The General Land Office (GLO), with the approval of the School Land Board (SLB), adopts new §9.2, relating to Scope and Applicability; §9.31, relating to General Provisions, §9.32, relating to General Responsibilities of State Lessees, and §9.91, relating to General Provisions, with changes to the text as published in the October 9, 1998, issue of the Texas Register (23 TexReg 10329).

The GLO, with the approval of the SLB, adopts new §9.1, relating to Definitions, §9.21, relating to Leasing Guide, §9.22, relating to Leasing Procedures; §9.33, relating to Delay Rental Payments, §9.34, relating to Drilling and Reworking Operations, §9.35, relating to Producing the State Lease, §9.36, relating to Shut-In Royalty, §9.37, relating to Offset Well Obligations and Compensatory Royalties, §9.38, relating to Suspending the State Lease; §9.81, relating to Pooling and Unitizing State Property;, §9.92, relating to Release, §9.93, relating to Assignment, §9.94, relating to Termination, and §9.95, relating to Forfeiture, without changes as published in the October 9, 1998, issue of the Texas Register (23 TexReg 10329), and these sections will not be republished.

This rulemaking action is intended to accomplish the following goals and purposes: (1) to make leasing, lease administration or lease compliance easier or more certain; (2) to insure these rules reflect current agency policy; (3) to incorporate statutory changes into them; and (4) to make them more user-friendly-clearer, more readable and easier to use.

These adopted rules have generally been made more user-friendly by organizational changes: renumbering, subdividing, gapping for expansion, reorganizing into subchapters, and placing the sections in the order of how an oil and gas lease progresses--from obtaining a lease, to maintaining and/or pooling, and finally to discontinuing the leasehold relationship. To assist in leasing and lease administration and compliance, the adopted rules explain how the GLO construes its basic lease provisions and associated statutes, set out what the GLO routinely expects of its state lessees, and detail what procedures/steps a lessee should follow to implement certain lease provisions. The following section-by-section discussion explains pertinent information concerning each adopted rule section, including how the section functions.

In adopting these rules, the state is not intending to place itself in the position of adjudicating property rights or to create a right to an evidentiary hearing where such right is not required by statute. In fact, nothing in these rules should be construed to place the state in the position of adjudicating property rights or creating a right to an evidentiary hearing where such right is not created by statute.

SECTION-BY-SECTION DISCUSSION:

SUBCHAPTER A: General Provisions

Section 9.1. Definitions: This section contains definitions of terms used throughout all of Chapter 9.

Section 9.2. Scope and Applicability: This section contains important principles that apply to all Chapter 9 rules. Subsection (b) clarifies that these rule are not intended to limit or infringe on the authority of other state and federal agencies. Subsection (f) has been added to state expressly that these rules shall not limit the automatic termination of acreage under a lease's retained acreage clause.

SUBCHAPTER B: Issuing Exploration Permits & Oil and Gas Leases

Section 9.21. Leasing Guide: This section is formatted by types of state properties and provides a quick overview of how each type of property is leased.

Section 9.22. Leasing Procedures: This section contains detailed leasing procedures for all types of state properties leased or administered by the GLO or SLB. Paragraphs (2) and (3) cover the leasing of Relinquishment Act lands, with paragraph (2) covering leasing by the surface owner acting as the state's agent and paragraph (3) covering direct leasing by the state when the surface owner will not or cannot act as our agent. Both of these paragraphs have been updated to include statutory changes to the Relinquishment Act found in Texas Natural Resources Code, §52.189 and §52.190. Additionally, §9.22(2)(B) reflects a change in longstanding agency policy. This provision now authorizes an attorney-in-fact to act on behalf of a surface owner in executing a Relinquishment Act lease under certain circumstances. However, this provision also makes it clear that the surface owner and the attorney-in-fact both continue to owe fiduciary duties to the state. Section 9.22(2)(B) is intended to make it easier to lease certain Relinquishment Act property while still protecting the state's interests. Paragraph (5) covering the leasing of highway rights-of-way has been amended to incorporate statutory changes found at Texas Natural Resources Code, §32.002(c) and §32.201.

SUBCHAPTER C: Maintaining a State Oil & Gas Lease

This subchapter subdivides and replaces one prior rule section. The new Subchapter C is now reorganized around operational activities that are likely to occur on a state lease rather than around lease clauses.

Section 9.31. General Provisions: Subsection (a) describes the scope and applicability of the rules included in this subchapter and specifically clarifies that these rule are not intended to limit or infringe on the authority of other state and federal agencies. To make the adopted rules easier to use, subsection (b) has been added to insure that key terms used throughout this subchapter are clearly defined and placed at the beginning of the subchapter. Because the definition of "solid waste" conflicted with its well-established meaning in many federal and state regulatory contexts, "solid waste" has been deleted as a general term in the adopted rules.

