Replies to This Discussion

Permalink Reply by rick linkenhoger on March 13, 2013 at 18:42

Sorry my friend.....This comes from Big Liberal not Big Oil! You've been duped!!!!!

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Permalink Reply by rick linkenhoger on March 13, 2013 at 18:45

The only thing pathetic is how the liberals packaged this so that it stops drilling! and a lot of people bought into it! Really sad!

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Permalink Reply by Andrew on March 11, 2013 at 18:34

I've read and reread the proposed bill, and though it is imperfect, I think it would be a net positive for most mineral owners. My thoughts are below.

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’t 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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Permalink Reply by intrepid on March 12, 2013 at 4:14

There is nothing in this bill that limits it to the good part. There is too much BAD that strongly outweighs any potential for 'good'.

Bottom line is that anything 'good' in this bill is already available in some shape or form.


Everyone wants every mineral acre to be developed. But, not at the expense of forcing small owners into a unit easily at unfavorable terms.

If this bill becomes law it will result in a net loss to most mineral owners.

It's too dangerous to hope that the potential 'good' will overcome the bad in this bill.

Let's get busy and KILL THIS BILL now.

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Permalink Reply by 1kw6x71km1v37 on March 12, 2013 at 6:39

Sec. 104.057 permits takings without compensation of private property interests. This is not even in the public interest, but would private and corporate interests to take private property. Clearly this is unconstitutional under the 5th Amendment to the U.S. Constitution. But the Texas Legislature is known to have made some really stupid moves in the past, and I would not be surprised to see this POS bill passed by those dolts in Austin. Again, this pig has the odor of Big Oil all over it.

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Permalink Reply by Andrew on March 12, 2013 at 8:39

I don't see it as an unconstitutional taking (and this argument has gone nowhere in the courts). Your property is going to be drained one way or the other by that well. 104.057 ensures that you get paid for that drainage with a 1/6 royalty plus 8/8ths after 300%. The reason I think this bill is a positive for mineral owners - and correspondingly negative for the industry - is that under present law you get nothing when you are drained. In fact, you can even be inside a unit and still not get paid. As a small mineral owner I see this as little more than outright theft.

I know there's probably nothing I can say to change your mind on this bill, but small mineral owners are being bulldozed by operators in Texas and I hope we can at least agree that something needs to be done about it.

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Permalink Reply by intrepid on March 12, 2013 at 9:18

This issues absolutely need to be addressed but HB 100 will not do it properly. Let's KILL THIS BILL AND DO IT RIGHT.

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Permalink Reply by adubu on March 12, 2013 at 10:43

interpid--- just got off phone with Rep Crownover Office in Austin , Vice Chair of HCER  Committee and they say phones calls > 95% against HB 100 and in their opinion the Bill will DIE in committee :) Very nice conversation of 5 minutes Chairman office Jeff Keller not taking call today.

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Permalink Reply by intrepid on March 12, 2013 at 11:43

They're getting pounded. The way it works some times is that the committee will not kill the bill by taking an unfavorable vote, although I hope they will in this case. What they may do is leave it pending in committee. Not very many bills that aren't actually voted out are ever really alive but if the sponsor gets enough support he can get the bill voted out. Then it can be passed. Please keep up heat on all members you know to kill this bill even if it's not positively voted out tomorrow.

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Permalink Reply by Andrew on March 13, 2013 at 6:47

I don't believe the bill is limited to secondary or tertiary projects, unless there is a provision I'm not reading. However, some sloppy drafting in the proposed bill does leave this open to interpretation. 

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Permalink Reply by Darrell Lohoefer on March 13, 2013 at 5:53

 

There is a lot of confusion here as HB 100 applies only to secondary and tertiary projects, commonly called waterfloods or CO2 floods. It does NOT apply to drilling and exploration units, commonly called pooling units.

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Permalink Reply by intrepid on March 14, 2013 at 17:51

Yeah. That's what they say now. Problem s once a law is on the books it gets expanded. Besides if it's as simple as you say then why does it have so many other specifics in it like the 1/6 royalty and the ability to change lease terms even including the way surface tights are addressed.

This bill materially changes the relationship between mineral owners and producers in a way that is detrimental to the mineral owner.

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