SECTION 3.34. Gas To Be Produced and Purchased Ratably

(a) Definitions. The following words and terms, when used in this section and in §3.31 of this title (relating to Gas Reservoirs and Gas Well Allowable) (Statewide Rule 31) shall have the following meanings, unless the context clearly indicates otherwise.

(1) Affiliate--A person or entity that owns, is owned by, or is under common ownership with another person or entity to the extent of 50% or more or that otherwise controls or is controlled by another person or entity. Affiliates of a common entity are also affiliates of each other. A person or entity that purchases gas solely for purposes other than resale shall not be considered an affiliate, and an interstate pipeline, as defined in the Natural Gas Policy Act of 1978, §2(15) (15 United States Code §3301 et seq.), shall not be considered an affiliate of an intrastate pipeline.

(2) Commission designee--A Railroad Commission employee authorized to act for the commission. Any authority given to a commission designee is also retained by the commission. Any action taken by the commission designee is subject to review by the commission.

(3) Downstream purchaser--One that purchases natural gas for resale and is not a first purchaser.

(4) First purchaser or initial purchaser--The first purchaser of natural gas produced from a well. A first purchaser and any affiliate of the purchaser that transports any natural gas it purchases from a well by use of the same pipeline system used by the first purchaser of which it is an affiliate shall be treated as a single first purchaser for purposes of ratability requirements; provided, however, that an affiliate that is purchasing and accepting deliveries pursuant to a special marketing program that is in compliance with this section, shall be treated as a separate first purchaser; and, provided further that the designation of such affiliate as a separate first purchaser is reviewable by the commission and may be disallowed upon a showing that the designation was for purposes of circumventing this section. Any affiliate may file forms in its own name.

(5) Pipeline system--A network of physically connected pipelines that are operated as a single unit under normal conditions.

(A) A first purchaser's pipeline system is that portion of a physical segment of a pipeline that the first purchaser owns.

(B) If a first purchaser does not own the pipeline it uses to transport its gas, the first purchaser's pipeline system shall include all the wells from which it purchases that are on the pipeline system of the transport pipeline.

(C) A first purchaser may not segregate its purchases from any one field into two or more pipeline systems by transporting on another pipeline gas that it purchases as a first purchaser if the first purchaser is also purchasing as a first purchaser from the same field and transporting on a pipeline that it owns.

(D) A first purchaser may not segregate its purchases from any one field into two or more pipeline systems by executing gas exchange agreements.

(E) Any of a first purchaser's pipeline systems which serve a common customer or common customers in a common geographic location shall be operated in a manner to avoid unjust or unreasonable discrimination in takes as between those systems.

(F) A first purchaser shall not segregate its physically connected pipelines that are capable of being operated as a single unit under normal conditions into two or more pipeline systems or designate a gathering system as a separate system for purposes of circumventing this section.

(6) Prorated gas field--A reservoir or field in which an allocation formula is in effect.

(b) General provisions. This section is promulgated to promote and maintain ratable production of natural gas and to require production in compliance with priority categories established by the commission for the purposes of preventing waste, including production in excess of market demand, protecting correlative rights, preventing discrimination, and conserving the natural resources of this state. An operator shall not produce in excess of its ratable share of the market demand as determined by this section and §3.28 and §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31). An operator shall produce ratably as set out in subsection (e) of this section and shall produce in compliance with subsection (i) of this section which establishes priority categories of natural gas. Because production is dictated by pipeline capacity and market demand, pipelines are an integral part of production regulation. The requirements imposed on pipelines by this section and §3.28 and §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) are enforced to assist in the regulation of production and provide the only method by which such production regulation can be enforced and market demand met as required by statutory law. A first purchaser shall not discriminate between different wells from which it purchases in the same field, nor shall it discriminate unjustly or unreasonably between separate fields. The provisions of this section requiring ratable production and purchasing of gas apply to purchase and production from wells from which a first purchaser is purchasing on its pipeline system.

