T D X Energy, L.L.C. v. Chesapeake Operating, Inc. , 857 F.3d 253 ( 2017 )

Case: 16-30450 Document: 00513990824 Page: 1 Date Filed: 05/12/2017
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 16-30450 FILED
May 12, 2017
Lyle W. Cayce
T D X ENERGY, L.L.C., Clerk
Plaintiff - Appellant Cross-Appellee
v.
CHESAPEAKE OPERATING, INCORPORATED,
Defendant - Appellee Cross-Appellant
Appeals from the United States District Court
for the Western District of Louisiana
Before PRADO, HIGGINSON, and COSTA, Circuit Judges.
GREGG COSTA, Circuit Judge:
Captain Anthony F. Lucas struck oil in the Spindletop salt dome in Texas
in 1901. A black oil plume erupted to twice the height of the drilling derrick,
and the well produced a record 800,000 barrels of oil within nine days. Others
rushed to seize a share of the abundance. Wells were “drilled as close together
as physically possible”; “on occasion four wells were drilled beneath one derrick
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floor.” 1 In short order, there were 440 wells on Spindletop’s 125-acre hill.
Another 600 were drilled around the hill. 2 This is how it looked: 3
Within a few years, most of the wells were dry. As Captain Lucas
remarked, the oil was “milked too hard” and “not milked intelligently.” 4
1 Rance L. Craft, Of Reservoir Hogs and Pelt Fiction: Defending the Ferae Naturae
Analogy Between Petroleum and Wildlife, 44 EMORY L.J. 697, 701 & n.22 (1995) (quoting
Walter Rundell, Jr., EARLY TEXAS OIL: A PHOTOGRAPHIC HISTORY 1866-1936, at 38 (1977)).
2 Id. at 701.
3 Edgerton, Boiler Avenue, 1903, in Rundell, supra note 1, at 43.
4 Craft, supra, at 701 (quoting Richard O’Connor, THE OIL BARONS: MEN OF GREED
AND GRANDEUR 85 (1971)).
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To prevent this “tragedy of the commons,” states have enacted
regulations in the years since Spindletop. Louisiana’s “forced pooling” regime
is the subject of this case. It allows the government to authorize a single
operator to drill for oil and gas even when all parties possessing oil and gas
interests in the drilling area have not agreed to go forward. The Louisiana
statutory scheme thus has to address a number of issues that contracts usually
decide, such as how to allocate costs and risk among those holding interests in
the oil and gas. We are presented with questions of statutory interpretation
about this scheme’s disclosure and risk-fee provisions.
I.
Although Spindletop is an extreme example, similar wasteful
overproduction was once common. A cause was the “rule of capture,” the
common law doctrine initially used in hunting disputes to determine
ownership of wild animals unconstrained by property borders. Rance L. Craft,
Of Reservoir Hogs and Pelt Fiction: Defending the Ferae Naturae Analogy
Between Petroleum and Wildlife, 44 EMORY L.J. 697, 708–09 (1995). Taught
during the first days of law school, the doctrine says if you catch it first, it is
yours. See Pierson v. Post, 3 Cai. Cas. 175 (N.Y. Sup. Ct. 1805). Courts later applied
the doctrine to oil and natural gas, reasoning that they too cross property
borders as they seep and spill through crevices underground. See Brown v.
Spilman, 155 U.S. 665, 669–70 (1895). In that context, the rule means a
landowner has a property right in oil and gas produced from wells on the
owner’s land, whether or not it migrated from other lands. Id. at 670 (“If an
adjoining owner drills his own land, and taps a deposit of oil or gas, extending
under his neighbor’s field, so that it comes into his well, it becomes his
property.”); Robert E. Hardwicke, The Rule of Capture and Its Implications As
Applied to Oil and Gas, 13 TEXAS L. REV. 391, 393 (1935). So, under the
common law, one landowner could drain an entire reservoir through wells on
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the landowner’s property, even if the reservoir extended under others’ lands.
Naturally, surrounding owners usually would not sit idly by while valuable
resources drained out from under them; instead, they raced to produce all the
oil and gas they could through their own property, often drilling multiple wells
to extract resources as quickly as possible. Frank Sylvester & Robert W.
Malmsheimer, Oil and Gas Spacing and Forced Pooling Requirements, 40 U.
DAYTON L. REV. 47, 49 (2015). At Spindletop and elsewhere, this drove up
production costs, reduced oil and gas market prices, and unnecessarily
decimated the environment. Id.
States intervened, creating often complex regimes to regulate drilling.
