Closing the Deal in the Bayou State: The Purchase and Sale of Producing Oil and Gas Properties

• Author: Patrick S. Ottinger
• Position: Ottinger Hebert, L.L.C. Lafayette, Louisiana. Member, Louisiana and Texas Bars; Adjunct Professor of Law, Paul M. Hebert Law Center, Louisiana State University, Baton Rouge, Louisiana.
• Pages: 691-786

Closing the Deal in the Bayou State: The Purchase

and Sale of Producing Oil and Gas Properties

Patrick S. Ottinger*

TABLE OF CONTENTS

Introduction .................................................................................. 693

I. Fundamentals of the Sale of Producing Oil and Gas Properties ... 696

A. The Nature of Producing Oil and Gas Properties ................... 696

B. Sales Involving Producing Oil and Gas Properties

in Practice ............................................................................... 697

C. The “Hierarchy of Pertinent Law” ......................................... 697

D. Influence of Decisions of Other States ................................... 699

II. Provisions of the Louisiana Mineral Code Pertinent to the

Sale and Assignment of Mineral Leases ....................................... 701

A. The Alienability of a Mineral Lease ...................................... 701

B. Inapplicability of the Remedy of Lesion Beyond Moiety ...... 702

C. Other Consequences Arising Out of the Assignment

of the Mineral Lease .............................................................. 703

III. Provisions of the Louisiana Civil Code Pertinent to the

Sale and Assignment of Mineral Leases ....................................... 703

A. Applicability of the Law of Sales ........................................... 704

B. Agreements Preparatory to the Sale ....................................... 704

1. Option .............................................................................. 705

2. Contract to Sell ................................................................ 706

3. Right of First Refusal ...................................................... 706

a. General ...................................................................... 706

b. “Pref Rights” in the Industry ..................................... 707

C. Other Associated Agreements ................................................ 712

1. Confidentiality Agreements ............................................. 712

2. Term Sheets ..................................................................... 713

3. Letters of Intent ............................................................... 714

4. Access or Boarding Agreements ..................................... 716

5. Transition Agreements .................................................... 717

Copyright 2016, by PATRICK S. OTTINGER.

* Ottinger Hebert, L.L.C. Lafayette, Louisiana. Member, Louisiana and

Texas Bars; Adjunct Professor of Law, Paul M. Hebert Law Center, Louisia na

State University, Baton Rouge, Louisiana.

692 LOUISIANA LAW REVIEW [Vol. 76

D. Agreements of Sale ................................................................ 719

IV. Customary Features of a Purchase and Sale Agreement .............. 721

A. Definitions .............................................................................. 722

B. Property and Purchase Price................................................... 723

1. Identification of Assets to be Sold and to be Excluded ... 723

2. Preliminary Purchase Price .............................................. 726

3. Deposit ............................................................................. 726

4. Purchase Price Adjustments ............................................ 727

C. Due Diligence ........................................................................ 734

1. Purpose and Objective ..................................................... 735

2. Title Due Diligence ......................................................... 736

3. Environmental Due Diligence ......................................... 740

a. Scope ......................................................................... 740

b. Regulatory Requirement ........................................... 741

c. Site-Specific Trust Agreements ................................ 741

4. Regulatory Due Diligence ............................................... 743

a. Administrative ........................................................... 743

b. Regulatory ................................................................. 744

5. Other Areas of Interest in the Conduct of Due

Diligence .......................................................................... 745

a. Financial .................................................................... 745

b. Litigation ................................................................... 745

c. Contractual ................................................................ 747

d. Insurance ................................................................... 749

D. Representations and Warranties ............................................. 749

1. Of the Seller ..................................................................... 750

2. Of the Purchaser .............................................................. 750

E. Covenants ............................................................................... 751

1. Pre-Closing Covenants .................................................... 752

2. Post-Closing Covenants ................................................... 752

F. Termination Provisions .......................................................... 753

G. Allocation of Liability and the Associated Indemnities ......... 755

H. The Closing ............................................................................ 757

1. Consummation of Transaction ......................................... 757

2. Preparation of Closing Documents .................................. 758

3. Typical Closing Documents ............................................ 758

I. Post-Closing Adjustments ...................................................... 759

J. Miscellaneous Provisions ....................................................... 760

1. “Freedom of Contract” .................................................... 760

2. Material Adverse Effect Clause ....................................... 761

3. Choice of Law ................................................................. 763

2016] CLOSING THE DEAL IN THE BAYOU STATE 693

4. Forum Selection Clauses ................................................. 765

V. Remedies for Breach of the Purchase and Sale Agreement .......... 766

A. Specific Performance ............................................................. 766

B. Money Damages .................................................................... 771

1. Duty to Mitigate .............................................................. 771

2. Stipulated Damages ......................................................... 772

C. Attorney’s Fees ...................................................................... 773

D. Prescription ............................................................................ 773

1. Applicable Prescriptive Period ........................................ 774

2. Unreasonable Delay in Seeking Relief ............................ 774

E. Arbitration of Disputes ........................................................... 777

Conclusion .................................................................................... 781

Appendix ...................................................................................... 782

INTRODUCTION

The purchase and sale of producing oil and gas properties is a significant

part of an oil and gas practice in Louisiana.1 The term “producing oil and

gas properties” encompasses not only the principal asset (the mineral lease)

but also the equipment and wells that have been drilled pursuant to the

mineral lease, as well as the panoply of agreements, licenses, permits, and

other contractual rights assembled by the selling party in connection with

the development and exploitation of the mineral lease. For a variety of

reasons, a party who owns producing mineral leases might elect to divest

itself of those interests.

The reasons leading a leasehold owner to a decision to divest might

range from a desire to be relieved of future liabilities, or at least to pass

along such obligations to another, to “quit” the business, or to commit

capital to other ventures or enterprises. Additionally, in the current

environment of depressed prices for oil and gas, many exploration and

production (“E&P”) companies operating under a commercial line of

credit are facing the certainty of a redetermination of their borrowing base

1. Having practiced oil and gas law since the Spring of 1974, this Author

has been involved in innumerable transactions of the type discussed here,

involving the purchase and sale of producing properties in several states, totaling

per transaction purchase prices ranging from smaller amounts to many millions

of dollars. The total of all such transactions would be in the billions of dollars in

the aggregate.