CHAPTER 7 SPECIAL LEGAL ISSUES AND PRACTICE BEFORE THE TEXAS RAILROAD COMMISSION
| Jurisdiction | United States |
(Sep 1985)
SPECIAL LEGAL ISSUES AND PRACTICE BEFORE THE TEXAS RAILROAD COMMISSION
Partner, Vinson & Elkins
Robin A. Melvin,
Associate, Vinson & Elkins
AUSTIN, TEXAS
I. INTRODUCTION
The Railroad Commission (the "RRC") did not begin as a regulator of oil and gas production and its current jurisdiction is much broader than oil and gas.1 Oil and gas matters are, however, at the heart of the RRC, and have been for most of the years since it initially received authority over them in 1917. In 1928, Texas became the leading state in oil production, and the RRC became a pioneer of oil and gas regulation. The RRC created many regulatory approaches that greatly influenced oil and gas regulation by other states and the federal government. For instance, the Texas system of market demand proration has been studied by at least five other states, and by several Arab countries, for background to use in establishing or augmenting their own regulatory system.2
The RRC's responsibility for oil and gas matters will remain important. Last year about 27% of the oil and 34% of
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the gas produced in the U.S. was produced in Texas.3
This paper will focus on certain practical aspects of RRC oil and gas practice. First, we will outline the structure and function of the RRC Oil & Gas Division, and a few of the most important procedural aspects of practice before the RRC, including the Texas Administrative Procedure Act and the Texas Open Meetings Act. We will then turn to some classic areas of RRC jurisdiction, including spacing and density and pooling. We will then address some of the new issues that have arisen at the Railroad Commission in the last few years, including Rule 69, Rule 89, and environmental protection. Finally, we will look at some old RRC issues that have taken on new importance, including well classification, secondary recovery, and market proration. We will pay special attention to the tensions between the RRC's state regulatory responsibilities and the demands of state property law and federal regulatory law.
II. RRC REGULATION OF OIL AND GAS
A. SCOPE
The RRC regulates virtually every aspect of the production of oil and gas in Texas. It regulates drilling practices. In 1984, it received 37,507 applications for drilling permits. It regulates completion practices. In 1984, 18,716 oil wells and 5,489 gas wells were completed in Texas. It regulates the amount of production. In 1984, Texas wells produced 845,502,075 barrels of oil and 5,864,223,824 mcf of gas.
B. AUTHORITY
The majority of the RRC's authority for the regulation of oil and gas is codified in the Texas Natural Resources Code, Chapter 81, et seq. As part of an ongoing effort to codify the majority of Texas civil statutes, the Texas Natural Resources Code was adopted in 1977. Although it purports to work no substantive changes in the existing
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law, in reality the Code from time to time affected changes in the wording of existing statutes. For example, the judicial review section provided by the Mineral Interest Pooling Act differs greatly from that found in Tex. Nat. Res. Code Ann. § 102.111. No explanation for this change is in the Code. Therefore, the practitioner needs to be wary of relying on the Code; ordinarily, it is necessary to look to the original statutes for guidance.
C. PURPOSES
RRC regulation under Texas law has two classic purposes: (1) the prevention of waste (also known as conservation), and (2) the protection of correlative rights (that is, the assurance of fairness between competing owner/operators). The prevention of waste is often described as the RRC's primary regulatory purpose. The protection of correlative rights is both a constraint on the prevention of waste purpose, and a necessary part of any system seeking to prevent waste.
For example, in the East Texas Field, the protection of correlative rights limited the RRC's ability to prevent waste. Fairness among competing owners required the RRC to allow wells to be drilled on numerous small tracts so that the owner could recover his hydrocarbons — even though the wells were unnecessary to effectively and efficiently recover the hydrocarbons underlying the tract, causing economic waste, and may have accelerated the progress of the field-wide water drive, causing physical waste. On the other hand, this fairness element was politically, and perhaps legally, vital to making the basic waste regulation system viable. Establishing orderly production, and thereby preventing the continuance of the great waste that occurred in the early years in the East Texas Field, would have been difficult, if not impossible, without a guarantee that small tract owners would be allowed to produce at least their fair share of the hydrocarbons in the field. See, e.g., Prindle, Petroleum Politics and the Texas Railroad Commission at 35 (1981).
