January 2017 Legal Update by Brittan J. Bush

by: Martha Mills at 1/23/2017 9:05:35 AM | Viewed 490 times.

Louisiana Legal Update

By Brittan J. Bush

Liskow & Lewis

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

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

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

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

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

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


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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

A.      Substantial Question of Federal Law

 

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

 

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

 

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

 

B.      Exclusive Federal Jurisdiction Under the Natural Gas Act

 

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

 

 

 

              

 



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

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

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

[3] See id.

[4] See id.

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

[6] Id. at 1.

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

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

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

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

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

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

 

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

[14] See id. at 3.

[15] See id.

[16] See id.

[17] See id.

[18] See id. at 4.

[19] See id.

[20] Id.

[21] See id.

[22] See id. at 4-5.

[23] See id. at 5-6.

[24] Id. at 7-8.

[25] Id. at 8.

[26] See id. at 10-12.

[27] See id. at 12.

[28] See id. at 12-13.

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

[30] See id. at 1.

[31] See id. at 4.

[32] See id.

[33] See id.

[34] See id. at 8-9.

[35] See id. at 5.

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

[37] See id. at 6.

[38] See id.

[39] See id.

[40] See id. at 7.

[41] See id. at 7-8.

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

[43] See id. at 8.

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

[45] See id. at 8.

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

[47] See id. at 8.

[48] See id. at 8.

[49] Id. at 9.

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

[51] Id. at 10.

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