This is an excerpt.  There is a link at the bottom to the full court ruling, 10 pages.

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF LOUISIANA

SHREVEPORT DIVISION

 

ALLEN JOHNSON, ET AL                                      CIVIL ACTION NO. 16-1543

VERSUS                                                                    JUDGE S. MAURICE HICKS, JR.

CHESAPEAKE LOUISIANA, LP                            MAGISTRATE JUDGE HORNSBY-

 

MEMORANDUM RULING

 

Before the Court are two Motions for Partial Summary Judgment. See Record Document 24 & 28. The first is a Motion for Partial Summary Judgment (Record Document 24) filed by Defendants, Chesapeake Louisiana, L.P. and Chesapeake  Operating, L.L.C. (collectively “the Chesapeake Defendants”). The second is Cross- Motion for Partial Summary Judgment (Record Document 28) filed by Plaintiffs AllenJohnson, Linda Johnson, Donald A. Crosslin, Jr., Mary Jo Gragg, Rodney M. Hudson, Clifton Layman, Alfred R. Meshell, Sherman R. Meshell, David E. Oliver, Tracy Oliver, Laura S. Pendleton, Andrew L. Piccolo, Karla S. Piccolo, Randall S. Rodgers, Freddie P. Spohrer, Tim G. Taylor, Charles R. Waldon, Rexford Galen White, James Shope, Donna Shope, Charlotte McCune, and Jerry McCune. The motions are fully briefed and the Court heard oral arguments on the cross-motions. The sole legal issue to be decided in the cross-motions is whether Plaintiffs, twenty-two unleased mineral owners (the “UMO Plaintiffs”), are responsible for a proportionate share of post-production costs.1 For the reasons set forth below, this Court holds that under Louisiana Revised Statute 30:10(A)(3), post-production costs cannot be recovered by an operator from an unleased mineral owner’s share of production proceeds. Thus, the UMO Plaintiffs’ Cross-Motion for Partial Summary Judgment (Record Document 28) is GRANTED and the Chesapeake Defendants’ Motion for Partial Summary Judgment (Record Document 24) is DENIED.

1The Chesapeake Defendants previously argued in their motion that post-production costs were operating costs. Yet, as noted in both the briefing and during oral argument, the Chesapeake Defendants have now abandoned this argument.

 

BACKGROUND

The Chesapeake Defendants were at all times relevant the operator of the Kelley Well, which is the unit well of the HA RA SU86 unit (“the Unit”). The UMO Plaintiffs are landowners within the Unit and own a non-operating, unleased interest in the Unit. In their Petition, the UMO Plaintiffs allege, among other claims, that the Chesapeake Defendants improperly deducted certain post-production costs from the UMO Plaintiffs’ share of production proceeds. In particular, Plaintiffs contend that Chesapeake has violated Louisiana law by charging or netting-out post-production costs from Plaintiffs’ share of production secured from the Kelley Well. These post-production costs generally include gathering, compression, treatment, processing, transportation, and dehydration costs.

The Chesapeake Defendants moved for partial summary judgment, alleging that their deductions for post-production costs are authorized under general principles of unjust enrichment and, alternatively, co-ownership. See Record Document 24. The Chesapeake Defendants contend that La R.S. 30:10 is inapplicable to the instant matter, as such statute is limited to development and operation costs and does not address post- production costs. The UMO Plaintiffs opposed the motion and filed their own cross- motion, arguing that general principles of co-ownership and unjust enrichment cannot supersede the positive statutory law governing their payment rights.  They contend that the statutory scheme set forth in La. R.S. 30:10 as a whole governs and that post-production costs are not among the exclusive list of expenses deductible against unleased owners, as set forth in Section 10(A)(3).

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Skip:  do you know who the law firms were that represented the plaintiffs and CHK?

Davidson, Summer APLC for the Plaintiffs.  I think it is the Onebane firm and Randall Songy for CHK but that's off the top of my head and I would need to confirm to be certain.

Maybe.  Hopefully.  The Conclusion of Judge Hick's ruling states, in part,

"Under Section 10(A)(3), post-production costs cannot be recovered by an operator from an unleased mineral owner's share of production proceeds."

Yeah. It's really a shame. That would be like me selling the timber off my land and then the mill charging me to truck it to the mill, debark it and chip it for pulp or fuel. 

Under this cited analysis below, the conclusion is at odds with His Honor. 

