Texas Supreme Court Agrees to Review Three Oil and Gas Cases in 2016

On September 2, 2016, the Texas Supreme Court agreed to review three oil and gas cases involving issues pertinent to the industry and land and mineral owners.

  1. BP America Production Company v. Red Deer Resources, LLC

In BP America Production Company v. Red Deer Resources, LLC, the lessee of a top lease, Red Deer, sued the lessee of the base lease, BP, contending that the prior lease had terminated due to a cessation of production in paying quantities.  The jury agreed, finding that the last well on the lease was incapable of producing in paying quantities at the time the well was shut-in.  On appeal, the Amarillo Court of Appeals agreed with Red Deer, finding that BP could not invoke the lease’s shut-in royalty clause because production from the last well was so slow that production in paying quantities had ceased, and thus the lease terminated, prior to BP shutting the wells in and offering to pay shut-in royalties.  At the Texas Supreme Court, BP argues that there was no finding and/or that the evidence was insufficient to support a finding that the well was incapable of producing in paying quantities at the time it was shut-in.

Red Deer has been set for oral argument on November 10, 2016.  Briefing can be found here. 

  1. BP America Production Company v. Laddex, Ltd.

BP America Production Company v. Laddex, Ltd. is another top-lease case from the Amarillo Court of Appeals.  In Laddex, the lessee of the top lease, Laddex, sued the lessee of the base lease, BP, contending that the prior lease terminated during a period of slow production between August 2005 and November 2006.  The jury found that the well on the base lease had failed to produce in paying quantities between August 1, 2005 and October 31, 2006 and that the lease therefore terminated, at which time the top lease became effective.  On appeal, BP argued that the top lease violated the Rule Against Perpetuities (the “Rule”) and that the trial court erred in limiting the jury’s consideration of whether the well ceased to produce in paying quantities to a fifteen-month period of time.

The Court of Appeals rejected BP’s argument that the top lease violated the Rule, explaining that the top lease conveyed a presently vested interest (i.e., the landowners’ reversionary interest in the mineral estate) as opposed to an interest that cannot vest until a condition precedent occurs (i.e., the expiration of the existing lease), and therefore was not subject to the Rule.  However, the appellate court found that the trial court erred in instructing the jury to only consider whether production had ceased in paying quantities during the time period of August 1, 2005 to October 31, 2006, finding that such a restricted time period was unreasonable, and remanded the case to the trial court.

Both parties filed petitions for review before the Texas Supreme Court.  Laddex has been set for oral argument on October 11, 2016.  Briefing can be found here.

  1. ExxonMobil Corporation v. Lazy R Ranch, L.P.

In ExxonMobil Corporation v. Lazy R Ranch, L.P., Lazy R Ranch, the surface owner of a site on which ExxonMobil conducted operations, sued ExxonMobil for an injunction to require ExxonMobil to prevent the alleged hydrocarbon-related groundwater contamination from spreading.  The trial court granted summary judgment in favor of ExxonMobil, finding that Lazy R Ranch’s claims were barred by the applicable statute of limitations as the landowners knew of the contamination for up to twenty years.  The El Paso Court of Appeals reversed and remanded, finding that the statute of limitations did not apply because Lazy R Ranch sought only non-monetary relief, an injunction to require ExxonMobil to abate a continuing nuisance.  ExxonMobil contends it will cost $6.3 million to comply with the requested injunction.

 Lazy R Ranch has been set for oral argument on November 7, 2016.  Briefing can be found here.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Attorney General Finds Governor’s Contract for Legal Services Not Approvable, Unacceptable, Illegal, and Unconstitutional

The dispute between Governor John Bel Edwards and Attorney General Jeff Landry over the retention of several private attorneys to represent the State of Louisiana, through the Department of Natural Resources (“LDNR”) in coastal loss litigation has taken a new twist.  These lawsuits were filed by several parish governments alleging dozens of oil and gas companies caused marsh loss by operations that violated state-issued coastal use permits and related permitting requirements.

