Replies to This Discussion

Permalink Reply by Andrew on March 10, 2013 at 23:35

Forced pooling laws should be a trade-off that balances the needs for efficient development, prevention of waste, and protection of individual property rights. I think Louisiana's system (which appears to be markedly different from HB 100) accomplishes that goal. In fact, my view is that Louisiana's forced pooling laws strongly favor the mineral owner. They ensure that mineral owners are protected from drainage, and the "consequence" of going non-consent is that the owners get carried in the well with no penalty. 

In contrast, I can't see how the current system in Texas is overly fair to the mineral owner. My principal reason for this conclusion is that you can own minerals under a tract that gets included in a unit, and if the operator doesn't deign to include you in the pool you are totally left out. In essence, this leaves tremendous bargaining power to the operator, who is incentivized to lease the minimum amount of ownership in a non-drillsite tract so he can retain the royalties and production from the remaining ownership in that tract for himself. To me, such a result is incredibly unfair, if not barbaric, as it takes those minerals completely out of commerce with no compensation to their owners.

Forced pooling laws would allow the mineral owner to "force" himself into that pool if his minerals are inside of the unit boundary. Depending on the penalty provisions, this seems to give much more bargaining power to the mineral owner, not the operator. This is the reason that bonuses in the Louisiana Haynesville got so much higher than in Texas - the operators have to deal with the owners inside the unit. 

Permalink Reply by adubu on March 11, 2013 at 0:40

Andrew---are you saying HB. 100 would be GOOD for individual mineral owner? Why would State want to be Exempt? However the unitized unit would trump your lease agreement and DO if I read bill correctly

Permalink Reply by Andrew on March 11, 2013 at 0:52

I'm working on reading HB 100 now, so I reserve judgment for the moment. My point was that forced pooling laws aren't automatically bad for the mineral owner, as Louisiana's forced pooling laws demonstrate. Also, I think Texas is in serious need of some change to its current system, which I see as illogical, unfair, and out of step with virtually every other mineral-producing state. I'll post my comments on HB 100 once I give it a read and some thought.

Permalink Reply by intrepid on March 12, 2013 at 4:24

Andrew, while I agree with you that Texas mineral law has some shortcomings with respect to the mineral owner, HB 100 is NOT the way to resolve it.

Permalink Reply by Andrew on March 12, 2013 at 4:27

Agreed, assuming the problems with it don't get fixed in committee. But it's a good start. At least TX legislators are aware of some of the inequities that currently exist under TX law.

Permalink Reply by JHH on March 10, 2013 at 7:23

One more... you ought to post this on the main page!

jhh

Permalink Reply by intrepid on March 10, 2013 at 8:13

Please feel free to post it where ever you think it will get attention! We need to KILL THIS BILL in committee on Wednesday 3-13-2013! Everyone needs to see the info on thus bill and KILL IT.

Permalink Reply by adubu on March 10, 2013 at 16:16

If bill passes who does it benefit? and Why?

Permalink Reply by jffree1 on March 10, 2013 at 18:30

Intrepid,

Here is a link to the text of the bill:http://legiscan.com/TX/text/HB100

I didn't read the entire bill but, of what I did read, I get the impression that this is dealing with the need to pool an area that covers an entire field for the purpose of enhance recovery, as in water flood or steam/gas (CO2 or any other) injection. I could be wrong, and I would appreciate clarification, but aren't most fields which would be good candidates for enhanced recovery... wouldn't they be depleted to the point that nobody is making a dime off them anymore and this might be the only way to return the wells to productivity? I mean, isn't this a good thing? To pool everyone in the field, I mean, since it is a field wide operation? They can't pay royalties just to the people who are in a unit that has the only producing wells because there is no telling where, in the formation, the oil, etc... might be coming from... right? If they pay out under regular pooling rules, the people who are stuck with just the injection wells would be left out of any revenue from the enhance recovery when some of the production could be coming from their tract. Does that make sense?

I apologize if that isn't exactly coherent but I'm a little bit over my head here trying to convey the little I know about enhanced recovery. I just see that some sort of pooling mechanism might be needed in this particular situation. I don't think it is intended to rewrite the Natural Resource Code re: pooling & unitization in conventional circumstances but if I am incorrect, I'd love to hear from anyone who can add to the discussion.
 

