Replies to This Discussion

Permalink Reply by Mac Davis on July 6, 2009 at 15:57

Thanks for the link, wolf. I've been reading Texas laws all day long and the Louisiana codes referenced above are much easier to read than the Texas stuff. I wonder if this is Louisiana civil law vs. English common law or just that Louisiana does a better job than Texas at writing the laws clearly.

• ▶ Reply

Permalink Reply by Mac Davis on July 6, 2009 at 15:43

Thanks for all the info. I think you folks are making this a lot clearer. It's mostly the way I thought it worked in theory.

Now for the third scenario. Operator pays lessee. Lessee doesn't pay royalties due to lessor.

It seems that lessor would have to sue the lessee. The lessor wouldn't have a claim against the operator.

If the lessor wins a case against the lessee, who can't pay, it seems the lessor would have a claim against future payments due from the operator to the lessee, but no claim against the operator for past payments due from lessee to lessor.

Some of the posts above suggest that the operator - lessor link is not as arms length than it would seem to be at first blush. Does the operator have some responsibility to the lessor?

• ▶ Reply

Permalink Reply by Dion Warr, CPL on July 6, 2009 at 16:40

Mac:

You are right in KB / Wolf's wheelhouse. There is a ready case for her to cite, and she can comment at length on the legal issues on point.

Skipping ahead, as a practical matter, unless operator agrees to bear or pay a portion of non-operator's burdens (say, up to the first 25%, which would generally cover Lessee's royalty) by way of a JOA, generally operator's responsibility to the lessor (or anyone within the unit) would be to operate the unit well(s) in a reasonable and prudent manner, prevent waste and economically drain the unit. As long as operator is doing so, there is not much cause to seek redress from the operator.

From what I have seen, a producing well fulfills most all obligations under the terms of the lease insofar as to performance; it is nearly impossible to break the lease in this scenario. Reorganization plans usually class royalty owners as unsecured creditors, and as such will be placed in a payment plan 'below' other secured creditors and holders of other perfected liens against the producing property until the entity reemerges from bankruptcy; usually the lessee / debtor is generally protected from penalties enumerated in the Mineral Code by the Bankruptcy Court. The revenue stream from the well is pulled into the bankruptcy as "income", and the royalty due to the lessor(s) is simply accounted for as a continuing debt obligation of the Lessee to be made up as the various creditors in the front of the line are satisfied, until the property is sold, or the reorganization is complete and the bankruptcy is discharged.

• ▶ Reply

Permalink Reply by Mac Davis on July 6, 2009 at 22:13

OK, sounds positively Wall Street. Leasing company gets leases, runs up debts, squanders (or embezzles) the money, pays big bonuses to the CEO of the leasing company, declares bankruptcy. Creditors get paid in part by the operator, property owners never get any of the proceeds from their minerals.

I wonder what happens if the operator goes bankrupt. I imagine the creditors would be ahead of the mineral rights holders for past payments due. Would the operators creditors be ahead of the mineral rights holders for future revenue from the well? It would seem that they shouldn't because those revenues don't belong to the operator.

Of course, Chrysler and GM prove that bankruptcy judges can and will ignore the law whenever it strikes their fancy.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on July 7, 2009 at 8:34

Wolf:

On occasion, such a clause might 'work' (if the lessee is willing to agree), but IMO such a clause would not be approved on a more widespread basis principally because such provisions would materially impact lessee's (or operator's) ability to secure credit for E&P from senior lenders and/or by use of credit revolvers. The 'bank' usually requires that they hold first position and all other liens and encumbrances which would prime theirs be discharged in order to put properties up for collateral and receive a prime valuation.

From what I've seen, sophisticated and/or persistent UMI's force pooled into a producing unit in which the operator is in BK do seem to have a better ability to recover revenues as their revenue stream than their leased neighbors, as the UMI is entitled to their proportionate share of revenues by mineral ownership and by state law, independent of the lease relationship and any contractual obligation to pay a share of that revenue to the landowner in the form of royalty. But as to the complete legal reasoning for this, I do not know.

• ▶ Reply

Permalink Reply by Mac Davis on July 7, 2009 at 14:11

Yet more examples of the need for a mineral interests coop.

Probably a dream, and too late for me.

• ▶ Reply

Permalink Reply by Dion Warr, CPL on July 8, 2009 at 16:32

It doesn't, (as secured financing valuations are based upon the NRI and not the Gross WI), but the first position also allows the 'bank' or secured creditors the preferred position on first call on production, as the operator would have. Lessor grants the right to explore, capture, and reduce the minerals to possession. As generally the payment of royalty is an obligation due and payable to lessor under the terms of the lease, they (lessor) does not have a first call on production. Besides, financing based upon a valuation which ignore the burdens (including the royalty) would point to an imprudent lender, not an imprudent operator.

Maybe it shouldn't be that way, but I have seen this happen often. The secured lenders go to the head of line, the RI gets put on the layaway plan by the bankruptcy court.

Wondering aloud about this situation and the current events alluded to earlier in the thread, one wonders if the l/o's might receive an ownership position if they formed a union and petitioned the current adminstration for assistance and 'leverage'. They might end of owning the well. Otherwise, the secured creditors end up in the catbird seat in BK, as I have seen it.

• ▶ Reply

• ‹ Previous
• 1
• 2
• Next ›
• Page