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

SPONSOR HAGC

ORIGINAL

DATE LAST

UPDATED

2-10-06 HB 437/HAGCS

SHORT TITLE Surface Owners Protection Act

SB

ANALYST Woods

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

NFI

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Energy, Minerals and Natural Resources Department (EMNRD)

Office of the Attorney General (OAG)

New Mexico State Land Office (SLO)

New Mexico Department of Agriculture (NMDA)

New Mexico Oil and Gas Association (NMOGA)

SUMMARY

Synopsis of Bill

House Agriculture and Water Resources Committee substitute for House Bill 437, Relating to

the Production of Oil and Gas; Enacting the Surface Owners Protection Act; Stating Certain Du-

ties Owed by Oil and Gas Operators to Surface Owners; Requiring Notice to the Surface Owners

of Oil and Gas Operations; Requiring a Bond or Other Surety in Certain Circumstances; Provid-

ing a Cause of Action, seeks to enact the Surface Owners Protection Act (the Act), which ad-

dresses the following general factors:

•

It makes the Surface Owner’s Protection Act (the “Act”) applicable to private surface

fee land only. It no longer requires operators of oil and gas operations to compensate

surface owners for the use of the surface owners’ property. It makes oil and gas op-

erators liable to surface owners for any damages sustained by the surface owner as a

direct result of the operator’s oil and gas operations, without setting forth what factors

House Bill 437/HAGCS – Page

2

may be included to calculate damages. It imposes a duty on the operator to reclaim

all surface directly affected by the operator’s oil and gas operations.

•

It requires operators of oil and gas operations to provide notice to the surface owners

of the planned oil and gas operations prior to entering the surface property. The no-

tice shall include (1) sufficient disclosure of the planned oil and gas operations to en-

able the surface owner to evaluate the effect of the operations on the property, (2)

contact information for the operator and the operator’s representative, and (3) a pro-

posed surface compensation agreement. The proposed surface compensation agree-

ment must at a minimum address the issues delineated in the Act. In the absence of a

surface use and compensation agreement, oil and gas operators are to post a bond or

other surety for the benefit of the surface owner with the Oil Conservation Division of

New Mexico Energy, Minerals and Natural Resources Department and in an amount

equal to the greater of (1) the compensation, as estimated by the operator, for dam-

ages, or (2) $2,500 per well site.

•

It no longer expressly creates a private right of action by surface owners against op-

erators who conduct oil and gas operations without a surface use and compensation

agreement or outside the scope of an existing agreement. It now simply states that in

an action brought pursuant to the Act, a court may award to a prevailing party attor-

ney fees (no longer compensatory or punitive damages) if the court finds that (a) the

operator failed to provide notice as required by Section 5.B of the act, (b) the operator

conducted oil and gas operations without a surface use and compensation agreement

and without posting bond, as required by Section 6, (c) in posting bond, the operator

failed to estimate in good faith the compensation that would be owed to the surface

owner for damages, or (d) the operator conducted oil and gas operations outside the

scope of a surface use and compensation agreement.

•

It deletes the 6-year Statute of Limitations provision contained in the original HB 437

and removes venue in Santa Fe.

•

It creates an exception for the notice, surface compensation agreement, or bond re-

quirements of the Act for operations to protect health, safety or the environment in

emergency situations.

There is no appropriation attached to this legislation.

SIGNIFICANT ISSUES

There are a number of differing legal opinions, interpretations, and observations associated with

this legislation. Accordingly, they will be presented without prejudice:

The Energy, Minerals and Natural Resources Department (EMNRD) perspective:

The substitute bill, like the original HB 437, changes existing law in favor of allowing surface

owners greater rights. Under common law (accustomed practice), an owner or lessee of oil and

gas has a right to use as much of the surface of the land as is necessary to explore for and pro-

duce minerals. The surface owner, absent a contrary agreement, is not entitled to compensation

for loss of use of the portion of the surface reasonably necessary for mineral operations, nor for

House Bill 437/HAGCS – Page

3

any diminution in the value of the surface due to such operations. The oil and gas operator is li-

able only for damages to the surface caused by its negligence, or by unreasonable or excessive

use of the surface. The substitute bill provides that the oil and gas operator is liable for damages

to the surface owner but does not specify what damages.

