By Dana Douglas

The Louisiana First Circuit Court of Appeal recently held that an operator is not responsible for payment of a non-operator’s royalties and overriding royalties before payout.  In Gulf Explorer, LLC v. Clayton WIlliams Energy Inc., 2007 WL 1651090 (La. App. 1st Cir. 6/8/07), the operator completed a well that was plugged and abandoned without reaching payout.  A non-participating working interest owner sued, asking the court to declare that its royalty and overriding royalty owners were entitled to their share of production.  Louisiana Revised Statute 30:10 provides that the party drilling a well can recover a non-participant’s share of expenses from production, but also provides that royalty and overriding royalty owners shall receive the portion of production due them.  The court held that, because La. R.S. 30:10 allows the drilling party to recover from the tract, while royalty obligations arise from a lease, the operator had no obligation to pay royalties before it recouped its expenses from production.  Thus, the non-participant was responsible for payment of its royalty and overriding royalty payments.