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Proposed New Mexico Rule to Grant Temporary Relief to Oil and Gas Producers

On April 3, 2020, the New Mexico State Land Office (“NMSLO”) announced the initiation of emergency rulemaking processes that would allow qualifying lessees of New Mexico state oil and gas leases to temporarily suspend production for at least 30 days (with a possible extension of up to 120 days following the commencement of longer-term rulemaking processes) without losing their leases or incurring a financial penalty.

The proposed amendment to previously expired Section 19.2.100.71 of the New Mexico Administrative Code (the “Proposed Rule”) is being proposed in direct response to the drastic drop in the price of oil in connection with recent events in the global economy, including the ongoing price war between Russia and Saudi Arabia and a dampened demand for oil. The current low prices for oil and gas, together with potential curtailment of downstream capacity as demand slows and pipelines and storage facilities reach full capacity, have many oil and gas producers risk being forced to, or anticipate having to, shut-in or curtail production from wells. The Commissioner of Public Lands has determined that “it is in the best interest of the beneficiaries of state trust land… [to] allow companies to apply for these temporary shut-ins until we can better predict the future of the Permian Basin.”

As drafted, the Proposed Rule will afford lessees an option to shut-in certain wells on state leases, then recommence production when it becomes more profitable to do so. The Proposed Rule only applies to oil and gas leases issued by the Commissioner and maintained in good standing, and to underlying wells (including wells located within the boundaries of an area covered by unit or communitization agreements) which are capable of producing oil but are shut-in on or after March 1, 2020 due to the severe reduction in the price of oil.

In order to qualify for the protections afforded by the Proposed Rule, lessees would be required to (a) provide the required written notice to the Commissioner within 30 days of the first shut-in of each well and (b) timely pay an annual shut-in royalty for each well equal to an amount that is twice the annual rental due under the lease but no less than $320.

The Proposed Rule takes effect immediately upon filing by the Commissioner, which is currently expected to occur on Monday, April 20, 2020, and following its adoption under normal rulemaking processes, remains in effect for two years thereafter, unless the Commissioner terminates the Proposed Rule at an earlier date. Lessees will have 90 days following the termination or expiration of the Proposed Rule to recommence production in paying quantities to prevent the automatic expiration of their leases.

A tele-hearing on the Proposed Rule has been scheduled for Friday, April 17 at 1:00 p.m. MDT. NMSLO has also invited public comment over the next two weeks (until April 17) and during the tele-hearing. These processes present opportunities for producers and the midstream companies which service them to discuss issues related to the implementation of the Proposed Rule or the suspension of oil production, which are not currently addressed by the proposed draft. Below is a link with further details from the NMSLO, including the language of the Proposed Rule. If you have any questions about these issues or would like assistance preparing comments for the NMSLO, please feel free to reach out to your V&E contact or any one of the following V&E partners Bryan Loocke, John B. Connally, Shay Kuperman, John Grand or Danielle Patterson.

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.