[Federal Register Volume 80, Number 90 (Monday, May 11, 2015)]
[Rules and Regulations]
[Pages 26993-27034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11314]



[[Page 26993]]

Vol. 80

Monday,

No. 90

May 11, 2015

Part II





 Department of the Interior





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Bureau of Indian Affairs





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25 CFR Part 226





Leasing of Osage Reservation Lands for Oil and Gas Mining; Final Rule

Federal Register / Vol. 80 , No. 90 / Monday, May 11, 2015 / Rules 
and Regulations

[[Page 26994]]


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DEPARTMENT OF THE INTERIOR

Bureau of Indian Affairs

25 CFR Part 226

[156A2100DD/AAKC001030/A0A501010.999900 253G]
RIN 1076-AF17


Leasing of Osage Reservation Lands for Oil and Gas Mining

AGENCY: Bureau of Indian Affairs, Interior.

ACTION: Final rule.

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SUMMARY: The Bureau of Indian Affairs is issuing its final revisions to 
the regulations addressing mineral development of the Osage minerals 
estate. This rule updates the leasing procedures and the rental, 
operations, safety and royalty requirements for oil and gas production 
on Osage mineral lands and is the result of a negotiated rulemaking.

DATES: This rule is effective on July 10, 2015.

FOR FURTHER INFORMATION CONTACT: Mr. Eddie Streater, Designated Federal 
Officer, Bureau of Indian Affairs, P.O. Box 8002, Muscogee, OK 74402; 
telephone (918) 781-4608; fax (918) 718-4604; or email 
osageregneg@bia.gov. Additional information on the negotiated 
rulemaking can be found at: http://www.bia.gov/osageregneg.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary of Rule
II. Background
III. Detailed Explanation of Revisions
IV. Explanation of Changes Made in Response to Departmental Review
V. Comments on the Proposed Rule and Responses
    A. Overview/General
    B. Comments Related to Section 226.1
    C. Comments Related to Section 226.3
    D. Comments Related to Section 226.4
    E. Comments Related to Section 226.5
    F. Comments Related to Section 226.6
    G. Comments Related to Section 226.8
    H. Comments Related to Section 226.9
    I. Comments Related to Section 226.14
    J. Comments Related to Section 226.15
    K. Comments Related to Section 226.18
    L. Comments Related to Section 226.19
    M. Comments Related to Section 226.20
    N. Comments Related to Section 226.25
    O. Comments Related to Section 226.27
    P. Comments Related to Section 226.29
    Q. Comments Related to Section 226.33
    R. Comments Related to Section 226.34
    S. Comments Related to Section 226.35
    T. Comments Related to Section 226.36
    U. Comments Related to Section 226.37
    V. Comments Related to Section 226.38
    W. Comments Related to Section 226.39
    X. Comments Related to Section 226.40
    Y. Comments Related to Section 226.41
    Z. Comments Related to Section 226.45
    AA. Comments Related to Section 226.46
    BB. Comments Related to Section 226.47
    CC. Comments Related to Section 226.48
    DD. Comments Related to Section 225.53
    EE. Comments Related to Section 226.56
    FF. Comments Related to Section 226.57
    GG. Comments Related to Section 226.59
    HH. Comments Related to Section 226.60
    II. Comments Related to Section 226.62
    JJ. Comments Related to Section 226.63
    KK. Comments Related to Section 226.65
    LL. Comments Related to Section 226.66
    MM. Subpart F (226.67 to 226.70)
    NN. Abandoned Wells
V. Procedural Requirements
    A. Regulatory Planning and Review (E.O. 12866 and 13563)
    B. Regulatory Flexibility Act
    C. Small Business Regulatory Enforcement Fairness Act
    D. Unfunded Mandates Reform Act
    E. Takings (E.O. 12630)
    F. Federalism (E.O. 13132)
    G. Civil Justice Reform (E.O. 12988)
    H. Consultation with Indian Tribes (E.O. 13175)
    I. Paperwork Reduction Act
    J. National Environmental Policy Act
    K. Effects on the Energy Supply (E.O. 13211)

I. Executive Summary of Rule

    This rule updates the existing oil and gas regulations governing 
Osage County, Oklahoma as set forth in 25 CFR part 226. It is intended 
to strengthen the management and administration of the Osage mineral 
estate for the benefit of the Osage. These provisions strengthen the 
rule's reporting and inspection requirements, offer more specificity 
regarding a lessee's obligations with respect to its mining operations, 
and adjust royalty rate calculations and bonding amounts, in order to 
protect the best interests of the Osage mineral estate, ensure safety, 
and discourage future regulatory violations.

II. Background

    On October 14, 2011, the United States and the Osage Nation 
(formerly known and referred to in Rule 226 as the ``Osage Tribe'') 
signed a Settlement Agreement to resolve litigation regarding the 
United States' alleged mismanagement of the Osage Nation's oil and gas 
mineral estate, along with other unrelated claims. In the Settlement 
Agreement, the parties agreed ``to address means of improving the trust 
management of the Osage Mineral Estate, the Osage Tribal Trust Account, 
and Other Osage Accounts.'' The parties agreed that a review and 
revision of the existing regulations is warranted to better assist the 
Bureau of Indian Affairs (BIA or Bureau) in managing the Osage mineral 
estate. The parties agreed to engage in a negotiated rulemaking for 
this purpose. Pursuant to the required, applicable procedures, after 
the Tribal Trust Settlement was executed, the Department of the 
Interior (Department) established a Negotiated Rule Making Committee in 
July 2012 and commenced structured negotiations on the amendment and 
revision of Rule 226. For additional information on this negotiated 
rulemaking process, please visit http://www.bia.gov/osageregneg/.
    The Negotiated Rule Making Committee submitted its report to BIA on 
April 25, 2013. On August 28, 2013, BIA published a proposed rule based 
on the Committee's report. See 78 FR 53083. In order to provide 
additional time for parties to comment on the proposed rule, BIA 
extended the original comment deadline until November 18, 2013. See 78 
FR 68859 (November 1, 2013). After a thorough evaluation of the many 
comments by various stakeholders with respect to the proposed rule, BIA 
revised and amended the proposed rule to incorporate those changes and 
amendments that BIA considered meritorious and beneficial in preparing 
the final rule as published herein.

III. Detailed Explanation of Revisions

    This final rule revises the existing rule for ``Leasing of Osage 
Reservation Lands for Oil and Gas Mining'' with the textual and 
substantive changes as set forth in Table 1. The BIA's additional 
revisions to the proposed rule that resulted from the comment period 
and BIA's consideration and evaluation of those comments (as set forth 
in Section IV below) were adopted in BIA's final rule as published 
herein and as set forth in Table 2.

[[Page 26995]]



