A W T Be Good L L C v. Chesapeake Louisiana L P et al

Filing 70

MEMORANDUM RULING re 47 MOTION for Summary Judgment filed by Chesapeake Operating L L C, Chesapeake Energy Marketing L L C, Chesapeake Louisiana L P, 49 MOTION for Summary Judgment filed by P X P Louisiana L L C, 45 MOTION for Partial Summary Judgment filed by A W T Be Good L L C. Signed by Chief Judge S Maurice Hicks, Jr on 1/11/2019. (crt,McDonnell, D)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF LOUISIANA
SHREVEPORT DIVISION
AWT BE GOOD LLC

CIVIL ACTION NO. 16-1412

VERSUS

JUDGE S. MAURICE HICKS, JR.

CHESAPEAKE LOUISIANA, L.P.,
ET AL.

MAGISTRATE JUDGE HAYES

MEMORANDUM RULING
Before the Court are multiple pending motions filed by the parties pursuant to
Federal Rule of Civil Procedure 56: (1) Plaintiff AWT Be Good LLC’s (“AWT”) Motion for
Partial Summary Judgment (Record Document 45); (2) Defendants Chesapeake
Louisiana, L.P. (“CLLP”), Chesapeake Operating, L.L.C. (“COLLC”), and Chesapeake
Energy Marketing, L.L.C.’s (“CEM”) (collectively “Chesapeake”) Motion for Summary
Judgment (Record Document 47); and (3) Defendant PXP Louisiana L.L.C.’s (“PXP”)
Motion for Summary Judgment (Record Document 49). Chesapeake and PXP oppose
AWT’s motion; AWT likewise opposes Chesapeake and PXP’s respective motions. For
the reasons set forth below, all motions are DENIED.
I.

BACKGROUND
This oil and gas case concerns the parties’ conflicting interpretations of certain

provisions contained in a mineral lease. On March 25, 2008, AWT entered into an oil and
gas lease (the “Lease”) with Meagher Oil and Gas Properties, Inc. covering property
located in DeSoto and Red River Parishes, Louisiana. See Record Document 47-2 at 1. 1

1

Because AWT has not controverted the majority of Chesapeake’s Statement of
Uncontested Material Facts as required by Local Rules 56.1 and 56.2 (and instead
primarily asserts legal conclusions in response to it), much of the background section of
Page 1 of 20

The Lease was later assigned to Chesapeake on August 15, 2008. See id.; Record
Document 45-1 at 1. Thereafter, Chesapeake subleased a 20% interest in the Lease to
PXP (the “Sublease”). See Record Document 45-1 at 1.
Two years later on August 18, 2010, AWT and Chesapeake entered into an
amendment of the Lease (the “Lease Amendment”), the interpretation of which is the
primary basis for the instant dispute, to provide as follows:
12. TRANSPORTATION CHARGES: With regard to mineral production,
LESSEE bears all costs of production, transportation, gathering,
compression, disposal of salt water and any other cost, expense or
preparation necessary to produce, process and/or transport the mineral
production, except with regard to gas, LESSEE shall pay all of said costs
including any other costs and expenses that are incurred prior to delivery of
the gas into a regulated intrastate pipeline or interstate gas pipeline at the
tailgate of the furthest downstream of either (i) a gathering system; or (ii) a
treating plant, for delivery to its final market destination (a “Transportation
Pipeline”). It is the intention of the parties that with regard to gas, the only
cost that the Lessor’s royalty shall bear is its proportionate share of the longhaul transportation charges to the point of sale of the royalty gas once the
gas is in a Transportation Pipeline. Royalty will be paid on any mineral
production produced from any well, even minerals that are used to operate
and/or service any equipment used in the production, compression,
processing or transportation of said mineral production, except for
shrinkage and fuel lost and unaccounted for incurred after delivery into the
Transportation Pipeline.
Record Document 45-2 at 6 (emphasis added). AWT alleges that Chesapeake, in direct
violation of the Lease Amendment, has been and continues to improperly deduct from
AWT’s royalties what it alleges are “unused” “capacity charges,” costs which AWT
contends are not associated with the “actual” transportation of AWT’s gas. See id. at 5–
6.

the instant Memorandum Ruling is drawn from that document. See Record Document 584; Record Document 47-2.
Page 2 of 20

