LOGA Industry Report - Winter 2009 - (Page 30) Non-consenters Beware: Your Pockets Just Got Shallower Regardless of whether a working interest owner elects to participate upfront in the costs of the well, each working interest owner, as a lessee, is responsible to its lessor for their royalty under La. R.S. 30:10.2 The Louisiana First Circuit, relying on basic, fundamental principles of law framed by the Civil Code, the Mineral Code and La. R.S. 30:10A(2)(e), reasoned that “a lessor must look to his lessee for payment of royalty under the terms of the contract creating the royalty.”3 Thus, a unit operator who has no contractual relationship with a lessor does not owe that lessor his royalty, because royalties are not a share of the production, but rather are rent due from the lessee to the lessor, according to their contract. La. R.S. 30:10A(2)(d)(ii)(e) provides that the royalty owner shall receive his royalty “under the terms of the contract creating the royalty.”4 These two developments, the increase in the risk fee penalty to two hundred percent and the publishing of a decision of requiring lessees to pay their royalty out of pocket, should have the effect of encouraging nonoperating lessees to participate in unit drilling operations by direct payment, farm out or otherwise. ● Kate Bailey Labue is an associate in the Baton Rouge office of Gordon Arata McCollam Duplantis & Eagan, LLP. She graduated from the Paul M. Hebert Law Center at Louisiana State University in 2004, earning her J.D. and Bachelor of Civil Law Studies. 1 Act 115 (formerly HB 1128) of First Regular Session of the 2008 Louisiana legislature became effective as of August 15, 2008. Act 115 amended and reenacted Louisiana Revised Statute 30:10(A)(2)(b)(i), commonly referred to as the Louisiana “Risk Fee Statute,” relative to the allocation of a penalty assessed on non-operating non-participating working interest owners in a unit well. When a non-operator has been sent a risk fee notice by an operator and has not elected to participate, the operator may recoup the costs to be borne by the non-operator for exploration and production from the non-operator’s share of unit production, plus a penalty. More specifically, La R.S. 30:10(2)(b)(i) entitles operators to own and recover out of production from a unit well, the actual costs-to drill, test, complete, equip and operate the unit well-allocable to any tracts belonging to non-participating owners. Moreover, as a penalty, the operator is also entitled to recover a risk fee charge which, prior to August 15, 2008, was 100 percent of such tract’s allocated share of the cost of drilling, testing and completing the unit well. After August 15, 2008, Act 115 amended La. R.S. 30:10(A)(2)(b)(1), increasing the risk fee charge, or as more commonly called, the risk fee penalty, to 200 percent. After payout of the costs and penalty, an operator is no longer entitled to recover the non-marketing owner’s share of production in the unit. Commonly, issues then arise about whether the operator must market the non-operator’s share of production. Absent an agreement to the contrary, jurisprudence has held that there is no express obligation to do so.1 However, an operator cannot simply tell a non-participating interest owner that “your gas is in the ground,” thus creating a sticky situation over the non-operator’s interest. 2 3 4 See Amoco v. Thompson, 516 So.2d 376 (La. App. 1st Cir.1987), writ denied, 520 So.2d 118 (1988); see also Hunt Oil Company v. Batchelor, 93-3144 (La. 10/17/94); 644 So.2d 191; Tufts v. Amoco Production Co. 1991 WL 61483, 6 (E.D.L.A. 1991) (unpublished). See Gulf Explorer v. Clayton Williams Energy, 964 So.2d 1042, 1045, 2006-1949,6 (La.App. 1 Cir. 6/8/07). Id. Id. at 1045. 30 | LOGA INDUSTRY REPORT | WINTER 2009
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