                                                     Table 1
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        Current 25 CFR section            Final rule section                    Final rule change
----------------------------------------------------------------------------------------------------------------
Part 226.............................  Part 226...............  Throughout the final rule the use of ``Osage
                                                                 Tribal Council'' has been deleted and replaced
                                                                 with ``Osage Minerals Council'' (``OMC'')
                                                                 because the former no longer exists and the
                                                                 latter holds the authority to make decisions
                                                                 regarding the Osage minerals estate. Similarly,
                                                                 all references to ``lease cancellation'' in the
                                                                 existing rule have been changed to ``lease
                                                                 termination,'' unless the reference in the
                                                                 final rule is to a voluntary lease cancellation
                                                                 by a lessee. Also, to clarify time deadlines,
                                                                 all references to due dates are to be uniformly
                                                                 calculated by calendar days, unless
                                                                 specifically noted otherwise. In addition, the
                                                                 final rule adds the term ``other marketable
                                                                 product'' to existing references to oil and gas
                                                                 in order that other minerals will not leave a
                                                                 gap and resulting in unregulated minerals.
226.1................................  226.1..................  The final rule deletes the terms ``contract''
                                                                 and ``agreement'' and substitutes the term
                                                                 ``lease''; provides definition for a ``lease;''
                                                                 clarifies that ``an authorized representative
                                                                 of a lessee'' is bound by those regulations
                                                                 that apply to the lessee represented; deletes
                                                                 the definition for ``major purchaser'' because
                                                                 it is no longer relevant; replaces and combines
                                                                 the definitions for ``casinghead gas'' and
                                                                 ``natural gas'' into one definition for ``raw
                                                                 natural gas'' and ``gas''; adds definitions for
                                                                 the additional following new terms: ``avoidably
                                                                 lost,'' ``condensate,'' ``drainage,''
                                                                 ``marketable condition,'' ``maximum ultimate
                                                                 economic recovery,'' ``natural gas liquids,''
                                                                 ``notice to lessee,'' ``onshore oil and gas
                                                                 order,'' ``other marketable product,''
                                                                 ``production in paying quantities,'' ``surface
                                                                 owner,'' and ``waste of oil and gas or other
                                                                 marketable product''.
N/A..................................  226.2 (New)............  The final rule sets forth sources of governing
                                                                 requirements for activities in Osage County
                                                                 related to oil and gas and the development of
                                                                 ``other marketable products''.
N/A..................................  226.3 (New)............  The final rule sets forth the authority of
                                                                 Bureau of Indian Affairs (``BIA'') to issue
                                                                 certain notices and orders after consultation
                                                                 with the OMC.
N/A..................................  226.4 (New)............  The final rule enumerates the responsibilities
                                                                 and authority of the Superintendent with
                                                                 respect to management and administration of the
                                                                 Osage mineral estate.
226.2................................  226.5..................  The final rule breaks the prior regulation into
                                                                 subparts and removes references to oil and gas
                                                                 in paragraphs (b) and (d), extends the time for
                                                                 a successful bidder to deposit his/her payment,
                                                                 requires that payment be made in a specified
                                                                 form other than cash; increases the filing fee
                                                                 for submitting a completed lease form;
                                                                 enumerates the circumstances in which a portion
                                                                 of the bonus bid will be forfeited; requires
                                                                 that the Superintendent post legal descriptions
                                                                 within 30 days of a lease sale; and authorizes
                                                                 the OMC to request comparable lease sales data
                                                                 from the Superintendent.
226.3................................  226.6..................  The final rule increases the filing fee, adds
                                                                 requirements regarding lessee's responsibility
                                                                 for plugging and abandoning wells upon
                                                                 surrender, and deletes the reference to
                                                                 allowing surrender of separate horizons.
226.4................................  226.7..................  The final rule amends the provision to allow the
                                                                 Superintendent to specify the manner and method
                                                                 of payments due under a lease or regulation.
226.5................................  226.8..................  No substantive change from current rule.
226.6................................  226.9..................  The final rule sets forth each bonding
                                                                 requirement in its own paragraph to improve
                                                                 readability, it adds personal bonds to surety
                                                                 bonds as acceptable bonding methods, it sets
                                                                 forth the requirements for personal and surety
                                                                 bonds and changes the bonding amount from a per
                                                                 lease-area bond to a $5,000 per well bond for
                                                                 up to 25 wells. The final rule also adds back
                                                                 in nationwide bonding, which was not in the
                                                                 proposed rule.
226.6(d).............................  226.10.................  The final rule moves the provision allowing the
                                                                 Superintendent to increase the amount of a
                                                                 required bond to its own section and amends the
                                                                 previous provision under which the
                                                                 Superintendent can increase the amount of a
                                                                 bond.
N/A..................................  226.11 (New)...........  The final rule sets forth the circumstances
                                                                 under which the Superintendent must release a
                                                                 bond.
226.7................................  226.12.................  No substantive change from current rule.
226.8................................  226.13.................  No substantive change from current rule.
226.9................................  226.14.................  The final rule sets forth each current
                                                                 requirement in its own paragraph to improve
                                                                 readability. It also increases rental rates,
                                                                 clarifies the lessee's responsibility for
                                                                 diligent development, adds a new provision
                                                                 allowing the Osage Minerals Council to request
                                                                 a determination as to the diligent development
                                                                 of a lease and new procedures for the automatic
                                                                 termination of a lease for failure to
                                                                 diligently develop.
N/A..................................  226.15 (New)...........  The final rule sets forth lessee's new
                                                                 obligations to protect land from drainage of
                                                                 its oil or gas content by wells outside the
                                                                 lease
N/A..................................  226.16 (New)...........  The final rule specifies the Superintendent's
                                                                 new remedies for requiring protective action
                                                                 once drainage has occurred.
226.10...............................  226.17.................  No substantive change from current rule.
226.11...............................  (See below)............  The final rule divides the current section on
                                                                 royalties into several new sections to improve
                                                                 readability, as shown below.
226.11(a)............................  226.18.................  The final rule clarifies that royalty may be
                                                                 taken in-kind. It also amends the royalty rate
                                                                 calculation for oil, subject to a price
                                                                 adjustment for gravity.
N/A..................................  226.19 (new)...........  The final rule sets forth how the gravity
                                                                 adjustment is calculated.
226.11(b)............................  226.20.................  The final rule amends the royalty rate
                                                                 calculation for gas and specifies how gross
                                                                 proceeds are calculated; allows the
                                                                 Superintendent to direct that gross proceeds be
                                                                 calculated in an alternative manner where
                                                                 reasonable cost of processing cannot be
                                                                 obtained; and adds a minimum royalty provision.
N/A..................................  226.21 (new)...........  The final rule provides that royalty must be
                                                                 paid for any oil and gas avoidably lost and
                                                                 allows the Superintendent to determine the
                                                                 volume and quality of the lost oil and gas.

[[Page 26996]]

