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A Primer on New Mexico Oil and Gas Law: State, Federal and Fee Lands
Rock River Minerals | November 5, 2019
Introduction
New Mexico’s 2
natural beauty and rich cultural traditions hold an observer’s gaze such that the State’s motto becomes self- evident: The Land of Enchantment. She is world famous for the Wild Wes 3
and her hatch chile peppers, 4
while her origin stretches back beyond recorded history into the myths and legends of her native people.
“Conquered” by Spain and subsequently ruled by Mexico, her civil law heritage continues to shape the contour of the legal landscape today. As a result, the lands of New Mexico are divided between sovereign Indian nations, the United States, the State of New Mexico, and private owners. The past, then, is very much present in New Mexico.
The purpose of this article is to orient the uninitiated to the complexities of New Mexico oil and gas law and to provide a helpful guide to additional resources available to the oil and gas practitioner. To this end, familiarity with the footnotes is highly recommended as they contain a wealth of hyperlinks to critical information resources. Section I and Section II of the article trace New Mexico’s development from pre-history to statehood in 1915, with particular focus on the genesis of land titles. Section III discusses the attributes of the fee mineral estate, the oil and gas lease, and provides a brief introduction to the New Mexico Oil Conservation Division. Section IV and Section V detail New Mexico’s unique community property, and descent and distribution regimes, including important historical variances. The final two sections of the article provide an overview of federal oil and gas leasing and lease maintenance with the Bureau of Land Management (Section VI), and state oil and gas leasing and lease maintenance with the State Land Office (Section VII).
1 T. C. Turner is a native Midlander, a reluctant Houstonian, a proud Texas Longhorn, and a founding partner of Buckley & Turner, PLLC. He is licensed in Texas, Louisiana, and New Mexico and is Board Certified in Oil, Gas, and Mineral Law by the Texas Board of Legal Specialization.
2 Grateful thanks in research to Jonathan Pratter with Tarlton Law Library at the University of Texas for helping me navigate the catacombs of Tarlton’s basement; and to Logan Migliore at the UNM Law Library for his expert knowledge of the NM statutes and arcane expertise with the outdated library scanner machine. Grateful thanks in review to Mike Curry with Henry Resources, LLC for his insightful feedback and patient mentorship; to Mike Gray with Sabinal Energy, LLC for his Hunter S. Thompsian take on the matter and YOUNG GUNS expertise; to Randy Wilson with Marathon for his early encouragement and feedback; and to Jared Hembree with Hinkle Shanor, LLP for his much- appreciated last minute review;
3 Everyone is familiar with the story of Sheriff Pat Garrett and Billy the Kid; lesser known is Pat Garrett’s role in co-founding the Pecos Irrigation and Ditch Company with Charles B. Eddy, which spurred the settlement of Southeastern New Mexico, particularly Lea and Eddy Counties; 2 GEORGE B. ANDERSON, HISTORY OF NEW MEXICO: ITS RESOURCES AND PEOPLE 768 (1907); Carlsbad Irrigation Project, NEW MEXICO HISTORY, https://perma.cc/8N2M-MCYJ (last visited Jan. 24, 2018).
4 Hatch, New Mexico is the self-styled Chile Capital of the World, and a premier source of capsicum annuum, the spicy pepper that is the basis for much of New Mexican cuisine. Once aged, the green pepper turns red, changing its overall flavor and spiciness. New Mexicans eat “chile” on everything, and the official state question is “red or green,” to which the author usually responds “Christmas.” This cryptic reply refers to smothering a burrito or enchiladas in both sauces such that one side is green and the other red. For your chile fix, the author suggests Mi Casita in Carlsbad, or Tomasita’s or the Shed in Santa Fe.
I. PRE-STATEHOOD
Ancestors of the Pueblo Indians occupied portions of New Mexico as early as 10,000 B.C.E., while Taos Pueblo was settled as early as 1,000 C.E. 5
The Anasazi, or “ancient ones” as the Navajos named them, inhabited cliff dwellings akin to those found at Chaco Culture National Historical Park in northwest New Mexico until their “dispersal” south of the Rio Grande valley in approximately 1,500 C.E. 6
Also present throughout this time were the Navajo and Ute Indians in the northwestern portion of the State, as well as the itinerant Apaches and Comanches 7
in the southeastern portions. 8
Spanish conquistadores encountered this rich dynamic in their discovery of “New Spain” in 1540 and during the beginning of their official colonization of the region in 1598. 9
With the Spanish settlers came their civilian legal system, based on custom and legislation, which included a concept novel to the Americas – the ownership of private property. 10
In order to encourage settlement of her new territory and particularly to secure her borders, Spain offered extensive private (individual) and community land grants in New Mexico. 11
This distinction between individual and community land grants, as well as the civil law reliance on custom, would later be the basis of much confusion, conflict, and, ultimately, litigation, which continues to this day.