(c) Designation of pipeline system. A first purchaser shall, on or before a date designated by the commission or a commission designee, designate its pipeline system(s) and shall identify its affiliates that use the same pipeline system, including an affiliate operating a special marketing program that is in compliance with subsection (k) of this section. A pipeline system designation must identify the physical segment of pipeline that constitutes the pipeline system and identify by Railroad Commission of Texas lease and/or identification number and field the wells on that pipeline system from which the first purchaser is purchasing. A change in pipeline system designation is not required to add or delete well connections. The designation of a pipeline system cannot be changed by a first purchaser without prior approval by the commission or a commission designee. Approval of a change in pipeline system designation cannot be given without prior notice of the requested designation given by the first purchaser to affected operators of wells on the system(s) for which a change in designation is sought. A hearing to determine the proper designation of a first purchaser's pipeline system may be called by the commission, or may be requested by a first purchaser or by an operator filing a complaint. The burden of proof in the hearing shall be on the first purchaser.

(d) Operators who use produced gas. Any person who purchases natural gas at the wellhead, at a common point within a field or fields or at the outlet of a processing or treating plant must determine if it is the initial purchaser.

(e) Production guidelines. An operator shall produce without discrimination between its wells in the same field on the same first purchaser's pipeline system and without unjust or unreasonable discrimination between its wells in separate fields on the same first purchaser's pipeline system. An operator shall apportion a first purchaser's delivery requests ratably to its wells in each field on the same first purchaser's pipeline system without discrimination in the same manner as provided in this section and §3.28 and §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) and shall not produce in excess of its ratable share of the market demand as its share is determined by those rules. An operator shall produce in compliance with the priority categories of gas production established by the commission in subsection (i) of this section.

(f) Purchases from different fields.

(1) In making purchases and accepting deliveries between fields, a first purchaser of natural gas that purchases and accepts delivery of gas from more than one field on its same pipeline system must accept from each field a consistent percentage of the portion of the aggregate deliverability as determined by the deliverability tests and total gas limits that it is entitled to purchase from all wells from which it purchases on its pipeline system, unless the purchaser can demonstrate a just and reasonable basis for discriminating between fields.

(2) Natural gas purchases from a well by a first purchaser that uses another first purchaser's pipeline system to transport its gas and sells the gas purchased on that pipeline system solely to the first purchaser that owns the transport pipeline must be treated as first purchases of gas by the first purchaser that owns the transport pipeline.

(g) Purchases within a field.

(1) In making purchases and accepting deliveries within fields, a first purchaser of natural gas that purchases and accepts delivery of gas from different gas wells in the same priority category (see subsection (i) of this section) in the same field on its same pipeline system shall purchase and accept from the wells from which it purchases in the field a consistent percentage of the portion that it is entitled to purchase of the maximum allowable that a well is entitled to under the field's allocation formula. If purchases and deliveries from different wells in the same field become nonratable, the first purchaser shall consider commission-assigned underproduction and overproduction to establish an appropriate pattern of purchases or acceptance of deliveries to restore ratability.

(2) Natural gas purchases from a well by a first purchaser that uses another first purchaser's pipeline system to transport its gas and sells the gas purchased on that pipeline system solely to the first purchaser that owns the transport pipeline must be treated as first purchases of gas by the first purchaser that owns the transport pipeline.

(3) Purchases and deliveries of casinghead gas shall be based on the well's gas limit as specified in §3.49 of this title (relating to Gas-Oil Ratio) (Statewide Rule 49) as provided in subsection (h) of this section. Overproduction and underproduction of gas is administered by the provisions of §3.31 of this title (relating to Gas Reservoirs and Gas Well Allowable) (Statewide Rule 31). A first purchaser shall not reduce purchases from a limited well as described in §3.31(g)(5) until all prorated gas wells from which it purchases in the field connected to its same pipeline system are ratably reduced to the assigned allowable of the limited well. Below that point, purchases from all prorated wells and limited wells should be reduced ratably by purchasing and accepting delivery of the same percentage of the portion that it is entitled to purchase of the maximum allowable established for the well by the field's allocation formula. If purchases and deliveries from different wells in the same field become nonratable, the first purchaser shall consider commission-assigned underproduction and overproduction in establishing an appropriate pattern of purchases or acceptances of deliveries to restore ratability. When purchases of gas described in subsection (i)(2) or (5) of this section are to be reduced, they shall be reduced ratably within each priority category.

