ENERGY IN THE LEGISLATURE

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Oil and Energy Industry. A field of oil pumps against a sunset. Oil prices, energy and economic commodities.

Because my specific area of practice for many years related to the oil-and-gas industry, during my four years in the state legislature, I had a particular interest in legislation dealing with oil-and-gas issues. At the outset of my tenure, I remember being surprised to learn that, out of 150 representatives and 31 senators, there were only four or five members that were conversant on the subject of oil and gas. Seriously? In Texas, the home of Spindletop, the Permian Basin, the Shale Revolution, the Barnett Shale, the Eagle Ford Shale, and numerous Gulf Coast refineries, so few legislators knew anything about oil and gas? That was both surprising and concerning because where policy-makers know little about a subject, the opportunity for inattention or even bad policy significantly increases.

Hence, our subject for this column — the legislative regular session has just ended. This was a session that started somewhat anemically because of the limitations on normal interaction imposed by COVID. The initial fear was that not much would get done because everyone would be hunkered down in their respective offices or attending by Zoom. 

Then, Winter Storm Uri hit in February, and everything suddenly got kicked into overdrive. The session ended up being every bit as active and productive as any past session, including several bills of interest dealing with energy-related topics. 

Among the various responses to the winter storm that were enacted, power plants will now be required to weatherize their facilities. There were many opinions regarding causes and proposed remedies, but one observation that all commentators seem to agree on is that our power plants were not sufficiently weatherized to withstand the prolonged subfreezing temperatures that covered all 254 counties in February. The legislature also swiftly addressed another odd reality that was revealed by the winter storm — many ERCOT board members lived outside of Texas. Admittedly, there are many non-Texans that have expertise regarding electric grids, but it definitely looked bad, in the midst of a crisis, to find out the decision-makers live in Michigan or Washington, D.C. or Europe. So, now, all ERCOT board members must live in Texas. It only makes sense to require them to live, along with the rest of us, with the consequences of their decisions.

I have noted in past columns that many local governments in California, the city of Seattle and some towns in Massachusetts have started enacting ordinances that ban natural gas in new construction in their effort to force their businesses and residents off fossil fuels. In response to that trend, the Texas legislature passed a bill that bans those bans. In other words, the state has now preempted local governments from being tempted to copy California.

I have also noted that some institutional investors and banks have started divesting their money from oil-and-gas companies as a way to virtue-signal their concerns about climate change. In response, the Texas legislature passed a bill that prohibits any such company or bank that has taken that kind of anti-fossil fuel action from doing business with the state of Texas.

Another result that was unexpected (at least, by me) was the failure of the legislature to renew the favorable tax treatment that has largely benefited wind and solar producers. A program known as “Chapter 313” enabled school districts to exempt new wind and solar farms from ad valorem school taxes as an incentive for the farms to be located in their area. While that was just one more tax break for renewable energy, school districts still needed that tax revenue, so the obligation simply got shifted from the wind or solar farm to the other local taxpayers or to the state’s general-revenue fund through the Robin Hood redistribution program. The bills to extend Chapter 313 ended up not passing, so the program is now scheduled to end on December 31, 2022.

The legislature also created the Texas Produced Water Consortium, whose purpose will be to study the economics and technology for finding beneficial uses for produced water. This consortium will reside at Texas Tech. There is a similar consortium in New Mexico, so I would anticipate the two groups coordinating their efforts.

There were also a couple of failed bills worth noting. During the final days of the session, there was an attempt to add to another bill an amendment authorizing allocation wells. Despite the fact that there are over 9,000 allocation wells in Texas, there is still no certainty regarding their legality. There has been no reported appellate-court decision, no formally promulgated rule by the Railroad Commission, and no statute enacted by the legislature. This amendment would have recognized allocation wells as legal — similar to a bill that was filed but failed in 2015. The House passed the bill with the amendment, but it died in the Senate. Coincidentally, a case dealing with this issue was decided by a state district court judge in Travis County in May, holding that the Railroad Commission has failed to follow the proper rulemaking procedure regarding allocation wells. Perhaps this development will prompt the Railroad Commission to act, or perhaps Governor Abbott will add this issue to his call in a future special session.

A bill relating to washouts of overriding-royalty interests also failed. Though it was unanimously passed by both the House and the Senate, Governor Abbott vetoed it. The bill would have created a cause of action by an overriding-royalty owner against a lessee that washes out the interest in bad faith. Governor Abbott stated his concern that such a law would unfairly interfere with a contract negotiated between the parties; if an overriding-royalty owner is concerned about getting washed out, his relief should be in negotiating a better deal at the outset.

The legislature certainly dealt with a broad range of energy-related issues, and it ended up being anything but an anemic session. Even with this brief overview, it is clear how important it is to have a meaningful number of legislators knowledgeable on energy issues. Having informed policy-makers leads to better policies. It reminds me of an astute op-ed that was recently in the Wall Street Journal:

“The U.S. is barreling towards one of the greatest self-inflicted wounds in history… Mr. Biden’s anti-carbon fusillade will have no effect on the climate as global demand for fossil fuels will continue to increase for decades no matter what the U.S. does… And Russia and China will take advantage of U.S. energy disarmament… But banishing fossil fuels in the U.S. won’t eliminate carbon emissions, which will be produced somewhere else. So will the jobs, economic growth, and geopolitical leverage.”

Amen.     

About the author: Bill Keffer is a contributing columnist to SHALE Oil & Gas Business Magazine. He teaches at the Texas Tech University School of Law and continues to consult. He

also served in the Texas Legislature from 2003 to 2007.

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