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Created by: Martha Mills at 10/17/2016 6:16:32 PM | 0 comments. | 541 views.
Created by: Martha Mills at 10/4/2016 8:37:06 PM | 0 comments. | 983 views.

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. | 617 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. | 522 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. | 492 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. | 837 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)

 

http://images.rigzone.com/images/home/article/img_138268_2.jpg

 

http://www.offshoreenergytoday.com/wp-content/uploads/2015/08/Repsol_exploring_use_of_drones_in_oil_industry.png

 



[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. | 843 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. | 547 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. | 653 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. | 775 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. | 810 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. | 845 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. | 829 views.

LOUISIANA LEGAL UPDATE

 

By Michael J. Pantaleo

Randazzo Giglio & Bailey

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Created by: Martha Mills at 4/13/2016 2:33:10 PM | 0 comments. | 1187 views.

LOUISIANA LEGAL UPDATE

 

By Brett Venn

Jones Walker

 

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

 

Mineral Code Prevails Over Civil Code for Maximum Mineral Lease Term

 

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

 

Relevant Facts:

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

 

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

 

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

 

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

 

Relevant Civil and Mineral Code Articles

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

 

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

 

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

 

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

 

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

 

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

 

La. R.S. 31:2.

 

Court’s Analysis:

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

 

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

 

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

 

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

 

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

 

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

 

Summary of Decision:

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

 

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

 

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

 

Relevant Facts:

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

 

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

 

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

 

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

 

Relevant Mineral Code Article:

 

Article 124 of the Mineral Code provides in relevant part:

 

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

 

La. R.S. 31:124 (emphasis added). 

 

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

 

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

 

Court’s Analysis:

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

 

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

 

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

 

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

 

1)      the depletion of the reservoir,

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

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

4)     the operating costs of the lease, and

5)      the net profit. 

 

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

 

Summary of Decision:

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

 

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

 

 

Created by: Martha Mills at 2/16/2016 9:37:45 AM | 0 comments. | 1106 views.

 

LOUISIANA LEGAL UPDATE

By Mark Dore
Dupuis & Polozola

 


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


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


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


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


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


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


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


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


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

Created by: Martha Mills at 2/2/2016 1:49:47 PM | 0 comments. | 881 views.

Staying in the Game: 7 Tips for Independent Landmen

By Richard Hines, CPL

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

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

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

 


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

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

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

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

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

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

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

Richard Hines, CPL, is Vice President of iLandman.

 

Created by: Martha Mills at 2/2/2016 12:32:33 PM | 0 comments. | 770 views.

FROM THE LAPL PRESIDENT

David Deville, CPL

 

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

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

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

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

Created by: Martha Mills at 2/2/2016 12:30:57 PM | 0 comments. | 836 views.

LOUISIANA LEGAL UPDATE

By Caleb Madere

Liskow & Lewis

 

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

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

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

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

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

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

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

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

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

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

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

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

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

Created by: Martha Mills at 12/2/2015 1:53:22 PM | 0 comments. | 1006 views.

Louisiana Legal Update

James L. Bullen

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

 

Sanity and sound legal reasoning prevail!

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

              

New State of Louisiana Oil and Gas Lease Form :

 

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

 

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

 

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

 

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

 

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

Created by: Martha Mills at 12/2/2015 1:51:42 PM | 0 comments. | 944 views.

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

by Senior Energy Markets Analyst, Alan Lammey

 

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

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

Smaller Commodity Price = Fewer Jobs, Less Tax Revenue

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

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

Natural Gas Prices Collapse to Decade Lows

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

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

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

Mountains of Debt Must Be Serviced

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

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

The Mother of Negative Loops

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

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

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

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