Dow Construction, LLC v. BPX Operating Company resolved a bundle of issues arising out of a drilling unit established by the Louisiana Commissioner of Conservation: who has the right to a drilling cost report, the operator’s right to deduct post-production costs, forfeiture of the operator’s right to reimbursement of drilling costs, and prescription.
The facts
BPX is operator of a drilling unit. Dow is a lessee of property within the unit. BPX was deducting PPCs from Dow’s share of production proceeds. Dow sued on several claims, arguing that BPX forfeited the right to demand contribution for drilling costs from Dow as an owner of unleased interests and BPX improperly deducted PPC’s from Dow’s proceeds. BPX responded that Dow’s interest was not an “unleased interest”, and Dow’s claims were time-barred.
The statutory scheme
Each non-operator of a drilling unit is responsible for its share of development and operating costs of unit wells. Upon request, the operator must issue a report containing sworn statements about drilling and operating costs, production volumes, and sales prices. The operator who fails to timely respond forfeits its right to recover costs. BPX was burdened by previous operator Petrohawk’s failure to respond to Dow’s requests for well cost information.
FOUR QUESTIONS
Standing and the “unleased interest”
LA. R.S. 30:10(A)(3) refers to “unleased interests” in establishing who has the right to demand a drilling cost report from the operator. The Court found the statute to be ambiguous; having different meanings depending on the context. Based on Civil Code art. 12 and the context in which the words occur and the text of the law as a whole, the Court read “unleased interests” to be unleased to the as to the operator rather than having no lease whatsoever. Dow had the right under the statute to demand a report and the operator risked forfeiture of the right to recover drilling costs if it failed to comply with the statute.
Negotiorum gestio and deduction of PPCs
Without significant comment the Court vacated and remanded the trial court’s application of the doctrine of negotiorum gestio, which would authorize the operator to deduct PPC’s from non-operators’ proceeds on the basis of Civil Code art. 2292. This was consistent with the Louisiana Supreme Court’s recent opinion in Self v. BPX Operating Company.
PPCs and recovery of costs
Per La. R.S. 30:103.2 the operator’s right to demand contribution for drilling costs from owners of unleased interests is forfeited when it fails deliver the proper reports. The question: What costs are included in drilling operations? The Court followed a Louisiana Third Circuit opinion that under La. R.S. 30:103.1 “drilling operations” refers to the total cost of drilling and completing the unit well and “all other unit costs” allocable to an owner. “All other unit costs” encompasses PPCs. PPCs should be categorized as operational costs and expenses as they form an integral part of the overall business operation.
Prescription
Whether Dow’s claims were governed by one-year or 10-year prescription depended on whether the damages were contractual or delictual. The courts treat causes of action as delictual unless the plaintiff alleges a violation of a specific contractual provision. In an action arising out of the breach of duty imposed by law damages are delictual and are extinguished by the prescription of one year. Dow’s allegation of a breach of the notice provision of 30:103.1 did not arise from a contractual obligation. Thus, the prescriptive period was one year.
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