The New Mexico Oil and Gas Act, specifically in relation to the Oil Conservation Division (OCD), establishes a framework for the prevention of waste and the protection of correlative rights. When a proposed drilling unit for a common source of supply of oil or gas is established, the OCD is empowered to allocate production among the owners within that unit. This allocation is typically based on the acreage within the unit and the potential productivity of that acreage, often referred to as the “allowable.” The concept of “pooling” is central here, where separately owned tracts are combined to form a drilling unit. If a landowner opts not to participate in the drilling of a well on their land (i.e., they are a non-consenting owner), their interest is typically subject to a risk penalty or overriding royalty interest that compensates the working interest owners for the risk of drilling. The amount of this penalty is determined by the OCD, considering factors such as the depth of the formation, the geological risks, and the costs associated with drilling. The purpose of the penalty is to ensure that non-consenting owners still receive a benefit from their mineral estate, but also to indemnify the consenting owners for the financial exposure they undertook. New Mexico Administrative Code (NMAC) 19.15.14.12 outlines the provisions for unleased mineral interests and the mechanics of pooling, including the determination of the penalty. The penalty is not a fixed percentage but is established on a case-by-case basis by the OCD through its administrative process, taking into account the specific circumstances of the proposed well and the pool.

In New Mexico, the Oil Conservation Division (OCD) of the Energy, Minerals and Natural Resources Department is responsible for regulating oil and gas operations. A crucial aspect of this regulation involves the proper plugging and abandonment of wells to protect correlative rights and prevent waste and pollution. When a well is no longer capable of producing oil or gas in paying quantities, the operator is obligated to plug it. The OCD has specific rules governing the plugging process, which typically involve setting cement plugs at various depths to isolate formations and prevent the migration of oil, gas, and water. These rules are outlined in the New Mexico Administrative Code (NMAC) Title 19, Chapter 10, specifically in Part 3. The primary goal is to ensure that the wellbore is sealed in a manner that permanently prevents any subsurface contamination or surface leakage. The responsibility for proper plugging lies with the current operator of the well. If an operator fails to plug a well as required, the OCD can take enforcement actions, which may include penalties and the ability to plug the well at the operator’s expense. The concept of “abandonment” in this context refers to a well that has ceased production and is not being maintained for future production, triggering the plugging obligation. The regulations aim to ensure that all wells, whether producing or non-producing, are managed in a way that safeguards the environment and the state’s natural resources. The OCD’s authority extends to enforcing these plugging requirements to prevent long-term liabilities and environmental damage.

In New Mexico, the Oil Conservation Division (OCD) of the Energy, Minerals and Natural Resources Department is responsible for regulating the oil and gas industry. A crucial aspect of this regulation involves the prevention of waste and the protection of correlative rights. When a proposed drilling unit is being formed, and there is a mineral owner within that unit who has not participated in the drilling or operation of the well, that owner is considered a non-consenting owner. New Mexico’s compulsory pooling statute, specifically NMSA 1978, § 70-2-17, outlines the process for dealing with such owners. This statute allows the working interest owners who have agreed to participate to pool the interests of non-consenting owners, provided certain conditions are met. A key condition is that the non-consenting owner must be given notice and an opportunity to elect to participate in the drilling and operation of the well on a basis that is proportionate to their ownership interest and the costs of drilling and operation. If the non-consenting owner fails to elect to participate after proper notice, the working interest owners can proceed with the pooling. The statute then specifies the penalties or recoupment rights for the working interest owners who bore the costs. They are typically allowed to recoup their costs from the non-consenting owner’s share of production, often with a penalty. This penalty is intended to compensate the working interest owners for the risk they undertook in drilling the well and for the administrative burden of pooling the non-consenting owner’s interest. The penalty is generally a percentage of the non-consenting owner’s share of the costs. This percentage is designed to be punitive enough to encourage participation but not so high as to be confiscatory. The statute sets a maximum allowable penalty.

The New Mexico Oil and Gas Act, specifically concerning the pooling of interests for unit operations, establishes a framework for cooperative development. When a proposed unit operation for a pool or part of a pool is approved by the Oil Conservation Commission (OCC), the order designates a unit operator and specifies the terms of the unitization, including the allocation of production. For royalty owners who have not consented to the unit operation, their share of production is to be paid to them in kind, or if that is not practical, held in trust by the unit operator. Crucially, the Act and subsequent OCC orders typically provide for a royalty owner to receive their proportionate share of the production based on the terms of their original lease, but without the obligation to pay for the costs of production. This means that while the royalty owner benefits from the unitized operation by having their minerals produced, they are not burdened with the expenses associated with drilling, operating, or developing the unit. Therefore, a non-consenting royalty owner is entitled to their royalty interest as defined by their lease, free of production costs.

