Author Ethan Wood

Louisiana’s compulsory pooling scheme seeks to balance the interests of individual landowners and oil and gas operators to promote responsible development of natural resources. Because of compulsory pooling, operators are not held hostage by individual landowners who refuse to lease, but landowners are afforded protections so as not to be taken for a ride by unscrupulous operators.

One such protection for landowners is the operator’s duty to report information to unleased landowners upon request (La. R.S. 30:103.1). Failure to provide the information means the operator forfeits the right to demand contribution from the unleased owner for the costs of drilling operations (La. R.S. 30:103.2).

These statutes are often litigated, but few disputes result in a reported decision. But last month, the U.S. 5th Circuit Court provided some guidance for how to interpret the notice provisions of 30:103.1-2 in B.A. Kelly Land Company, LLC v. Aethon Energy Operating, LLC.

What We Have Here is a Failure to Communicate

B.A. Kelly Land Company owned unleased interests in two compulsory units in Bossier Parish. Kelly sent a letter via certified mail to Aethon Energy Operating, LLC on December 15, 2017, requesting information regarding sixteen wells in the two units. The letter described the unleased lands, the units, names of wells, and asked for information regarding (1) the total amount of hydrocarbons produced, (2) the price received for the hydrocarbons, (3) operating costs and expenses, and (4) information regarding funds expended to enhance or restore production. This first letter did not contain an explicit reference to 30:103.1, nor did it request that reports be classified as “initial reports” or “quarterly reports.”

Kelly followed up with another letter sent via certified mail on April 17, 2018, that referenced the previous letter and called attention to the fact that Aethon failed to comply with the first letter. This letter also did not include a specific reference to 30:103.1 or 30:103.2, nor did it reference the possibility of a lawsuit, penalty or forfeiture under 30.103.2.

Aethon did not send the requested information to Kelly until February 12, 2019—after Kelly filed suit seeking a judgment that Aethon had failed to comply with its disclosure and reporting obligations. Kelly sought a declaration that Aethon had forfeited its rights to demand contribution for Kelly’s share of drilling costs.

The Pen is Mightier

At the district court, Aethon successfully argued that because Kelly failed to reference the statutes and failed to use certain key language, Kelly had failed to comply with the statutory requirements. The Court of Appeals reversed, finding that the district court had “erroneously engrafted conditions into [30:103.1 and 30:103.2] that are not present in the text of the statutes themselves.”

The first letter satisfied the requirements of the statute because it was (1) in writing, (2) sent by certified mail, (3) contained the name and address of the unleased owner, and (4) “was sufficiently clear to give Aethon, as operator of the Units, notice that Kelly, an unleased owner, was requesting reports pursuant to [30:103.1].” Further, the letter’s request for four types of information “matched almost verbatim the four categories of information” the statute requires operators to provide. The second letter similarly complied with 30.103.2 by referencing the earlier letter, reciting most of the crucial language of 30.103.2, and sufficiently calling attention to Aethon’s failure to comply with 30.103.1.

The court of appeals rejected the district court’s emphasis on referencing the statutes and omission of “reports” or the possibility of a lawsuit in the letters; these “requirements” are not in the text of the statutes and should not be read into them.

The Last Word

This week’s musical interlude …ouch.