CHAPTER 7
THE MINERAL LEASE
AIMEE WILLIAMS HEBERT*
7.1
Introduction
The mineral lease in Louisiana in its basic clauses is essentially the same as leases used in
other jurisdictions.1 The lease is a contract between a producer-lessee and the owner of the
executive rights to the minerals underlying a particular tract of land, typically a landowner or a
mineral servitude owner or some combination of the two.2 Leases are the legal vehicles by
which a producer-lessee acquires the exclusive right to enter upon the leased premises to explore
for, and if found, to develop, produce and market the minerals underlying the property described
in the lease.3 The normal mineral lease has the usual habendum or granting clause, is for a stated
primary term and for so long thereafter as minerals are produced in paying quantities, generally
provides for the payment of a fixed royalty expressed as a percentage of the minerals produced,
provides for the payment of bonus money, annual delay rentals and shut-in royalty or rentals for
gas wells, and contains the normal drilling clauses and notice clauses.4
*
Aimee Williams Hebert is a Member of Gordon, Arata, McCollam, Duplantis, & Eagan LLC, New
Orleans, Louisiana. Ms. Hebert acknowledges her partner and mentor, John M. McCollam, under whose guidance
much of this paper was written. Mr. McCollam’s article Impact of Louisiana Mineral Code on Oil, Gas and Mineral
Leases, served as a starting point for the structure and development of this chapter. Ms. Hebert would also like to
thank Kelly Perrier, Matthew Emmons, and Jane Jackson, attorneys with Gordon Arata, McCollam, Duplantis &
Eagan LLC, for their assistance in providing research for various portions of this chapter.
1
John M. McCollam, Impact of Louisiana Mineral Code on Oil, Gas and Mineral Leases, 22 MIN. L. INST.
37, 38 (1975) [hereinafter McCollam, Impact]; John M. McCollam, A Primer for the Practice of Mineral Law under
the New Mineral Code, 50 TUL. L. REV. 729, 782 (1976) [hereinafter McCollam, Primer]; Patrick H. Martin & J.
Lanier Yeates, Louisiana and Texas Oil & Gas Law: an Overview of the Differences, 52 LA. L. REV. 769, 823
(1992).
2
McCollam, Impact, supra note 1 at 38; McCollam, Primer, supra note 1, at 782.
3
LA. REV. STAT. § 31:114; Odom v. Union Producing Co., 141 So. 2d 649 (La. 1961); McCollam, Impact,
supra note 1 at 38; McCollam, Primer, supra note 1, at 782.
4
McCollam, Impact, supra note 1 at 38; McCollam, Primer, supra note 1, at 782.
1281448
The relationship between the lessor and lessee is described in Louisiana jurisprudence as
a “cooperative venture.”5 Under the “cooperative venture” doctrine, it is recognized that the
lessor and lessee make separate contributions to the relationship: the lessor contributes the land
and the lessee contributes the capital and expertise necessary to develop the minerals for the
mutual benefit of both parties. The relationship, however, does not rise to the level of a “joint
venture.” Indeed, the Louisiana Mineral Code expressly negates any fiduciary relationship
between the lessor and lessee.6 Moreover, the “mutual benefit” principle does not extend to
every contractually granted right under the lease.7
Thus, an important principle to emphasize is that the mineral lease is a bilateral contract
between the parties and that the relative rights and obligations of the parties are governed by the
contractual provisions contained in the lease.8 The parties’ freedom of contract is endorsed by
the Louisiana Mineral Code (hereinafter the “Mineral Code”)9 except in those limited instances
where derogating from its basic principles would contravene public policy.10
Specifically,
Article 3 of the Mineral Code provides that, unless the code expressly or impliedly prohibits the
particular contractual provision, the parties are at liberty to renounce or modify the rights
Frey v. Amoco Prod. Co., 943 F.2d 578 (5th Cir. 1991), opinion withdrawn in part on reh’g, 951 F.2d 67
(5th Cir. 1992), certified question accepted, 592 So.2d 1308 (La. 1992), certified question answered, 603 So.2d 166
(La. 1992), opinion reinstated in part on reh’g, 976 F.2d 242 (5th Cir. 1992); Henry v. Ballard & Cordell Corp.,
418 So. 2d 1334, 1439 (La. 1982); Thomas Harrell, Developments in Non-Regulatory Oil & Gas Law, 30th ANN.
INST. ON OIL & GAS L. & TAX, SOUTHWESTERN LEGAL FOUNDATION 311 (1979).
5
See LA. REV. STAT. § 30:122, which in pertinent part provides: “A mineral lessee is not under a fiduciary
obligation to his lessor . . . .”
6
7
See Caskey v. Kelly Oil Co., 737 So. 2d 1257 (La. 1999), (holding that mineral lessee need not pay for the
use of a road on the leased premises to access operations on an adjacent tract of land pursuant to a so-called
“adjacent lands” clause). Cf. Musser Davis Land Co. v. Union Pac. Res., 201 F.3d 561, 568-70 (5th Cir. 2000).
8
LA. REV. STAT. § 31:3; Caskey, 737 So. 2d at 1262; Frey, 603 So. 2d at 172; McCollam, Impact, supra note
1, at 38; McCollam, Primer, supra note 1, at 782; Martin & Yeates, supra note 1, at 823.
9
The Louisiana Mineral Code is found in title 31, Section 1, et seq., of the Louisiana Revised Statutes.
10
LA. REV. STAT. § 31:3; Caskey, 737 So.2d at 1262; Frey, 603 So.2d at 172; McCollam, Impact, supra note
1, at 38, McCollam, Primer, supra note 1, at 782.
2
otherwise granted under the code, unless such modification is contrary to public policy.
11
Further, Article 2 of the Mineral Code provides that the provisions of the code are supplementary
to those of the Louisiana Civil Code (hereinafter the “Civil Code”), and if the Mineral Code does
not expressly or impliedly cover the particular situation, the Civil Code or other laws apply. 12
Thus, the basic legal concepts applicable to leases and contracts in general are likewise
applicable to oil and gas leases.13 Accordingly, the whole suite of Civil Code articles dealing
with ordinary leases are potentially applicable to oil and gas leases as are the basic tenets of
contract construction.14
7.2
Conceptual Classification of the Mineral Lease
The Mineral Code provides a functional definition of the mineral lease.15 Article 114 of
the Mineral Code defines the mineral lease as “a contract by which the lessee is granted the right
to explore for and produce minerals.”16
However, this article does not answer the more
significant question of the substantive nature of the rights granted by a mineral lease.
11
LA. REV. STAT. § 31:3; see also Caskey, 737 So.2d at 1262.
12
LA. REV. STAT. § 31:2; McCollam, Impact, supra note 1, at 39; McCollam, Primer, supra note 1, at 783.
13
Jack W. Thompson, Jr., The Nature of a Mineral Lease in Louisiana, 25 TUL. L. REV. 497 (1951);
McCollam, Impact, supra note 1.
14
See Caskey, 737 So.2d at 1262; Cascio v. Twin Cities Dev., LLC, 45, 634 (La. App. 2 Cir. 9/22/10), 48 So.
3d 341; Adams v. JPD Energy, Inc., 45,420 (La. App. 2 Cir. 8/11/10), 46 So. 3d 751, 755; Stephenson v. Petrohawk
Props., L.P., 45,296 (La. App. 2 Cir. 6/2/10), 37 So. 3d 1145 (citing Blanchard v. Pan-OK Prod. Co., 32,764 (La.
App. 2d Cir. 4/5/00), 755 So. 2d 376, writ denied, 2000-1297 (La. 6/23/00), 765 So. 2d 1043).
15
LA. REV. STAT. § 31:114 cmt.
16
LA. REV. STAT. § 31:114.
3
7.2.1 Historical Classification of the Mineral Lease
Prior to the adoption of the Mineral Code, one of the most challenging problems in
Louisiana mineral law was the question of the substantive nature of a mineral lease.17 Courts
were largely confused as to whether the lease, and all rights carved out of same, constitutes a real
right and incorporeal immovable property18 subject to all of the laws having to do with real or
immovable property or whether the lease is a personal right or obligation governed by rules
having to do with so-called personal or movable property.19
At first blush, the question of the substantive nature of the mineral lease may seem purely
academic, but the solution to several very real problems hinges on the classification. For
example, the classification of a mineral lease as real or personal property impacts the venue in
which suit may be brought to assert a right in a mineral lease, 20 whether the lease contract must
be in writing,21 whether a mineral lessee has the right to be a party in a partition suit,22 whether
the public records doctrine applies to the contract,23 whether a mineral lessee has the right to
17
For a detailed discussion of the pre-Code decisions and attendant confusion, see William M. Hall, Jr. The
Juridical Nature of the Louisiana Mineral Lease, 11 MIN. L. INST. 106 (1964); see also McCollam, Impact, supra
note 1, at 40-43; McCollam, Primer, supra note 1, at 784-85.
18
LA. CIV. CODE arts. 462, 464 and 470. Land is the classic example of immovable property. Louisiana
immovable property is essentially the same as “real” property at common law. Under Article 470 of the Louisiana
Civil Code, mineral rights are included among an enumerated list of incorporeal immovables. LA. CIV. CODE ANN.
art. 470.
19
LA. CIV. CODE arts. 471, 472, 474, 475. An incorporeal moveable is a right, obligation or action applying
to a moveable thing. LA. CIV. CODE ANN. art. 473. A bond or annuity would be an example of incorporeal movable
property. Louisiana movable property is essentially the same type property as common law personal property.
20
See Payne v. Walmsley, 185 So. 88 (La. Ct. App. 2d Cir. 1938); Ironwood Resources, Ltd. v. Baby Oil, Inc.,
921 So.2d 1189 (La.App. 3d Cir. 2006).
21
Hayes v. Muller, 158 So. 2d 191 (La. 1963); Davidson v. Midstates Oil Corp., 31 So. 2d 7 (La. 1947).
22
Amerada Petroleum Corp. v. Reese, 196 So. 558 (La. 1940).
23
Arnold v. Sun Oil Co., 48 So. 2d 369 (La. 1950).
4
bring a real action,24 and whether the laws of Louisiana or other jurisdictions would apply to the
mineral lease located in Louisiana under conflicts of law principles.25
In the early years of oil and gas development in Louisiana, courts had no statutory or
codal direction to guide their classification of the mineral lease.26 Louisiana courts resorted to
provisions of the Civil Code regarding leases, sales or other obligations with inconsistent
results.27 As early as 1913, in the case of Rives v. Gulf Refining Co. of Louisiana,28 the
Louisiana Supreme Court found that the oil and gas lease was in a class by itself having the
nature both of sale and of lease. In Arent v. Hunter,29 the court ruled that a mineral lease
conveys a servitude on the land, thus a lease on four noncontiguous nonproducing tracts
prescribed for nonuse of ten years despite the fact that on the fifth tract of the original lease a
producing well was in existence.30 But only six years after the Arent decision was rendered, the
court issued its opinion in Gulf Refining Co. v. Glassell,31 in which the court treated the mineral
lease as a common lease, refusing to allow the lessee to protect its interest through a real action.
24
Dixon v. Am. Liberty Oil Co., 77 So. 2d 533 (La. 1954); Gulf Ref. Co. of La. v. Glassell, 171 So. 846 (La.
1936).
25
Succession of Simms, 175 So. 2d 113 (La. Ct. App. 4th Cir. 1967).
26
Hall, supra note 16, at 107; Martin & Yeates, supra note 1, at 824-25.
27
Hall, supra note 16, at 107; Martin & Yeates, supra note 1, at 824-25; See, e.g. Reagan v. Murphy, 105 So.
2d 210 (La. 1958) (mineral leases do not confer substantive rights in realty); Arnold v. Sun Oil Co., 48 So. 2d 369
(La. 1950) (mineral leases convey personal rights); Hamill v. Moore, 193 So. 715 (La. 1939) (mineral leases are
considered personal rights); Gulf Ref. Co. v. Glasell, 171 So. 846 (La. 1936) (mineral lease is a personal right); Fed.
Land Bank of New Orleans v. Mulhearn, 157 So. 370 (La. 1934) (a mineral lease is a servitude); Powell v. Rapides
Parish Police Jury, 115 So. 667 (La. 1928) (a mineral lease is not an immovable); Gulf Ref. Co. v. Hayne, 70 So.
509 (La. 1915) (contract is one of letting or of hire); Spence v. Lucas, 70 So. 796 (La. 1915) (rights acquired under a
mineral lease are immovable); Succession of Simms, 175 So. 2d 113 (La. Ct. App. 4th Cir. 1967) (rights carved out
of a mineral lease are incorporeal immovables).
28
62 So. 623 (La. 1913).
29
133 So. 157 (La. 1930).
30
See also White v. Ouachita Natural Gas Co., 150 So. 15 (La. 1933).
31
171 So. 846 (La. 1936); see also Tyson v. Spearman, 183 So. 201 (La. 1938).
5
This jurisprudential confusion prompted legislative action seeking to statutorily define mineral
leases as real rights and incorporeal immovables which could be asserted, protected, and
defended in the same manner as the ownership or possession of other immovable property.32 But
despite early these legislative efforts, there remained confusion among Louisiana courts as to the
classification of a mineral lease as a personal or real right, and courts continued to classify the
mineral lease as a personal right for some purposes and a real right for others.33
7.2.1 Classification of the Mineral Lease under the Mineral Code
With the adoption of the Mineral Code, this debate was put to rest. Under Articles 16 34
and 1835 of the Mineral Code, mineral leases are expressly classified as “mineral rights” which
are in turn defined as real rights and incorporeal immovables.36 However, Article 1637 of the
Mineral Code further indicates that all real rights are not necessarily subject to the ten (10) year
prescription for nonuse,38 and Article 115 of the Mineral Code expressly provides that a mineral
32
See 1938 LA. ACTS 208, Reg. Sess., 1950 LA. ACTS 6, 2d Extra. Sess., enacting and amending LA. REV.
STAT. § 9:1105 (1950); see also 1940 LA. ACTS 336, Reg. Sess.; 1950 LA. ACTS 521, 1st Extra. Sess.; and 1950 LA.
ACTS 7, 2d Extra. Sess.
