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U.S. Fifth Circuit Rejects OCSLA-Based Criminal Charges Against Contractors

Posted in BSEE, Outer Continental Shelf

In an important case of first impression, the federal Fifth Circuit has just affirmed that contractors cannot be criminally prosecuted for violations of various safety regulations under the Outer Continental Shelf Lands Act (OCSLA). See United States v. Moss, No. 16-30561 (5th Cir. Sept. 27, 2017).  This decision has broad implications—both in the criminal and civil context and for both contractors working in the OCS and holders and operators of leases and rights-of-way on the OCS.

Black Elk Energy Offshore Operations, LLC owned and operated a federal oil and gas lease covering West Delta Block 32 on the OCS in the Gulf of Mexico and had a three-platform production facility on the block. Black Elk retained several contractors to provide various services on the platforms.

In 2012, while some contractors were performing welding work for Black Elk on one of the platforms, a fatal explosion occurred, killing three workers, injuring many others, and discharging pollutants into the Gulf of Mexico. Although the exact cause of the explosion is disputed, the federal government indicted Black Elk and many of these contractors for allegedly violating multiple OCSLA regulations administered by the Bureau of Safety and Environmental Enforcement (BSEE) by failing to obtain proper authorization to weld, failing to conduct appropriate pre-work inspections, and failing to ensure the construction area was safe for the welding work.

The government waited nearly three years to issue its indictments. The government charged the defendants with violating 43 U.S.C. § 1350(c), which provides that any person who willfully violates any OCSLA regulation may be criminally liable and punished by a fine of up to $100,000 and imprisonment of up to ten years.  Specifically, the government charged Black Elk and the contractors with violating various safety regulations under 30 C.F.R. §§ 250.113(c) and 250.146(c).

The contractors moved the district court to dismiss these OCSLA charges against them on grounds that none of the pertinent regulations applies to oilfield contractors. Central to their argument was that each of the pertinent regulations imposes requirements only on “You,” which another OCSLA regulation defines as follows:

        You means a lessee, the owner or holder of operating rights, a designated operator or agent of the lessee(s), a pipeline right-of-way holder, or a State lessee granted a right-of-use and easement.

The district court agreed and thus dismissed all OCSLA charges against the contractors. In the first appellate case to address this issue, the Fifth Circuit has now affirmed this dismissal.

On appeal, the contractors argued that OCSLA, read as a whole, precludes the government from criminally prosecuting anyone who is not a holder of OCS leases or permits for violating regulations under OCSLA. While finding “much to be said” for this argument, the Fifth Circuit stopped short of deciding it head on.  Instead, it affirmed the dismissal on the narrower grounds that the regulations at issue did not purport to regulate contractors.

The Fifth Circuit easily rejected the government’s argument that the OCSLA regulations apply not only to lessees and operators, but also to the person actually performing the activity at issue. The court dismissed this argument as contrary to “hornbook principles of interpretation,” namely, that two provisions in a statute or regulation cannot be read in isolation, but rather must be construed together.  The court emphasized that regulations at issue all applied only to “You,” but that BSEE’s definition of “You” does not cover contractors.  Indeed, BSEE itself had publicly stated that “you” “DOES NOT include a CONTRACTOR.”  The court also noted various earlier explanations by the agency that it intended to limit regulatory liability to just lessees and operators, that “it does not regulate contractors” and that it had rejected a proposal that “You” be defined more broadly to cover contractors.  Finally, the Fifth Circuit stressed that the “virtually non-existent past enforcement of OCSLA regulations against contractors confirms that the regulations never intended to apply to [contractors]” and that, in other, recently promulgated regulations (see 30 C.F.R. § 585.112), BSEE has “gone out of its way to specifically include contractors and subcontractors within the regulatory purview.”  For all these reasons, the Fifth Circuit affirmed the district court, holding that the OCSLA regulations at issue do not apply to contractors and therefore cannot provide a basis for criminal liability of contractors.

The Fifth Circuit’s legal reasoning is almost assuredly correct. The plain words of the OCSLA regulations at issue, coupled with the regulatory history and long practice thereafter, strongly support the conclusion that contractors are not governed by these regulations.  However, it is a separate issue whether BSEE should rethink the narrow reach of these regulations by amending them to cover contractors as well.  The criminal penalties available under § 1350(c) for violations of OCSLA’s regulations provide a powerful disincentive against potential violators.

But of course subjecting contractors to criminal penalties would not be cost-free. If BSEE amends these regulations to expressly cover contractors, then that would present squarely the issue whether BSEE in fact has the statutory power to promulgate regulations enforceable against contractors.  Indeed, the Fifth Circuit may soon be addressing that issue, as the government has recently appealed a ruling by another Louisiana federal court in Island Operating Co. v. Jewell that BSEE does not have the statutory authority under OCSLA to issue civil penalties or fines against contractors.  But even if the Fifth Circuit ultimately determines that BSEE has the statutory authority to regulate contractors, there may be practical reasons why it might not be wise for BSEE to do so.  As the Fifth Circuit astutely observed, “complex, overlapping cross-indemnity provisions are an inherent feature through the oil and gas industry.”  Thus, tinkering with a regulatory scheme that has been in place since OCSLA’s enactment over sixty years ago could cause unintended consequences that “could adversely impact multiple layers of contractors and subcontractors,” as it would upend the historical allocations of cost and risk among the numerous players on the OCS.  Among other things, any such change would necessitate lessees and operators to undertake a wholesale review of all their agreements with contractors and others.  So if you’re a contractor, lessee or operator on the OCS, stay tuned.

