Risky Business: Uncertain Outcomes for Application of Bankruptcy Code 365
Variations in How States Treat Oil & Gas Leases Make Dispositions Complicated Ability of a debtor to assume, assign, or reject oil and gas “leases” under section 365 of the Bankruptcy Code Section 365(a) of the Bankruptcy Code (11 U.S.C. § 365) provides that “the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” On the face of the statute, it would appear an oil and gas lease may be rejected in bankruptcy as an “unexpired lease.” However, as one court has held, “[t]he term ‘oil and gas lease’ is →
Utah Board of Oil, Gas & Mining Amends Force Pooling Rules
Effective June 1, 2020, the Utah Board of Oil, Gas & Mining (the “Board”) approved significant revisions to the state’s force pooling rules. The prior rules gave an operator little certainty and direction on how to force pool interests in Utah. The new rules include procedures for handling disputes over the governing terms of the imposed operating agreement, treatment of unidentifiable or unlocatable owners, and application of the initial force pooling order to subsequently drilled wells. Definitions for “Authority for Expenditure,”1 “Joint Operating Agreement,”2 and “Notice of Opportunity to Participate”3 are now included in Section R649-1-1. Importantly, definition for “Notice →
NDIC To Hold Special Hearing on Potential Output Restrictions
Last month, North Dakota adopted a waiver program that allowed O&G producers to keep wells in non-completed or inactive status longer than regulations typically permitted. The policy was designed to prevent producers from either bringing more unwanted crude to market or being forced to abandon wells. Now, North Dakota is looking into requiring oil and natural gas production cuts. The North Dakota Industrial Commission (“NDIC”) has announced the Oil and Gas Division of the Department of Mineral Resources has scheduled a special hearing for May 20 on whether or not the current production of oil and natural gas at low →
Proposed BLM Interim Guidance to Provide Relief for Oil & Gas Operators
Lease Suspension and Reduction of Royalty Rates Available Late on April 21, 2020, the Bureau of Land Management (BLM) issued two separate Interim Guidance statements to help alleviate some of the industry’s and BLM’s hardships created by the COVID-19 pandemic and the dramatic collapse of oil prices. Interim Guidance for Lease Suspension Requests During the COVID-19 National Emergency Federal oil and gas leases may qualify for a suspension of production or a suspension of operations due to force majeure provision of Section 17 of the Mineral Lease Act of 1920. Both types of suspensions toll the lease term, but the →
EPA Issues Temporary Policy for Violations Caused By COVID-19
On March 26, 2020 EPA issued a temporary policy for enforcement of environmental legal obligations during the COVID-19 pandemic. The policy provides the framework for the agency’s use of its enforcement discretion where COVID-19 related worker shortages and governmental restrictions affect facility operations and impede the ability of regulated entities to comply with EPA requirements. The policy does not extend to Superfund or Resource Conservation and Recovery Act (“RCRA”) corrective actions, which will be subject to forthcoming guidance, or pesticide imports under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”). Broadly speaking, the policy states that EPA will forego enforcement →
Idaho Court Voids 845 Federal Leases
United States District Court in Idaho voids numerous federal oil and gas leases in sage-grouse habitat areas within Nevada, Utah, and Wyoming, and sets aside corresponding Trump administration leasing procedures, while reinstating more stringent standards implemented during the Obama administration.[1] In a win for environmentalists, a federal district court judge in Idaho voided 845 federal oil and gas leases in greater sage-grouse habitat areas issued in 2018 in Nevada, Utah, and Wyoming, finding Trump administration leasing policies are invalid. These leases and leasing policies, which were aimed at streamlining and simplifying the federal leasing process, were challenged as part of →
Can I Drill Through Unleased Federal Lands?
