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 don't you think Chesapeake will appeal?? If this stands they will be out lots of money

Your question is to Skip, but I’d guess that it will be appealed.  Remember, this is not a final verdict, but a denial of a Motion for Summary Judgment.  However, if this stands, then the only issue left for both sides at trial is not “if” but “how much” CHK will owe them.  

If you are a land or mineral owner and lose in District Court, whether or not to appeal is primarily a financial issue.  CHK may be broke, but they can still afford to pay their attorneys to file an appeal.  Small change spent in comparison to a spread of this decision on how much CHK can deduct from their payments to a number of other unleased mineral owners.   If the shoe was on the other foot, the cost of an appeal to a mineral owner may well not be small change.

Steve I am one of those unleased mineral owners and unfortunately both unleased parcels in different sections are with Chesapeake. First parcel we became UMO in south Caddo. Chesapeake came calling and offered $6000 an ac. with a 25% royalty. This was 2009 and that sounded good. We said yes. We had leased several parcels with Chesapeake before that with about same terms. This time we dealt DIRECTLY with a Chesapeake landman. Prior to that we dealt with Twin Cities. Anyway he emailed the lease for us to look at and set a time to meet with us the following week at 10 a.m. At 9:30 a.m. that morn he called and said we are not going to lease you because your friends in the adjacent neighborhood aren't leasing. I told him we didn't even live in the area as our minerals were reserved and didn't know anyone in the neighborhood. He said no lease and hung up. End of story. Found out later that the adjacent neighborhood group had been negotiating with him and we just happened to have land nearby and got caugtht in the battle.

 I had to learn how to become an UMO. Did all the demand letters.etc. and still unleased today. Fast forward to 2013. We bought a parcel of land in Desoto from a man who was dying. He had never been offered a lease with Chesapeake. I tried to get Chesapeake to sign a lease then but they wouldn't consider it. Dealt with the same rude guy as in the past. Became UMO's on that property. Have dealt with the same rude guy several times since then. He offered us 1/8% lease in last couple of months. I hope this ruling moves forward and I hope I find out the day the Chesapeake land person loses his job. That man who was dying who was unleased could have used $6000 an ac. which is what they had been paying an ac. for the area he was in. He lived in abject poverty. $15000 would have made a huge improvement in how he lived his last days.

well, you won't me ever trying to defend CHK - I"m in a dispute with them right now over royalties.  Until this discussion string, I actually wasn't aware of all of the land or mineral owners who were perfectly willing to lease and but weren't offered the opportunity.  There is such a thing as "infield leasing" where someone goes in and cleans up the unleased areas.  I've been gone from Louisiana for decades, so I don't know enough about all of the practices that go on now.  In the past, no operator wanted an UMO in their unit.  Apparently that's no longer true.

Sad situation for the fellow that sold you his land.  He could have had an opportunity but it didn't materialize.

Steve, I know of investors who bought up open acreage in CHK units right behind their leasing.  They couldn't get a lease either.

Correction.  For the defendants was Pat Ottinger, Ottinger Hebert.  Onebane only handles CHK's unit and alternate unit well applications. 

Certainly.  And it's not just Chesapeake that this ruling places in jeopardy.  The ruling makes it clear that the mineral code does not allow for post production deductions on unleased minerals.  The language in the statute is clear and unambiguous.  If Chesapeake could not come up with a cogent counter argument in this case, they won't have much to base an appeal upon.

Skip,  Thanks for catching this decision and posting it.  A couple of things first.  Chesapeake will either settle with the plaintiffs or appeal.  This issue is far too large to be ignored.  A simple google search of "Chesapeake" will reveal that they do not have a great track record anywhere in dealing with mineral interest owners or non-operating working interest owners alike.  The good news is that the jurisdiction and venue where the case is situated tends to be landowner friendly.  Give thanks you're not in Texas.

In as much as there is commonality of defendants and commonality of issues and law, I believe a class action has a decent chance to withstand dismissal and may be brought.  This is somewhat similar to the numerous royalty owner suits filed in multiple states and multiple jurisdiction of the past several years. I believe Chesapeake was in the forefront of that effort as well.

As an attorney (Texas) I am not involved in post production matters.  I am involved in an issue involving direct and indirect costs charged by the Operator to the non-operator working interest owners.  This would include any unleased mineral owner as same are treated as working interest owners but without the protection of the JOA/COPAS.

I have recently pursued trying to understand the Louisiana unleased mineral interest owners procedure. As an aside and in response to an earlier comment, proceeding to drill with unleased mineral owners who are force pooled is more the rule than the exception.

My question is this - a unitization order generally provides that the force pooled unleased owner pay its share of production costs including supervision expenses.  In many state (e.g. New Mexico), the commission adopts and attaches a form JOA and COPAS to the order which governs the handling of the unleased owner's expenses.  Again, this is because the unleased owner is in reality a working interest owner who has been made a party to the JOA by force of law, not by independent choice. Accordingly, in New Mexico, the unleased owner has all of the contractual protections of the non-operating working interest owner.  My question is "How does this work in Louisiana?"  Under the JOA, the Operator is permitted to charge only specific costs. Is this also the case in Louisiana? If not, does the operator simply charge the same expenses that are being charged to the parties to the JOA?  I asked this question to the Louisiana Conservation Commission and was told that they did not know.  Apparently once you're force pooled as an unleased owner you're on your own.  

