In Louisiana, the owner of a mineral servitude is under no obligation to exercise it. However, a mineral servitude will prescribe from ten years of nonuse. To interrupt the running of prescription, the owner of a mineral servitude may undertake “good faith operations for the discovery and production of minerals.” Article 29 of the Mineral Code defines “good faith operations” as those:
- Commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth,
- Continued at the site chosen to that point or depth, and
- Conducted in such a manner that they constitute a single operation although actual drilling or mining is not conducted at all times.
Notably absent from these requirements is the actual production of oil or gas. Under the Mineral Code and Louisiana jurisprudence, a “dry hole” is sufficient to interrupt the prescription of nonuse as long as these requirements are met. See Union Oil & Gas Corp. of La. v. Broussard, 237 La. 660, 112 So.2d 96 (1958); Reeves v. Reeves, 607 So.2d 626 (La. App. 2d Cir. 1992).
Surface owners, or other parties who may benefit from the termination of the mineral servitude, most often challenge the servitude owner under the first two prongs of Article 29. That is, they argue that the operations were not conducted with a reasonable expectation to discover and produce minerals in paying quantities. Courts conduct both a subjective and objective fact based inquiry to determine whether “good faith operations” were conducted. Two cases from the Second Circuit illustrate this type of analysis.
In Matlock Oil Corp. v. Gerard, 263 So.2d 413 (La. App. 2d Cir.1972), the Louisiana Second Circuit ruled that the mere act of drilling through a shallower formation, without any intent to obtain production from the formation, was not “good faith operations” sufficient to interrupt the running of prescription of nonuse. The court noted three particular factors for its conclusion: 1) contrary to industry standards, the mud logging unit was not installed until drilling operations had almost passed through the particular formation at issue; 2) the petroleum geologist assisting in the drilling operations never requested information from nearby well operators that had produced in the same formation; and 3) the drilling permit obtained by the operator was for oil in a deeper formation than the formation at issue. The court concluded that the drilling through the shallower formation did not interrupt the running of prescription as the operator never intended to produce minerals in paying quantities from the shallower formation.
By contrast, in Bass Enterprises Prod. Co. v. Kiene, 437 So.2d 940 (La. App. 2d Cir.1983), the prescription of nonuse was interrupted by good faith operations even though the well was unproductive. In Bass the operator obtained a permit to drill to a formation at a proposed total depth of 11,500 feet. During drilling operations, as the drilling depth passed through a shallower formation at approximately 9,000 feet, several drilling logs were run to gain information as it related to the shallower formation. The logs included 1) dual induction lateral log; 2) density neutron log; 3) micro log; and 4) mud logs. When the well reached the deeper formation and was tested, it was determined that the well, in that formation, was not capable of commercially producing minerals. The well was then plugged back to a depth of approximately 9,000 feet—to the shallower formation. The operator had further analysis done on the logs for the shallower formation and then sought and obtained a permit to perforate and acidize the shallower formation. After obtaining a subsequent permit to frac the sand for further testing, it was determined that the well was commercially unproductive and it was plugged. The Second Circuit held that the actions, as they related to the shallower formation, were good faith operations with a reasonable expectation of discovering and producing minerals. Thus, the running of prescription of nonuse was interrupted by the operations conducted at the shallower depths.
The above cases illustrate the necessity for operators to take all prudent measures and to follow all industry standards as to each targeted formation to ensure interruption of prescription through good faith operations.