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Louisiana Legal Update

By Brittan J. Bush

Liskow & Lewis

       I.          Louisiana State and Federal Courts Split Over Parties Entitled to Reports Under La. R.S. 30:103.1

La. R.S. 30:103.1 requires operators or producers of oil and gas units created by the Louisiana Commissioner of Conservation to provide reports containing information related to well costs and production to owners of “unleased oil and gas interests” (referred to herein as “103.1 report(s)”). If an operator does not provide the information required under the statute in a manner that is sufficiently detailed after receiving a proper request, the operator or producer “shall forfeit his right to demand contribution from the owner or owners of the unleased oil and gas interests for the costs of the drilling operations of the well” under La. R.S. 30:103.2.

While almost the entirety of Louisiana jurisprudence involving La. R.S. 30:103.1 involves reporting to unleased mineral owners, Louisiana’s federal and state courts have recently become divided as to whether unit operators must provide 103.1 reports to not only unleased mineral owners but also non-operating working interest owners with an oil, gas and mineral lease within the confines of the unit at issue. This division arose as a result of the interpretation of what constitutes an “owner of an unleased oil and gas interest.”[1]

In XXI Oil & Gas v. Hilcorp I, the Louisiana Third Circuit Court of Appeal found that a unit operator was subject to La. R.S. 30:103.2’s penalty provision when it failed to provide a 103.1 report to a non-operating working interest owner who held oil, gas and mineral leases within the unit at issue.[2] In its decision, the Third Circuit did not examine the question of whether La. R.S. 30:103.1 was meant to require reporting to non-operating working interest owners or simply unleased mineral owners within a Commissioner’s Unit.[3] Instead, the Third Circuit’s opinion assumed that non-operating working interest owners were entitled to 103.1 reports.[4]

 sequently, the U.S. District Court for the Western District of Louisiana came to a different conclusion as to what parties are entitled to 103.1 reports in TDX Energy, LLC v. Chesapeake Operating, Inc.[5] Similar to XXI Oil & Gas I, TDX Energy involved a claim by a non-operating working interest owner that it was entitled to 103.1 reports from a unit operator.[6] In response, the unit operator argued that the non-operating working interest owner was not afforded a remedy under La. R.S. 30:103.1-.2, because it was not an unleased mineral owner.[7] The non-operating working interest owner responded to this argument by contending that “the phrase ‘owner or owners of unleased oil and gas interests’ [was] a shorthand method of referring to the owner of oil and gas interests within a unit that are unleased by the unit operator” as opposed to mineral interests that are unleased at all.[8] The Western District rejected the non-operating working interest owner’s argument and held that the phrase “owner or owners of unleased oil and gas interests” refers to “oil and gas interests that are not leased at all.[9]

On September 28, 2016, the Louisiana Third Circuit issued another opinion in XXI Oil & Gas v. Hilcorp II.[10] Despite the fact that the Third Circuit did not examine whether or not La. R.S. 30:103.1-2 applied to unleased mineral owners and non-participating working interest owners in XXI Oil & Gas I, the Third Circuit’s recent opinion did address this question in light of the Western District’s decision in TDX Energy. In its decision, the Third Circuit explicitly rejected the Western District’s holding in TDX Energy and stated:


[W]hile decisions of federal courts are considered persuasive, especially cases concerning federal law, they are not binding on the courts of the State of Louisiana, especially on matters concerning the interpretation of state law which have been ruled upon. 

 

We maintain our position that when an owner or operator drills a well, and that owner or operator has no valid oil, gas, or mineral lease on a portion of that land, the mineral lessee of those portions not leased by the operator or producer of the well has a claim to demand an accounting pursuant to La. R.S. 30:103.1, as an owner of a valid oil, gas, or mineral lease.[11]

 

The Third Circuit’s recent decision in XXI Oil & Gas II clearly conflicts with the Western District’s ruling in TDX Energy. As a result, operators or producers of Commissioner’s units face uncertainty as to what parties are entitled to 103.1 reports.[12] Therefore, until the conflict between Louisiana’s federal and state courts is resolved as to the proper interpretation of La. R.S. 30:103.1-2, unit operators should exercise caution in situations where a non-operating working interest owner with mineral leases in a Commissioner’s unit requests 103.1 reports.

 

      II.          Louisiana Third Circuit Addresses Payment of Royalties in Situations Involving Production Under a Mineral Lease Pursuant to a Conditional Allowable Prior to Unitization

 

In Gladney v. Anglo-Dutch Energy, L.L.C., the Third Circuit addressed the question of whether or not a mineral lessee must pay its lessor full lease-basis royalties for production undertaken during the effective period of a conditional allowable but prior to the effective date of a unit order.[13] In the case, the Plaintiffs granted a mineral lease to the Defendant-Lessee that provided for a 1/5 royalty in 2009.[14] The Defendant-Lessee drilled a gas well on the leased premises on February 14, 2012.[15] The well, which was to produce from a reservoir and zone under the property of multiple landowners, was completed on April 27, 2012 and began production on May 18, 2012.[16] Shortly before the well went on production, the Defendant-Lessee applied for a compulsory unit with the Office of Conservation.[17] In conjunction with their application, the Defendant-Lessee also sought a conditional allowable, which was granted on May 17, 2012, and provided as follows:

 

All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed upon results of those proceedings.[18]

 

Several months later, the Commissioner issued an order establishing the unit, and the order stated that it “shall be effective on and after October 30, 2012.”[19]

 

In 2013, the Plaintiffs made demand on the Defendant-Lessee on the grounds that “despite the October 30, 2012 effective date of the Commissioner’s Order, [the Defendant-Lessee] refused to pay Plaintiffs their full [1/5] Lessor’s Royalty” pursuant to the mineral lease between the parties.[20] The Plaintiffs’ primary argument was that while royalties could be paid on a “unit tract” basis after the effective date of the Commissioner’s Order, Plaintiffs were entitled to their full 1/5 royalty, on a lease-basis, from the date of first production until the effective date of the Commissioner’s Order.[21] The Defendant-Lessee contended that Plaintiffs were not entitled to their full lease-basis 1/5 royalty because the issuance of the conditional allowable required them to pay on a unit-basis and replaced its obligation under the mineral lease to pay full lease-based royalties.[22] The trial court accepted the Defendant-Lessee’s argument.[23]

 

The Third Circuit reversed and remanded and ultimately found that the Plaintiffs were entitled to their full 1/5 lease-basis royalty from the date of first production until the effective date of the unit. The Court’s primary reasoning was that the conditional allowable did not abrogate the contractual terms of the mineral lease between the Plaintiffs and the Defendant-Lessee:

 

the Office of Conservation does not attempt to interpret private mineral leases and other private contracts, as they are beyond its jurisdiction and authority.” Yuma v. Thompson, 98-1399 (La. 3/2/99), 731 So.2d 190, 197. In Arkansas Louisiana Gas Co. v. Southwest Natural Production Co., 60 So.2d 9, 11 (La. 1952), the Louisiana Supreme Court explained that the Commissioner of Conservation, when establishing a drilling unit, “did not intend to, and did not, in fact, abrogate the contracts between the several lessors and their respective lessees with respect to the nature or structure of their mineral ownership, or alter in any way the consideration to be paid and the method of payment.” The trial court’s judgment holding that Anglo-Dutch’s royalty obligations under the Mineral Lease were abrogated by the terms of the conditional allowable is in direct contrast to this longstanding rule that the Commissioner nor his office should alter private contractual rights.[24]

 

In addition, the Court noted the testimony of a former presiding officer over unitization proceedings who stated that:

 

[t]he issuance of a conditional allowable is not intended to affect in any manner the private contractual obligations of an operator or lessee on whose land is situated a well which is the subject of a unit application.” He also stated “[t]he Office of Conservation issues a conditional production allowable without consideration of, and without prejudice to, any private contractual rights between the operator and the landowner-lessee on whose lands the well is drilled.[25]

 

The Court also rejected the Defendant-Lessee’s argument that the Plaintiffs’ claims were a collateral attack on the Commissioner’s authority because the Plaintiffs were not attacking the Commissioner’s conditional allowable but simply seeking to enforce their rights under the mineral lease.[26] Finally, the Court rejected the Defendant-Lessee’s argument that it had no choice but to pay royalties on a unit-basis because payment of the full 1/5 lease-basis royalty would have resulted in double royalties.[27] In its reasoning, the Court noted that the Defendant-Lessee could have modified its lease obligations through a royalty escrow agreement, an option which Plaintiffs had suggested, but the Defendant-Lessee did not give the Plaintiffs such an option.[28]

 

Ultimately, the Gladney decision provides mineral lessees with clear instructions regarding the payment of royalties on production undertaken prior to the effectiveness of a unit. In addition, it shows that mineral lessees, when faced with situations that could be resolved by escrow or other alternative agreements, should undertake such steps in order to avoid potential litigation and/or royalty demands.

