NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
 
BILL NUMBER: A8672B
SPONSOR: Rules (Parment)
 
TITLE OF BILL: An act to amend the environmental conservation law and
the general obligations law, in relation to mineral resources; and to
repeal certain provisions of the environmental conservation law and the
general obligations law relating thereto
 
PURPOSE OR GENERAL IDEA OF BILL:
The purpose of this legislation is to eliminate uncertainty in the
unitization and integration processes relating to the exploration and
development of oil and gas reserves, protect investment associated with
the development of oil and gas reserves, and protect the correlative
rights of all landowners and adds consumer protection measures to facil-
itate the orderly leasing of oil and gas rights.
 
SUMMARY OF SPECIFIC PROVISIONS:
Section 1: Paragraph e of subdivision 8 of section 23-0305 of the envi-
ronmental conservation law is amended.
Section 2: Paragraph e of subdivision 9 of section 23-0305 of the envi-
ronmental conservation law is amended.
Section 3: Subdivision 11 of section 23-0305 of the environmental
conservation law is amended.
Section 4: Paragraph f of subdivision 14 of section 23-0305 of the
environmental conservation law is amended.
Section 5: The title heading of title of article 23 of the environ-
mental conservation law is amended.
Section 6: Section 23-0501 of the ECL is repealed and two new sections
23-0501 and 23-0503 are added. The new sections add new definitions to
clarify existing concepts and refines existing definitions for clarity.
Defines statewide spacing units for specific formations; defines "well
operator."
Adds new statutory procedures governing the application for and issuance
of well drilling permits (based largely on existing DEC practice)
including a fast-track approval process for units that conform to state-
wide spacing. Adds streamlined procedure for individuals to contest
units that do not conform with statewide spacing units, but requires
that they meet the substantive and significant threshold for adjudi-
cation.
Section 7: Section 23-0701 of the ECL is amended by adding a require-
ment for DEC to issue an order memorializing voluntary integration
agreements following notice and an opportunity for a hearing.
Section 8: Subdivisions 1, 2, 3 and 6 of section 23-0901 of the ECL,
subdivision 1 is amended and a new subdivision 13 is added. Adds or
clarifies several definitions.
Adds a new, streamlined statutory procedure for the integration of
interests in a unit in the absence of voluntary agreement among owners.
Revises the manner in which non-operator owners in a unit can be inte-
grated by providing three options: (1) participate up front in all costs
and receive a full working interest in the well's production; (2) not
participate up front, and be subject to a 300% risk penalty, and be
subject to a proportionate share of costs going forward; or (3) be inte-
grated at a royalty of either the lowest royalty paid to owners who have
entered into voluntary agreements with the operator, or 1/8, whichever
is greater. Requires that the failure to elect one of the three options
results in being integrated as option (3) described above.
Defines what costs are recoverable by the well operator from owners who
elect one of the options to receive a full working interest; and speci-
fies the terms of integration that are applicable to all such owners.
Section 9: Subdivision 5 of section 5-333 of the general obligations
law is repealed and two new subdivisions 5 and 6 which ensures that
individuals leasing oil and gas interests have notice of the significant
legal import of the leases; requires that all leases contain an uncondi-
tional three business days right of rescission.
Section 10: Effective date.
 
JUSTIFICATION:
New York State's gas and oil conservation statute was originally enacted
in 1963 to attract the investment capital necessary for exploration and
development of the deep oil and gas horizons in New York State while
ensuring that the production costs and production revenues would be
shared on a just and reasonable basis, either through voluntary agree-
ments or through orders issued by the Department of Environmental
Conservation ("DEC"). It has taken more than 40 years since the enact-
ment of New York's oil and gas conservation statute, but now companies
are investing hundreds of millions of dollars into exploration and
development of these resources. This investment in a potential source of
clean domestic fuel comes at a crucial time. The original legislation
did not, however, anticipate the controversy that has developed over
implementation of the existing unitization and integration provisions in
Article 23. The existing framework encourages inefficiency and discour-
ages investment by bona fide operating companies.
This legislation is intended to remove the uncertainty associated with
the process of developing oil and natural gas wells, and to allocate
risks and responsibilities among operators and owners of mineral inter-
ests (either leased or unleased) on a reasonable and equitable basis. To
achieve this objective, the proposed revisions make several types of
changes. Generally, this legislation adds several new defined terms, and
either explains or clarifies other terms. It also increases the risk
penalty for owners who wish to make no up front investment in the well,
but wish to obtain a potentially greater share in the revenue. This bill
also revises the procedures for obtaining a well permit, establishing
drilling units, and integrating interests. The existing law currently
allows an operator to drill a well before the unit is finally deter-
mined, which has led to significant conflict among operators and the
various owners who seek to gain from the successful completion of a
well. This bill provides an expedited procedure for determining spacing
units such that the spacing unit can be determined before a well is
drilled.
Detailed public notice and hearing procedures have been added to ensure
that the DEC-administered unitization and integration processes are open
and transparent, giving all potentially affected parties the opportunity
to participate as they are able, and to obtain revenue from the well
commensurate with their risk investment. Time frames for unitization
and integration have been imposed, allowing these two processes to run
more quickly and consistently.
Most importantly, this legislation fundamentally simplifies the poten-
tial methods for integrating ownership interests in a unit in the
absence of voluntary agreement by creating three basic options for hold-
ers of gas or oil interests: (1) participate up front in all costs and
receive a full working interest in the well's production; (2) not
participate up front and be carried by the operator subject to cost
recoupment plus a 300% risk penalty, and be subject to a proportionate
share of costs going forward; or (3) be integrated cost-free as a royal-
ty interest. Finally, this legislation adds a section devoted to
consumer protection designed to ensure that all individuals participat-
ing in leases of oil and gas interests have notice of the significant
legal import of the leases, and requires that all leases contain an
unconditional three business day right of rescission.
 
PRIOR LEGISLATIVE HISTORY:
This is new legislation.
 
FISCAL IMPLICATIONS:
This legislation will have no fiscal implications for the state and
local governments.
 
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to any oil or gas
well permit issued on or after such effective date except as otherwise
provided in this act.
