Legislature Passes New Penalties - But They Are Not Applicable to Owners Who Don't Lease At All

A new law has been passed by the Louisiana legislature imposing a substantial new penalty on working interest owners in conservation units who do not contribute a share of the well costs. The law, Act No. 115 of 2008, was sponsored by Henry Burns (R-Haughton) and is set to become law in August of this year, based on Governor Jindal's failure to sign or veto the measure.

Act No. 115 allows the unit operator to charge a 200% "risk penalty" on any "unleased interest owner" who fails to pay their share of costs upon being invoiced.

Under early rules developed by the courts, when there were owners or lessees in an involuntary conservation unit who had not leased to the unit operator and who had not consented to participate in drilling a unit well, the operator could sell the non-consenting party's share of the production and deduct the non-consenting party's share of the drilling, completion and operating costs. Then, the Louisiana legislature stepped in and started imposing a "risk penalty" of 100% of the drilling and completion costs, which the operator could charge against the non-consenting owner's share of mineral production in addition to the actual costs.

Now, Act No. 115 will raise that risk penalty amount to 200%.

However, another portion of the law continues to exempt landowners who don't lease at all from the risk penalty. What does this mean? The definition of "unleased interest owners" really includes only companies that take leases on interests in units but fail to contribute to the unit's operations. Apparently, if you do not lease at all, the operator can only charge your share of production for its share of actual drilling and completion costs. [Hat tip to Les B for clarifying what the amendment didn't change].

So what do you think? Is being an unleased interest owner in a unit an economically viable choice?

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Permalink Reply by BirdDawg, plain ole' idiot on June 22, 2008 at 14:13
We need to find out what polititians voted for this and we should all express our displeasure. Like you implied, that are in effect attempting to force landowners to accept any offer an O&G company offers you, or else they will penalize you. This is legal theft, backed up by our own state government.
Permalink Reply by Greyshades on June 23, 2008 at 16:50
I think Les B got it right (see below). I understood the rule before amendment, and then someone lobbed Act 115 at me and got me turned around. As Les B points out, the statute continues to exclude landowners who did not lease at all from the risk penalty.

Per our previous discussion - does going unleased make any sense economically?
Permalink Reply by Les Bamburg on June 22, 2008 at 15:53
Greyshades, can you provide a link to the text of this new Act? I would also appreciate a reference and link for the regulation that imposed the 100% risk penalty against unleased mineral interest owners.
Permalink Reply by Greyshades on June 22, 2008 at 17:06
Go to the following and hit the button for "115 (HB 1128)":

http://www.legis.state.la.us/

There, you can find the text and the list of the roll call votes- it was nearly unanimous.
Permalink Reply by Les Bamburg on June 23, 2008 at 3:47
Greyshades, thank you for the information. Please see the following text and link:

"(e) The provisions of Paragraph 2(b) above with respect to the risk charge shall not apply to any unleased interest not subject to an oil, gas, and mineral lease. Notwithstanding the provisions of Paragraph 2(b) the royalty owner and overriding royalty owner shall receive that portion of production due to them under the terms of the contract creating the royalty."

http://law.justia.com/louisiana/codes/15/86885.html

I believe this is still effective so the unleased owner would be "carried" and only have 100% of the capital and operating cost deducted from his share of proceeds.
Permalink Reply by Clyde J. Lengel on June 23, 2008 at 15:31
Just follow the money, lol.
Permalink Reply by barneyfife on June 23, 2008 at 7:24
Anybody ever heard of cooperation? Besides in Mississippi the penalty is 300%.
Permalink Reply by Les Bamburg on June 23, 2008 at 14:56
DWS, I am not sure you read my previous posting. The "non-consent" penalty does not apply to unleased mineral interest holders based on my interpretation of the regulation. The "carried" interest owner only has to cover the capital and operating costs from the proceeds. The penalty applies to O&G companies that have a working interest in the unit but does not impact any royalty or over-riding interest owners. Most O&G companies prefer not to have carried interest owners so it should give incentive to get people to lease their acreage.

I welcome any other opinion on this matter.
Permalink Reply by DrWAVeSport Cd1 on June 24, 2008 at 14:15
Les B:

Thank you for your correction. No, I had not read the previously posted clarification. I am retracting my soapbox statements, with an apology for misunderstanding on my part. But I still have some questions about this bill. I suppose in all fairness I need to direct these questions directly to Mr. Burns, thus eliminating my second guessing this measure's effects on NWLa.

I have read in my notes, some Oklahoma State Supreme case where a unleased mineral owner fought forced pooling and posthumously was billed for "costs and penalties" all the while not receiving adequate royalties or compensation. (Much, much more to it than I have space for in this venue) The decision went in favor of the unleased mineral owner's estate:

..."In the decision, the court has clearly demonstrated that under the present statute a mineral interest owner or one who owns a leasehold in a drilling and spacing unit could shield his interest from compulsory pooling proceedings or, at least, gain greater economic benefits from his interest..." O'Neil v. American Quasar Petroleum Co.

Thank you again, for your clarity and response. I am quite happy to be totally wrong in this situation. And my apology to Rep. Henry Burns for taking a negative view of his measure when I did not investigate the matter with a more responsible approach. Never too old to take a step back and look at something from a better vantage point.

DrWAVeSport 6/24/08 p.m.
Permalink Reply by Greyshades on June 24, 2008 at 15:28
My bad. My first post was not so good - it didn't take into account the old exclusion, which still applies. Led you down the primrose path...
Permalink Reply by Snake Stewart on July 4, 2008 at 4:50
Sure , thats what we are trying to get BIG O & G to do, cooperate!
Permalink Reply by DrWAVeSport Cd1 on July 4, 2008 at 3:23
Kassi:

Please read this discussion. It is still a little confusing, but explains this 200% risk penalty. This measure still exempts landowners who don't lease.

Happy 4th to you and yours. Thanks for all your help with this.

DrWAVeSport 7/4/2008

P.S. To me...the GREATEST ASSET of "gohaynesvillehale.com" is its "historical recording" of this important history-making phenomenon called the Haynesville Shale Play. It will go down in the history books! And years from now, others will be able to read about the day-by-day evolution of the 4th largest shale in the world...The Haynesville in NWLa!

Thanks "haynesville"

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