SECTION 9.22. Leasing Procedures

State property will be leased for the exploration and development of oil and gas under these procedures.

(1) Sealed bid leasing by the SLB.

(A) Lands affected. See §9.21 of this title, (relating to Leasing Guide) to determine which lands are leased by sealed bid. Generally, this includes all lands owned in fee by either the PSF or state agencies, except TPWD or TDCJ lands, and certain other lands in which the PSF owns a mineral interest.

(B) Nominations, advertising, and awarding leases. The SLB, GLO staff, or persons interested in leasing a specific tract may nominate a tract for lease. Nominated tracts will be evaluated by GLO geologists. The SLB will set the terms and conditions upon which tracts will be offered for lease. These terms will be advertised and bids taken. The SLB shall accept the best bid meeting the minimum requirements set by the SLB or by law, or, reject all bids. See Chapter 151 of this title, (relating to Operations of the School Land Board) for more details on the leasing procedure.

(2) Leasing of Relinquishment Act lands by surface owner as the state's agent.

(A) Lands affected. The leasing procedures as set out in this paragraph apply only to the leasing of Relinquishment Act lands.

(B) Identity of the state's agent. The surface owner of Relinquishment Act land acts as the state's leasing agent. A minor or a person of unsound mind, as these terms are defined in the Texas Probate Code, cannot act as the state's agent. However, a person authorized by law to act on such a person's behalf may do so. An agent of the surface owner, including an attorney-in-fact, cannot execute a Relinquishment Act lease, unless a power of attorney expressly authorizes the attorney-in-fact to execute Relinquishment Act leases. Said power of attorney shall be submitted to the GLO concurrently with the lease. Both the surface owner and attorney-in-fact shall owe the state the full fiduciary duty discussed in paragraph (2)(C) of this subsection, and as otherwise provided by law. If the surface owner is a corporation, a Relinquishment Act lease may be executed by any duly authorized officer or agent of the corporation.

(C) Authority and fiduciary duty of agent.

(i) Authority. The surface owner is authorized to execute oil and gas leases on behalf of the state, unless a surface owner's agency rights have been forfeited or waived. The surface owner may not enter into a seismic option or any other contract to execute a Relinquishment Act lease. As the state's agent, a surface owner owes the state a fiduciary duty and the duty of utmost good faith. A surface owner must fully disclose to the commissioner any facts affecting the state's interest and must act in the best interest of the state. Any conflict of interest must be resolved by putting the interests of the state before the interests of the surface owner. In addition to these duties, the surface owner owes the state all the common law duties of a holder of executive rights.

(ii) Consequences of a breach of the surface owner's fiduciary duty or a violation of the prohibition against self-dealing. When a surface owner engages in self-dealing by acquiring an assignment in a lease executed by that surface owner, such lease is void as of the time of assignment and the commissioner may forfeit the surface owner's agency rights. When a surface owner breaches any duty or obligation owed to the state, the commissioner may request that the attorney general file suit. A suit to enforce the surface owner's duties and obligations or to forfeit the surface owner's agency rights shall be filed in a district court in Travis County. See Texas Natural Resources Code, §52.188 and §52.189.

(iii) Penalty assessment for breach of the surface owner's fiduciary duty. A penalty of 10% shall be imposed on any sums due the state because a surface owner breaches a fiduciary duty. The imposition of this penalty does not limit the right of the state to obtain punitive damages, exemplary damages, or interest. Any punitive damages or exemplary damages assessed by a court shall be offset by the 10% penalty imposed by this paragraph.

(D) Prohibition against self-dealing. A surface owner as the state's agent may not engage in self-dealing either directly or indirectly. Except as provided in Texas Natural Resources Code, §52.188(a)(b) and (d) and §52.189(a)(3)(4), a surface owner will be considered to have engaged in self-dealing if the surface owner, either directly or indirectly, leases or assigns a lease executed by that surface owner to themselves or to any of the following persons:

(i) a nominee;

(ii) any corporation or subsidiary in which the surface owner is a principal stockholder or an employee of such a corporation or subsidiary;

(iii) a partnership in which the surface owner is a partner or an employee of such a partnership;

(iv) if the surface owner is a corporation or a partnership, a principal stockholder of the corporation or a partner of the partnership, or any employee of the corporation or partnership;

(v) a fiduciary representing the surface owner, including, but not limited to, a guardian, trustee, executor, administrator, receiver, or conservator; or

(vi) a person related to the surface owner within and including the second degree of consanguinity or affinity, including a person related by adoption, or;

(I) to a corporation or subsidiary in which that related person is a principal stockholder, or;

(II) to a partnership in which that related person is a partner, or;

(III) to an employee of such a corporation or subsidiary or partnership.