STATE OF NEW YORK
________________________________________________________________________
8672--B
2005-2006 Regular Sessions
IN ASSEMBLY
June 2, 2005
___________
Introduced by COMMITTEE ON RULES -- (at request of M. of A. Parment) --
read once and referred to the Committee on Environmental Conservation
-- committee discharged, bill amended, ordered reprinted as amended
and recommitted to said committee -- reported and referred to the
Committee on Rules -- Rules Committee discharged, bill amended,
ordered reprinted as amended and recommitted to the Committee on Rules
AN ACT to amend the environmental conservation law and the general obli-
gations law, in relation to mineral resources; and to repeal certain
provisions of the environmental conservation law and the general obli-
gations law relating thereto
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. Paragraph e of subdivision 8 of section 23-0305 of the
2 environmental conservation law, as amended by chapter 846 of the laws of
3 1981, is amended to read as follows:
4 e. Enter, take temporary possession of, plug or replug any abandoned
5 well as provided in the rules and regulations, whenever any owner or
6 operator neglects or refuses to comply with such rules and regulations.
7 Such plugging or replugging by the department shall be at the expense of
8 the owner or operator whose duty it may be to plug the well and who
9 shall hold harmless the state of New York for all accounts, damages,
10 costs and judgments arising from the plugging or replugging of the well
11 and the surface restoration of the affected land. Primary liability for
12 the expense of such plugging or replugging and first recourse for the
13 recovery thereof shall be to the operator unless a contract for the
14 production, development, exploration or other working of the well, to
15 which the lessor or other grantor of the oil and gas rights is a party,
16 shall place such liability on the owner or on the owner of another
17 interest in the land on which the well is situated. When an operator
18 violates any provision of this article, any rule or regulation promul-
19 gated thereunder, or any order issued pursuant thereto in reference to
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD11831-09-5
A. 8672--B 2
1 plugging or replugging an abandoned well, [he] the operator may not
2 transfer [his] the operator's responsibility therefor by surrendering
3 the lease. Prior to the commencement of drilling of any well, the opera-
4 tor shall be required to furnish to the department, and continuously
5 maintain, a bond acceptable to it conditioned upon the performance of
6 said operator's plugging responsibilities with respect to said well.
7 Upon the approval of the department, in lieu of such bond, the operator
8 may deposit cash or negotiable bonds of the United States Government of
9 like amount in an escrow account conditioned upon the performance of
10 said operator's plugging responsibilities with respect to said well. Any
11 interest accruing as a result of the aforementioned escrow deposit shall
12 be the exclusive property of the operator. The aforementioned bonding
13 requirements shall remain the obligation of the original operator
14 regardless of changes in operators unless a subsequent operator has
15 furnished the appropriate bond or substitute as herein provided accepta-
16 ble to the department and approval for the transfer of the well plugging
17 responsibilities to the subsequent operator has been granted by the
18 department. The failure of any operator to maintain a bond or other
19 financial security as prescribed herein shall be deemed a breach of
20 plugging responsibilities and entitle the department to claim the
21 proceeds of the bond or other financial security. The cost of plugging
22 or replugging any well, where such action is necessary or incident to
23 the commencing or carrying on of storage operations pursuant to
24 [sections] section 23-1103 or 23-1301 shall be borne by the operator of
25 the storage facility.
26 § 2. Paragraph e of subdivision 9 of section 23-0305 of the environ-
27 mental conservation law, as amended by chapter 846 of the laws of 1981,
28 is amended to read as follows:
29 e. Enter, take temporary possession of, plug or replug any abandoned
30 well as provided in the rules and regulations, whenever any operator
31 neglects or refuses to comply with such rules and regulations. Such
32 plugging or replugging by the department shall be at the expense of the
33 owner or operator whose duty it shall be to plug the well and who shall
34 hold harmless the state of New York for all accounts, damages, costs and
35 judgments arising for the plugging or replugging of the well and the
36 surface restoration of the affected land. Primary liability for the
37 expense of such plugging or replugging and first recourse for the recov-
38 ery thereof shall be to the operator unless a contract for the
39 production, development, exploration or other working of the well, to
40 which the lessor or other grantor of the solution salt rights is a
41 party, shall place such liability on the owner or on the owner of anoth-
42 er interest in the land on which the well is situated. When an operator
43 violates any provision of this article, any rule or regulation promul-
44 gated thereunder, or any order issued pursuant thereto in reference to
45 plugging or replugging an abandoned well, [he] the operator may not
46 transfer [his] the operator's responsibility therefor by surrendering
47 the lease. Prior to the commencement of drilling of any well to which
48 this subdivision applies, the operator shall be required to furnish to
49 the department, and continuously maintain, a bond acceptable to it
50 conditioned upon the performance of said operator's plugging responsi-
51 bilities with respect to said well. Upon the approval of the department,
52 in lieu of such bond, the operator may deposit cash or negotiable bonds
53 of the United States Government of like amount in an escrow account
54 conditioned upon the performance of said operator's plugging responsi-
55 bilities with respect to said well. Any interest accruing as a result
56 of aforementioned escrow deposit shall be the exclusive property of the
A. 8672--B 3
1 operator. The aforementioned bonding requirements shall remain the obli-
2 gation of the original operator regardless of changes in operators
3 unless a subsequent operator has furnished the appropriate bond or
4 substitute as herein provided acceptable to the department and approval
5 for the transfer of the well plugging responsibility to the subsequent
6 operator has been granted by the department. The failure of any operator
7 to maintain a bond or other financial security as prescribed herein
8 shall be deemed a breach of plugging responsibilities and entitle the
9 department to claim the proceeds of the bond or other financial securi-
10 ty. Any order issued pursuant to this paragraph may be reviewed upon
11 application of an aggrieved party by means of an order to show cause
12 which order shall be issued by any justice of the supreme court in the
13 judicial district in which any such order applies and shall be return-
14 able on the third succeeding business day following the issuance of such
15 order. Service of such show cause order shall be made upon the regional
16 office of the department for the region in which such order applies, and
17 upon the attorney general by delivery of such order to an assistant
18 attorney general at an office of the attorney general in the county in
19 which venue of the proceeding is designated, or if there is no office of
20 the attorney general within such county, at the office of the attorney
21 [geenral] general nearest such county. Except as hereinabove specified,
22 the proceeding to review an order under this paragraph shall be governed
23 by article seventy-eight of the civil practice law and rules.
