By Chisum H.B. No. 1354 75R2357 MI-F A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to authorizing plans for unit operations for oil and gas 1-3 production. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Subtitle C, Title 3, Natural Resources Code, is 1-6 amended by adding Chapter 104 to read as follows: 1-7 CHAPTER 104. UNITIZATION 1-8 SUBCHAPTER A. GENERAL PROVISIONS 1-9 Sec. 104.001. SHORT TITLE. This chapter may be cited as the 1-10 State Assisted Unitization Act. 1-11 Sec. 104.002. DEFINITIONS. In this chapter: 1-12 (1) "Commission" means the Railroad Commission of 1-13 Texas. 1-14 (2) "Common source of supply" means an accumulation or 1-15 multiple accumulations of oil and gas that can best be produced and 1-16 operated as a single reservoir. 1-17 (3) "COPAS" means the Council of Petroleum Accounts 1-18 Societies of North America. 1-19 (4) "Extraneous substances" are hydrocarbon or other 1-20 substances purchased or otherwise obtained from outside a unit area 1-21 for injection into the common source of supply during unit 1-22 operations. 1-23 (5) "Oil and gas" includes oil and gas separately or 1-24 in combination, oil, gas, and other hydrocarbons and other 2-1 substances in solution or suspension, or any combination of those 2-2 substances found in or produced from the unit area. 2-3 (6) "Plan of unitization" means a plan or agreement 2-4 that is consistent with the requirements of this chapter between 2-5 working interest owners and royalty owners of mineral interests in 2-6 a common reservoir in which unit operations may be conducted to 2-7 enhance the production of oil or gas or oil and gas from the common 2-8 reservoir above the volumes that would otherwise be produced by 2-9 primary recovery operations only. 2-10 (7) "Primary recovery" means the displacement of oil 2-11 or gas or oil and gas from the earth into the well bore by means of 2-12 the natural pressure of the reservoir, including artificial lift. 2-13 (8) "Royalty interest" means the right to, or interest 2-14 in, oil and gas or proceeds of oil and gas production. The term 2-15 does not include a working interest. 2-16 (9) "Royalty owner" means the owner of a royalty 2-17 interest. 2-18 (10) "Tract" means a parcel of land of uniform 2-19 ownership lying within the unit area that, immediately before 2-20 unitization: 2-21 (A) was not producing; or 2-22 (B) was under separate operation for production 2-23 of oil and gas. 2-24 (11) "Tract participation" means the percentage shown 2-25 in the plan of unitization for allocating unit production to a 2-26 tract. 2-27 (12) "Unit area" includes the surface area inside the 3-1 boundaries of the unit and the common source of supply or the part 3-2 of the common source underlying the surface area that may be 3-3 reasonably required for conduct of unit operations. "Unit area," 3-4 "unit," or "prior unit" includes only those units formed 3-5 voluntarily or by commission order for the purpose of unit 3-6 operations. 3-7 (13) "Unit expense" includes any cost or expense 3-8 incurred in the conduct of unit affairs or unit operations. 3-9 (14) "Unit operations" means: 3-10 (A) operations related to the production of oil 3-11 and gas from the unit area, including: 3-12 (i) cycling; 3-13 (ii) recycling; 3-14 (iii) repressuring; 3-15 (iv) waterflooding; 3-16 (v) pressure maintenance; 3-17 (vi) tertiary recovery operations; or 3-18 (vii) other operations to increase the 3-19 ultimate recovery of oil or gas, oil and gas, or other hydrocarbons 3-20 from the proposed unit area; or 3-21 (B) the establishment and operation of the 3-22 necessary facilities for the operations listed in Paragraph (A). 3-23 (15) "Unit operator" means the working interest owner 3-24 designated under the plan of unitization to conduct unit 3-25 operations, acting as operator and not merely as a working interest 3-26 owner. 3-27 (16) "Unit participation of a royalty owner" means the 4-1 percentage equal to the product obtained by multiplying the 4-2 royalty interest of each royalty owner in each tract by the tract 4-3 participation of the tract. 4-4 (17) "Unit participation of a working interest owner 4-5 or unleased mineral interest owner" means the percentage equal to 4-6 the product obtained by multiplying the working interest of the 4-7 working interest owner in each tract or, if the working interest 4-8 owner is an unleased mineral interest owner, the mineral interest 4-9 of that owner in each tract, by the tract participation of the 4-10 tract. 