Regulations

Can I Drill Through Unleased Federal Lands?

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

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 do not actually penetrate the unleased federal tract.  The BLM Manual and the BLM Handbook specifically provide that a communitization agreement (CA) can be approved with unleased federal lands if there is at least one other leased tract (federal, state, fee, or Indian), there is a well producing in paying quantities, and it would be a long delay (i.e., more than six months) in leasing the unleased federal lands (or presumably if the unleased federal lands are not available for lease).[1]

In regard to the well producing in paying quantities requirement, we note there is nothing in the federal statutes or regulations requiring a producing well.  We suspect this requirement exists to determine the well drainage and spacing unit for the lands.  If a drilling unit has already been established by the relevant state regulatory body, we do not believe a well producing in paying quantities should be required for approval of a CA with unleased federal lands.  The BLM Manual and Handbook also direct that any unleased federal lands should be leased as soon as possible.  Any lease subsequently issued will be subject to the successful bidder joining the CA or otherwise showing why joinder should not be required.[2]  

If the unleased federal lands are committed to a CA, an interest-bearing account is established and 8/8ths of all proceeds attributable to the unleased federal lands are to be placed  in the account.  Once the tract is leased, the suspended proceeds will be settled with the successful bidder.  In lieu of leasing an unleased federal tract, a compensatory royalty agreement (CRA) for small tracts of unleased lands may also be negotiated.[3]  The BLM has specific procedures in place for this situation, which require an unleased lands account to be established for any unleased lands.  The CRA must be executed by the United States and all adjoining interest owners in lands draining the unleased federal lands. The royalty rate will typically be the same as the rate for a competitive lease.

Unfortunately, there is no precedent that commitment of the unleased federal lands to a CA and/or CRA gives the operator the right to drill into and produce from the unleased federal lands.  There is a potential argument that the BLM’s approval of the CA commits the unleased federal lands to the CA and provides the operator of the CA with full access to all the communitized lands (including drilling on and through the unleased federal lands), but there is no guidance on this point. 

What if I drill through, but don’t produce from unleased federal lands?

Yes, it is possible to drill through unleased federal lands so long as they are not perforated or otherwise produced from.  This is because, when it comes to federal miners, there is a distinction between subsurface trespass (drilling through but not producing from unleased federal minerals) and mineral trespass (drilling through and producing from unleased federal minerals).  It should be noted that the penalties for mineral trespass against the United States can be quite severe.[4] 

Although there is a split in jurisdictions (and even inconsistency within certain jurisdictions) as to the ownership of the pore space after the severance of the surface and mineral estates, the BLM generally defers to the surface owner for approval to drill through (but not produce from) unleased federal lands.  The BLM will not typically assert any approval authority in this situation unless the federal minerals are at risk of harm or interference.[5]  However, a prudent operator may seek a subsurface access agreement from the BLM (even if it is not ultimately granted) to at least notify the BLM of the proposed operations in an effort to protect itself from the risk of subsurface trespass.  In some states, when an APD is filed, the state’s oil and gas commission will either send notice or require the operator to send notice to the BLM when federal lands are involved.

What if the tract is only partially unleased federal minerals?

Generally, whether or not federal or state law controls when dealing with federal minerals is a difficult question to answer.[6]  When the subject involves the disposition or development of federal minerals, state regulatory authorities generally have no jurisdiction or authority.[7]  Specifically, scholars believe that Congress has the ability to preempt conservation regulations under the Supremacy Clause or the Commerce Clause of the Constitution or state regulation of federal lands under the Property Clause of the Constitution.[8] 

As a result, it is not clear whether traditional remedies available for a co-tenant (e.g., compulsory pooling) apply to minerals owned in part by the United States.  On one hand, a private party attempted to force pool unleased federal minerals and a federal court found that compulsory pooling of federal lands could not be done without the Secretary’s consent, essentially requiring a communitization agreement.[9] On the other hand, courts have found that lands reacquired by the United States are subject to state law.[10]  

Furthermore, if the unleased federal minerals are committed to a CA, it would be difficult to argue that development of the unleased federal minerals is a mineral trespass because the Secretary consented to the pooling and development of the unleased federal minerals by approving the CA.  Unfortunately, we have not been able to identify a situation where an operator has attempted to develop a partially-owned unleased federal tract as a co-tenant. 

In the event an operator is actually successful at developing a tract with partially federal minerals, a CA will need to be approved and an interest-bearing account will be established as discussed above.

