Recently in Legislation Category

July 1, 2013

Inside Story on Failure of Pipeline Bills in Texas Legislature

Colleen Schreiber has written an excellent article in the June 13 edition of Livestock Weekly, "Landowners Hold Off Oil and Gas Lobby on Common Carrier Bills," describing the blow-by-blow negotiations and lobbying in the pipeline industry's efforts to "solve" the problems created by the Texas Supreme Court's decision in Tex. Rice Land Partners, Ltd. v. Denbury Green Pipeline-Tex., LLC, 363 S.W.3d 192, 198 (Tex. 2012).

Lined up on one side:  pipeline lobbyists supporting bills by Rep. Tryon Lewis, R. Odessa, in the House, and Robert Duncan, R. Lubbock, in the Senate, including the powerful Koch brothers, owners of Koch Enterprises.

On the other side:  Texas and Southwestern Cattle Raisers Association, Texas Farm Bureau, Texas Land and Mineral Owners' Association, the Bass family, and plaintiffs' lawyers.

Ultimately, all bills failed. The pipeline industry asked the Governor to add their issue to the special session but, so far at least, pipelines have been overshadowed by abortion bills and financing of higher education projects.

In Denbury, the Supreme Court surprised the pipeline industry by holding that they actually have to prove their proposed line will be a "common carrier" before they can use the power of eminent domain to condemn right-of-way. This left the pipelines, in their view, subject to interminable delays and suits by landowners unhappy with the pipeline routes, the terms of their proposed easements and the compensation being offered.

To "fix" the problem, the pipelines proposed that a pipeline's common-carrier status be determined once for each pipeline, at a hearing held before the Texas Railroad Commission. Landowner lobbyists agreed to negotiate and agreed to consider the concept of a single hearing that would determine common-carrier status for a pipeline; but they wanted the hearing to be before the State Office of Administrative Hearings (SOAH), rather than the RRC; they wanted to be sure all landowners likely to be affected got notice of the hearing; and they wanted strict standards to determine whether a pipeline qualifies as a common carrier. In the end, the biggest sticking point was whether the hearings would be before the RRC or SOAH. Pipelines obviously favored the RRC; the landowners, believing that the RRC would not protect their interests, favored SOAH.  (Most administrative hearings related to state agencies in Texas are held before administrative judges at SOAH. The RRC is one of the few agencies that has kept the right to have hearings before its own administrative judges, called hearings examiners.)

A bill might have been hammered out, but late in the game plaintiffs' lawyers, led by Wayne Reaud, a lawyer who made a fortune suing tobacco companies, weighed in and refused to compromise. Reaud at the time was fighting a condemnation action brought by CrossTex for a pipeline that would cross lands he owns in Jefferson County. Reaud claimed that CrossTex should not have the right to survey on his land until it proved that it is a common carrier. He sought and obtained a temporary injunction to keep CrossTex off his property. CrossTex appealed that injunction to the 9th Court of Appeals in Beaumont, and the appeal was pending when the pipeline bills were being considered. (The Beaumont court has since issued its opinion affirming the trial court's decision to grant the injunction. The opinion can be viewed here.) The end result was that the pipeline bills died in committee and never came up for a vote in either the Senate or the House.

Underlying the debate over the pipeline legislation is the perception by those representing landowners' interests that the RRC is not the place to have hearings on the qualifications of pipelines to exercise eminent domain, and the insistence by the pipeline interests that the RRC be the judge. The RRC has jurisdiction to enforce other laws affecting landowners' interests, and their experience has been that the RRC is not an agency friendly to landowners' complaints.

June 17, 2013

Energy Lobbyists Big Spenders in Texas Legislature

Terrence Henry, a writer for StateImpact Texas, has written a recent article, "Why Oil and Gas Lobbyists Were Big Spenders in Texas." He analyzes two reports on spending on lobbyists and campaigns compiled by Texans for Public Justice. Lobbyists for energy and natural resources companies spent between $31.4 million and $62.5 million on lobbyists during the most recent legislative session, according to the report, 19% of the total of between $155 million and $328 million spent on the session. Incredible numbers. There are no limits on such spending in Texas.

Texas Railroad Commissioners were big beneficiaries of both campaign contributions and lobbying by oil and gas interests. Sunset-recommended reforms of the Commission, opposed by the Commissioners, failed to pass once again. The only RRC-related reform that did pass (but which the Governor has vetoed) was a requirement that a commissioner resign if he/she decides to run for another office.  Andrew Wheat, a researcher at Texans for Public Justice, says that's because the oil and gas industry supported that measure:  "The [oil and gas industry] is interested in paying their bills while they're commissioners. But they don't want to pony up huge amounts of money every time one of these people wants to run for higher office."

One important bill supported by the energy industry did not pass. It would have limited public participation in hearings at the Texas Commission on Environmental Quality in applications for emissions permits. The bill was opposed by communities and environmental groups. And pipeline companies' bills to make it easier for them to exercise the power of eminent domain to condemn pipeline easements also failed to pass.

