Texas Star

Texas 84th Legislative Session Wrap-Up

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Unlike previous sessions, the 84th legislative session ended calmly in Austin, Texas on Monday, June 1, without the threat of imminent special sessions being called. After intensive negotiation and compromise, the Texas Legislature ultimately passed a $209.4 billion budget for the 2016-17 biennium without busting the spending cap or tapping the Rainy Day Fund. The budget is the only piece of legislation the Texas Legislature is required to pass every session. In addition to negotiated property tax relief and a broad 25 percent cut to the state’s business tax, the Legislature also passed into law significant legislation related to oil and gas regulation and production in Texas.

One of the priorities of the oil and gas industry was to support funding of the Railroad Commission of Texas (RRC) for personnel and technology updates to strengthen the agency’s functions. Another priority was to pass legislation establishing the state’s pre-eminence in regulation of oil and gas production. Both goals were accomplished. The Legislature also passed legislation to fund needed transportation infrastructure and legislation related to the future regulation of water use in Texas. Also passed was legislation making certain changes to proceedings related to the Texas Commission on Environmental Quality (TCEQ) and the Texas Water Development Board (TWDB) and legislation affecting industry in general.

Special comments on H.B. 40

The Texas State Capitol Building at Night in downtown Austin, Texas
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H.B. 40 will be recognized as a historic piece of legislation to the oil and gas industry and is already being touted as a nationwide model on state preemption jurisdiction. The bill, authored by State Rep. Drew Darby, Chair of Energy Resources, was filed in response to the Denton ban on hydraulic fracing and was controversial from its inception. However, Darby guided the bill through the legislative process and showed mastery at the helm by working out a compromise between the oil and gas industry and municipalities, then holding firm on no amendments. On the Senate side, Sen. Troy Fraser, Chair of the Senate Natural Resources & Economic Development Committee, was the force to be reckoned with, claiming H.B. 40 as his own. Recognition that oil and gas is the economic engine of the state and the need to establish the parameters for regulation by the state and local governments on oil and gas activity led to unprecedented solidarity and bipartisan support on the issue.

Water — the new oil

During the 84th legislative session, State Rep. Jim Keffer made a smooth transition from being Chair of Energy Resources in Texas to heading up the increasingly important Natural Resources Committee. Whereas last session the drought had the stakeholders united behind Proposition 6 and funding of the state water plan, this session was characterized by competition for limited water resources and balancing the needs of producers and users. Jim Keffer’s H.B. 200 — which establishes the framework for uniform regulation of groundwater conservation districts and desired future conditions — is a noteworthy piece of legislation in the evolving treatment of water, also referred to as “the new oil.”  Key pieces of legislation are presented below:

Railroad Commission budget, seismic monitoring & transportation

H.B. 1: House author: Otto, John / Senate sponsor: Nelson, Jane

General appropriations bill.

The bill appropriates approximately $87 million for fiscal years 2016 and 2017 and 820 FTEs to the Railroad Commission (RRC). The funding for the RRC includes the following exceptional items: $2.8 million in addition to the base budget; 20 additional FTEs to enhance safety inspections; and $150,000 to replace the microfiche reader for the central record department. The RRC is scheduled to undergo an extensive Sunset Review during the interim months leading up to the next legislative session. Efforts to delay the review until 2023 were defeated in the final days of the session.

In a separate rider, the Legislature approved a seismic monitoring program at the University of Texas Bureau of Economic Geology. A technical advisory committee will advise and a report will be submitted to the next Legislature.

SJR 5: Senate authors: Nichols, Robert / Nelson, Donna

Proposing a constitutional amendment dedicating a portion of the revenue derived from the state sales and use tax and the tax imposed on the sale, use, or rental of a motor vehicle to the state highway fund.

If approved by the voters, would give Texas Department of Transportation (TxDOT) an additional $2.5 billion a year in sales taxes; and with contributions from the Rainy Day Fund from the 2013 constitutional amendment adds up to close to $5 billion more a year in spending cash than TxDOT had in 2014.

Oil and Gas

SCR 13: Senate author: Seliger, Kel / House sponsor: Anchia, Rafael

Urging the U.S. Congress to end the ban on crude oil exports.

This resolution is to be sent to the President of the U.S. Senate and Speaker of the U.S. House of Representatives. It has been sent to the governor for signature.

