Oil and Gas Lawyer Blog
The article below appeared in the latest newsletter of the Texas Land and Mineral Owners Association. It reviews the Texas Railroad Commission’s recent amendment of its Rule 15, dealing with dormant oil and gas wells. Thanks to TLMA and the author, Trey Scott, for giving me permission to publish his article. TLMA submitted comments on the proposed rule, arguing that the proposed amendments should not be adopted. Abandoned wells are a huge problem for Texas landowners and the public at large. Landowners should consider addressing the problem in their oil and gas leases, since the RRC has failed to do so.
RAILROAD COMMISSION ADOPTS RULE CHANGES AFFECTING
INACTIVE WELLS
As part of Railroad Commissioner Christi Craddick’s Texas Oilfield Relief Initiative, the Railroad Commission has adopted two proposed rulemakings to ease the administrative burden on oil-and-gas companies. The Commissioners amended Statewide Rule §3.15 (“Rule 15”) to relax the production requirements to return a well in active status, and the changes to Statewide Rule §3.28 will minimize the frequency of deliverability testing requirements for gas wells.
TLMA filed comments on the proposed rule changes to Rule 15. The rulemaking on Rule 15 proposed to cut in half the volume of oil or gas a well must produce each month for 3 consecutive months-5 barrels of oil instead of 10, or 50 Mcf of gas instead of 100—in order for a well to be deemed active and avoid triggering site-clean-up obligations. In addition, the rulemaking added a new provision that would allow a well be returned to active status if it reported any amount of production each month for a year.
TLMA expressed concern that the changes could affect lease terms where the lease refers to Commission rules. In addition, TLMA noted the serious impact to surface owners who do not own the minerals beneath their land and have no say-so in the oil-and-gas operations on their land. Relaxing production requirements means a landowner could find themselves stuck just-barely-active wells that affect the health and use of their land, and that never trigger site-clean-up obligations for the operator.
TLMA also took the opportunity in our filed comments to highlight a related concern for mineral owners—the inability to audit production reporting to ensure accuracy. It is practically impossible for a royalty owner to audit reports to make sure that production from an active well has not been attributed to a marginal well in order to keep that well in the active designation.
The Commissioners unanimously adopted the proposed rules. Despite receiving numerous comments in opposition to the proposal for Rule 15, the only revision was to the addition stating any amount of monthly production for a year could return a well to active status. The Commission’s online production-reporting system only recognizes a minimum volume of 1 barrel of oil or 1 Mcf of gas per month, so the rule adopted reflects those units of measure as the threshold minimum production each month for a year.
THE CRISIS IN ENFORCING RRC RULES AND ABANDONED WELLS
In the world of oil and gas in Texas, the State Legislature proposes, votes and passes laws that it determines are in the best interest of the people of the State. These laws are codified to give the laws effect. The Railroad Commission of Texas (the “RRC”) is the rule-making and enforcement agency for oil and gas matters in the State of Texas.
In 1919, the RRC adopted the first Statewide Rule regulating the oil and gas industry. As time progressed and tens of thousands of wells were drilled, the ability of the RRC to keep up with the inventory of wells became a daunting task; not to mention enforcing the various rules and regulations it was charged with enforcing. The matter of oversight and compliance was compounded with the booms and bust of the industry. Through the years, as exploration activity increased, so did the need for additional rules and regulation. What was once uncomplicated and well-intended became a maze of paperwork entwined in bureaucracy. There never seemed to be enough time or money for the RRC to fulfill its duties. This lead to the RRC adopting policies that, intentional or not, allow the oil operators to circumvent the laws enacted by the legislature. This led to many abandoned “orphaned” wells with no operator held accountable for cleaning up abandoned sites.
In a strongly-contested battle, the 2009 legislative session passed House Bill 2259 (HB-2259) which attempted to address the growing inventory of inactive wells and surface equipment clean-up and removal based on the length of time a well has been reported shut-in. It was subsequently adopted as RRC Statewide “Rule 15.”