 

May 6, 2013

Oil Pipeline Bill Dead in Texas Legislature?

The pipeline industry bill intended to "fix" the issues raised by Texas Rice Land Partners v. Denbury Pipeline, appears to be dead in the Texas legislature. The issue: requiring pipelines that assert the power of eminent domain to prove that they qualify as common carriers. The Texas Supreme Court held in Denbury that simply filing a form with the Texas Railroad Commission would not suffice; the pipeline has to show that it will actually use the pipeline to transport oil or gas for hire. This requirement could substantially slow the condemnation process, requiring pipelines to prove their common-carrier status each time they sue to condemn a right-of-way.

The solution proposed by the pipelines: have one hearing, at the Texas Railroad Commission, to establish that a proposed new line will in fact qualify for common-carrier status. That determination will then be binding on all landowners whose property will be crossed by the pipeline. Those landowners would be given the opportunity to participate in the hearings; notice of the hearings would be given by publication in local newspapers. The Texas Farm Bureau, the forestry industry, and other landowner groups opposed the bill. Most major oil and gas asociations favored the bill.

The bill, HB 2748, was defeated Friday on a procedural point of order raised by Democrats that moved it back to committee. Rural Republican representatives were faced with a difficult decision whether to support the bill, in light of opposition by rural landowners. Time is running out before the end of the session and it may be difficult to revive the bill.

Another bill, HB 3547, would establish common carrier status by a hearing before the State Office of Administrative Hearings (SOAH). Industry representatives would prefer such hearings to be before the Railroad Commission, a friendlier venue. HB 3547 has not yet reached the floor. Similar bills in the Senate do not appear to be moving.

April 1, 2013

House Bill 325 to Amend Open Beaches Act

State Representative Harold Dutton, Jr. has introduced a bill in the Texas Legislature to amend Texas' Open Beaches Act. What does this have to do with oil and gas, you may ask? Read on.

Last year, the Texas Supreme Court decided a case interpreting the Open Beaches Act, Severance v. Patterson, 370 S.W.3d 705 (Tex. 2012). The case arose because of Hurricane Rita. Carol Severance owned two beachfront houses on Galveston Island, as rental properties. Because of Hurricane Rita, erosion shifted the beach vegetation line farther landward, causing both homes to be located on the dry beach facing the Gulf of Mexico. As a result, under the Open Beaches Act, the Commissioner of the General Land Office informed Severance that she would have to remove the houses and offered her $40,000 assistance to relocate or demolish them. Severance then sued the Commissioner in US District Court claiming that the Commissioner's action constituted a taking of her property without compensation under the Fifth Amendment of the US Constitution. Her case was dismissed, and she appealed to the 5th Circuit Court of Appeals. That court, after analyzing the case, concluded that Texas law was unclear on the matter, and it submitted "certified questions" to the Texas Supreme Court.

To understand the significance of Severance v. Patterson, it is necessary to go back a ways, to the Texas Supreme Court case of Luttes v. State, 324 S.W.2d 167 (1958). In that case, Mr. Luttes was claiming to own about 3,400 acres of "mud flats" lying on the edge of the Laguna Madre in Cameron County. The State of Texas holds title to all submerged lands along the coast, including lands within the Laguna Madre, the long, shallow lagoon that runs between the mainland and Padre Island along much of the Texas Gulf Coast. Mr. Luttes contended that these mud flats were part of his "dry land", and not "submerged land" belonging to the State.

The original grant within which Mr. Luttes' land lay was, like much of the land along the Texas Gulf Coast, originally granted by the King of Spain when Texas was a Spanish possession. When Texas gained its independence, it recognized the validity of land grants previously made by Spain and Mexico within its territory. Issues regarding title to original grants in Texas are decided based on the law in effect at the time the grants were made - in Mr. Luttes' case, the law of Spain. So, in deciding Mr. Luttes' case, the Court had to determine how the boundary between land and the sea should be determined under Spanish law in effect at the time of the original grant. The case was the first time the Texas Supreme Court had addressed this question.

The Spanish law addressing this question, as recognized by the Court, is known as Las Siete Partidas, or "The Seven Parts," compiled in the 13th century. Spanish law declared the shore of the sea to be public property, available for all to use. A part of that law says: "and all that place is called shore of the sea insomuch as it is covered by the water of the latter, however most it grows in all the year, be it in time of winter or of summer."  Because of its Spanish heritage, Texas has long considered its beaches public property -- unlike many states whose antecedent law is the common law adopted from England, which holds that the dry beach above the ordinary reach of the tide is private land.

The Court in Luttes decided to adopt a "scientific" approach to mark the boundary between the sea and the land, borrowing from a US Supreme Court case decided in 1935 that addressed the question of the location of the shore boundary in California. The Court held that the boundary was "the line of mean higher high tide," determined by the average of the reach of the tide each day during a seven-year tidal cycle.

