BILL ANALYSIS
C.S.H.B. 2731
By: CRADDICK
April 18, 1995
Committee Report (Substituted)
BACKGROUND
The largest source of oil in Texas is the unrecovered oil left
in place when wellbores are plugged and abandoned. There is an
excellent chance that oil price movements or technological
developments occurring in the next twenty to thirty years will turn
non-producing but mechanically sound and non-polluting wellbores
into producing assets of great value to the state and its people.
Under present state law, the Railroad Commission is required to
plug all abandoned wells regardless of their condition or potential
use in the future. Operators cannot afford to keep non-producing
wells open indefinitely. There is no legal mechanism for
maintaining environmentally and mechanically sound wells.
PURPOSE
This bill sets up a voluntary program, the Texas Experimental
Research and Recovery Activity (TERRA), for maintaining non-producing, but environmentally and mechanically sound wells under
the stewardship of the Railroad Commission. The TERRA program will
provide operators and research organizations with a pool of sound
wellbores, to which access may be granted through the Commission
without the usual oil and gas lease. The wellbores may be used to
run modern log suites, make seismic studies, conduct production
tests, etc., with the qualification that any licensed use have a
reasonable potential to increase the production of hydrocarbons
from the tract on which the well is located. The wellbores will
also serve as a "ready reserve" in the event that price increases
or technological development make the tract economically feasible
to once again lease. Finally, the bill provides a limited exemption
for production from a TERRA well used for research and for former
TERRA wells from taxes imposed by Chapters 201 and 202, Tax Code.
RULEMAKING AUTHORITY
This bill grants additional rulemaking authority in SECTIONS
2 and 5 to the Railroad Commission of Texas.
The bill does not expressly grant rulemaking authority to the
Comptroller. However, in SECTION 5 it allows the Comptroller to
establish procedures to implement the provisions of this bill.
SECTION BY SECTION ANALYSIS
SECTION 1. Establishment of Legislative Intent: The legislature
finds that the oil left in place when wells are plugged has great
economic value; that the incentives and opportunities in the act
will enhance and encourage new technologies; that mechanically
sound, non-polluting wells are a valuable asset; that mineral
interest owners should be encouraged to preserve wells which would
otherwise be plugged by placing them in the TERRA program; and that
the activities provided by this act serve a governmental purpose
and benefit to people of this state.
SECTION 2. Adds Chapter 93, entitled "Texas Experimental Research
and Recovery Activity", to Texas Natural Resources Code as follows:
SUBCHAPTER A. GENERAL PROVISIONS
Sec. 93.001. Definitions.
Sec. 93.002. Establishes TEXAS EXPERIMENTAL RESEARCH AND RECOVERY
ACTIVITY, places it in the Railroad Commission of Texas and
establishes its purpose.
Sec. 93.003. COMMISSION POWERS. Grants rulemaking authority to the
Railroad Commission of Texas to administer this chapter.
Sec. 93.004. TERRA FUND; CERTIFICATION. Creates the TERRA fund in
the state treasury and specifies its sources of funding:
(1) fees for TERRA licenses;
(2) money in the oil-field cleanup fund (as provided for in Section
93.013(c) of this bill);
(3) payments made by mineral owners to place wells into TERRA;
(4) administrative penalties received from license holders who
violate a license condition and fees for wells bought from TERRA;
(5) proceeds from the sale of salvaged equipment minus claims paid
under Chapter 89 during the previous fiscal year;
(6) private contributions and grants;
(7) any other money as provided by this chapter.
Requires that interest earned on the fund be credited to the fund.
Provides that whenever the balance of the TERRA fund is less than
the total estimated plugging cost for all TERRA wells, the fund may
be used only for TERRA program purposes. However, when the balance
exceeds that total, 75% of the annual interest earned on the fund
may also be put toward general oil-and-gas-related administrative
and program costs of the commission.
Sec. 93.005. USE OF OIL-FIELD CLEANUP FUND. Prohibits the use of
money from the oil-field cleanup fund to plug a TERRA well. (Except
for oil-field cleanup fund money that is transferred to TERRA when
a well scheduled for plugging is transferred to TERRA.)
(Sec. 93.006-93.010 are reserved for expansion.)
