Davis Oil v. Steamboat Petroleum

583 So. 2d 1139, 113 Oil & Gas Rep. 98, 1991 La. LEXIS 1887, 1991 WL 117328
CourtSupreme Court of Louisiana
DecidedJune 28, 1991
Docket91-C-0145
StatusPublished
Cited by5 cases

This text of 583 So. 2d 1139 (Davis Oil v. Steamboat Petroleum) is published on Counsel Stack Legal Research, covering Supreme Court of Louisiana primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Davis Oil v. Steamboat Petroleum, 583 So. 2d 1139, 113 Oil & Gas Rep. 98, 1991 La. LEXIS 1887, 1991 WL 117328 (La. 1991).

Opinion

583 So.2d 1139 (1991)

DAVIS OIL COMPANY
v.
STEAMBOAT PETROLEUM CORPORATION.

No. 91-C-0145.

Supreme Court of Louisiana.

June 28, 1991.

*1140 L. Linton Morgan, Robert L. Redfearn, Judy P. Martinez, Eddie L. Sapir, New Orleans, Servando Caesar Garcia, III, Metairie, for defendant-applicant.

Matthew J. Randazzo, III, Vernon L. Terrell, Jr., F. Henri Lapeyre, New Orleans, for plaintiff-respondent.

John M. McCollam, Margaret P. Sullivan, New Orleans, amicus curiae.

Donald W. Doyle, Clyde H. Jacob, III, New Orleans, amicus curiae.

DENNIS, Justice.

We are called upon to decide whether the operator of a forced drilling unit who initiated the unitization process may hold an adjacent lessee personally liable for dry hole well costs because the lessee requested the Commissioner to modify the proposed unit to include part of the lessee's leasehold. In the present case, in response to the adjacent lessee's counter-proposal, the Commissioner included parts of its leaseholds in two proposed units. Consequently, part of the land under the adjacent lessee's leases comprised 4.6859% of the acreage of one unit and 2.58931% of the other. After drilling a dry hole in each of the two units, the operator sought to hold *1141 the lessee personally liable for a proportionate share of the well costs, but the trial court ruled that such costs could not be recovered except out of production. The court of appeal reversed, holding that the lessee was personally liable because it took an active role in the unitization proceedings by submitting and arguing in support of its counterplan for unitization. Davis Oil Co. v. Steamboat Petroleum Co., 570 So.2d 495 (La.App. 5th Cir.1990). We reverse. A non-operating owner of a mineral interest, who does not consent to operations within a compulsory drilling unit by an operating owner, has no liability for the costs of development and operations except out of his share of production. Under the circumstances of the present case, in which the non-operating lessee merely introduced a counter-proposed unit plan at the Commissioner's hearing, prior to the drilling of the dry holes, only as a precaution against the uncompensated drainage of part of the land underlying its leases, the lessee did not consent to the unit operations.

FACTS

Plaintiff, Davis Oil Company, and defendant, Steamboat Petroleum Corporation, held separate mineral leases on adjacent property. On March 5, 1984 Davis Oil notified the Commissioner of Conservation and all interested parties, including defendant, of its intent to request a hearing before the Commissioner to consider Davis Oil's proposed unitization plan which would create several drilling and production units in the East Manchester Field located in Calcasieu Parish. The geographic units proposed by Davis Oil did not include two adjacent tracts (the Mott tract and the Richard tract) leased by Steamboat. Steamboat filed a counterplan in which it opposed Davis Oil's plan and urged the Commissioner to adopt Steamboat's unitization plan which included parts of the tracts leased by Steamboat. A public hearing was held on May 29, 1984 at which Davis Oil and Steamboat each appeared and urged the Commissioner to adopt its unit plan. Although the Commissioner's unitization order did not totally accept either Davis Oil's plan or Steamboat's plan in toto, it did include in the units small parts of the lands upon which Steamboat held leases. According to the official unit survey plats, the Richard tract (leased by Steamboat) contributed 14.9949 acres or 4.6859% to one unit and the Mott tract (leased by Steamboat) contributed 8.2858 acres or 2.58931% to the other unit. The Commissioner's order also appointed Davis Oil as the operator of the units and authorized Davis Oil to drill unit wells.

