This article is a follow up to A Snapshot of Louisiana’s Risk-Fee Statute written in 2015.  In 2021, a Risk Charge Commission was created to conduct public meetings, receive comment and input from interested parties and submit recommendations to revise and amend La. R.S. 30:10 (or, as it is commonly called, the Louisiana Risk-Fee Statute).  The Commission met several times in the latter part of 2021, and, in February 2022, submitted for approval that the Louisiana Legislature formally adopted and enacted effective August 1, 2022.  In sum, the 2022 Amendments  provide for definitions and terminology, procedures, obligations, and remedies; information required to be furnished; indemnification; title opinions; and subsequent unit operations.  

The overall underlying purpose of the Louisiana Risk-Fee Statute remains unchanged: fair allocation among owners in a Commissioner’s unit of the risk and expense of wells and operations within the unit, and more specifically when there is no contractual relationship between the operator/drilling owner and a non-drilling owner/non-operator and/or its lessor/royalty owner and/or overriding royalty interest owner.  But as detailed below, the 2022 Amendments provide for some technical housecleaning and modernization.  Here is what operators and other owners in a Commissioner’s unit in Louisiana need to know now. 

When any drilling owner who has or intends to drill a unit well, substitute unit well, alternate unit well, or cross-unit well on a Commissioner’s unit, such operator may, by registered mail, return receipt requested, or other form of guaranteed delivery and notification method, not including electronic communication or mail, notify all other owners in the unit of the drilling or the intent to drill and give each an opportunity to participate in the expense thereof.  The 2022 Amendments specifically, and finally, define this notice as the “risk charge notice”.  

The requirements of the contents and formalities of the risk charge notice remain unchanged for the most part. The notice shall contain: 

(aa)  An authorization for expenditure form (AFE), which shall include a detailed estimate or the actual amount of the cost of drilling, testing, completing, and equipping such well. The AFE shall be dated within one hundred twenty days of the date of the mailing of the risk charge notice. 

(bb)  The proposed or actual location of the well. 

(cc) The proposed or actual objective depth of the well. 

(dd) An estimate of ownership as a percentage of expected unit size or approximate percentage of well participation. 

(ee)  In the event that the well is being drilled or has been drilled at the time of mailing the risk charge notice, then a copy of all available logs, core analysis, production data, and well test data from the well which has not been made public. 

(ff)  At the option of the drilling owner, a statement that payment in full of the notified owner’s share of costs as set forth in the AFE is required to be included with any election to participate. 

Notably, the 2022 Amendments beef up protection against free riders.  Under the revisions, the drilling owner now has the option to include with the risk charge notice a statement that the notified owner’s share of costs as set forth in the AFE is required to be paid with any election to participate. And, following that, any election to participate must still be exercised according to the strict rules of the statute (electronic means not acceptable) and within 30 days after receipt of the initial risk charge notice but now, if required by the drilling owner, an election to participate must include timely payment of the notified owner’s share of costs as set forth in the AFE.  Under the revisions, failure to make timely election (or payment as may be required) is deemed an election not to participate.  The revisions also require that the risk charge notice contain a copy of all available logs, core analysis, production data and well test data not made public.  Also, if any of the AFE costs are estimated, the revisions require that, within 60 days of receipt of invoices of the actual costs, the drilling owner must make adjustments to account for the difference in estimated versus actual costs.  In short, these changes will often give operators significant leverage to hold non-participating owners accountable early on and further encourage fair allocation and participation among owners. 

As a recap, the risk charge for a unit well, substitute unit well, or cross-unit well that will serve as the unit well or substitute well for the unit shall be 200% of such tract’s allocated share of the cost of drilling, testing, and completing the well, exclusive of amounts the drilling owner remits to the nonparticipating owner for the benefit of the nonparticipating owner’s royalty and overriding royalty owner.  The risk charge for an alternate unit well or cross-unit well that will serve as an alternate unit well for the unit shall be 100% of such tract’s allocated share of the cost of drilling, testing, and completing such well, exclusive of amounts the drilling owner remits to the nonparticipating owner for the benefit of the nonparticipating owner’s royalty and overriding royalty owner. Following the 2022 Amendments, a nonparticipating owner’s obligation to bear its tract’s proportionate share of the expenditures incurred in drilling, testing, completing, equipping, and operating a unit well shall also now apply to subsequent unit operations.  The risk charge for such subsequent unit operations shall be 100% of the tract’s allocated share of the actual reasonable expenditures incurred in conducting the subsequent unit operation, including a charge for supervision, regardless of whether the wellbore on which such operations were conducted is a unit well, alternate unit well, substitute unit well, or cross-unit well. 

