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

SPONSOR Griego

ORIGINAL DATE

LAST UPDATED

2/15/2007

HB

SHORT TITLE Surface Owners Protection Act

SB 991

ANALYST Schuss

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

Unknown Unknown Unknown Recurring General

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Attorney General’s Office (AGO)

Energy, Mineral and Natural Resources Department (EMNRD)

Department of Agriculture (DOA)

SUMMARY

Synopsis of Bill

Senate Bill 991 would enact the Surface Owners Protection Act that pursuant to Section 2

applies to private fee surface land. Section 4 requires oil and gas operators to compensate

surface owners for any damages sustained as a direct result of oil and gas operations on their

land, but operators are not responsible for allocating compensation between the surface owner

and any tenant. An operator must also reclaim (here defined as making reasonable efforts to

restore the surface directly affected by oil and gas operations to the condition that existed prior to

oil and gas operations or as otherwise agreed to in writing by the surface owner and the operator)

the surface directly affected.

Section 5 requires an operator to provide 5 business days’ notice to the surface owner prior to

initial entry upon the land for activities that do not disturb the surface, and 30 days’ notice prior

to entering to conduct oil and gas operations. It also describes the methods of providing notice,

and the contents of a notice regarding the intent to conduct operations, including sufficient

disclosure of the planned operations to enable the surface owner to evaluate the impact of those

operations on the property, contact information of the operator and the operator’s authorized

representative, and a proposed surface use and compensation agreement. At a minimum, that

agreement must describe: placement, specifications, maintenance and design of well pads,

Senate Bill 991 – Page

2

gathering lines and roads to be constructed; construction, maintenance and placement of all pits

and equipment used or planned; terms of entry and exit; use and impoundment of water and

surface water drainage changes; removal and restoration of plant life; erosion control and actions

to limit and effectively control precipitation runoff and erosion; control and management of

weeds, dust, traffic, trespass, litter and interference with surface owner’s use; interim and final

reclamation; and an offer of compensation for damage to surface resulting from oil and gas

operations. Upon receipt of notice, the surface owner has 20 days to accept the proposed

agreement.

Section 6 allows the operator, 30 days after the required notice to the surface owner and if no

agreement has been entered into, to enter the property and conduct operations after depositing a

bond or other surety with the Energy, Minerals and National Resources Department for the

benefit of the surface owner in an amount equal to the greater of the compensation as estimated

by the operator for damages or $2,500 per well site.

Section 7 may provide a cause of action and provides for award of attorney fees and costs in any

action brought pursuant to the act if the operator failed to provide the required notice; operations

were conducted without an agreement and the required surety was not posted; the operator failed

to exercise good faith in estimating the compensation owed when posting its surety; or the

operation went beyond the scope of the agreement and the operator at the time of entering into

the agreement had reason to believe that the scope was too narrow.

Section 8 states that no notice, surface use and compensation agreement or bond shall be

required for operations to protect health, safety or the environment in emergency situations.

Section 9 makes the Act applicable to oil and gas operations commenced on or after July 1, 2007

(effective date) except for maintenance and ongoing production activities relating to a well that is

producing or capable of producing on June 30, 2007 for which the operator has a valid permit

from the Oil Conservation Division, but operations requiring a drilling rig or additional waste

pits that disturb additional surface are subject to the Act. An additional exception is provided for

operations conducted pursuant to an agreement entered into prior to the effective date between

the surface owner and the operator that sets forth each party’s rights and obligations with respect

to surface activities.

FISCAL IMPLICATIONS

EMNRD estimates that it would need one additional full-time employee to administer the

provisions requiring filing of bonds for the benefit of the surface owner with the Oil

Conservation Division (OCD).

SIGNIFICANT ISSUES

EMNRD has included the following in their analysis:

Under common law (accustomed practice typically applied by courts in the absence of a

statute), 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 produce minerals. The surface owner, absent a contrary

agreement, is not entitled to compensation for loss of use of the portion of the surface necessary

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

The oil and gas producer is liable only for damages to the surface caused by its negligence, or by

Senate Bill 991 – Page

3

unreasonable or excessive use of the surface.

State law does not presently require prior notice of 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 United States, 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

requires 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

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

so.

SB 991 would put New Mexico in company with nine other states (Illinois, Kentucky,

Montana, North Dakota, Oklahoma, South Dakota, Tennessee, West Virginia and Wyoming) that

have modified the common law concerning an oil and gas operator's liability to surface owners

by statute. SB 991 follows the general pattern of other states by providing surface owners a right

to compensation while allowing oil and gas operators access on prescribed conditions. Under the

bill, the oil and gas operator could obtain immediate access by posting a bond or other security in

the amount provided, if the surface owner does not respond to the operator's proposal, or if

negotiations are not successful.

SB 991 would apply to lands where the United States owns the minerals as well as to

lands in State or private mineral ownership. Accordingly, an oil and gas operator drilling on

federal mineral lands would, if it failed to secure a surface use agreement, have to comply with

the bonding requirements of the Act as well as the existing BLM requirements described above.

ADMINISTRATIVE IMPLICATIONS

OCD states that they would be charged with the responsibility of administering the bonding

provisions of the act. OCD would need additional staff to maintain and track these bonds, and if

additional resources were not available, this duty would require diversion of staff from OCD’s

existing functions, including, specifically, accounting for bonds payable to the State. Since the

bonds this bill requires are for the benefit of private persons (surface owners) these bonds should

either be made payable to and held by the surface owner beneficiaries, or deposited with a trustee

as provided in SB 960 and HB 827.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Conflicts with/Relates to SB 960 and HB 827

AGO notes the following issues, these issues arise from the differences SB 991 has with SB 960

and HB 827:

1.

This bill applies only to private fee surface land. (Section 2)

2.

The required notice of entry under this bill does not need to include a copy of this act.

(See Section 5B)

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4

3.

This bill requires compensation only for damages (and not for use of the surface owner’s

property. (Section 4)

4.

This bill does not require the operator to compensate a tenant for leasehold improvements

it has damaged.

5.

The obligation to reclaim in this bill is limited to “reasonable efforts" to restore the

surface directly affected (instead of substantially restoring the affected surface).

6.

A surface use and compensation agreement under this bill is not required to include a)

actions to minimize surface damage to the property; b) operator indemnification of the

surface owner for personal injuries caused by the operator; or c) compensation for use of

the surface. (See Section 5)

7.

The amount of the surety to be posted by the operator under this bill is determined by the

operator by estimating what it may owe in damages, or $2,500 per well, and there are no

provisions governing when the surety is to be released. (See Section 6)

8.

This bill does not authorize additional damages upon a finding of willing and knowing

violations of certain provisions of the Act or the parties’ agreement. (See Section 7)

9.

Section 7 of this bill may create an exclusive cause of action as to liability between a

surface owner and an operator.

10.

There appears to be no duty to reclaim as to wells existing as of the effective date of the

act.

BS/csd