[Federal Register Volume 66, Number 7 (Wednesday, January 10, 2001)]
[Rules and Regulations]
[Pages 1883-1894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-446]
[[Page 1883]]
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DEPARTMENT OF THE INTERIOR
Bureau of Land Management
43 CFR Parts 3100, 3106, 3108, 3130, and 3160
[WO-310-1310-01-24 1A-PB]
RIN 1004-AC54
Oil and Gas Leasing: Onshore Oil and Gas Operations
AGENCY: Bureau of Land Management, Interior.
ACTION: Final Rule.
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SUMMARY: The final rule will: Clarify the responsibilities of oil and
gas lessees and operating rights owners for protecting Federal and
Indian oil and gas resources from drainage; specify when the
obligations of the lessee or operating rights owner to protect against
drainage begin and end; clarify what steps to take to determine if
drainage is occurring; and specify the responsibilities of assignors
and assignees for reclamation and other lease obligations.
EFFECTIVE DATE: This rule is effective on February 9, 2001.
FOR FURTHER INFORMATION CONTACT: Donnie Shaw, Fluid Minerals Group,
Bureau of Land Management, Mail Stop 401LS, 1849 ``C'' Street, NW,
Washington, DC 20240; telephone (202) 452-0382 (Commercial or FTS).
Individuals who use a telecommunications device for the deaf (TDD) may
call the Federal Information Relay Service at 1-800-877-8339, 7 days a
week, 24 hours a day, except holidays, for assistance in reaching Mr.
Shaw.
SUPPLEMENTARY INFORMATION:
Contents
I. Background
II. Final Rule as Adopted.
III. Responses to Comments.
IV. Procedural Matters.
I. Background
The existing regulations in 43 CFR part 3100 allow for agreements
to compensate the Federal Government for drainage of (oil and gas)
mineral resources. Those regulations and the regulations at part 3160
require the lessee or operating rights owner to drill and produce wells
necessary to prevent drainage or, instead, to pay compensatory
royalties. These regulations are based on BLM's authority under the
Mineral Leasing Act of 1920 (MLA), as amended and supplemented, and
other cited authorities to issue a rule to carry out their purposes.
The existing regulations and the standard oil and gas lease terms make
express covenants to protect the lessor against drainage that is
implicit in the law of all oil and gas producing states. An audit by
the Department's Office of the Inspector General and a BLM Internal
Control Review in 1990, both recommended we revise our regulations on
drainage protection to clarify:
(1) When the obligations of the lessee or operating rights owner
begin and end; and
(2) What steps to take to determine if drainage is occurring.
In 1995, BLM's Director appointed the Bureau Performance Review
Bonding and Unfunded Liability Team to review a broad range of
liability issues. The Team recommended we revise and clarify our
regulations on lessee and operating rights owner liability for drainage
prevention, compensatory royalty payments, well plugging and
abandonment, lease site reclamation and environmental remediation. This
final rule enables BLM to fulfill its responsibility to ensure that the
public and Indian lessors receive full value for their oil and gas
resources.
In addition to addressing drainage issues, the final rule clarifies
the current regulations concerning the responsibilities of assignors
and assignees of record title or operating rights interests. The
current version of 43 CFR 3106.7-2 expressly states that an assignor is
fully responsible after the assignment and prior to BLM approval of the
assignment, but the current rule is not clear as to the responsibility
of the assignor after approval. The final rule makes clear that the
assignor continues to be responsible for satisfying those obligations
that accrued prior to the approval of the assignment.
The final rule clarifies that assignees have responsibilities for
certain plugging and abandonment, reclamation and environmental
liabilities that arose prior to their assignment and which were evident
to a purchaser exercising due diligence.
The final rule implements a change in the definition of the term
``lessee'' to include the operating rights owner, consistent with the
substantive provisions of the proposed rule.
II. Final Rule as Adopted
The final rule reorganizes the order of the questions and answers,
renumbers subpart 3162, and locates the sections into a more logical
sequence. Some commenters suggested these regulations should also apply
to Indian oil and gas leases. The final rule adopts the suggestion to
make these regulations apply to both Federal and Indian oil and gas
leases. To accomplish this result, the final rule consolidates all
drainage provisions in part 3160. The following table lists the section
numbers in the proposed and final rule.
------------------------------------------------------------------------
Proposed rule section Final rule section
------------------------------------------------------------------------
3100.5................................... 3160.0-5
3100.21.................................. 3162.2-2
3100.22.................................. 3162.2-3
3100.23.................................. 3162.2-4
3100.70.................................. 3162.2-5
3100.50.................................. 3162.2-6
3100.24.................................. 3162.2-7
3100.40 and 3100.45...................... 3162.2-8
3100.51.................................. 3162.2-9
3100.52.................................. 3162.2-10
3100.60.................................. 3162.2-11
3100.61.................................. 3162.2-12
3100.71.................................. 3162.2-13
3100.80.................................. 3162.2-14
3100.55.................................. 3162.2-15
3165.3................................... 3165.3
3165.4................................... 3165.4
3106.7-2................................. 3106.7-2
3106.7-6................................. 3106.7-6
3108.1................................... 3108.1
3130.3................................... 3130.3
3160..................................... 3160
3162.2................................... 3162.2
3165.3................................... 3165.3
3165.4................................... 3165.4
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III. Responses to Comments
On January 13, 1998, (63 FR 1936), BLM published in the Federal
Register the proposed rule on oil and gas drainage. In a notice
published on February 24, 1998, (63 FR 9171), we extended the comment
period for 60 days. In response to several requests, we reopened the
comment period for 60 days in a notice published on December 3, 1998,
(63 FR 66776). We reopened the comment period to consult with Indian
Tribes, under Executive Order 13084, on the issue of whether the
proposed rule should apply to Tribal and individual Indian oil and gas
leases. We extended the reopened comment period by notice published on
January 13, 1999 (64 FR 2166), with the comment period ending April 5,
1999, and extended the reopened comment period again in a notice
published on April 12, 1999 (64 FR 17598) with the comment period
ending on June 4, 1999. Some provisions were proposed for comment in
another rule (see 63 FR 66840). We received 40 written comments on the
proposed rule from industry, organizations, and individuals.
[[Page 1884]]
Specific Comments
A commenter objected to the question and answer format and
suggested these regulations were repetitive, poorly organized, and
required a reader to look in multiple sections to find related
information. The final rule simplifies the question and answer format
and utilizes plain language in accordance with the Administration's
Reinventing Government Initiative. We believe this format will help
everyone find relevant topics more easily. We restructured the final
rule to better group topic related sections.
A commenter suggested we should not apply this rule to reinterpret
the meaning of terms in existing leases. Except where changes are
expressly acknowledged in this preamble, the final rule is consistent
with and interprets existing lease provisions and so may lawfully apply
to existing leases. In addition, all Federal and Indian oil and gas
leases are subject to future regulations except to the extent such
regulations are inconsistent with express lease provisions or the
rights granted in the lease.
A commenter suggested it was not worthwhile for BLM to adopt a rule
that generates $250,000 in revenues while increasing Federal
expenditures by $150,000 and driving industry to move to private lands
or abroad. The final rule did not adopt this suggestion. Our previous
estimates were based on the assumption that no revenues other than
additional compensatory royalty assessments would be generated from
drainage cases. In addition, the compensatory royalties estimates were
understated due to insufficient data. Based on our recent survey of
State offices, if the number of potential drainage cases and the
success rate of case retirements remain at the 1998 level (1,665 cases
and 8.82 percent respectively), we expect additional revenues around
$9.2 million from the oil and gas drainage program. These revenues
include royalties from protective wells, compensatory royalty
assessments, unitization and communitization agreements, or bonus bid
payments on previously unleased lands. Besides the additional revenues,
lessees benefit from the implementation of this rule because they have
a better understanding of when, why, and how to fulfill their
obligations to protect Federal and Indian minerals from drainage. By
adopting this final rule, the Federal Government benefits because it
reduces the time needed to correspond with the lessees regarding
procedural matters, and thus leads to greater efficiency in performing
technical and economic analyses to determine whether prudent operators
need to drill an offset well. Further, it reduces the need for reviews
and appeals to the State Director. The estimate of $150,000 is
equivalent to 10 percent of the annual expense for the oil and gas
drainage program, and a one-time cost for implementing these
regulations. These expenses may increase if we postpone the
implementation of this rule.
A commenter suggested this rule violates the Administrative
Procedure Act because the preamble to the proposed rule was misleading
in characterizing the rule as merely a clarification of existing law.
