Proposed Changes to Louisiana’s “Risk Fee Statute,” La. R.S. 30:10 (2022)

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oil rig, industry,

The Louisiana Legislature is again proposing a change to Louisiana’s “Risk Fee Statute,” La. R.S. 30:10 (2022).  Specifically, there is a bill proposing to reverse one of the most notable 2022 Amendments to the statute, regarding the obligation of payment of royalty and overriding royalty during the period of recovery of the actual reasonable expenditures incurred in completing or recompleting a well, the charge for supervision, and the risk charge. The proposed legislation will give non-participating owners the out to place the onus back on the drilling owner operator to directly pay each and every lessor royalty and/or overriding royalty due in their units, instead of allowing them to pay the non-participating owners, for the benefit of their royalty and overriding royalty owners, all amounts due.

Specifically, in 2022, the Legislature revised the Risk Fee statute to permit the operator to pay the non-participating owners who furnished certain requisite statutory information to the drilling owner the following: (i) for the benefit of its lessor royalty owner that portion of the proceeds from the sale or other disposition of production due to the lessor royalty owner under the terms of the contract or agreement creating the royalty between the lessor royalty owner and the nonparticipating owner reflected of record at the time of the risk charge notice; and (ii) for the benefit of any overriding royalty owner a portion of the proceeds from the sale or other disposition of production that is the lesser of (I) the nonparticipating owner’s total percentage of actual overriding royalty burdens associated with the existing lease or leases that cover each tract attributed to the nonparticipating owner reflected of record at the time of the risk charge notice or (II) the difference between the weighted average percentage of the total actual lessor royalty and overriding royalty burdens of the drilling owner’s leasehold within the unit and the weighted average percentage of the total actual lessor royalty of the nonparticipating owner’s leasehold within the unit reflected of record at the time of the risk charge notice.

Representative Lawrence Bagley, a Republican representing District 7, which includes all parishes that encompass the Haynesville Shale play, Caddo, DeSoto, and Sabine, is proposing HB 590 for the 2023 Regular Session, which will reverse the ability of the operators to directly pay the non-participating owners the royalty and overriding royalty payments allocable to their tracts in their units, instead mandating that drilling owners must pay, at a non-participating owner’s discretion, all overriding royalties and royalties directly to their owners during the recoupment of costs and risk charge.

Should HB 590 become law, it will make the operator, in addition to the non-participating owner, the obligor under the 2022 Amendments to the procedures and remedies available to the lessor royalty owners and overriding royalty owners for nonpayment of royalties under La. R.S. 31:137 (Nonpayment of royalties; notice prerequisite to judicial demand) and La. R.S. 31:212.21 (Nonpayment of production payment or royalties; notice prerequisite to judicial demand). This will, in all practicality, create a quasi-contractual relationship between the drilling owner and any person to whom the nonparticipating owner is liable, contractually or otherwise.

On a brighter note, in 2023, the Western District of Louisiana, in the matter Johnson v. Chesapeake La., LP, 2022 U.S. Dist. LEXIS 61617, 2022 WL 989341 finally answered the long-awaited question of whether the Risk-Fee Statute allows for recovery of post-production costs. The Court held that since a unit operator is managing an unleased mineral owner’s affairs by selling his share of gas for him, and post-production costs are expended to make that production marketable, the managing operator is entitled to be reimbursed for the unleased mineral owner’s share of post-production costs.

Moreover, the 2022 Risk Fee statute revisions also now permit recoupment for expenditures to include “all actual reasonable costs incurred by a drilling owner in obtaining a title examination and title opinion as a unit operating cost.”  Thus, if a drilling owner/operator pays for the creation of a title opinion from a licensed Louisiana attorney on a unit tract burdened by a mineral lease, or other agreement, which reveals a lessor royalty or overriding royalty for which a nonparticipating owner is entitled to receive from the drilling owner, the drilling owner is entitled to recoup its actual reasonable costs in obtaining the opinion out of a tract’s allocable share of production.

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