A distinctly civilian creature, the community land grant concept transferred large areas of land to settlers to be used in common, with smaller grants within the common lands granted to individuals to be used for their homesteads and for farming purposes. 12
Known as ejidos, the community lands could not be sold, unlike the individual land grants used to elevate the status of the conquistadores. Eventually, the American common law system rejected the concept of communal lands, and those that had not been previously approved were invalidated and transferred to the United States government. 13
Spain made land grants to the Pueblo Indians and instituted legal protections to prevent the Pueblos’ land from being encroached upon or sold, including requiring buffer zones between Pueblo lands and lands granted to European settlers. 14
This treatment was the spiritual predecessor to the United States’ “special relationship” with Native Americans, 15
and mirrors the three main principles that shape American Indian law today: “sovereignty, Federal-to-Tribe relationship, and the Trust Responsibility of the U. S. Government to Indian tribes.” 16
Mexico, who gained her independence from Spain in 1821, continued the Spanish civil law tradition of individual and communal land grants in New Mexico. Instability marked the Mexican period of governance such that it was often unclear who among government officials had authority to make land grants 17
Ultimately, between the late 1600s and 1846, Spain and Mexico made 295 land grants within New Mexico. Roughly 141 were made to individuals, with the remainder made to communities, including twenty-three granted to Indian pueblos. 18
The majority of such grants were located in central and northern New Mexico, with none directly affecting Lea or Eddy Counties in southeastern New Mexico. 19
In response to territorial disputes and the deafening drumbeat of “manifest destiny,” U.S. President James K. Polk declared war on Mexico on May 13, 1846. Brigadier General Stephen Watts Kearney, led by able guide and mythical figure of the West, Kit Carson, embarked for the New Mexico territory soon thereafter. By August 1846, the Governor of New Mexico, Juan Batista Vigil y Alarid, surrendered the New Mexico territory to the United States, 20
and the Treaty of Guadalupe Hidalgo of 1848 brought the war to an end. Mexico ceded approximately fifty-five percent of her territory to the United States, including the later Gadsden Purchase of 1853. 21
The Treaty included a clause that “inviolably respected” and guaranteed the property rights of former Mexican citizens. 22
The implementation of the guarantees of the Treaty of Guadalupe Hidalgo was imperfect at best, and predatory at worst, with the United States passing a series of legislation governing land claims, first adjudicated by the Surveyor General, and authorized by the Act of 1854. 23
The office of the Surveyor General processed over 200 claims under the Act of 1854, with Congress considering 181 grants and ultimately approving less than one-half. 24
Congress halted this process during the Civil War and later suspended it again due to concerns of fraud and corruption. 25
In order to address these concerns, Congress passed the Act of 1891, which established the Court of Private Land Claims (the CPLC). 26
The CPLC included stricter provisions and oversight and allowed appeal of its decisions to the United States Supreme Court. The combined efforts of both courts confirmed eighty-four grants and rejected fifty-five grants. 27
Ultimately, this period in New Mexican history resulted in the transfer of all lands not previously granted by Spain or Mexico and approved by the Surveyor General, the CPLC, or Congress, to the United States of America. All land titles then, other than prior land grants, originate with the federal government.
5 Robert L. Lucero, Jr., State v. Romero: The Legacy of Pueblo Land Grants and the Contours of Jurisdiction in Indian Country, 37 N.M. L. REV. 671, 672-73 (2007).
6 Id.; David Laskin, New Mexico’s Mysterious Anasazi Ruins, N.Y. TIMES, Sept. 22, 1991, http://www.nytimes.com/1991/09/22/travel/new- mexico-s-mysterious-anasazi-ruins.html
7 For a brush-up on your 7th grade Texas history, see S. C. GWYNNE, THE EMPIRE OF THE SUMMER MOON (2014).
8 JOSEPH P. SANCHEZ, ROBERT L. SPUDE, & ARTHUR R. GOMEZ, NEW MEXICO: A HISTORY (2013). The author highly recommends this very accessible book as background for understanding the events that shaped the State.
9 Lucero, Jr., supra note 5, at 673.
10Elaine Patricia Lujan, The Pajarito Land Grant: A Contextual Analysis of its Confirmation by the U. S. Government, 48 N.M. L. REV. 1009, 1010 (2008). For a civil law comparison, see LA. CIV. CODE arts. 1-3, noting that the sources of Louisiana’s civil law are legislation and custom, and that custom “results from a practice repeated for a long time and generally accepted as having acquired the force of law.” For an overview of the history of Spanish civilian law, see Judge William A. Keleher, Law of New Mexico Land Grants, 23 LAW. & BANKER & CENT. L.J. 21 (1930). For an in- depth understanding of Spanish community property law as it affects New Mexico, see RICHARD A. BALLINGER, A TREATISE ON THE PROPERTY RIGHTS OF HUSBAND AND WIFE UNDER THE COMMUNITY OR GANANCIAL SYSTEM (1895) [hereinafter GANANCIAL SYSTEM].
11 Lujan, supra note 10; Robert V. Urias, The Tierra Amarilla Grant, Reies Tijerina, and the Courthouse Raid, 16 CHICANO-LATINO L. REV. 141, 141-42 (1995).
12 U. S. GOV’T ACCOUNTABILITY OFF., GAO-04-59, TREATY OF GUADALUPE HIDALGO: FINDINGS AND POSSIBLE OPTIONS REGARDING LONGSTANDING COMMUNITY LAND GRANT CLAIMS IN NEW MEXICO 3-4 (2004) [hereinafter GAO 2004]; Lujan, supra note 10.
13 See generally Maizie Houghton, The Northern New Mexico Lands of Life and Death, 8 LAW & SOC’Y J. UCSB 55, 57 (2008); U.S. v. Sandoval, 167 U.S. 278 (1897) (which invalidated all communal land grants and awarded such lands to the United States).
14 Lucero Jr., supra note 5, at 675.
15 Oneida County, N.Y. v. Oneida Indian Nation of N.Y. State, 470 U.S. 226, 234 (1985).
16 U.S. FOREST SERV., FOREST SERVICE NATIONAL RESOURCE GUIDE TO AMERICAN INDIANS AND ALASKA NATIVE RELATIONS 34 (Apr. 1997), https://www.fs.fed.us/people/tribal/trib-1.pdf
(citing Worcester v. Georgia, 31 U.S. 515 (1832)). U.S. CONST. art. I, § 8, cl. 3 grants exclusive jurisdiction to Congress “to regulate commerce . . . with the Indian tribes . . . .”
