Drill Deeper

Drill Deeper

News and Updates on Oil & Gas Legal Issues

UPDATE: BOEM Withdraws Sole Liability Orders Issued Under NTL 2016-01

Posted in BOEM

The Bureau of Ocean Management (BOEM) announced that it will withdraw its orders issued in December 2016 to provide additional security for sole-liability properties to Outer Continental Shelf (OCS) oil and gas lease and grant holders.  “Sole-liability properties” are leases, rights of way (ROWs) and right of use easements (RUEs) for which there are no co-lessees/co-owners and no prior interest holders responsible for the outstanding obligations.  BOEM stated the reason for the withdrawal is “to allow time for the new Administration to review the complex financial assurance program” and that it will welcome “continued industry engagement on [the] important issue [of financial assurance].”  As you may be aware, the sole liability concept has raised numerous issues and concerns.  For example, because RUEs cannot be conveyed, BSEE has considered each platform and other facility under a RUE to be a sole liability asset, even if such platform or facility was also covered by a prior RUE or, as is often the case, by an earlier oil and gas lease so that multiple parties have accrued liability for the decommissioning of such platform or facility.  A similar issue arises for pipeline ROWs.  Although BSEE’s predecessor (the MMS) had allowed ROWs to be owned by more than one party, BSEE now does not grant, or approve assignments for, split-ownership of ROWs.  Thus, BSEE has categorized many ROWs as sole liability assets, even though those ROWs and the associated pipe are in fact owned by multiple parties.

As our recent blogs posted on January 6, 2017 and January 9, 2017 have discussed, BOEM previously announced a six-month delay of the effectiveness of NTL 2016-01 for non-sole liability properties.  BOEM will now also consider any implementation issues associated with the sole liability orders as part of its review of the NTL.  Despite the six-month extension, operators and lessees on the OCS should be aware that “BOEM may re-issue sole liability orders before the end of the six-month period if it determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.”

The effective date of the NTL was pushed to March 12, 2017 by the six-month delay.  As the effective date fast approaches, we expect that the current supplemental bonding uncertainty facing OCS lessees and operators will continue as BOEM may either revise the NTL or further delay its implementation.

Texas appellate court rules that mineral leases with municipalities are worth more than the paper they are written on

Posted in Legal Updates

On February 7, 2017, a Texas appellate court ruled that the city of Dallas must face a $200 million lawsuit filed back in 2014, where a driller alleged that the city acted improperly by entering into a mineral lease with the company and then denying it permits to drill—effectively rendering the lease worthless. See City of Dallas v. Trinity East Energy, LLC, No. 05-16-00349-CV (Tex. App.- Dallas Feb. 7, 2017).  Dallas had argued that it was immune from suit because it was acting in a governmental function when it entered into the lease; however, the court held that the city was actually acting in a proprietary function and therefore was not immune.

Trinity East Energy, LLC signed a mineral lease with the city to drill for oil and gas, but then the city of Dallas refused to approve Trinity’s applications for permits to drill. Trinity in turn sued for breach of contract and inverse condemnation.  As the court in City of Midlothian v. Black, 271 S.W.3d 791 (Tex. App.- Waco 2008), explained, “inverse condemnation” occurs when “a governmental entity physically appropriates or invades the property, or when it unreasonably interferes with the landowner’s right to use and enjoy the property, such as by restricting access or denying a permit for development.”  Dallas maintained that it was immune from suit.  The district court agreed, finding that the city was immune and thus beyond the reach of the court.

The appellate court reversed, in part, and rejected Dallas’s immunity arguments based on recent Texas Supreme Court precedent in Wasson Interests, Ltd. v. City of Jacksonville, 489 S.W.3d 427 (Tex. 2016) that “sovereign immunity does not imbue a city with derivative immunity when it performs proprietary functions.  This is true whether a city commits a tort or breaches a contract, so long as in each situation the city acts of its own volition for its own benefit and not as a branch of the state.”

