Chapter 3A Permian Basin Oil & Gas Regulatory Issues - New Mexico

• Jurisdiction: United States

Chapter 3A Permian Basin Oil & Gas Regulatory Issues - New Mexico

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Deana M. Bennett¹ Modrall Sperling Albuquerque, NM

DEANA BENNET'S practice is focused on natural resource development on public and tribal lands. Deana's experience includes permitting and environmental compliance efforts under the National Environmental Policy Act (NEPA), the Endangered Species Act (ESA), the Clean Air Act (CAA), and other related federal statutes. She has worked on a number of utility matters, and her experience includes working with renewable resource developers with siting issues on public, tribal, state, and local land. Her work also includes representing wind and solar projects, focusing on state and federal environmental law, permitting, due diligence, and opinion letters. Deana has represented lenders and borrowers in a number of renewable energy projects in New Mexico. Prior to joining Modrall Sperling, Deana served as a judicial law clerk for the Honorable Richard Bosson of the New Mexico Supreme Court. Deana is recognized in Native American Law at the state and national levels by Chambers USA. She is also recognized by Best Lawyers in America® for her work in Energy Law and Native American Law, and by Southwest Super Lawyers®. It is not surprising that Deana's practice areas focus primarily on natural resource development and public lands. Deana calls the West home, from New Mexico to Alaska. Deana's early childhood was spent travelling in a Volkswagen bus from Yellowstone National Park to Everglades National Park, where her father was a Park Ranger. After leaving the Park Service, her father worked for the Bureau of Land Management until he retired. Deana is a true coal miner's daughter; her mother worked in an underground coal mine in Wyoming for several years, while her father attended the University of Wyoming. Before attending law school, Deana retraced some of her childhood adventures. Deana worked in Yellowstone National Park, spent a winter working at a ski area in Utah, and spent two summers working on a luxury passenger train in Alaska, where she bought her own 1979 Volkswagen bus. Deana has driven the ALCAN twice in her bus. Deana earned her Juris Doctor from the University of New Mexico. Deana also has a M.A. in French Literature and a B.A. in French Language, both from the University of New Mexico. While studying abroad as an undergraduate, Deana travelled to Romania immediately after the revolution that marked the end of the Communist regime of Nicolae Ceausescu to deliver much-needed food, supplies, and medicine to families, churches, and communities.

I. INTRODUCTION

This paper provides an overview of the primary regulatory authorities governing oil and gas development in New Mexico, including the New Mexico Oil Conservation Commission ("OCC" or "Commission") and New Mexico Oil Conservation Division ("OCD" or "Division"), the United States Bureau of Land Management ("BLM"), and the New Mexico Commissioner of Public Land a/k/a the State Land Office ("SLO"). This paper also provides an overview of regulatory requirements including the horizontal well rule, which governs standards versus non-standard spacing units and well locations, compulsory pooling, and recent trends from orders issued in OCD/OCC cases. This paper ends with a brief discussion of other regulatory issues including disposition and use of produced water, Class II UIC injection authority, and compliance and enforcement issues.

II. OVERVIEW OF PRIMARY REGULATORY ENTITIES IN NEW MEXICO

In New Mexico, there is a mixture of federal, state, tribal, and privately owned lands and minerals. As a result, oil and gas development in New Mexico is governed by several regulatory entities, including, as relevant to this paper, the Commission/Division, the BLM, and the SLO.

A. Overview of the OCC and the OCD

The OCC and the OCD are divisions within New Mexico's Energy, Minerals, and Natural Resources department.² They were established by the New Mexico Oil and Gas Act.³ Pursuant to the Act, the Commission is composed of three members: the Division Director, a designee of the Commissioner of Public Lands, and a designee of the Secretary of EMNRD.⁴ Since the Governor appoints both the Director and the Secretary of EMNRD, a majority of the Commission is practically appointed by the Governor. The Oil and Gas Act grants the Commission "concurrent jurisdiction and authority" with the Division;⁵ however, the Commission's activities primarily focus on rulemaking and de novo review of Division issued orders.⁶ The Commission generally meets once a month.