(h) Casinghead gas reductions. When purchases and deliveries of casinghead gas described in subsection (i)(1) or (3) of this section are to be reduced, each well's share of the reduction shall be calculated by multiplying the total reduction by the fractional share that each well's gas limit bears to the arithmetic sum of the aggregate gas limits of all wells in the field from which the first purchaser has been purchasing on its same pipeline system. In calculating its reduction of a well, a first purchaser shall use that portion of the gas limits that it is entitled to purchase. A well operating under net gas/oil ratio authority shall produce no more gas than its gas limit as it would be reduced by the previously mentioned procedure absent the net gas/oil ratio authority.

(i) Priority categories. First purchasers of gas shall satisfy their pipeline system demand for gas by purchasing and accepting delivery of gas from the following priority categories in ascending numerical order. Lower priority category gas is gas from a higher numerical category. A first purchaser shall not within its pipeline system curtail gas from a priority category if the purchaser is purchasing and accepting delivery of lower priority category gas as a first purchaser on its same pipeline system. A first purchaser's purchases and acceptance of delivery of first, second, or third priority category gas under an obligation to purchase and accept delivery from the tailgate of a plant processing gas to extract liquids, or from a gathering system that purchases from wells and is required by contract or by its physical connections to sell its gas entirely to the purchaser, whether or not these purchases are made as a first purchaser, shall not be curtailed if the first purchaser is purchasing and accepting delivery of lower priority category gas as a first purchaser on its same pipeline system. If curtailed, the curtailment must be ratable with like priority category gas which the first purchaser is purchasing and accepting delivery of from wells on its same pipeline system.

(1) First priority shall be given to casinghead gas produced from certified tertiary recovery projects approved by the commission and secondary recovery projects involving water injection, gas injection, or pressure maintenance approved by the commission to prevent waste.

(2) Second priority shall be given to gas from special allowable wells as defined in §3.31(g)(6) of this title (relating to Gas Reservoirs and Gas Well Allowable) (Statewide Rule 31) granted special allowable status after the effective date of this section to prevent physical waste. Wells classified as special allowable wells pursuant to notice and hearing prior to the effective date of this section shall be given second priority unless a new determination is made that the special allowable status is not necessary to prevent physical waste.

(3) Third priority shall be given to the remainder of casinghead gas so that gas produced in association with oil production shall not be wastefully vented and oil production shall not be unnecessarily curtailed. Gas recovered from a landfill or sewage process shall also be given third priority.

(4) Fourth priority shall be given to gas from wells classified under §3.49(b) of this title (relating to Gas-Oil Ratio) (Statewide Rule 49), but only to the extent of one full allowable for multiple 49(b) wells.

(5) Fifth priority shall be given to gas from administrative special allowable wells as defined in §3.31(g)(7) of this title (relating to Gas Reservoirs and Gas Well Allowable) (Statewide Rule 31) to gas from special allowable wells as described in §3.31(g)(6) granted that status prior to the effective date of this section (see paragraph (2) of this subsection) without notice and hearing, and to gas from special allowable wells granted that status by the commission subsequent to the effective date of this section after notice and hearing for other reasons than to prevent physical waste.

(6) Sixth priority shall be given to the remainder of gas well gas, including limited wells (see subsection (g) of this section).

(j) Prohibition against discriminating in favor of purchaser's own production. A first purchaser of natural gas may not discriminate between or against natural gas of a similar kind or quality in favor of its own production or production in which it may be directly or indirectly interested in whole or in part.

(k) Special marketing programs. If a first purchaser elects to qualify an affiliate as a separate first purchaser, the first purchaser may designate the affiliate as a special marketing program. The special marketing program must comply with the following with respect to the purchase and acceptance of delivery of natural gas.

(1) For purposes of this subsection, an affiliated first purchaser is the special marketing program purchaser's affiliate whose pipeline is being used to transport the gas in the special marketing program.

