In Louisiana, the commissioner of conservation has the statutory authority to combine or “pool” mineral interests to create a drilling unit—the maximum area of land or deposit of minerals that may be efficiently and economically drained by one well. By default, all the “owners” in the unit, defined as persons with the right to drill, produce, and appropriate production in the unit, share the proceeds of the unit well based upon their pro-rata ownership share of the minerals within the unit. The commissioner also has the authority to designate a unit operator or “drilling owner,” who has the exclusive right to drill a unit well and sell unit production. When there is no contractual relationship between a “drilling” owner and a “non-drilling” owner in a drilling unit formed by the commissioner, the provisions contained in the Risk Fee Statute (La. R.S. § 30:10) allocate the risk and expense of drilling certain unit wells.
Under the Risk Fee Statute, a drilling owner has the option to send a notice offering other owners in the unit the opportunity to participate in drilling a unit well. The non-drilling owners are sent an estimate of the total cost of the proposed well (an “authorization for expenditure” or “AFE”) and given the opportunity to pay their pro-rata share of the costs. When a non-drilling owner receives such a notice and elects not to participate or is deemed to be a non-participant in the drilling of the unit well, the drilling owner may recoup the costs to be borne by the non-drilling owner from the non-drilling owner’s share of unit production, plus a risk fee of 200 percent (or in some cases, 100 percent) of the drilling owner’s allocated share of the cost of drilling, testing, and completing the unit well.
The Risk Fee Statute thus provides a mechanism to compensate the drilling owner for advancing the non-drilling owner’s share of the costs of a successful well. Given its oil and gas history and the development of recent shale plays, Louisiana is a legislative leader in this area, and many states watch changes to Louisiana’s Risk Fee Statute with interest, especially in light of the growing development of shale plays throughout the country.