17 GAO 2004, supra note 12, at 19.
18 Id. at 14.
19 Maps of New Mexico Land Grants are maintained by the State Land Office.
See NEW MEXICO STATE LAND OFFICE, https://perma.cc/U7UM-PRM6
(last visited Feb. 20, 2018).
20 See generally HAMPTON SIDES, BLOOD AND THUNDER: AN EPIC TALE OF THE AMERICAN WEST (2006). Other than Brigadier General Kearney, few men have had as dramatic an effect on the history of the State of New Mexico as Kit Carson. Intrepid mountain man, expert guide of the West, and legend in his own time, Carson time and again proved indispensable to Kearney, subsequent Civil War generals, and rescued pioneers. His “total war” campaign against the Navajo Nation secured the State, decimated the “Dine” (the Navajo’s name for themselves; the “people”), and remains a dark stain on his otherwise sterling reputation.
21 Houghton, supra note 13, at 58.
22 See Treaty of Guadalupe Hidalgo, Mex.-U.S., art. VIII, Feb. 2, 1848, 9 Stat. 922:
In the said territories, property of every kind, now belonging to Mexicans not established there, shall be inviolably respected. The present owners, the heirs of these, and all Mexicans who may hereafter acquire said property by contract, shall enjoy with respect to it guaranties equally ample as if the same belonged to citizens of the United States.
The Queretaro Protocol to the Treaty of Guadalupe Hidalgo additionally provided that “all legitimate titles under Mexican law up to May 13, 1846” should be upheld and respected. The Kearney Code, which governed New Mexico during its territorial period from 1847 to the early 1850s, similarly included protections for property previously granted by Spain and Mexico. Applicants could petition the Office of Register of Lands within five years of 1847 to verify land grants made by the two former sovereigns. Subsequent federal legislation preempted the land provisions of the Kearney Code in the 1850s. GAO 2004, supra note 12, at 26; see generally SIDES, supra note 20.
23 GAO 2004, supra note 12, at 54; the Act of 1854 evaluated claims based on the “laws, usages, and customs” of Spain and Mexico.
24 Id.
25 A contemporary complaint regarding clouded land titles groused that “New Mexico show[ed a] disease from which this rich territory is suffering . . . spotted all over with Spanish and Mexican land grants more or less fraudulent…” and blamed, among others, the Santa Fe Land Ring. William S. Brackett, Land Grants in New Mexico, 1 CHI. L. TIMES 323, 324 (1887). For a lively and detailed depiction of the Santa Fe Land Ring, see DAVID L. CAFFREY, CHASING THE SANTA FE LAND RING: POWER AND PRIVILEGE IN TERRITORIAL NEW MEXICO (2014). For an in-depth examination of the mechanisms of fraud and corruption employed by land speculators during this time period, see David Correia, Land Grant Speculation in New Mexico During the Territorial Period, 48 NAT. RESOURCES J. 927 (2008).
26 GAO 2004, supra note 12, at 77.
27 Id. at 52, 77; The new standard judged claims on whether they were “lawfully and regularly” derived under Spanish or Mexican law, a much stricter standard than the “laws, usages, and customs” standard employed by the Act of 1854.
II. The Ferguson Act of 1898 and The Enabling Act of 1910 / Statehood
New Mexico moved from a territory to statehood at the dawn of the 20th century, thanks in large part to the efforts of Harvey B. Fergusson. 28
A Virginia native and attorney, Fergusson’s West Virginia law firm sent him to White Oak, New Mexico in lawless Lincoln County during the time when fugitives such as William H. Bonney (“El Chivato” also known as Billy the Kid) frequented the local saloons. There, Fergusson started his own practice and successfully defended his clients’ claim to the Homestake mine, making a name for himself as a skilled attorney. 29
Fergusson later moved to Albuquerque and became involved in Democratic politics, serving one term as New Mexico’s territorial delegate to the U.S. Congress, among numerous other public service positions. 30
In Congress, Fergusson used powerful and persuasive rhetoric to advocate for the progressive causes of his day. The Ferguson Act of 1898 stands as a historic result of his advocacy. 31
The Ferguson Act of 1898 allotted huge swaths of territory to New Mexico to be put in trust to support a public-school system, universities, and hospitals. 32
The resulting transfer of Sections 16 and 36 in each Township and Range, among numerous other lands, enriched the State’s public institutions in perpetuity.
With the stroke of a pen and a rather pithy remark, President William Howard Taft signed legislation on January 6, 1912 that admitted New Mexico as the forty-seventh State of the Union. 33
This final chapter in the march to statehood, however, began almost two years earlier when President Taft signed the Enabling Act of 1910. 34
The Enabling Act of 1910 required New Mexico to elect delegates and hold a constitutional convention. After adoption of the Constitution of the United States, the delegates were then free to adopt a New Mexico State Constitution “under the conditions contained in [the] Act,” 35
which were “uncharacteristically lengthy management requirements by comparison to preceding enabling acts.” 36
These management requirements 37
continue to be refined and litigated to the present day. 38
The Enabling Act significantly enlarged the Ferguson Act by transferring Section 2 and Section 32 in every Township and Range in New Mexico as well as additional specific land grants to be held in trust for the benefit of various public institutions, such as public buildings, penal institutions, and insane asylums, among others. 39
Where such sections or specific grants were unavailable due to previous land grants, Indian lands, or the reservation of mineral or “saline” lands, the State chose “lieu” lands in place of the previously patented lands to supplement the grant. A significant portion of these “lieu” lands is located in the Permian Basin of Lea and Eddy Counties, while the “saline” reservation constitutes some of the richest potash deposits in the world in Lea County. 40
President Taft’s signature effectively transferred over thirteen million acres of land to the newly-formed State of New Mexico to be held in trust for the benefit of various public schools and other institutions, including Sections 2, 16, 32, and 36 in each Township and Range. The Commissioner of Public Lands currently manages all such lands “subject to the restrictions imposed by the Enabling Act, the [New Mexico State] Constitution and the statutes, and the manner of its exercise is subject to review by the courts.” 41
28 For a rich and detailed history of the Fergusson clan, including H.B., Sr., and H.B., Jr. (who became a celebrated author), see ROBERT GISH, FRONTIER’S END: THE LIFE AND LITERATURE OF HARVEY FERGUSSON, ch. 3 (1988).
