If you’ve ever tried to escape penalties for the operator/producer’s failure to comply with La. R.S §30:103.1 and §103.2, take comfort in XXI Oil & Gas, LLC v. Hilcorp Energy Company. You are not alone. No excuse has satisfied the courts, and there is none here.
The statutes (links above) require information and certain procedures to be followed by an operator before it can recoup costs of unit drilling operations from an unleased mineral owner. Of particular importance is a detailed sworn statement of costs of the operation and a statement of revenues.
The events unfold
XXI was the lessee of leases comprising 20% of a drilling unit; Hilcorp was the operator.
- 1/11/11-Hilcorp recompletes a well in the drilling unit and begins producing.
- 2/11/11-XXI acquires the leases.
- 4/21/11-XXI sends a letter by certified mail requesting the information required by Section 103.1.
- 4/21/11-Hilcorp sends XXI an AFE itemizing estimated costs to recomplete the well but including no revenue information.The accompanying letter explains that the unit well had been shut-in and would be returned to production shortly.
- 5/20/11-XXI elects to participate in the recompletion and signs the AFE as “participant”. .
- 6/13/11-XXI sends Hilcorp a second letter stating that because Hilcorp failed to provide the statement required by the statute, it could not deduct the cost of recompleting or operating the well from XXI’s revenues.
- 9/9/11-XXI sues, seeking penalties for failure to comply with the statutory reporting requirements.
Summary judgment was granted for XXI on the basis that Hilcorp did not comply with the statutes. The statement of costs was neither sworn nor detailed.
Hilcorp appealed, admitting it did not comply with the technical requirements of the statute but asserting that it achieved the intent and purpose the statute by submitting a statement of cost with the AFE. Hilcorp argued that XXI’s position was weakened because it elected to participate in the well after receiving the AFE.
The court of appeal upheld the trial court’s judgment against Hilcorp. Here is the reasoning:
- Whether the leases had been validly executed by owners of each tract was not relevant to issue of whether operator forfeited its right to demand contribution. Hilcorp offered no authority supporting the proposition that validity of the underlying leases is a required element for the statute to apply.
- The producer forfeited its rights to demand reimbursement by submitting an unsworn statement of costs.
- The statutory provisions were subject to strict construction.
- Where the statute is unambiguous it is not the court’s role to determine the purpose of the statute. “Detailed” is unambiguous. The text of the statute does not invite an inquiry about its purpose.
REVISION: What’s new about this opinion?
An observation that didn’t make its way into the original post is the court’s application of the statute to a lessee of a mineral owner who did not have a lease with the offending operator. Prior to this case that was an unanswered question.
Obvious musical interlude
Hey, you of a certain age, sitting in your 60’s and 70’s dorm room you thought “literature” wasn’t what you were doing. Think again. Here are a few good ones from our Nobel Prize winner (from Youtube’s slim pickins):