By Don G. Briggs, President – LOGA (Louisiana Oil & Gas Association)

It’s easy to say, “Louisiana is open for business,” but making it happen is another story. Louisiana Governor Kathleen Blanco is working to do just that. The question is, can she and industry overcome the recent trial lawyer’s regime of nuisance lawsuits?

Indeed, 2003 was not a great year for Louisiana’s oil and gas industry when compared to 2002 (see Figure 1). In fact, drilling and exploration was down by 4 percent in 2003, while in our sister producing states of Texas and Oklahoma, drilling activity was up 25 and 35 percent respectively. Nationwide, the average number of rigs drilling for oil and natural gas was up by 25 percent in 2003 over 2002. As Figure 2 shows, oil and natural gas prices were strong, which made it more confusing to the service sector of the industry because historically, increased activity has always followed strong prices. If it had not been for the 50 percent increase in drilling activity in north Louisiana, the decline of 4 percent would have been even greater. The service sector of the state’s vast support system was ready and willing, but it did not happen. What is wrong with this picture?

In an effort to understand this new phenomenon and break from a historical trend, the Louisiana Independent Oil and Gas Association (LIOGA) requested input from its membership on how they view doing business in Louisiana. The same story was told over and again, and it soon became apparent why exploration in Louisiana was not in sync with the rest of the country. The decline of oil and gas activity was due to a combination of impediments, with one more prominent than others: trial lawyers seeking retribution for environmental damages on what is commonly referred to as “legacy sites.”

What Are Legacy Sites?

Legacy sites are oil and gas fields that at one time were operated and produced by a major oil company (commonly referred to as the “deep pockets”). We have all seen photos from the early 1900s of oil shooting through the top of a wooden derrick. Technology has changed that. In the 1940s through the 1980s, it was common practice to build pits to hold produced water and cuttings extracted from production. These pits were the technology of the time.

Today, produced water is injected back into the earth or hauled away and then injected into a saltwater disposal well. Louisiana has thousands of miles of canals through its marshes, dredged to reach drill sites. With today’s technology of horizontal and directional drilling, few permits are issued to dredge new canals. Scale – rust, as it used to be called – is now NORM, or naturally occurring radioactive material, which has piled up in pipe yards or production locations for years. NORM has never caused even a blister or sneeze, yet our industry spends tens of millions to dispose of it. Countless oil fields – legacy sites – exist throughout Louisiana; however, they are no longer operated by a major oil company but instead have been sold to independent oil and gas producers. In many cases these old fields have been bought and sold several times over. In looking back at operators of record on most legacy sites or fields, it would not be uncommon to find that 20 different oil companies operated the field or portions of it at one time or another.

These sites are now the target of a group of trial lawyers claiming alleged environmental damages caused by the old technology of pits, dredging or cleaning scale out of tubulars. Legacy-site litigation is the new tobacco or asbestos in Louisiana.

The following is a summary from a vast majority of suits being filed in Louisiana:

Since at least the 1930s the defendants have known that the disposal of oilfield wastes in unlined earthen pits inevitably results in seepage which contaminates both surface and subsurface soils and waters. Plaintiffs have suffered damages resulting from the improper disposal of oilfield waste in unlined earthen pits which were constructed by the defendants on or near their property during the course of oil and gas exploration and production activities. The oilfield wastes deposited in these pits includes (but is not limited to) such substances as naturally occurring radioactive material (“NORM”), produced water, drilling fluids, chlorides, hydrocarbons, and heavy metals. Also, leaks, spills, and other discharges of these substances from wells, pipelines, tank batteries, gas plants and other equipment have further polluted plaintiffs’ property.

Going to court is risky in anyone’s book; going to court in Louisiana can be fatal. As one trial lawyer so eloquently put it, “What I call the ‘magic jurisdiction’ ? is where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected.” Parish and district court judges, elected by their constituents and financed by trial lawyers, are making decisions that have a huge impact on the American and Louisiana economy.

The “Feeding Frenzy” Begins

One case in particular sums up the legacy-site litigation surge: Corbello et al v. Iowa Production et al. The decision on this case is one of the most important pertaining to the oil and gas industry from a Louisiana court in a decade. Very briefly, the case involves a 1961 surface lease on certain tracts and on five acres where the lessee built an oil terminal. The lessee held over on the lease after it expired. In May 1992, the plaintiffs filed suit for trespass, unauthorized disposal of saltwater and the poor condition of the premises, seeking exemplary damages. The jury awarded the plaintiffs damages for Shell’s failure to vacate the leased premises after the surface lease expired, $33 million to restore the leased premises to its 1961 condition and $16,670,000 for Shell’s illegal disposal of saltwater on the leased premises. Plaintiffs were awarded $689,000 in attorney fees, and expert fees were set at $65,000. Both parties appealed, and the appeals court affirmed on most points but raised the attorneys’ fees to $4 million. The case went to the Louisiana Supreme Court, which awarded the plaintiffs $33 million plus attorney fees, and interest, which came close to $80 million for a few acres with a value of approximately $108,000 and a cleanup cost of $800,000. Making the decision even more shameful is the fact that the court did not require the plaintiffs to use any of the funds for restoration of the property.

