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F I S C A L I M P A C T R E P O R T

SPONSOR Nunez

DATE TYPED 3/1/05

HB 1015

SHORT TITLE Surface Owners’ Protection Act

SB

ANALYST Aguilar

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

Indeterminate Recurring

Varies

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to HM 34

SOURCES OF INFORMATION

LFC Files

Responses Received From

Energy, Minerals and Natural Resources Department (EMNRD)

New Mexico Environment Department (NMED)

Responses Not Received From

New Mexico Department of Transportation (NMDOT)

Commissioner of Public Lands (SLO)

SUMMARY

Synopsis of Bill

House Bill 1015 creates the “Surface Owners Protection Act”, which establishes the require-

ments to which oil and gas producers and surface land owners must adhere to negotiate surface

access agreements and determine compensation for property damages from oil and gas opera-

tions.

Significant Issues

There has been an ongoing controversy between oil and gas producers and landowners over ac-

House Bill 1015 -- Page 2

cess to private lands for the development and production of oil and natural gas. Often the surface

landowner does not own the minerals underlying the surface estate. The mineral estate allows

the mineral owner the right to access the surface estate to conduct activities reasonably necessary

to produce the minerals. In some cases, producers may not feel the need to conduct good faith

negotiations since the mineral estate is superior to the surface estate causing conflict between oil

and gas producers and landowners. New Mexico law does not presently require prior notice of

operations to the surface owner, or require any security from the operator for damages that may

accrue to the surface owner.

As a general practice, oil and gas producers construct single lined drilling pits for containing

drilling fluids utilized and produced by the drilling process. These pits may contain drilling ad-

ditives, hydrocarbons, and high levels of salts. If not disposed of properly these wastes have the

potential to contaminate ground water, surface water, and cause a negative impact to the land

surface. The typical oilfield practice for disposal of these drilling wastes is to bury the drilling

wastes onsite. Landowners maintain that oil and gas producers have no right to intentionally

dispose of wastes on lands that the producers do not own, and that these waste disposal practices

are not reasonably necessary to produce the minerals. Landowners also maintain that they are

left with an environmentally damaged property that affects land value.

HB1015 would set out a regulatory process under state law requiring:

-

Producers to notify landowners in advance of contemplated oil and gas operations, pro-

vide specific information on the proposed operations, and make an offer of settlement for

compensation for damages.

-

A specified process for negotiation of settlements for compensation of damages.

-

Specific issues that must be addressed during negotiations.

-

A binding arbitration process upon written notice by either party of failure to reach an

agreement after good faith negotiations.

-

Compensation for damages to the surface and the types of damages allowed.

-

A method for civil actions by the landowner against the producer for willfully and know-

ingly beginning an oil and gas operation before a settlement agreement is reached or an

arbitration award is made.

Under common law, an owner or lessee of minerals (including oil and gas) has a right to use so

much of the surface of the land overlying its minerals as may be necessary to explore for and

produce the minerals. The surface owner, absent a contrary agreement, is not entitled to any

compensation for loss of use of the portion of the surface reasonably necessary for mineral op-

erations, nor for any diminution in the value of the surface due to such operations.

FISCAL IMPLICATIONS

The Oil and Gas Conservation Division notes some delays in production may be caused by this

bill, thereby reducing revenues somewhat.

TECHNICAL ISSUES

The Oil and Gas Conservation Division (OCD) notes the bill applies to existing as well as future

operations. The definition of "oil and gas operations" includes production as well as drilling or

re-entry. If the bill were literally interpreted, oil and gas producers would have to shut in exist-

ing wells to comply with the bill and might even be precluded from entry on the surface to main-

House Bill 1015 -- Page 3

tain these wells until surface damages were determined.

OCD notes the bill contains no transition provisions to alleviate the hardship it may impose upon

producers who, at the time of its passage, would not have sufficient time left on their leases to

comply with its provisions in time to prevent termination of those leases.

OCD further notes the bill defines "surface owner" as "the person who holds equitable title to the

surface of the property." Under this definition, if the surface estate were held in trust, the oil and

gas producer would have to give notice to, and obtain an agreement with, the beneficiaries of the

trust rather than the trustee, this may be difficult to comply with since beneficiaries might be

numerous, would frequently be minors, and could include classes of persons whose specific

identity could not be easily determined.

PA/yr