First, they created spacing laws, which prevent wells from being drilled too
close together. Id. at 47–48. Then, to protect landowners who, as a result of
spacing laws, were no longer able to drill on smaller tracts of land, they created
pooling laws, which allow owners of adjacent tracts to combine their interests
to form drilling units that meet spacing requirements. Id. Many states also
have “forced pooling laws,” which force unwilling owners to be part of a drilling
unit in order to protect their neighbors’ rights to benefit from their mineral
rights and to promote states’ interests in preventing waste and promoting
economic activity. Id. at 48.
Louisiana is one such state. Its Commissioner of Conservation
designates drilling units whenever necessary to prevent waste or avoid
needless drilling, even if owners of oil and gas interests have not agreed to pool
their interests. LA. R.S. §§ 30:9(B), 30:10(A)(1). 5 Once a unit has been
established, the Commissioner may appoint an operator to extract oil and gas
5 As discussed later, portions of the title governing mineral law in Louisiana (Title
30), have been amended since this case was filed. The version of the statute in effect from
August 15, 2008, to July 31, 2012, applies to this dispute.
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from a reservoir. 6 Hunt Oil Co. v. Batchelor, 644 So. 2d 191, 196 (La. 1994).
The operator is responsible for drilling within the unit but pays a proportionate
share of production to owners of oil and gas interests for any acreage on which
the operator does not have an oil and gas lease. 7 LA. R.S. § 30:10(A)(1)(b);
Amoco Prod. Co. v. Thompson, 516 So. 2d 376, 392 (La. App. 1 Cir. 1987). If
those other owners have leased their mineral interests to another party,
operators often pay the lessee in kind and the lessee markets and sells the oil
or gas, then pays its lessor royalties; if not, the operator often sells production
and makes a cash payment to the owner. King v. Strohe, 673 So. 2d 1329,
1338–39 (La. App. 3 Cir. 1996); see also LA. R.S. § 30:10(A)(3).
As a corollary to this scheme for sharing the benefits of unit production
in the absence of a contract, Louisiana law contains mechanisms for sharing
drilling risks and costs. See Sylvester & Malmsheimer, supra, at 62–67. Each
oil and gas interest owner is responsible for a share of development and
operation costs. LA. R.S. § 30:10(A)(2). To prevent free riding, the statute
creates a mechanism for sharing the risk that a well, once drilled, will not
produce enough to cover drilling costs. Id. The operator gives notice to oil and
gas interest owners regarding the drilling of a well, allowing owners to elect to
participate in the risk by contributing to drilling costs up front. Id.
§ 30:10(A)(2)(a)(i). If an owner does not participate, and the well produces, the
operator can recover out of production the nonparticipating owner’s share of
expenditures along with a risk charge of two hundred percent of the owner’s
6 This is “an underground reservoir containing a common accumulation of crude
petroleum oil or natural gas or both.” LA. R.S. § 30:3(6).
7 An “owner” under Louisiana Revised Statutes Title 30 is a “person . . . who has or
had the right to drill into and to produce from a pool and to appropriate the production either
for himself or for others.” LA. R.S. § 30:3(8). A lessee of oil and gas rights falls within this
definition.
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expenditure share. LA. R.S. § 30:10(A)(2)(b)(i); see also Keith Hall, Louisiana
Oil and Gas Update, 19 TEX. WESLEYAN L. REV. 361, 365–66 (2013).
The law also requires operators to share information about the costs and
production other owners share under this scheme. Section 103.1 of Title 30
creates an obligation for operators to issue upon request reports containing
sworn statements about drilling and operating costs, amount of production,
and the price received for any sale of production. LA. R.S. § 30:103.1. Section
103.2 provides that when an operator does not provide this information within
ninety days of completing a well and thirty additional days of receiving notice
of its failure to comply with section 103.1, it cannot collect drilling costs. LA.
R.S. § 30:103.2.
II.
As part of this forced pooling regime, the Commissioner of Conservation
created an approximately 640-acre drilling unit called “HA RA SUH” in DeSoto
Parish. Chesapeake, which held a number of oil and gas leases in this unit,
was named the operator. The unit well was “spud” (drilling commenced) on
February 5, 2011, and was completed on July 19, 2011. When the well was
spud, the oil and gas rights for approximately 63 acres in the unit had not been
leased to Chesapeake or any other party (that is, the land owners still held
their mineral interests). Touchstone Energy LLC acquired those rights
through leases dated before drilling was completed (July 15) but not recorded
until after drilling ended (between July 22 and September 14). Touchstone
later transferred these leases to TDX with an effective date retroactive to the
September 14th date of the final recording.
In late 2011, TDX notified Chesapeake of its interests and requested an
accounting in accordance with section 103.1. About six weeks later, TDX
followed up, telling Chesapeake that it was failing to comply with the statute.
