Regardless of whether you are an oil and gas producer or an oilfield services provider, the recent drop in the price of oil makes this a great time to get your ducks in a row for oil and gas well supply contracts and accounts. In Louisiana, a privilege (lien) may be placed on oil and gas wells for non-payment of services or materials furnished. Subpart A of the Louisiana Oil Well Lien Act (LOWLA) details privileges available to qualified parties performing labor or furnishing materials in conjunction with oil and gas wells. [Subpart B of the LOWLA also provides for privileges and other rights of an operator against a non-operator and vice versa; the provisions and requirements for those privileges are similar but not identical to those detailed in Subpart A and are not addressed here.]
Here is a short overview of (1) who may bring privilege claims; (2) what a privilege claim attaches to; (3) the timeline to assert and enforce a privilege claim; and (4) what can be collected with a properly perfected privilege. If you have any particular questions about the LOWLA, please contact us.
In Louisiana, a privilege, which is commonly referred to as a lien elsewhere, is a right that, based on the nature of a debt, entitles a creditor to be preferred before other creditors.
The first question a potential claimant may need to ask is whether or not he or she can bring a claim for a privilege under the LOWLA. The following persons may establish a privilege under Subpart A of the LOWLA: (1) a contractor, for the price of its contract for operations; a contractor for the price of its contract for providing services or facilities; (2) a laborer or employee of an operator or contractor, for the price of his labor performed at the well site; (3) a person who performs trucking, towing, baring, or other transportation services for an operator or contractor, for the price of transporting movables to the well site; (4) a person who transports, to or from a well site located in the waters of the state, persons who are employed in rendering labor or services on the well site, for the price of transporting those persons; (5) a seller, for the price of a movable that is sold to an operator or contractor and incorporated in a well or in a facility located on the well site, consumed in operations, or consumed at the well site by a person performing labor or services on a well site located in the waters of the state; and (6) a lessor, for the rent of a movable that is leased to an operator or contractor and used in operations.
A contractor is a person, other than a lessee, who contracts with an operator to perform the operations giving rise to the claimant’s privilege or who, by subcontract with a contractor of the operator or through a series of subcontracts emanating from such a contractor, contracts to perform all or part of the operations contracted for by the operator.
An operator is defined as a lessee who is personally bound by contract to the claimant or to a contractor from whom the claimant’s activities giving rise to the privilege emanate.
2. WHAT IS COVERED BY THE PRIVILEGE?
A privilege under Subpart A of the LOWLA is established over the following: (1) the operating interest under which the operations giving rise to the claimant’s privilege are conducted together with the interest of the lessee of such interest in a well, building, tank, leasehold pipeline, and other construction or facility on the well site, a movable on a well site that is used in operations, other than a movable that is only transiently on the well site for repair, testing, or other temporary use, and a tract of land, servitude, and a surface use lease covering the well site of the operating interest; (2) the drilling or other rig located at the well site of the operating interest if the rig is owned by the operator or by a contractor from whom the activities giving rise to the privilege emanate; (3) the interest of the operator and participating lessee in hydrocarbons produced from the operating interest and the interest of a non-participating lessee in hydrocarbons produced from that part of the operating interest subject to the privilege; and (4) the proceeds received by, and the obligations owed to, a lessee from the disposition of hydrocarbons subject to the privilege. For a non-participating lessee, the privilege affects only its interest that is used in the operations of the unit well in (1) and (2) above.
A nonparticipating lessee is defined as a lessee who is neither an operator nor a participating lessee. A participating lessee is a lessee who is not the operator, but who is personally bound by contract to the operator to pay or reimburse the operator for any part of the obligation secured by the privilege or for any part of the price of the contract of the contractor from whom the operations giving rise to the claimant’s privilege emanate.
Operating interest is defined as a mineral lease or sublease of a mineral lease, or an interest in a lease or sublease that gives the lessee, either singly or in association with others, the right to conduct the operations giving rise to the claimant’s privilege. If before a claimant has established a privilege, the owner of a mineral lease or sublease, or an interest in the lease or sublease, has divested himself of the right to conduct operations by assignment, sublease or other form of mineral right, then such owner is treated as no longer owning an operating interest.
A well site is defined as the area covered by the operating interest, a unit in which the operating interest participates, or a tract of land or the area covered by a servitude or predial lease of the lessee on which is located a well drilled to, producing from, or injecting substances into the area covered by the operating interest. While this definition seems to expand the scope of what is traditionally thought of as a well site, its scope is reduced by the definition of operations under the Act and the fact that only those who have provided a direct benefit to the traditional well location may claim a privilege. Operations include all traditional well site activities such as drilling, completing, and testing, and also include activities associated with the plugging and abandoning of wells. It notably does not include activities associated with the transportation, handling, or processing of production after it leaves the leasehold tanks or the transmission lines away from the well site.
A privilege under the LOWLA does not affect that part of hydrocarbons produced from an operating interest that is owned by a lessor, sublessor, overriding royalty owner, or other person who is not a lessee of the operating interest, nor does it affect the obligations or proceeds arising from the disposition of the hydrocarbons owned by or payable to such person. Also, the privilege does not attach to any equipment moved onto the lease for the purpose of plugging and abandoning a well in compliance with an order issued by the Commissioner of Conservation. Furthermore, the privilege that results on voluntary or compulsory units affects only that part of a non-participating lessee’s interest in the operating interest located within the boundaries of the unit and only insofar as the unit covers and affects the unitized zone or formation. The privilege also affects the interest of the non-participating lessee only as to that portion used in the operations of the unit well.
