While the long-term fallout from the recent decline in oil prices and the COVID-19 pandemic remains unclear, it is clear that drilling activity has already started to decline. During this downturn in activity, mineral rights owners must remain cognizant of the maintenance activities necessary to preserve their mineral rights. Cannisnia Plantation, LLC v. Cecil Blount Farms, LLC, is the most recent decision that provides the industry with a real-life application of the rules under Louisiana law for maintaining mineral servitudes.
In Cannisnia Plantation, the Louisiana Second Circuit faced the issue of whether a mineral servitude owner conducted good faith operations sufficient to interrupt the prescription of non-use of a mineral servitude. The mineral servitude was created on June 28, 1996, and the mineral servitude owner made no effort to exercise the mineral rights for more than nine years. In January 2006, approximately 6 months before the servitude would expire for non-use, the mineral servitude owner conveyed the servitude to an affiliated business entity on the condition that it drill a well on the property by June 15, 2006. A well was spud on March 28, 2006. The well was a dry hole, however, and was therefore plugged and abandoned on April 21, 2006.
On November 5, 2014, the landowner provided notice to the mineral servitude owner that the mineral servitude expired and requested a recordable act evidencing its expiration effective June 28, 2006. The mineral servitude owner disagreed with the notice and refused to comply. The landowner then filed suit, claiming the well drilled on the property in March 2006 was not drilled in good faith, but instead was drilled solely to interrupt prescription.
At trial, the mineral servitude owner testified that in 2005, the Cotton Valley drilling activity was ramping up and other operators near the servitude successfully drilled gas wells. He also testified that the amount of production and gas prices at the time provided an incentive to keep the mineral servitude alive.
Moreover, prior to drilling the March 2006 well, the mineral servitude owner consulted with multiple professionals. He relied on the research of two geologists, who both believed the well would be capable of production in paying quantities based on the success of nearby wells and the property’s close proximity to several productive fields. At trial, two more experts also testified that the mineral servitude owner had a reasonable expectation of production in paying quantities from the well.
The drilling contractor of the well, who had approximately 40 years of experience in drilling wells, also testified that, in his experience, he knew when the purpose of the drill was solely to interrupt prescription. He pointed to owners having a cement truck waiting to fill the well as soon as drilling was completed as objective evidence of such an intent. Here, according to the drilling contractor, the actions of the mineral servitude owner did not indicate that the well was drilled solely to interrupt prescription.
The trial court ruled in favor of the mineral servitude owner and concluded that the well was drilled in good faith. On appeal, among other issues, the Second Circuit examined whether the mineral servitude owner satisfied the requirements of Mineral Code article 29. Article 29 states that for operations to meet the good faith standard and interrupt prescription, they must be: (1) commenced with reasonable expectation of discovering and producing minerals in paying quantities at a particular point or depth, (2) continued at the site chosen to the point or depth, and (3) conducted in such a manner that they constitute a single operation although drilling or mining is not conducted at all times.
The controlling element in this case focused upon by the Second Circuit was whether the operations were “commenced with reasonable expectation of discovering and producing minerals in paying quantities” at the location and depth chosen. In its examination of the critical testimony at the trial court, the Second Circuit noted that that the mineral servitude owner actually declined to follow the recommendation of one geologist to drill into shallower sands because the mineral servitude owner believed there was a better chance of producing gas at a deeper depth. Additionally, based on several fields in the area known to be producing, the geologists advised the mineral servitude owner prior to drilling that the area selected was likely to produce in paying quantities. The drilling contractor’s testimony was also significant because it established there was no indication that the mineral servitude owner was acting solely to interrupt prescription.
Furthermore, looking to the factors considered in Indigo Minerals, LLC v. Pardee Minerals, LLC, the court noted that the mineral servitude owner (1) consulted with geologists, (2) visited with other oil and gas professionals, (3) hired a drilling contractor, (4) obtained the proper permits, (5) paid over $160,000 for the drilling of the well, (6) sent core samples to be tested, (7) drilled to its desired depth, and (8) ultimately followed the advice of the oil and gas professionals to plug and abandon the well. The court also recognized that if the mineral servitude owner’s sole concern was interrupting prescription, it could have drilled a shallower well and spent less time and money drilling. Upon reviewing the testimony and applying the Indigo factors, the Second Circuit concluded that the trial court did not manifestly err in finding the good faith standard of Mineral Code article 29 satisfied and affirmed the trial court’s ruling.
This opinion serves as a reminder that mineral servitude owners (and lessees of such acreage) nearing the end of the 10-year prescriptive period should remain vigilant as to the continuing validity of the mineral rights. Indeed, the burden of proof with respect to a prescription claim rests with the mineral servitude owner or his lessee (not the landowner who files suit). And although the Second Circuit in Cannisnia Plantation concluded the operations were conducted in good faith, it is important to note that the good faith analysis is “inextricably connected with, although not wholly decisive of, the factual situation presented.” Particularly in any downturn in oil and gas activity, Cannisnia Plantation provides the most recent guidance for operators in Louisiana about what steps must be taken in order to demonstrate good faith operations to preserve a mineral servitude.
 53,252 (La. App. 2 Cir. 3/4/20), 2020 WL 1036500.
 45,160 (La. App. 2 Cir. 5/28/10), 37 So. 3d 1122.
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