BILL ANALYSIS H.B. 2731 By: Craddick (Bivins) Finance 05-19-95 Senate Committee Report (Unamended) BACKGROUND The largest source of oil in Texas is the unrecovered oil left in place when wellbores are plugged and abandoned. Current law requires the Texas Railroad Commission 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 As proposed, H.B. 2731 creates the Texas Experimental Research and Recovery Activity program (TERRA) for maintaining non-producing, but environmentally and mechanically sound wells under the stewardship of the Texas Railroad Commission (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. RULEMAKING AUTHORITY It is the committee's opinion that rulemaking authority is granted under SECTIONS 2 (Sections 93.003 and 93.037(b), Natural Resources Code) and 5 (Sec. 202.059, Tax Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. (a) Sets forth the findings of the Legislature regarding unrecovered hydrocarbons. SECTION 2. Amends Title 3b, Natural Resources Code, by adding Chapter 93, as follows: CHAPTER 93. TEXAS EXPERIMENTAL RESEARCH AND RECOVERY ACTIVITY SUBCHAPTER A. GENERAL PROVISIONS Sec. 93.001. DEFINITIONS. Defines "commission," "license holder," "mineral interest owner," "operator," "present possessory mineral interest," "production test," "responsible person," "TERRA," "tract," "wellbore," and "wellsite equipment." Sec. 93.002. TEXAS EXPERIMENTAL RESEARCH AND RECOVERY ACTIVITY. (a) Establishes the Texas Experimental Research and Recovery Activity (TERRA) in the Texas Railroad Commission (commission). (b) Sets forth the purpose of TERRA. Sec. 93.003. COMMISSION POWERS. Authorizes the commission to adopt and enforce any appropriate rules or orders that the commission finds necessary to administer this chapter. Sec. 93.004. TERRA FUND; CERTIFICATION. (a) Creates the TERRA fund in the state treasury. (b) Requires the commission to send to the comptroller, or notify the comptroller of certain amounts of money to be transferred, for credit to the TERRA fund. (c) Requires interest earned on the TERRA fund to be credited to the fund. (d) Authorizes money in the TERRA fund to be used by the commission for certain purposes and administrative and program costs. (e) Prohibits money in the TERRA fund from being used or pledged for a purpose described by Subsection (d)(2) unless the unobligated money in the TERRA fund exceeds the total estimated plugging cost of all unplugged TERRA wellbores. Sec. 93.005. USE OF OIL-FIELD CLEANUP FUND. Prohibits a TERRA wellbore from being plugged with money from the oil-field cleanup fund. SUBCHAPTER B. TERRA AGREEMENT Sec. 93.011. AGREEMENT BETWEEN COMMISSION AND MINERAL INTEREST OWNERS. (a) Authorizes a mineral interest owner by agreement to designate the Texas Railroad Commission (commission) as its agent and grant to the commission an easement for the sole purpose of maintaining and licensing a wellbore in TERRA. (b) Authorizes the commission to accept a grant of an easement from, and become the agent of, a mineral interest owner. (c) Provides that an easement granted to the commission under this chapter is public property held and used on behalf of the public solely for the purposes of TERRA as provided by this chapter and is not subject to taxation. (d) Requires the commission to prepare a form for the agreement. Sets forth the guidelines of the agreement. (e) Authorizes the agreement to incorporate by reference any provision of this chapter. (f) Requires the agreement to contain certain information. (g) Provides that the consideration for the granting of the easement and the use of any wellsite equipment is forbearance by the commission in requiring the mineral interest owner's compliance with otherwise applicable rules regarding maintenance and plugging of inactive wells, and the possibility that participation in TERRA may lead to the recovery of hydrocarbons that otherwise would not have been recovered for the benefit of the mineral interest owner. (h) Requires the commission to file the agreement in the office of the clerk of the county in which the wellbore is located. Requires the clerk to record it in the real property records without collecting a fee. Sec. 93.012. TERRA EASEMENTS: EFFECT AND CONDITIONS. (a) Provides that an easement granted in an agreement under Section 93.011 runs with the land and is valid under certain conditions. (b) Provides that the agreement, including the designation of the commission as agent of the mineral interest owner, binds all successors in interest of the mineral interest owner even though the commission does not have a beneficial interest in the mineral estate or the wellbores covered by the agreement. (c) Provides that a vested mineral or surface interest existing at the time an agreement under Section 93.011 is executed is not affected by the agreement unless the owner of the mineral or surface interest is a party to the agreement, ratifies the agreement, or consents to the agreement. (d) Provides that a mineral interest in a tract on which a wellbore covered by an agreement is located that is acquired by a person after the person has signed an agreement covering the wellbore is bound by the agreement. Sec. 93.013. ACCEPTANCE OF WELLBORES INTO TERRA. (a) Authorizes the commission to accept an inactive wellbore used in connection with the exploration for or production of hydrocarbons into TERRA under certain conditions. (b) Requires the commission to return the payment under Subsection (a)(8) if the wellbore is not accepted into