Aliens From Pluto Have Landed
At least, it feels that way. On March 21, 2019 the United States District Court of Western Louisiana handed down a ruling that made the earth stand still in the oil and gas exploration and production industry in Louisiana.
In a nutshell, if I am paraphrasing correctly, the court ruled that after 100% payout of costs of drilling, completing, equipping, and other allowed costs are recouped, unleased owners begin receiving their full share of proceeds from the sale of their gas. Unleased owners always "came into" a well after 100% payout, so the 100% payout requirement didn't change. No, that's not what the ruling changed. The ruling set a new definition of "full share". This one change is profound.
The court said that unleased owners in Louisiana cannot have deducted from their share of gas proceeds any post-production costs. Their share can have deducted from it only the monthly costs of producing the well. Unleased interests have borne their share of production costs for decades. No, what changed is the prohibition against deducting any of the costs of gathering, transportation, compression, treating, processing, dehydrating, or any other cost incurred after the gas is severed from the wellhead. Only severance tax can be deducted from an unleased owner's share of sales money as a post-production expense.
Common post-production costs can amount to as much as half of the sale price for the natural gas, bringing the sales proceeds down to as little as half of the purchase price, a price which might have been agreed months (or years) before the month of production.
The operator, as a working interest owner, pays those same post-production costs for their share of the gas as everyone else in the well. Except under this new ruling, the operator and other working interest owners in the well must absorb the post-production costs that cannot be passed on to, and deducted from, an unleased owner's interest. That's in addition to the proportionate share they are already paying.
The Defendant gas producer (the operator of the well who was sued by a small group of unleased owners) still has several days to file a formal appeal of the ruling, or file an application for rehearing. Trust me when I say that either an application for rehearing will be filed (if not done already), or a formal appeal will be filed. An appeal will suspend the ruling until the Fifth Circuit Court of Appeals in New Orleans can hear the case.
Everyone wants the natural gas exploration and production industry in Louisiana to flourish. Especially, the State of Louisiana who gathers a significant portion of its annual revenues from natural gas severance taxes and numerous other fees and penalties paid to them by the operators drilling and producing there.
Let's everyone wait until a final ruling on the case is rendered, whether that be by a rehearing in this court, or a remand back to this court by the Fifth Circuit, to change its ruling. It seems highly unlikely that the outcome at the U. S. District Court level would survive review and be upheld by the Fifth Circuit.
Everyone stands to lose if this ruling remains in place and becomes settled case law, including the unleased owners. Wells will not be drilled by many of the current Louisiana operators if not less than a threshold amount of mineral rights are fully leased inside the unit before spud. For example, if unleased land exceeds perhaps as little as 5% of the total lands inside a 640-acre unit, the economics and return-on-investment numbers will cause that operator to pick up and take their drilling dollars to the unit next door that's fully leased.
Updates will be posted to this blog as they become available.