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News and Updates on Oil & Gas Legal Issues

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.

Louisiana Governor Issues State of Emergency for Coastal Louisiana

Posted in News

On April 18, 2017, Louisiana Governor John Bel Edwards issued a State of Emergency for Coastal Louisiana. Proclamation No. 43 JBE 2017 outlines the national importance of the Louisiana coastline and many continuing threats it faces and specifically identifies alleged damage caused by the energy industry.  In response to the deteriorating coastline, the Louisiana Coastal Protection and Restoration Authority developed “Louisiana’s Comprehensive Master Plan for a Sustainable Coast,” often referred to as the Coastal Master Plan.  The 2017 update of that plan was unanimously approved by the Louisiana Coastal Protection and Restoration Authority and has been sent to the Louisiana Legislature for approval.  The proclamation finds the Louisiana coast to be “in a state of crisis and emergency that requires immediate and urgent action and attention.”

Gov. Edwards has sent a letter to President Trump requesting that the federal government designate five important integrated coastal protection projects, including the Coastal Master Plan, for “high priority status.” He has also called on the state and federal legislatures to implement laws and regulations “expediting or creating exemptions for permitting and environmental review currently necessary to implement integrated coastal protection in coastal Louisiana.”  The emergency extends for 30 days, from April 18 to May 17, 2017.

There has been speculation that Gov. Edwards issued this proclamation as a strategic step to help pursue the land loss cases filed in parishes within the Coastal Zone against various stakeholders in the oil and gas industry, including operators, lessees, and pipeline companies. It is currently unknown how this proclamation may affect the Governor’s authority in hiring outside counsel for these lawsuits or the Attorney General Landry’s position over the prosecution of these lawsuits.

Recent Developments on Interrupting Prescription of Non-Use of a Mineral Servitude

Posted in Mineral Code

With the Louisiana Second Circuit’s recent opinion in Smith v. Andrews, it seems a good time to revisit the law on interruption of prescription of non-use of mineral servitudes.  In Smith, the landowners attempted a full-frontal, but ultimately unsuccessful assault to have the court rule that a mineral servitude burdening their land had prescribed for non-use.  The courts’ methodical rejection of their various theories provides a good platform for reviewing the applicable law.

Prescription of non-use of a mineral servitude can be interrupted numerous ways. Under Article 29 of the Louisiana Mineral Code, prescription is interrupted by good faith operations for the discovery and production of minerals.  To be in good faith, operations must be:

1)   commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth,

2)   continued at the site chosen to that point or depth, and

3)   conducted in such a manner that they constitute a single operation.

Under this first requirement, operations must be commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth.  Thus, an operator drilling an oil or gas well must have reasonable expectation that there are paying quantities of oil or gas at the depth to which he intends to drill.  The reasonableness of these expectations can be proven by testimony of geologists, experienced oil men, or both.  Under the second requirement, a well must actually be drilled at the chosen site to the depth at which there were reasonable expectations that oil or gas would be discovered.  It is enough that a well is actually drilled; the well does not have to be a producer.  Thus, a dry hole suffices to interrupt prescription assuming the other good faith requirements are met.  But if an operator abandons or aborts before the target depth is reached (in either that same well or a substitute thereof if that first well encounters problems), the operations will not interrupt prescription.  Under the third requirement, the operations must be conducted in such a manner that they constitute a single continuous operation although actual drilling or mining is not conducted at all times and may actually include multiple wells if, for instance, the initial well encounters problems.

Although numerous Louisiana courts have addressed whether particular drilling operations constituted use of a mineral servitude sufficient to interrupt prescription, no single test has yet been established for all circumstances. The Louisiana Second Circuit’s decision in Smith v. Andrews, 51,186 (La. App. 2 Cir. 2/15/17), although not yet final and still subject to Supreme Court review, is the latest development in Louisiana jurisprudence on what constitutes sufficient operations for purposes of interruption of prescription and, therefore, maintenance of a mineral servitude.

In Smith, Billy Joe and Betty Ruth Andrews owned several tracts of land in DeSoto Parish, Louisiana.  But their land was burdened by two mineral servitudes: one granted to Union Central Life Insurance Company predecessor by merger to Ameritas Life Insurance Corporation (“Ameritas”) and another in favor of a group referred to as the Smith Heirs.  In 1966, the mineral servitude owners granted mineral leases to Mallard Drilling Corporation.  Thereafter, Mallard drilled several successful wells on the Andrews’ land.  Over time, all but one of Mallard’s wells ceased producing.  The last producing well, the Rogers No. 1 Well, is the subject matter of this lawsuit.

