The United States Court of Appeals for the Fifth Circuit recently decided the case of Breton Energy, L.L.C., et al. v. Mariner Energy Resources, Inc., et al which concerned claims of waste and drainage against Defendants who were operators of a neighboring mineral lease. The issue was whether the Plaintiffs sufficiently plead a claim for relief against each Defendant. The Fifth Circuit concluded that the claims of drainage against all Defendants should be dismissed, and the claims of waste should be dismissed as to all but one Defendant, IP Petroleum Co. (“IP”).
The Facts
Conn Energy, Inc. (“Conn”) owned a mineral lease named West Cameron 171 (“WC 171”) in the Gulf of Mexico. In 2009, Conn had an agreement with Breton Energy, LLC (“Breton”), allowing Breton to explore WC 171 for hydrocarbons. Conn and Breton sued the owners and operators of a neighboring lease called West Cameron 172 (“WC 172”). It was significant in this case that the WC 171 and the WC 172 shared a hydrocarbon reservoir: the K-1 sands. The other Defendants were other lease owners and operators or predecessors or successors to the current operators.
In 2010, Conn and Breton targeted the K-1 sands with plans to reenter a well on WC 171, specifically the area of the “Upper Cib Op Zone.” The records of the Minerals Management Service (“MMS”) (an agency of the federal Bureau of Ocean Energy Management, Regulation and Enforcement) disclosed that a well had been completed in 1999 in a K-2 sands zone called the “Middle Cib Op Zone.” However, the records did not reveal any completed well production in the K-1 sands area. After completing their due diligence, Conn and Breton spent $6 million to drill and complete a well in the K-1 sands. The results of that well were poor, leading Conn and Breton to believe that the reservoir had been depleted.
Seismic data indicated the presence of two oil and gas reserves, one each in the K-1 sands and the K-2 sands. Over Conn’s objections, in 1998 MMM approved IP’s permit to drill into an area near WC 171. MMS required that IP produce the reservoirs as “two separate completions.” Breton and Conn allege that IP completed separately in both reservoirs simultaneously. By doing so, IP caused an overproduction of the hydrocarbons by commingling production from the K-1 sands and the K-2 sands. Conn and Breton filed suit, alleging that current and former operators had committed waste and unlawful drainage in violation of federal and Louisiana law.
The Applicable Law
Property owners in Louisiana are encouraged to develop their lands without concern for any potential effects on neighboring owners under what is called the rule of capture. In addition, Louisiana law prohibits drainage claims. Louisiana defines “waste” as “physical waste,” and federal regulations use a substantially similar definition. Conn and Breton claimed that the Defendant oil companies committed waste by reducing the quantity of oil and gas in the reservoir that would normally be recoverable under proper operations. The federal District Court decided that the Plaintiffs did not state a claim for either drainage or waste.
On appeal, the Fifth Circuit accepted Plaintiff’s argument that commingling causes waste since it reduces the maximum recovery of oil and gas. The Court agreed that IP violated the federal dual-completion requirement that was directly aimed at preventing waste. As a result, the Fifth Circuit sent the claim of waste against IP back to the District Court for trial. However, given the Louisiana law prohibiting drainage claims, and the lack of behavior by other Defendants that could constitute negligent waste, the Fifth Circuit affirmed dismissal of drainage claims against all Defendants, and affirmed dismissal of waste claims against all Defendants except IP.
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