The Luttes decision caused a huge controversy when it was decided, because it meant that the "dry beach," the area between the "wet beach" and the line of vegetation -- what the public understood to be its public beach -- was in fact private property. If the public wanted to use the beach, it would have to wade in the water. As a result, the Legislature passed the Open Beaches Act. That Act declares that the public has an easement over the dry beach for its public use. And, since it was well known that beaches often erode, leaving homes and other structures originally built behind the line of vegation out on the beach, the Act created a mechanism for requiring removal of those structures. Private owners are never happy when this occurs, and there have been numerous cases involving the application of the act since it was passed, but until last year it was generally believed that the Open Beaches Act had solved the problem created by Luttes, at least as far as the public's use of the beaches was concerned. That is, until Severance v. Patterson.

But what, you ask, does this have to do with oil and gas? Be patient.

So, in Severance v. Patterson, the 5th Circuit Court of Appeals asked the Texas Supreme Court three questions. The first question was

"Does Texas recognize a "rolling" public beachfront access easement, i.e., an easement in favor of the public that allows access to and use of the beaches on the Gulf of Mexico, the boundary of which easement migrates solely according to naturally caused changes in the vegetation line, without proof of prescription, dedication or customary rights in the property so occupied?"

In other words, does the public's easement along the beach move whenever the vegetation line changes, whether by gradual erosion or sudden changes caused by storm events? The Court's answer: No. In the Court's majority opinion the court, clothing its opinion in the language of "private property rights," held that "[a]lthough existing public easements in the dry beach of Galveston's West Beach are dynamic, as natural forces cause the vegetation and the mean high tide lines to move gradually and imperceptibly, these easements do not spring or roll landward to encumber other parts of the parcel or new parcels as a result of avulsive events." In other words, if an owner's house becomes stranded on the beach because of an "avulsive" event -- a storm -- the public has no easement over the newly created beach and cannot force the owner to remove the house.  Three justices dissented from the majority opinion, arguing that:

Texas beaches have always been open to the public. The public has used Texas beaches for transportation, commerce, and recreation continuously for nearly 200 years. The Texas shoreline is an expansive yet diminishing public resource, and we have the most comprehensive public beach access laws in the nation. Since its enactment in 1959, the Texas Open Beaches Act ("OBA") has provided an enforcement mechanism for the public's common law right to access and to use Texas beaches. The OBA enforces a reasoned balance between private property rights and the public's right to free and unrestricted use of the beach. Today, the Court's holding disturbs this balance and jeopardizes the public's right to free and open beaches.

Because of continued erosion along the Texas shore and gradually rising water levels, it is feared that the public's right to use Texas beaches will continue to be eroded -- a direct result of the Texas Supreme Court's rulings in Luttes and Severance.

Representative Dutton's House Bill 325 is an attempt to overturn Severance by declaring that the "public beach" is "any beach area, whether publicly or privately owned, extending inland from the line of mean low tide to the line of vegetation bordering on the Gulf of Mexico, as the line of vegetation may shift over time as a result of avulsive events or other forces of nature." It is not clear whether his bill has any chance of passage, or whether, if passed, the Court would be willing to recognize the public beach as the bill re-defines it.

So, what does all of this have to do with oil and gas?

The boundary between the sea and the land marks not only the line between the State's ownership of the seabed and private upland, but also the line of the State's ownership of minerals under submerged land. Texas owns title to minerals under the Gulf of Mexico extending three marine leagues from the shore. But a large portion of Texas' submerged lands lie within the Laguna Madre, which stretches from Brownsville to Matagorda Bay.

laguna madre.jpg

 

Laguna Madre is in most places very shallow, two feet or less in depth. Wind-driven tides cause huge areas of the laguna to be sometimes dry, sometimes inundated. The Intracoastal Waterway, constructed by the US Army Corps of Engineers in the 1930's, runs the length of the laguna and allows for navigation.

There is one area of the laguna, called the "land cut," located in Kenedy County, which is often totally exposed, from the mainland to Padre Island. It serves to separate the northern and southern segments of the Laguna Madre. In some seasons of the year it is covered with water - in other seasons it is dry mud flats. Below is an image from Google Earth of the land cut. The entire area encompasses about 35,000 acres of land.

land cut.JPG

 

 Beginning in about 1996, our firm represented the Texas General Land Office in a dispute with the John G. and Marie Stella Kenedy Memorial Foundation over title to the land cut. The Kenedy Foundation owns the lands to the west of the land cut, given to the Foundation by Sarita Kenedy East. The Ranch encompasses some 235,000 acres, one of the largest ranches in Texas. The Foundation argued that the land cut, under the rules for location of the shore boundary established by the Texas Supreme Court in Luttes, was dry land and part of the original Spanish and Mexican grants making up the Kenedy Ranch. The State argued that the land cut - sometimes dry, sometimes inundated - was part of the bed of the Laguna Madre, owned by the State. The fight, of course, was not over the land, a vast mud flat wasteland, but over the mineral rights to 35,000 acres along the Texas Gulf Coast.

