Louisiana Revised Statute 30:10, commonly referred to as the Risk Fee Statute, was amended during the 2016 Regular Session of the Louisiana Legislature. The statute as amended took effect June 13, 2016. The amendment expressly allows an operator of a commissioner’s unit to assert the risk fee penalty against a non-operator lessee by sending the required notice under the Risk Fee Statute after the spudding of the well. This article is limited to discussing only the 2016 amendment to the Risk Fee Statute and how it closed a loophole illustrated by a recent case addressing a prior version of the statute. For prior discussions of other particulars of the Louisiana Risk Fee Statute, see our prior blog and paper.
As background, the Risk Fee Statute was also amended previously in 2012. The 2012 amendment to the Risk Fee Statute required the risk fee notices to be sent before the spudding of a well. The pre-2012 amendment version of the statute required an operator to send the risk fee notices to non-operator lessees before the completion of the well. The potential loophole created by this requirement was illustrated in the recent case of TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206, which was decided under the pre-2012 version of the Risk Fee Statute.
In the TDX case, TDX Energy, LLC acquired several leases in a Haynesville unit operated by Chesapeake Operating, Inc. The unit order was dated effective September 16, 2008 and the unit well was spud on February 5, 2011 and completed on July 19, 2011. TDX acquired its leases from Touchstone Energy, LLC on October 25, 2011. The leases were taken by Touchstone between July 18, 2011 and September 14, 2011 but were dated July 15, 2011 and were not recorded until between July 22, 2011 and September 14, 2011 and thus after Chesapeake had completed the unit well. Remember that under the pre-2012 version the risk fee notices were required to be sent to non-operator lessees prior to the completion of the unit well. However, in the TDX case the leases acquired by TDX were not recorded in the parish conveyance records until after the well was completed. In fact, Chesapeake was not aware of the TDX leases until TDX sent it a request for a report on the well in accordance with La. R.S. 30:103.1 and 30:103.2 on December 5, 2011. Chesapeake responded by letter dated January 23, 2012 and provided the well costs and invoked the Risk Fee Statute to give TDX 30 days from the date of the risk fee notice to elect whether to participate in the well.
Thereafter, TDX sued Chesapeake in Louisiana federal court to recover production payments, accounting, penalties, and attorney’s fees under La. R.S. 30:103.1 and 30:103.2. In response, Chesapeake filed a counterclaim seeking a declaration that pursuant to the Risk Fee Statute it was entitled to recover out of the production from the unit well not only the expenses incurred in drilling, testing, completing, equipping and operating the well, including a charge for supervision, allocable to the tracts covered by the TDX leases, but also a risk charge equal to 200% of those costs.
The court ruled that Chesapeake was entitled to own and recover out of production from the unit well TDX’s allocated share of the actual reasonable expenditures incurred in drilling, testing, completing, equipping and operating the unit well, including a charge for supervision. In fact, TDX did not dispute that Chesapeake was entitled to these well costs.
But the court also ruled that Chesapeake could not recover a risk fee penalty against TDX because the pre-2012 version of the Risk Fee Statute called for the risk fee notice to be sent before the completion of the well with few exceptions, which were not applicable to the facts of the TDX case, i.e., changing the size and/or shape of a unit after the unit well had been completed. The court recognized the policy behind the Risk Fee Statute was to get rid of the free-rider problem of a non-operator sitting back and waiting until after a well was drilled before deciding to participate in the well. However, here, the Risk Fee Statute failed to accomplish this goal. Nonetheless, the Court stated that its hands were tied by the plain language of the statute. As a result, TDX was able to avoid having the risk fee charged against it by not recording the leases it acquired until after the completion of the well, thereby avoiding letting Chesapeake learn of its interest as a non-operator leaseholder. The court also reaffirmed the fact that the risk fee cannot be asserted against an unleased mineral owner. Therefore, there would have been no reason for Chesapeake to risk fee notice the mineral owners before the TDX leases were recorded.
The TDX case shows the loophole that existed in the pre-2012 version of the Risk Fee Statute (and also the version that existed after the 2012 amendment). Under both prior versions of the Risk Fee Statute, a non-operator lessee could avoid having to bear a risk fee penalty simply by waiting to record its leases until after the unit well at issue was completed (pre-2012) or spud (after 2012 amendment). That way, any risk fee notice sent by the operator of a unit well to that non-operator lessee would be untimely and, therefore, the risk fee of 200% for a unit well for well costs could not be charged.
Act No. 524, which became effective June 13, 2016, amended La. R.S. 30:10 to allow the operator of a unit well to send the required risk fee notices after a well was spud or even completed. By allowing for the notice to be sent after a well has been completed, the loophole in the Risk Fee Statute as demonstrated by TDX appears to have been closed. Therefore, it appears that if TDX were decided under the current version of the Risk Fee Statute, then Chesapeake would have been allowed to assert the risk fee charge against the non-operator lessee.
The 2016 amendment to the Risk Fee Statute makes several other changes to the language and procedures outlined under the statute to allow for the risk fee notice to be sent after completion of a well. Specifically, the payment of estimated drilling costs by a non-operator lessee is now deemed timely if received by the operator within 60 days of the actual spudding of the well or within 60 days of the receipt by the notified non-operator lessee of the notice of AFE costs, whichever is later. The prior version of the Risk Fee Statute required the payment to be received within 60 days of the spudding of the well or within 60 days from the receipt of subsequent detailed invoices for subsequent costs incurred after the spudding of the well. Additionally, the requirement under the prior version of the Risk Fee Statute for notices to be sent within 60 days of the date of a unit order to non-operator lessees in a unit where there is located a well already drilled or drilling (post-drill unitizations) or within 60 days of a unit order to any additional non-operator lessees included in a revised unit has been eliminated. Again, these changes to the Risk Fee Statute have the effect of allowing an operator to send a risk fee notice to a non-operator lessee after the spudding and completion of a well.
Of additional note, the 2016 amendment to the Risk Fee Statute clarifies that an operator’s failure to provide a risk fee notice to one non-operator lessee will not affect the validity of a risk fee notice being properly provided to any other non-operator lessee. Thus, a non-operator lessee who receives a risk fee notice cannot attack the validity of that notice by arguing that someone did not timely receive a proper notice. The prior version of the Risk Fee Statute did not directly address this issue.
If you should have any questions concerning the application of the Risk Fee Statute in Louisiana, please do not hesitate to give us a call.