New Mexico Issues Emergency Rule for Shut-in Wells on State Land

April 22, 2020 In response to the impact of the COVID-19 pandemic and foreign price wars, the New Mexico State Land Office (“NMSLO”) recently issued an Emergency Rule that allows oil producers to temporarily shut-in wells on state land without facing penalties.[1]  Specifically, the Emergency Rule allows lessees to apply to the NMSLO to shut-in wells while maintaining the terms of their lease for at least 30 days, with the possibility of an extension of up to 120 days.  To qualify for the emergency relief under the new Rule, lessees must satisfy that:

  • There is at least one well capable of producing oil that was shut-in because of the severe reduction in the price of oil;
  • The lessee notifies the NMSLO within 30 days of the date all wells have been shut-in on a form[2] provided by the NMSLO, including a C-103 filed with the oil conservation division; and
  • The lessee pays an annual shut-in royalty within 90 days from the date the well was first shut-in and each year thereafter.

Further, the Emergency Rule includes the following critical terms:

  • The shut-in royalty payment will be calculated per well, will depend on the rental amount in the lease, and will be no more than twice the amount of the annual rental.
  • Lessees with multiple wells on a lease must provide notice of the shut-in and payment of shut-in royalty to the NMSLO as to each well capable of producing oil that is shut-in.
  • For all shut-in wells covered by a unit agreement, royalty payments will be calculated by multiplying the base shut-in royalty that would be due for that lease by the percentage of acreage of that lease within the area.

The Emergency Rule will remain in effect for at least 30 days, with longer-term relief coming under the normal rulemaking process.  Importantly, the Rule only applies to wells classified as oil wells and not gas wells.  With the adoption of this Emergency Rule, producers with leases on state lands will immediately be able to start applying for temporary shut-in of oil wells and hopefully mitigate losses.

Lastly, while the State of New Mexico has addressed the issue of shut-in wells for state leases covering state lands, the Rule does not affect the shut-in of wells for federal or fee leases.  Nevertheless, producers may still apply to the Bureau of Land Management for discretionary royalty relief on a case-by-case basis, so long as they can demonstrate that the relief is necessary for drill sites to continue operations.  Likewise, producers may seek to amend or extend fee leases to address any issues relating to fee or private leases.

Kiefaber & Oliva LLP has a depth of experience in analyzing state, federal and fee leases in New Mexico and can provide trusted guidance in analyzing shut-in royalty provisions and other strategies for perpetuating oil and gas leases beyond the primary term in a low-price environment.

[1] https://www.nmstatelands.org/wp-content/uploads/2020/04/Rule-100.71_-4.21.2020.pdf.

[2] The application can be found at the following link: https://www.nmstatelands.org/wp-content/uploads/2020/04/4.21.2020-NMSLO-Shut-In-Notification-Form.pdf.

CONTACT

If you have any questions regarding this energy law update, please call our office at 713-229-0360 or contact:

Zachary Oliva

Zachary Oliva

Partner

[email protected]

Licensed to practice in New Mexico, Ohio and Texas

 


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