The 2022 Amendments also provide that during the recovery of the actual reasonable expenditures incurred in drilling, testing, completing, equipping, and operating the well, the charge for supervision, and the risk charge, the nonparticipating owner who has furnished certain requisite statutory information to the drilling owner shall be entitled to receive from the drilling owner (i) for the benefit of its lessor royalty owner that portion of the proceeds from the sale or other disposition of production due to the lessor royalty owner under the terms of the contract or agreement creating the royalty between the lessor royalty owner and the nonparticipating owner reflected of record at the time of the risk charge notice; and (ii) for the benefit of any overriding royalty owner a portion of the proceeds from the sale or other disposition of production that is the lesser of (I) the nonparticipating owner’s total percentage of actual overriding royalty burdens associated with the existing lease or leases that cover each tract attributed to the nonparticipating owner reflected of record at the time of the risk charge notice or (II) the difference between the weighted average percentage of the total actual lessor royalty and overriding royalty burdens of the drilling owner’s leasehold within the unit and the weighted average percentage of the total actual lessor royalty of the nonparticipating owner’s leasehold within the unit reflected of record at the time of the risk charge notice.  

This requisite statutory information is defined as (i) a true and complete, or redacted, copy of the mineral lease or other agreement creating any lessor royalty or overriding royalty for which the nonparticipating owner is entitled to receive a portion of the proceeds from the sale or other disposition of production; and (ii) a sworn statement of the ownership of the nonparticipating owner as to each tract embraced within the unit in which the nonparticipating owner has an interest and the amounts of the lessor royalty and overriding royalty burdens for which the nonparticipating owner is entitled to receive a portion of the proceeds from the sale or other disposition of production. Additionally, and in its discretion, the nonparticipating owner may also provide to the drilling owner copies of any title opinions in its possession or portions thereof on which the statement of ownership is based in whole or in part; however, doing so shall not relieve the nonparticipating owner of its obligation to provide the sworn statement described above. Moreover, no change or division in the ownership of a nonparticipating owner shall be binding upon a drilling owner for the purpose of paying to the nonparticipating owner for the benefit of its lessor royalty owner or overriding royalty owner until a certified copy of the instrument constituting the chain of title has been furnished to the drilling owner. 

The 2022 Amendments are express that the drilling owner’s obligation to pay royalty and/or overriding royalty to the nonparticipating owner in no way creates an obligation, duty, or relationship between the drilling owner and any person to whom the nonparticipating owner is liable, contractually or otherwise.  It remains that if the nonparticipating owner does not pay the lessor royalty and/or overriding royalty due, then as a prerequisite to a judicial demand for payment from the drilling owner, the lessor royalty owner and/or overriding royalty owner must first provide written notice of such failure to the drilling owner and to the nonparticipating owner. The nonparticipating owner is in no way relieved of any obligation to pay any lessor royalty and/or overriding royalty during or after the recoupment of recoverable costs and the risk charge.  

The 2022 Amendments also provide that the procedures and remedies available to the lessor royalty owners and overriding royalty owners for nonpayment of royalties against the nonparticipating owner remain as set forth in the Mineral Code. Specifically: La. R.S. 31:137 (Nonpayment of royalties; notice prerequisite to judicial demand) provides: “If a mineral lessor seeks relief for the failure of his lessee to make timely or proper payment of royalties, he must give his lessee written notice of such failure as a prerequisite to a judicial demand for damages or dissolution of the lease.” Additionally, La. R.S. 31:212.21 (Nonpayment of production payment or royalties; notice prerequisite to judicial demand) provides: “If the owner of a production payment created out of a mineral lessee’s interest or a royalty owner other than a mineral lessor seeks relief for the failure of a mineral lessee to make timely or proper payment of royalties or the production payment, he must give his obligor written notice of such failure as a prerequisite to a judicial demand for damages.” See also Termination and remedies for violation (§§ 31:133 — 31:143) and Production payments and royalty payments to other than mineral lessor; remedies of obligee (§§ 31:212.21 — 31:212.23). 