The scenario presented involves a dispute over overriding royalty interests (ORRI) in New Mexico. An overriding royalty is an interest in the oil and gas produced from a leased premises, free of the costs of production, and is carved out of the lessee’s working interest. It terminates when the lease terminates. In New Mexico, the determination of whether an interest is a true overriding royalty or a royalty interest derived from the fee simple estate hinges on its creation and relationship to the lease. A royalty interest is typically reserved by the landowner in the original lease, while an overriding royalty is created by the lessee or a subsequent assignee of the lessee. In this case, the assignment from Amigos Energy to Pecos Petroleum explicitly states that the interest conveyed is “an overriding royalty interest equal to five percent (5%) of the gross production of oil and gas produced, saved, and marketed from the Premises, free and clear of all costs of drilling, development, and operation.” This language clearly indicates that the interest is carved out of the lessee’s working interest and is contingent upon production under the lease. Therefore, when the lease covering the subject acreage expired due to cessation of production in paying quantities, the overriding royalty interest created by the assignment also terminated. The New Mexico Oil and Gas Conservation Commission’s rules and the Oil and Gas Act, particularly concerning correlative rights and the prevention of waste, emphasize the importance of production for the continuation of leasehold rights and interests derived therefrom. The nature of an ORRI as a non-possessory interest that is dependent on the leasehold estate means it cannot survive the termination of that estate.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-12, grants the Oil Conservation Division (OCD) the authority to make rules and orders to prevent waste, protect correlative rights, and conserve oil and gas resources. When considering the creation of a new pool or the amendment of existing pool rules, the OCD must conduct a hearing. Public notice of such hearings is a critical procedural safeguard. The Act mandates that notice be given to all parties who have a right to produce from the pool or to any offset well or wells. This notice is typically published in a newspaper of general circulation in the county where the lands affected are located, and also mailed to interested parties as determined by the division. The purpose of this notice is to ensure due process, allowing all affected parties to present evidence and arguments before a decision is made. The OCD’s rules, found in the New Mexico Administrative Code (NMAC) 19.15.3.107, further detail the requirements for notice, including the content and timing of such publications and mailings. The Division’s discretion in defining “parties who have a right to produce” or “offset well or wells” is guided by the overarching statutory mandate to protect correlative rights and prevent waste, ensuring that those with a vested interest are adequately informed and have an opportunity to be heard.

The New Mexico Oil and Gas Act, specifically the provisions governing unitization, empowers the Oil Conservation Division (OCD) to establish drilling units for common sources of supply. When a proposed unitization plan is submitted, the OCD must consider various factors to ensure it is in the public interest and will prevent waste and protect correlative rights. Key among these considerations is the feasibility and practicality of the proposed unit’s operation. This includes evaluating whether the proposed boundaries are geographically reasonable, whether the proposed development plan is technically sound and economically viable, and whether the proposed method of allocating production among interest owners is fair and equitable. The Act also mandates that the OCD consider the potential impact on existing leases and mineral rights. The standard for approval is not merely that the unitization is possible, but that it is the most effective means of developing the common source of supply while protecting all correlative rights and preventing waste, as defined by New Mexico statutes and regulations. The OCD’s decision is based on a thorough review of the evidence presented at a public hearing, where all interested parties have the opportunity to be heard.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-12, governs the pooling of interests in oil and gas wells. When a working interest owner fails to consent to the drilling of a well on a proration unit after receiving notice, they may be deemed a non-consenting working interest owner. Under New Mexico law, a non-consenting working interest owner who is subsequently included in a pooled unit for a well drilled on that unit is subject to a risk charge. This risk charge is a penalty designed to compensate the consenting working interest owner for the additional risk undertaken in drilling the well. The statute specifies that this risk charge shall not exceed 200% of the non-consenting working interest owner’s proportionate share of the actual and reasonable costs of the well. Therefore, if the actual and reasonable costs of drilling and completing the well amount to $10,000,000, and a non-consenting working interest owner’s proportionate share of these costs is $1,000,000, the maximum risk charge that can be assessed against their interest is 200% of $1,000,000, which equals $2,000,000. This total amount, $1,000,000 (actual costs) + $2,000,000 (risk charge), represents the non-consenting owner’s share of the well costs that will be recouped by the consenting owner from the non-consenting owner’s share of production before the non-consenting owner begins to receive revenue. The question asks for the maximum amount that can be recouped by the consenting owner from the non-consenting owner’s share of production, which is the sum of the actual costs and the risk charge. Thus, the calculation is $1,000,000 (actual costs) + \(200\% \times \$1,000,000\) (risk charge) = $1,000,000 + $2,000,000 = $3,000,000.