24 § 3. Subdivision 11 of section 23-0305 of the environmental conserva-
25 tion law, as amended by chapter 922 of the laws of 1973 and renumbered
26 by chapter 846 of the laws of 1981, is amended to read as follows:
27 11. The department may use any of its powers for the purpose of coop-
28 erating with any other state or jurisdiction in regulating or otherwise
29 affecting the development or production of oil, gas or salt at any
30 location where such development or production may have a physical
31 [affect] effect on development or production in such other state or
32 jurisdiction.
33 § 4. Paragraph f of subdivision 14 of section 23-0305 of the environ-
34 mental conservation law, as added by chapter 410 of the laws of 1987, is
35 amended to read as follows:
36 f. Require that the operator furnish to the department, and contin-
37 uously maintain, a bond or other financial security conditioned upon the
38 satisfactory performance of [his] the operator's plugging responsibil-
39 ities with respect to said well. The failure of any operator to maintain
40 a bond or other financial security as prescribed herein shall be deemed
41 a breach of plugging responsibilities and entitle the department to
42 claim the proceeds of the bond or other financial security. Such bond or
43 other financial security shall be for an amount as determined pursuant
44 to the provisions of paragraph k of subdivision eight of this section.
45 § 5. The title heading of title 5 of article 23 of the environmental
46 conservation law, as amended by chapter 846 of the laws of 1981, is
47 amended to read as follows:
48 WELL PERMITS AND
49 WELL SPACING IN OIL AND NATURAL GAS POOLS AND FIELDS
50 § 6. Section 23-0501 of the environmental conservation law is REPEALED
51 and two new sections 23-0501 and 23-0503 are added to read as follows:
52 § 23-0501. Well permits.
53 1. a. This section shall not apply to (1) wells drilled, deepened,
54 plugged back or converted in oil fields or pools which were discovered,
55 developed and operated prior to January first, nineteen hundred eighty-
A. 8672--B 4
1 one, and (2) wells drilled, deepened, plugged back or converted in
2 natural gas fields or pools which were discovered, developed and oper-
3 ated prior to January first, nineteen hundred ninety-five and which are
4 not being extended.
5 b. As used in titles five, seven and nine of this article, unless the
6 context otherwise requires:
7 (1) "Statewide spacing" means spacing units for gas wells that are
8 within ten percent of the following sizes, unless another percentage is
9 specifically stated:
10 (i) For Medina polls and shale pools at any depth, 40 acres with the
11 wellbore within the target formation no less than 660 feet from any unit
12 boundary;
13 (ii) For Onondaga reef or Oriskany pools at any depth, 160 acres with
14 the wellbore within the target formation no less than 660 feet from any
15 unit boundary;
16 (iii) For fault-bounded Trenton and/or Black River hydrothermal dolom-
17 ite pools where the majority of the pool is between 4,000 and 8,000 feet
18 deep, 320 acres with the proposed productive section of the wellbore
19 within the target formation no less than one-half mile from any other
20 well in another unit in the same pool and no less than 1000 feet from
21 any unit boundary that is not defined by a field-bounding fault but in
22 no event less than 660 feet from any unit boundary;
23 (iv) For fault-bounded Trenton and/or Black River hydrothermal dolom-
24 ite pools where the majority of the pool is below 8000 feet, within five
25 percent of 640 acres with the proposed productive section of the well-
26 bore within the target formation no less than one mile from any other
27 well in another unit in the same pool and no less than 1500 feet from
28 any unit boundary that is not defined by a field-bounding fault but in
29 no event less than 660 feet from any unit boundary;
30 (v) For all other pools where the majority of the pool is above the
31 depth of 4,000 feet, 80 acres with the wellbore within the target forma-
32 tion no less than 660 feet from any unit boundary;
33 (vi) For all other pools where the majority of the pool is 4,000 to
34 6,000 feet deep, 160 acres with the wellbore within the target formation
35 no less than 660 feet from any unit boundary;
36 (vii) For all other pools where the majority of the pool is 6,000 to
37 8,000 feet deep, 320 acres with the wellbore within the target formation
38 no less than 1000 feet from any unit boundary; and
39 (viii) For all other pools where the majority of the pool is below
40 8,000 feet, within five percent of 640 acres with the wellbore within
41 the target formation no less than 1500 feet from any unit boundary.
42 (2) "Well operator" means the applicant for a permit to drill, deepen,
43 plug back or convert a well subject to this title and titles 7 and 9 of
44 this article, or the actual operator of the well if the well is not
45 operated by the original applicant.
46 (3) "Permit" or "well permit" means a permit to drill, deepen, plug
47 back or convert a well for production of oil or gas.
48 2. Every person who applies for a permit to drill an oil or gas well
49 or deepen or plug back a well to a different pool after the effective
50 date of this section, notwithstanding prior orders, shall control
51 through fee ownership, voluntary agreement, or integration pursuant to
52 section 23-0701 or 23-0901 of this article no less than sixty percent of
53 the acreage within the proposed spacing unit for such well and shall
54 provide the department with:
55 a. A map in a format specified by the department depicting the
56 proposed spacing unit for the well, the surface and bottom hole
A. 8672--B 5
1 locations of the well, the location of the wellbore in the target forma-
2 tion, the location of any field-bounding faults within the proposed
3 spacing unit, the acreage of the proposed spacing unit, and the bounda-
4 ries of each tract wholly or partially within the proposed spacing unit
5 as may be evidenced by tax identification numbers; and
6 b. A demonstration that the applicant controls the oil or gas rights,
7 as applicable, in the target formation to be penetrated by the wellbore,
8 provided that, if the applicant does not control such oil or gas rights,
9 the department shall issue a permit that is conditional upon the appli-
10 cant completing the integration process required by section 23-0901 of
11 this article before the applicant can exercise the right to drill, deep-
12 en, plug back or convert under the permit.
