BILL ANALYSIS



S.B. 905
By: Ellis (Dutton)
May 4, 1995
Committee Report (Amended)



BACKGROUND

Of approximately 12,000 wells on Permanent School Fund oil and gas
leases, there are about 4,000 wells that produce fewer than 15
barrels of oil per day or its equivalent in natural gas.  With
current oil and gas prices, these 4,000 wells are economically
marginal and are often abandoned even when small production
problems occur, although many still have meaningful reserves of oil
and gas.  Abandonment means that those reserves will likely be
lost, and that royalty rates, severance tax, and ad valorem tax
revenues are lost to state funds and local governments.

Reduction of the amount of royalty can extend the economic life of
marginal wells.


PURPOSE

S.B. 905 would authorize the School Land Board to reduce royalty
rates applicable to marginal oil and gas properties on public
lands, and authorizes the Board for Lease of University Lands to
limit reduction of royalty rates for certain reservoirs on
university lands.


RULEMAKING AUTHORITY

It is the committee's opinion that rulemaking authority is granted
to the School Land Board under SECTION 1 (Section 32.067, Chapter
32C, Natural Resources Code) and to the Board for Lease of
University Lands under SECTION 2 (Section 66.84 (a)(4) and
66.84(b), Education Code) of this bill.


SECTION BY SECTION ANALYSIS

SECTION 1. Amends Chapter 32C, Natural Resources Code, by adding
Section 32.067, as follows:

     Sec. 32.067.  MARGINAL PROPERTY ROYALTY RATES.  
     
      Subsection (a) provides definitions:
     1) "Barrel of oil equivalent" ("BOE")
     2) "Qualifying Gulf of Mexico property"
     3) "Qualifying Gulf of Mexico reservoir"
     4) "Qualifying property"
     5) "Qualifying reservoir"
     6) "Reservoir"
     
     Subsection (b) authorizes the School Land Board to adopt
       rules for the reduction of royalty rates as provided by this
       section.
       
       Subsection (c) prohibits a royalty rate for oil and gas
       produced from a qualifying reservoir to be reduced to less
       than one-sixteenth (6.25 percent).
       
       Subsection (d) Prohibits a royalty rate for the state's
       share under a lease issued under Chapter 52F or Sections
       51.195(c)(2) and (d) to be reduced to less than one-thirty-second (3.125 percent).  Authorizes the state's royalty rate
       to be reduced only if the royalty rate for the owner of the
       soil is reduced in the same proportion.
       
       Subsection (e) prohibits a royalty rate on a lease issued
       for a riverbed tract from being reduced to a rate lower than
       the rate under lease of land that adjoins it and is held,
       operated, or under the significant control of the state's
       lessee.
       
       Subsection (f) prohibits the royalty rate under a lease
       issued for a highway tract from being reduced to a rate
       lower than the rate under a lease of land that adjoins it.
       
       Subsection (g) states that if a qualifying reservoir seeks
       a royalty rate reduction subject to the board's authority
       then the terms may be modified by the board as a condition
       of approving the requested reduction.
       
       Subsection (h) excludes the free royalty reserved under
       Section 51. 54, Natural Resources Code. (The free royalty is
       a fixed percentage of production set at the time of sale.
       The Permanent School Fund receives no bonus or rental under
       lease of those lands and does not have the right to execute
       leases covering its reserved royalty.)
       
       
       SECTION 2.   Amends Chapter 66D, Education Code, by adding Section
66.84, as follows:

     Sec. 66.84.  MARGINAL PROPERTY ROYALTY RATES.  
     
       Subsection (a): Definitions. (In the definition of
     "Qualifying reservoir," the Board for    Lease of University
     Fund Lands [BLUL] is allowed to adopt rules to determine the 
         period in which a reservoir may produce 15 barrels of oil
     equivalent or less to qualify.)
     
     Subsection (b) authorizes the BLUL, by rule, to provide that
       the royalty rate for qualifying reservoirs may be reduced to
       not less than one-sixteenth (6.25 percent).
       
       Subsection (c) states that if a qualifying reservoir seeks
       a royalty rate reduction subject to the board's authority
       then the terms may be modified by the BLUL as a condition of
       approving the requested reduction.

SECTION 3. Makes application of this Act prospective.


SECTION 4. Emergency Clause.
           Effective Date: upon passage.


EXPLANATION OF AMENDMENTS

Amendment No. 1 amends the definition of a "barrel of oil
equivalent" in SECTION 2 of the bill to make it match the
definition in SECTION 1 of the bill.

The amendment also allows the Board for Lease of University Fund
Lands to consider application of new recovery techniques and
operating efficiency of a reservoir when deciding whether to grant
a royalty rate reduction.


SUMMARY OF COMMITTEE ACTION

S.B. 905 was considered by the Energy Resources Committee in a
public hearing on May 2, 1995. Stroud Kelley of the Texas General
Land Office testified neutrally on the bill. The committee
considered one amendment to the bill. The amendment was adopted
without objection. The bill was reported favorably as amended, with
the recommendation that it do pass and be printed and be sent to
the Committee on Local and Consent Calendars, by a record vote of
6 ayes, 0 nays, 0 PNV, and 3 absent.

The vote by which S.B. 905 as amended, was reported to the
Committee on Local and Consent Calendars was reconsidered by a
record vote of 6 ayes, 0 nays, 0 PNV, and 3 absent.

The bill was reported favorably as amended, with the recommendation
that it do pass and be printed and be sent to the Committee on
Calendars, by a record vote of 6 ayes, 0 nays, 0 PNV, and 3 absent.