Texas School Land Board Approves New Policies Offering Relief for Operators on Permanent School Fund Lands

April 24, 2020 Due to the impact of the COVID-19 pandemic and foreign price wars on the price of oil, on April 21, 2020, the Texas School Land Board unanimously approved three new policies that give operators more freedom in the interim, while also upholding the Texas School Land Board’s fiduciary duty to the school children of Texas to generate the highest revenues  possible for the Permanent School Fund (“PSF”).[1]  Specifically, the new policies delegate to the Texas Land Commissioner, George P. Bush, the following:

  • The authority to up to a six-month extension on all drilling commitments, when it’s deemed to be in the state’s best interest, made by lessees of permanent school fund property during 2020;
  • A 90-day tolling on calculations for enforcing lease terminations for halting of production or failure to produce in paying quantities; and
  • Adoption of a policy addressing a waiver of penalties and interest on late royalty payments submitted from April 1, 2020 through June 30, 2020.

Neither Commissioner Bush nor the Texas General Land Office (“GLO”) have issued guidance on the criteria to be used to determine when an extension on all drilling commitments will be in the state’s “best interest.” However, in determining when an extension would in the state’s “best interest,” the GLO must always uphold their fiduciary duty to generate the highest revenue possible to the PSF whenever making a decision.

Further, it is presumed that the six-month extension will also apply to any continuous development program outlined in GLO leases. If so, the extension would allow those clauses to be extended, and, thus preventing any Pugh and/or depth termination clauses from taking effect. However, the GLO has not issued any specific guidance. As a result, the Commissioner will have broad discretion in granting any extensions.

Lastly, the 90-day tolling on calculations for enforcing lease terminations for halting of production or failure to produce in paying quantities will allow operators the freedom to shut-in wells without the worry of losing their lease in the interim. As always though, operators should make sure to review the shut-in provisions in their leases before instituting a shut-in.

All together these policies were approved to give operators more leeway to conduct their operations in the interim on PSF lands. Commissioner Bush stated that “[w]aiving the penalties and interest on late royalty payments is a small step that we as a state can take to help mitigate this crisis while protecting the best interest of Texas School Children.”

Kiefaber & Oliva LLP has a depth of experience in analyzing GLO leases and working with them to allow operators to effectively conduct operations. Given the broad discretion afforded the Commissioner, operators seeking extensions should seek legal counsel in making their applications. Further, our attorneys 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.glo.texas.gov/the-glo/news/press-releases/2020/april/commissioner-bush-school-land-board-act-to-mitigate-oil-and-gas-crisis-adopts-waiver-policy.html

CONTACT

If you have any questions regarding this energy law update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact:

D. Bradley Gibbs, Partner, bgibbs@kolawllp.com

Patrick Schenkel, Attorney, pschenkel@kolawllp.com


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