After these attorneys appeared as counsel for the State in one coastal loss case filed by Jefferson Parish, the Attorney General raised the lack of his approval of their contracts.  On September 6, the Attorney General concluded that the contracts should not be approved in a letter sent to the Governor’s Executive Counsel.

The contract was determined to be unacceptable for three reasons.  First, the Attorney General determined that the contract’s services description– “in connection with coastal land loss restoration and environmental damage remediation issues which the State may have a claim or interest,” — was too vague and overly broad.  Instead, the Attorney General advised that the contract would need to be limited to “the representation of LDNR’s claims pursuant to Title 49:214.36, which is the subject of the coastal litigation.”

Second, the Attorney General took issue with the proposed fee arrangement.  While noting that the contract references an hourly rate, they also included a provision that allowed subcontracted attorneys to “be paid from the gross recovery.”  The Attorney General found that this provision “creates an illegal and unconstitutional contingency fee arrangement” because private attorneys hired by the State are to be paid solely on an hourly rate absent legislative approval otherwise.

Third, potential conflicts of interest were “of great concern.”  The letter states that two law firms, which were subcontracted under the Governor’s contract for legal services (and could be paid from the “gross recovery” under the provision noted above), were representing local government bodies in pending or proposed coastal litigation.  The Attorney General considered their representation of local government bodies to create a conflict with the State’s interest.

For now, the dispute has triggered the withdrawal of private counsel but whether this issue will arise again remains to be seen.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Offshore Companies Face Surge in BSEE Enforcement Actions and Penalties

In recent years, offshore companies have witnessed a marked uptick in the number of enforcement actions undertaken by the Bureau of Safety and Environmental Enforcement (BSEE).[1]  Operators face more BSEE inspections, Incidents of Non-Compliance (INCs), and civil penalties than ever before.  Meanwhile, the average penalty amount has grown.  For example, in 2014 the agency imposed a civil penalty of $1,230,000—an unprecedented figure in the history of the BSEE civil penalty program. BSEE has also begun to target offshore contractors, who, until recently, have not faced exposure to agency enforcement actions.  See Island Operating Co., Inc., 186 IBLA 199 (2015).  Together, these developments will undoubtedly lead to more litigation and a higher cost of doing business on the Outer Continental Shelf.

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The number of civil penalty cases has risen gradually since 2009, with a sharp increase over 2013-2015.  BSEE collected civil penalties in 22 cases in 2009, 26 cases in 2010, 30 cases in 2011, 31 cases in 2012, 42 cases in 2013, 53 cases in 2014, and 42 cases in 2015.

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The civil penalty dollar amount has also grown significantly.  Since 2010, the agency has collected over $19.5 million in civil penalties.  This number roughly equates to the total amount collected for the twelve-year period from 1997-2009.  Moreover, in 2014, BSEE collected $5,695,498 in civil penalties—the most ever collected in a single year by a margin of $2,851,000.  In 2015, BSEE collected $3,659,018, the second highest amount in agency history.

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The average civil penalty amount per case has also grown, especially in the last two years.  In 2013, the average penalty was $67,714 over 42 cases.  In 2014, the average penalty reached $107,462 over 53 cases.  In 2015, the average penalty was $87,119 over 42 cases.  Moreover, in July 2016, BSEE increased the maximum daily penalty rate from $40,000 to $42,017.[2]

As civil penalty numbers continue to grow, appeals of BSEE enforcement actions will become more and more attractive to offshore companies.  With contractors facing new penalty exposure, operators can expect additional demands for indemnification and higher day rates.  For more information on the mechanics of BSEE enforcement actions and the process for challenging INCs and civil penalties, see Stephen W. Wiegand, “INCs, Civil Penalties, and the Appeals Process,” 2016 NO. 1 RMMLF-INST PAPER NO. 7 (2016).


[1]           The data used to compile the statistics in this section are available at  http://www.bsee.gov/Inspection-and-Enforcement/Civil-Penalties-and-Appeals/Civil-Penalties-and-Appeals/.

