The Governor has signed into law an amendment to Louisiana's forced pooling statute, 30:10.

This is the statute that provides for forced pooling of non-consenting Working Interests (WI) and Unleased Mineral Interests (UMI). The amended statute showing changes is attached.

The key substantive change is that a WI owner who non-consents will now be forwarded the royalty  he owes under the terms of his lease (or the average royalty of the unit, whichever is less) which he is then obligated to forward to the royalty owner. Prior to this change, the WI owner would get nothing from the operator, and would have to pay the royalties out of pocket. Needless to say, this was a substantial incentive to the WI owner to make a deal, because he would get sued when he most likely failed to pay that royalty. 

This situation appears much more just to the unsuspecting royalty owner who leased to the wrong party. Instead of getting no royalty and some legal bills, they will now get most or all of the royalty they are owed. The WI owner still gets a 200% risk charge after payout, and the UMI still has no risk charge.

 

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For all those than find yourself in this scenario, now it is prudent to notify both your operator along with your lessee (in situations where they are different parties) for underpayment demands.  Some people have always done this anyway, but this changes the operator's duties (I believe). 

One thing I don't know is if this bill is retroactive, so it may only apply to unit orders after the date of the law. When the new law does apply, it does change the operator's duties somewhat. The statute makes clear that the operator does NOT have any obligations to the royalty owner, and forwarding the royalties due to the Lessee discharges the operator from all liability. However, the major impediment to royalty owners getting paid in this scenario is that the Lessee probably doesn't have the cash to pay the royalties out of pocket (considering they went non-consent), so if the operator starts forwarding them that cash they should pay.

One question left unanswered (at least for me) is what happens when the Lessee receives the money and doesn't pay it. I would be curious to know what kind of preference the royalty owner would be given in the event the Lessee is insolvent/bankrupt. Regardless, this isn't a perfect solution, because the Lessee could always fail to remit the royalty, but it still substantially increases the likelihood of the royalty owner getting paid.

Andrew, what is clear is the Lessee was always legally obligated to pay Lessor's royalty even if he did non-consent the well.  Of course this amendment should increase the probability of royalty payment.

One thing I've wondered is if this statute would increase the royalty owner's position in a bankruptcy or as a creditor in general. The royalties are arguably owned by the royalty owner and are being forwarded to the Lessee as a fiduciary. In the case of nonpayment by an insolvent WI owner (and let's face it, that seems to be the likely scenario if the Lessee has gone non-consent) it would appear to be a case of conversion of the Lessor's property rather than failure to pay a debt, which should put the royalty owner first in line to recover ahead of creditors.

Andrew, I had hoped this would result in the Lessor having a high priority for payment in the event of a bankruptcy proceeding.

 

By the way, many (if not most) non-consents by Lessee's are driven by factors other than insolvency.  In the early 80's I worked for a major O&G company and elected to non-consent a number of operator drilling proposals based on economics.

Les B,

Very good point. I have seen quite a few cases like you mentioned. Small companies often try to get in deeper pockets!

That is a good point. I'm sure there are many cases where a WI owner literally "does not consent" to the drilling of the well because they disagree with the potential. Sometimes I get my mind stuck in the Haynesville, where the prospects are good and the most likely non-consent is someone who can't foot the huge bill (although lately I'm hearing of some non-consents purely based on the price of gas).

Andrew, yes - one of the current issues is hedged versus unhedged WIO's.  It can equate to $2.00 to $3.00 per MMBtu difference in value.

That's an interesting point. I could see it getting complicated logistically if a WI owner wanted to take advantage of an operator's hedges.

Andrew, only the individual party reaps the benefit of their hedges so it is up to each individual WIO to determine if and how they will hedge gas production.   

That's what I would guess, but what if the "hedges" are pre-sold contracts with the direct purchaser? 

Andrew, I was referring to financial hedges rather than long term gas sales contracts.  By the way each WIO is responsible for marketing their share of natural gas production unless they have entered into a marketing arrangement with the operator. 

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