  

Permalink Reply by intrepid on March 10, 2013 at 19:38

jffree1, where did you see that this only applied to depleted wells or fields? I don't think it is limited in any way to that. If this bill passes it's my understanding that the WI owners and operators will be able to use it where ever they can get a mineral owner(s) who make up 70% of the unit to force the other mineral owners into the unit as described below.

It will be bad for small tract owners especially. Even if it would be potentially beneficial in some rare circumstances it's not something that should be imposed on all mineral/land owners across the board. We have very little time to stop this bill in committee. Please call the committee members and ask them to Vote NO on HB100.

Here is more info from TLMA:
HB 100 by Taylor (R) / SB 136 (identical) by Ellis (D)  – “The Oil and Gas Majority Rights Protection Act” Relating to unit operations for oil, gas, or oil and gas production or carbon dioxide storage.

These two companion bills create a scheme for forced pooling in Texas on private lands, exempting the state from being forced to pool its own mineral interests.  The bill allows working interest owners and operators to apply to the Railroad Commission (RRC) to create a pooled unit. 

If the RRC does create a pooled unit, the plan must meet the approval of 70% of the working interest in the unit.  The operator then has 6 months from the date the forced pooling order is entered to contact royalty interest owners.  If, of the ballots completed and returned by royalty owners, 70% of the balloting royalty interest approves the plan, then the RRC will let the pooling order stand.

Production proceeds from pooling units are distributed to interest holders based on each tract’s “fair share.”  Determining a tract’s fair share of production is case-by-case, based on a number of factors including acreage, quantity of resources recoverable from the tract, the probable productivity of the tract, and as many other factors as “reasonably susceptible of determination.”

A forced pooling plan can include a penalty for nonpaying owners who choose not to ratify the pooling agreement, or share in the costs of unit operation.  Up to 300% of what would be the nonpaying owner’s share of costs can be withheld from his production proceeds and used to compensate paying owners.  An operator may also take a nonpaying owner’s production share to cover operating expenses and additional compensation amounts, giving the nonpaying owner any net proceeds that remain.

The bill provides that when an owner’s mineral interest is under lease, the forced pooling agreement imposed by the RCC is superior to, and can modify any pre-existing leases or division orders.  Owners of unleased mineral interests can be pooled, and under forced pooling plans are treated as owning 1/6 royalty interest and 5/6 working interest.

Permalink Reply by jffree1 on March 11, 2013 at 5:17

Intrepid,

My main goal was to incite discussion because I saw some points that would be good for mineral owners. Andrew has done a pointed analysis and I agree with him that there are some issues that need to be addressed. What I don't want to happen is for any bill (and this one, in particular) to come out of committee and go straight to the floor for a vote... without debate or amendment. This happens in the U.S. Senate fairly often and in the House when there is a "must pass" (made up) crises situation to avert. I am not familiar enough with statehouse procedures to know if they might be inclined to "ramrod" a bill, such as this, through without the opportunity to amend. They bear watching. 

I don't have time this morning to dig into Andrew's post but I do have questions which I will try to get to this evening.

Permalink Reply by Andrew on March 11, 2013 at 3:10

I've read and reread the proposed HB 100. Overall, I see the proposed change as decidedly positive for the mineral owner. The current draft of the bill is imperfect in many ways, but makes several changes to the law that will significantly protect or enlarge the rights of the parties other than the operator.

Below is a list of some specific provisions that I see as either good or bad for the mineral owner (I don't think the non-operating working interest owner issues are of much interest to the readers of this thread, so I've omitted them). Direct quotes are underlined.

The Good 

104.003(b)  "The commission in accordance with this chapter shall determine whether a plan of unitization, including the participation formula, proposed under this chapter for all or part of a common source of supply is fair, reasonable, and equitable for all interests concerned and necessary to carry out the purposes of this chapter." This provision is essentially good for the mineral owner, as it is designed to require that he is treated fairly in addition to all the other requirements for forced pooling.

Sec. 104.051.  APPLICATION FOR UNITIZATION. (b)  The application must contain: 

      (3)(A)  the manner in which the costs and expenses of unit operations are to be apportioned among and assessed against the tracts and interests chargeable with those costs and expenses, including a detailed accounting procedure governing all charges and credits incident to unit operations and providing for audits of those charges and credits; It seems to me that this will prevent innumerable opportunities for foul play and accounting shenanigans. 