(E) Lease negotiation procedure.

(i) Subject to the limitations against self-dealing, the surface owner is authorized to act as the state's leasing agent with any person desiring to develop or explore for the oil and gas.

(ii) The lease shall be on the GLO lease form in use on the date of execution. This form will be prepared and furnished by the GLO.

(iii) All of the negotiated terms must be included in the lease instrument. No lease term or provision may be included in a collateral contract or agreement.

(iv) The proposed lease shall be submitted to the GLO for approval prior to recording the lease in the county records. The proposed lease shall be accompanied by the processing fee required by §3.31 of this title, (relating to Fees).

(F) State approval and filing of lease.

(i) Any additions, modifications, deletions, or changes to the GLO lease form must be approved by the commissioner.

(ii) A lease must adequately reflect the actual consideration paid or promised for the lease. The state and the surface owner must share equally in all consideration paid under the lease. However, the surface owner may waive or defer his or her share of the bonus. At any time after preapproval and before filing with the GLO, the adequacy of the consideration may be reassessed by the commissioner.

(iii) The commissioner may reject and refuse to file any lease deemed contrary to the best interests of the state. If the commissioner rejects a lease that has been recorded prior to submission to the commissioner, a release of the lease must be filed in the appropriate county or counties and a certified copy sent to the GLO.

(iv) If the commissioner rejects a proposed lease, the prospective lessee will be notified of the reasons for the rejection and any changes, deletions, or additions which would render the lease acceptable. The prospective lessee may request reconsideration of a rejection. This request shall be made to the commissioner.

(v) A Relinquishment Act lease may not provide for a primary term of more than five years.

(vi) A Relinquishment Act lease may not encompass more than four full sections or 2,560 acres. A "mother hubbard" or "coverall" clause in the lease is not acceptable.

(vii) Private land and Relinquishment Act land may not be included in the same lease.

(viii) A lease may encompass several smaller tracts if they are contiguous or within 1/2 mile of each other.

(ix) A Relinquishment Act lease must provide the state with a royalty of at least 1/16th and a delay rental during the primary term of at least $.10 per acre per year to the state, or, on paid up leases, a paid up payment of at least $.10 per acre per year in the primary term.

(x) When a proposed lease covering an undivided interest in Relinquishment Act land is submitted for approval, the person submitting the lease shall inform the GLO of all remaining undivided interest owners of that land. See also Texas Natural Resources Code, §52.190(k) and (l).

(xi) Upon approval, the lease shall be recorded in each county in which the land is located. Leases are not effective until approved by the commissioner, and until a certified copy of the lease, from each county in which it is recorded, has been filed with the GLO. Such filing and approval of leases shall not limit, waive, or affect any lawful claim or remedy available to the state. After a lease is properly filed, the term of the lease shall be treated as beginning on the effective date stated in the lease.

(xii) The state's share of the bonus payment and the filing fee prescribed by §3.31 of this title, (relating to Fees) shall be submitted along with the certified copy or copies of the lease.

(3) State as sole lessor of Relinquishment Act lands.

(A) Leasing procedure when surface owner's rights (including the right to receive any part of the bonus, royalty and other consideration relating to the lease) have been waived. A surface owner may lease Relinquishment Act land from the state by complying with Texas Natural Resources Code, §52.190, and any other relevant laws or regulations.

