Chapter 9B Growing Pains: A Century of Leasing and Developing State Minerals in New Mexico

• Jurisdiction: United States

Chapter 9B Growing Pains: A Century of Leasing and Developing State Minerals in New Mexico

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Ann Cox Tripp Hinkle Shanor LLP Roswell, NM

ANN COX TRIPP is a senior associate in the Roswell, New Mexico office of Hinkle Shanor LLP. Her practice focuses on the before and after in upstream: advising oil and gas companies and mineral and leasehold owners on title issues in state and federal land and litigating when disagreements arise. In other areas, Ann advises and represents clients in estate planning, probate, and administrative matters—primarily tethered to resolving matters related to mineral ownership, exploration, and production. Ann obtained her undergraduate degree from the United States Naval Academy in 2004 and her J.D. (summa cum laude) from Washington & Lee University School of Law in 2017. She previously co-wrote a paper for the RMMLF Special Institute on bankruptcy in October 2020 and presented the 2021 Oil and Gas Law Update for Texas and the West.

INTRODUCTION

Crescit Eundo:¹ As it goes, it grows. New Mexico's state motto, while curious for a state noted for its general lack of greenery,² nevertheless aptly describes both the Permian Basin's demonstrated potential for development and New Mexico's $27 billion Land Grant Permanent Fund, which will distribute $1.34 billion in Fiscal Year 2024 to its beneficiaries.³ With this growth, new challenges arise for the state lessor and private lessee alike. This article strives to serve as an introduction to the unique opportunities in leasing and developing state minerals in the Land of Enchantment by providing a brief historical background of New Mexico State Trust Lands, outlining the role of the Commissioner of Public Lands ("Commissioner") and the New Mexico

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State Land Office ("SLO") in overseeing a century of leasing state trust lands,⁴ and touching briefly on recent shifts in approach and enforcement from the industry perspective and experience.

I. BACKGROUND

A. History of New Mexico State Lands

New Mexico's 60-year path to statehood was neither quick nor smooth. The United States established New Mexico as a territory under the Organic Act of 1850,⁵ following the Treaty of Guadalupe Hidalgo in 1848 which ended the Mexican-American War and ceded present-day California, Nevada, Utah, part of Arizona, western New Mexico, and western Colorado to the United States for the bargain price of 5 cents an acre.⁶ As a result, title in New Mexico lands, save prior grants by Spain or Mexico, originate with the United States.⁷ Following the General Land Ordinance of 1785, the Organic Act promised Sections 16 and 36 of each township to the state in trust for the benefit of schools, upon completion and acceptance of a federal survey.⁸ The Ferguson Act of 1898,⁹ granted those two sections and provided for an exchange between the federal government and New Mexico where parts of the designated lands were already reserved to "national purposes," commonly referred to as "indemnity" or "in-lieu" lands.¹⁰ Of these 5,589,185

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in-lieu acres to be selected,¹¹ the commission designated the majority of in-lieu lands in mineral-rich Eddy, Lea,¹² and San Juan Counties.¹³ Thereafter, the Enabling Act of 1910,¹⁴ admitted New Mexico to the union subject to statewide approval of a state constitution, and dedicated Sections 2 and 32 to the state in trust for its common school beneficiaries.¹⁵ The detail and limits placed upon the sale and lease of state trust land, going so far as to set minimum prices per acre,¹⁶ were a direct result of congressional desire to avoid prior scandals and abuses of power in the sale of public

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lands.¹⁷ To that extent, the powers of the Commissioner under the Enabling Act and its mirror provisions in the articles of the New Mexico Constitution¹⁸ have been narrowly construed by courts.¹⁹ This strict interpretation follows the embedded constraints of the Enabling Act, which required certain provisions—to include Section 10 addressing public lands—to be incorporated wholesale into the state constitution and amended only through public approval in the amendment process.²⁰

This winding and delayed path to statehood puts current state leasing and enforcement practices in context, to be viewed through two lenses: First, legislation creating New Mexico's state trust lands marked a distinct departure from past practices to a purposefully circumscribed, limited grant of authority to manage lands through public sale for appraised value.²¹ Second, the Commissioner serves not the State in todo, but is the fiduciary of the state trust beneficiaries, to

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which the Commissioner owes an uncompromising duty to maximize economic benefit of the lands and resources therein for that select group, not the State itself or its general public.²²

