American Oil and Gas Reporter - December 2015 - 111

page 108-115_Layout 1 12/3/2015 10:19 AM Page 111

Texas Alliance Board

Legislative Interim Brings More Work

By Danny Boyd
Special Correspondent

FORT WORTH-The Texas Alliance
of Energy Producers experienced success
during this year's state legislative session
in Austin, but association officers and staff
said plenty of work remained in the interim as lawmakers geared for a 2017 session
that would include a third look at Railroad
Commission sunset review and likely reconsideration of a bill on allocation wells.
And despite a key victory in the form of
HB 40 spelling out state regulatory primacy over the oil and gas industry, debate
about state versus local control likely isn't
over, government relations consultant Bill
Stevens told members at the Alliance's fall
Board of Directors meeting, Nov. 5 at the
Fort Worth Downtown Hilton.
Lawmakers passed HB 40 to clarify
state regulatory authority after voters in
Denton approved a ban on hydraulic fracturing in November 2014, Stevens reviewed.
"But provisions of HB 40 probably will
be challenged in court," he quickly added.
Attorney Gloria Leal, who advises
the Alliance on legislative and regulatory affairs, said the bill gave the state authority over subsurface operations while
recognizing municipal responsibility for
public safety and surface impacts. But she
said the bill required all municipal ordinances to be commercially reasonable.
Any local ordinance must meet a fourpart test Leal said:
* Recognizes reasonably prudent operator standards;
* Is commercially reasonable;
* Doesn't effectively prohibit oil and
gas operations; and
* Isn't pre-empted by state or federal law.
Leal said a "safe harbor" provision was
included for pre-existing municipal ordinances that met the standards.
Another bill passed this year, Leal mentioned, is HB 2207 by Representative Jim
Keffer, R-Eastland, which protects an
oil and gas lessee of the unsevered minerals from a foreclosure of a surface
mortgage. She said the bill provided that
an oil and gas lease not recorded prior to
the mortgage, but executed and recorded
before the foreclosure sale, would survive
the foreclosure, but lose surface rights.
Royalties payable to the lessor become
payable to the purchaser at the foreclosure
sale, and no agreement between the mortgagor and mortgagee can modify the

statute, Leal detailed. The bill became effective Sept. 1.

Allocation Wells
During this year's interim, Stevens said
lawmakers would study potential legislation addressing the allocation of production from a horizontal well that traversed
multiple tracts.
At present, he said, Texas has no statue that addresses such an allocation. HB
1552 was filed in the 2015 legislative session, but was left pending in the House Energy Resources Committee, he said. The
issue came to the fore after the legal departments at two large companies held up
drilling over concerns that state statute
should provide the RRC with the authority to formulate rules governing production allocation from horizontal wells, he
said.
Stevens said HB 1552 was intended to
address instances where an oil and gas well
traversed the boundary between two or
more tracts where no agreements existed
on how production would be allocated
among the tracts.
Texas' 3rd Court of Appeals has ruled
that a well that traverses more than one
tract is to be viewed as "multiple drill sites
on multiple tracts," and that production
from the well should be allocated among
the tracts with "reasonable probability,"
Stevens said.
However, the courts have provided little guidance for operators and mineral
owners on allocating production where no
agreement exists, and "the RRC has approved more than 1,000 permits for such

wells," Stevens observed.
To drill allocation wells, operators
must have the right to drill on every tract
that the well traverses, and a permit from
the Railroad Commission, he said.
Stevens said proposed legislation would
not give the RRC authority to allocate royalties, but would:
* Update state law to reflect current
industry practice of drilling, operating, and
producing allocation wells;
* Consistent with case law, would ensure that where no agreement existed, the
operator would allocate production fairly and reasonably, and would notify affected mineral owners of the allocation formula; and
* After notice and a hearing, enable
the RRC to adjust the allocation formula
determined by the operator to protect the
affected royalty and mineral owners.
Stevens said HB 1552 was divisive
from its inception and remained controversial. He said producers were divided in
their approaches, royalty and mineral
owners often stringently opposed the
measure, and the Texas General Land Office was concerned that fewer wells
would be drilled on state and university
lands. He added that the RRC's procedure
was working and commissioners were not
motivated to change.
But, "The issue is not going away,"
Stevens allowed. "It's something we need
to deal with and we need to hear from all
our members."
Abilene, Tx., attorney John L. Beckham, who represents royalty interests, told
the Alliance Board that opposition prima-

Attorney Gloria Leal (left), who advises the Alliance on legal and regulatory affairs, and
Jim Standley (right), government relations adviser to the Alliance from the Texas Star Alliance, listen while Texas Alliance government relations adviser John Tintera addresses
the Texas Alliance of Energy Producers Board of Directors during its Nov. 5 meeting in
Fort Worth.

DECEMBER 2015 111

American Oil and Gas Reporter - December 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - December 2015