Replies to This Discussion

Permalink Reply by HBP on August 1, 2012 at 9:29

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). 

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Permalink Reply by Andrew on August 1, 2012 at 9:55

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.

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Permalink Reply by Les Bamburg on August 1, 2012 at 18:34

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.

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Permalink Reply by Andrew on August 1, 2012 at 23:37

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.

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Permalink Reply by Les Bamburg on August 2, 2012 at 2:44

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.

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Permalink Reply by Aubrey C. Sanders, Jr. on August 2, 2012 at 7:21

Les B,

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

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Permalink Reply by Andrew on August 2, 2012 at 8:35

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).

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Permalink Reply by Les Bamburg on August 2, 2012 at 9:18

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.

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Permalink Reply by Andrew on August 7, 2012 at 2:14

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.

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Permalink Reply by Les Bamburg on August 7, 2012 at 2:54

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.   

Permalink Reply by Andrew on August 7, 2012 at 3:50

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

Permalink Reply by Les Bamburg on August 8, 2012 at 18:22

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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