In the 19-page ruling released Wednesday, the appellate court rejected District Judge Charles B. Adams' finding that Questar never intended to develop the Annie and Santo Ferraras' deep rights.
"The record does not support a finding that Questar failed to act as a reasonably prudent operator for the mutual benefit of itself and its lessor" as required by state law, the court states.
It further notes: "We certainly understand the district court's sense of awe at the potential of the Haynesville Shale, but there is inadequate support for a blanket finding of 'plans to drill wells in every section or every square mile.' More importantly, there was no evidence that a prudent operator utilizing geological data would have drilled on the Ferraras' property to the Haynesville Shale depth by the date of trial."
It's unknown if the Ferraras will appeal. Their attorney, Randall Davidson, did not return a phone call seeking comment Wednesday.
The Ferraras own 47 acres in DeSoto Parish. The land was first leased in 1988. In 2001, Questar drilled a well in the Hosston unit. Santo Ferrara made a demand on Questar in August 2008 to further develop the deep rights.
He filed suit in 2008 seeking dissolution of the lease based on Questar's failure to develop the Haynesville Shale, which gained the public's attention in March 2008.
Questar did not respond to the demand letter or lawsuit. And during a two-day trial in May 2010, the company did not present any evidence on its behalf.
Adams cited the company's lack of communication in his June 2010 judgment. Adams said it was clear Questar did not intend to develop Ferrara's deep rights.
The panel of 2nd Circuit judges said it completely understood the Ferraras' and district court's "impatience and indignation at Questar's inexplicable failure even to acknowledge the demand letter, its dilatory conduct after suit was filed and its unhelpful strategy of putting on no evidence. However, the Ferraras received royalties from shallow strata continuously since 1988 and made no demand for further exploration or development since 1994. The instant demand came a mere one week after the commissioner recognized the potential of the Haynesville Shale by dispensing with test wells; suit was filed only 46 days after the unanswered demand letter. The record is utterly devoid of evidence that any reasonably prudent operator could have begun exploration, much less drilled a well to the deep Haynesville Shale stratum, within this remarkably short time."Questar also objected to Adams' use of an expert witness and his reliance of evidence of post-suit activity in the Haynesville Shale play to determine of the company breached its obligation. The appellate court, however, rejected those arguments and found no error in Adams' actions.
Vertical Pugh clauses that limit drilling rights to depths produced prior to the end of the primary term of the lease can successfully address this particular situation. And a standard depth clause should be a part of every mineral lease. Many modern lease forms contain that language but the actual wording, and therefore the level of protection, can vary. For those with leases that do not have a depth clause, the Demand To Develop statute is their only avenue of redress. Considering the magnitude of historical exploration and production in NW. LA., there are a lot of lessors bound by older leases without depth limitations who have not benefited from the Haynesville Play. Nor will they from the Bossier Shale. This is an issue of state-wide importance as those in Central Louisiana will find themselves in the same situation if the Tuscaloosa Marine Shale and the Austin Chalk Play turns out to be economic.
There are two avenues to approach reform of the state mineral statutes; incrementally through court rulings or through legislative action to amend and modernize the code. There would need to be a ground swell of public interest and political action as the O&G industry will use any and everything at their disposal to defeat those attempts.
Even with depth clauses, Lessors are still stuck with lessees sitting on their minerals if just one well is drilled at those depths...I'm sure many lessees would bulk at a lease that would require them to further or fully develop a unit...but if enough Lessors insisted..maybe this stuck forever with one well stuff would go away..
How many lessors are there that has thought, "boy if only I had this to do over again, I'd change a few things"..?
Perhaps a vertical depth clause that will only bind the lease to wells at a given depth that are drilled within a certain time frame..
I think we agree. They drill the wells because they will make money. I was responding to Baron's possible legal argument that the companies will not develop the sections because it is not prudent to develop the wells at this time. And maybe it could be argued that while the companies are making money, a prudent operator might make more money by waiting. (I, personally, would not issue a "demand to develop" at these low prices. But someone might try.)