As horizontal wells and larger spacing units become the norm, the question often arises how to deal with an unleased federal tract in the proposed drilling unit. Generally, you cannot drill through and produce from an unleased tract of land that is entirely or partially owned by the United States, but there are some options available. Can I include unleased federal lands in my drilling unit if I don’t penetrate that tract? Yes, there is precedent where drilling units have been approved and operators have drilled horizontal wells that come close to the boundary of an unleased federal tract, but →
Operator Responsibilities Under Federal Oil and Gas Leases
Record title and operating rights owners each have responsibilities and liabilities under federal leases. After a transfer of operating rights, the BLM will initially look to an operating rights owner to perform primary operational obligations. However, the record title holder is ultimately responsible for complying with lease provisions (see, for example, Petroleum, Inc., Frank H. Gower Trust, Rex Monahan, 161 IBLA 194 (2004), holding that a record title owner was liable for well plugging obligations upon the bankruptcy of the operating rights owner). A transfer of operating rights is considered a sublease and does not affect the relationship imposed by →
Utah Clarifies Who Is Entitled to Proceeds of Unclaimed Mineral Interests
On March 1, 2019, the Utah State Legislature passed a law clarifying what happens to unclaimed mineral interests located in the state of Utah. The text of S.B. 78 and information about its passing can be found here. This new law doesn’t change who owns unclaimed mineral interests, but it does streamline the process for transferring ownership and dealing with any proceeds derived from the interests. The Utah Uniform Probate Code, Utah Code § 75-1-101, et seq., governs what happens to a person’s property at his death. If a person dies without a will, then his property passes to his →
When Do I Need to Obtain a Lease Bond to Operate on a Federal Oil and Gas Lease?
By Angela Franklin and Andy LeMieux Pursuant to the Federal Onshore Oil and Gas Leasing Reform Act of 1987 (“1987 Reform Act”), when operating on federal lands, an adequate bond (or other financial assurance) must be posted (1) before commencement of any surface disturbing activities related to drilling to ensure reclamation of lands and waters adversely affected by oil and gas operations (“lease bonds”); (2) before entry and commencement of geophysical exploration or surface-disturbing operations and for parties other than lessees before conducting geophysical exploration operations; and (3) before any surface disturbing activities for surface protection.[1] This article focuses on →
What Are Federal Lease Rentals and When Are They Required?
Federal oil and gas leases require annual rental payments until a discovery of oil or gas in paying quantities on the leased lands. This means that, upon the completion of a well capable of producing oil and gas in paying quantities, the lease is transferred into producing status and annual rentals are no longer required. However, thereafter in lieu of rentals, the lessee is required to make a minimum royalty payment of not less than the amount of the annual rental that would otherwise be required prior to the end of each lease year.[1] The annual rentals required under all →
How Are Federal Oil and Gas Leases Pooled and Unitized?
In the context of federal oil and gas leases, the terms “communitization” and “unitization” are distinct concepts which are subject to different statutes, regulations, and procedures. As such, the method to “communitize” a federal oil and gas lease is different than the process used to “unitize” such leases. These respective differences are highlighted herein. Communitization of Federal Oil and Gas Leases Virtually all oil and gas producing states have promulgated minimum acreage requirements for the drilling of oil or gas wells.[1] The United States recognized the importance of state conservation statutes, and accordingly passed an amendment to the Mineral Leasing →
BLM Directives Rein In the Federal APD Environmental Review Process
In the first two weeks of June 2018, the Bureau of Land Management (BLM) issued two directives streamlining and clarifying the environmental review process undertaken by the BLM to approve an application for permit to drill (APD). The first directive was issued on June 6, 2018, as Information Bulletin (IB) 2018-061, NEPA Efficiencies for Oil and Gas Development, found at https://www.blm.gov/policy/ib-2018-061. IB 2018-061 prioritizes the creation of efficiencies to meet the BLM’s requirements under the National Environmental Policy Act (NEPA), from using existing environmental analyses to evaluating groups of APDs under a Master Development Plan. →
What Is the Difference Between Leasing BLM and Forest Service Lands?
Leasing on National Forest System lands requires coordination between the BLM and the Forest Service throughout the leasing process. The BLM and the Forest Service share the responsibility over oil and gas leasing on National Forest System lands.[1] The BLM issues the oil and gas leases on National Forest System lands with the consent of the Forest Service.[2] Generally, the Forest Service manages the surface of the lands, while the BLM manages the subsurface, and the agencies work together to develop the permitting conditions under their separate management authorities.[3] How do I get an oil and gas lease and drill →
What Are the Types of Interests in Federal Oil and Gas Leases and How Are They Assigned?
Federal oil and gas leases are administered by the Bureau of Land Management (“BLM”) pursuant to the Mineral Leasing Act of 1920, as amended (“MLA”), and the implementing federal regulations. Federal leases have a slightly different ownership scheme than fee oil and gas leases. As to fee leases, the lessee owns a leasehold interest that includes the right to drill for and produce the leased substances, subject to royalty payments to the lessor. The term “working interest” is commonly used and is generally considered synonymous with the lessee’s interest and the term “leasehold interest.” As to federal leases, the lessee’s →