 

    III.          U.S. Fifth Circuit Finds Lack of Subject Matter Jurisdiction Over Claims Involving the Migration of Gas from FERC Certificated Gas Storage Facility Resulting from Operations Within a Conservation Unit

 

In Enable Mississippi River Transmission, L.L.C. v. Nadel & Gussman, L.L.C., the U.S. Fifth Circuit addressed whether federal courts had subject matter jurisdiction over claims stemming from the alleged migration and production of gas from a FERC certificated underground natural gas storage facility by an operator in a neighboring oil and gas unit formed by the Commissioner of Conservation.[29] The Fifth Circuit affirmed the Western District of Louisiana’s dismissal and found that such claims do not give rise to federal question jurisdiction.[30]

 

In the case, the Plaintiff argued that federal courts have jurisdiction to hear claims involving the production of storage gas by a neighboring oil and gas operator under 28 U.S.C. § 1331 (general federal question jurisdiction) and 15 U.S.C. § 717u (Natural Gas Act).[31] In support of its federal question jurisdiction argument, the Plaintiff did not assert that its claim was created by federal law.[32] Instead, it argued that its claims turned on substantial questions of federal law.[33] In addition, Plaintiff claimed that the Natural Gas Act’s (“NGA”) grant of exclusive jurisdiction extended to its claims against the well operator because its alleged production of storage gas interfered with the Plaintiff’s own rights and obligations under the NGA.[34]

 

A.      Substantial Question of Federal Law

 

The Fifth Circuit rejected the Plaintiff’s argument that its claims turned on substantial questions of federal law. At the outset, the Fifth Circuit agreed with the District Court’s conclusion that Plaintiff’s claims amounted to nothing more than a conversion claim under Louisiana law.[35] As a result, the Court noted that “[f]or a state law claim to support federal subject matter jurisdiction, a federal issue must be ‘(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.’”[36]

 

Applying the required substantial question of federal law standard, the Court reasoned that the Plaintiff’s claims did not raise a question of federal law for the following reasons. First, the Court rejected the Plaintiff’s argument that its FERC Certificate of Public Convenience and Necessity, which is required for a party to operate a natural gas storage facility, does not address the property rights a facility operator may have over storage gas but instead merely authorizes the operation of a storage facility.[37] Second, the Court found that the Plaintiff’s FERC tariff, which provides certain rules regarding possession of storage gas, only applies between a storage facility operator and their customer and do not extend to other parties that may interfere with storage gas.[38] Third, the Fifth Circuit found that the Plaintiff’s facility as well as the operator’s oil and gas operations were subject to regulation by the Commissioner of Conservation.[39] As a result, it reasoned that Louisiana law provided the proper rules for determining which party had a right to the storage gas as opposed to federal law.[40] Finally, the Court rejected the Plaintiff’s argument that the well operator’s activities were outside of the production exception of the NGA because the gas being produced was traveling in interstate commerce.[41] In support of this conclusion, the Court noted that “producers are subject to the jurisdiction of the FERC when they engage in activities that can be classified as sales or transportation rather than as production or gathering”[42] and that the erroneous production of storage gas is still part of the production process.[43]

 

The Court also found that any federal issues involving the Plaintiff’s claims were not substantial because the “[r]egulation of the production and gathering of natural gas is left to the states.”[44] Furthermore, the Court recognized that asserting subject matter jurisdiction over such claims would disrupt the balance between state and federal regulation of natural gas markets.[45] In support of this point, the Court noted that “the Natural Gas Act ‘was drawn with meticulous regard for the continued exercise of state power, not to handicap or dilute it in any way’”[46] and that federal jurisdiction in this matter would interfere with the congressionally approved right of Louisiana to regulate production according to its own laws and in its own courts.[47]

 

B.      Exclusive Federal Jurisdiction Under the Natural Gas Act

 

The Court rejected the Plaintiff’s second argument that the well operator’s actions interfered with the Plaintiff’s right to operate its storage facility and resulted in a violation of the NGA that fell within the confines of the NGA’s exclusive federal jurisdiction provision.[48] In its reasoning, the Fifth Circuit noted that the Plaintiff’s argument presented an issue of first impression as to “whether the NGA’s exclusive jurisdiction provision extend[ed] to actions involving third party interference.”[49] However, the Court noted that the Ninth and Sixth Circuits had previously addressed this question and found that because well operators are not subject to any duties under the NGA, they could not violate the NGA and be subject to its exclusive jurisdiction clause.[50] The Fifth Circuit agreed with the conclusion of its sister courts and refused to find that the operator’s action implicated a violation of the NGA.[51]

 

 

 

              

 



* Associate, Liskow & Lewis, B.A., University of Georgia, 2009. J.D., Paul M. Hebert Law Center, Louisiana State University, 2012. Any views expressed herein are my own and do not necessarily reflect the views of Liskow & Lewis and/or its clients. Copies of any decisions discussed herein are available from the author upon request.

[1] See TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206 (W.D. La. 2016) (finding that only unleased mineral owners are entitled to 103.1 reports from a unit operator or producer), but see XXI Oil & Gas, LLC v. Hilcorp Energy Co., 13-410 (La. App. 3 Cir. 2013), 124 So. 3d 530 (hereinafter referred to “XXI Oil & Gas I”);  XXI Oil & Gas, LLC v. Hilcorp Energy Co., 16-269 (La. App. 3 Cir. 9/28/2016), 2016 WL 5404650 (hereinafter referred to as “XXI Oil & Gas II”).

[2] XXI Oil & Gas I, 124 So. 3d at 534-35.

[3] See id.

[4] See id.

[5] TDX Energy, 2016 WL 1179206 at p. 5-7.

[6] Id. at 1.

[7] See id. at p. 5-7.

[8] Id. at p. 5 (emphasis added).

[9] Id. (emphasis added). In support of its conclusion, the Western District stated that “[i]f the legislature had intended the statute to benefit ‘owners of oil and gas interests unleased by the operator,’ it should have so stated.” In addition, the Western District noted that such a conclusion does not lead to absurd consequences under the clear and unambiguous language of La. R.S. 30:103.2. Furthermore, the Court examined the language of Mineral Code article 111 and La. R.S. 30:10 to show that the term “unleased mineral owner” refers to the owner of mineral interests that are not leased by any party. Finally the Court stated that “[t]he legislature well may have intended to provide greater protections for landowners who typically are not as sophisticated as, or have the available resources of, individuals or entities that procure mineral leases.” Id. at 5-7.

[10] XXI Oil & Gas, LLC v. Hilcorp Energy Co., 16-269 (La. App. 3 Cir. 9/28/2016), 2016 WL 5404650.

[11] Id. at p. 3-4.