In 1990, Mallard assigned its leases to Quest, who was operating the Rogers No. 1 Well at the time. At some point in the 1990s, the Andrews alleged that Quest damaged a road on their land, so Quest agreed to share certain profits in the well with the Andrews.  Additionally, Quest hired Mr. Andrews to serve as “pumper” on the well checking on the well periodically and monitoring the amount of oil stored in the tanks.  In 1994, the mineral servitude owners executed new leases in favor of Quest (apparently as a result of the prior leases lapsing).  In 2001, Quest assigned the 1994 leases to Jordan, who was then the operator of the well.  Jordan had worked for Quest in the past and took over several wells in an attempt to get them pumping again.  Jordan operated the Rogers No. 1 well here pursuant to the Quest assignment and, according to his testimony, he believed that the assignment from Quest gave him the right to act for his own benefit and the benefit of anyone else with an interest in the lease (including the mineral owners).

In 2008, Andrews sent letters to the Smith heirs and Ameritas demanding that they acknowledge that their servitudes had prescribed. Upon inquiry with the Office of Conservation, the servitude owners discovered that, without their knowledge, Mr. Andrews had had the records changed to reflect no production after 1997; they refused to execute the releases in favor of Andrews.  Mr. Andrews contended that, as part of his activities in monitoring the well, he had witnessed the Rogers No. 1 Well stop pumping as a result of mechanical difficulties in May 1997.  Mr. Andrews represented to the Office of Conservation “that he knew what happened to the well and when, that he had records proving that production on the well stopped in 1997, and that the servitude owners were aware of it.’ Interestingly, these statements were later shown to be untruthful.

In 2009, the Smith heirs filed suit against the Andrews and others for a declaratory judgment that their servitude was still in effect. The Andrews then filed pleadings that the mineral servitudes in favor of Smith heirs and Ameritas had both prescribed for non-use from a lack of production or operations between 1997 and 2007 and thus that the Andrews (as landowners) were now the owners of the relevant mineral rights.  But after a long trial, the district court sided with the mineral-servitude owners, and the Second Circuit affirmed.  Both courts rejected the four arguments pushed by the Andrews.

First, the only evidence the Andrews presented regarding the lack of production between 1997 and 2007 was Mr. Andrews’s own testimony, which the district court found not to be credible.  The servitude owners presented sales receipts, electricity reports, expert and lay testimony to reconstruct the wells activities at that time, successfully proving that the well had actually produced through September 1998 resulting in interruption of prescription on the mineral servitudes through that date.

Second, the Andrews argued that the operation on the wells were not performed on behalf of the servitude owners, as there was no legal relationship between Jordan, the operator, and the servitude owners. Although the lease in favor of Jordan had previously lapsed under the 90 day cessation of operations provision, Mineral Code article 43 provides that a person may also act on behalf of the servitude owners to interrupt prescription “when there is clear and convincing evidence that he intended to act for the servitude owner. Based on testimony from Jordan, the operator at the time, the court found that it was clear that Jordan intended to act, not only for himself, but also the servitude owners.  Jordan testified that he was 66 years old and had over 50 years’ experience working in the oilfield, including 38 years as a pumper.  Jordan testified that he understood that the wells were subject to a lease and that any production obtained would benefit the royalty owners and the mineral servitude owners.  Jordan testified that he believed his assignment gave him the right to produce the Rogers No. 1 Well and thus that he was acting both for his own benefit and for anyone else who owned an interest in the lease.  His assignment clearly referenced the two leases from the servitude owners.  The court found all of this evidence clear and convincing and concluded that Jordan was acting to make money for both himself and the servitude owners, and, thus, intended to act for, among others, the servitude owners.

Third, the Andrews argued that the operator did not obtain enough production sufficient to interrupt the prescription of non-use. Citing the comments to Mineral Code article 38, the Andrews contended that, to interrupt prescription, production must be in an amount sufficient to put to a beneficial use.  But the court swiftly rejected this novel theory.  The text of article 38 is clear: “To interrupt prescription, it is not necessary that minerals be produced in paying quantities.  It is necessary only that minerals actually be produced in good faith with the intent of saving or otherwise using them for some beneficial purpose.”  The record clearly demonstrated that Jordan produced oil in good faith in accordance with the statutory requirements.

