Opinion ID: 1659585
Heading Depth: 1
Heading Rank: 4

Heading: The Amoco Decisions

Text: In Amoco Production Company v. Thompson, 516 So.2d 376 (La.App. 1st Cir.1987), writ denied, 520 So.2d 118 (La.1988) (hereinafter  Amoco I ), and Amoco Production Company v. Thompson, 566 So.2d 138 (La. App. 1st Cir.), writ denied, 571 So.2d 627 (La.1990) (hereinafter  Amoco II ), the court of appeal was faced with the same issue as that presented herein, i.e., the proper resolution where a substantial gas imbalance had arisen in the absence of a joint operating agreement or a gas balancing agreement between the owners of a compulsory unit. Though the manner in which the gas imbalance arose in the Amoco dispute was different, both the parties herein and the lower courts correctly recognized that the analysis of the issue presented in this case is the same. It is therefore necessary to examine the Amoco decisions in some detail before resolving this particular dispute. In the Amoco cases, the court of appeal was presented with the issue of the proper method of correcting a gas imbalance where the owners in a compulsory unit had failed to enter into either a joint operating agreement or a gas balancing agreement. The operator, Amoco Production Company, as well as two non-operator owners, had taken their production in kind. The remaining owners in the unit did not elect to take their share of production in kind, and also did not enter into operating or balancing agreements with Amoco or the other mineral owners for the future sale of gas production. Amoco entered into a contract to sell its portion of the gas production to a gas transmission and marketing company. Amoco then began delivering all of the gas produced (less that delivered to the non-operators who had elected to take their share of production in kind) to its purchaser. After a change in market conditions, Amoco's purchaser notified Amoco that it would no longer accept delivery of any gas other than that contracted for, i.e., the purchaser would only accept delivery of Amoco's share of production. Thereafter, dispute arose when Amoco applied to the Commissioner for an order which would allow it to separately market its share of production from the field and balance in kind the share of the non-marketing owners at a later date. The non-marketing owners who had not elected to take their share of production in kind demanded instead that Amoco correct the imbalance which had resulted while Amoco had delivered all production to its purchaser through payment in cash of the amounts received by Amoco for the gas sold which was attributable to the non-taking owners. See Amoco I, 516 So.2d at 379-382. After reviewing the authority and the jurisdiction of the Commissioner over the operations of and gas produced from a compulsorily unitized field, as well as the nature of ownership of gas produced from such a field, the court in Amoco I held: 1) that the gas produced from a compulsory unit is owned in indivision, such that the Commissioner's and the trial court's application of the molecular theory of ownership of the gas was correct; 2) that the pertinent Louisiana Mineral Code provisions and statutes governing the Commissioner of Conservation establish an owner's right to his share of the production, and the Commissioner has the authority through issuance of compulsory unit orders to effect a partition of the gas produced in the unit; 3) that while the preferred method of such partition of the gas produced is in kind, the Commissioner has the power under certain circumstances to order alternative methods of partition; 4) that the Commissioner has the power to order balancing where partition has occurred and the owners have not received their allocated share in kind; and 5) that in partitioning the gas produced from a compulsorily unitized field or in ordering gas balancing to correct any imbalances which may arise, the preferred method of partition or balancing is in kind. However, in conjunction with its holding that balancing in kind is the preferred method for partitioning the gas or correcting any imbalances which may arise, the Amoco I court also held: If taking in kind by an owner (1) causes waste [La.R.S. 30:2, 3], (2) precludes another owner from recovering or receiving his just and equitable share [La.R.S. 30:10(A)(1)(a)], or (3) infringes on the correlative rights of another owner by limiting his liberty to enjoy his rights or causes damage to him [La.R.S. 31:9, 10, and 11], the Commissioner has the authority to modify or deny the right to take in kind.       If the actions of an owner adversely affect the ability of a co-owner to get his share, an accounting in kind (by volume balancing) or an accounting in cash may be necessary for the affected owner to get his fair share. If, in taking their share in kind, some owners deplete the unit, then those owners who did not get their share in kind prior to depletion may be entitled to a cash accounting. However, if the unit is not depleted and the gas remaining in the unit is enough to provide each owner with his fair share (if properly balanced), then a balancing in kind may be appropriate. It is implicit in the obligation of the Commissioner to issue orders affording each owner the right to recover his just and equitable share, that the Commissioner can order an accounting in kind for balancing purposes or an accounting in cash (if such is the only available practical relief).       Thus we hold that the Commissioner has the authority to order an accounting either in kind or in cash, depending on the circumstances. Amoco I, 516 So.2d at 393-394. We agree with the Amoco I court that balancing in kind is the preferred method of correcting any imbalances which may arise between owners in a compulsorily unitized lease. It has long been the custom of the industry for the owners to correct any imbalances which may arise through balancing in kind, [14] and absent any contractual arrangement to the contrary among the owners, there is no reason to alter this established practice. We also agree with the Amoco I court's determination that balancing in kind is not the only method which may be employed to correct any production imbalances which may arise, and that depending on the particular circumstances presented, the Commissioner has the authority to order either balancing in kind or balancing in cash. After acknowledging the expertise and primary responsibility of the Commissioner of Conservation in deciding such matters, the court in Amoco I remanded the matter to the Commissioner for reconsideration of the issues presented in light of the court's decision. On remand, the Commissioner determined that because a viable market for the non-taking owners' share did not exist during part of the time period at issue, balancing in cash should be made by the overproduced owners for that time period. See Amoco II, 566 So.2d at 143. The overproduced parties then sought judicial review of the Commissioner's decision. Id. at 144. The trial court reversed the Commissioner's decision, concluding that the Commissioner had misinterpreted the court's decision in Amoco I and erroneously ordered balancing in cash to correct the existing imbalance. On appeal, the court reinstated the Commissioner's order, finding first, that it was the trial court that had misinterpreted the court's decision in Amoco I, and second, that the trial court had applied an improper standard of review to the Commissioner's decision. Amoco II, 566 So.2d at 144-146. Regarding the proper standard of review, the Amoco II court held: Reviewing courts should not reverse a substantive decision by the Commissioner on its merits, unless it be shown that the balancing of costs and benefits performed by the Commissioner was achieved arbitrarily or with insufficient consideration of public and private interests. See Save Ourselves Inc. v. Louisiana Environmental Control Comm., [452 So.2d 1152 (La. 1984)]. The manifest error test ... is used in reviewing the facts as found by the agency, as opposed to the arbitrariness test used in reviewing conclusions and exercises of agency discretion. Save Ourselves, Inc. v. Louisiana Environmental Control Comm., supra at 1159. Amoco II, 566 So.2d at 145 (Citation added). Therefore, after review of the Commissioner's findings as though they were before the court on initial judicial review, the Amoco II court concluded that the Commissioner was not clearly wrong in his factual findings and that the Commissioner did not act arbitrarily and capriciously in ordering a cash accounting. Id. at 146. For purposes of the instant case, we note that the Amoco II court also stated: Incongruous, indeed, would be a decision on our part which would dilute the power of the Commissioner to exercise his discretion. Previously having recognized and deferred to the expertise of the Commissioner and his Department, we must be especially diligent in requiring a clear showing by those who challenge his order that his action was arbitrary and capricious. Amoco II, 566 So.2d at 146 (Emphasis added).