29 Discovered by an outlaw, the North Homestake claim was later sold for a horse, $40, and a bottle of whiskey to “Uncle Jack” Winters; the claim eventually produced over half a million dollars in gold. “Uncle Jack’s” heirs were Fergusson’s clients, whom he most famously defended in Brunswick v. Winters’ Heirs, 3 N.M. 386 (N.M. 1885). The facts of the case will be interesting to anyone who’s negotiated a Joint Operating Agreement. Gish, supra note 28. Fergusson later made a significant fortune when the previous owners of the Old Abe mine forfeited their rights as they failed to pay sufficient attention to the details of mining claim law. A savvy attorney, Fergusson perfected title to the claim in himself and two partners. Gold production from the Old Abe significantly dwarfed that of the North Homestake. Id.
30 OFF. OF THE N.M. SECRETARY OF STATE, NEW MEXICO BLUE BOOK: 2012 CENTENNIAL EDITION 12 (Kathryn A. Flynn, ed., 2011-2012).
31 Ferguson Act, Ch. 489, 30 Stat. 484 (1898), https://perma.cc/6M43-KVMN.
32 See Gabe Long, When Is a Rock a Rock – New Mexico’s Abandonment of Property Rules in Mineral Conveyancing, 45 N.M. L. REV. 343, 349 (2014). A list of State Trust beneficiaries can be found on the New Mexico State Land Office website. Trust Beneficiaries, NEW MEXICO STATE LAND OFFICE, https://perma.cc/65ZH-6GQS
(last visited Feb. 22, 2018).
33 “Well, it’s all over. I’m glad to give you life. I hope you will be healthy.” – President Taft. Such remarks underscored New Mexico’s near sixty- year struggle to be admitted to the Union. Her path to statehood marched through prejudice against her Spanish and Catholic heritage, the firestorm of pro- and anti-slavery controversies and compromises, the resulting Civil War, numerous Indian wars and conflicts, and generally, the curse of perceived geographical obscurity. In contrast, consider California’s admission as the thirty-first State of the Union in 1850 immediately following her acquisition from Mexico in the Mexican-American War. See generally DAVID V. HOLTBY, 47TH STAR: NEW MEXICO’S STRUGGLE FOR STATEHOOD (2012).
34 New Mexico-Arizona Enabling Act of 1910, Ch. 310, 36 Stat. 557 (1910).
35 Id.; adopted by N.M. Const. art XXI, §9 (“This state and its people consent to all and singular the provisions of the said act of congress, approved June twentieth, nineteen hundred and ten, concerning the lands of said act granted or confirmed to this state, the terms and conditions upon which said grants and confirmations were made and the means and manner of enforcing such terms and conditions, all in every respect and particular as in said act provided.”).
36 See Erin Pounds, State Trust Lands: Static Management and Shifting Values Perspectives, 41 LEWIS & CLARK ENVTL. L. REV. 1333, 1335 (2011).
37 For example, Section 10 of the Enabling Act prevents state lands from being mortgaged or encumbered in any way, details the strict conditions under which state lands may be sold, and nullifies any sale of state lands not in accordance with the Act, as well as providing numerous other management requirements. New Mexico-Arizona Enabling Act, § 10.
38 See State ex rel. King v. Lyons, 248 P.3d 878 (N.M. 2011); the court relied on a strict interpretation of the Enabling Act and the State’s Constitution to disallow the Commissioner’s exchange of public trust lands for private lands.
39 New Mexico-Arizona Enabling Act, 36 Stat. 557.
40 For an overview of the Designated Potash Area, see Thomas C. Turner, Jr., Potash in the Permian Basin of New Mexico, TAKEOFF (Permian Basin Landmen’s Association, T ex.), Oct. 2016, at 5.
41 King, 248 P.3d at 882.
III. Fee lands, the Mineral Estate, and the Oil and Gas Lease
After drilling a dry hole and an uneconomic gas well, Martin Yates, Jr. 42
allowed his wife, Mary, to select his next drill site. The resulting Flynn-Welch-Yates No. 3 (alternatively, the Illinois State #3) proved to be economic, launching the illustrious career of the “Father” of the New Mexico Oil business. 43
Before his death in 1949, Yates helped discover enormous Potash deposits in southeastern New Mexico, built pipelines and refineries, and discovered numerous prolific fields. 44
His legacy continues through his family to this day, as evidenced by EOG Resources’ recent $2.5 billion acquisition of Yates Petroleum. 45
It is an understatement to say that Yates merely “contributed” to the development of oil and gas jurisprudence in New Mexico, as discussed below.
