Co-author Ethan Wood

In Johnson et al vs. Chesapeake et al, unit operator Chesapeake deducted post-production costs (gathering, compression, treatment, processing, transportation and dehydration) from non-operating, unleased mineral  owners’ share of production proceeds. The UMO’s (so-called by the court) sued. The federal district court concluded that La. R.S. 30:10(A)(3) governs the dispute, and post-production costs could not be recovered from the UMO’s share of production proceeds.

The UMOs said …

The case is to be decided by application of Louisiana statutory law. La. R. S. 30:10 (A)(2) provides, “In the event pooling is required, the costs of development and operation of the pooled unit chargeable to the owners therein shall be determined and recovered as provided herein”. “Owners” includes the UMO’s. La. R.S 30:10(A)(3) provides that where owners of unleased interests are included in a unit created by the commissioner of conservation, the unit operator shall pay “ … to such party or parties such tract’s pro rata share of the proceeds of the sale of production within 180 days.”

Chesapeake said …

Section 30:10 does not apply because the statute addresses development and operating costs and does not address costs beyond the point of production. Post-production costs can be assessed under the theories of unjust enrichment or, alternatively co-ownership, according to Louisiana Civil Code art 4. Any other result would lead to absurd consequences because the UMO plaintiffs would enjoy a “free ride” at the expense of the operator.

Then the UMO’s said …

Co-ownership and unjust enrichment cannot supersede the positive statutory law governing the UMOs’ payment rights. A specific statutory provision governs when an unleased owner is to be paid for production from a compulsory unit, and that is 30:10(A)(3). The UMOs asked the court to compare 10(A)(2) and 10(A)(3) and note the distinction between UMO’s and non-participating working interest owners. The UMO is entitled to be paid his tract’s pro rata share of production proceeds. No costs other than for drilling and operating are identified in the statute as recoverable.

… and the court ruled.

The legislature could have phrased 10(A)(3) to authorize deduction of post-production costs but it did not do so. The plain language of the statute does not include postproduction expenses as permissible deductions. The court, reading the statute as a whole, saw that UMO’s and nonparticipating working interest owners are treated differently is several respects. For example, a specific set of costs is addressed in 10(A)(2). 10(A)(3) applies only to UMO’s and there is no enumeration of costs there. Under Civil Code art. 4, when there is no rule for a particular situation that can be derived from legislation or custom the court is bound to proceed according to equity. But a claim for unjust enrichment cannot be employed to modify the positive law stated in 30:10(A)(3).

As a case of first impression with implications far beyond these parties, one would expect strong disagreement in the producer community. For example, the court reasoned that its construction of the statute, essentially granting the UMO’s a “no cost royalty clause “, as not unjust. Producers would respectfully disagree.

What would happen in Texas?

The result would likely not be the same. The general rule: A co-owner of a tract must account to its co-tenants for “the value of the minerals taken less the necessary and reasonable cost of producing and marketing the same.” And Chesapeake v. Hyder tells us that marketing costs are post-production. (“Value at the well is…net of reasonable marketing costs.”).

What about a unit? Texans, reluctant as they are to submit to any governing body, have no compulsory pooling regime akin to Louisiana’s. Generally, an unleased mineral owner in the drillsite tract within a pooled unit (itself a creature of contract) would be entitled to an accounting from his co-tenant. Not on the drillsite tract? Unless you ratify the unit, the operator has no duty to you. You want to force your way in under the Mineral Interest Pooling Act? Good luck.

A Louisiana case begs one to ask, What would Dewey Balfa do?