33
See e.g., Reagan v. Murphy, 105 So. 2d 210 (La. 1958) (mineral leases do not confer substantive rights in
realty); Arnold v. Sun Oil Co., 48 So. 2d 369 (La. 1950) (mineral leases convey personal rights); Succession of
Simms, 175 So. 2d 113 (La. Ct. App. 4th Cir. 1967) (rights carved out of a mineral lease are incorporeal
immovables); Martin & Yeates, supra note 1, at 825.
34
LA. REV. STAT. § 31:16.
35
LA. REV. STAT. § 31:18.
36
LA. CIV. CODE art. 470. A real right is a right that a person has in a thing, a matter of property law. A
personal right is a right that a person has against another person to demand a performance, a matter of the law of
obligations. A. N. Yiannopoulos, 2 LOUISIANA CIVIL LAW TREATISE: PROPERTY, § 201 at 476 (2011). The
nature of a personal right is an obligation, whereas the nature of a real right is one of ownership and its
dismemberments. See CLK Co., L.L.C. v. CXY Energy, Inc., 719 So.2d 1098, 1104 (La.App. 4 Cir. 1998), writ
denied, 738 So.2d 574 (La. 1999).
37
LA. REV. STAT. § 31:16.
38
Prescription of nonuse is a mode of extinction of a real right other than ownership as a result of failure to
exercise the right for a period of time. LA. CIV. CODE. art. 3448. Prescription of nonuse is distinguished from
liberative prescription in that the former extinguishes the right itself while the latter bars actions. Id. cmt. (c).
6
lease is not subject to the prescription of nonuse. 39 In this respect, Article 115 is the codification
of the Louisiana Supreme Court’s decision in Reagan v. Murphy,40 holding that the Civil Code
articles pertaining to prescription of nonuse were inapplicable to mineral leases.41 The Mineral
Code makes clear that, though classified as an immovable, the mineral lease is not subject to the
prescription of nonuse.
7.3
Requirement of a Term
7.3.1 Term Requirements for Fugacious Minerals
Although or perhaps because the mineral lease is not subject to the laws of prescription,
Article 115 of the Mineral Code provides that a mineral lease must have a fixed term and that oil
and gas leases cannot, as a matter of public policy, be continued for a period of more than ten
(10) years without drilling or mining operations or production.42 Simply stated, this means that
an oil and gas lease cannot have a primary term of more than ten (10) years. The limitation
prevents the potential circumvention of the laws of prescription of nonuse that apply to other
mineral rights, such as servitudes.43 Without the requirement of a lease term, a servitude owner
could potentially avoid prescription of nonuse by the creation or retention of a paid-up mineral
lease having a primary term in excess of ten (10) years.44 Under this article there must either be
39
LA. REV. STAT. § 31:115.
40
105 So. 2d 210 (La. 1958).
41
It should be noted that the Reagan v. Murphy was largely based on the conclusion that the mineral lease is a
personal right, rather than a real right. Id. As discussed above, this part of the decision was not perpetuated in the
Mineral Code. See LA. REV. STAT. § 31:16.
42
LA. REV. STAT. § 31:115.
43
See generally LA. REV. STAT. §§ 31:28-61 which establish the rules of prescription applicable to mineral
servitudes and mineral royalty rights.
44
There had always been speculation that a long term mineral lease could be executed with respect to a
particular property and reserved in any sale of the property, thus, circumventing in part the prohibition against
7
drilling on or production from the leased premises or land with which the lease is unitized within
ten (10) years of the granting of the lease, or the lease will lapse because its primary term will be
presumed to have expired. This is an express limitation on the right of freedom of contract
provided in Article 345 of the Mineral Code and is founded in public policy.46 However, Article
115 leaves the parties free to decide as a matter of contract what form of drilling or mining
operations or production will maintain the lease.47
7.3.2
Term Requirements for Solid Minerals
Article 115 treats leases for solid minerals differently than oil and gas leases, allowing
such leases to be extended beyond their initial ten (10) year terms without actual drilling mining
operations or production but only if certain conditions are met. 48 Paragraph B of Article 115
provides an exemption from the ten (10) year term limitation for leases of solid minerals other
than coal and lignite, while Paragraph C of Article 115 provides a similar exemption for leases of
lignite and other types of coal.49 The provisions of Paragraphs B and C of 115 are necessitated
by the nature of hard mineral mining operations, which are often initiated many years before
actual mining operations take place on a particular tract of land included in a mining plan. 50 To
severing the minerals from the fee title for a period of longer than 10 years without use by drilling. See LA. REV.
STAT. § 31:115, cmts; see McCollam, Impact, supra note 1, at 44; McCollam, Primer, supra note 1, at 786.
45
As noted previously, unless there is an express prohibition in the Mineral Code, the parties to a mineral
lease are at liberty to derogate from its basic terms and conditions. See LA. REV. STAT. §§ 31:3, 115(D).
46
See Wemple v. Nabors Oil & Gas Co., 97 So. 666 (La. 1923) (discussing the public policy against the
permanent fragmentation of titles to immovable property and the desirability of keeping such interests in
commerce); see also LA. REV. STAT. § 31:115, cmts.
47
See LA. REV. STAT. §31:115, cmts.
48
See LA. REV. STAT. § 31:115 (B)-(C).
49
Id.
LA. REV. STAT. § 31:115, cmts. Article 213 defines “mining plan” as follows: “Mining Plan” means that
plan for development of lignite or other form of coal filed with the appropriate government official in connection
with an application for a surface mining permit to conduct operations within some portion of the mining plan. The
50
8
accommodate this distinctive feature of hard mineral operations, Article 115 sanctions the use of
a particular type of clause in hard mineral leases similar in nature to the “shut-in clause” used in
oil and gas leases.51
However, in order for the shut-in provision to operate to extend hard
mineral leases beyond the initial ten (10) year period, the express conditions found in Article 115
must be met.
Under Paragraph B of Article 115 addressing the extension of leases for hard minerals
other than lignite and other coals, the following conditions must be met to extend the lease: (1)
there must have been a discovery of hard minerals susceptible of production in paying quantities,
(2) the lessee must have commenced mining operations on neighboring lands for the production
of the mineral discovered, and (3) the leased premises must be included in a development plan
anticipating ultimate production from the leased premises.52 If these three pre-conditions are met
and the lease so provides,53 the lease may be maintained for a period greater than ten (10) years
by the payment of rent at least annually.54 Such rental payments will maintain the lease only as
mining plan indicates the area ultimately to be mined or used for mining operations, and an area of land may be
included in a mining plan even though a surface mining permit for operations is limited to a portion of the land in
the mining plan or to a specified period of time shorter than the time necessary for full implementation of the mining
plan. For purposes of filings under Articles 61, 115, and 191, a mining plan shall consist of a description of the land
covered by the filing with the appropriate government official or a plat showing the same. If that official shall
disapprove of inclusion of land in the mining plan under his authority under the Surface Mining and Reclamation
Act or successor legislation, then the filing of the mining plan will have no effect under Articles 61, 115, and 191
with respect to the land disapproved. If he shall require under his authority under the Surface Mining and
Reclamation Act or successor legislation the amendment of a mining plan to include land not included in a previous
filing, then the amendment of the mining plan shall have the same effect from the date of the amendment under
Articles 61, 115, and 191 as though such additional land had been included in the mining plan. When used in this
definition, “appropriate government official” means the commissioner of conservation or other state or federal
official who issues permits to conduct surface mining of lignite or other forms of coal within the state of Louisiana.
LA. REV. STAT. § 31:213 (2).
51
Id.
52
LA. REV. STAT. § 31:115(B).
53
See id.
54
See id. This provision is distinguishable from that found in Paragraph C of Article 115 which provides that
the extension may be based on any form of periodic payment and makes no reference to the timing of such
9
long as operations are continued with the diligence of a reasonably prudent operator without
cessation for more than six (6) calendar months, and in no event may the lease be maintained by
such payments for a period of more than twenty (20) years.55
Under Paragraph C of Article 115, a lease of lignite or other forms of coal may provide
for its extension beyond the initial ten (10) year term for an additional thirty (30) year period56
when no actual operations have commenced by the payment of rent, advanced royalty, or any
other form of periodic payment57 if the following conditions are met: (1) the leased premises are
included in a mining plan,58 (2) such minerals have been discovered as a result of acts committed
on the land or due to acts providing a reasonable basis of proof of the discovery of the mineral,59
(3) a mining plan for the ultimate production of such mineral, together with a permit issued by
the commissioner of conservation, has been filed in the conveyance records of the parish or
parishes in which such leased premises are located,60 (4) the mining plan, along with any
payments. If the extension is based on the payment of rent, care should be taken to determine whether the nonpayment of such rentals would result in the triggering of an express resolutory condition which would cause the loss
of the lease. See Matheson v. Placid Oil Co., 33 So. 2d 527, 529-30 (La. 1947); Acquisitions Inc. v. Frontier
Exploration, Inc., 432 So. 2d 1095 (La. Ct. App. 3d Cir. 1983).
55
LA. REV. STAT. § 31:115(B).
Paragraph C (4) of Article 115, states that “[t]he lease granting the right to explore for and produce lignite
or other forms of coal may not be extended for a period greater than forty years unless there have been actual mining
operations or production on the land leased or land unitized therewith.” LA. REV. STAT. § 31:115(C)(4). It is worth
noting that this subparagraph does not expressly require that such production be in paying quantities. Arguably, the
requirement of production in paying quantities is a matter of public policy that should not be derogated unless such
exception is express. However, Paragraph C (4) leaves room for argument that it does not impose such requirement
for leases of lignite and other hard minerals.
56
57
Compare LA. REV. STAT. § 31:115(C) (allowing maintenance through any form of periodic payment), with
LA. REV. STAT. § 31:115(B) (allowing payment through rental payments made at least annually).
58
LA. REV. STAT. § 31:115(C)(1).
59
LA. REV. STAT. § 31:115(C)(1)(a).
60
LA. REV. STAT. § 31:115(C)(1)(b). The mining plan may authorize the removal of lignite or other forms of
coal different streams, beds or other deposits and from noncontiguous tracts of land provided such operations are so
integrated to constitute a single mining plan. LA. REV. STAT. § 31:115(C)(2).
10
amendments, provides for the ultimate production of such minerals from the leased premises,61
and (5) actual mining operations62 have begun on land included in the plan, although such
operations are not being conducted on the lease being extended.63 Moreover, such rental
payments will maintain the lease only as long as mining operations under the development plan
are continued with the diligence of a reasonably prudent operator without cessation for more than
five (5) years.64
Before leaving Article 115, it is again worth noting that its requirements represent public
policy.65 The parties are not free to provide for time periods greater than those provided in the
article but may only derogate by providing periods of shorter durations than those provided by
Article 115 or by otherwise increasing the obligations of the lessee.66
61
LA. REV. STAT. § 31:115C (1)(b).
62
LA. REV. STAT. § 31:212 (7). Article 212 (7) defines “actual mining operations” as follows:
(a) “Actual mining operations,” as used in connection with the mining of lignite or other forms of
coal, means good faith operations to obtain or establish the production of lignite or other
forms of coal.
(b) Such operations shall be deemed to have commenced with the good faith initiation of any of
the following or other similar types of activity: the removal of existing improvements,
construction of railroad spurs, conveyor or transportation facilities for lignite and other forms
of coal, and haul roads, construction of electric power lines, relocation of existing pipelines,
construction of sedimentation ponds, on-site erection of major equipment for removal or
transportation of lignite and other forms of coal and overburden, construction and installation
of de-watering facilities, construction of office, shop, or other facilities, the removal of
overburden, and other such necessary operations conducted to obtain or utilize lignite or other
forms of coal.
(c) The initiation of any of the above or similar activities shall constitute a commencement of
actual mining operations when conducted by or under the authority of:
(i) The party mining or commencing the mining of lignite or other forms of coal;
(ii) An affiliated synthetic fuel facility; or
(iii) An affiliated specific major electric generating facility.
63
LA. REV. STAT. § 31:115 (C)(1)(d).
64
LA. REV. STAT. § 31:115(C)(3).
65
LA. REV. STAT. § 31:115, cmts.
66
LA. REV. STAT. § 31:115(D).
11
7.4
Operations on the Leased Premises
7.4.1
Mineral Lease Is Not Subject to the Contiguity Rule
Another distinguishing feature of the mineral lease is that, unlike mineral servitudes and
mineral royalties, the mineral lease is not subject to the contiguity rule.67 Under Article 114, if a
mineral lease covers two (2) or more non-contiguous tracts of land and operations sufficient to
maintain the lease are conducted on some portion of the land burdened by the lease, or on lands
unitized therewith,68 the lease will be maintained as to its entirety in accordance with its
particular terms. This rule preserves the pre-Mineral Code law which holds that a mineral lease
is indivisible.69
In the pre-Mineral Code case of Hunter Co. v. Shell Oil Co., the Louisiana Supreme
Court held that production from a portion of the leased premises included within a unit70
maintained the entire lease, stating:
drilling of a producing well in the unit . . . within the
primary term of the lease complies with the obligation to
drill assumed by the lessee under the terms and provisions
67
LA. REV. STAT. § 31:114. This rule should be contrasted with those governing mineral servitudes and
mineral royalties. Compare, LA. REV. STAT. § 31:114 with LA. REV. STAT. §§ 31:73, 103. If the instrument by
which a mineral royalty or mineral servitude is granted covers non-contiguous tracts of land, such instrument creates
as many servitudes or royalties as there are tracts. LA. REV. STAT. §§ 31:73, 103. Article 114 allows the creation of
a single mineral lease on two or more noncontiguous tracts of land and operations on any part thereof sufficient to
maintain the lease according to its terms will maintain the lease as to its entirety. LA. REV. STAT. § 31:114.
68
This assumes that there is no Pugh Clause in the lease which would contractually limit the effect of unitized
operations to that part of the lease actually in the unit. See, e.g., LeBlanc v. Danciger Oil Co., 218 La. 463, 49 So.2d
855 (1950) and official comments under La. Rev. Stat. 31:114.
69
See LA. REV. STAT. § 31:114 cmt., citing Hunter v. Shell Oil Co., 211 La. 893, 31 So.2d 10 (La. 1947). See
also LeBlanc v. Danciger Oil & Refining Co., 49 So. 2d 855 (La. 1950); Smith v. Carter Oil Co., 104 F.Supp. 463,
466 (W.D. La. 1952).