The section-by-section analysis of the proposed rule described every
modification to the existing rule so that all potentially affected
parties were properly advised of its provisions. While the rule does
provide greater detail than existing regulations with respect to both
drainage and the duties of parties holding various interests in a
lease, the substantive obligations remain those established in the
lease and existing regulations.
Some commenters suggested we should not cover plugging and
abandonment issues in this ``drainage'' rule. The final rule retains
the provision for well plugging and abandonment. Nothing precludes us
from promulgating rules on several topics in a single rulemaking if we
provide adequate notice to the affected public.
Several commenters suggested the rule reverses IBLA interpretations
of the lease and current regulations, particularly with respect to who
bears the burden of proof of drainage. The final rule preserves IBLA's
precedent that BLM bears the burden of proof that drainage exists and
the lessee's notice or knowledge of drainage, but the rule shifts the
burden of proof after BLM has established a prima facie case (i.e.,
sufficient evidence absent rebuttal by the lessee). This shift of the
burden of proof to the lessee is warranted because the lessee, by
undertaking the duty to protect, agreed to take the responsibility to
monitor activities that could result in drainage of Federal or Indian
mineral resources. Moreover, the lessee is in a better position to
obtain and interpret relevant geologic and reservoir data.
Some commenters suggested it is uneconomical for lessees who hold
leases for speculative purposes, with no intent to drill, to monitor
activity on adjacent leases for drainage. The final rule did not adopt
this suggestion. The duty to detect drainage and drill to protect the
Federal or Indian lessor from drainage is not a new requirement, but is
a lease obligation voluntarily entered by lessees. A lessee who cannot
protect the Federal or Indian lessor from drainage should not acquire a
Federal or Indian lease. To allow anyone to hold a Federal or Indian
lease without requiring an agreement to prevent the uncompensated loss
of valuable mineral resources is not in the interest of the public or
Indian mineral owners.
A commenter suggested that if BLM directs the drilling of a
protective well and the well does not return a reasonable profit to the
lessee, BLM should pay the cost of drilling, completing and equipping
the well. The final rule did not adopt this suggestion. However, we
address the issue of uneconomic wells under Sec. 3162.2-5.
Several commenters suggested economic self-interest leads lessees
to drill protective wells when it is economic to do so. Therefore, the
rule is not necessary. While we agree with the suggestion that economic
self-interest motivates an operator to drill protective wells; we
cannot permit a reluctant operator to allow the uncompensated loss of
mineral resources that belongs to the American public or to an Indian
mineral owner. We have the responsibility to issue regulations we feel
in the best interest of the public and Indian mineral owners. We also
have the responsibility to ensure that lessees drill all necessary
wells to protect public and Indian mineral interest owners from
drainage at the earliest possible time. This final rule better serves
the oil and gas industry by ensuring it has a clearer understanding of
obligations to protect its oil and gas leases from drainage.
Several commenters believe that inasmuch as existing regulations
provide for BLM to make drainage determinations, additional
responsibilities for drainage detection could not be imposed on
lessees. The final rule permits us to make drainage determinations and
assess compensatory royalty damages against lessees as we have done in
the past. Lessees are not excused from their lease obligations to take
initiatives to protect the Federal or Indian lessors. This final rule
simply provides additional detail on how a lessee should fulfill
existing lease obligations.
A commenter suggested we notify adjacent lessees when we approve an
Application for Permit to Drill (APD). The final rule did not adopt the
suggestion. However, we post APD's for 30 days in State Office public
rooms before we approve them. The oil and gas data service industry
publishes information on the approval status of APD's on a regular
basis. It is the lessees' responsibility to monitor APD
[[Page 1885]]
approvals to ensure that they protect Federal and Indian lessors from
drainage.
One commenter suggested the arbitrary decisions about what
constitutes drainage might be avoided by standardizing drainage
parameters at 330 feet from the lease line. The final rule did not
adopt the suggestion. The characteristics and performance of the oil
and gas reservoir are primary factors which determine the necessary
actions to take to protect the lease from drainage. Since each oil and
gas reservoir is unique and has different characteristics and
performance capabilities, it is inappropriate to adopt a single
baseline standard for drainage.
An Alaska environmental group recommended that these regulations
state that BLM has the authority to address drainage by prohibiting the
removal of its oil and gas. It also wanted these regulations to make
clear that BLM is not obliged to lease or permit drilling. The final
rule is quite clear that we have discretion when to lease and
regulatory authority over drilling. We do not possess the practical
ability to prohibit removing oil and gas from beneath Federal surface
because fluid minerals follow no political or property boundaries.
Where we cannot permit surface disturbance, lessees must pursue other
means of protecting the lessor from drainage such as horizontal
drilling or through communitization when feasible.
An Alaska environmental group suggested that the authority
citations be broadened to include additional sections of the Federal
Land Policy and Management Act of 1976 (FLPMA) and the Mineral Leasing
Act of 1920 (MLA), as well as the Alaska National Interests Lands
Conservation Act, the National Wildlife Refuge Administration Act, and
the Naval Petroleum Reserves Production Act of 1976. The final rule
uses the appropriate citations to sections that grant relevant
rulemaking authority to the Secretary of the Interior. BLM does not
administer the Naval Petroleum Reserves. The National Wildlife Refuge
Administration Act does not grant regulatory authority with respect to
mineral production.
Section-by-Section Analysis
The final rule renumbers many sections. In the following
discussion, we reference the section number of the proposed rule and
indicate in parentheses where the section appears in the final rule. We
also describe the final rule and how, if at all, it differs from the
proposed rule. Further, we respond to comments on the section.
Section 3100.5 (3160.0-5)
The final rule amends Sec. 3160.0-5 to alphabetize and add these
definitions: ``drainage,'' ``lessee,'' ``operating rights owner,''
``protective well'' and ``record title holder.'' We modified the
definitions of ``lessee'' and ``operating rights owner'' and added new
definitions for ``drainage,'' ``protective well,'' and ``record title
holder.''
Several commenters suggested that we modify the drainage definition
to refer to ``oil or gas'' rather than hydrocarbons, inert gases or
associated resources. The final rule did not adopt this suggestion
because ``inert gases'' is needed to make clear that the rule applies
to drainage of non-petroleum gases such as carbon dioxide.
A commenter suggested that the drainage definition does not allow
for the concept of counter drainage and suggested that we include the
phrase ``and not offset by counter drainage'' at the end of the
definition. The final rule did not adopt this suggestion because the
drainage definition already contemplates only the net loss after
consideration of counter drainage.
Some commenters suggested that we modify the protective well
definition to include the options of well deepening, plugging back an
existing well bore, adding laterals to address drainage situations, or
recompleting existing wells, and removing the language ``on nearby or
adjacent lands'' from the definition. The final rule modifies the
``protective well'' definition to provide for wells drilled ``or
modified'' and by dropping the reference to nearby or adjacent lands.
We agree with commenters that ways exist to protect the lease from
drainage other than drilling new wells.
Section 3100.21 (3162.2-2)
This section indicates the steps BLM will take to ensure the
Federal Government and Indian lessors are compensated for drainage of
mineral resources. The final rule differs from the proposed rule. We
modified the question of this section to make clear that Indian lessees
must protect the leased resources from drainage. We changed the
language in this section from ``wells draining oil or gas'' to ``wells
draining mineral resources'' to clarify the rule applies to other
mineral resources. We deleted the phrase ``on adjacent lands'' from the
rule text as unnecessary. We modified paragraph (a) to clarify we will
consider applicable Federal, State, or Tribal rules, regulations, and
spacing orders when determining which drainage protective action to
take. We modified paragraph (b) to clarify that the Secretary may enter
into agreements with owners of the draining well to compensate for
drainage of leased or unleased Federal minerals or (in consultation
with the Indian mineral owner and BIA) leased or unleased Indian
minerals. We also deleted the reference to ``Federal lands.'' We
modified paragraph (c) to clarify we may offer for lease any qualifying
unleased mineral resources under part 3120 and deleted the phrase
referring to ``offering unleased lands'' from the rule text. We added
paragraph (d) to conform to the provisions of Sec. 3181.5.
Some commenters suggested that we apply these regulations to
``Federal minerals'' instead of ``Federal lands.'' The final rule
amends this section to clarify that these regulations apply to Federal
minerals not Federal surface in a split-estate situation. The lessee of
Federal minerals owes the duty of drainage protection and surface
ownership is not relevant.