After a jury trial, the trial court entered judgment holding that the State owned the disputed land. That judgment was upheld by the Austin Court of Appeals.  In December 2000, the Texas Supreme Court affirmed. But the Kenedy Foundation asked the Court to reconsider, and in 2001 the Court agreed to rehear the case. During the interim, several supreme court seats on the court changed hands. Finally, on August 29, 2002, the Court withdrew its prior opinion and issued an opinion reversing the courts below and holding that the entire disputed area belongs to the Foundation. Three justices dissented.

As a result of the Kenedy case the map of the Kenedy Ranch as now shown on its website now looks like this:

Kenedy Ranch.gif

In effect, the Court ruled that the "shore" of the Laguna Madre adjacent to the Kenedy Ranch lies along the edge of the Intracoastal Waterway, a man-made channel.

I'm sure that the Court in 1958, when it decided Luttes, had no idea that it was giving away thousands of acres of submerged land in the Laguna Madre, or allowing the public's access to beaches to disappear. Nevertheless, this has been the result. With the introduction of House Bill 325, the fight over the coastal lands and beaches along the Texas shore continues.

A footnote: The author of the Luttes opinion was Justice St. John Garwood. He was the father of Will Garwood, at one time a member of our firm and later a judge on the 5th Circuit Court of Appeals. St. John Garwood was of counsel to our firm after he left the court, and he was still coming to the office when I joined our firm in 1978. Justice Garwood's most notable opinion during his time on the court was Luttes. His wife, Ellen Clayton Garwood, was a member of the prominent Clayton family of Houston and was known for having donated $2.5 million to conservative groups backing the Nicaraguan contras during Ronald Reagan's presidency.  She testified in support of Lt. Col. Oliver North in the contra hearings before Congress. Her father was William L. Clayton, who served as Under Secretary of State in the Truman administration.

January 10, 2013

Taylor and Ellis Introduce Forced Pooling Bill in Texas Legislature

State Representative Van Taylor, R-Plano, and Senator Rodney Ellis, D-Houston, have introduced a bill to allow for forced pooling in Texas. The House bill, HB 100, may be viewed here.

The bill would allow an operator to force-pool mineral, royalty and leasehold interests into a unit if the operator obtains agreement from 70% of the leasehold owners and 70% of the royalty owners in the area to be unitized. Unleased mineral owners could be pooled, and would be treated as owning a 1/6 royalty interest and a 5/6 working interest. The unit operating agreement can provide for a "sit-out" penalty of no more than 300% for a working interest owner who elects not to pay its share of the well costs. The bill does not allow force-pooling of mineral or royalty interests owned by the State.

Here is just one interesting provision in the bill:

Lease or surface use provisions that conflict with the use of the surface for unit operations in such a manner as to prevent or render uneconomical the implementation of the plan of unitization as approved by the commission must be amended by the unit order to the extent, and only to the extent, necessary to implement the plan in an economical and efficient manner.

If I read this correctly, the bill would allow the Railroad Commission to amend any oil and gas lease surface use provisions if those provisions "conflict with the use of the surface for unit operations in such a manner as to prevent or render unecomonical" the plan of unitization.

Another interesting provision: The operator can apply for and obtain an order forming the unit before getting approval of 70% of the royalty owners. The operator then has six months to get 70% sign-up.

The participation of unit tracts in unit production is not necessarily on a per-acre basis. The bill provides that

A tract's fair share of the unit production must be measured by the value of each tract and its contributing value to the unit in relation to like values of other tracts in the unit, taking into account acreage, the quantity of oil, gas, or oil and gas recoverable from the tract, the tract's location on the geological structure, the tract's probable productivity of oil, gas, or oil and gas in the absence of unit operations, or as many other factors, including other pertinent engineering, geological, or operating factors, as are reasonably susceptible of determination.

Passage of this bill would materially change the nature of the relationship between mineral owners and operators in Texas.

September 18, 2012

Congressmen Weigh In on Proposed BLM Rules on Hydraulic Fracturing

This summer, the Department of Interior's Bureau of Land Management issued proposed rules relating to disclosure of the content of frac fluids and handling of frac fluids used in wells drilled on puclic lands managed by the BLM. Last week a group of Congressmen led by Congressman Edward J. Markey, D. Mass., head of the House Natural Resources Committtee, have submitted an extensive letter commenting on the proposed rules.

The letter criticizes BLM's rules for (1) not requiring disclosure of chemicals in frac fluids prior to drilling of a well rather than after the fact, (2) proposing to use FracFocus as the method for disclosure of frac fluids, (3) allowing flowback fluids to be stored in earthen pits, (4) not imposing requirements for proper well construction, cement and casing design and installation, and (5) not establishing minimum setbacks between wells and public buildings to minimize harm from air emissions during well completions.

