Originally published by Charles Sartain.
Posted by Charles Sartain
Co-author Brooke Sizer
Prevails over what, you ask? In Gladney v. Anglo-Dutch Energy, LLC, a conditional allowable from the Office of Conservation didn’t supersede lease royalty obligations.
How did we get here?
Anglo-Dutch completed a gas well on the Gladneys’ lease and then filed a pre-application notice for a compulsory drilling and production unit and applied for a conditional allowable. On May 17, 2012, the application was granted:
All monies generated from the date of first production, the disbursement of which is contingent upon the outcome of the current proceedings before the Office of Conservation for the Frio Zone will be disbursed based upon results of those proceedings.
The next day Anglo-Dutch began sales of production from the well and later submitted a formal unit application. Order No. 124-Y established the unit, effective on and after October 30, 2012.
Perhaps to the surprise of Anglo Dutch, but certainly to its chagrin, the Gladneys demanded payment of the full one-fifth royalty for production from the well prior to October 30th, rather than settle for their share of production on a unit basis.
Anglo-Dutch refused, relying on the conditional allowable which, it said, superseded its lease obligations.
The trial court ruled for Anglo-Dutch, holding that the “allowable covers the royalty payments” because the allowable dated back to first production. The court found no provision in the lease which would require that the Gladneys be paid more than that provided by the commissioner under the allowable and the unitization order.
Reversal from the court of appeal
The court of appeal reversed. “The Mineral Lease … clearly provided Plaintiffs were to get lease-basis royalties on all production from the well and that lease governed the parties’ relationship prior to the unitization order, which was not effective until October 30, 2012.”
Under the Order, the effective date of the unit was October 30, 2012, not the first date of production. The Gladneys were entitled to a full one-fifth royalty from first production until the effective date of the Commission’s Order.
The Gladneys argued, and the court agreed, that the Office of Conservation can’t impede private contract rights. According to an affidavit from a long-time Office of Conservation representative, the conditional allowable was not meant to abridge privately negotiated contract rights. That is consistent with settled Louisiana jurisprudence that meddling in private contracts is beyond the Office of Conservation’s authority.
The court helps those who help themselves
The court was unpersuaded by Anglo-Dutch’s plea that it had no choice other than to pay royalty on a unit basis because otherwise it would have had to pay double royalties. Anglo-Dutch could have amended its lease obligations through a royalty escrow agreement. The Gladneys noted that they suggested this alternative and it was rejected, and that such an arrangement is a common practice in these situations. The court also rejected the argument that the Gladneys were improperly attacking the Commission’s actions.
Anglo-Dutch should have listened to Alabama Shakes.
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