads in the futures contract fluctuating between measly intraday highs and lows of typically less than 7¢ per day.  With this kind of dismal trading action, it’s no secret that the bearishness in the U.S. natural gas market is unarguably at a near historical peak.
 
So just how bearish is the market? For starters, looking out on the futures curve, one would have to go out to January of 2021 just to find the ‘first’ $3.50s-handle for a gas contract. This in itself is a bit mind-blowing considering that there are plenty of unknowns that could radically change the supply and demand equilibrium over the next 6 years. For example, future summers could be blazing hot, winters may produce record frigid conditions, hurricane seasons might be highly active, and steep production declines could finally set-in resulting from the recent historic drop in rig counts. Second, compared to this time last year when November gas was range trading between $3.50 and $4.00, prompt-month gas prices are down over a $1.00.
 
But what’s an even bigger barometer of the dreary sentiment prevalent throughout the gas market is that the November gas futures contract is presently trading in the $2.60s. What makes this such a big deal is that the last time that ‘November gas’ traded ‘below’ $3.20 was prior to 2002. Historically speaking, in the past the U.S. gas complex typically sees a ‘surprise rally’ around late September or in early October, but this time around any upside rally in prices is likely to be notably muted as the first part of winter (November and December) doesn’t appear to be very cold in the biggest gas consumption areas of the U.S., according to several of the long-range forecast models. With all this said, because the winter months are dead ahead – which is the largest gas demand period of the year -- from a long-range technical perspective, it doesn’t appear that November prices may fall much below the $2.45-area, because this price point is a historically major area of support for early winter gas. However, that obviously remains to be seen depending on the cold weather intensity (or lack thereof) during the back-half the 2015-16 winter months from January through March.

 

 
 
Alan M Lammey
Energy Analyst and Consultant
Host of the 'Energy Week' radio program
Ph: 281-658-0395
Website: www.TexasEnergyAnalyst.com
Created by: Martha Mills at 10/6/2015 12:47:49 PM | 0 comments. | 857 views.

Presented by:

Michael C. Wynne


Ottinger Hebert, L.L.C.

Lafayette, Louisiana

337-232-2606


Acquiring and Exercising Mineral Rights

Over Lands or Mineral Servitudes Held in Indivision


I. Introduction


The acquisition of mineral rights and the commencement of exploration and production operations (“Operations”) pursuant thereto pertaining to lands or mineral servitudes held in indivision is a task fraught with peril.  When lands or mineral servitudes are “held in indivision,” transactions and subsequent Operations relating to a mineral lease or servitude are more precarious because obtaining the consent of the co-owners of the underlying interests is a prerequisite for conducting exploration and production activities thereon. However, the comprehensive co-ownership regime found in the Louisiana Mineral Code has established bright-line rules that provide stability and predictability to acquirers of these mineral interests.


First, it is necessary to determine under what circumstances lands or mineral servitudes are “held in indivision” and to articulate the importance of this designation. Generally, “[o]wnership of the same thing by two or more persons is ownership in indivision.” To put it simply, when lands or mineral servitudes are held in indivision, they are, in fact and in law, co-owned.  


Notably, the co-ownership of lands and mineral servitudes is a common occurrence.  Typically, the co-ownership of such interests results from a contractual disposition or alienation -- in favor of two or more persons -- such as a sale, donation or exchange.  In addition, co-ownership of lands and mineral servitudes can further result by operation of law by way of a divorce, a legal entity’s liquidation or dissolution and, most commonly, inheritance. Accordingly, given the prevalence of co-owned interests, the regime of co-ownership established by the Louisiana Mineral Code is increasingly important in the context of not only lease and servitude acquisition, but also subsequent Operations.


II. Co-owned Lands, the Mineral Lease and an Introduction to the “Eighty Percent Rule”


Louisiana Mineral Code Article 166 (“Article 166”) addresses the ability of a co-owner of land to grant a mineral lease and his lessee’s ability to commence Operations. Article 166 provides, as follows:


A co-owner of land may grant a valid mineral lease … as to his undivided interest in the land but the lessee … may not exercise his rights thereunder without consent of co-owners owning at least an undivided eighty percent interest in the land, provided that he has made every effort to contact such co-owners and, if contacted, has offered to contract with them on substantially the same basis that he has contracted with another co-owner. A co-owner of the land who does not consent to the exercise of such rights has no liability for the costs of development and operations or other costs, except out of his share of production.