[12] It is important to note that TDX Energy is currently on appeal to the U.S. Fifth Circuit, and the parties in XXI Oil & Gas II have applied for writs to the Louisiana Supreme Court.

 

[13] 16-468 (La. App. 3 Cir. 12/21/16). Opinion available at http://www.la3circuit.org/Opinions/2016/12/122116/16-0468opi.pdf. At the time of this update, the legal delays for rehearing and/or further review of this decision by the Louisiana Supreme Court have not expired.

[14] See id. at 3.

[15] See id.

[16] See id.

[17] See id.

[18] See id. at 4.

[19] See id.

[20] Id.

[21] See id.

[22] See id. at 4-5.

[23] See id. at 5-6.

[24] Id. at 7-8.

[25] Id. at 8.

[26] See id. at 10-12.

[27] See id. at 12.

[28] See id. at 12-13.

[29] See Case No. 16-30269 (Dec. 23, 2016). Opinion available at http://www.ca5.uscourts.gov/opinions/pub/16/16-30269-CV0.pdf. In the interest of full disclosure, the author served as counsel of record in this matter. At the time of this update, the legal delays for rehearing and/or further review of this decision by the U.S. Supreme Court have not expired.

[30] See id. at 1.

[31] See id. at 4.

[32] See id.

[33] See id.

[34] See id. at 8-9.

[35] See id. at 5.

[36] Id. at 4 (citing Gunn v. Minton, 133 S. Ct. 1059, 1065 (2013)).

[37] See id. at 6.

[38] See id.

[39] See id.

[40] See id. at 7.

[41] See id. at 7-8.

[42] Id. at 7 (citing Shell Oil Co. v. Fed. Energy Regulatory Comm’n, 566 F.2d 536, 539 (5th Cir. 1978)).

[43] See id. at 8.

[44] Id. (citing Oneok, inc. v. Learjet, Inc. 135 S. Ct. 1591, 1596 (2015)).

[45] See id. at 8.

[46] Id. (Oneok, 135 S. Ct. 1599 (quoting Panhandle E. Pipe Line Co. v. Pub. Serv. Commin, 332 U.S. 507, 517-18 (1947))).

[47] See id. at 8.

[48] See id. at 8.

[49] Id. at 9.

[50] See id. at 9 (citing Williston Basin Interstate Pipeline Co. v. An Exclusive Gas Storage Leasehold and Easement in the Cloverly Subterranean Geological Formation, 524 F.3d 1090 (9th Cir. 2008) & Columbia Gas Transmission, LLC v. Singh, 707 F.3d 583, 588 (6th Cir. 2013)).

[51] Id. at 10.

Created by: Martha Mills at 12/6/2016 10:41:43 AM | 0 comments. | 823 views.

LOUISIANA LEGAL UPDATE

James L. Bullen

Bullen & Plauché, LLC

 

PUBLIC POLICY AGAINST RESERVING OUTSTANDING MINERAL RIGHTS AFFIRMED

In Sterling Timber Assocs., L.L.C. v. Union Gas Operating Co., 2016 La. App. LEXIS 2034; 16-433 (La. App. 3 Cir. 11/02/2106), Sterling Timber Associates (“Sterling”) sold two parcels of property in Allen Parish, Louisiana to O’Neal Stuart Investment, L.L.C. and Barbara L. O’Neal (collectively “OSI”) as part of a transfer of more than 14,000 acres in Allen, Beauregard, Calcasieu, and Jefferson Davis parishes.  The two parcels at issue were subject to a mineral servitude created in August 1995.  Nevertheless, when Sterling sold the parcels on October 8, 2004, it reserved all mineral rights to the property in the act of sale.  The same day, the vendee, OSI, executed a mineral deed in favor of Sterling on the 14,000 plus acres Sterling had just sold to OSI even though OSI did not own any mineral rights.  In August 2010, OSI granted mineral leases on the two parcels to Orbit Energy Partners, which leases were eventually assigned to Union Gas Operating Company (“Union Gas”).  Union Gas drilled and began producing from the two parcels, and Sterling filed suit, alleging it was entitled to the minerals being extracted therefrom.

On appeal, the Third Circuit agreed with the trial court that Rodgers v. CNG Producing Co., 528 So. 2d 786 (La. App. 3 Cir.), writ denied, 532 So.2d 180 (La. 1988) applied to the Sterling to OSI transaction and warranted the application of Louisiana Mineral Code Article 76 instead of Louisiana Mineral Code Article 77.  La. R.S. 31:76 provides that “[t]he expectancy of a landowner in the extinction of an outstanding mineral servitude cannot be conveyed or reserved directly or indirectly.”  An exception to this rule is provided in La. R.S. 31:77, which states: “If a party purports to acquire a mineral servitude from a landowner when the right purportedly acquired is outstanding in another and the landowner either subsequently acquires the outstanding right or is the owner of the land at the time it is extinguished, the after-acquired title doctrine operates to vest the right in the party who purported to acquire it to the full extent of his title.”

The application of Mineral Code Article 76 versus Article 77 was at issue in the Rodgers case decided by the Third Circuit in 1988.  Like the facts in Sterling, the Rodgers seller sold property burdened by a mineral servitude and, in the sale instrument, indicated the reservation of mineral rights was part of the consideration for the transfer.  Also like Sterling, the buyer in the Rodgers transaction executed a mineral deed in favor of the seller on the same day as the sale of the land.  Furthermore, like Sterling, the Rodgers buyer knew that the seller owned no mineral interest in the land at the time it was sold.  In both cases, only a future right to receive the mineral rights through prescription of nonuse existed.

Based on the factual similarities between Rodgers and the present case, the Sterling court reasoned that Rodgers was directly on point and merited the application of Mineral Code Article 76 to the contested transaction.  The Sterling court adopted the Rodgers’ holding that the mineral conveyance from buyer to seller of a known outstanding mineral servitude was a disguised reservation of reversionary mineral rights, a violation of Louisiana public policy, and directly forbidden by La. R.S. 31:76.  Furthermore, the Sterling court adopted Rogers’ finding that La. R.S. 31:77 did not apply because the purpose of Mineral Code Article 77 is to “… protect an innocent purchaser from an oversale of mineral rights by a land owner.”  Sterling at 8, citing Rodgers at 789.  An “oversale” occurs “… when a tract might be subject to grants or reservations in excess of the grantor’s ownership interest, i.e. the putative burden in excess of the owned mineral rights” [Sterling, citing Patrick H. Martin, Louisiana Mineral Law Treatise 141 (Patrick H. Martin ed., Claitor’s Publishing Division) 2012].

The Sterling court observed that “… in Rodgers and in this case, the purchaser of the property knew that the seller presently owned no mineral interest in the land.  Only a future right to receive the mineral rights through nonuse was potentially present.  As such, like in Rodgers, there was not an “oversale” here where an innocent party needed protection from a seller’s attempt to sell something that the seller did not presently own.”  Sterling at 9.

Sterling and Rodgers confirm that a buyer’s execution of a mineral deed in favor of the seller in anticipation of applying the after-acquired title doctrine will be rejected as an attempt to circumvent Louisiana’s public policy against reserving reversionary mineral rights.  Only “innocent” parties will benefit from the protection of Mineral Code Article 77, which exists to remedy an “oversale” where the buyer is unaware the seller does not own the mineral rights purportedly conveyed.

 

ROYALTY AND OVERRIDING ROYALTY DIFFERENTIATED FOR APPLICATION OF MANDATE

In Encana Oil & Gas (USA), Inc. v. Brammer Engineering, Inc., 2016 La. App. Lexis 2099, 51,045 (La. App. 2 Cir. 11/16/16) the Second Circuit Court of Appeal held that the language in a contract of mandate did not authorize the mandatary (Brammer) to reserve a free “overriding royalty” on its Principals’ (mineral lessor’s) royalty in a mineral lease without actually securing an additional [overriding] royalty for the mineral lessor. 