[2]           Pursuant to the Oil Pollution Act of 1990, the Secretary of the Interior adjusts the maximum civil penalty on a regular basis to reflect increases in the Consumer Price Index.


Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Louisiana Flooding – Legal Update

Louisiana Flooding - Legal Update

The Liskow & Lewis family stands by our friends and neighbors throughout the unprecedented flooding in our community. As we begin the long process of recovery, here is a brief legal update on the response of various courts and state agencies:

  • State courts: Governor John Bel Edwards has issued an executive order which purports to suspend all legal deadlines, including prescriptive and preemptive periods, in all state courts, administrative agencies and boards until Friday September 9th.
    • UPDATE: Governor Edwards issued an amended executive order purporting to maintain the suspension of prescription for the entire state until Friday September 9th, but ending the suspension of all other legal deadlines except for select parishes on August 19th.
  • State court closures: The Louisiana Supreme Court is maintaining and updating a list of all city and state courts that are experiencing closures. The 19th and 21st Judicial District Courts (serving East Baton Rouge Parish, St. Helena Parish, and Livingston Parish) will be closed through the remainder of the week.
  • Federal court: Chief Judge Brian A. Jackson has issued an omnibus order suspending all deadlines and delays in cases pending before the Middle District of Louisiana indefinitely.
  • The Department of Environmental Quality: Secretary Chuck Carr Brown issued a Declaration of Emergency and Administrative Order addressing various issues under the jurisdiction of the Dept. of Environmental Quality including the Louisiana Pollutant Discharge Elimination System (LPDES), water discharges, debris management, and hazardous waste disposal.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

All or Nothing: Regulators Strictly Define Pipeline Abandonment

On August 16th, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued an advisory bulletin to clarify the regulatory requirements that may vary depending on the operational status of a pipeline under 49 C.F.R. Parts 192 and 195 (2016).

This clarification comes after a number of leaks in 2014 and 2015 from pipelines that were believed to be “abandoned.”  In two incidents, the current owners or operators of the pipelines had purchased the pipelines from previous owners or operators with the understanding that the pipelines had been properly abandoned before purchase.  In both cases, the prior owner or operator allegedly had not followed the proper procedure for abandoning a pipeline, specifically regarding purging the pipeline of hazardous material.

The operational status of a pipeline has often been referred to offhandedly as “idled,” “inactive,” or “decommissioned.”  These pipelines may still contain hazardous materials.  The formal operational status of a pipeline is either “active” or “abandoned,” and not “idled,” “inactive,” or “decommissioned.”  Each status invokes a certain procedure for safety and maintenance of the pipelines by the owner or operator.  For example, in order to properly abandon a pipeline, all combustibles must be purged and all remaining facilities sealed.  §§ 192.727 and 195.402(c)(10).  Importantly, “abandoned,” as defined by the PHMSA, means permanently removed from service and subject to “an irreversible process of discontinuing the use of a pipeline.”  § 192.3.  “No attempts are made to maintain the serviceability” of an abandoned pipeline.  Id.  If a pipeline does not comply with the abandonment procedures and may be used at a later time, this is considered “active” by PHMSA.  These pipelines are subject to all safety and maintenance requirements for “active” pipelines.  Pipelines that contain hazardous material and were once classified as “idled” are now deemed active until the owner or operation follows all formal procedures for changing the status to “abandoned.”

PHMSA has recognized that some pipelines are exceptional.  There are a number of pipelines that were informally abandoned prior to the abandonment regulations taking effect.  To the extent feasible, the operators or owners of these pipelines should ensure that these facilities “do not present a hazard to people, property or the environment.”  Additionally, PHMSA recognizes that some pipelines are purged but with the expectation that they will be used at a later time.  At this time, PHMSA is permitting these purged but active pipelines to defer certain regulatory activities.

PHMSA’s requirement that a pipeline is either “active” or “abandoned” potentially can affect State servitude or easement rights if the contractual agreement between an owner of those rights and a landowner automatically terminates upon abandonment of a pipeline.  However, a determination on whether a pipeline is terminated will necessarily depend on the contractual terms and individual state laws.