As explained by AWT, these capacity charges incurred by Chesapeake are
“upfront reservation fee[s] a gas producer pays to a pipeline owner in order to secure
future space in the pipeline for the delivery of its gas to distant markets.” See id. at 6–7
(quoting Commissioner of General Land Office of State v. SandRidge Energy, Inc., 454
S.W.3d 603, 621 (Tex. App.–El Paso 2014)). AWT further explains these charges as a
type of “take-or-pay” obligation that producers, like Chesapeake, agree to pay to thirdparty transportation pipelines each month to transport a certain volume of gas, whether
or not the producer actually ships the reserved volume. See id. According to AWT,
Chesapeake incurs these costs (and subsequently charges them against AWT’s
royalties) not only when it ships a volume of AWT’s gas that is below the reserved volume
but also when no amount of AWT’s gas is shipped in the pipeline. See id. Chesapeake
responds that the capacity charges are actual transportation costs that are a customary
practice in the oil and gas industry and are necessary to ship the gas to additional
downstream markets in order to maximize revenue. See Record Document 47-1 at 7–8.
Chesapeake also maintains that, contrary to AWT’s assertion, capacity charges (or
reservation fees) are not netted in computing AWT’s royalty if none of AWT’s gas is
shipped in a pipeline that has a reservation fee. See id. at 11.
Beginning on October 13, 2015, AWT first sent notice to Chesapeake of an alleged
underpayment of royalties. See Record Document 47-2 at 4. Chesapeake responded to
this notice by issuing a royalty check to AWT which, according to Chesapeake, included
reimbursement to AWT for gathering and associated fuel costs that Chesapeake had
mistakenly charged to AWT in computing its royalties. See id. The following year,
Chesapeake received additional notices for failure to properly pay royalties from AWT’s

Page 3 of 20

counsel, to which Chesapeake responded that AWT’s royalties were being calculated and
paid properly. See id. at 5.
On September 7, 2016, AWT filed an Original Petition for Proper Payment of
Royalties Plus Damages and Attorney’s Fees (the “Petition”), which was subsequently
removed to this Court, alleging various claims against Chesapeake regarding its
computation and payment of AWT’s royalties. See Record Document 1-2 at 1, 19–20.
AWT seeks from this Court an order against Chesapeake declaring that the disputed
Lease Amendment prohibits Chesapeake from charging AWT’s royalties with certain
transportation-related post-production costs. See Record Document 45-2 at 5. In
response, Chesapeake also requests summary judgment in its favor, not only as to
whether such transportation costs are properly deductible, but also as to the other claims
AWT alleges in its Petition. See Record Document 47 at 1. Additionally, PXP requests
summary judgment dismissing all of AWT’s claims against it or, in the alternative, joins in
Chesapeake’s motion for the same relief. See Record Document 49-1 at 6.
II.

LAW AND ANALYSIS
A.

Summary Judgment Standard

Summary judgment is proper pursuant to Rule 56 of the Federal Rules of Civil
Procedure when “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Quality Infusion Care, Inc. v. Health Care Serv.
Corp., 628 F.3d 725, 728 (5th Cir. 2010). 2 A genuine dispute of material fact exists if the
record, taken as a whole, could lead a rational trier of fact to find for the non-moving party.

2

The Court notes that amended Rule 56 requires that there be “no genuine dispute as to
any material fact,” but this change does not alter the court’s analysis. F.R.C.P. 56(a) and
advisory committee’s note (2010) (emphasis added).
Page 4 of 20

See Geoscan, Inc. of Texas v. Geotrace Techs., Inc., 226 F.3d 387, 390 (5th Cir. 2000).
During this stage, courts must look to the substantive law underlying the lawsuit in order
to identify which facts are “material.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,
106 S. Ct. 2505, 2510 (1986).
Rule 56(c) mandates the entry of summary judgment, after adequate time for
discovery and upon motion, against a party “who fails to make a showing sufficient to
establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof [at trial].” See Patrick v. Ridge, 394 F.3d 311, 315 (5th
Cir. 2004) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552
(1986)). If the movant demonstrates the absence of a genuine dispute of material fact,
“the nonmovant must go beyond the pleadings and designate specific facts showing that
there is a genuine [dispute] for trial.” Gen. Universal Sys., Inc. v. Lee, 379 F.3d 131, 141
(5th Cir. 2004). Where critical evidence is so weak or tenuous on an essential fact that it
could not support a judgment in favor of the nonmovant, then summary judgment should
be granted. See Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005).
In reviewing a motion for summary judgment, the court is to view “the facts and
inferences to be drawn therefrom in the light most favorable to the non-moving party.”
Tubos de Acero de Mexico, S.A. v. Am. Int'l Inv. Corp., Inc., 292 F.3d 471, 478 (5th Cir.
2002); Harris v. Serpas, 745 F.3d 767, 771 (5th Cir. 2014). The court should not, however,
in the absence of any proof, presume that the nonmoving party could or would prove the
necessary facts. See Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994).
As the present case is before the Court under diversity jurisdiction, the Court must
apply the substantive law of the forum state pursuant to the Erie doctrine. Bradley v.