Article 212 of the Mineral Code defines the term unit as follows: “Unit” means an area of land, deposit, or
deposits of minerals, stratum or strata, or pool or pools, or a part or parts thereof, as to which parties with interests
therein are bound to share minerals produced on a specified basis and as to which those having the right to conduct
drilling or mining operations therein are bound to share investment and operating costs on a specified basis. A unit
may be formed by convention or by order of an agency of the state or federal government empowered to do so. A
unit formed by order of a governmental agency is termed a “compulsory unit.” LA. REV. STAT. § 31:212 (6).
70
12
of the lease and production in paying quantities from such a
well constitutes production from all the property described
in the lease and maintains the lease in full force and
effect.71
7.4.2
Avoidance of the Non-Contiguity Rule by Use of a Pugh Clause
However, this non-contiguity rule does not represent a matter of public policy, and as
noted above, the parties are free to contract for a result different than that created by the general
rule in the Mineral Code so long as it does not violate public policy. 72 Parties to oil and gas
leases often do this by inserting a so-called “Pugh clause” into their leases.73
The Pugh clause is named after Lawrence C. Pugh, of Crowley, Louisiana, who is said to
have included the clause in a lease to avoid the holding of Hunter Co. v. Shell Oil Co.74 There are
various versions of Pugh clauses, but in its basic form, the Pugh clause provides that production
from any part of a unit preserves the lease only as to the leased land included in the unit.75 The
clause, in effect, severs the lease into parts that must be separately maintained.76 The Pugh
clause usually provides that the portion of the leased land not included in a producing unit may
be maintained by the payment of delay rentals or Pugh clause rentals for a limited period of
time.77
71
31 So. 2d 10 (La. 1947); see also LeBlanc v. Danciger Oil & Ref. Co., 49 So. 2d 855 (La. 1950).
72
LA. REV. STAT. § 31:3; LA. REV. STAT. § 31:114, cmt.
73
LA. REV. STAT. § 31:114, cmt.; see also Will-Drill Res., Inc. v. Huggs, 738 So. 2d 1196, 1199 (La. Ct. App.
2d Cir. 1999).
74
4 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW at § 669.14 (Updated and Revised by
Patrick H. Martin & Bruce M. Kramer, 2011).
75
8 WILLIAMS & MEYERS, supra note 74, at 849; see also Will–Drill Res., Inc., 738 So. 2d at 1199.
76
4 WILLIAMS & MEYERS, supra note 74, at § 669.14, p. 47.
77
Fremaux v. Buie, 212 So. 2d 148, 150 (La. Ct. App. 3d Cir. 1968).
13
The Pugh clause is advantageous to and protective of the lessor’s interests in reasonable
development of the leased premises.78 It was designed to prevent the undesirable consequences
of unitizing for the lessor.79 The main purpose of a Pugh clause is to protect the lessor from the
anomaly of having the entire lease held by production from a very small portion of the leased
premises included in the unit.80
Care should be taken in the drafting of a Pugh Clause to ensure that it results in the
intended effect. For example, the specific wording of the clause will control whether it applies to
declared units formed by the lessee,81 voluntary units created by the consent of the parties to the
lease,82 compulsory units formed by the Louisiana Commissioner of Conservation, 83 or some
combination of the three. Several cases applying Louisiana law have held that a Pugh Clause
was not triggered by the formation of a compulsory unit. 84 However, there is no general policy
78
Patrick H. Martin, IMPLIED COVENANTS IN OIL AND GAS LEASES: Past, Present, & Future, 33 WBN.
L.J. 639, 647 (1994); see also Sandefer Oil & Gas, Inc. v. Duhon, 961 F. 2d 1207, 1209 (5th Cir. 1992).
79
Fremaux, 212 So. 2d at 151.
80
EARL A. BROWN, EARL A. BROWN, JR. & LAWRENCE T. GILLASPIA, THE LAW OF OIL AND GAS LEASES, §
17-14[7] (2d. ed. 2006) (quoting Will-Drill Res., Inc., 738 So. 2d at 1199); see also Sandefer, 961 F. 2d at 1209.
81
A declared unit is one formed by the lessee acting under the provisions of the lease pooling clause. 8
WILLIAMS & MEYERS, supra note 74, at 240.
82
A voluntary unit is one specifically created by joint agreement of the mineral lessee and the owners of all
the other mineral or royalty interests affecting the land in question, as distinguished from a declared unit, which is
one formed by the lessee acting under the provisions of a lease pooling agreement. Id. at 1126.
83
A compulsory unit is one formed by an order of a governmental agency. Id. at 177. In Louisiana, that
agency is the Louisiana Office of Conservation; the Louisiana Commissioner of Conservation is empowered to
create compulsory units to unitize the maximum area which may be efficiently and economically drained by one
well. LA. REV. STAT. § 30:6.
84
See Smith v. Carter Oil Co., 104 F. Supp. 463, 466 (W.D. La. 1952) (holding that forced pooling of a lease
pursuant to an order of the Commissioner of Conservation did not divide the obligations of the lease under the Pugh
clause in question); see also Bennett v. Sinclair Oil & Gas Co., 405 F.2d 1005, 1010 (5th Cir. 1968) (holding that
“the so-called ‘Pugh’ clause does not divide the lease in a case such as this which involves compulsory unitization
by orders of the Louisiana Conservation Commissioner”); Odom v. Union Producing Co., 129 So. 2d 530, 536-37
(La. Ct. App. 2d Cir. 1961), rev’d on other grounds, 141 So. 2d 649 (La. 1961) (on rehearing).
14
in Louisiana against application of Pugh clauses to compulsory units.85 Lessors who so desire
can and often do draft Pugh clauses applicable to both units created by the lessee and units
compelled by the Commissioner of Conservation.86 Drafters should carefully articulate the
circumstances that will trigger the application of the Pugh clause.87
Pugh clauses commonly provide that a lease will be divided with the establishment of a
unit that pools or combines a portion of the lands covered by the lease with other lands.88
Whether or not a unit for purposes of such a Pugh clause can be comprised entirely of land held
under one lease is an issue which has resulted in conflicting decisions by Louisiana appellate
courts,89 and the conflict has not been resolved by the Louisiana Supreme Court.
85
Martin, supra note 73, at 584.
86
Id.
87
Aimee Williams Hebert, A Review of Selected Lease Clauses, 57 MIN. L. INST. 170, 199-200 (2007). The
Pugh Clause in Will-Drill Res., Inc., provides an example of how to draft a clause that will divide a lease upon either
declared or compulsory creation of a unit. The clause there stated:
Any provision in this lease to the contrary notwithstanding, it is expressly agreed that if, either by
an order of the Commissioner of Conservation of Louisiana, or by any other State or Federal
authority having control of such matters, or in the manner hereinabove provided, a drilling and/or
production unit be created and established, pooling and combining a portion of the lands covered
by this lease with other lands, lease or leases in the vicinity thereof, then drilling operations on or
production of oil, gas, sulphur or other minerals from such unit shall continue this lease in force
and effect during or after the primary term only as to the lands covered hereby which are included
in such unit, irrespective of whether such drilling operations be conducted on, or production be
secured from lands covered hereby, or from other lands embraced within such unit, it being
expressly agreed that drilling operations on, or production from any drilling or production unit,
however created or established, shall not maintain this lease in force or effect during or after the
primary term as to any of the land covered hereby which are not included in such unit. This lease,
during any period in which it is being so maintained as to a part of the land covered hereby may be
maintained as to the remainder of said lands in any manner elsewhere provided for herein;
provided that if it be maintained by rental payment, the rentals may be reduced in proportion to the
number of acres in such unit or units as to which this lease is being maintained by drilling
operation or production. Will-Drill Res., Inc., 738 So. 2d at 1197.
88
Id.
89
In Will-Drill Resources, Inc. v. Huggs, 738 So. 2d 1196, 1199 (La. App. 2d Cir. 1999), the Louisiana
Second Circuit Court of Appeal held that the drilling of a well on a unit comprised entirely of leased land did not
activate the Pugh clause in question; thus, unit drilling maintained the lease in its entirety. The Third Circuit reached
a similar result in the earlier case of Fremaux v. Buie, 212 So. 2d at 150-151. However, in Banner v. GEO
Consultants International, Inc., 593 So. 2d 934 (La. Ct. App. 4th Cir. 1992), the Fourth Circuit determined that the
15
The vast majority of Pugh clauses in Louisiana cause a vertical division of leased land;
that is, most Pugh clauses are invoked to divide the surface of the leased premises on a surface
acre basis. However, in some instances a Pugh clause may divide the leased premises on the
basis of horizontal planes at a specific depth or horizon below the surface.90 In such cases, the
clause is called a “horizontal Pugh clause” or a “bottomhole severance clause.”91 The contract
itself will control how the horizontal boundary is determined and care should be taken in the
drafting of a lease to carefully define the horizontal boundary.92
7.6
Authority to Execute Lease
It is axiomatic that the basic authority to grant an oil and gas or other mineral lease is
vested in the party or his authorized representative, who owns the exclusive right to explore for
minerals on the particular tract in question, be he a landowner owning the entire fee title, a
mineral servitude owner, or the independent holder of the executive rights.93 This basic principle
is specifically recognized in Article 11694 of the Mineral Code as supplemented by Articles 15,95
creation of a “unit” comprised entirely of one party’s land triggered the application of the Pugh clause in the lease.
The decision in Banner has been questioned in subsequent Louisiana jurisprudence and by commentators and legal
scholars. See Will-Drill Res., Inc.,738 So. 2d at 1201; Patrick H. Martin, Review of Recent Developments: 19911992: MINERAL RIGHTS, 53 LA. L. REV. 891, 910 (1993).
90
8 WILLIAMS & MEYERS, supra note 74, at 476.
91
Id.
92
See Hebert, supra note 87 at 209. In some cases outside of this context, courts have found that the parties
intended a horizontal boundary to be located at a consistent, fixed depth. EOG Res., Inc. v. Wagner & Brown, LTD.,
202 S.W.3d 338, (Tex. App. 2006). In others, the court found that the boundary was found at variable depths based
on stratigraphy. Sandefer Oil Gas, Inc. v. Duhon, 961 F. 2d 1207, 1209 (5th Cir. 1992). But see Martin, supra note
86, at 911 (questioning the rationale of Sandefer by stating “[t]he appeals court read the clause such that ‘producing
in paying quantities’ modified ‘depth’ and not ‘well.’ The court’s strained interpretation of syntax was bolstered, in
its view, by the purpose of a Pugh clause to overcome the rule of Hunter v. Shell Oil and to insure diligent
development.”).
93
See LA. REV. STAT. § 31:16, cmts; LA. REV. STAT. §§31:105-13 (dealing with executive rights). For general
discussions of the authority to enter into mineral leases see generally McCollam, Impact, supra note 1, at 53-61;
McCollam, Primer, supra note 1, at 793-99.
94
LA. REV. STAT. § 31:116.
16
16,96 19,97 and 117.98 It should be noted that an entire chapter of the Mineral Code is devoted to
the topic of executive rights, which is beyond the scope of this chapter 99 Reduced to essentials,
an executive right is the exclusive right to grant mineral leases burdening a specified tract of land
or mineral right.100
Article 20 of the Mineral Code provides that the authority of a tutor, curator, succession
representative or trustee to grant a mineral right, including a mineral lease, is governed by the
laws applicable to each such representative. 101 Thus, special rules found in sources other than
the Mineral Code regarding capacity merit attention.
7.6.1 Property of the Deceased, Unemancipated Minors, Incapacitated
Persons, and Property Held in Trust
Under special rules found outside of the Mineral Code, if the property to be leased is
owned by the estate of a deceased person under administration, the executor or the administrator
of the succession is the proper party to execute the lease and not the heirs or legatees. 102 The
court may authorize the granting of a mineral lease when it appears to be in the best interest of
the succession.103 The succession representative must petition the court having jurisdiction over
95
LA. REV. STAT. § 31:15.
96
LA. REV. STAT. § 31:16.
97
LA. REV. STAT. § 31:19.
98
LA. REV. STAT. § 31:117.
99
LA. REV. STAT. § 31:105, et seq.
100
LA. REV. STAT. § 31:105.
101
LA. REV. STAT. § 31:20.
102
LA. CODE CIV. PROC. arts. 3081, 3091, 3226. Cf. Lowry v. Atl. Ref. Co., 231 F. Supp. 775 (W.D. La. 1964),
aff’d, 363 F. 2d 876.
103
LA. CODE CIV. PROC. art. 3226.
17
the estate of the deceased for authority to execute the lease. A copy of the proposed lease must
be attached to the petition for approval.104 A notice of application reflecting the details of the
proposed lease and the date of the hearing on the application to lease, must be advertised in a
newspaper published in the parish where the succession is pending and in the parish or parishes
where the property is located.105 The notice shall state that the order approving the lease may be
issued seven (7) days from the date of the publication and that an opposition may be filed any
time prior to the issuance of the order.106 If no opposition is filed, the court may issue its order
after the expiration of the seven (7) day delay and will generally grant the lease upon the terms
recommended by the succession representative.107
If an unemancipated minor or incapacitated person owns mineral property, the tutor or
curator may grant a mineral lease when it is in the best interest of the minor or incapacitated
person.108 Court approval of the proposed lease is a prerequisite to its validity.109 No publication
or advertisement is required with respect to the application to lease, and the term of the lease
may extend beyond the anticipated duration of the tutorship or curatorship.110
104
Id.
105
LA. CODE. CIV. PROC. art. 3229.
106
Id.
107
Id. If opposition is filed, a hearing is held and the court will determine the matter on the merits giving due
consideration to all arguments presented. McCollam, Impact, supra note 1, at 56; McCollam, Primer, supra note 1,
at 795.
108
LA. CODE CIV. PROC. arts. 4268, 4271, 4566.
109
LA. CODE CIV. PROC. arts. 4268, 4271, 4566.
110
LA. CODE CIV. PROC. arts. 4268, 4271, 4566.
