Re: Emergency Amendment of New Mexico State Land Office Rule 184.108.40.206 NMAC, “Temporary Shut-In of Oil Wells Due to Severe Reduction in the Price of Oil”
The Commissioner of Public Lands intends to file an emergency amendment to a New Mexico State Land Office Rule pertaining to oil and gas leases, 220.127.116.11, New Mexico Administrative Code (NMAC). Previously, the rule expired automatically pursuant to Section 19-10-6 NMSA 1978, but remains codified in the NMAC. This amendment will be filed on an emergency basis, in accordance with Section 14-4-5.6 NMSA 1978 and 18.104.22.168 NMAC, in order to avoid imminent peril to the public health, safety or welfare in light of the public health emergency declared by the Governor and Department of Health, and other circumstances related to the COVID-19 global pandemic. Specifically, the Commissioner intends to exercise her authority to allow the temporary shut-in of oil wells in response to a severe reduction in the price of oil and is doing so on an emergency basis to (i) respond to a sudden, severe and unexpected drop in price; and (ii) allow lessees under State Land Office oil and gas leases to shut in wells temporarily without expiring their leases, thereby discontinuing operations that might endanger public health, safety or welfare.
- The Commissioner’s authority to allow temporary shut-in of oil wells.
Under statutory State Land Office oil and gas leases, the lease remains in effect for a certain term to allow the lessee time to explore for oil and gas and bring the lease into production. After the expiration of the “primary” and “secondary” terms of the lease, the lease remains in effect so long as oil and/or gas is produced in paying quantities from the lands covered by the lease. See Sections 19-10-4.1 through 19-10-4.3, NMSA 1978.
Under Section 19-10-6, NMSA 1978, if, after notice and public hearing, the Commissioner finds that because of a severe reduction in the price of oil the beneficiaries of state trust lands are ultimately better served if oil wells are allowed to be temporarily shut in rather than produced at a low price, the Commissioner may promulgate a regulation which allows such wells to be shut in without expiring the lease where the well is located. (The lease includes an analogous provision allowing the lease to remain in effect where there is a gas well capable of producing in commercial quantities which is shut in due to the inability of the lessee to obtain a pipeline connection or to market the gas.).
- Sudden, severe and unexpected drop in the price of oil.
Under statutory State Land Office oil and gas leases, the lessee/operator pays as royalty the cash value of the oil or gas produced and saved from the leased premises and marketed or utilized, such value being the net proceeds derived from the sale of such gas in the field. The benchmark price for the sale of oil produced under State Land Office oil and gas leases is the price for West Texas Intermediate Crude Oil (WTI).
When markets closed on December 30, 2019, the WTI price was $63.05/barrel. The WTI price dropped throughout the month of January, so that the closing price on February 3, 2020 was $50.32/barrel. After a slight uptick in the price in the first half of February, the WTI price began a sudden, severe and unexpected drop that largely has continued to the present. On March 30, 2020, the WTI price closed at $20.09/barrel, roughly one-third of the price just a few months before on December 30, 2019. The drop in the price has been attributed to a price war between the Organization of Petroleum Exporting Countries (OPEC) and Russia, exacerbated by a significant decline in demand associated with the worldwide outbreak of COVID-19 and a severe slowdown in economic activity associated with efforts to contain the disease. It is unknown how long the price war and the decline in demand will persist.
The sudden, severe and unexpected drop in the price of oil presents a situation where lessees/operators under State Land Office oil and gas leases may wish to act quickly to temporarily shut in oil wells without causing the expiration of their lease. The Commissioner has determined that the beneficiaries of state trust lands will be better served by allowing oil wells to be temporarily shut in on an emergency basis rather than producing at the currently prevailing extremely low price.
- COVID-19 public health emergency.
On March 11, 2020, the Governor of the State of New Mexico declared in Executive Order 2020-004 (“EO 2020-004”) that a Public Health Emergency exists in New Mexico under the Public Health Emergency Response Act in response to the COVID-19 pandemic. On March 12, 2020, the Secretary of the Department of Health issued a Public Health Emergency Order to Limit Mass Gatherings Due to COVID-19, which limited certain public gatherings. On March 23, 2020, the DOH Secretary, declaring that the further spread of COVID-19 in the State of New Mexico poses a threat to the health, safety, wellbeing and property of the residents in the State due to, among other things, illness from COVID-19, illness-related absenteeism from employment (particularly among public safety and law enforcement personnel and persons engaged in activities and businesses critical to the economy and infrastructure of the State), potential displacement of persons, and closures of schools or other places of public gathering, issued an amended order further limiting public gatherings and directing that businesses, except those entities identified as “essential businesses”, to reduce the in-person workforce at each business or business location by 100%. The amended order allows “essential businesses” to remain open provided they, among other things, (i) minimize their operations and staff to the greatest extent possible; and (ii) adhere to social distancing protocols and maintain at least six-foot social distancing from other individuals, avoid person-to-person contact, and direct employees to wash their hands frequently.
While the amended public health emergency order identifies oil drilling, oil refining, and natural resources extraction or mining operations as “essential businesses,” those operations are still subject to the restrictions set forth. As a result, lessees/operators under State Land Office oil and gas leases are subject to certain restrictions that may impair their ability to explore for and produce oil and thereby cause their leases to expire. For example, the labor-intensive work of drilling of an oil well involves more than 10 people working at times in close proximity, as does hydraulic fracturing of the well and other well completions and recompletions. On-site work as part of day-to-day production includes inspection of centralized tank batteries and well maintenance.
Recognizing the public health restrictions on lessees/operators and wanting to encourage compliance with them, the Commissioner is exercising her authority under Section 19-10-6 NMSA 1978 on an emergency basis to allow the temporary shut-in of oil wells to allow lessees/operators under State Land Office oil and gas leases to shut in oil wells temporarily without expiring their lease and thereby discontinue operations that might endanger public health, safety or welfare.
For the reasons addressed above, the Commissioner intends to amends Rule 22.214.171.124 NMAC via emergency rulemaking, in accordance with NMSA 1978, § 14-4-5.6 and 126.96.36.199 NMAC. This emergency amendment is temporary, and will remain in effect for 30 days, unless within that time the Commissioner commences proceedings to adopt the rule under the normal rulemaking process, in which case the emergency rule will remain in effect for up to 120 days.