Page 5 of 20

Allstate Ins. Co., 620 F.3d 509, 517 n.2 (5th Cir. 2010) (citing Erie R. Co. v. Tompkins,
304 U.S. 64, 58 S. Ct. 817 (1938)). Here, because the Lease covers immovable property
situated in Louisiana, it is undisputed that Louisiana substantive law controls. See Arctic
Slope Regional Corp. v. Affiliated FM Ins. Co., No. 07-0476, 2007 WL 4545894, at *2
(W.D. La. Dec. 18, 2007).
B.

Interpretation of the Lease Amendment

The central dispute between the parties concerns the interpretation of the Lease
Amendment, which is cited above. Both AWT and Chesapeake argue that the language
in the provision is unambiguous as to whether the Lease Amendment prohibits
Chesapeake from deducting the disputed capacity charges from AWT’s royalties.
In Louisiana, mineral leases are construed as leases generally and, wherever
pertinent, codal provisions applicable to ordinary leases are applied to mineral leases.
See Musser Davis Land Co. v. Union Pacific Resources, 201 F.3d 561, 565 (5th Cir.
2000); Frey v. Amoco Production Co., 603 So. 2d 166, 171 (La. 1992); see also La. R.S.
31:2. Louisiana law provides that “[c]ontracts have the effect of law for the parties” and
the “[i]nterpretation of a contract is the determination of the common intent of the parties.”
La. C.C. arts. 1983 and 2045. “When the words of a contract are clear and explicit and
lead to no absurd consequences, no further interpretation may be made in search of the
parties' intent.” Id. art. 2046. “When the language of a contract is clear and unambiguous,
it must be interpreted solely by reference to the four corners of that document.” Dickson
v. Sklarco L.L.C., No. 11-0352, 2013 WL 1828051, at *3 (W.D. La. Apr. 29, 2013) (citing
Tammariello Properties, Inc. v. Medical Realty Co., Inc., 549 So. 2d 1259, 1263 (La. App.
3d Cir. 1989)). Words of art and technical terms must be given their technical meaning

Page 6 of 20

when the contract involves a technical matter, and words susceptible of different
meanings are to be interpreted as having the meaning that best conforms to the object of
the contract. See La. C.C. arts. 2047 and 2048. In Louisiana, “[p]arol or extrinsic evidence
is generally inadmissible to vary the terms of a written contract unless there is ambiguity
in the written expression of the parties’ common intent.” Blanchard v. Pan-OK Production
Co., Inc., 32,764, p. 7 (La. App. 2d Cir. 4/5/00), 755 So. 2d 376, 381. “A contract is
considered ambiguous on the issue of intent when it lacks a provision bearing on that
issue or when the language used in the contract is uncertain or is fairly susceptible to
more than one interpretation.” Id. When a contract provision relating to mineral rights is
ambiguous on a pivotal issue, the Louisiana Supreme Court and Courts of Appeal have
interpreted the provision as having the meaning that best conforms to the object of the
contract in light of the nature of the contract, equity, and usages, including extrinsic
evidence as to custom and practices in the oil and gas industry. See Musser Davis Land
Co. v. Union Pacific Resources, 201 F.3d 561, 565–67 (5th Cir. 2000); Henry v. Ballard
& Cordell Corp., 418 So. 2d 1334, 1339–40 (La. 1982).
In the instant matter, AWT argues that the Lease Amendment clearly and
expressly prohibits Chesapeake from deducting the capacity charges at issue from its
royalties and points to certain language in the provision in support of its position. The key
portions of the Lease Amendment that AWT relies on are those stating that Chesapeake
“bears all costs of production, transportation, gathering, compression . . . and any other
cost, expense or preparation necessary to produce, process and/or transport the [gas] . .
. including any other costs and expenses that are incurred prior to delivery of the gas into
a [pipeline],” as well as the portion providing that the only cost that can be charged against