SCR 32: Senate author: Bettencourt, Paul / House sponsor: Wu, Gene

Urging Congress to expedite natural gas exports.

This resolution is to be sent to the President of the U.S. Senate and Speaker of the U.S. House of Representatives. It has been sent to the governor for signature.

H.B. 40: House author: Darby, Drew / Senate sponsor: Fraser, Troy

Relating to the express preemption of regulation of oil and gas operations and the exclusive jurisdiction of those operations by the state.

The bill provides for “exclusive jurisdiction and expressed pre-emption” of oil and gas operations and provides that municipal ordinances must be deemed to be “commercially reasonable.” A municipality may enact, amend, or enforce an ordinance or other measure that regulates only above-ground activity related to an oil and gas operation that occurs at or above the surface of the ground, including a regulation governing fire and emergency response, traffic, lights, noise, imposing notice or reasonable setback requirements. The ordinance must meet the reasonably prudent operator standard, must be commercially reasonable, may not effectively prohibit oil and gas operations and must not be pre-empted by state or federal law. A “safe harbor” provision is included for qualifying, existing municipal ordinances. Signed by the governor, effective May 18, 2015.

H.B. 497: House author: Wu, Gene / Senate sponsor: Uresti, Carlos I.

Relating to the applicability of the law governing saltwater pipeline facilities located in the vicinity of public roads.

The 83rd Legislature passed legislation relating to saltwater pipeline facilities that helped set standards for the placement of a saltwater pipeline on a right-of-way. This bill will allow for water to be brought to production sites and for non-produced waterlines to also be installed on public roads or rights-of-way. The definition was expanded to include water that contains salt and other substances and is intended to be used in drilling or operating a well used in the exploration for or production of oil or gas, including an injection well used for enhanced recovery operations, or is produced during drilling or operating an oil, gas or other type of well. Sent to the governor, effective Sept. 1, 2015.

H.B. 1331: House author: King, Phil / Senate sponsor: Fraser, Troy

Relating to the treatment and recycling for beneficial use of certain waste arising out of or incidental to drilling for or the production of oil or gas.

The increase in oil and gas production has inspired a number of environmentally minded companies to pioneer new methods of recycling the solid waste from drill sites. However, well operators interested in recycling had concerns about liability associated with the cuttings once recycled and used for another purpose. The bill amends current law and provides that unless otherwise expressly provided, when drill cuttings are transferred to a permit holder, the transferred material is considered to be the property of the permit holder; and when the permit holder transfers possession of the treated product to another person, ownership and tort liability associated with the permitted use is also transferred. Sent to the governor, effective Sept. 1, 2015.

H.B. 2207: House author: Keffer, Jim / Senate sponsor: Eltife, Kevin

Relating to the foreclosure sale of property subject to oil or gas lease.

The bill protects an oil and gas lessee of the unsevered minerals from a foreclosure of a mortgage on the surface. For example, where an owner grants a mortgage to build a building on the surface and also grants an oil and gas lease on the underlying minerals but defaults on the mortgage and is foreclosed upon, prior law would have terminated the lease under some circumstances. The oil and gas lease, if not already recorded prior to the mortgage, and if executed and recorded before the foreclosure sale, will survive the foreclosure but with the loss of surface rights. Royalties payable to the lessor become payable to the purchaser at the foreclosure sale and no agreement between the mortgagor and mortgagee can modify the statute. The ownership of the reversionary interest is uncertain. Sent to the governor, effective Sept. 1, 2015.

H.B. 3291: House author: Raymond, Richard / Senate sponsor: Zaffirini, Judith

Relating to the creation of the offense of theft of pipeline equipment, oil and gas equipment, oil, gas, or condensate and the unauthorized purchase or sale of oil, gas, or condensate.

The bill elevates the theft of crude oil, gas and condensate from a third-degree felony to a second-degree felony. Though exempting pipelines and gatherers, the legislation requires that anyone possessing, transporting, removing, delivering, accepting, purchasing, selling or physically storing crude oil, gas or condensate must have a permit, approval or authorization for the transaction from the RRC or must have a pending application for such. Sent to the governor, effective Sept. 1, 2015.