18
However, the property of an unemancipated minor is involved, venue for court approval
of the mineral lease is jurisdictional and cannot be waived.111 An unemancipated minor is
deemed to have the domicile of his or her tutor.112
Proceedings subsequent to the initial
confirmation or appointment of the minor’s tutor must be brought in the parish of the tutor’s
domicile when the tutor resides in Louisiana.113
Where the property to be leased is owned by a validly created inter vivos or testamentary
trust which does not expressly limit the power of the trustee,114 an oil and gas lease covering any
property owned by the trust may be granted by the trustee, without publication or court approval.
115
Thus, to determine whether a trustee has the authority to enter into a mineral lease, the trust
instrument or testament must be examined to determine whether it contains any limitations on
leasing. The term of a lease granted by a trustee may extend beyond the term of the trust. 116
7.6.2
Community Property
A special note should be made regarding community property, which is both interesting
from a historical perceptive and significant for the purposes of examining title to oil and gas
properties. Under current Louisiana law, the concurrence of both the husband and wife is
necessary for the granting of a mineral lease.117 However, prior to January 1, 1980, the husband
111
LA. CODE CIV. PROC. art. 44(B), 4034. Cf. Hammond v. Gibbs, 176 So. 2d 465 (La. Ct. App. 2d Cir. 1965)
(approval of sale of minor’s immovable property by a court of improper venue was an absolute nullity).
112
LA. CIV. CODE. art. 41.
113
LA. CODE CIV. PROC. art. 4034.
114
If the trust instrument limits the power of the trustee the normal statutory rules do not apply. LA. REV.
STAT. § 9:2061.
115
LA. REV. STAT. § 9:2118.
116
Id.
117
LA. CIV. CODE art. 2347.
19
as “head and master” could dispose of community property without the concurrence of his
spouse.118 Regardless of whether the property to be leased is community or purportedly separate
property, it is a good idea for both spouses to appear on the lease, if only for the purpose of
acknowledging that the other is dealing with his or her own separate property. 119 Moreover,
unless there is a contractual stipulation to the contrary, all moneys, including bonus money,
delay rentals and royalties, owed to the lessor are community assets.120
7.6.3 State Owned Property and Agency Lands
If the State of Louisiana, or some state agency, owns the property to be leased, the
procedures for obtaining the lease are again controlled by specific statute.121 The main point to
bear in mind is that all such leases are let by public bid after extensive publication of the
proposed lease in local newspapers and in the official state journal.122
The Louisiana State Mineral Board (the “Mineral Board”) is the official governmental
agency vested with authority to grant leases on state-owned property, and anyone wishing to
lease state lands may nominate a tract for leasing.123 A prospective lessee must submit an
application to the assistant secretary of the Louisiana Office of Mineral Resources, giving a
118
Louisiana statutorily terminated the “head and master” rule on January 1, 1980, prior to the decision of the
United States Supreme Court in Kirchberg v. Feenstra, 450 U.S. 455, 462-63 (1981), which held that the “head and
master” rule was unconstitutional, and substituted an equal management rule. See 1979 LA. ACTS 709 (effective
Jan. 1, 1980), revising Book III, Title VI of the Louisiana Civil Code (Matrimonial Regimes). See Katherine S.
Spaht, Background of Matrimonial Regimes Revision, 39 LA. L. REV. 323, 340-43 (1978-1979).
119
Cf. McCollam, Impact, supra note 1, at 54-55.
120
LA. CIV. CODE art. 2339.
121
LA. REV. STAT. § 30:121 et seq. For additional discussions of leases of state-owned properties, see William
O. Bonin, Public Mineral Leasing in Louisiana, 27 TUL. L. REV. 246 (1953); McCollam, Impact, supra note 1, at
56-59; McCollam, Primer, supra note 1, at 795-96. For a detailed discussion of leasing state and state agency lands,
see Leslie Moses, The Mineral Leasing of State and State Agency Lands in Louisiana, 10 LA. MIN LAW INT. 42
(193).
122
LA. REV. STAT. § 30:126.
123
LA. REV. STAT. § 30:124.
20
description of the land, including a plat, and make payment of a nonrefundable four hundred
dollar processing fee.124 Prospective lessees must be registered with the Louisiana Office of
Mineral Resources125 and provide the office with a certificate of good standing from the
Louisiana Secretary of State, evidencing its right to conduct business in the state of Louisiana. 126
This registration must be renewed annually by January 31st, updating all required information
and providing a renewal certificate from the Secretary of State.127
Some basic points to remember are that no state lease may contain more than five
thousand acres,128 a bid may cover all or any portion of the land advertised,129 and other than the
statutorily mandated minimum royalties,130 the Mineral Board has the authority to enter into a
lease upon whatever terms it considers proper.131 The Mineral Board has the discretion to reject
any and all bids and generally speaking has considerable latitude in accepting the bid it considers
most favorable.132
124
LA. REV. STAT. § 30:125.
125
In the event that a lease is awarded to a bidder who is not registered, such bid is conditionally accepted, and
the bidder has until the second business day following the date on which the bid was accepted to register. LA. REV.
STAT. § 30:127.
126
LA. REV. STAT. § 30:123(1)(A).
127
LA. REV. STAT. § 30:123(1)(B).
128
LA. REV. STAT. § 30:126.
129
LA. REV. STAT. § 30:127.
130
See id.
131
Id.
132
Id. Sometimes the Mineral board will accept a high royalty in lieu of a high bonus and sometimes it will
reject all bids if same are considered inadequate. McCollam, Primer, supra note 1, at 795.
21
Where the property in question is not owned by the state proper but by an agency, such as
a levee district, drainage district or parish school board,133 the lease may be granted in one of two
ways. An agency may lease its own lands134 by public bidding following appropriate publication
of the offer to lease.135 Any such lease is subject to approval by the Mineral Board. 136 If the
agency elects to lease its own land, it may do so on its own motion or by written application for
same.137
When by application, the applicant must comply with the statutory requirements
dealing with state leases in general, including the making of its application and the payment of
its deposit.138 Alternatively, the agency may elect by resolution to have the Mineral Board lease
its lands in accordance with the normal procedure for leasing state owned lands.139
One somewhat obscure point should be mentioned. Where the property in question is a
sixteenth section or school indemnity lands owned by a school board,140 additional rules apply.141
Agency is defined as a “levee district, drainage district, road district, school district, school board, or other
board, commission, parish, municipality, state university, state college state penal or charitable institution or agency,
unit or institution of the state or subdivision thereof.” LA. REV. STAT. § 30:151.
133
134
LA. REV. STAT. § 30: 152.
135
LA. REV. STAT. § 30:155, et seq.
136
LA. REV. STAT. §§30:155, 158.
137
LA. REV. STAT. § 30:155.
138
LA. REV. STAT. § 30:156.
139
LA. REV. STAT. § 30:153.
140
Various Acts of Congress conveyed regular Section 16 of each township to the states to be held in trust for
school purposes, title vesting in the state upon completion of the survey of the township without the necessity of a
formal transfer. If there was no regular Section 16, or if portions or all of the regular Section 16 had already been
conveyed by the Federal Government, the states were permitted to select other land in lieu of sixteenth section land,
but such land did not vest in the state until it was selected. The latter are called “school indemnity lands.” Ellis
Barnes, The Origin of Private Titles in Louisiana: Federal and State Transfers of Land, 27 TUL. LAW. REV. 57, 67
(1952). State ex rel. McEnery v. Gov. Nichols, 7 So. 738 (1890); Vavoline Oil Co. v. Concordia Parish Sch. Bd.,
216 So. 2d 702, 705 n.3 (La. Ct. App. 3d Cir. 1968). LA. REV. STAT. § 30:152 authorizes school boards to lease
sixteenth section lands set aside in each township for benefit of the school children by the federal government. See
Terrebonne Parish Sch. Bd. v. St. Mary Parish Sch. Bd., 131 So. 2d 266, aff’d 138 So. 104 (1962).
22
Generally, the school board follows the same procedure as other state agencies and may elect
whether to handle its own leasing or to have the Mineral Board lease the school board’s lands.142
However, a distinction is drawn between “sixteenth section or school indemnity lands.” In the
case of school indemnity lands, the lease may only be made by the Mineral Board and the funds
derived from such lease are credited to the parish school board entitled thereto. 143 The school
board does not have the option of leasing school indemnity lands.144
7.7
Leases Granted by an Owner under Conditional Title
In addition to those areas of capacity found in authorities outside of the Mineral Code, the
code contains certain rules governing the capacity to grant a mineral lease by one whose title
may be ultimately lost during the pendency of the lease and the effect of the loss of title on the
continuing efficacy of the lease.
Entire chapters of the Mineral Code are devoted to
servitudes,145 executive rights,146 and usufructs,147 and a detailed treatment of these topics are
beyond the scope of this chapter. However, certain specific rules regarding the capacity of such
owners under conditional title are contained in Chapter 7 of the Mineral Code addressing the
mineral lease. These rules are addressed below.
141
Ryan M. Seidaman, Curious Corners of Louisiana Mineral Law: Cemeteries, School Lands, Erosion,
Accretion, and Other Oddities, 23 TUL. ENVTL. L.J. 93, 102-18 (2009).
142
LA. REV. STAT. §§ 30:151-58.
143
LA. REV. STAT. § 30:154(C).
144
Id.
145
See LA. REV. STAT. § 31:21, et seq.
146
See LA. REV. STAT. § 31:105, et seq.
147
See LA. REV. STAT. § 31:188, et seq.
23
7.7.1
Owners of Servitudes and Executive Rights
Under Article 117, “[a] mineral lease may be granted by the owner of an executive
interest whose title is extinguished at a particular time or upon the occurrence of a certain
condition, but it terminates at the specified time or condition.”148 Because the lease will not
extend beyond the continuing existence of the underlying title of the grantor, when taking a lease
the lessee should consider whether the grantor’s title is tied to a term, resolutory condition or
may be extinguished by the occurrence of prescription of nonuse.
In this connection, it should be noted that independent executive rights and mineral
servitudes are extinguished by ten (10) year prescription of nonuse149 unless prescription is
otherwise interrupted or suspended.150 Therefore, one owning only an executive right151 or a
mineral servitude would fall under Article 117 and any lease granted by such owner would not
survive in the event title is lost by prescription of nonuse.152 Accordingly, if a mineral lease is to
be taken from the owner of an executive right or a mineral servitude that will soon become
148
LA. REV. STAT. § 31:117. The limitation that such mineral lease will be extinguished along with the title
from whom it is granted applies to anyone owning an “executive interest.” An executive interest is defined as a
mineral right that includes an executive right. LA. REV. STAT. § 31:108. Under this definition, the owner of an
executive interest would include, the owner of an executive right, a mineral servitude owner, and a landowner whose
interest is not burdened by the foregoing.
149
As noted previously, prescription of nonuse is a mode of extinction of a real right other than ownership as a
result of failure to exercise the right for a period of time. LA. CIV. CODE. art. 3448. Prescription of nonuse is
distinguished from liberative prescription in that the former extinguishes the right itself while the latter bars actions.
Id. cmt. (c).
150
LA. REV. STAT. § 31: 27, et seq; LA. REV. STAT. § 31:107.
151
LA. REV. STAT. § 31:105. This point is not specifically stated in the Mineral Code; however, Article 105
provides that the owner of an executive right may lease the land over which he has power to the same extent and on
such terms and conditions as if he were the owner of a mineral servitude, and a lease based on a mineral servitude
expires with the expiration of the servitude since the lessee cannot rise above the source of his lessor’s title.
152
See Plaquemines Parish Gov’t v. Getty Oil Co., 673 So.2d 1002 (La. 1996).
24
extinguished by, consideration should be given to obtaining a cover lease from the owner of the
land or other mineral right which will be freed of the burden upon the accrual of prescription.153
Although Article 117 seems to make clear that a lease will not generally survive if the
grantor loses title, in Plaquemines Parish Gov’t v. Getty Oil Comp.,154 the Louisiana First Circuit
Court of Appeal held that a lease granted by the owners of multiple mineral servitudes continued
to burden all of the tracts covered by the lease although one or more of the underlying servitudes
had terminated by prescription of nonuse.155 The court reasoned that neither the contiguity rule
nor prescription of nonuse156 applied to mineral leases, and thus, the owners of multiple
noncontiguous servitudes could grant a lease that survived the extinction of one or more of the
servitudes.157 On rehearing, the court considered whether Article 117 dictated a different result
but concluded it did not.158 The court reasoned that prescription of nonuse does not occur at a
“particular time” or upon the happening of a “certain condition,” and therefore, Article 117 did
not apply.159 On appeal to the Louisiana Supreme Court, the court recognized that, if the lease in
question was granted by servitude owners, then that lease was dependent on the continued
viability of their servitudes, citing Article 117.160 This subsequent decision is consistent with the
rule found in Article 117.
153
McCollam, Impact, supra note 1, at 60; McCollam, Primer, supra note 1, at 797.
154
663 So.2d 773 (La. App. 1st Cir. 1995).
155
Id.
156
LA. REV. STAT. §§ 31: 114 and 115. For detailed discussions of these issues, see Sections 7.3 and 7.4
supra.
157
663 So.2d at 778-781.
158
Id. at 786.
159
Id.
160
673 So.2d 1002, 1006 (La.1996).
25
7.7.2
Property Subject to a Redemptive Right
Another type of conditional title recognized in Louisiana is title subject to a redemptive
right. Under the Civil Code a seller who exercised the right of redemption is entitled to recover
the property free of any encumbrances placed on it by the buyer; therefore, a lease granted by a
landowner whose title is subject to a right of redemption would be limited by this condition.161
Likewise, property lost through a tax sale is redeemable for a period of three years after the
recordation of the tax sale.162 In the event that the right of redemption is exercised, a lease
granted by the tax purchaser would terminate.163 As a result, lessees should use caution when
leasing from a party who derives its title through a tax sale.
7.7.3
Property Subject to a Usufruct
A somewhat similar problem is presented where the property to be leased is subject to a
usufruct.164 The usufruct and naked ownership situation in Louisiana is akin to the life estate and
remainderman concept recognized in common law states165 and the existence of same has
historically created some rather complicated problems in Louisiana. 166 Under Articles 118167
161
LA. CIV. CODE art. 2588.
162
LA. CONST. ART. 7, § 25
163
See Gulf Oil Corp. v. Olivier, 412 F.2d 938 (5th Cir. 1969).