SUBCHAPTER B. TERRA AGREEMENT
Sec. 93.011. AGREEMENT BETWEEN COMMISSION AND MINERAL INTEREST
OWNERS. Provides that owners of mineral interests may execute an
agreement with the commission providing an easement of access to
wellbores for TERRA purposes and appointing the commission as the
owner's agent for the purpose of licensing the wellbores for data
collection, research, or production testing under the TERRA
program. Such easements are considered public property and not
subject to taxation. The commission is required to prepare a form
for the TERRA agreement and file it with the county clerk in the
county where the well is located.
Sec. 93.012. TERRA EASEMENTS: EFFECT AND CONDITIONS. Validates the
easements granted in a TERRA agreement even though it is not of a
character recognized under the common law; they do not touch and
concern the land and there is not privity of estate between the
grantor and commission. The easement binds successors in interest
of the granting mineral owner. An after-acquired mineral interest
becomes bound by a TERRA agreement executed beforehand by the
acquiring interest owner. Mineral interests owned by persons who
have not signed a TERRA agreement are not affected by the
agreement, but the non-signing interest owners may become bound by
ratifying the agreement or consenting to it.
Sec. 93.013. ACCEPTANCE OF WELLBORES INTO TERRA. Establishes the
process under which wellbores will be accepted into the TERRA
program as follows:
subsection (a) Acceptance of wellbores into TERRA is at the
discretion of the commission. Wells must be in compliance with all
commission rules and in good mechanical condition; at least 50 per
cent of the present possessory mineral ownership (100 per cent in
the case of state lands) must sign a TERRA agreement; available
wellbore documentation, and any other information required by the
commission, must be provided; and payment of not more than 75 per
cent of the estimated plugging costs must be made by the signers of
the TERRA agreement. The commission must be provided with
documentation that there are no outstanding charges, liens, or
other obligations secured by the affected leasehold estate or
wellsite equipment. Logs and other well documentation must be
submitted to the commission.
subsection (b) Requires the Commission to return to the mineral
interest owner payment received for transferring a wellbore into
the TERRA program if the well is not accepted into TERRA.
subsection (c) Allows the commission to place an abandoned
wellbore scheduled for plugging into TERRA. If a well scheduled
for state-funded plugging is transferred to TERRA, an amount equal
to 100 per cent of estimated plugging costs is transferred from the
oil-field cleanup fund to the TERRA fund. Thereafter, the well must
be plugged with TERRA funds.
subsection (d) When a wellbore is transferred from TERRA to an
operator, the money transferred from the oil-field cleanup fund
will be returned to the fund.
subsection (e) The offer of a wellbore in TERRA or its acceptance
is not to be construed as an abandonment of the wellbore or the
lease or the lease purposes by the mineral interest owner.
subsection (f) The Commission is prohibited from accepting
additional wellbores after September 1, 1999 unless the funds in
the TERRA account exceed the total estimated costs for plugging all
TERRA wells.
Sec. 93.014. EFFECT OF ACCEPTANCE OF WELLBORE INTO TERRA. Sets
forth the respective duties and responsibilities of the commission
and the signors of the TERRA agreement as follows:
subsection (a) During a well's tenure in TERRA, the commission
assumes all plugging responsibility.
subsection (b) A licensee or the commission is not responsible for
pollution occurring before the wellbore is accepted into TERRA.
subsection (c) Allows the Commission to plug or require plugging
of a well by the mineral interest owner, if the mineral interest
owner has misrepresented the condition of the well in connection
with its acceptance into TERRA.
subsection (d) The commission is authorized to retain as an
administrative penalty payment received under TERRA and order
reimbursement for any plugging or cleanup costs.
subsection (e) Acceptance of the wellbore or transfer of oilfield
cleanup funds into TERRA does not preclude the commission from
proceeding on any violations of commission rules or state law.
subsection (f) Acceptance of a wellbore into TERRA creates a
"rebuttable presumption" that it was in compliance with commission
rules when accepted.
subsection (g) Mineral interest owners who have signed an
agreement to transfer a well to TERRA and are not licensees are not
responsible for plugging or clean-up of a TERRA wellbore.
subsection (h) Neither the commission nor the licensee are
responsible as fiduciaries to the mineral interest owners of a
tract on which a TERRA wellbore is located; no express or implied
lease covenants shall apply to the commission or to a licensee.