A contract of mandate is commonly referred to as a “power-of-attorney” and may be onerous (performed for compensation) or gratuitous (performed for free).  See La. C.C. Arts. 2989, et seq.   The onerous contract of mandate in this case provided:

“It is recognized that mineral leases executed in the future by Agent on behalf of Principal will provide for the reservation of an additional free overriding royalty interest on behalf of the lessors.  It is agreed that in consideration of the services rendered and to be rendered by Agent, [sic] shall be entitled to compensation as follows, to wit: 1. On oil, gas and mineral leases under the terms of which not less than 1/16 free overriding royalty is reserved, Agent shall be entitled to a 1/32 free overriding royalty…”.  Brammer at 8.

Pursuant to the contract of mandate, Brammer agreed to place its Principals’ mineral rights in a lease offer package with other mineral owners; and, the package offered a mineral lease with a 25% lessor’s royalty to the high bidder.  Encana acquired the package and Brammer inserted a reservation of a 1/32 royalty interest in its favor in the lease it granted to Encana as Agent for its Principals. A dispute arose between Brammer and its Principals as to Brammer’s right to reserve the 1/32 overriding royalty interest, and consequently Encana filed this concursus action.

The contract of mandate was based on the terms of an earlier mandate between the lessors and a third party executed in 1962 when a lessor’s royalty of 1/8 was common in north Louisiana.  Therefore, Brammer asserted it was entitled to a 1/32 royalty on any lease providing for more than the “standard” lessor’s royalty of 1/8.

The trial court rendered summary judgment in favor of Brammer, but the Court of Appeal reversed.  The Second Circuit recognized that, unlike lessor’s “royalty” (see La. R.S. 31:213) and “mineral royalty” (see La. R.S. 31:80), the Louisiana Mineral Code does not expressly define “overriding royalty”, but the term is acknowledged in Mineral Code Articles 126, 171, and 191.  The court explained that the term “overriding royalty” is used to describe “a royalty carved out of the working interest created by an oil and gas lease,” and cited Williams & Meyers Manual of Oil & Gas Terms definition of “overriding royalty” as “an interest in oil and gas produced at the surface, free of the expense of production, and in addition to the usual landowner’s royalty reserved to the lessor in an oil and gas lease.”  Brammer @ 8. 

Based on the definitions of royalty and overriding royalty set forth above, the Second Circuit found “it is clear that an overriding royalty is in addition to a lessor’s royalty.”  Brammer at 9.  Furthermore, based on the plain meaning of the word “additional” in the Brammer power of attorney and an assignment of overriding royalty in the Encana lease to itself, the court concluded that Brammer had to expressly reserve an additional royalty interest on behalf of the mineral owners to trigger its right to compensation by overriding royalty interest.  Id.  In addition, the court noted that “Brammer’s argument redefines the term “royalty” to mean “standard lessor’s royalty”, whatever that “standard” may be.”  Id.  Whereas 1/8 may have been the standard lessor’s royalty in the past, the court stated that by 2008, a 1/4 royalty was offered at the outset in the Haynesville Shale.  Based on the fact that all lessors in the lease package received a 25% royalty from Encana, the court found Brammer “did nothing” to obtain an additional royalty for the lessors to trigger its right to an override in the leased interest.  Brammer at 10.

 

SALE OF MINERAL RIGHTS BY MAIL SOLICITATION

Act 179 of the Louisiana Legislature, 2016

The Louisiana Legislature recently enacted the Sale of Mineral Rights by Mail Solicitation Act (La. R.S. 9:2991.1 through 9:2991.11).  The Act provides form requirements for the sale of mineral rights that were solicited by mail, provides the method of rescinding such a sale, and imposes penalties on the mineral rights buyer for failure to comply with the form requirements set out in the Act.  The Act is designed to protect landowners and other mineral rights owners who are at risk of exploitation.  Because the doctrine of lesion beyond moiety does not apply to mineral rights under Louisiana law, mineral right owners could not previously rescind a sale of their rights for less than half of their value.  The Sale of Mineral Rights by Mail Solicitation Act addresses this issue by allowing mineral rights sellers the option to rescind a mineral rights sale within a given time period, when the sale was solicited by mail containing a check, draft, or other form of payment.

La. R.S. 9:2991.2 defines the sale of mineral rights by mail solicitation as “the creation or transfer of a mineral servitude or mineral royalty, or the granting of an option, right of first refusal, or contract to create or to transfer a mineral servitude or mineral royalty, that is contracted pursuant to an offer…received by the transferor through the mail…and is accompanied by any form of payment.”  Interestingly, the Act does not apply when there was a “prior personal contact” that included a “meaningful exchange” between the buyer and the seller. (La. R.S. 9:2991.3).  What may constitute a “meaningful exchange” between the buyer and seller can include negotiations in person, by telephone, or by written or electronic communication.  By contrast, mass-mailings and automated telephone calls do not constitute a “meaningful exchange.” [See Act 179, La. R.S. 9:2991.3, comment (c)].

Landmen mailing out “cold” offers to buy mineral rights are encouraged to follow the form requirements for a sale of mineral rights set out in La. R.S. 9:2991.4, and use the notice of rescission language provided in La. R.S. 9:2991.5 in the act of sale.  They should also omit the prohibited terms described in La. R.S. 9:2991.10 from the act of sale.  The notice of rescission disclosure is particularly important because when it is not included in the act of sale, the seller has a three year peremptive period in which to rescind the sale, and the buyer may be liable for attorney’s fees, court costs, and additional damages at the court’s discretion.  On the other hand, when the notice of rescission disclosure is included in the act of sale, the seller has only 60 days from the date of signing the transfer to rescind the sale, and the buyer is not liable for attorney’s fees, court costs and potential additional damages as provided in La. R.S. 9:2991.9.

The Sale of Mineral Rights by Mail Solicitation Act further provides that if a seller exercises its right to rescind the sale, the written act of rescission is effective between the parties as soon as it is transmitted.  The seller must repay any payments made to him by the buyer within 60 days “after rescission”.  The rescission’s effect on third parties is governed by La. R.S. 9:2991.7, which generally provides that third parties are subject to the rescission only when it contains the name of the transferor and transferee and is filed for record within 90 days of the recordation of the mineral rights sale.   Additional provisions regarding the effect of the rescission are contained in La. R.S. 9:2991.8 and 9:2991.9.  Landmen are encouraged to read the entirety of the Sale of Mineral Rights by Mail Solicitation Act to become familiar with the form, notice, and timing provisions it contains.

Sara T. Donohue contributed to this article.  Copies of the cases and/or statutes discussed above may be obtained upon request from James L. Bullen by facsimile (337-233-9095) or e-mail (jim@bullenplauche.com).

 

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HPS Oil & Gas is currently looking for experienced Landmen for due diligence research in Oklahoma and Abstractors for north Louisiana.  Ability to travel required.  For consideration, please email resume and references to jbivins@hps-og.com.

Created by: Martha Mills at 11/3/2016 4:42:19 PM | 0 comments. | 774 views.

LOUISIANA LEGAL UPDATE

David J. Rogers

Gordon Arata

 

INTERPRETATION OF DEPTH LIMITATION CLAUSES IN MINERAL TRANSFERS

 

               The Court in BRP LLC (Delaware) v. MC Louisiana Minerals LLC, 196 So.3d 37 (La. App. 2d Cir. 5/18/16) recently offered guidance on interpreting an ambiguous depth limitation clause found in a mineral transfer. Often times when interpreting such clauses, it is important to have some basic knowledge of the geology of the region in which the minerals being transferred are located in order to fully understand any depth limitation clause contained therein. Further, new geologic structures capable of producing oil and/or gas can be discovered over time which may change the interpretation of such a clause or render such a clause ambiguous.

