Mineral Leases in Louisiana are typically granted for a stipulated length of time, known as the primary term, and for so long thereafter as production in paying quantities continues. As production commences and a mineral lease is extended beyond its primary term, various common issues often arise, many of which are briefly discussed below:
Lease Maintenance
When considering the maintenance of mineral lease beyond the primary term, we typically examine the production history to ensure there has been production in paying quantities to maintain the lease and review whether the lease includes a Pugh Clause and/or Automatic Depth Termination Provision.
Production in Paying Quantities – In order to effectively maintain a mineral lease beyond its primary term with production of oil or gas, such production must be in paying quantities.[1] If production is not in paying quantities, a mineral lease will automatically terminate in the absence of some other method of maintenance, like additional operations. Production is in paying quantities when it is sufficient to “induce a reasonably prudent operator to continue production in an effort to secure a return on his investment or to minimize any loss”.[2] When litigated, paying quantities analyses are often fact-intensive and tedious.
Pugh Clause – modern mineral leases will often include a “Pugh Clause”, pursuant to which unit production or unit operations will only maintain the leased premises as to the acreage contained within such unit. It is important to note that not all Pugh Clauses are uniform in their application and each provision should be analyzed independently along with the operational and production history of the leased premises and lands unitized therewith to assess lease maintenance.
Automatic Depth Termination Provision –Automatic depth termination provisions commonly result in automatic termination of the depths below and/or above a certain point (e.g. productive strata or the deepest depth penetrated by a well on the leased premises or lands unitized therewith), based on a specific date. These provisions are important to consider for a lessee that is interested in developing intervals that are not unitized in a common zone. Additionally, automatic depth termination provisions and Pugh Clauses are important because they may result in partial lease termination, which can trigger release obligations, discussed below.
Further Development
Louisiana’s mineral code recognizes various implied obligations in mineral leases, one of which is the lessee’s duty to develop and operate the leased premises as a reasonably prudent operator for the mutual benefit of himself and his lessor.[3] One iteration of this implied obligation is that, after initial production in paying quantities has been established, the lessee must further develop the premises, to the extent a reasonably prudent operator would so develop after considering (1) geological data, (2) number and location of wells drilled (3) productive capacity of wells, (4) cost of drilling operations (5) time interval between completion of the last well and the demand for additional operations, and (6) acreage involved in the disputed lease.[4] In making further development demands, mineral lessors often seek partial cancellation of the mineral lease at issue. Fortunately, there are a number of negotiation methods that a lessee can utilize to resolve further development demands. Additionally, the inclusion of a Pugh Clause and/or an Automatic Depth Termination Provision further mitigates the risk of a development demand and should be considered by lessees who believe the administrative burden of managing their leasehold outside of the productive depths outweighs the benefits of maintaining their leasehold to such depths.
Further development demands are not unique to private mineral lessors. The Office of Mineral Resources staff conducts routine reviews of many of the older mineral leases granted by the State of Louisiana to occasionally recommend to the State Mineral and Energy Board that a demand for a partial release/further development should be made. These demands often involve older mineral leases covering large acreage with no Pugh Clause and a modest lessor royalty. Such demands can often be resolved by meeting with the staff at the Office of Mineral Resources and/or presenting plans of development or other information to the State Mineral and Energy Board at its public meeting.
Demand for Written Release of a Terminated Mineral Lease
After a mineral lease terminates, either wholly or in part, the mineral code authorizes the lessor to make demand on the lessee for a recordable release of the expired lease.[5] If the lessee fails to provide the release within 30 days (if the relevant lease is beyond the primary term) from receipt of the demand, then the lessee may be liable for resulting damages and reasonable attorneys fees in bringing suit.[6] Additionally, certain custom mineral lease forms impose a daily monetary penalty for the lessee’s failure to provide a written release when a mineral lease expires. Accordingly, written demands for release of a purportedly expired mineral lease should be promptly addressed by the lessee.
Surface/Subsurface Rights
Mineral leases commonly grant the lessee the right to use the surface and subsurface of the leased premises for drilling one or more wells. On occasion, unit wells are drilled from a surface location on the leased premises, but outside of the unit boundary. When a mineral lease contains a Pugh Clause and the lease expires as to the non-unitized premises containing the surface location and wellbore, the operator of the well may be without the right to use the surface location and be at risk of trespassing.
To mitigate the risk of such rights expiring, lessees will often include a subsurface and surface servitude within a mineral lease that is stipulated to survive lease termination. Alternatively, an operator using a non-unitized surface location should enter into a separate surface use agreement authorizing its operations in the event the associated mineral lease terminates as to the surface location.
[1] La. R.S. 31:124
[2] Id.
[3] La. R.S. 31:122
[4] Ferrara v. Questar Exploration and Production Co., 70 So.3d 974 (La. App. 2 Cir. 6/29/11)
[5] La. R.S. 31:206.
[6] La. R.S. 31:207.