The New Mexico Oil and Gas Act, specifically concerning the pooling of interests for the development of oil and gas, vests significant authority in the Oil Conservation Division (OCD) of the New Mexico Energy, Minerals and Natural Resources Department. When a spacing order for a drilling unit is issued, it establishes the size and configuration of the unit and dictates the royalty owners’ share of production. For a non-consenting owner within a unit, the Act provides for a penalty, often referred to as a “risk penalty” or “risk charge,” to compensate the working interest owners who undertake the expense and risk of drilling and completing a well. This penalty is typically applied to the non-consenting owner’s share of the production costs and the cost of drilling and completing the well. The percentage of this penalty is determined by the OCD based on various factors, including the geological risk, the depth of the formation, and the applicant’s proposed plan of development. New Mexico law, as interpreted by the OCD, generally allows for a penalty that can range up to a specified percentage, commonly 200% of the non-consenting owner’s proportionate share of the cost of the well. This penalty is deducted from the non-consenting owner’s share of the revenue until the well is fully recovered by the working interest owners. The purpose is to incentivize participation and to ensure that those who bear the financial burden of exploration and production are adequately compensated for the inherent risks involved in oil and gas operations in New Mexico.

The New Mexico Oil and Gas Act, specifically Section 70-2-13 NMSA 1978, governs the pooling of oil and gas interests. When an operator seeks to develop a spacing unit and cannot reach an agreement with all mineral owners within that unit, they may seek a compulsory pooling order from the Oil Conservation Division (OCD). This order dictates the terms under which non-consenting owners will participate in the development. The OCD, in exercising its authority, must ensure that the terms are just and reasonable, considering the costs of exploration, development, and production, as well as the risks involved. A common provision in such orders is a risk penalty or risk charge applied to the proportionate share of the costs incurred by the working interest owner who drills the well. This charge compensates the risk-taking working interest owner for the possibility that the well may be unproductive, thereby bearing the entire upfront financial burden. The statute and OCD rules allow for a risk penalty of up to 200% of the non-consenting owner’s share of the actual costs of drilling, completing, and equipping the well. This penalty is levied against the non-consenting owner’s share of production until their share of the costs is recouped. Therefore, a non-consenting mineral owner’s share of production revenue would first be applied to satisfy their proportionate share of the well’s costs, and then the risk penalty would be applied to their share of production revenue until the penalty amount is also recouped. The question asks about the initial distribution of production revenue. The working interest owner who drilled the well is entitled to recover their costs first. Once those costs are recouped, the risk penalty is then applied to the non-consenting owner’s share of production until the penalty is satisfied. The remaining production revenue, if any, would then be distributed according to ownership interests. However, the question specifically asks about the initial distribution of revenue to the non-consenting mineral owner’s share. The non-consenting mineral owner’s share of production revenue is first applied to recover the costs of drilling, completing, and equipping the well attributable to their mineral interest. Once those costs are recouped, the risk penalty is then applied to their share of production revenue until the penalty amount is also recouped.

The New Mexico Oil and Gas Act, specifically Section 70-2-17 NMSA 1978, addresses the correlative rights of owners in a common source of supply. When the State Engineer determines that a common source of supply of oil or gas is threatened by waste or by the improvident, excessive, or improper drilling of wells, they may issue an order to pool all or any part of the common source of supply. This pooling order is designed to prevent waste and protect correlative rights. The Act mandates that if a voluntary agreement for pooling cannot be reached, the State Engineer, after notice and hearing, may issue a compulsory pooling order. Such an order designates an operator for the pooled unit and specifies the terms and conditions of the pooling, including the allocation of production and costs. The purpose is to ensure that each owner receives their just and equitable share of the oil and gas from the common source, preventing drainage and protecting the interests of all parties involved, particularly in instances where individual well spacing might not be economically or technically feasible. The concept of correlative rights is central, ensuring that no owner can take from the common source more than their proportionate share of the total oil or gas in the pool.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-13, addresses the pooling of interests in oil and gas. When a compulsory unitization order is issued, it is binding on all owners of mineral interests within the unit. This includes royalty owners, overriding royalty owners, and working interest owners. The purpose of compulsory unitization is to prevent waste and protect correlative rights by ensuring that each owner receives their fair share of production from the unitized pool. The act grants the Oil Conservation Division (OCD) the authority to create such units. In this scenario, the compulsory unitization order issued by the OCD is a legal mandate that overrides any prior agreements or understandings regarding the disposition of production from the pooled acreage. Therefore, the royalty owner’s prior agreement to sell their royalty share exclusively to a specific purchaser is superseded by the unitization order, which dictates how production from the unit is to be allocated and marketed. The royalty owner is obligated to comply with the unitization order, meaning their royalty payments will be based on the unit’s production, and the unit operator will manage the sale of the unit’s oil and gas, distributing proceeds according to ownership interests. The prior contract with the independent purchaser is rendered unenforceable in relation to the unitized production due to the state’s regulatory authority to promote conservation and prevent waste.