Message from Gordon Arata Montgomery Barnett Regarding Hurricane Harvey

Posted in Seminar/Events

We at Gordon Arata Montgomery Barnett express our sincere heartfelt sympathy to all those who are in the path of Hurricane Harvey.  You assisted us when Katrina and Rita hit Louisiana twelve years ago and we are here now to assist our friends in Texas.

We have been in contact with some of you already and appreciate your concerns.  We stand ready to assist you in your time of need.  If for example, you should need office space, please contact us.  We have limited office space available in our Houston office and additional spaces in New Orleans, Lafayette and Baton Rouge offices.  Also, the firm has set up a Harvey Emergency Recovery Team to assist with your needs, including the following:

  • Business Interruption Claims/Insurance Coverage
  • FEMA assistance/SBA Loans
  • Tax Relief
  • Force Majeure Issues
  • Real Estate Issues/Leasing Issues
  • Environmental/Toxic Tort
  • Employment Issues
  • Oil & Gas Issues
  • Admiralty and Maritime
  • Bankruptcy and Creditors’ Rights
  • Construction Issues

Please do not hesitate to contact us at gambharvey@gamb.law.

We also want to provide you with some information regarding the federal and state tax return filing and payment relief which has just been made available to victims of Hurricane Harvey.

Federal Tax Return Filing and Payment Relief to Victims of Hurricane Harvey; 2016 Returns on Valid Extension Have Until Jan. 31st to File

The Internal Revenue Service announced today that Hurricane Harvey victims in parts of Texas have until Jan. 31, 2018, to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on Oct. 16th, and businesses with extensions that run out on Sept. 15th.

The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for individual assistance. Currently, 18 counties are eligible, but taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

The tax relief postpones various tax filing and payment deadlines that occurred starting on Aug. 23, 2017. As a result, affected individuals and businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the Sept. 15, 2017 and Jan. 16, 2018 deadlines for making quarterly estimated tax payments. For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until Oct. 16, 2017. Please note that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

A variety of business tax deadlines are also affected including the Oct. 31st deadline for quarterly payroll and excise tax returns. In addition, the IRS will waive late-deposit penalties for federal payroll and excise tax deposits normally due on or after Aug. 23 and before Sept. 7, if the deposits are made by Sept. 7, 2017. Details on available relief can be found on the disaster relief page on IRS.gov.

The IRS will automatically provide filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with taxpayers who live outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area must contact the IRS at 866-562-5227. This relief also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016). See IRS Publication 547 for details.

Currently, the following Texas counties are eligible for relief: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria and Wharton.

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.

Relief from Texas Tax Filing and Payment Deadlines for Taxpayers in Disaster Areas

Texas Comptroller Glenn Hegar announced on Friday that taxpayers in declared disaster areas affected by Hurricane Harvey can postpone paying state taxes while they recover from storm-related losses. Businesses located in those areas can call the Comptroller’s office and request up to a 90-day extension to file and pay certain monthly and quarterly state taxes.

In addition to allowing the Comptroller to extend tax-filing deadlines, Texas law exempts certain recovery-related expenses from sales tax, including:

  • the cost of labor to repair storm-damaged, nonresidential property, including office buildings and stores. Labor charges must be separately stated on the repair bill. Texas does not impose sales tax on labor for residential repairs.
  • services used to restore storm-damaged tangible personal property, including dry cleaning of clothing and draperies, rug and carpet cleaning, and appliance repairs regardless of whether the property is residential or nonresidential.

For more information or to request a tax filing extension, call the Texas Comptroller’s toll-free tax assistance line in Austin at 800-252-5555, or go to the Comptroller’s website for answers to frequently asked questions.

Gordon, Arata, Montgomery, Barnett, McCollam, Duplantis & Eagan, LLC
201 St. Charles Ave., 40th Floor | New Orleans, LA 70170-4000
Main:  (504) 582-1111

Disclaimer:  Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, this Firm would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

BSEE Finally Allows Pipeline ROWs To Be Co-Owned

Posted in BSEE

Are you pining for the cheery days of yore when regulations made at least some business sense?  Happy days are here again, at least for BSEE’s new policy on ownership of pipeline rights-of-way (ROW) on the outer continental shelf (OCS).  After years of refusing to recognize multiple owners of a pipeline ROW, the Bureau of Safety and Environmental Enforcement (BSEE) has just advised that it will now allow a pipeline ROW to be assigned to more than one party with a single operator to be designated to act on behalf of the co-owners.

Historically, BSEE’s predecessor, the Minerals Management Service (MMS), had permitted a pipeline ROW on the OCS to have multiple co-owners.  Many years ago, however, the MMS adopted an internal policy that it would no longer approve assignments for co-owners.  And—until now—BSEE has continued that policy.

