HBA-NMO H.B. 1624 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 1624 By: Chisum Energy Resources 3/26/1999 Introduced BACKGROUND AND PURPOSE Texas is the only oil producing state which has no state-assisted unitization law. Unitization allows oil and gas producers to operate from a common source as a unit or single entity, rather than on a leasehold basis. H.B. 1624 requires the Railroad Commission of Texas (commission) to adopt rules to provide for the unitization of secondary and tertiary recovery operations that are reasonably anticipated to substantially increase the recovery of oil above that which would be recovered by primary recovery alone. This bill provides that a proposed unit operator, upon application to the commission of a plan of unitization, must show that a good faith effort to voluntarily unitize was made, that at least 80 percent of the working interest owners and 80 percent of the royalty interest owners that respond are in favor of the plan, and that the plan is fair, reasonable, and equitable to those involved. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the Railroad Commission of Texas in SECTION 1 (Section 104.003, Natural Resources Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle C, Title 3, Natural Resources Code, by adding Chapter 104, as follows: CHAPTER 104. UNITIZATION SUBCHAPTER A. GENERAL PROVISIONS Sec. 104.001. SHORT TITLE. Authorizes this chapter to be cited as the Texas Enhanced Recovery Unitization Act. Sec. 104.002. DEFINITIONS. Defines "affiliate," "commission," "common source of supply," "extraneous substances," "marketing," "oil and gas," "plan of unitization," "primary recovery," "royalty interest," "royalty owner," "tract," "tract participation," "unit area," "unit cost," "unit operations," "unit operator," "unit participation of a royalty owner," "unit participation of a working interest owner or unleased mineral interest owner," "unit production," "working interest," and "working interest owner." Sec. 104.003. POWER AND AUTHORITY OF COMMISSION. Requires the Railroad Commission of Texas (commission) to adopt any necessary rule, issue and enforce any necessary order, and perform all required acts necessary to carry out the purposes of this chapter. Requires the commission in accordance with this chapter to determine whether a plan of unitization (plan) is fair, reasonable, and equitable for all interests concerned and necessary to carry out the purposes of this chapter. Sec. 104.004. APPLICABILITY. Provides that this chapter does not apply to any common source of supply that has produced over five billion barrels of oil, a gas field that produces primarily dry gas or natural gas and condensate, or land that has been excluded from unitization under Section 104.027 (Exclusion of Land). Provides that this chapter does not affect or apply to a voluntary cooperative agreement in secondary recovery operations as provided by Subchapter B, Chapter 101, Natural Resources Code (Cooperative Agreements in Secondary Recovery Operations). Sec. 104.005. APPLICATION TO PUBLIC LAND. (a) Provides that this chapter does not apply to land owned by the state or land in which the state has a direct or indirect interest. (b) Provides that this chapter, except as provided by Subsection (c), does not affect in any manner the authority or jurisdiction of the state, the commissioner of the General Land Office (commissioner, GLO), or any board or agency of the state with respect to any land or interest in land in which those respective entities have jurisdiction or the unitization of such land. (c) Authorizes that the land in which the state has an interest be unitized with the approval and consent of the state, the commissioner, or any board or agency to a plan first obtained, or at the instance of the commissioner, or with consent of the board or agency having jurisdiction. Requires the plan and unit operating agreement, in the event of such approval or consent, to be subject to and incorporate by reference all applicable statutes, rules, and regulations as they pertain to land in which the state has an interest. Sec. 104.006. CONFLICT WITH ANTITRUST ACTS. (a) Prohibits a plan and operation under an agreement that complies with this chapter, is approved by commission order, and is found by the commission to be necessary to prevent waste and conserve the natural resources of this state from being construed to be in violation of Chapter 15 (Monopolies, Trusts and Conspiracies in Restraint of Trade), Business & Commerce Code. (b) Provides that this chapter, if a court finds a conflict between this chapter and Chapter 15, Business & Commerce Code, is intended as a reasonable exception to that chapter. (c) Provides that the legislature intends that this chapter, or any conflicting part of this chapter, if a court finds a conflict between this chapter and Chapter 15, Business & Commerce Code, and finds that this chapter is not a reasonable exception to that chapter, be declared invalid rather than Chapter 15, Business & Commerce Code, or any portion of