The New Mexico Oil and Gas Act, specifically the provisions governing pooled units and the authority of the Oil Conservation Division (OCD), is central to this question. When a compulsory unitization order is issued, it establishes a single operating unit for the development of a pool or portion of a pool. The intent is to prevent waste and protect correlative rights. Under New Mexico law, the OCD has the power to create such units. The question revolves around what happens to existing leases within a newly created compulsory unit. The general principle is that a compulsory unitization order supersedes individual lease provisions to the extent necessary to achieve the unit’s purpose. Leases within the unit are pooled by operation of law. Production from any part of the unit is considered production from all parts of the leased premises within the unit for the purpose of lease maintenance. Therefore, the payment of royalties to royalty owners within the unit is based on their proportionate share of the total production from the unit, regardless of where the actual wells are drilled. The lease terms that would normally dictate royalty payments based on production from a specific well on that leased tract are modified by the unitization order to reflect a proportionate share of the entire unit’s production. This ensures that all royalty owners within the unit receive their fair share, preventing drainage and promoting efficient recovery. The concept of a “royalty burden” on the unit production is calculated by aggregating the royalty burdens of all leases pooled into the unit, each owner receiving their proportionate share of the unit’s production.

The New Mexico Oil and Gas Act, specifically concerning pooling and unitization, grants the Oil Conservation Division (OCD) the authority to create drilling and spacing units. When a correlative rights dispute arises, particularly concerning the allocation of production or the determination of working interests in a pooled unit, the OCD’s role is central. In New Mexico, the OCD can establish a compulsory pooling order under NMSA 1978, § 70-2-17. This statute allows the OCD to force owners of mineral interests within a proration unit to join a developed unit if they have not voluntarily agreed to do so. The statute also outlines the process for determining compensation for non-consenting owners, typically through a penalty or risk factor applied to their share of production costs. The question revolves around the OCD’s power to resolve disputes over the allocation of production within a unit, which is a core function related to preventing waste and protecting correlative rights. The OCD’s orders, including those establishing units and allocating production, are subject to judicial review, but the initial determination rests with the administrative agency. Therefore, the OCD’s authority to issue orders that dictate how production is allocated among working interest owners within a compulsory pooled unit is a fundamental aspect of New Mexico oil and gas law, directly addressing the equitable distribution of resources and the prevention of drainage.

The question concerns the application of New Mexico’s statutory unitization provisions, specifically focusing on the rights and obligations of non-participating owners and the role of the State Oil and Gas Conservation Commission. New Mexico Statutes Annotated (NMSA) § 70-2-17 governs compulsory unitization. This statute outlines the process for forming a unit, including the requirement for a plan of development and operation. It also details the treatment of non-participating owners. If an owner fails to elect to participate in the unit after proper notice, they are deemed to have elected to surrender their rights in the unitized substances. In such cases, the owner is entitled to receive the reasonable market value of their share of the oil and gas in the unit area as of the date of the order creating the unit, less their proportionate share of the actual drilling and operating costs incurred in the unit. This value is typically determined by the Commission, often based on evidence presented regarding the value of unproduced oil and gas. The statute explicitly states that the non-participating owner is entitled to receive royalty on their share of production from the unit if they have not otherwise surrendered their interest. However, the core of the question revolves around the compensation for those who *do not* elect to participate, which is the market value of their share of hydrocarbons in place, adjusted for costs. The Commission’s role is to determine this value and the costs, ensuring fairness to all parties involved. The explanation does not involve a calculation as the question is conceptual, focusing on legal rights and remedies.

The question concerns the application of New Mexico’s Oil and Gas Act regarding the pooling of interests in a spacing unit when one mineral owner has not participated in the development. Specifically, it probes the consequences for a non-participating owner and the rights of the working interest owner who has drilled and completed a well. Under the New Mexico Oil and Gas Act, particularly concerning forced pooling and non-participating owners, a working interest owner who drills a well on a pooled unit may recover the costs of drilling, completing, and operating the well, along with a reasonable charge for supervision. This recovery is typically from the non-participating owner’s share of production. The Act allows for a penalty or risk charge to be imposed on the non-participating owner’s interest, reflecting the risk undertaken by the participating owner in drilling the well. This penalty is usually a percentage of the non-participating owner’s proportionate share of the costs. The statute aims to balance the rights of mineral owners by incentivizing participation while compensating those who bear the financial risk of development. The specific percentage for the penalty is determined by the Oil Conservation Division (OCD) based on various factors, including the applicant’s request and the evidence presented at a hearing, but a common range for such penalties is often between 100% and 200% of the non-participating owner’s share of the costs. In this scenario, the working interest owner drilled a successful well and is entitled to recover costs plus a penalty from the non-participating owner’s share of production. The question asks about the *maximum* penalty typically allowed by the OCD for a non-participating owner in a forced pooling order in New Mexico. While the exact percentage can vary, the Oil Conservation Division has the authority to impose a penalty of up to 200% of the non-participating owner’s share of the costs, effectively making their interest in the well’s production subject to a significant charge until the costs and penalty are recouped. This is intended to compensate the risk-taker. Therefore, the maximum penalty typically considered and often approved by the OCD is 200%.