Page 7 of 20

AWT’s royalties is “[AWT’s] proportionate share of the long-haul transportation charges .
. . once the gas is in a [p]ipeline.” See Record Document 45-2 at 6 (emphasis added).
AWT contends that this language is unambiguous in meaning that Chesapeake can only
deduct from AWT’s royalties its proportionate share of transportation charges that are
incurred for the actual transport of AWT’s gas “in a” transportation pipeline, not for any
other costs or charges that Chesapeake may or may not incur if AWT’s gas is not placed
in a transportation pipeline and transported to its final point of sale. See Record Document
59 at 17–18.
Conversely, Chesapeake responds that the “actual3 transportation costs” it incurs
in transporting AWT’s gas include both the commodity fee 4 and any capacity charges
charged by a pipeline transporting the gas, which are actual costs necessary to move the
gas to its final point of sale. Chesapeake also maintains that it does not violate the terms
of the Lease Amendment when it charges AWT’s royalties with its share of capacity
charges because it only does so for periods in which AWT’s gas is placed in a pipeline
for transport to a downstream point of sale. See Record Document 57 at 1, 3.
Furthermore, Chesapeake disputes AWT’s contention that Chesapeake is required to
prorate AWT’s share of capacity charges based on the ratio of gas shipped to the total
volume reserved, and that it is instead permitted to prorate these costs based on the
percentage of AWT’s gas to the total volume shipped. See id. at 4. Chesapeake argues

3

The Court notes that while both parties make arguments as to the meaning of “actual
transportation costs,” this phrase is not mentioned or defined anywhere in the Lease
Amendment. See Record Document 45-2 at 6.
4 The commodity charge appears to be smaller than the capacity charges paid in these
contracts and is associated with the cost the producer incurs for the transport of the gas
itself. See Commissioner of General Land Office of State v. SandRidge Energy, Inc., 454
S.W.3d 603, 621 (Tex. App.–El Paso 2014); Record Document 47-1 at 7.
Page 8 of 20

that this interpretation is consistent not only with the Lease Amendment itself but also the
custom 5 in the oil and gas industry as to how such fees are charged by third-party
transportation pipelines. See id. at 2, 4.
In this case, the Court finds that the Lease Amendment is ambiguous as to the
issue of whether the disputed capacity charges are properly deductible from AWT’s
royalties. At the outset, the Court notes that the instant case is riddled with ambiguities,
those of which are prevalent in the provisions of the Lease, the Lease Amendment, and
the parties’ inconsistent arguments as to their proper interpretation. As an initial starting
point, there is no reference to the terms “capacity charge,” “demand” or “commodity
charge,” or “reservation fee” in the Lease Amendment or the Lease itself; instead, the
Lease Amendment only references “transportation charges.” See Record Document 452 at 6. Likewise, the Court determines that the phrase “long-haul transportation charges”
provided in the Lease Amendment is susceptible of more than one reasonable
interpretation and thus is also ambiguous as to the issue of whether such phrase includes
the disputed capacity charges, some portion of the charges, or none at all. Moreover, as
further explained below, there is insufficient and contradictory evidence as to the exact
nature of Chesapeake’s arrangements with the third-party transportation pipelines
involved in transporting AWT’s gas, as well as the other Chesapeake entities involved in
marketing and transporting the gas, such that the Court is unable to grant summary
judgment for either party at this stage. In addition, a related issue further adding to the
ambiguity of the Lease Amendment (and overall Lease itself) is the apparent conflict

5

The Court notes that none of the parties have provided an affidavit from an expert as to
the custom in the oil and gas industry regarding any of the issues in this case.
Page 9 of 20

