Unit Operations In Louisiana

By Guy E. Wall

I. SOME CONSERVATION PRINCIPLES

A. Commissioner's Powers

The Commissioner of Conservation has expansive authority to promulgate necessary rules, regulations, and orders to prevent waste and protect correlative rights. See Tex/Con Oil and Gas Co. v. Batchelor, 634 So.2d 902, 909 (La. App. 1st Cir. 1993), writ denied, 635 So.2d 1102 (La. 1994); McDougal, Louisiana Oil and Gas Law 313 (Michie 1995). The Commissioner's authority includes the power to (1) prevent wells from being drilled; (2) regulate the spacing of wells and establish drilling units; (3) require the filing of reports and records; and (4) prorate production among units and set allowables for each well. Id.; La. R.S. 30:4. Thus, the Commissioner is given broad discretion in implementing these powers because of the strong public interest in preventing waste and protecting correlative rights and because of the agency's considerable expertise in this area. E.g., McDougal at 313. Moreover, an administrative agency is entitled to deference on its administration and construction of the rules and regulations that it promulgates; thus, when authorized judicial review is taken from an agency order, the agency order must stand unless it is arbitrary, capricious or manifestly contrary to its rules and regulations. Matter of Recovery I, 635 So.2d 690 (La. App. 1st Cir.), writ denied, 639 So.2d 1169 (La. 1994); La. R.S. 30:12(B)(5).

B. Units

A drilling unit is "the maximum area which may be efficiently and economically drained by one well." La. Rev. Stat. Ann. § 30:9.B (West 1975). Louisiana Revised Statutes section 30:9.C provides that each well permitted to be drilled upon a drilling unit hereafter established shall be drilled at the location established by the Commissioner of Conservation, after public hearing, in the order creating the unit. La. Rev. Stat. § 30:9.C. Once a producing well is located on a unit, the unit is a "developed area," La. Rev. Stat. § 30:9.B, and no other well can be drilled on the unit to the same pool. See Sohio Petroleum Co. v. V.S. & P.R.R., 222 La. 383, 62 So.2d 615 (1952). McDougal, Oil and Gas Law, § 6.3, p. 324 (1995). The Commissioner of Conservation is also charged with the responsibility of assuring that each owner in a unit receives his just and equitable share of the oil and gas in the pool. La. Rev. Stat. Ann. § 30:9.C; Hunt Oil Co. v. Batchelor, 93-3144 (La. 10/17/94); 644 So.2d 191 (La. 1994).

C. Substitute Unit Wells

Statewide Order No. 29-K-1, effective October 20, 1995, contains regulations that apply to substitute unit wells. "Substitute unit well" is defined as any well drilled to, or to be drilled to, completed or recompleted in, the unitized sand which should be "designated to take the place of" and become the unit well. Statewide Order No. 29-K-1, LAC § 43:XIX.2903. The Commissioner may designate by supplemental order a substitute unit well without a public hearing unless one is requested. Statewide Order No. 29-K-1, LAC § 43:XIX.2905A; Statewide Order No. 29-K-1, LAC § 43:XIX.2905D.

In a memorandum dated November 2, 1964, the Commissioner of Conservation issued the procedure for handling applications for substitute unit wells under the provisions of the old Statewide Order No. 29-K. This memorandum provides in part:

In order to expedite the issuance of a permit to drill the substitute unit well, the application to drill with the required plat and fee, should accompany the letter of application for substitute unit well.

Thus, an operator had to prepare and file a permit application designating the well as a unit well and showing the unit boundaries if it sought designation of a substitute unit well under Order 29-K.


D. Permits to Drill and Well Spacing

No well may be drilled in search of minerals without first obtaining a permit from the Commissioner of Conservation. La. Rev. Stat. Ann. § 30:204; Statewide Order 29-B.II.C, LAC § 43:XIX.103C. Furthermore, any work prior to issuance of a permit such as digging pits, erecting buildings, derricks, etc., will be done at the operator's risk with the understanding that the Department of Conservation may change the location or deny the permit. Statewide Order 29-B.II.C, LAC § 43:XIX.103.C.

