Operator Responsibilities Under Federal Oil and Gas Leases

FAQs of Federal Oil and Gas Leases, Federal Lands, , , , ,

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 a lease between the lessee(s) and the United States. 43 CFR § 3100.0-5.  Although transferring operating rights only does not remove the record title holder from liability, “once a lessee transfer[s] record title, the assignee and its surety bec[o]me responsible for the performance of all obligations.” Id.  It is not uncommon to find a federal oil and gas lease where a record title owner has transferred operating rights from the surface to the base of the deepest producing formation in an area, but has retained record title and operating rights to formations below such depth. That approach may not always be in the best interest of the record title owner as it may be reserving negligible or speculative economic interests in deeper formations, while also retaining potential liability for the operations of the operating rights owner in the productive formations.   

The operator must “comply with applicable laws and regulations; with the lease terms, Onshore Oil and Gas Orders, NTL’s; and with other orders and instructions of the authorized officer.”  43 C.F.R. § 3162.1(a). The following, while not an exhaustive list, is a summary of some key obligations of an operator on a federal lease. The Bureau of Land Management (BLM) also has internal manuals that supplement some of the following requirements. The failure of an operator or record title owner to comply with regulations can subject the violating party to assessments and penalties as set forth in 43 C.F.R. § 3163.

Drilling and Producing Obligations

  • The operator may drill and produce wells in conformity with the well spacing orders affecting the field that is authorized by applicable law or the authorized officer.  43 C.F.R. § 3162.2-l(a).
  • The authorized officer may reasonably require the operator to promptly drill and produce other wells on the lease to properly and timely develop the lease.  43 C.F.R. § 3162.2-l(b).
  • If economically feasible, oil and other hydrocarbons produced on the lease must be put into marketable condition.  43 C.F.R. § 3162.7-1.
  • The operator is expected to prevent avoidable loss of oil and gas, and will be liable for royalty payments on oil and gas lost or wasted. Id.

Protection from Drainage

  • The lessee may be required within a reasonable time after receiving constructive or actual notice, or a demand letter from the BLM, to drill and produce wells necessary to protect the lease from drainage.  43 C.F.R. § 3162.2-2; 43 C.F.R. § 3162.2-11.  In the alternative, the BLM may execute agreements with owners of interests in the producing well to compensate for drainage, offer for lease any qualifying unleased mineral resources, or approve a unit or communitization agreement. 43 C.F.R. § 3162.2-2.
  • The BLM may require the lessee to “pay compensatory royalties for drainage that has occurred or is occurring.”  43 C.F.R. § 3162.2-4.
  • If the lessee can prove a protective well would be uneconomic, then the lessee is not required to take certain protective actions.  43 C.F.R. § 3162.2-5.
  • “Operating rights owners are jointly and severally liable with each other and with all record title holders for drainage affecting the area and horizons in which they hold operating rights during the period they hold operating rights.”  43 C.F.R. § 3162.2-7.
  • After assigning an interest in a federal oil and gas lease interest, the assignor is only responsible for compensatory royalties until the time the BLM approves the assignment or transfer, after which, the assignee or transferee will be responsible.  43 C.F.R. § 3162.2-8.
  • Duty to Inquire of drainage:
    • A lessee must monitor the drilling of wells in the same or adjacent spacing units and gather information to determine if drainage is occurring. 43 C.F.R. § 3162.2-9.
    • The lessee must determine the amount of drainage from production of the draining well, the amount that will be drained, and whether a protective well would be uneconomic.  Id.
    • The lessee must then notify the BLM of the actions it will take within 60 days of actual or constructive notice of the draining.  Id.
    • The lessee must provide the BLM with the analysis within 60 days after it has been requested.  Id.

Conduct of Operations

  • The authorized officer must be promptly notified of an operator change and the new operator must have sufficient bond coverage.  43 C.F.R. § 3162.3.
  • A contractor is considered an agent of the operator with full responsibility to comply with the laws and regulations.  Id.
  • The operator must submit an application for permit to drill prior to commencing any drilling operations.  43 C.F.R. § 3162.3-1.  
  • The operator must submit a proposal for further well operations prior to performing subsequent well operations.  43 C.F.R. § 3162.3-2.
  • The operator must conduct work and maintain equipment in a safe and workman-like manner, and take safety precautions to protect life and property.  43 C.F.R. § 3162.5-3.
  • Wells and production facilities must be identified by a sign with information as required by law and the authorized officer 43 C.F.R. § 3162.6.

Well Abandonment

  • The operator must promptly plug and abandon any well not capable of producing oil or gas in paying quantities unless it will be used for injection.  43 C.F.R . § 3162.3-4.  Permanent abandonment may be delayed up to 12 months with prior approval from the authorized officer.  Id.
  • After abandonment, the surface must be reclaimed by the operator in accordance with a plan approved or prescribed by the authorized officer.  Id.
  • Abandoned wells must be identified by a permanent monument unless the requirement is waived by the authorized officer.  43 C.F.R. § 3162.6(e).

Reporting

  • The operator must keep records of all lease operations (drilling, producing, redrilling, repairing, plugging back, and abandonment operations, etc.), production facilities and equipment, and determining and verifying the quantity, quality, and disposition of production.  43 C.F.R. § 3162.4-1.
  • The operator must notify the authorized officer by letter, sundry notice, or orally (followed by letter or sundry notice) no later than 5 business days after production begins.  Id.
  • The operator shall conduct the required tests and report results to the authorized officer.  43 C.F.R. § 3162.4-2.

Environmental

  • The operator must conduct operations so as to protect the natural and environmental resources.  43 C.F.R. § 3162.5-1.
  • An operator must comply with orders of the authorized officer, applicable laws and regulations, lease terms and conditions, and the approved drilling/operations plan.  Id.
  • The operator must exercise due care and diligence to not cause undue surface or subsurface damage.  Id.
  • Water must be disposed of by injection, pits or in a manner approved by the authorized officer.  Id.
  • All spills, leaks or other accidents shall be reported by the operator.  Id.  The operator will then take the necessary measures to solve the issues as approved by the authorized officer.  Id.
  • The authorized officer may require a contingency plan from the operator to protect life, property, and the environment.  Id.