State law does not presently require prior notice of oil and gas operations to the surface owner, or

require security from the operator for damages that may accrue to the surface owner. Where,

however, the mineral estate is owned by the federal government, the United States Bureau of

Land Management requires that oil and gas producers give notice to the surface owner and either

obtain a surface use agreement or post security prior to commencement of operations. BLM re-

quires that an oil and gas operator file a statement that it has an agreement with the surface

owner, or a bond, with BLM at the time the operator files its application for permit to drill. The

bond amount is determined by BLM on a case by base basis and is usually from $1,000 to $5,000

per well location. Oil and gas producers in New Mexico typically pay surface damage settle-

ments to surface owners prior to operations. There is, however, no legal requirement to do so.

The substitute bill would require prior notice to the surface owner and would require that the op-

erator either obtain a surface use agreement or post a bond for protection of the surface owner

prior to commencement of operations.

The substitute HB 437 would put New Mexico in company with nine other states (Illinois, Ken-

tucky, Montana, North Dakota, Oklahoma, South Dakota, Tennessee, West Virginia and Wyo-

ming) that have modified the common law concerning an oil and gas operator's liability to sur-

face owners by statute. Some of the bill's provisions are similar to those statutes.

The substitute bill, like the original bill, requires operators to submit a proposal prior to com-

mencement of operations that includes detailed operational plans. In practice, the plans for ini-

tial operations should be known thirty days prior to commencement of operations, but plans for

later operations on the property, in most cases, would not be known at commencement. This is-

sue could be addressed by requiring the operator to give notice of additional or revised opera-

tional plans.

New Issues Raised by the Substitute Bill

The original bill contained a detailed list of the elements of damage for which a surface owner

would be entitled to compensation, including specifically loss of use of the land, diminished

market value, damage to water resources and cost of reclamation. The substitute bill removes

this detailed list and simply provides that the operator shall compensate the surface owner for

"damages caused as a direct result of the operator's oil and gas operations." This change leaves

the question of the elements of compensation that a surface owner can recover to be resolved by

the courts, thus introducing a number of uncertainties. For example:

(a) The original bill provided that a surface owner could recover compensation for loss of

use of the portion of the surface used for oil and gas operations in addition to any physical

damage to the land. A surface owner could not recover for such loss of use under present

law. It is unclear what a surface owner could recover for loss of use under the substitute

bill.

(b) The original bill allowed the surface owner to recover compensation for damage to wa-

ter resources without limiting such recovery to the surface owner's water rights. The sub-

House Bill 437/HAGCS – Page

4

stitute bill contains no reference to water resources. Hence it is unclear what right a sur-

face owner would have to compensation for water, even if the surface owner had a water

right.

(c) The original bill specifically provided that, in the event of an operator's failure to re-

store the surface, the surface owner could recover the cost of such restoration even if it ex-

ceeded the value of the land as restored. The substitute bill is silent on this subject. Under

common law, recovery for damages to land is usually limited to the land's fair market

value.

The substitute bill deletes the word, "gathering" from the definition of "oil and gas operations."

This may not be a substantive change, since "gathering" is an activity "associated with produc-

tion" and therefore may be included in the substitute bill's definition of "oil and gas operations."

However, if the alteration in language from the original bill is intended to make a substantive

change, it may exclude recovery of damages resulting from the operation of "gathering" pipe-

lines running from wells to field collection points or processing facilities.

The Office of the Attorney General (OAG) perspective:

The legislation is not clear as to what statute of limitations would apply for bringing an action

under the Act; there is no definition or criteria as to what may qualify as an emergency situation

under Section 8; and it is unclear whether to provide these protections to surface owners to help

protect their property rights.

New Mexico Oil and Gas Association (NMOGA) perspective:

The House Agriculture and Water Resources Committee Substitute for HB 437 retains the Cattle

Growers’ priority issues from the original bill which are:

•

require notice by the oil and gas operator to the surface owner;

•

require agreement & compensation by the oil and gas operator to the surface

owner; or in lieu of that;

•

financial assurance.

The committee substitute has cleared up several NMOGA legal concerns and ambiguities that

were in the original bill and CS/HB 437 no longer

•

abrogates common law or New Mexico property law;

•

does not subjugate the property right of the mineral estate;

•

does not void New Mexico constitutional provisions; nor

•

does not void a long history of judicial decisions;

•

clarifies the relationship between surface owner/oil & gas operator and the tenant;

House Bill 437/HAGCS – Page

5

•

does not harm the mineral estate relationship between New Mexico and the federal

government; and

•

clarifies that the Act only applies to private fee surface land.