between the Lease Amendment and the “market value at the well” provision contained in
the original Lease. This issue is further addressed below in Section II.C., infra.
The Court further notes that only a small number of cases have addressed the
specific issue of capacity charges (i.e., firm transportation costs or reservation fees), the
majority of which do not address the issue in depth, and none of which involved a lease
provision sufficiently comparable to the disputed provision in this case to warrant a clear
result for the Court to follow. In addition, none of the cases are Louisiana decisions and,
therefore, are persuasive only and not binding on this Court. See, e.g., Frey v. Amoco
Production Co., 603 So. 2d 166, 182 (La. 1992). Even so, both parties have presented
arguments as to why these cases favor their respective interpretations of the Lease
Amendment. The most relevant and factually similar of these cases is Commissioner of
General Land Office of State v. SandRidge Energy, Inc., 454 S.W.3d 603 (Tex. App.–El
Paso 2014), a somewhat recent Texas state court decision that involved a lease provision
with similar language to the one at issue here. In that case, the parties disputed a
provision in one of the leases that provided as follows:
The royalties reserved by [Longfellow], and which shall be paid by
[SandRidge], are . . . on gas . . . [sold by SandRidge] . . . one-eighth (l/8th)
of the net proceeds derived from the sale thereof . . . remaining after
deducting . . . all costs and expenses actually incurred by . . . [SandRidge
in] . . . transporting . . . the gas so sold . . . .
See id. at 622 (emphasis in original). There, the parties acknowledged that transportation
costs were properly deductible from the lessor’s royalties under the lease, but they
disagreed as to the proper allocation of certain “firm transportation charges.” In its
analysis of the issue, the court first noted that “[t]here is virtually no judicial authority
discussing, much less meaningfully analyzing firm transportation charges.” Id. at 621. The

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court also stated that while the parties had cited to Independent Petroleum Ass'n of
America v. DeWitt, 279 F.3d 1036 (D.C. Cir. 2002), an earlier decision that addressed
firm transportation charges in the context of federal regulations, it was not applicable to
its case because DeWitt did not involve a contractual dispute and thus was only useful
for its general explanation of the charges. See SandRidge, 454 S.W.3d at 621 (citing
DeWitt, 279 F.3d at 1036–42). In reversing the lower court’s decision that allowed the
lessee to deduct the entire demand (or capacity) charge at issue, the court held that any
firm transportation charges that the lessee deducts from royalties “must directly correlate
to the volumes of gas it produces, transports, and sells under the [l]eases,” and that any
charges “incurred for pipeline space that is not ultimately used are not ‘actually
incurred’ in connection with the sale of gas produced.” See id. at 622.
In this case, both parties argue that the SandRidge decision supports their
respective positions as to whether the capacity charges in dispute here are properly
deductible. Chesapeake contends that the way in which transportation costs (including
any capacity charges) are deducted from AWT’s royalties comports exactly with the
court’s holding in SandRidge, i.e., such costs are only deducted when AWT’s gas is
actually transported in a pipeline. See Record Document 57 at 4. Regardless of whether
Chesapeake actually deducts such costs in the manner it describes, the Court is less
clear as to AWT’s claim on this issue, as well as the exact remedy AWT seeks from the
Court. For example, AWT’s position for the majority of this litigation has been its claim
that Chesapeake violates the Lease Amendment when it deducts capacity charges from
AWT’s royalties whenever Chesapeake either (1) does not ship any amount of AWT’s
gas in a pipeline or (2) does ship some of AWT’s gas in a pipeline but when less than

Page 11 of 20

100% of the volume reserved is shipped. See Record Document 45-2 at 10; see also
Record Document 59 at 16 (arguing that like the result in SandRidge, “Chesapeake is
prohibited under the [] Lease Amendment terms from charging [AWT’s] royalty for any
capacity charges incurred by Chesapeake for Chesapeake’s reservation of pipeline space
that is not ultimately used in connection with the transportation of [AWT’s] gas to a
transportation pipeline”). 6 In its most recent brief filed with the Court, however, AWT now
appears to be arguing that whether or not these charges are classified as “transportation
charges” under the Lease Amendment is “immaterial,” and that Chesapeake is prohibited
from deducting any capacity charges at all, even those incurred when AWT’s gas is
transported in a pipeline, on the sole basis of Chesapeake having allegedly incurred these
charges prior to delivery of the gas into a pipeline. See Record Document 67 at 2–3.
However, for several reasons discussed below, the Court finds that regardless of which
argument AWT is pursuing, neither it nor Chesapeake has met its burden in showing the
absence of a genuine dispute of material fact as to whether the capacity charges are
properly deductible under the Lease.
First, neither party has provided sufficient summary judgment evidence as to the
exact nature of both the contracts that Chesapeake enters into with the third-party
transportation pipelines in order to transport AWT’s gas, as well as the contracts between
the multiple Chesapeake entities and their respective roles in this process. Although there

