Trigger warning for Texas readers: This entry will discuss forced pooling. You may now retreat to your “safe space”, where “no guvment-sumbitch-bureaucrat can conspire with [name of large oil company] to steal my stripper well.”
TDX Energy, L.L.C. v. Chesapeake Operating, Inc. doubles down on XXI Oil and Gas v. Hilcorp Energy Company from the Louisiana Third Circuit, while giving a useful tutorial on the purpose and effect of Louisiana forced pooling. Caveat: Pay attention below to the statute as amended.
The statutory scheme requires the operator of an Office of Conservation-established drilling unit to give notice of the costs of drilling a well to owners of unleased interests if the operator wants to recover drilling costs. If an owner doesn’t participate, the operator can recover out of production the nonparticipating owner’s share of expenditures, along with a risk charge of 200%. The risk charge does not apply to mineral servitude owners.
Chesapeake operated a unit well that was spudded when 63 acres were unleased. Those acres were leased before drilling ended; the leases were transferred to TDX retroactively but not recorded until after drilling ended.
Who gets the notice?
As held in XXI v. Hilcorp, La. R. S. 30:103.1 requires the operator, upon request, to send reports when the operator has no lease. By failing to send timely reports to a lessee with leases in lands upon which the operator has no lease, the operator forfeited its right to contribution for well costs.
The court reasoned that Sections 103.1 and 103.2 must be read together. Section 103.1 is directed toward the operator’s obligation the operator to, upon request, issue statements about drilling and operating costs, while 103.2 explains when the operator forfeits rights to demand contribution. References in the statute to “unleased interests” are to any interests unleased by the operator, not unleased generally.
Who must pay the risk charge
Under 30:10(A)(2)(a)(i), when an owner notified of estimated well costs elects not to participate, the operator can recover out of production the nonparticipating owner’s share of actual reasonable expenditures plus a 200 percent risk charge. The operator can’t collect a risk charge when it fails to provide timely notice.
Under the law then in effect, notice was only required to be presented to leaseholders. Unleased tracts required no notice. Notice requirements are based on the date leases are recorded – not the date leases are signed.
Because notice was sent to TDX after the leases were recorded, which was also after drilling was completed, the notice was untimely. Chesapeake could not recover a risk charge. An owner not notified still bears its tract’s share of actual reasonable expenditures but no risk charge.
Pay attention to the amended statute
The rule has changed in favor of the operator. 30:10(A)(2)(a)(i), was amended in 2016 added an operator “ … who has drilled a unit well” may send a notice. This amendment clarifies that notice of actual costs is required when the well has been drilled.
A musical interlude for Gregg Allman, RIP, and his inspiration.