leasing, assignments, communitization agreements and units · 2019. 11. 12. · lease can be...

Federal Oil and Gas Leases: Leasing, Assignments,

Communitization Agreements and Units

Sheryl Howe

Federal Leasing Is Complex!

This presentation is a very basic overview

For more information: BLM website: https://www.blm.gov/

Week long Rocky Mountain Mineral Law Institute course on Federal Oil & Gas Leasing

Many scholarly articles

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https://www.blm.gov/

Federal Leasing and Assignments Communitization Agreements (Pooling) Federal Exploratory Units

Presentation Roadmap

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U.S. Federal Lands and U.S. Gas & Oil Shale Plays

Source: http://www.eia.gov/ 4

The BLM Leases Federal Onshore Lands The Mineral Leasing Act of 1920, as amended, Right-of-Way Leasing Act of 1930, as amended, and the Mineral Leasing Act for Acquired Lands of 1947, as amended, grant the Bureau of Land Management (BLM),within the Department of Interior (DOI), responsibility for leasing onshore lands.

‒ See 30 U.S.C.§§ 181- 287, 351-360, and 301 et seq.

Federal Onshore Leasing Authority

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Definition: A provision that modifies standard lease rights and is made an enforceable part of the lease.

Supersedes inconsistent standard lease terms or regulations.

Examples: Controlled Surface Use, Timing Limitations

Lease Stipulations

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The general public may nominate federal lands identified as “open for leasing” in the RMP Expression of Interest (EOI)

BLM places nominated lands for leasing if: 1) The nominated parcels are actually available

2) The applicable stipulations are attached

Nominations of Lands

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Federal leases must be offered for sale at competitive auction under the Federal Onshore Oil and Gas Leasing Reform Act of 1987

Must be purchased for a minimum bid specified by the Secretary of the Interior (not less than $2.00/acre). Lease is awarded to highest bidder.

Maximum Size: 2,560 acres in Lower 48, 5,760 in Alaska

Competitive Leasing

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Arises when no bid received for minimum acceptable bid during competitive bidding process

Available for leasing for two years following lease sale

Maximum Size: 10,240 acres in all states Priority determined by the time of filing

Noncompetitive Leasing

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The BOEM Leases Federal Offshore Lands Under the Outer Continental Shelf Lands Act, the Bureau of Ocean Energy Management (BOEM),within the DOI, is responsible for leasing offshore lands.

‒ See 43 U.S. §§1331, et seq.

This presentation is limited to onshore, not OCS, federal leases.

Federal Offshore Leasing Authority

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https://www.boem.gov/

Adult U.S. Citizens

Associations of U.S. Citizens Includes trusts and partnership

U.S. Corporations incorporated under U.S. state law

Restricted Ownership: Aliens, minors

Federal Lessee Qualifications

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Lessee Rights Explore and drill for, extract, remove, and dispose of oil

and gas deposits, except helium, that you may find on your lease

Term 10 years, and “for as long thereafter as oil and gas is

produced in paying quantities”

Federal Leasing: Terms and Conditions

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Rentals Rental Rate: $1.50 for first 5 years, $2.00 thereafter, per

acre or fraction of an acre, per year (but different for pre-1987 leases)

Payment of first year filed with offer

Subsequent payments are due annually on or before the lease date


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Rentals Failure to make timely payment causes the lease to

terminate automatically by operation of law. 43 C.F.R. 3103.2-2

Reinstatement (which can sometimes be done after a lease terminates for failure to pay rentals) causes rentals to increase to $5.00 or $10.00 per acre, depending on the type of lease, plus another $5.00 or $10.00 per acre for each succeeding reinstatement. Yikes!


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Royalties 12.5% for competitive leases and minimum of 12.5% for

noncompetitive leases

Some older federal leases have higher royalty rates

16-2/3% on noncompetitive leases reinstated under 43 C.F.R. § 3108.2-3 plus an additional 2% increase for each succeeding reinstatement

The lease royalty rate plus 4% for a competitive lease that is reinstated plus an additional 2% for each succeeding reinstatement. 43 C.F.R. § 3103.3-1


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Minimum Royalties Payable at the end of each lease year after discovery of

oil or gas in paying quantities (except on unitized leases minimum royalty is payable only on the participating acreage and rentals are payable on the lands not in a participating area)

For leases after 1987, same amount as rental which would otherwise apply for that lease year. 43 C.F.R. § 3103.3-2


