The question with wide-ranging implications for Louisiana operators and mineral owners in Johnson et al. v. Chesapeake Louisiana LP et al is whether unleased mineral owners in a drilling unit established by the Commissioner of Conservation must bear their proportionate share of post-production costs.

The statutory scheme

Under Louisiana’s forced pooling statutes, the Commissioner may form drilling units and appoint an operator to drill and operate wells for all owners in the unit. Unleased mineral owners (the court called them UMO’s) are exempt from the statutory 200% risk charge for drilling costs applied to non-participating lessees. The operator is required by La. R.S 30:10(A)(3) to pay a UMO who has not elected to market his share of production the tract’s pro rata share of proceeds from the sale of hydrocarbons.

The claims and defenses Continue Reading Louisiana Unit Operators May Deduct Post-Production Costs from Unleased Mineral Owners

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.

photo
Co-author Brittany Blakey

[Updated] The North Dakota Supreme Court will hear oral arguments on Thursday to consider who owns the right to profit from the value of the porous spaces within subsurface rock formations. The issue is over Senate Bill 2344, passed by the Legislature in 2019 and, no surprise here, supported by the oil and gas industry.

The Northwest Landowners Association sued North Dakota arguing that SB 2344 is unconstitutional, that it renders the surface owners’ “pore space estate” worthless, and amounts to a “taking” of property owners’ pore space without compensation. Incidentally, the court in Mosser v. Denbury Resources determined in 2017 that subterranean pore spaces are owned by the landowner.

The trial court in the Northeast District, Bottineau County concluded that landowners in North Dakota have a constitutionally protected property right to their subsurface pore space and said pore space has inherent value. SB 2344 prohibits landowners from obtaining compensation for an oil and gas operator’s use of their pore space estate and “[renders] the pore space worthless in every instance of its application[.]” It “acts to give North Dakota landowners’ value from pore space to the oil and gas industry, for free, under the guise of the North Dakota Industrial Commission.”  The opinion was seen as a huge victory for landowners.

Disputes involving pore space are likely to continue in North Dakota given increased oil and gas activity. North Dakota is a promising area for carbon dioxide injection. For example, there are projects in place and envisioned that would transport carbon dioxide from other areas of the country to North Dakota to be injected into pore space for carbon sequestration.

Compare Denbury with the Texas Supreme Court’s ruling in Lightning Oil Company v. Anadarko E&P Onshore:  The mineral owner has the right to explore for and produce the minerals and the surface owner owns the right to possess the specific place or space where the minerals are located. Looks pretty much the same.

Your musical interlude.

Co-author Stephanie Snyder-Zuasnabar*

A subcontractor’s mineral lien in Texas is invalid when, at the time the mineral owner receives notice of the lien affidavit, the mineral owner is not yet obligated to pay the contract price to its contractor.  So says Pearl Resources Operating Co., LLC v. Transcon Capital, LLC,

The real takeaway that drilling contractors already know: A turnkey drilling contract gone wrong is the gateway to a financial apocalypse.

The wild well

Pearl Resources and PDS Drilling agreed in a Turnkey Drilling Contract for PDS to drill a well in Pecos County. Pearl was to pay 30% of the contract price after PDS positioned a rig at the wellsite. The remaining 70% would be paid after delivery of a successful well. PDS was liable for the cost of regaining control of a wild well, along with associated remediation and restoration efforts.

The 30% was paid and as PDS drilled the well, a wild well incident caused an eruption of freshwater out of the well and an adjacent water well. PDS contracted with Cannon to haul away the accumulated water. PDS abandoned the well, notifying Pearl that it did not have the funds to repair the well or drill a replacement.

Cannon sent PDS two invoices requesting payment for services performed before PDS abandoned the well. PDS failed to pay, and Cannon transferred its rights to Transcon. Transcon requested payment of $57,000 based on the two unpaid invoices. When Pearl refused to pay, Transcon sent the statutory notice of its intent to file a Mineral Lien Affidavit. Pearl again refused to pay. Transcon filed a lien affidavit in the Pecos County records.

Pearl sued for a judgment that Transcon’s lien was invalid under Chapter 56 of the Property Code. Transcon counterclaimed for a judgment that its lien was valid and sought to foreclose. The trial court found that Transcon’s lien was valid and awarded an Order of Sale for foreclosure on the lien.

