Texas Takes a Different View Towards Compulsory Unitization Legislation

March 24, 2017

Since the creation of the first commercial oil well in the United States in 1859[1], state legislatures and courts have struggled to craft a comprehensive legal framework that accommodates the wide variety of competing interests in mineral-rights ownership. Historically governed by the “rule of capture,” courts have treated roaming underground natural resources as if they were wild animals (animae ferae naturae) and held that title to land does not necessarily constitute ownership of the oil and gas beneath it.[2] The unintentional result of this doctrine was that landowners on oil-producing property rushed to capture the oil beneath their land before their neighbor had the chance to.[3] This race to drill resulted in a myriad of litigation and oil-production issues, including overdrilling and economic waste.[4] In response, the majority of oil-producing states began to implement a variety of statutes designed to regulate the spacing of wells, to require adjacent landowners to act as a block to make drilling decisions, and to pool their underlying oil supply to reduce the environmental and economic waste that comes as a result of overproduction.[5] These statutes require the “unitization” of oil fields, which is defined as “the operation of separately owned tracts of land for oil and gas as if they are one tract under one ownership and with disregard to property lines or interests, except for the apportionment of the costs and proceeds.”[6] Unitization is governed by individual states’ oil-conservation laws,[7] and it statutorily mandates that the interested parties of an oil-producing field operate as a unit.[8]

To date, 29 oil-producing states have statutes that govern unitization, and of those, 25 require authorization by both owners of the “working interest group” (those responsible for costs) and the “royalty group” (owners entitled to royalties).[9] The percentage of parties’ approval required to unitize varies between states, but usually it is the same percentage within a particular state as to both the working interest group and the royalty group.[10] It ranges from as low as 51 percent (e.g. Illinois and Kentucky) to as high as 80 percent (e.g. Colorado).[11] Sixteen states require 75 percent approval for at least one group.[12]

 

Texas is the only oil-producing state in the United States to not have a compulsory unitization statute.[13] With the 85th regular legislative session currently in full swing, this issue has arisen once again in the Texas legislature. Prior to this legislative session, Senator Van Taylor (R-Plano) pre-filed Senate Bill 177, titled the Majority Rights Protection Act (MRPA), which would enable a supermajority of 70% or more of both working groups and royalty interest owners to enter into a pool in order to proceed with field development for secondary and tertiary recovery operations.[14] Texas law currently requires the unanimous approval and agreement of all working and royalty interest owners in order for secondary recovery operations to commence in a field, which can be nearly impossible to obtain.[15] If enacted, the bill would make it easier for Texas oil and gas companies to conduct secondary recovery operations with the consent of 70% of working and royalty interest owners of the field.[16] In his press briefing regarding the legislation,[17] Senator Taylor stated that with the 70% supermajority, Texas would have a standard of agreement “greater than or equal to 26 of the 29 states with a Majority Rights Protection statute already in place.”[18]

 

Proponents of a Texas compulsory unitization statute argue that it would increase efficiency, protect the environment, and ultimately lead to higher overall royalties because fewer wells with better management would promote greater oil production.[19] Senator Taylor and other supporters also argue that unitization promotes job growth and will ultimately protect landowners by reducing the number of spills and property damage caused by excessive drilling.[20] Advocates of the bill also argue that the lack of mandated unitization results in a dramatically increased number of idle and orphaned wells, which ultimately costs the state money to clean and dispose of.[21]

 

Critics of the proposed compulsory unitization bill argue that this legislation opposes the wildcatter, individual liberty focused spirit which this state prides itself on. In Texas, there is a history of rewarding risk and valuing individual rights over governmental intervention.[22] A substantial number of the Texas oil fields were cultivated by independent oil producers, with large oil companies not becoming big players in the oil game until later.[23] For years in Texas, independent producers have successfully competed with major oil companies and used their influence in the Texas legislature to maintain a regulatory environment that gives small producers the ability to be competitive in an otherwise densely crowded and frequently monopolized market.[24] Additionally, MRPA would authorize Texas’s primary oil and gas regulatory body, the Railroad Commission, to amend or abrogate surface use protections that could potentially conflict with unit operations.[25] Small operators fear that they will be unable to pay their proportion of upfront costs for “multimillion dollar carbon dioxide advanced recovery projects, subjecting them to a possible penalty of up to 300 percent of the cost and eliminating current income from their small producing wells,”[26] and they do not want to be subject to the high price tags associated with maintaining fields larger than those that they currently operate.

