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 remains one of the top five states in natural gas production and reserves. Apart from a brief decline in production and related activity due to COVID-19, annual production in Louisiana has consistently increased reaching a record high for 2021. The most recent increases in gas prices and demands for such energy have only fueled higher production levels. Exploration and drilling activities associated with these changing market conditions create new opportunities and legal issues about which businesses operating in the state should be cognizant.

LNG  

While most of the natural gas produced in Louisiana goes to other states, nearly a quarter is exported to other countries through Liquified Natural Gas export terminals located within the state. In 2020, Louisiana’s two liquefied natural gas (LNG) export terminals shipped out approximately 55% of US total LNG exports. The demand for LNG is expected to rise 25 to 50% by 2030. These increased energy needs of various states and many foreign countries (some non-related to the Ukrainian conflict) have resulted in planned expansions of existing terminals and the construction of numerous new terminals. Interstate pipelines associated with these activities are sometimes combined with complex gathering systems and intrastate pipelines in order to move the natural gas from wellhead to market. Legal disputes frequently arise between operators and non-operating working interest owners under the terms of joint operating agreements and marketing agreements, or, in their absence, under Louisiana’s statutory scheme. This is combined with extensive litigation between lessors and lessees under various mineral lease provisions.

Moreover, the development of these LNG facilities and new petrochemical plants, and new regulations that impact current and in-progress facilities, will be significantly impacted by the burgeoning environmental justice movement in the state. Of particular note, in late 2021 the new director of the EPA visited Louisiana on a tour of many of the major sites of industrial development in South Louisiana and communities surrounding them and held a number of events involving advocates of environmental justice policies.

Cost litigation arising out of interpretation of Louisiana statutes

Louisiana compulsory unitization (or forced pooling) statutorily allows the state to authorize a single operator to drill for oil and gas even when some interest owners in the unit do not have a contract or lease with the operator. Two recent court decisions have provided additional guidance on the correct interpretation of certain statutes governing how to allocate costs and risk among the interest owners and how the operator should provide an accounting of well production and costs to those owners.

In one case, a federal district court addressed a res nova issue regarding whether an operator is statutorily allowed to recover post-production costs from an unleased mineral owner’s share of production proceeds. The court found that the applicable Louisiana statutes create a quasi-contractual relationship, by operation of law, of negotiorum gestio between the unit operator and the unleased mineral owners when the operator sells production, thereby providing the mechanism for reimbursement of post-production costs incurred by an operator to market the unleased mineral owner’s gas. This was consistent with prior Louisiana jurisprudence that had defined the relationship of operators and unleased mineral owners as quasi-contractual.

In another recent case the United States Court of Appeals, Fifth Circuit, reversed a district court decision and held that the defendant operator of certain units had failed to comply with its disclosure and reporting obligations to the plaintiff, as an unleased mineral owner, under Louisiana Revised Statutes §§ 30:103.1 and 103.2, and consequently the operator had forfeited its right to demand contribution from the unleased mineral owner for a proportionate share of the costs of well drilling operations. According to the Fifth Circuit, the applicable statutes impose a duty on operators to send reports when demanded by unleased owners who request such reports in writing, by certified mail to the operator or producer, and when such demand contains the unleased interest owner’s name and address. The Fifth Circuit also rejected the district court’s conclusion that the plaintiff’s second demand letter did not comply with the statutes because the letters did not explicitly cite the statutes or reference the possibility of a “lawsuit, penalty, or forfeiture.” The plaintiff’s second letter was an adequate notice of default because it called attention to the operator’s failure to comply with Louisiana law. Further, since the defendant operator did not respond within the statutory time period, it forfeited its right as operator to recoup a pro rate share of the costs of drilling operations of the well. The Fifth Circuit forcefully noted that “[a]n operator…cannot shirk its duty without incurring the consequences the legislature has prescribed to protect the owners of unleased mineral interests.”

Update on carbon capture and sequestration in Louisiana

Louisiana is a prime candidate for carbon capture and sequestration (CCS) projects because of the presence of refining and petrochemical production activities in the state coupled with its geology which has tremendous carbon dioxide (CO2) storage potential. Over the last year several companies have entered into various agreements related to CCS projects in Louisiana. The acquisition of property rights needed for a CCS project in Louisiana includes surface and subsurface rights. Indeed, several of the recent agreements related to CCS projects involve the leasing of land with high-capacity reservoirs underlying deep sealing formations. In some instances only a portion of the land is needed, in which case companies are opting to execute pore space agreements to increase the potential volume of CO2 that can be sequestered at a particular site. Optimal sites are located along the Louisiana industrial corridor where captured industrial emissions can be transported through existing and new CO2 pipelines.

In addition, the State of Louisiana, acting through the Louisiana State Mineral and Energy Board, has entered into “Carbon-Dioxide Storage Agreements” for the purpose of injecting CO2 into certain geological strata or formations for permanent storage underlying over 100,000 acres. Importantly, these agreements address, among other items, time periods for the termination and maintenance of the agreements, the interaction of different operations on the properties that are the subject of the agreements, as well as liability and responsibility for surface use and restoration, and closure, post-closure and monitoring activities.

Developments in legacy litigation 

Landowner lawsuits related to alleged contamination arising from historical oil and gas exploration and production activities have existed in Louisiana for decades and now include claims for damages related to increased hydraulic fracturing and frac hit litigation. The damages recoverable and the application of Louisiana’s “subsequent purchaser doctrine” frequently have been the subject of legislative and judicial change. 2021 was no different.

In 2006 the Louisiana legislature enacted a statute commonly referred to as Act 312 in an effort to ensure that funds awarded in a lawsuit for remediation of properties would actually be used for that purpose. In June of last year, the Louisiana Supreme Court reversed its own 2013 decision that had allowed the determination of the cost to remediate contaminated property to state regulatory standards under Act 312 to be submitted to juries. The Court has now determined that, as concerns remediation of contaminated lands to state regulatory standards, “specific performance of remediation” is the appropriate remedy under Louisiana’s regulatory scheme. Without the existence of a contractual provision between the parties that creates an obligation to the contrary, juries in Louisiana would not be permitted to consider damages related to statutory remediation of the properties that are the subject of legacy lawsuits. The reach of this decision remains the subject of significant debate, primarily due to the Court’s granting of an application for rehearing in the case, which is still pending.

The Louisiana “subsequent purchaser doctrine” in legacy lawsuits provides that, without an express contractual provision in a document transferring title to property, the acquirer of property that has already been the subject of contamination does not have a cause of action to seek remediation of the property. 2021 saw the first Louisiana appellate opinion that affirmatively determined that the subsequent purchaser doctrine applies to transfers from an individual or individuals to their own wholly owned juridical entity. The resolution of the question of whether some exception to the subsequent purchaser doctrine may exist for the transfer of properties to “family LLCs” is not insignificant. In many cases, the exploration and production activities complained of in legacy suits are decades old, and the properties at issue are often owned by families for generations. Over time, ownership interests in these properties regularly are held by many family members in indivision, and the creation of LLCs to hold the properties are attractive vehicles to make the management of family properties easier and more efficient. This decision will likely impact the viability of pursuing legacy litigation for many generational landowners in Louisiana.