(Sections 93.015-93.030 are reserved for expansion.)
SUBCHAPTER C. LICENSES FOR TERRA WELLBORES
Sec. 93.031. LICENSE REQUIRED. Requires a person to have a license
before using a TERRA wellbore.
Sec. 93.032. APPLICATION FOR LICENSE. Requires an applicant for a
TERRA license to comply with the financial security requirements of
Chapter 91. Establishes procedures for making applications for
licenses to use TERRA wellbores. Provides that the applicants may
request protection from disclosure of any trade secrets or
geological information submitted as part of the application.
Commission rules, including any applicable requirements for notice
and opportunity for hearing, must be followed for all licensed
uses. The commission may impose conditions on TERRA licenses.
Licenses must be approved by adoption of a commission order.
Sec. 93.033. LICENSE FEE. Sets a non-refundable administrative fee
at the lesser of $50.00 per wellbore or $500.00 for each (multi-wellbore) tract involved in the application; and provides for
filing renewals or amendments of TERRA licenses, but gives priority
to previously-filed applications for release of a wellbore from
TERRA.
Sec. 93.034. LICENSES UNDER TERRA. Governs the issuance of
licenses to use TERRA wellbores, and makes the licensee the
"responsible person" under Chapter 91 for the duration of the
license and until any violations of commission rules have been
corrected. The license must state its duration, specific approved
uses of the wellbore, and conditions imposed by the Commission.
Sec. 93.035. LICENSE AMENDMENT AND RENEWAL; PRIORITY. Provides for
filing renewals and amendments of TERRA licenses, but gives
priority to previously-filed applications for release of a wellbore
from TERRA.
Sec. 93.036. VIOLATION OF LICENSE. Allows a TERRA license to be
revoked for non-compliance with commission rules, orders, or
license conditions. In these cases, the commission may seek
reimbursement of its plugging or cleanup costs and impose
administrative penalties, and may elect to proceed against the
licensee's bond or letter of credit.
Sec. 93.037. LICENSED USES. Allows the use of TERRA wellbores for
research, data collection, or production testing, subject to the
requirement that all licensed uses must have a reasonable potential
to increase the recovery of hydrocarbons from the tract on which
the wellbores are located. The commission may adopt rules to
impose conditions on TERRA licenses.
Sec. 93.038. EXPIRATION OF LICENSE. Specifies that after a license
has expired, the commission may license the wellbore to another
person, release the wellbore from TERRA, or maintain the wellbore
in TERRA.
Sec. 93.039. WELLSITE EQUIPMENT. Allows licensees to use wellsite
equipment found at a TERRA wellsite or to remove and safeguard it.
Licensees must re-install the removed equipment unless a possessory
mineral interest owner or the owner has requested otherwise or has
reclaimed the equipment, or the well has been plugged. Persons
removing wellsite equipment from TERRA wells subject themselves to
the jurisdiction of the commission for any rule violations. Any
fines assessed for a violation will be deposited in the TERRA fund.
Sec. 93.040. RESTORATION OF LAND SURFACE. Requires the license
holder to restore the surface of the land as nearly as reasonably
possible to the condition it was in when the licensed use commenced
unless the license holder, acting under a lease, assumes
responsibility for the well and the wellsite and obtains the
release of the wellbore from TERRA within thirty days after the
license expires.
Sec. 93.041. PRODUCED HYDROCARBONS. Allows the production of
hydrocarbons during a TERRA production test without an allowable
and the selling of such production without complying with oil & gas
conservation regulations. This section also allocates the proceeds
of the sale of hydrocarbons recovered during production testing
authorized by a TERRA license. Mineral interest owners accepting
their share of these proceeds ratify and consent to, and become
bound by, the TERRA agreement under which the production occurred.
TERRA production does not trigger Section 64.092, Civil Practice
and Remedies Code, and is considered "ordinary production" when a
requirement that production be continued in paying quantities is an
issue.
Sec. 93.042. PREVENTION OF POLLUTION. Explicitly preserves the
commission's existing authority to prevent pollution, plug wells,
and clean up oil and gas wastes and other materials.
(Sections 93.043-93.050 are reserved for expansion.)
SUBCHAPTER D. RELEASE OF WELLBORES FROM TERRA
Sec. 93.051. PLUGGING OF WELLBORE. Provides that a well may be
released from TERRA by being plugged. Commission permission is
required before a TERRA well may be plugged.