Pearl’s winning argument

Pearl argued that Transcon’s lien was invalid because Chapter 56 only allows a subcontractor’s lien on a mineral owner’s property in the amount the property owner owes to its contractor, if any, at the time it receives notice of the lien affidavit, and Pearl did not owe money to PDS when the lien notice was delivered.  The court of appeals agreed. The mineral lien is “dependent upon the state of the account between the owner and its contractor, and not upon the condition of the account between the contractor and subcontractor when the owner receives notice of the claim.”

Transcon contended the early termination provisions in the Turnkey Contract were invoked when PDS abandoned the well, requiring Pearl to pay PDS for its services. The court determined that the sections referencing early termination and compensation only applied to a Pearl-directed shutdown. Because PDS walked off the job, the contract did not obligate Pearl to pay PDS for Cannon’s services.

In denying Transcon’s argument that Pearl still owed 70% of the total contract price, the court focused on the plain language of the contract which did not obligate Pearl to pay the remaining balance until completion of a successful well, which never occurred. The Court was not willing to rewrite the parties’ contract which expressly obligated PDS, not Pearl, to pay the remediation costs. The trial court erred in finding a valid mineral lien.

Transcon’s claim for quantum meruit was not addressed because actual damages were not awarded by the trial court.

Norma Waterson, RIP. Category, you ask? “Celebrated English folk singers I’ll bet you’ve never heard of”.

*Stephanie is a Universlity of Houston law student and Gray Reed law clerk.

Foote and Cypert v. Texcel Exploration and Decker determined that cattle loitering uninvited around a well and tank battery and causing destruction are trespassers, not licensees.

How it happened

Foote arranged with Yates to graze 650 head of cattle on Yates’ pasture and paid Cypert to take care of them. Texcel operated the Hertel oil and gas lease on the property. Decker was Texcel’s pumper. The lease did not require Texcel to fence off the property or its equipment.  A one-wire electric fence surrounded the wellsite and tank battery to protect the premises from, you guessed it, wandering cattle. If the wire fell to the ground or otherwise hit brush or other material it would ground out and no longer be “hot”.

There was conflicting testimony about who did or did not do what to cause the bovine incursion. In short, 300 cattle, no-doubt drunk on hydrocarbon fumes, pushed over the fence and broke a PVC pipe, spilling saltwater and oil on the ground. 132 perished from drinking oil and others were under their expected weight at sale time.

Foote and Cypert sued Texcel and Decker for failure to construct and maintain an adequate fence around the well site and tank battery which created a dangerous condition that proximately caused the death and injury of cattle. The theories were premises liability and negligent undertaking.

Plaintiffs lost. Here’s why:

In order to recover against a mineral lessee/operator for injury to cattle, an owner or lessee of the surface must obtain a jury finding on one of the following:

  • The lessee/operator intentionally, willfully, or wantonly injured the cattle, or
  • The lessee/operator used more land than was reasonably necessary for carrying out the purposes of the lease and as a result of some negligent act or omission he proximately caused injury to the surface owner’s cattle.

Plaintiffs’ failure was in ignoring these requirements and seeking to expand the law to the same standards for protecting persons from a premises defect. Plaintiffs contended that because Foote was in business with Yates and the landowner (Yates leased the property), his status extended to his cattle on the entire premises, including the area where Texcel operated. The evidence established that the cattle did not have the status of invitees on the area of Texcel’s operations. The premises liability theory concerns the duty an owner or occupier of land owes to a person injured on the property.

By denying the cattle were licensees the jury essentially determined that the cattle were trespassers.  There was abundant evidence for this conclusion.

Texas has never categorized livestock as persons for premises liability purposes. The rule likens wandering cattle and other domestic animals to trespassers upon the legitimate area of oil and gas operations.

Other futile theories

Plaintiffs argued that the cattle were poisoned in an area where they were undisputedly invitees. An operator in Texas has no duty to fence or otherwise protect or prevent livestock from entering the premises of mineral lease. Tercel was not liable for the fluids deposited outside its legitimate area of operations because the cattle caused the fluids to escape.

The plaintiffs contended that the fence was inadequately maintained. Because there was no duty in the first place, the inquiry was whether the defendants acted in a way that required imposition of a duty where one would not otherwise exist. This, the plaintiffs failed to prove.