Chesapeake did not provide reports. Instead it sent TDX a letter asking TDX
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to make an election whether to participate in the well’s risk under section
10(A). TDX responded that the notice was untimely, so TDX was not required
to make an election, and Chesapeake could not collect a risk charge. Finally,
TDX wrote Chesapeake that by not providing the cost and production data,
Chesapeake had forfeited its right to contribution for drilling costs.
TDX filed suit seeking its share of revenues from the unit well without
deduction of drilling costs because Chesapeake did not provide the requested
reports. It also sought an order directing Chesapeake to provide the reports.
In addition to disputing these claims, Chesapeake filed a counterclaim seeking
a declaration that it was entitled to recover TDX’s share of costs incurred in
drilling, testing, completing, equipping, and operating the well, plus a risk
charge of two hundred percent of TDX’s share because TDX did not elect to pay
a risk fee.
On competing motions for summary judgment, the district court held: (1)
section 103.2 was inapplicable because TDX was leasing the oil and gas
interests, so Chesapeake’s failure to provide the reports did not excuse TDX
from paying its share of drilling costs; and (2) section 10(A) did not allow
Chesapeake to collect a risk charge because it had not provided TDX timely
notice that it was drilling the unit well. Each party appeals the adverse portion
of the judgment. We review these questions of statutory interpretation de
novo. Woodfield v. Bowman, 193 F.3d 354, 358 (5th Cir. 1999).
III.
A.
TDX claims that Chesapeake cannot deduct drilling costs because
Chesapeake forfeited that right under section 103.2. That provision states
that:
Whenever the operator or producer permits ninety calendar
days to elapse from completion of the well and thirty additional
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calendar days to elapse from date of receipt of written notice by
certified mail from the owner or owners of unleased oil and gas
interests calling attention to failure to comply with the provisions
of R.S. 30:103.1, such operator or producer shall forfeit his right to
demand contribution from the owner or owners of the unleased oil
and gas interests for the costs of the drilling operations of the well.
LA. R.S. 30:103.2 (emphasis added).
Section 103.1 provides that:
Whenever there is included within a drilling unit . . . lands
producing oil or gas, or both, upon which the operator or producer
has no valid oil, gas, or mineral lease, said operator or producer
shall issue . . . reports to the owners of said interests . . .
LA. R.S. 30:103.1(A) (emphasis added).
The oil and gas interests at issue were leased (to TDX), but not to the
operator (Chesapeake). The question, then, is whether “owners of unleased oil
and gas interests” in section 103.2 includes lessees. The district court held that
it does not.
Because the Supreme Court of Louisiana has not addressed the question,
we must attempt to determine how that court would resolve it. Howe ex rel.
Howe v. Scottsdale Ins., 204 F.3d 624, 627 (5th Cir. 2000). We look to decisions
of intermediate appellate state courts as “the strongest indicator of what a
state supreme court would do.” Hux v. S. Methodist Univ., 819 F.3d 776, 780–
81 (5th Cir. 2016); see also Adams v. Chesapeake Operating, Inc., 561 F. App’x
322, 324 (5th Cir. 2014).
The only appellate court in Louisiana to address whether sections 103.1
and 103.2 give rights just to owners of wholly unleased interests or owners of
interests not leased to the operator followed the latter, more expansive view.
That court found that an operator breached section 103.1 by failing to provide
adequate reports to a lessee of oil and gas interests not leased to the operator,
and that the lessee was thus entitled to a forfeiture under section 103.2. XXI
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Oil & Gas, LLC v. Hilcorp Energy Co., 206 So. 3d. 885, 888 (La. App. 3 Cir.
2016) (describing previous writ denial and holding in XXI Oil & Gas, LLC v.
Hilcorp Energy Co., 124 So. 3d 530 (La. App. 3 Cir. 2013)). Although the
opinion is short on analysis, and relies in part on the law of the case doctrine,
its holding was necessary to the outcome: a lessee was entitled to rely on
section 103.2. After reviewing and finding unpersuasive the district court’s
decision in this case, the Louisiana Court of Appeals “maintain[ed its] position”
that a “mineral lessee of those portions not leased by the operator or producer
of the well has a claim to demand an accounting” under section 103.1. Id.
Other published appellate court decisions, which do not directly consider the
issue, also assume lessees may invoke section 103.2. See Scurlock Oil Co. v.
Getty Oil Co., 324 So. 2d 870, 876 (La. App. 3 Cir. 1975); Genmar Oil & Gas,
Inc. v. Storm, 297 So. 2d 722, 724 (La. App. 4 Cir. 1974). 8
We defer to this view of intermediate Louisiana courts “unless convinced
by other persuasive data that the highest court of the state would decide
otherwise.” Chaney v. Dreyfus Serv. Corp., 595 F.3d 219, 229 (5th Cir. 2010)
(quoting Travelers Cas. & Sur. Co. v. Ernst & Young LLP, 542 F.3d 475, 483
(5th Cir. 2008)). We have not seen that authority. The parties have cited to
treatises that offer differing answers to the question. Compare 1 Bruce M.