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Filing Lessee must file any assignment or transfer of interest

with BLM state office within 90 days of execution

If you are past the 90 days, check with BLM as a letter from all parties that the assignment is still in force and effect may work

Acreage At least 640 acres outside of Alaska

At least 2,560 acres in Alaska

Federal Leasing: Assignments

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Assignment of Record Title Upon BLM approval of record title, the assignee steps into the shoes

of the assignor

Assignee is treated as original lessee

Depth limitations are not allowed in Assignments of Record Title

Operating Rights Transfers Assignor retains title to the lease

Assignor responsible for all lease obligations

A Transfer of Operating Rights gives the transferee the right to drill and produce from the lands and depths assigned


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Assignment of Overriding Royalty Assignments of Overriding Royalties shall be filed with

the BLM but BLM does not approve them. 43 C.F.R. § 3106.1

Assignments of Overriding Royalty may be made on a non-BLM form, or on the BLM forms for Assignment of Record Title or Transfer of Operating Rights by checking the box for “Overriding Royalty” on those forms.

Assignee must file Statement of Qualifications


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Transfers to Heir or Devisee or Corporate Name Change or Merger An estate order may be filed if an owner dies, with a

Statement of Qualifications. 43 C.F.R. § 3106.8-1.

Evidence of corporate name change or merger is filed with the BLM. 43 C.F.R. § 3106.8-2, 3.

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BLM Form Must be Used for Assignment of Record Title or Transfer of Operating Rights The current form must be used or the BLM will reject

the assignment or transfer.

Fees See 43 C.F.R. § 3000.12 for fees (currently, for Fiscal Year

2017, $95 per lease for Assignment of Record Title or Transfer of Operating Rights; $10 per lease for Assignment of Overriding Royalty; and $215 for name change, merger or transfer to heir or devisee) 43 C.F.R. § 3106.3


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Lease Can be Segregated by Assignment An assignment of 100% of record title in part of the

lands in a lease causes the lease to be segregated into separate leases. 43 C.F.R. § 3106.7-5.

Often you want to avoid lease segregation by assignment, as then you would need a well on each lease to extend the two leases beyond the primary term.

An assignment of record title of less than 100% or a transfer of operating rights does not cause lease segregation.


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BLM Case Files Each BLM Land office maintains a case file of all public land

transactions

The case file contains information related to the issuance, effectiveness, and current lease ownership

County Records County records provide constructive notice under state

recording acts

BLM records do not impart constructive notice

Review Both!

Federal Leasing: Where to Check Title

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Adjudication Agency process for decisions or orders, determination

of rights and liabilities

Determined by the BLM on a case by case basis

Interior Board of Land Appeals Issues final decisions of the DOI

Review appeals from BLM decisions

Federal Leasing: Adjudication

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“Production in paying quantities” Lease is extended so long as oil or gas is being produced in paying

quantities. 43 C.F.R. § 3107.2-1.

Drilling Extension Two year extension for drilling operations over the end of the

primary term, subject to rental being timely paid (11th year rental, 12th year rental). 43 C.F.R. § 3107.1. This only applies at the end of the primary term and not at the end of any extended term (such as after a prior two year extension).

Unit Termination or Elimination Extension Two year extension when a federal exploratory unit terminates or

if a lease is eliminated from a unit. 43 C.F.R. § 3107.4. Public interest requirement must be met to get these extensions.

Federal Lease Extensions

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CAs - usually for a state spacing area containing a federal lease The BLM regulations say: “When a lease or portion

thereof cannot be independently developed and operated in conformity with an established well-spacing or well-development program” the BLM may approve communitization. 43 C.F.R. § 3105.2-2

State Conservation Commissions do not have jurisdiction to pool Federal lands

Federal Communitization Agreements

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Timing Your CA application must be filed with the BLM before

the expiration of the federal lease. 43 C.F.R. § 3105.2-3

The CA is effective from the date of the agreement or from the onset of production, whichever is earlier, or as provided in 43 C.F.R. § 3105.2-3.

Important Resources Available on the BLM Website: Communitization Manual MS-3160-9 Communitization Handbook H-3160-9


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Federal Communitization Agreements Effect

Operations or production under an approved CA is deemed to be operations or production as to each lease committed to the CA. 43 C.F.R. § 3105.2-2.

Production is allocated to each tract as provided in the CA.

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Federal Communitization Agreements Overlapping CAs

A new Instruction Memorandum, dated April 11, 2018, states BLM will approve a new CA overlapping a prior CA only when the new CA will allocate production and royalties from the new CA directly to the leases in the new CA. No allocation to the existing CA.