Ultimately, the advisory bulletin concludes as follows: “Pipeline owners and operators are fully responsible for the safety of their pipeline facilities at all times and during all operational statuses.”

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

First Parish Coastal Zone Lawsuit to Proceed to Decision Falls for Failure to Exhaust Administrative Remedies

The first of 40 coastal permitting lawsuits to proceed to disposition has been dismissed for failure to exhaust administrative remedies.

In a ruling released today, Judge Enright of the 24th JDC for Jefferson Parish dismissed The Parish of Jefferson v. Atlantic Richfield Company, finding that the statutory scheme at issue provided administrative channels to investigate and resolve alleged permit violations, and thus those remedies must be exhausted before the plaintiffs could pursue civil damages through the courts.

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Beginning in November 2013 and as recently as two weeks ago, the parishes of Jefferson, Plaquemines, Cameron, and Vermilion filed a combined 40 lawsuits alleging that oil and gas companies’ coastal operations violated the State and Local Coastal Resources Management Act of 1978 (“SLCRMA”), by either failing to obtain coastal use permits for certain operations, or by violating the terms of coastal use permits.

Atlantic Richfield was the first case to result in a substantive decision in state court.  Defendants argued a suite of exceptions in February, the disposition of which was delayed by the separate interventions of the State’s Attorney General and the Louisiana Department of Natural Resources – Office of Coastal Management within the Governor’s Office.  The State entities adopted Jefferson Parish’s briefing, and all exceptions were submitted for decision after a July 20th hearing.

The decision released today notes that an administrative procedure for addressing permit violations is set forth in SLCRMA and associated provisions of the Louisiana Administrative Code, specifically La. Admin. Code tit. 43, pt. I sec. 723(D)(1-4). These provisions allow a permitting body to investigate coastal activities, to suspend a permit upon finding that it was violated, and after giving the permittee an opportunity to respond, to reinstate, modify, or revoke the permit. If the permittee fails to comply, then the permitting body can then seek civil or criminal relief in court.

The court noted that there was “no showing that Plaintiff and Intervenors made any attempt to comply with the enforcement regime.”  Because Defendants met their burden of showing that an administrative remedy was available, the burden shifted to Plaintiffs to show that an administrative remedy was irreparably inadequate. The Court was unpersuaded by Plaintiffs’ argument that the administrative process was inadequate because it did not provide for an award of civil damages, noting that “in the absence of an exhaustion of administrative remedies, it is yet to be determined whether civil damages exist.”  The administrative process is thus necessary to determine the existence of alleged violations.  In the court’s view, only after it is established that violations exist which could give rise to damages can Plaintiffs pursue litigation.


Disclaimer
: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

The Dusky Gopher Frog Causes Big Problems for Industrial and Commercial Development in Parts of St. Tammany Parish

In 2010, under the Endangered Species Act (“ESA”), the United States Fish and Wildlife Service (“the FWS”) designated 6,477 acres in Mississippi and Louisiana as “critical habitat” for the Rana sevosa or the dusky gopher frog.  This frog has historically lived in nine counties or parishes across Louisiana, Mississippi, and Alabama.  Since its 2001 designation as an endangered species, an estimate of 100 adult frogs are known to only exist in Harrison County, Mississippi.  The gopher frog spends most of its time living underground, but will migrate to short-lived, ephemeral ponds to breed.  After breeding, the frog will return to its underground habitat, along with its offspring.  According to the FWS, the greatest threat to the gopher frog population is the low number of adult frogs and human-induced environmental stressors, such commercial development.  Markle Interests, L.L.C. v. United States Fish & Wildlife Serv., 2016 WL 3568093, at *1-2 (5th Cir. June 30, 2016).