That policy seemed entirely misplaced, as it ignored the realities of business on the OCS.  Frequently (if not more often than not), developments on the OCS have multiple co-owners.  Joint venturers who co-own an oil and gas lease almost universally agree to share among themselves not only production revenues from the lease, but also the related costs and expenses.  Because production facilities on the OCS are not near refineries or other end users of such production, pipelines are an absolute necessity for OCS production.  But under this old policy, only one party would be recognized as the owner of a pipeline ROW on the OCS, even if multiple parties were responsible for paying for any pipeline facilities on the ROW.

This old policy caused multiple problems.  On the one hand, without a government-recognized ownership interest in a ROW, a party who nonetheless was obligated to pay for a portion of the costs and expenses for such ROW would have to concoct a set of contractual provisions that would do Rube Goldberg proud.  But even then, it was uncertain how effective those contractual efforts would be.  For example, if such a “non-owner” co-owner attempted to mortgage its “non-owner” interest, how would foreclosure work?  What exactly could a marshal seize and sell if the “non-owner” owner defaulted on its financing?  On the other hand, any equally daunting set of contractual arrangements would be needed to protect a “non-owner” owner in the event that the BSEE-recognized owner sought to mortgage (or otherwise encumber) its ROW interest—which, per BSEE, was 100%.  Nor did this policy serve the public: by recognizing only a single owner, BSEE effectively limited the possible number of parties it could pursue to enforce decommissioning obligations for a ROW or if there was ever a spill from a pipeline on the ROW.  Thus, for example, if the BSEE-recognized owner went belly up and its bonds to the government were not sufficient to satisfy a clean-up obligation, BSEE would have had difficultly pursuing any “non-owner” owners for any payment or contribution.

By its NTL No. 2017-N04 issued effective August 18, 2017, BSEE has now finally come to its senses to cure these self-inflicted problems.  BSEE will now, once again, allow a pipeline ROW to be assigned to more than a single party.  Thus, government-recognized ownership in a pipeline ROW on the OCS may now, once again, mirror the parties’ actual economic interests in the ROW.  Of course, as 30 C.F.R. § 250.1701(b) has long recognized, co-owners of a pipeline ROW will be jointly and severally (or, as we Louisiana lawyers would say, solidarily) liable for meeting the related decommissioning obligations.  [The new NTL is silent whether there can be separate co-ownership for each pipeline segment authorized under a single ROW; fortunately, however, that should not be a big concern, as it has been decades since multiple pipeline segments were designated under a single ROW.]  On the flip side, BSEE will now require that a single party be designated as the “operator” for a pipeline ROW—at least when there are two or more co-owners.  Identifying an operator won’t relieve the pipeline ROW holders of any responsibility for the ROW.  If an operator defaults, the pipeline ROW holders are still responsible for complying with the ROW grant and applicable law, regulations and orders.  While 30 C.F.R. § 550.147(c) is express and clear that an operator under a lease is jointly and severally liable with the lessee(s) for various regulations relating to the lease, there is no comparable express regulation for operators of ROWs.  Although the new NTL states that BSEE may disqualify a pipeline ROW operator or revoke its identification as an operator for a ROW if its performance is “unacceptable,” the new NTL never expressly states that a ROW operator who is not also a holder of the ROW may itself be liable (jointly, severally or otherwise) for any decommissioning or other obligations for the ROW.

So if you have an interest in a pipeline ROW where BSEE lists someone else as the sole owner or if BSEE recognizes you as the sole owner of a ROW that, as a contractual matter is co-owned by two or more parties, you should consider whether now to file an appropriate assignment with BSEE so that the ownership of record mirrors the parties’ contractual arrangements.  But pay attention to the details: for example, if the owner of recorded granted a mortgage on the ROW (or even just on its rights under the ROW), you might want to obtain appropriate partial releases from the mortgage holder.  Co-ownership of ROWs of course raises many of the same issues that occur with co-ownership of leases.  But we’re better for the new scheme: letting the parties have the flexibility to determine what works best for them is almost always far superior than a one-choice-is-all-you-get approach to government regulation.

If you have any questions about pipeline ROWs or other issues on the OCS, give us a call.


A Primer on Consent-To-Assignment Clauses Under Louisiana Law

Posted in Legal Updates

As the name suggests, a consent-to-assignment clause is one way of preventing an obligor from subsequently transferring its contractual rights and obligations to a third party assignee without the prior consent of the original obligee. The original intent behind including these clauses in contracts, such as leases, was to ensure that the assignee would be bound to the same terms and conditions as the original obligee or lessee. However, it has become more common for lessors to rely on such consent-to-assignment clauses as a mechanism to require lessees and/or their assigns to agree to more onerous terms and conditions than otherwise contemplated, such as requiring the lessee to remain liable to the lessor should the assignee default or requiring that the assignor compensate the lessor for consenting to the assignment. The express language of the consent-to-assignment clause, as well as the venue in which the issue is litigated, typically will determine the extent to which the lessor can lawfully condition its consent to a proposed assignment.