13 3. In furtherance of the policy objectives of this article, the
14 department shall take all actions required by it under this title and
15 titles 7 and 9 of this article as expeditiously as possible.
16 § 23-0503. Well spacing in oil and natural gas pools and fields.
17 1. Spacing orders are not required for wells drilled, deepened,
18 plugged back or converted in oil fields or pools which were discovered,
19 developed and operated prior to January first, nineteen hundred eighty-
20 one. Spacing orders are not required for wells drilled, deepened,
21 plugged back or converted in natural gas fields or pools, which were
22 discovered, developed and operated prior to January first, nineteen
23 hundred ninety-five and which are not being extended.
24 2. The department shall issue a permit to drill, deepen, plug back or
25 convert a well, if the proposed spacing unit submitted to the department
26 pursuant to paragraph a of subdivision 2 of section 23-0501 of this
27 title conforms to statewide spacing and is of approximately uniform
28 shape with other spacing units within the same field or pool, and abuts
29 other spacing units in the same pool, unless sufficient distance remains
30 between units for another unit to be developed. Prior to issuing any
31 such permit, the department shall publish a notice of intent to issue a
32 well permit in the environmental notice bulletin, which shall include
33 information concerning the spacing unit associated with the well.
34 3. a. If the proposed spacing unit does not meet the requirements
35 described in subdivision two of this section, the department shall
36 determine if the proposed spacing unit satisfies the policy objectives
37 of section 23-0301 of this article.
38 b. If the department determines the proposed spacing unit meets the
39 policy objectives of section 23-0301 of this article, the department
40 shall issue a notice of intent to issue a permit and spacing order. The
41 well operator shall cause such notice to be published in a form and
42 manner prescribed by the department. If the notice of intent relates to
43 a proposed spacing unit that is not of a uniform size and shape with
44 other spacing units for the field or pool, the department shall, if
45 necessary, make such adjustment of the allowable production from the
46 well to be drilled thereon so that the owners in the spacing unit
47 receive their just and equitable shares of the production from the pool.
48 Any such adjustment of the allowables shall be included in the notice of
49 intent to issue a permit and spacing order.
50 c. Any comments regarding a notice of intent to issue a permit and
51 spacing order must be received by the department within thirty days of
52 the date of the notice of intent and must meet the substantive and
53 significant requirement for establishing an issue for adjudication. Any
54 challenge to a spacing unit must contain (i) a description and a map of
55 the proposed alternative spacing unit; (ii) a technical justification of
56 the proposed alternative spacing unit, which shall include a description
A. 8672--B 6
1 and analysis of the scientific data intended by the owner to support its
2 proposed spacing unit configuration; and (iii) the name, address and
3 experience of any expert witness proposed to support the proposed alter-
4 native spacing unit configuration. The department may request the owner
5 challenging the spacing unit to present its scientific data to the
6 department.
7 d. The department shall determine whether substantive and significant
8 issues have been raised. If the department receives no comments or if
9 the comments do not raise a substantive and significant issue, the
10 department shall issue the permit and the final spacing order. If the
11 department determines that substantive and significant issues have been
12 raised in a timely manner, the department shall schedule an adjudicatory
13 hearing.
14 4. The department may issue permits to drill infill wells on a reason-
15 ably uniform pattern within the spacing unit after an integration order
16 has been issued, if required, and only if it determines that drilling
17 infill wells is necessary to satisfy the policy objectives of section
18 23-0301 of this article. The distances from the unit boundaries set
19 forth in paragraph b of subdivision 1 of section 23-0501 of this title
20 shall apply to any infill wells. For purposes of this section, new
21 lateral wellbores drilled from the original wellbore in the unit are not
22 considered infill wells if they are drilled prior to the first product
23 sales from the original surface location.
24 5. For wells permitted prior to the effective date of this section
25 where a spacing order is required but has not been issued, the depart-
26 ment shall issue a notice of intent to issue a spacing order. The well
27 operator shall cause such notice to be published in a form and manner
28 prescribed by the department. The department may issue an order without
29 a hearing if the proposed spacing unit complies with the requirements of
30 subdivision two of this section and no substantive and significant
31 objections to the boundaries of the proposed spacing unit are received
32 within thirty days after publication of the notice by the well operator.
33 If the department determines that substantive and significant issues
34 have been raised in a timely manner, the department shall schedule an
35 adjudicatory hearing.
36 6. An order establishing a spacing unit shall be binding upon all
37 persons and their heirs, successors and assigns. Upon good cause shown,
38 an order establishing a spacing unit may be modified by the department
39 without conducting a hearing if a finding has been made that no facts
40 are in dispute after all affected persons have been provided a reason-
41 able opportunity to comment. If necessary, upon issuance of a modified
42 order which changes unit boundaries, the well operator shall adjust the
43 accounts for owners within the original and modified units to reflect
44 the modified boundary. Any participation by new owners and any adjust-
45 ment of revenue or royalties based thereon shall be on a prospective
46 basis only. If the initial risk penalty phase pursuant to title 9 of
47 this article is in effect, any new owner added to the unit may elect to
48 be integrated as a participating owner, a non-participating owner or an
49 integrated royalty owner as defined by title 9 of this article. Full
50 well costs shall be assessed against new participating owners and non-
51 participating owners and included in the risk penalty calculation. If
52 the initial risk penalty phase has concluded, any new owner added to the
53 spacing unit may elect to be integrated as a participating owner or an
54 integrated royalty owner on a prospective basis only.
55 7. Upon the expiration of a well permit or the plugging and abandon-
56 ment of all wells in a spacing unit, the spacing unit shall be extin-
A. 8672--B 7
1 guished. Upon extinguishment, all lands within such spacing unit shall
2 be eligible for inclusion in subsequent spacing units.