Each CA is a “stand alone” agreement. I.M. No. 2018-006

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Proposal and Formation Under the Mineral Leasing Act the BLM may approve unit

agreements “for the purpose of more properly conserving the natural resources of any oil or gas pool, field, or like area, or any part thereof.” 30 U.S.C. § 226(m).

The BLM Website states that, “Unitization provides for the exploration and development of an entire geologic structure or area by a single operator so that drilling and production may proceed in the most efficient and economic manner.”

Federal Exploratory Units

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Units – Federal Lease Extensions Committed Leases Extended by Unit A lease committed to a federal exploratory unit (cooperative or unit

plan in federal lingo) that contains a general provision for allocation of oil and gas shall continue in effect so long as the lease or portion thereof remains subject to the plan; Provided, That there is production of oil or gas in paying quantities under the plan prior to the expiration date of such lease. 43 C.F.R. § 3107.3-1.

Key Requirements Only committed leases receive the benefits of the unit. Lease extension by the unit lasts only as long as the unit, so if the

unit terminates, the leases will terminate (unless otherwise held). There must be production of oil or gas in paying quantities before

the expiration date of the lease. 32

Units – Federal Lease Extensions Unit Well: Section 9, Federal Form Unit agreement

requires “quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit . . .” (= a unit paying well)

Yates Well: The Interior Board of Land Appeals holds “commercial costs” generally requires costs of production and marketing, but not drilling (= a Yates or lease well) Yates Petroleum Corp., 67 IBLA 246 (1982)

A Yates Well will extend the committed leases during the Unit Term, But only a Unit Well will extend the life of the unit!

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Federal Exploratory Units Two Important Agreements 1. Unit Agreement

Agreement between the BLM and the proponent (operator) of the unit.

Standard form is at 43 C.F.R. § 3186.1.

2. Unit Operating Agreement Agreement between the operator and other working interest owners

within the unit boundary.

Governs allocation of costs and production between the working interest owners.

A copy of the unit operating agreement must be filed with the BLM – but the BLM is not a party to the agreement and cannot control the terms of the agreement.

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Federal Exploratory Units Two Forms of the Unit Operating Agreement 1. FORM 1

Working interest owners fix costs and share of production for the term of the unit

Interests remain constant despite expansion or contraction of participating areas

This form is generally used when the extent and uniformity of the prospect area are known

2. FORM 2 Working interest owner’s share in production and costs is determined by

its interests in a participating area

This form is generally used when the extent and uniformity of the prospect area are unknown

Most commonly used form

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The Unit Agreement 1. Exhibit A to the Unit Agreement

Describes the outline of the proposed unit and the amount and percentage of Federal, State and Fee lands in the total unit area.

Identifies individual tracts within the unit

Usually in the form of a map


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Exhibit A to the Unit Agreement


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The Unit Agreement 2. Exhibit B to the Unit Agreement

Schedule of ownership of all oil and gas interests within the unit lands including total acreage and percentage of total unit area.

Lands should be listed in the following order: Federal, Indian, State and Fee

Tracts should be identified by tract numbers and determined by order of listing in Exhibit B and appear in appropriate place on Exhibit A.


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Exhibit B to the Unit Agreement


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Segregation of Leases Federal Leases: Segregation occurs when lands within a lease

are not included within the unit boundary, when the unit is formed and the lease is committed. The lands outside of the unit boundary are segregated into a separate oil and gas lease. Segregated leases continue for the term of the lease or two (2) years from

the date of the segregation, whichever is longer, if the public interest requirement for the unit is satisfied. 43 C.F.R. 3107.3-2

Fee Leases: Fee leases are not subject to segregation unless the Unit Agreement includes the optional paragraph 18(h).

State Leases: Whether a state lease can be segregated depends on the statute and regulation of each specific state.


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Initial Obligation Well(s) Upon approval of the unit the operator will have six (6)

months to commence to drill an initial test well at the approved location. If not drilled, the public interest requirement of the unit is not met, and

the unit terminates “ab initio” as though the unit had never existed.

Operator may drill additional test wells, with not more than six (6) months between the drilling of wells, until a well capable of producing unitized substances in paying quantities is completed.

If the initial well is not capable of producing in paying quantities, the failure to drill additional wells until discovery will cause the unit agreement to terminate automatically.

Depending on the unit size, additional wells may be required.