164
See La. Civ. Code art. 533, et seq.
165
McCollam, Impact, supra note 1, at 60; McCollam, Primer, supra note 1, at 798; Martin & Yeates, supra
note1, at 819-20. Usufruct is a personal servitude and a real right of limited duration on the property of another. The
features of the right vary with the nature of the things subject to it as consumables or nonconsumables. See La. Civ.
Code arts. 534 and 535.
166
See Gueno v. Medlenka, 238 La. 1081, 117 So.2d 817 (1960) and King v. Buffington, 240 La. 955, 126
So.2d 326 (1961) which were concerned with the question of who (as between usufructuary and naked owner) had
the right to grant oil and gas leases and to retain the considerations reserved to lessor therein.
167
LA. REV. STAT. § 31:118.
26
and 192168 of the Mineral Code, if a usufruct does not include mineral rights,169 any lease granted
by the usufructuary alone will be extinguished with the termination of the usufruct. With respect
to a usufruct over a mineral servitude or other limited executive interest, Article 118 specifically
provides that a usufructuary of such interests may grant a mineral lease that extends beyond the
term of the usufruct and binds the naked owner who will acquire the servitude free of the
usufruct. The rationale is that, if the usufruct did not have this right, his ability to preserve the
servitude by encouraging drilling would be unduly diminished, and this would contravene the
general obligation to act as a good administrator of the property subject to the usufruct.170 In
those situations where the usufructuary of a full fee title does have the right to grant a mineral
lease under Articles 188-196171 of the Mineral Code, it is advisable to have the naked owners
join in the lease because of the provision that any lease granted by a usufructuary will terminate
on the date the usufruct terminates.172
7.8
Obligations of the Lessor
Prior to the adoption of the Mineral Code, the topic of obligations owed by the mineral
lessor to the lessee, in particular those related to warranties, was an area of law marked by
confusion, resulting largely from the courts’ difficulty in determining the nature of the mineral
168
LA. REV. STAT. § 31:192.
169
See LA. REV. STAT. §§ 31:188 and 189.
170
See LA. REV. STAT. § 31:118, cmt.; see also McCollam, Impact, supra note 1, at 60; McCollam, Primer,
supra note 1, at 798.
171
LA. REV. STAT. §§ 31:188-196.
172
LA. REV. STAT. § 31:118. See McCollam, Impact, supra note 1, at 60; McCollam, Primer, supra note 1, at
798.
27
lease.173 The Mineral Code clarified the obligations owed by the lessor to the lessee, and
otherwise affirmed that the mineral lessor is subject to the overarching duty to perform the
contact good faith.174
7.8.1
The Lessor Must Not Disturb the Lessee’s Possession
Under Article 119, a mineral lessor is bound to deliver the leased premises for use by the
lessee as contemplated by the lease document, to refrain from disturbing the lessee’s possession
and to otherwise perform the lease contract in good faith. 175 The requirements of Article 119 are
statements of established law in the area of sales and lease as set forth in the Louisiana Civil
Code.176 For example, under Civil Code article 2475, a seller is bound to deliver the thing sold
and to warrant to the buyer ownership and peaceful possession of, and the absence of hidden
defects in, that thing.177 Likewise, Civil Code article 2682 provides that a lessor is bound to
deliver the thing to the lessee, maintain the thing in a condition suitable for the purposes of
which it was leased, and protect the lessee’s peaceful possession for the duration of the lease.178
The obligations of the lessor to deliver the leased premises for use by the lessee as
contemplated by the lease document and to refrain from disturbing the lessee’s possession under
Article 119 are not affirmative duties.179 Rather, the obligations are passive duties – essentially
173
Compare Martel v. Hunt, 195 La. 701, 197 So. 402 (La. 1940), with Slack v. Riggs, 177 La. 222, 148 So. 32
(La. 1933); and compare Sabine Lumber Co. v. Broderick, 88 F.2d 588 (5th Cir. 1937) with Nabors Oil & Gas Co.
v. Louisiana Oil & RefiningCo., 151 La. 361, 91 So. 765 (La. 1922).
LA. REV. STAT. § 31:119. As noted in the comments to Article 119, “the requirement of good faith
performance is inherent in all contracts.”
174
175
Id.
176
See LA. REV. STAT. § 31:119, cmt.
177
LA. CIV. CODE ART. 2475.
178
LA. CIV. CODE ART. 2682.
179
In re WRT Energy Corp., 202 B.R. 579, 583 (Bkrtcy.W.D.La. 1996).
28
obligations not to act in a certain manner.180 The issue of whether the lessor has violated the
duty to refrain from disturbing the lessee’s possession typically arises in the situation in which
the lessor wrongly contends that the lease has terminated.181 Indeed, the filing of a lawsuit in
which the lessor contests the lessee’s title is considered an interference if the lessee ultimately
prevails.182 For the period during which the lessor contests the lessee’s rights under the lease, the
lessee’s obligations are suspended.183 If prayed for in its answer or otherwise, the lessee is then
granted an extension of time within which to comply with the lease obligations.184
7.8.2
The Lessor Owes a Warranty of Title
The Mineral Code also imposes on the lessor a limited warranty obligation entitling the
lessee, in the event of a failure of title or other breach of the warranty, to a recovery of the money
paid or the value of other property delivered to the lessor during the existence of the lease,
including any royalties paid on production. 185 As a practical matter, this means the lessee can
recover all bonus money, rentals and royalties paid the lessee, but cannot hold the lessor for
additional damages suffered by the lessee.186 The recovery provided for in Article 120 is akin to
180
Id.
181
See e.g. O'Neal v. JLH Enterprises, Inc., 862 So.2d 1021 (La.App. 2d Cir. 2003).
182
Baker v. Potter, 223 La. 274, 65 So.2d 598 (La. 1952); Knight v. Blackwell Oil & Gas Co., 197 La. 237, 1
So.2d 89 (La. 1941); Williams v. James, 188 La. 884, 178 So. 384 (La.1938); Fomby v. Colombia County
Development Co., 155 La. 705, 99 So. 537 (La. 1924).
183
Baker, 65 So.2d 609; Knight, 1 So.2d at 92 Williams, 178 So. at 386; Fomby, 99 So. at 542.
184
O'Neal, 862 So.2d at 1030; In re WRT Energy Corp., 202 B.R. at 583; Baker, 65 So.2d 609; Knight, 1
So.2d at 92 Williams, 178 So. at 386; Fomby, 99 So. at 542. See also Patrick G. Tracy, Jr., The Effects of Top
Leasing in the Louisiana Law of Oil and Gas, 43 LA. L. REV. 1189 (1983).
LA. REV. STAT. § 31:120. For a historical discussion of the lessor’s warranty of title, see Richard E. Gerard,
Some Miscellaneous Lease Clauses of Interest to Lawyers and Landmen, 18 LA. MIN. LAW. INST. 194, 205-07
(1971). It should be noted that a claim for overpayment of royalties prescribes after three years from the production
of minerals. LA. CIV. CODE. art. 3494 (5).
185
186
See McCollam, Impact, supra note 1, at 60; McCollam, Primer, supra note 1, at 798.
29
the recovery permitted by Civil Code Article 2506 to an evicted buyer against his seller, which
includes the price paid and the value of the fruits he was obligated to return to the true owner.187
Article 120 was designed to cure some ambiguities in the prior law as to the extent of the lessee’s
permitted recovery and will put at rest speculation, for example, as to whether the lessor could be
held in damages for the full value of a developed lease lost by virtue of a title defect.188
Prior to the adoption of the Mineral Code, there was conflicting case law addressing
whether the lessee was entitled to damages for the breach of warranty of title. In the early case
of Slack v. Riggs,189 the Louisiana Supreme Court allowed the lessee to recover drilling costs as
an element of damages in warranty. However, in the later case of Martel v. Hunt,190 the Supreme
Court held that a lessee was not entitled to a proportionate part of drilling costs as damages when
there was a partial failure of title; rather, the court found that recovery was limited to a return of
a portion of the bonus. The court in Martel reasoned that the nature of the lease transaction
made it apparent that the lessee assumed the risk of drilling and had more to gain than the
lessor.191 The court also noted that the lessee had not relied exclusively on the lessor's warranty
but had had its counsel examine title before committing its funds to drilling.192 In this regard, the
court in Martel distinguished Slack on the basis that the lessee did rely on the lessor’s warranty
187
See LA. REV. STAT. § 31:120, cmt. While Civil Code Article 2506 also permits an evicted buyer to recover
“other damages sustained because of the eviction,” these additional damages have been excluded from Article 120.
Compare LA. CIV. CODE ART. 2506 with LA. REV. STAT. § 31:120.
188
See LA. REV. STAT. § 31:120, cmt.; see also McCollam, Impact, supra note 1, at 60; McCollam, Primer,
supra note 1, at 798. Compare Martel v. Hunt, 195 La. 701, 197 So. 402 (La. 1940), with Slack v. Riggs, 177 La.
222, 148 So. 32 (La. 1933).
189
177 La. 222, 148 So. 32 (La. 1933).
190
195 La. 701, 197 So. 402 (La. 1940).
191
Id. at 412.
192
Id. at 413.
30
in committing its money to drilling.193 The Martel court also noted that the lessee in Slack had
not paid a cash bonus but had undertaken a drilling obligation.194
The inconsistent approach to the measure of damages that may be awarded for breach of
warranty of title continued until the adoption of the Mineral Code. 195 Article 120 was intended
to clarify the “murky jurisprudence” in this area.196 By limiting the lessee’s recovery to the
return of bonus, rentals and royalties, Article 120 adopts the same approach taken by the court in
Martel, shifting the more substantial risk of loss of title to the lessee in the event that title is lost
after exploration and production has commenced.197
It should be noted that Article 120 states a rule to be imposed if the lease contract is
silent, and parties are free to extend the lessor’s liability beyond that provided for in Article
120.198 Furthermore, the implied warranty can be expressly excluded or limited from the lease
by a specific clause to that effect, which is often done by more sophisticated landowners. 199 This
contractual freedom to limit the warranty has been expressly preserved in Article 120.200 The
right of the parties to modify the implied warranty of title provided for in Article 120 is
193
Id.
194
Id.
195
See e.g. Jefferson Lake Sulphur Co. v. State, 213 La. 1, 34 So.2d 331 (1948); Carter Oil Co. v. King, 134
So.2d 89 (La.App.2d Cir. 1961); Berwick Mud Co. v. Stansbury, 205 So.2d 147 (La.App.3d Cir. 1967); Harville v.
Campbell, 221 So.2d 273 (La.App.2d Cir. 1969).
196
See LA. REV. STAT. § 31:120, cmt.
197
Id.
198
See LA. REV. STAT. § 31:120, cmt.
199
See McCollam, Impact, supra note 1, at 60; McCollam, Primer, supra note 1, at 798.
200
LA. REV. STAT. § 31:120.
31
consistent with Article 2503 of the Civil Code, which permits the parties to a contract of sale to
increase, limit or exclude the implied warranty against eviction.201
7.8.3
The Lessee May Take Cover Leases
Another area clarified by the Mineral Code is the question of whether a lessee can take a
protective lease from a prospective adverse claimant without jeopardizing his basic lease. Under
the prior jurisprudence, there was some debate concerning the right of the lessee to take such
leases because of the general rule applicable to ordinary lease that a lessee may not question his
lessor’s title.202 Early jurisprudence took a common-sense view of the mineral lease, holding
that the rule applicable to ordinary leases that a lessee may not contest his lessor’s title was
inapplicable to mineral leases.203 But, following the decision in Gulf Refining Co. v. Glassell,204
which held a mineral lease to be of the nature of an ordinary lease and denied the lessees the
right to bring real actions, the United States Fifth Circuit Court of Appeals held that a lessee
cannot deny his lessor’s title.205
Article 121of the Mineral Code, however, expressly gives the lessee the right to take a
cover lease from persons claiming the leased land, mineral rights or interests therein adversely to
201
See LA. REV. STAT. § 31:120, cmt.; See also McCollam, Impact, supra note 1, at 60; McCollam, Primer,
supra note 1, at 798.
202
Compare Sabine Lumber Co. v. Broderick, 88 F.2d 588 (5th Cir. 1937) with Nabors Oil & Gas Co. v.
Louisiana Oil & Refining Co., 151 La. 361, 91 So. 765 (1922).
203
See LA. REV. STAT. § 31:120, cmt., citing Nabors Oil & Gas Co. v. Louisiana Oil & Refining Co., 151 La.
361, 91 So. 765 (La. 1922); Powell v. Rapides Parish Police Jury, 165 La. 490, 115 So. 667 (La. 1928); Gulf
Refining Co. of Louisiana v. Hayne, 138 La. 555, 70 So. 509 (La. 1916); Rives v. Gulf Refining Co. of Louisiana,
133 La. 178, 62 So. 623 (La. 1913); Grimm v. Pugh, 197 So. 641 (La.App.2d Cir. 1940).
204
186 La. 190, 171 So. 846 (1936).
205
Sabine Lumber Co. v. Broderick, 88 F.2d 588 (5th Cir. 1937).
32
his lessor. 206 However, this is not a rule of public policy, and lessors can and often do exclude
the warranty of title in the specific terms of the lease.207 Because Article 121 allows the lessee to
take competing leases, it also implicitly authorizes non-owners to grant mineral leases, and it has
been held that doing so does not violate the actual owner’s rights.208
The rule stated in Article 121 is consistent with the rule of Article 120 that the mineral
lessor’s warranty is that of a seller.209 Under Article 121, if a title dispute arises that cannot be
amicably resolved, the lessee may, without exposure, obtain lease coverage from both contesting
parties, and in the event of production, settle the matter by depositing the contested royalties or
other payments into the registry of the court in an appropriately initiated concursus or
interpleader proceeding.210
7.9
Payment of Rent by Lessee
Under Mineral Code Article 123, “payments made for the maintenance of a mineral lease
without drilling or mining operations or production or for the maintenance of a lease during the
presence on the lease or any land unitized therewith of a well capable of production in paying
206
LA. REV. STAT. § 31:121.