Consent-to-assignment clauses typically are categorized as either “qualified” or “unqualified.” Qualified consent-to-assignment clauses contain a caveat limiting the lessor’s right to withhold its consent, such as: “and such consent will not be unreasonably withheld.” The phrase “unreasonably withheld” has been interpreted to mean that “there are no sufficient grounds for a reasonably prudent business person to deny consent.”  Louisiana courts have found that “sufficient grounds” existed for the lessor to withhold its consent where the proposed sublessee or assignee is financially inferior compared to the present lessee; where the sublessee’s proposed use does not fall within the permitted uses in the lease or would inhibit the lessor’s ability to lease other spaces in the leased property; and where the sublease or assignment would cause the lessor to lose a lessee on the same property. However, a lessor’s refusal to consent to a sublease or assignment likely will be found unreasonable if the reasons for the refusal are pretextual, or if the proposed sublessee is identical to the lessee in financial status and proposed use of the property.

Alternatively, unqualified consent-to-assignment clauses (also referred to as “silent” consent-to-assignment clauses) do not expressly prohibit the lessor from withholding consent for unjustifiable reasons or for no reason at all. When litigating such silent consent-to-assignment clauses, lessees and potential sublessees have argued that courts should inject a reasonableness standard or that an implied standard of reasonableness exists based upon general contract principles. The majority of courts, including those in Texas, adhere to the traditional view that silent consent provisions allow a lessor arbitrarily to refuse to approve a proposed assignment or sublease, no matter how suitable the assignee or sublessee appears to be and no matter how unreasonable the lessor’s objection. These jurisdictions typically have found that there is no implied covenant of good faith requiring a lessor to be “reasonable” in refusing to consent. Other courts following the traditional view may simply refuse to rewrite what they consider to be unambiguous contractual language, especially in cases where there is evidence that the silent consent was included as a result of negotiation.

Louisiana, on the other hand, was the first jurisdiction in the nation to adopt the modern view of implying a standard of “reasonableness” when interpreting silent consent-to-assignment clauses. Louisiana courts historically implied an abuse of rights standard to restrain the lessor’s arbitrary refusal to consent to an assignment. In their view, allowing a lessor to arbitrarily refuse consent to an assignment or sublease virtually nullifies any right to assign or sublease. However, in 1987 the Louisiana Supreme Court limited the applicability of the abuse of rights doctrine, articulating that it applies only when one of the following conditions is met:

(1) if the predominant motive was to cause harm;

(2) if there was no serious or legitimate motive for refusing;

(3) if the exercise of the right to refuse is against moral rules, good faith, or elementary fairness;

(4) if the right to refuse is exercised for a purpose other than that for which it is granted.

See Truschinger v. Pak, 513 So.2d 1151, 1154 (La.1987).

In Truschinger, the lessor conditionally consented to a proposed sublease in exchange for a cash payment of $40,000.00. The court held that because the lessor’s predominate motive was economic, serious, and legitimate, and was not a wish to harm, the lessor’s refusal was not an abuse of rights. It is questionable whether the historical authority for implying a standard of reasonableness has survived in the wake of Truschinger, considering that the court appeared tacitly to approve of lessors withholding or conditioning consent based on purely economic motives.

Even so, it is important to note that Truschinger and the cases cited therein relied upon La. Civ. Code. art. 2725 (1870) and the French interpretations of its ancillary provision in Code Napoléon as support for construing silent consent-to-assignment clauses against lessees. However, in 2004 La. Civ. Code. art. 2725 (1870) was revised and renumbered as La. Civ. Code art. 2713 and now expressly provides that a “provision that prohibits subleasing, assigning, or encumbering is to be strictly construed against the lessor.” The 2004 Revision Comment explains:

[This] sentence restates the principle of the second paragraph of Civil Code Article 2725 (1870) properly understood. . . . In derogation of general principles of interpretation, some cases have erroneously construed such interdiction against the lessee. The third sentence of Civil Code Article 2713 (Rev. 2004) corrects this error.

Although Article 2713 has been in effect for more than twelve years, no court has applied this article in the context of interpreting a silent consent-to-assignment clause.  Consequently, while Louisiana courts traditionally have been less favorable toward lessors when interpreting such clauses, a lessor’s conditioned consent or refusal to consent may nonetheless be lawful, absent a showing that such refusal equates to an abuse of rights as set forth in Truschinger.

BLM Moves to Rescind Federal Fracking Regulations

Posted in Fracking

In a proposed rule published yesterday in the Federal Register, the Department of the Interior’s Bureau of Land Management (BLM) seeks to rescind Obama-era regulations governing hydraulic fracturing on public lands.  The regulations—which were promulgated in March 2015 and later stayed before they ever took effect—would impose stringent well casing integrity requirements and increased standards for storage and disposal of waste fluids.  The regulations would also require operators to submit detailed geological information to the BLM and publicly disclose chemicals used in the fracking process via the website www.fracfocus.org.

Although the regulations would apply only to operations on federal and Native American tribal lands (which represent around 10% of fracking operations in the U.S.), they have been met with widespread disapproval.  Critics argue that that the regulations are either redundant or conflict with existing laws, and many have voiced concerns that the regulations may be used as a de facto standard for state legislatures developing their own fracking rules.  The federal reporting requirements in particular have come under intense scrutiny due to the potential for disclosure of trade secret information related to proprietary fracking fluids.