6

The evidence is also inconsistent as to whether Chesapeake only deducts a
proportionate amount of the charges from AWT’s royalties when AWT’s gas is shipped in
a pipeline. See Record Document 57 at 1; see also Record Document 67 at 2 (disputing
Chesapeake’s claim that it mistakenly netted certain costs from AWT’s royalties and
claiming that such action was in fact a concealed attempt by Chesapeake to make
improper deductions).
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is some evidence in the record generally describing the process by which AWT’s gas is
transported from the wellhead to its eventual point of sale, see Record Document 47-2 at
2–4 (citing Affidavit of Deven Bowles, Exhibit 3), there are nevertheless numerous gaps
and inconsistencies in the record regarding, inter alia, when, how, and by whom the
capacity charges are incurred. Because the Court finds that these questions relate to
factual issues that are “material” for purposes of summary judgment in this case, the
granting of summary judgment for either party is not appropriate because there remain
genuine disputes as to material facts that the Court cannot decide at this stage.
For example, while COLLC is the entity responsible for calculating and paying
AWT’s royalties, CEM is the entity that actually incurs the costs to transport AWT’s gas,
including any capacity charges, and “nets these costs in computing the proceeds it pays
COLLC, on Lessees’ 7 behalf.” See id. at 3. Regarding the capacity charges specifically,
Chesapeake explains that “CEM allocates the [capacity charges] back to producing wells
based on the amount of gas produced from each well compared to the volume shipped.”
See id. This statement suggests that the process by which CEM allocates any capacity
charges it incurs to COLLC, which are then considered in COLLC’s computation of AWT’s
royalties, is not complete until after AWT’s gas is shipped, since CEM bases its allocation
of the charges “on the amount of AWT’s gas produced from each well compared to the
volume shipped.” See id. (emphasis added). However, Chesapeake appears to contradict
this statement when it cites to various other statements in the record in which it explains

7

According to Chesapeake, the actual “Lessees” in this matter are Chesapeake
Louisiana, L.P. (“CLLP”) and Chesapeake Plains, L.L.C. (“CPLLC”). See Record
Document 47-2 at 1. The Court notes that CPLLC is not named as a defendant with the
other Chesapeake entities in AWT’s Petition. See Record Document 1-2 at 10–11.
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that the capacity charges are “charged regardless of whether 100% of the reserved
volumes are shipped, since they are fixed costs that secure guaranteed, priority access.”
See Record Document 57 at 2. These other statements, if read alone, would seem to
imply that the capacity charges are incurred “prior to delivery of the gas into a [pipeline]”
and, thus, not deductible from AWT’s royalties under the Lease Amendment. See Record
Document 45-2 at 6. When read in context with the other statements provided above
explaining how the capacity charges are incurred, the Court is left with a muddled
understanding of how these charges are incurred and allocated when Chesapeake
calculates AWT’s royalties. Thus, even though AWT has not offered competent summary
judgment evidence to rebut Chesapeake’s assertion as to when it incurs the capacity
charges, Chesapeake’s inconclusive evidence is likewise insufficient to resolve the
dispute for purposes of summary judgment.
C.

Whether AWT’s Royalty Is Based on the Correct Point of Value

Chesapeake also seeks summary judgment dismissing AWT’s additional claim
that Chesapeake has not been basing AWT’s royalty on the correct point of value. Record
Document 47-1 at 17. In Louisiana, the general rule is that when a mineral lease directs
the lessee, in calculating the royalties owed to the lessor, to base the royalty payments
on the “market value at the well,” post-production costs are shared pro rata between the
lessor and lessee unless the lease provides otherwise. See Merritt v. Southwestern Elec.
Power Co., 499 So. 2d 210, 213 (La. App. 2d Cir. 1986). In other words, in order to
determine the market value at the well under a lease with such a provision, the lessee
“begin[s] with the gross proceeds from the sale of the gas and deduct[s] therefrom any
additional costs of taking the gas from the wellhead (the point of production) to the point

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of sale.” See id. These post-production costs include certain processing and, inter alia,
transportation costs incurred to market the gas to a downstream point of sale. See Babin
v. First Energy Corp., 96-1232, p. 3 (La. App. 1st Cir. 3/27/97), 693 So. 2d 813, 815.
In this case, the original Lease provides that AWT’s royalties, on gas “produced
and sold or used off the premises,” are based on the “market value at the well of oneeighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall
be one-eighth of the amount realized from such sale . . . .” See Record Document 47-3
at 9. 8 However, the Lease Amendment that was later entered into by the parties appears
to conflict with the market value provision because it provides that Chesapeake shall bear
all costs of producing the gas, in addition to other post-production costs, except for the
“long-haul” transportation charges that AWT is to proportionately share. See Record
Document 45-2 at 6. Because it is unclear as to what the parties intended regarding the
exact scope of the Lease Amendment and its effect on the other provisions in the Lease,
the Court finds that summary judgment is not appropriate as to this issue as well. Although
there are several reasonable explanations as to what the parties intended, it is certainly
not unambiguous as to the intended result. First, even assuming that the parties intended
to alter the point of valuation by entering into the Lease Amendment, it is unclear as to

