Articles Posted in Legislation

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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.
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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.

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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.

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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.
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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.

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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:

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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 . Below is a summary of some key facts and recommendations on the RRC.

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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.

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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.

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Exxon Mobil announced that it would acquire XTO Energy in an all-stock deal worth $41 billion. The acquisition is viewed as Exxon’s decision to enter the domestic onshore gas shale play, which to date has been developed almost exclusively by independent producers. But the deal includes an exit clause in the event Congress passes legislation that would make hydraulic fracturing illegal or “commercially impracticable.” Shale gas development would be impossible without hydraulic fracturing technology. Bills are pending in Congress (known as the FRAC Act) to subject fracturing to federal regulation under the Safe Drinking Water Act. The bills would require companies to publicly disclose the chemicals used in frac fluids. And U.S. Rep. Ed Markey, Dem. Massachusetts, said he would hold hearings in the House Energy and Commerce Committee to review the Exxon-XTO deal and to address environmental concerns about hydraulic fracturing.

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