Some commenters questioned whether BLM found owners of an adjacent
well willing to enter into a drainage compensation agreement. We have
found owners in the past willing to enter into such agreements. This
final rule implements the provision of Section 17 of the MLA on
agreements to compensate the Federal Government for drainage.
One commenter wanted to know what we reported to Congress about
drainage compensatory royalty agreements. We reported annually to
Congress as required by statute until the reporting requirement was
repealed in 1987.
Some commenters questioned the BLM's authority to communitize an
unleased tract. The final rule clarifies if spacing precludes us from
authorizing the drilling of a well on our land, as a mineral owner, we
have the right to communitize an unleased tract with others in the
spacing unit. We recognize that a mineral owner who does not contribute
to drilling costs is subject to receiving a smaller share of production
than if BLM were able to share in the costs of drilling a well.
A trade association suggested that BLM be required to notify
prospective bidders that a sale tract was being drained and questioned
the interest in bidding for such a tract. The final rule did not adopt
this suggestion. We notify prospective bidders of drainage tracts in
the oil and gas lease sale notices. In the past, there have been
bidders who bid on such drainage tracts.
Some commenters expressed concern over whether BLM had authority to
order operators to drill protective wells or to order the lessees to
enter into communitization agreements without
[[Page 1886]]
considering State spacing orders. These commenters suggested to BLM to
include the following language ``When determining which action to take,
the BLM will give consideration to the existing State rules,
regulations, and spacing orders.'' The final rule modifies the language
to adopt this suggestion. However, spacing determinations for Federal
minerals are made by the BLM under 43 CFR 3162.2-2(a).
Section 3100.22 (3162.2-3)
This section clarifies when lessees are responsible for protecting
their leases from drainage. The final rule differs from the proposed
rule. In response to comments, we modified this section to:
(a) Include Indian leases;
(b) Change lands to minerals; and
(c) Change oil and gas to mineral resources.
We also combined the provisions concerning drainage by wells in
other units or communitization agreements.
Section 3100.23 (3162.2-4)
This section provides a list of actions BLM may require a lessee to
take to provide drainage protection. The final rule differs from the
proposed rule. We modified the question to make clearer what we may
require the lessee to do to protect leases from drainage. We modified
paragraph (a) to include the language ``drill or modify and produce all
wells that are necessary to protect the leased mineral resources from
drainage'' and deleted the language ``leased lands from drainage,
subject to provisions of Sec. 3100.70'' to clarify that we refer to
leased mineral resources not leased lands. We modified paragraph (b) to
delete the cross reference to subpart 3105 and part 3180.
A commenter suggested that we give lessees the option of paying
compensatory royalty rather than drilling a protective well because BLM
is not authorized to require either communitization or the drilling of
a protective well. The final rule does not represent a change from the
previous regulations that require the BLM's consent to propositions to
pay compensatory royalty in lieu of drilling protective wells. We agree
that a lessee may have to estimate the compensatory royalties due to
compensate Federal or Indian lessors for all drainage that has
occurred, is occurring, or will occur; however, there is no guarantee
that such compensation is adequate. Requiring payment of royalties on
production from an economic protective well is the most effective way
of ensuring that the amount of compensation that is due for drainage is
accurate. Additionally, certain spacing and mineral ownership scenarios
dictate well drilling for correlative right protection. We did not
adopt the suggestion.
Some commenters expressed concern over whether lessees are liable
for compensatory royalties if drainage involves an area in which BLM
will not permit drilling due to a wilderness area, environmental
reasons, or a no surface occupancy stipulation. In the final rule, we
state a lessee who cannot, as a practical manner, drill a protective
well for reasons not specified in the lease itself will not be required
to pay compensatory royalties. The lessee will have an obligation to
consider the feasibility of the other means of compliance: drilling
directional or horizontal wells or entering into agreements with the
owner of the well causing the drainage.
Section 3100.24 (3162.2-7)
This section specifies that all record title holders are jointly
and severally liable for paying compensatory royalties when more than
one person owns record title interest in the same lease. Operating
rights owners having an interest in the same lease are jointly and
severally liable with one another and with the record title holders for
the compensatory royalties attributable to drainage. The final rule is
unchanged from the proposed rule.
Several commenters suggested that only operating rights owners with
an interest in the mineral resources in the horizon or formation being
drained are responsible for drainage protection. The final rule did not
adopt the suggestion. Operating rights owners with interest only in
other formations are not liable; but a sublease does not exempt any
record title holder from liability. The record title holder has an
interest in all horizons and formations and the sublease of operating
rights does not diminish the record title holder's responsibility for
compliance with all lease terms.
Several commenters suggested that the responsibility for drainage
protection be imposed only on the operating rights owners and not on
the record title holders. They argue that without operating rights, you
have no right to drill a protective well. These commenters suggested we
should not demand drainage protection from record title holders until
we exhaust demands against the operating rights owners. The final rule
continues the policy found at 43 CFR 3100.0-5 of the previous
regulations which requires the lessee to retain the responsibility for
complying with lease obligations when it subleases operating rights to
another party. We do demand performance first of the designated
operator who represents all parties with interest in the lease. It is
the responsibility of the lessee who creates subleases of operating
rights to make sure that the sublessee performs all lease obligations.
Some commenters suggested that joint and several liability for
compensatory royalties is contrary to 30 U.S.C. 1712(a) as amended by
the Royalty Simplification and Fairness Act. These commenters suggested
that IBLA has recognized that joint and several liability for drainage
protection or compensatory royalty is unfair. We do not know of any
IBLA cases on this point. The provisions in 30 U.S.C. 1712(a) address
lease obligations to pay money such as rentals and royalties. The duty
to protect from drainage is not an obligation to pay money. Rather, it
is the nonperformance of an obligation of diligent development for
which we may assess compensatory royalties. Compensatory royalties are
not true royalties payable on lease production. Rather, they are
liquidated damages for nonperformance of the obligation. We measure
damages by the royalty value of resources the lessee has allowed to be
drained. Each party to a BLM or Indian lease makes the same promise as
every other lessee and is responsible for full performance of those
obligations, regardless of the inability of its co-lessees to share in
the performance. A lessee may choose to pay compensatory royalty
instead of drilling a protective well or we may assess compensatory
royalties as damages if the lessee does not take direct protective
action. However, this action does not make the drainage obligation a
monetary one.
Sections 3100.40 and 3100.45
(3162.2-8)
This section specifies the responsibility for drainage protection
and compensatory royalties after assignment or transfer of operating
rights. The final rule combines two sections of the proposed rule
(3100.40 and 3100.45) to form Sec. 3162.2-8. The final rule differs
from the proposed rule. We modified the question of these two sections
to read ``Does my responsibility for drainage protection end when I
assign or transfer my lease interest?'' to specify the responsibility
for drainage protection and compensatory royalties after assignment or
transfer. We modified the section to address lessee obligations for
drainage protection and payment of compensatory royalties after
assignment or transfer.
One commenter suggested that it was not clear whether BLM is to
assess compensatory royalty against an
[[Page 1887]]
assignee for drainage that occurred before acquiring the interest. The
final rule clarifies that as an assignee, your liability to pay
compensatory royalties begins on the date you acquire the lease
interest. We believe this rule makes clear that an assignee is not
responsible for drainage that occurred before acquiring the lease
interest.
Some commenters suggested that we include the following language in
this section: ``Your liability for paying compensatory royalties will
begin a reasonable period of time after notice from the BLM or after a
reasonably prudent operator knew or should have known that drainage was
occurring. If you acquire your lease interest after this time, your
liability to pay compensatory royalties begins the date you acquire the
lease interest.'' The final rule adopts the language ``If you assign
your record title interest in a lease or transfer your operating
rights, you are not liable for drainage that occurs after the date we
approve the assignment or transfer'' in response to comments.
Some commenters suggested that BLM uses an undefined and arbitrary
standard for when a prudent operator should have known when drainage
began. These commenters believe that BLM sets an impossible compliance
standard in drainage situations. The final rule clarifies when a
prudent operator has constructive notice that drainage may be occurring
under Sec. 3162.2-6. When a lessee signs a lease, the lessee has agreed
to protect the lessor (the United States or an Indian mineral owner)
against drainage. Nothing in the lease terms conditions this obligation
on BLM notifying lessees of drainage. We believe it is reasonable to
expect that a lessee will:
(1) Evaluate the potential for drainage at the earliest time it can
receive information about a well drilled on an adjacent lease; and
(2) Immediately consider the economic feasibility of taking
protective action.