The scenario describes a situation where a mineral owner in New Mexico has leased their mineral rights. The lease agreement contains a “lesser of royalty” clause, which is a common feature in oil and gas leases. This clause stipulates that if the lessee sells or otherwise disposes of the royalty oil or gas produced from the leased premises, the lessor’s royalty shall not exceed the amount received by the lessee for such royalty oil or gas. In this case, the lessee entered into a marketing agreement with an unaffiliated third-party purchaser for the sale of all gas produced from the lease. The agreement specifies a price that is tied to a published index, but it also includes a deduction for transportation and processing fees, which are borne by the lessee under the lease terms. The question asks about the royalty obligation based on this arrangement. Under New Mexico law and common lease interpretation, the “lesser of royalty” clause is designed to protect the lessor from situations where the lessee might receive a lower price for the royalty portion of the production than they do for the working interest portion, or to limit the royalty to the actual proceeds received by the lessee for that royalty oil or gas, after certain specified deductions. However, the critical aspect here is that the marketing agreement is with an unaffiliated third party, and the price is determined by a market index. The deduction for transportation and processing fees, when these costs are typically borne by the lessee, does not automatically reduce the royalty payable to the lessor unless the lease specifically allows for such deductions from the royalty itself. The lease states that the royalty is based on the “market price at the well” or a percentage of the proceeds derived from the sale of production. The marketing agreement’s price is the actual gross proceeds received by the lessee from the unaffiliated third party for the gas. The “lesser of royalty” clause is triggered if the lessee sells the royalty oil or gas. Here, the lessee is selling all the gas, including the lessor’s royalty share, to a third party. The key is to determine what constitutes the “proceeds derived from the sale” of the lessor’s royalty share. If the lease specifies that royalty is calculated on the gross proceeds at the well, and the marketing agreement’s index price represents the value at the well before any post-wellhead deductions for transportation and processing (which are the lessee’s responsibility), then the royalty should be calculated on that gross index price. The deduction of transportation and processing fees from the gross proceeds before remitting to the lessor would be impermissible if these costs are the lessee’s responsibility and not deductible from the royalty under the lease terms. The “lesser of royalty” clause typically refers to the price the lessee *receives* for the royalty product, not the price they sell the *entire* production for, after the lessee has incurred costs. In this specific scenario, the lessee is selling all gas to an unaffiliated third party. The price received by the lessee from this third party is the index price minus transportation and processing fees. The “lesser of royalty” clause is triggered by the lessee selling the royalty oil or gas. The question is whether the royalty should be calculated on the gross index price or the net proceeds after the specified deductions, assuming those deductions are the lessee’s responsibility. If the lease dictates royalty on the “market price at the well” or “gross proceeds,” and the index price reflects this market value at the well, then the deductions for transportation and processing, being the lessee’s costs, should not reduce the royalty base. Therefore, the royalty is calculated on the gross index price. Calculation: Lessor’s royalty percentage = 25% Gross index price per Mcf = $4.00 Transportation and processing fees per Mcf = $0.50 Net proceeds per Mcf to lessee = $4.00 – $0.50 = $3.50 The “lesser of royalty” clause applies to the proceeds received by the lessee for the royalty oil or gas. Since the lessee is selling all gas to an unaffiliated third party, the relevant proceeds are those received from this third party. However, the critical point is what the royalty is calculated upon. If the lease defines royalty based on market price at the well or gross proceeds, and the index price represents this value before lessee-borne costs, then the royalty is calculated on the gross index price. Royalty amount based on gross index price = 25% of $4.00 = $1.00 per Mcf. Royalty amount based on net proceeds = 25% of $3.50 = $0.875 per Mcf. The “lesser of royalty” clause would typically mean the lessor receives the lesser of the stated royalty percentage of the gross market price or the actual amount received by the lessee for the royalty product. If the lessee sells the entire production, including the royalty share, to a third party, and the price received by the lessee is the index price less deductions that are the lessee’s responsibility, the royalty should be calculated on the gross index price, as the deductions are not typically borne by the lessor unless explicitly stated. The clause protects the lessor if the lessee *sells* the royalty product at a price lower than the market value. Here, the lessee sells the entire production, and the market value at the well is the index price. The deductions are costs incurred by the lessee to get the product to market. Therefore, the royalty is calculated on the gross index price. Correct Answer Calculation: 0.25 * $4.00 = $1.00