 
226.11(c)............................  226.22.................  The final rule amends the date for payment of
                                                                 royalties and adds provision for adjusting the
                                                                 minimum royalty.
226.11(e)............................  226.23 (New)...........  The final rule sets forth the minimum royalty
                                                                 due for ``other marketable products'' and
                                                                 clarifies that it is in addition to any royalty
                                                                 that may be due on oil or gas.
226.12...............................  226.24.................  The final rule amends the reference to royalty
                                                                 payment to ensure that the federal government
                                                                 purchases oil consistent with the new
                                                                 requirements.
226.13(a)............................  226.25.................  The final rule requires lessees to provide a
                                                                 written agreement when purchaser is the party
                                                                 responsible for payment; provides procedure for
                                                                 making royalty payments and late payments;
                                                                 describes how royalty payments are made; and
                                                                 deletes the provision allowing the Osage
                                                                 Minerals Council to waive late charges with
                                                                 approval of the Superintendent.
226.13(b), (c).......................  226.26.................  The final rule sets forth those reports that
                                                                 lessees must submit to the Superintendent and
                                                                 further specifies the format and content of
                                                                 those reports. The final rule also adds a
                                                                 requirement that the Osage Minerals Council be
                                                                 copied on all such reports, as well as
                                                                 establishing the date that the monthly reports
                                                                 are due.
226.14...............................  226.27.................  The final rule sets forth each current
                                                                 requirement for division orders in its own
                                                                 paragraph to improve readability. It also
                                                                 extends the due date in paragraph (b) for
                                                                 submitting the reporting statement for oil and
                                                                 gas sold should the due date fall on a weekend
                                                                 or holiday.
226.15...............................  (See below)............  The final rule divides the current section on
                                                                 lease unitizations and assignments into several
                                                                 new sections to improve readability, as shown
                                                                 below.
226.15(a)............................  226.28.................  No substantive change from current rule.
226.15(b)............................  226.29.................  The final rule sets forth each current
                                                                 requirement in its own paragraph to improve
                                                                 readability. It also adds provisions relating
                                                                 to the responsibilities and liabilities of
                                                                 assignors and assignees and deletes the
                                                                 provisions that allowed for the assignment of
                                                                 separate lease horizons.
226.15(c)............................  226.30.................  No substantive change from current rule.
226.15(d)............................  226.31.................  No substantive change from current rule.
226.15(e)............................  226.32.................  No substantive change from current rule.
N/A..................................  226.33 (New)...........  Sets forth the general requirements governing
                                                                 leasing operations.
226.16...............................  226.34.................  The final rule sets forth each current
                                                                 requirement in its own paragraph to improve
                                                                 readability and adds specific reference to the
                                                                 existing requirement that the Superintendent
                                                                 comply with the National Environmental Policy
                                                                 Act and the National Historic Preservation Act
                                                                 where applicable.
226.17...............................  226.35.................  No substantive change from current rule.
226.18...............................  226.36.................  The final rule reformats this section to improve
                                                                 readability. It also adds requirements for
                                                                 notice to surface owners before lessees conduct
                                                                 certain activities and eliminates any
                                                                 difference in notice based on the surface
                                                                 owner's residence status as within or outside
                                                                 Osage County.
226.19(a)............................  226.37.................  The final rule sets forth in its own paragraph
                                                                 each current aspect of a lessee's rights and
                                                                 responsibilities in using the surface of the
                                                                 land to improve readability. It also adds a
                                                                 provision requiring notification to the lessee
                                                                 and surface owner before the Superintendent
                                                                 sets the routing of pipelines, electric lines,
                                                                 etc.
226.19(b), (c).......................  226.38.................  The final rule sets forth each current
                                                                 requirement with respect to commencement money
                                                                 into its own paragraph to improve readability.
                                                                 It also increases the amount of commencement
                                                                 money the lessee must pay the surface owner.
226.19(d)............................  226.39.................  The final rule increases per tank siting fees
                                                                 and provides for arbitration to determine fees
                                                                 to be paid for tanks occupying more than 2500
                                                                 sq. feet if the parties are unable to agree.
226.20...............................  226.40.................  No substantive change from current rule.
226.21...............................  226.41.................  No substantive change from current rule.
N/A..................................  226.42 (New)...........  The final rule sets forth additional obligations
                                                                 with respect to lessee's obligation for
                                                                 production and marketability.
N/A..................................  226.43 (New)...........  The final rule requires documentation for
                                                                 transportation of oil, gas or other marketable
                                                                 product to enable the Superintendent to inspect
                                                                 and confirm proper transportation.
226.22...............................  226.44.................  The final rule sets forth each current
                                                                 requirement in its own paragraph to improve its
                                                                 readability. It also adds provisions in
                                                                 paragraph (e) clarifying that pits or tanks
                                                                 used for collecting deleterious fluids must
                                                                 have fencing and be removed and reclaimed
                                                                 immediately after operations.
N/A..................................  226.45 (New)...........  The final rule sets forth a lessee's specific
                                                                 environmental responsibilities and obligations
                                                                 while conducting operations.
N/A..................................  226.46 (New)...........  The final rule requires certain safety standards
                                                                 and equipment for lessee operations, as well as
                                                                 compliance with the National Electric Code.
226.23...............................  226.47.................  The final rule adds a provision requiring the
                                                                 Superintendent to notify or attempt to notify
                                                                 surface owners before decisions are made with
                                                                 respect to easements of leased premises.
226.24...............................  226.48.................  No substantive change from current rule.
226.25...............................  226.49.................  The final rule has reformatted this section on
                                                                 the responsibility of other types of lessees
                                                                 when they are not the lessee drilling in order
                                                                 to improve its readability. It also deletes
                                                                 prior/current requirements that wells be
                                                                 plugged if no apportionment agreement is
                                                                 accepted, making the Superintendent's decision
                                                                 on apportionment final.
226.26...............................  226.50.................  No substantive change from current rule.
226.27...............................  226.51.................  The final rule adds general requirement that gas
                                                                 for tribal use must be odorized and treated to
                                                                 ensure public safety.

[[Page 26997]]

 
226.28...............................  226.52.................  The final rule provides new standards for
                                                                 determining whether a well may be permanently
                                                                 abandoned on a showing that it is incapable of
                                                                 future profitable production, as opposed to
                                                                 being capable of producing in paying
                                                                 quantities.
226.29...............................  226.53.................  The final rule has reformatted this section to
                                                                 improve its readability. In paragraph (a), it
                                                                 also eliminates an exception for termination of
                                                                 a lease, other than for cause. In paragraph
                                                                 (c), it also adds a requirement that a
                                                                 Superintendent's orders for plugging a well
                                                                 must be in writing, as well as eliminating the
                                                                 fee for submitting an application to plug a
                                                                 well.
226.30...............................  226.54.................  The final rule divides paragraph (b) into two
                                                                 provisions, thereby adding a paragraph (c). It
                                                                 also adds paragraph (d), which requires that
                                                                 lessees maintain records for a period of 6
                                                                 years, unless notified to maintain certain
                                                                 records for a longer period.
226.31...............................  226.55.................  The final rule deletes the provision applying
                                                                 when several parties own a lease jointly
                                                                 allowing the designation of a representative be
                                                                 made by the party in charge of operations when
                                                                 several parties own a lease jointly, to
                                                                 requiring that all of the parties must jointly
                                                                 designate the representative.
226.32...............................  226.56.................  The final rule reformats this section to improve
                                                                 its readability.
226.33...............................  226.57.................  No substantive change from current rule.
226.34...............................  226.58.................  The final rule adds a requirement that wells and
                                                                 tank batteries be marked with lessee's name.
226.35...............................  226.59.................  No substantive change from current rule.
226.36...............................  226.60.................  The final rule adds paragraphs (b)-(f), which
                                                                 require safety precautions for drilling wells
                                                                 generally, drilling vertical wells, maintaining
                                                                 and controlling high pressure or loss of
                                                                 circulation in wells, protecting fresh water
                                                                 and other minerals and ensuring safety and
                                                                 protection when hydrogen sulfide gas is present
                                                                 at certain levels by adopting BLM On-Shore Oil
                                                                 and Gas Order 6.
226.37...............................  226.61.................  No substantive change from current rule.
226.38...............................  226.62.................  The final rule adds paragraphs (b)-(d), which
                                                                 specify requirements for measuring, calibrating
                                                                 and adjusting meters, including notice to and
                                                                 follow-up by the Superintendent; require
                                                                 notification to the Superintendent when an oil
                                                                 tank is ready for removal or for witnessing
                                                                 gaugings, and provide that repeated failures to
                                                                 comply with the new provisions subject the
                                                                 lessee to lease termination after consultation
                                                                 with the Osage Minerals Council.
226.39...............................  226.63.................  The final rule adds paragraphs requiring
                                                                 measurement of gas to be done in accordance
                                                                 with BLM Onshore Oil and Gas Order 5, specify a
                                                                 lessee's obligations for calibrating,
                                                                 inspecting and adjusting meters, including
                                                                 notification and inspection by the
                                                                 Superintendent, and provide that repeated
                                                                 failures to comply will subject the lease to
                                                                 termination after consultation with the Osage
                                                                 Minerals Council.
226.40...............................  226.64.................  No substantive change from current rule.
N/A..................................  226.65 (New)...........  The final rule sets forth specific safety and
                                                                 other requirements to ensure proper site
                                                                 security.
226.41...............................  226.66.................  The final rule adds requirements to ensure that
                                                                 incidents are reported in a timely manner, that
                                                                 notification is provided when environmental or
                                                                 other types of accidents occur, specifying who
                                                                 must be notified, including impacted surface
                                                                 owners.
226.42...............................  226.67.................  The final rule allows lease provisions for
                                                                 different fines and penalties, and it deletes
                                                                 the provision allowing the Osage Minerals
                                                                 Council to waive late charges.
226.43...............................  226.68.................  No substantive change from current rule.
226.44...............................  226.69.................  No substantive change from current rule.
226.45...............................  226.70.................  No substantive change from current rule.
226.46...............................  226.71.................  The final rule adds information concerning
                                                                 approval of OMB and the assigned OMB Control
                                                                 Number.
----------------------------------------------------------------------------------------------------------------

    Table 2 below sets forth the substantive changes made in the final 
rule to the text of the proposed rule as published August 28, 2013. The 
basis for each of these changes is discussed in the next section of 
this preamble.

