Texas Administrative Code
Title 31 - NATURAL RESOURCES AND CONSERVATION
Part 1 - GENERAL LAND OFFICE
Chapter 9 - EXPLORATION AND LEASING OF STATE OIL AND GAS
Subchapter C - MAINTAINING A STATE OIL AND GAS LEASE
Section 9.37 - Offset Well Obligations and Compensatory Royalties
Universal Citation: 31 TX Admin Code ยง 9.37
Current through Reg. 49, No. 38; September 20, 2024
(a) Obligation to drill an offset well. An offset well must be drilled on state property under the terms of this section whenever an encroaching well is completed unless one of the following conditions applies: lessee has properly pooled the state property with the property containing the encroaching well (see § 9.81 of this title, (relating to Pooling and Unitizing State Property), the commissioner has granted written approval to allow payment of compensatory royalties in lieu of drilling an offset well (see subsection (c) of this section) or the commissioner has agreed that the encroaching well cannot be draining state hydrocarbons (see subsection (b) of this section). Failure to drill an offset well can result in the forfeiture of a lease or of a surface owner's agency rights under the Relinquishment Act.
(1) Who is obligated. For any state property
other than Relinquishment Act property, the lessee of the state property has
the obligation to drill the offset well. For leased or unleased Relinquishment
Act property, the surface owner, lessee, sublessee, receiver or other agent in
control of the property has the obligation to drill the offset well.
(2) Drilling the offset well. In addition to
meeting the requirements found in §
9.32
of this title, (relating to General Responsibilities of State Lessees) and
§
9.34
of this title, (relating to Drilling and Reworking Operations), an offset well
shall also be drilled to a sufficient depth and in such a manner as to prevent
drainage of oil or gas from state land.
(3) When to begin drilling. The drilling
operation associated with an offset well shall begin:
(A) for Relinquishment Act lands, within 100
days of the date that the encroaching well first produces commercially
(excluding test production); or
(B)
for other state properties, within 60 days of the date that the encroaching
well first produces commercially (excluding test production).
(b) Agreement that no drainage of state hydrocarbons is possible.
(1) Application. If the person obligated to
drill an offset well is certain that an encroaching well cannot be draining the
state property, he shall apply in writing to GLO staff at the address found in
§
9.32(c)(3)(A)
of this title (relating to Required Activity Lessee Responsibilities). This
application should include a full explanation of why applicant contends that no
drainage of state hydrocarbons is possible and request the commissioner to
agree with this contention.
(2)
Information/Data supporting application. With the application, the applicant
shall submit any evidence, data, or information necessary to support the
application and request, including geological, geophysical, economic,
engineering, or production data from the encroaching well, and any other data
regarding the state property, the encroaching well or any shut-in well located
on the state property. Applicant shall submit additional evidence, data or
information upon request of GLO staff.
(3) Effect of reaching an agreement. If the
commissioner, after reviewing all pertinent data and evaluating the GLO staff
recommendation, agrees that the encroaching well cannot drain state
hydrocarbons, then the commissioner will send a letter to the applicant as
evidence of this agreement. This letter agreement will not prevent the state
from claiming or collecting damages should later technology show that state
hydrocarbons were drained or if the data submitted by applicant was false,
inaccurate or incomplete.
(4)
Effect of failing to reach an agreement. If the commissioner, in his sole
discretion, concludes that the state property may possibly be drained, then a
letter will be mailed to applicant stating that the drilling of an offset well
is required under the statutory provisions and any corresponding lease
provision. Applicant will then be given the opportunity to seek the
commissioner's approval to pay compensatory royalties in lieu of an offset well
under subsection (c) of this section.
(c) Agreement to accept compensatory royalty in lieu of drilling offset wells.
(1) Effect
of reaching or failing to reach an agreement. If an agreement is reached with
the commissioner under this section, the payment of a compensatory royalty will
satisfy the obligation to drill an offset well on the state property involved.
Reaching an agreement will not prevent the state from claiming or collecting
damages should later technology show that additional state hydrocarbons were
drained or if the data submitted by applicant was false, inaccurate or
incomplete. If such an agreement cannot be reached and the state property
cannot be pooled, an offset well must be drilled under the appropriate
statutory provisions and any corresponding lease provisions.
(2) Application. If the person obligated to
drill an offset well desires to pay compensatory royalty in lieu of drilling
it, he should apply in writing to GLO staff at the address found in
§9.32(c)(3)(A). This application should include, at a minimum, an
explanation of why applicant does not plan to drill an offset well (or to
produce and market production if there is a shut-in well on the state
property), why applicant cannot pool the state property with the property
containing the encroaching well, and why the payment of a certain compensatory
royalty will adequately protect the state's interests.
(3) Information/Data supporting application.
With the application, the applicant shall submit any evidence, data, or
information necessary to support his application, including geological,
geophysical, economic, engineering, or production data from the encroaching
well, and any other data regarding the state property, the encroaching well or
any shut-in well located on the state property. Applicant shall submit
additional evidence, data or information upon request of GLO staff.
(4) Mandatory terms of the agreement. If,
after reviewing the pertinent data and evaluating the GLO staff recommendation,
the commissioner is able to reach an agreement with applicant under this
section, the agreement may contain additional terms at the commissioner's sole
discretion but must contain the following provisions:
(A) The amount of the compensatory royalty
payment. The compensatory royalty on the state property burdened by the offset
obligation shall be paid:
(i) on the royalty
rate set in the lease covering such state property or on a royalty rate set by
the commissioner if such property is unleased Relinquishment Act land;
and
(ii) on the market value at the
well of all production from the encroaching well unless the commissioner, in
his sole discretion, agrees to reduce proportionately the compensatory royalty
volumes based upon the amount of state hydrocarbons being drained as reflected
by the data submitted by the applicant.
(B) Special provisions if state property
already has a shut-in well. If compensatory royalties are paid on state
property that has a shut-in well and the annual total of these compensatory
royalty payments is less than the annual shut-in royalty payment set in the
applicable state lease, lessee shall pay additional compensatory royalty equal
to the difference. Such additional compensatory royalty is due one year and 30
days from the date that the first compensatory royalty was due and annually
thereafter on the same date.
(5) Due date. Unless the agreement reached
with the commissioner states otherwise, the first compensatory royalty payment
(covering all past production from the encroaching well) is due by the last day
of the month following the month in which the agreement was reached and,
thereafter, compensatory royalties are due by the last day of each month and
computed based on the encroaching well's production for the preceding
month.
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