Although Article 166 empowers a single co-owner to grant a valid mineral lease, the exercise of the right to conduct exploration and production activities on the co-owned property, is conditioned upon the lessee acquiring the consent of “an undivided eighty percent interest in the land.”


For example, if a property is co-owned equally by three sisters: A, B and C, and A grants a mineral lease in favor of an exploration and production company, the company must further acquire the consent of both B and C in order to operate on the leased premises. Absent such consent, the company lacks the power to commence Operations and exploit the mineral resources beneath the leased premises although it has a valid mineral lease.


In contrast, if the property were co-owned equally by five siblings, the company could only be required to acquire the consent of four out of the five siblings in order to commence Operations on the leased premises.


The establishment of Article 166’s “eighty percent rule” is a significant development in Louisiana mineral law and represents a departure from the former law.  Prior to the 1986 Amendments to the Louisiana Mineral Code, a mineral lessee could not operate on the leased premises unless he obtained the consent of all co-owners.  Consequently, an obstinate landowner with a mere one percent ownership interest could prevent a lessee from developing the land’s mineral resources -- in spite of the fact that a vast majority of the remaining co-owners (holding a ninety-nine percent interest) -- desired the lessee to develop these resources. Needless to say, under the prior law, there was the potential for abuse.


Nonetheless, even the Louisiana Supreme Court upheld this principle. In it’s seminal case, Gulf Refining Company v. Carroll, the Court upheld the right of a noncompliant co-owner to preclude a lessee from operating on the subject property, in spite of the fact that the lessee obtained a mineral lease from the noncompliant co-owner’s son, an owner of an undivided one-half interest in the subject property.


However, the Louisiana Legislature -- both recognizing and acknowledging the potential for abuse -- amended Article 166 twice in order to address the inequitable state of the co-ownership law as it relates to lease operations.


III. The Creation of a Mineral Servitude by a Co-owner of Land


Just as a co-owner of land can grant a valid mineral lease, a co-owner of land may likewise create a mineral servitude out of his undivided interest in the land.  This right is memorialized in Louisiana Mineral Code Article 164 (“Article 164”), a parallel provision to Article 166, which provides, in pertinent part:


A co-owner of land may create a mineral servitude out of his undivided interest in the land, and prescription commences from the date of its creation. One who acquires a mineral servitude from a co-owner of land may not exercise his right without the consent of co-owners owning at least an undivided eighty percent interest in the land….


Notably, pursuant to Article 164, although a mineral servitude confers upon its owner the right to operate, when acquiring this right from a co-owner of land (the servitude’s creator), the commencement of Operations is conditioned upon obtaining the consent of co-owners of the land owning at least an eighty percent interest therein.


As a result, the unilateral consent of the creator of the mineral servitude is not dispositive -- despite the fact he is a co-owner of the land.  It is the consent of all of the co-owners of the land subject to the mineral servitude that counts. Thus, particular care is necessary when acquiring a mineral servitude created by a co-owner pursuant to Article 164, as the acquirer’s ability to maintain the mineral servitude by Operations may be limited.


IV. Co-owned Mineral Servitudes and the “Eighty Percent Rule”


Co-owners of mineral servitudes are also subject to a similar restriction to lessees who acquire their interests pursuant to Article 166. According to Mineral Code Article 175 (“Article 175”), “[a] co-owner of a mineral servitude may not conduct operations on the property subject to the servitude without the consent of co-owners owning at least an undivided eighty percent interest in the servitude….”


Seemingly, the application of Article 175 is straightforward when viewed in isolation. However, in factual scenarios, wherein a co-owner of lands creates a distinct mineral servitude pursuant to Article 164 and such servitude is also co-owned, confusion abounds.


When seeking to operate on a co-owned servitude obtained from a co-owner of the lands, two “levels” of consent must be obtained from two different classes of persons.  First, the party seeking to operate must obtain the consent of co-owners representing at least an undivided eighty percent interest in the land (i.e., Article 164 consent).  Second, after obtaining this first “level” of consent, it is still necessary to satisfy Article 175 and obtain the “consent of co-owners owning at least an undivided eighty percent interest in the servitude.”  Absent consent from both “levels,” Operations will not be permitted.

 

Michael C. Wynne is an associate attorney with Ottinger Hebert, L.L.C. His practice focuses primarily on oil and gas litigation and environmental litigation, including royalty disputes and oilfield indemnity disputes. He graduated cum laude from the University of North Carolina at Chapel Hill with a Bachelor of Arts with Distinction in Political Science. He earned his Juris Doctorate magna cum laude from the Paul M. Hebert Law Center at Louisiana State University in 2014.