Locke Lord QuickStudy: Texas Oil and Gas Gathering Systems Should Not Cease Gathering Service Without ‎Considering Railroad Commission Rule 73‎

Texas oil and gas producers have recently faced economic challenges from low commodity prices ‎brought on by a combination of the global pandemic and oversupply caused by the production ‎dispute between Russia and Saudi Arabia.  As a result, midstream companies, particularly oil and ‎gas gathering companies, may find themselves facing the prospect of declining gathering ‎volumes, and even missed minimum volume commitment payments, that make the gathering deal ‎unprofitable or prevent the recovery of the significant capital outlay required to build and operate ‎the system.  Gathering agreements frequently protect midstream companies in such cases, ‎allowing them to terminate the agreement for a breach or allowing termination in the event the ‎midstream company determines that the continued provision of services to the producer has ‎become uneconomic.  But gatherers should be wary about exercising such contractual options ‎without first complying with a little known, but very important, rule of the Railroad Commission ‎of Texas (“Commission”).‎

Statewide Rule 73 requires a pipeline company that seeks to disconnect or cease providing ‎‎“pipeline services” to a well or lease to first either obtain the written consent of the producer or ‎the permission of the Commission.  The Commission has specifically determined that the ‎existence of a gathering agreement with contractual remedies for non-payment or declining ‎profitability DOES NOT comply with the written consent requirement of Rule 73.  Failure to ‎comply with this rule can subject a pipeline company to administrative penalties from the ‎Commission and the possibility that the producer will file a complaint for which the remedy ‎could be to require continuation of the gathering service.  The Commission has the power to ‎approve a Rule 73 application administratively, but if a producer contests the application the ‎prescribed process is a contested evidentiary hearing before an administrative law judge.‎

In determining whether or not to approve a request to physically disconnect from, or cease ‎providing service to, a well or lease, Rule 73 states that the Commission may consider relevant ‎factors, including but not limited to:‎

• operational integrity of the pipeline facilities;‎
• operational integrity of the equipment on the well or lease;‎
• cost of continued operation of the physical connection or service;‎
• risk to public safety, human health and the environment; ‎
• availability of alternative transportation;‎
• protection of correlative rights; and
• prevention of waste.‎

The very few cases that have been decided under Rule 73 indicate that the Commission’s ‎decision involves a balance of the following key considerations: (1) the economics of continuing ‎to provide service, (2) the safety of the pipeline system, and (3) the possibility that shutting in a ‎well could cause waste.  There is a fairly consistent line of precedent indicating that the ‎Commission cannot order a gatherer to provide service at a loss or in circumstances that are ‎uneconomic, but if the gatherer’s Rule 73 application is challenged, or if the producer files a ‎complaint with the Commission, the gatherer may well have to prove in an evidentiary hearing ‎before a judge that operation of its system meets the standards for uneconomic operation.  That is ‎an expensive and time consuming proposition, even where the ability to demonstrate the ‎prescribed criteria is clear cut.  ‎

Thus, if a gatherer confronts declining volumes or missed payments that render its service ‎uneconomic, it must evaluate compliance with Rule 73 in addition to whatever contractual rights ‎it may also have.  Furthermore, as the current state of the oil and gas market has brought Rule 73 ‎into sharper focus, going forward it may warrant drafting changes to the remedies a gatherer can ‎pursue in a gathering agreement, including perhaps charging a “low volume fee” with respect to ‎receipt points that become uneconomic due to limited volume delivery by the producer.‎