      (3)(D)  the division of interest or formula for allocation of unit production, payment of interests free of costs, and allocation of unit expenses; I reiterate my previous remark. 

      (6)  an allegation that: (A)  each owner of an interest in the oil and gas under each tract in the proposed unit area has been given an opportunity to enter into the unit on the same basis; I see what this is designed to accomplish, which is preventing the operator from "cutting out" any mineral owner from production. This is the most significantly favorable aspect of the proposed bill. As I mentioned in a previous post, currently operators can and often do lease some small interest in a tract and don't bother leasing anyone else, in effect cutting out those mineral owners and keeping their royalty. The language "on the same basis" is problematic though. Same basis as what? I think this would make more sense if it said the operator was required to offer to lease minerals on substantially the same basis the leases granted to others in the unit. All in all though, this is a positive addition.

     (6) an allegation that: (B)  the applicant or proposed unit operator has made a good faith effort to voluntarily unitize all interests in the proposed unit area. I reiterate that this attempt must be made for all interests.

     (c)  The applicant shall submit with the application a list including:

          (1)  the name of each person owning or having a working interest, royalty interest, or unleased mineral interest in the proposed unit area and each offset operator and unleased mineral interest owner adjacent to the proposed unit area; and

          (2)  for each person listed:

               (A)  an address; or

               (B)  a statement that the person's address is unknown.

     This provision ensures that the operator conducts substantial due diligence in determining proper ownership before attempting to form a unit. 

Sec. 104.053.  NOTICE.  (a)  Notice of the application and the time and place of the hearing on the application must be mailed, postage prepaid, not later than the 31st day before the hearing date to each working interest owner, operator, unleased mineral interest owner, and royalty owner in the unit area and to each offset operator and unleased mineral interest owner whose name and address is shown on the list provided under Section 104.051. This will comply with constitutional due process requirements, and will give mineral owners fair notice that they may be pooled and allow them the opportunity to object at the hearing.

Sec. 104.054.  COMMISSION FINDINGS.  After notice and a hearing, the commission shall determine whether: 

      (2)  the estimated incremental recovery of oil, gas, or oil and gas from the common source of supply is reasonably anticipated to exceed the estimated incremental expenses incident to conducting unit operations; This requires that unit operations be "in paying quantities." The requirement that production be in paying quantities is implied in every oil and gas lease, but this provision imports that same obligation to unleased mineral owners and working interest owners.

      (5)  the unsigned owners of interests in the oil and gas under each tract of land in the proposed unit area have been given a reasonable opportunity to enter into the unit on the same basis as the owners of interests in the oil and gas under the other tracts in the unit area and the applicant or proposed unit operator has made a good faith effort to voluntarily unitize all interests within the proposed unit area; Same comments as above, although this provision is clearer than the language in 104.003(b)(6). This means that the commission can deny an application for forced pooling if it finds that the operator didn't make good faith efforts to contract with the mineral owners. 

      (11)  the plan of unitization, including the tract participation formula and percentages, is in all respects fair, reasonable, and equitable. This would seemingly prevent any suspect math in calculating unit ownership (see my comments on "the bad" regarding calculation of "tract participation.")

Sec. 104.055.  UNITIZATION ORDER; EFFECT OF OPERATIONS. (d)  If only a part of a lease is included in the unit, unit operations on or production from the unit maintains an oil and gas lease as to the part excluded from the unit only if the excluded part of the lease otherwise would have been maintained under the terms of the lease by the unit production attributable to the included tract or tracts. This effectively says that compulsory unitization won't override a Pugh clause. This doesn't quite go so far as to make Pugh Clauses the default rule (this is called a "Statutory Pugh Clause") but it at least preserves the right to use one in your lease.

Sec. 104.057.  STATUS OF UNLEASED MINERAL INTERESTS.  Any mineral interest in the unit area that is unleased on the effective date of unitization is considered for purposes of unit participation:

(1)  to have a royalty interest of one-sixth of that interest, free and clear of all unit expenses; and

(2)  to be a working interest to the extent of five-sixths of that interest, with all the rights and obligations of a lessee as if the mineral rights were leased.