Dallas attempted to argue that these transactions were an exercise of its governmental functions in the regulation of parks, floodplains, building codes and inspections when it entered into the leases and that the grant or denial of a specific use permit is a zoning change- a governmental function. But the court held that the conduct at issue clearly implicated Dallas’s proprietary function because the actions were taken not for the benefit of the entire state, but rather for the benefit of only those who live within the city’s corporate limits.  As a result, the city was not immune from suit.  However, the court also concluded that “even if the City was acting in its governmental capacity, Trinity alleged a viable claim for inverse condemnation.”

This decision will likely provide a good measure of comfort to drillers in the Texas area who take leases from municipalities. If this decision is left to stand, drillers should have comfort that cities cannot pull the rug out from under them and leave them holding a worthless lease that cannot be worked.  And while Dallas may be reeling from this decision, in the long-run it might actually be to its benefit.  If drillers had to worry that they would be left without recourse after leases from cities were nullified by their failure to issue permits, it is likely that the market for such leases would dry up, or at least become way less attractive.  We will keep you posted on whether the Texas Supreme Court decides to take up this issue.

Blake Arata

Posted in News

arataAll of us at Gordon Arata are saddened by the passing of Blake Arata.  Blake dedicated his life to practicing law in the firm he co-founded in 1970 and loved.  For over half a century, Blake was renowned as one of the premier oil and gas attorneys in the State of Louisiana.  He handled complex oil and gas matters of all kinds, and he was admired equally as a skilled negotiator in the boardroom and as a staunch advocate in the courtroom.  Blake also proudly served New Orleans as its City Attorney from 1970-1975 and admirably served his country on active duty in the United States Navy and as lieutenant commander in the United States Naval Reserve.

Our Firm loved him dearly – we will miss him.

BOEM Delays NTL 2016-01 for Non-Sole Liability Properties

Posted in BOEM

Just hours after we posted our blog questioning the future viability of the Bureau of Ocean Management (BOEM) new financial assurance regime, BOEM announced in a Note to Stakeholders that it “will extend the implementation timeline for NTL 2016-N01 by an additional six months as to leases, rights-of-way and rights of use and easement for which there are co-lessees and/or predecessors in interest, except in circumstances in which BOEM determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.” BOEM had issued NTL 2016-N01 (dated July 12, 2016) to “clarify the procedures and criteria that BOEM Regional Directors use to determine if and when additional security … may be required” for OCS leases, pipeline ROWs and RUEs.  As our previous blogs have mentioned, the NTL became effective on September 12, 2016.

Operators and lessees on the OCS have repeatedly expressed to us and to BOEM their frustrations in attempting to comply with the NTL, particularly where co-lessees or predecessors-in-interest are involved. BOEM has now recognized that “navigating the multi-party business relationships that exist between co-lessees and predecessors-in-interest can prove challenging and time-consuming. Further, because the non-sole liability properties may include several co-lessees and prior interest owners, their existing financial arrangement may require assessing the extent to which these existing financial arrangements can be considered in determining whether BOEM needs additional security.”  “Sole-liability properties” are leases, ROWs or RUEs for which there are no co-lessees and no prior interest holders responsible for the outstanding obligations.  The sixth-month delay of effectiveness for non-sole liability properties will push the effective date of the NTL to March 12, 2017.

However, the NTL’s effectiveness has not been delayed for sole-liability properties.  BOEM believes that sole-liability properties “represent the greatest programmatic risk to the American taxpayer.”  The Orders to Provide Additional Security that BOEM issued in December 2016 for sole liabilities properties are not affected by this extension.  In addition, BOEM has left open the possibility of requiring any interest holder to immediately comply with the NTL if BOEM determines “there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.”  As you may be aware, there are ongoing discussions between BOEM and BSEE as to which assets are sole liability properties.  For example, RUEs can only be held by one party and cannot be assigned.  So technically each RUE could be considered as a sole liability property.  However, in most instances the facility covered by a RUE was installed by lessees pursuant to an oil and gas lease which has since terminated and the facility may have also been covered by one or more prior RUEs in favor of third parties.  Therefore while the RUE will only be owned by one party, in most instances several parties will be responsible for the decommissioning liability for the facility covered by the RUE.  BOEM has recently sent orders to RUE owners requiring them to post security for these facilities as sole liability properties, even when various other parties have accrued obligations to decommission the same facility.  We hope that BOEM and BSEE are able to resolve this issue and recognize that most RUEs are not sole liability properties.