Furthermore, in an attempt to return the gopher frog population to Louisiana, the 2010 designation by the FWS included 1,544 acres of private land in St. Tammany Parish (“Unit 1”).  A group of private landowners (“the Landowners”), who owned all of Unit 1, brought a lawsuit in 2013 for declaratory judgment and injunctive relief against the FWS, its director, the United States Department of the Interior, and the Secretary of the Interior.  The Landowners claimed that their property value decreased due to the designation and that they had future plans to develop Unit 1 for residential and commercial development and timber operations.  However, these plans could not go forward due to the FWS’s designation of Unit 1 as a critical habitat.  Id.

On August 22, 2014, District Judge Martin L.C. Feldman of the United States District Court for the Eastern District of Louisiana granted the FWS’s Motion for Summary Judgment and held that the FWS properly applied the Endangered Species Act to private lands in St. Tammany Parish.  Subsequently, on June 30, 2016, in a 2-1 decision, the United States Court of Appeals for the Fifth Circuit affirmed Judge Feldman’s ruling, upholding the FWS’s designation of Unit 1 as a “critical habitat” under the ESA.  Id.

Writing for the Fifth Circuit, Circuit Judge Stephen A. Higginson first ruled that the Landowners had standing to bring a lawsuit against the FWS under Article III of the United States Constitution.  The Court held that the Landowners’ assertion of lost property value is a “concrete and particularized injury that supports standing.”  Id. at *4; U.S.C.A. Const. Art 3, § 2, cl 1.  Next, the Court rejected the Landowners’ four challenges to the FWS’s designation of Unit 1 as a critical habitat for the dusky gopher frog:

  • First, the Court rejected the Landowners’ argument that the FWS’s designation violated the ESA. The FWS brought forth sufficient evidence to prove that designating occupied habitat in Harrison County, Mississippi alone was inadequate to ensure the conservation of the gopher frog and Unit 1 was essential for the conservation of the frog due to its landscape and natural, ephemeral ponds.  Thus, the Court ruled that the designation of Unit 1 as a critical habitat was not arbitrary and capricious, and it did not violate the ESA.  Markle Interests, 2016 WL 3568093, at *10-12.
  • Second, the Court addressed the issue of the FWS’s refusal to exclude Unit 1 from the critical habitat designation. The ESA mandates that the FWS “take into consideration the economic impact…of specifying any particular area as critical habitat.”  16 U.S.C. § 1534(a).  After this is done, the FWS may exclude any area from the critical habitat if it “determines that the benefits of such exclusion outweigh the benefits of specifying such areas as part of the critical habitat.” Id. at *12-13.  Here, the Landowners argued that Unit 1 has a potential loss of $33.9 million in commercial development over a period of twenty years, and that the benefits of excluding Unit 1 “clearly outweigh the benefits of including it in the designation.”  Id. at *12.  However, the Court stated that after the FWS fulfilled its statutory obligation to consider the economic impacts, a decision to not exclude an area is discretionary.  Under the Administrative Procedure Act (“APA”), such decisions “committed to agency discretion by law” are not reviewable in federal court under the APA.  Id. at *13.
  • Third, the Court held that the ESA did not exceed Congress’s powers to regulate commerce under the Commerce Clause. The Court held that the designation of Unit 1 as a critical habitat is an intrastate activity and an essential part of a larger regulation of economic activity.  This regulatory scheme could be undercut unless the intrastate activity is regulated. Id. at *14.
  • Lastly, the Court rejected the Landowners’ claim that the FWS violated the National Environmental Policy Act by failing to prepare an environmental impact statement before designating Unit 1 as a critical habitat. The Court held that the FWS did not need a NEPA impact statement because the designation did not effect changes to the Landowners’ physical environment.  “The ESA statutory scheme makes clear that [the FWS] has no authority to force private landowners to maintain or improve the habitat existing on their land.” Id. at *18.

Therefore, after rejecting all of the Landowners’ arguments, the Fifth Circuit ruled in favor of the U.S. Fish and Wildlife Service and held that the Landowners’ privately owned land can be designated as a critical habitat for the dusky gopher frog.  This opinion suggests that the federal government, through the FWS, may prevent the industrial and commercial development of a private citizen’s land, even though the endangered species does not presently occupy the critical habitat.