In a first-of-its-kind revision, the 2022 Amendments provide that all actual reasonable costs incurred by a drilling owner in obtaining a title examination and title opinion shall be chargeable as a unit operating cost and fully recoverable by the drilling owner.  Thus, if a drilling owner/operator secures a title opinion from a licensed Louisiana attorney for a tract of land in a unit burdened by a mineral lease, or other agreement, that creates any lessor royalty or overriding royalty for which a nonparticipating owner is entitled to receive from the drilling owner a portion of the proceeds from the sale or other disposition of production, the drilling owner’s actual reasonable costs in obtaining the title examination and the title opinion may, at the drilling owner’s sole discretion, be chargeable as a cost recoverable by the drilling owner out of the tract’s allocable share of production.  In that case, the drilling owner must provide the nonparticipating owner any applicable excerpts of such title opinion. This guaranteed recoupment cost as specified in the statute constitutes a valuable tool for drilling owners to protect their investment and abate litigation in this regard.  

Finally, the 2022 revisions provide several clarifying definitions, including as follows: 

1. “Deepening” means an operation whereby an existing wellbore serving as a unit well, alternate unit well, substitute unit well, or cross-unit well is extended to a point within the same unit and unitized interval beyond its previously drilled total vertical depth. 
2. “Extension” means an operation related to a horizontal well whereby a lateral is drilled in the same unitized interval to a greater total measured depth or extent than the lateral was drilled pursuant to a previous proposal. 
3. “Recompletion” means an operation to attempt a completion in a portion of the unitized interval in the existing wellbore different from the initial completion in the unitized interval. 
4. “Rework” means an operation conducted in the wellbore after it is initially completed in the unitized interval in a good faith effort to secure, restore, or improve production in a stratum within the unitized interval that was previously open to production in that wellbore, including re-perforating, hydraulic fracturing and re-fracturing, tubing repair or replacement, casing repair or replacement, squeeze cementing, setting bridge plugs, and any essential preparatory steps. “Rework” does not include routine maintenance such as acidizing, sand or paraffin removal, repair, or replacement of downhole equipment such as rods, pumps, packers, or other mechanical devices.  
5. “Sidetrack” means the intentional deviation of an existing wellbore serving as a unit well, alternate unit well, or substitute unit well from its actual or permitted bottom hole location within that unit and unitized interval to a different bottom hole location within the same unit and unitized interval or done to drill around junk in the hole or to overcome other mechanical difficulties in order to reach the permitted bottom hole location. 
6. “Subsequent unit operation” means a recompletion, rework, deepening, sidetrack, or extension conducted within the unitized interval for a unit or units created under R.S. 30:9(B). 
7. “Unitized interval” means the subsurface interval defined in the office of conservation order creating the unit or units that the existing wellbore is serving as a unit well, alternate unit well, substitute unit well, or cross-unit well. 

Notably, the Risk Charge Commission considered adding a provision that would have permitted royalty owners and/or overriding royalty owners to submit directly to the drilling owner the information that the nonparticipating owner is otherwise required to provide.  The proffered reason for the proposed provision was to address circumstances involving either an uncooperative nonparticipating owner or a nonparticipating owner which no longer exists.  However, the Commission members reached no consensus on this issue, and therefore the issue was left unaddressed in the final 2022 Amendments.  

To no surprise, the 2022 Amendments do not resolve all outstanding questions that many practitioners and oil companies have had concerning the Risk-Fee Statute. As it stands, there are lawsuits currently pending in certain courts in Louisiana on the responsibility of an unleased mineral owner for its proportionate share of post-production costs.  Indeed, the broader question of whether the Risk-Fee Statute even applies to post-production costs remains unanswered.  Also, remember that the Risk-Fee statute still expressly excludes email and other forms of electronic communication as sufficient for notices and/or responses under the statute.  Check back in on our Drill Deeper Blog periodically for future updates to the Risk-Fee Statute and to easily and quickly keep up with changes to Louisiana oil and gas law in general.