Two industry groups (the Independent Petroleum Association of America and the Western Energy Alliance), four states (Wyoming, Colorado, North Dakota and Utah), and the Ute Indian Tribe have filed suit in Wyoming federal court challenging the regulations, and in June 2016, a Wyoming district judge ruled in their favor, finding that Congress had not delegated authority to the BLM to regulate hydraulic fracturing.  The Obama administration appealed that ruling to the U.S. Court of Appeals for the Tenth Circuit, which initially scheduled oral argument for March 2017.  Following the recent presidential election, however, the Tenth Circuit issued an order asking the BLM if it wished to proceed with oral argument given a potential shift in federal policy, stating that “the court is concerned that the briefing filed by the federal appellants in these cases may no longer reflect the position of the federal appellants.”  In response, the BLM asked the court to stay the litigation to provide the new administration an opportunity to review the matter. Oral argument has been rescheduled for this Thursday .

The BLM’s proposed rule confirms that the government’s position has changed drastically.  The proposed rule states that implementation of the 2015 regulations “would result in compliance costs to the industry of approximately $32 million per year (and potentially up to $45 million per year),” which costs the BLM has determined are “not justified.”  The proposed rule goes on to acknowledge that all 32 states with federal oil and gas leases currently have laws or regulations governing hydraulic fracturing, and that “the appropriate framework for mitigating [environmental] impacts exists through state regulations, through tribal exercise of sovereignty, and through BLM’s own pre-existing regulations and authorities.”   Regarding disclosure of the chemical content of hydraulic fracturing fluids, the proposed rule recognizes that such disclosure “is more prevalent than it was in 2015 and there is no need for a Federal chemical disclosure requirements, since companies are already making those disclosures on most of the operations, either to comply with state law or voluntarily.”  Notably, although not mentioned in the proposed rule, a number of states have enacted legislation designed to protect the secrecy of proprietary information that operators are required to submit to state regulatory bodies.

In sum, the proposed rule concludes that the 2015 regulations are “unnecessarily duplicative of state and some tribal regulations and impose burdensome reporting requirements and other unjustified costs on the oil and gas industry.”   Public comment on the proposed rule will be accepted for 60 days after publication, following which the BLM will make any necessary changes before publishing a final rule.  A new legal battle between the Trump-led BLM and proponents of the 2015 regulations may be on the horizon.

Noble Energy Gets More Than It Bargained For in Bankruptcy Purchase

Posted in Bankruptcy

A recent case from the Texas Supreme Court emphasizes the importance of doing due diligence before purchasing assets from a debtor in bankruptcy. The case, Noble Energy, Inc. v. ConocoPhillips Company, held that Noble, through its predecessor and without realizing it, purchased a $63 million liability when, in addition to purchasing the bankrupt entity’s assets, it agreed to assume liability for all “Assumed Liabilities and Assumed Obligations,” even ones not expressly disclosed in the bankruptcy.

The dispute centered around an indemnity claim for environmental damage and contamination claims filed by the State of Louisiana and the Cameron Parish School Board against ConocoPhillips and others related to activities on the Johnson Bayou oil field in Cameron Parish, Louisiana. In 1994, ConocoPhillips’ predecessor entered into a lease exchange agreement with Alma Energy Corp. where each assignee agreed to indemnify the other party for all claims arising out of waste materials or hazardous substances on the exchanged leases assigned to such assignee, whether or not attributable to the assignor’s actions, prior to, during, or after the period of the assignor’s ownership of those leases.

Five years later, in 1999, Alma declared bankruptcy. As part of the bankruptcy, Noble’s predecessor in interest purchased through an asset purchase agreement all of Alma’s assets, including all executory contracts and leases that Alma had not expressly rejected in its bankruptcy case.  The bankruptcy plan, which was confirmed in August of 2000, contained language providing that “any Executory Contract or lease not referenced above shall be assumed and assigned” to Noble’s predecessor.  In addition to a list of expressly rejected contracts and leases, Noble’s predecessor was also able to provide its own list of contracts and leases it wanted to reject.  The Johnson Bayou lease and the related indemnity obligation from the 1994 exchange agreement were not listed on the list of rejected contracts and leases, nor was it listed by Noble’s predecessor as a rejected contract and lease.  In fact, it was not mentioned at all in the plan or at any point in the bankruptcy.

In May of 2010, Louisiana and the Cameron Parish School Board filed their suit against ConocoPhillips and others. ConocoPhillips settled the claims for $63 million and then sought indemnity from Noble pursuant to the 1994 exchange agreement, which ConocoPhillips claimed was assumed by Noble’s predecessor in the Alma bankruptcy.  Noble argued that because the Johnson Bayou lease and related exchange agreement were not specifically mentioned anywhere in the plan or disclosure statement, it was not provided with adequate notice of their existence, let alone that they were being assumed.  Noble further argued that the language in the plan was mere boilerplate language and did not reflect a specific intent to assume the exchange agreement.