 

               The transfer of mineral rights at issue in the BRP, LLC case involved a 2008 transfer of certain depths in approximately 13,000 acres from International Paper Company (“IP”) to Chesapeake Royalty, LLC (“Chesapeake”). Following the transfer between IP and Chesapeake, IP transferred its remaining mineral rights to BRP, LLC (“BRP”).  Thereafter, a dispute arose between Chesapeake and BRP as to the rights that were conveyed to Chesapeake and those reserved by IP due to the ambiguity contained in the definition of the “assets” as defined in the purchase and sale agreement (“PSA”). BRP claimed that IP intended to transfer its mineral rights in the Haynesville Shale only to Chesapeake. While Chesapeake claimed that it acquired from IP all the mineral rights below the Cotton Valley formation, which includes the Bossier Shale and Haynesville formations. BRP brought suit seeking a declaratory judgment declaring that BRP owned the mineral rights in the Bossier Shale.  The Bossier Shale, according to the expert testimony presented in the case, exists between the Cotton Valley formation and the Louark Group. The Louark Group consists of the Haynesville and Smackover formations.[1] The expert testimony from geologists presented during the trial indicated that the productive portion of the Bossier Shale was the Bossier C Shale located in the middle to the lower portion of the structure.

 

               In the PSA by and between IP and Chesapeake, the mineral rights being transferred were described in pertinent part as follows:

 

The “Assets” shall mean the following: all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands described in the attached Exhibit A, and any and all oil and gas leases covering such lands, INSOFAR AND ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765’ in the Winchester Samuels 23 # 1 well (API # 1703124064) located in Section 23-14N-13W, DeSoto Parish, LA, and correlative to a depth of 9,298’ in the Tenneco Baker # 1 well (API # 1701320382) located in Section 12-16N-10W, Bienville Parish, LA[2]

 

               The ambiguity in the definition exists because the Bossier Shale is understood to exist between the Cotton Valley formation and the Louark Group. However, the description in the transfer does not allow for a third formation to exist between the Cotton Valley formation and the top of the Louark Group. Chesapeake claimed to have known about the productive capability of the Bossier Shale at the time of the transfer while IP did not.

 

               The lower court after hearing conflicting testimony from expert geologists on both sides and from the individuals on each side that negotiated the deal between IP and Chesapeake ruled in favor of Chesapeake. The trial court found that IP’s main intent in the depth limitation language was to reserve the Cotton Valley depths because of the shallow production it had established at those depths. Further, the lower court noted that the correspondence between the parties during the negotiations appeared to focus on the Haynesville depths being transferred to Chesapeake. Most importantly, the trial court found that the well depth footage markers contained in the depth limitation clause both denoted locations that were considered above the Bossier C Shale. The well depth footage markers were given considerable weight by the trial court in the interpretation of which zones were reserved and conveyed in the transfer. The trial court stated that “if any ambiguities exist in the depth limitation language, the logical interpretation would be to use the lower correlative marker or the depth most beneficial to the defendants.”[3]

 

               On appeal BRP argued that due to the footage markers given in the description being erroneous in describing the top of the Louark Group and the ambiguity created thereby, the depth clause should be interpreted to convey all minerals below the lowest depth listed, which was the top of the Louark Group. The well depth footage markers given in the transfer created ambiguity because the markers denoted depths that were located within the Bossier Shale and that left several hundred feet of Bossier Shale between the well depth markers and the top of the Louark Group. Thus, BRP contended that the only way to give effect to all depths given in the depth limitation clause was to set the depth at the deepest depth given, being the top of the Louark Group. The effect of such an interpretation would be to reserve to the transferor the Bossier Shale and the Cotton Valley formations.

 

               The Appellate Court noted that the evidence presented at trial and the expert testimony given showed that the definitions of the location and composition of formations and groups may change over time and are subject to disagreement by geologists thus leading to much uncertainty in interpretation. The oil and gas industry has handled this ambiguity by using stratigraphic markers such as the well depths used in the transfer between IP and Chesapeake. Like the trial court, the Appellate Court found that it was proper to apply the stratigraphic markers represented by the well depths as the boundary line for the mineral rights conveyed. This interpretation was supported by the expert testimony given by Chesapeake, which the Appellate Court did not find manifestly erroneous. Furthermore, the letter of intent executed by IP and Chesapeake clearly stated that the mineral rights being transferred fell below the Cotton Valley formation.

 

               As letters of intent and purchase and sale agreements are usually not recorded, landmen usually do not have access to these contracts when examining depth limitations clauses contained in assignments and bills of sale or mineral deeds to determine the intent of the parties to the transfer. According to the BRP, LLC case, if it is not clear which depths are being transferred and which are being reserved, it would appear that less deference should be given to the formation names in any depth limitation clause and closer attention paid to the well depth markers in the referenced wells. By using the exact depths listed in the agreement you will have a clearer demarcation of ownership. 

 



[1] BRP LLC (Delaware) v. MC Louisiana Minerals LLC, 196 So.3d at 40 (La. App. 2d Cir. 5/18/16).

 

[2] Id.

[3] BRP LLC (Delaware) v. MC Louisiana Minerals LLC, 196 So.3d at 46 (La. App. 2d Cir. 5/18/16).

David John Rogers is an 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 oil and gas transactions, unitization and litigation involving oil and gas issues. He is also a Registered Professional Landman (RPL) and has extensive experience prior to joining the firm as a field landman 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)

·       Lafayette Association of Professional Landmen (LAPL)

·       Houston Association of Professional Landmen (HAPL)

·       Young Professionals of LAGCOE

·       Louisiana State Bar Association

 

Admissions

 

Louisiana, 2010

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AFTER-ACQUIRED TITLE AND THE MINERAL LEASE[1]

 

Patrick S. Ottinger

Ottinger Hebert, LLC

Adjunct Professor of Law, Paul M. Hebert Law Center,

Louisiana State University, Baton Rouge, Louisiana

 

Introduction

 

                    Before the adoption of the Louisiana Mineral Code, effective January 1, 1975, courts consistently held that a lessor of land as to which there were outstanding mineral servitudes, could expressly stipulate that the mineral lease would cover “outstanding mineral interests” after they “reverted” to the lands.  Whether such an agreement would bind particular successors to the land was a matter of significant doubt.  It was thought by some that, to recognize such an agreement, would be contrary to the prohibition against “dealing with” the “reversionary” interest.[2]

 

Jurisprudence

 

                    This early case law clearly recognized that the lessor’s obligation to “deliver” the newly acquired interest was “personal,” not “real,” to the end that a successor of a lessor under a recorded mineral lease, was not bound by this obligation, in the absence of an agreement by that successor to be bound thereby.

 

                    In the principal case,[3] suit was filed to declare the validity or invalidity of several conflicting mineral leases.  At issue was whether a successor-in-interest to the lessor’s interest in the land affected by a mineral lease which, when granted, covered an undivided one-fourth (1/4) interest in the minerals, was bound by an “After-acquired Title Clause” in the mineral lease so that, when an outstanding mineral servitude prescribed, it was automatically subjected to the lease.  This clause read, as follows:

 

Lessor agrees that any additional or greater mineral interest in the leased premises that may be acquired by him by purchase or otherwise, is also included and leased herein, and upon his written notice to said lessee with evidence of such additional interest given thirty (30) days prior to any annual delay rental paying date, the delay rentals payable hereunder shall be increased proportionately.[4]

 

                    The court held that a successor to the lessor is not bound by such a “personal” obligation,[5] explaining its view of the law as applied to the facts before it, as follows:

 

Therefore, when Mrs. Calhoun acquired the land from Thompson, while the land was subject to the lease, that lease was limited to Thompson’s ownership in the minerals, that is, one-fourth, and the other three-fourths interest remained outstanding.  The clause in the Thompson lease dealing with the outstanding minerals merely evidenced a personal agreement be­tween the original parties to the lease, was dependent on the happening of an uncertain event, and was limited to whatever additional ownership in the mineral rights Thompson right acquire while the lease was in full force and effect; the situation did not mate­rialize; consequently, the clause fell when Thompson failed to acquire outstanding mineral interests, and those became vested in Mrs. Calhoun, the owner of the land, at the time the servitude was extinguished because of its non-use for a period of more than ten years.[6]

 

Mineral Code

 

                    The Mineral Code now expressly regulates both the matter of the lessor’s warranty, and the effect of extinction of a mineral servitude.  When a lessor has “purportedly” leased rights that are “outstanding in another,” and those interests are extinguished by prescription, the interest that the lessor “acquires” accrues to the benefit of the lessee.