4-11 (18) "Unit production" includes all oil and gas 4-12 produced and saved from a unit area after the effective date of the 4-13 unit regardless of the well or tract in the unit area from which 4-14 the oil and gas are produced. The term does not include the 4-15 following substances if the working interest owners under a lease, 4-16 contract, or agreement have excluded the substances from unit 4-17 production: 4-18 (A) recoverable extraneous substances injected 4-19 into the common source of supply or used in well treatment or 4-20 pressure maintenance; 4-21 (B) any production that is reinjected into the 4-22 unit area, unless the reinjected production is removed from the 4-23 unit area for non-unit purposes or sold, in which case it will be 4-24 considered to be unit production; or 4-25 (C) any production used or consumed in unit 4-26 operations. 4-27 (19) "Working interest" means an interest in oil and 5-1 gas by virtue of a lease, operating agreement, fee title, or 5-2 otherwise, including a carried interest, the owner of which is 5-3 obligated to pay, in cash, out of production, or otherwise, the 5-4 owner's share of the unit expense under the proposed plan of 5-5 unitization. Any interest in unleased lands or mineral rights is 5-6 considered a working interest to the extent of thirteen-sixteenths 5-7 (13/16) of that interest with all the rights and obligations of a 5-8 lessee as if the mineral rights were leased, and a royalty interest 5-9 to the extent of three-sixteenths (3/16) of that interest. If the 5-10 owner makes an oil and gas lease on that interest, the working 5-11 interest and royalty interest are as stated in the lease. 5-12 (20) "Working interest owner" means the owner of 5-13 working interest. 5-14 Sec. 104.003. POWER AND AUTHORITY OF COMMISSION. (a) The 5-15 commission shall make and enforce any order and perform any act 5-16 necessary to carry out the purposes of this chapter. 5-17 (b) The commission in accordance with this chapter may 5-18 determine whether a plan of unitization proposed under this chapter 5-19 for all or part of a common reservoir is fair, reasonable, and 5-20 equitable for all interests concerned, and necessary to carry out 5-21 the purposes of this chapter. 5-22 (c) Subject to this chapter and the commission's selective 5-23 use of the appropriate provisions of Subchapters C and E, Chapter 5-24 81, the commission by rule shall establish any additional 5-25 requirements and shall issue and enforce any order or perform any 5-26 act it finds necessary to promote the planned development and 5-27 operations of common sources of supply for the ultimate enhanced 6-1 recovery of natural resources, the prevention of waste, or the 6-2 protection of the correlative rights of the owners in each unitized 6-3 area. 6-4 Sec. 104.004. APPLICABILITY. (a) This chapter does not 6-5 apply to any production, lease, royalty, or other interest that is 6-6 subject to an agreement approved by the commission before January 6-7 1, 1969, under Section 101.011. 6-8 (b) This chapter does not affect a voluntary cooperative 6-9 agreement in secondary recovery operations as provided by 6-10 Subchapter B, Chapter 101. 6-11 Sec. 104.005. PARTICIPATION IN PLAN BY GOVERNMENTAL AGENCY. 6-12 The state or an agency or political subdivision of the state, 6-13 subject to other applicable laws, may participate in a plan of 6-14 unitization under this chapter with regard to any land owned by the 6-15 entity. 6-16 Sec. 104.006. CONFLICT WITH ANTITRUST ACTS. (a) An 6-17 agreement, plan of unitization, or operation under an agreement 6-18 that complies with this chapter and is necessary to prevent waste 6-19 and conserve the natural resources of this state may not be 6-20 construed in violation of Chapter 15, Business & Commerce Code. 6-21 (b) If a court finds a conflict between this chapter and 6-22 Chapter 15, Business & Commerce Code, this chapter is intended as a 6-23 reasonable exception to that law that is necessary for the public 6-24 interest described by Subsection (a). 