Louisiana's oil and gas leasing process

The state's Department of Natural Resources says the first oil well in Louisiana was drilled in 1901 in a rice field near the southern town of Jennings.  111 years later, oil and gas exploration and production has swept across the state, including the waters off its coastline.

Louisiana's regulatory process has evolved, too, though at a much slower pace.

In early 1936, when W.T. Burton won the rights to work the lands and water bottoms of State Lease 340, only the Governor -- at the time, James A. Noe -- and the Registrar of State Lands were required to approve new leases.  But later in 1936, the State Mineral Board was created and given the authority to administer Louisiana's proprietary interest in oil, gas and mineral resources.

"The board shall be composed of the governor and the secretary of the Department of Natural Resources, ex officio, and nine members appointed by the governor," reads Louisiana's Revised Statute 30, Section 121.  "Each appointment by the governor shall be submitted to the Senate for confirmation.  Six members shall constitute a quorum."

When Louisiana developed a new constitution and reorganized state government in the mid-70's, the State Mineral and Energy Board was given new administrative capability through an agency called the Office of Mineral Resources, which took over the previous functions of the State Lands Office in managing existing leases and exploring new opportunities for exploration and production.  And the Board developed a complicated process for reviewing new bids for state leases, and for allowing lease transfers to new holders.

Today, when a private citizen or a corporation wants to lease an area of state land or water bottoms for the purpose of developing or producing oil, gas or mineral resources, they must submit a bid to the Board.  The bidder "nominates" a tract, describing the area in question in detail, its boundaries and the nature of the resources to be developed, and suggests a monetary sum for its lease from the state.

The Board receives that tract nomination and considers it in a formal, tightly scheduled process.  First, the Board's Tract and Nomination Committee reviews the tracts to be sure they have been properly submitted and documented.  If so, the nominations are publicized in the official journal of the tract's home parish and the newspaper serving the state capitol in Baton Rouge (these days, that's The Advocate), 60 days from the tract's submission.  Nominations are also advertised on the board's website.  That advertisement tells deadline for submitting sealed bids and the date and time of the next Board meeting, when all bids for that particular tract are to be opened.

The Board meets at the call of the governor, but generally speaking it holds its meetings on the second Wednesday of each month in Baton Rouge.  Bids are opened at 8:30 in the morning and read aloud to whoever is in the meeting room at the time.  Then each bid must be reviewed by the Geology and Engineering Division of the OMR, which compiles and analyzes scientific data related to the tract in question.

If Geology and Engineering staffers are satisfied with the technical details of the bids, the OMR considers whether the bonus amount and royalty percentage offered are sufficient for Board approval.  In modern times, the state generally receives between 20 and 25 percent of all royalties, depending on how productive the tract is expected to be, while the leaseholder takes the rest.  The leaseholder must also bear the costs for drilling and producing the wells.  Notably, State Lease 340 required just a 12.5 percent state royalty when Gov. Noe approved it in 1936.

The Board itself reviews other aspects of the bids at hand, including royalty arrangements, legal ownership of the area, current operating agreements.  Then the Board meets to hear the recommendations of its various sub-committees, and decides whether to approve or reject the bids.  The Board on averages acts on 25 to 30 bids every time it meets to consider lease sales, but occasionally the bids under consideration exceed 100 – it all depends on the industry itself, and how it moves to develop existing leases and open up new areas for production.

Additional consideration must be given to lease transfers, which occur when a current leaseholder agrees to transfer their rights to a tract to a second party, whether an individual or a corporation.  We have little documentation to show how W.T. Burton's transfers of royalty rights to the Texas Company and the Win or Lose Corporation were reviewed, back in the 30's.  But today, the Board has final approval of such transfers, and it only approves them after a thorough review of the tract's history to ensure that the interests being transferred are actually owned by the party requesting to make the transfer.  Additionally, the party requesting to receive the transfer must be registered and in good standing with the Secretary of State as well as the Office of Mineral Resources.  .

Often, areas under state lease become less productive or even unproductive.  If productive area ceases production for more than 90 days, the Board can move to reclaim the rights to the tract and designate them as available for new lessees.   It happened in 1994 – the Burton holdings transferred to Texaco were so large, with thousands of wells drilled, that many had become unproductive.  In a deal dubbed the Texaco Global Settlement, Texaco agreed to reassign most of the unproductive areas to Burton's successors, who then sub-leased to other developers.  The royalties due the state from these tracts were raised from 12.5 percent to 20 percent under the Settlement.

Officials at the Department of Natural Resources note that present day leases contain a "Pugh Clause", which provides that production in one area of a lease does not hold the entire lease for the lessee.  However, older leases such as SL 340 did not have Pugh Clauses, and lessees may hold all acreage under lease even if only a small portion of the acreage is productive.  The OMR geologists and engineers monitor those old leases and work to obtain releases of unproductive acreage to the extent that they can.