Section 9.32. General Responsibilities of State Lessees: This section sets out the state's minimum expectations of how lessees should conduct operations on state properties. It also makes routine lease administration easier by specifying exactly what reports, information, and materials related to lease operations should be routinely submitted to the GLO and when they should be submitted. Our statutes and leases generally ask for operational materials and records and are sometimes not specific about when they should be submitted. Accordingly, compliance has been sporadic and poor. To give lessees clearer guidance about what documents must be filed with the GLO, subsection (c)(3) narrows the requirements to specific items and records and sets specific due dates. The GLO reserves the right to ask for additional materials when needed. Of particular note is subsection (c)(3)(C)(ii)(V), which requires lessees to send additional records when they complete a well on a state tract that is within 1,000 feet of another state tract.

Because subsection (c)(3) clearly sets out the required filings and allows the faxing of documents to meet the deadlines, it is expected that compliance will dramatically increase. In addition, compliance should increase because this rule also sets out a penalty if these items and records are not timely received.

Section 9.33. Delay Rental Payments: This section explains how to hold a lease by tendering delay rentals to the state.

Section 9.34. Drilling and Reworking Operations: This section explains how to hold a lease by drilling and reworking operations. Subsection (c) explains how to obtain an extension of the primary term. An extension is allowed under state fee leases when a lessee is conducting drilling operations at the expiration of the primary term.

Section 9.35. Producing the State Lease: This section explains how to hold a lease by production. Subsection (a)(2)(3), respectively, require the use of a separator when a well produces liquids and require the GLO's permission to commingle production from a separate lease or reservoir with any other production.

Section 9.36. Shut-in Royalty: This section explains how to hold a lease by tendering shut-in royalty payments.

Section 9.37. Offset Well Obligations & Compensatory Royalties: This section sets out our current practice of handling offset wells and authorizing compensatory royalties in lieu of requiring an offset well. It implements Texas Natural Resources Code, §52.034 and §52.173 and the associated offset obligation lease provisions.

Texas Natural Resources Code, §52.034 and §52.173 create statutory obligations to drill offset wells on state property when a well on adjoining property is either draining state hydrocarbons or is within 1,000 feet of the state property. (The well that triggers the offset obligation is referred to as an "encroaching well" under these rules.) These same statutes give the commissioner the sole discretion to accept compensatory royalties instead of requiring an offset well. Under these statutes, the commissioner is not acting as an adjudicator of property rights and an evidentiary hearing is not a prerequisite to the commissioner's decision.

Texas Natural Resources Code, §52.034 and §52.173 do not require the state to prove actual drainage when the encroaching well is within 1,000 feet and nothing in §9.37 is intended to impose any such requirement. The statutes mandate the drilling of an offset well when the encroaching well is within 1,000 feet and specify that any compensatory royalties shall be based on total volumes produced from the encroaching well. Nevertheless, these provisions, if applied indiscriminately in all circumstances, could lead to harsh results that do not serve the legitimate purpose of protecting the state's mineral interests. For example, one such result is requiring an offset well to be drilled when the scientific evidence shows that a geological fault would prevent any possible drainage of the state's hydrocarbons. The following adopted rule provisions mitigate against these kinds of results: (1) Section 9.37(b) allows the commissioner, in his discretion, to reach an agreement that no offset well is necessary because he is convinced that there can be no drainage of state minerals in that particular instance, and (2) Section 9.37(c)(4)(A)(1) allows the commissioner, in his discretion, to reduce the volumetric component of compensatory royalties based on sound scientific evidence.

Any decision to mitigate against harsh results in a particular instance under §9.37 is a matter committed to the commissioner's discretion. A contested case hearing is neither required nor contemplated under this rule. Moreover, nothing in this rule is intended: (a) to impose on the state any burden of proof beyond what may be required by statute, or (b) to cause drainage, failure to pool, or other matters that the commissioner may consider under this rule to become factually or legally relevant in any legal proceeding concerning the offset obligation under Texas Natural Resources Code, §52.034 and §52.173 or the associated offset obligation lease provisions.

Section 9.38. Suspending the State Lease: This section explains when a suspension of a state lease is warranted and how to obtain one.

SUBCHAPTER E: Pooling and Unitization

Section 9.81. Pooling and Unitizing State Property: This section explains how to pool or unitize state properties.

SUBCHAPTER F: Discontinuing the Leasehold Relationship

This subchapter subdivides and replaces one prior rule section.

Section 9.91. General Provisions: This section sets out how the leasehold relationship between the state and a lessee may be discontinued and explains what duties and obligations are still owed to the state when that relationship is discontinued. Subsection (c)(5)(D) sets out in more detail what is expected of a lessee in cleaning up submerged leased premises when operations have ceased. These provisions reflect standard industry practice and the typically expected actions of a reasonably prudent operator. As adopted, subsection (d) insures that the commissioner has the authority to waive lease-mandated clean-up measures while clarifying that the commissioner must exercise this authority within the parameters of existing federal and state laws and regulations relating to clean-up operations.