207
As noted previously, freedom to contract contrary to the provisions of the Mineral Code, except as to those
provisions which are based on public policy, has been preserved under Article 3. See Am. Lung Ass'n of Louisiana,
Inc. v. State, 645 So.2d 1219, (La.App. 1st Cir. 1994), rehearing denied, writ denied 650 So.2d 1182, (La. 1995)
(under LA. REV. STAT. § 31:3, a mineral lessor has the power to take away the statutory right provided for in LA.
REV. STAT. § 31:121 from its lessee by incorporating a lease provision which specifically prohibits or limits the
lessee’s right to take such protective leases). Many large landowner leases include an express prohibition against
the acquisition of cover leases without the express consent of the lessor, and these contractual provisions would not
be changed by the new code. See McCollam, Impact, supra note 1, at 63, fn 131; McCollam, Primer, supra note 1,
at 799, fn 466.
208
Am. Lung Ass'n of Louisiana, Inc., 645 So.2d 1219.
209
See LA. REV. STAT. § 31:120 cmt.
210
See LA. CODE CIV. PROC. arts. 4651, et seq. which allow a lessee to file a concursus proceeding, naming all
persons with conflicting claims parties, and to deposit funds into the registry of the court. Once the funds are
deposited, the lessee is relived of liability for the money so deposited. LA. CIV. CODE PROC. art. 4658.
33
quantities, and royalties to the lessor on production are rent.”211 Article 123 further provides that
a mineral lessee is obligated to make timely payment of rent according to the terms of the
contract or the custom of the mining industry in question if the contract is silent.212
In essence, Article 123 identifies three categories of rent, which are commonly known as
delay rentals, royalties, and shut-in payments.213 Each type of rental payment merits discussion.
7.9.1
Payment of Delay Rentals
Delay rentals are payments to the lessor to maintain a mineral lease without drilling or
mining operations or production during the primary term of the lease. 214 The primary term of the
lease is the period of time during which the lease may be kept alive by the lessee even though oil
and gas is not being produced in paying quantities.215 The primary term of the lease is fixed by
the habendum clause, which generally allows the lessee to maintain the lease for a fixed period
of time by paying delay rentals (the primary term) and for so long thereafter as oil and gas are
produced for the leased premises in paying quantities (the secondary term).216
The payment of delay rentals allows a lessee to maintain a lease by paying rent despite
the fact that no drilling, mining operations or production are being conducted on the land. 217 The
parties have the power to contract as to the time, place and method of payment of delay rentals
211
LA. REV. STAT. § 31:123.
212
Id.
213
Id.
214
Id.; Acquisitions, Inc. v. Frontier Explorations, Inc., 432 So. 2d 1095, 1100 (La. Ct. App. 3d Cir. 1983). 8
WILLIAMS & MEYERS, supra note 74, at 248.
215
8 WILLIAMS & MEYERS, supra note 74, at 804-05.
216
8 WILLIAMS & MEYERS, supra note 74, at 465.
217
LA. REV. STAT. § 31:123; 2 W.L. SUMMERS, LAW OF OIL AND GAS § 15:1 (3 ed. 2006).
34
and as to whom payment may be made.218 Delay rental clauses are typically constructed in one
of two ways, resulting two different types of leases: the “unless” lease and the “or” lease.219
In an “unless” lease, the more common type of lease, the parties typically include a
clause modifying the lease’s habendum clause, which provides that the lease will terminate under
specific circumstances, unless delay rentals are paid.220 Thus, the delay rentals are made an
express resolutory condition,221 the failure of which results in the termination of the lease.222 For
example, a habendum clause in an “unless” type lease may provide:
This lease shall be for a term (hereafter called “Primary Term”) of three (3) years
from date, and for as long thereafter as oil, gas, or other mineral is being produced
in paying quantities as hereinafter defined, or drilling is being conducted on this
land or on lands pooled therewith, or rental payments as hereinafter provided are
timely and correctly made.
Provided, however, that this lease shall terminate unless a well shall be completed
within one year from the date hereof, or unless the lessee shall pay at the rate of
one hundred ($100.00) dollars, monthly in advance, for each additional month
such completion is delayed from the time above mentioned for the completion of
the well until such well is completed.223
In the above clause, the lease has a primary term of three years and includes an “unless”
clause providing that the lease shall expire in one year unless the lessee is drilling wells or pays
218
2 SUMMERS, supra note 217, at § 15.1.
219
3 WILLIAMS & MEYERS, supra note 74 at §605.
220
LA. REV. STAT. § 31:123, cmt.; 3 WILLIAMS & MEYERS, supra note 74, §605; 2 SUMMERS, supra note 217,
§ 15:1-186; see McCollam, Impact, supra note 1, at 67 (referring to the “unless” type lease as the normal type of
lease).
221
A resolutory condition is a condition that terminates an obligation on the happening of an uncertain event.
LA. CIV. CODE art. 1767.
222
LA. REV. STAT. § 31:123, cmt.; see Harry Bourg Corp. v. Benbury Res., Inc., No. 04-379, 2004 WL
1661200, at *1 (E.D. La. 2004).
223
See, e.g., Harry Bourg Corp., 2004 WL 1661200, at *1; 2 SUMMERS, supra 217, §§ 15:1-186.
35
delay rentals.224 In this situation, the failure of the lessee to either drill or pay the delay rentals
ipso facto terminates the lease.225 The Mineral Code Article 133 authorizes such automatic
termination, providing that a mineral lease terminates at the expiration of the agreed term or
upon the occurrence of an express resolutory condition.226 The lessor is relieved from the
necessity of putting the lessee in default in this circumstance.227
Courts have generally strictly adhered to these principles in administering resolutory
conditions in mineral leases.228 Even when payments are missed because of mere neglect or
oversight, courts still find that the express resolutory condition requiring such payment is met
when payment is not made timely, thus, terminating the lease.229 But it is not the case that every
failure to pay delay rentals as required by the lease will result in enforcement of the resolutory
condition. For example, where a lessee made a check out to the original lessor, who had died,
rather than to his successors who were identified as the new lessors in an act of correction to the
lease, the court refused to find that the resolutory condition had been satisfied.230 The court noted
that the lessee made timely payment in the correct amount to the correct depository bank and
224
See, e.g., Harry Bourg Corp., 2004 WL 1661200, at *2.
225
Id.
226
LA. REV. STAT. § 31:133.
227
Id., cmt.; Miller v. Kellerman, 228 F. Supp. 446, 463 (W.D La. 1964).
228
Miller v. Kellerman, 228 F. Supp. 446 (W.D. La.1964), aff'd 354 F.2d 46 (5th Cir. 1966), cert. denied 384
U.S. 951 (1966); Broussard v. Phillips Petroleum Co., 160 F. Supp. 905 (W.D.La.1958), aff'd 265 F.2d 221 (5th Cir.
1959); Rushing v. Griffin, 121 So. 2d 229 (La. 1960); Johnson v. Smallenberger, 110 So.2d 119 (La. 1959); Atlantic
Refining Co. v. Shell Oil Co., 217 La. 576, 46 So.2d 907 (La. 1950); Stream Family Ltd. P’ship v. Marathon Oil
Co., 2009-561 (La. App. 3d Cir. 2009), 27 So. 2d 354.
229
Johnson v. Smallenberger, 110 So.2d 119 (La. 1959).
230
Lapeze v. Amoco Prod. Co., 842 F.2d 132, 134-35 (5th Cir. 1988).
36
found that the plaintiffs’ argument was convoluted and ignored the actual facts.231 Courts have
also refused to enforce express resolutory conditions where there is a good faith, though
erroneous, effort to pay which could reasonably have been called to the attention of the lessee by
the lessor prior to the rental date, where there is a mutual error as to the amount due, or where
nondelivery by a reliable and accepted mode of communication is beyond the control of the
lessee.232
The second type of lease, the “or” type of mineral lease, does not contain the resolutory
condition found in the “unless” lease. In an “or” lease, the lessee covenants to do one of two or
more acts.233 The lessee has the option of which of the specified acts to perform.234 Payment of
rentals is often one of the acts the lessee can choose to perform.235 A typical clause in an “or”
lease may read:
Lessee agrees to drill a well upon said premises within six months from this date,
or thereafter pay to the lessor a yearly rental of one hundred dollars until said well
is drilled.236
This is known as a “drill or pay” provision because the lessee’s only options are to drill a
well or pay rentals.237 Other alternatives that may be included in an “or” lease include a “drill or
pay or surrender” provision and a “drill or pay or forfeit” provision. 238 Under a “drill or pay or
231
Id. at 135.
232
See Calhoun v. Gulf Refining Co., 104 So.2d 547 (La. 1958); Jones v. Southern Natural Gas Co., 36 So.2d
34 (La. 1948); Baker v. Potter, 65 So.2d 598 (La. 1953).
233
3 WILLIAMS & MEYERS, supra note 74, at § 605.
234
Id.
235
Id.
236
See id. at § 605.1.
237
Id.
238
Id.
37
surrender” provision, the lessee has the option of drilling, paying rentals, or surrendering the
lease.239 Under “drill or pay or forfeit” provision, the lessee expressly covenants to drill or pay
rentals, and the lessor is authorized to declare forfeiture in the event the lessee breached his
obligation.240
The primary difference between the “unless” lease and the “or” lease is the effect the
lessee’s failure to fulfill its obligations. As discussed above, an “unless” lease terminates
automatically upon the lessee’s failure to either drill or pay delay rentals. A lessee’s failure of its
obligations in an “or” lease, however, does not result in automatic termination of the lease, and
the effect of the failure depends on the specific language in the clause. For example, under “drill
or pay of forfeit” clause, if the lessee fails to drill a well or pay rentals, the lessor has the option
to either declare forfeiture of the lease or to bring suit to recover the rentals owed.241 Under “drill
or pay” or “drill or pay or surrender” provisions the lessor is not authorized to declare forfeiture.
However, if the lessee fails to drill or pay, the lessor may bring suit to recover the rent owed, and
the lessee’s liability for such rent continues either until the end of a definite term or until the
lessee exercises his option to surrender the lease (if he has that option).242
7.9.2
Payment of Lessor’s Royalties
For the purposes of Article 123, royalty also constitutes rent.243 “Royalty” as used in
connection with mineral lease,244 means any interest in production, or its value, from or
239
Id.; 2 SUMMERS, supra note 217, at § 15.3.
240
3 WILLIAMS & MEYERS, supra note 74, at § 605; 2 SUMMERS, supra note 217, at § 15.3.
241
2 SUMMERS, supra note 217, at § 15:3.
242
Id.
243
LA. REV. STAT. § 31:123.
38
attributable to land subject to a mineral lease, that is deliverable or payable to the lessors entitled
to share therein.245 Such interests in production or its value are “royalty,” whether created by the
lease or by separate instrument, if they comprise a part of the negotiated agreement resulting in
the execution of the lease.246 There is often no fixed payment date for production royalties, and
usually industry custom determines the timing of the payments.247 Unlike the payment of delay
rentals, the lessor is entitled to notice and an opportunity to cure the default in payment of
royalties, unless the failure was fraudulent.248
While the specific measure of royalty is fixed by the mineral lease, generally speaking
the lessor’s royalty is measured by the gross production of minerals free of the costs of
production.249 This means that the lessee generally bears all of the costs of drilling and
producing, but that both lessor and lessee proportionately bear costs incurred subsequent to
production.250 Generally, minerals are valued at the “market value” at the wellhead for the
purposes of computing royalty.251 The wellhead rule follows from the fundamental principle in
A lessor’s royalty should be distinguished from a mineral royalty under Article 80 of the Mineral Code.
The royalty provided under Article 80 is the right to participate in production of mineral from land owned by
another or lands subject to a mineral servitude owned by another. LA. REV. STAT. § 31:80.
244
245
LA. REV. STAT. § 31: 213.5
246
Id.
247
Id., cmt.; Thomas H. Kiggans, Article 138 of the Mineral Code: A Reasonable Cause for Nonpayment of
Royalties, 43 LA. L. REV. 1271, 1271 (1983). It should be noted that claims for underpayment or overpayment of
royalties prescribe after three years from the production of minerals. LA. CIV. CODE. art. 3494 (5).
248
La. Rev. Stat. §§ 31:135, et seq.
249
8 WILLIAMS & MEYERS, supra note 74 at 554-55. See also Frederick R. Parker, Costs Deductible by the
Lessee in Accounting for the Production of Oil or Gas, 46 LA. L. REV. 895, 895-911 (1986).
250
Parker, supra note 249, at 898-99.
251
Coyle v. Louisiana Gas & Fuel Comp., 175 La. 990, 144 So. 737 (La. 1932); Crichton v. Standard Oil Co.
of La., 178 La. 57 (La. 1933); Wall v. United Gas Public Service Co., 179 La. 908, 152 So. 561 (La. 1934); Sartor v.
United Gas Public Service Co., 173 So. 103 (La. 1937); Freeland v. Sun Oil Co., 277 F.2d 154 (5th Cir. 1960);
39
Louisiana that oil and gas, as fugacious minerals, are not susceptible of ownership until removed
from the ground and reduced to possession at the wellhead.252 Because ownership in oil and gas
first vests at the wellhead, it is at that point that the lessee’s and the lessor’s shares are divided
and valued for the purposes of paying royalty.253
Louisiana courts have employed two basic methods of determining the market value of
oil and gas at the wellhead: actual sales at the wellhead and the reconstruction approach. When
evidence of market value at the well exists, such as from comparable sales in the same area, the
inquiry ends and downstream sales are irrelevant.254 If there is no means of directly measuring
market value at the wells the reconstruction method is employed and downstream prices are
used, but only after deducting certain post-production costs.255
Louisiana courts have recognized that the following costs and activities undertaken after
production are deductible from the ultimate sales price in order to reconstruct a value at the
wellhead for the purposes of paying royalties: severance taxes,256 transportation,257 separation,258
processing,259 extraction,260 certain compression charges,261 and treatment.262
Once the
Merritt v. Southwestern Electric Power Co., 499 So.2d 210 (La. App. 2d Cir. 1986); Babin v. First Energy Corp.,
693 So.2d 813 (La. App. 1st Cir. 1997).
252
LA. REV. STAT. § 31: 6 and 7.
253
Wall, 152 So. at 564.
254
Wall, 152 So. at 564-65; Sartor, 173 So. at 108.