Finding that the indemnity agreement under the 1994 exchange was an executory contract, the Court then concluded the language in the plan was sufficient to provide Noble’s predecessor with notice of the contracts being assumed. Specifically, the Court stated:

The Order confirmed the [asset purchase agreement] and the Plan that used both exclusive and non-exclusive language throughout, and we must assume the choices were intentional. As Conoco observes, the Plan could have stated, as reorganization plans often do, that all executory contracts not formally assumed and assigned by a certain date would be rejected.  Either way, the language is adjudicatory, not boilerplate.

Thus, the Court found Noble had at least constructive notice of the exchange agreement.

While acknowledging Noble’s concern that the ruling would discourage future purchases in bankruptcy proceedings by rewarding Alma for its failure to fully disclose all of its assets and liabilities in its bankruptcy case, the Court found it more important that bankruptcy plans and court orders be interpreted and enforced according to their plain terms.

The case provides a cautionary tale to companies looking to acquire a troubled competitor’s assets from a bankruptcy case. Under this ruling, it is not enough to rely on a debtor’s disclosure in bankruptcy.  There still exists a need for due diligence and a complete investigation into the debtor’s assets and liabilities.

Federal Appeals Court Prevents Environmental Group from Suing Over Gas Well Estimates

Posted in Environmental

On May 30, 2017, the United States Court of Appeals for the Eighth Circuit dismissed a lawsuit brought by an environmental group accusing the U.S. Forest Service of ignoring the environmental impact of natural gas drilling in the Ozark National Forest that was approximately 860% above what its prior analysis assumed.  Without addressing the merits of the environmental group’s claims, the Eighth Circuit dismissed its appeal, holding that it lacked constitutional standing to bring the suit.  See Ouachita Watch League v. U.S. Forest Serv., No. 16-1952, 2017 WL 2324706 (8th Cir. May 30, 2017).

In 2005, the Forest Service developed a management plan for the Ozark-St. Francis National Forests in Arkansas.  The plan noted 49 natural gas wells in the Ozark National Forest and anticipated 10 to 20 new wells in the next decade.  However, in 2008, with the technological advances for producing shale plays, a drilling boon was sparked in Arkansas’ Fayetteville Shale.  When the government updated its predictions for natural gas development, it estimated that, instead of 10 to 20 new wells, there would be about 1,730.  Despite this dramatic increase, the government decided that the revised projection did not require a new environmental analysis to determine if the drilling activity should continue.  In response, the Ozark Society filed suit.

In its suit, the plaintiff alleged that the Forest Service violated federal environmental laws by not conducting a new impact study, when the original assessment had been based on significantly lower well site estimates.  The plaintiff also contended that the government failed to meaningfully consider the effects of gas leasing and exploration operations in the forest on public health, air quality, and water quality and failed to provide them an opportunity to participate in that decision.  The district court held that the Ozark Society had standing, but denied its request for injunctive relief.  The district court ultimately ruled in favor of the government, holding that it was not required to supplement the 2005 environmental impact statement.  It later granted summary judgment to the government for four reasons: (1) the agency’s 2010 decision not to conduct a new environmental study was not a final agency decision subject to judicial review; (2) the Forest Service was not obligated to supplement the 2005 environmental impact statement; (3) federal agencies do not have to allow public participation when deciding whether to supplement an environmental impact statement; and (4) the Ozark Society’s challenge to one particular drilling permit was moot because the well had already been drilled.

On appeal, the Eighth Circuit first addressed whether the Ozark Society had standing, that is, had the right to sue for this alleged injury.  The court noted that, while harm to recreational or esthetic interests can support standing for organizations like the Ozark Society on behalf of its members, the members must have a specific and concrete plan to enjoy national forests, instead of a mere generalized harm.  In other words, each member must have a specific plan to enjoy that forest.  In analyzing the complaint, the court found that it was insufficient to establish standing.  Specifically, the complaint spoke only to the alleged harm to the society as a whole, not to each of its individual members.  Citing the Supreme Court’s decision in Summers v. Earth Island Inst., 555 U.S. 488 (2009), the Eight Circuit held that the complaint must allege that the challenged activity would affect all members of the group.  The Eight Circuit held that the Ozark Society’s allegations that it regularly uses the Ozark National Forest and that one identified member had used it in the past fell “short of the mark” necessary to establish standing.

Because the Eighth Circuit found that the Ozark Society lacked standing, it never reached the other issues ruled upon by the district court.  In some respects, this appears to be a dodge by the Eighth Circuit, because a simple rewording of the complaint likely would have resolved these semantic standing issues.  It remains unanswered whether it was arbitrary to forgo a new environmental revise based on a new estimate, when the original estimate had been premised upon significantly fewer wells.  Perhaps future environmental groups will draft their complaints more precisely so that these issues can be squarely addressed.

BSEE Extends Time OCS Lease Remains in Effect after Cessation of Operations or Production

Posted in BSEE, Outer Continental Shelf

On June 9, 2017, the Bureau of Safety and Environmental Enforcement (BSEE) issued a final rule amending certain regulations in 30 CFR Part 250 to extend the time that an Outer Continental Shelf (OCS) lease remains in effect after cessation of production or other operations to one year.

Under the previous regulations, an OCS lease beyond its primary term expired 180 days after the last operations, unless the operator resumed operations or applied for a Suspension of Operations (SOO) or a Suspension of Production (SOP) from the BSEE Regional Supervisor within that 180-day period.  Operations include drilling, well-reworking, and production in paying quantities.  To maintain a lease, OCS lessees and operators will now have one year after the cessation of operations to apply for an SOO or SOP or resume operations.