As previously detailed, title to lands in New Mexico originate from the United States, the State of New Mexico, or from approved Spanish or Mexican land grants. Land patents issued by the United States or the State of New Mexico convey all of the oil, gas, and other minerals to private landowners unless they include specific reservations.
New Mexico follows the ownership-in- place theory of mineral ownership. Minerals may be severed from the surface by grant or reservation to constitute a separate estate. 46
The separate mineral estate includes the right to receive royalty, bonus, and delay rentals, the executive right, and the right of ingress and egress to explore for and produce the minerals. 47
A mineral interest may be “stripped” of one or more of its attributes by grant or reservation. 48
Severed mineral or royalty interests are considered real property 49
and are thus devisable, heritable, and subject to the laws of community property.
The ownership-in-place theory results in the application of all real property concepts to the severed oil and gas estate. This includes the statute of frauds, 50
which requires written and signed instruments evidencing the conveyance of real property interests, as well as an implied easement of necessity to use the surface of another’s property to develop the oil and gas estate. In New Mexico, such an implied easement is subject to the Surface Owner’s Protection Act (SOPA), 51
discussed below. Additionally, civil actions such as quiet title actions, 52
partition, 53
and adverse possession, 54
among others, are applicable to the severed oil and gas estate. Finally, the severed interests are subject to taxation by the State, including severance taxes on oil and gas and ad valorem taxes on production equipment, among others. 55
The owner of the executive right may grant an oil and gas lease, 56
with such lease also being an interest in real property. 57
A lease conveys a fee simple determinable, 58
the term of which is outlined in the habendum clause, 59
usually consisting of a set primary term (three years) and a secondary term (for so long thereafter), the maintenance of which is dependent on production in paying quantities. 60
The lack of production in paying quantities automatically terminates the lease at the end of the primary term or during the secondary term, unless various savings clauses are invoked, including continuous operations, payment of delay rentals, or shut-in gas royalties. Failure to timely pay delay rentals during the primary term or shut- in gas royalties during the secondary term will automatically terminate the lease. 61
The statute requires lessees to execute a release of a forfeited oil and gas lease within thirty days of its expiration 62
or be subject to a $100 penalty and payment of the lessor’s reasonable attorney’s fees. 63
A typical habendum clause will also allow extension of the lease so long as operations are being conducted. In New Mexico, a “party may prove that it has actually commenced drilling operations with evidence that it committed resources, whether on-site or off- site, that demonstrate its present good-faith intent to diligently carry on drilling activities until completion. 64
This permissive standard considers back room operations such as execution of a drilling contract, as well as on site activities to constitute commencement as a matter of law, provided they are carried on with the good-faith intention to complete the well. This is confirmation and clarification of the prior standard, which considered almost any action to constitute commencement. 65
The execution of an oil and gas lease transfers all of the mineral estate to the lessee, while the lessor retains a portion of the royalty estate and the possibility of reverter (fee simple determinable). 66
As a result, the lessee obtains the implied easement of necessity attendant to the mineral estate and may use “so much of the surface area as is reasonably necessary for…drilling and production operations.” 67
The lessee’s use is limited by SOPA, 68
however, which grants certain rights to private fee landowners as well as surface tenants whose leasehold improvements could be damaged by oil and gas operations.
Under SOPA, notice must be given by either certified mail or in person five days prior to commencement of surface activities, including staking and surveying, and thirty days prior to drilling operations. Most importantly, SOPA provides for treble damages in the event clear and convincing evidence demonstrates that an operator willfully entered on the premises to drill without giving the required notice.
Once production is obtained, royalty payments are governed by the Oil and Gas Proceeds Payments Act, 69
which requires payments be made no later than six months after the first day of the month following the date of first sale, and thereafter not later than forty-five days after the end of the calendar month within which payment is received by the payor for production. The Proceeds Act allows for interest to be paid on unpaid or suspended royalties, and provides for a penalty in certain circumstances. Despite language contained in a division order to the contrary, a lessor cannot contract away her right to receive interest payments on unpaid royalties as a matter of public policy. 70
It is common for operators to pool two or more oil and gas leases covering fee lands into spacing 71
or production units. 72
“Communitization” is the term used for pooling fee, state, 73
and/or federal 74
leases into a spacing or production unit. The intricacies of federal and state leases are discussed in subsequent sections of this paper. Pooling agreements should be recorded in the local county records. 75
Where an oil and gas lease does not include a pooling clause, an operator must obtain ratification of the pooled unit from the lessor or pursue a forced pooling order from the New Mexico Oil Conservation Commission. 76
Under the statute, forced pooled mineral owners receive a one-eighths royalty interest and a seven-eighths working interest, with production and costs allocated on a surface acreage basis. 77
In the event a co-tenant refuses to pay his share of reasonable costs attributable to the drilling and completion of a well, an operator may reimburse itself out of the non-consenting co- tenant’s share of production for such costs, plus a risk penalty not to exceed 200 percent. 78
Non-participating royalty interest (“NPRI”) owners and overriding royalty interest (“ORI”) owners must also ratify pooled units. NPRI and ORI are likewise subject to forced pooling. 79
Unitization should not be confused with pooling and communitization. While the latter combine two or more leases to create spacing or production units, unitization is the combination of “an entire field [or pool] to be operated as a single entity.” 80
Developed to maximize efficiency and economic returns, prevent waste, and protect correlative rights, 81
the original unitization scheme was “patterned after similar [water] irrigation systems in the parched American West.” 82
The State of New Mexico has enacted the Statutory Unitization Act (SUA), 83
which applies to “any type of operation that will substantially increase the recovery of oil…[but]…not to what the industry understands as exploration units.” 84
Unitization for exploration, then, is not common on fee lands. Such practice however, is common on state 85
and federal lands. 86
New Mexico gauges a lessee’s conduct by the reasonably prudent operator standard 87
and recognizes several implied covenants. Such covenants include the implied covenant to develop, 88
the implied covenant to prevent drainage, which must be shown by proof of substantial damage, 89
and the implied covenant to market production. 90
Implied covenants are superseded by the express terms of a lease 99
and can only be invoked in the absence of such express terms.