Whether this is good or bad is in the eye of the beholder. I count this is as a net positive because the 1/6 royalty ensures that you will get paid even if the well is not profitable. The trade-off, of course, is the 200% penalty that is discussed under "the bad." By way of comparison, in Louisiana there is no penalty for non-consent, but you don't get any royalty (or any money at all) until the well reaches payout. Some unleased owners will win in one scenario and not the other. I call this a net positive because the unleased mineral owner would get something if the well produces, as opposed to the current state of affairs, where he would get nothing.

Sec. 104.107.  FINANCING UNIT OPERATIONS.  (a)  The plan of unitization must provide the manner in which unit costs, including overhead and interest, are determined, allocated, and charged to the separately owned tracts or interests and must include a detailed accounting procedure for all charges and credits incident to unit operations.  The unit costs chargeable to a tract or interest must be paid by each working interest owner on a unit participation basis.

      (b)  The plan also must:

          (1)  provide for the auditing of all records of the unit operator pertaining to unit operation;

          (2)  require the operator to maintain records sufficient to show the reasonableness of any payments to affiliates of the operator and of other unit costs;

          (4)  include provisions that disallow situations in which a profit or other benefit would accrue solely to the operator as unit operator.

Collectively, this is an extremely positive step in the right direction. Suffice to say, anyone who has ever tried to get a straight answer from certain companies regarding cost deductions from royalty can understand the kind of problems this would prevent.

Sec. 104.152.  EXPANSION OF UNIT AREA.  (a)  In accordance with this section and subject to Section 104.153, an existing unit area may be expanded to include additional nonunitized tracts under the terms contained in the plan of unitization for the existing unit if the working interest owners and the royalty owners in each additional tract and in the existing unit area approve the expansion by the same percentages and in the same manner as required by Section 104.056 and Section 104.005(c). Very simply, this prevents the mineral owner from being diluted by unit expansion. 

Sec. 104.201.  STATUS OF PRODUCTION PROCEEDS; STANDARD OF CARE; DISTRIBUTION.(c) A unit operator that markets the production of such an owner shall do so in such a manner that the owner receives the same price and proportionate share of premiums and other compensation as the unit operator receives for the unit operator's share of unit production, except to the extent that a previous contractual commitment or express specific term of a contract entered into in good faith prohibits such sharing or marketing of additional production. At first glance this looks like it makes all royalty cost-free. It actually doesn't do this, as the lease provisions can override this. However, if your lease does provide for cost-free royalty, this does give additional protection to mineral owners in determining the value of royalties to be paid.

Sec. 104.204.  EFFECT OF UNIT OPERATIONS ON EXPRESSED OR IMPLIED COVENANTS AND CONDITIONS.

      (b)  Notwithstanding any other provision of this chapter, without a separate voluntary agreement supported by consideration, a plan of unitization may not:

          (1)  cause a royalty interest to become liable for any part of unit expense that the interest is not otherwise obligated to pay;

          (2)  reduce a royalty interest fraction; or

          (3)  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.

These all speak for themselves. A unit order will not change the terms of a mineral lease in those respects.

The Bad 

Sec. 104.103.  PARTICIPATION; ALLOCATION OF UNIT PRODUCTION. (b)  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. This one is so problematic it's just negative for the mineral owner. In most "forced pooling" jurisdictions, your share of the unit is purely a function of acreage - if you own 100 net mineral acres in a 1000 acre unit, you have 10% of the unit. Adding other factors as this provision does just imposes an insurmountable scientific obstacle to the mineral owner from disputing his unit ownership amount. This should be done by acreage only, it's fairer, easier to calculate, and gives the mineral owner a fighting chance at objecting if he feels that he is being underallocated. 