Statewide Order No. 29-B, Section II, entitled "Application to Drill," states that when a tract to be drilled is composed of separately owned interests which have been pooled or unitized, the boundaries of the acreage in each separately owned interest must be indicated on the survey plat accompanying the application for permit to drill. Order 29-B.II.A, LAC § 43:XIX.103A. Statewide Order No. 29-E, which establishes well spacing rules, provides that no permit shall be issued for the drilling of wells and no wells shall be drilled unless inter alia the applications for permit to drill contain (1) a commercial map showing the location of existing producing or drilling wells, (2) the lease and property ownership of tracts in the vicinity of the well for which permit is sought, and (3) the location of the proposed well with respect to property lines and lease lines. "Property line" includes the boundaries of the unit. Statewide Order 29-E(5).

Statewide Order 29-B.II.D provides that no well shall commence drilling below the surface casing until a sign has been posted on the derrick showing the ownership and designation of the well. LAC § 43:XIX.103.D. The purpose of the rules regarding designation are to facilitate the handling of all matters relative to any particular well. Order 29-B.II.D, LAC § 43:XIX.103.D. Order 29-B.II.D.2 provides that all wells drilled on a lease basis shall bear the lessor's surname and initials. Id., D.2. Order 29-B.III.D.3 provides that the Commissioner shall issue a memorandum regarding the procedure for assigning well and unit nomenclature. The memo requires that a unit well be designated by the name of the unit and the Sand Unit ("SU") letter (e.g., "A") followed by the lease name and well number. See Order 29-B.II.D.4 (alternate unit wells); See also Conservation Memo dated December 1, 1972 re Nomenclatures for Units, 1 (Description of Units).

Statewide Order 29-B, Section XII, entitled "Penalty for Infractions," provides that any infraction of these rules may result in inter alia the prohibition of acceptance of oil from such well or lease for purchasing or transporting by any purchasing or transporting agency or, in the alternative, may be prosecuted under Section 17 of Act 157 of 1940. The instructions on the Form R-4, entitled "Operators Certificate of Compliance and Authorization to Transport Oil From Lease," provide that the certificate will not be approved unless inter alia the well name is in exact agreement with the permit to drill and the applicable orders issued by the Department of Conservation. The R-4 contains a statement of compliance by the operator certifying compliance with the conservation laws and orders with respect to the property covered by the report.


E. Conservation Records Are Public Records

The Commissioner of Conservation has the authority to keep records and require the making of reports. La. Rev. Stat. Ann. § 30:4. The records of the Department of Conservation are public records that third parties are entitled to rely upon. In Taylor v. Smith, 619 So.2d 881 (La. App. 3d Cir. 1993), plaintiffs sued defendants as the unit operator of a well demanding an accounting and recovery of the value of the proceeds of unit production allocable to their land in the unit. The defendant filed a motion for summary judgment contending that he was not the operator of the well. The Court of Appeal noted that the records from the well file of the Office of Conservation showed that defendant had been the operator. Plaintiffs submitted the affidavit of John Aldredge, Chief Engineer of the Office of Conservation, who stated that the person designated as operator is considered the operator by the Office of Conservation until officially amended. In reversing the summary judgment in favor of the defendant, the court wrote:

The original drilling permit was issued in favor of the entity called Smith Wentworth, an unincorporated entity, as the operator of the well. No amendment was made in this filing until August of 1983, when David New Operating Company became the operator of record. Insofar as the Office of Conservation is the "public record" as to who is the operator of record, third parties are entitled to rely upon this "public record" in actions against an operator without examining the entire well file in an attempt to determine the responsible party.

619 So.2d at 884 (emphasis added). Thus, the court held that the records of the Office of Conservation are public records upon which third parties are entitled to rely.


F. Electric Log Confidentiality

Title 44 is entitled Public Records and Recorders and Chapter 1 thereof is entitled Public Records. This includes Revised Statutes § 44:1 which governs the inspection of electrical well surveys. In Treadway v. Jones, 583 So.2d 119 (La. App. 4th Cir. 1991), the court held that citizens have the unequivocal constitutional and statutory right to examine public records, and access to records can be denied only when the law specifically provides for denial of access.