Kramer & Patrick H. Martin, THE LAW OF POOLING AND UNITIZATION § 14.04
(3d ed. 2016) (stating that section 103.2 “appears expressly to apply only to
8 Chesapeake points to an earlier writ denial by the same court that decided XXI Oil
& Gas: Kash Oil & Gas, Inc. v. Tex. Petroleum Inv. Co., No. CW 10-00079 (La. App. 3 Cir.
Apr. 22, 2010). The trial court had denied the defendant’s objection of no right of action
(arguing a lessee is not an owner of an unleased interest under 103.2) but granted the
defendant’s objection of no cause of action (arguing that applying 103.2 to a lessee is
unconstitutional because 103.1’s title refers only to owners of unleased oil and gas interests).
The appellate court found “no irreparable injury in the trial court’s ruling.” Id. We do not
rely on this writ denial, which has no precedential value. See State v. Romero, 552 So. 2d 45,
49 (La. App. 3 Cir. 1989).
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unleased interests, not to a non-operator working interest owner”); with Philip
N. Asprodites, Conservation Practice, in LOUISIANA MINERAL LAW TREATISE
527, 546 (Patrick H. Martin ed., 2012) (“[A]ny nonoperating working interest
owner or unleased owner must be provided with an itemized statement of the
well costs, expenses and unit production . . . . Failure to provide the . . .
information within ninety (90) days from completion of the well and after an
additional thirty (30) days from receipt of a certified letter from the mineral
interest owner requesting compliance with R.S. 30:103.2 will result in the
operator forfeiting its right to recoup the cost of drilling the unit well allocated
to said owner.”). We held off ruling on this case while a writ of certiorari was
pending in XXI Oil & Gas. See 2017 WL 1207915 (La. Mar. 24, 2017). The
denial of that writ is given no weight, Ehrlicher v. State Farm Ins., 171 F.3d
212, 214 n.1 (5th Cir. 1999), but leaves the intermediate court’s decision as the
most probative evidence of Louisiana law.
We also find XXI Oil & Gas’s conclusion persuasive. The district court
believed that the plain language of section 103.2—“owners of unleased oil and
gas interests”—is clear: unleased interests are interests that are not leased.
TDX Energy, LLC v. Chesapeake Operating, Inc., 2016 WL 1179206, at *5–6
(W.D. La. Mar. 24, 2016). But sections 103.1 and 103.2 must be read together.
Adams v. Chesapeake Operating, Inc., 2013 WL 1193716, at *4 (W.D. La. Mar.
21, 2013) (rejecting construction of 103.1 where “[o]nly a purely literal
application of each sentence of the statute, in isolation and without regard to
context or the other provisions of the statute” supported it), aff’d, 561 F. App’x
322; see also LA. CIV. CODE. art. 13 (mandating that laws on the same subject
matter be interpreted in reference to each other). Sections 103.1 and 103.2
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were added to Title 30 by the same legislative act, 9 and section 103.2 refers to
section 103.1, which creates the obligation that section 103.2 enforces. See LA.
R.S. § 30:103.2. When, as punishment for failure to comply with section 103.1,
section 103.2 absolves owners from paying drilling costs, it thus refers to the
same owners the operator was obligated to send reports to under 103.1. 10
So to whom are operators obligated to send reports under section 103.1?
This much seems undisputed: an operator must send reports when the operator
has no lease, not when there is no lease at all. But, as Chesapeake points out,
section 103.1(A) is less clear about who has a right to receive reports: the
operator must issue reports to owners of “said interests,” but section 103.1
refers to “lands,” not interests, before using “said interests.” Despite the
imprecise reference to the antecedent term, the only logical reading is that
“said interests” means oil and gas interests in lands for which the operator has
no lease. “Said” must refer to something mentioned earlier in the section.
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY (2002) (“‘Said’ modifying a
noun means ‘aforementioned.’”). And what section 103.1 refers to before using
“said interests” is lands producing oil or gas on which the operator has no oil
and gas lease.
Chesapeake does not point to any other aforementioned interests to
which section 103.1 could refer. Instead, it contends the court should look
further down in the statute to understand “said interests.” Section 103.1(C)
says reports must be sent to “each owner of an unleased oil or gas interest” who
9 1950 La. Sess. Law Serv. 387; 2001 La. Sess. Law Serv. 973 (amending and
reenacting the provisions).
10 It is especially clear that the owners described in section 103.2 are the same owners
described in section 103.1 as, after establishing the reporting obligation in section 103.1(A),
the legislature went on to describe the mechanics of reporting in subsections 103.1(B)–(D)
using shorthand similar to that used in section 103.2: “owner of the unleased interest,”
“owner of an unleased oil or gas interest,” and “owner of an unleased interest.”