255
Freeland, 277 F.2d at 155.
256
Wright v. Imperial Oil & Gas Products Co., 177 La. 482, 148 So. 685 (La. 1933); Sartor v. United Gas
Public Service Co., 173 So. 103 (La. 1937). See also Cox v. Cardinal Drilling Co., 188 So. 2d 667 (La. App. 2d
Cir. 1966). This should be distinguished from Windfall Profits Tax, which is born by the lessee alone. Parker,
supra note 249, at 901.
257
Wall, 152 So. at 564-65; Sartor, 173 So. at 108. But see, Wegman v. Central Transmission, Inc., 499 So.2d
436, 448 (La.App. 2nd Cir.1986) (gathering costs are not deductible).
258
Coyle v. Louisiana Gas & Fuel Comp., 175 La. 990, 144 So. 737, 742-743 (La. 1932);
259
Freeland, 277 F.2d at 155; Babin, 693 So.2d 813.
40
allowable deductions are made to reconstruct the value at the wellhead, the royalty owner shares
what is left.
Under the cooperative venture doctrine adopted in Louisiana in Henry v. Ballard &
Cordell Corp.,263 and in Frey v. Amoco Production Co.,
264
a mineral lease is a “cooperative
venture” between lessor and lessee requiring that benefits received by the lessee be shared with
the lessor on the basis of the fractional royalty stipulated in the subject lease. 265 As a practical
matter, this means that lessor’s royalty is tied to the marketing decisions made by the lessee.266
In this respect, the royalty paid to the lessor may be lower than the current market price if the
lessee in good faith has committed the gas to a long term contract at a time when gas prices were
lower than current market prices.267 However, it also means that royalties may be owed on
certain economic benefits derived from the lease even though no oil or gas has actually been
produced and sold.268
260
Coyle v. Louisiana Gas & Fuel Comp., 175 La. 990, 144 So. 737 (La. 1932); Crichton v. Standard Oil Co.
of La., 178 La. 57 (La. 1933); Freeland, 277 F.2d at 155. But see Wemple v. Producers’ Oil Co., 145 La. 1031, 83
So. 232 (La. 1919) (which found that the comparatively small expense for extraction would not warrant a deduction
from the royalty portion).
261
Merritt, 499 So.2d at 213.
262
Freeland, 277 F.2d at 155. Babin, 693 So.2d 813.
263
418 So.2d 1334, 1339 (La. 1982).
264
603 So.2d 166 (1982).
265
The cooperative venture doctrine as adopted in Louisiana was founded on the writings of Professor Thomas
Harrell. See Thomas Harrell, Developments in Non-Regulatory Oil & Gas Law, 30 INST. ON OIL & GAS L. & TAX’N
311 (1979).
266
See Henry, 418 So.2d 1334; Frey, 603 So.2d 166.
See Henry, 418 So.2d 1334 (lessor’s royalty was valued under a long term gas contract, rather than the
more favorable current market prices).
267
268
See Frey, 603 So.2d 166 (lessor was entitled to royalty on the value obtained by the lessee under the
settlement of a take-or-pay contract even for gas which was not produced and sold). It should be noted, however,
that there are certain benefits under the lease that inure to the lessee alone. See e.g. Caskey v. Kelly Oil Co., 737 So.
41
Two issues regarding the payment of royalties which have yet to be addressed in any
published opinion in Louisiana are the use of posted prices 269 as a basis for paying royalties and
the use of sales to affiliates as a basis for paying royalties. 270 It is unclear how a Louisiana court
would resolve these issues, but the courts would be guided by decades of prior jurisprudence
including those cases adopting the reconstruction approach for royalty valuation and the
cooperative venture doctrine.271
7.9.3
Shut-In Payments
The third type of rent identified in Article 123 is the shut-in payment. Shut-in payments
are payments to maintain a lease during the presence on the lease, or any land unitized therewith,
of a well capable of production in paying quantities.272 Shut-in payments fall into two categories:
rent or royalty.273
As discussed above, the standard mineral lease typically provides for the production of
minerals from the lease premises as a means to extend a mineral lease beyond its primary
term.274 In the absence of a special provision to the contrary, the lease will terminate upon the
2d 1257 (La. 1999), (holding that mineral lessee need not pay for the use of a road on the leased premises to access
operations on an adjacent tract of land pursuant to a so-called “adjacent lands” clause); Musser Davis Land Co. v.
Union Pac. Res., 201 F.3d 561, 568-70 (5th Cir. 2000) (finding that the mineral lease granted the lessee the right to
conduct seismic operations as an element of mineral exploration and that such seismic was owned by the lessee to
the exclusion of the lessor).
269
The posted field price is the announced price at which a crude oil purchaser will buy oil of a specified
quality from the field. It is unclear that the posted field price is a proper measure of the value of the oil produced. It
may be speculated that a higher price could be obtained than the posted field price. 8 WILLIAMS & MEYERS, supra
note 74, at 785 (citing Bass Development Corp. v. Mississippi State Tax Commission, 271 So. 2d 432, 43 O. & G. R.
167 (Miss. 1973)).
270
See John Kolwe, Royalty Calculation Issues, 51 LA. MIN. LAW INST. 315, 332-42 (2004).
271
Id. at 338.
272
LA. REV. STAT. § 31:123; Acquisitions, Inc., 432 So. 2d at 1100-01.
273
LA. REV. STAT. § 31:123 cmt.
274
See LA. REV. STAT. § 31:124 cmt.
42
expiration of the primary term in the absence of production even if a well exists on the leased
premises capable of producing in commercial quantities if the lessee is unable to produce the
well.275 Therefore, modern oil and gas leases almost invariably contain a shut-in payment
provision allowing the lessee to maintain the lease through the payment of a sum of money when
production has been discovered, but the well in which such production has been achieved has to
be shut-in.276
The justification for inclusion of shut-in clauses arises from the difference between oil
and gas.277 While oil can be stored in tanks and transported by trucks, pipelines, or tank cars, the
only effective storage place for natural gas is the underground reservoir in which it is found. 278
If there is no available pipeline, the gas must remain in the ground until a market can be
secured.279 There are almost innumerable variations in the form a shut-in clause may take, 280
and its application largely depends on the specific language employed in the provision.281
A significant issue, depending largely on the precise language used in the lease, is
275
See Smith v. Sun Oil Co., 135 So. 15 (1931). See also 3 WILLIAMS & MEYERS, supra note 74, at § 631,
469.2-98; Leslie Moses, Problems in Connection with Shut-In Royalty Provisions in Oil and Gas Leases, 23 TUL. L.
REV. 374, 375 (1948); Hebert, supra note 87, at 177.
276
Hebert, supra note 87, at 176, citing Robert E. Beck, Shutting-In: For What Reason and for How Long? 33
WASHBURN L.J. 749 (1994); Masterson, supra note 40 at 323. (“The main reason for including a shut-in clause is to
give a lessee a way to continue a lease beyond its primary term where there has been a shut-in well.”). See D.
Douglas Howard, Problems of Interpreting and Applying Shut-in Clauses, 11 LA. MIN. LAW INST. 3 (1964).
277
Patrick S. Ottinger, Neither Fish nor Fowl: the Louisiana Law of Shut-in Gas Wells, 69 La. La. Rev. 43,
44-47 (2008); Hebert, supra note 87 at 176, Moses I, supra note 40 at 376.
278
Ottinger, supra note 277, at 44; Hebert, supra note 87, at 176, Moses, supra note 275, at 376.
279
Ottinger, supra note 277, at 44-46; Hebert, supra note 87, at 176-77, Moses, supra note 275, at 376.
280
Hebert, supra note 87, at 177, citing Beck, supra note 176 at 749; 3 WILLIAMS & MEYERS, supra note 74,
at § 632.
281
See e.g. Davis v. Laster, 138 So. 2d 559 (1962); Odom v. Union Producing Co., 141 So. 2d 649 (La. 1962)
(on rehearing); Acquisitions Inc. v. Frontier Exploration, Inc., 432 So. 2d (La. App. 3d Cir. 1983); Nortan-Lawton
Oil & Gas Corp. of Texas v. Miller, 272 F. Supp. 125 (W.D. La. 1967).
43
whether the payment should be construed as the payment of royalty or as a rental payment.282
The comments to Article 192 of the Mineral Code indicates that shut-in royalty clauses in leases
commonly used in north Louisiana provide for payment regarded as the constructive equivalent
of production when there is a shut-in well, while the shut-in clauses of leases commonly used in
south Louisiana treat a shut-in well as a dry hole or a well incapable of commercial production
with shut-in payments operating as delay rentals.283 If the lease is not explicit in its classification
of the payment as royalty or rental, the payment should usually go to the royalty owner. 284
Given that the payment is made in lieu of production for a well fully capable of producing, it
seems incongruous to treat the well as a dry hole.285 However, Louisiana courts have declined to
hold that all shut-in payments should be treated as royalties, instead resting their decisions on the
language chosen by the parties.286
The distinction of whether a shut-in payment should be treated as a royalty or a rental
carries with it significant consequences. The most profound of which is the possibility of
282
See Davis, 138 So. 2d 558; Acquisitions, Inc., 432 So. 2d 1095; Carlisle v. United Producing Co., 278 F.2d
893 (10th Cir. 1960); Morris v. First Nat’l Bank of Mission, 249 S.W.2d 269 (Tex. Civ. App. 1952). Mineral Code
Article 213(4) and (5) define “rental” and “royalty” and include the following language, implicating the shut-in
provision:
(4) . . .“Rental” does not include payments classified by a lease as constructive production.
(5) . . . “Royalty” also includes sums payable to the lessor that are classified by the lease as constructive production.
La. Rev. Stat. §§ 31:213 (4) and (5).
283
LA. REV. STAT. § 31:182 cmts. 3 WILLIAMS & MEYERS, supra note 74, § 632.10 at 440.2. It should be
noted, however, that in numerous reported decisions addressing shut-in provisions in leases covering land in south
Louisiana courts have described such payments as “royalties” without expressly holding that they should be
characterized as such. See LeBlanc v. Haynesville Mercantile Co., 88 So. 2d 377 (La. 1956) (covering land in
Vermilion Parish, Louisiana); Union Oil Co. of California v. Touchet, 86 So. 2d 50 (La. 1956) (covering land in
Vermilion Parish, Louisiana); Melancon v. Texas Co., 89 So. 2d 135 (1956)(covering land in Lafourche Parish,
Louisiana); Bollinger v. Texas Co., 95 So. 2d 132 (La. 1957) (covering land in Lafourche Parish, Louisiana);
Bernard v. Marathon Oil Co., 381 So. 2d 1286 (La. App. 3d Cir. 1980) (covering land in Vermilion Parish,
Louisiana). Hebert, supra note 87, at 177-78, fn. 51. For a detailed discussion of the application of the shut-in
provision in leases commonly used in Louisiana, see Ottinger, supra note 277, at 52-58.
284
3 WILLIAMS & MEYERS, supra note 74, § 632.10 at 442.
285
See Moses, supra note 275, at 379.
286
See e.g. Davis, 138 So. 2d 559; Acquisitions Inc., 432 So. 2d 1095.
44
automatic termination of the lease for late payment if the payment is classified as a “rental” tied
to an express resolutory condition.287 If the payment is a royalty, rather than a rental, the lessee
should be entitled to notice and an opportunity to cure a defect in performance before the lessor
may seek cancellation.288 Further, the characterization of the payment as a rental or royalty may
control who is entitled to payment,289 affect the continued rights of royalty and possibly
servitude owners,290 and implicate certain tax consequences.291
Another issue which has arisen in relation to shut-in payments is how much production is
necessary to trigger the operation of a shut-in clause. In order to preserve a lease through actual
production, production must be achieved in paying or commercial quantities.292
Because
payment of a shut-in royalty is viewed as payment for “constructive production,” it is generally
understood that a shut-in well must be capable of achieving commercial production in order to
take advantage of a shut-in payment provision.293 To be sure, even when the provision fails to
state that the well must have the capacity to produce in paying or commercial quantities, it is
287
See Acquisitions, Inc., 432 So. 2d 1095. See also Matheson v. Placid Oil Co., 33 So. 2d 527, 529-30 (La.
1947) (citing LA. CIV. CODE art. 1767).
288
Acquisitions, Inc., 432 So. 2d 1095. See also Lapeze v. Amoco Production Co., 842 F.2d 132, 133, n. 3
(5th Cir. 1988); LA. REV. STAT. § 31.137-141.
289
3 WILLIAMS & MEYERS, supra note 74 § 632.10 at 440.1-444. In Louisiana, for example, the holder of an
executive right would be entitled to rentals but not royalties. LA. REV. STAT. § 31:105. It may also control who is
entitled to payment if the lease is granted by the owner of a ususfruct. LA. REV. STAT. §§ 31: 188, et seq. Further, a
royalty owner under Article 80 of the Louisiana Mineral. A royalty owner under Article 80, as owner of a nonexecutive right, would be entitled to the shut in payment only if it were characterized as a royalty. See LA. REV.
STAT. § 31:80 See also LA. REV. STAT. §§ 31:105, 108; and Ottinger, supra note 277 at 79-80.
290
See LeBlanc v. Haynesville Mercantile Co., 88 So. 2d 377 (La. 1956). Compare Union Oil Co. of
California v. Touchet, 86 So. 2d 50 (La. 1956). See also 3 WILLIAMS & MEYERS, supra note, 75 § 632.10 at 440.2.
But see LA. REV. STAT. §§ 31:34, 90 and LA. REV. STAT. § 31:137 cmt. (suggesting that the interruption of
prescription should not be dependent on characterization of shut-in payments as constructive production).
291
Ottinger, supra note 277, at 79.
292
See LA. REV. STAT. 31:124.
293
Id. at 407; Moses, supra note 275, at 376.
45
generally thought that payment of shut-in royalties will not maintain the lease unless the well is
actually capable of producing in paying quantities.294
7.10
Production in Paying Quantities
After expiration of the primary term of an oil and gas lease, the lease will be maintained
in effect only if there is “production in paying quantities” under the provisions of Article 124. 295
The standard mineral lease typically provides for the production of minerals from the lease
premises as a means to extend a mineral lease beyond its primary term.296 As noted, this is often
referred to as the secondary term of a lease.297
The requirement of production in paying quantities for continuation of the lease need not
be expressly stated in the lease’s language.298 Rather, such production is an implicit requirement
in all oil and gas leases.299 Requiring production in paying quantities ensures that a lessee makes
294
See Taylor v. Kimbell, 54 So. 2d 1 (La. 1951); Webb v. Hardage Corp., 471 So. 2d 889 (La. App. 2d Cir.