[1] BLM Manual 3160-9 Communitization, .1.11.H.;  BLM Handbook 3105-1 Cooperative Conservation Provisions, Section II.A. 

[2] It is uncertain whether the latter is actually possible due to the fact that a lease within a CA cannot be independently developed. 

[3] 43 C.F.R. § 3100.2-1.

[4] In assessing the penalty for mineral trespass of federal minerals, the BLM will first look to state law governing oil trespass to measure damages.  If the state where the trespass occurred has no law governing oil trespass, the BLM’s assessment of damages will depend on whether the trespass was “innocent” or “willful.”  For innocent trespass, BLM will measure damages based on the value of oil taken, less expenses of “taking” the oil (i.e., drilling costs).  For willful trespass, the BLM will measure damages based on the “[v]alue of the oil taken without credit or deduction for the expense incurred by the wrongdoers in getting it.”  The BLM’s trespass regulations do not address measurement of damages from gas trespass, but generally state that it will measure damages for “other trespass” based on the laws of the state in which the trespass occurred.  See, generally, Kathleen C. Schroder & William Lambert, “Permitting and Trespass Issues Associated with Horizontal Development on Federal Lands and Minerals,” 62 Rocky Mt. Min. L. Inst. 12-1 (2016).

[5] See U.S. Government Accountability Office, Oil and Gas: Updated Guidance, Increased Coordination, and Comprehensive Data Could Improve BLM’s Management and Oversight, GAO-14-234, Published May 5, 2014, Reissued May 16, 2014.

[6] In the astute words of Professor Bruce M. Kramer, “The rules are in flux, which makes it an exciting time for academics and a difficult time for those providing legal advice to oil and gas explorers and producers.”

[7] Kleppe v. New Mexico, 456 U.S. 529, 540 (1976); Kennedy & Mitchell, Inc. 68 IBLA 80, 83 (1982) (finding “Congress has preempted from the state regulation of communitization or drilling agreements affecting Federal oil and gas leases . . . [U]ntil [a] communitization agreement [is] approved . . . each Federal oil and gas lease . . . [has] to stand by itself”).

[8] Owen L. Anderson, “State Conservation Regulation – Single Well Spacing and Pooling – Vis-à-vis Federal and Indian Lands,” Federal Onshore Oil and Gas Pooling and Unitization, 2-12 (Rocky Mt. Min. L. Fdn. 2006).

[9] Kirkpatrick Oil & Gas Co. v. United States, 675 F.2d 1122, 1125 (10th Cir. 1982) (holding “no state-ordered forced pooling would bind the government without the Secretary’s consent”).  It appears that obtaining a CA may be the more practical approach because the BLM Manual instructs that, in this situation, the operator should submit a copy of the state order force pooling the interest with the CA and the CA will be approved if executed by the operator and complete in all other respects.

[10] See Mallon Oil Co., 104 IBLA 145, 150 (1988) (applying Montana law as to the ownership of the subsurface to find the United States owns both the surface and subsurface of acquired lands located in Montana.

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.

How Do I Access the Lands Under a Federal Oil and Gas Lease?

FAQs of Federal Oil and Gas Leases, Federal Lands, Lease Provisions, Oil and Gas Regulations, , , , , , , ,

At the end of Disney/Pixar’s “Finding Nemo,” a group of fish escape from their tank by jumping into plastic bags that are filled with water and then securely tied at the top. After hopping out of a window, they cross a busy street and land safely in the waters of Sydney Harbour. Still in a plastic bag and bobbing up and down on the water, one of the fish asks an important question: “Now what?” The whole point of escaping was to obtain freedom from captivity. Similarly, the whole point of obtaining a federal oil and gas lease is to produce the natural resources on which our nation relies. To do so, however, requires obtaining the necessary surface use authorizations, which can be complicated.

Lease Rights

The current form of federal oil and gas lease[1] grants to the lessee “the exclusive right to drill for, mine, extract, remove and dispose of all the oil and gas (except helium) [in the leased lands] together with the right to build and maintain necessary improvements . . . .”[2] Those rights, however, are “subject to applicable laws, the terms, conditions, and attached stipulations of [the] lease, the Secretary of the Interior’s regulations and formal orders in effect as of lease issuance, and to regulations and formal orders [promulgated after lease issuance] when not inconsistent with lease rights granted or specific provisions of [the] lease.”[3] That’s where things get complicated.