Davis Oil drilled a well in each unit, both of which were dry holes. Steamboat was invited to participate in the drilling of each well on the basis of its interest in the units. Steamboat refused to participate. Davis Oil submitted invoices to Steamboat totaling $90,567.31 for Steamboat's proportionate share of the costs of one well and $186,409.13 for its proportionate share of the costs of the other. Steamboat refused to pay, and Davis Oil instituted this action seeking cash payments from Steamboat. Steamboat claims that it is not required to pay the costs in cash and that Davis Oil's sole remedy is reimbursement from the proceeds of production from the wells. The trial court rendered judgment in favor of defendant, Steamboat, and dismissed Davis Oil's claims with prejudice. The court of appeal reversed holding that Steamboat was liable for its share of drilling costs in cash. Davis Oil Co. v. Steamboat Petroleum Co., 570 So.2d 495 (La. App. 5th Cir.1990). We granted Steamboat's writ application. 575 So.2d 381 (La. 1991).

THE NEED TO ALLOCATE WELL COSTS BETWEEN THE OPERATING AND NON-OPERATING PARTIES IN THE UNIT

In order to prevent waste in the recovery of oil and gas from a producing formation located beneath separately owned or leased tracts of land and to protect the rights of each separately owned or leased tract of land overlying a common source of supply, the legislature has granted the Commissioner of Conservation the statutory authority to establish compulsory drilling units. La.R.S. 30:4; La.R.S. 30:9; *1142 La.R.S. 30:10; see also Crawford v. Texaco, Inc., 40 F.R.D. 381 (S.D.N.Y.1966); Digby, The Conservation Laws and Their Administration, 24 Tul.L.Rev. 155 (1949). The general concept behind the establishment of drilling units is to prevent adjoining landowners or leaseholders from having to drill protective offset wells on their premises by permitting them to share production proportionately to the area of their acreage drained by the unit well. Superior Oil Co. v. Humble Oil & Refining Co., 165 So.2d 905 (La.App. 4th Cir.), writ refused, 246 La. 842, 167 So.2d 668 (1964). As a result of these compulsory drilling units, there has arisen a need for a rule allocating the costs between the unit operator and all non-operating parties who share in the unit's production.

The difficulty faced by judges and legislators in developing a rule that will adequately balance the rights of the unit operator and the non-operating parties whose interests have been pooled in a forced drilling unit is indicated by the substantial differences between the different state approaches to the problem. Kramer, Compulsory Pooling and Unitization: State Options in Dealing with Uncooperative Owners, 7 J. Energy L. & Pol'y 255 (1986); Note, Oil and Gas-Forced Drilling Unit-Compulsory Payment In Cash of Pro-Rata Well Costs, 39 Tul.L.Rev. 381 (1965). A rule that requires landowners or leaseholders to share in all costs and all production on the same proportional basis may work harshly on a party with little available cash. 1 B. Kramer & P. Martin, The Law of Pooling and Unitization, § 12.01 (3rd ed. 1989). On the other hand, a rule that requires the operating party to absorb all losses but forces the operating party to share all profits will work harshly on that risk-taker whose efforts have led to production. Id. In fact, this rule will encourage people who might otherwise contribute to the costs in advance to hold out until the results of the drilling are known, since they can get the benefits of the well without the risks. Id.

STEAMBOAT'S LIABILITY

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Bluebook (online)
583 So. 2d 1139, 113 Oil & Gas Rep. 98, 1991 La. LEXIS 1887, 1991 WL 117328, Counsel Stack Legal Research, https://law.counselstack.com/opinion/davis-oil-v-steamboat-petroleum-la-1991.