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Participating Areas (PAs) Definition: Land reasonably proven to be producing unitized

substances in paying quantities (a “unit paying well”). 43 C.F.R. 3180.0-5 Paying Quantities: “Quantities sufficient to repay the costs of drilling,

completing and producing operations, with a reasonable profit…”

Application to Establish PA: Generally an application to establish a PA is filed within 3-6 months after the completion of the unit well.

Determination of PA: Once the BLM is satisfied that a well is capable of producing unitized substances in paying quantities it will approve a PA surrounding that well.

Separate PAs for separate formations


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Participating Areas (PAs) Cont. Effective Date of PA: The effective date is usually the

date the well was determined to be capable of producing the unitized substances in paying quantities.

Method for Establishing Size of PA: There are no regulations that dictate the size or shape of a PA – scientific evidence controls. In most states the BLM uses the circle/tangent method for radial drainage. Circle/Tangent – Draw a circle around the well in the size of the drainage

area.

Subdivision – If the unit covers a 40-acre subdivision of which at least 50% of the lands are within a drainage circle, the entire subdivision will be included.


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Participating Areas (PAs) Cont. Revising a PA:

A PA is revised pursuant to the terms of the Unit Agreement (Section 11) when additional lands are reasonable proved to be productive of unitized substances in paying quantities.

Any addition of lands to a PA must be lands that are contiguous to the existing PA.


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Most BLM offices (CO, UT, WY) assume radial drainage in absence of contrary evidence

“Circle-Tangent” method

Some BLM offices (NM) tend to use state spacing units for PAs

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Participating Areas

Initial Well PA

Draw a circle around well using radius for assumed drainage area

Legal subdivisions cut 50% or more are in PA

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Participating Areas (Vertical Wells)

First Revision under circle tangent method

If circles more than 4x radius apart, separate PAs

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Participating Areas

40-acre circles around entry point of lateral to formation and around terminus

10-acre subdivisions cut by circles and tangents

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Participating Areas (Horizontal Wells)

All production allocated to each committed tract in a PA on an acreage basis

No allocation of production to uncommitted tracts (except unleased federal land in post-1989 units)

Uncommitted tracts may require formation of spacing unit/communitization agreement

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Participating Areas

Contraction of Unit If continuous operations are not occurring on non-PA lands, the unit will

automatically contract to the boundaries of the PA (plus any land in the same 40 acre parcel or nearest lot equivalent) on the fifth anniversary of the initial PA. Section 2(e) of the Unit Agreement

If operations are occurring on non-PA lands after the fifth anniversary of the initial PA the unit will remain in effect so long as diligent operations are being conducted with not more than 90 days elapsing between the completion of one well and the commencement of the next.

Revised Exhibits A and B should be submitted concurrently or shortly after approval for contraction.


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Termination of a Federal Unit The Term of a Unit: The unit will remain in effect for five years (5) from the effective date of unit approval, so long as the drilling obligations were met.

If the initial well is a dry hole or a Yates well, then the unit operator must commence operations for a second well within six (6) months after completion of the first well in order to keep the unit in effect.

If there is a timely discovery of unitized substances in paying quantizes, the unit continues so long as unitized substances can be produced in quantities sufficient to pay for the cost of producing same on land in the PA. Section 20(c) of the Unit Agreement


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Termination of a Federal Unit Automatic Termination: A Federal unit will automatically terminate five (5) years after its effective date unless there was a discovery of unitized substances in paying quantities.


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Participating Area – Tracts 1, 2, 3, 4 - Lands shaded in Orange are communitized

Overlapping CA and PA for the Same Formation

Per I.M. No. 2018-006 and BLM Draft Handbook 3180-1: Communitization Agreement (“CA”) entirely or partially overlapped by a

participating area (“PA”) covering the same formation. Generally, that part of the production from the CA that is allocated to the PA is

then further allocated to all of the PA. Location of CA well makes no difference

Tract 1 Tract 2

Tract 3

Tract 4 - Federal Lease A

OUTSIDE UNIT - Federal Lease B

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OG Plat: at BLM GLO Records home page, click on Land Status Records

Key BLM Records

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Serial Register Page: in BLM’s LR2000, click on Pub CR Serial Register Page, then New Format Serial Entry

Key BLM Records

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Federal leases are an opportunity

You need to know the rules and regulations regarding federal leases

CAs are like “pooling” for a federal lease

Units are larger and have their own special rules.

Thank you!

And, thank you to Laura Lindley, Tom McKee and Scott Turner of Welborn Sullivan Meck & Tooley P.C. for their help.

Conclusion!

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leasing, assignments, communitization agreements and units · 2019. 11. 12. · lease can be...

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