By Kyle P. Polozola

The Louisiana Risk Fee Act (La. R.S. 30:10) continues to be a big headache for operators.  The Louisiana Legislature revised the Act significantly in 2012, adding alternate and cross unit wells to the category of wells to which the statute applies, but also imposed new obligations on drilling owners during the recovery period.  These new obligations include making drilling owners responsible for paying the burdens owed by non-consenting owners to the parties they contract with.  La. R.S. 30:10A(2)(b)(ii)(aa).  Now, during the recovery period, a drilling owner must pay a nonparticipating owner certain royalties due the nonparticipating owner’s lessor.  During the recovery period, the drilling owner also must now pay a nonparticipating owner certain amounts for the benefit of overriding interest owners.  These payments must not only be made by the drilling owner, they must be made in conformity with the “check stub” statute.

The oil and gas industry reacted harshly to the Louisiana Legislature’s action.  The 2012 amendment was seen as controverting the central rationale for the Risk Fee Act – incentivizing risk taking and investment in Louisiana’s oil patch.  The industry’s response resulted in the Louisiana Senate passing Senate Resolution No. 31 in 2016, requesting that the Louisiana Law Institute study the implications of the 2012 amendments on the Louisiana Risk Fee Act.  The central focus of the Senate’s resolution was the manner in which the 2012 amendments frustrated the original policy and purpose of the Act, which was meant to incentivize parties to share the risk and expense of drilling wells, by rewarding a nonparticipating owner for its failure to share in such risk.  The Law Institute’s committee issued an Interim Report to the Senate outlining several issues that remain under the committee’s consideration, including the following that pertain to the payment of proceeds:

  1. Addressing the responsibility of a nonparticipating owner to demonstrate to an operator charged with responsibility to pay royalties the sufficiency of such owner’s title to its leases as well as the lease terms pertaining to royalties.
  2. Clarifying that any costs incurred by an operator to conduct title work with respect to a tract under lease to a nonparticipating owner is subject to recoupment as well as any applicable risk charge.
  3. Clarifying R.S. 30:10 with respect to the determination of the revenue stream to be applied against payout of any recoverable expenses and risk charge as it relates to the deduction or exclusion of royalties paid by the operator on behalf of the nonparticipating owner.

While the Law Institute committee’s work continues, addressing the foregoing aspects of the Act would be a welcomed development due to, at once, the legal and administrative burden the Act imposed on drilling owners in 2012.  Another report from the Law Institute committee is anticipated this year, and a legislative fix to the statute will likely be sought in the next non-fiscal legislative session in 2020.  In the meantime, operators should apply vigilance in navigating the Louisiana Risk Fee Act’s maze.  Stay tuned.