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NMSLO Holds Hearing on Proposed Emergency Rule Allowing the Temporary Shut-In of Oil and Gas Wells in New Mexico

On Friday April 17, 2020, the New Mexico State Land Office (“NMSLO”) held a virtual public hearing on its proposed amendment to the previously expired Section 19.2.100.71 of the New Mexico Administrative Code (the “Proposed Rule”), which would allow qualifying lessees of New Mexico state oil and gas leases to temporarily suspend production for up to two years without losing their leases. In attendance were representatives of producers, professional groups, and civil society organizations, such as the New Mexico Oil and Gas Association (NMOGA), the Independent Petroleum Association of New Mexico (IPANM), Earthworks, and the Rio Grande Chapter of the Sierra Club.

Referencing an earlier announcement by the New Mexico Commissioner of Public Lands, the Assistant Commissioner of Mineral Resources, Jordan Kessler, cited as reasons for the Proposed Rule the COVID-19 pandemic and the Russia-Saudi Arabia price war, which have greatly impacted New Mexico’s oil and gas industry and its beneficiaries. She explained that due to the severe reduction in the price of West Texas Intermediate (WTI) and the consequent drop in production, there has been a growing decline in the NMSLO’s royalty distributions to its beneficiaries (for example, from $108 million and $99 million in February 2020 and March 2020, respectively, to a projected $39.24 million by July 2020): “as a result…the Commissioner has determined that it is in the best interest of the beneficiaries to allow lessees to shut-in oil wells for the time being so that the oil can be produced at a higher price in the future and beneficiaries will benefit from that higher price.”

Kessler also clarified certain important terms of the Proposed Rule: (a) it would not be a mandatory shut-in order for certain producers, but would be an option for qualifying lessees seeking immediate relief with respect to their leases; (b) the Proposed Rule would be initiated under emergency rule-making processes and be in effect for 30 days and, following the commencement of regular rule-making processes by the Commissioner, would automatically extend to 120 days; (c) the term of the regular rule would be decided at the Commissioner’s discretion and could be as long as two years; (d) the proposed shut-in royalty payment for lessees would be calculated per well, would depend on rental amount in the lease (which ranges from 25 cents to $1 per acre), and would be no more than twice the amount of the annual rental; and (e) the shut-in payment obligations would only apply to leases that no longer have wells producing in paying quantities and would be triggered once the final well on the lease that is producing in paying quantities is requested to be shut-in.

Following Kessler’s presentation, members of the public were invited to offer comments on the Proposed Rule. While the commentators all agreed that the Proposed Rule was timely and necessary, they were divided on what its purpose should be, how far it should extend, and what protections should be afforded to impacted parties.

Representatives of producers and oil and gas associations generally focused on the economic losses sustained by producers and their employees and the ways in which these losses could be mitigated. Some expressed concerns that the proposed shut-in royalties were prohibitive (especially for small and independent operators holding multiple leases) and could negate the intended economic relief that would be afforded by the Proposed Rule. Others suggested that in implementing the rule, the NMSLO should uniformly approve requests for emergency shut-ins and ensure that operators who wish to resume production on wells upon the recovery of oil prices do not incur additional costs as a result of administrative burdens imposed by the Proposed Rule.

By contrast, various individuals and environmental groups called for more stringent measures, such as a strategic shift towards renewable sources of energy, caps on oil production, mandatory shut-ins of certain wells and the mandatory plugging and abandonment of wells which have been shut-in for over 30 days. One speaker expressed concerns that oil companies could go bankrupt “leaving them unable to engage in proper plugging and clean up and leaving a legacy of pollution and staggering clean-up costs in their wake that would be problematically shouldered by the state and its residents.” Another speaker proposed additional requirements for oil and gas lessee applicants under the Proposed Rule, including each applicant’s demonstration of its compliance with current NMSLO and Oil Conservation Division (OCD) bonding requirements and filing of adequate financial assurances. Furthermore, a financial reporting professional encouraged the NMSLO and the State of New Mexico to use the Proposed Rule as an opportunity to “de-risk its credit exposure to the [oil and gas] industry” by enacting favorable policies for operators in exchange for reforms with respect to Asset Retirement Obligations (AROs).

At the conclusion of the hearing, Assistant Commissioner Kessler shed some light on the next steps. The hearing memo and recording will be prepared and sent to the Commissioner of Public Lands for her to consider the changes to the draft Proposed Rule. Upon the Commissioner’s signing of the final draft of the Proposed Rule and subsequent filing thereof, the rule will become official and companies will be able to start applying for shut-in of oil leases while the NMSLO begins standard, statutory rulemaking processes that would allow the shut-ins to continue for a longer period. Kessler announced that notifications to this effect will be sent via email, print media, social media and other web channels for the benefit of the public.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.