6-25 (c) If a court finds a conflict between this chapter and 6-26 Chapter 15, Business & Commerce Code, and finds that this chapter 6-27 is not a reasonable exception to Chapter 15, the legislature 7-1 intends that this chapter, or any conflicting part of this chapter, 7-2 be declared invalid rather than that Chapter 15, Business & 7-3 Commerce Code, or any portion of that chapter, be declared invalid. 7-4 Sec. 104.007. APPEALS. A person affected by an order of the 7-5 commission issued under this chapter is entitled to judicial review 7-6 of that order in accordance with Chapter 2001, Government Code. 7-7 (Sections 104.008-104.020 reserved for expansion 7-8 SUBCHAPTER B. APPLICATION PROCEDURES; CONSIDERATION 7-9 AND APPROVAL OF PLAN 7-10 Sec. 104.021. APPLICATION FOR UNITIZATION. (a) Any working 7-11 interest owner may file an application with the commission 7-12 requesting an order for the unit operation of a common source of 7-13 supply or a part of that common source of supply. 7-14 (b) The application shall contain: 7-15 (1) a description of the proposed unit area and the 7-16 vertical limits and producing horizons to be included in that unit 7-17 area with a map or plat attached; 7-18 (2) a statement of the type of operations contemplated 7-19 for the unit area; 7-20 (3) a copy of a proposed plan of unitization that the 7-21 applicant considers fair, reasonable, and equitable; 7-22 (4) an allegation of the facts required to be found by 7-23 the commission under Section 104.024; and 7-24 (5) an allegation that the applicant has obtained at 7-25 least the minimum required approval of the plan of unitization as 7-26 required by Section 104.026. 7-27 (c) The applicant shall submit with the application a list 8-1 including: 8-2 (1) the name of each person owning or having a working 8-3 or royalty interest in the proposed unit area and each adjacent 8-4 offset operator as reflected in the working interest owners' 8-5 division order records or the deed records for each county in which 8-6 the unit area is located; and 8-7 (2) an address for each person listed or a statement 8-8 that the person's address is unknown. 8-9 Sec. 104.022. HEARING REQUIRED. (a) On receipt of an 8-10 application, the commission shall promptly set the matter for 8-11 hearing and cause notice of the hearing to be given as provided in 8-12 Section 104.023. 8-13 (b) At the hearing an interested party is entitled to be 8-14 heard, to introduce evidence, and to introduce witnesses. 8-15 Sec. 104.023. NOTICE. (a) Notice of the application and 8-16 the time and place of the hearing on the application shall be 8-17 mailed, postage prepaid, not later than the 30th day before the 8-18 hearing date to each working interest owner, operator, and royalty 8-19 owner in the unit area and to each offset operator whose name and 8-20 address is shown on the list provided by the applicant under 8-21 Section 104.021. 8-22 (b) Notice of an application and the time and place of 8-23 hearing shall be published in at least one issue of a newspaper 8-24 authorized by law to publish legal notices in the county or 8-25 counties in which the land involved is located, or in another 8-26 newspaper or publication designated by the commission, not later 8-27 than the 30th day before the hearing date. 9-1 (c) Typographical errors in a notice that are not material 9-2 do not affect the validity of the notice. 9-3 Sec. 104.024. FINDINGS OF COMMISSION. After notice and a 9-4 hearing as provided by Sections 104.022 and 104.023, the commission 9-5 shall find whether: 9-6 (1) the unitized operation of the common source of 9-7 supply or the part of the common source of supply involved in the 9-8 plan of unitization is reasonably necessary to conduct unit 9-9 operations and the plan of unitization provides for unit operations 9-10 consistent with the prevention of waste, the protection of 9-11 correlative rights, and the prevention of the drilling of 9-12 unnecessary wells; 9-13 (2) the value of the estimated recovery from the 9-14 common source of supply will exceed any estimated additional cost 9-15 incident to conducting unit operations; 9-16 (3) the proposed plan of unitization is fair, 9-17 reasonable, and equitable in that it prevents waste and promotes 9-18 conservation of natural resources while giving due regard to the 9-19 correlative rights of the owners in the unit area; 9-20 (4) the expense of establishing the unit that is to be 9-21 charged as unit expense is reasonable and necessary; 9-22 (5) the productive limits of the common source of 9-23 supply or the part of the common source of supply proposed for 9-24 unitization have been reasonably defined by development and the 9-25 area proposed for unitization is reasonably necessary and 9-26 sufficient for unit operations; and 9-27 (6) the plan of unitization meets the requirements of 10-1 Subchapter C and reasonably conforms to the requirements of this 10-2 chapter. 