A commenter suggested that the responsibilities of an assignor for
drainage should end the earlier of 30 days after an assignment is
properly submitted to BLM or on the approval date. The final rule did
not adopt this suggestion because we disagree with the commenter. In
section 30a of the MLA, 30 U.S.C. 187a, it is clear that an assignor of
a partial interest remains responsible for all lease obligations that
accrued before BLM approved the assignment. We believe Congress
intended not to release the assignor of accrued obligations upon
assigning all record title interest.
Section 3100.50 (3162.2-6)
This section clarifies when we deem a party with interest in a
lease to have constructive notice that drainage may be occurring. The
final rule is unchanged from the proposed rule except to change the
order of the clauses in paragraph (b).
Some commenters suggested that we should not utilize the
information in this section as constructive notice to lessees because
such information does not reflect drainage occurrence. These commenters
believe that lessees need enough time to evaluate production
information from the well to determine if drainage is occurring. The
final rule did not adopt the suggestion because IBLA has long
recognized that a lessee may be on constructive notice of drainage.
This final rule clearly defines what constitutes constructive notice of
potential drainage (see Sec. 3162.2-6) and allows the lessee to rebut
the occurrence of drainage (see Sec. 3162.2-9). It also allows a lessee
to state that the information then available is not adequate to make a
conclusive determination of drainage; but will continue to monitor the
situation and make a further report at a later date (see Sec. 3162.2-
9(c)).
Several commenters suggested that a well completion report never
gives enough information to determine if a well is capable of draining
the minerals covered by the adjacent Federal lease. The commenters also
suggested that drainage protection should not be required until
sufficient production information is available to show potential
drainage, including information adequate to determine the type of
reservoir, the drive mechanism, the depletion rate, the permeability
and porosity of the formation, and many other factors before you can
determine if drainage is occurring. A commenter suggested that
impressive initial production may not be sustained and encouraging
drill stem results may be disproved by later well performance.
Therefore, the rule should not use these items as a basis for
constructive notice. The final rule did not adopt these suggestions.
Well completion reports and first production reports from a draining
well provide sufficient information to alert a prudent operator or
lessee that drainage may be occurring. If the lessee does not have an
interest in the draining well, the lessee is not required to take
action to protect the lease from drainage until information sufficient
to determine whether an economic well can be drilled becomes publicly
available. Drill stem tests may be one factor used to determine well
performance; but the lessee must gather other information as soon as it
is available to determine whether to drill an economic well.
Section 3100.51 (3162.2-9)
This section clarifies the duty of lessees and operating rights
owners to monitor the drilling of wells in the same or adjacent spacing
units and gather sufficient information to determine whether drainage
may be occurring. The final rule differs from the proposed rule. We
modified paragraph (a) to include the language ``in the same or
adjacent spacing units'' and deleted the phrase ``on adjacent lands''
from the rule text to establish clear limits of responsibility on a
lessee. We modified this section to change the words ``offending well''
to ``draining well'' to establish a clearer description of a well
draining Federal or Indian mineral resources. Commenters suggested we
modify paragraph (a)(1) to include the language ``specify the amount of
drainage from production of the draining well.'' We modified paragraph
(a)(3) to delete the cross reference to Sec. 3100.50. We modified
paragraph (b) to change the cross reference from ``Sec. 3100.50'' to
``Sec. 3162.2-4'' to clarify that an election of remedies is
envisioned, not a detailed plan of action. We modified paragraph (c) to
indicate that if you do not have sufficient information to comply, you
must indicate when you will provide the information to BLM. We added
paragraph (d) to clarify that you must provide BLM with the analysis
within 60 days after we request it.
One commenter objected to requirements to monitor wells on adjacent
lands and to gather information sufficient to determine whether
drainage is occurring. The commenter suggested that such monitoring was
impossible and the requirement would lead many to relinquish their
Federal or Indian leases because such requirements prevent operators
from having sufficient time to pursue exploration and production. As
stated above, the final rule adopts a change to specify that you must
monitor wells in the same or adjacent spacing units. This change better
defines the area which a lessee and operating rights owner must
normally protect from drainage. When a lessee undertook the duty to
protect against drainage, the lessee agreed to be responsible for, and
aware of, activities that might result in drainage of Federal or Indian
oil and gas. In addition, the lessee is in a better position to obtain
and interpret geologic and reservoir data than the BLM.
A commenter suggested that basing the prudent operator economic
analysis on the facts at a time when the lease is
[[Page 1888]]
owned by another party is an illegal retroactive application of a new
law to events of years past. It is not. The rule only applies to those
who acquire an interest hereafter. It will not change the prudent
operator standard for those who already hold interests.
A commenter suggested that we should not apply these regulations to
prior lessees unless the lessees or operating rights owners had an
interest in the draining well or BLM notified them of potential
drainage before they assigned their lease interest. The final rule did
not adopt this suggestion. The final rule does not change the
obligations of those who disposed of their interest before these
regulations take effect. Under existing law, constructive notice
triggers the obligation to protect against drainage. It is not
necessary for BLM to notify the lessee of such drainage.
A commenter suggested that we should not require lessees to develop
plans in all instances since the duty to take protective action arises
only when drilling an economic well. The commenter also suggested that
BLM be more concerned with the lessee taking protective measures rather
than filing ``useless'' plans. The final rule did adopt a change in
response to the comment. The final rule clarifies that operators need
only inform BLM of the form of drainage protection they will provide,
not a detailed plan. Further, the lessee must choose a remedy only when
drilling a protective well is economic.
Some commenters suggested that the 60-day time period is
unrealistic to provide BLM with drainage protection plans. These
commenters indicated that much of the required information may be
confidential or unavailable within 60 days. The final rule did adopt a
change from this suggestion. We added paragraph (c) to this section to
allow you to choose an appropriate schedule.
A commenter suggested that we replace ``is'' with the word ``may
be'' prior to the word ``occurring'' in the first sentence. The final
rule did not adopt this suggestion because the purpose of this section
is to determine if you must protect the lease from drainage.
Section 3100.52 (Sec. 3162.2-10)
This section clarifies when BLM will provide a demand letter to
lessees on drainage protection. The final rule is substantively
unchanged from the proposed rule. Ordinarily, BLM will serve record
title holders, operators, and operating rights owners.
A commenter suggested that the question might mislead operators
into thinking that they may wait until they received the demand letter
from BLM before taking action. The final rule was not changed in
response to this suggestion. We disagree with the comment, because the
rule clearly states that the duty of the lessee to take protective
measures is not dependent on the BLM sending a demand letter.
Some commenters suggested that we retain the current regulations,
which anticipate BLM sending a drainage demand letter. The final rule
did not adopt this suggestion. The lessee has the duty to monitor and
take protective action. IBLA already recognizes that a lessee may have
constructive notice of drainage without a BLM demand letter.
Significant Federal and Indian oil and gas resources may already be
drained before the lessee receives BLM's demand letter. The lessee is
in a better position than BLM to know whether drainage is occurring.
Some commenters expressed concern with BLM's demand letter time
frame and the assessing of compensatory royalty damages. The lessee or
operating rights owner is allowed a reasonable time from when the
draining well establishes production to take protective action. Since
there is no average reasonable time for every drainage situation, we
will determine what is a reasonable time on a case-by-case basis.
Section 3100.55 (Sec. 3162.2-15)
This section clarifies the burden of proof in a drainage contest.
BLM has the burden in a drainage contest of establishing a prima facie
case that drainage is occurring. The burden then shifts to the lessee
and operator to refute the existence of drainage, to prove the lessee
could not have known of drainage or to prove that a protective well is
not economic. The final rule is substantively unchanged from the
proposed rule.
Some commenters expressed concern that lessees are at a distinct
disadvantage in their ability to refute BLM's prima facie case that
drainage is occurring. These commenters oppose shifting the burden of
proof for drainage to the lessees. The final rule did not adopt this
comment. Once we establish the existence of drainage and constructive
notice, the lessee and operating rights owner under current precedent
have the burden of proving that drainage has not occurred or that they
could not have known of drainage. Under current precedent, the lessee
and operating rights owner have the burden of proving that a protective
well would not be economic.
BLM is also confident that we and IBLA will continue to fairly
consider all geological and engineering data that the operator
furnishes on the existence of drainage and will not hold lessees to an
impossible standard of proof.