As I have reported earlier, the Texas Railroad Commission recently published proposed rules tightening regulations on well construction and cementing, as well as more stringent regulation of disposal wells, to better protect against contamination of groundwater.

The Congressmen's comments reveal an interesting problem with use of FracFocus for disclosure of chemicals in frac fluids. FracFocus is a project of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. Several states, including Texas, have required companies to post the contents of their frac fluids on this website. The Congressmen's letter cites a brief done by the Natural Resources Defense Council comparing the disclosure rules of different states and the capability of the FracFocus website to contain all the information required by the state's rules. "[B]ecause the standardized disclosure form of FracFocus contains fields for only a very limited set of information, there is not a single state in which disclosures on the site contain all the information required by the state rule. For example, Texas requires in its state rules that companies report on FracFocus the amount and type of the base fluid used (i.e. fresh water, recycled water, other fluid, etc). However, the form on FracFocus provides no field entry for the base fluid type at all and instead allows only for reporting of the 'Total Vlume of Water'." BLM's proposed rules require disclosure of the type of base fluid and where the fluid was obtained, pump pressures of the fluid and information on the chemical additives, none of which FracFocus can accommodate in its present configuration. In addition, the Congressmen's letter says that the information is posted on FracFocus in pdf format rather than a spreadsheet or database format, so it is practically impossible for a researcher to use the data as an analytical tool to aggregate and analyze the data. "In fact, the terms of use for FracFocus forbid exactly this sort of broad use of the chemical information it contains for analysis, significantly limiting its scientific usefulness and ability to inform future policy decisions." A Department of Energy report on the impact and safety of hydraulic fracturing specifically recommended that FracFocus should be updated so that "information can be searched, sorted and aggregated by chemical, by well, by company and by geography."

 

August 29, 2012

New Railroad Commission Rules

The Texas Railroad Commission has been issuing new rules and proposed rules affecting oil and gas exploration activities that landowners should know about.

New Penalty Guidelines

The RRC proposed new rules earlier this year establishing guidelines for penalties for violations of RRC rules. This month, the RRC adopted those proposed rules. In the last Texas legislative session, the RRC was criticized by the Sunset Advisory Commission for not enforcing its rules more vigorously. The Sunset Commission said that the RRC's current "voluntary compliance" policy contributes to "a public perception that the Commission is not willing to take strong enforcement action." It said that operators must have a reasonable incentive, a realistic threat of penalties that are greater than the savings achieved by violating the rules. The Legislature did not act on the Sunset Commission's recommendations, but postponed consideration of the RRC's report until the next legislative session.

The new rules continue the RRC's policy of "voluntary compliance." The RRC's policy is stated in the rule:  "Encouraging operators to take appropriate voluntary corrective and future protective actions once a violation has occurred is an effective component of the enforcement process." In response to comments made by Texas Land & Mineral Owners' Association and other landowners that the guidelines do not follow the Sunset Commission's recommendations, the RRC said that "this rule is not intended to address all of the recommendations made by the Sunset Advisory Commission." The RRC said that it "is a compliance-driven agency. Operators are notified of violations through a Notice of Violation (NOV) letter, and are allowed to correct them in a timely manner. If the violations are not corrected, the lease becomes subject to severance and, ultimately, legal enforcement." So the RRC's voluntary compliance policy, allowing operators a free pass as long as they correct a violation once discovered, continues unchanged.

Proposed Rules Addressing Casing, Cementing and Fracture Stimulation

The RRC has published proposed rules that "clarify" requirements for drilling, casing, cementing, and fracture stimulation of wells -- rules intended to assure that groundwater is protected. See the proposed rules here. In part, these rules are a response to the Legislature's transfer to the RRC from the Texas Water Board of responsibility for determining the minimum depth of surface casing required to protect potable aquifers. The proposed rules also allow the RRC to more closely scrutinize hydraulic fracturing procedures where the formation to be frac'd is less than 1,000 feet below any usable quality groundwater. The proposed rules have more detailed specifications for how surface casing must be cemented in place and the quality requirements for cement used; strengthen the requirements for pressure testing of casing after cementing it in place; and update rules regarding blowout prevention systems and pressure testing of wells before performing hydraulic fracture stimulation.

The RRC has also initiated a rulemaking to address the surface casing in disposal wells, to assure that it is adequately installed and cemented through the base of usable quality groundwater. And the RRC has issued a new rule requiring companies that perform casing cementing operations and well stimulation operations to file and maintain with the RRC an organization report. Requiring the filing of such a report makes those companies subject to the jurisdiction of the RRC. If the companies fail to comply with the RRC's rules, it can suspend or terminate their authority to conduct such operations. 
April 10, 2012

Report Card on HB 2259 - Inactive Wells

In its 2009 Legislative Session, the Texas Legislature passed House Bill 2259, whose stated purpose is to ensure that inactive oil and gas wells get plugged and that surface equipment associated with those wells gets removed. I provided a summary of the bill's terms in a post on this site. A summary of the bill's requirements from the Texas Railroad Commission may be found here. The Texas Land and Mineral Owners Association, which lobbied for the bill, has now issued its report card: the Railroad Commission is not doing its job.