3 8. The department, without considering correlative rights, may grant a
4 permit to those entities described in paragraphs b and c of subdivision
5 3 of section 23-1901 of this article for the purposes of natural gas
6 development if the department determines, after notice and hearing, that
7 the natural gas resource would not be developed by any other entity
8 within twelve months of the close of the hearing record. In the event
9 that the department shall not receive timely notice of appearance prior
10 to the scheduled date of hearing, it may dispense with such hearing. In
11 making its determination the department shall require that the entity
12 described in paragraphs b and c of subdivision 3 of section 23-1901 of
13 this article submit a finding made by such entity that such drilling is
14 likely to be economically sound, and that the entity in question utilize
15 the resource for its exclusive use when granting such a permit.
16 § 7. Section 23-0701 of the environmental conservation law, as amended
17 by chapter 846 of the laws of 1981, is amended to read as follows:
18 § 23-0701. Voluntary integration and unitization in oil and natural gas
19 pools and fields.
20 1. Voluntary integration and unitization in oil pools or fields and in
21 natural gas pools or fields shall be subject to the provisions of this
22 section. When two or more separately owned tracts are embraced within a
23 spacing unit, or when there are separately owned interests in all or a
24 part of a spacing unit, the interested persons may integrate their
25 tracts or interests for the development and operation of the spacing
26 unit. An agreement for the unit or for the cooperative development and
27 operation of a field, pool, or part thereof, may be submitted to the
28 department for approval as being in the public interest or reasonably
29 necessary to prevent waste. Such approval shall constitute a complete
30 defense to any suit charging violation of any statute of this state
31 relating to trusts and monopolies on account thereof or on account of
32 operations conducted pursuant thereto. Failure to submit such an agree-
33 ment to the department for approval shall not for that reason imply or
34 constitute evidence that the agreement or operations conducted pursuant
35 thereto are in violation of laws relating to trusts and monopolies.
36 2. Upon twenty-one days notice to the fee owners of oil and gas
37 interests under lease in a spacing unit, a well operator may record as
38 to each tract for which notice has been given a declaration of voluntary
39 integration. The declaration of voluntary integration shall include the
40 acreage applicable to each tract so integrated and the proportion such
41 acreage bears to the entire spacing unit. The declaration of voluntary
42 integration shall be final and binding upon all persons and their heirs,
43 successors and assigns, and all persons who take title by operation of
44 law.
45 § 8. Subdivisions 1, 2, 3 and 6 of section 23-0901 of the environ-
46 mental conservation law, subdivision 1 as amended by chapter 1020 of the
47 laws of 1981, are amended and a new subdivision 13 is added to read as
48 follows:
49 1. Compulsory integration and unitization in oil pools [or] and fields
50 and in natural gas pools [or] and fields shall be subject to the
51 provisions of this section with subdivision 3 to be specifically appli-
52 cable to integration within individual spacing units, and subdivisions 4
53 through 12 to be specifically applicable to unit operation of an entire
54 pool or part thereof.
55 2. The department shall not make any order requiring the integration
56 of interests in any spacing unit or requiring the development or opera-
A. 8672--B 8
1 tion of any field, pool or part thereof as a unit unless it finds, after
2 detailed study and analysis, notice and hearing, that the integration of
3 interests in spacing units, under conditions then existing in this
4 state, or in the field or pool to be affected, is necessary to carry out
5 the policy provisions of section 23-0301 of this article. [The hearing
6 may be coincidental with that required prior to the spacing of wells as
7 provided in subdivision 2 of section 23-0501.]
8 3. In the absence of voluntary integration as permitted by section
9 23-0701 of this article and after finding as required by subdivision 2
10 of this section, the department shall make an order integrating all
11 tracts or interests in the spacing unit for development and operation.
12 Each such integration order shall be upon terms and conditions that are
13 just and reasonable[.] and subject to the following:
14 a. As used in this section or otherwise in this article, to the extent
15 applicable to oil and gas wells:
16 (1) "Integrated non-participating owner" or "non-participating owner"
17 means an owner who elects to reimburse the well operator, out of
18 production proceeds, for such owner's proportionate share of the actual
19 well costs of the initial well in a spacing unit and be subject to a
20 risk penalty, and complies with all of the requirements for integration,
21 including the terms of integration, as specified in an order of inte-
22 gration issued pursuant to the compulsory integration provisions of this
23 section. The non-participating owner shall receive the full share of
24 production attributable to such owner's proportionate interest in the
25 spacing unit following the recoupment by the well operator of the
26 owner's proportionate share of the actual well costs plus a risk penalty
27 of two hundred percent of the share of the actual well costs allocable
28 to such owner. In the case of a leased tract, a royalty shall be
29 deducted from the non-participating owner's share of production, which
30 shall not be subject to charges or costs, but shall be separately calcu-
31 lated and paid to the non-participating owner on behalf of the royalty
32 owner as follows:
33 (i) During the recovery of the actual well costs, 1/16 or 6.25%,
34 (ii) During the recovery of the first 100% of the risk penalty, 3/32
35 or 9.38%,
36 (iii) During the recovery of the second 100% of the risk penalty, the
37 lowest royalty fraction set forth in an existing lease in the unit, but
38 no less than 1/8 or 12.5%.
39 Nothing in this subparagraph relieves any lessee of its obligation to
40 pay, from the commencement of production, any remaining royalty and
41 overriding royalty owed under the terms of its lease.
42 (2) "Integrated participating owner" or "participating owner" means an
43 owner who elects to participate in the initial well in a spacing unit,
44 pays all costs associated with participation and complies with all of
45 the requirements for participation, including the terms of integration,
46 specified in an order of integration issued pursuant to the compulsory
47 integration provisions of this section.
48 (3) "Integrated royalty owner" means an owner who has either elected
49 to be an integrated royalty owner or who does not elect to become either
50 a participating owner or a non-participating owner. The integrated
51 royalty owner shall receive a royalty equal to the lowest royalty in an
52 existing lease in the spacing unit, but no less than one-eighth. The
53 integrated royalty owner shall have no obligation to the well operator
54 or any other owner for any charges, taxes or fees associated with the
55 operation of the oil or gas well and, notwithstanding any other law to
56 the contrary, shall not be liable by reason of the owner's status as an
A. 8672--B 9
1 integrated royalty owner for any claims for personal injury or property
2 damage suffered by any person relating to the drilling and operation of
3 the well.