10-3 Sec. 104.025. UNITIZATION ORDER. (a) If the commission 10-4 finds that all the conditions under Section 104.024 exist, the 10-5 commission shall order the unitized operation of the unit area. 10-6 (b) The order shall: 10-7 (1) unitize the interests of all owners in the unit 10-8 area regardless of whether those owners have approved the plan of 10-9 unitization in writing; 10-10 (2) approve the area of the common source of supply or 10-11 the part of the common source of supply to be included in the unit 10-12 area and the vertical limits of the common source of supply; 10-13 (3) approve the plan of unitization; and 10-14 (4) designate the initial unit operator designated in 10-15 the plan of unitization. 10-16 Sec. 104.026. APPROVAL OF THE PLAN OF UNITIZATION BY WORKING 10-17 INTEREST AND ROYALTY OWNERS. (a) A plan of unitization must be 10-18 approved in writing by: 10-19 (1) the owners, on a tract participation basis, of at 10-20 least 75 percent of the aggregate unit working interests and by the 10-21 owners, on a tract participation basis, of at least 75 percent of 10-22 the aggregate unit royalty interests; or 10-23 (2) the owners of working interests and royalty 10-24 interests who, on a tract participation basis, will be entitled to 10-25 at least 75 percent of all production from the unit area or 10-26 proceeds of that production, provided that it is approved by the 10-27 owners, on a tract participation basis, of at least 50 percent of 11-1 the aggregate unit royalty interests. 11-2 (b) A commission order providing for unit operations is not 11-3 effective until the commission makes a finding, either in the order 11-4 providing for unit operations or in a supplemental order, that the 11-5 plan of unitization has been approved as required by Subsection 11-6 (a). 11-7 (c) If the plan of unitization has not been approved as 11-8 required by this section within six months after the date the order 11-9 providing for unit operations is issued, the order expires unless 11-10 the commission extends the six-month period for an additional 11-11 period not to exceed one year. 11-12 (Sections 104.027-104.040 reserved for expansion 11-13 SUBCHAPTER C. PLAN OF UNITIZATION 11-14 Sec. 104.041. AUTHORIZED PLANS. (a) Subject to Subsection 11-15 (b), a plan of unitization may be proposed under this chapter for 11-16 the following purposes: 11-17 (1) to establish units and cooperative facilities 11-18 necessary for unit operations; 11-19 (2) to establish units and cooperative facilities 11-20 necessary for the conservation and use of oil and gas, including 11-21 units and facilities for extracting and separating the hydrocarbons 11-22 from the natural gas or casinghead gas and returning the dry gas to 11-23 a formation underlying any land or leases committed to the unit 11-24 area; or 11-25 (3) to establish units necessary for other operations 11-26 to prevent waste, protect correlative rights, or prevent the 11-27 drilling of unnecessary wells. 12-1 (b) The commission may not approve a plan of unitization 12-2 unless the purpose of the plan is to increase substantially the 12-3 production of oil or gas or oil and gas above the volume that would 12-4 otherwise be produced from the primary recovery operations alone. 12-5 (c) The plan of unitization and the commission order of 12-6 approval may provide for unit operation of less than the whole of a 12-7 common source of supply if the unit area is of a size and shape 12-8 that is reasonably suitable for that purpose, and that operation 12-9 will not have an unreasonable adverse effect on the other parts of 12-10 the common source of supply that are not included in the plan of 12-11 unitization. 12-12 Sec. 104.042. SINGLE OR MULTIPLE AGREEMENTS. The plan of 12-13 unitization may consist of one or more agreements that the 12-14 applicant considers to be fair, reasonable, and equitable. 