Louisiana law will be the law of decision in federal court. To wit:

STATE OF LOUISIANA COURT OF APPEAL, THIRD CIRCUIT
CA 16-269
XXI OIL & GAS, LLC VERSUS HILCORP ENERGY COMPANY

When reading the two statutes in conjunction with one another it is obvious
that costs of drilling operations includes the costs of “drilling, completing, and
equipping the unit well.” La.R.S. 30:103.1(A)(1). In amending both statutes, the
legislature was aware that the penalty provision contained the term “costs of the
drilling operations of the well.” There was no need to further define it when it had
already done so in La.R.S. 30:103.1(A)(1). Clearly “drilling operations”
contemplate both drilling and operational aspects of taking and producing oil and
gas from land. Otherwise, there would be no incentive for the operator or producer
to provide the quarterly reports. While not at issue in White v. Phillips Petroleum
Co., 232 So.2d 83 (La.App. 3 Cir.), writ refused, 255 La. 907, 233 So.2d 560
(1970), this court considered the penalty to be one for drilling and operating costs.
7
We agree with the trial court that the penalty for “costs of the drilling operations”
includes both pre-production and post-production costs.

Under this cited analysis below dealing with pre and post production cost deductability, the conclusion is at odds with His Honor. This is getting interesting.
Louisiana law will be the law of decision in federal court. To wit:

STATE OF LOUISIANA COURT OF APPEAL, THIRD CIRCUIT
CA 16-269
XXI OIL & GAS, LLC VERSUS HILCORP ENERGY COMPANY

When reading the two statutes in conjunction with one another it is obvious
that costs of drilling operations includes the costs of “drilling, completing, and
equipping the unit well.” La.R.S. 30:103.1(A)(1). In amending both statutes, the
legislature was aware that the penalty provision contained the term “costs of the
drilling operations of the well.” There was no need to further define it when it had
already done so in La.R.S. 30:103.1(A)(1). Clearly “drilling operations”
contemplate both drilling and operational aspects of taking and producing oil and
gas from land. Otherwise, there would be no incentive for the operator or producer
to provide the quarterly reports. While not at issue in White v. Phillips Petroleum
Co., 232 So.2d 83 (La.App. 3 Cir.), writ refused, 255 La. 907, 233 So.2d 560
(1970), this court considered the penalty to be one for drilling and operating costs.
7
We agree with the trial court that the penalty for “costs of the drilling operations”
includes both pre-production and post-production costs.

Such a small world.  Randy D and I graduated from LSU Law in 1976, Randy S and Maury Hicks graduated the following year, 1977.  We have all gone our own paths.

Right about now, I'd say that Randy S has got his work cut out for him.  Of course the entire industry is on point over this ruling, It's not just Chesapeake that is in jeopardy.  The result of the coming litigation could very well have significant consequences for a number of operating companies active in LA.  And, of course, for their un-leased mineral owners.

There are many unleased mineral owners (myself included) who would like to be leased but the Operator has adamantly refused to lease them at any cost because the Operator can pencil whip them such that the well never pays out.  Hopefully this ruling may change that.

I’m just curious - are you unleased because you never had the chance to lease, or did you have the chance, and turned the offer down hoping for better bonus dollars?  My experience is that it is rare for someone to “never” get a lease offer.  Maybe you bought the property after the prior owner turned down offers.

Steve, while you wait for an answer from Spring Branch, I'd like to state that many unleased mineral owners were never offered a lease. They were simply skipped over.  In fact I suspect that the number that were never offered a lease is significantly greater than those who turned down a lease.  The Haynesville Shale was a different kind of land rush unlike anything that had come before.  The reason is/was the nature of an unconventional reservoir in that it is productive over a large, continuous area.  Conventional reservoirs are typically relatively small in size and productive areas may be scattered across a wide geographic area.  Think the Cotton Valley formation in north LA.  The leasing dynamics are considerably different in a conventional reservoir  play.

The Haynesville, and the Barnett Shale, were the first major unconventional plays to see competitive leasing.  Companies leased far and wide with no real idea of what areas were economic and which were not.  There was little well control or logs to guide assessment of rock quality.  And, as Aubrey McClendon, was fond of stating, "There will be two kinds of energy companies in the future.  The shale haves and the shale have-nots."  Meaning that the future of the industry was unconventional reservoirs and those companies that didn't stake out significant unconventional leasehold would be non-competitive.

I review unit survey plats on a regular basis and I can tell you that there are thousands of small tracts <5 acres in Haynesville drilling units.  As some of these have undivided ownership, there may be something over ten thousand owners.  It is expensive and time consuming for an operating company or the land company they employ to track down each and every one of those owners.  And to do so would have slowed the land machines that were gobbling up hundreds of thousands of acres in a race to secure an operating position in the Haynsville Shale.

Steve P, my brother and I signed an agreement to lease with CHK in July 2008 for 16K/acre, and we actually received the lease which we signed, notarized, and returned, as did several of our cousins. We were all in the same unit but separate property owners. We had accepted the first offer CHK made; we did not shop around for a better deal. Some of us received the lease bonus, but some didn't. By October of that year it was clear that CHK was not going to honor our agreement. They did come back a couple of months later with an offer of $6k, but my brother and I decided to gamble and go unleased. It may have been a good bet had the price of gas stayed above $4 like it was back then.

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