(B) Leasing procedure when surface owner cannot be located. If a potential lessee cannot locate a surface owner, the procedures set out in Texas Natural Resources Code, §52.186, shall be followed. The land will then be leased by sealed bid as provided in paragraph (1) of this subsection. The state will receive all the consideration paid under such a lease except as provided in Texas Natural Resources Code, §52.186(b)(4), which concerns certain rights available to surface owners (and to owner's of an undivided interest therein) who appear within two years after a lease has been executed on their land and who are able to satisfy the conditions of the statute.

(C) Leasing procedure when surface owner's agency rights are forfeited.

(i) When a surface owner's agency rights have been forfeited, the land shall be subject to lease by sealed bid as provided in paragraph (1) of this subsection. The surface owner shall not be entitled to share in the proceeds of such lease. Upon expiration or termination of such lease, the surface owner's agency rights will be ipso facto reinstated.

(ii) If no lease is executed within one year of forfeiture, the surface owner's agency rights may be reinstated at the commissioner's discretion.

(4) Leasing the state's free royalty interests.

(A) Lands affected. These leasing procedures apply to free royalty lands.

(B) Leasing by executive right holder on behalf of the state. The holder of the executive or leasing rights on free royalty land shall act as the state's agent in executing oil and gas leases covering the state's free royalty interest. In executing this lease, the executive right holder owes the state a duty of good faith and any other common-law duties which an executive right holder owes to a nonexecutive mineral interest owner. A free royalty interest bears no costs of production, including the costs of sale, treatment, transportation, gathering, compression, or delivery.

(C) Filing with the GLO. Leases covering the state's free royalty interest are not effective until a certified copy is filed with the GLO.

(5) Leasing of highway rights-of-way by the SLB.

(A) Definitions. As used in this paragraph, the terms "adjacent mineral owner", "highway right-of-way" and "tract", have the following meanings unless the context clearly indicates otherwise.

(i) Adjacent mineral owner: a person that owns the right to explore for, develop, and produce oil and gas from a tract of land adjoining a highway right-of-way.

(ii) Highway right-of-way: a tract of land owned by the state that was or may be acquired to construct or maintain a highway, road, street, alley, or other right-of-way.

(iii) tract: a highway right-of-way subject to lease under this paragraph.

(B) Lands affected.

(i) A tract may be leased if the state owns the minerals under it and if the tract is not within 2,500 feet of a well which was capable of producing oil or gas in paying quantities as of January 1, 1985. A tract may also be leased if the state owns the minerals under it and if the oil or gas is leased to facilitate the drilling of a horizontal well.

(ii) In its discretion, the SLB may establish the size and the outer boundaries of each tract to be leased; however, the lease extends only to the center of the width of the particular highway right-of-way adjacent to the property in which the lessee is the mineral owner.

(iii) The SLB may refuse to lease a particular tract, either on its own or upon the request of the highway department.

(iv) Tracts subject to the Relinquishment Act shall be leased by sealed bid under paragraph (1) of this subsection.

(C) Preliminary leasing procedures.

(i) The SLB may initiate the leasing of tracts by providing notice to adjacent mineral owners in accordance with paragraph (6)(C)(iv) of this subsection.

(ii) Any outside party, including the adjacent mineral owner, may apply to lease a tract by sending the following materials to the GLO:

(I) a written description of the tract sufficient for it to be located on the ground and a map showing the tract's boundaries and dimensions;

(II) the names and addresses of all adjacent mineral owners, as reflected in the tax assessor-collector's records and county clerk's records in the county or counties where the tract is located;

(III) an affidavit stating either that there was no well capable of producing oil or gas in paying quantities within 2,500 feet of the tract as of January 1, 1985, or that the lease is necessary to facilitate the drilling of a horizontal well; and

(IV) the processing fee required by §3.31 of this title, (relating to Fees).

(iii) An applicant who is also an adjacent mineral owner must also submit the following:

(I) a written waiver of the notice to which the applicant as an adjacent mineral owner is entitled; and

(II) if the applicant is a lessee of the adjacent tract,

(-a-) certified copy or a reproduction of a certified copy of any recorded lease or leases on the land adjacent to the tract. If the lease has not been recorded, an applicant must submit a copy of the lease along with an affidavit stating that it is a true and correct copy of the lease on the adjacent land; and

(-b-) a notarized affidavit stating the consideration paid for any lease or leases on the adjacent land.