4 (4) "Risk penalty" means the percentage applied to well costs to reim-
5 burse the well operator for the risk involved with the exploration for
6 and development of a well or the percentage applied to other costs that
7 are subject to recoupment and a risk penalty, as provided herein. At any
8 time during a risk penalty phase, an owner subject to a risk penalty may
9 pay to the well operator the full amount subject to recoupment by the
10 well operator, to terminate the risk penalty phase and be eligible for
11 other opportunities for participation as provided herein.
12 (5) "Well costs" means the costs incurred or estimated to be incurred
13 by the well operator in relation to the drilling, completion, and the
14 installation of surface equipment, other than as described in item E of
15 clause (ii) of subparagraph 1 of paragraph c of this subdivision,
16 including, without limitation, surveying, drill site preparation, leas-
17 ing of surface rights and access roads pertinent to the drill site,
18 construction of access roads, permitting, drilling, stimulation, test-
19 ing, well logging, drilling insurance, plugging and abandonment of the
20 well, environmental mitigation costs associated with drilling and any
21 other costs associated with the foregoing that the operator has incurred
22 or anticipates incurring, including a reasonable charge for supervision
23 of the foregoing activities.
24 b. If upon issuance of a well permit by the department, the well oper-
25 ator does not control all owners within the spacing unit, either through
26 lease or voluntary agreement, the department shall schedule an inte-
27 gration hearing.
28 c. The well operator shall, no later than thirty days prior to the
29 date of the integration hearing scheduled by the department, provide
30 actual notice of the hearing to all uncontrolled owners wholly or
31 partially within the spacing unit and shall provide notice by publica-
32 tion in a form and manner prescribed by the department. Prior to or
33 contemporaneously with such notice, the well operator shall provide to
34 the department the well operator's estimate of those well costs that the
35 owners electing to participate shall be required to pay to the well
36 operator prior to or at the integration hearing based on each owner's
37 proportionate share of such costs and a list of each tract wholly or
38 partially within the spacing unit, the acreage attributable thereto, the
39 percentage interest of the total spacing unit of each tract, an indi-
40 cation of whether the tract is controlled by the well operator and the
41 names and addresses of the uncontrolled owners. If applicable, such list
42 shall also identify each tract where the owners remain unknown or cannot
43 be located after diligent efforts by the well operator. To the extent an
44 owner cannot be determined after diligent efforts by the well operator
45 and such owner is integrated as an integrated royalty owner, the well
46 operator shall hold the royalty percentage payable to such integrated
47 royalty owner in an interest bearing account for such integrated royalty
48 owner until the owner is located or the property is deemed abandoned,
49 whichever comes first.
50 (1) The notice of hearing to each uncontrolled owner shall be made in
51 a form prescribed by the department, and shall include:
52 (i) An election form, as prescribed by the department, granting the
53 uncontrolled owner the right to elect to be integrated into the spacing
54 unit as an integrated participating owner, an integrated non-participat-
55 ing owner or an integrated royalty owner. Such form shall set forth the
56 well operator's good faith estimate of those well costs which the owners
A. 8672--B 10
1 electing to be integrated as participating owners will be responsible
2 for paying to the well operator prior to conclusion of the integration
3 hearing, based on each owner's proportionate share of such costs, and
4 confirm that if an uncontrolled owner does not make a timely election
5 and does not timely comply with all of the requirements to be either a
6 participating owner or a non-participating owner, that such uncontrolled
7 owner shall be integrated into the spacing unit as an integrated royalty
8 owner.
9 (ii) A copy of the proposed order of integration, which shall include
10 the proposed terms of integration applicable to integrated participating
11 owners and integrated non-participating owners. The proposed order of
12 integration shall include the following terms in addition to any appli-
13 cable risk penalty:
14 A. The owner shall be liable for its proportionate share of all costs
15 and expenses, including taxes, and claims of third parties related to
16 the well, operations thereon and in conjunction therewith, and shall be
17 entitled to its proportionate share of all benefits therefrom. If an
18 owner's share of production is subject to a risk penalty, the well oper-
19 ator shall establish a risk penalty account for such owner and all
20 costs, expenses and benefits attributable to such owner shall be
21 reflected in the penalty account;
22 B. The well operator shall hold any funds paid by the owner or
23 recouped through the risk penalty attributable to the plugging and aban-
24 donment costs of the well, as estimated prior to the drilling of the
25 well, in an interest bearing account until such funds are required and
26 utilized for such purpose;
27 C. The owner shall be liable for and shall indemnify all other persons
28 participating in the development of the well, whether participating
29 owners, non-participating owners or otherwise, including the well opera-
30 tor, from and against all claims arising out of the owner's non-payment
31 of rentals, royalties and other payments or burdens on the oil and gas
32 rights that such owner contributes to the spacing unit and from and
33 against all claims associated with the loss or failure of title to the
34 oil and gas rights the owner contributes to the spacing unit;
35 D. The well operator shall have a first lien on the production of the
36 owner to pay any outstanding costs, expenses or claims and the well
37 operator shall be entitled to withhold and retain for the purposes of
38 set off any revenue or production owed or due to the owner under an
39 order of integration. Nothing in this paragraph shall affect the well
40 operator's right to collect any outstanding amounts incurred nor the
41 right of any fee owner of oil and gas interests to collect any amounts
42 owed under the terms of any lease from such owner. The exercise of any
43 remedy shall not preclude the well operator from seeking any other reme-
44 dies available under the law;
45 E. Whether or not the owner is subject to a risk penalty, the well
46 operator shall submit to the owner a written authority for expenditure
47 of the estimated costs associated with the construction of any facili-
48 ties not included in well costs beyond the surface equipment at the
49 wellhead to the first point of interconnection with other facilities
50 that commingle production from a group of wells that includes the well,
51 including, but not limited to, pipe, compression, processing, treating,
52 dehydrating or separating equipment, fixtures, related buildings and
53 other equipment. The owner shall have thirty days to elect to partic-
54 ipate and pay its proportionate share of such estimated cost, the fail-
55 ure of which shall be deemed to be an election by the owner not to
56 participate. If the owner elects not to participate or is deemed to have
A. 8672--B 11
1 elected not to participate, the well operator shall be entitled to
2 retain for its own account all of the owner's share of production from
3 the well until the well operator has recouped from the net proceeds of
4 the owner's share of production the owner's share of the actual costs of
5 the facilities, plus a risk penalty of one hundred percent of such
6 costs. Any such amounts shall be added to the risk penalty account for
7 such owner;
8 F. If the owner is not subject to a risk penalty, the owner shall have
9 the right to take its share of gas or oil production in kind and shall
10 be responsible for its transportation and marketing arrangements down-
11 stream of the facilities constructed pursuant to item E of this clause.