During the six-month extension, BOEM will continue to negotiate tailored plans for non-sole liability properties. Given the new political climate, and calls by the oil and gas industry for an even longer delay of the NTL’s effectiveness, the future of the regime outlined in NTL 2016-N01 has become even more uncertain.

What Does the Future Hold for BOEM’s Financial Assurance Requirements?

Posted in BOEM

As we have reported in previous blog posts (for example, BOEM Issues NTL Implementing Major Changes to its Financial Security Requirements for the OCS), the Bureau of Ocean Management (BOEM) published a long-awaited Notice to Lessees and Operators (NTL) implementing new financial security requirements (NTL No. 2016-N01 dated July 12, 2016).  This NTL was issued to “clarify the procedures and criteria that BOEM Regional Directors use to determine if and when additional security … may be required for Outer Continental Shelf (OCS) leases, pipeline rights-of-way (ROW), and rights-of-use and easement (RUE).”  The NTL became effective on September 12, 2016.

Since the issuance of the NTL, OCS lessees and operators have taken steps to comply with the procedures and criteria set forth in the NTL.  However, these lessees and operators, especially independent producers, have expressed to us frustrations with the new requirements.  In particular, the NTL procedures often create a logistical nightmare for designated operators, who are required to coordinate with all co-lessees in providing additional security.  Further, BOEM utilizes decommissioning cost figures determined by the Bureau of Safety and Environmental Enforcement (BSEE), even though those cost figures are often significantly higher than estimates obtained from actual contractors for the same work.

In December 2016, fourteen sitting United States Senators sent a letter to the Secretary of the Interior, Sally Jewell, requesting that BOEM suspend implementation of the NTL and stating that there is “broad consensus that the NTL poses a very serious threat to the sustainability and viability of independent producers in the offshore oil and gas industry.”  The Senators also expressed their concern with “BOEM’s lack of transparency in developing this new policy” and with BOEM’s reliance on estimates from BSEE, which the Senators remarked “significantly inflate actual decommissioning costs, particularly for facilities in the shallow water of the Gulf of Mexico.”

We are also aware that some concerned operators and lessees have submitted letters to both BOEM and BSEE relating to the decommissioning cost risk management procedures referenced in NTL No. 2016-N01 and NTL No. 2015-N04.  Operators and lessees have also expressed concern about the accuracy of the lease decommissioning costs figures contained in the BOEM/BSEE’s online database.

As the 115th Congress gets to work in Washington, D.C., we expect significant engagement from members of both the House of Representatives and the Senate around BOEM’s financial assurance requirements.  President-elect Donald Trump has yet to publicly comment on the topic.  Although we doubt that BOEM’s new financial assurance regime will remain unchanged, the timing of any suspension of or changes to the program remains unknown.

Gordon Arata Announces New Members

Posted in News

Gordon, Arata, McCollam, Duplantis & Eagan, LLC is pleased to announce that Amy Duplantis Gautreaux, Paul B. Simon and Margaret “Peggy” Welsh have become members of the Firm.