12-15 Sec. 104.043. PARTICIPATION; ALLOCATION OF UNIT PRODUCTION. 12-16 (a) The plan shall provide for the apportionment and allocation of 12-17 the unit production among the tracts in the unit area in order to 12-18 reasonably permit a person entitled to share in, or benefit by, 12-19 the production from a tract in the unit to receive a fair share of 12-20 the unit production or other benefits. 12-21 (b) A tract's fair share of the unit production shall be 12-22 measured by the value of each tract and its contributing value to 12-23 the unit in relation to like values of other tracts in the unit, 12-24 taking into account acreage, the quantity of oil and gas 12-25 recoverable from the tract, its location on structure, its probable 12-26 productivity of oil and gas in the absence of unit operations, or 12-27 as many of those factors or other pertinent engineering, 13-1 geological, or operating factors as can be reasonably determined. 13-2 Sec. 104.044. VOTING BY WORKING INTEREST OWNERS. The plan 13-3 of unitization shall establish a voting procedure for decisions by 13-4 the working interest owners. Each working interest owner must have 13-5 a voting interest equal to the owner's unit participation. 13-6 Sec. 104.045. OPERATING PLAN. The plan of unitization shall 13-7 include a proposed operating plan establishing the manner in which 13-8 the unit will be supervised and managed, unit operations will be 13-9 conducted, and costs will be allocated and paid. 13-10 Sec. 104.046. EFFECTIVE DATE AND TERMINATION DATE OF PLAN OF 13-11 UNITIZATION. (a) The plan of unitization shall provide for the 13-12 date on which the plan takes effect, the manner in which and the 13-13 circumstances under which unit operations terminate, the settlement 13-14 of accounts on termination, and notice by the unit operator to the 13-15 public within 30 days after the effective date of the unit. Notice 13-16 shall be given by filing for record, in the real property records 13-17 of the county or counties in which the unit area or any part of the 13-18 unit area is located, a certificate containing: 13-19 (1) the name of the unit; 13-20 (2) the legal description of the land included in the 13-21 unit area and a description of the common source of supply or the 13-22 part of the common source of supply included in the unit area; 13-23 (3) the commission docket number; 13-24 (4) the date of the commission order, including any 13-25 supplemental orders, relating to approval of the plan of 13-26 unitization; 13-27 (5) the effective date of unit operations; and 14-1 (6) the percentage of participation of each tract. 14-2 (b) The plan of unitization shall require the unit operator 14-3 to file for record a certificate stating the date the unit 14-4 operations will terminate. 14-5 Sec. 104.047. FINANCING UNIT OPERATIONS. The plan of 14-6 unitization shall provide the manner in which the costs and 14-7 expenses of unitized operations, including investment, are charged 14-8 to the separately owned tracts or interests and shall include a 14-9 detailed accounting procedure for all charges and credits incident 14-10 to the operations. The costs and expenses chargeable to a tract or 14-11 interest shall be paid by the working interest owners who, in the 14-12 absence of unit operations, would be responsible for the costs and 14-13 expenses of developing and operating the tract or interest. The 14-14 plan shall also provide for the auditing of records. 14-15 Sec. 104.048. ATTACHMENT OF PROCEEDS OF PRODUCTION TO COVER 14-16 DEBTS OF NONAPPROVING WORKING INTEREST OWNERS. (a) The plan of 14-17 unitization shall provide for carrying or otherwise financing a 14-18 working interest owner who has not approved the plan under Section 14-19 104.026 and is not paying the owner's share of the costs of unit 14-20 operations. The plan of unitization shall allow an interest charge 14-21 against the nonapproving owner payable out of the owner's share of 14-22 production at a rate equal to the interest rate set out in the 14-23 COPAS or other accounting exhibit attached to and made a part of 14-24 the unit agreement or unit operating agreement. 