TERRA. (c) Authorizes the commission to place an abandoned wellbore scheduled for plugging with state money under Chapter 89 in TERRA if it meets the requirements of Subsections (a)(1)-(5). Requires the commission to transfer from the oil-field cleanup fund to the TERRA fund the amount of money equal to the commission's estimated plugging costs on placement of the wellbore in TERRA. Authorizes the wellbore to be plugged only with money from the TERRA fund after the transfer of money and while the wellbore remains in TERRA. Prohibits the oil-field cleanup fund from being used to plug a TERRA wellbore. (d) Requires the amount of money received into the TERRA fund under Subsection (c) to be transferred back to the oil-field cleanup fund if a wellbore transferred to TERRA under Subsection (c) is subsequently released. (e) Provides that the offer of a wellbore to TERRA or its acceptance by the commission is not an abandonment of the wellbore or of the lease or the lease purposes by mineral interest owner. (f) Prohibits the commission from accepting a wellbore into TERRA, after September 1, 1999, under Subsection (a)(8) unless the TERRA fund balance exceeds the total estimated plugging cost of all TERRA wells. Sec. 93.014. EFFECT OF ACCEPTANCE OF WELLBORE INTO TERRA. (a) Requires the commission to assume the well-plugging duties imposed on the last operator by Chapter 89 until the wellbore is released from TERRA under Subchapter D on acceptance of a wellbore into TERRA. (b) Provides that a license holder or the commission is not responsible for any discharge or oil and gas waste or other substances or materials regulated by the commission under Section 91.101 occurring before the wellbore was accepted into TERRA. (c) Authorizes the commission, after notice and opportunity for a hearing, to order restoration of all plugging and cleanup responsibility to the mineral interest owner and require the mineral interest owner to plug the wellbore and to clean up the wellsite, or plug the wellbore and clean up the wellsite if a mineral interest owner has materially misstated the condition of a wellbore or wellsite and its compliance with Section 93.013(a)(4), (5), or (6) in connection with the acceptance of the wellbore into TERRA. (d) Authorizes the commission to retain as an administrative penalty the payment made under Section 93.013(a)(8) and order reimbursement of any plugging or cleanup costs incurred by the commission. (d) Provides that acceptance of a wellbore into TERRA or transfer of money from the oil-field cleanup fund to the TERRA fund does not bar the commencement or continuation of an administrative or judicial proceeding, including a collection suit, against an operator or other responsible person for a violation of a commission rule or order or state law. (f) Provides that acceptance by the commission of a wellbore into TERRA creates a rebuttable presumption that the well was in compliance with commission rules at the time of acceptance. (g) Provides that a mineral interest owner who has signed an agreement under Section 93.011 and who is not a license holder is not a responsible person for a well covered by the agreement and, except as provided by Subsection (c), is not responsible under commission rules for plugging, cleaning up, or remediating a TERRA wellbore or TERRA wellsite. (h) Prohibits the commission or a license holder from being held to exercise any fiduciary or similar duty for the benefit of a mineral interest owner in the tract on which a TERRA wellbore is located. Provides that an express or implied lease covenant does not apply to the commission or a license holder in the use or nonuse of a TERRA wellbore. SUBCHAPTER C. LICENSES FOR TERRA WELLBORES Sec. 93.031. LICENSE REQUIRED. Requires a person to have a license before a person may use a wellbore as provided by this subchapter. Sec. 93.032. APPLICATION FOR LICENSE. (a) Requires an applicant for a license to comply with Subchapters D and E, Chapter 91, before the commission may issue a license. (b) Requires a separate application to be submitted for each oil lease and each gas wellbore. (c) Requires an application for a license to be on a form prescribed by the commission. (d) Authorizes the commission to require an applicant to provide any information relating to a tract that is the subject of a license, including a legal description of the mineral ownership of the tract and identification and location of wells. (e) Authorizes the commission to require an applicant to provide the commission with agreements under Subchapter B executed by owners of reversionary and other mineral interests before the license may be issued. (f) Requires the applicant to request in writing confidential treatment and clearly mark the documents as confidential if an applicant intends to claim that any of the information submitted is confidential under Section 552.110, Government Code, relating to trade secrets or Section 552.113, Government Code, relating to geological or geophysical information. (g) Requires a license to be approved by the commission by adoption of a final order and may be in the form of a commission order or in some other form prescribed by the commission. (h) Authorizes the commission to hold a hearing on an application for a license and a proposed use in accordance with commission rules. Sec. 93.033. LICENSE FEE. Requires an applicant to submit to the commission an administrative fee equal to the lesser of $50 for each wellbore or $500 for each tract. Provides