On March 21, 2019, the U.S. District Court for the Western District of Louisiana held that a unit operator may not recover post-production costs from an unleased mineral owner’s share of production proceeds in Allen Johnson, et al. v. Chesapeake Louisiana, LP.[1]  The dispute in Johnson involved a group of unleased mineral owners (“UMOs”) who filed suit against a unit operator for deducting a litany of post-production costs against their share of production proceeds from an oil and gas unit in the Haynesville Shale.[2]

The UMOs argued that La. R.S. 30:10 governed whether a unit operator may deduct post-production costs against UMO’s share of production proceeds.[3] The argument, however, was one of exclusion. The UMOs argued that La. R.S. 30:10 contains the exclusive list of any costs that could be properly charged against a UMO’s share of production proceeds. Therefore, because post-production costs were not expressly listed in La. R.S. 30:10(A)(3), the UMOs argued that such expenses were not recoverable from a UMO’s share of production.[4] In opposition, the unit operator contended that La. R.S. 30:10 was inapplicable to the case because the costs outlined in the statute comprised only pre-production and production costs. The operator argued the statute was never intended to address  post-production costs.[5] As a result, the unit operator claimed that the statute did not forbid deductions for post-production costs against a UMO, but instead those costs were properly authorized under the general principles of unjust enrichment and co-ownership.[6]

The statute at the center of Johnson is La. R.S. 30:10, which governs agreements for drilling units and pooling interests in Louisiana.[7] La. R.S. 30:10(A)(2) provides that the costs of development and operation of a unit well are chargeable to the “owners” within a unit, and La. R.S. 30:8 includes UMOs as “owners” against whom development and operational costs are chargeable.[8] However, La. R.S. 30:10(A)(3) provides an additional provision related to UMOs that states:

If there is included in any unit created by the commissioner of conservation one or more unleased interests for which the party or parties entitled to market production therefrom have not made arrangements to separately dispose of the share of such production attributable to such tract, and the unit operator proceeds with the sale of unit production, then the unit operator shall pay to such party or parties such tract’s pro rata share of the proceeds of the sale of production within one hundred eighty days of such sale.[9]

The Court described the question before it as an issue of first impression and focused on the language of La. R.S. 30:10(A)(3) to find that a unit operator may not deduct post-production costs from a UMO’s share of production proceeds.[10] In its analysis, the Court first looked to the statutory language of La. R.S. 30:10(A)(3) and recognized that the statute required an UMO to receive its “pro rata share of the proceeds of the sale of production.”[11] The Court reasoned that this provision did not authorize post-production cost deductions against UMOs and stated that the Legislature could have phrased La. R.S. 30:10(A)(3) differently had it intended to authorize such deductions.[12] While the unit operator argued that La. R.S. 30:10(A)(3) was merely a provision directing the time period within which operators must pay UMOs, the Court disagreed and found that the section not only addressed when the UMO is to be paid but what it is to paid.[13]

The Court also reasoned that the differing treatment of UMOs and non-participating working interest owners (i.e., mineral lessees not electing to participate in a well under La. R.S. 30:10) throughout La. R.S. 30:10 as a whole further supported its conclusion.[14] First, the Court noted that La. R.S. 30:10(A)(2), which directs that development and operation costs be charged against owners within a unit, was broad in its application and applicable to all owners, including UMOs.[15] The Court contrasted this provision with La. R.S. 30:10(A)(3) and found that Section 10(A)(3): (1) was narrowly tailored to only include UMOs, and (2) did not include an enumerated list of costs that may be charged against UMOs.[16] Second, the Court recognized other situations in which UMOs were treated differently than non-participating working interest owners by referencing the exemption of UMOs from the risk charge under La. R.S. 30:10(A)(2)(e).[17]

After its review of the statutory language of La. R.S. 30:10, the Court refused to find that its statutory interpretation would lead to absurd results.[18] In support of its conclusion, the Court cited and appeared to rely on the UMO’s briefing, which stated:

The unleased owner involuntarily loses all of his rights to explore — or not explore — his own property. He must still pay all development and operations costs if he is to see economic benefit from the compulsory pooling to which he is subject. A strict construction of [La. R.S.30:10] simply means that, for all of this, he is given the equivalent of a “no cost” royalty clause on production proceeds. This is hardly unjust.[19]

In addition, the Court referenced the Fifth Circuit’s opinion in Adams v. Chesapeake Operating, Inc. for the position that La. R.S. 30:10(A)(3) provides alternative actions available to UMOs.[20] While the Court did not provide any background into the Adams case, one can infer that the Court cited this provision to support the idea that there are differing actions and remedies available to different owners within a unit. For these reasons, the Court found that the idea that the Legislature would treat UMOs differently and that such treatment would be reflected in La. R.S. 30:10(A)(3) is not absurd.[21]

Although the Johnson case provides one federal district court’s interpretation on an issue of first impression, it raises more unanswered questions for unit operators in Louisiana. The practical reality is the industry practice stands in stark contrast to this result. It should be noted that this decision is not final and may be appealed to the United States Fifth Circuit and/or certified to the Louisiana Supreme Court. In the meantime, unit operators should be aware of the risk posed should this decision become final in Louisiana.

If you would like additional information on this case and its potential implications, please contact Brittan J. Bush (bjbush@liskow.com), April L. Rolen-Ogden (arolen-ogden@liskow.com), and Jeff Lieberman (jdlieberman@liskow.com).

* Brittan J. Bush is an Associate in Liskow & Lewis’ Lafayette, Louisiana office. April L. Rolen-Ogden and Jeff Lieberman are Shareholders in Liskow & Lewis’s Lafayette, Louisiana, office. Any views expressed herein are those of the authors and do not necessarily reflect the views of Liskow & Lewis and/or its clients. Furthermore, it is the authors’ intention to provide the information contained herein in an objective fashion that presents the practical effects of particular legal decisions without any commentary as to whether a particular decision is legally correct or sound policy.

[1] See 2019 WL 1301985 (W.D. La. Mar. 31, 2019). As of the posting of this blog entry, the delays for appeal have yet to expire.

[2] See id. at 1.

[3] See id.

[4] See id.

[5] See id.

[6] See id.

[7] See id. at 2.

[8] Id. (citing La. Rev. Stat. § 30:10(A)(2))

[9] Id. (citing La. Rev. Stat § 30:10(A)(3))

[10] See id. at 3-5.

[11] Id. at 4.

[12] See id.

[13] See id.

[14] See id. at 4-5.

[15] See id. at 4.

[16] See id.

[17] See id.

[18] See id. at 4-5.

[19] Id. at 4-5.

[20] See id. at 5 (citing Adams v. Chesapeake Operating, Inc., 561 Fed. App’x 322 (5th Cir. 2014).

[21] See id. at 5.

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