14-25 (b) The plan of unitization shall allow the additional 14-26 attachment of proceeds due any nonapproving owner who is not paying 14-27 the owner's share of the costs of unit operations as compensation 15-1 to the approving owner or owners for assuming the investment risk 15-2 of the nonapproving owner. The compensation amount may not exceed 15-3 200 percent of the nonapproving owner's share of unit costs and 15-4 expenses, with the maximum compensation amount to be set by the 15-5 commission in each case. An interest charge equal to the interest 15-6 rate specified in Subsection (a) shall be applied to the 15-7 compensation amounts set by the commission. 15-8 (c) The plan of unitization shall provide that 15-9 thirteen-sixteenths (13/16) of the unit production allocated to the 15-10 nonapproving owner of each separately owned tract or interest that 15-11 does not pay the share of the unit expenses charged and additional 15-12 compensation amounts applied to that nonapproving owner may be 15-13 appropriated by the unit operator and marketed and sold for the 15-14 payment of unit costs, expenses, and additional compensation 15-15 amounts. Any money remaining after payment of unit expenses and 15-16 additional compensation amounts shall be remitted to the 15-17 nonapproving working interest owner. 15-18 (d) As to any unleased interest located in the unit, 15-19 three-sixteenths (3/16) of the production as provided in Section 15-20 104.097(b) shall be free and clear of all unit expenses and 15-21 additional compensation amounts. Thirteen-sixteenths (13/16) of 15-22 the production is subject to being financed or carried under this 15-23 section. 15-24 Sec. 104.049. INVESTMENT ADJUSTMENTS AND PROPERTY TAKEN 15-25 OVER. The plan of unitization shall provide for the procedure and 15-26 basis for adjustment among the owners of the unit area of their 15-27 respective investment in wells, tanks, pumps, machinery, materials, 16-1 equipment, facilities, and other items of value taken over and used 16-2 in unit operations. 16-3 Sec. 104.050. ADDITIONAL PLAN PROVISIONS. The plan of 16-4 unitization may include any additional provisions that are 16-5 reasonably appropriate for carrying on unit operations. 16-6 (Sections 104.051-104.070 reserved for expansion 16-7 SUBCHAPTER D. AMENDMENT OF PLAN OR 16-8 ORDER OF UNITIZATION; EXPANSION OF 16-9 UNIT AREA 16-10 Sec. 104.071. AMENDMENT OF PLAN OR ORDER FOR UNITIZATION. 16-11 (a) An original or supplemental order may be amended in the same 16-12 manner and subject to the same conditions as are required for an 16-13 original order providing for unitized operations. 16-14 (b) Approval of an amendment by royalty owners is not 16-15 required if the amendment affects only the rights and interests of 16-16 working interest owners. 16-17 (c) An amendment to an order may not, without the aggregate 16-18 approval of at least the minimum percentage of working interest and 16-19 royalty interest ownership required under Section 104.026 for 16-20 approval of unitization: 16-21 (1) change the unit oil and gas participation 16-22 percentage allocated to each tract in the plan approved by the 16-23 original or supplemental order approving the existing unit; or 16-24 (2) change the percentage for allocation of unit 16-25 expenses to each tract in the plan of unitization approved by the 16-26 original or supplemental order for the existing unit. 16-27 (d) This section does not apply to an order: 17-1 (1) expanding an existing unit area under Section 17-2 104.072; or 17-3 (2) creating a new unit area under Section 104.073. 17-4 Sec. 104.072. EXPANSION OF UNIT AREA. (a) In accordance 17-5 with this section and subject to Section 104.073, an existing unit 17-6 area may be expanded to include additional tracts under the terms 17-7 contained in the plan of unitization for the existing unit. 17-8 (b) Working interest owners in the existing unit area must 17-9 approve the expansion in accordance with the voting procedures 17-10 prescribed by the plan of unitization. The requirements for 17-11 creating a new unit under this chapter apply to the expansion of 17-12 the unit area under this section. 