 

                    Thus, article 144 of the Louisiana Mineral Code reads, as follows:

 

Art. 144.  After-acquired title clause may bind lessor and successors in title

 

A mineral lease may provide that a mineral right that terminates during the existence of the lease and becomes owned by the lessor or his successor in title shall be subject to the lease.  If the lease is filed for registry, the provision is binding on all subsequent owners of the land or mineral rights leased.[7]

 

                    Article 145 of the Louisiana Mineral Code provides, as follows:

 

Art. 145.  After-acquired title doctrine; applicabil­ity in absence of special clause

 

If, in the absence of an express provision of the kind contemplated by the preceding Article, a party purports to grant a mineral lease on land or mineral rights that he does not own, any title thereto he subsequently acquires inures to the benefit of the lessee.  Successors in title of the original lessor are not bound under this Article unless they agree ex­pressly and in writing to become so bound.[8]

 

                    The typical scenario is where the lessor owned the land, but the leased premises was subject to outstanding mineral servitude interests for some portion of the minerals.  If, during the term of the mineral lease, the outstanding mineral servitude interests were to prescribe, such minerals would revert to the then surface owner of the land.[9]  The “After-acquired Title Clause” is designed to bring the prescribed interests under the ambit of the mineral lease, and correspondingly increase the fraction of minerals covered and affected by that lease.

 

Commercially Printed Mineral Lease Forms

 

                    The “After-acquired Title Clause” contained in both the Bath 4 Form and the Bath 6 Form reads, as follows:

 

Whether or not any reduction in rentals shall have previously been made, this lease, without further evidence thereof, shall immediately attach to and affect any and all rights, titles, and interests in the above described land, including reversionary mineral rights, hereafter acquired by or inuring to Lessor and Lessor’s successors and assigns.

 

                    This clause in the North Form simply states that the “lease shall also extend and apply to all outstanding mineral rights or servitudes affecting the lands herein described as the same may revert to Lessor, his heirs or assigns, from time to time.”

 

                    The motivation for the adoption of article 144 is explained in Acree v. Shell Oil Co., Inc.,[10] in which it is stated, as follows:

 

Article 144 changes the jurisprudential rule with re­spect to outstanding mineral rights which terminate during the existence of the lease.  Under the pre-code decisions, it was virtually impossible to obtain a secure lease when mineral servitude rights were outstanding and about to expire.  The servitude owner was unable to give secure title and the landowner would generally refuse to give a joint lease since that would extend the life of the servitude.  Thus, it was necessary to remedy this situation by allowing the lessee to bind the lessor’s successor to the lease when the outstanding mineral rights reverted to him.  L.S.A.-Min.Code art. 144 Comment.[11]

 

                    The import and purpose of the “After-acquired Title Clause” is explained in the comments to article 144 of the Mineral Code, as follows:

 

It has been recognized that lessor and lessee may validly execute an after-acquired title clause binding the lessor to subject outstanding mineral rights to the lease if they terminate and become reunited with the landowner’s title.  . . .  However, it was previously the law that such a clause is not binding on the suc­cessors and assigns of the landowner who grants a lease containing such a clause.  The obligation to subject the outstanding rights to the lease was regarded as “personal” to the lessor and not binding on his successor in title unless expressly as­sumed by him.  . . .  Article 144 changes the law in this respect and permits the execution of leases with after-acquired title clauses which, when filed for registry, will bind the successors in title of the lessor.  The principal reason for doing this is that in Louisiana it has been virtually impossible for a lessee to obtain a secure lease at a time when mineral servitude rights were outstanding and on the verge of expiring.  In such situations, the servitude owner could not give a lease that would give the lessee security of title, even if the servitude owner had executive rights over the landowner’s interest in the minerals.  . . .  The landowner was not ordinarily interested in granting a joint lease as this would have extended the life of the outstanding mineral servitude.  . . .  As noted above, the landowner could not execute a lease with an after-acquired title clause binding on successors in the title unless the obligation was expressly assumed.  This situation has often frustrated efforts at development of land for mineral production.  Therefore, the law was changed in this regard.[12]

 

Conclusion

 

                    The commercially printed mineral lease forms in prevalent use (the so-called South Forms, Bath 4 and 6, and the North Form), albeit formulated differently, each contain an “After-acquired Title Clause.”  Thus, unless it is stricken, article 144 would operate to the exclusion of article 145, and subject to the recorded mineral lease any fractional mineral interest that prescribes during the existence of the lease, but after the lessor has sold the land subject to the recorded lease. 

 

                    If the mineral lease does not contain an “After-acquired Title Clause,” article 145 regulates the situation, and subjects the newly acquired interest to the mineral lease only if the lessor remains the owner of the land, but not if the land has been sold, “unless they agree expressly and in writing to become so bound.”



[1]           This is an adaption of several sections contained in Patrick S. Ottinger, Louisiana Mineral Leases:  A Treatise, published by Claitor’s Law Books and Publishing Division, Inc., June 2016.  It is available at www.claitors.com and www.amazon.com.

[2]           See Hicks v. Clark, 72 So. 2d 322 (La. 1954), now codified at La. Rev. Stat. Ann. § 31:76.  See also Patrick S. Ottinger, Mineral Servitudes, Louisiana Mineral Law Treatise, Ch. 4, § 416 (Martin, ed., Claitor’s Law Publishing, 2012).

[3]           Calhoun v. Gulf Refining Co., 104 So. 2d 547 (La. 1958).  

[4]           Id. at 548.

[5]           Id. at 551.  It is noteworthy that the case was decided during the period of time when there was much uncertainty as to the legal character of a mineral lease under Louisiana law. 

[6]           Id. at 551-52.

[7]           La. Rev. Stat. Ann. § 31:144.  The statement that a mineral lease “may provide” to the effect stated in the article, is an explicit reference to the opportunity to address the topic under the notion of “freedom of contract.”  The lease clause that invokes this opportunity is generally called an “After-acquired Title Clause.”

[8]           Id. at § 31:145.

[9]           McDonald v. Richard, 13 So. 2d 712, 714 (La. 1943) (“The judge of the district court decided that, inasmuch as the mineral rights reserved by the Morley Cypress Company were merely a real obligation, or mineral servitude imposed upon the land, the lapsing of the obligation or servitude inured to the party who owned the land at the time when the obligation lapsed.  Our opinion is that the judgment is correct.”).

[10]         548 F. Supp. 1150 (M.D. La. 1982), aff’d 721 F. 2d 524 (5th Cir. 1984).

[11]         Id. at 1155.

[12]         La. Rev. Stat. Ann. § 31:144, cmt.