                                 Table 2
------------------------------------------------------------------------
           Section                Final rule's change to proposed rule
------------------------------------------------------------------------
226.1........................  The final rule adds a definition for
                                ``surface owner'', references ``other
                                marketable product'' in the definition
                                of ``lease'' and ``Osage Minerals
                                Council'' and amends the definition of
                                ``waste of oil or gas or other
                                marketable product.''
226.2........................  The final rule adds a reference to other
                                marketable products.
226.3........................  The final rule deletes the reference in
                                226.3(a) to the Administrative Procedure
                                Act and replaces it with ``applicable
                                law and regulations'' and also adds the
                                phrase ``where appropriate'' after the
                                reference to consultation with the Osage
                                Minerals Council because not all of the
                                items listed in the provision are
                                subject to the APA or the Department's
                                Consultation Policy.
226.4(a)(4)..................  The final rule deletes reference to
                                ``other'' as unnecessary.
226.4(a)(10).................  The final rule adds the phrase ``unless
                                otherwise approved by the
                                Superintendent'' at the end.
226.4(b).....................  The final rule removes provisions that
                                allowed the Superintendent to issue oral
                                orders.
226.4(c).....................  The final rule adds a requirement that
                                any history of noncompliance be
                                documented.
226.5(a)(4) (ii).............  The final rule removes the phrase
                                ``twenty five percent of the bonus bid''
                                at the beginning of the provision and
                                adds a reference to paragraph 5 in
                                subparagraph (c).

[[Page 26998]]

 
226.5(b).....................  Deletes references to oil and gas as
                                unnecessary.
226.5(d).....................  Language added to end of the provision to
                                clarify that the environmental analyses
                                will be completed in accordance with
                                existing Bureau procedures.
226.5(f).....................  Amends the reference to corporation
226.6........................  The final rule deletes the reference to
                                ``surrender of a separate horizon'' in
                                (b)(4). It also adds a paragraph (c)
                                that requires the Superintendent to
                                determine that wells have been plugged
                                and abandoned or that legal liability
                                therefore has been otherwise assumed
                                before approving surrender or partial
                                surrender of a lease.
226.9........................  The final rule adds paragraph (f), which
                                allows for a bond for nationwide
                                coverage in lieu of a surety or personal
                                bond.
226.11.......................  Paragraph (c) was deleted.
226.14.......................  The final rule changed time period for
                                non-production of a lease from 90 days
                                to 120 days in paragraph (e) and the
                                deadline for requesting a temporary
                                suspension of operations to 20 days
                                prior to the expiration of the 120-day
                                period, rather than the 45th day in
                                which the lease has not produced. The
                                final rule also deletes waiver language
                                and adds a requirement of good cause in
                                order for the Superintendent to extend a
                                temporary extension.
226.15.......................  In paragraph (b), the final rule replaces
                                the reference to ``in paying
                                quantities'' with ``for a reasonable
                                profit''. It also adds that assignors
                                are liable for drainage upon
                                determination of the Superintendent
226.18.......................  Paragraph (a) of the final rule was
                                amended to allow royalty to be taken in
                                kind. In paragraph (b) the provision
                                regarding time for payment was deleted,
                                and in subparagraph (b)(2) the reference
                                to NYMEX was moved to subparagraph
                                (b)(1).
226.20.......................  In paragraph (b) of the final rule, the
                                calculation for determining gross
                                proceeds was amended and a method for
                                determining the heating value of gas was
                                added. In paragraph (c) the reference to
                                1206.173 was replaced with a reference
                                to 1206.180(a)-(b).
226.20.......................  The final rule defines how the minimum
                                royalty is to be calculated, and it
                                deletes paragraph (d).
226.25.......................  In paragraph (a), the final rule adds a
                                provision requiring that the
                                Superintendent be notified if the
                                purchaser is the responsible party for
                                making payment. In paragraph (b), it
                                deletes the provision stating ``unless
                                otherwise provided by the Osage Minerals
                                Council and approved by the
                                Superintendent,'' in an effort to
                                standardize and ensure prompt,
                                consistent payments. Paragraph (c) was
                                revised to reference back to paragraph
                                (a) and to delete language allowing
                                other rates to be set and the waiver of
                                late fees.
226.27.......................  In paragraph (a) at the end, the words
                                ``his lease'' are replaced with
                                ``Section 226.25''. In paragraph (b),
                                the provision allowing the
                                Superintendent to authorize extensions
                                was deleted.
226.29.......................  The final rule deletes the provision
                                allowing assignment of separate
                                horizons. It also adds paragraphs (a)(i)
                                and (a)(ii), which specify the liability
                                and obligations of both the assignor and
                                assignee when a lease is assigned.
226.34.......................  The final rule explicitly requires
                                compliance with NEPA and NHPA.
226.36.......................  In paragraph (b), the final rule requires
                                the Superintendent to notify or attempt
                                to notify both the surface owner and the
                                lessee of their opportunity to meet and
                                submit information before the
                                Superintendent issues a decision.
226.37.......................  The final rule adds a requirement that
                                the Superintendent to notify or attempt
                                to notify both the surface owner and
                                lessee before setting routes.
226.40(a)....................  The final rule deletes the last sentences
                                referencing a court of competent
                                jurisdiction and replaces it with an
                                express reference to 226.41, which
                                provides for the same relief after
                                compliance with the dispute resolution
                                provisions.
226.44.......................  The final rule adds requirements for pits
                                or tanks containing deleterious fluids
                                in order to protect the environment.
226.46.......................  The final rule adds a requirement for
                                compliance with the National Electric
                                Code.
226.47.......................  The final rule adds a requirement for the
                                Superintendent to notify or attempt to
                                notify both surface owner and lessee
                                before easements are granted.
226.52.......................  The final rule amends the provision
                                allowing wells to be permanently
                                abandoned if they are no longer capable
                                of producing in paying quantities rather
                                than for lack of further profitable
                                production.
226.53.......................  In paragraph (a), the final rule deletes
                                the provision that creates an exception
                                for termination of a lease other than
                                for cause, and paragraph (c) adds a
                                requirement that the Superintendent's
                                orders for plugging a well be in
                                writing.
226.55(b)....................  In the final rule, the provision allowing
                                the designation of the parties'
                                representative to be made by the ``party
                                in charge of operations'' was deleted
                                and changed to require that all of the
                                parties must jointly designate a
                                representative.
226.62.......................  The final rule in paragraph (c) deletes
                                the provision regarding penalties and
                                the adjustment provision for penalties.
226.66.......................  The final rule clarifies that accidents
                                include environmental and other types of
                                accidents. It also requires the
                                reporting of thefts within one business
                                day, rather than ``promptly'' and
                                requires lessees to notify, or attempt
                                to notify, the surface owner or agent in
                                writing.
Subpart F (226.67-68)........  The final rule reverts to the language in
                                the current/prior version of the
                                regulation and deletes the Committee's
                                recommendations for penalties for
                                violations of lease terms, instead
                                adding a provision that the lease can
                                specify alternative fines and penalties.
                                In 226.68(j) the provision regarding
                                criminal penalties was deleted as
                                unnecessary because criminal laws are
                                applicable irrespective of their
                                inclusion or reference within these
                                regulations.
------------------------------------------------------------------------

IV. Explanation of Changes Made in Response to Departmental Review

    In drafting the final rule, the Department made revisions to the 
proposed rule based on its own internal review, in addition to its 
review and analysis of the public comments. This section sets forth 
those the changes made as a result of that internal review. In Section 
226.1, the Department added references to ``other marketable product'' 
in the definitions of ``lease'' and ``Osage Mineral Council'' in order 
to fully incorporate the addition of the term ``other marketable 
product'' into