ADGAmy Duplantis Gautreaux focuses her law practice on oil and gas title examination, unitization and related oil and gas and commercial transactions.  Her experience encompasses analyzing all levels of oil and gas and real estate title and rendering opinions including surface, mineral, royalty, drilling, division order and leasehold title opinions as well as drafting and interpreting contractual provisions in oil and gas leases, operating agreements, rights of way, surface use agreements and other surface and subsurface agreements.  She is also a licensed title insurance agent for Current Title Agency, L.L.C. (the Firm’s real estate title agency).  Ms. Gautreaux serves as Public and Industry Relations Director for the South Louisiana Chapter of Women’s Energy Network.  She is also a member of the Firm’s Marketing Committee.  This year, Louisiana Super Lawyers named her a Rising Star for her work in Energy and Natural Resources.  She received her J.D. and B.C.L. from the Paul M. Hebert Law Center at Louisiana State University and her B.A., magna cum laude, from the University of Louisiana, Lafayette.  She is admitted to practice law in the state of Louisiana.  She works in the firm’s Lafayette, Louisiana office.

simon.b&wPaul B. Simon serves the Louisiana oil and gas industry.  He handles disputes, corporate matters, acquisitions and appeals for the firm’s oil and gas clients.  He regularly assists clients with issues arising under Louisiana’s Mineral Code and the industry’s primary agreements (JOA’s, mineral leases, participation agreements, etc.), and with regulatory issues before the Louisiana Department of Natural Resources’ Office of Conservation and the Louisiana’s State Mineral and Energy Board.  Before joining the Firm, Paul served as a law clerk to two federal judges, the Honorable W. Eugene Davis of the United States Court of Appeals for the Fifth Circuit and the Honorable D. “Dee” Drell, Chief United States District Judge for the Western District of Louisiana.  Paul earned his J.D. from the Law School of Columbia University where he was a James Kent Scholar and a Harlan Fiske Stone Scholar, the two highest academic honors Columbia Law School awards.  He also received the Parker School Recognition of Achievement in International and Comparative Law, was an editor of the American Review of International Arbitration and was Co-President of the Columbia Society of International Law and Co-Founder and Co-President of the Columbia International Arbitration Association.  Before law school, Paul worked in the Amsterdam office of the international consulting firm McKinsey & Company.  Paul received his B.A., magna cum laude, from Williams College and studied abroad at Oxford University and the Catholic University of Louvain in Flanders, Belgium.  Paul is admitted to practice law in both Louisiana and New York.  He works in the firm’s Lafayette, Louisiana office, where he resides with his wife and daughters.

Welsh (B&W) - croppedMargaret “Peggy” Welsh focuses her practice in the areas of corporate, real estate, oil and gas and securities transactions as well as handling regulatory issues before Federal agencies. Her experience includes participating in every stage of many high-profile and challenging corporate transactions, both private and public, and joint ventures. She also has experience in other related practices, including cross-border acquisitions, high-yield debt issuances, real estate, bankruptcies and restructurings, financing arrangements and securitizations. Before joining the Firm, Ms. Welsh worked as a transactional associate in New York at a London-based firm.  Ms. Welsh earned her J.D., magna cum laude, from Tulane University Law School in 2009, where she served as a Managing Editor of the Tulane Law Review.  She earned her B.S., with Honors, in Geology-Physics/Mathematics from Brown University in 2002. After law school, she founded the education advocacy arm of the Louisiana Center for Children’s Rights. Before law school, she taught Chemistry, Physical Science and Math at Marion Abramson Senior High School in New Orleans for three years through Teach for America.  Ms. Welsh serves as Membership Director for the South Louisiana Chapter of Women’s Energy Network.  She is admitted to practice law in both Louisiana and New York.  She works in the firm’s New Orleans, Louisiana office.

Louisiana’s Law of Reversionary Mineral Interests Revisited

Posted in Legal Updates, Louisiana Mineral Code

Can a landowner in Louisiana whose land is burdened by a mineral servitude sell the land and reserve the reversionary mineral rights or sell the reversionary rights to another?  Although almost no jurisprudence addresses these issues, the Louisiana Third Circuit did so recently.  On November 2, 2016, in Sterling Timber Associates, L.L.C. v. Union Gas Operating Co., the Third Circuit adhered to the slim line of cases that have looked unfavorably at most efforts to reserve or sell reversionary mineral rights in Louisiana.

