future-focused

OCS Lease Expiration: MMS Denial of Suspension of Operations Upheld

2 minute read

 

By Jana Grauberger:

A recent Interior Board of Land Appeals (“IBLA”) ruling, ATP Oil & Gas Corp., 173 IBLA 250 (2008), affirms an MMS denial of a Suspension of Operations (“SOO”) where the lessee submitted an revised exploration plan (“EP”) and permit to drill (“APD”) just days before the lease’s 10-year primary term expired, but was unable to conduct lease activities before the expiration date. The lessee, ATP, acquired its interest in the lease located in the Mississippi Canyon Area, Offshore Louisiana a little more than two months before expiration of its primary term, which the IBLA described as a “risky venture.” Due to weather conditions and the limitations of ATP’s contracted drilling rig, ATP was unable to get a well drilled prior to the lease expiration date.

In denying ATP’s request for an SOO, the MMS relied upon its Notice to Lessees No. 2006-G02, which requires a lessee “to show that a drilling rig was scheduled to commence operations prior to lease expiration and to have an approved plan (in this case , the EP) and APD.” The MMS found that, even in the absence of weather conditions, ATP would have been unable to commence drilling operations prior to expiration of the lease because of its failure to meet the regulatory requirements of an approved EP and APD. The IBLA affirmed determining that ATP waited too long to submit its revised EP: “The rules required an approved revised EP before lease activities could occur, and anticipated 30 days, at a minimum, for MMS to approve an EP.” The IBLA further concluded that ATP’s APD, submitted on the same date as its request for an SOO, was not submitted so that drilling operations could begin before the lease expiration date, but rather for the purpose of obtaining an SOO. The IBLA also rejected ATP’s argument email communications between ATP and an MMS employee constituted approval or a de facto suspension stating that “[a] set of email communications cannot supplant the approved lease activity that MMS’ detailed regulations require.”

In a footnote, the IBLA clarified statements made in relation to 30 C.F.R. § 250.175(a) concerning the ability of lessees to perform little to no operations on an OCS lease for up to 180 days for any or no reason made in Kerr-McGee Oil & Gas Corp., 172 IBLA 195 (2007): The IBLA stated that it was not its intention in Kerr-McGee “to hold that a lessee that has never engaged in any lease activities is entitled to an additional 180 days after the primary lease term before it must seek an SOO or SOP.”

Preferential Rights Decision From Texas Courts

2 minute read

By Jana Grauberger
and Anna Knull

In Navasota Resources, L.P. v. First Source Texas, Inc., No. 10-06-00236-CV, 2008 WL 90444 (Tex. App.-Waco Jan. 9, 2008), the issue presented was whether the preferential right in a Joint Operating Agreement was triggered when working interests subject to the JOA were to be sold along with other interests not subject to the agreement.  In this case, First Source, a working interest owner under a JOA, sought to sell to Chesapeake Energy Corp. a portion of its working interest under the JOA along with stock and interest in an AMI, both of which were unrelated to the JOA.  First Source notified Navasota, the other working interest owner under the JOA, of its intent to sell a portion of its working interest, and Navasota opted to exercise its preferential right to purchase First Source’s working interest that was up for sale.  First Source rejected Navasota’s offer on the ground that Navasota had only offered to purchase the working interest, and not the stock or interest in the AMI, reasoning that Navasota was required to accept the exact terms of the deal as offered to Chesapeake.  Navasota sued, claiming breach of contract and requesting specific performance.  The trial court granted Chesapeake’s motions for summary judgment, and the appellate court reversed in favor of Navasota, holding: (1) Navasota’s preferential right to purchase First Source’s working interest was triggered even though the interest was to be sold along with interests not subject to the JOA, (2) Navasota was required only to comply with the terms of the sale relating to the working interest being conveyed, and not the additional terms of the sale relating to the stock and the AMI, (3) a binding contract for sale between Navasota and First Source was created when Navasota notified First Source that is was exercising its preferential right to purchase the working interest under the terms of the sale as offered to Chesapeake, (4) the preferential right provision of the JOA did not place an unreasonable restraint on alienation, and (5) that Navasota had established its right to specific performance of the contract for sale of First Source’s working interest under the terms offered to Chesapeake.