that chapter. Sec. 104.007. APPEALS. Entitles a person affected by an order of the commission issued under this chapter to judicial review of that order in accordance with Chapter 2001 (Administrative Procedure), Government Code. Requires that the petition for review be filed in Travis County or in any county in which the affected tract is located. SUBCHAPTER B. APPLICATION PROCEDURES; CONSIDERATION AND APPROVAL OF PLAN Sec. 104.021. APPLICATION FOR UNITIZATION. Authorizes any working interest owner or proposed unit operator to file an application with the commission requesting an order under this chapter for the unit operation of a common source of supply or a part of that common source of supply. Sets forth the required contents of the application. Requires the applicant to submit with the application a list including the name of each person owning or having a working or royalty interest in the proposed unit area and each offset operator adjacent to the proposed unit area, and an address for each person listed or a statement that the person's address is unknown. Sec. 104.022. HEARING REQUIRED. Requires the commission, on receipt of an application, to promptly set the matter for hearing and cause notice of the hearing to be given as provided by Section 104.023. Entitles an affected person to be heard, to introduce evidence, and to introduce and cross-examine witnesses at the hearing. Sec. 104.023. NOTICE. Requires that notice of the application and the time and place of the hearing on the application (notice) be mailed not later than the 31st day before the hearing date to each working interest owner, operator, and royalty owner in the unit area and to each offset operator whose name and address is shown on the list provided by the applicant under Section 104.021. Requires that notice be published once a week for four consecutive weeks in an eligible newspaper of general circulation, not later than the 31st day before the hearing date. Provides that typographical errors in a notice that are not material do not affect the validity of the notice. Sec. 104.024. FINDINGS OF COMMISSION. Requires the commission, after notice and a hearing, to determine whether the plan meets certain requirements relating to the common source of the supply involved, the present value of the estimated recovery of oil and gas, the parties involved in the plan, certain expenses, conformity to law, fairness, reasonableness, and equity. Sec. 104.025. UNITIZATION ORDER; EFFECT OF OPERATIONS. Requires the commission, if it finds that all requirements are met, to order the implementation of the unitization plan. Sets forth specifics of the order. Sec. 104.026. APPROVAL OF PROPOSED PLAN OF UNITIZATION BY WORKING INTEREST AND ROYALTY OWNERS. Provides that a proposed plan must by approved in writing by the owners, on a unit participation basis, of at least 80 percent of the aggregate unit working interests; and least 80 percent of the owners, on a unit participation basis, of the aggregate unit royalty interests that complete and return the ballot provided. Sets forth the composition of the ballot and balloting procedure. Requires the commission to dismiss the application if it finds that the applicant has not reasonable complied with balloting procedure. Sec. 104.027. EXCLUSION OF LAND. (a) Authorizes that land be excluded from a unitization plan if, on the date the application for unitization is filed with the commission under Section 104.021, the land is not under current lease or agreement providing for permitting the exploration for or production of oil or oil and gas, the fee surface ownership has not been severed from the fee mineral ownership, and all the owners present or future possessory interests in the land have elected to exclude the land from the proposed plan. (b) Requires that such owners be accorded an opportunity to make an election at least 30 days before balloting as provided for in Section 104.026. (c) Provides that the owners who have elected to exclude land, unless they and the unit owners subsequently otherwise agree, forfeit any right to present and future production of oil or oil and gas from the unitized formation, and any right to proceeds or other money arising from or associated with that production. Sec. 104.028. PARTIAL FIELD UNITIZATION. (a) Provides that any person who claims that the exclusion of a tract from proposed unit area will have an unreasonable adverse effect on the excluded tract has the burden of providing that claim by clear and convincing evidence. (b) Prohibits the commission from denying an application for unitization under this chapter solely because the commission finds that exclusion of a tract from a proposed unit area will have an unreasonable adverse effect on the excluded tract. Requires the commission, in that instance, to issue an order approving the application on the condition that the applicant or unit operator offer participation in the approved unit under the unit expansion provisions of Section 104.072 (Expansion of Unit Area) or under the approved unit