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has requested them, without specifying unleased by the operator. This
clarifies, Chesapeake argues, that operators must only provide reports to
owners whose interests are entirely unleased.
Chesapeake’s interpretation runs into two problems. First, it is contrary
to the rule that “courts are bound, if possible, to give effect to all parts of a
statute and to construe no sentence, clause, or word as meaningless and
surplusage.” Katie Realty, Ltd. v. La. Citizens Prop. Ins., 100 So. 3d 324, 328
(La. 2012). If the legislature intended for operators to send reports only to
owners who have not leased their mineral interests at all, section 103.1(A)
should have referred to lands “upon which there is no valid oil, gas, or mineral
lease” instead of “upon which the operator or producer has no” such lease. The
only apparent role for the language the legislature used is to specify to whom
an operator is required to send reports. Second, Chesapeake’s view is contrary
to the meaning of “said” described above: an adjective that refers to something
mentioned before. See Antoine v. Consol.-Vultee Aircraft Corp., 46 So. 2d 260,
262 (La. 1950) (holding that a statute’s reference to “said Courts of Appeal”
“could refer only to the [courts] named specifically in the two preceding
sections”). 11 The imperfect grammar of using “said interests” to refer back to
“lands producing oil or gas” rather than a prior reference to “interests” is a
small thing; giving “said” its opposite meaning to refer to a subsequent term in
the statute is a big thing. Cf. Lamie v. U.S. Trustee, 540 U.S. 526, 534 (2004)
(“The statute is awkward, and even ungrammatical; but that does not make it
ambiguous on the point at issue.”). Section 103.1 thus requires that reports be
given to owners of interests on which the operator has no lease. And TDX’s
11 Later subsections in a statute can provide additional specificity regarding a
statutory right. See Adams, 561 F. App’x at 324 (holding that, although section 103.1(A) says
operators “shall” provide reports, without qualification, section 103.1(C) clarifies that the
operator is only required to send reports after notice). But “said interests” cannot mean
“interests defined below.”
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reading is the only one that fits the section 103.1 piece of the statutory puzzle
together with the section 103.2 piece.
This interpretation is confirmed by a broader view of Title 30. See LA.
CIV. CODE. art. 12 (noting that when the words of a law are ambiguous, courts
must examine the context in which they occur and the text of the law as a
whole). Title 30 uses “unleased interests” to mean different things in different
chapters. Section 111 states that “[o]wners of unleased mineral interests and
lessees” are not liable to the operator for materials used in drilling and
production in excess of the materials’ prevailing market price. LA. R.S.
§ 30:111 (emphasis added). In that section, the legislature evidently did not
include lessees in the term “owners of unleased interests.” On the other hand,
section 10(A)(2)(e) states that provisions regarding a risk charge will “not apply
to any unleased interest not subject to an oil, gas, and mineral lease.” LA. R.S.
§ 30:10(A)(2)(e) (emphasis added). The second part of this provision would be
superfluous if “unleased interest” always meant an interest not subject to any
lease. To determine the meaning of “unleased interests” in a particular
provision, we therefore must examine the context. Like sections 111 and
10(A)(2)(e), section 103.1(A) contains clarifying language: an operator shall
send reports when the operator has no lease. Further, section 103.1 is directed
to the operator regarding the operator’s obligations, and section 103.2 explains
when an operator forfeits the right to demand contribution. Both provisions
are addressed to the operator, and it makes sense that they would use
“unleased interest” to mean interests unleased by the operator. In contrast,
section 111 is addressed to owners and lessees regarding those parties’
obligations. In that context, there is no reason to believe “unleased interests”
would mean interests unleased by the operator.
TDX’s reading of the statute is also consistent with the reason for
requiring operators to provide the accounting. LA. CIV. CODE art. 10 (stating
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that when a statute is susceptible to different meanings, courts must select the
meaning that best conforms to the purpose of the law). Forced pooling allows
the operator to extract oil and gas without the consent of others holding
mineral interests in the same unit. When this happens, lessees, like other
owners of oil and gas interests, have a right to benefits and a duty to contribute.
But nonoperators lack access to the data showing the well production and costs
in which they share. Sections 103.1 and 103.2 address this information
asymmetry by giving lessees, like all nonoperating owners who have not
contracted with the operator, an accounting of what the operator is doing. This
court has recognized that, under 103.1, a “report has to relate the cost to the
benefit: it must tell the unleased mineral owner what it is getting for its
money.” Brannon Props., LLC v. Chesapeake Operating, Inc., 514 F. App’x 459,
461 (5th Cir. 2013). Lessees need this information just as much as other
owners of oil and gas interests, as the statute apparently does not provide an
alternate mechanism for lessees to get this information. 12 Indeed, XXI Oil &
Gas found that, given the lessee’s rights and obligations in a unit well, a lessee
“has a serious stake in the reliability of the statement” required by section
103.1 and is entitled to sworn statements as “[a]n unsworn statement leaves
mineral lessees . . . vulnerable to a degree that this statute seeks to prevent.”