S.B. 1985: Senate author: Uresti, Carlos / House sponsor: Bonnen, Dennis

Relating to the appraisal for ad valorem tax purposes of a real property interest in oil or gas in place.

To accommodate timely posting of ad valorem tax data, a chief appraiser shall use the projected current and preceding calendar year spot price of West Texas Intermediate crude oil in nominal dollars per barrel or the spot price of natural gas at the Henry Hub in nominal dollars per million British thermal units, as applicable, as stated in the Short-Term Energy Outlook report published in January of the current calendar year by the U.S. Energy Information Administration in the price adjustment factor calculations. Signed by the governor, earliest effective date.

Water

H.B. 30: House author: Larson, Lyle / Senate sponsor: Perry, Charles

Relating to the development of seawater and brackish groundwater.

Provides incentives for the development of brackish groundwater. Each regional planning group is required to submit to the Texas Water Development Board (TWDB) a water plan that identifies data, water sources, possible actions, infrastructure, drought planning, water transfer, etc. Includes opportunities for the development of large-scale desalinization facilities for seawater or brackish groundwater. The TWDB shall submit to the Governor a biennial progress report. Uses 1,000 ml/l to separate brackish from freshwater. Exempts several groundwater conservation and subsidence districts. Also exempts permitted zones used for wastewater injection or disposal. Will identify brackish water production zones within these and other parameters. Sent to the governor.

H.B. 200: House author: Keffer, Jim / Lucio, Eddie III / Senate sponsor: Perry, Charles

Relating to the regulation of groundwater.

Landmark legislation clarifies vested property rights in the ownership of groundwater, ensures “loser pay” provisions apply to suits challenging groundwater districts, establishes “best available science” as the determining factor for establishing a desired future condition, establishes an appeals process for challenging the reasonableness of desired future conditions, provides a mediation period for agreement before the administrative process and develops an administrative hearing process for parties in order to develop findings of fact and conclusions of law. Sent to the governor; effective date Sept. 1, 2015.

H.B. 655: House author: Larson, Lyle / Senate sponsor: Perry, Charles

Relating to the storage and recovery of water in aquifers, authorizing fees and surcharges; adding provisions subject to a criminal penalty.

Authorizes the undertaking of an aquifer storage and recovery (ASR) project. Identifies and allows permitting of ASR injection wells as Class V wells by the Texas Commission on Environmental Quality (TCEQ), allows for water recovery wells, identifies native groundwater and defines parameters for permits. Requires ASR operator to provide monthly reports. Sent to the governor.

H.B. 2230: House author: Larson, Lyle / Senate sponsor: Estes, Craig

Relating to the authority of the TCEQ to authorize an injection well used for oil and gas waste disposal to be used for the disposal of non-hazardous brine produced by desalination operations or non-hazardous drinking water treatment residuals.

Allows the dual authorization of Class II (oil and gas) injection wells to inject brine from desalination or water treatment residuals when non-hazardous. Requires the RRC and TCEQ to enter into a memorandum of understanding.  Sent to the governor, effective Sept. 1, 2015.

H.B. 2767: House author: Keffer, Jim / Senate sponsor: Perry, Charles

Relating to the powers, duties, and administration of groundwater conservation districts.

The bill would amend the definition of “operating permit” in the Water Code and permit a groundwater conservation district to impose fees for water exportation, administration and production under certain circumstances. The bill originally would have required a financial audit and other financial standards. Under the provisions of the bill, a county could pay costs and expenses incurred in the creation and organization of a district and the TWDB to allocate funds to a district under certain circumstances. Signed by the governor, effective immediately.

Legal

H.B. 1692: House author: Sheets, Kenneth / Senate sponsor: Huffman, Joan

Relating to the doctrine of forum non conveniens.

Under the legal doctrine of forum non conveniens, a court may dismiss a lawsuit if another court is a more appropriate forum to hear the case because the lawsuit has little or no connection to the state. Most jurisdictions consider the legal residency of the plaintiff as one of many factors in a balancing test, but Texas uses residency alone as the basis to maintain a lawsuit in Texas. The definition of “legal resident” was considered overly broad and interpreted to allow resident intervenors or derivative plaintiffs to bring a case from nonresidents into the state (for example, an accident occurring in Mexico). The bill amends the doctrine to preserve Texas courts for Texas residents by requiring nonresidents to establish that claims arising in another state or country have a significant connection to Texas. Sent to the governor, effective Sept. 1, 2015; application of the act is prospective.