Your musical interlude: What Muddy Waters went without during Lent..

It was jurisprudential Groundhog Day as the Supreme Court of Texas handed down Nettye Engler Energy v. Bluestone Natural Resources, another in a series of postproduction cost disputes, only two days after Puxsutawney Phil peeked out of his cozy burrow to pronounce six more weeks of winter.

The takeaway

The Court clarified Burlington Resources v. Texas Crude Energy. Contrary to the reasoning of the court of appeals, Burlington did not establish a rule that “delivery into the pipeline” or similar phrasing creates a valuation or delivery point at the well or nearby.  Rather, Burlington reiterated that all contracts are construed as a whole to ascertain the parties’ intent from the language they used to express their agreement.

Recall the basic Texas PPC cost-sharing rule: A royalty interest bears its proportional share of PPC’s from the point of delivery to the purchaser or working interest owner unless the conveyance specifies otherwise. Likewise, a royalty interest is free of PPC’s incurred before delivery. The question in cases such as this, Where is the delivery point?

Facts

Engler’s predecessors conveyed 646 acres by special warranty deed reserving an undivided 1/8th NPRI in and to all the oil, gas, etc. The deed required the royalty “… to be delivered to grantor’s credit free of cost in the pipeline, if any, otherwise free of cost at the mouth of the well or mine …”

Gas produced at the wells is collected in a gas-gathering system on the lease for compression, processing and delivery to third-party transportation pipelines off the lease and then sold to third parties.

Former operator Quicksilver valued Engler’s NPRI at the point of sale to the gas purchaser’s pipeline, freeing Engler’s royalty from the burden of PPC’s. Under current operator Bluestone’s valuation, delivery of Engler’s share occurs at the point where unprocessed gas enters the on-site gathering system, thus bearing its proportional share of PPC’s from that point forward.

Engler argued that the delivery point was downstream of the wellsite at the transportation pipeline, if not farther, because a gas gathering pipeline is not a pipeline and use of the term “otherwise” to introduce the alternative delivery point “at the mouth of the well or mine” negated a construction of “the pipe line, if any” as including any pipeline at or near the wellhead.

 What is a “pipeline”?

The Court rejected Engler’s contention that a gathering system is not a pipeline. Resorting to contemporaneous dictionaries, treatises, decisions, and regulations, the Court concluded that a gas gathering pipeline is a pipeline in common industry and regulatory parlance.  The deed in question did not limit the delivery location to a specific pipeline nor prohibit delivery to a pipeline at or near the well if any.

The result

Bluestone discharged is royalty obligation by delivering Engler’s fractional share of production in the gathering pipelines on the premises. Therefore, Bluestone properly deducted PPC’s between that point and the point of sale. The Court of Appeals held that delivery occurs in the gathering pipeline, but misconstrued Burlington in reaching the correct result.

Lagniappe – no room for expert testimony

The Court rejected affidavits by attorneys purporting to clarify and explain what the original drafting parties could have meant by “in the pipe line.” Courts will consider only objectively determinable extrinsic facts and circumstances surrounding the contract’s execution that do not vary or contradict the contract’s plain language. The instrument was unambiguous and it was within the Court’s province to determine its meaning. The expert testimony Engler relied on to construe the phrase would impermissibly add words of limitation to modify the deed’s terms.

Your seasonal musical interlude 

This just in!

John Kerry has a plan to offset carbon emissions from the conflict in Ukraine.

Consider the power of a single word over the fortunes of the parties to a property deed. Such was the effect of the court’s ruling in Barrow Shaver Resources, LLC, et al v. NETX Acquisitions, LLC, et al.

In 1963, by the Stone Deed, Dawson and Hill conveyed a 181-acre tract in Cass County, Texas, to the Stones (John and Treba, not the Rollings). The granting clause described the land by metes and bounds, and continued, “There is likewise conveyed … 1/8th of the Oil, Gas and Other Minerals … .”  The conveyance was subject to an oil and gas lease then existing. At the time of the suit, Barrow Shaver had an oil and gas lease from Dawson/Hill and NETX had a lease from Merritt (successor to the Stones).

The question and spoiler alert

Did Dawson/Hill convey 1/8th of the minerals or did they convey 100% of the minerals and attempt to reserve 7/8ths in themselves?  Dawson and Hill conveyed 1/8th of the minerals (and the surface, of course).