These issues were first squarely presented in the 1954 Louisiana Supreme Court case of Hicks v. Clark.  That case involved a 1941 sale of lands where the seller, W.C. Raines, reserved one-fourth of the mineral rights.  Hicks Company, Ltd., Inc. then acquired the property subject to this mineral reservation.  In 1948, Hicks Company sold the surface together with one-half of the minerals to Red Chute Land Company, Inc. and specifically reserved the right of reversion of Raines’ outstanding one-fourth mineral interest; the sale further provided that the reversionary mineral right retained by Hicks Company should prescribe at the same time as the other (1/4) mineral rights then owned and reserved by Hicks Company.  After the sale to Red Chute, Hicks Company was liquidated; the liquidator executed an instrument purporting to convey to S.B. Hicks and two other individuals “all of the mineral and reversionary rights in and to all of the lands conveyed by the Hicks Company, Ltd., Inc., to Red Chute Land Company.”  The ten-year prescriptive period following the 1941 sale was not interrupted, so that Raines’ mineral servitude prescribed for non-use. Sometime thereafter, these three individuals sued the then-current landowners to be recognized as owners of one-fourth of the mineral rights originally reserved by Raines in the 1941 sale.

The Louisiana Supreme Court considered the reservation of the reversionary interest in Hicks as an attempt to circumvent Louisiana’s public policy against mineral servitudes remaining in effect for more than 10 years without operations or production and thus refused to recognize or give effect to it.  The Court also noted that the stipulation in the reservation that prescription would commence at the date of the reservation does not make the reservation any less objectionable from a public policy standpoint: “Even with this limitation the mineral rights could still be outstanding for more than 10 years without exercise of the right to explore.”

With the enactment of the Mineral Code in 1974, article 76 codified this holding in Hicks v. Clark.  Article 76 (entitled “Expectancy of extinction not an article of commerce”) provides: “The expectancy of a landowner in the extinction of an outstanding mineral servitude cannot be conveyed or reserved directly or indirectly.”  A narrow exception to this rule is found in article 77 on the after-acquired title doctrine:

If a party purports to acquire a mineral servitude from a landowner when the right purportedly acquired is outstanding in another and the landowner either subsequently acquires the outstanding right or is the owner of the land at the time it is extinguished, the after-acquired title doctrine operates to vest the right in the party who purported to acquire it to the full extent of his title.

In Rodgers v. CNG Producing Co., the Third Circuit affirmed Louisiana’s strong public policy against circumventing the laws of prescription and discussed Mineral Code articles 76 and 77.  On October 22, 1968, the Thompsons acquired a 1580-acre tract of land subject to the vendors’ reservation of all mineral rights.  Thereafter, the Thompsons agreed to sell the 1580-acre tract to the Rodgers.  Their agreement was subject to “reservation of a mineral servitude contained in the deed of acquisition of vendor” and provided that the Rodgers would grant to the Thompsons the right to purchase all oil, gas and other mineral rights in, on and under the tract at the time of this sale.  In 1975, the Thompsons then conveyed to the Rodgers the 1580-acre tract with warranty of title and subject to prior reservation of the mineral servitude contained in the Thompsons’ 1968 deed of acquisition.  As agreed, following the sale of land to the Rodgers, the Rodgers executed a deed conveying all of the oil, gas and other mineral rights in the tract to the Thompsons.  On October 22, 1978, the mineral servitudes reserved in the 1968 deed to the Thompsons were extinguished by prescription of ten years non-use.  In 1984, the Thompsons executed a mineral lease covering this same tract.  A month later, the Rodgers executed a mineral lease covering some of the same property as covered by the Thompsons lease.

The Rodgers and their lessee then sued the Thompsons and their lessee for (among other things) a declaration of mineral ownership in these same lands.  The Thompsons’ lessee argued that under Mineral Code article 77 the after acquired title doctrine vested a mineral servitude in the Thompsons.