Section 3100.60 (Sec. 3162.2-11)
This section clarifies what is a reasonable time to take protective
action after a draining well begins to produce oil or gas resources
with the actual time determined on a case-by-case basis. The final rule
differs from the proposed rule. We modified this section to delete
these words ``earliest,'' ``oil or gas,'' ``offending wells,'' and
``lands adjacent or nearby'' to establish a clearer understanding of
this section as commenters suggested. We changed the format and the
leading sentences to the answer to form paragraph (a). We added
paragraph (b) to clarify some of the factors we consider when
determining whether the lessee took protective action within a
reasonable time. We added paragraph (c) to clarify that if you take
protective action but do not do so in a timely fashion, you are
responsible for compensatory royalty for the period of the delay as
provided in Sec. 3162.2-12. In response to comments, we modified
paragraph (d) to change the word ``assessments'' to ``analysis,'' which
is a more accurate term.
A commenter suggested that we add ``split estate'' to the list of
factors we consider in determining what might be a reasonable time to
take protective action. The final rule did not adopt this suggestion.
It is not practical to attempt to list all of the relevant data on cost
and revenue in the regulation. Depending on the circumstances of each
case, it may or may not require a different amount of time to take
protective action where there is separate surface estate ownership.
A commenter suggested that it is impractical to interrupt an
ongoing drilling schedule to drill an offset well. The final rule did
not change in response to this comment. The lessee is obligated by its
lease terms to take protective action. If the lessee does not want to
interrupt its drilling schedule, it can request BLM's approval to pay
compensatory royalty or communitize the lease with the tract containing
the draining well.
Some commenters suggested that the title question of this section
should read: ``How soon must I take protective action?'' The commenters
also suggested that we delete the first sentence of the section. The
final rule adopted the language to change the question to read ``How
soon after I know of the likelihood of drainage must I take protective
action?'' We adopted the suggestion to delete the first sentence of
this section. We reformatted this section
[[Page 1889]]
and formed new paragraphs (a) and (b). The lessee or operating rights
owner is responsible for initiating action at a reasonable time after
constructive notice that drainage is occurring.
Some commenters suggested that we establish a time frame for
protection instead of the ``earliest reasonable time.'' These
commenters also suggested that BLM provide specific guidelines or
criteria for determining what is the ``earliest reasonable time.'' The
final rule did not adopt the suggestion to establish a specific time
frame. We deleted the word ``earliest'' because all reasonable time
requirements vary greatly for each situation. We must determine the
reasonable time on a case-by-case basis.
A commenter suggested that we include ``time required for
acquisition and evaluation of geological and/or geophysical data'' in
paragraph (b). The final rule adopted the language time required to
evaluate the characteristics and performance of the draining well'' for
paragraph (b)(1), but did not include the geological/geophysical data.
Section 3100.61 (3162.2-12)
This section describes the period of time for which the Department
will assess compensatory royalties against a lessee or operating rights
owner who does not drill and produce from a protective well or enter
into a unitization or communitization agreement to protect the lease
from drainage. The final rule differs from the proposed rule. We
deleted the word ``earliest'' to establish a clearer time frame for
which the Department will assess compensatory royalties against a
lessee or operating rights owner. We deleted the cross reference to
Sec. 3100.60. In response to comments, we modified paragraph (a) to
include the word ``economic.'' In response to comments, we modified
paragraph (b) to change the language ``the lands being drained'' to
``the mineral resources being drained'' to clarify that we refer to
mineral resources not lands. In response to comments, we modified
paragraph (c) to change the phrase ``ceases production'' to ``stops
producing.'' In response to comments, we modified paragraph (d) to
change the language ``the oil and gas lease interests in spacing units,
lots, or aliquot parts of the Federal lands being drained'' to ``your
interest in the Federal or Indian lease.''
A commenter suggested that we change the language to add
``economic'' before ``protective'' in paragraph (a) and add ``until
drainage ceases in the offending well'' to paragraph (c). The final
rule adopted a change to paragraph (a) to add the word ``economic,''
but not to paragraph (c). We did not change paragraph (c) because the
duty to pay compensatory royalty stops when the draining well stops
producing. The level of compensation required is based on determining
the percentage of the draining well's overall production attributed to
the lease with mineral resources being drained.
A commenter suggested that the obligation to pay compensatory
royalty ends when the drilling of a protective well demonstrates
insufficient production to recover drilling and operating costs. The
final rule did not adopt this suggestion because it was unnecessary. No
compensatory royalty is to be paid because drilling a protective well
satisfies the obligation to protect against drainage. In the lease, the
lessee has promised to protect the Federal or Indian lessor from
drainage.
A commenter suggested that we change paragraph (d) to read ``You
relinquish the oil and gas lease interests in spacing units, lots, or
aliquot parts in the geological horizon(s) of the Federal land being
drained.'' We do not recognize the division of record title by
geological horizon(s). Therefore, we did not adopt that comment.
Section 3100.70 (3162.2-5)
This section, as in the proposed rule, states that you do not have
to take action under Sec. 3162.2-4 if you can demonstrate that it is
not possible to do so and get a reasonable profit above the cost of
drilling, completing, and operating the protective well. The final rule
differs from the proposed rule. We modified the question of this
section to read ``Must I take protective action when a protective well
is uneconomic?'' We modified the first sentence to change the language
``will not assess you compensatory royalty'' to ``you are not required
to take any of the actions listed in Sec. 3162.2-4'' to establish a
clearer understanding of when a lessee does not take action for
drainage protection.
Section 3100.71 (3162.2-13)
This section informs an assignee or transferee that if they acquire
a lease being drained, they will be assessed compensatory royalty for
all drainage obligations accruing on and after the approval date of the
assignment of record title or transfer of operating rights. The final
rule is substantively unchanged from the proposed rule with the
exception of including the word ``Indian'' to clarify that this section
applies to Indian assignees or transferees.
A commenter suggested that we notify an assignee or transferee of a
lease interest that is subject to drainage and the obligation to pay
compensatory royalty or drill a protective well. The final rule did not
adopt this suggestion because a prudent purchaser of a lease interest
should examine the lease file prior to purchase. After BLM approves an
assignment of record title or transfer of operating rights, the
assignee or transferee assumes all lease obligations including the
obligation to protect the lease from drainage.
Section 3100-80 (3162.2-14)
This section indicates that a lessee or operating rights owner may
request BLM State Director review as outlined in 43 CFR 3165.3, and
appeal to IBLA as outlined in 43 CFR Parts 4 and 1840, a BLM decision
to require drainage protective measures. The final rule includes
language that a lessee or operating rights owner may request for a BLM
State Director review. This language was omitted in the proposed rule
in anticipation of a new appeals rule.
Section 3106.7-2
This section specifies that an assignor or transferor remains
responsible for all obligations accruing prior to the approval of the
assignment or transfer, including the payment of compensatory royalties
for drainage and the plugging and abandonment of any unplugged wells
drilled or used prior to the effective of the transfer. The final rule
differs from the proposed rule. We modified this section to change the
question to read ``If I transfer my lease, what is my continuing
obligation?'' to better reflect that the purpose of the section is to
inform the lessee of its continuing obligations. Also, we reformatted
the section to make it easier to understand.
A commenter suggested that we recognize the terms of assignment
agreements that specify which responsibilities are assigned or
transferred. The final rule did not adopt this suggestion because we
cannot be bound by agreements to which we are not a party.
A commenter suggested that we clarify that the assignee merely
assumes reclamation responsibilities and not all wells must immediately
be plugged when we approve the assignment. The final rule did not adopt
this suggestion. We do not believe that the rule implies otherwise. If
additional beneficial uses for the wells exist, you do not need to plug
the wells immediately.
Some commenters suggested that the original lessee or operator
should not be responsible for plugging and abandoning when control and
all
[[Page 1890]]
obligations have been conveyed to other parties. The final rule did not
adopt this suggestion. While we first look to the current lessee for
lease compliance, we believe it prudent to reserve our rights against
all parties who had the potential to benefit from the well's existence.
Section 3106.7-6
This section informs a transferee of its obligations to comply with
the original lease terms, including plugging and abandonment of
unplugged wells, reclaiming the lease site, remediating environmental
problems in existence which should have been known at the time of
assignment, as well as maintaining an adequate bond to ensure
performance of those responsibilities. The final rule differs from the
proposed rule. We modified this section to add paragraphs (a) and (b)
to differentiate between record title holders and operating rights
owners.
Section 3108.1
This section adds a requirement that where more than one party
holds record title interest in the same lease, all such parties must
sign the relinquishment form. In addition, all parties relinquishing
the lease are still responsible for settling all outstanding lease
obligations, including placement of all wells on the lease in proper
condition for suspension or abandonment, and for reclaiming leased land
in accordance with an approved plan. The final rule is substantially
unchanged from the proposed rule. In response to comments, we deleted
the phrase ``leased land'' in the rule text.