This rule is effective as of June 9, 2017.  The Consolidated Appropriations Act of 2017 (CAA) directed the Secretary of the Interior to amend the regulations extending the time period from 180 days to one year.  BSEE did not go through the prior notice and public comment process because the CAA required adoption of the exact language of the rule, leaving no discretion to BSEE.

The rule change will “provide operators with more time and flexibility to evaluate information (e.g., review prior well data, plan for an additional well, obtain Authorization for Expenditure approval) to determine if they will perform another leaseholding operation.”  While the rule change does not apply retroactively, lessees and operators with pending SOOs or SOPs (or IBLA appeals of denials of SOOs or SOPs) may be able to utilize the new rule as an argument in favor of granting the SOO or SOP.

Louisiana Department of Revenue Attempts to Rewrite Crude Oil Purchase Agreements in an Effort to Collect More Severance Taxes

Posted in Legal Updates, Tax

The Louisiana Department of Revenue and Louisiana oil producers continue to battle over the imposition of severance tax on oil and condensate produced in Louisiana.  Gordon Arata Montgomery Barnett partner Martin Landrieu has posted previously on the Department’s attempt to charge hundreds of thousands of dollars in “delinquent taxes” the Department claims is owed under oil purchase agreements; that post can be accessed here.  Litigation on this issue is intensifying.

The contract price in a standard oil purchase agreement is commonly structured using several adjustable pricing components followed by a fixed component referred to as a “premium or deduct.”  The premium or deduct is negotiated by the parties and takes into account various factors specific to the particular field at issue including, among other things, distance of the well from the selling point, quality and quantity of the oil purchased, speculation, risk of loss, marketability and the bargaining power of the parties.  The adjustable components are used to calculate what is called the “Base Price,” from which the fixed premium or deduct is subtracted.  The Department has stated its position that any such deduct should be categorized as an unallowed “transportation deduction,” while Louisiana oil producers and their customers take the stance that any such deduct (or premium) is part of the price of the oil as negotiated under the contract.

The Department has initiated audits and has formally assessed dozens of oil companies in Louisiana with a claim that delinquent severance taxes, together with penalties and interest, are owed for oil severed from the ground and water in Louisiana under contracts as described above.  That is, the Department is claiming that any deduct component should be categorized as an unallowed transportation deduction and added back into the price for severance tax purposes, resulting in an increase in the price of the oil, even though the parties negotiated the price to be otherwise and the oil producer never received that incremental amount.

In support of its assessments, including interest, penalties, and fees, the Department points to Revenue Information Bulletin No. 08-015, which takes the position that the transportation deduction allowed by 61 LAC Pt I, § 2903(A)(h) is limited to transportation which transports oil off lease and excludes the movement of oil on lease, which the Department categorizes as “gathering activities,” and, therefore, not considered “transportation.”  The transportation deduction in § 2903 states in its entirety:

Transportation Costs—there shall be deducted from the value determined under the foregoing provisions the charges for trucking, barging, and pipeline fees actually charged the producer. In the event the producer transports the oil and/or condensate by his own facilities, $0.25 per barrel shall be deemed to be a reasonable charge for transportation and may be deducted from the value computed under the foregoing provisions. The producer can deduct either the $0.25 per barrel or actual transportation charges billed by third parties but not both. Should it become apparent the $0.25 per barrel charge is inequitable or unreasonable, the secretary may prospectively re-determine the transportation charge to be allowed when the producer transports the oil and/or condensate in his own facilities.

As the previous post noted, the Department’s recent assaults have the effect of essentially rewriting the contract price two parties agreed upon for the purchase of crude oil in the open marketplace.  Louisiana law, however, simply states that you tax the value of the oil and condensate at the time and place of severance.  If there is no posted field price, which, there generally is not these days, the value of the oil and condensate at the time and place of severance is determined by the gross receipts received by the producer from the first purchaser, less charges for trucking, barging and pipeline fees (i.e. transportation costs).  This method of calculating the value of the oil is aimed at getting to the true value of the oil at the moment it is severed from the earth, that is at the wellhead.  It is common sense that if the producer of oil has to expend extra costs to get the oil to the point of sale once it is severed from the earth, that cost will be added to the price the first purchaser pays, but it is not part of the true value of the oil at the time and place of severance.  Following the same logic, if the producer and purchaser engaged in an arm’s length transaction agree that a premium or deduct is necessary in order to better reflect the true value of the oil at the time and place of severance, that premium or deduct constitutes part of the value of the oil and should not be unilaterally added back into the price in direct contradiction to the words of the statute and regulation.

Additionally, it is important to note that nowhere in the provision allowing for a transportation deduction is there a distinction between transportation which takes place “on lease” versus “off lease.”  As Judge Morvant of the 19th JDC recently recognized in Mantle Oil & Gas, LLC v. La. State Revenue Department, Case No. 646215, § 2903 simply states that if the producer incurs “charges for trucking, barging, and pipeline fees” in order to get the oil to the point of sale, he may deduct those costs from the price of oil for severance tax purposes.  Judge Morvant’s decision provides hope that Louisiana courts recognize that the Department’s recent attacks on oil and gas producers in Louisiana are in direct contradiction to the law and infringe upon parties’ determinations of the market value of oil at the point of severance.