12 The owner's election to take in kind must be conveyed to the well opera-
13 tor no later than fourteen days prior to first production from the well
14 or upon seventy-five days written notice to well operator at any time
15 following first production from the well subject to the expiration of
16 any existing contracts;
17 G. If the owner is not subject to a risk penalty and does not take its
18 share of gas or oil production in kind, the well operator shall market
19 the owner's share of production from the well ratably with its own share
20 of production from the well for the account of the owner. The well oper-
21 ator shall pay the owner based on the price received by the well opera-
22 tor for production in the general area less (I) the owner's propor-
23 tionate share of all costs incurred by the well operator for
24 transporting, treating, processing, or otherwise making the production
25 marketable, and (II) a marketing fee not to exceed five percent of the
26 sales price of the production;
27 H. The well operator shall be entitled to propose and conduct a
28 subsequent operation on a well, meaning any reworking, sidetracking,
29 deepening, re-completing or plugging back of the well or the drilling of
30 a lateral or an infill well in the formation for which the unit was
31 created. Owners shall be provided with a written authorization for
32 expenditure of the estimated costs of the subsequent operation. An owner
33 shall not be entitled to participate in a subsequent operation as long
34 as the owner is in a risk penalty phase. If a subsequent operation is
35 proposed while an owner is in a risk penalty phase, the owner's propor-
36 tionate share of the actual cost of the subsequent operation plus two
37 hundred percent of such actual costs shall be added to the risk penalty
38 account for such owner. The owner not in a risk penalty phase shall
39 have thirty days to elect and pay its proportionate share of the esti-
40 mated costs, unless a drilling rig is on location, in which event notice
41 of a subsequent operation may be given by telephone and the owner shall
42 have forty-eight hours, exclusive of Saturday, Sunday and legal holi-
43 days, to make an election and thirty days to pay the owner's propor-
44 tionate share of costs. The failure of any such owner to elect and pay
45 in a timely manner shall be deemed an election by the owner not to
46 participate in the subsequent operation. If such owner elects or is
47 deemed to have elected not to participate in the subsequent operation,
48 the well operator shall be entitled to retain all of the owner's propor-
49 tionate share of production from the well until the well operator has
50 recouped the proportionate share of the actual costs of the subsequent
51 operation attributable to such owner, plus two hundred percent of such
52 actual costs;
53 I. The well operator, on behalf of the owner, shall be entitled to
54 conduct all acts associated with the well and necessary facilities
55 related thereto, including without limitation: conducting title examina-
56 tion and curative work on the tracts included in the spacing unit;
A. 8672--B 12
1 arranging for contract services or employees of the well operator, at
2 the customary salaries, wages and benefits of such employees, to oversee
3 the operation and maintenance of the well and the facilities in the
4 production unit associated with the well; arranging for and maintaining
5 required financial security for well bonds and insurance; discharging
6 litigation, claims of third parties and disputing tax assessments;
7 developing and implementing emergency responses and dealing with
8 catastrophic events; and arranging for the storage, transporting and
9 disposal of produced water, by-products or refuse associated with
10 production and maintenance facilities; and
11 J. Other terms may be included in the order of integration if the
12 department determines such terms are reasonably required to further the
13 policy objectives of section 23-0301 of this article.
14 (2) Within twenty-one days of receiving notice of the integration
15 hearing, each uncontrolled owner shall provide to the well operator and
16 the department its election as to whether it chooses to be integrated as
17 a participating owner, a non-participating owner or an integrated royal-
18 ty owner. Failure of an uncontrolled owner to elect to be integrated as
19 a participating owner, a non-participating owner or an integrated royal-
20 ty owner and to pay the amount specified in the notice by the date of
21 the hearing, or to make any election, shall result in the owner being
22 integrated as an integrated royalty owner. Nothing contained in this
23 section shall preclude any person from entering into a lease or other
24 voluntary agreement at any time prior to the hearing.
25 d. If substantive and significant issues are raised during the inte-
26 gration hearing, the department shall schedule an adjudicatory hearing.
27 e. If no substantive and significant issues are raised at the hearing,
28 the department shall issue a final order of integration confirming the
29 status of all uncontrolled owners in the spacing unit as participating
30 owners, non-participating owners or integrated royalty owners; the terms
31 of integration; the acreage attributable to each owner and the propor-
32 tion such acreage bears to the entire spacing unit; and the royalty
33 applicable to each integrated royalty owner. Such order shall be
34 recorded by the well operator in the office of the county clerk in the
35 county or counties where the spacing unit is wholly or partially located
36 and such order shall be final and binding upon the well operator, all
37 owners and their heirs, successors and assigns.
38 f. All operations including, but not limited to, the commencement,
39 drilling, or operation of a well or the existence of a shut-in well upon
40 any portion of a spacing unit covered by an order of integration [order]
41 shall be deemed for all purposes the conduct of such operations upon
42 each separately owned tract in the spacing unit by the owner or several
43 owners thereof. That portion of the production allocated to each tract
44 included in a spacing unit covered by an order of integration shall,
45 when produced, be deemed for all purposes to have been produced from
46 such tract by a well drilled thereon. [Each such integration order shall
47 authorize the drilling, equipping and operation or operations of a well
48 on the spacing unit, and make provision for the payment of the reason-
49 able actual cost thereof, plus a reasonable charge for supervision and
50 interest. If there is any dispute as to such costs, the department shall
51 determine the proper costs. If one or more of the owners shall drill,
52 equip and operate, or operate, or pay the expenses of drilling, equip-
53 ping and operating, or operating, a well for the benefit of another
54 person as provided for in an order of integration, then such owner or
55 owners shall be entitled to the share of production from the spacing
56 unit accruing to the interest of such other person, exclusive of a
A. 8672--B 13
1 royalty not to exceed one-eighth of the production, until the market
2 value of such other person's share of the production, exclusive of such
3 royalty, equals twice such other person's share of the reasonable actual
4 cost of drilling, equipping and operating, or operating the well,
5 including a reasonable charge for supervision and interest.]