[[Page 26999]]

the regulations. Without these changes, the Department was concerned 
that ``other marketable product'' would not have been fully and 
consistently referenced as part of the Osage minerals estate, which was 
the original intent of the Negotiated Rulemaking Committee. For the 
same reason, references to ``other marketable product'' were added to 
Section 226.2 and the words ``oil and gas'' were deleted from 226.5(b) 
and (d), so that the provision references all leases generally.
    The Department revised the definition of ``waste of oil or gas or 
other marketable product'' to clarify that waste only occurs after the 
Superintendent makes a specific finding. The Department was concerned 
that without that change, the regulations would suggest that any 
production without the advance approval of the Superintendent would be 
considered waste, resulting in unnecessary administrative burdens.
    In 226.3, the Department qualified that that consultation with the 
Osage Minerals Council is required where appropriate and notes that 
consultation must be conducted in accordance with the Department's 
Tribal Consultation Policy where applicable. Similarly, the notice and 
comment requirements of the Administrative Procedure Act (APA) do not 
apply to each of the proposed actions and the reference to requiring 
adherence to the APA has been removed to avoid any presumption that 
notwithstanding the limitations of the APA, it automatically applies. 
Rather, it should be noted that the APA only applies where required by 
law. For example, notices to lessees (NTLs) are interpretive rules that 
are not subject to the notice and comment requirements of the APA. See 
e.g., Perez v. Mortgage Bankers Assoc., No. 13-1041, __ U.S. __ (March 
9, 2015).
    The Department deleted the word ``other'' from 226.4(a)(4) because 
it was confusing. The Superintendent is responsible for approving and 
monitoring all lease proposals, not ``other'' lease proposals.
    The phrase ``unless otherwise approved by the Superintendent'' was 
added to the end of Section 226.4(a)(10) because as drafted it did not 
allow the Superintendent to approve actions that might have adverse 
effects on other mineral resources. However, there might be instances 
where the Osage Minerals Council wants to allow certain mining to have 
adverse effects on other lesser mineral resources, and the Department 
determined that the Superintendent must retain discretion to approve 
those actions depending on the circumstances.
    In Section 226.5(a)(4)(ii), the phrase ``twenty five percent of the 
bonus bid'' at the beginning of the provision was deleted because it 
was inconsistent with subsection (a)(3). That subsection requires that 
a minimum deposit of twenty five percent of the cash bonus be offered, 
but it is possible for additional amounts to be deposited, and the 
intent of Section 226.5(a)(4)(ii) is for all of the deposit to be 
forfeited under certain circumstances. Section 226.5(a)(4)(ii)(C) was 
amended to add a reference to subsection 5 for clarification purposes. 
To address confusion within Osage County regarding the applicability of 
environmental laws, Section 226.5(d) was amended to clarify that the 
Agency must comply with applicable laws, including the National 
Environmental Policy Act (NEPA), before issuing leases and will do so 
by following applicable BIA regulations. Section 226.5(f) was amended 
to delete the reference to ownership of stock and instead reference an 
employee who acquires an interest in a corporation or business entity 
holding a lease, because one cannot acquire an ``interest in a lease'' 
by merely owning stock in a company.
    In Section 226.6(b)(4), the Department deleted the reference to 
surrender of a separate horizon because the Osage Agency does not lease 
or sublease by separate horizons, in light of the administrative 
burdens those arrangements have caused in the past. Furthermore, 
allowing surrender of separate horizons causes similar problems and is 
not permitted elsewhere on other Indian and Federal lands.
    The Department deleted subsection (c) in 226.11 because it was 
repetitive of the prior paragraph and the release language was moved to 
the beginning for clarification. In 226.14(c), the 90 day timeline for 
a determination on diligent production was deleted because it is 
considered overly burdensome, administratively. Instead, a provision 
was added that allows the Superintendent to require the lessee and 
Osage Minerals Council to submit additional information so that he/she 
can make an informed determination.
    In Section 226.18, the Department amended subsection (a) to allow 
royalty to be taken in kind so that the provision is consistent with 
subsection (b). In 226.18(b), the provision regarding time for payment 
was deleted because timing of payment is governed by Section 226.25, 
and in subparagraph (b)(2) the provision relating to the availability 
of the average NYMEX daily price was moved to subparagraph (b)(1) to 
correct an error in the proposed rule.
    In Section 226.22, the Department revised how minimum royalty is 
calculated because, as set out in the proposed rule, the provision 
confuses separate lease concepts. Minimum royalty is a separate lease 
term and not a subset of royalty, and Section 226.22 is not about 
underpayment of minimum royalty, but about the occurrence of a 
circumstance that triggers the obligation to pay minimum royalty.
    In Section 226.25, the Department added a requirement to subsection 
(a) that requires lessees to provide a written agreement if the 
purchaser has agreed to be the responsible party for making payments. 
This change is intended to reduce the administrative burden placed on 
the Superintendent when having to determine the responsible party. 
Also, a cross-reference to subsection (a) was added to subsection (c) 
for consistency. In addition, the phrase ``unless otherwise provided by 
the Osage Minerals Council and approved by the Superintendent'' was 
deleted to standardize and ensure prompt, consistent payments. For the 
same reason, and to aid in the administrative implementation of the 
provision, the Department deleted the provisions in subsection (c), 
allowing the Superintendent to set other rates for late fees and 
allowing the Osage Minerals Council to waive late fees, with approval 
by the Superintendent.
    In Section 226.27(a), the Department added that royalty payments on 
division orders or contracts must be made in accordance with Section 
226.25, since it is Section 226.25 that governs payments of royalties 
and all leases are subject to the regulations. And, in subsection 
226.27(b,) the provision allowing the Superintendent to authorize 
extensions was deleted in order to reduce the considerable 
administrative burden on the Superintendent of having to consider 
requests for extensions on a case by case basis.
    The Department added provisions in 226.29 to clarify liability for 
wells and related facilities once a lease is assigned. The Department 
found that there has been a concern both by surface owners during the 
negotiated rulemaking and the Office of Inspector General with respect 
to the abandonment of wells within Osage County. The new provisions 
regarding liability will provide additional protections for enforcement 
after a lease is assigned and provide greater clarity and transparency 
regarding lessee obligations.
    In 226.34, the Department added a new provision making clear that 
NEPA and the National Historic Preservation Act (NHPA) continue to 
apply within

[[Page 27000]]

Osage County. These are not new legal requirements and do not create 
new responsibilities over what is already required. However, the 
Department determined it was necessary to expressly recognize these 
responsibilities in the Rule given confusion within Osage County with 
respect to the Agency's and lessees' duties under NEPA and NHPA. The 
Department also added an express requirement that, where applicable, 
requires the lessee to submit certain information to aid the Agency in 
meeting its obligations under NEPA and NHPA.
    The Department amended Section 226.52 to allow for the permanent 
abandonment of a well upon a showing that the well is no longer 
producing in paying quantities, rather than a showing of its lack of 
further profitable production of oil, because the standard for showing 
that a well is no longer producing in paying quantities is more 
objective, less administratively burdensome to determine, and 
consistent with the standard applied with respect to Indian leases 
outside of Osage County.