B. Organization, Authority, Responsibilities of the State Land Office

Where the state constitution creates the elected position of Commissioner,²³ the New Mexico Legislature established the SLO with the Commissioner as its executive. NMSA 1978, § 19-1-1. New Mexico statutes also control terms and conditions of leasing state trust lands. See id., §§ 19-10-4 to 4.3. Note, the State Land Office is a separate agency from the New Mexico Oil Conservation Division and the New Mexico Oil Conservation Commission,²⁴ addressed by other papers and speakers in this Special Institute,²⁵ whose oversight extends to all oil and gas operations within the state. In contrast, the Commissioner's authority to make rules and regulations extends only to state trust lands.²⁶ As is relevant to oil and gas operations in the Permian Basin, those

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statutes are codified in Chapter 19, Article 10 ("Lease of Oil and Gas Lands").²⁷ The regulations which provide further detail as to state oil and gas leases, occasionally referred to as "State Land Rule ___" are located in Title 19, Chapter 2, Part 100: State Trust Lands.²⁸

Under the leadership of the Assistant Commissioner of Public Lands for Mineral Resources, the Minerals Division Director administers all aspects of oil and gas leasing, to include sales, assignments, compliance with lease terms, review of on-lease and off-lease activity, and review of unit and communitization agreements.²⁹ The Minerals Division also oversees and administers leases for other minerals (coal, salt, caliche, sand, gravel, potash, geothermal).³⁰ Because both operations typically involve water, the Minerals Division also handles water disposal easements and reviews salt water disposal applications affecting state trust lands. Together with royalty management duties, the Minerals Division employs 36 staff and managers.

The SLO legal division advises the Commissioner and her staff on maximizing the economic benefit of trust lands while also preserving the same assets for long-term management. General Counsel legal staff are involved in resolving land disputes, royalty collection efforts, and represents the Commissioner in administrative contest proceedings and lawsuits.³¹

C. The State Leasing Process

As reported by the SLO, of the almost 13 million mineral acres of state trust land, some 6,800 oil and gas leases cover 2.3 million acres of trust land.³² Over half of the leasehold acreage lies in Eddy County and Lea County under 4,480 active state leases covering the oil, gas and other minerals in 1.2 million state trust acres.³³ With the availability of state lands, the additional benefit of lease sale frequency far outmatches the slow forward progress following the 2021 federal leasing moratorium.³⁴

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(1) Nomination: After identifying open acreage, any party can submit a location description of the nominated tract to the Minerals Division Director. Under prior administrations, all nominations have been held confidential by the State Land Office. Nominations should be submitted via email to the Commissioner's designee, as published on the SLO page for Lease Sale Notices and Results.³⁵ Nominations must be: (i) submitted as far in advance of the sale as possible; (ii) for a legal subdivision or larger; (iii) accompanied by a minimum bid because the failure to do so may affect future nominations.³⁶ A nominated tract that is not included will be rolled over to the next month's lease sale.

(2) Notice and Sale: By statute, the SLO lease sale must occur on the third Tuesday of every month, NMSA 1978, § 19-10-17(A), with notice published not less than ten days before the sale which discloses the legal description of the lands, form of lease, royalty rate, and annual rental acre.³⁷ The Commissioner has discretion to set a minimum bonus, referred to as the "Minimum Acceptable Bid." The Commissioner is under no requirement to offer lands for sale or lease, but after electing to do so, must follow all applicable laws once those lands are offered for lease. Currently, the SLO offers lands for lease via a competitive, sealed bidding process through the platform EnergyNet.com, wherein the auction opens a week in advance and closes at 8:30 on the set lease sale day. To submit a bid, the operator must have an NMOCD-issue OGRID number ("Oil and Gas Remittance Identifier"). Where two or more sealed, equal bids are received, the Commissioner has established a rule for "Tie Bids," NMAC § 19.2.100.30, offering the tract at auction to the tie bidders only and issuing the lease to the highest and best bid. Successful bidders are required to remit the bid amount, the application fee, minimum rentals, and the Lease Application form before close of business on the sale date—by wire transfer or in person at the SLO.³⁸ Note, the SLO Lease Application form does require a notarized acknowledgement, and the Rule retains the requirement that applications accompanying sealed bids "shall be executed under oath by the applicant."³⁹

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(3) Lease Terms:

State oil and gas lease terms are controlled by statute, and categorization of state lands dictates the form of lease available.⁴⁰ At the discretion...