CS/HB 437 still contains a list of items in Section 3.B and some of those items are regu-

lated by either the Oil Conservation Division, who has statutory authority under the Oil

and Gas Act, or the Bureau of Land Management and are considered a part of the permit

to drill process and third party transactions covered under the statutory authority of the

Oil and Gas Gathering Act or Pipeline Act, which industry feels can be clarified in the

negotiation process with the surface owner.

The New Mexico Department of Agriculture (NMDA) perspective:

This legislation addresses the ranching industry’s potential loss of resources during oil or gas ex-

ploration and extraction, and the differences between the House Agriculture and Water Re-

sources Committee substitute for HB 437 and HB 437 include the following:

•

Applies to private fee surface land only.

•

Definition of “reclaim” is changed to “make reasonable effort to restore surface di-

rectly affected”…… rather than as closely as reasonably practicable.

•

The oil or gas operator shall compensate the surface owner for damages caused as

a direct result of operations.

•

The oil or gas operator shall not be responsible for allocating compensation be-

tween the surface owner and any tenant.

•

Provisions for lost income from diminished land value, loss of use, loss of im-

provement value, harm to environment, and costs of reclamation are removed in

the substitute bill.

•

The oil or gas operator has a duty to reclaim all surface directly affected by their

operation, however, loss of use liability is removed.

•

The oil or gas operator shall give the surface owner notice of the planned opera-

tions which will include terms of ingress and egress and a definite offer of com-

pensation for damages resulting from the operations 30 days, rather than 40 days,

prior to first entering the surface to conduct oil or gas operations. Many references

to aesthetics and responsibility/liability requirements in the original bill are

stricken from the substitute.

•

Notices required by the act shall be deemed to have been received 5 days after

mailing by certified mail or immediately upon hand delivery. This change allows

the oil or gas operation to proceed without delay if the surface owner fails to ac-

cept certified mail and without a definitive agreement.

•

In lieu of a written agreement between the oil or gas operator and the surface

House Bill 437/HAGCS – Page

6

owner, pursuant to rules of the Oil Conservation Commission, the operator must

post a bond or other surety for the benefit of the surface owner in the greater of the

compensation estimated by the operator or $2,500 per well site. This differs in the

requirement per well rather than a set rate of $25,000 or the estimated compensa-

tion.

The legislation will affect farms and ranches in New Mexico as well as help compensate for dis-

ruptions to their operations or to reclaim damages to the surface estate. The disruptions have the

potential to increase costs of farming/ranching operations affecting returns to that operation di-

rectly related to the amount of surface disturbance. However, the oil and gas industry, besides

owning the right to develop the mineral estate, provides economic and fiscal benefits to the state

and local economies.

ADMINISTRATIVE IMPLICATIONS

EMNRD suggests that the Act requires OCD to approve, maintain on file, and, when necessary,

collect bonds and other security furnished for the benefit of surface owners. This would require

one additional FTE.

TECHNICAL ISSUES

EMNRD notes that the provisions for notice to the surface owner to be sent to the address

"shown by the records of the county clerk" [Page 4, lines 21 through 23, and Page 5, lines 1

through 3] should be changed to the records of the county tax assessor, since the tax office would

ordinarily have more current and complete information regarding surface owner addresses.

OTHER SUBSTANTIVE ISSUES

NMDA suggests that House Agriculture and Water Resources Committee substitute for HB 437 applies

only to private fee surface land thereby excluding federal and state land ownership. The act also provides

for the court to award attorney fees to the prevailing party (surface estate) if public notice and other pro-

cedures outlined in the act are not followed.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

EMNRD indicates that the oil and gas industry liability to surface owners will continue to be de-

termined by private negotiations and under the common law as developed by the New Mexico

courts.

OAG notes that surface owners have no claim for compensation for the use of the surface prop-

erty and no recourse for damages caused to the surface property as a direct result of operators’

oil and gas operations.

NMDA adds that the exploration for oil and gas resources will continue under current conditions

regardless of bill passage.

BW/nt