Section 3130.3
This section amends the cross reference of these provisions. The
final rule amends the cite to read ``Sec. 3162.2.''
Section 3162.2
This section adds ``lessees'' to the persons who must satisfy the
requirement of drilling and producing operations related to drainage.
The final rule differs from the proposed rule. We modified this section
to consolidate the previous drainage requirements of Part 3100 with
those of Part 3160. We also modified this section to remove paragraph
(a) and to redesignate current paragraphs (b) and (c) as paragraphs (a)
and (b).
A commenter suggested that we should not require the lessees to
have the same development responsibilities as the operating rights
owners if they are not the same entity. The final rule did not adopt
this suggestion because we must ensure that if either party is
negligent in its responsibilities, we have a recourse by holding the
other party responsible for fulfilling the lease obligations. A
sublease does not relieve the lessee of the responsibility for lease
performance.
Section 3165.3
This section adds ``lessee'' to the list of parties notified by BLM
in the case of an alleged violation of the lease or regulations
pertaining to operations on an oil and gas lease. The final rule
differs from the proposed rule. We modified this section to add the
phrase ``and the lessee(s)'' after ``appropriate party'' in the first
sentence of paragraph (a) to clarify that we will notify lessees of
alleged violations of the lease or regulations.
Section 3165.4
This section adds a provision specifying that an appeal of BLM's
determination of drainage does not stay the determination and that
compensatory royalties and interest will accrue during the appeal. The
final rule is substantively unchanged from the proposed rule.
IV. Procedural Matters
Executive Order 12866
In accordance with the criteria in Executive Order 12866, this rule
is not a significant regulatory action and is not subject to review by
the Office of Management and Budget (OMB).
(a) This rule will not have an annual economic effect of $100
million or adversely affect an economic sector, productivity, jobs, the
environment, or other units of government. Since fiscal year 1996, the
drainage protection program has generated an average of about $16.1
million to the U.S. Treasury per year, with about 10 percent of these
revenues attributed to compensatory assessments. These revenues are
from payments by lessees and operating rights owners obligated to pay
royalties and compensatory royalties under the drainage protection
program. The adoption of this final rule could result in the generation
of additional revenues from compensatory royalty assessments, royalties
from the drilling of new protective wells, and royalties from entering
unitization or communitization agreements totaling about $2 million.
This is far below the $100 million threshold set out in the Executive
Order.
(b) This rule will not create inconsistencies with other agencies'
actions. This rule does not change the relationships of the drainage
protection program with other agencies' actions.
(c) This rule will not materially affect entitlements, grants, user
fees, loan programs, or the rights and obligations of their recipients.
This final rule clarifies ambiguities in the existing regulations and
does not add new requirements to protect the lessor from drainage to
those in the lease itself or impose new obligations on lessees and
operating rights owners. Since the final rule merely clarifies how a
lessee meets the terms in the lease that created their property
interest, and imposes no limits on the use of the property, there will
be no rights or obligations impaired as a result.
(d) This rule will not raise novel legal or policy issues.
Regulatory Flexibility Act
Congress enacted the Regulatory Flexibility Act of 1980 (RFA), as
amended (5 U.S.C. 601-612), to ensure that government regulations do
not unnecessarily or disproportionately burden small entities. The RFA
requires a Regulatory Flexibility Analysis if a rule has a significant
economic impact, either detrimental or beneficial, on a substantial
number of small entities. The Department certifies that this document
will not have a significant economic effect on a substantial number of
small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). A Regulatory Flexibility Analysis and a Small Entity Compliance
Guide are not required. This final rule does not produce an impact of
$100 million or more on the economy. Its initial annual impact is
estimated at $20.2 million or about one-third of one percent of
revenues generated by oil and gas leases. Our estimate on the drainage
liabilities is based on the average yearly amount of revenues recovered
by BLM from successfully retired drainage cases. These revenues include
royalties on protective wells, compensatory royalty assessments,
royalties generated through protective agreements, or bonus bid
payments on unleased lands.
Small Business Regulatory Enforcement Fairness Act
This rule is not a major rule under 5 U.S.C. 804(2), the Small
Business Regulatory Enforcement Fairness Act. This rule:
a. Does not have an annual effect on the economy of $100 million or
more.
b. Does not cause a major increase in costs or prices for
consumers, individual industries, Federal, State, or local government
agencies, or geographic regions. This final rule would not affect costs
or prices for consumers that are associated with the actions of this
rulemaking.
The Department has determined that this final rule is not a major
rule under
[[Page 1891]]
5 U.S.C. 804(2), the Small Business Regulatory Enforcement Fairness
Act. This final rule is not a major rule because annual total royalty
revenues we anticipate receiving through drainage protections,
including any increases as a result of these regulations, barely exceed
$25 million.
Unfunded Mandates Reform Act
We have determined that in accordance with the Unfunded Mandates
Reform Act (UMRA) (2 U.S.C. 1501, et seq.):
a. This rule will not ``significantly or uniquely'' affect small
governments. A Small Government Agency Plan is not required. The final
rule would not change the relationship between BLM and small
governments.
b. This rule will not produce a Federal mandate of $100 million or
greater in any year, i.e., it is not a ``significant regulatory
action'' under the Unfunded Mandates Reform Act. This final rule does
not impose an unfunded mandate on State, local, or tribal governments,
or the private sector of more than $100 million per year. The final
rule does not have a significant or unique effect on State, local, or
tribal governments, or the private sector. A statement containing the
information required by the Unfunded Mandates Reform Act (2 U.S.C. 1531
et seq.) is not required.
Government-to-Government Relationship With Tribes
We have considered the impact of this rule on the interests of
Tribal governments under the President's memorandum of April 29, 1994,
``Government-to-Government Relations with Native American Tribal
Governments'' (59 FR 22951) and Department of the Interior Manual (512
DM 2). BLM did consult with Indian Tribes, under Executive Order 13084,
on the issue of whether these regulations should apply to Tribal and
individual Indian oil and gas leases. This complies with Executive
Order 13175 which takes effect on January 6, 2001. However, we have
determined the government-to-government relationship will not be
affected as a result of the consultation on the applicability of these
regulations. This rule will enhance the protection of Indian oil and
gas resource owners.
Executive Order 12630
In accordance with Executive Order 12630, the final rule does not
represent a government action capable of interfering with
constitutionally protected property rights. A takings implication
assessment is not required. The Department has determined that the
final rule would not cause a taking of private property or require
further discussion of takings implications under this Executive Order.
Since the final rule merely clarifies how a lessee meets the terms in
the lease that created their property interest, and imposes no limits
on the use of the property, there will be no private property rights
impaired as a result.
Executive Order 13132
We have considered the effect of the final rule in accordance with
Executive Order 13132 and have determined that it does not have
sufficient Federalism implications to warrant the preparation of a
Federalism summary impact statement. The final rule does not have
substantial direct effects on the States, on the relationship between
the national government and the States or on the distribution of power
and responsibilities among various levels of government.
Executive Order 12988
In accordance with Executive Order 12988, the Office of the
Solicitor has determined that this final rule does not unduly burden
the judicial system and meets the requirements of sections 3(a) and
3(b)(2) of the Order. This final rule clarifies the drainage
obligations of lessees and operating rights owners and ambiguities in
the existing regulations.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3501 et seq.), the information collection required by these regulations
has been approved by the Office of Management and Budget under Approval
No. 1004-0185 which expires May 31, 2002.
National Environmental Policy Act
BLM has determined that this final rule is not subject to the
review process established by the National Environmental Policy Act
(NEPA) of 1969, since it is categorically excluded under 516
Departmental Manual (DM), Chapter 2, Appendix 1, Item 1.10, and 516 DM,
Chapter 2, Appendix 2. We also determined that the final rule does not
meet any of the ten criteria for exceptions to categorical exclusion
listed in 516 DM, Chapter 2, Appendix 2. Pursuant to Council on
Environmental Quality regulations (40 CFR 1508.4) and the environmental
policies and procedures of the Department of the Interior, the term
``categorical exclusion'' means a category of actions that have been
found not individually or cumulatively to have a significant effect on
the human environment and in procedures adopted by a Federal agency for
which neither an environmental assessment nor an environmental impact
statement is required.