124 So. 3d at 535.
12 The district court thought that lessees like TDX can find out the information by
disputing the calculation of unit well costs pursuant to LA. R.S. § 30:10(A)(2)(f), and
requesting that the Commissioner hold a hearing to determine proper costs. TDX Energy,
2016 WL 1179206, at *7 n.10. There is no reason to believe the legislature intended for
lessees, unlike other owners of oil and gas interests, to regularly institute proceedings with
the Commissioner in order to understand the calculation of costs. Further, this remedy is
unlikely to be effective. The Commissioner has rarely exercised authority under section
10(A)(2)(f) to resolve a dispute regarding the calculation of unit costs. Asprodites, supra, at
546.
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The district court thought that the “legislature well may have intended
to provide greater protections for land owners who typically are not as
sophisticated as, or have the available resources of, individuals or entities that
procure mineral leases.” TDX Energy, 2016 WL 1179206, at *6. Title 30 does
provide some extra protection to completely unleased owners. They are not
subject to a risk charge. LA. R.S. § 30:10(A)(2)(e). That makes sense, as an
unsophisticated owner may lack resources to contribute to drilling costs up
front. But there is no apparent reason to treat lessees differently when it
comes to reports. If anything, lessees may have a greater interest than
unleased owners in timely disclosures from operators, as lessees are often
under an obligation to promptly pay royalties to their lessors.
Chesapeake argues that our interpretation of “said interests” leads to
the absurd result of requiring operators to report to owners of any interest in
the land, even those with no obligation to contribute to drilling expenses or
right to benefit from production. But section 103.1 is concerned with interests
in “lands producing oil or gas,” and its title specifies that the section deals with
operators’ reporting requirements regarding “mineral interests.” 2001 La.
Sess. Law Serv. 973. This “do[es] not constitute part of the law” but does
“provide some aid in interpreting legislative intent.” Adams, 561 F. App’x at
326 (internal quotation marks and citations omitted). In context—under a title
referring to mineral interests, with provisions relevant only to such interests—
section 103.1 refers to owners of oil and gas interests, not of any interest in the
relevant lands. Further, an operator is not required to produce reports unless
they are requested, id. at 325, and we see little reason why owners with no
interest, or only a passive interest, in production would make the effort of
requesting them. Finally, the remedy provided for failure to produce reports
is that the operator forfeits the right to demand contribution for the costs of
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drilling, a remedy that cannot apply to owners without an obligation to
contribute to such costs.
We thus are not convinced that XXI Oil & Gas takes an erroneous view
of the statute. The most natural reading of sections 103.1 and 103.2 is that
operators forfeit their right to contribution when they fail to send timely
reports to lessees with oil and gas interests in lands upon which the operator
has no lease, and that interpretation is most consistent with the statute’s
context and purpose.
B.
Chesapeake alleges that even if sections 103.1 and 103.2 provide a
remedy for lessees, applying them in that way would violate Article III of the
Louisiana constitution. That Article dictates that “[e]very bill . . . shall be
confined to one object” and “contain a brief title indicative of its object.” LA.
CONST. art. III § 15(A). The purpose of this requirement is to “give the
legislature and the public fair notice of the scope of the legislation” and “defeat
deceitful practices of misleading the legislature into the passage of provisions
not indicated by the title of the bill.” Bazley v. Tortorich, 397 So. 2d 475, 485
(La. 1981). According to Chesapeake, the brief title of the act enacting sections
103.1 and 103.2 did not indicate its object if it applied to lessees, because it
referred only to “reporting requirements of operators and producers to owners
of unleased mineral interests.” 13 Act No. 973, 2001 La. Leg.; see also Bazley,
397 So. 2d at 485 (noting that an act’s title is the brief description beginning
with “[t]o amend and reenact”).
13 The brief title reads: “to amend and reenact R.S. 30:103, 103.1 and 103.2, relative
to reporting requirements of operators and producers to owners of unleased mineral
interests; to provide for exceptions; to provide for quarterly reporting of the amount of and
price received for production and occasional costs of operations; to provide for method of
transmittal of reports and notices; to provide for time limits for payments; and to provide for
related matters.”
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But the title of Act 973 provided sufficient notice of its object. Regardless
of the meaning of the phrase “unleased mineral interests,” the legislature used
it throughout the Act. The title of an act “is not to be strictly construed, but
rather liberally construed to effectuate the legislative purpose of the statute.”