Finally, the Andrews argued that Jordan’s actions in “bumping” the well were insufficient to constitute operations for purposes of interruption of the mineral owners’ servitudes. They insisted that, under the statute, the operator must perform operations involving equipment actually in the bore hole and that Jordan’s activities were not “intimately connected with the resolution of the difficulty that caused the well to cease production in order to constitute reworking.”  In support, the Andrews cited the following comments to Mineral Code article 39:

Once actual production of minerals has ceased, operations seeking to restore production or to secure new production from the same site may be conducted. It is felt that as long as such operations are conducted in good faith and in accordance with the basic principles stated in Articles 29 through 31, they should constitute an interruption of prescription.  Insofar as the petroleum industry is concerned, Article 39 should be construed to include any good faith reworking operations or operations for recompletion of the well in another sand that involve use of equipment in the well bore.

The court reasoned that Article 39 clearly states that either good faith reworking operations or operations for recompletion of the well in a different sand that involve the use of equipment in the wellbore will interrupt prescription.  Although it involved the sufficiency of reworking operations within the scope of the contractual provisions in a mineral lease rather than for purposes of maintaining mineral servitudes such as here, the Supreme Court’s discussion on reworking operations in Jardell v Hillin Oil Co., 485 So. 2d 919 (La. 1986), is pertinent here.  After analyzing several earlier cases that considered the definition of “reworking” as used in mineral lease and similar contract provisions in the oil and gas industry, the Court concluded that reworking operations at least include the following:

Any process or procedure which you may undertake to either regain, increase or create new production in a well or activity to restore or increase production of a well that has been drilled[,] usually the second attempt or to work again on a well. In a well that has produced it would be an operation when the well came off of production or ceased production, and it would be an operation to maintain, restore, improve production.

The Jardell court ultimately held that the lease at issue therein did not terminate under its cessation of production clause, for the lessees had commenced good faith reworking operations within 90 days of the shut in of the well. In Smith, the well had ceased to produce because a pump was stuck.  The court found that Jordan’s actions in jarring the well to unstick the pump and restore production (albeit for a short period of time to follow) constituted good faith reworking operations under the reasoning in Jardell.

The Louisiana Supreme Court case of Nelson v. Young, 255 La. 1043, 234 So. 2d 54 (1970) is historically significant to the ruling in Smith.  In Nelson, the surface owner granted leases even though he did not own the minerals.  In 1959, the lessee drilled a well, which produced until 1964.  In 1967, the mineral servitude owners filed suit to be declared owners of the mineral rights.  The trial court dismissed the suit.  But the Second Circuit reversed.  Thereafter, the Supreme Court affirmed the Second Circuit, relying on the theory of quasi-contract based on the approving silence of the servitude owners when the lease was executed by the landowner and production was established thereunder.  Pursuant to the apparent acquiescence of the mineral servitude owner, the landowner’s act became the servitude owner’s act, thus interrupting prescription.

The reasoning of Nelson was not enthusiastically received by all.  It appeared to be contrary to jurisprudence that no act by a landowner should have the effect of interrupting prescription unless he intended it to do so.  As a result of much criticism, the redactors of the Mineral Code legislatively overruled Nelson in 1975 with the adoption of Mineral Code article 43.  Mineral Code article 43 specifically defines when a person is deemed to have acted on behalf of the servitude owner and includes the scenario present in Smith where an operator’s intent to act on behalf of the servitude owner is evident.

In Smith, the court ultimately held that the prescription of non-use of the mineral servitudes was interrupted by good faith reworking operations conducted by a person who, based on clear and convincing evidence, had the intention to act on behalf of the mineral servitude owners in his attempts to regain production from the well, thereby making use of the mineral servitude for their benefit.  In short, the Smith decision reminds us that the actual beliefs/intent of an operator can sometimes make all the difference.

Two Gordon Arata Montgomery Barnett Lawyers Scheduled to Speak at HAPL’s 48th Annual Technical Workshop

Posted in Seminar/Events

Mike Fussell and David Rogers are scheduled to speak at the Houston Association of Professional Landmen’s (HAPL) 48th Annual Technical Workshop on Tuesday, April 18.  They will give a “Multi-State Case Law Update” and address cases covering issues that attorneys and landmen practicing in the area of oil, gas and mineral law should be aware of no matter the basin or state in which they are working.  The cases covered will be applicable for in-house landmen, field landmen and attorneys rendering advice on the issues covered including the definition of production in paying quantities under a mineral lease in order to maintain a lease and the proper descriptions needed for a mineral transfer. Mike and David will also discuss the differences among states concerning certain issues such as whether minerals may be held in perpetuity and the surface use rights of mineral owners among other issues.