Oil & Gas: State Regulation

Front 1

TX regulates O&G production through RR Commission

Back 1

1) Prevent waste and maximize o&g recovery
2) Protect correlative rights by giving all owners of interests in a common reservoir the chance to recover fair share of oil and gas
3) Protect environment from o&g activities

Front 2

RRC has 3 major ways to prevent waste and protect correlative rights

Back 2

1) Drilling permits and spacing rules
2) Prorationing rules
3) MIPA and compulsory pooling

Front 3

Drilling Permit & Spacing Rule (37)

Drilling permit required before any well can be drilled. Statewide spacing rule requires that permitapplicant have a minimum of 40 acres to drill

Back 3

Exceptions granted to tracts < 40 acres if applicant can prove:

1) Confiscation (drainage) and
2) Small tract was subdivided by deed before o&g discovered in area or before land was leased

Front 4

Subdivisions into small tracts occur after o&g discovery in area or by o&g lease are voluntary subdivisions. NOT entitled to a confiscation exception.

Back 4

Note: Small tract can get exception to spacing rule, even if voluntary subdivision, if small tract owner or Lessee can prove waste would occur w/o exception well. Waste exceptions are rare; require proof that proposed well would produce o&g otherwise unrecoverable from any other well in the field.

Front 5

Prorationing

RRC regulates max amt of o&g that wells can produce (prevent physical waste from premature dissipation of natural reservoir pressure in field and to protect correlative rights).

Back 5

Before 3/8/61, small tracts allowed to produce more than their fair share under prorationing rules.

TX Sc Ct declared rules unreasonable; since then, almost all fields are prorated on basis of how much productive surface acreage is allocated to each well-like pooling examples in outline.

Front 6

MIPA: Mineral Interest Pooling Act

RRC, under certain circumstances, in fields discovered after 3/8/61, can force owners to pool (share well production). Preempts Rule of Capture.

Back 6

2 basic rules to trigger MIPA:
1) MIPA applies only to fields discovered after 3/8/61
2) Owners seeking pooling must first make a fair/reasonable offer to pool voluntarily.

Fairness is judged from standpoint of party being forced to pool at time of offer.

Front 7

Relinquishment Act*

Applies to state-owned land sold to private parties between 1895 and 1931. Grantees (largely W.TX ranchers who bought land) do not own the o&g underneath the surface; TX owns minerals.

Surface owners only have right to lease o&g as agents of the State and to share in lease benefits (royalty, bonus, etc.) equally w/ state.

Back 7

In other words, private surface owners on Relinquishment Act land have the executive right over minerals and lease them on behalf of TX. They owe a fiduciary duty to State when they exercise this executive right and must share all benefits equally with TX. Surface owners can't convey mineral interests bc they don't own minerals. Nor can they convey perpetual royalty interests (NPRI interests). Surface owners can assign their right to royalties from an existing lease for the duration of that existing lease.

Front 8

Abandoned and improperly plugged wells pose hazards to public and environment. Statute require plugging; enforced by RRC.

Duty to plug:

1) First, "operator" (person responsible for physical control of well at time well is about to be abandoned or ceases production)
2) "Non-operator" who owns working interest in well at that time. May be responsible though they never had physical control of well. Had an opportunity to profit from drilling, secondarily responsible for plugging costs.

Back 8

Landowners and royalty interest owners are not responsible for well plugging.

Old wells- TX oil field clean-up fund. RRC has authority to order well plugging or other corrective action by an operator upon a finding of "potential pollution" rather than waiting for pollution to occur.