8

The Court notes that Louisiana courts, when interpreting leases containing “market
value at the well” provisions, distinguish between the “point of valuation” and the point of
sale of the gas, a distinction explained by the Fifth Circuit in a case involving a lease with
a nearly identical provision:
The lease, quite plainly, thus makes separate provision for two main
situations: first, where the gas in (1) “sold or used off the premises”; and
second, where it is (2) “gas sold at the wells.” On the latter (2), the royalty
is the specified fraction of the amount actually received. But where the gas
is (1) sold or used off the premises, it is the “market value at the well” of gas
so sold or used.
Freeland v. Sun Oil Co., 277 F.2d 154, 157 (5th Cir. 1960).
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what point of valuation the parties intended to be substituted in its place. The Court could
plausibly reconcile the two provisions by concluding that the parties intended the “tailgate
of the furthest downstream of either (i) a gathering system[] or (ii) a treating plant” to be
the point of valuation. See id. However, this interpretation would require the Court to
render the “market value at the well” provision superfluous9 (even though the parties
chose not to remove or alter this language when it amended the Lease), since Louisiana
courts interpret “market value at the well” to mean that both parties share post-production
costs, which would inherently include any costs that occur before the above-referenced
“tailgate.” See Merritt, 499 So. 2d at 213. Furthermore, it would be illogical for the Court
to conclude that it is unambiguous as to how the market value provision is altered by the
Lease Amendment when the Court has already concluded above that the exact scope
and effect of the Lease Amendment itself is ambiguous.
This Court was previously confronted with issues similar to those in the present
case in Magnolia Point Minerals, LLC v. Chesapeake Louisiana, LP, No. 11-0854, 2013
WL 3989579 (W.D. La. Aug. 2, 2013). There, an exhibit to the parties’ lease agreement
contained a broad “no cost” provision which provided that “no cost shall be charged or
allocated to Lessor's interest except severance and other applicable taxes.” See id. at *3.
However, like the present case, the lease also contained a “market value at the well”
provision, which the Court noted conflicted with the former provision. Because the Court
found the “no cost” provision ambiguous as to its meaning and effect on the market value

9

See KPW Associates v. S.S. Kresge Co., 535 So. 2d 1173, 1182–83 (La. App. 2d Cir.
1988) (“A cardinal rule in the construction of contracts is that the contract must be viewed
as a whole and, if possible, practical effect given to all of its parts . . . so to avoid
neutralizing or ignoring any of them or treating them as surplusage.”) (emphasis added)
(quoting Lambert v. Maryland Casualty Co., 418 So. 2d 553, 559–60 (La. 1983)).
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provision, the Court denied summary judgment on the ground that extrinsic evidence was
needed in order to determine the parties’ intent. See id. at *5. Here, as in that case, the
Court cannot determine the parties’ intent from the Lease and Lease Amendment alone
and thus summary judgment is premature at this stage.
D.

Claim for Penalties Under the Louisiana Mineral Code

Chesapeake also seeks summary judgment dismissing AWT’s claim that AWT is
entitled to penalties, or “double damages,” under the Louisiana Mineral Code on the
ground that Chesapeake willfully and intentionally failed to pay royalty payments due to
AWT. See Record Document 47-1 at 18–19. Under Louisiana law, a mineral lessee, upon
receiving a proper notice of failure to pay royalty payments, must respond within 30 days
by either paying the royalty due or providing a reasonable cause for nonpayment. See
La. R.S. 31:138. If a lessee violates these requirements, the court may in its discretion
“award as damages double the amount of royalties.” Id. 31:140. In addition, Louisiana
courts generally disfavor such awards and consider the reasonableness of the lessee’s
conduct, including whether lessee acted fraudulently or willfully, as factors in deciding
whether to grant such awards. See, e.g., Columbine II Ltd. Partnership v. Energen
Resources Corp., 129 Fed. App’x 119, 123 (5th Cir. 2005) (citing Matthews v. Sun
Exploration and Production Co., 521 So. 2d 1192, 1195–97 (La. App. 2d Cir. 1988)).
In this case, because the Court has already concluded that genuine disputes of
material fact exist regarding the parties’ intent under the Lease, the Court cannot at this
stage determine whether or not Chesapeake’s reasons for deducting the disputed costs
from AWT’s royalties were “unreasonable.” Likewise, the record evidence is wholly
insufficient as to whether Chesapeake “willfully and intentionally” failed to properly pay

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royalty payments to AWT. Therefore, summary judgment is also premature regarding
AWT’s claim for penalties.
E.