Pat Ottinger is a partner in Ottinger Hebert, L.L.C., where he has practiced oil and gas law since 1974.  He is a graduate of the Paul M. Hebert Law Center at Louisiana State University.  He is licensed to practice in Louisiana and Texas.  Since 1996, he has taught the course in Mineral Rights at the Paul M. Hebert Law Center.  He is the author of A Course Book on Louisiana Mineral Rights, utilized at three law schools in the state.  He recently published a work on mineral leases, entitled Louisiana Mineral Leases:  A Treatise, available through claitors.com and amazon.com.  He is an experienced mediator and arbitrator, rendering such services through The Patterson Resolution Group.  He currently serves on the Advisory Council of the Mineral Law Institute at LSU.  He is a member of the Mineral Code Committee, Prescription Committee, Counter-letter Committee, Unsolicited Offers Committee, Tax Sales Committee, and the Risk Fee Act Committee of the Louisiana State Law Institute.  He is a Past President of the Louisiana State Bar Association, and served as Chair of the Mineral Law Section of that association.  He served as City-Parish Attorney of Lafayette Consolidated Government from January 2004 to February 2011.

 

Links:

01H LAPL Article on After-acquired Title
Created by: Martha Mills at 9/20/2016 10:16:13 AM | 0 comments. | 693 views.

FROM THE MEMBERSHIP CHAIRMAN

Mandy Barrilleaux, RPL

 

Welcome back to all of our wonderful members!!!!! I’m so happy to serve as your Membership Chairman again this year. September 1st marked the official new year for the LAPL, so please keep an eye out for the LAPL Membership Renewal form. This form is for you to review, make changes to and return to us, and will help us in making sure that we have all of your current and up to date information, so that you receive your newsletters, emails and any other information that we send out throughout the year. There is also an option to make all of these changes, renew and pay for your membership online.

I would like to share with all of you some important reasons why being or becoming a member is so beneficial.   LAPL events bring together hundreds of landmen from around the community, surrounding communities and even other states to provide outstanding networking opportunities for members.

With our newsletter, website, member directory, social events, and educational opportunities, etc., LAPL provides access to qualified landmen throughout our area through one of the largest local job networks in the energy industry.

Monthly luncheons provide an opportunity to learn about current events and legal issues in our ever-changing industry, as well as an opportunity for networking. Points/credits are available; however, the education provided is stellar and a bonus to all in our industry. 

Safety Meetings, which is our tongue-in-cheek term for a social, primarily take place on the third Thursday of every month from 5 until 8.

The LAPL awards scholarships to students in the ULL PLRM Program based on merit.

LAPL hosts at least 9 educational programs, meetings and seminars locally each year to help members stay competitive in an ever-shifting industry. Both the LAPL Spring Seminar and the Fall Seminar offer no less than 7 credits each at an extremely affordable price. Our monthly luncheons are $20 and include a full meal. Every hour of education provided is AAPL certified and counts towards continuing education points. However, all members are encouraged to further their education and attend these events as they are good networking opportunities as well.  Membership in LAPL makes you a part of a united voice to seek what is best for the energy industry.

LAPL supports the interests of landmen by being proactive on key legislative issues such as licensing and taxes. Our association works closely with AAPL and other Louisiana Associations to protect our landman industry from harmful legislation.  LAPL is currently spearheading an effort to combine our resources with AAPL and our sister in-state Associations to create a Louisiana Coalition, which will provide a higher level of protection against such legislation. 

I hope that you consider becoming a member if you aren’t already one or taking the time to talk to a fellow colleague about your experience being a member. Thank you to all of our wonderful and dedicated members! Without you, none of this would be possible. Let’s make 2016-2017 another one for the books!

 

Created by: Martha Mills at 9/20/2016 10:07:08 AM | 0 comments. | 577 views.

New Members:

 

Pamela Guidry

Active, Lake Charles, LA 

 

Michael R. Brassett, II

Active, Baton Rouge, LA 

 

Scott Patton

Active, Baton Rouge, LA 

 

Margaret Patton 

Active, Baton Rouge, LA 


New Applicants:

Ross Roubion
Active, Lafayette, LA 

Spencer Casey
Student, Richardson, TX 

Created by: Martha Mills at 9/20/2016 9:50:25 AM | 0 comments. | 560 views.

 

 

Thomas G. Smart Biography

 

Thomas G. Smart received his Bachelor’s of Science from Louisiana State University in 1979. He went on to Louisiana State University Law Center where he earned his Doctor of Jurisprudence in 1982. Tommy is licensed to practice in Louisiana and Texas. He is Vice President of the Mineral Law Section of the Louisiana State Bar Association, and a member of the Oil, Gas and Energy Resources Law Section of the Texas Bar Association. He is a frequent speaker at various legal, land and industry seminars, including the Louisiana Mineral Law Institute, and is a guest lecturer for the University of Louisiana at Lafayette PLRM Program.

 

Tommy is a shareholder at the Onebane Law Firm, where he has practiced in its oil and gas section since 1982. He has a general oil and gas transactional practice serving producers and others engaged in onshore and offshore operations, including title examination, the structuring, drafting and negotiation of complex agreements, the acquisition, sale and/or financing of oil and gas properties, due diligence for property acquisition, serving as local counsel for purchase and financing transactions, 3-D seismic permit and license agreement advice, and general advice.

 

Links:

Article-Mineral Rights by Solicitation Bill
Created by: Martha Mills at 8/29/2016 11:41:00 AM | 0 comments. | 947 views.

LOUISIANA LEGAL UPDATE

 

Game of Drones: An Overview of the New Final Rule Issued by the FAA

Relating to the Operation of Small Unmanned Aircraft Systems

 

By:  Colleen C. Jarrott, Esq.

Lafayette Association of Professional Landmen

Summer 2016 - Legal Update

July 1, 2016

            The use of small unmanned aircraft systems (“sUAS” or, colloquially, “drones”) is becoming more prolific in our society.  In the oil and gas context, drones can play a key role in conducting risky oilfield operations.  The uses for drones in the oil patch are limitless--(i) inspecting miles of pipeline for leaks in remote or mountainous areas; (ii) surveying offshore platforms in the Gulf of Mexico for damage; (iii) monitoring oil spills/breadth of the oil plume at rig sites; (iv) flying over oil rig flare stacks; and (v) detecting gas emissions.[1]  In this way, drones can allow oil and gas companies to save money and operate efficiently and safely. This legal update will provide a high-level overview of the new drone regulations issued by the Federal Aviation Administration (“FAA”) on June 21, 2016.[2]  The promulgation of these regulations is groundbreaking because it marks the first time that the FAA has formally recognized the need for government oversight of the operation of small unmanned aircraft and has fashioned a regulatory framework to fit that need.

            Until recently, the FAA did not have a comprehensive regulatory scheme to govern the use and operation of drones in the national airspace.  Instead, people or companies wanting to use drones had to seek a “Section 333 exemption” from the FAA, which was reviewed and granted on a case-by-case basis.  In 2012, Congress passed the Federal Aviation Administration Modernization and Reform Act (“Act”).  Section 333 of the Act authorized the FAA to create regulations relating to the operation of drones.[3]  Specifically, it directed the Secretary of Transportation to determine whether certain unmanned aircraft systems could operate in the national airspace system and, if so, then the Secretary was to “establish requirements for the safe operation of such aircraft systems in the national airspace.”[4]  With the issuance of the new final rule, “Section 333 exemptions” are no longer needed or available.

            In February 2015, the FAA issued a notice of proposed rulemaking and received over 4,600 comments in response.  After reviewing and considering the comments, the FAA issued its final rule on June 21, 2016.  The final rule was published in the Federal Register on June 28, 2016 and will be codified in Title 14 of the Code of Federal Regulations as Part 107.  The effective date of the new regulations is August 29, 2016. 

            The final rule recognizes that drones will be used by a number of industries for various purposes and, thus, it establishes a uniform set of requirements for persons or companies seeking to operate drones in a commercial setting.  For instance, the new regulations cover the following types of operations:

·       Crop monitoring/inspection;

·       Research and development;

·       Educational/academic uses;

·       Power-line/pipeline inspection in hilly or mountainous terrain;

·       Antenna inspections;

·       Aiding certain rescue operations;

·       Bridge inspections; and,

·       Aerial photography and wildlife nesting area evaluations.