As mentioned, federal oil and gas leases are subject to “applicable laws.” Generally, this means federal laws, such as the National Environmental Policy Act (NEPA)[4] and Endangered Species Act,[5] which can significantly impact a lessee’s ability to access federal oil and gas. There are several other laws that may apply to the extraction of federal oil and gas, including state laws and local ordinances, and operators should consult with competent legal counsel when evaluating their compliance with all applicable laws.

Compliance must also be made with the terms and conditions of the lease. The current form of lease and current regulations, for example, require a bond for lease operations. This requirement can be satisfied by obtaining a lease bond (at least $10,000), a statewide bond (at least $25,000), or a nationwide bond (at least $150,000). An operator may apply for partial release of a lease bond as reclamation operations are completed. Partial release is not available for statewide or nationwide bonds.

Another example of lease terms and conditions is the “conduct of operations” section of the current lease form. This section requires the lessee to “conduct operations in a manner that minimizes adverse impacts to the land, air, and water, to cultural, biological, visual, and other resources, and to other land uses or users.” These requirements can express themselves in many ways. The BLM (and FS) have published generally applicable standards and guidelines for operators engaged in the production of federal oil and gas, commonly known as “The Gold Book,” which provides an indication of how the BLM may require operations to be conducted.[6]

As noted, a federal oil and gas lease is also subject to any attached stipulations. The specific stipulations will depend on the characteristics of the leased lands. By way of example, those stipulations may include, but are certainly not limited to, restrictions on operations due to (1) threatened, endangered, and special status species; (2) animal breeding or nesting sites; (3) protection of cultural resources; (4) congressionally designated historic trails; and (5) avoidance of conflicts due to multiple mineral development. The restrictions may sometimes be seasonal or only applicable during a certain time of day. It is important to carefully review all of the stipulations attached to your lease to ensure that your proposed operations can comply with them.

The Secretary of the Interior has also published regulations, formal orders, and “Notices to Lessees” that govern access to federal oil and gas. Many of the relevant regulations can be found in 43 CFR Part 3160, et seq. There are currently seven “Onshore Oil and Gas Orders” that govern federal oil and gas operations, including Onshore Order No. 1 (approval of operations); Onshore Order No. 2 (drilling); and Onshore Order No. 3 (site security). There are currently two National Notices to Lessees (NTLs) promulgated by the BLM, which govern the reporting of undesirable events and royalty or compensation for oil and gas lost, as well as one Utah-specific NTL regarding the standards for use of electronic flow computers in gas measurement.[7]

The surface access rights granted under a federal oil and gas lease only apply to operations on the leased lands or lands that are unitized therewith and are authorized as part of an Application for Permit to Drill (APD), as discussed below. For operations outside of the leased lands or unit, a right-of-way, permit, or other authorization will need to be obtained from the federal government, the state government, or private surface owner(s), as applicable.

Permitting and Approval of Lease Operations

The earlier you can start the process of gaining access to federal oil and gas, the better. Early coordination with the BLM during the planning stages can help bring to light site-specific issues and local requirements, which generally leads to a more efficient permit approval process. In addition to a BLM-approved APD, an operator will need to obtain any approvals required by other federal, Tribal, state, or local authorities, which can also take some time.

There are additional considerations that apply in split-estate situations (non-federal surface over federal oil and gas). When split-estate is involved, an operator must make a good faith effort to notify the surface owner before entering the land to conduct surveys or stake a well location. An operator is also required to make a good-faith effort to negotiate a surface use agreement (SUA) with the surface owner. If negotiations are not successful, then a separate bond will be required as part of APD approval. The bond must be at least $1,000 and is designed to compensate the surface owner for reasonable and foreseeable loss of crops and damage to improvements. If the surface owner objects to the amount of the bond, then the BLM will review and either confirm the previously established bond amount or set a new amount.

Geophysical operations involving federal oil and gas are considered lease operations that may be performed on a federal lease after filing a Sundry Notice[8] or Notice of Intent and Authorization to Conduct Oil and Gas Geophysical Exploration Operations (Notice of Intent)[9] with the BLM. The party filing the Notice of Intent will need to be bonded. The BLM may require cultural resource or threatened/endangered species surveys for geophysical operations that will involve surface disturbance. BLM approval is not necessary for geophysical operations involving federal oil and gas under fee or state surface. In that case, an operator must work with the fee surface owner or relevant state agency to obtain access to the lands.

