In 2011, a dispute arose over a large drilling unit’s oil and gas rights. Chesapeake Operating (“Chesapeake”) was the unit’s appointed operator and a lessee of mineral interests for a portion of the unit. TDX Energy (“TDX”) was also a lessee for a part of the unit. The unit’s drilling began in February 2011 and ended in July 2011. TDX’s leases to its oil and gas interests had not been recorded until after the drilling had been completed in September 2011.
Later in 2011, TDX made Chesapeake aware of its leases and requested accounting reports, as required under Louisiana’s Title 30, section 103.1. After six weeks, having yet to receive a response, TDX again notified Chesapeake of how it had failed to comply with the law. Chesapeake eventually responded with a letter to TDX, requesting TDX decide whether it would participate in the unit well’s risk under section 10(A) of the statute. TDX responded by disagreeing, stating it was not required by law to opt-in or out and that Chesapeake did not provide the accounting reports; it forfeited its rights to contribution to drilling costs.
TDX then filed a lawsuit and sought its share of revenues from the drilling unit, absent any deduction of drilling costs since Chesapeake never gave TDX the requisite reports previously requested. Additionally, TDX sought a court order forcing Chesapeake to provide the reports. Chesapeake counterclaimed, asking the Court for a declaration that it was entitled by law to recover TDX’s share of costs sustained that related to the drilling unit, as well as a risk charge of 200% of TDX’s share since TDX had not elected to pay a risk fee.
Both parties moved for summary judgment. The lower court ultimately found that although Chesapeake failed to send the reports, TDX was not excused from paying its share of drilling costs. It also found Louisiana’s statute governing mineral law did not entitle Chesapeake to a risk charge since it had not provided TDX notice that it was also drilling the unit well. Both parties appealed.
TDX argued on appeal that Chesapeake forfeited its right to deduct drilling costs because it never issued reports to TDX as laid out in the statute. However, the oil and gas interests had been leased to TDX, not Chesapeake. Therefore the Fifth Circuit Court of Appeals had to interpret the mineral rights statute to determine whether “owners of unleased oil and gas interests” includes lessees. Since the Supreme Court of Louisiana had not dealt with this issue previously, the Fifth Circuit looked to the only Louisiana appellate court that had analyzed this issue. That court held the lessee was entitled to a forfeiture when the operator failed to provide adequate reports of oil and gas interests. Therefore, a lessee is entitled to rely on section 103.2.
The Fifth Circuit explained sections 103.1 and 103.2 of the statute must be read together. Section 103.1 pertains to the operator’s obligations, and 103.2 establishes when an operator forfeits their right to demand contribution. Section 103.2 essentially releases owners from paying drilling costs when the operator fails to comply with their obligation to send the requisite reports to the owner under section 103.1.
Chesapeake argued section 103.1 is ambiguous as to who has the right to receive reports, and based on the plain language, operators only need to give reports to owners whose interests are “entirely unleased.” The Fifth Circuit disagreed. In remaining consistent with the statute’s context and purpose, the most natural reading of the two sections is that operators forfeit their right to contribution to the costs of drilling when they fail to promptly send reports to lessees (who have oil and gas interests in land where the operator has no lease themselves).
The Fifth Circuit noted that if the Louisiana legislature’s intent aligned with Chesapeake’s interpretation, it would have expressly provided for that in the statute. Therefore, the Court determined section 103.1 requires reports to be given to owners of interests on which the operator has no lease. The Fifth Circuit further explained that this interpretation is consistent with Title 30. Since Title 30 uses “unleased interests” to mean different things in different chapters, it was necessary to examine the context within each section. Since both sections 103.1 and 103.2 are addressed to the operator, it is fitting “unleased interests” means interests unleased by the operator.
Understanding your property rights can be confusing, especially when leasing property and the relevant law needs to be clarified. Connecting with an excellent attorney who will look out for you and ensure you are adequately protected is essential.
Additional Sources: TDX Energy, LLC v. Chesapeake Operating, Inc.
Written by Berniard Law Firm Blog Writer: Kate Letkewicz
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