In Self v. BPX Operating, a case with significant implications for Louisiana operators and royalty owners, the Supreme Court of Louisiana ruled that the doctrine of negotiorum gestio in La. Civil Code art. 2292 does not allow the operator of a drilling unit created by Louisiana’s conversation laws to withhold post-production expenses (PPCs) from the share of proceeds to be paid to an unleased mineral owner (a UMO). The doctrine does not apply to the relationship between the operator of a unit well and the UMO.   

Negotiorum gestio establishes a regime for management of the affairs of a person where the manager (the gestor) acts without authority to protect the interests of another (the owner) in the reasonable belief that the owner would approve of the action if made aware of the circumstances.

According to the Court, negotiorum gestio cannot be the basis for liability because a unit operator is always “acting with authority” under Louisiana’s oil and gas conservation laws which establish a quasi-contractual relationship between the operator and the UMO.

The court concluded that a party is only a gestor if his action is taken without authority, and La. R.S. 30:10 (A)(3) statutorily authorizes the unit operator to sell UMO’s share of unit production when the UMO has not arranged to dispose of its share. The requirement for 2295 to apply is not merely voluntariness but an absence of authority altogether, including authority granted by statute.  

A strenuous, and lonely, dissent

Justice Weimer would conclude that the authority should focus on the voluntary nature of the act of the gestor and be understood to mean the action is not taken pursuant to a legal obligation. A unit operator’s statutory authority to sell production is not the same as a statutory mandate.

The concept behind the establishment of drilling units is to prevent adjoining owners from having to drill offset wells by permitting them to share production proportionately to other unit owners. Forced pooling converts separate interests within the drilling unit into a common interest relative to the development of the unit and the drilling of the well.

Under the statutory scheme UMOs are entitled to sell their share production but the statute allows the operator to market production if a UMO fails to make his own arrangements. The UMO and the operator have no contractual relationship.

Justice Weimer noted that R.S. 30:10 is silent as to PPCs; thus there is no inherent prohibition against a unit operator looking to the Civil Code for a mechanism by which to recoup PPCs. Because the statute is silent as to PPCs, there is no conflict between that provision in the Mineral Code and art. 2292. Silence alone is insufficient to create a conflict.

Responding to the majority’s conclusion that because the operator has specific authority to sell the UMO’s share of production, the operator cannot be a gestor under 2292, Weimer reasoned that reference to “without authority” does not encompass permissive authority to act such as in 30:10.

Where does this leave the ultimate question

… that being whether, on any theory, the UMO can be required to bear its proportionate share of PPCs incurred by the unit operator? The court in Self and Judge Hicks of the federal district court in Johnson v. Chesapeake (who ruled that negotiorum gestio applies) did not address other theories urged by the producers, such as Louisiana laws of mandate, co-ownership, unjust enrichment, and fundamental property law. Johnson was also appealed but this ruling is only in Self.

There is plenty more to come on this big issue.

Your musical interlude

[View source.]