Louisiana Revised Statutes § 44:1.B provides:

Electrical well surveys produced from wells drilled in search of oil and gas located in established units and which are filed with the Assistant Secretary of the Office of Conservation shall be placed in the open files of the Office of Conservation. Any party or firm shall have the right to examine or reproduce, or both, at their own expense, copies of said survey, by photography or other means not injurious to said records. All other electric logs and other electronic surveys, other than seismic data, produced from wells drilled in search of oil and gas which are filed with the Assistant Secretary of the Department of Conservation shall remain confidential upon the request of the owner so filing for periods as follows:

For wells shallower than 15,000 feet, a period of one year, plus one additional year when evidence is submitted to the Assistant Secretary of the Office of Conservation that the owner of the log has a leasehold interest in the general area in which the well was drilled and the log produced....

La. Rev. Stat. Ann. § 44:1. Thus logs for wells that are not "drilled in search of oil and gas located in established units" may be held confidential for up to two years.

The phrase "wells drilled in search of oil and gas located in established units" is ambiguous regarding whether it refers to wells located within the surface limits of a unit or wells seeking unitized production. The phrase "located in established units" appears to modify "oil and gas." Under this interpretation, wells drilled in search of unitized production must be kept in open files but wells merely drilled within the confines of a unit without more may be kept confidential. On the other hand, if the phrase "located in established units" modifies "wells," then any well drilled within the surface limits of a unit must be kept in open files even if unit production was not sought. Some Office of Conservation personnel have unofficially stated that the log of any well within the surface limits of a unit should be made public.

Statewide Order 29-B, Section IV, entitled "Records," provides that electric logs shall be mailed to the District Office of the Department of Conservation within ten days after completion of the well. LAC § 43:XIX.107. This rule also provides that a well history and work resume report shall be filed with the District Office in which the well is located within 20 days after completion of the well. Id. Completion probably refers to cessation of drilling.


II. EFFECT OF CONSERVATION ORDERS ON CONTRACTS

The Commissioner's Orders supersede the provisions of a mineral lease and become the law between the parties. In Delatte v. Woods, 232 La. 341, 94 So.2d 281 (1957), the lease provided that the lessee would pay $1,000 per month until a well was commenced on the lease premises and, after "spudding in," the lessee would pay $500 per month until oil or gas was produced and marketed. Another company drilled a well which was unitized with the tract in question. The lessee stopped paying $1,000 per month when the well was unitized and began paying $500 per month (because the well was shut in). The lessor sued for lease cancellation because the lessee had not drilled a well on the leased premises. The court held that the lease had been maintained, noting that the orders of the Commissioner supersede, supplement, replace and are incorporated into leases regarding mineral development and become the law as between the parties in determining their respective rights and obligations.

In Mire v. Hawkins, 249 La. 278, 186 So.2d 591 (La. 1966), plaintiffs, servitude owners, contended that their servitude had been kept alive for more than ten years without drilling because a Conservation order, placing their property in the unit and declaring a third party to be the unit operator, constituted an obstacle to use of the servitude. The unit operator was the only party who could conduct unit operations and had chosen not to do so. The court held that the order was not an obstacle. The court observed that any detriment resulting from the regulation of the use of the servitude, such as permitting only one well in a unit and depriving the servitude owner of the right to drill another well on his tract, are compensated for by the benefits flowing from the order. The requirements that drilling be through a designated operator on a designated location are validly imposed requirements of the conservation statute and Commissioner's orders for a public purpose. Owners of mineral servitudes are charged with knowledge of the conservation laws and it must be concluded in law that they tacitly agree to acquire their servitude subject to preexisting lawful regulations governing their use.


III. PROHIBITION OF COLLATERAL ATTACK ON COMMISSIONER'S ORDERS

The Commissioner's orders may not be collaterally attacked in litigation. In Trahan v. Superior Oil Co., 700 F.2d 1004 (5th Cir. 1983), plaintiffs sued for lease cancellation claiming that defendants' failure to present information at a conservation hearing resulted in a failure to protect plaintiffs from drainage. The court observed that the collateral attack prohibition applied not only to suits seeking to enforce the order, but also to suits between private parties in which a particular order of the Commissioner is an operative fact upon which the determination of the parties' respective rights directly depends, even though all relief sought can be given, such as by money damages or lease cancellation, without thereby causing any actual violation of the Commissioner's order.