As a general rule, New Mexico courts will interpret an oil and gas lease against the lessee. 92
New Mexico has rejected the plain- meaning or four corners rule of contract interpretation 93
and instead employs a contextual approach. 94
Even when the terms of an oil and gas lease or deed are unambiguous, a New Mexico court may consider circumstantial evidence to deduce the intent of the parties. 95
The question of ambiguity is a matter of law to be decided by the trial court. 96
In regard to mineral conveyances, New Mexico has adopted the Duhig rule. 97
This contextual approach equally applies to land descriptions. 98
To be legally sufficient, a land description must contain within itself the means by which the land can be located on the ground. 909
Specific references to other instruments such as deeds and plats that contain legally sufficient descriptions will satisfy the statute of frauds. 100
Finally, no discussion of oil and gas in New Mexico would be complete without mention of the New Mexico Oil Conservation Division (NMOCD). The NMOCD of the Energy, Minerals, and Natural Resources Department (EMNRD) is the primary regulator of oil and gas exploration and production in the State. The NMOCD enforces the New Mexico Oil and Gas Act, 101
enacted in 1935, as expanded by Chapter 19, Section 15 of the New Mexico Administrative Code. The NMOCD, as well as the New Mexico Oil Conservation Commission (NMOCC), are empowered with concurrent jurisdiction to protect correlative rights and prevent waste, and are granted broad authority to that end. 102
The NMSA defines waste to include the production of oil and gas in excess of market demand, as well as operations for production of oil and gas that would reduce the total commercial quantities of recoverable potash. 103
To this end, the NMOCD regulates spacing,1 104
special pool rules, proration and allowables,1 105
drilling permits, 106
pooling, 107
forced pooling, 108
and all other facets of oil and gas development and production in the State. 109
42 For the full story, see SAMUEL D. MYRES, PERMIAN BASIN – PETROLEUM EMPIRE OF THE SOUTHWEST: ERA OF DISCOVERY 294 (1973); ERA OF DISCOVERY as well as ERA OF ADVANCEMENT include meticulously researched, fascinating accounts of the discovery and development of the major fields of the Permian Basin. SAMUEL D. MYRES, PERMIAN BASIN – PETROLEUM EMPIRE OF THE SOUTHWEST: ERA OF ADVANCEMENT, FROM THE DEPRESSION TO PRESENT (1977). The two volumes provide the most complete history of Southeastern New Mexico the author has encountered and include the genesis stories of several Permian dynasties, the family names of which will be most familiar to those who grew up in the Permian Basin. Additionally of interest is SAMUEL D. MYRES, EDUCATION OF A WEST TEXAN (1985), which recounts the research and writing of ERA OF DISCOVERY and ERA OF ADVANCEMENT, a monumental project conceived by George Abell, a legendary Midland oilman, and funded by the Abell-Hanger Foundation of Midland, Texas.
43 ERA OF DISCOVERY, supra note 43.
44 Martin Yates, Jr., PERMIAN BASIN PETROLEUM MUSEUM, https://perma.cc/BZ3J-WNMJ (last visited Feb. 22, 2018).
45 Ellen Marks, Yates Petroleum of Artesia Sold to Houston Company for $2.5 Billion, ALBUQUERQUE JOURNAL (Sept. 7, 2016), https://perma.cc/AB9J-GTCK.
46 Kaye v. Cooper Grocery Co., 312 P.2d 798, 802 (N.M. 1957).
47 HNG Fossil Fuels Co. v. Roach, 656 P.2d 879, 882 (N.M. 1982); Duvall v. Stone, 213 P.2d 212, 216 (N.M. 1949).
48 HNG Fossil Fuels Co., 656 P.2d at 882.
49 Duvall, 213 P.2d at 215.
50 Childers v. Talbott, 16 P. 275, 276 (N.M. 1888) (adopts English Statute of Frauds in New Mexico); for a discussion, see Beaver v. Brumlow, 231 P.3d 628 (N.M. 2010).
51 Surface Owners Protection Act, N.M. STAT. ANN. § 70-12-1, et seq. (2007).
52 N.M. STAT. ANN. § 42-6-1 (1953).
53 N.M. STAT. ANN. § 42-5-1 (1953).
54 See N.M. STAT. ANN. § 37-1-22 (1973), which allows for the acquisition of title by adverse possession as defined therein and bars an action to recover title not filed within ten years.
55 See Oil and Gas Severance Tax, N.M. STAT. ANN. § 7-29-1, et seq. (1985); Oil and Gas Ad Valorem Production Tax, N.M. STAT. ANN. § 7-32- 1, et seq. (1985); Oil and Gas Emergency School Tax, N.M. STAT. ANN. § 7-31-1, et seq. (1985); Oil and Gas Production Equipment Ad Valorem Tax, N.M. STAT. ANN. § 7-34-1, et seq. (1985); Natural Gas Processor Tax, N.M. STAT. ANN. § 7-33-1, et seq. (1985); and Oil and Gas Conservation Tax, N.M. STAT. ANN. § 7-30-1, et seq. (1985). For everything you ever wanted to know about oil and gas taxation in New Mexico, see THOMAS CLIFFORD, OVERVIEW OF NEW MEXICO TAXES ON OIL AND GAS PRODUCTION, https://perma.cc/5KZ4- L5E6 (last visited Feb. 23, 2018).