The environmental effects of this rule are too speculative or
conjectural to lend themselves to meaningful analysis. Although this
rulemaking requires that Federal lessees and operating rights owners
protect their leases from drainage of oil and gas resources by
producing wells on adjacent lands, there are several steps that must be
taken before it is determined that an operator will take actions
subject to NEPA review. The lessee must monitor well activities on
adjacent lands, and then conduct an analysis of information available
to determine if the adjacent well is too far away to be capable of
draining the Federal lease. Even if draining the Federal lease, the
lessee might be able to exercise options such as forming a unitization
or communitization agreement with the owners of the draining well or
paying compensatory royalties. These two options are exercised in more
than 80 percent of the cases where there is economic drainage and a
NEPA analysis is not required.
In about 10 percent of all drainage cases identified, it might be
determined that drilling a protective well is the only option for
protecting the lease from drainage. However, the lessee might prove
that even if it drilled a protective well, it might not be economic.
This is perhaps true in 75 percent of the cases where drilling a
protective well is considered. If the lessee determines it can drill an
economic protective well, then obtaining approval to drill the well is
subject to a review under procedures established by BLM to comply with
NEPA.
Authors: The principal author of this rule making is Donnie Shaw,
Fluid Minerals Group, assisted by Shirlean Beshir, Regulatory Affairs
Group.
List of Subjects
43 CFR Part 3100
Government contracts, Land Management Bureau, Mineral royalties,
Oil and gas exploration, Public lands-mineral resources, Reporting and
record keeping requirements, Surety bonds.
43 CFR Part 3130
Alaska, Government contracts, Mineral royalties, Oil and gas
exploration, Oil and gas reserves, Public lands-mineral resources,
Reporting and record keeping requirements, Surety bonds.
[[Page 1892]]
43 CFR Part 3160
Government contracts, Hydrocarbons, Land Management Bureau, Mineral
royalties, Oil and gas exploration, Public lands-mineral resources,
Reporting and record keeping requirements.
Dated: January 2, 2001.
Sylvia V. Baca,
Assistant Secretary, Land and Minerals Management.
Accordingly, under the authorities cited below, BLM adopts as final
the amendments to Parts 3100, 3106, 3108, 3130, and 3160, Group 3100,
Subchapter C, Chapter II of Title 43 of the Code of Federal Regulations
to read as follows:
SUBCHAPTER C--MINERALS MANAGEMENT (3000)
1. Remove the heading and the note following Group 3000--Minerals
Management.
PART 3000--MINERALS MANAGEMENT: GENERAL
2. Revise the authority citation for Part 3000 to read as follows:
Authority: 30 U.S.C. 189 and 359; and 40 Opinion of the Attorney
General 41.
3. Remove the heading and the note following Group 3100--Oil and
Gas Leasing.
PART 3100--OIL AND GAS LEASING
4. Revise the authority citation for part 3100 to read as follows:
Authority: 30 U.S.C. 189 and 359; 43 U.S.C. 1732(b), 1733, and
1740; and 40 Opinion of the Attorney General 41.
5. Revise Sec. 3106.7-2 to read as follows:
Sec. 3106.7-2 If I transfer my lease, what is my continuing
obligation?
(a) You are responsible for performing all obligations under the
lease until the date BLM approves an assignment of your record title
interest or transfer of your operating rights.
(b) After BLM approves the assignment or transfer, you will
continue to be responsible for lease obligations that accrued before
the approval date, whether or not they were identified at the time of
the assignment or transfer. This includes paying compensatory royalties
for drainage. It also includes responsibility for plugging wells and
abandoning facilities you drilled, installed, or used before the
effective date of the assignment or transfer.
6. Add new Sec. 3106.7-6 to read as follows:
Sec. 3106.7-6 If I acquire a lease by an assignment or transfer, what
obligations do I agree to assume?
(a) If you acquire record title interest in a Federal lease, you
agree to comply with the terms of the original lease during your lease
tenure. You assume the responsibility to plug and abandon all wells
which are no longer capable of producing, reclaim the lease site, and
remedy all environmental problems in existence and that a purchaser
exercising reasonable diligence should have known at the time. You must
also maintain an adequate bond to ensure performance of these
responsibilities.
(b) If you acquire operating rights in a Federal lease, you agree
to comply with the terms of the original lease as it applies to the
area or horizons in which you acquired rights. You must plug and
abandon all unplugged wells, reclaim the lease site, and remedy all
environmental problems in existence and that a purchaser exercising
reasonable diligence should have known at the time you receive the
transfer. You must also maintain an adequate bond to ensure performance
of these responsibilities.
7. Revise Sec. 3108.1 to read as follows:
Sec. 3108.1 As a lessee, may I relinquish my lease?
You may relinquish your lease or any legal subdivision of your
lease at any time. You must file a written relinquishment with the BLM
State Office with jurisdiction over your lease. All lessees holding
record title interests in the lease must sign the relinquishment. A
relinquishment takes effect on the date you file it with BLM. However,
you and the party that issued the bond will continue to be obligated
to:
(a) Make payments of all accrued rentals and royalties, including
payments of compensatory royalty due for all drainage that occurred
before the relinquishments;
(b) Place all wells to be relinquished in condition for suspension
or abandonment as BLM requires; and
(c) Complete reclamation of the leased sites after stopping or
abandoning oil and gas operations on the lease, under a plan approved
by the appropriate surface management agency.
PART 3130--OIL AND GAS LEASING: NATIONAL PETROLEUM RESERVE, ALASKA
8. Revise the authority citation for part 3130 to read as follows:
Authority: 42 U.S.C. 6508; 43 U.S.C. 1732(b), 1733, and 1740;
and 40 Opinion of the Attorney General 41.
Sec. 3130.3 [Amended]
9. Amend Sec. 3130.3 by revising the cross reference of
``Sec. 3100.3'' to read ``Sec. 3162.2.''
PART 3160--ONSHORE OIL AND GAS OPERATIONS
10. Revise the authority citation for part 3160 to read as follows:
Authority: 25 U.S.C. 396d; 30 U.S.C. 189 and 359; 43 U.S.C. 1733
and 1740; and 40 Opinion of the Attorney General 41.
Sec. 3160.0-5 [Amended]
11. Amend Sec. 3160.0-5 as follows by:
a. Removing the paragraph designations (a) through (w) and
alphabetizing all definitions;
b. Adding new definitions for Drainage, Protective well, and Record
title holder, and revising the definitions of Lessee and Operating
rights owner to read as follows:
* * * * *
Drainage means the migration of hydrocarbons, inert gases (other
than helium), or associated resources caused by production from other
wells.
* * * * *
Lessee means any person holding record title or owning operating
rights in a lease issued or approved by the United States.
* * * * *
Operating rights owner means a person who owns operating rights in
a lease. A record title holder may also be an operating rights owner in
a lease if it did not transfer all of its operating rights.
* * * * *
Protective well means a well drilled or modified to prevent or
offset drainage of oil and gas resources from its Federal or Indian
lease.
* * * * *
Record title holder means the person(s) to whom BLM or an Indian
lessor issued a lease or approved the assignment of record title in a
lease.
* * * * *
12. Amend Sec. 3162.2 as follows by:
Sec. 3162.2 [Amended]
a. Revising the heading;
b. Adding ``(s)'' after ``operating rights owner'' in paragraph (b)
and (c) each time it appears, and by adding the term ``a lessee(s)
and'' before ``operating rights owners'' each time it appears; and
c. removing paragraph (a).
Sec. 3162.2 Drilling, producing, and drainage obligations.
* * * * *
13. Add a new Sec. 3162.2-1 and redesignate paragraphs (b) and (c)
of
[[Page 1893]]
Sec. 3162.2 as paragraphs (a) and (b) of this new section.
Sec. 3162.2-1 Drilling and producing obligations.
* * * * *
14. Add new Secs. 3162.2-2 through 3162.2-15 to read as follows:
Sec.
3162.2-2 What steps may BLM take to avoid uncompensated drainage
of Federal or Indian mineral resources?
3162.2-3 When am I responsible for protecting my Federal or Indian
lease from drainage?
3162.2-4 What protective action may BLM require the lessee to take
to protect the leases from drainage?
3162.2-5 Must I take protective action when a protective well
would be uneconomic?
3162.2-6 When will I have constructive notice that drainage may be
occurring?
3162.2-7 Who is liable for drainage if more than one person holds
undivided interests in the record title or operating rights for the
same lease?
3162.2-8 Does my responsibility for drainage protection end when I
assign or transfer my lease interest?
3162.2-9 What is my duty to inquire about the potential for
drainage and inform BLM of my findings?
3162.2-10 Will BLM notify me when it determines that drainage is
occurring?
3162.2-11 How soon after I know of the likelihood of drainage must
I take protective action?
3162.2-12 If I hold an interest in a lease, for what period will
the Department assess compensatory royalty against me?
