T D X Energy, L.L.C. v. Chesapeake Operating, Inc.
2017 U.S. App. LEXIS 8462
| 5th Cir. | 2017Background
- Louisiana created forced-pooling and unitization rules (Title 30) allowing the Commissioner to form drilling units and appoint an operator who produces for the unit and allocates production and costs among owners and lessees.
- Operators must provide, on request, sworn reports of drilling/operating costs, production and sales under La. R.S. § 30:103.1; failure to provide within 90 days of completion plus 30 days after certified-mail notice causes forfeiture of the operator’s right to demand contribution under § 30:103.2.
- The statutory risk-charge scheme (La. R.S. § 30:10(A)(2)) lets notified owners elect to participate in drilling; non-participants who were timely notified may be charged their share of costs plus a 200% risk charge; owners not timely notified owe no risk charge.
- Facts: Chesapeake was named operator of a ~640-acre unit; certain tracts were unleased as to the operator when the well was spud and completed. Leases for those tracts were executed before completion but recorded only after completion and ultimately conveyed to TDX. TDX requested § 103.1 reports; Chesapeake did not provide them and instead sought a participation election and claimed a risk charge against TDX.
- Procedural posture: District court held § 103.2 inapplicable to lessees (so operator could recover costs) and that § 30:10(A) notice was untimely (so operator could not recover a risk charge). Parties appealed; Fifth Circuit reviews de novo and partly reverses/affirms.
Issues
| Issue | Plaintiff's Argument (TDX) | Defendant's Argument (Chesapeake) | Held |
|---|---|---|---|
| Whether La. R.S. § 30:103.2’s forfeiture for failure to provide reports applies to lessees whose interests are not leased to the operator | §103.2 applies to any owner whose interest is unleased by the operator, including lessees of record other than the operator; failure to provide reports forbids cost recovery | “Unleased” in §103.2 means interests not subject to any lease at all; lessees are not protected by §103.2 so operator may recover costs | Reversed district court: §103.1/103.2 read together require reports to owners of interests on which the operator has no lease (including lessees of those tracts), and failure to comply forfeits right to demand contribution |
| Whether the act’s title violated La. Const. art. III, §15 by failing to give notice that lessees were covered | Title referring to “owners of unleased mineral interests” was sufficient and must be liberally construed; not misleading | Title referred only to unleased owners and so could not have indicated coverage of lessees | Held title provided fair notice and did not violate the constitution; liberal construction applies |
| Whether Chesapeake could collect a 200% risk charge under La. R.S. § 30:10(A)(2) where leases were recorded only after completion (and notice was sent after completion) | TDX’s late recording should not relieve it; court should apply equitable principles to prevent gaming the system | The statute required notice by an owner “drilling or intending to drill” (present/future tense), so notice after completion is untimely and risk charge cannot be collected | Affirmed in part: the pre-2016 version limited notice to before drilling/intent to drill; Chesapeake’s post-completion notice was untimely, so it cannot collect the risk charge |
Key Cases Cited
- Brown v. Spilman, 155 U.S. 665 (U.S. 1895) (discussing the rule of capture applied to oil and gas)
- Hunt Oil Co. v. Batchelor, 644 So. 2d 191 (La. 1994) (operator appointment and unit-production principles under Louisiana law)
- King v. Strohe, 673 So. 2d 1329 (La. App. 3 Cir. 1996) (recordation timing makes leases null as to third parties until recorded)
- XXI Oil & Gas, LLC v. Hilcorp Energy Co., 206 So. 3d 885 (La. App. 3 Cir. 2016) (intermediate appellate decision holding §103.1/103.2 protect lessees not leased to the operator)
- XXI Oil & Gas, LLC v. Hilcorp Energy Co., 124 So. 3d 530 (La. App. 3 Cir. 2013) (earlier opinion addressing reporting obligations)
- Brannon Props., LLC v. Chesapeake Operating, Inc., [citation="514 F. App'x 459"] (5th Cir. 2013) (interpreting §103.1’s reporting requirement as tying costs to benefits)
- Bonn Operating Co. v. Devon Energy Prod. Co., 613 F.3d 532 (5th Cir. 2010) (contractual notice waiver/equity principles not controlling interpretation of statute)
- Lamie v. U.S. Trustee, 540 U.S. 526 (U.S. 2004) (awkward statutory wording does not necessarily create ambiguity)