The Texas legislative session has now ended. I followed 44 bills identified as potentially affecting the interests of mineral owners. Only two of those bills passed.
The bill that produced the most controversy was HB 40, introduced by Rep. Darby, chair of the House Energy Resources Committee. It restricts the ability of municipalities to regulate oil and gas operations within their jurisdictions. This bill and several other bills were introduced in response to the referendum passed by the City of Denton barring hydraulic fracturing. The bill allows cities to adopt ordinances related to oil and gas activity only if the ordinance regulates “aboveground activity … at or above the surface of the ground, including … fire and emergency response, traffic, lights, or noise, or imposing notice or reasonable setback requirements,” is “commercially reasonable,” and “does not effectively prohibit an oil and gas operation conducted by a reasonably prudent operator.” The bill defines “commercially reasonable” as:
a condition that would allow a reasonably prudent operator to fully, effectively, and economically exploit, develop, produce, process, and transport oil and gas, as determined based on the objective standard of a reasonably prudent operator and not on an individualized assessment of an actual operator’s capacity to act.
Prior to passage, the following language was added to the bill:
An ordinance or other measure is considered prima facie to be commercially reasonable if the ordinance or other measure has been in effect for at least five years and has allowed the oil and gas operations at issue to continue during that period.
Although the Texas Municipal League did not object to the bill after inclusion of the additional language, many cities, along with the Environmental Defense Fund, testified against the bill as an unnecessary intrusion on local control. I think the bill leaves a lot of room for operators to challenge ordinances they consider objectionable. Determining what is “commercially reasonable” is an invitation to litigation. A bill introduced by Senator Burton, SB 770, which simply prohibited cities from banning hydraulic fracturing, seemed to me to be a more logical response to Denton’s ban, but it never got a hearing.
Two other bills of most interest to Texas mineral owners were HB 1552 by Craddick and its companion, SB 919, by Fraser, neither of which passed. Those bills would have legalized allocation wells — horizontal wells drilled across two or more leases without pooling the tracts crossed by the well. The Texas Railroad Commission has decided that it can issue permits for allocation wells over the objection of royalty owners, despite significant legal issues as to whether such wells are authorized by the applicable oil and gas leases, and despite the RRC’s failure to adopt any rules related to allocation wells. The bills were opposed by the National Association of Royalty Owners – Texas, Texas Land and Mineral Owners Association, the Texas Cattle Raisers Association, and the Texas Forestry Association. The Texas General Land Office estimated that the bill would cost the Permanent School Fund $100 million per year in lost royalties, and the University of Texas System estimated that the bill would result in a loss of $290 million per year in royalties from UT lands.
RRC Sunset Review
One other controversy arose at the end of the session, regarding when the RRC would next come up for review by the Texas Sunset Commission. On May 30, near the end of this session, a conference committee recommended delaying sunset review of the RRC until 2023, apparently at the request of Railroad Commissioners. But objection was raised, and the recommendation was defeated.
Under Texas law, every regulatory agency in Texas must be reviewed periodically by the Sunset Commission. The legislature must then pass legislation continuing the existence of the agency until it next sunset review. Sunset Commission recommendations for changes in the agency are often incorporated into the renewal legislation. The RRC was subject to sunset review in 2011, but the legislature failed to pass reform legislation recommended by the Sunset Commission, instead requiring that the Commission look again at the RRC and make recommendations for the 2013 legislative session. In 2013, the legislature again failed to pass recommended Sunset Commission reform legislation, and instead called for RRC sunset review in 2017.
The Sunset Commission’s 2013 recommendations were controversial because they called for limiting when Commissioners could solicit and receive campaign contributions, and requiring the automatic resignation of a Commissioner running for another elected office. Office holders often consider the RRC as a political stepping-stone to higher office, and the ability to raise campaign funds from the oil and gas industry while sitting as a Commissioner is a powerful campaign advantage. The 2013 legislature did adopt one recommendation — requiring the automatic resignation of a Commissioner running for another elected office — but that provision was later vetoed by Governor Perry. The 2013 bill continuing the RRC’s existence requires the sunset review to include an assessment of whether other state agencies are better able to perform the Railroad Commission’s functions and requires the Railroad Commission to pay all costs of the review
As in 2013, a bill to allow forced unitization of fields for tertiary recovery was introduced but not passed. HB 3313 and its companion SB 118 were both left pending in committee.
HB 2901 and HB 3068
Two bills proposed by royalty owners also did not make the cut. HB 2901 would have required the RRC to adopt rules and a system for landowners to file and track complaints against operators online. HB 3068 would have required operators, upon request, to provide royalty owners the calculations used to determine the royalty owner’s decimal interest on a division order.
This bill, which passed, deals with the priority of a mortgage over a subsequently filed oil and gas lease. The bill provides that, if a mortgage is foreclosed, and if an oil and gas lease covering the property was entered into after the mortgage, the oil and gas lease remains in effect and is not cut off by the foreclosure; but the oil and gas lessee thereafter has no right to use the surface of the foreclosed property for oil and gas operations. I expect that this bill arose from problems in the urban areas of the Barnett Shale in and around Fort Worth, where most homeowners own the minerals under their lot. Operators who obtain oil and leases from those homeowners don’t try to obtain subordinations from the homeowners’ mortgage company. Absent this law, if the mortgage is foreclosed, the lease terminates. The law will allow the lease to continue, and the mortgage company will acquire the royalty interest in the foreclosure.