Doherty v. Calcasieu Par. Sch. Bd., 634 So. 2d 1172, 1174–75 (La. 1994)
(reversing the trial court’s holding that, because the title of an act “use[d] the
permissive term ‘authorize,’ and the body of the act use[d] the mandatory term
‘shall’, the title violate[d] the title-body clause”); Bazley, 397 So. 2d at 486
(specifying that a title need not “be an index to the contents of the act”; it is
sufficient that “the object be fairly stated, although it be expressed in general
terms”).
Chesapeake identified three cases in which the Supreme Court of
Louisiana found titles misleading. One title did not give fair notice when it
said the act provided quarters for a parish court, without indicating that it also
authorized the parish to charge tax-levying bodies, including school boards, for
the costs of collecting any taxes they levied. Orleans Parish Sch. Bd. v. City of
New Orleans, 410 So. 2d 1038, 1039 (La. 1982). Another gave no “notice that
substantial funds were to be transferred annually” from one district to another,
an “extraordinary legislative subject.” Terrebonne Parish Police Jury v. Bd. of
Comm’rs, 306 So. 2d 707, 709 (La. 1975). The third said nothing about the fact
that an act authorized the establishment of an institution for juvenile offenders
in New Orleans. Jefferson Parish v. Louisiana Dep’t of Corr., 254 So. 2d 582,
597 (La. 1971). The titles in these decades-old cases omitted that the acts they
described addressed matters generally subject to intense public scrutiny:
public money and the location of a penal institution. This small number of
cases finding titles misleading, and their subject matter, shows they are the
exception and not the rule. Given the liberal construction courts must give
titles, a title which gave notice that an act dealt with operators’ reporting
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requirements cannot fail because it did not specify every party to whom they
must report.
IV.
Chesapeake’s counterclaim asserts that TDX is required to pay a risk fee
under section 10(A) because TDX did not make an election regarding the risk
fee under that provision. The version of section 10(A) that was in effect at all
times relevant to this case stated that:
Any owner drilling or intending to drill a unit well, . . . on
any drilling unit heretofore or hereafter created by the
commissioner, may . . . notify all other owners in the unit of the
drilling or the intent to drill and give each owner an opportunity
to elect to participate in the risk and expense of such well.
LA. R.S. § 30:10(A)(2)(a)(i). According to that section, the notice must contain:
(1) an “estimate of the cost of drilling, testing, completing, and equipping the
unit well”; (2) the “proposed location of the unit well”; (3) the “proposed
objective depth of the unit well”; and (4) “[a]ll logs, core analysis, production
data, and well test data from the unit well which has not been made public.”
Id.
When a notified owner elects not to participate in the risk and expense
of the unit well, the operator is entitled to recover out of production the
nonparticipating owner’s “share of the actual reasonable expenditures
incurred in drilling, testing, completing, equipping, and operating the unit
well, including a charge for supervision, together with a risk charge, which risk
charge shall be two hundred percent of such tract’s allocated share of the cost
of drilling, testing, and completing the unit well.” Id. § 30:10(A)(2)(b)(i). An
owner not notified still bears its tract’s share of “actual reasonable
expenditures,” but owes no risk charge. Id. § 30:10(A)(2)(b)(ii). As discussed
above, the risk charge also does not apply to “any unleased interest not subject
to an oil, gas, and mineral lease.” Id. § 30:10(A)(2)(e).
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TDX obtained two of its twenty-one leases, and all were dated
retroactively to, before the well was completed. But no lease was recorded until
the unit well was completed. In Louisiana, “[a]lthough the lease may have
retroactive effects between the parties to it, the document is a nullity with
respect to third parties until recordation.” King, 673 So. 2d at 1340. The
relevant lease date for the purposes of determining Chesapeake’s rights and
obligations under section 10(A) is therefore the date the leases were recorded.
Id. (finding an interest “unleased for the purposes of La. R.S. 30:10(A)(3) . . .
until the date of recordation of the [lessee’s] lease,” because at the time the
operator’s obligation arose—the sale of unit production—the lease had not
been recorded); see also LA. R.S. § 30:10(A)(2)(h) (“The owners in the unit to
whom the notice . . . may be sent, are the owners of record as of the date on
which the notice is sent.” (emphasis added)). Thus, as to Chesapeake, when
the well was completed, the oil and gas interests for the relevant tracts were
not subject to oil and gas leases, and there was no reason for Chesapeake to
send notice to the owner of record, as it had no chance of obtaining a risk fee.
Chesapeake thus sent notice for the first time after TDX’s interests were
recorded. Unfortunately for Chesapeake, this notice was untimely. Drilling
was complete. The provision in effect at the time said that an “owner drilling
or intending to drill” must notify other owners of “the drilling or the intent to
drill” in order to receive a risk charge. The use of the present and future tenses
shows legislative intent that the provision did not apply to completed wells.
