Compulsory Unitization Undermines Texas Values (Rhetorically Speaking)

by Gray Reed & McGraw

Texas’s proposed Oil and Gas Majority Rights Protection Act(House Bill 100) has many detractors whose reasons are intense and varied. Here are some of them:

It’s About Liberty

It’s my property that I’ve worked for years to develop (or not, but that’s my concern and not yours). I should be able to do business with those I choose and to avoid those I don’t. Your bill deprives me of that freedom. Let’s say I make a good living off my six or seven 20 BOD wells, and there’s room for more, and I can drill ‘em cheap. The decline curves suggest that with my lean operation, these wells will be around for as close to forever as I need them to be. I’m going to educate my kids off the revenues; then I’m going to sell them and retire. But your $30MM CO2 flood will impose huge costs that will take more years to recoup than I have left in this world, made wretched by people trying to steal my leases. And if I don’t have the money? See next.

Severe Penalties

The bill allows bullies to confiscate my leases. There is a 300% “sit out” penalty on those owners who don’t participate in (that is, pay for) operations, and a lien is allowed to secure the operator’s expenses. (§104.108, 203). Small operators who can’t afford the expenditure and long payout necessary for a huge CO2 flood should oppose the bill on this basis alone.

Abrogation of Private Contracts

The Railroad Commission may amend or abrogate surface use protections in pre-existing oil and gas leases that conflict with unit operations so as to prevent or render operations uneconomical. (§104.204) There goes my blueberry patch, for the good of the collective!

The Big Get Bigger at the Expense of the Small

It allows “big oil” to run over the “little guy”. Again, we refer to working interest owners with the small leases who are happy with their current situation and can’t afford to plan tens of millions of dollars down the road. “Big Oil” proposes a $20-$30MM CO2 flood that will not only wipe out the revenue from their small wells but impose huge costs with a long pay-out, or worse – a 300% penalty.

And speaking of the big guys, it will be expensive and time-consuming for small working interest and royalty owners to fight the proponent at the Railroad Commission proceeding, with all the engineers and lawyers that will be required.

The Share of Production is Uncertain

Sharing of proceeds is not on an acreage basis, but on each tract’s “fair share” of unit production (§104.103). When and how will a royalty owner determine if her interests are likely to benefit from the unitization?

Voting Favors Those with the Most Resources

Approval must be of 70% of the royalty owners who actually cast a ballot (§104.056(a)(2)). This doesn’t say 70% of all royalty owners. It means 70% of those who care enough to vote. In the face of a concentrated effort by the proponent with its hoards of landmen and public affairs personnel to woo the undecideds, royalty owner indifference will benefit the proponent.

If you’ve read this far, you probably know that we’ve had several posts on this topic.  We are neither for nor against. We give you the information so that you can decide for yourself. Here’s a little swamp pop to inspire.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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