3162.2-13 If I acquire an interest in a lease that is being
drained, will the Department assess me for compensatory royalty?
3162.2-14 May I appeal BLM's decision to require drainage
protective measures?
3162.2-15 Who has the burden of proof if I appeal BLM's drainage
determination?
Sec. 3162.2-2 What steps may BLM take to avoid uncompensated drainage
of Federal or Indian mineral resources?
If we determine that a well is draining Federal or Indian mineral
resources, we may take any of the following actions:
(a) If the mineral resources being drained are in Federal or Indian
leases, we may require the lessee to drill and produce all wells that
are necessary to protect the lease from drainage, unless the conditions
of this part are met. BLM will consider applicable Federal, State, or
Tribal rules, regulations, and spacing orders when determining which
action to take. Alternatively, we may accept other equivalent
protective measures;
(b) If the mineral resources being drained are either unleased
(including those which may not be subject to leasing) or in Federal or
Indian leases, we may execute agreements with the owners of interests
in the producing well under which the United States or the Indian
lessor may be compensated for the drainage (with the consent of the
Federal or (in consultation with the Indian mineral owner and BIA)
Indian lessees, if any);
(c) We may offer for lease any qualifying unleased mineral
resources under part 3120 of this chapter or enter into a
communitization agreement; or
(d) We may approve a unit or communitization agreement that
provides for payment of a royalty on production attributable to
unleased mineral resources as provided in Sec. 3181.5.
Sec. 3162.2-3 When am I responsible for protecting my Federal or
Indian lease from drainage?
You must protect your Federal or Indian lease from drainage if your
lease is being drained of mineral resources by a well:
(a) Producing for the benefit of another mineral owner;
(b) Producing for the benefit of the same mineral owner but with a
lower royalty rate; or
(c) Located in a unit or communitization agreement, which due to
its Federal or Indian mineral owner's allocation or participation
factor, generates less revenue for the United States or the Indian
mineral owner for the mineral resources produced from your lease.
Sec. 3162.2-4 What protective action may BLM require the lessee to
take to protect the leases from drainage?
We may require you to:
(a) Drill or modify and produce all wells that are necessary to
protect the leased mineral resources from drainage;
(b) Enter into a unitization or communitization agreement with the
lease containing the draining well; or
(c) Pay compensatory royalties for drainage that has occurred or is
occurring.
Sec. 3162.2-5 Must I take protective action when a protective well
would be uneconomic?
You are not required to take any of the actions listed in
Sec. 3162.2-4 if you can prove to BLM that when you first knew or had
constructive notice of drainage you could not produce a sufficient
quantity of oil or gas from a protective well on your lease for a
reasonable profit above the cost of drilling, completing, and operating
the protective well.
Sec. 3162.2-6 When will I have constructive notice that drainage may
be occurring?
(a) You have constructive notice that drainage may be occurring
when well completion or first production reports for the draining well
are filed with either BLM, State oil and gas commissions, or regulatory
agencies and are publicly available.
(b) If you operate or own any interest in the draining well or
lease, you have constructive notice that drainage may be occurring when
you complete drill stem, production, pressure analysis, or flow tests
of the well.
Sec. 3162.2-7 Who is liable for drainage if more than one person holds
undivided interests in the record title or operating rights for the
same lease?
(a) If more than one person holds record title interests in a
portion of a lease that is subject to drainage, each person is jointly
and severally liable for taking any action we may require under this
part to protect the lease from drainage, including paying compensatory
royalty accruing during the period and for the area in which it holds
its record title interest.
(b) 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.
Sec. 3162.2-8 Does my responsibility for drainage protection end when
I assign or transfer my lease interest?
If you assign your record title interest in a lease or transfer
your operating rights, you are not liable for drainage that occurs
after the date we approve the assignment or transfer. However, you
remain responsible for the payment of compensatory royalties for any
drainage that occurred when you held the lease interest.
Sec. 3162.2-9 What is my duty to inquire about the potential for
drainage and inform BLM of my findings?
(a) When you first acquire a lease interest, and at all times while
you hold the lease interest, you must monitor the drilling of wells in
the same or adjacent spacing units and gather sufficient information to
determine whether drainage is occurring. This information can be in
various forms, including but not limited to, well completion reports,
sundry notices, or available production information. As a prudent
lessee, it is your responsibility to analyze and evaluate this
information and make the necessary calculations to determine:
(1) The amount of drainage from production of the draining well;
(2) The amount of mineral resources which will be drained from your
Federal or Indian lease during the life of the draining well; and
[[Page 1894]]
(3) Whether a protective well would be economic to drill.
(b) You must notify BLM within 60 days from the date of actual or
constructive notice of:
(1) Which of the actions in Sec. 3162.2-4 you will take; or
(2) The reasons a protective well would be uneconomic.
(c) If you do not have sufficient information to comply with
Sec. 3162.2-9(b)(1), indicate when you will provide the information.
(d) You must provide BLM with the analysis under paragraph (a) of
this section within 60 days after we request it.
Sec. 3162.2-10 Will BLM notify me when it determines that drainage is
occurring?
We will send you a demand letter by certified mail, return receipt
requested, or personally serve you with notice, if we believe that
drainage is occurring. However, your responsibility to take protective
action arises when you first knew or had constructive notice of the
drainage, even when that date precedes the BLM demand letter.
Sec. 3162.2-11 How soon after I know of the likelihood of drainage
must I take protective action?
(a) You must take protective action within a reasonable time after
the earlier of:
(1) The date you knew or had constructive notice that the
potentially draining well had begun to produce oil or gas; or
(2) The date we issued a demand letter for protective action.
(b) Since the time required to drill and produce a protective well
varies according to the location and conditions of the oil and gas
reservoir, BLM will determine this on a case-by-case basis. When we
determine whether you took protective action within a reasonable time,
we will consider several factors including, but not limited to:
(1) Time required to evaluate the characteristics and performance
of the draining well;
(2) Rig availability;
(3) Well depth;
(4) Required environmental analysis;
(5) Special lease stipulations which provide limited time frames in
which to drill; and
(6) Weather conditions.
(c) If BLM determines that you did not take protection action
timely, you will owe compensatory royalty for the period of the delay
under Sec. 3162.2-12.
Sec. 3162.2-12 If I hold an interest in a lease, for what period will
the Department assess compensatory royalty against me?
The Department will assess compensatory royalty beginning on the
first day of the month following the earliest reasonable time we
determine you should have taken protective action. You must continue to
pay compensatory royalty until:
(a) You drill sufficient economic protective wells and remain in
continuous production;
(b) We approve a unitization or communitization agreement that
includes the mineral resources being drained;
(c) The draining well stops producing; or
(d) You relinquish your interest in the Federal or Indian lease.
Sec. 3162.2-13 If I acquire an interest in a lease that is being
drained, will the Department assess me for compensatory royalty?
If you acquire an interest in a Federal or Indian lease through an
assignment of record title or transfer of operating rights under this
part, you are liable for all drainage obligations accruing on and after
the date we approve the assignment or transfer.
Sec. 3162.2-14 May I appeal BLM's decision to require drainage
protective measures?
You may appeal any BLM decision requiring you take drainage
protective measures. You may request BLM State Director review under 43
CFR 3165.3 and/or appeal to the Interior Board of Land Appeals under 43
CFR part 4 and subpart 1840.
Sec. 3162.2-15 Who has the burden of proof if I appeal BLM's drainage
determination?
BLM has the burden of establishing a prima facie case that drainage
is occurring and that you knew of such drainage. Then the burden of
proof shifts to you to refute the existence of drainage or to prove
there was not sufficient information to put you on notice of the need
for drainage protection. You also have the burden of proving that
drilling and producing from a protective well would not be economically
feasible.
Sec. 3165.3 [Amended]
13. Amend Sec. 3165.3 by adding the phrase ``and the lessee(s),''
after ``appropriate party'' in the first sentence of paragraph (a).
14. Amend Sec. 3165.4 by adding a new paragraph (e)(4) to read as
follows:
Sec. 3165.4 Appeals.
* * * * *
(e) * * *
(4) When an appeal is filed under paragraph (a) of this section
from a decision to require drainage protection, BLM's drainage
determination will remain in effect during the appeal, notwithstanding
the provisions of 43 CFR 4.21. Compensatory royalty and interest
determined under 30 CFR Part 218 will continue to accrue throughout the
appeal.
* * * * *
[FR Doc. 01-446 Filed 1-9-01; 8:45 am]
BILLING CODE 4310-84-P