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J & L Family LLC v. BHP Billiton Petroleum Properties (N A), LP

United States District Court, W.D. Louisiana, Shreveport Division

May 2, 2018

J & L FAMILY, LLC
v.
BHP BILLITON PETROLEUM PROPERTIES (N A), LP, ET AL

          MEMORANDUM ORDER

          Mark L. Hornsby U.S. Magistrate Judge

         Introduction

         Before the court are two motions: (1) Motion to Compel filed by J&L Family, LLC (“J&L”) (Doc. 84) and (2) Motion to Limit Discovery or For Protective Order filed by BHP Billiton Petroleum Properties, (“BHP”) (Doc. 87). The motions are granted in part and denied in part as set forth below.

         Factual Background

         J&L is an unleased mineral owner in a force-pooled unit operated by BHP. BHP is a subsidiary of Petrohawk Energy Corporation (“Petrohawk”). In or around the period of 2007 to 2010, Petrohawk made a decision to construct a gas gathering pipeline system to serve various wells that operated in northwest Louisiana. Petrohawk did so through a wholly-owned subsidiary named Hawk Field Services, LLC (“Hawk”). In April to May of 2010, Petrohawk, Hawk and other affiliates entered into a series of related transactions with affiliates of Kinder Morgan, Inc. (“Kinder Morgan”) that included a Gas Gathering Agreement. The Gas Gathering Agreement included a commitment of all of Petrohawk's gas in the Haynesville Shale area and fixed fees for gathering and treating the gas. The fees were subject to an annual escalation based on the Consumer Price Index, and Petrohawk made minimum volume commitments that required it to pay a minimum fee regardless of the amount of gas it moved through the system.

         J&L contends that, as part of the above transactions, Petrohawk and its affiliates sold the gas gathering system to a newly formed entity named Kinderhawk for $875, 000, 000 and received the right to participate as a 50% owner in Kinderhawk on a going forward basis. J&L contends that this position gave Petrohawk a significant economic interest on the opposite side of the Gas Gathering Agreement. J&L also contends that Petrohawk did not have the typical incentives of an operator. This is so, J&L argues, because each increase to the long-term gathering costs under the Gas Gathering Agreement, which Petrohawk charged through to interest owners in the units, was offset by other benefits which Petrohawk did not share with the interest owners, namely: (a) the increased cash price paid to Petrohawk and its affiliates for the gathering system; and (b) the resulting increased revenues and asset values attributable to Petrohawk's interest in Kinderhawk going forward. A year later, Petrohawk sold its remaining 50% interest in Kinderhawk to Kinder Morgan.

         J&L contends that each added cent of charges incurred under the Gas Gathering Agreement represented a cost that Petrohawk (and its successor BHP), passed on to J&L. Each additional cent of such charges increased the revenues and value of Kinderhawk, resulting in substantial economic benefits that Petrohawk did not share with J&L. As a result, J&L argues, the gathering charges Petrohawk has billed to J&L are inflated.

         The discovery at issue relates to J&L's claims against BHP regarding post-production costs which BHP has applied to J&L's interest in the five wells that are the subject of this lawsuit. J&L served discovery requests seeking information pertaining to policies and procedures, analysis, and shareholder or investor reports that related to BHP's decision making process in procuring pipeline services, constructing or acquiring pipeline services, and divesting their ownership in various pipeline and pipeline operating entities that handle J&L's share of unit gas. These specific requests are set forth in the following Requests for Production:

Request for Production No. 26 (procurement of gas gathering facilities in Haynesville and consideration of alternatives):
Produce any and all documents that describe or depict any communication between You and any affiliate of You or between or among Your employees or contractors, regarding: (a) policies, practices or strategies concerning the procurement, reservation, development or purchase of gathering, treatment and compression facilities between the wellhead and interstate pipeline interconnects in the Haynesville Shale Production Area; (b) analysis, discussion or consideration of alternatives for procurement, reservation, development or purchase of gathering, treatment and compression facilities between the wellhead and interstate pipeline interconnects in the Haynesville Shale Production Area; and (c) reports to investors or shareholders regarding any of the foregoing from January 1, 2008, to the present. (Italics added.)
Request for Production No. 27 (procurement of transportation capacity in Haynesville and consideration of alternatives):
Produce any and all documents that describe or depict any communication between You and any affiliate of You or between or among Your employees or contractors, regarding: (a) policies, practices or strategies concerning the procurement, reservation, development or purchase of transportation capacity for gas from the tailgate or terminus points of gathering systems in the Haynesville Shale Production Area to delivery or sale points outside the Haynesville Shale Production Area; (b) analysis, discussion or consideration of alternatives for the procurement, reservation, development or purchase of transportation capacity for gas from the tailgate or terminus points of gathering systems in the Haynesville Shale Production Area to delivery or sale points outside the Haynesville Shale Production Area; and (c) reports to investors or shareholders regarding any of the foregoing, from January 1, 2008, to the present. (Italics added.)
Request for Production No. 28 (sale of gas gathering facilities in Haynesville and consideration of alternatives):
Please produce any and all documents that describe or depict any communication between You and any affiliate of You or between or among Your employees or contractors, regarding (a) policies, practices or strategies concerning the divestment or sale of gathering, treatment or compression facilities in the Haynesville Shale Production Area, or of ownership interests in entities owning, operating or management such gathering, treatment or compression facilities; (b) analysis, discussion or consideration of alternatives for sale of gathering, treatment or compression facilities in the Haynesville Shale Production Area, or of ownership interests in entities owning, operating or management such gathering, treatment or compression facilities; and (c) reports to investors or shareholders regarding any of the foregoing, from January 1, ...

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