The Comments to Article 77 state that there is no requirement that either or both parties act in good faith.  Insofar as this rule might permit a party to enter into a deliberate “oversale” of mineral rights, there is no damage to the prescriptive system because the “overpurchaser’s” title cannot be perfected unless the “overseller” later acquires the rights previously outstanding or remains owner of the land at the time of their extinction.  No subsequent owner of the land may be bound by the oversale unless after-acquired title has already vested in the overpurchaser at the time the subsequent owner takes title to the land.  Therefore, permitting deliberate entry into oversale transactions cannot result in the creation of real rights burdening the land for periods greater than ten years.

Nonetheless, the Rodgers court stated that there was no true oversale of minerals, as no present mineral rights existed for the Rodgers to convey to the Thompsons at the time.  The court refused to allow the Thompsons, who were parties to both the 1968 and 1975 transactions, to acquire a future mineral servitude by virtue of Article 77.  The court reasoned that “Article 77 concerns purchases of present servitudes by third parties rendered invalid for reasons of the absence of the mineral rights in the seller who purports to sell them, whether by accidental or intentional oversale.  Article 77 does not legislate the creation of future mineral reservations.”  The trial court held that the two-step process by which the Thompsons ultimately acquired the minerals was an indirect attempt to defeat Article 76, and the Third Circuit agreed.

The Third Circuit reinforced these holdings in Hicks and Rodgers in the recent case of Sterling Timber Assocs., L.L.C. v. Union Gas Operating Co.*  In Sterling Timber, a mineral servitude burdening the subject lands was created in 1995.  Thus, this servitude was set to terminate in 2005 unless prescription of non-use was timely interrupted.  In 2004, Sterling Timber sold the subject lands to OSI as part of a sale of more than 14,000 acres.  At the time, the 1995 mineral servitude was still outstanding.  Nonetheless, Sterling Timber reserved all mineral rights to the 14,000 plus acres in the sale.  On this same date, OSI executed a mineral deed to Sterling Timber on the 14,000 plus acres.  Thereafter, in 2010, OSI executed mineral leases covering the subject lands in favor of Orbit.  Union Gas ultimately acquired Orbit’s interest in the leases and successfully obtained production.  Shortly thereafter, and following Sterling Timber’s unanswered notice and demand upon Union Gas, Sterling Timber sued Union and OSI alleging entitlement to the mineral rights and royalty from production.

Here, like in Rodgers, the seller sold property that was burdened by a mineral servitude and the sale instrument included an indication that the seller’s reservation of the mineral rights was a consideration of the sale.  Additionally, as in Rodgers, the buyer of the property in Sterling Timber conveyed the mineral rights back to the seller in an instrument executed on the same day as the sale of the land.  Finally, as in Rodgers, the purchaser of the property knew that the seller presently owned no mineral interest in the land.  Only a future right to receive the mineral rights through nonuse was potentially present.  The Sterling Timber court noted that, like Rodgers, this was not an “oversale” where an innocent party needs protection from a seller’s attempt to sell something he does not presently own.  Given all the factual similarities, the Sterling Timber court found Rodgers directly on point and controlling.  The court ruled that “Sterling’s claim to ownership in the minerals is based on disguised reservations of reversionary mineral rights.  This is a violation of public policy and is directly forbidden by La. R.S. 31:76.”

As an aside, the rules provided in Articles 78 and 79 concerning the running of prescription, if the doctrine of after-acquired title operates, are necessary complements to Article 77 in assuring that parties are not free to avoid the system of prescription.  Mineral Code article 78 provides: “If the landowner who purported to create the mineral servitude acquires the previously outstanding mineral servitude, after having alienated the land, the party in whose favor the doctrine operates has ten years from the date of the transaction by which he purported to acquire or the remaining period of the rights acquired by his grantor in which to exercise his rights, whichever period is greater.”  Mineral Code article 79 provides: “If the landowner who purported to create the servitude remains the owner of the land at the time of the extinction of the previously outstanding rights, the party in whose favor the doctrine operates has whatever time remains between the date of vesting of title in him and ten years from the date of the transaction by which he purported to acquired [sic] in which to exercise his rights.”  Thus Articles 78 and 79 deal with the problem of the prescriptive period applicable to the title of the overpurchaser once it vests by operation of after-acquired title.  Interestingly, it is possible that the overpurchaser could theoretically have a prescriptive period greater than ten years from the date of the oversale to him in which to exercise his rights as mineral servitude owner, but, coincidentally, no damage is done to the system of prescription because the landowner would have had to create the mineral servitude acquired by the overseller and thus would have consented to having that particular servitude outstanding for the applicable prescriptive period.