Preferential Rights Decision From Texas Courts

2 minute read

 

By Jana Grauberger
and Anna Knull

 

In Navasota Resources, L.P. v. First Source Texas, Inc., No. 10-06-00236-CV, 2008 WL 90444 (Tex. App.-Waco Jan. 9, 2008), the issue presented was whether the preferential right in a Joint Operating Agreement was triggered when working interests subject to the JOA were to be sold along with other interests not subject to the agreement.  In this case, First Source, a working interest owner under a JOA, sought to sell to Chesapeake Energy Corp. a portion of its working interest under the JOA along with stock and interest in an AMI, both of which were unrelated to the JOA.  First Source notified Navasota, the other working interest owner under the JOA, of its intent to sell a portion of its working interest, and Navasota opted to exercise its preferential right to purchase First Source’s working interest that was up for sale.  First Source rejected Navasota’s offer on the ground that Navasota had only offered to purchase the working interest, and not the stock or interest in the AMI, reasoning that Navasota was required to accept the exact terms of the deal as offered to Chesapeake.  Navasota sued, claiming breach of contract and requesting specific performance.  The trial court granted Chesapeake’s motions for summary judgment, and the appellate court reversed in favor of Navasota, holding: (1) Navasota’s preferential right to purchase First Source’s working interest was triggered even though the interest was to be sold along with interests not subject to the JOA, (2) Navasota was required only to comply with the terms of the sale relating to the working interest being conveyed, and not the additional terms of the sale relating to the stock and the AMI, (3) a binding contract for sale between Navasota and First Source was created when Navasota notified First Source that is was exercising its preferential right to purchase the working interest under the terms of the sale as offered to Chesapeake, (4) the preferential right provision of the JOA did not place an unreasonable restraint on alienation, and (5) that Navasota had established its right to specific performance of the contract for sale of First Source’s working interest under the terms offered to Chesapeake.

 

Court Addresses Sufficiency of Demand Letter Under Mineral Code Articles 212.21-23

2 minute read

In CLK Company, L.L.C. v. CXY Energy, Inc., No. 07-834, 2007 WL 4409686 (La. App. 3d Cir. 12/19/07), the court addressed the payment of royalties and penalties under Mineral Code article 212.23(c) and concluded that plaintiff’s letters were insufficient to trigger the provisions of that article.  In CLK Company, the parties entered into a confidentiality agreement whereby the plaintiff agreed to provide services to the defendant.  In exchange, the defendant agreed to transfer an overriding royalty interest in the subject prospect to the plaintiff in the event defendant acquired an interest in the prospect.  When defendant refused to assign the overriding royalty interest to the plaintiff, plaintiff brought action, inter alia, for penalties under Article 212.23(c).  That article provides that a court may award as damages double the amount of royalties due together with attorney’s fees if the recipient of a demand letter fails to pay or otherwise fails to state a reasonable ground for non-payment in response to such notice.

In coming to its decision, the CLK Company court observed that a royalty owner must give a mineral lessee written notice of its failure to “’make timely or proper payment of royalties . . . as a prerequisite to a judicial demand for damages.’” Id. at *8 (citing La. R.S. 31:212.21).  Next, the court noted the dearth of reported cases involving Mineral Code articles 212.21-23 and considered jurisprudence under analogous Mineral Code article 137. Under Article 137, a demand for payment must be “’something more than the mere recitation of the lessee’s contractual and statutory duty to pay royalties’” and that the “’notice [must] be of a more specific nature, so as to reasonably alert the lessee and to allow for an appropriate investigation of the problem by the lessee.’”  Id. at *9 (citing Lewis v. Texaco Exploration & Prod. Co., Inc., 96-1458, pp. 11-12 (La. App. 1st Cir. 7/30/97), 698 So. 2d 1001, 1010).  Ultimately, the CLK Company court concluded that the trial court erred by instructing the jury to consider the plaintiff’s two letters as notice to make timely or proper payment of overriding royalties required by Article 212.23.  The court found that the letters merely requested an assignment of an overriding royalty, and neither made demand for royalties nor notified the defendant of deficiency of payment.  The court further reasoned that no royalties were due when the first letter was sent.  Accordingly, the court found that plaintiff’s claims for double damages had no merit. 