In some instances the Department has taken an alternative approach, claiming that the value of oil for severance tax purposes is the price per barrel published as a “market center price” in one or more published index price bulletins (e.g. NYMEX or ARGUS Petroleum).  In other words, the Department has treated a published “market center price” as the statutory equivalent of “posted field price.”  The Department has stated its position on this issue as follows:

The only issue on the schedules is that the contract deductions have been disallowed and added back to the taxable value of the oil.  The statute imposing the oil severance tax (47:633(7)(a)) states that the taxable value of oil is the higher of (1) the gross receipts received from the first purchaser, less charges for trucking, barging and pipeline fees, or (2) the posted field price.  Based on the Louisiana Administrative Code’s definition of posted field price as it relates to the oil severance tax statute, the Department of Revenue has taken the position that the index price bulletins used in contracts are today’s equivalent of the posted field price, and therefore the contract deductions are deductions from the posted field price (number 2 in the statute above).  Since the statute taxes the higher of gross receipts or the posted field price, we have added the contract deductions back to the taxable price per barrel.

The Department’s position on “posted field price” has been rejected by courts in the past, and does not appear to be supported by the facts this time around either.

In a new twist in a few of the more recent cases, the Department of Revenue has gone so far as to allege fraud and unclean hands on the part of some oil producers and has asserted that they entered into contracts that provide for deductions for certain costs in the determination of the purchase price for the purpose of reducing the severance tax owed.

Stay tuned!

Please feel free to call Martin Landrieu, Caroline Lafourcade or Michael Landis if you have any questions about your severance tax issues.

Fifth Circuit Upholds “Subsequent Purchaser Rule” For Mineral Leases

Posted in Mineral Leases, News

On April 18, 2017, the United States Court of Appeals for the Fifth Circuit held in Guilbeau v. Hess Corp. (Docket No. 16-30971) that Louisiana’s subsequent purchaser rule applies to rights arising under mineral leases.  The ruling surely comes to the relief of the oil and gas industry concerned over uncertain liability to third parties with whom oil companies had no privity of contract.

The subsequent purchaser rule in Louisiana, as articulated in Eagle Pipe & Supply Co. v. Amerada Hess Corp. (79 So. 3d 246 (La. 2011)), is based on the premise that although injury to property is damage to the real rights in the property, the right to sue another who infringes upon that real right is a personal right, which belongs to the owner of the real right (that is, the owner of the property) at the time the damage is inflicted.  (Id. at 279.)  Thus, the theory goes, “an owner of property has no right or actual interest in recovering from a third party for damage which was inflicted on the property before his purchase, in the absence of an assignment or subrogation of the rights belonging to the owner of the property when the damage was inflicted.”  (Id. at 256–57.)

The Court’s opinion in Eagle Pipe contained a conspicuous footnote, in which the Court expressed “no opinion as to the applicability of [the subsequent purchaser rule] to fact situations involving mineral leases or obligations arising out of the Mineral Code.”  (Id. at 281 n.80.)  Enter, Guilbeau, who seized on this language to argue that there is uncertainty whether the rule applies to mineral leases.  The land at issue, which Guilbeau purchased in 2007, had earlier been leased to Hess’s predecessor for oil and gas operations.  The operations ceased in 1971, and the lease terminated in 1973.  By the time Guilbeau purchased the property, all wells had been plugged and abandoned.  The federal court for the Western District of Louisiana dismissed the case, holding that the subsequent purchaser rule barred Guilbeau’s cause of action.

The Fifth Circuit agreed with the district court and recited decisions from the Louisiana First Circuit (Global Marketing Solutions, L.L.C. v. Blue Mill Farms, Inc., 153 So. 3d 1209 (La. Ct. App. 2014)), Second Circuit (Wagoner v. Chevron USA, Inc., 55 So. 3d 12 (La. Ct. App. 2010); Walton v. ExxonMobil Corp., 162 So. 3d 490 (La. Ct. App. 2015)), and Third Circuit (Bundrick v. Anadarko Petrol. Corp., 159 So. 3d 1137 (La. Ct. App. 2015); Boone v. Conoco Phillips Co., 139 So. 3d 1047 (La. Ct. App. 2014)), all of which applied the subsequent purchaser rule to hold that a plaintiff, as owner of land, cannot recover for damages that arose on a leased premises before the plaintiff  acquired the same premises.  In Walton, however, the Second Circuit noted that although a purchaser cannot recover for damages that occurred under a mineral lease before the purchaser acquired its interest in the land/lease, a purchaser may still recover for damages that occur after the purchaser’s acquisition of its interest in the land/lease.

Finding no persuasive data to suggest that the Louisiana Supreme Court would rule differently from this consensus among the Louisiana appellate courts, the Fifth Circuit ruled similarly and upheld the district court’s ruling that, absent an assignment or subrogation, a purchaser of property may not recover for damages incurred under a mineral lease before the purchaser’s acquisition of an interest in the property/lease.