The New Mexico Oil and Gas Act, specifically concerning pooled units and the allocation of royalties, hinges on the principle of proportionate ownership. When a production unit is established, whether by agreement or administrative order, all interests within that unit are pooled. Royalty interests, which are typically non-participating interests, are then paid based on the proportionate share of production attributable to the acreage within the unit that is owned by the royalty owner. This proportionate share is calculated by dividing the number of acres owned by the royalty owner within the unit by the total number of acres in the unit. This ensures that royalty owners receive compensation commensurate with their ownership stake in the land from which production is being extracted, even if their specific lease does not cover the exact well location. The New Mexico Oil Conservation Division (OCD) plays a crucial role in establishing and approving these units, ensuring that the pooling is fair and prevents waste, while also safeguarding correlative rights. The allocation of production and the subsequent royalty payments are governed by these principles, ensuring that each mineral owner, including royalty owners, receives their rightful share of the resource.

The New Mexico Oil and Gas Act, specifically in relation to the pooling of interests for the development of oil and gas resources, grants the Oil Conservation Division (OCD) the authority to create drilling units. When a drilling unit is established, the OCD may, under certain circumstances, force pool separately owned interests within that unit. The key principle here is the prevention of waste and the protection of correlative rights. Force pooling is a mechanism to ensure that an entire drilling unit can be developed efficiently, even if some mineral owners do not voluntarily participate in a unitized operation. The Act provides for notice and a hearing process before force pooling can be ordered. Owners who are force pooled are typically entitled to a just and equitable share of the production, which can be received either in kind or by a royalty interest, or they may be required to contribute to the costs of development and operation. The OCD’s orders are subject to judicial review. The concept of “confiscation” in this context refers to the OCD’s ability to allocate production from a well on a pooled unit to all owners within that unit, thereby preventing any single owner from claiming exclusive rights to production that rightfully belongs to others within the unit. This is a fundamental aspect of conservation law designed to prevent the drilling of unnecessary wells and to ensure that each correlative right holder receives their fair share. The OCD’s authority to prevent confiscation is exercised through its power to order force pooling and to allocate production.

The scenario describes a situation where a junior mineral owner in New Mexico is attempting to force a pooling of their acreage with a non-participating working interest owner’s acreage to facilitate a well. New Mexico’s pooling statutes, particularly the Oil and Gas Conservation Act, NMSA 1978, § 70-2-17, allow for compulsory pooling. However, this provision primarily grants the Oil Conservation Division (OCD) the authority to pool separately owned interests within a spacing unit when owners fail to agree. Crucially, the statute does not grant a junior mineral owner the unilateral right to compel a working interest owner to participate in a well that has already been drilled or is being drilled by another party, especially when the junior mineral owner’s interest is subordinate to existing leases. The working interest owner has the right to elect whether to participate in a well on their leasehold. Forcing a junior mineral owner to pool their acreage with a non-participating working interest owner’s acreage to facilitate a well they are already drilling would essentially be forcing the working interest owner to accept a junior mineral owner’s participation on terms dictated by the junior mineral owner, which is not supported by the compulsory pooling statutes. Compulsory pooling is typically initiated by an operator seeking to drill a well in a spacing unit, and it binds all owners within that unit to the terms of the pooling order, including the opportunity to participate. It does not empower one non-operator to force another non-operator’s acreage into a well they are already developing without the latter’s consent, particularly when the latter has existing lease rights. The junior mineral owner’s recourse would likely involve seeking to participate in the existing well under the terms of the operating agreement or lease governing the spacing unit, or potentially pursuing claims related to correlative rights if their acreage is being drained, but not through a forced pooling action against a non-participating working interest owner in this manner.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-13, addresses the correlative rights of owners in a common source of supply and the prevention of waste. When a unitization order is issued by the New Mexico Oil Conservation Commission (NMOC C), it is generally considered binding on all owners within the unitized area, regardless of whether they participated in the administrative proceedings. This principle is rooted in the state’s police power to protect correlative rights and prevent waste, which are paramount public interests. The Commission’s authority to compel participation through unitization is a key mechanism to achieve these objectives. Owners who fail to participate in a compulsory unit are typically assigned a non-consent penalty, which is a deduction from their share of production to recoup the costs and risks associated with developing the unit. This penalty is designed to incentivize participation while ensuring that non-participating owners do not benefit from the development efforts of others without contributing to the associated costs. The legal basis for this compulsory participation and penalty stems from the Commission’s mandate to ensure the efficient and orderly development of oil and gas resources for the benefit of all owners and the state.