HB 2259 does not actually require that inactive wells be plugged. It imposes requirements on operators of inactive wells, depending on how long the wells have been inactive, to: disconnect the wells from electricity; post additional bonds to assure that the wells will eventually be plugged; and remove surface equipment from the wells. These provisions are phased in over a 10-year period. HB 2259 provides that an operator who does not comply with the new requirements will lose its operating permit (known as a P-5) -- meaning that it will not have the right to continue to operate any wells in the State.

Recently, TLMA asked the RRC how many P-5 permits have been denied because of failure to comply with HB 2259. The answer: none. Even though, according to TLMA, almost 1,500 operators failed to comply with the statute.

After HB 2259 was passed, operators complained to the Lege that they could lose their P-5 for simple paperwork violations that were not substantive. So the Lege in 2011 amended the statute to provide to the operator an opportunity to appeal the RRC's denial of an operating permit.

TLMA asked the RRC how many violations of the statute resulted from paperwork problems and how many were substantive violations. The RRC was unable to provide that information.

According to the RRC's website, there are 38,854 inactive wells in Texas that have been inactive for 10 years or more. Inactive wells pose a hazard to the environment, including groundwater resources, and are an eyesore on Texas land.

Under a typical oil and gas lease, the operator has no obligation to plug a well as long as the lease remains in effect. When leases reach their later stages of production they are often transferred to smaller operators who continue to operate the active wells on the lease as "stripper" wells. When a lease is transferred, the RRC requires that the permit to operate wells on the lease be transferred to the new operator. As long as the wells are in compliance with RRC rules and the new operator has a valid operating permit, the transfer will be approved. Once transfer of the permits for the wells is approved, the prior operator has no further obligation with respect to the wells transferred. So the prior operator in effect has transferred the obligation to plug any inactive wells on the lease to the new operator. Stripper well operators may have limited financial resources and will continue to defer plugging of active wells as long as they can. In many instances, the stripper operator eventually goes broke, and the obligation to plug the wells falls on the State. The wells become "orphan" wells.

I have struggled to find an appropriate way to address inactive wells in my oil and gas leases. Operators naturally want to delay spending the money to plug inactive wells. One solution I have used in oil and gas leases is to impose a "rental" on inactive wells. The lease provides that the lessee must pay the landowner for the right to keep a well unplugged and inactive. The annual rentals increase over time, thus increasing the operator's incentive to either plug the well or put it back into production. Failure to pay the rental may result in termination of the lease.

With the new drilling boom in Texas, the problem of inactive wells will only continue to increase. It remains to be seen whether HB 2259 will improve the situation.

September 5, 2011

Texas Railroad Commission Staff Proposes Draft Rule for Disclosure of Frac Chemicals

The staff of the Texas Railroad Commission has proposed to the Commision rules to implement House Bill 3328, passed by the last Legislature, requiring the disclosure of chemicals used in frac fluids. The rules will be subject to a period for public comment, and a hearing will be held on the rules, now proposed for Wednesday, October 5.

Earlier this year, the 82nd Texas Legislature passed HB 3328, requiring the RRC to adopt rules requiring disclosure of chemicals in frac fluids. The draft rule would require operators to disclose chemical content of frac fluids on FracFocus, a website developed by the Ground Water Protection Council and the Interestate Oil and Gas Compact Commission. (The website contains a lot of good information about hydraulic fracturing and its benefits and risks.)  FracFocus was launched on April 1, 2011. As of August 16, 2011, according to RRC staff, operators had registered 950 Texas wells on the website, including wells drilled by Anadarko, Chesapeake, Chevron, Conoco-Phillips, Devon, El Paso, Energen, EOG, Forest, Newfield, Occidental, Penn Virginia, Petrohawk, Pioneer, Plains, Range, Rosetta, Shell, Williams, and XTO. You can search for a well near you by using FracFocus's search feature. An example of the information disclosed can be found here:  4243935364-3212011-10792272-CHESAPEAKE[1].pdf The disclosure includes the percentage by mass of each chemical used in the frac fluid.

Under the proposed rule, an operator must also provide the same information with its completion report for the well, as part of the completion report. The completion report for all Texas wells can also be found on the RRC's website.

RRC's staff's discussion of the proposed rule estimates that 13,000 wells undergo frac treatment in Texas each year -- 85% of all wells drilled in Texas.