1985); Auzene v. Lawrence Oil Co., 179 So. 2d 533 (La. App. 3d Cir. 1965). See also 3 WILLIAMS & MEYERS,
supra note 74, § 632.3 at 407-409. In Webb, the court found that the lessee bears the burden of proving by a
preponderance of evidence that, prior to the expiration of the primary term of the lease or the continuous drilling
operation term of the lease, a well was completed and surface tested and that the well was demonstrably capable of
producing in paying quantities at that time. Webb v. Hardage Corp., 471 So. 2d 892. This evidentiary standard has
yet to be applied in the context of newly developed resource plays, such as the Haynesville Shale. It is possible that
courts may find that commercial production may be established for shale plays by means other than surface testing.
Cf. In re Reichmann Petroleum Corp., 399 B.R. 463 (Bkrtcy. S.D. Tex. 2009).
295
LA. REV. STAT. § 31:124.
296
Id.
297
See 8 WILLIAMS & MEYERS, supra note 74, at 952.
298
Lege v. Lea Exploration Co., , 631 So.2d 716, 717 (La. App. 3d Cir. 1994); Patrick S. Ottinger, Production
in “Paying Quantities” – A Fresh Look, 65 La. L. Rev. 635, 635-36 (2005) (citing Brown v. Sugar Creek Syndicate,
197 So. 583, 593 (La. 1940); Peacock v. Schroeder, 846 S.W.2d 905, 908 (Tex. Civ. App. 1993)(holding that even
though “whether or not in paying quantities” was stricken from the Habendum Clause, continuing the lease based
upon production in paying quantities was contemplated by the parties)).
299
Ottinger, supra note 298, at 635-36.
46
earnest efforts to maximize the potential of the lease and prevents a lessee from removing the
lease from commerce for purely speculative purposes.300
7.10.1 Historical Test for Determining Production in Paying Quantities
Production in “paying quantities” is a term of art within the oil and gas industry. Prior to
the adoption of the Mineral Code, the Louisiana Supreme Court defined “paying quantities” to
mean:
the production of oil or gas in such a quantity as will pay a small profit over
operation costs of the well, although the expense of drilling and equipping the
well may never be paid, and thus, the operation as a whole might result in a loss
to the lessee. Under such circumstances, the well might be operated by the lessee,
in order to recoup some of the drilling and equipment costs.301
Under pre-Code jurisprudence, courts employ a two-part test to determine whether or not a well
or lease produced in paying quantities, evaluating both an objective factor to determine the value
to the lessor and a subjective factor regarding the efforts of the lessee.302
The first prong of the analysis, or the objective component, compares the amount the
lessor receives in royalties to other payments that arise from the lease, such as bonuses and delay
rentals, which are paid regardless of the extent of production.303 If the royalties can be seen as
“serious” or “adequate” consideration to the lessor, production in paying quantities exists and
further analysis is unnecessary.304 In applying this principle, the courts historically ordered the
300
Lege, 631 So.2d at 718; Ottinger, supra note 298, at 637 (citing Garcia v. King, 164 S.W.2d 509 (Texas
1942)).
301
Knight v. Blackwell Oil & Gas Co., 1 So. 2d 89, 91 (La. 1941).
302
See Noel Estate, Inc. v. Murray, 65 So.2d 886, 887 (La. 1953), evaluating whether adequate consideration
is present in favor of the lessor and whether the operator is reasonable and efficient; See also Vance v. Hurley, 41
So.2d 724, 726-727 (La. 1949), considering both the net profits and reasonable efforts of the lessee; See also
Ottinger, supra note 298, at 638-643.
303
Noel Estate, Inc., 65 So.2d at 888; Ottinger, supra note 298, at 639 (citing Caldwell v. Alton Oil Co., 108
So. 314 (La. 1926)).
304
Ottinger, supra note 298, at 639 (citing Vance, 41 So. 2d 724; Noel Estate, Inc., 65 So. 2d 886).
47
leases in question cancelled when, among other things, the royalty did not at least equal the
annual delay rental.305
The second prong examines the diligence of the lessee in securing continued production.
The standard by which paying quantities is determined is whether or not under all the relevant
circumstances a reasonably prudent operator would continue to operate a well for the purposes of
making a profit or obtaining a return on investment.306
7.10.2 Definition of Paying Quantities under the Mineral Code
Mineral Code articles 124 and 125 dispense with the objective component as a decisive
factor and focus on the reasonable prudence of the operator.307 The subjective factor of assessing
the reasonable prudence of the operator was codified in Article 124, which states that production
in paying quantities continues “when production allocable to the total original right of the lessee
to share in production under the lease is sufficient to induce a reasonably prudent operator to
continue production in an effort to secure a return on his investment or to minimize any loss.”308
In Article 124, the drafters codified the long standing policy of the State of Louisiana to
“prohibit the lessee from speculating with mineral interests or otherwise acting in a selfish
manner, without regard for the lessor.”309
All relevant circumstances are considered in
305
See Logan v. Tholl Oil Co., 180 So. 473, 475 (La. 1938), noting steady decline of production, with no
indication that production would increase; See also Noel Estate, Inc., 65 So.2d at 888, holding the production on the
independent lease for 10 acres could not maintain the lease for the separate lease of 50 acres; See also Caldwell, 108
So. at 316, deriving a small profit is not enough when no other efforts of further development are made.
306
Knight v. Blackwell Oil & Gas Co., 1 So. 2d 89, 91 (La. 1941).
See LA. REV. STAT. § 31:124 and 125. “In applying Article 124, the amount of the royalties being paid may
be considered only insofar as it may show the reasonableness of the lessee's expectation in continuing production.
The amount need not be a serious or adequate equivalent for continuance of the lease as compared with the amount
of the bonus, rentals, or other sums paid to the lessor.” LA. REV. STAT. § 31:125.
307
308
LA. REV. STAT. § 31:124. The Texas Supreme Court case of Clifton v. Koontz, 325 S.W.2d 684, 691 (Tex.
1959) provided the foundation for Article 124. See LA. REV. STAT. § 31:124, cmt.
309
Ottinger, supra note 298, at 637-38 (citing Caldwell, 108 So. 2d at 142). The court in Caldwell explained:
48
determining whether the lease is being held by the lessee in a reasonable and prudent attempt to
recover costs or minimize loss, or whether the lease is being held for mere speculation.
The Mineral Code does not entirely ignore the objective factor requiring “serious
consideration,” but instead it now constitutes only one of the multitudes of considerations in the
analysis.310 Article 125 retains the basic concept of comparing royalties to delay rentals and
bonuses, but it is not a decisive factor.
In determining whether the standard found in Articles 124 and 125 is met the following
factors are typically reviewed: (1) the reserves at issue and the price the lessee can obtain for the
production, (2) the relative profitableness of other wells in the area, (3) the operating and
marketing costs of the lease, (4) the lessee’s profit, (5) the actual provisions of the lease at issue,
(6) a reasonable time period under the circumstances, and (7) whether or not the lease is being
held strictly for speculation.311 Most importantly, the lessee must demonstrate that its production
income exceeds its operating expenses.312
A development that falls short of a reasonable production which would bring a
net profit to the lessee and furnish an adequate consideration to the lessor of the
continuance of the lease might well be said to be no development at all within
the contemplation of the parties . . . To hold that any production, however small,
and in less than paying quantities, gives to the lessee the right to continue the
lease indefinitely and with no obligation to further development, would be
contrary to the established rule of jurisprudence, and would be writing for the
parties a contract the never intended to make . . . It was never contemplated that
the lease under consideration should be continued for all time to come upon the
mere production of oil in quantities not sufficient to compensate the lessee and
totally inadequate as a consideration to the lessor for continuing the lease.
310
LA. REV. STAT. § 31:125.
311
Id; See also Wood, 899 So. 2d at 142 (citing Lege v. Lea Exploration, 631 So. 2d 716, 717 (La. App. 3d
Cir. 1994)).
“Implicit in the term ‘paying quantities’ is that the lessee is required to show a profit; production income
must exceed operating expenses.” O’Neal v. JHL Enter., Inc., 862 So. 2d 1021, 1027 (La. App. 2d Cir. 2003)(citing
Menoah Petroleum, Inc. v. Mc Kinney, 545 So. 2d 1216 (La. App. 2d Cir. 1989)).
312
49
7.10.3 Calculation of Paying Quantities
The more complicated aspect of evaluating a lessee’s reasonableness is actually
calculating whether a profitable return, and/or its potential, exists. The lessee accomplishes this
by establishing at least a small profit above and beyond current operating costs.313 Simply put,
production income must exceed operating costs.314
The process of determining the presence of a profit involves a fact-sensitive analysis
consistent with accepted legal and accounting procedures.315
First, a time frame must be
established in which such evaluation will be limited. There is no established minimum or
maximum time period,
316
rather a “reasonable time under the circumstances” forms the
baseline.317 Courts may even look to periods after the institution of a lawsuit in the analysis as
long production has not been affected by lessor’s institution of a lawsuit.318
Because all income associated with a well or lease is not production income and all
expenses are not operating expenses,319 properly classifying funds forms the linchpin in
313
Vance, 41 So.2d at 726-727; Menoah Petroleum, Inc. v. McKinney, 545 So.2d 1216, 1220 (La. 2 Cir.
1989); Heirs v. Union Texas Petroleum Corp., 1992 WL 91938, *2 (E.D. La. 1992); Dore Energy Corp. v.
Prospective Investment & Trading Co., Ltd., 2010 WL 4068802, *6 (W.D. La. 2010); Ottinger, supra note 298, at
639-640.
314
Menoah Petroleum, Inc., 545 So.2d at 1220 (citing Vance, 41 So.2d 724; Knight, 1 So.2d 89); Dore Energy
Corp., 2010 WL at *6.
315
Dore Energy Corp., 2010 WL at *7 (citing Lege, 631 So.2d at 718; citations omitted).
Edmundson Bros. P’Ship v. Montex Drilling Co., 672 So. 2d 1061, 1064 (La. App. 3d Cir. 1996) rev’d on
other grounds, 679 So. 2d 1364 (citing Brown, 197 So. at 583; Smith v. Sun Oil Co., 116 So. 379 (La. 1928);
Caldwell, 108 So. at 314; Menoah Petroleum, 545 So. 2d at 1216; Smith v. W. Va Oil & Gas, Co., 365 So. 2d 269
(La. App. 2d Cir. 1978) rev’d on other grounds, 373 So. 2d 488 (La. 1979); Noel v. Amoco Prod. Co., 826 F. Supp
1000 (W.D. La. 1993)).
316
317
Ottinger, 65 supra note 298, at 647-648 (citing Clifton, 325 S.W.2d at 691).
“A lessor is estopped from complaining about any alleged cessation of production in paying quantities that
is the result of the lessee’s failure to maintain and repair wells during the pendency of the suit by the lessor.” Noel,
826 F. Supp at 1015.
318
319
Id. (citing Lege, 631 So.2d at 717; Menoah Petroleum, Inc., 545 So.2d at 1220).
50
determining whether the lease is profitable. Not surprisingly, the most widely litigated aspect of
this analysis involves the classification of expenses incurred by the operator.
Louisiana jurisprudence provides some guidance in categorizing many of the common
expenses necessary for production. The following expenses are not operating expenses;
therefore, they are not deducted from production income: (1) capital costs, such as seeking out
production and reworking expenses;320 (2) extraordinary, non-recurring expenses, such as
repairs, remedial expenses, completion or recompletion, depreciation of original equipment, and
equipment costs;321 (3) overhead costs, such as salaries and district office expenses;322 and (4)
marketing expenses.323 Expenses that must be deducted from production income, and, therefore,
are operating expenses include the following: (1) ordinary, recurring expenses; 324 (2) ad
valoreum taxes, even those past due;325 and (3) overhead expenses when operations are done by a
third party other than the lessee.326 By properly categorizing costs, the parties gain an accurate
understanding of whether a lease has been maintained by production in paying quantities.
It should be observed that if a determination is made that there has been a cessation of
production in paying quantities, the lease will automatically lapse under its own terms unless
320
Heirs, 1992 WL at *3 (citing Menoah Petroleum, Inc., 545 So.2d at 1221; Noel Estate, Inc., 65 So.2d at
888-889; Vance, 41 So.2d 724; Knight, 1 So.2d 89); Dore Energy Corp., 2010 WL at * 7 (but see CHH, Inc. v.
Heard, 410 So.2d 1283, 1285-1286 (La. App. 1 Cir. 1982), which included capital expenses as operating expenses);
Ottinger, supra note 298, at 648 (citations omitted).
321
Dore Energy Corp., 2010 WL at *7 (citing Heirs, 1992 WL at *3); Lege, 631 So.2d at 718-719.
322
Dore Energy Corp., 2010 WL at *7 (citing Heirs, 1992 WL at *3); Ottinger, supra note 298, at 650-652
(citations omitted).
323
Ottinger, supra note 298, at 653-654 (noting that the lessee should not be penalized for taking reasonable
and necessary steps to fulfill its duty under the Mineral Code).
324
Dore Energy Corp., 2010 WL at *7.
325
Menoah Petroleum, Inc., 545 So.2d at 1221.
326
Id.
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there is some drilling clause or resumption of rental clause which the lessee utilizes on a timely
basis. Many leases include such a “grace” period to allow a lessee to commence reworking,
redrilling or new drilling operations.327 During the secondary term of the lease, this period is not
triggered until production in paying quantities has ceased. In a close case it may be unclear
whether there has been a cessation of production in paying quantities until the court makes a
final determination. At that point, it may be too late to resume drilling, reworking or operations.
8 Williams & Meyers, supra note 74, at 141-42, 1074-75. This is commonly referred to as a “cessation
clause” or a “thirty day” or “sixty day” clause. 8 Williams & Meyers, supra note 74, at 141, 1074.
327
52