Surveying and staking can take place before approval of an APD, but APD approval is required before drilling and any related surface-disturbing operations. To apply for a permit to drill, an operator has two options: (1) file a Notice of Staking (NOS), followed by an APD; or (2) file an APD only. An NOS is a formal request for an onsite inspection[10] prior to filing an APD and it initiates the 30-day posting period that the BLM is required to follow before approving an APD. Filing an NOS can be particularly useful if the operator anticipates concerns that will eventually need to be addressed in an APD. The BLM has published a sample form of NOS,[11] but no specific form is required.

A completed APD package includes (1) APD Form 3160-3;[12] (2) a well plat certified by a registered surveyor; (3) a Drilling Plan; (4) a Surface Use Plan of Operations (including a reclamation plan);[13] (5) evidence of bond coverage; (6) operator certification in accordance with the requirements of Onshore Order No. 1; and (7) any other information required by order, notice, or regulation. An operator may file a Master Development Plan for multiple wells within a single Drilling Plan and Surface Use Plan of Operations, but an APD and survey plat still have to be submitted for each individual well. Changes to plans reflected in an APD must be submitted for BLM approval by filing a Sundry Notice. After the well is completed, a Well Completion Report[14] must be filed. As of March 13, 2017, all of these filings must be done through the BLM’s electronic filing system.

The BLM is charged with the responsibility of ensuring compliance with NEPA. When evaluating an APD, the BLM will conduct an Environmental Assessment (EA), if one has not already been done, and issue a decision in that regard. Issues raised by an EA may prompt a more-comprehensive Environmental Impact Study, delay approval of an APD, or result in stipulations or conditions of approval in addition to those that are attached to the lease.

Before approving an APD, the BLM will also conduct an onsite inspection (whether initiated as part of an NOS or APD) to identify site-specific issues and requirements. The BLM will notify the operator if any cultural resource studies or threatened or endangered species studies will be required. The operator, any parties associated with the planning of a drilling project (such as the operator’s dirtwork contractor or drilling contractor), and the fee surface owner, if any, will be invited to attend the onsite inspection.

If an operator desires to request a variance from the requirements of an onshore order, or an exception, waiver, or modification of a stipulation attached to a lease, then a request may be filed with the BLM, explaining the basis for the variance and how the intent of the onshore order will be satisfied, or the reason(s) why the stipulation is no longer justified.

[1] For purposes of this article, “federal” refers to federal government lands administered exclusively by the Bureau of Land Management (the “BLM”), as opposed to the United States Department of Agriculture, Forest Service (the “FS”), other surface management agencies, or the Bureau of Indian Affairs (the “BIA”). While the BLM works with the BIA, FS, and other surface management agencies in administering the lands within their stewardship, the nuances relating to the lands of those other agencies are not addressed in this article.
[2] Form 3100-11, Offer to Lease and Lease for Oil and Gas, available at https://www.blm.gov/sites/blm.gov/files/uploads/Services_National-Operations-Center_Eforms_Fluid-and-Solid-Minerals_3100-011.pdf.
[3] Id.
[4] See 42 U.S.C. § 4321, et seq.
[5] See 16 U.S.C. § 1531, et seq.
[6] See, e.g., Surface Operating Standards and Guidelines for Oil and Gas Exploration and Development, United States Department of the Interior and United States Department of Agriculture, 2007, p. 41 (regarding painting of facilities), available at https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/operations-and-production/the-gold-book (The Gold Book).
[7] Links to the regulations, onshore orders, and NTLs are available at blm.gov.
[8] Form 3160-5, available at https://www.blm.gov/sites/blm.gov/files/uploads/Services_National-Operations-Center_Eforms_Fluid-and-Solid-Minerals_3160-005.pdf.
[9] Form 3150-4, available at https://www.blm.gov/sites/blm.gov/files/uploads/Services_National-Operations-Center_Eforms_Fluid-and-Solid-Minerals_3150-004.pdf.
[10] The BLM has 10 days to schedule an onsite inspection after receiving an NOS or APD, but there is no deadline for when the inspection itself must to take place.
[11] See The Gold Book, p. 61.
[12] Available at https://www.blm.gov/sites/blm.gov/files/uploads/Services_National-Operations-Center_Eforms_Fluid-and-Solid-Minerals_3160-003.pdf.
[13] In a split-estate situation, an operator must make a good-faith effort to provide the surface owner with copies of (1) the Surface Use Plan of Operations; (2) the approved APD with its conditions of approval; and (3) any proposals involving new surface disturbance.
[14] Form 3160-4, available at https://www.blm.gov/sites/blm.gov/files/3160-004.pdf.