November 2016 Legal Update by David J. Rogers

by: Martha Mills at 11/3/2016 4:42:19 PM | Viewed 577 times.

LOUISIANA LEGAL UPDATE

David J. Rogers

Gordon Arata

 

INTERPRETATION OF DEPTH LIMITATION CLAUSES IN MINERAL TRANSFERS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 



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

 

[2] Id.

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

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

 

Professional Affiliations:

·       American Association of Professional Landmen (AAPL)

·       Lafayette Association of Professional Landmen (LAPL)

·       Houston Association of Professional Landmen (HAPL)

·       Young Professionals of LAGCOE

·       Louisiana State Bar Association

 

Admissions

 

Louisiana, 2010

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