Sec. 93.052. REQUEST FOR RELEASE BY MINERAL INTEREST OWNER BOUND
BY TERRA AGREEMENT. Allows mineral interest owners who are bound by
a TERRA agreement to obtain release of a wellbore from TERRA upon
compliance with all legal requirements to operate or plug the well,
and upon payment of a fee based on the estimated plugging cost and
dependent on the length of time the wellbore has been in TERRA.
Any payment required shall be reduced by the amount paid by a
person to place the well into TERRA if:
(1) the wellbore is released to that person or to that
person's lessee or assignee;
(2) that person owned at least 50% of the mineral interest in
the tract on which the well is located when the wellbore was
placed into TERRA; and,
(3) the agreement under which the well was placed into TERRA
is still in effect.
Payment will not be required for release of a well from TERRA if an
applicant agrees to plug the well. Applications for release may be
approved subject to the expiration of existing licenses. The
person to whom a wellbore is released assumes responsibility for
plugging and for compliance with commission rules.
Sec. 93.053. REQUEST FOR RELEASE BY MINERAL INTEREST OWNER NOT
BOUND BY TERRA AGREEMENT. Provides that mineral interest owners who
have not signed a TERRA agreement, and whose mineral rights are
thus unaffected by the agreement, may obtain release of the well
from TERRA. A wellbore may not be released from TERRA until the
mineral interest owner is in full compliance with state law and
commission rules. Provides for early release of a TERRA wellbore
prior to expiration of license. The person to whom a wellbore is
released assumes all responsibility for plugging the wellbore and
cleanup of the site.
Sec. 93.054. RELEASE OF TERRA EASEMENTS. Provides that when the
last TERRA well on a tract has been released, the commission shall
file a release of all TERRA easements on the tract in the office of
the county clerk. Information required to be contained in the
release is specified in the section.
(Sections 93.055-93.070 are reserved for expansion)
SUBCHAPTER E. ADMINISTRATIVE PROCEDURE; LIABILITY
Sec. 93.071. APPLICABILITY OF ADMINISTRATIVE PROCEDURE ACT. Applies
Chapter 2001, Government Code to:
1) proceedings to revoke a TERRA license or assess a penalty;
2) proceedings to require an operator to correct a wellbore
after it was accepted into TERRA;
3) hearings for proposed uses of a TERRA well.
Exempts the following from Chapter 2001, Government Code:
1) decisions on acceptance or refusal of wellbores into TERRA;
2) amount of payment required to accept a wellbore into TERRA;
3) decisions on issuance of a license under this chapter; and,
4) conditions determined for the issuance of a license.
Sec. 93.072. JUDICIAL REVIEW. Commission decisions described in
Sec. 93.071 are not subject to judicial review.
Sec. 93.073. LIABILITY OF STATE, COMMISSION, AND LICENSE HOLDERS.
Immunizes the commission, an employee or agent of the commission,
a license holder, and the state from suit and from liability under
any cause of action alleging that a TERRA wellbore should not have
been plugged, or that use of a TERRA wellbore has decreased the
value of the mineral estate in the tract on which the TERRA
wellbore is located.
This section also immunizes the commission and an employee or
agent of the commission from suit and from liability under any
cause of action arising from the participation of a wellbore in
TERRA and alleging wrongful death or injury or harm to persons,
property, or interests caused by or suffered by a license holder.
SECTION 3.Amends Subchapter B, Chapter 201, Tax Code, by adding
Sec. 201.058 to provide exemptions from the gas production tax for
certain natural gas, condensate, and liquid hydrocarbons produced
for inactive wells (Section 202.056, current law) and from TERRA
wells and former TERRA wells (Section 201.059, this legislation).
SECTION 4. Amends Section 202.052(c), Tax Code, to make conforming
language changes consistent with SECTION 3 by adding reference to
the current exemption from the gas severance tax for inactive wells
(Section 202.056) and the added exemption for TERRA wells and
former TERRA wells (Section 201.059, this legislation).