agreement Sec. 104.029. STATUS OF UNLEASED MINERAL INTERESTS. Provides that any mineral interest in the unit area that is unleased on the effective date of the unitization is considered for the purposes of unit participation to have a royalty interest of one-fifth of that interest and to be a working interest to the extent of four-fifths of that interest, unless the commission determines that a different royalty interest is reasonable under the circumstances, with all the rights and obligations of a lessee as if the mineral rights were leased. SUBCHAPTER C. PLAN OF UNITIZATION Sec. 104.041. AUTHORIZED PLANS. Authorizes that a plan be proposed under this chapter only to establish units and cooperative facilities necessary for unit operations that are reasonably anticipated to substantially increase the recovery of oil above that which would by recovered by primary recovery alone. Authorizes that the proposed plan and the commission order approving the plan provide for unit operation of less that the whole common source of supply if the unit area is of a size and shape that is reasonably suitable for unit operations, and that operation will not have an unreasonable adverse effect on the other parts of the common source of supply that are not included in the plan. Sec. 104.042. SINGLE OR MULTIPLE AGREEMENTS. Authorizes that the plan consist of one or more agreements that the applicant considers to be fair, reasonable, and equitable if the applicant submits each agreement to the commission as required by Section 104.021. Sec. 104.043. PARTICIPATION; ALLOCATION OF UNIT PRODUCTION. Requires that the proposed plan provide for the apportionment and allocation of the unit production among the tracts in the unit area in order to reasonably permit a person entitled to share in, or benefit by, the production from a tract in the unit to receive a fair share of the unit production or other benefits. Requires that a tract's fair share of the unit production 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 certain factors. Sec. 104.044. VOTING BY WORKING INTEREST OWNERS. Requires that the proposed plan establish voting procedure for decisions by the working interest owners. Provides that the voting procedure need not be the same for each type of decision that may be made by the working interest owners if each working interest owner has a voting interest equal to that owner's unit participation. Provides that the plan, subject to reasonable limitations regarding voting frequency and in addition to other appropriate provisions, must require an operator to submit certain matters relating to the use of an affiliate of the operator and the tertiary recovery operations to the working interest owners in accordance with the plan if petitioned to do so by the vote of at least 15 percent of the nonoperating working interest owners. Sec. 104.045. OPERATING AGREEMENT. Requires that the proposed plan include a proposed operating agreement which establishes certain guidelines. Sec. 104.046. EFFECTIVE DATE AND TERMINATION DATE OF PLAN OF UNITIZATION. (a) Requires that the proposed plan provide for the date on which the plan takes effect, the manner in which and the circumstances under which unit operations terminate, the settlement of accounts on termination, and notice by the unit operator to the public within 30 days after the effective date of the unit. Requires the unit operator, after the commission adopts the plan, to give public notice by filing for record in each county in which any part of the unit area is located, a certificate containing specified information. (b) Requires that the plan require the unit operator, not later than the 60th day after the date of termination of the unit, to file for record in each county in which any part of the unit area is located a certificate stating the date the unit operation terminated. Sec. 104.047. FINANCING UNIT OPERATIONS. Requires that the plan provide the manner in which unit costs are determined, allocated, and charged to the separately owned tracts or interests and include a detailed accounting procedure for all charges and credits incident to unit operations. Requires that the unit costs chargeable to a tract or interest be paid by the working interest owners who, in the absence of unit operations, would be responsible for the costs and expenses of developing and operating the tract or interest. Requires that the plan address certain other financial issues. Sec. 104.048. ATTACHMENT OF PROCEEDS OF PRODUCTION TO COVER DEBTS OF NONPAYING WORKING INTEREST OWNERS. (a) Requires that the plan allow the attachment of proceeds of production due any owner who is not paying the owner's share of the costs of unit operations as compensation to each paying owner. Prohibits the compensation amount from exceeding 175 percent of the nonpaying owner's share of unit costs, which are required to be considered to include all interest, with the maximum compensation amount to be set by the commission in each case. (b) Requires that the plan authorize that all of the unit