A supplier, service company or operator is entitled under the draft rule to claim trade-secret protection for a chemical additive. If such protection is claimed, the particular chemical and its concentration need not be provided, but the operator must disclose the chemical family of the ingrediant and the properties and effects of the chemical. The claim of trade-secret protection may be challenged by the landowner on whose property the well is drilled or any adjacent landowner, or by any state department or agency with jurisdiction over issues related to health and safety. Any such challenge must be filed within 2 years after the claim of trade-secret protection was filed. If a challenge is filed (with the RRC), the RRC refers the matter to the Texas Attorney General who makes a determination, based on evidence submitted by the person claiming trade-secret protection, of whether the identity of the chemical is in fact a trade secret under Texas law. The AG's determination may be appealed to a state district court. If a trade-secret exemption is claimed, a health professional or emergency responder may still obtain the information but must keep it confidential except to the extent it must be disclosed to protect health and safety.

An operator who fails to disclose as required by the rule may have its operating permit revoked.


Continue reading "Texas Railroad Commission Staff Proposes Draft Rule for Disclosure of Frac Chemicals" »

June 23, 2011

Oil and Gas-Related Legislation from the 82nd Texas Legislative Session

Bills of Interest from the Texas Legislature's now-completed session:

  • SB 652 - re-authorized the Texas Railroad Commission for two more years. The Lege was unable to agree on changes recommended by the Sunset Commission to reform the RRC. See my discussion of Sunset recommendations here and here. Legislators could not agree on a provision changing the terms of the three commissioners from 6 to 4 years, and could not agree on a provision transferring hearings involving enforcement and gas utility rates to the State Office of Administrative Hearings.  See story here.
  • HB 3134 - Revises earlier legislation (HB 2259, passed in the previous session) that made it more difficult for an operator to renew its operating license if it had unplugged wells not in compliance with rules. The revision gives the operators more time to achieve compliance, and will make it more difficult to require operators to plug inactive wells. See my description of HB 2259 here.
  • HB 3328 - mandates public disclosure of chemicals used in hydraulic fracturing treatments in Texas. The oil and gas industry supported the measure. Environmental groups called the legislation a mixed bag.  EDF advisor Scott Anderson said that the bill doesn't allow for a "simple, statewide list of what chemicals are used by whom and in what quantities." Also, the bill may not be fully implemented until 2013.  Railroad Commissioner David Porter said he would push the RRC to complete its rulemaking on the bill by July 1, 2012, a full year before the deadline set out in the bill.
  • SB 875 - prohibits nuisance suits against gas companies as long as they have a valid permit and are in compliance. The bill was pushed by the industry to prevent nuisance lawsuits related to emissions and noise from gas compressor facilities and other installations near populated areas.
  • SB 332 - provides that a landowner "owns the groundwater beneath the surface of the landowner's land as real property," and entitles the landowner to drill for and produce the groundwater, subject to reasonable regulation. This bill as originally filed provided that a landowner "has a vested ownership interest in and right to produce groundwater below the surface of the landowner's property." The bill is likely to give rise to litigation about the ability of groundwater districts to regulate water wells.

Other legislation of interest that did not pass:

  • HB 2087 - would have allowed operators to force-pool non-participating royalty interests. The bill was opposed by landowners, including the Texas Land and Mineral Owners' Association.
  • HB 2939- would have required operators to submit an annual report of groundwater used to the RRC, the TCEQ and the TWDB.
  • HB 3586 - would have allowed for compulsory unitization for purposes of enhanced oil recovery and CO2 storage.
February 22, 2011

Class Action to Force Companies to Reimburse Royalty Owners for Severance Tax Refunds - Coll v. Abaco

Recently some of my clients have received notices of class action settlements in Coll v. Abaco Operating, LLC, et al., in the U.S. District Court for the Eastern District of Texas, Marshall Division, C.A. No. 2:08-CV-345 TJW. The case reveals a little-known aspect of royalty payments: many companies never reimburse their royalty owners for refunds of severance taxes.

Most royalty owners know little about severance taxes except that they are a deduction that regularly appears on their royalty check stubs. Texas imposes a tax on the value of all oil and gas produced in the state: 7.5% for gas and 4.6% for oil. Most producing states impose similar severance taxes. Pennsylvania has been debating whether to pass a severance tax in light of its budget problems and recent development of the Marcellus Shale in that state. Texas' severance taxes are paid into its "rainy day fund" that has been much in the news of late.

Continue reading "Class Action to Force Companies to Reimburse Royalty Owners for Severance Tax Refunds - Coll v. Abaco" »

January 7, 2011

Railroad Commissioners Defend Themselves Before Texas Sunset Advisory Commission

The three current Texas Railroad Commissioners and the new incoming Commissioner David Porter all testified before the Texas Sunset Advisory Commission earlier this month, defending the RRC against criticism in the Sunset Commission staff report. The three commissioners are elected by Texas voters, and a position on the commission is often viewed as a steping-stone to higher office.  Two current commission members, Michael Williams and Elizabeth Ames Jones, both considered running for U.S. Senate when Kay Bailey Hutchinson indicated she would step down to run for Texas Governor. State Senator John Whitmire, a member of the Sunset Commission, said that their running for U.S. Senate conflicted with their duties to the Railroad Commission. "You're running for office, but while you're doing that and regulating and making decisions, you're running and actually raising money from the folks that you are regulating." The criticism mirrors the Sunset staff report, which recommends changing the law to have the RRC run by a five-member appointed board. (For my summary of the Sunset staff report recommendations, go here.) Commissioners Victor Carrillo and Michael Williams said they would support a single elected RRC to replace the three-member commission but would oppose a five-member appointed board. Commissioner Jones said she supported the current three-commissioner governance structure.