(2) Each and every special marketing program offer to purchase gas must be made without discrimination within a field and without unjust or unreasonable discrimination between fields to all operators for all wells on the pipeline system of the affiliated first purchaser from which the affiliated first purchaser has been purchasing and accepting delivery of gas as a first purchaser. The offer must also be made for all first, second, and third priority category gas on the affiliated first purchaser's pipeline system which it has been purchasing and accepting for delivery under an obligation to purchase and accept delivery from the tailgate of a plant processing gas to extract liquids or from a gathering system that purchases from wells and is required by contract or by its physical connections to sell its gas entirely to the affiliated first purchaser, whether or not those purchases were made as a first purchaser.

(3) It is unreasonably discriminatory, and therefore prohibited, for the offer to purchase gas in the special marketing program, or for any release of gas for sale in the special marketing program to require release of any claims under any existing contract or require modification of any existing contract provisions other than a release of the gas for sale in the special marketing program or a requirement of a volume-for-volume basis for gas taken in the special marketing program to be credited against the contract from which gas is released for sale in the special marketing program, if the credit provision is limited to the period of actual participation in the special marketing program. Nothing in this paragraph shall prohibit an operator of any well from offering terms inconsistent with these provisions. The making of an offer which is not accepted shall not affect rights under existing contracts.

(4) If a well producing priority category 1, 2, or 3 gas is shut in or curtailed, and waste, as defined in the Texas Natural Resource Code, Title 3, is found by the commission to exist, neither a special marketing program purchaser nor its affiliated first purchaser may purchase lower priority category gas until all the priority Category 1, 2, and 3 gas is taken and resulting waste is prevented. The commission shall expedite determination of waste, and may enter an emergency, temporary, or interim order upon application and affidavit proof that waste is occurring. The application and affidavit proof must be accompanied by supporting documentation, including data on well performance, and a statement that the application and affidavit proof has been served on the first purchaser(s) of the subject well(s) and any affiliated special marketing program purchaser using the first purchaser(s) same pipeline system on or before the date the application and affidavit proof has been mailed or delivered to the commission, with the opportunity for the first purchaser to respond within five days of service or of commission receipt, whichever is latest.

(5) The affiliated first purchaser must continue in compliance with this section to purchase and accept delivery from the wells for which the offer was made and not accepted.

(6) With respect to the purchase of gas from those that accept an offer made pursuant to this subsection, the special marketing program purchaser must comply with this section and §3.28 and §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) as a separate first purchaser.

(7) It is not the objective of this subsection to abrogate any existing contract rights or obligations.

(l) Sellers' complaint procedure. Any operator or nonoperator that is denied by the first purchaser in violation of this section or §3.28 or §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) the opportunity to produce a well's ratable share of gas or opportunity for a well to participate in a special marketing program may file a complaint with the commission and request the commission to direct the first purchaser to end the discriminatory practices. A complainant may request a hearing regarding alleged discriminatory practices or to determine whether a first purchaser is or has, through gas exchange agreements or through actions of its affiliate(s), denied an operator a reasonable opportunity to market its gas.

(m) Purchasers' complaint procedure. If after reasonable notice by the purchaser, an operator fails to comply with a first purchaser's request to reduce production ratably in compliance with this section and §3.28 and §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) the purchaser may file a complaint with the commission and request the commission to direct the operator to comply with the purchaser's requests to reduce production ratably. The complainant or the operator may request the commission to take further action, including setting the issue for hearing.

(n) Hardship exceptions. If the operation of this section or §3.28 or §3.31 of this title (relating to Potential and Deliverability of Gas Wells To Be Ascertained and Reported, and Gas Reservoirs and Gas Well Allowable) (Statewide Rules 28 and 31) causes undue hardship, the commission may, after proper notice and hearing, grant an exception or take appropriate action, including action to prevent waste or protect correlative rights.

(o) Severability provisions. If any provision of this section or its application to any person or circumstance is held invalid, the invalidity shall not affect other provisions or applications of the section which can be given effect without the invalid provisions or appreciation, and the provisions of the section are declared to be severable.

Source Note: The provisions of this §3.34 adopted to be effective September 1, 1986, 11 TexReg 3691; amended to be effective March 2, 1987, 12 TexReg 536; amended to be effective September 8, 1987, 12 TexReg 2860; amended to be effective February 29, 1988, 13 TexReg 838; amended to be effective July 1, 1992, 17 TexReg 3236; amended to be effective November 24, 2004, 29 TexReg 10728