Under La. R.S. 30:103.1 and 30:103.2, an unleased owner in a commissioner’s unit is entitled to reports on production and costs from a well in the unit and, in certain circumstances, statutory penalties if such reports are not timely provided. But is a non-operator lessee entitled to the same relief? Two recent courts have reached opposite results. In TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206 (W.D. 3/24/2016), the United States District Court for the Western District of Louisiana ruled that these statutes do not apply to non-operator lessees. However, in XXI Oil & Gas, LLC v. Hilcorp Energy Co., 124 So.3d 530 (La. App. 3 Cir. 10/9/13) and 206 So.3d 885 (La. App. 3 Cir. 9/28/16), the Louisiana Third Circuit Court of Appeal applied them to a non-operator lessee. Until this conflict is finally resolved by either the Legislature or the Louisiana Supreme Court, operators should respond to non-operator lessees making demands under 103.1 for production and costs information as though the lessees do qualify as an “owner or owners of an unleased oil and gas interest” under 103.1 and 103.2. Let’s take a closer look at the facts and the courts’ reasoning for their rulings in each case.
In TDX Energy, LLC v. Chesapeake Operating, Inc., TDX acquired several leases in a Haynesville unit operated by Chesapeake. The unit order was dated effective September 16, 2008 and the unit well was spud in February 2011 and completed on July 19, 2011. TDX acquired its leases from Touchstone Energy, LLC in October 2011. The leases were taken by Touchstone between July 18, 2011 and September 14, 2011; they were all dated effective July 15, 2011, but were not recorded until after the well was completed. In fact, Chesapeake was not aware of the TDX leases until TDX sent it a request for a report on the well in accordance with 103.1 in December 2011. Chesapeake responded by letter and provided the well costs and invoked the risk fee statute. [See our earlier blog article on the application of the risk fee statute to the TDX case.]
Thereafter, TDX sued Chesapeake in federal court to recover production payments, accounting, penalties, and attorney’s fees under 103.2 for its failure to provide the information required under 103.1. A central issue litigated in the case was whether TDX, as a non-operator lessee, was able to invoke 103.1 for these well reports and to assert the penalty under 103.2 against Chesapeake.
For reference, Louisiana Revised Statute 30:103.1 reads as follows:
(1) Within ninety calendar days from completion of the well, an initial report which shall contain the costs of drilling, completing, and equipping the unit well.
(2) After establishment of production from the unit well, quarterly reports which shall contain the following:
(a) The total amount of oil, gas, or other hydrocarbons produced from the lands during the previous quarter.
(b) The price received from any purchaser of unit production.
(c) Quarterly operating costs and expenses.
(d) Any additional funds expended to enhance or restore the production of the unit well.
La. R.S. 30:103.2 states the penalty for not complying with 103.1 and reads as follows:
Whenever the operator or producer permits ninety calendar days to elapse from completion of the well and thirty additional calendar days to elapse from date of receipt of written notice by certified mail from the owner or owners of unleased oil and gas interests calling attention to failure to comply with the provisions of R.S. 30:103.1, such operator or producer shall forfeit his right to demand contribution from the owner or owners of the unleased oil and gas interests for the costs of the drilling operations of the well.
Chesapeake argued on appeal that TDX should not be afforded the remedy under 103.2 because it does not qualify as an “owner or owners of unleased oil and gas interests.” TDX contended that the phrase contained in 103.2 “owner or owners of unleased oil and gas interests” is a shorthand method of referring to the oil and gas interests within a unit that are unleased by a unit operator such as Chesapeake in this instance.
The court agreed with Chesapeake and found that 103.2 was penal in nature and, therefore, should be strictly construed. Furthermore, the court found that 103.2 is clear and unambiguous as written and that applying 103.2 solely to lands unencumbered by mineral leases does not lead to absurd consequences. The court then looked to the text of 103.2 and 103.1 to try to discern the legislative intent behind both. Unable to do so, the court then looked at other statutes within Title 30 including La. R.S. 30:111 and La. R.S. 30:10 for clues as to what the phrase “owners of an unleased oil or gas interest” means.
The relevant portion of La. R.S. 30:111 reads as follows:
Owners of unleased mineral interests and lessees in any drilling unit authorized by the department of conservation of this state, shall not be liable or obligated to pay to the operator or producer for materials furnished or used in the drilling, completion, and production of any oil, gas, or mineral well drilled on said unit a sum in excess of the prevailing market price of such materials.
The relevant portion of La. R.S. 30:10(A)(2)(e) as it read in 2011 when the well at issue was drilled reads as follows in pertinent part:
The provisions … above with respect to the risk charge shall not apply to any unleased interest not subject to an oil, gas and mineral lease…
The court noted that in La. R.S. 30:111 the words lessees and unleased mineral interest are both included as two separate and distinct terms. Thus, the court reasoned, the legislature understood that “owners of unleased mineral interests” refers to owners of mineral interest unleased by anyone. It pointed to the language in La. R.S. 30:10(A)(2)(e) to suggest that “unleased interest” means a mineral interest not leased by either the operator or a non-operator lessee. Thus, the court determined that in some instances the legislature intended to give greater protection to unleased owners than mineral lessees. Therefore, the court held that 103.1 and 103.2 do not apply to non-operator lessees. Note that this case is currently up on appeal at the United States Court of Appeal for the Fifth Circuit.
