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.

A win for the little guy.  

Jay

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."

Too bad they can be from a leased mineral owner.

Jay

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.

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