12/8/12 8:51 AMNew Texas Rule Creates Liabilities and Obligations for Operators of Inactive Oil and Gas Wells | Bracewell & GiulianiPage 1 of 2http://www.bracewellgiuliani.com/news-publications/updates/new-texas-rule-creates-liabilities-and-obligations-operators-inac
New Texas Rule Creates Liabilities and Obligations for Operators of Inactive Oil and Gas Wells
April 14, 2011Effective September 13, 2010, the Texas Railroad Commission ("Railroad Commission") adopted a newrule on the plugging of inactive oil and gas wells and the removal of associated surface equipment. Thenew rule, codified with existing Statewide Rule 15, applies to onshore wells and was instituted principally toaddress the risks presented by live electrical lines connected to inactive wells as well as to contain theincreasing cost to the State of plugging inactive wells. In order to comply, operators are required to plugthe well and remove equipment, return the well to active operation, or file for an extension.
Which Wells Are Affected?
The rule mandates a variety of actions depending on how long particular wells have been idle. Morespecifically, operators of wells that have been inactive:for more than 12 months must certify that the electric service has been physically terminated.for at least five years are additionally required to certify that they own the land that the well sits on or that they have emptied or purged of production fluids all piping, tanks, vessels and other equipmentassociated with the well.for more than ten years are further required to certify that they either own the land or that they haveemptied and purged all production fluid and removed all of the surface equipment. Additionally, operators with wells inactive prior to September 1, 2000 may consider the Phase-in programprovided under the rule which still requires electric disconnection but does not impose a requirement topurge fluids and provides a five-year phase-in period for the removal of surface equipment. Notably,companies that acquire inactive wells are subject to all of the rule's plugging and removal requirements butthey receive far less leeway on timing than do existing operators and, further, until those wells comply withRule 15, they are prohibited from further transactions involving the inactive wells.
One immediate liability for operators created by Rule 15 is the cost to plug many inactive wells, which isestimated by the Railroad Commission to cost anywhere from $4,500 to $15,000 per well. Over 87,000wells currently are listed on the Railroad Commission's inactive well aging report ("IWAR"), with someindividual companies having hundreds of such wells subject to the rule.Other options for compliance under the rule include obtaining an extension or returning wells to activeoperation. Operators can choose to seek an extension either on a well-by-well basis or on a blanket basisacross the company. The blanket extension requires that the operator either plug or restore to active 10percent of the inactive wells listed on their most recent P-5, submit financial security to cover the cost of plugging all of the inactive wells or $2 million, whichever is less, or, for those operators that are publiclytraded entities, file a financing statement naming the operator as a debtor and the Railroad Commission asa secured creditor. Additionally, an extension to plug wells that have been inactive for 36 months or longer requires the operator to establish a bond in the amount of the estimated cost of plugging the well and