V. Comments on the Proposed Rule and Responses

A. Overview/General

    Several commenters stated that it was not necessary to change the 
regulations and that the proposed changes to the regulations would make 
oil and gas operations in Osage County more cumbersome and costly to 
the industry because the burden is being put entirely on the lessees.
    During the negotiated rulemaking it was explained that the United 
States was sued by the Osage for breach of trust with respect to 
management and administration of the Osage minerals estate. The United 
States settled with the Osage for $380 million and, as part of the 
settlement, agreed to engage in a negotiated rulemaking to revise the 
regulations governing Osage in order to improve the management and 
administration of the minerals estate. Further, not all of the 
regulations are being revised. To the extent that some of the 
regulations are revised, the Department acknowledges that there may be 
some additional upfront costs to ensure compliance with the 
regulations. However, the regulations are necessary to improve 
management and administration of the Osage mineral estate. Overall, 
given the Osage tribal trust litigation and resulting settlement, the 
Department had to balance the need to ensure that the regulations 
fulfill the United States trust responsibility to the Osage with some 
potential increased costs to industry. Moreover, this Rule brings Osage 
closer in line to how oil and gas operations are regulated on other 
Indian and Federal lands and reflects the availability of new 
technology and improved industry standards since the regulations were 
initially promulgated.
    Some commenters stated that the proposed regulations should not be 
approved because the Bureau is already short-staffed and has no 
budgetary resources to handle the additional work and explained that 
the proposed changes will threaten oil lessees and have negative 
impacts on Osage headright owners quarterly payments.
    These comments do not relate to the rule but to internal agency 
operations that are outside the scope of the rulemaking. However, the 
Osage Agency developed a staffing plan in 2013 to address concerns 
regarding lease enforcement and compliance issues. The Osage Agency 
requested additional funding as part of its Fiscal Year (FY) 2014 and 
2015 budgets, which will be incorporated into its base funding for the 
FY 2016 budget cycle. The Osage Agency has also created 13 additional 
positions for inspections, enforcement and lease compliance, lease 
management and oil and gas accounting. While compliance with the 
regulations may result in some additional upfront costs to both 
industry and the Bureau, the majority of the new regulations address 
shortfalls that resulted in the Osage's lawsuit against the United 
States for breach of trust related to mismanagement of the Osage 
minerals estate, including royalty collection, auditing, accounting, 
record keeping, inspections and lease compliance. There was also no 
evidence presented to show that finalization of the rule would 
negatively impact royalty payments, rather the rule has increased 
protections for ensuring royalty collection and provisions to ensure 
that lessees are calculating royalty in a manner that minimizes third 
party manipulation.
    Some commenters suggested that management and enforcement of 
regulations governing surface use and lease violations is key.
    These comments relate to agency operations and implementation and 
do not relate to any particular regulation. The Department agrees that 
management and enforcement of the regulations is key and has worked 
over the last few years to address staffing concerns and budgetary 
limitations at the Osage Agency.
    Numerous commenters suggested that the Department restart the 
negotiated rulemaking process and include all affected parties as part 
of the Negotiated Rulemaking Committee. Some of these commenters 
suggested that the actual process of the rulemaking normally takes 2 
years to ensure that all interested parties may be properly notified of 
the proposed rule changes, be given adequate time to comment and 
understand how new regulations will impact private citizens. Whereas, 
commenters stated that in this circumstance the rule making was pushed 
through in a little over seven months resulting in a lack of due 
process and a one-sided nature of the proposed rules.
    The Department does not believe it is necessary to restart the 
negotiated rulemaking process. Formation of the Negotiated Rulemaking 
Committee was first announced in the Federal Register on June 18, 2012, 
and the final Committee was announced on July 31, 2012. All meetings of 
the Committee were published in the Federal Register at least thirty 
(30) days in advance, as well as, posted at the Osage Agency and the 
Osage Minerals Council offices. Throughout the process, the Committee 
provided extensive opportunity for public comment during meetings and 
also welcomed written comment between meetings. Issues raised during 
that process included, but were not limited to, the benchmark index, 
bonding fees and requirements, and commencement fees. Other matters 
were also discussed across multiple meetings, recorded in meeting 
summaries, and proposals to the regulations were adjusted where the 
Committee determined it appropriate, in multiple drafts of the 
regulations during that process. The administrative record shows, 
through the meeting summaries from the Committee meetings, that the 
Committee not only provided substantial time for public comment, but 
the Committee also engaged extensively with commenters in dialogue. 
Committee members asked questions and explored options with the 
commenter, and sought to reach an accommodation or revision where 
appropriate. Overall, the Committee provided 21 public comment sessions 
totaling some 18.25 hours of public comment during the eight meetings 
over its August 2012 to April 2013 process. On April 2, 2013, the 
Committee met for its final meeting and concurrence on a proposed 
package of revised regulations was reached between the Federal caucus 
and Osage caucus.
    The Department received numerous form letters generally opposing 
the regulations and suggesting that making the lessees within Osage 
County comply with Bureau of Land Management (BLM)

[[Page 27001]]

regulations will make Osage lose its appeal as a one-stop shop and 
asserting that the regulations will lengthen the drilling permitting 
process, diminish the Osage minerals estate and impact income 
generated.
    The Department acknowledges that some of the new provisions in the 
regulations are modeled after existing Federal regulations governing 
oil and gas on other Indian and Federal lands governed by BLM. However, 
under the rule, BLM is not delegated with the responsibility for oil 
and gas operations within Osage County. Rather, BIA has that 
responsibility. Additionally, it is relevant to note that some 
commenters noted their disagreement with the form letters submitted 
opposing the proposed regulations.
    At least one commenter requested that the Department amend the 
rules so that they properly recognize the State of Oklahoma's primacy 
and exclusive role in environmental regulation of oil and gas 
exploration and production activities in Osage County as well as the 
State's right to regulate the waters within its borders. The commenter 
asserted that the State is better equipped to design, administer and 
enforce laws and regulations related to oil and gas development.
    The United States holds the Osage mineral estate in trust pursuant 
to the Act of June 28, 1906 Sec.  3, 34 Stat. 539, 543-44, amended in 
relevant part by Act of March 2, 1929, 45 Stat. 1478 (extending 
restricted trust status of mineral estate to 1959); Act of June 24, 
1938, 52 Stat. 1034 (extending restricted trust status of mineral 
estate to 1983); Act of Oct. 21, 1978, 92 Stat. 1660 (extending 
restricted trust status of mineral estate in perpetuity). Thus, the 
United States, through the Department, has a non-delegable fiduciary 
obligation to manage the mineral estate for the benefit of the Osage. 
It is relevant to note that one commenter disputed the assertion that 
the State is better equipped to address oil and gas leasing in Osage 
County and explains that the Osage Nation and the United States have 
more experience and knowledge in administering and enforcing oil and 
gas leases in Osage County. The first lease in Osage County was 
developed in 1896, eleven years before creation of the State, and the 
United States has regulated and managed the Osage mineral estate since 
1896.
    At least one commenter objected to references to ``reservation 
lands'' in Osage County and asserts that the reservation was 
disestablished in Osage Nation v. Irby, 597 F.3d 1117 (10th Cir 2010).
    This is a legal issue outside the scope of the rulemaking. The 
Department does not need to address the impacts, if any, of the Irby 
case in order to revise these regulations. The United States holds the 
Osage mineral estate in trust and the Secretary has authority under the 
Act of June 28, 1906, Sec.  3, 34 Stat. 539, as amended, to promulgate 
regulations to manage and administer the mineral estate, and this Rule 
is being promulgated pursuant to that authority.
    At least one commenter requests that the Department and the Osage 
Minerals Council enter into a cooperative agreement with the State of 
Oklahoma to delegate responsibility for management and administration 
of oil and gas operations to the State.
    This comment does not relate to the revised regulations and is 
outside the scope of the rulemaking process. It is relevant to note 
that one commenter disagreed with the request for a cooperative 
agreement that gives the State administrative jurisdiction in Osage 
County and cites, 25 U.S.C. 1a & 9, noting that Congress granted 
authority over Indian Affairs to the President. This commenter also 
cited 25 CFR 1.4(a), for the proposition that the President, acting on 
his authority, has specifically excluded States from exercising 
jurisdiction over Indian property, including Indian water rights; and 
further cited legal precedent for the proposition that the Department 
cannot delegate authority to a State without tribal consent and the 
Osage Nation has not consented to such jurisdiction or delegation. See 
Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation v. Bd. 
Of Oil and Gas Conservation of the State of Montana, 792 F.2d 782 (9th 
Cir. 1986).
    At least one commenter suggested that the rule should reflect the 
separate and unique relationships (a) between the Department of the 
Interior, and the Osage headright holders, Osage Mineral Estate, and 
the Osage Minerals Council under the 1906 Act; and (b) between the 
Department and the Osage Nation under the 2004 Act.
    This comment does not relate to the revised regulations and is 
outside the scope of the rulemaking process. The United States holds 
the Osage mineral estate in trust under the Act of June 28, 1906, Sec.  
3, 34 Stat. 539, as amended, and the revised regulations only pertain 
to the United States' responsibilities to the Osage as defined in that 
Act. The 2004 Act, Public Law 108-431, 118 Stat. 2609 (Dec. 3, 2004) 
speaks to tribal membership issues for purposes other than those 
defined by the 1906 Act.
    At least one commenter suggested that the proposed rule likely 
violates Executive Orders 12866 and 13175 because it adversely affects 
the Nation and its members. The proposed rule also has tribal 
implications and requires the Bureau to incur new costs that require 
consultation with the Nation. There is no evidence that the Bureau has 
consulted with the Nation.
    Pursuant to the Osage Tribal Trust Settlement, the Bureau is 
required to consult twice annually with the Osage Minerals Council, the 
duly elected governing body within the Osage Nation that oversees the 
Osage mineral estate. Throughout the Negotiated Rulemaking Process, the 
Bureau held its required consultations to discuss the rulemaking 
process and other issues with the Osage Minerals Council. During those 
meetings a tribal representative of the Nation was invited and present. 
Additionally, the Negotiated Rulemaking Committee was comprised of duly 
appointed members of the Osage Minerals Council.
    At least one commenter requested that the Bureau make more 
information available to surface owners and the public with respect to 
operations within Osage County, including but not limited to freshwater 
aquifer maps, well location maps, mineral lease-holder maps and contact 
information, and lease inspection reports. The commenter suggested that 
lessees should be required to report the amount and type of chemicals 
used in any hydraulic fracturing operation to www.fracfocus.org.
    These comments are not within the scope of this rulemaking. 
However, as an operational matter, the Bureau is exploring 
opportunities to make oil and gas operations more transparent by 
possibly developing a Web site that would contain pertinent 
information, consistent with the Freedom of Information Act 
requirements, with regards to oil and gas activities within the Osage 
County.
    At least one commenter suggested that the Department commit to 
regularly publish monthly statistical data, provide headright holders 
with detailed statements regarding operational and royalty data, 
provide all relevant data to the Minerals Council, and develop an 
accessible and auditable database.
    This comment is outside the scope of the rulemaking. The Osage 
Agency regularly provides detailed information regarding the Osage 
mineral estate to the Osage Minerals Council on a regular basis and, 
consistent with the Freedom of Information Act, headright holders may 
request information relating to the Osage mineral estate from the Osage 
Agency.