Court Addresses Sufficiency of Demand Letter Under Mineral Code Articles 212.21-23

2 minute read

 

In CLK Company, L.L.C. v. CXY Energy, Inc., No. 07-834, 2007 WL 4409686 (La. App. 3d Cir. 12/19/07), the court addressed the payment of royalties and penalties under Mineral Code article 212.23(c) and concluded that plaintiff’s letters were insufficient to trigger the provisions of that article.  In CLK Company, the parties entered into a confidentiality agreement whereby the plaintiff agreed to provide services to the defendant.  In exchange, the defendant agreed to transfer an overriding royalty interest in the subject prospect to the plaintiff in the event defendant acquired an interest in the prospect.  When defendant refused to assign the overriding royalty interest to the plaintiff, plaintiff brought action, inter alia, for penalties under Article 212.23(c).  That article provides that a court may award as damages double the amount of royalties due together with attorney’s fees if the recipient of a demand letter fails to pay or otherwise fails to state a reasonable ground for non-payment in response to such notice.

 

In coming to its decision, the CLK Company court observed that a royalty owner must give a mineral lessee written notice of its failure to “’make timely or proper payment of royalties . . . as a prerequisite to a judicial demand for damages.’” Id. at *8 (citing La. R.S. 31:212.21).  Next, the court noted the dearth of reported cases involving Mineral Code articles 212.21-23 and considered jurisprudence under analogous Mineral Code article 137. Under Article 137, a demand for payment must be “’something more than the mere recitation of the lessee’s contractual and statutory duty to pay royalties’” and that the “’notice [must] be of a more specific nature, so as to reasonably alert the lessee and to allow for an appropriate investigation of the problem by the lessee.’”  Id. at *9 (citing Lewis v. Texaco Exploration & Prod. Co., Inc., 96-1458, pp. 11-12 (La. App. 1st Cir. 7/30/97), 698 So. 2d 1001, 1010).  Ultimately, the CLK Company court concluded that the trial court erred by instructing the jury to consider the plaintiff’s two letters as notice to make timely or proper payment of overriding royalties required by Article 212.23.  The court found that the letters merely requested an assignment of an overriding royalty, and neither made demand for royalties nor notified the defendant of deficiency of payment.  The court further reasoned that no royalties were due when the first letter was sent.  Accordingly, the court found that plaintiff’s claims for double damages had no merit. 

Res Judicata Bars Relitigation of 1938 Buras Levee District Lease’s Validity

2 minute read

      On November 21, 2007, the Louisiana Fourth Circuit Court of Appeal affirmed the trial court’s ruling in favor of Chevron U.S.A., Inc. (“Chevron”), the Plaquemines Parish Government (“PPG”), and others in a dispute with the State of Louisiana over the validity of a 1938 mineral lease granted by the Buras Levee District (“BLD”). The State of Louisiana had previously created the BLD and transferred to it all lands belonging to the State within its geographic borders, including the tract involved in the instant matter (Tract 1). In 1975, the BLD merged and consolidated with the PPG. The State of Louisiana asserted, among other arguments, that the merger and consolidation of the BLD with the PPG constituted an impermissible alienation of state minerals and that the State was entitled to the mineral revenues attributable to Tract 1 as an unleased owner. Faced with competing claims for royalty payments from the PPG and State of Louisiana, Chevron, as sublessee of the 1938 BLD lease, filed a petition for concursus and deposited royalty payments into the court registry.

            Ultimately, the Fourth Circuit affirmed the trial court’s finding that the State’s claims were barred by res judicata. Previously, in 1990, Chevron had filed a concursus to seek a resolution of competing claims made by the PPG and the State of Louisiana as to royalties applicable to a separate tract covered by the 1938 BLD Lease, Tract 87. In that prior litigation, the Louisiana Fourth Circuit affirmed a judgment in favor of PPG, finding that the 1938 BLD Lease was valid. 

