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Energy & the Law

Is Texas Ready for Forced Pooling?

Posted in Pooling
Co-author Travis Booher

Efforts to introduce forced pooling into Texas law continue. House Bill 100, the Oil and Gas Majority Rights Protection Act, has been introduced by Rep. Van Taylor in the Texas legislature. Today’s post summarizes the bill. Upcoming entries will ponder whether it is a victory over the tyranny of the myopic minority or a fascist invasion of our God-given and hard-earned property rights.

The bill authorizes a working interest owner to apply to the Railroad Commission for an order for the unit operation of a common source of supply or a part of that common source of supply.

The application must:

• Describe the unit area,

• Identify the operations contemplated,

• Include a copy of the plan and all related agreements, such as an operating agreement (including the provisions you would typically find in an operating agreement),

and allege that:

• The minimum required approval of the plan has been met (more on this later),

• Each owner has been given an opportunity to enter into the unit on the same basis, and

• The applicant has made a good faith effort to voluntarily unitize all the interests.

(§ 104.051)

In order to approve an application the Railroad Commission must make these findings after a hearing:

• The plan is reasonably necessary to conduct unit operations and to prevent waste, protect correlative rights and promote the conservation of oil and/or gas,

• The estimated incremental recovery of oil and/or gas is reasonably anticipated to exceed the estimated incremental expense of the operations,

• Productive limits of the common source of supply have been reasonably defined by exploration and development,

• If only a portion of the common source is to be unitized, operations will not have a material adverse effective on the remainder of the common source,

• Unsigned owners have been given a reasonable opportunity to enter into a unit agreement on the same basis as those who have signed,

• The applicant has obtained the permission of a minimum number of working interest and royalty interest owners (see below for percentages),

• Unit expenses to be charged are reasonable and necessary,

• Expenses for operations will be for the common benefit of all interest owners and will be allocated on a fair and equitable basis and will not favor the unit operator over other unitized owners,

• A working interest owner will have a reasonable right to review all records pertaining to operations.

• The plan is, in all respects, fair, reasonable and equitable.

(§104.054).

To get a plan approved, the applicant must have a super majority of at least 70% of the aggregate working interest and a super majority of at least 70% of owners of royalty interests that complete and return an approval or ratification and a ballot. (§104.056)

A tract’s fair share of production must measure by the value of each tract, taking into account acreage, quantity of oil and gas from the tract, the geological struture, and other factors. (§104.103)

The operator may charge as much as 300% penalty to workingineerest owners who do not pa their share of expenses, and will have a lien on working interests to secure payment of operating expenses. (§104.108)

Surface use is addressed:

• A conflict between a lease and the unit plan is to be resolved in favor of the unit plan.

• Lease or surface use provisions that conflict with the use of the surface for unit operations so as to render the unit plan uneconomical may be amended by the RRC.

(§104.204)

There are provisions for storage of CO2. (§§104.209 and 104.210).

We see benefits to Texas oil and gas production and pitfalls for some royalty and small working interest owners. More to come.