6 6. No order of the department providing for unit operations shall
7 become effective unless and until the plan for unit operations
8 prescribed by the department has been approved in writing by the owners
9 of sixty [per cent] percent or more in interest as the costs of such
10 unit operations are shared under the order of the department, and by
11 owners of record of a like percentage of a one-eighth royalty interest
12 in and to the unit area, and the department has made a finding, either
13 in the order providing for unit operations, or in a supplemental order,
14 that the plan for unit operations has been so approved by the required
15 number of owners and royalty owners. If the plan for unit operations has
16 not been so approved by owners and royalty owners at the time the order
17 providing for unit operations is made, the department shall upon appli-
18 cation and notice hold such supplemental hearings as may be required to
19 determine if and when the plan for unit operations has been so approved.
20 If the owners and royalty owners, or either, owning the required
21 percentage of interest in the unit area do not approve the plan for unit
22 operations within a period of six months from the date on which the
23 order providing for unit operations is made, such order shall cease to
24 be of force and shall be revoked by the department.
25 13. Any person taking title by operation of law to any oil and gas
26 interests integrated into a spacing unit pursuant to an order of inte-
27 gration, shall take such interests subject to the terms and conditions
28 of the final order of integration issued by the department duly recorded
29 in accordance with the provisions of this section and shall be subject
30 to all liabilities and benefits associated therewith, unless such
31 person, within sixty days of the taking of such interest, elects to be
32 an integrated royalty owner and notifies the well operator of such
33 election.
34 § 9. Subdivision 5 of section 5-333 of the general obligations law is
35 REPEALED and two new subdivisions 5 and 6 are added to read as follows:
36 5. On or after January first, two thousand six, any oil or gas lease
37 shall contain the following statement printed in at least ten point bold
38 type:
39 THIS IS A LEASE OF OIL AND GAS RIGHTS, NOT A SALE, CONTAINING TERMS
40 THAT MAY BE NEGOTIATED BY YOU. YOU HAVE THE RIGHT TO CANCEL THIS LEASE
41 WITHIN THREE BUSINESS DAYS AFTER EXECUTION OF THE LEASE BY NOTIFYING THE
42 LESSEE THAT YOU HAVE CANCELED THIS CONTRACT. IN ORDER TO CANCEL THIS
43 LEASE, YOU MUST EXECUTE A NOTICE OF CANCELLATION IN THE FORM PROVIDED
44 BELOW, MAIL IT TO THE LESSEE AND REFUND ALL AMOUNTS PAID TO YOU BY THE
45 LESSEE WITHIN THE THREE-DAY CANCELLATION PERIOD. THE MAILING MUST BE
46 POSTMARKED WITHIN THE THREE-DAY CANCELLATION PERIOD TO BE EFFECTIVE.
47 NOTICE OF CANCELLATION
48 I/WE HEREBY CANCEL THIS LEASE.
49 DATED:
50 SIGNATURE(S):
51 THE PERSON PRESENTING THIS LEASE TO YOU IS [] NOT [] A MEMBER OF
52 (name of organization) AND THEREFORE IS [] IS NOT [] SUBJECT
53 TO A CODE OF CONDUCT. IF THE PERSON PRESENTING THIS LEASE TO YOU IS
54 SUBJECT TO A CODE OF CONDUCT, A COPY OF THE CODE OF CONDUCT MUST BE
55 PRESENTED TO YOU WITH THIS LEASE. IF APPLICABLE, THE CODE OF CONDUCT
56 PROVIDES A DISPUTE RESOLUTION MECHANISM FOR ANY DISPUTE THAT YOU MAY
A. 8672--B 14
1 HAVE REGARDING THE MANNER BY WHICH THIS LEASE WAS PRESENTED TO YOU. IF
2 YOU HAVE ANY SUCH DISPUTE, YOU MAY INVOKE THE DISPUTE RESOLUTION MECH-
3 ANISM OF THE CODE OF CONDUCT BY CONTACTING THE PERSON OR PERSONS DESIG-
4 NATED IN THE CODE OF CONDUCT. THE FAILURE OF THE LESSEE TO PAY ANY
5 ROYALTIES TO YOU AS REQUIRED UNDER THE TERMS OF THE LEASE FOR A PERIOD
6 OF FOUR CONSECUTIVE MONTHS OR MORE SHALL BE A DEFAULT UNLESS OTHERWISE
7 PROVIDED BY LAW, AND WILL RESULT IN CANCELLATION OF THE LEASE APPLICABLE
8 TO THE TARGET FORMATION OF THE WELL WITHIN THE SPACING UNIT, FOLLOWING
9 WRITTEN NOTIFICATION TO THE LESSEE OF YOUR INTENT TO CANCEL AND SIXTY
10 DAYS FOR THE LESSEE TO CURE THE DEFAULT. IF THE LESSEE HAS A BONA FIDE
11 DISPUTE REGARDING THE GROUNDS FOR CANCELLATION, SUCH DISPUTE AND THE
12 REASONS THEREFOR MUST BE PROVIDED TO YOU IN WRITING OR THE DEFAULT MUST
13 BE CURED WITHIN SUCH SIXTY DAY PERIOD, OTHERWISE THE LEASE SHALL BE
14 CANCELLED.
15 6. The provisions of subdivisions one, two, three and four of this
16 section shall apply to leases entered into on or after January first,
17 nineteen hundred eighty-five and the provisions of subdivision five of
18 this section shall apply to leases entered into on or after January
19 first, two thousand six.
20 § 10. This act shall take effect immediately and shall apply to any
21 oil or gas well permit or spacing order issued on or after such effec-
22 tive date except as otherwise specifically provided in this act.