production allocated to a nonpaying working interest owner that does not pay the share of the unit expenses charged and any additional compensation amounts applied to that nonpaying owner under Subsection (a) be appropriated by the unit operator and marketed and sold for payment of unit expenses and additional compensation amounts. Requires that any sale proceeds remaining after payment of unit expenses and additional compensation amounts be remitted to the nonpaying working interest owner. (c) Provides that one-fifth of the production attributable to the unleased interest, or a different amount as determined by the commission, as to an interest to an interest located in the unit that is not leased by the effective date of unitization, is considered as royalty interest and requires it to be free and clear of all unit expenses and additional compensation amounts. Provides that four-fifths of the unleased interest, or a different amount as determined by the commission, is considered as working interest and is subject to being financed or carried under this section. Sec. 104.049. SALE BY NONSIGNING WORKING INTEREST OWNER. Authorizes a nonsigning working interest owner to elect to offer through the unit operator to sell and assign all of the owner's working interest in the unit area to the unit operator and to other working interest owners who desire to acquire a portion of the interest under this section. Sets forth the procedure for sale by a nonsigning working interest owner, including time requirements, matters of price, and those of payment. Sec. 104.050. INVESTMENT ADJUSTMENTS AND PROPERTY TAKEN OVER. Requires that the plan provide for the procedure and basis for adjustment among the working interest owners in the unit area of their respective investment in items of value taken over and used in unit operations. Prohibits investment adjustments and credits for property taken over from being used as a factor in setting participation percentages and allocations of unit production under Section 104.043. Sec. 104.051. ADDITIONAL PLAN. Authorizes that the plan include any additional provisions approved by the commission that are consistent with the findings required by Section 104.024. SUBCHAPTER D. AMENDMENT OF PLAN OR ORDER OF UNITIZATION; EXPANSION OF UNIT AREA Sec. 104.071. AMENDMENT OF PLAN OR ORDER FOR UNITIZATION. (a) Authorizes that a commission order of unitization be amended in the same manner and subject to the same conditions as are required for an original order providing for unitized operations. Provides that approval of an amendment by royalty owners is not required if the amendment affects only the rights and interests of working interest owners. Prohibits an amendment to an order, without certain approval, from changing the percentage of unit oil and gas production allocated to each tract, certain percentages of expenses, or recovery operations. Prohibits an amendment to an order, without certain approval, from changing certain provisions of the operating agreement. Provides that this section does not apply to an order expanding an existing unit area under Section 104.072, or creating a new unit area under Section 104.073. Sec. 104.072. EXPANSION OF UNIT AREA. Authorizes that an existing unit be expanded to include additional nonunitized tracts under the terms contained in the plan for the existing unit. Sets forth the procedure for the expansion of unit area. Sec. 104.073. ENLARGEMENT INCLUDING ALL OR PART OF PREVIOUSLY ESTABLISHED UNIT. Prohibits the commission from combining two or more units created under this chapter or parts of units created under this chapter unless each working interest or royalty owner in each unit or part to be combined has agreed to the combination. Sets forth the procedure for the combination of units. SUBCHAPTER E. UNIT OPERATIONS Sec. 104.091. STATUS OF PRODUCTION PROCEEDS; STANDARD OF CARE; DISTRIBUTION. (a) Prohibits unit production, proceeds from the sale of production, or other receipts from being treated or taxed as income or profit of the unit. Provides that all unit production and proceeds are income of the owners to whom or to whose credit the production or proceeds are payable under the plan. Provides that a person does not become an agent or a fiduciary of a working interest owner to whom production or proceeds are payable solely by reason of receiving or disbursing production or proceeds. Sets forth standards of duty. Sets forth standards of distribution. Sec. 104.092. LIABILITY OF WORKING INTEREST OWNER. Provides that the liability of a working interest owner for payment of unit expense is several and not joint or collective. Provides that a working interest owner, except as provided by this subsection and Section 104.048, is not liable, directly or indirectly, for more than the amount charged to that owner's interest in the tract. Provides that any environmental condition or liability existing before the effective date of the commission order approving the unit, unless otherwise agreed to by the parties as part of an approved