3. WHAT CAN BE COLLECTED UNDER A PRIVILEGE?
A validly created privilege under Subpart A of the LOWLA may secure the following: (1) the amount of the obligations; (2) the interest due on the amount of the obligation; (3) the cost of preparing and filing the statement of privilege and notice of pendency of action; and (4) the amount of any reasonable attorney fees not to exceed ten percent.
4. WHAT IS THE TIMELINE TO BRING A CLAIM UNDER THE LOWLA AND PERFECT AND ENFORCE A PRIVILEGE?
One of the most important details parties should be aware of is the timeline for perfecting and enforcing a privilege under Subpart A of the LOWLA. This privilege ceases to have effect against a third person 180 days after the last activity or event which gives rise to the privilege, unless (1) the property subject to the privilege is not a drilling or other rig and the claimant files a statement of privilege in the mortgage records of the parish where the operating interest subject to the privilege is located or (2) the property subject to the privilege is a drilling or other rig and the claimant files a financing statement in the UCC records of any parish. This statement of privilege over a drilling or other rig thus does not have to be filed in the parish where the rig is located. For “non-rig” property located on the outer continental (OCS) shelf offshore Louisiana, the statement of privilege should be filed both in the “non-required” lease files of the Bureau of Ocean Energy Management (BOEM) and in the mortgage records of each adjacent coastal parish; similarly, for rigs located on the OCS offshore Louisiana, the financing statement should be filed both in the BOEM’s “non-required” lease files and in the UCC records of any parish.
This privilege shall also cease to have effect against a third person unless the claimant files an action to enforce the privilege within one year after the date of the filing of the statement of the privilege or financing statement. A claimant may also request a writ of sequestration as a part of this enforcement action without being required to furnish any security. Because special procedures and additional deadlines may apply where the operator is in bankruptcy, any claimant faced with this situation should consult bankruptcy counsel before undertaking any actions.
This privilege will also cease to have effect against a third person who is not brought in as a party, unless the claimant files a notice of pendency of action in the mortgage records of the parish where the property is located or lawfully seizes the property subject to the property within 30 days after the institution of the action unless the property subject to the privilege is a drilling or other rig. For property located on the OCS, this notice should be filed both in the BOEM’s “non-required” lease files and in the mortgage records of each adjacent coastal parish.
This privilege is extinguished over the property upon which it is established, other than a drilling or other rig not owned by the operator, unless a statement of the claimant’s privilege is delivered to the operator within 180 days after the last activity or event giving rise to the privilege or unless the operator is contractually bound to the claimant for the obligation secured by the privilege. Similarly, this privilege over a drilling or other rig not owned by the operator is extinguished within 180 days after the last activity or event giving rise to the privilege unless a statement of the claimant’s privilege is delivered to the owner of the rig within that time, or unless the owner of the rig is contractually bound to the claimant for the obligation secured by the privilege.
As a practical matter, claimants should also provide notice of their privilege to any purchasers of hydrocarbons from the subject well site, demanding that the purchaser withhold payment of proceeds to the operator of the subject well site. This will afford the claimant the best chances of collecting on the privilege before any proceeds are paid out by the purchaser of hydrocarbons.
Properly perfected privileges under Subpart A of the LOWLA are of equal rank (and superior to those under Subpart B) except that the privilege of a contractor is inferior to that of a person to whom the contractor is contractually bound. However, LOWLA privileges are inferior to privileges for ad valorem taxes against the property subject to the privilege, liens and privileges of the Commissioner of Conservation, mortgages and vendor’s privileges that are effective as to a third person before the privilege is established and security interests that are perfected before the privilege is established or that are perfected by a financing statement covering the collateral filed before the privilege is established if there is no period thereafter when there is neither filing nor perfection.
Most claims fail due to improper adherence to the procedures and timeliness laid out under the LOWLA. Thus, it is vitally important to take notice of these timelines.
If you are not being paid timely for services rendered or materials provided to a Louisiana oil and gas well, then you should consider options under the LOWLA and plan accordingly by familiarizing yourself and billing department with the important deadlines discussed above. It is not conducive to the successful collection of monies owed to decide to bring a claim on day 179. The wheels to do so should be in motion long before the 180 day mark. A provider can help itself by including a specific designation on each invoice of the well site, parish, field, or unit to which the provider provides its services or materials. This will help establish an evidentiary link between the vendor’s services and materials and a specific well site. Proof of delivery of movables to a well site by a claimant asserting a privilege under the LOWLA is prima facia evidence that the movables were incorporated in a well or in a facility located on the well site, or were consumed on the well site. Be proactive by having systems put into place to identify unpaid invoices on days 30, 60, and 90 and begin to send out the proper notices in preparation for a potential privilege to be claimed.
If you are a claimant, an operator, a participating lessee or non-participating lessee and have any questions about Subpart A or Subpart B of Louisiana’s Oil Well Lien Act, please feel free to give us a call.