Section 9.92. Release: This section explains how to file releases, including both voluntary releases and those resulting from total or partial lease termination.

Section 9.93. Assignment: This section explains how to properly effectuate assignments.

Section 9.94. Termination: This section describes the process the GLO undertakes in determining and recording the fact that a lease has terminated.

Section 9.95. Forfeiture: This section describes the process the commissioner undertakes in forfeiting a lease and considering a forfeited lease for reinstatement. Under Texas Natural Resources Code, §52.176, the commissioner has the sole discretion to forfeit or reinstate a lease under certain circumstances.

The GLO received only one set of comments on its proposed rulemaking and those were from the Texas Railroad Commission (RRC). These comments related to one rule section (§9.32) and various other rule provisions that concern environmental issues. The RRC's objections to these rules had one underlying concern: to insure that these Chapter 9 rules relating to environmental matters did not infringe upon or unnecessarily overlap with the regulatory responsibilities of the RRC or other state and federal agencies.

In response to these general RRC concerns, it was never the GLO's intention to usurp the regulatory authority of any federal or state agency. Provisions in our rules were intended to make that clear and have been modified to make this intention even clearer. Nevertheless, in developing or leasing the minerals under state lands, the legislature has required that water pollution be prevented. (Texas Natural Resources Code, §52.032(a) and §52.085(a).) Consistent with these legislative directives, the SLB has approved a lease form with a material term requiring lessees to prevent pollution. Consequently, in adopting these rules, the GLO is notifying lessees about material lease terms, including the pollution prevention provision, which the GLO, as the lessor and steward of public lands, will enforce to protect its property. Enforcement of these pollution prevention provisions could include lease forfeiture.

Listed by the affected Chapter 9 section are the specific RRC comments and the GLO's responses, which were authorized by the SLB in their December 15, 1998 meeting. The amended rule provisions have satisfied the RRC's concerns.

2(b):

The RRC requested that this section be strengthened and clarified because the GLO cannot supplement, alter, amend or replace any other existing state or federal regulation.

Because it was never the GLO's intent to usurp the regulatory authority of any federal or state agency, the GLO incorporated changes to clarify that these rules do not impair other laws or regulations. In addition, because the sentence in §9.2(b) was also included in another rule provision, the GLO made similar changes to §9.32(a).

31(b)(10):

The RRC recommended deletion of the proposed definition of "solid waste" because the GLO definition conflicts with well-established state and federal definitions of the term.

Staff agreed to this recommendation to prevent confusion.

32(b)(1), 32(b)(2)(D) and 32(b)(4):

The RRC stated that these rules addressed the issue of pollution prevention too narrowly and in a manner that unnecessarily overlaps with its regulatory programs. In particular, the RRC recommended that these three sections should be changed to clarify that discharges of pollutants are only prohibited if they are not authorized by another agency's rule or permit.

32(b)(1): Staff did not agree to the RRC's modifications since this rule provision stems from an express lease clause. Instead, staff has amended this rule provision to track the precise pollution standard set in our lease and to clarify what this standard means. By narrowing our rules to track express lease language, the GLO highlights that its role in these environmental rule sections is as a lessor/landowner enforcing its lease to protect its property.

32(b)(2)(D): No change needed because the pollution standard in §9.32(b)(1) has been changed.

32(b)(4): Because this rule provision is derived from an express lease clause, staff did not agree to the exact RRC modifications. Instead, staff made changes to cross-reference and to incorporate relevant MARPOL prohibitions as they have been implemented in federal laws and regulations.

32(c)(1)(C):

The RRC recommended deletion of this signage requirement.

Again, because this requirement is based on an express lease provision, staff did not agree to a deletion of this provision. Instead, staff made changes to clarify that this signage requirement is only enforceable where required by a lease provision.

32(c)(2):

The RRC requested that the inspection authority of non-GLO entities (the attorney general and the governor) be deleted because it was inappropriate and could create confusion over the inspection authority of other non-GLO regulatory agencies-like the RRC.

The attorney general and the governor have been given express statutory inspection authority over state lands because each has a representative that is a member of the SLB. Since this rule section tracks a statute, staff did not agree to delete any language but instead added a sentence to insure that the inspection authority of other agencies is not undercut.

32(c)(3)(C)(v)(I):

The RRC pointed out an improper reference to an RRC form.

Staff has changed this reference to correct a clerical error.

91(c)(5) (A)-(D) and 91(d):

The RRC noted that these provisions were internally inconsistent and that some of these sections allowed the GLO to unilaterally agree to modify a lessee's clean-up and abandonment operations-which operations are regulated by other entities. .

Staff agreed with this comment and has amended the rules to clarify that these rules will not impair other laws or regulations.

Subchapter A. General Provisions

Subchapter B. State Water Pollution Control Revolving Fund

Subchapter B. Program Requirements