Replies to This Discussion

Permalink Reply by Les Bamburg on August 8, 2012 at 18:23

Andrew, Plains Exploration has non-consented every Haynesville Shale well since March based on economics.

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Permalink Reply by Andrew on August 8, 2012 at 18:55

Wow. I've heard of this anecdotally, but not anyone with the resources of PXP. I guess it makes sense, because these wells are not likely to produce much of a return below $3 gas. 

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Permalink Reply by VSC DeSoto South on August 2, 2012 at 9:06

If I understand this correctly, if one does not have lease in place in a unit where there is a producing well, the new amendment includes the UMI receiving their royalty from the operator or lessee? If a operator/lessee (the same co. in the case I am thinking of) has been holding royalties until well pays out drilling costs, would they now need to determine division order and pay the royalties or could they continue to say that they will not be paying any royalties until the well pays the drilling costs?

Does the amendment apply to new wells only or well that are producing?

Thank you.

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Permalink Reply by Les Bamburg on August 2, 2012 at 9:25

VSC, an UMI (ie "carried" working interest owner) does not receive royalties.  Instead they receive their share of revenue less operating expenses after the well pays out (ie operator recoups their share of the drilling cost from their share of revenue).  This has not changed since the operator is always responsible for handling any unleased mineral interest in his unit. 

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Permalink Reply by Andrew on August 2, 2012 at 12:14

As Les B mentioned, "royalties" are only created by a contract, and an unleased mineral owner does not have a contract by definition. They would not be paid anything until payout, at which point they still receive 8/8ths of their share of revenues less costs. The royalties the operator would have to pay would be those due under a lease, royalty deed, or overriding royalty from an assignment.

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Permalink Reply by VSC DeSoto South on August 3, 2012 at 8:53

I should have known that! That's what happens when I skim things. Thank you for the information though, as soon as I read yours and Andrew's responses it all came back to me.

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Permalink Reply by The_Baron on August 7, 2012 at 3:53

This new admendment does not affect UMI, as they DO NOT OWN A ROYALTY.

 

Royalty is created by a lease, so no lease no royalty. This affect WI owners who go non-consent. Now the Operators have to make sure they recive the moneis so the WI can pay its lessors.

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Permalink Reply by Robert B Dunlap on April 17, 2014 at 3:52

I just got a ruling in a suit against CHK and others in DeSoto Parish on the issue.  The court held that 30:10 did not apply retroactively; but would apply from August 2012.  I argued that the law should apply retroactively because 1) it merely clarified existing law and legislatively overruled Gulf Explorer vs. Clayton; and 2) retroactive application would not violate due process since the operator has never had a property right in royalties.  Indeed, the prior version of 30:10 specifically states that the royalty owner is entitled to receive royalties out of production which mirrors the right of the operator to receive the non-participating working interest owners share of production. Regardless, we are happy with the decision inasmuch as the well in question went on line Jan. 2012, so not much lost and there is recourse against some of the lessors.  In this case, CHK was also a lessee owning 76% of a HBP lease and 24% was owned by individual lessees.  I sued CHK via oblique action on behalf of the individual lessors which goes to the second part of your question.  One other thought is whether their failure to turn over royalties to the lessors would be theft?  I'm hoping we don't have to go there.

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Permalink Reply by HBP on April 17, 2014 at 4:13

You say  the well went online in Jan. 2012, so "not much lost".  Is the ruling saying new 30:10 is effective for any production claims or royalty months starting August 2012, or for any wells drilled or units formed after August 2012.  I thought some version of the latter was the way it would be seen effective.

To re-phrase, are you saying that the ruling would allow you to seek out your lessor's royalty from operator CHK starting August 2012 (assuming from your post your Lessors are leased to a 3rd party non-op lessee)?

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Permalink Reply by Robert B Dunlap on April 17, 2014 at 4:24

The ruling says CHK is liable for royalties attributable to production from August 2012 forward.  When I say not much is lost, I merely meant that we weren't talking about 3 years of nonpayment; there is more upside to the ruling than downside.  Also, the individual lessees are still responsible for royalties from production prior to August 2012, plus double damages, etc...  While I would like to have won the retroactivity argument, I was happy the court agreed with our fall back position that the law was effective for all production after August 2012, regardless of when the well was drilled.

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Permalink Reply by HBP on April 17, 2014 at 4:55

I have to think CHK will take that to the 2nd Cir. to argue that it should only be effective for units formed or wells permitted after June 2012, basically that they relied on the existing 30:10 in good faith, etc..., etc... and that the new 30:10 was substantive not interpretative of the previous 30:10.

I think the 30:10 update was needed due to some realities with 3rd party lessees, but the industry won't lay down for an interpretation that affects their rights in existing wells/units.

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Permalink Reply by Andrew on April 18, 2014 at 10:36

The argument for the amendment to 30:10 being substantive is that it shifts certain financial risks from the non-op's lessor to the operator. Under the new law, the operator can recoup the royalty payments it makes from the non-op's share of production, but if the well doesn't pay out, the operator recoups less at the end of production than it would under the old law.

If the operator's only way to get reimbursed for the non-op's royalty payments under the new is from production, then its financial risk that the well might not pay out has increased by the percentage of the non-op's royalty. Even if operator can recover the payments from the non-op personally, under the new law the risk of the non-op's insolvency would still fall on the operator instead of the non-op lessor.

The changing of rights and remedies and the reallocation of risks among various parties seems like a substantive change to me. I think the much more difficult question is whether the new law applies to all production after its enactment, or only to production from unit wells drilled under under the new law.

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