that the fee is not refundable. Sec. 93.034. LICENSES UNDER TERRA. (a) Provides that a license entitles a license holder to use the wellbore named in the license for the duration of the license solely for the purposes of TERRA and in accordance with the license, this chapter, and other applicable state law. (b) Requires the license holder to comply with all commission rules governing the licensed use, including rules that require a permit to be issued or an exception to a commission rule to be granted. (c) Provides that a license holder is the responsible person for the licensed wellbores for the duration of the license and until any violations of commission rules or orders committed by the license holder have been corrected. (d) Requires a license to state certain information. Sec. 93.035. LICENSE AMENDMENT AND RENEWAL; PRIORITY. (a) Authorizes a license to be renewed or amended as provided by commission rules. (b) Provides that an application for release of a TERRA wellbore submitted to the commission under Section 93.052 or 93.053 has priority over a new license for a TERRA wellbore or an amendment or renewal of an existing license. Sec. 93.036. VIOLATION OF LICENSE. (a) Authorizes the commission to revoke the license of a license holder who violates the license or a commission rule or order. (b) Authorizes the commission to seek reimbursement of its costs and administrative penalties under Chapter 81 or 85, proceed against a bond or letter of credit, or pursue both remedies. Sec. 93.037. LICENSED USES. (a) Authorizes TERRA wellbores to be licensed for the collection of data, for production testing, or for developmental research on recovery techniques, each of which must have a reasonable potential to increase the recovery of hydrocarbons from the tract on which the wellbores are located. (b) Authorizes the commission, by rule or as part of the license, to establish terms for licensed uses. Sec. 93.038. EXPIRATION OF LICENSE. Authorizes the commission to release a wellbore under the license as provided by Subchapter D; maintain the wellbore in TERRA; or license the wellbore to another person. Sec. 93.039. WELLSITE EQUIPMENT. (a) Authorizes a license holder to use, or to remove and safeguard, wellsite equipment in which it does not have a legal interest. Requires a license holder to return and properly reinstall all equipment removed not later than the 30th day after the date the license of the license holder expires unless the equipment has been lawfully claimed by a person with an ownership or security interest in the equipment; or a mineral interest owner or the owner of the equipment has requested otherwise. (b) Provides that the license holder is not required to reinstall any wellsite equipment taken from the wellbore or wellhead. (c) Provides that a person who removes wellsite or production equipment from a licensed or unlicensed TERRA wellbore is subject to the regulatory jurisdiction of the commission under Chapter 81C. Requires any reimbursement of commission costs or administrative penalties assessed or civil penalties adjudged in an action against the person for violation of commission rules to be deposited into the TERRA fund. Sec. 93.040. RESTORATION OF LAND SURFACE. (a) Requires the license holder to restore the surface of the land, as nearly as reasonably possible, to the condition of the land when the licensed use commenced not later than the 30th day after the date a license expires. (b) Provides that this section does not apply if, before the 30th day after the date the license expires, the license holder, acting under a lease, obtains release of the wellbore from TERRA and assumes responsibility for the wellbore under state law and commission rules. Sec. 93.041. PRODUCED HYDROCARBONS. (a) Authorizes the license holder to sell hydrocarbons produced during a production test from a TERRA wellbore approved by the commission without complying with Chapter 85E. Provides that an allowable is not required to produce hydrocarbons, but the license holder shall report all production in accordance with commission rules. (b) Requires proceeds of any hydrocarbons sold by a license holder that are produced during production from a TERRA wellbore approved by the commission to be paid unless otherwise provided by a lease or other legal document. (c) Requires the license holder to make prompt payment in accordance with Chapter 91C, unless otherwise provided by a lease or other legal document. (d) Provides that a mineral interest owner accepting payment of a share of the proceeds under this section ratifies and consents to the terms of and becomes bound by the agreement under Subchapter B that covers the proceeds. (e) Provides that the production of a reasonable amount of hydrocarbons, to be determined by the commission, from a TERRA wellbore during a production test approved by the commission is not waste of the corpus or remainder of a mineral estate, and Section 64.092, Civil Practice and Remedies Code, does not apply to the production. (f) Provides that hydrocarbons produced from a TERRA wellbore during a production test approved by the commission are ordinary production for purposes of determining whether a lease requirement that production be continued in paying quantities has been met. Sec. 93.042. PREVENTION OF POLLUTION. Provides that this chapter does not limit the commission's authority under this title to prevent pollution, plug wells, or control or clean up oil and gas wastes or other substances or