A copy of the Fifth Circuit’s opinion can be found here.

For further information, contact Collin Melancon at cmelancon@liskow.com or James Lapeze at jelapeze@liskow.com.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Louisiana Department of Revenue Targets Energy Companies in Rash of Oil Severance Tax Audits

The oil and gas industry has a significant and far reaching economic impact in Louisiana. According to one 2014 study, the total direct and indirect impact on the state is approximately $73.8 billion.[1] Taxes make up a large part of the industry’s direct economic impact in Louisiana: In 2013, the industry paid nearly $1.5 billion in taxes to the State, about 14.6% of the total taxes, licenses and fees collected that year.[2] A large chunk of the taxes paid by oil and gas companies are severance taxes, which are levied on the production of natural resources taken from private and public land or water bottoms within the territorial boundaries of the state.[3] Natural resources might include, for example timber, minerals like oil and gas, coal, salt, or sulphur. Overall, collections on oil and gas amount to nearly 92% of all severance tax collections in the state.[4]

In the last few months, the Louisiana Department of Revenue (the “Department”) has audited dozens of Louisiana oil producers seeking additional oil severance taxes. As explained below, the Department has issued audit findings which determine that any negative adjustments embedded into the negotiated prices in various oil purchase contracts were not allowable. As a result, the Department is seeking payment of severance taxes on a price which is higher than the one actually paid pursuant to the contracts. This new interpretation has resulted in significant liability for many producers, some in the hundreds of thousands of dollars.

Severance taxes on oil are paid based on the value of the oil at the time and place of severance. La. R.S. 47:633(7)(a). The value of the oil is the higher of: (1) The gross receipts received from the first purchaser, less charges for trucking, barging and pipeline fees, or (2) the posted field price. Id. Since posted field prices are uncommon today (and the industry would assert that the concept no longer exists and should be removed from the law), the amount of severance taxes due to be paid is likely based on option (1) above. If neither the first purchaser nor producer of the oil claims a deduction for trucking, barging or pipeline fees, then the value of the oil for tax purposes is based solely on the gross receipts received from the first purchaser. Normally, the calculation process ends here and the taxpayer submits payment accordingly. The recent audits by the Department, however, indicate a new state of affairs.

The oil purchase agreements recently targeted by the Department include a price formula which begins with a “market center price” (i.e. West Texas Intermediate Crude Cushing OK), and then includes various positive and negative adjustments to that market center price to arrive at the price to be paid for the crude oil. For instance, if the oil is purchased at or near the lease, the particular lease may include a deduction or premium applicable only to that lease. This increase or decrease from the market center price might be based on a variety of factors. In its recent audit reports, the Department has “unbundled” the contractually negotiated prices actually paid, and seeks to assess additional severance taxes based upon a hypothetical amount of additional value which ignores any negative adjustments embedded in the price formula. The Department essentially created its own theoretical prices for the oil, and is attempting to assess an additional severance tax based on that amount.

Consider the following hypothetical:

  • Operator X enters into an Oil Purchase Agreement to sell oil from a mineral lease to First Purchaser Y. Under the terms of the Agreement, First Purchaser takes title to the oil at or near the lease. By law, Operator X is the “severer” of oil and is therefore subject to the Louisiana oil severance tax under LA. R.S. 47:633(7); but, First Purchaser Y agrees to withhold the severance taxes from the proceeds due to Operator X and reports and remits these taxes to the Department.
  • Pursuant to the Oil Purchase Agreement, Operator X and First Purchaser Y agree to a price formula which begins with a market center price of $65, and then deducts $3 for a final price of $62 per barrel. Accordingly, First Purchaser Y withholds severance taxes based upon the $62 price it paid to Operator X, and reports and remits the same to the Department.
  • A year or two after the sale, Operator X receives an audit report from the Department which provides that Operator X owes additional severance taxes for those months it sold oil to First Purchaser Y under the Oil Purchase Agreement. The audit letter from the Department indicates that the value of the oil for severance tax purposes was actually $65 per barrel, and not the $62 negotiated price. Therefore, the Department proposes to assess an additional severance on the extra $3 per barrel, plus interest and penalties.