 

This debate has been heated, occasionally even vitriolic, since the 1940s and is ongoing to this day.[27] The history of Texas oil and gas jurisprudence boils down to the politics of the independent producers versus the major vertically integrated oil companies,[28] and the modern debate continues to revolve around balancing an individual’s private property rights against maximized public benefit.[29] Only time will tell the fate of S.B. 177 in the 85th legislative session or the future of compulsory unitization in the Lone Star State, but if history is any indication, individual liberty will continue to thrive deep in the heart of Texas.


[1] Matthew Trawick, Note, Cooperative Mineral Interest Development in The Lone Star State: It’s Time to Mess with Texas, 4 Mich. J. Envtl. & Admin. L. 385, 386 (2015).

[2] Westmoreland & Cambria Natural Gas Co. v. De Witt, 18 A 724, 725 (1889).

[3] Sharon Flanery & Ryan Morgan, Overview of Pooling and Unitization Affecting Appalachian Shale Development, Steptoe & Johnson, PLLC, 4, (2015), file:///Users/kategoodrich/Downloads/106553701-A-National-Survey-of-Statutory-Pooling-and-Unitization.pdf.

[4] Flanery & Morgan, supra note 3, at 6.

[5] Id. at 9.

[6] 1 W.L. Summers, The Law of Oil and Gas § 5.49 (3d ed. 2004).

[7] Flanery & Morgan, supra note 3, at 10.

[8] Trawick, supra note 1, at 399.

[9] Flanery & Morgan, supra note 3, at 22.

[10] Id. at 22-23.

[11] Id. at 23.

[12] Id.

[13] Trawick, supra note 1, at 385.

[14] Tex. S.B. 177, 85th Leg., R.S. (2017).

[15] Senator Van Taylor Files the Majority Rights Protection Act, Texas Senate, http://www.senate.texas.gov/press.php?id=8-20161114i&ref=1.

[16] Cody Vasut, 85th Texas Legislature: Oil and Gas Roundup, Mondaq, http://www.mondaq.com/unitedstates/x/564512/Oil+Gas+Electricity/85th+Texas+Legislature+Oil+And+Gas+Roundup.

[17] Sen. Taylor has previously attempted to pass similar legislation during the 82nd, 83rd, and 84th sessions.

[18] Senator Van Taylor Files the Majority Rights Protection Act, supra note 15.

[19] Trawick, supra note 1, at 402.

[20] Id.

[21] Id. at 403-04.

[22] Id.

[23] Id.

[24] Jacqueline Lang Weaver, The Politics of Oil and Gas Jurisprudence: The Eighty-Six Percent Factor, 33 Washburn L.J. 492, 498 (1994). (Part II of the Article is titled “The Texas Legislature and the Conservation Laws: Worshiping the Independent.”).

[25] Trawick, supra note 1, at 403.

[26] Id.

[27] Weaver, supra note 24, at 492.

[28] Id. at 494.

[29] Trawick, supra note 1, at 403.

Kate Goodrich is a second-year student at the University of Texas School of Law. She graduated magna cum laude from University of Texas at Austin in 2011, and has a master's degree in Global Politics from Trinity College in Dublin, Ireland. Prior to attending law school, she was a federally-registered lobbyist in Washington D.C. She currently works as the legal research assistant for the Texas Senate Natural Resources and Economic Development Committee. After law school, she plans to pursue a career in government relations in Austin.