Before the Mineral Code was enacted, the Louisiana Supreme Court declared it against the public policy of Louisiana to allow servitudes to remain alive for period longer than ten years without use and that any contract to the contrary is therefore void.  The recent Sterling Timber case confirms that Louisiana’s public policy favoring the timely return of outstanding mineral rights to the owner of the land remains strong.  If you have any questions about mineral servitudes in Louisiana, please give us a call.

* This case is not yet final, and thus is subject to change.

Gordon Arata Lawyers Continue to Help Lead the South Louisiana Women’s Energy Network Board in 2017

Posted in News

Amy Gautreaux and Peggy Welsh will remain in their positions on the 2017 Women’s Energy Network Board of Directors for the South Louisiana chapter. Amy will continue serving as the Public & Industry Relations Director for Lafayette and Baton Rouge and Peggy will continue in her role as the Membership Director.  Kelly Perrier will serve as the Immediate Past President.

The Women’s Energy Network (WEN) is an international organization of professional women who work in the energy industry. WEN’s mission is to develop programs to provide networking opportunities and foster career and leadership development of these women.  Its vision is to be the premier global organization that educates, attracts, retains, and develops professional women in this field.

Interpretation of Depth Limitation Clauses in Mineral Transfers

Posted in Mineral Code

Ambiguous or conflicting property descriptions in conveyance instruments have been around as long as property conveyances have been made. With the radical increase in recent years of mineral production at deeper and deeper depths, the need for carefully describing what depths are being conveyed or reserved has become all the more important.  A lackadaisical attitude over such issues can lead to headaches down the line.

The Court in BRP LLC (Delaware) v. MC Louisiana Minerals LLC, 196 So.3d 37 (La. App. 2d Cir. 5/18/16) recently offered guidance on interpreting an ambiguous depth limitation clause found in a mineral transfer.  Often times when interpreting a depth limitation clause in a particular agreement, some basic knowledge of the geology of the region where the minerals at issue are located is helpful to fully understand the clause.  Further, new geologic structures capable of producing oil and/or gas can be discovered over time which may change the interpretation of such a clause or disclose an ambiguity in such a clause.

The BRP, LLC case involved a 2008 transfer of certain depths in approximately 13,000 acres from International Paper Company (“IP”) to Chesapeake Royalty, LLC and then a later transfer from IP of its remaining mineral rights to BRP, LLC.  A dispute arose between Chesapeake and BRP over which rights were conveyed to Chesapeake and which were reserved by IP.  BRP asserted that IP intended to transfer to Chesapeake its mineral rights only in the Haynesville Shale.  But Chesapeake claimed that it acquired from IP all the mineral rights below the Cotton Valley formation, thus including both the Bossier Shale and Haynesville formations.  BRP sued for a declaratory judgment that BRP owned the mineral rights in the Bossier Shale.  The Bossier Shale, according to the expert testimony presented in the case, exists between the Cotton Valley formation and the Louark Group, which in turn consists of the Haynesville and Smackover formations.  The expert testimony from geologists presented during the trial indicated that the productive portion of the Bossier Shale was the Bossier C Shale located in the middle to the lower portion of the structure.