In his discussion notes on Corbello et al v. Iowa Production et al, Dr. Pat Martin, a professor of law at Louisiana State University (LSU), said: “There are many thousands of sites in Louisiana where wells have been drilled or related operations have been undertaken. Probably most if not virtually all of them can be said to have resulted in some sort of damage to the premises, often in the same way that placing a house upon property must involve damage to the pristine condition of the property.”

Dr. Martin goes on to say that although

most of the wells were drilled under leases, and many leases provided expressly for restoration or compensation for damage to the property, virtually all leases are subject to the implied obligations provided by Article 122 of the Louisiana Mineral Code, La.R.S. 31:22, one of which is identified as the obligation to restore the surface. Many well sites have had present on them pits for drilling mud or brine and heavy machinery that may have leaked fluids. Other thousands of wells have been drilled in the marshes of south Louisiana; access to the well sites for drilling and for pipelines has generally been by canals specifically authorized by the leases. Restoring the property where there have been operations may involve such things as “decontamination” of soil in which chemicals may be present or refilling canals by obtaining fill from other sources. Land worth only hundreds of dollars per acre may have restoration costs running into tens of thousands of dollars per acre, as with the principal case or as with marshland. Few landowners are actually interested in obtaining restoration of the land.

Will the Corbello approach to damages be applied to cases involving Louisiana’s recognition of an implied covenant to restore the surface (more akin to tort than contract)? The first cases coming out since Corbello appears to indicate that it will. This seems not to have been in the contemplation of the drafters of the Mineral Code. The comments to Article 122 state there appears to be “an economic balancing process which limits this duty” and “it appears that in effect the obligation to restore the surface is limited by a standard of reasonableness which balances the cost of perfect restoration against the value of the use to which the land is being put.” Using this standard, surely the fair market value of the land would be an upper limit on damages.

Threat from Trial Lawyers Is No Joke

The aftermath of the Louisiana Supreme Court’s Corbello decision finds Louisiana’s oil and gas industry fending off more than 40 lawsuits – that is, 40 lawsuits LIOGA can identify. They target more than 100 different oil and gas companies. Trial lawyers are serving up crawfish boils and barbeques to solicit landowners to participate in suits. The feeding frenzy is on.

Word of Corbello has spread to the boardrooms of oil and gas companies that have, or are considering, investments in older Louisiana fields. Potential future investments are being put on hold. Recently, when a field was put up for auction that under normal conditions would have brought in several million dollars, a minimal bid of $50,000 was offered. The trial lawyers claim that is not true (or, as one said to me recently, “That’s bull —-”).

But how would any oil or gas producer consider entering into an agreement where they could possibly be sued for alleged damages legally done by a company 20 to 80 years ago? The following are two of the many statements made by senior executives in LIOGA’s inquiry on doing business in Louisiana. The first:

From an oilfield industry perspective, your state is in the reserve blow down phase so margins are tight. These cases get much more attention today than they did in the exploratory high profit margin phase of our industry. New industries also see these cases and are not locating in Louisiana as a result. Plaintiff attorneys are slowly killing your economy.

The second:

My criticism and jaded view of the Louisiana courts remain. The personal injury and class action plaintiff’s bar is running business out of your state. My perception and experience is that the plaintiff’s bar owns the Louisiana judiciary.

The threat from the trial lawyers is no joke. “I believe this [Corbello-type suit] will be extremely costly for Louisiana’s oil and gas industry,” said Dr. Martin of LSU. The Corbello decision and the number of lawsuits filed have had a direct correlation to the decline of drilling activity in Louisiana. Some would argue drilling activity is up in 2004 compared to 2003, and that’s true. However, a true analysis would prove the activity would be considerably greater were it not for the trial-lawyer frenzy. Figure 3 shows the numerous oil and gas fields of Louisiana. These lawsuits will have a profound impact on the state’s economy.

Much at Stake in Louisiana

There is far too much at stake for Louisiana’s economy and citizens to allow a group of trial lawyers to bankrupt the state’s largest industry. LIOGA is currently working to develop and pass legislation that will bring some sense into the allegations of many of these legacy-site lawsuits. Our industry is a responsible environmental steward of our state. It is not our intent to be nonresponsive for our actions. Jobs cannot be created if the largest industry in Louisiana is run out of the state.

I have been president of LIOGA since its founding in 1992, and I can safely say there is a new attitude in the state agencies that regulate Louisiana’s oil and gas industry. More positive steps are in progress at this time than have been in the past 12 years. This is refreshing. Governor Blanco demonstrated her interest recently with her visit to Houston and the Offshore Technology Conference to promote Louisiana to the oil and gas industry. Our Louisiana companies got the recognition that they have long deserved for providing good-quality jobs for our citizens. It was definitely a first.

Along with Governor Blanco, our state leaders must join together to recognize the importance of the oil and gas industry to Louisiana’s economy. I believe Governor Blanco’s aggressive promotion will encourage companies to reinvest in Louisiana, expand their exploration and production on and off our shores and do business with our service companies. I also believe the governor and industry will overcome the recent trial lawyer’s regime of nuisance lawsuits.