            Here, the Fourth Circuit found that the instant case was barred by the doctrine of res judicata, since the present action concerning Tract 1 arose out of the same transaction or occurrence as the litigation concerning Tract 87. The court observed that the 1938 BLD Lease’s validity had been recognized by courts since 1943. Further, the real “cause of action” for res judicata purposes in both the Tract 87 litigation and the instant case was the immovable known as the 1938 BLD Lease, not any single tract of land contained therein. The court concluded that “[t]his is exactly the type of case to which res judicata applies” and “[t]o find otherwise would permit the State to file a series of separate actions challenging the ownership of mineral rights in each and every tract contained in the 1938 BLD Lease.”  Chevron U.S.A., Inc. v. State of Louisiana, et al., No. 2007-CA-0673, pp. 7-8 (La. App. 4th Cir. 11/21/07).    

Res Judicata Bars Relitigation of 1938 Buras Levee District Lease’s Validity

2 minute read

 

      On November 21, 2007, the Louisiana Fourth Circuit Court of Appeal affirmed the trial court’s ruling in favor of Chevron U.S.A., Inc. (“Chevron”), the Plaquemines Parish Government (“PPG”), and others in a dispute with the State of Louisiana over the validity of a 1938 mineral lease granted by the Buras Levee District (“BLD”). The State of Louisiana had previously created the BLD and transferred to it all lands belonging to the State within its geographic borders, including the tract involved in the instant matter (Tract 1). In 1975, the BLD merged and consolidated with the PPG. The State of Louisiana asserted, among other arguments, that the merger and consolidation of the BLD with the PPG constituted an impermissible alienation of state minerals and that the State was entitled to the mineral revenues attributable to Tract 1 as an unleased owner. Faced with competing claims for royalty payments from the PPG and State of Louisiana, Chevron, as sublessee of the 1938 BLD lease, filed a petition for concursus and deposited royalty payments into the court registry.

            Ultimately, the Fourth Circuit affirmed the trial court’s finding that the State’s claims were barred by res judicata. Previously, in 1990, Chevron had filed a concursus to seek a resolution of competing claims made by the PPG and the State of Louisiana as to royalties applicable to a separate tract covered by the 1938 BLD Lease, Tract 87. In that prior litigation, the Louisiana Fourth Circuit affirmed a judgment in favor of PPG, finding that the 1938 BLD Lease was valid. 

            Here, the Fourth Circuit found that the instant case was barred by the doctrine of res judicata, since the present action concerning Tract 1 arose out of the same transaction or occurrence as the litigation concerning Tract 87. The court observed that the 1938 BLD Lease’s validity had been recognized by courts since 1943. Further, the real “cause of action” for res judicata purposes in both the Tract 87 litigation and the instant case was the immovable known as the 1938 BLD Lease, not any single tract of land contained therein. The court concluded that “[t]his is exactly the type of case to which res judicata applies” and “[t]o find otherwise would permit the State to file a series of separate actions challenging the ownership of mineral rights in each and every tract contained in the 1938 BLD Lease.”  Chevron U.S.A., Inc. v. State of Louisiana, et al., No. 2007-CA-0673, pp. 7-8 (La. App. 4th Cir. 11/21/07).    

Pipeline Right of Way

2 minute read

By Katie Caswell

In Rose v. Tennessee Gas Pipeline Co., plaintiff, owner of an undivided interest in property across which Defendant Tennessee Gas Pipeline Co. (“TGP”) held a pipeline “easement” or “right of way” obtained in an expropriation proceeding, appealed from the district court’s dismissal of her claims against TGP as time barred by prescription. 2007 WL 4111191 (5th Cir. Nov. 20, 2007). The United States District Court for the Eastern District of Louisiana concluded that TGP did not owe plaintiff a duty to maintain the canal it constructed pursuant to the 1964 expropriation judgment. As a result, the district court held that no continuing tort was at issue and the case therefore prescribed. On appeal, plaintiff argued that TGP did have a continuing duty to maintain and thus the prescriptive period was interrupted. TGP asserted that because it was granted a “right of way and easement” pursuant to the expropriation proceedings rather than by means of a conventional agreement, no servitude existed and thus Louisiana’s suppletive law on servitudes was not implicated. The 5th Circuit disagreed and concluded that the expropriation judgment did in fact create a servitude, implicating Louisiana’s suppletive rules; specifically, that the dominant estate owner “must not ‘aggravate’ the condition of the servient estate.” In reaching this conclusion, the 5th Circuit found that the use of the common law terms “right of way” and “easement” in the expropriation judgment did not work any substantive change in the law because it is well-know that “myriad common law terms have seeped interstitially into Louisiana judicial opinions…” Further guiding the 5th Circuit’s opinion was the conclusion that the interest granted to TGP met the definition of a servitude. Moreover, TGP only resorted to expropriation when it was unable to negotiate a conventional servitude with the plaintiff’s predecessor-in-interest. Therefore, the 5th Circuit held that Louisiana’s suppletive rules applied and if implicated by plaintiff’s claims, such rules would impose duties upon TGP. As such, the 5th Circuit remanded the case to the district court to determine whether the judgment of expropriation disposed of any applicable provisions or whether the parties did or did not contract out of Louisiana’s suppletive law on servitudes; specifically, whether TGP was under a continuing duty to conduct preventative maintenance with respect to the width of the canals in which its active pipelines lay so as to prevent the erosion on plaintiff’s property. 