(iv) The GLO shall notify each adjacent mineral owner, by registered mail, of the proposed leasing of the tract. An adjacent mineral owner may waive this notice by providing a written waiver to the GLO. If the person who initiates the leasing process cannot determine the identity or address of an adjacent mineral owner from the county records, notice shall be by publication as provided in Texas Natural Resources Code, §32.201(d).

(D) Preferential leasing right of adjacent mineral owners.

(i) General rule. Each adjacent mineral owner is entitled to lease to the center of the tract in the same proportion as his or her ownership in the adjoining land. The preferential right to lease under this paragraph must be exercised by the adjacent mineral owner within 120 days of the actual notice (as defined by Texas Natural Resources Code, §32.201(d)) of the intention to lease, or such right is forfeited.

(ii) Examples.

(I) if the adjacent mineral owners on opposite sides of a tract differ, each is entitled to preferentially lease to the center of the tract, thereby leasing one-half of the tract.

(II) if the adjacent mineral owner on both sides of a tract is the same person, he or she may lease the entire tract.

(III) when the mineral ownership of leased or unleased land adjoining one side of a tract is owned in cotenancy among several adjacent mineral owners, each shall have a preferential right to lease to the center of the tract in proportion to his or her interest in the adjoining land.

(iii) Lease terms. Each lease issued on a tract shall grant the lessee the authority to pool the acreage in accordance with Texas Natural Resources Code, §32.202. A certified copy of the unit designation or the pooling agreement must be filed with the GLO. Each lease shall also provide for the payment of compensatory royalty in accordance with Texas Natural Resources Code, §32.203. The additional terms of a lease depend on whether lands adjacent to the tract are leased. If the adjacent land is unleased, the SLB shall set the terms of the lease. If the adjacent land is leased, the tract shall be leased upon terms at least as favorable to the state as those of the most favorable lease held on the adjoining land.

(iv) Lease approval and payments. A lease will not be issued until the SLB approves the lease and receives the bonus payment and the 1.5% sales fee provided by Texas Natural Resources Code, §32.110. If the adjacent mineral owner does not tender such sums within 120 days of receipt of notice under paragraph (4)(C)(i) of this subsection, the preferential right to lease is forfeited.

(v) Waiver. Any adjacent mineral owner may waive the preferential right to lease by filing with the GLO a written waiver executed and acknowledged by the mineral owner or their duly authorized agent.

(E) Leasing after forfeiture or waiver of preferential leasing right.

(i) Generally. Within 18 months of the forfeiture or waiver of the preferential right, the SLB may lease the tract directly to an adjacent mineral owner prior to a public offering to the highest bidder under a sealed bid sale.

(ii) Lease to adjacent mineral owners and applicants.

(I) If the adjoining land on one side of the tract is owned by several adjacent mineral owners in cotenancy, and one or more of these adjacent mineral owners forfeits or waives his or her preferential right, the SLB shall lease in equitable proportions to the remaining cotenants who have applied to lease the tract.

(II) If the adjacent mineral owners on one side of a tract waive or forfeit their preferential rights to lease, the SLB shall lease in equitable proportions to the adjacent mineral owners on the other side of the tract who have applied to lease such tract.

(III) If all or part of a tract is not leased to an adjacent mineral owner, the SLB shall lease all or part of the unleased tract to the first person who submitted an application to lease it.

(IV) The terms and conditions of a lease issued under this subparagraph will be the same as those found in leases issued to adjacent mineral owners. The SLB shall not lease to an applicant at a price or terms which are less than those offered to the adjacent mineral owner.

(V) A lease will not be issued until the SLB approves the lease and receives the bonus payment and the 1.5% sales fee provided by Texas Natural Resources Code, §32.110.

(iii) Lease by sealed bid. If all or part of the tract is not leased to an adjacent mineral owner or to an applicant, the SLB shall offer all or part of the unleased tract for lease by sealed bid under paragraph (1) of this subsection.

Source Note: The provisions of this §9.22 adopted to be effective January 7, 1999, 24 TexReg 146; amended to be effective August 9, 2009, 34 TexReg 5379