material. SUBCHAPTER D. RELEASE OF WELLBORES FROM TERRA Sec. 93.051. PLUGGING OF WELLBORE. (a) Authorizes a wellbore to be released from TERRA when it is plugged and abandoned in accordance with commission rules. (b) Prohibits a person from plugging a TERRA wellbore without permission of the commission. Sec. 93.052. REQUEST FOR RELEASE BY MINERAL INTEREST OWNER BOUND BY TERRA AGREEMENT. (a) Authorizes an owner of a present possessory mineral interest in the tract on which the wellbore is located who is bound by an agreement under Subchapter B relating to the wellbore to file an application to release the wellbore from TERRA. (b) Prohibits the commission from approving an application or releasing a wellbore under this section until the mineral interest owner fully complies with all applicable state laws and commission rules relating to oil and gas, including obtaining all permits or other authorizations required under commission rules before the wellbore may be operated or plugged, and submits to the commission an amount of money that the commission may set, not to exceed twice the reasonable plugging cost on the date of release and as estimated by the commission. (c) Prohibits the payment required under Subsection (b)(2) from exceeding the reasonable plugging costs on the date of release and as estimated by the commission if the wellbore to be released has been in TERRA for one year or less. (d) Requires the commission to reduce any payment required under Subsections (b)(2) and (c) by the amount of payment by a person under Section 93.013(a)(8) under certain conditions. (e) Prohibits the commission from requiring a payment under this section if the applicant agrees to plug the wellbore and complies with all commission plugging rules. (f) Authorizes the commission to approve the application for release, effective not earlier than the day after the date the license expires unless the applicant submits a written release from the license holder that allows for an earlier release date. (g) Provides that a person to whom a wellbore is released assumes responsibility for plugging of the wellbore and cleanup of the site, including all associated costs in accordance with state law and commission rules, but the license must comply with Sections 93.039 and 93.040. Sec. 93.053. REQUEST FOR RELEASE BY MINERAL INTEREST OWNER NOT BOUND BY TERRA AGREEMENT. (a) Authorizes an owner of a present possessory mineral interest in the tract on which the wellbore is located who is not bound by an agreement under Subchapter B on the wellbore to request that the wellbore be released from TERRA. (b) Prohibits the commission from releasing a wellbore under this section until the mineral interest owner is in full compliance with all applicable state laws and commission rules relating to oil and gas and has obtained all permits or other authorization required under commission rules before the wellbore may be operated or plugged. (c) Authorizes the commission to approve the application for release, effective not earlier than the day after the date the license expires unless the applicant submits a written release from the license holder that allows for an earlier release date. (d) Makes conforming changes. Sec. 93.054. RELEASE OF TERRA EASEMENTS. (a) Requires the commission to file a release of all TERRA easements on the tract in the office of the clerk of the county in which the tract is located. (b) Requires the release to contain certain information. (c) Provides that the release does not have to be acknowledged. (d) Requires the clerk to record the release in the real property records without collecting a fee. Sec. 93.055. REQUEST FOR RELEASE BY SURFACE OWNER. (a) Authorizes the owner or owners of at least 50 percent of the surface interest in the land on which a TERRA wellbore is located to file with the commission a written request to plug the wellbore if it has been in TERRA for more than seven years. (b) Requires the commission to notify all persons who have signed the TERRA agreement pertaining to the wellbore and any licenses of the wellbore under Section 93.037 of the request for commission plugging. Requires the notice to also state that the wellbore will be plugged unless a mineral owner obtains release of the wellbore from TERRA under Section 93.052 or 93.053 within 90 days, or at the expiration of an existing TERRA license, whichever occurs later. (c) Requires the commission to schedule the wellbore to be plugged at the end of any existing licensed use if the wellbore is not released from TERRA under Subsection (b). (d) Authorizes the commission to require surface owners requesting plugging of a TERRA wellbore to provide a copy, certified by the clerk of the county in which the land is located, of the deed or other instrument under which they claim title to the surface estate. SUBCHAPTER E. ADMINISTRATIVE PROCEDURE; LIABILITY Sec. 93.071. APPLICABILITY OF ADMINISTRATIVE PROCEDURE ACT. (a) Provides that Chapter 2001, Government Code, applies to a proceeding to revoke a TERRA license and to assess an administrative penalty against or require reimbursement from a license holder; a proceeding under Section 93.014(c); and a hearing required by commission rules on proposed uses. (b) Provides that Chapter 2001, Government Code, does not apply to a decision by the commission under this chapter on acceptance or refusal to accept a wellbore into TERRA; on the amount of payment required under Section 93.013(a)(8); on the issuance of a license under this