SECTION 5. Amends Subchapter B, Chapter 202, Tax Code by adding
Section 202.059 (Entitled "EXEMPTION FOR HYDROCARBONS FROM TERRA
WELLS) as follows:
Subsection (a) provides an exemption from the oil and gas
production taxes for hydrocarbons produced from TERRA wells under
a TERRA license, if approved by the comptroller under Subsection
(g).
Subsection (b) provides an exemption from the oil and gas
production taxes for hydrocarbons produced from former TERRA wells
resuming production after two years in TERRA, if approved by the
comptroller under Subsection (g).
Subsection (c) allows the commission to certify a well eligible for
the exemption or an application may be made to the commission under
this section. The commission may required an applicant to provide
any relevant information required to administer the section. The
commission is required to issue a certificate to each operator of
such a well. The certificate must identify the well and list the
effective date of the tax exemption (subject to the comptroller's
approval of the exemption).
Subsection (d) requires the commission to furnish to the
comptroller a copy of a certificate of exemption for each qualified
well.
Subsection (e) allows the commission to revoke the exemption
certification for wells if information indicates that the wells
were not eligible for tax exempt status or if a TERRA license is
revoked. The commission must notify the operator and the
comptroller that the certificate has been revoked. The tax
exemption is automatically revoked on the date the certification is
revoked and hydrocarbons produced from these wells after the date
on which certification is revoked are not eligible for the
exemption.
Subsection (f) grants the commission broad discretion and
authorization to adopt and enforce necessary rules and orders to
administer this section.
Subsection (g) provides that a person responsible for paying the
tax must apply to the comptroller in order to qualify for the tax
exemptions provided by this section and provide a copy of the
certificate issued under Subsection (c). The comptroller is
required to approve the application for exemption if the
hydrocarbons are eligible for the exemption. The comptroller is
authorized to require other information necessary to grant the tax
exemption, and may establish necessary procedures to comply with
this subsection and subsection (h).
Subsection (h) provides that an operator is entitled to a credit
against severance taxes that were paid on production after the
effective date of the exemption but before the comptroller approved
the application. The operator must apply to the comptroller for
the credit prior to the first anniversary after the date the
commission certifies the well for tax exemption.
Subsection (i) provides that any person submitting false
information on a report or other document required by this section
will be subject to penalties imposed by Chapters 85 and 91, Natural
Resources Code.
Subsection (j) provides that a person is liable to the state if the
person after notice of revocation of the exemption, applies or
attempts to apply for exemption for a well under the revoked
certificate. Penalties may not exceed (A) $10,000; and (B) the
difference between the amount of taxes paid or attempted to be paid
and the amount of taxes due.
Subsection (k) allows the attorney general to recover a penalty
imposed by subsection (j) and establishes venue for suits in Travis
County.
Subsection (l) defines "Commission" as the Railroad Commission of
Texas; "Hydrocarbons" as any oil, gas, condensate, or other liquid
hydrocarbons produced from a well; and "TERRA" as the program
established under Chapter 93, Natural Resources Code.
SECTION 6. Effective Date: January 1, 1996.
SECTION 7. Emergency Clause.
COMPARISON OF ORIGINAL TO SUBSTITUTE
The original bill was not a Legislative Counsel draft. The
substitute was drafted by Legislative Counsel following the filed
version of the bill. As a result, some items that were combined
into a single section of the filed version have been drafted into
separate sections in the substitute.
An amendment to the substitute deleted SECTION 6. The section was
identical to SECTION 6 of the filed bill which amended Subchapter
M, Chapter 91, Natural Resources Code, relating to the oil and gas
well logs filed with the Railroad Commission of Texas.
SUMMARY OF COMMITTEE ACTION
H.B. 2731 was considered by the Energy Resources Committee in a
public hearing on April 18, 1995. The committee considered a
complete substitute to the bill. One amendment was offered to the
substitute. The amendment was adopted without objection. The
substitute, as amended, was adopted without objection. The Chair
directed the committee staff to incorporate the amendment into the
substitute. The following witnesses testified neutrally on the
bill:
Barry Williamson, Chairman of the Railroad Commission of
Texas;
Charles Matthews, Commissioner for the Railroad Commission of
Texas; and,
David Garlick, Director of the Oil & Gas Division of the
Railroad Commission of Texas.
The bill was reported favorably as substituted, with the
recommendation that it do pass and be printed, by a record vote of
6 ayes, 0 nays, 0 PNV, and 3 absent.