Claim Against PXP

In addition to the motions filed by AWT and Chesapeake, the Court also addresses
Defendant PXP’s Motion for Summary Judgment in which it seeks dismissal of all of
AWT’s claims against it. PXP’s primary contention is that it was not a party to the Lease
Amendment entered into by AWT and Chesapeake and, therefore, it cannot be held liable
to AWT for any of its claims and that AWT can only seek relief from Chesapeake. See
Record Document 49 at 1–2. Under the Louisiana Mineral Code, both an assignee and a
sublessee of a mineral lessee are directly responsible to a mineral lessor for the
performance of the lessee’s obligations. See Dickson v. Sklarco L.L.C., No. 11-0352,
2013 WL 1828051, at *5 (W.D. La. Apr. 29, 2013). Thus, in contrast to the articles
governing assignees and sublessees under the Louisiana Civil Code, it is irrelevant under
the Mineral Code whether the lessor has contractual privity with the sublessee because
Mineral Code article 128 effectively creates statutory privity between them which enables
the lessor to demand performance from either party. See La. R.S. 31:128; see also
Hoover Tree Farm, L.L.C. v. Goodrich Petroleum Co., L.L.C., 46,153, pp. 11–12 (La. App.
2d Cir. 3/23/11), 63 So. 3d 159, 166–67.
In this case, the transaction between Chesapeake and PXP is properly classified
as a sublease, since the Sublease shows that Chesapeake reserved to itself an overriding
royalty interest in the Sublease agreement. See Record Document 64-1 at 1; see also
Bond v. Midstates Oil Corp., 53 So. 2d 149, 154 (La. 1951) (stating that Louisiana courts
have long held that the reservation of an overriding royalty interest is, in and of itself,

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sufficient to “stamp the transfer as a sublease”). However, because the Mineral Code
makes both assignees and sublessees directly liable to a mineral lessor for the lessee’s
obligations, the Court finds that AWT can seek to hold PXP liable for the same claims it
brings against Chesapeake (the original lessee) regardless of whether PXP is classified
as an assignee or sublessee of Chesapeake’s interest in the Lease.
Furthermore, Chesapeake and PXP appear to have also entered into a separate
“Participation Agreement” that, based on its express terms, provides that “Chesapeake
will act as [the] lead leasing [p]arty” and single operator responsible for negotiating
documents relating to their shared leasehold interest. See Record Document 58-1 at 34.
An additional provision working against PXP’s argument is the portion of the Lease
Amendment that states that it “shall be binding upon and shall inure to the benefit of the
respective heirs, successors, legal representatives, sublessees or assigns of the parties
hereto.” See Record Document 47-3 at 17 (emphasis added). Given that PXP has failed
to provide sufficient evidence to rebut AWT’s arguments based on these documents, or
to support its claim that it did not intend to be bound by the Lease Amendment, 10 PXP
has, at the very least, failed to show the absence of any genuine disputes of material fact
in order to warrant summary judgment in its favor.

10

Notwithstanding the express terms of the referenced Participation Agreement and
Lease Amendment, PXP’s lack of evidence in support of its argument that the Lease
Amendment somehow constituted a new contract is also insufficient to rebut the general
rule that novation “may not be presumed” and “must be clear and unequivocal.” See La.
C.C. art. 1880; see also La. C.C. art. 2726 (“An amendment to a provision of the lease
contract that is made without an intent to effect a novation does not create a new lease.”).
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III.

CONCLUSION
The Court finds that the ambiguity contained in both the Lease and the Lease

Amendment prevents summary judgment at this stage. Thus, based on the foregoing
reasons, both AWT’s Motion for Partial Summary Judgment (Record Document 45) and
Chesapeake’s Motion for Summary Judgment (Record Document 47) are DENIED.
Additionally, PXP’s Motion for Summary Judgment (Record Document 49) is DENIED.
An order consistent with the terms of the instant Memorandum Ruling shall issue
herewith.
THUS DONE AND SIGNED, in Shreveport, Louisiana, on this 11th day of January,
2019.

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