Louisiana Oil and Gas Legislative Update: HB123

July 28, 2020 The 2020 Louisiana Legislative Regular Session enacted a change to the method of allocating mineral proceeds for trusts.  By Louisiana House Bill 123 which was enacted on June 4, 2020, and will take effect on January 1, 2021, the Louisiana Legislature revised La. R.S. §9:2152 to resemble Texas Property Code §116.174 and remove the application of the “open mines doctrine” in trusts.

Prior Louisiana law allocated royalty payments to be apportioned between the principal and income of a trust at the rate of twenty-seven and one-half percent (27.5%) of the gross proceeds to principal and the remaining seventy-two and one-half percent (72.5%) to income.  These amounts were calculated in accordance with the 1964 Internal Revenue Code (“IRC”) depletion amounts.  However, those IRC depletion amounts are no longer in effect, and most states, accordingly, have updated their method of allocation.  Under the old method, the majority of the proceeds from wells were being paid out as income, and thus little value was left for the principal of a trust when wells stopped producing.

La. R.S. §9:2152(D) has updated the allocation amounts to allow for a “safe harbor” if ninety percent (90%) of royalty payments are allocated to principal and ten percent (10%) are allocated to income.  This is a major reversal from the previous allocation method.  The Legislature believes that this method will “allow[] the trustee to obtain other income-producing assets that might still be productive when the minerals are exhausted.”  Furthermore, La. R.S. §9:2152(D) provides that “any other allocation shall not be presumed to be unreasonable or inequitable.”  This allows the trustee of a trust greater flexibility in determining their own allocation method between the income and principal of a trust.

In another change to the old law, no longer will the “open mines doctrine” apply to the proceeds of mineral interests for trusts.  La. R.S. §9:2152(B), as revised, provides that the allocation methods “[apply] whether or not a decedent or donor was extracting oil, gas, or other minerals before the interest became subject to the trust.”  Therefore, the determination of whether an oil and gas lease was executed and production obtained prior to the creation of a trust is immaterial to the allocation method decided upon by the trustee.

As activity increases in the Haynesville Shale[1], House Bill 123 will be important to keep in mind when it goes into effect on January 1, 2021.  All changes noted above are prospective in nature, but, for those mineral interests already included in a trust on the effective date, the trustee will have discretion in deciding which method of depletion (i.e., the old or new law) to apply.

[1] https://www.houstonchronicle.com/business/energy/article/Drilling-Down-Haynesville-Shale-overtakes-Eagle-15413848.php


CONTACT

If you have any questions regarding this legislative update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact:
Patrick Schenkel, Partner

[email protected]


The content of this publication and any attachments are not intended to be and should not be relied upon as legal advice or to create a lawyer-client relationship.

© 2020 Kiefaber & Oliva LLP. All rights reserved. This publication may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Houston (principal office): 815 Walker Street, Suite 1140, Houston, Texas 77002, 713-229-0360 | Columbus: One East Livingston Avenue, Suite B, Columbus, Ohio 43215, 614-349-4525.