700 F.2d at 1016. The court affirmed the trial court's F.R.C.P. 12b(6) dismissal for failure to state a claim, ruling that plaintiffs' complaint constituted an impermissible collateral attack on the Commissioner's order.

In Simmons v. Pure Oil Co., 241 La. 591, 129 So.2d 786 (1961), plaintiff sued for lease cancellation claiming that defendant had breached its lease obligation to protect plaintiff by obtaining an exceptional well location and a revised unit from the Commissioner of Conservation that reduced plaintiff's interest in production. The court dismissed the action on the pleadings, ruling that plaintiff's contention conflicted with established facts "since it is presumed as a matter of law that the Commissioner acted in good faith and on the basis of the evidence before him when he authorized the exceptional drilling location. . . ." 129 So.2d at 790.

In Knighton v. Texaco Producing, Inc., 762 F. Supp. 686 (W.D. La. 1991), plaintiffs contended that the Commissioner's thermal recovery unit order, which contained no language pooling the leases, nevertheless automatically created forced pooling entitling them to share in production. The court noted that plaintiffs crafted their argument to avoid having it classified as an impermissible collateral attack on an order of the Commissioner. The court rejected plaintiff's claim, ruling that the collateral attack rule prevented peering "behind the Commissioner's into the factual components upon which the Commissioner's order may or may not have been based." 762 F. Supp. at 690, n. 1.

In Pierce v. GoldKing Properties, Inc., 396 So.2d 528 (La. App. 3d Cir.), writ denied, 400 So.2d 904 (La. 1981), the plaintiff claimed that his lessee should have requested that the conservation order pooling his land with a producing well be effective as of the date of the public hearing rather than the later date issued by the Commissioner. Plaintiff sought lease cancellation and damages. The court held that plaintiff's claim that defendant breached its lease obligation in failing to request the earlier effective date of the unit order constituted an impermissible collateral attack upon the Commissioner's order.


IV. UNIT OPERATIONS FOR LEASE OR SERVITUDE MAINTENANCE

The Mineral Code provides that a single operation commenced with reasonable expectation of discovering and producing minerals in paying quantities from the unitized sand and continued at the site chosen to that sand will interrupt the prescription of non-use running against a mineral servitude located within the unit even if the operation is conducted on land not burdened by the servitude. La. Rev. Stat. Ann. §§ 31:29,33. For mineral leases, the Mineral Code simply provides that operations on land unitized with the lease is sufficient to maintain it in accordance with its terms but contains no definition of the requite operations. La. Rev. Stat. Ann. § 114. Most mineral leases similarly provide that they will be maintained by operations to drill a well thereon or on lands pooled or unitized therewith. The leases usually don't mention "unit operations." A few cases have addressed when the drilling of a well constitutes operations sufficient to maintain a servitude and, in one case, a lease, which is located in a unit but which is not the drill site tract.

In Matlock Oil Corporation v. Gerard, 263 So.2d 413 (La. App. 2d Cir. 1972), plaintiffs sued the surface owners and their lessees to be declared the owners of certain mineral leases. The issue was whether mineral servitudes in favor of plaintiffs' lessors were maintained in effect by wells drilled off the servitude but within a unit that includes the servitude. The court observed that no workover operations were conducted on the unit well after August 1959. Plaintiffs contended that a well drilled in 1969 interrupted prescription. The well in question was drilled through the unitized formation in January 1959, some eight months before the servitude would expire. The court concluded that good faith drilling on any tract in the unit would interrupt the servitude and defined good faith as a bona fide attempt to obtain production. The court observed that the well in question was permitted as an oil well with the proposed completion in the Smackover, not the unitized gas sand in question. The court noted that the operator's personnel testified that they did not test the unitized sand as they passed through it. The court held that plaintiffs did not intend to obtain production from the unitized sand and, more importantly, there was no bona fide attempt to test this formation.

