MANSFIELD, LA (KSLA) – Testimony will continue Tuesday in a mineral rights trial in DeSoto Parish that could have major implications for more than just the parties involved. If the plaintiff prevails, it could set a legal precedent that will thrill mineral owners trapped in old leases and send chills down the collective spine of the oil and gas industry.
DeSoto Parish mineral owner Santo Ferrara, Jr., is demanding Questar Exploration and Production Company develop his minerals or give up their rights to do so. "I want my lease back. I want to get somebody to explore it like it's supposed to be explored," Ferrara said on the witness stand Monday.
"He's got a 47 acre tract in the middle of the Haynesville Shale development, literally," according to his attorney Randall Davidson, who says the minerals that lie a mile beneath the land could be worth to a lot of money his client. "He's in his seventies. How long does he have to wait? That's his position."
Ferrara's mineral rights are held by Questar under a 22 year old lease acquired from Tide West Oil Company in 1996, long before "Haynesville" became a household name. Five wells have been drilled on his section of land in Grand Cane since the lease was first signed with Long Oil & Gas back in 1988. Only three of them produced oil or natural gas, and none were deeper than 4,000 feet. Between them, Ferrara was paid about $88,000 in royalties. "That's not a whole lot of money," Ferrara pointed out from the stand, when you consider it came from 20% royalties stretched out over a span of more than 20 years. For Ferrara, it wasn't enough.
Two years after Tide West Oil Company took over the lease in 1993, he demanded they either drill more wells into the oil-producing Baker Lime zone or relinquish their rights to do so. In a settlement agreement, Tide West gave up the rights to explore the Baker Lime, but kept the rights to everything else below the surface of Ferrari's land. That includes the prolific Haynesville shale formation that lies more than twice as deep below the surface and is far more expensive to explore and develop. Questar now holds those rights, and they say that under current economic conditions, it's just not feasible to drill to that depth.
It may also be a matter of strategy. Many of the leases snatched up in the initial mineral rights rush in the second half of 2008 will begin to expire in 2011. Oil and gas companies are now focused on drilling up hundreds of thousands of acres in order to hold on to those leases with at least one producing well per unit. Ferrara's attorney suggests that might be why Questar is willing to fight for the older lease, rather than give it up or negotiate a new one. "I think there's some desire to speculate in a lease that you don't think you have to drill or you spend your money on leases that you think you better go ahead and drill or you might lose. And we don't think that's reasonable from Mr. Ferrari's point of view."
The civil suit centers around whether Questar has fulfilled their obligation under the Louisiana Mineral Code Title RS :31 (Article 122) "to develop known mineral formations in the manner of a reasonable, prudent operator" in a reasonable amount of time, and "to the mutual benefit of themselves and the lessor." "This is one of the first cases that I'm aware of a modern bench who will actually decide what that means," says Davidson. "What's a reasonable period of time to develop and what rights to landowners have, what rights do oil companies who have old leases have? It's a significant case, and I think it will have some far-reaching consequences, no matter how it comes out."
There will be no jury. Davidson says they opted for the bench trial because of the legal and interpretive nature of the issue. They expect to finish testimony Tuesday from local mineral broker and landman Homer Peel, before Questar calls an expert of their own and a company representative to testify. Then it will be up to DeSoto Parish District Court Judge Charles Adams.
The economic impact of a finding in Ferrara's favor would be significant. Peel estimates some 12% of Haynesville acreage could be tied up in old leases, which could add up to as much as half a million acres held by production from wells at shallower depths. Operators would have to drill wells to the deeper formation, or face being forced to either relinquish or renegotiate old mineral leases at current market prices and considerations. "I think there are a lot of landowners who are similarly situated, that if they thought they could force further development under an old oil and gas lease, they would do so," Davidson says. "There's not very much precedent out there and this case may provide some."
New signing bonuses and royalties, increased drilling and the resulting local tax collections could inject millions of dollars into the local economy. The State of Louisiana would also see a big bump in severance tax revenue from the increased development.
Whichever side prevails, the stakes are high and appeals are expected. Davidson says he's prepared to take it all the way to the Louisiana Supreme Court. '"Unfortunately, it is going to be decided by the courts of appeal, but Judge Adams has to start somewhere, he's gonna start the ball rolling and it'll be his decision."
Questar's attorneys declined comment Monday, deferring statements until after the trial is over.