January 23, 2017
The Texas Legislature is officially in business. After its first week of swearing in of lawmakers, the unanimous election of Speaker Joe Straus to his fifth term, standard housekeeping resolutions, and a long holiday weekend, it’s off to the races for the 85th Texas Legislative Session.
The majority of media and public attention this year will be highly focused on efforts to balance the state’s budget, address border issues, public education and healthcare. Issues such as the franchise tax and the Railroad Commission’s sunset review – while maybe not headline grabbing – are still vitally important to the health of an industry that has been a long-term driver of the state’s economy. As in any session of the Texas Legislature, hundreds of bills with potential impacts on the oil and gas industry will be filed. The great majority of these bills will never receive a hearing nor come to a vote, but a handful will require serious analysis and engagement from the industry.
Since comptroller Glenn Hagar’s projection that the state will have about $104 billion in state funds to craft the next budget, we should expect much debate over the means of balancing the budget for the next biennium. Despite an additional $11 billion in the Rainy Day Fund, there are real challenges posed by lower than anticipated economic activity and tax receipts in recent years. The legislature will be challenged to close a multi-billion dollar budget gap which will occupy a great deal of their time and attention.
Lt. Governor Dan Patrick has laid out a set of priorities for the session that focus heavily on social issues. These, along with the budget exercise, will likely take many energy-related matters out of the headlines. However, a lack of media attention should not be taken as indication that the industry will face a lack of important issues during the session. To the contrary, several key items have already been teed up, and others will inevitably arise over the session’s 140 days. What is certain is that the 2017 session will be fast paced and require both vigilance and timely, effective engagement by oil and natural gas companies active in the Lone Star State.
Every state Commission in Texas must be reauthorized every 12 years through the state’s sunset review process. The Texas Railroad Commission, responsible for regulating the state’s oil and gas industry, was originally set to be renewed during the 2011 legislative session. Due to several controversial provisions in the sunset review bill, the House and Senate were unable to agree on a compromise, and chose instead to punt the matter to the 2013 session. Controversies arose again during 2013, and the legislature chose to delay the matter again, this time for four years rather than two.
This is undoubtedly the industry’s top priority this session. To avoid issues in sessions past, we expect members to move a clean bill to reauthorize the RRC for another 12-year term. Nevertheless, issues of controversy, such as changing the commission’s name or moving contested case hearings to another agency could appear in stand-alone bills. If a proposal to move contested case hearings sees the light of day, the industry will need to effectively communicate why the Railroad Commission – name change or not – is the agency most qualified to regulate the highly complex and technical nature of oil and natural gas production.
We expect to see renewed debate on the issue of eminent domain reform which was hotly debated during the 2015 session without resolution. Property rights groups are likely to propose reforms that address compensation during the condemnation process and increase protections for landowners in negotiations with pipeline companies, electric utilities, and other entities with this power. Companies and public agencies will work to ensure that reform doesn’t unreasonably impede the ability to build pipelines and other critical infrastructure.
In 2015, the legislature passed a 25 percent reduction in the franchise tax rate paid by businesses. Property tax reform is back again as one of Lt. Governor Patrick’s priorities this session. As he has stated, “Texans pay the sixth highest property taxes in the nation and the high rates are taxing people out of their homes and hampering business growth. This must change.” However, as legislators weigh providing tax relief for residential homes and small businesses, the tax burden to offset this relief could be shifted to larger companies.
The High Cost Gas exemption program allows companies that drill natural gas wells into shale, tight sands and other formations certified as “high cost” by the Railroad Commission to recover some of their intangible drilling costs via a temporarily reduced severance tax rate. In recent years, some operators have made filings to change wells originally classified as oil wells to natural gas wells as the ratio of oil to natural gas produced from the wells has changed over time. The comptroller’s office has expressed concern about this practice and some members of the legislature plan to hold hearings about the issue. It will be important for the industry to communicate the importance of this exemption, especially to smaller operators.
During the 2015 session, oil and natural gas trade associations and the Texas Municipal League (TML) reached agreement on HB 40, a bill that clarified the rights of municipalities to regulate surface issues related to oil and natural gas development, while reserving the statutory authority to regulate downhole issues to the state government. Several municipal governments, including the cities of Denton and Edinburg, have indicated they will file challenges to this statute during the 2017 session. We can also expect efforts to challenge HB 40 from anti-oil and gas activist groups. Nevertheless, the industry should continue to communicate how it operates safely and responsibly and how a decentralized approach to regulating oil and gas production not only threatens safety standards but could do real harm to the Texas economy.
We expect to see legislation related to both disposal well pressurization and the jurisdiction of groundwater conservation districts (GCDs). The GCDs engaged in efforts to expand their jurisdiction over permitting and regulation of oilfield activities in the last several legislative sessions, and will most likely attempt to do so again 2017.
With a number of seismic events in Texas linked to over-pressurization of some wastewater disposal wells, the legislature is likely to at least hold hearings on the matter.
Recent concerns regarding the City of Corpus Christi’s public water supply, with allegations that leaks from a local industrial site may have been introduced to the system, will most likely generate committee hearings, and could result in increased regulation. Industry engagement is critical on all of these fronts to ensure that consistent, sound, science-based regulation continues to prevail in the often politically charged debates over water.