chapter; and on the conditions of a license. Sec. 93.072. JUDICIAL REVIEW. Provides that a judicial decision described by Section 93.071(b) is not subject to judicial review. Sec. 93.073. LIABILITY OF STATE, COMMISSION, AND LICENSE HOLDERS. (a) Sets forth the persons or persons who are immune from suit and from liability under any cause of action alleging certain actions. (b) Provides that the commission and an employee or agent of the commission are immune 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 Chapter 201B, Tax Code, by adding Section 201.058, as follows: Sec. 201.058. TAX EXEMPTIONS. Provides that the exemptions described by Sections 202.056 and 202.059 apply to the taxes imposed by this chapter as authorized by and subject to the certifications and approvals required by those sections. SECTION 4. Amends Section 202.052(c), Tax Code, to provide that the exemptions described by Sections 202.056 and 202.059 apply to oil produced in this state from a well that qualifies under Section 202.056 or 202.059, subject to the certifications and approvals required by those sections. SECTION 5. Amends Chapter 202B, Tax Code, by adding Section 202.059, as follows: Sec. 202.059. EXEMPTION FOR HYDROCARBONS FROM TERRA WELLS. (a) Provides that hydrocarbons produced from a well subject to an agreement under Chapter 93, Natural Resources Code, and under a license issued under that chapter qualify for an exemption from the taxes imposed by this chapter and Chapter 201 if the comptroller approves the tax exemption under Subsection (g). (b) Provides that hydrocarbons produced from a well formerly subject to an agreement under Chapter 93, Natural Resources Code, and a license issued under that chapter resuming production after participation in TERRA for two years qualify for an exemption from the taxes imposed by this chapter and Chapter 201 if the comptroller approves the tax exemption under Subsection (g). (c) Authorizes the commission to certify a well eligible for a tax exemption or an application may be made to the commission for certification under this section. Authorizes the commission to require an applicant to provide the commission with any relevant information required to administer this section. Requires the commission to issue a certificate to each operator of the well. Requires the certificate to contain certain information. (d) Requires the commission to furnish to the comptroller a copy of a certificate of exemption for each well qualifying under this section. (e) Authorizes the commission to revoke a certificate for a tax exemption if information indicates that a well was not eligible for that designation at the time of certification or if a license issued under Chapter 93, Natural Resources Code, is revoked by the commission. Requires the commission to notify the operator and the comptroller that a certificate has been revoked. Provides that a tax exemption granted under this section is automatically revoked on the date the certificate is revoked, and hydrocarbons produced from the well after the date of revocation are not eligible for the tax exemption. (f) Authorizes the commission to adopt and enforce any rules or orders that the commission finds necessary to administer this section. (g) Requires the person responsible for paying the tax to apply to the comptroller for the exemption and include with the application the certificate issued by the commission under Subsection (c). Requires the comptroller to approve the application of a person if the hydrocarbons are eligible for the tax exemption. Authorizes the comptroller to require a person applying for the tax exemption to provide any relevant information necessary to administer this section. Authorizes the comptroller to establish procedures to comply with this subsection and Subsection (h). (h) Entitles the operator to a credit on taxes due under Chapter 201 or this chapter in the amount equal to the tax paid during that period if the tax is paid at the full rate provided by this chapter and Chapter 201 on hydrocarbons produced on or after the effective date of the tax exemption but before the date the comptroller approves an application for the tax exemption. Requires the operator to apply to the comptroller for the credit not later than one year after the date the commission certifies the well for a tax exemption to receive a credit. (i) Subjects a person to the penalties that may be imposed under Chapters 85 and 91, Natural Resources Code, if the person makes and submits to the commission or comptroller an application, report, or other document used or intended to be used for a certification, tax exemption, or tax credit under this section and the person knows that the application, report, or other document contains a false or untrue material fact. (j) Provides that a person is liable to the state for a civil penalty if the person, after receiving notice from the commission that the person's tax exemption certificate for a TERRA well or a former TERRA well has been revoked, applies or attempts to apply for a tax exemption for hydrocarbons produced from the well under this revoked certificate. Prohibits the amount of the penalty from exceeding a certain sum. (k) Authorizes the attorney general to recover a penalty under Subsection (j) in a suit brought on behalf of the state. Provides that venue for the suit is in Travis County. (l) Defines "commission," "hydrocarbons," and "TERRA." SECTION 6. Effective date: January 1, 1996. SECTION 7. Emergency clause.