A taxpayer who has been audited and receives a notice of proposed tax due from the Department must act quickly to protect its procedural rights. For any significant proposed assessment, a taxpayer should always seriously consider how it can protect itself from additional tax liability.

If you have any questions about this or any other tax issues, please contact RJ Marse at rjmarse@liskow.com, Jim Exnicios at jexnicios@liskow.com, or Cheryl Kornick at cmkornick@liskow.com.

[1] http://www.lmoga.com/issues-initiatives/economic-impact/

[2] http://www.lmoga.com/issues-initiatives/economic-impact/

[3] http://dnr.louisiana.gov/assets/TAD/data/severance/la_severance_tax_rates.pdf 

[4] http://dnr.louisiana.gov/assets/TAD/data/severance/la_severance_tax_rates.pdf

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

Navigating Non-Compete and Other Key Talent Issues: A Primer for Employers

Finding new customers and growing sales and market share are the Holy Grail.  One way to achieve these objectives is to hire talented sales professionals or managers from competitors.  These individuals already know the market and have relationships with potential new customers.

But these individuals’ employers have invested time and money in training them and provided them with trade secrets and confidential business information.  They will fight, in the marketplace and the courts, when a competitor poaches their key team members.

Your business could find itself on either side of this equation and must prepare in advance for acquiring employees from, and losing employees to, a competitor.  Here are a few tips to help protect your business from the risks of expensive litigation associated with hiring a competitor’s employee, or the loss of critical business assets when your employee departs for a job with a competitor.

When Hiring a Competitor’s Employee

  • Require the prospective employee to provide you with all non-compete, confidentiality or restrictive covenant agreements with current or former employers, and to certify in writing that he has done so. Keep in mind that if the agreements state that they are confidential, the employee may need to provide them to your counsel.
  • Have your counsel analyze the non-compete, confidentiality or restrictive covenant agreements and advise you as to their enforceability and scope. Louisiana’s non-compete statute is unique and may invalidate common provisions in agreements drafted in other states.
  • Consider encouraging the employee to file a declaratory judgment action to invalidate all or part of restrictive covenants that are defective.
  • Consider whether you will indemnify the employee if a former employer files suit against him.
  • Advise the employee in writing that you do not want any trade secrets or confidential business information from other employers. Require a written commitment that the employee understands this directive and will not bring confidential documents into your workplace or download them into your information systems.
  • Reiterate these directives when the employee comes on board. And consider monitoring the employee’s email accounts and computer/phone after the move to ensure compliance with these directives.
  • Notify managers that they must refrain from asking the employee to disclose former employers’ trade secrets and confidential business information in an effort to gain a competitive advantage. Advise managers of the risks they and your company face under trade secrets and unfair business practices laws, including the new federal Defend Trade Secrets Act.

Protecting Trade Secrets and Confidential Business Information if a Key Employee Leaves to Work for a Competitor

  • Carefully identify the information and documents that constitute your business’s trade secrets and are truly confidential.
  • Protect trade secrets and confidential business information by: (i) restricting access to sensitive documents, files and emails to those with a need to know; (ii) using password protection and other security measures with sensitive documents; and (iii) installing security measures on employee phones and devices (particularly if you have a BYOD policy) so that information can be removed when the employee departs or loses the device.
  • Draft confidentiality and document retention policies and require employees to sign acknowledgments of these policies.
  • Draft Confidentiality/Non-Disclosure Agreements and require employees to sign them.
  • Require key employees to sign non-competition and non-solicitation agreements that comply with the law of the jurisdiction where they are employed. Be mindful of the unique requirements of the Louisiana non-compete statute.
  • Remind any departing employee of confidentiality and non-disclosure obligations during exit interviews and by written directives at the time of, or immediately after departure. Make written demands that the employee preserve all evidence related to employment with your company, his departure/move, and employment with the competitor.
  • Circle the wagons immediately upon the employee’s departure and contact key customers to preserve your company’s relationship with them.
  • Monitor the departed employee’s subsequent employment for connections to a competitor.
  • Consider notifying the departed employee’s new employer of the employee’s confidentiality and non-disclosure obligations. Consult with counsel before doing so.
  • Hire an outside technology consultant and conduct forensic examinations of the departed employee’s computer, phone and other devices to determine whether trade secrets or confidential information were stolen and, if so, to develop evidence for litigation purposes.
  • If necessary, file suit to obtain an injunction or otherwise enforce restrictive covenants and protect trade secrets and confidential information.
  • Ensure that other key personnel are content so you do not have more departures.