[[Page 27002]]

    At least one commenter suggested that the mineral estate be 
independently audited under the auspices of the Department's Office of 
Inspector General and that the audit results be provided to headright 
holders.
    This comment is outside the scope of the rulemaking process. The 
Department notes, however, that the Office of Inspector General (OIG) 
issued a publicly available report on the Osage Agency in October 2014 
(No, CR-EV-BIA-0002-2013). That report states that the Osage Agency 
needs to institute substantial changes to improve the management and 
administration of the Osage mineral estate, and further provides that 
many of the OIG's proposed recommendations and concerns will be 
addressed upon finalization of this rule.
    Some commenters requested that STRONGER should be invited to do an 
audit of the Osage Agency and provide recommendations for transparency, 
accountability and enforcement, as well as to strengthen regulations.
    This comment is outside the scope of the rulemaking. Moreover, 
STRONGER is an organization that focuses on State, not Federal, reviews 
of oil and gas regulations and best management practices. As noted in 
response to other comments, the Department's OIG has recently performed 
an audit of the Osage Agency and has issued a public report providing 
specific recommendations to improve management and administration of 
the Osage mineral estate. That report notes that many of the areas in 
which improvement is needed will be addressed upon finalization of this 
rule, and other issues are being addressed operationally. In addition, 
the Negotiated Rulemaking Committee was comprised of a team of experts 
in all fields of Federal oil and gas operations (BLM, Office of Natural 
Resource Revenue (ONRR), BIA, and the Office of Indian Energy and 
Economic Development) to evaluate Osage Agency operations and to make 
recommendations for improving the management and administration of the 
Osage mineral estate.
    At least one commenter suggested that the Department of the 
Interior provide for full end-to-end accounting to headright holders of 
withdrawals to the Osage mineral estate, royalty payments made, 
expenses withdrawn, interest earned and quarterly disbursements to 
headright holders.
    This comment is outside of the scope of the rulemaking; however, 
the Department provides the Osage Minerals Council with a periodic 
statement, at least on a quarterly basis, that provides information 
regarding the source, type, and status of the funds in the mineral 
estate account, the beginning and ending balance for the period 
reported, all gains and losses in the account and all receipts and 
disbursements for the account.
    At least one commenter suggested that in any provision where the 
regulations require consultation with the Osage Minerals Council, such 
references should be replaced with ``approval by the Osage Minerals 
Council.''
    The Secretary, not the Osage Minerals Council, has been delegated 
the authority to manage the Osage mineral estate by Congress. Thus, 
while the Bureau is willing to consult with the Osage Minerals Council 
on matters relating to the Osage mineral estate, it must retain its 
ability to take corrective actions against lessees that are in 
violation of the regulations, including termination of the lease after 
consultation with the Osage Minerals Council (Sections 226.25(c), 
226.62(b)-(c), 226.63(c), 226.67, and 226.70). In addition, the 
Department must retain the discretion to make changes to the 
regulations in the future.
    At least one commenter has requested that the reference to ``for 
the benefit of the Osage'' needs to be changed to ``for the benefit of 
the Osage shareholder/headright owner.''
    The phrase commented on is in the Executive Summary of the Rule 
that was proposed in the Federal Register on August 28, 2013, and is 
not a comment relating to the rule.

B. Comments Related to Section 226.1

    At least one commenter suggested that the definition of ``headright 
holders'' be amended to reflect the distinction that Congress has made 
between (a) the Osage Mineral Estate and its headright holders and (b) 
the Osage Nation.
    The rule does not define ``headright holders'' and the Department 
does not believe it is necessary to define this term because it is 
defined in the 1906 Act. Moreover, the distinction made by the 
commenter is not relevant to the rule. The rule only relates to the 
Osage mineral estate as defined in the 1906 Act and not to other 
purposes.
    At least one commenter suggested that the definition of the ``Osage 
Minerals Council'' be amended to reflect the Council's role as the 
elected representative of the Osage headright holders, composed of 
headright holders, and vested with authority to enter leases and take 
other actions related to the mineral estate.
    The Department believes the current definition of Osage Minerals 
Council in the Rule is consistent with this comment and reflects that 
the Osage Minerals Council is a duly elected governing body within the 
Osage Nation.
    At least one commenter sought clarification on the definition of 
``Other Marketable Product'' because it is unclear whether language 
``for which there is a market'' refers to a local market or any 
national or international market. For example, simply because carbon-
dioxide may be selling in Montana, does not mean there is a willing 
buyer or market for an Osage lessee.
    The Department does not believe that there is a need to further 
expand the definition. ``[F]or which there is a market'' was intended 
to be left sufficiently broad to mean any market which there is a 
demand that makes it economically feasible to develop the non-
hydrocarbon.
    At least one commenter suggested that the definition of ``royalty'' 
be amended to reflect the many diverse types of payments made by 
lessees included in the draft regulations, save for tank fees and fees 
to arbiters.
    Royalty is not defined in the definitions section of the rule, but 
is defined by the amount a lessee must pay on the amount of oil, gas, 
or other marketable product sold in accordance with Sections 226.18 
through 226.23. Other fees paid under the regulations are for 
administrative costs or expenses.
    At least one commenter suggested that the definition of 
``Superintendent'' be amended to reflect the ability of the 
Superintendent to delegate authority only to employees of the Bureau 
and enumerate an extensive set of duties and responsibilities.
    The Department does not believe that this level of specificity is 
required or necessary. The 1906 Act delegated to the Secretary of the 
Interior the responsibility to manage and administer the Osage mineral 
estate and such delegations are governed by applicable authority, 
including the Departmental Manual. If the Secretary delegates a 
specific duty to the Superintendent, the Superintendent may only 
further delegate that responsibility in accordance with the 
Departmental Manual. Further, to the extent that the Secretary 
delegates certain responsibilities to the Superintendent, those 
delegations may be changed by the Secretary, and this authority is 
expressly retained in the definition of ``Superintendent'' in Section 
226.1.
    At least one commenter suggested that the provision allowing the