See Benjamin v. Zeichner, 113 So. 3d 197, 203 (La. 2013) (finding the
legislature’s use of the present tense meaningful). Two exceptions to this
temporal limit also indicate that there was such a limit: (1) an owner “who
drilled or was drilling” a well could provide notice “as if a unit well were being
proposed” if a drilling unit was created around a well “already drilled or
drilling”; and (2) an owner who “had drilled the unit well” could provide notice
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“as if a unit well were being proposed” if a unit was revised to include
additional tracts. LA. R.S. § 30:10(A)(2)(c)–(d). When a unit was revised to
include additional tracts, the operator could only send notice to the owners of
added tracts, not owners previously included in the unit, indicating that the
time for sending notice to included owners had elapsed. Id.
Chesapeake argues that the time to send notice was not limited because
the notice was required to contain production data, and production data is not
available until a well is drilled. But section 10(A) did not require the notice to
contain production data in all circumstances. It allowed owners “intending to
drill” to send a notice, and the notice was required to include “all . . . production
data . . . from the unit well which ha[d] not been made public.” That means if
there was no such data, the notice did not need to include it. The production
data requirement also was not surplusage: the exceptions discussed above
allowed notice to be sent in certain circumstances (not present here) after a
well was completed, and production data would be available in those
circumstances. Further, other notice requirements would be illogical if the
well were completed when notice was sent. The notice was required to include
an “estimate” of drilling costs and the “proposed” location and depth of the well.
The current version of section 10(A) fixes the problem we face. It says
that an owner “drilling, intending to drill, or who has drilled a unit well” may
send notice. LA. R.S. § 30:10(A)(2)(a)(i) (effective June 13, 2016) (emphasis
added). The addition of the last category shows it is not included in the first
two. The notice also must now contain an “estimate or the actual amount” of
drilling costs and the “proposed or actual” location and depth of the well. Id.
(emphasis added). And, “[i]n the event that the well is being drilled or has
been drilled at the time of the notice,” production data which has not been
made public must be included. Id. To give meaning to the current statute, we
must give interpretative significance to these differences.
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Chesapeake calls these changes merely a clarification of prior legislative
intent. But between the version of section 10(A) that applies to this dispute
and the current version, the legislature enacted a different version which said
an “owner drilling or intending to drill” must notify other owners “prior to the
actual spudding” of the well to receive a risk charge. LA. R.S. § 30:10(A)(2)(a)(i)
(effective from August 1, 2012, to June 12, 2016). That version made explicit
that the production component of the notice was only applicable “[i]n the event
the proposed well [wa]s being drilled or drilled at the time of the notice,” a
condition which, under that version, was explicitly only possible under the two
exceptions. The history of these amendments confirms what the new language
indicates: in enacting the current version, the legislature charted a new course.
Chesapeake’s fallback position urges us to resort to equity, arguing that
TDX gamed the system by not recording its leases until the time for
Chesapeake to send notice had elapsed. TDX may have discovered a loophole
in the law which allowed it to reap the benefits of the unit well without taking
on any risk, though TDX contends it did not intend to game the system as it
did not begin taking leases in the unit until the day before the well was
completed. And Chesapeake did not end up in a worse position than it
expected. At the time it drilled the unit well, it knew there were no recorded
leases for the acres at issue and did not expect any upfront contribution or risk
fee under section 10(A) for those acres. Regardless, as Chesapeake points out,
giving TDX any benefit based on a late notice makes little sense: a late notice
provides an owner greater information about whether a well will produce
enough to merit the risk. When the text of the law is clear, however, the court
may not resort to equity. See LA. CIV. CODE art. 4; Brannon Properties, 514 F.
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App’x at 460–62. In this case, the text limited the time to provide notice to
before the well was complete. 14
***
The judgment is REVERSED in part and AFFIRMED in part. The case
is remanded for entry of a judgment consistent with this opinion.
14 Chesapeake points to a case in which we applied equitable principles in interpreting
a joint operating agreement including similar notice and risk charge components. Bonn
Operating Co. v. Devon Energy Prod. Co., 613 F.3d 532, 533 (5th Cir. 2010). The agreement
provided for notice of “proposed operations,” but the operator sent Bonn notice after the well
was completed. Id. We held that even though the language “indicat[ed] that the notice
should be sent prior to operations being commenced,” Bonn was not harmed by receiving
notice after completion and had waived any right to object by making an election. Id. at 535–
36. As the district court held, Bonn is not controlling. It did not interpret a Louisiana statute.
When interpreting a statute, the court may only resort to equity if “no rule . . . can be derived
from legislation.” LA. CIV. CODE art. 4.
22