For more information, please contact Thomas J. McGoey II at tjmcgoey@liskow.com or Kindall C. James at kjames@liskow.com or go to www.liskow.com.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

EPA Biting Off More Than It Can Chew? Agency Publishes First Year Implementation Plan for New TSCA Legislation

This is Part II of our TSCA update following the recent changes to the TSCA legislation.

On June 29, 2016, the U.S. Environmental Protection Agency (“EPA”) released its first year implementation plan for the recently-enacted amendments to the Toxic Substances Control Act (“TSCA”).  Faced with the ambitious requirements and timeframes laid out by the Frank R. Lautenberg Chemical Safety for the 21st Century Act (the “Act”), EPA has planned out its implementation activities during the first year. The agency divided up actions into four categories: Immediate Actions, Framework Actions, Early Mandatory Actions, and Later Mandatory Actions (beyond the first year of implementation).

Immediate Actions

From Day 1, EPA has to make an affirmative determination of safety before the manufacture of new chemicals (or significant new uses of chemicals) can commence.  For notices received prior to enactment, EPA’s goal is to complete the review within the remaining time under the original deadline, but in any event no later than 90 days from enactment.  The first 30 days will see a number of actions related to the Confidential Business Information (“CBI”) process.  Specifically, EPA will create a plan for linking confidential business information to a unique identifier, develop an approach for routine review of confidentiality claims, and provide additional information on statements and certifications required for CBI claims.  Within the next six months, EPA will issue risk management rules for three solvents: Trichloroethylene or TCE, Methylene Chloride, and N-Methylpyrrolidone or NMP.

Framework Actions

A number of proposed rules expected in the next six months will provide the framework for new regulatory processes required by the Act, including prioritization of chemicals for risk evaluation, evaluation of the risk of high priority chemicals, fee collection, and inventory reporting.  In the next six months, EPA also plans to issue the initial list of ten chemicals to undergo risk evaluations and create a new Science Advisory Committee on chemicals.

Early Mandatory Actions

EPA also expects to take action on a number of early mandatory requirements.  EPA will publish a list of mercury compounds prohibited from export by mid-September of this year.  Within the next six months, the agency will review the “small business” definition for purposes of TSCA and submit the first TSCA implementation report to Congress.  Finally, the plan for the first year of enactment also includes publishing the scope of evaluation for the first 10 chemicals, preparing the agency’s first annual plan for risk evaluation of chemicals, and publishing an inventory of mercury in commerce.

Beyond the first year of implementation, EPA will be required to issue additional rules on mercury reporting and CBI substantiation, as well as come up with a strategy for alternative testing methods.  There may be some doubt about whether EPA can meet all these aggressive implementation goals, but one thing is for sure: the regulated community can expect a lot of regulatory development in this area for the foreseeable future.

A copy of EPA’s First Year Implementation Plan can be found here.

Disclaimer: This Blog/Web Site is made available by the law firm of Liskow & Lewis, APLC (“Liskow & Lewis”) and the individual Liskow & Lewis lawyers posting to this site for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice as to an identified problem or issue.  By using this blog site you understand and acknowledge that there is no attorney client relationship formed between you and Liskow & Lewis and/or the individual Liskow & Lewis lawyers posting to this site by virtue of your using this site.  The Blog/Web Site should not be used as a substitute for legal advice from a licensed professional attorney in your state regarding a particular matter.

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