17-13 (c) Allocation of unit production from the expanded unit 17-14 shall be calculated first by allocating to the expansion area a 17-15 portion of the total production of oil or gas or both oil and gas 17-16 from the unit area as enlarged. That allocation shall be based on 17-17 the relative contribution to the total production of oil or gas or 17-18 both oil and gas that the expansion area is expected to make during 17-19 the remaining course of unit operations. If the expansion area 17-20 consists of separately owned tracts, the production allocated to 17-21 the expansion area shall be allocated to the separately owned 17-22 tracts in proportion to the relative contribution of each of those 17-23 tracts as provided by Section 104.043. The remaining portion of 17-24 unit production shall be allocated among the tracts in the existing 17-25 unit area in the same proportions as those set out in the existing 17-26 plan of unitization. 17-27 Sec. 104.073. ENLARGEMENT INCLUDING ALL OR PART OF 18-1 PREVIOUSLY ESTABLISHED UNIT. (a) The commission by order may 18-2 create a new unit area that includes all or part of a unit area 18-3 established by previous commission order either voluntarily or 18-4 under this chapter. 18-5 (b) The order, in allocating unit production, shall first 18-6 treat the unit area previously established as a single tract, and 18-7 the portion of the unit production allocated to that tract shall 18-8 then be allocated among the separately owned tracts included in the 18-9 previously established unit area in the same proportion as set 18-10 forth in the previous order. 18-11 (Sections 104.074-104.090 reserved for expansion 18-12 SUBCHAPTER E. UNIT OPERATIONS 18-13 Sec. 104.091. STATUS OF PRODUCTION PROCEEDS; DISTRIBUTION. 18-14 (a) Unit production, proceeds from the sale of production, or 18-15 other receipts may not be treated or taxed as income or profit of 18-16 the unit. All unit production and proceeds are income of the 18-17 owners to whom or to whose credit the production or proceeds are 18-18 payable under the plan of unitization. 18-19 (b) The unit operator may receive or disburse production or 18-20 proceeds under the plan of unitization without becoming an agent of 18-21 any person to whom the production or proceeds is payable. 18-22 Sec. 104.092. LIABILITY OF WORKING INTEREST OWNER. (a) The 18-23 liability of a working interest owner for payment of unit expense 18-24 is several and not joint or collective. 18-25 (b) Except as provided by this subsection and Section 18-26 104.048, a working interest owner in a tract is not liable, 18-27 directly or indirectly, for more than the amount charged to that 19-1 owner's interest in the tract. A working interest owner shall 19-2 indemnify the operator or share a proportionate part of a 19-3 defaulting working interest owner's share as provided by the plan 19-4 of unitization. 19-5 (c) An indemnification provision in a plan of unitization is 19-6 not unenforceable solely because it does not expressly provide that 19-7 the indemnification covers an operator's own negligent acts or 19-8 omissions. 19-9 Sec. 104.093. LIEN FOR COSTS. (a) Subject to any 19-10 reasonable limitations in the plan of unitization, a unit has a 19-11 lien on the leasehold estate and other oil and gas rights in each 19-12 separately owned tract, the interest of the owners in the unit 19-13 production, and all equipment in the possession of the unit to 19-14 secure the payment of the amount of the unit expense and other 19-15 additional compensation charges as provided for in Section 104.048 19-16 charged to each separately owned tract. 19-17 (b) The lien established under this section does not attach 19-18 to the three-sixteenths (3/16) royalty interest or the free of cost 19-19 interest provided in the plan of unitization that allocates costs, 19-20 if that interest is different from three-sixteenths (3/16). 19-21 Sec. 104.094. EFFECT OF UNIT OPERATIONS ON EXPRESSED OR 19-22 IMPLIED COVENANTS. Operations conducted in accordance with a plan 19-23 of unitization approved by the commission are presumed to comply 19-24 with all provisions, covenants, and obligations, express or 19-25 implied, of each lease or contract covering lands in the unit area 19-26 to the extent that the lease or contract relates to the common 19-27 source of supply or the part of the common source of supply 20-1 included in the unit area. 20-2 Sec. 104.095. DISTRIBUTION OF UNIT PRODUCTION. (a) The 20-3 amount of unit production allocated to each tract in the unit, and 20-4 only that amount, regardless of the location of the well or wells 20-5 in the unit area from which it may be produced and regardless of 20-6 whether it is more or less than the amount of any actual production 20-7 from the well or wells on the tract, has, for all purposes, the 20-8 same effect on maintaining the term of each lease or each tract as 20-9 actual production from the tract. 