More recently, RRC oil and gas regulation has stressed a third purpose: environmental protection. This purpose has been reflected in the RRC's revision of its statutes and rules to provide stricter standards and stronger methods to enforce those standards, and in its vigorous use of those methods.
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D. FEDERAL RESPONSIBILITIES
In addition to its authority under Texas law, the federal law gives the RRC certain responsibilities for the regulation of pricing and marketing of oil and gas. As an example, the Natural Gas Policy Act ("NGPA"), 42 U.S.C.A. § 3301 et seq., requires the RRC to work with the Federal Energy Regulatory Commission ("FERC") in determining the applicable price for gas produced in Texas. In 1984, the RRC processed 16,197 applications to the FERC for NGPA pricing.
III. RRC STRUCTURE AND PROCEDURES
A. THE COMMISSIONERS
Under the Texas Constitution, Art. 16, § 30, the three Railroad Commissioners are elected state officers. One Commissioner is elected every two years for a term of six years. See also Tex. Rev. Civ. Stat. Ann. art. 6447. Traditionally, the chairmanship of the Commission is rotated every two years, and is held by the Commissioner next facing reelection.
Each Commissioner has a small staff, generally less than five people. In addition, the Commissioners have created the Office of the Special Counsel, which acts as in-house legal counsel to the Commissioners in all aspects of their jurisdiction. The Office of the Special Counsel often serves as a liaison between the Commissioners and the RRC's various divisions, including the Oil and Gas Division.
B. THE OIL AND GAS DIVISION
All substantive regulatory duties of the RRC are handled by the staff of one of the divisions: the Transportation Division, the Gas Utilities Division, the LPG Division, the Surface Mining Division, and the Oil and Gas Division.
The Oil and Gas Division employs about 300 people in its Austin office and about 250 people in ten District Offices throughout the State. It is currently headed by a Director, formerly the Chief Engineer. He supervises all of the Division's operations, and reports directly to the
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Commissioners in Austin. Although the Oil and Gas Division staff is completely separated from that of the other RRC divisions, it is not completely isolated from them, and often communicates with, for example, the Gas Utilities Division, whose jurisdiction is closely related to that of the Oil and Gas Division.
1. The Austin Office
a. In Austin, the Oil and Gas Division has a General Counsel who serves as chief legal counsel to the Director and to the RRC on all oil and gas matters.
b. The well permits section handles all drilling permit applications.
c. The NGPA division provides the FERC with the pricing determinations required under the NGPA.
d. The Underground Injection Control Section handles injection applications, as well as a variety of environmentally-related matters.
e. The Production and Proration Section deals with well classification and allowables.
f. The Legal Enforcement Division mainly pursues administrative penalty and plugging cases.
g. A legal examiner generally conducts legal hearings, sometimes with the assistance of a technical examiner, drafts proposed rules, and prepares legal opinions. The most common legal hearings are on exceptions to spacing or density rules or ratable take issues. In these cases, a legal examiner may request a technical examiner to sit with him if technical evidence is involved.
h. A technical examiner conducts all technical hearings, sometimes with the assistance of a legal examiner. The most common technical hearing is the special field rules case, in which an operator applies to have special rules rather than Statewide rules, on spacing, density, proration, etc., apply to a particular field. Other technical hearings include requests for special allowables and productive acreage hearings. In these situations, a technical examiner, a petroleum engineer or geologist, may request the assistance of a legal examiner if
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the case is contested. Thus, in most contested cases, both a lawyer and an engineer hear the case.
2. The District Offices — The Field Operations Section in Austin directs the ten District Offices in San Antonio, Houston, Corpus Christi, Kilgore, Abilene, San Angelo, Midland, Lubbock, Wichita Falls, and Pampa. The District Offices perform a wide variety of functions. A clerical staff processes completion reports, plugging reports, and cementing reports which operators are required by rule to file with the District offices. In addition, a field inspection staff routinely inspects leases to ensure compliance with RRC rules, particularly environmental regulations, and to witness well tests. A technical staff assists the field staff in conducting investigations and initiating appropriate action. The District Offices are very cooperative and good sources of practical information, but the practitioner must remember that they...
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