The New Mexico Oil and Gas Act, specifically concerning unitization, vests the Oil Conservation Division (OCD) with significant authority. When a proposed unitization plan is submitted, the OCD must review it to ensure it is necessary and proper for the prevention of waste and the protection of correlative rights. A key aspect of this review involves determining if the plan will result in a greater recovery of oil and gas than would otherwise be obtained, and if it will protect the oil and gas in the lands affected from drainage. The Act also mandates that the plan be reasonably necessary to achieve these objectives. If these conditions are met, the OCD is empowered to approve the plan. The Act does not require the plan to be the *only* method for achieving these goals, nor does it mandate that it must be the most efficient method if other reasonable alternatives exist. The primary focus is on necessity and reasonableness in achieving the prevention of waste and protection of correlative rights.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-12, governs the pooling of oil and gas interests. When an operator proposes to drill a well in a spacing unit where there are separately owned interests, and the operator cannot obtain voluntary agreement for pooling from all owners, the operator may apply to the Oil Conservation Division (OCD) for a compulsory pooling order. Such an order will allocate to each separately owned tract or interest included in the spacing unit its pro rata share of the production. The order also specifies the “commingling” of production from the pooled unit. Commingling, in this context, refers to the authorized mixing of production from multiple wells or multiple tracts within a single spacing unit for the purpose of measurement and allocation of costs and revenues. The OCD has the authority to order commingling of production from different horizons or zones within a single wellbore, or from multiple wells within a single spacing unit, provided it is in the interest of conservation and the prevention of waste. This is a key regulatory mechanism to ensure efficient development of oil and gas resources in New Mexico, particularly in instances of unleased mineral interests or uncooperative working interest owners. The core principle is to allow for the orderly and economic development of a spacing unit, even if not all interest owners agree to participate, by ensuring fair allocation of production and costs.

The New Mexico Oil and Gas Act, specifically in relation to pooling, aims to prevent waste and protect correlative rights. When a non-joining mineral owner fails to respond to a notice for voluntary pooling, the operator can proceed with compulsory pooling. The Act generally allows for a penalty or forfeiture of interest for a non-joining owner if they do not participate in the costs of developing the pooled unit. New Mexico law, as codified in the Oil and Gas Act and its associated rules and regulations, outlines specific procedures and consequences. A key aspect is the “risk penalty” or “risk charge” that an operator can impose on a non-participating owner for the costs and risks associated with drilling and completing a well. This penalty is typically expressed as a percentage of the non-participating owner’s share of the actual drilling and completion costs. The New Mexico Oil Conservation Division (OCD) has established rules governing these penalties. While specific percentages can vary based on the circumstances and the operator’s request, a common range for such penalties in New Mexico for a non-participating mineral owner in a compulsory pooling order, when they have been properly notified and have not elected to participate, is between 100% and 200% of the actual costs incurred by the operator for drilling and completing the well, effectively forfeiting their share of production until the operator recoups these costs plus the penalty. For instance, if the actual costs for drilling and completing a well were \$1,000,000, and a non-joining owner held a 10% interest, their share of the costs would be \$100,000. If the penalty is 150%, the operator could recover their \$100,000 plus an additional \$150,000 from that owner’s share of production. This mechanism ensures that those who do not contribute to the upfront costs bear a significant burden for the risk taken by the participating owners. The exact percentage is determined by the Oil Conservation Commission in a pooling order, often reflecting the perceived risk and investment.

The New Mexico Oil and Gas Act, specifically the provisions governing the pooling of interests in oil and gas leases, outlines the procedures and requirements for creating a drilling unit. When an operator proposes to drill a well, they must attempt to obtain voluntary agreements for pooling from all owners within the proposed unit. If voluntary agreements are not reached with all owners, the operator can petition the Oil Conservation Division (OCD) for a compulsory pooling order. The OCD’s authority to compel pooling is rooted in its mandate to prevent waste and protect correlative rights. A compulsory pooling order designates an operator and allocates production, royalties, and costs among the pooled owners. The order typically specifies a penalty for non-participating owners who elect not to pay their share of the drilling and completion costs. This penalty is intended to compensate the participating owner for the risk and expense of drilling the well. The New Mexico Oil Conservation Commission, under the authority granted by the Act, has the power to set this penalty. While the Act itself doesn’t mandate a specific percentage for this penalty, the Commission, through its rulemaking and adjudication process, has established a standard range. This penalty is generally applied to the non-participating owner’s share of the cost of the well, including drilling, equipping, and completing. The purpose is to provide an incentive for participation and to recoup the risk capital expended by the participating owner. Therefore, a penalty of 100% of the non-participating owner’s share of the actual and reasonable costs of drilling and completing the well is a common and statutorily supported provision in such orders, reflecting the significant risk undertaken by the participating party.