Pipeline Right of Way

2 minute read

 

By Katie Caswell

In Rose v. Tennessee Gas Pipeline Co., plaintiff, owner of an undivided interest in property across which Defendant Tennessee Gas Pipeline Co. (“TGP”) held a pipeline “easement” or “right of way” obtained in an expropriation proceeding, appealed from the district court’s dismissal of her claims against TGP as time barred by prescription. 2007 WL 4111191 (5th Cir. Nov. 20, 2007). The United States District Court for the Eastern District of Louisiana concluded that TGP did not owe plaintiff a duty to maintain the canal it constructed pursuant to the 1964 expropriation judgment. As a result, the district court held that no continuing tort was at issue and the case therefore prescribed. On appeal, plaintiff argued that TGP did have a continuing duty to maintain and thus the prescriptive period was interrupted. TGP asserted that because it was granted a “right of way and easement” pursuant to the expropriation proceedings rather than by means of a conventional agreement, no servitude existed and thus Louisiana’s suppletive law on servitudes was not implicated. The 5th Circuit disagreed and concluded that the expropriation judgment did in fact create a servitude, implicating Louisiana’s suppletive rules; specifically, that the dominant estate owner “must not ‘aggravate’ the condition of the servient estate.” In reaching this conclusion, the 5th Circuit found that the use of the common law terms “right of way” and “easement” in the expropriation judgment did not work any substantive change in the law because it is well-know that “myriad common law terms have seeped interstitially into Louisiana judicial opinions…” Further guiding the 5th Circuit’s opinion was the conclusion that the interest granted to TGP met the definition of a servitude. Moreover, TGP only resorted to expropriation when it was unable to negotiate a conventional servitude with the plaintiff’s predecessor-in-interest. Therefore, the 5th Circuit held that Louisiana’s suppletive rules applied and if implicated by plaintiff’s claims, such rules would impose duties upon TGP. As such, the 5th Circuit remanded the case to the district court to determine whether the judgment of expropriation disposed of any applicable provisions or whether the parties did or did not contract out of Louisiana’s suppletive law on servitudes; specifically, whether TGP was under a continuing duty to conduct preventative maintenance with respect to the width of the canals in which its active pipelines lay so as to prevent the erosion on plaintiff’s property. 

Recovery of Damages for Lost Production

less than a minute

By April Rolen-Ogden

In Mayne & Mertz, Inc. v. Excalibur, et al., the issue presented was whether damages for loss of a lease opportunity were too speculative to survive summary judgment. The case involved a claim for misappropriation of trade secrets, in this case seismic data. The landowner, Excalibur, received the data but was required to maintain its confidentiality. Mayne & Mertz claimed that Excalibur violated those terms by using the seismic to obtain lease bids from competitors of Mayne & Mertz. Mayne & Mertz sued, contending that, but for the misappropriation of the seismic, Excalibur would have granted the lease to it. No well was ever drilled, and the lease granted by Excalibur expired. Accordingly, Excalibur sought summary judgment, claiming that Mayne & Mertz could not prove the value of an undrilled mineral lease. The Court disagreed. Citing the experts’ opinions and testimony, as well as the applicable jurisprudence, the Court held that a jury could conclude that Mayne & Mertz was entitled to damages for the value of the undrilled mineral lease. The decision can be found at 2007 WL 2900510 (W.D. La.)