 

            As for actual requirements, these regulations apply to drones that weigh 55 pounds or less.  All drone operations must be performed during daylight hours or civil twilight hours (30 minutes before sunrise or 30 minutes after sunset) with appropriate anti-collision lighting.  While being operated, the drone must be within the visual line of sight of the remote pilot (i.e., person operating the drone).  This means that the unmanned aircraft must remain close enough to the remote pilot such that the pilot can see and avoid other aircraft and such that the drone can be seen by the pilot without the aid of any device, except glasses or contacts.  A drone may not operate (i) over any persons not directly participating in the operation, (ii) under a covered structure and (iii) inside a covered stationary vehicle. 

 

            One big concern with having unmanned aircraft operating in the same airspace as manned aircraft (e.g., commercial passenger airplanes) is safety.  The FAA took care to craft regulations that would prevent mid-air collisions between manned and unmanned aircraft.  For instance, a drone must yield the right-of-way to other aircraft.  The maximum altitude for a drone is 400 feet above ground level or, if higher, within 400 feet of a structure.  The maximum groundspeed is limited to 100 mph (87 knots).  The final rule also prohibits operating a drone from a moving car (unless in a sparsely populated area) or a moving aircraft.     

 

            The new regulations also require that drones not be operated carelessly or recklessly. A drone cannot carry hazardous materials and a pre-flight inspection must be conducted by the remote pilot to ensure that the drone will not violate any state or federal laws.  A person may not operate a drone if he or she knows or has reason to know of any physical or mental condition that would interfere with its safe operation.  External load operations are allowed but only if the object being carried by the drone is securely attached and does not adversely affect the flight characteristics or controllability of the drone.

 

            The final rule also establishes certain operator certification requirements and responsibilities.  In order to operate a drone, a person must either hold a remote pilot airman certificate with a drone rating or be under the direct supervision of a person who holds a remote pilot certificate.  To qualify for a remote pilot certificate, as person must demonstrate aeronautical knowledge by either: (a) passing an initial aeronautical knowledge test at an FAA approved knowledge testing facility or (b) hold a Part 61 pilot certificate, complete a flight review within the prior 24 months, and complete a small drone online training course.  The cost to receive the certification is about $150.  A candidate also has to be vetted by the Transportation Security Administration (TSA) in the interest of national security.  All drone pilot candidates must be at least 16 years of age or older.

 

            Once a remote pilot certificate has been obtained, the pilot must make available to the FAA, upon request, the drone itself for inspection and testing, and any associated documents/records required to be kept by law.  A pilot must report to the FAA, within 10 days, any operation that results in serious bodily injury, loss of consciousness or property damage of at least $500.  A pilot must also conduct a preflight inspection, including specific aircraft and control station systems checks, to ensure that the drone is in proper condition for safe operation.  A pilot must also ensure that the drone complies with the existing registration requirements specified in 14 CFR § 91.203(a)(2).  An FAA airworthiness certificate is not required to operate a drone, but the remote pilot must conduct a preflight check of the drone to ensure that it is safe for operation.

 

            No doubt the oil and gas industry is poised to take advantage of drone technology pursuant to the FAA’s new regulatory framework in short order.  It is no secret that drone technology has outpaced the development of federal and state laws regulating the use of such aircraft.  State legislative efforts in Louisiana, for instance, have focused mainly on privacy considerations or criminalizing the unlawful use of drones instead of safety or orderly use concerns.[5]  To date, Louisiana legislators have not really focused on the commercial use of drones, except for a few efforts in 2015 relating to drones used in precision agriculture.[6]  However, with the new federal regulatory scheme in place, local legislative efforts will likely kick into high gear, especially in states like Louisiana where the energy and agricultural industries--pillars of the state’s economy—have come to rely on the use of drones.  Interesting developments in this area of the law are afoot.  Stay tuned.

 

Colleen C. Jarrott was a Member of the law firm of Slattery, Marino & Roberts, APLC (2007-2016).  Her practice principally focuses on civil litigation and regulatory matters concerning oil and gas law in Louisiana.  Ms. Jarrott provides counsel to industry trade associations and oil and gas companies on a variety of issues.  Ms. Jarrott graduated from the Catholic University of America's Columbus School of Law in 2002.  There, she served on the Law Review and Moot Court.  Ms. Jarrott was also the President of the Women's Energy Network for South Louisiana (WEN-SOLA) in 2013.  Any questions or inquiries relating to this article can be directed to Ms. Jarrott at the law firm of Baker Donelson at (504) 566-8664 (direct) or by e-mail to cjarrott@bakerdonelson.com

 

 

 

 

 

 

 

 

 

For further information, contact:

Colleen C. Jarrott

Slattery, Marino & Roberts

1100 Poydras Street, Suite 1800

New Orleans, Louisiana 70163

(504) 585-7830 (direct)

 

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[1] See Michael Weller, Salo Zelermyer and Joshua Zive, Drones and The Oil and Gas Industry, Oil & Gas Financial Journal, February 6, 2015, at http://www.ogfj.com/articles/2015/02/drones-and-the-oil-and-gas-industry.html.  Interestingly, BP was the first oil and gas company to be approved to fly a drone over its Prudhoe Bay oil field in Alaska (http://www.bp.com/en/global/corporate/bp-magazine/innovations/drones-provide-bp-eyes-in-the-skies.html).

[2] The 624-page final rule (regulations) can be found at https://www.federalregister.gov/articles/2016/06/28/2016-15079/operation-and-certification-of-small-unmanned-aircraft-systems.  These regulations do not apply to model aircraft that satisfy the criteria set forth in Section 336 of the Federal Aviation Administration Modernization and Reform Act, Pub. L. No. 112-95.

[3] Federal Aviation Administration Modernization and Reform Act of 2012, Pub. L. No. 112-95.

[4] Id. at §333.

[5] See e.g., Louisiana’s DRONE Act, codified at La. R.S. 14:337.  DRONE stands for “Deterrence of Reconnaissance Over Noncriminal Entities Act.”  This law went into effect in August 2014.

[6] See e.g., “Unmanned Aerial Systems,” Acts 2015, No. 166, codified at La. R.S. 3:41-47 (agriculture and forestry).  This law went into effect in June 2015. 

Created by: Martha Mills at 8/24/2016 9:27:07 PM | 0 comments. | 918 views.

LAPL Members,

 

This message comes to you today hoping that you were spared the worst of the recent flood.  As many of you have witnessed, the people of our state are resilient and have responded in amazing ways with the true character of the men and women here being revealed as they put away their daily lives to assist one another.  However, as time passes and those that are now giving so much of their time to help get family, friends, neighbors and, in many cases, strangers lives back to some sense of normality, many will continue to need a helping hand after the first wave must return to their own lives.

 

If you are able to help and may not have yet been able to identify how or where, we are reaching out to you now to ask that you visit one of these websites:  Samaritan’s Purse (samaritanspurse.org), Louisiana Baptists (louisianabaptists.org), Diocese of Lafayette (337-261-5650), United Way of Acadiana (337-232-4357), and Community Foundation of Acadiana (cfacadiana.org), which we have identified as reputable organizations that are making noticeable headway in our relief efforts in and around Acadiana.  Also, if you know of anyone in need of assistance or know of someone who is looking for a place to help out, please let us know who they are by visiting LAPL’s LinkedIn page or our Facebook page.  If you are not able to get to either of these sites you can email damon.dartresources@gmail.com or call Damon at (337) 849-3121 and he can get you the information you need.

 

Thank you and God Bless!

 

Lafayette Association of Professional Landmen

Created by: Martha Mills at 8/9/2016 12:05:06 PM | 0 comments. | 607 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. | 715 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. | 867 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. | 884 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. | 917 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. | 923 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.