The Court’s journey to the answer Continue Reading Texas Court Decides What “Likewise” Means in a Conveyance

If you dispose of produced water you are no-doubt aware of the intensive earthquakes being observed across the Midland and Delaware Basins. In West Texas Earthquake Observations, Implications for the Oil and Gas Industry, Scott Pinsonnault and John Shepherd of Ankura Consulting summarize the evolving situation and the Texas Railroad Commission’s response. They also present a series of initial questions that will need to be answered.

You should read the report itself, but in short the Commission has determined that saltwater disposal injections contribute to seismic activity in three particular areas and has taken action, including limiting injections and stopping deep water injections in the area identified as the Gardendale SRA, giving operators 120 days to propose next steps in the Northern Culberson-Reeves SRA, and giving operators in the Stanton SRA 90 days to come up with a response plan. The RRC says it will implement its own plan if it is not happy with the industry’s response.

Surely we’ve not seen the end of this.

Your musical interlude.

The baseball season might be in jeopardy, but litigants are swinging for the fences. In Mary v. QEP Energy, the parties entered into a Pipeline Servitude Agreement over Ms. Mary’s 160 acres. One of QEP’s pipelines extended beyond the servitude by 31 feet and another by 15 feet.

Ms. Mary sued claiming the pipeline was placed in bad faith and sought disgorgement of QEP’s profits or an order permitting removal of the pipeline.

The parties agreed that the case turned on Louisiana Civil Code art. 486:

A possessor in good faith acquires the ownership of fruits he has
gathered. If he is evicted by the owner, he is entitled to
reimbursement of expenses for fruits he was unable to gather.

A possessor in bad faith is bound to restore to the owner the fruits
he has gathered, or their value, subject to his claim for
reimbursement of expenses

The question was whether the standard for good faith was governed by La. CC art. 487 or La. CC art. 670. In granting summary judgment for QEP the district court ruled that art. 670 applied. But art. 670 applies only to construction of a building by a landowner. Under Louisiana law a servitude owner is not a landowner, and a pipeline is not a building.

The Fifth Circuit determined that art. 487 governs:

A possessor is in good faith when he possesses by virtue of an act translative of ownership and does not know of any defects in his ownership.  He ceases to be in good faith when these defects are made known to him or an action is instituted against him by the owner for the recovery of the thing.

What’s next?

Ms. Mary’s at-bat continues. Because the district court incorrectly relied on art. 670, the case was remanded for the district court to determine whether her cause of action for QEP’s intrusion is for trespass, accession, or some other provision of Louisiana law.  The Fifth Circuit instructed the district court to apply the relevant definition of bad faith (assuming the cause of action requires such a showing) to decide whether Ms. Mary is entitled to disgorgement of profits.

Your musical interlude. 

Of course it is. (Apologies for the clickbait.) If further reading would damage you, I recommend a subscription to the Guardian. Otherwise, consider these points of view when conversing with those in need of enlightenment. Counter-arguments abound, but they are not the purpose of this post.

The industry is subject to ad hominem attacks, as gratuitous and relentless as they are hollow and devoid of substance. Big Oil should be flattered to be in the same company as Big Poultry, Big Car, Big Pharma, Big Food and Big Semiconductor.  With the universal DH just around the corner, she should turn her hyper-regulatory energies to Big Sports.

Rebukes based on facts and economics, such as EQT president Toby Price’s response to Senator Warren, are more likely to sustain a meaningful exchange of ideas. His topics include affordability and reliability, China’s energy policies, and more. If you only have time for one of these links, read this one.

Daniel Markind in Forbes and David Frum writing in Defense One.com remind us of the industry’s contribution to national security.

The moral benefits to fracking are ignored by the anti’s, says Jude Clemente in Forbes.

Irina Slav at OilPrice.com says energy transition will be expensive: $15 trillion, then $14 trillion, then $1 trillion for key metals, then hidden costs, then environmental risks … .

Daniel Yergin in the Atlantic starts with the Colorado Oil and Gas Association’s Customer Appreciation Award to North Face and continues to the European energy crisis and other complex issues that must be resolved.

Lyn Arden Schwartzer in Seeking Alpha discuses the significance of oil and energy to the world’s economy.

Your musical interlude, for when you think you’re having a bad day.