In XXI Oil & Gas, LLC v. Hilcorp Energy Co., Hilcorp Energy Company recompleted the Trahan No. 1 Well as a unit well in a commissioner’s unit on January 11, 2011. The next month, XXI Oil & Gas, LLC acquired several mineral leases covering minerals underlying lands located within the unit. In April 2011, XXI sent a certified letter to Hilcorp requesting reports containing the costs of recompleting the Trahan Well and the production information associated with the well. That same day Hilcorp sent XXI a letter stating that the Trahan Well had casing damage and would not flow. The letter attached an AFE showing a cost estimate to recomplete the Trahan Well and an invoice in the amount of $40,737.33. A representative of XXI signed the letter evidencing that it agreed to participate in the recompletion of the Trahan Well.
In June 2011, XXI sent Hilcorp a letter stating that Hilcorp had failed to provide it with a “sworn, detailed statement of revenues and expenses” for the Trahan Well within 90 days of the recompletion and within thirty days of XXI’s April 2011 letter. As a result, XXI stated that Hilcorp could not deduct the costs of recompleting or operating the Trahan Well from XXI’s share of revenues. Hilcorp did not respond further. XXI then sued for penalties under103.2. The trial court granted XXI’s motion for partial summary judgment on the issue whether XXI was entitled to the penalty under 103.2 for Hilcorp not complying with 103.1. The trial court found that Hilcorp did not comply with 103.1 because the statement of costs it submitted to XXI was not sworn and detailed. XXI was granted its share of revenue from the Trahan Well without the deduction of the costs of drilling operations (the penalty under 103.2).
On appeal, Hilcorp argued that the trial court erred in granting XXI’s motion for partial summary judgment because a genuine issue of material fact existed whether the leases taken by XXI were valid. Second, Hilcorp argued that the trial court erred in applying 103.1 against Hilcorp. But it is unclear whether Hilcorp ever argued that 103.1 and 103.2 do not apply to non-operator lessees such as XXI. The court dismissed Hilcorp’s first assignment of error by stating that the issue whether the leases were valid was not relevant to the appeal and is an issue suitable for a trial on the merits. The court further noted that, should the leases be found to be invalid, then XXI would receive no revenue from which Hilcorp could deduct production cost.
Concerning the second assignment of error whereby Hilcorp argued that the AFE it sent to XXI sufficed to satisfy the intent and purpose of 103.1, the court first looked at whether 103.1 was ambiguous as written. The court found 103.1 to be unambiguous and thus that it must be applied as written; however, it is unclear whether the court was just addressing the question of what constitutes a sufficient report under the statute, as opposed to the question whether the statute applies to lessees. In determining whether Hilcorp complied with 103.1 as written, the court found that the AFE provided by Hilcorp lacked the detail “relevant to such a document.” In discussing the detail needed in the reports required under 103.1, the court stated the report must tell the unleased mineral owner what it is getting for its money. However, ultimately the court found the AFE inadequate because it was not a sworn statement. Because the AFE was not sworn, the court ruled that it was inadequate under 103.1 and, as a result, the 103.2 remedy was available to XXI.
On remand, the trial court found Hilcorp liable to XXI for penalties under 103.2 in the amount of $367,231.30 representing all revenue from the Trahan Well attributable to the XXI leases. Hilcorp filed a second appeal assigning as error the application by the trial court of 103.1 and 103.2 to XXI as a non-operator lessee. In making this argument, Hilcorp cited the TDX case. But the Third Circuit cited its previous opinion and maintained its position that a non-operator lessee has a claim to an accounting under 103.1 as an owner of a valid oil, gas or mineral lease. In its written opinion, the court did not explain its reasoning any further as to 103.1 applying to non-operator lessees.
Both the court in TDX and the court in XXI agreed that 103.1 and 103.2 are unambiguous as written. However, they reached opposite results. The court in TDX appeared to focus on what is meant by “owner or owners of unleased oil and gas interest” and whether that language was meant to include non-operator lessees. Although the court in XXI appeared to not directly address the issue whether a non-operator lessee may invoke either statute and focused more on the proper method to comply with 103.1 and the reach of the penalty under 103.2, it nonetheless ruled in favor of a non-operator lessee. The end result is two conflicting conclusions reached by the courts. Therefore, in order to avoid the penalty under 103.2, operators should properly respond within the delays allowed under 103.1 to a non-operator lessee who seeks production and cost information until further clarity is given by the courts or the legislature.