268 Strata Res. v. State

Richard F. Brown

 
The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
 
Strata Resources v. State, 264 S.W.3d 832 (Tex. App.—Austin 2008, no pet.), holds
 
(1) that the State of Texas was not precluded from recovering the costs of plugging oil wells because the Texas Railroad Commission (“Commission”) converted the wells to water wells, even if the converted water wells provided a benefit to the landowner, and (2) to challenge the value the Commission obtained when disposing of an operator’s equipment, an operator must make a claim on the oil-field cleanup fund pursuant to Section 89.086 of the Texas Natural Resources Code.
 
The Commission plugged two wells after the operator ignored orders requiring that the operator bring the wells into compliance or plug them. However, rather than simply plugging the wells, the State converted the wells to water wells for the benefit of the landowner. This was done without giving notice to the operator. Finding that the Commission plugged the wells pursuant to statute, the court held that the State was allowed to seek reimbursement from the operator for plugging the wells.
 
The operator argued that while the Commission had the right to seek reimbursement for plugging the wells, the Commission could not recover such costs if it plugged a well in a manner allowing it to be used as a water well—even when doing so would cost the State less than fully plugging the well and yield the added benefit of a water well. Finding no support for the operator’s position, the court concluded that the Commission plugged the wells consistent with the requirements of 16 Tex. Admin. Code §§ 3.14(b)(4) and (5). The court stated that “the fact that the Commission’s method of plugging also provided a benefit to the landowner by converting the wells into water wells has no bearing on the State’s ability to ‘seek reimbursement from the operator . . . for plugging the well.’”
 
The operator also argued that plugging costs could not be imposed because the State failed to prove the value of the salvaged well-site equipment, which the operator was entitled to offset against plugging costs. The State contended that the Texas Natural Resources Code allows, but does not require, such an offset and to challenge the value of the offset, the operator was required but failed to make a claim on the oilfield cleanup fund under Section 89.086.
 
The operator testified that the recognized market value of the salvaged equipment was “greatly in excess” of the salvage price set by the Commission, and that to the extent that the Commission decided to dispose of well equipment, Section 89.085 required it to do so “in a commercially reasonable manner.” The court held that the reasonableness of the amount for which the salvaged equipment was sold was irrelevant. The operator was required to make a claim on the oilfield cleanup fund pursuant to Section 89.086. Failing to make such a claim, the operator was precluded from challenging the reasonableness of the salvage price set by the Commission.
 
The significance of the case is the segregation of liability for plugging costs from the recovery of offsetting salvage costs from the oilfield cleanup fund, and the freedom given to the State to determine how to plug the well.