56 In driving through Roswell, one can see the Hall-Poorbaugh Press Alien Mural that depicts aliens disseminating literature via paper form. More interesting to the oil and gas practitioner is the Hall-Poorbaugh Press lease form, which for years was the standard of the oil and gas lease in Southeastern New Mexico, akin to the Producer’s 88 in Texas; Alien Print Shop Mural, ROADSIDE AMERICA, https://perma.cc/GD58-ESRC (last visited Feb. 23, 2018).
57 Duvall, 213 P.2d at 215; Heath v. Gray, 274 P .2d 620, 622 (N.M. 1954). Similarly, an overriding royalty carved from a leasehold is an interest in real property; Christy v. Petrol Res. Corp., 691 P.2d 59 (N.M. Ct. App. 1984).
58 A fee simple determinable is an estate in land that automatically terminates upon the occurrence of a specified event. Until such occurrence, the grantor retains the possibility of reverter. The grantor of a fee simple determinable in a typical oil and gas lease additionally retains the lessor’s royalty. The habendum (granting) clause in an oil and gas lease determines the duration of the fee simple determinable, which can be indefinite. For example: “for a term of three years, and for so long thereafter as oil or gas is produced….”
59 Maralex Res., Inc. v. Gilbreath, 76 P.3d 626, 630 (N.M. 2003); Bolack v. Hedges, 240 P.2d 844 (N.M. 1952).
60 Greer v. Salmon, 479 P.2d 294, 295-96 (N.M. 1970); commercial quantities is analogous to “production in paying quantities” as per Maralex Res., Inc., 76 P.3d at 630. Town of Tome Land Grant v. Ringle Dev. Co., 240 P.2d 850 (N.M. 1952) (concluding the mere discovery of oil and gas cannot extend a lease).
61 As to shut-in payments, see Greer, 479 P.2d 294; as to delay rentals, see HNG Fossil Fuels Co., 656 P.2d 879.
62 N.M. STAT. ANN. § 70-1-3 (1953).
63 Id. § 70-1-4.
64 Enduro Operating, LLC v. Echo Prod., Inc., 2018 WL 897360 (NM S. Ct.); “(1) actual drilling is conclusive proof, but is not necessary, (2) obtaining a permit is not essential, (3) activities such as leveling the well location, digging a slush pit, or other good-faith commitment of resources at the drilling site will suffice as evidence of the parties’ present intent to diligently carry on drilling activities until completion, and (4) the off-site commitment of resources, such as entering into an enforceable drilling contract requiring the diligent completion of the well, will also suffice as evidence that the operator actually commenced drilling operations.”
65 See Johnson v. Yates Petroleum Corp., 981 P .2d 288 (N.M. Ct. App. 1999).
66 See Bolack, 240 P.2d 844.
67 Amoco Prod. Co. v. Carter Farms, 703 P.2d 894, 896 (N.M. 1985) [hereinafter Carter Farms]; Kysar v. Amoco Prod. Co., 93 P.3d 1272, 1278 (N.M. 2004) (noting New Mexico case law on production in paying quantities is consistent with the principles announced in Carter Farms, 703 P.2d 894).
68 N.M. STAT. ANN. § 70-12-1, et seq. (2007).
69 N.M. STAT. ANN. § 70-10-1, et seq. (1985).
70 First Baptist Church of Roswell v. Yates Petroleum Corp., 345 P.3d 310 (N.M. 2015); for a thorough review of the case, see Thomas C. Turner, Jr., NM: Strong Public Policy Favors Payment of Interest on Suspended Royalties, BUCKLEY & TURNER (July 27, 2016), https://perma.cc/7M6R-YZ8B.
71 See N.M. ADMIN. CODE § 19.15.15.1, et seq. (2008), for spacing requirements.
72 N.M. STAT. ANN. § 70-2-17 (1977). Spacing and production units were first developed in New Mexico as a mechanism to protect grazing rights of cattle ranchers who leased lands from the state in Lea and Eddy Counties. They were most successfully employed during the early days of the Hobbs field, and the longevity of the field can be credited to the original 40-acre spacing units; see ERA OF DISCOVERY, supra note 46, at 536.
73 N.M. STAT. ANN. § 19-10-53 (1955).
74 See 30 U.S.C. § 226(m) (2014).
75 Owens v. Superior Oil Co., 730 P.2d 569 (N.M. 1986).
76 N.M. STAT. ANN. § 70-2-17(C) (1977); N.M. ADMIN. CODE § 19.15.13.8 (2008).
77 Id.
78 Id.
79 N.M. STAT. ANN. § 70-2-17(C) (1977).
80 PATRICK H. MARTIN & BRUCE M. KRAMER, WILLIAMS & MEYERS, OIL AND GAS LAW § 901 (3d ed., 2007); Kysar, 93 P.3d at 1277 (includes detailed discussion on differences between pooling, communitization, and unitization).
81 See ROBERT MCNALLY, CRUDE VOLATILITY: THE HISTORY AND THE FUTURE OF BOOM-BUST OIL PRICES (2017).
82 Id. at 54. For a better historical understanding of the development of unitization, see Norman Nordhauser, Origins of Federal Oil Regulation in the 1920’s, 47 BUS. HIST. REV. 53 (1973).