plan, remains the sole responsibility of the party or parties responsible for such before the effective date of the order. Sec. 104.093. LIEN FOR COSTS. Provides that a unit operator, subject to any reasonable limitations in the plan, has a lien on the leasehold estate and other oil and gas rights in each separately owned tract, the interest of the owners in the unit production, and all equipment in the possession of the unit to secure the payment of the amount of the unit expense and other additional compensation charges as provided for in Section 104.048 charged to each separate working interest. Provides that the lien under this section does not attach to the royalty interest under lease or the one-fifth royalty interest assigned to an unleased mineral interest or to any interest in land directly or indirectly owned by the state. Sec. 104.094. EFFECT OF UNIT OPERATIONS ON EXPRESSED OR IMPLIED COVENANTS AND CONDITIONS. (a) Requires that all terms of a lease, division order, or contract, express or implied, to the extent that a lease, division order, or contract covering lands in the unit area relates to the common source of supply or the part of the common source of supply included in the unit area, be construed by giving due regard to the plan approved by the commission. Provides that operations conducted in accordance with a plan approved by the commission are presumed to comply with those terms unless there is an irreconcilable conflict between the lease, division order, or contract and the approved plan, the plan controls, but requires the lease, division order, or contract terms to be regarded as modified only to the extent necessary to conform to the plan. (b) Prohibits a plan, without a separate voluntary agreement supported by consideration, from causing a royalty interest to become liable for any part of unit expense that the interest is not otherwise obligated to pay, reduce a royalty interest fraction, alter an express surface use restriction, alter a provision of a lease or contract providing for indemnification or similar compensation in the event the actions of one person cause another person to become liable for damages to the environment or for a violation of a statute, rule, or common-law standard that serves to protect the environment. (c) Requires that a surface use conflict that is not governed by express lease or contract terms be accommodated or otherwise resolved after giving due regard to the plan as provided by this section. (d) Prohibits Section 104.091 from being construed to diminish an operator's duty to market production on behalf of a royalty interest owner. Sec. 104.095. DISTRIBUTION OF UNIT PRODUCTION. Requires that the unit production, except as authorized by this chapter or in an approved plan, be distributed among, or the proceeds paid to the owners entitled to share in the production from each tract in the same manner that those owners would have shared in the production or proceeds from the tract if the unit had not been established. Sec. 104.096. MODIFICATION OF PROPERTY RIGHTS OR TITLES. Provides that a commission order under Section 104.025, except to the extent that the parties affected by the plan otherwise agree, does not alienate, convey, cross-convey, transfer, or change title or ownership, legal or equitable, of a person in a parcel of land or the oil and gas rights in that parcel. Sec. 104.097. ROYALTY OBLIGATIONS; BURDENS; UNLEASED INTERESTS. Provides that each working interest owner who is the owner of an interest in an oil and gas lease is responsible for the payment of all royalty, or lease burdens affecting the owners's leasehold estate unless the plan provides otherwise. (b) Requires that one-fifth of the production or proceeds attributable to any unleased interest located in the unit area, free of all unit expense and free of any lien, be allocated to that interest unless the commission determines that a different allocation is reasonable under the circumstances. Requires that four-fifths of any unleased interests in the production or proceeds bear its pro rata share of all unit expense and is subject to any lien provided by this chapter or the plan. Requires the commission, if it allocates more than one-fifth of the production or proceeds free of all unit expense and free of any lien, to make an equal, opposite adjustment in the part of production or proceeds allocated to the interest that is to bear expense and be subject to liens. Sec. 104.098. UNIT OWNERSHIP OF PRODUCTION, PROCEEDS, AND ACQUIRED PROPERTY. Provides that the part of the unit production allocated to any tract and the proceeds from the sale of that production are the property and income of the owners to whom or to whose credit the production and proceeds are allocated or payable under the order for unit operations. Provides that any property that is acquired in the conduct of unit operations and charged as an item of unit expense is owned by the working interest owners in the unit area as provided in the plan. SECTION 2.Emergency clause. Effective date: upon passage.