According to the Division's website, the Division "regulates oil and gas activity in New Mexico. The Division gathers well production data, permits new wells, enforces the division's rules and the state's oil and gas statutes, makes certain abandoned wells are properly plugged, and

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ensures the land is responsibly restored."⁷ The Oil and Gas Act gives the Division jurisdiction "over all matters relating to the conservation of oil and gas and the prevention of waste of potash as a result of oil or gas operations in this state."⁸ Section 70-2-12 of the Oil and Gas Act outlines the Division's powers, including the power to regulate plugging and abandonment of wells, "fix the spacing of wells," classify pools, authorize injection, regulate the disposal or re-use of produced water, among other powers.⁹ Because the Commission and the Division were created by statute, questions as to whether the Legislature intended to bestow upon them authority under the statutory grant of jurisdiction is a question of law for which they are afforded little deference.¹⁰

The Division holds hearings twice a month, usually the first and third Thursday of the month.¹¹ In general, and as discussed in more detail below, the Division hearings involve compulsory pooling applications, requests for approval of non-standard units, and amendments to existing orders.

B. Overview of BLM

BLM manages approximately 38 million acres of mineral estate within New Mexico. This includes split estate lands (private, state or tribal surface and federal minerals). It also includes the designated potash area subject to development under 2012 Secretarial Order.¹² There are mandatory federal lease forms for minerals. The federal statutes governing most oil and gas development are: a) the Mineral Leasing Act (codified at 30 U.S.C. § 181 et seq.), and b) the Mineral Leasing Act for Acquired Lands (codified at 30 U.S.C. § 351 et seq.). Federal regulations for BLM leasing are found at 43 C.F.R. §§ 3000 and 3100. More information regarding the BLM in New Mexico can be found at https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/about/new-mexico. Leases on BLM lands or of federal minerals can result in delays due to needing BLM APDs and compliance with federal environmental laws, such as the Endangered Species Act and the National Environmental Policy Act.

C. Overview of SLO

The SLO manages approximately 9 million acres of surface estate and 13 million acres of mineral estate in New Mexico.¹³ In terms of oil and gas development, the Oil, Gas, and Minerals Division is the division within the SLO responsible for lease sales and lease administration. According to its website, the Oil, Gas, and Minerals Division "administers all oil and gas leases, including lease sales, assignments, compliance with lease terms, the review of on lease and off lease activity to determine potential impairment to Trust minerals, administration of the Reduced Royalty Program, and review of unit and communitization agreements."¹⁴ The Oil, Gas, and Minerals Division also "administers all fresh water and salt water disposal easements [on State

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Trust Lands] and is responsible for reviewing all salt water disposal applications that may impact State Trust lands."¹⁵ The SLO has rules and forms available on its website.¹⁶

III. OVERVIEW OF HORIZTONAL WELL RULE, SPACING UNITS, AND WELL LOCATIONS

In 2018, the Commission revised its rules to

provide greater clarity and specificity for horizontal wells and to meet the Commission's obligations to prevent waste and protect correlative rights, and to adopt rules to fix the spacing of wells and to "require wells to be drilled, operated and produced in such manner as to prevent injury to neighboring leases or properties governing the drilling of wells."¹⁷

The 2018 revision consolidated most requirements for horizontal wells into a single part, Rule 19.15.16 (the "Horizontal Well Rule" or the "Rule"). Revisions were made to other portions of the rules to supplement the Horizontal Well Rule and for consistency with the Horizontal Well Rule. The Horizontal Well Rule became effective June 26, 2018. The Rule withstood a judicial challenge following its enactment.¹⁸ Among other things, the Horizontal Well Rule outlines the requirements for standard spacing units and standard well locations. This paper discusses the requirements for horizontal spacing units first and then discusses the requirements for well locations.

A. Horizontal Spacing Units

Pursuant to the Rule, "each horizontal well shall be dedicated to a standard horizontal spacing unit or an approved non-standard horizontal spacing unit...."¹⁹ The Rule lays out certain requirements for standard spacing units, depending on whether the wells proposed to be dedicated to the unit are targeting an oil pool or a gas pool.²⁰ A horizontal spacing unit that does not meet the "criteria for a standard horizontal spacing unit shall be considered a non-standard horizontal spacing unit and must be approved" by the Division.²¹

Rule 19.15.16.15(B) sets out the requirements for standard spacing units. A standard oil spacing unit "shall comprise one or more contiguous tracts that the horizontal oil well's completed interval penetrates, each of which consists of a governmental quarter-quarter section or equivalent."²² A standard gas spacing unit "shall comprise one or more...