83 See N.M. STAT. ANN. § 70-7-1, et seq. (1975).
84 Id. § 70-7-1.
85 See NEW MEXICO STATE LAND OFFICE, OIL AND GAS MANUAL 203 (July 2014), https://perma.cc/79T6-L6PK Gas_Manual_MASTER_WORD_version_May_2 016.doc.pdf.
86 See 43 C.F.R. § 3181.1, et seq. (1998).
87 Libby v. De Baca, 179 P.2d 263 (N.M. 1947).
88 State ex rel. Shell Petroleum Corp. v. Worden, 103 P.2d 124, 126 (N.M. 1940) (“after production of oil and gas in paying quantities is obtained, [a lessee] will thereafter continue the work of development for production of oil and gas with reasonable diligence as to the undeveloped portion of the leased land”).
89 Cone v. Amoco Prod. Co., 532 P.2d 590 (N.M. 1975).
90 Libby, 179 P.2d 263 (applying the reasonably prudent operator standard to lessee’s conduct and imposing the implied covenant to market).
91 Continental Potash, Inc. v. Freeport-McMoran, Inc., 858 P.2d 66 (N.M. 1993); State ex. rel. Shell Petroleum Corp, 103 P.2d 124.
92 See Greer, 479 P.2d 294.
93 C.R. Anthony Co. v. Loretto Mall Partners, 817 P.2d 238, 243 (N.M. 1991) (as per the four- corners doctrine, “New Mexico case law to the contrary is hereby overruled.”); Mark V, Inc. v. Mellekas, 845 P.2d 1232 (N.M. 1993); Jaramillo v. Providence Wash. Ins. Co., 871 P.2d 1343 (N.M.1993).
94 See C.R. Anthony Co., 817 P.2d 238.
95 Id.; see Mark V, Inc., 845 P.2d at 1235.
96 C.R. Anthony Co., 817 P.2d 238; Mark V, Inc., 845 P.2d 1232.
97 PATRICK H. MARTIN & BRUCE M. KRAMER, WILLIAMS & MEYERS, OIL AND GAS LAW 301 (6th ed., 2016):
[This] construction rule is based on the case of Duhig v. Peavy-Moore Lumber Co., 135 Tex. 503, 144, S.W.2d 878 (1940), relating to reservations in deeds purporting to cover 100% interest in the premises. Under this rule the grantor is said to be estopped to deny the effectiveness of the instrument to convey the interest recited in the instrument’s granting clause.
See also Atlantic Refining Co. v. Beach, 436 P.2d 107 (N.M. 1968).
98 See Hughes v. Meem, 371 P.2d 235, 238 (N.M. 1962):
[I]t may be laid down as a broad general principle that a deed will not be declared void for uncertainty in description if it is possible by any reasonable rules of construction to ascertain from the description, aided by extrinsic evidence, what property is intended to be conveyed. It is sufficient if the description in the deed or conveyance furnishes a means of identification of the land or by which the property conveyed can be located.
99 Id.
100 Id.
101 N.M. STAT. ANN. § 70-2-1, et seq. (1989); N.M. ADMIN. CODE § 19.15.2, et seq. (2008).
102 N.M. STAT. ANN. § 70-2-11(a)-(b) (1977); § 70- 2-6 (1979).
103 N.M. STAT. ANN. § 70-2-3 (1965).
104 N.M. ADMIN. CODE § 19.15.15 (2008).
105 Id. § 19.15.20; N.M. STAT. ANN. § 70-2-17 (1977).
106 N.M. ADMIN. CODE § 19.15.14 (2008); N.M. STAT. ANN. § 70-2-6 (1979).
107 N.M. ADMIN. CODE § 19.15.12 (2008); N.M. STAT. ANN. § 70-2-17 (1977).
108 N.M. ADMIN. CODE § 19.15.13 (2008); N.M. STAT. ANN. § 70-2-17 (1977).
109 Index to Rules, NEW MEXICO ENERGY, MINERALS AND NATURAL RESOURCES DEPARTMENT, HTTPS://PERMA.CC/9B2C-XN78 (last visited Feb. 23, 2018) (a helpful Index of the rules of the NMOCD).
The Permian Basin in West Texas and New Mexico has rapidly become the largest source of new oil reserves in the United States. Drilling activity in the region is dominated by hydraulic fracturing, or frac’ing, which enables operators to access previously unreachable hydrocarbon resources located in tight shale rock formations. The tremendous upsurge in oil and gas drilling in the Permian has created challenges for operators in the region due to the difficulties they can face acquiring sufficient supplies of water for drilling and in managing the “produced water” generated by the drilling process. Frac’ing involves injecting large amounts of water, along with proppants such as sand and some chemical additives, into shale rock formations, opening up fractures to release the trapped oil and gas found there. A single frac’d well, on average, can use from 500,000 to 700,000 barrels of water – equal to more than 21 million gallons. As production continues to expand in the Basin, operators tend to use larger drilling pads to serve multiple wells, as well as extend lateral lengths to improve well yields. These tactics increase the demand for supplying, transferring, storing, and maintaining water at the location of each pad.
Hydraulic fracturing, commonly called frac’ing, is a completion technique in oil and gas operations that uses a high-pressure mixture of water, sand and chemical additives to unlock hydrocarbon resources such as oil and gas. The frac’ing process is mainly used in shale formations, where tight underground rock structures make traditional methods of producing oil and gas uneconomic. Frac’ing can be defined as a well stimulation process designed to maximize underground resource extraction. The process typically includes drilling a particular formation, casing the formation, completion or stimulating the well using water from the surface, producing the well, and disposing of waste from its operation. It is commonly used in conjunction with horizontal drilling to reach energy deposits that could not be accessed via traditional vertical drilling methods.
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