On March 24, 2017, the Louisiana Supreme Court declined to consider the Louisiana Third Circuit Court of Appeal’s decision in XXI Oil & Gas v. Hilcorp.[1] The Third Circuit’s decision involved the interpretation of Louisiana’s well cost reporting regime under La. R.S. 30:103.1-103.2 (collectively referred to herein as “the Statutes”) with respect to: (1) the parties entitled to receive reporting under La. R.S. 30:103.1 and (2) the scope of penalties under La. R.S. 30:103.2 that may be imposed against a unit operator, who fails to provide sufficient well cost reports.[2] For now at least, the Court’s decision to deny writs in XXI Oil & Gas effectively leaves unit operators subject to increased reporting obligations under La. R.S. 30:103.1 and more expansive penalties under La. R.S. 30:103.2 in situations where they fail to provide adequate reporting.[3]
In regards to increased reporting obligations, many previously interpreted the Statutes to only require reporting to parties whose mineral interests within a unit were unleased.[4] After XXI Oil and Gas however, unit operators are required to also provide well cost reports to non-operating mineral lessees who have leased mineral interests within a unit.[5] Notably, the Third Circuit did not examine whether a mineral lessee’s right to receive reporting under La. R.S. 30:103.1 depends on whether or not it elected to participate in a particular well under La. R.S. 30:10.[6]
As to penalties, if an operator fails to provide adequate reporting under La. R.S. 30:103.1 then the operator “shall forfeit his right to demand contribution from the owner or owners of the unleased oil and gas interest for the costs of the drilling operations of the well.” In XXI Oil & Gas, the Third Circuit interpreted what constitutes the “costs of drilling operations of the well.”[7] Before the decision, some practitioners believed that this phrase only required an operator to forfeit drilling costs associated with a well and excluded other costs associated with completing, equipping, or operating a well.[8] In addition, some argued that the penalty only applied to drilling and completion costs prior to the establishment of production from a unit well.[9] The Third Circuit disagreed with these views, however, and found that the “costs of drilling operations” under La. R.S. 30:103.2 “includes both pre-production and post-production costs.”[10]
Based on the Third Circuit’s opinion, unit operators, who are subject to penalties under La. R.S. 30:103.2, shall forfeit the right to demand contribution from the prevailing party for their share of “drilling and operating costs” that are incurred before and after production is established from a well.[11] It is important to note that the Third Circuit’s use of the term “post-production costs” may lead to further confusion in situations where an operator is subject to penalties under La. R.S. 30:103.2. After all, “post-production costs” is a term of art in the oil and gas industry, and it generally refers to “costs associated with making natural gas marketable after gas is severed or removed from the ground” such as costs for transportation, gathering, and treating, etc.[12] Nonetheless, the context of the Third Circuit’s opinion, which involved an oil well as opposed to a natural gas well, indicates that the term “post-production costs” means well costs that are incurred after a well establishes production.[13] However, operators should expect that parties may attempt to expand the Third Circuit’s ruling to include additional costs such as those associated with the transportation, gathering, and treatment, etc. of natural gas in future cases.
The Court’s writ denial in XXI Oil & Gas leaves unit operators with the reporting and penalty regime established by the Third Circuit as discussed above. Therefore, unit operators should now be on alert when they receive requests for well cost reporting under La. R.S. 30:103.1 from non-operating mineral lessees. In addition, operators should ensure that they comply with their reporting obligations under La. R.S. 30:103.1 in order to avoid the immense penalties that may be levied against them under the Third Circuit’s interpretation of La. R.S. 30:103.2.
*Associate, Liskow & Lewis, B.A., University of Georgia, 2009. J.D., Paul M. Hebert Law Center, Louisiana State University, 2012. Any views expressed herein are my own and do not necessarily reflect the views of Liskow & Lewis and/or its clients. Furthermore, it is the author’s 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] XXI Oil & Gas, LLC. v. Hilcorp Energy Co., 2016-C-2181 (2017).
[2] See e.g., XXI Oil & Gas, LLC v. Hilcorp Energy Co., 16-269 (La. App. 3 Cir. 9/28/2016), 2016 WL 5404650
[3] See id.
[4] In XXI Oil & Gas, the Defendant advanced this position. See id. at 2-4. In addition, at least one Louisiana federal court has agreed with this interpretation as well. [4] See TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206 (W.D. La 2016) (finding that only unleased mineral owners are entitled to 103.1 reports from a unit operator or producer). This author addressed the conflict between XXI Oil & Gas and TDX Energy, which is currently on appeal to the U.S. Fifth Circuit, in a prior blog post shortly after the Third Circuit’s decision in XXI Oil & Gas. See Brittan J. Bush, Louisiana State and Federal Courts Split Over Parties Entitled to Reports Under La. R.S. 30:103.1, The Energy Law Blog (October 6, 2016), available at http://www.theenergylawblog.com/2016/10/articles/louisiana-mineral-law/louisiana-state-and-federal-courts-split-over-parties-entitled-to-reports-under-la-r-s-30103-1/
[5] XXI Oil & Gas, at p. 3-4.
[6] See id. at 2-4.
[7] See id. at 4-6. It is important to note that the Third Circuit limited the penalty provision to costs that are incurred during “the period covered by the operator’s deficient or failed reporting.” The Third Circuit further stated that “[o]nce the operator or producer complies with the statutory requirement [under La. R.S. 30:103.1], it would no longer be penalized and could start deducting for costs.” Id. at 7.
[8] April Rolen-Ogden, A Primer on Reporting Duties Under La. Rev. Stat. 30:103.1, 62nd Ann. Inst. Min. Law, at 12-13.
[9] In XXI Oil & Gas, the Defendant offered this argument in addition to the argument that La. R.S. 30:103.2 only provided a penalty for drilling costs. XXI Oil & Gas, at p. 4.
[10] Id. at 7.
[11] See id. at 6-7.
[12] Williams & Meyers, Manual of Oil & Gas Law Terms (15th ed.), 789 (citing Schroeder v. Terra Energy, Ltd., 565 N.W. 2d 887, 890).
[13] See XXI Oil & Gas, at 6-7.