Austin, Texas
                    FISCAL NOTE, 77th Regular Session
                              March 20, 2001
          TO:  Honorable J.E. "Buster" Brown, Chair, Senate Committee on
               Natural Resources
        FROM:  John Keel, Director, Legislative Budget Board
       IN RE:  SB1019  by Armbrister (Relating to certain matters
               regarding oil and gas regulation, including fees,
               plugging of wells, required financial security, and
               offenses.), As Introduced
*  Estimated Two-year Net Impact to General Revenue Related Funds for    *
*  SB1019, As Introduced:  positive impact of $0 through the biennium    *
*  ending August 31, 2003.                                               *
*                                                                        *
*  The bill would make no appropriation but could provide the legal      *
*  basis for an appropriation of funds to implement the provisions of    *
*  the bill.                                                             *
General Revenue-Related Funds, Five-Year Impact:
          *  Fiscal Year  Probable Net Positive/(Negative)   *
          *               Impact to General Revenue Related  *
          *                             Funds                *
          *       2002                                   $0  *
          *       2003                                    0  *
          *       2004                                    0  *
          *       2005                                    0  *
          *       2006                                    0  *
All Funds, Five-Year Impact:
*Fiscal    Probable Revenue         Probable        Change in Number of  *
* Year   Gain/(Loss) from Oil  Savings/(Cost) from State Employees from  *
*            Field Cleanup      Oil Field Cleanup         FY 2001        *
*              Account/             Account/                             *
*            GR-Dedicated         GR-Dedicated                           *
*                0145                 0145                               *
*  2002            $27,000,000           $(971,500)                  4.0 *
*  2003             27,000,000            (971,500)                  4.0 *
*  2004             27,000,000            (971,500)                  4.0 *
*  2005             27,000,000            (971,500)                  4.0 *
*  2006             27,000,000            (971,500)                  4.0 *
Technology Impact
The bill will require the capability to monitor and enforce the new
Mechanical Integrity Test  requirements.  The Railroad Commission (RRC)
anticipates the need for approximately 160 hours of programming to
design and build such a system at a cost of approximately $20,000.
Fiscal Analysis
The bill would increase the oil field cleanup (OFCU) regulatory fee on
crude oil from 5/16th to 15/16th of one cent/barrel. It would also
increases the OFCU regulatory fee on gas from 1/30 to 1/10 of a cent for
each thousand cubic feet. The bill would increase certain drilling permit
fees and 14(b)(2) extension of time to plug well fees.

The bill would remove the waiver of extension fee for operators with a
P-5 bond. The bill leaves two options for financial assurance:
Individual Performance Bonds (Option 1) and Blanket Performance Bonds
(Option 2). The bill would increase the required amount for Individual
Performance Bonds by requiring that the amount be calculated at
$3.00/foot of well depth for all wells, rather than the previous
$2.00/foot. The bill would require bonding as financial assurance upon
transfer of wells from one organization to another.
The estimated total incremental gain to the OFCU in FY 2002 would be
approximately $32.7 million. The component gains are as follows: Drilling
permits $2,700,000; W1X Extension fees $23,000,000; Oil Regulatory fee
$3,000,000; Gas Regulatory Fee $3,100,000 and Interest on Fund Balance
approximately $900,000.

The Comptroller's Biennial Revenue Estimate estimates that the adjusted
ending balance in the Oil Field Cleanup Dedicated Account at the end of
fiscal year 2001 will be $9,627,704.  Therefore at current levels of
activity, only approximately $400,000 of the estimated $6,100,000
incremental gain to the fund from oil and gas regulatory fees would be
collected since the fund balance would soon exceed the $10 million cap
permitted by statute. The net gain to the OFCU would therefore be
approximately $27,000,000.

Note: The Railroad Commission in its estimate of probable gain included
an additional $5.7 million in gain to OFCU, reflecting the full amount of
gas and oil regulatory fees increases, disregarding the $10 million cap.
The RRC also included in its estimate additional costs of $28.3 million
to reflect 2,400 wells that could be plugged and contaminated sites that
could be cleaned with the increase in fees. The fiscal note is based on
the Comptroller's estimate.

The RRC anticipates that the bonding requirements for all operators will
expand the areas of bond tracking and collections which could result in
the expansion of the current extension application process by a factor of
three (from 22,000 to 64,800 at current levels of activity).  The RRC
estimates that approximately 4 FTE s will be necessary to handle the
additional filings and extensions.

The bill requires the bonding of all operators and a W-1X extension for
wells subject to 14(b)(2). According to the RRC, there are approximately
64,800 compliant 14(b)(2) wells. The 64,800 times $400 is not all gain.
The current 22,000 W-1X filers times $100 that the RRC currently receives
must be deducted.

Originally, 205,800 was the projected number of "permit applications
processed" for fiscal years 2002 and 2003.  This number already included
22,000 W-1Xs filed by unbonded operators.  The RRC added 42,800
additional W-1Xs for bonded operators to that count to come up with
249,600, then reduced the number of total W-1X's (64,800) by 5% (3,240)
figuring 1% (650) wells would be plugged by operators and 4% (2,590)
would be abandoned and left for OFCU.  Based on this assumption the
number of permit applications would change to 246,360 (249,600 - 3,240).

Amendments in Section 5 include certain specific plugging requirements
relating to pressure testing after setting plugs. The new testing
requirements will also increase the average cost per well for plugging
wells with state funds from $4,500 per well to an estimated $5,500 per
well. Currently the RRC is plugging approximately 800 wells per year.
The increased costs under the plugging requirements of the bill would be
approximately $800,000 per year.
Local Government Impact
There should be no administrative cost impact to local governments.
Source Agencies:   304   Comptroller of Public Accounts, 455   Railroad
                   Commission of Texas
LBB Staff:         JK, CL, SK