Chapter 2 Crossing the Permian State Line—Legal Differences and Similarities for Texas Oil & Gas Companies that Operate in New Mexico and Their Advisors
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KERRY R. MCENIRY serves as Senior Counsel at Chevron supporting the Mid-Continent Business Unit, which includes the Permian Basin. In this role, McEniry coordinates a team of more than ten attorneys and legal professionals in supporting Chevron's asset development activities across the business unit and provides direct legal counsel for upstream development and regulatory activities in New Mexico. She began her legal career with private law firms in San Antonio and then Houston, working primarily as a commercial litigator for various industries including the energy industry. For more than a decade, her legal career has focused on oil and gas upstream law, working first for BP's U.S. onshore upstream business, and in 2018, joining Chevron. McEniry also became licensed in New Mexico in 2018 in conjunction with her support of Chevron's New Mexico assets. McEniry holds bachelor's degrees in art and education from University of Tulsa and a juris doctor from the University of Oklahoma. She and her partner, Johnathan, have two children, Grace (12) and Charlotte (4), and one surly chihuahua mix who answers to Freddy when he feels like it. She actively participates in pro bono activities through the Houston Volunteer Lawyers program.
ELIZABETH A. RYAN ("Beth") is Senior Counsel, Regulatory Lower 48, at ConocoPhillips, based at its Permian Division headquarters in Midland, Texas. Prior to ConocoPhillips' merger with Concho Resources Inc., Beth was senior counsel at Concho. Beth advises the company's asset and business development teams on New Mexico, North Dakota, and federal operations, regulatory, transactions, and is the leading expert in the Lower 48 Business Unit on regulatory and administrative practices, including the BLM, NMOCD, NM State Land Office, and NDIC. Prior to going in-house with Concho, Beth was a founding-partner at her law firm of Carson Ryan LLC. After serving four years as a commission member of the NM Environmental Improvement Board (EIB), in 2015 New Mexico Governor Susana Martinez appointed her to the NM Game and Fish Commission where she served four years and sought to achieve the State's comprehensive wildlife management goals. Beth served as a Trustee for the Foundation of Natural Resources and Energy Law (formerly the Rocky Mountain Mineral Law Foundation) from 2008-2021, representing the NM Bar Association. Beth is a routine speaker and panelist the Foundation's at the Annual and Special Institutes, and chairs the Scholarship Committee. Beth serves on the Board of Directors at Midland's YMCA and on the Lubbock Christian University Foundation Board. She was LCU's Commencement Speaker in 2019. Beth is a published author a dozen times over, on issues ranging from appellate standards of review, tort liability of alcohol providers, and many topics on oil and gas operations in the Permian Basin and Rocky Mountain states. Beth is a proud single mom of two daughters, Belle age 13 and Kate age 9 who attend Midland Christian School.
Development of the Permian in the past few decades has necessitated that oil and gas practitioners get comfortable on both sides of the Texas-New Mexico border. Their clients certainly are. While the rock and drilling and completion plans are basically the same, land, regulatory, and legal have different obstacles to overcome in order to get the bit in the ground and production to market. This Paper focuses on what the Permian practitioner needs to know for the operator client, both the nuts and bolts but also the pitfalls to avoid. We do not attempt to dive into every detail of each stage but instead refer you to other sources for those details while trying to stay more high-level and focus on the differences between the two states.
I. Regulatory Framework: Texas vs. NM
A. Texas
1. Statehood & Development Framework
Overall, the State of Texas is the second largest state in the nation at almost 172 million acres and home to just under 30 million people. Unlike the Rocky Mountain states, the vast majority of the land in Texas, over 95%, is privately owned. The remaining portion is owned and/or administered by various state and federal government agencies. Historically and currently, the state of Texas contains several oil and gas producing areas, including the Permian Basin.