In Bass Enterprises Production Co. v. Kiene, 437 So.2d 940 (La. App. 2d Cir. 1983), the court noted that no drilling occurred on the servitude for ten years from its creation in 1968. In 1974, a well was drilled to test the Smackover formation and, after it was found unproductive, additional shallower sands were tested and also found unproductive. The court held that actual operations to obtain production from the shallower sands, which were unitized with the servitude tract, interrupted prescription.

In Bass, the well was at a location not authorized by Statewide Order 29-E. Plaintiff argued that the operations in the unit sand could therefore not be considered unit operations and that the contrary argument constituted a prohibited collateral attack upon the Commissioner's orders. The Court rejected this contention because an exceptional location could have been granted and because the Office of Conservation issued two work permits that specifically authorized the operations in the unit sand.

In both Matlock and Bass, the only issue was whether operations had actually been conducted in the unitized sand; there was no issue as to whether operations in the unitized sand could retroactively interrupt prescription as a unit operation on the date the well was spudded.

In Malone v. Celt Oil, Inc., 485 So.2d 145 (La. App. 2d Cir. 1986), a servitude was scheduled to expire on October 2, 1980. On September 9, 1980, a well was spudded on property unitized for the Haynesville interval with the servitude. The well was drilled through the Haynesville sand, reached total depth on October 24, 1980 and was thereafter completed in the Smackover interval. After production ceased, the well was recompleted to the Haynesville sand in April of 1981. Despite the fact that the Haynesville sand was evaluated prior to completion of the well in the Smackover, the court held that the operation was not a single continuous operation to obtain production from the unitized sand that would interrupt prescription from the date of spudding.

In Gorenflo v. Texaco, 566 F. Supp. 722 (M.D. La. 1983), the defendant declared a unit and commenced preparing a location a few days before the lease was scheduled to expire. Several days after the lease expiration date, but before the well was spudded, the defendant obtained an amended permit to drill the well as a unit well. Thereafter, the well was continuously drilled and completed in the unit sand. The court noted that it was not illegal to build the location without a proper permit and held that those operations constituted unit operations that maintained the lease.

In Nunez v. Wainoco Oil & Gas Co., 488 So.2d 955 (La. 1986) the court denied plaintiff's request for an injunction to compel a unit operator, who did not have a lease on plaintiff's property, to remove a well that had crossed onto plaintiff's property 100,000' below the surface of the earth. The court rejected plaintiff's argument that the well was not a unit well at the time the trespass because it had not been formally designated as such. The court stated that the operator's intent determines whether drilling operations are unit operations or lease operations. 488 So.2d at 964. The court wrote:

The jurisprudence indicates that it is the intent of the operator and the operations conducted which determine whether drilling operations constitute unit operations or merely lease operations. In Bass Enterprises v. Kiene, 437 So.2d 940 (La. App. 2d Cir. 1983), the well was permitted for non-unitized sand but was drilled within the boundaries of a unitized sand. When the permitted sand was found not to be commercially production of hydrocarbons, the well was plugged back and tested at other intervals, including the unitized sand. Although production was not obtained from the unitized sand and thus the well was never permitted as the unit well, these operations were sufficient to interrupt prescription on a servitude tract within the unit. Similarly, in Gorenflo v. Texaco, Inc., 566 F.Supp. 722 (M.D. La. 1983), operations for the drilling of a well, conducted before the well was permitted as a unit well, were found sufficient unit operations to maintain the lease. The court noted that there was no indication that "drilling under a permit which gives the well a name which does not show its status [as a unit well] is illegal." Id. at 729. Indeed, the amended permit, which designated the Stone Well No. 1 as the unit well for Sand Unit F, indicated that the amendment action was a change in the well "name" from lease to unit. Such a procedure does not seem to be of sufficiently significant stature to affect the relationships between the parties.

Id., n. 1. However, this language was dicta because the relief plaintiff requested was removal of a unit well after it had been designated. Moreover, no special order is required to designate the first well in a unit, only subsequent wells.