The Sunset Advisory Commission is composed of ten members: four members of the Texas House of Representatives, four Texas senators, and two private citizens:

Senate Members:

  • Glenn Hegar, Jr., Chair
  • Juan "Chuy" Hinojosa
  • Joan Huffman
  • Robert Nichols
  • John Whitmire
  • Charles McMahen, Public Member

House Members:

  • Dennis Bonnen, Vice Chair
  • Rafael Anchia
  • Byron Cook
  • Linda Harper-Brown
  • Larry Taylor
  • Lamont Jefferson, Public Member

The Sunset Commission will vote on recommendations for legislation to continue and reform the Railroad Commission at its next meeting on Wednesday, January 12.

November 27, 2010

Texas Sunset Commission Makes Recommendations on Review of Railroad Commission

Texas' Sunset Advisory Commission has issued its Staff Reports on review of three of the state's most important regulatory agencies: the Texas Railroad Commission (RRC), the Texas Commission on Environmental Quality (TCEQ), and the Public Utility Commission (PUC). These reports will frame the debate on legislation to renew the mandates of these regulatory bodies in the coming legislative session. Landowners should be aware of the Sunset Commission's recommendations and be prepared to weigh in on those issues that affect landowners' interests. Links to the full staff reports of the Sunset Commission can be found on the Commission's website at http://www.sunset.state.tx.us/ . Below is a summary of some key facts and recommendations on the RRC.

Continue reading "Texas Sunset Commission Makes Recommendations on Review of Railroad Commission" »

September 18, 2010

Water Fight in the Texas Panhandle

T. Boone Pickens has filed a lawsuit to protect his water rights in Hemphill County, a suit that highlights the problems with Texas' attempt to regulate pumping from aquifers in the State. The suit, Mesa Water, L.P. and G&J Ranch, Inc. v. Texas Water Development Board, was filed in Travis County in April.  Water is a little outside the scope of my blog, but this fight concerns the Ogallala Aquifer in the Texas Panhandle, where I was born and grew up, and so is of special interest to me.

To understand the litigation, it is necessary to know something about the Ogallala and about Texas' efforts to regulate underground water resources.

Continue reading "Water Fight in the Texas Panhandle" »

March 31, 2010

Strauss Charges Texas Legislature to Look at Local Ordinances Governing Surface Use in Barnett Shale

Speaker of the House Joe Strauss has charged the House Committee on Energy Resources as follows for the next legislative session:

"Survey current local ordinances governing surface use of property in oil and gas development. Recommend changes, if any, to the authority of the Railroad Commission to regulate the operation of oil and gas industries in urban areas of the state, particularly the Barnett Shale."

It seems evident from this charge that operators in the Barnett Shale will be asking the Texas Legislature to curtail the authority of municipalities to issue drilling permits for areas within their jurisdiction, or at least to limit what conditions they can place in those permits. Drilling ordinances such as those in Fort Worth and surrounding cities are becoming quite sophisticated, and place significant conditions on the granting of permits, including distances from houses and other structures, sound limits, handling of frac water, produced water and other wastes, safety requirements, traffic, and damage to surrounding streets. The City of Grapevine has revised its drilling ordinance to require an 8-foot masonry wall around the wellsite and shrubbery between 3 and 5 feet high along the wall. The City of Flower Mound is considering revision of its drilling ordinance to require companies to report their airbrorne emissions and use vapor recovery technology. In some cases, municipal ordinances are so stringent that as a practical matter they prevent drilling within city limits. I expect that eventually constitutional takings claims will be made against cities whose restrictions prevent any mineral development within their limits.

If the Legislature restricts municipal permitting authority, it could enlarge the requirements that the Railroad Commission must impose, or at least consider, when granting permits in urban areas, to include environmental considerations. The Austin Court of Appeals recently held that the Commission must consider the impact of traffic when ruling on an application for a disposal well permit. The Commission has appealed that decision, and the Texas Supreme Court has agreed to consider the case. Texas Citizens for a Safe Future and Clean Water v. Railroad Commission of Texas, 254 S.W.3d 492 (Tex.App.-Austin 2007, review granted March 12, 2010). It appears that the Commission would not relish the idea of regulating issues of traffic, noise, safety and pollution issues in urban settings, in connection with applications for well permits.