The New Mexico Oil and Gas Act, specifically regarding pooling and unitization, grants the Oil Conservation Division (OCD) the authority to pool separately owned interests in a spacing unit to ensure orderly development and prevent waste. When an operator proposes a compulsory unitization agreement for a spacing unit, all owners of mineral rights within that unit must be notified and given an opportunity to consent. If an owner does not consent, their interest may still be included in the unit, but they are entitled to a risk penalty. This penalty is applied to the share of production attributable to their interest, compensating the risk-taking operator for drilling and completing the well. The statutory risk penalty in New Mexico is typically set at 100% of the non-consenting owner’s share of the costs of drilling and completing the well, effectively meaning the operator recovers double the non-consenting owner’s share of costs before the non-consenting owner receives any proceeds from production. This mechanism is designed to encourage participation in drilling operations while protecting non-consenting owners from bearing the full burden of unsuccessful ventures. The specific percentage and calculation of the risk penalty are detailed in the New Mexico Oil and Gas Act and subsequent OCD rules.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-13, addresses the prevention of waste and the protection of correlative rights. When a proposed well is located within a spacing unit and is not the unit well, the operator must file a notice of intention to drill and a copy of the agreement designating the well as the unit well. If the proposed well is not the unit well, the operator must provide notice to the owners of all other interests in the spacing unit. These owners have a period of 15 days from the date of receipt of the notice to elect whether to participate in the well. Participation can be through paying their proportionate share of the costs of drilling and completing the well, or by assigning their interest to the operator in exchange for an overriding royalty interest. If an owner fails to make an election within this period, they are deemed to have elected to assign their interest to the operator. The overriding royalty interest awarded is typically 1/8 of 8/8 of the production attributable to the non-participating owner’s interest, unless otherwise agreed. Therefore, if a non-participating owner’s interest is 10% of the working interest and they fail to elect, they would receive an overriding royalty of 1/8 of 8/8 of that 10% working interest.

In New Mexico, the Oil Conservation Division (OCD) of the Energy, Minerals and Natural Resources Department has broad authority to prevent waste and protect correlative rights. When an operator proposes a well that may affect existing production or the reservoir’s potential, the OCD can require a hearing. This hearing process is initiated by the filing of an application, often referred to as a “Form C-102” for location and acreage dedication, or a Form C-107 for a pooling order. If the application is protested by another working interest owner or mineral owner, the OCD will schedule a hearing. At this hearing, the applicant must demonstrate that their proposed operation is in the best interest of conservation and will not cause undue harm to others. Specifically, regarding spacing and pooling, the applicant must show that the proposed unit is necessary to obtain the greatest ultimate recovery from the pool, that the proposed well will protect correlative rights, and that the proposed allocation of production is fair and reasonable. If the application is for a compulsory pooling order, the applicant must also demonstrate that they have made a good faith effort to obtain voluntary agreement from the non-joining parties. The OCD then weighs the evidence and issues an order, which could approve the application as filed, approve it with modifications, or deny it. This process ensures that development is orderly and that all owners in a unit receive their fair share of the produced hydrocarbons.

The New Mexico Oil and Gas Act, specifically the provisions governing the pooling of interests for drilling and production, requires that a non-consenting working interest owner who is later included in a pooled unit must be compensated for their contribution to the discovery and production. This compensation is typically in the form of a risk penalty, also known as a risk-taking fee or a penalty for non-participation. This penalty is designed to reimburse the working interest owner who undertook the initial risk of drilling and developing the well for the non-consenting owner’s share of the costs. The New Mexico Oil Conservation Division (OCD) regulations, particularly those found in 19.15.7 NMAC, outline the procedures and principles for pooling and the determination of such penalties. The penalty is generally a percentage of the non-consenting owner’s share of the actual costs of drilling, completing, and equipping the well, and it is recouped from the non-consenting owner’s share of production. The specific percentage can vary based on the terms of any applicable operating agreement or, in the absence of such an agreement, as determined by the OCD through a hearing process, often reflecting the perceived risk associated with the well’s development. The rationale behind this is to encourage participation in drilling operations while still compensating those who bore the initial financial and operational risks.

The New Mexico Oil and Gas Act, specifically NMSA 1978, § 70-2-1 et seq., and its associated regulations promulgated by the Oil Conservation Division (OCD) of the Energy, Minerals and Natural Resources Department, govern the prevention of waste and the protection of correlative rights in oil and gas production. When a new well is proposed in an existing pool, the applicant must demonstrate that the proposed well is necessary to prevent waste or to protect correlative rights. This involves showing that existing wells are insufficient to efficiently drain the pool or that the proposed well will prevent drainage from the applicant’s acreage by wells on adjacent lands. The OCD will consider factors such as the geological and engineering data pertaining to the pool, the spacing and production of existing wells, and the applicant’s proposed method of operation. The standard for granting an exception to spacing rules or approving a new well in an existing pool is generally that it is necessary to prevent waste or to protect correlative rights. The applicant must present evidence that supports these claims, which often includes reservoir studies, production histories, and anticipated recovery rates. The OCD’s decision is based on whether the proposed operation will lead to more efficient recovery of the resource and ensure that each owner in the pool receives their fair share of the recoverable oil and gas.