H.B. 1794: House author: Geren, Charlie / Senate sponsor: Hancock, Kelly

Relating to suits brought by local governments for violations of certain laws under the jurisdiction of, rules adopted, orders or permits issued by the Texas Commission on Environmental Quality; affecting civil penalties.

The bill amends current law relating to suits brought by local governments for violations of certain environmental laws under the jurisdiction of the TCEQ such as illegal dumping of pollutants and unpermitted waste sites. Current law allows such actions to supplement the enforcement activities of the TCEQ and has been in place for several decades. The genesis of the bill was a ruling in a lawsuit in Harris County where penalties were assessed against a company for the release of pollutants into Texas waters and the award of attorney fees which might have set a precedent for environmental enforcement in Texas and by extension, the economic competitiveness of the state. The bill identifies factors to be considered in determining the amount of civil penalty and provides for division of the penalties between the local government and the state. Sent to the governor, effective Sept. 1, 2015; application of the act is prospective.

S.B. 529: Senate author Hancock, Kelly / House sponsor: King, Phil

Relating to the eligibility of a landman for unemployment compensation.

Ambiguity in interpretation of the definition of “landman” resulted in the Texas Workforce Commission challenging the status of independent contractors working as landmen and their eligibility for unemployment benefits. Reconciliation of the definition between certain provisions of state law provided consistency and clarity in the application of the term’s definition. The bill amends the Labor Code to clarify that “employment” under the Texas Unemployment Compensation Act does not include services performed for a private for-profit person by a landman and to instead provide for the definition of “landman” by reference to the Private Security Act. Signed by the governor, effective immediately.

S.B. 709: Senate author: Fraser, Troy / House sponsor: Morrison, Geanie

Relating to environmental permitting procedures for applications filed with the Texas Commission on Environmental Quality.

In contested case hearings challenging a permit at the TCEQ, the administrative judge must, after a preliminary hearing, return a proposal for decision no later than 180 days or a date specified by the commission, whichever is earlier. The draft permit prepared by the executive director of the commission and supporting documentation establishes a prima facie demonstration of state and federal legal and technical compliance. Also, it provides the criteria for a group or association designation as affected party. Signed by the governor, effective Sept. 1, 2015.

Some noteworthy legislation which did not pass

Toward the end of the session, bills mysteriously disappeared, reappeared, died and were resurrected, and referred to as “Lazarus bills,” as if a divine hand was at work. Legislation that did not pass included H.B. 14 relating to the Texas Emissions Reduction Plan and S.B. 12 relating to alternative fuel fleets of certain governmental entities, including funding for motor vehicles, infrastructure and equipment. H.B. 1552, relating to oil and gas (allocation) wells that traverse multiple tracts, died in the House but was surprisingly resurrected as an amendment in the Senate, and then died again. H.B. 1392, a seemingly non-controversial bill relating to the recovery of stranded oil and/or gas from depleting Cenozoic Era reservoirs in East Texas, got unexpected opposition from West Texas and died. And SB 118 relating to unit operations for oil and/or gas production from depleting reservoirs or carbon dioxide storage seemed to have powerful enemies from the start.

Looking forward

The interim promises to be a busy one as agencies initiate rule-making to implement legislation. The effective date for most of the legislation passed is Sept. 1, 2015, although some legislation is effective immediately. For a complete list of relevant legislation contact this author or go to Texas Legislature Online at www.capitol.state.tx.us.

The disappointments and successes of the 84th Legislative Session will set the stage for the 85th. The Tea Party has identified at least 30 candidates who will challenge Republican incumbents in primaries next March. Already, several incumbents considered moderate Republicans have announced plans to retire or not run for re-election for several reasons — intraparty politics being one of them. Democrats meanwhile are pinning their hopes on increased voter turnout during the next presidential primary to boost their numbers and influence.

In the next issue: Agency news, rulemaking and pre-election maneuvering.

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About the author: Gloria Leal is an attorney and government affairs consultant in Austin, Texas. Leal has a solo practice primarily relating to energy, environmental and healthcare matters. She also represents the Texas Alliance of Energy Producers, a national association of independent producers and service providers. She can be reached at [email protected].

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