In the Purchase and Sale Agreement between IP and Chesapeake, the mineral rights being transferred to Chesapeake were described in pertinent part as follows:

The “Assets” shall mean the following: all of Sellers’ right, title and interest in and to (a) the oil, gas and other minerals in, to and under the lands described in the attached Exhibit A, and any and all oil and gas leases covering such lands, INSOFAR AND ONLY INSOFAR as such oil, gas and other minerals are located below that depth which is the stratigraphic equivalent of the base of the Cotton Valley formation and the top of the Louark Group defined as correlative to a depth of 10,765’ in the Winchester Samuels 23 # 1 well (API # 1703124064) located in Section 23-14N-13W, DeSoto Parish, LA, and correlative to a depth of 9,298’ in the Tenneco Baker # 1 well (API # 1701320382) located in Section 12-16N-10W, Bienville Parish, LA

The ambiguity in the definition exists because the Bossier Shale is understood to exist between the Cotton Valley formation and the Louark Group. However, the description in the transfer does not recognize any formation between the Cotton Valley formation and the top of the Louark Group.  Chesapeake claimed to have known about the productive capability of the Bossier Shale at the time of the transfer while IP did not.

The lower court after hearing conflicting testimony from expert geologists on both sides and from the individuals on each side that negotiated the deal between IP and Chesapeake ruled in favor of Chesapeake. The trial court found that IP’s main intent in the depth limitation language was to reserve the Cotton Valley depths because of the shallow production it had established at those depths.  Further, the lower court noted that the correspondence between the parties during the negotiations appeared to focus on the Haynesville depths being transferred to Chesapeake.  Most importantly, the trial court found that the well depth footage markers contained in the depth limitation clause both denoted locations that were considered above the Bossier C Shale.  The well depth footage markers were given considerable weight by the trial court in the interpretation of which zones were reserved and conveyed in the transfer.

On appeal BRP argued that because the footage markers given in the description erroneously (mis)described the top of the Louark Group, the depth clause should be interpreted to convey all minerals below the lowest depth listed, which was the top of the Louark Group. The well depth footage markers given in the transfer created ambiguity because the markers denoted depths that were located within the Bossier Shale and that left several hundred feet of Bossier Shale between the well depth markers and the top of the Louark Group.  Thus, BRP contended that the only way to give effect to all depths given in the depth limitation clause was to set the depth at the deepest depth given, being the top of the Louark Group.  The effect of such an interpretation would be to reserve to the transferor not only the Cotton Valley formation, but also the Bossier Shale formation.

The appellate court rejected BRP’s position. It noted that the evidence presented at trial and the expert testimony given showed that interpretations about the location and composition of formations and groups may change over time and may be subject to disagreement by geologists.  The oil and gas industry has often handled this uncertainty by referencing specified stratigraphic markers such as the well depths rather than just by naming a particular formation.  The problem here was the instruments specified both wells depths and formation names.  Like the trial court, the appellate court found that the stratigraphic markers identified by well depths should control as the boundary line for the mineral rights conveyed.  This interpretation was supported by Chesapeake’s expert testimony, which the appellate court did not find manifestly erroneous.  Furthermore, the letter of intent executed by IP and Chesapeake clearly stated that the mineral rights being transferred fell below the Cotton Valley formation.

The lesson from this case is clear. To avoid ambiguities and competing interpretations of what depths are or are not included within a particular geologic formation, parties to a conveyance of depth-severed mineral interests should generally identify the boundary of any applicable depth severance by reference not to undefined geologic formations, but instead to specified, measured depths (for example the stratigraphic equivalent of a particular measured depth in a particular well, or a specified true vertical depth).  Where possible, avoid using just the name of a geologic formation as a boundary line—at least where the instrument does not also define for purposes of the instrument where the pertinent boundary of such formation is located.

Cynthia Nicholson Quoted in New Orleans CityBusiness

Posted in News

Cynthia Nicholson was quoted recently in the New Orleans CityBusiness article, “Offshore independents struggle with decommissioning requirements”.  The article pinpoints independent oil producers struggle to survive given the challenge of complying with new federal requirements to financially guarantee their costly responsibility to decommission offshore infrastructure after it is no longer useful and profitable.  Cynthia discusses the new rules and explains that “they’ve [BOEM] changed it to evaluate each company on its own merits.”