The significance of this issue is that in older wells, marginal wells (of which there are over 15,000 in Louisiana), the cost of operation to the working interest owner may exceed the owner's proceeds from production.  The net effect is to deny the unleased owner its right to the property taken against its will.

I do not have access to either a joint billing statement to an unleased mineral interest owner or a corresponding revenue statement.  I would very much like to see those documents strictly for education and information purposes (I cannot and do not practice law in Louisiana and would not solicit same).

Finally, as to the comment of the future value of the Haynesville.  Over the past five years the cost of exploring for and producing shale oil and gas has decreased significantly. (Thanks OPEC!).  It will continue to do so and the demand for American gas will increase as well.

Never bet against American ingenuity, technology and the free market system"  

Robert, alas I am but a lowly landman, not an experienced O&G attorney.  However I have been lobbying for this litigation and performing research in support of it for quite some time.  Reaching this point provides a little satisfaction but I know there is more litigation and negotiation to come.

Louisiana treats unleased mineral owners differently from Working Interests.  For those unleased owners there is no "risk penalty".  The operator keeps all of the revenue due the unleased owners until such time as the well reaches payout, 100% of cost to drill and complete.  From first production until well pay out, the operator may not charge the unleased owner for any costs and, upon request, must provide them with a quarterly unit production statement to track progress to payout.  The mineral code is clear in what may be deducted and what may not be deducted after payout is reached.  The usual post production deductions for gathering and treating, and in Chesapeake's case I believe marketing, are not included in those operator expenses that may be deducted.  Lease operating expense (LOE) may be deducted.  As you are an attorney I think you can read the statute and the ruling and see that the plaintiffs' counsel has crafted a very strong argument supported by case law. 

The Haynesville/Bossier operator economics are very price sensitive.  Marcellus gas, even with an approximate sixty cent per mcf transportation cost differential to the Gulf Coast, and associated gas from the Permian will serve to cap the Haynesville gas price.  At this point it looks as if supply is winning the race over demand.  So, another 2 to 3 years at least for range bound prices.  It is difficult to track growing demand for electric generation although that is significant nationally.  The next year will reveal how many Greenfield LNG projects pass their FID and actually begin construction to increase Gulf Coast demand.  As majors acquire more and more of the Haynesville reserves, drilling will slow and be stimulated or degraded based on price.  The oil majors do not have the same dynamics driving development that the private operators backed by PE do.

Skip,

Thanks.  I understand the distinction as to deductions pre and post payout.  I believe I am correct (and please correct me if I am not) that the pre-payout costs may impact payout as the amount of those costs may defer and delay recoupment of the amount due to the Operator.  

Be that as it may, my question focuses on the amounts deductible by the Operator from the unleased mineral owners proceeds from production after payout.  Keeping in mind that the gas being sold attributable to the unleased mineral owners interest is the property of the Unleased mineral owner and, ass the gas is being marketed by the Operator and all funds received therefrom are managed by the Operator, it is arguable that the Operator owes the unleased mineral interest owner a fiduciary duty as its mandatary.

Putting that aside for another time, my question is "What specific costs, particularly indirect overhead costs, can the Operator deduct from the unleased mineral owners proceeds?"  I know for a fact that these costs will render aa marginal well unprofitable to a minority working interest owner but produce a significant profit to the Operator.

PS - I've been around too many landmen to buy into the "lowly" adjective.  Thanks for your help and thoughts.

RS 30:10 covers the issue at hand.  Here is a friend's interpretation of the specific section.

  A maxim of interpretation is when a statute includes a certain list of things, things not listed are exclusive. A Contrary maxim is that a list may be illustrative. However, the wording of 30:10 lends itself to the exclusive, as opposed to the inclusive, maxim of interpretation. Thus, the "proceeds of production" due the UMI arguably is the price obtained by the operator times the production quantum due the UMI, less the proportionate share of the expressly listed costs: drilling, testing, completing, equipping, operating, and supervising the unit well. 

Skip,

That is exactly correct.  Here is mu question and I am very interested in your thoughts "Does the Operator have the right to make a profit from its position as operator?"  Not from its participation as a working interest owner like everyone else, but from its power of operator?  For example, the Operator has the right to charge a supervision fee.  Does he only have the right to be reimbursed for the actual costs associated with that fee or does he have a right to make a profit as the operator providing the supervision?  If the operator has the right to make a profit (which the COPAS organization says he does not) how much is enough and how much is too much?

Robert, from a legal stand point I have no opinion regarding your question.  From a practical stand point, operators are making a profit, or are commonly recovering costs not associated with their rights to deduct from unleased mineral owners under LOE regs.  Should a UMO be charged for copy paper?  Cokes?  Cutting grass?  I've seen the records of all those things being charged to UMO.  Should an operator deduct for "capital expenses" associated with gathering and treating systems and then deduct an additional amount per mcf to transport the lessors gas through that system?  When the cover is pulled back through legal discovery, the industry is revealed to be pencil whipping a lot of their mineral lessors and unleased mineral owners.  It is common practice, not isolated instances.

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