Once a well has been shut-in for 10 years, the operator is required to remove all surface equipment associated with the well and infrastructure not associated with other producing wells. To get around this responsibility, the operator simply needs to classify one of the wells as producing and file a W-10 report. A short time later, the operator can reclassify the well, once again, as shut-in. In the sea of dozens or hundreds of wells in a field, it is unlikely the RRC would discover the falsified W-10.
Well intended, good operators were already in the practice of managing their inactive well inventories. The rub comes when the leases are sold further down the road to less responsible operators that are willing to produce the last fraction of oil, sell off the hard assets and never consider the plugging and cleanup obligations that come with the package. In fact, there are operators that have plugging obligations far more than the value of the leases and wells they own.
This is why HB-2259 and Rule 15 are so critical. The first option an operator has available is to reduce its inventory of inactive wells, as required by Rule 15, either by plugging or restoring to production 10% of its inactive well inventory each year. However, there is simply no incentive for operators to take the initiative to comply with Rule 15. The inadequate monitoring and complex enforcement policies combined with lenient remedies and nominal fines strangle the efforts of the RRC staff to hold operators accountable.
It is unfortunate for the people of the great State of Texas that the RRC lenience in enforcing Rule 15 is leading to an unimaginable number of inactive wells that may become orphaned. These orphaned wells will eventually become wards of the state and plugged with tax dollars. Unfortunately, there is not enough money in the State’s plugging fund to plug these wells.
The RRC “Orphaned Well” Program was established to address the issue of wells that have been inactive for 12 consecutive months and the listed operator’s P-5 status has been revoked. State funded plugging is a last resort when, not only is the operator delinquent, but is nowhere to be found for the RRC to try to assign plugging payment responsibility.
The RRC faces a growing inventory of Orphaned Wells that it must high-grade to be plugged by prioritizing wells that present a pollution risk. While the RRC performs initial testing to determine an orphan well’s pollution risk for ranking of its threat level, thereafter the RRC does not perform periodic testing of wells. They do occasionally “re-visit” wells that have been on the Orphan Well list for a long period of time and may re-test some of them to determine if their threat level has changed. Unfortunately, the RRC does not hold itself responsible to the same well-testing standards as they require of the operator.
With sincere enforcement of Rule 15, the RRC can significantly reduce the number of wells that make their way to the Orphaned Well list. The teeth in Rule 15 provide that an operator would be required to be in compliance with Rule 15 in order to have its annual P-5—the operator’s organizational report required to perform operations within the jurisdiction of the RRC—renewed. However, nonrenewal a P-5 permit does not relieve the operator from their plugging liability. In addition, the officers listed on the operator’s P-5 will be prohibited from being listed on any other RRC P-5. If the officers are serving as an officer of any other entity, those operators would also lose their P-5 “active” status. One would think, having their P-5 denied, an operator would not be able to operate, all leases would be severed and seals would be placed on all wells and pipelines, but this is not always the case.
Unfortunately, under the RRC’s current system of enforcement and accountability, it is much more practical and financially feasible for an operator to falsify its reporting of inactive wells knowing it will not be held accountable. Moreover if it is brought to the attention of the RRC that an operator has manipulated its inventory of inactive wells, the operator can be certain that if the RRC pursues enforcement, the repercussions are negligible and the “death penalty” is stayed. If the operator successfully falsifies their inactive well filings and they are not challenged by the RRC and have no other outstanding violations, then their P-5 is renewed administratively.
For over a hundred years, the RRC has been concerned with the abandonment of oil and gas wells. The magnitude of the issue has multiplied exponentially as time progressed. It was unforeseen that the trend would lead us to the situation we find the industry in today where practical-sense solutions incorporated into law give way to the struggles of inadequate enforcement of rules and regulations leaving land and minerals owners underserved.
Trey Scott has worked in oil and gas for a total of 37 years. He is currently involved in all aspects of managing oil and gas royalty portfolios, including the development of databases and software for oil and gas management, with his company Trinity Mineral Management. Mr. Scott is a member of the Texas Land and Mineral Owner Association where he is currently serving as District Representative, the San Antonio Association of Professional Landmen where he served as President and as Education Chairman, and the American Association of Professional Landmen. He also served on Texas Railroad Commissioner David. Porter’s Eagle Ford Task Force.