Court Approves Unleased Mineral Owner Suit Against Chesapeake

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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Replies to This Discussion

Permalink Reply by Steve P on March 27, 2019 at 7:47

The La. Mineral Code provides many protections for land and mineral owners.  I'm pretty sure that the drafters (from the Louisiana Mineral Law Institute at LSU Law School) did not anticipate operators of unitized wells neglecting or refusing to lease tracts within a forced unit in order to disadvantage them.

On your example in the Pitkin Field, if the operator didn't have a lease covering their well site, then they were trespassing, and should have been subject to all sorts of penalties.  The Department of Conservation can approve a unit, but the operator has to at least hold a valid lease on their well site.

Permalink Reply by casingpoint on March 27, 2019 at 8:57

My mistake, I should have noted the operator was going to drill on leased ground and that the unleased landowner was merely force pooled  in the unit. Hence no mineral trespass occurred. 

However, even if the landowner's unleased property had been spud uopn against his will, he has no recourse but to accept the drilling, development and operation under the forced pooling doctrine in Louisiana. 

Permalink Reply by Steve P on March 27, 2019 at 15:19

My knowledge of Louisiana Mineral Law is dated, but I would be really surprised in an operator could obtain access to an unleased land/mineral owner for surface operations for a drill site.  It would be tresspassing, and the Conservation Department can’t change that.  The Department of Conservation can grant an operator to produce minerals from an unleased mineral owner within a unit.  Surface operations are different.

Permalink Reply by Skip Peel - Mineral Consultant on March 27, 2019 at 15:34

A mineral lessor in a unit has a lease nearing the end of the primary term, no extension clause.  The standard form lease language allows the lease to remain in effect past the primary term as long as operations are under way on the lands or those pooled with it in a drilling unit, i.e. a well is spud.  However the surface location of the drill pad is in the adjoining section, not in the unit.  The lease term expires while the vertical section of the well is drilling, i.e. before the well is turned horizontal and penetrates the section covered by the lease. Just one example of how regulations and standard lease terms fail to operate as intended in the era of horizontal development.

Permalink Reply by casingpoint on March 30, 2019 at 6:25

<regulations and standard lease terms fail to operate as intended in the era of horizontal development>>>

One need only to examine the intent of the parties of interest to settle that quandary. Bottom line IMHO, once a unit well is spud, prescription is interrupted.

Permalink Reply by Skip Peel - Mineral Consultant on March 30, 2019 at 6:31

The lease language states "on the leaseed lands".  The section next door is not on the leased lands.  Petrohawk readily admitted this and the mineral owner gave them a new lease with some modest improvement in terms.

Permalink Reply by casingpoint on March 30, 2019 at 13:05

Again, as long as exploratory drilling is in progress, prescription is interrupted on both leases, assuming both leases are in the same forced pool. In not in the same pool, then yes, the operator would need a lease to continue.

Problems could arise where a horizontal passes through a dry zone on one landower (s) but hits the good stuff underneath the unit next door. How do you get it out of the ground through the dry hole without compensation to the landowners who have a dry hole? This is getting a little weird.

Permalink Reply by Skip Peel - Mineral Consultant on March 30, 2019 at 13:42

Haynesville units are governmental sections. So not in the same forced pool.  Not weird, the operator simply gets a subsurface easement if the owner of the adjacent section is not under lease.  If the owner of the surface location is under lease, the lessee may provide the easement.  As soon as the favored surface location for Haynesville horizontal wells was off the unit, all the operators provided subsurface easement rights as a professional courtesy as they all needed the ability to use off unit pads.

Permalink Reply by Andrew on January 14, 2020 at 10:50
Permalink Reply by Steve P on January 21, 2020 at 14:42

I try and learn something new everyday.  Today, this is it - never underestimate the power of the Commissioner of the La. Department of Conservation (not sure that's the correct title for these days).

In this case, the Plaintiff clearly compromised his legal position by agreeing to the well being drilled in the unit.  Maybe that would have not made a difference in the end.  But it clearly didn't help his case.

Permalink Reply by casingpoint on March 31, 2019 at 18:14

Unless in LRS 30:10 the specific language has ben changed, the operator owns the production from which he recovers his UMO costs. It is really irrelevant if the stock comes from pre production or post production. He owns it in proportion to the UMO acreage in the unit. 

Apparently LRS 30:10 has been re-written twice recently, in 2012 and 2016. Does anyone know where to access the earlier versions?

The language I used above does indeed not appear in the current version, unless I missed it. 

Permalink Reply by Robert mcintyre on January 14, 2020 at 11:36
This is an interesting decision which has effects far beyond post production expenses. First, because Chesapeake produces, markets and sells the UMO’s gas and then controls the use of those proceeds to pay itself, it owes the UMO’s a fiduciary duty. This practice could also constitute a violation of the Louisiana unfair trade practices act exposing Chesapeake to treble damages.
Further, this case deals with post production costs. There is a much more serious issue not addressed concerning administrative expenses charged to a UMO.

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