Sec. 104.108.  ATTACHMENT OF OR LIEN ON PROCEEDS OF PRODUCTION TO COVER DEBTS OF NONPAYING WORKING INTEREST OWNERS.  (a)  The plan of unitization must provide for the attachment of or a lien on proceeds of production due to any working interest owner who is not paying the owner's share of the costs of unit operation as compensation to the paying owner or owners.  The compensation amount may not exceed 300 percent of the nonpaying working interest owner's share of unit costs, which is considered to include all penalties and interest. This applies to unleased mineral owners as to their 5/6 working interest only. Basically, this is a 200% penalty (the first 100% is just a carried interest) for non-consenting owners. Though the mineral owner would still get a 1/6 royalty both before and after 300%, that's a pretty steep burden to place on a mineral owner. I have less sympathy for working interest owners, they knowingly took leases obligating them to pay costs of drilling if they get force pooled, but the mineral owner has made no such agreement.

Sec. 104.204.  EFFECT OF UNIT OPERATIONS ON EXPRESSED OR IMPLIED COVENANTS AND CONDITIONS. (c)  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. This allows the commission to basically delete a "no surface operations" clause if the well can be drilled otherwise. As I see it, if you own the land and the minerals, you should be able to prevent a company from using your land. Period.

The Problematic 

102.002(9): "'Tract' means a parcel of land lying within the unit area that is under uniform royalty and working interest ownership." What constitutes uniform royalty ownership? If various parties have different amounts of ownership under a tract, that wouldn't exactly be "uniform," but why should that matter?

102.002(14): "'Unit participation of a royalty owner' means the percentage  equal to the sum of the products obtained by multiplying the royalty interest of each royalty owner in each tract in which the owner owns a royalty interest by the tract participation of that tract in the unit." This definition is terribly unclear, although I think what they're trying to say is that it = 100% of unit production X a royalty owner's % tract participation X the royalty owner's % of royalty. This should probably be called "Division of Interest (DOI) of a Royalty Owner," because "participation" implies working interest.

Sec. 104.005.  APPLICABILITY TO PUBLIC LAND.  (a)  This chapter does not apply to land owned by the state or land in which the state has a direct or indirect interest. This isn't unfair to the mineral owner per se, but it's a double standard which I foresee being very unpopular. What's problematic is that this provision only applies to land owned by the state. It does not directly say whether minerals owned by the state when it doesn't own the surface could be force pooled. On that same note, would ownership of the mineral estate constitute an "indirect interest?" I'm not as well-versed in common law property, I may just be reading this wrong.

Sec. 104.055.  UNITIZATION ORDER; EFFECT OF OPERATIONS. (a)  If the commission finds that all the requirements of Section 104.054 are met, the commission shall issue an order providing for: (2)  unitization of all working interests and royalty interests in the unit area. This may be nitpicking, but you don't unitize royalty, you pool it. 

Sec. 104.056.  APPROVAL OF PROPOSED PLAN OF UNITIZATION BY WORKING INTEREST AND ROYALTY OWNERS.  (a)  An order of the commission creating a unit and prescribing the plan of unitization takes effect only when the proposed plan of unitization has been approved in writing by: (2)  a supermajority consisting of at least 70 percent of the owners, on a unit participation basis, of the aggregate unit royalty interests that complete and return an approval or ratification together with the ballot distributed under Subsection (b). This provision is essentially positive in that it requires a minimum threshold of royalty owner approval to be effective. Thus, if the unit order is unfair or not in the royalty owners' best interest, they can essentially veto it. However, what troubles me is that it requires 70% "that complete and return an approval or ratification." A few problems come to mind. First, by definition 100% of those who submit an "approval" will consent. What this is trying to say is that 70% of the ownership with a ballot submitted will be counted. Even with sufficient clarity, I don't know why non-returned ballots are not considered a "no" vote. This is particularly suspicious in light of the fact that the previous provision dealing with working interest owners does treat unreturned ballots as "no" votes.

Sec. 104.151.  AMENDMENT OF PLAN OR ORDER OF UNITIZATION. (f)  For purposes of Subsection (e)(3), the common source of supply is considered to be operated for the economic recovery of oil, gas, or oil and gas if there is a reasonable expectation of more than insignificant future production volumes of oil, gas, or oil and gas. Two problems here. First, this language is inconsistent with a similar provision regarding production in paying quantities in 104.054(2) (see above under "the good"). Second, the definition is simply not well-conceived. The issue should not be based on volume alone (and what constitutes "insignificant" volumes anyway?), it should be based on whether operation of the unit is profitable to the operator. If not, the presumption is that he holding the leases for merely speculative purposes.

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