20-10 (b) Except as authorized by this chapter or in a plan of 20-11 unitization approved by the commission, the unit production shall 20-12 be distributed among, or the proceeds paid to, the owners entitled 20-13 to share in the production from the tract in the same manner that 20-14 those owners would have shared in the production or proceeds from 20-15 the tract if the unit had not been established. 20-16 Sec. 104.096. MODIFICATION OF PROPERTY RIGHTS, LEASES, 20-17 CONTRACTS, OR TITLES. (a) Except to the extent that the parties 20-18 affected by the plan of unitization agree, a commission order 20-19 providing for unit operations may not alienate, transfer, or change 20-20 title or ownership, legal or equitable, of a person in or to a 20-21 tract of land or the oil and gas rights in that tract to another 20-22 person or to the unit operator. 20-23 (b) Property rights, leases, contracts, and all other rights 20-24 and obligations shall be regarded as amended and modified to the 20-25 extent necessary to conform to the provisions of this chapter and 20-26 to any plan of unitization approved by the commission. 20-27 Sec. 104.097. ROYALTY OBLIGATIONS; BURDENS; UNLEASED 21-1 INTERESTS. (a) Each working interest owner who is the owner of an 21-2 interest in an oil and gas lease is responsible for the payment of 21-3 a royalty, overriding royalty, or other lease burden affecting the 21-4 owner's leasehold estate unless the plan of unitization provides 21-5 otherwise. If a lease or other contract pertaining to a tract or 21-6 interest stipulates a royalty, overriding royalty, or other lease 21-7 burden in excess of three-sixteenths (3/16) of the production or 21-8 proceeds, the working interest owner subject to that excess payment 21-9 or other obligation shall pay that excess payment. 21-10 (b) Three-sixteenths (3/16) of the production or proceeds, 21-11 free of all unit expense and free of any lien, shall be allocated 21-12 to any unleased interest located in the unit area. 21-13 Thirteen-sixteenths (13/16) of the production or proceeds shall 21-14 bear its pro rata share of all unit expense and is subject to any 21-15 lien provided by this chapter or the plan of unitization. 21-16 Sec. 104.098. UNIT OWNERSHIP OF PRODUCTION, PROCEEDS, AND 21-17 ACQUIRED PROPERTY. (a) The part of the unit production allocated 21-18 to any tract and the proceeds from the sale of that production are 21-19 the property and income of the owners to whom or to whose credit 21-20 the production and proceeds are allocated or payable under the 21-21 order for unit operations. 21-22 (b) Any property that is acquired in the conduct of unit 21-23 operations and charged as an item of unit expense is owned by the 21-24 working interest owners in the unit area as provided in the plan of 21-25 unitization. 21-26 Sec. 104.099. EFFECT OF UNITIZATION ON EXISTING DIVISION 21-27 ORDERS AND CONTRACTS. An order for unit operations does not 22-1 terminate a division order or other contract relating to the sale 22-2 or purchase of production from a separately owned tract. Such a 22-3 division order or contract remains in force and applies to oil and 22-4 gas allocated to the tract until it is terminated in accordance 22-5 with its own terms. 22-6 SECTION 2. This Act is supplemental to other laws relating 22-7 to unitization. Any existing unit agreement or any plan of 22-8 unitization in effect or in the process of being executed on the 22-9 effective date of this Act may be made the subject of an 22-10 application under the terms of Chapter 104, Natural Resources Code, 22-11 as added by this Act, if the agreement otherwise complies with the 22-12 terms of that chapter. 22-13 SECTION 3. The importance of this legislation and the 22-14 crowded condition of the calendars in both houses create an 22-15 emergency and an imperative public necessity that the 22-16 constitutional rule requiring bills to be read on three several 22-17 days in each house be suspended, and this rule is hereby suspended, 22-18 and that this Act take effect and be in force from and after its 22-19 passage, and it is so enacted.