The primary agency that owns and administers state lands, including the associated minerals, is the General Land Office (the "GLO"). The GLO is the oldest state agency in Texas, having been established in the first Constitution of the Republic of Texas in 1836 before Texas became a part of the United States. Upon the annexation of Texas, Texas retained control of its public lands, constitutionally dedicating half of these public lands to the Permanent School Fund, which is maintained for the benefit of the public-school children of the State of Texas.3
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Now, the GLO administers approximately 13 million acres of land on behalf of the School Land Board and the Veterans Land Board. The GLO has standardized right of way and oil and gas lease forms for development on such lands, which operators must utilize when developing on these lands.4 A subset of the lands managed by the GLO are considered Relinquishment Act lands and Land Sales Act lands, which have different statutory and common law aspects and different standard lease forms.5
Beyond that, Texas is home to a limited amount of federal lands, less than 3.5 million acres, with almost half of that acreage held by the National Park Service.6 For an interesting graphic with some general location information on the various federal and state land designations on the Texas side of the Permian Basin, see the DataBayou website.7
The primary regulatory framework governing all oil and gas activities in Texas is fairly straightforward once you understand the history behind the agency's name. The Railroad Commission of Texas ("RRC"), was initially established in 1891 by the Texas Constitution to regulate the railroad industry and has long since been given exclusive state regulatory jurisdiction over the oil and gas industry in Texas.8 State law in Texas also establishes that municipalities and other political subdivisions are expressly preempted from regulating oil and gas operations, except in certain limited circumstances.9
The RRC also administers other activities related to oil and gas development and beyond, including the pipeline industry, natural gas utilities, the LP-gas industry, critical natural gas infrastructure, and coal and uranium surface mining operations.10 The administrative rules applicable to the system for practice and procedure before the RRC can be found in the Texas Administrative Code.11 The sections of the Texas Administrative Code which relate to the Oil and Gas Division of the RRC are also sometimes referred to as "Statewide Rules" or "SWR."
2. Regulatory Process and Operatorship
a. Permitting
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In Texas, permits to drill new wells, recomplete or rework existing wells, are issued by the RRC under certain Statewide Rules.12 The application itself uses Form W-1 found on the RRC's website in fillable form.13 The RRC website also includes step by step instructions for completing many permit forms and an extensive FAQ page that addresses and provides guidance on a variety of topics related to permitting. Topics include everything from substantive guidance on the applicability of notice requirements to troubleshooting use of the RRC's online system.14
b. Establishing Horizontal Spacing Units
Voluntary Pooling or Production Sharing Agreements. Texas law expressly recognizes the rights of parties to enter into voluntary cooperative development agreements including unitization and pooling.15 Texas generally considers pooling to be a cross-conveyance of interest among the pooled interests.16
The power to pool an interest is often granted in the instrument creating the interest. For example, the right to pool acreage is commonly given by a lessor (a mineral owner) to a lessee as part of the express terms in an Oil and Gas Lease.17 Another, less common voluntary approach is called a community lease.18 Operators permitting wells with pooled interests will typically file a Form P-12 Certificate of Pooling Authority with the RRC as part of a broader well permit package, which also may include obligations related to specific Field Rules.19
Another more recent voluntary approach has been for interest owners, including royalty and working interest owners, to enter into a Production Sharing Agreement ("PSA"). A PSA is an agreement between various interest owners to establish a "method for allocating production from horizontal wells" located on lands subject to the interests.20 In 2022, the RRC adopted revisions to the Form P-16 Acreage Designation and instructions that reference applications for PSA wells.21 The detailed instructions also give guidance related to permit content that the RRC expects to see for administrative approval. For example, Section IV. Instructions note that for PSA wells, the applicant must demonstrate that they have secured an agreement from at least 65% of the mineral
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or working interest owners on a per tract basis.22 Many of the same instructions apply to and give guidance on permits for allocation wells, which are discussed in more detail below.
Allocation Well Permit. In the last several years, operators in Texas have also begun to use a third option for horizontal development, the allocation well. An allocation well is more accurately a reference to the permitting and production allocation process, and not a different type of well. Like a PSA well, production from the horizontal well is allocated among the relevant interest owners, which have not...
