LOUISIANA: An Introduction to Energy & Natural Resources: Oil & Gas
LOUISIANA: An Overview for Energy and Natural Resources: Oil and Gas
Contributors:
Joseph L. Shea, Jr.
Katherine “Katie” S. Baker
Joshua S. Chevallier
Louisiana has always been one of the top five states in natural gas production and reserves. The Haynesville Shale located in Northwest Louisiana is currently one of the key natural gas producing regions in the United States. While drilling activity declined as a result of COVID-19 pandemic-fueled lows last year, there has been a dramatic turnaround in 2021. Together, the extensive history of production and robust ongoing exploration and drilling activities in Louisiana create a number of opportunities and legal issues about which businesses operating in the state should be cognizant.
Pipeline Issues
Due to extensive natural gas activity, a vast network of interstate pipelines in Louisiana plays a pivotal role in the distribution of natural gas to major markets throughout the country. While most of that natural gas goes to other states, nearly a quarter is exported to other countries through liquefied natural gas export terminals located within Louisiana, which are projected to continue to operate at near capacity. These interstate lines are sometimes combined with complex gathering systems and intrastate pipelines in order to move the natural gas from wellhead to market. Legal disputes have arisen between operators and non-operating working interest owners, concerning who bears the costs to secure firm capacity for the transportation of natural gas under the terms of joint operating agreements and marketing agreements, or, in their absence, under Louisiana’s statutory scheme. Moreover, the costs of transporting this natural gas, along with other post-production costs, have given rise to extensive litigation about who bears those costs.
Hydraulic Fracturing
Today, most natural gas production in Louisiana is derived from wells located in historically active areas of oil and gas production through the use of modern drilling and completion techniques including horizontal drilling and hydraulic fracturing. This has brought about new developments in the regulatory realm with respect to unitization procedures, including increased permitting for cross-unit horizontal wells. These unitization procedures have led to an increasing prevalence of instances where subsurface drilling locations are owned by parties other than those entitled to the payment of royalties on the gas produced from the cross-unit well. This requires an updated outlook on the contractual relationships that have traditionally governed the property rights at issue in oil and gas production.
Frac Hit Litigation
Landowner lawsuits related to alleged contamination arising out of the “legacy” of oil and gas exploration and production activities have recently expanded to include claims concerning the interaction of modern oil and gas operations with legacy operations in mature oil and gas fields, in what has has been characterized as a “frac hit.” A frac hit refers to the hydraulic communication between two or more adjacent wells as a result of hydraulic fracturing operations. More specifically, there are allegations that soil and groundwater contamination have been caused by communication between new horizontal completions and older, conventional wells that had been plugged and abandoned.
The inclusion of parties with active and ongoing operations introduces a whole host of legal and business considerations that have not traditionally been present in legacy litigation. The nature of these frac hit claims presents not only new technical issues to be addressed by experts, a major component of all legacy litigation, but also considerably widens the scope of fact discovery. When current operations are implicated, current employees, contractors and decision-makers become fact witnesses concerning those operations giving rise to the alleged contamination.
Carbon Sequestration
Commercial crude oil production in Louisiana began early in the 20th century, and Louisiana remains one of the top ten states in crude oil production and reserves. Added to this onshore production, many of the nation’s largest oil fields are found off of the Louisiana coast in the Gulf of Mexico and a large portion of that production is piped into Louisiana. Due to the abundance of this onshore and offshore crude oil production, Louisiana has 17 oil refineries that account for nearly one-fifth of the nation’s refining capacity.
Given the presence of refining and petrochemical production activities in the state coupled with geology that has tremendous carbon dioxide (CO2) storage potential, Louisiana is uniquely situated to sustain carbon capture and sequestration (“CCS”) projects. CCS involves the capture of CO2 from power plants and other large industrial sources, its transportation to suitable locations, and injection into deep underground geological formations for long-term sequestration. Concerns about global warming have led to new governmental and corporate policies that promote CCS. For example, an incentive program like the federal “45Q” tax credit provides a performance-based tax credit for carbon capture projects that can be claimed when an eligible project has securely stored the captured “qualified carbon oxide” in “secure geologic storage.” However, CCS in Louisiana does not come without various regulatory and legal implications.
Louisiana is no stranger to the injection of CO2 into underground formations to enhance recovery of residual oil and natural gas. Indeed, Louisiana already has existing regulations for CO2 enhanced recovery projects that utilize Class II wells and has been granted primacy for the permitting of Class II enhanced recovery wells. The Louisiana Department of Natural Resources (“LDNR”) Office of Conservation oversees the regulations governing CO2 enhanced recovery wells.
Further, the “Louisiana Geologic Sequestration of Carbon Dioxide Act,” first implemented in 2009, provides for a coordinated statewide program for the storage of CO2. Various Louisiana agencies regulate and authorize most of the components of CO2 storage projects with the exception of the Class VI Underground Injection Control Permit, which is currently administered by the U.S. Environmental Protection Agency (“EPA”) pursuant to regulations under the federal Safe Drinking Water Act. Class VI wells are used to inject CO2 into deep rock formations for long-term sequestration. To encourage CCS projects in Louisiana, LDNR officials have indicated that Louisiana is seeking primacy for the permitting of such wells from the EPA.
Given Louisiana’s unique property and mineral law regimes, the acquisition of property rights that will be needed for a CCS project in Louisiana, including surface and subsurface rights, will need to be closely analyzed. It will be important for the prospective operator of a CO2 storage facility to identify (1) who owns the surface of the CO2 storage area, (2) who owns the subsurface or pore space beneath the CO2 storage area, (3) what rights of eminent domain (referred to as expropriation in Louisiana) are granted to the operator of a CO2 storage facility, and (4) the interaction of different operations on the same property if, for example, the CO2 storage area is subject to a pre-existing mineral lease. Finally, as with other industrial projects, a concern of importance, since the goal of a CCS project is the long-term sequestration of CO2, is the transfer of liability and responsibility for long-term management of the CO2 storage facility.