[[Page 27003]]

Superintendent to delegate her authority needs to be clarified; it 
could be read to allow the Superintendent to delegate to the Osage 
Nation, which includes non-headright owners.
    No changes were made in response to this comment. The question of 
the Superintendent's authority to delegate is not controlled by the 
regulation but is an independent question of Federal authority. The 
Superintendent can only make delegations consistent with applicable 
authorities including Departmental Manuals.
    At least one commenter suggested that the term ``surface owner'' be 
defined in the regulations as ``any person, firm, corporation or other 
entity that owns the surface of the land on which oil and gas 
development is proposed or occurs.''
    In response to this comment, a definition of ``surface owner'' was 
added to Section 226.1 to include ``any person or entity that owns a 
surface estate within Osage County, irrespective of whether the surface 
estate is held in fee, restricted fee or trust status.''
    With respect to the definition of ``waste of oil or gas or other 
marketable product'' (226.1), one commenter suggested clarification, 
noting that even using a reasonable and prudent operating standard, 
subcategory (1) ``a reduction in quantity or quality of product from a 
reservoir'' may prove so vague and open to interpretation that it will 
be both unworkable and subject to disagreement whenever such a claim is 
made.
    The definition of ``waste of oil or gas or other marketable 
product'' must be read in conjunction with Section 226.21, which 
specifies who makes a determination regarding royalty payments for lost 
or avoidably wasted materials. Section 226.21 allows the lessee to 
submit information in support of his/her position that gas was not 
wasted or avoidably lost before a finding is made. This provision 
ensures that the Superintendent has all relevant information from the 
lessee before making a final decision. In addition, during the 
Negotiated Rulemaking when this provision was discussed by the 
Committee and the public, it was noted that the Superintendent's 
decision is subject to appeal under 25 CFR part 2.
    At least one commenter noted that references to the ``Osage 
Nation'' in the rule diminish the rights of the headright owners 
because the Nation includes non-headright holders. The commenter also 
stated that the Osage Tribe (under the 1906 Act) is not the same as the 
Osage Nation today.
    The reference to the Osage Nation in the definition of Osage 
Minerals Council is an accurate reference because the Osage Minerals 
Council is a duly elected governing body within the larger Osage 
Nation. Only Osage headright holders are eligible to vote for 
candidates for the Osage Minerals Council.

C. Comments Related to Section 226.3

    At least one commenter stated that the BLM regulations and on-shore 
oil and gas orders are onerous and costly to comply with and lessees 
don't know how to navigate them. This commenter suggested that it cost 
them over $87,400 for a drilling permit in Kay County, Oklahoma, and 
that following BLM requirements will make the decision to drill more 
cost-based rather than potential-based.
    Section 226.3 allows the Bureau, in consultation with the Osage 
Minerals Council, to adopt BLM onshore oil and gas orders, notices to 
lessees or related onshore oil and gas regulations, but does not 
require adoption. Prior to adoption, the Bureau must comply with the 
Administrative Procedure Act. This rule does adopt two BLM onshore oil 
and gas orders that relate to the measurement of gas in Section 
226.63(a), and hydrogen sulfide in Section 226.60(f), but neither of 
these relate to the drilling permit process. Moreover, while Section 
226.34 (previously numbered Section 226.16), which relates to drilling 
permits, was amended to expressly provide that National Environmental 
Policy Act and the National Historic Preservation Act apply, those 
statues are already applicable within Osage County. The amendment only 
makes clear that lessees must submit certain environmental information 
to assist the agency in complying with those laws. To the extent that 
the comment could be interpreted to imply that Section 226.60 
(previously numbered Section 226.36) is revised to add requirements 
regarding well safety, those requirements were adopted from the BLM 
regulations, but do not impact the drilling permit process. It is also 
relevant to note that the rule does not become effective until 60 days 
after publication and the Bureau is working on a plan to educate 
lessees in Osage County regarding the changes to the regulations to 
ensure compliance and understanding of any new requirements before the 
rules go into effect.
    At least one commenter suggested that all seven of the BLM's 
current onshore orders be adopted immediately and that future onshore 
orders be adopted automatically by the Bureau without consultation with 
the Osage Minerals Council.
    The Negotiated Rulemaking Committee reviewed all of the BLM's 
onshore orders and after much discussion and public comment only 
recommended adopting Orders 5 and 6. However, the Committee 
recommended, and the final rule adopts the recommendation, that the 
Bureau be expressly provided the authority to adopt other onshore oil 
and gas orders in the future. The requirement that the Bureau consult 
with the Osage Minerals Council prior to any such future adoption is 
consistent with Executive Order 13175 on tribal consultation. In 
addition, the Bureau must comply with the Administrative Procedure Act 
in adopting any future onshore oil and gas orders.

D. Comments Related to Section 226.4

    At least one commenter suggested that in Section 226.4(a)(10), the 
Superintendent's responsibilities with respect to protection of the 
environment, public health, and safety need to be expanded and 
strengthened.
    The rule already adequately addresses this comment, however, an 
additional change was made to Section 224.44(e) to further address this 
and other comments related to safety and the environment. For example, 
in addition to Section 226.4(a)(10), the rule has specific protections 
against hydrogen sulfide gas in Section 226.60(f), which was added 
during the negotiated rulemaking process to address concerns from the 
public regarding the existence of hydrogen sulfide within Osage County. 
Section 226.44 also provides additional requirements with respect to 
the lessee's obligations for preventing pollution and an additional 
provision was added for safety, to require fences around pits and tanks 
and that removal and remediation of tank and pit sites occur 
immediately after completion of operations. Section 225.45 provides 
additional requirements with respect to other environmental 
responsibilities. These are just some of the provisions that ensure 
lessees take steps to protect the environment and ensure public health 
and safety.
    At least one commenter opposed Section 226.4(b) of the proposed 
rule because it allows oral orders, which could risk creating 
additional uncertainty in the supervision of operations and could be 
misinterpreted and/or unclear. It was suggested that a written order 
clearly identifying specific violations, necessary corrective actions, 
and the time for compliance would ensure full compliance and create a 
record in the event of an enforcement action or surface owner lawsuit.
    The Department agrees that written orders are preferable and has 
removed

[[Page 27004]]

all references in the rule allowing oral orders so that it is clear 
that written orders must be issued.
    Some commenters suggested that the Bureau should inspect oil and 
gas leases at least once annually and that the Bureau should promptly 
address and more frequently inspect non-compliant leases. It was 
suggested that there is a general lack of day-to-day oversight and that 
most ranches have old scars or current pollution issues associated with 
oil and gas production and saltwater spills. Commenters also suggested 
posting information regarding inspections like the BLM does because it 
allows landowners and the public to see when wells are inspected and 
violations reported.
    To the extent that these comments relate to the rule, they are 
already addressed by the rule. In Section 226.4(c), leases with a 
history of noncompliance must be reviewed at least once annually. The 
Bureau has also established a toll-free 24 hour hotline (855) 495-0373 
for reporting spills or accidents and a tracking system has been 
created to ensure that all calls are responded to in a timely manner 
and other officials are notified as appropriate. The Bureau has also 
discussed creating a Web site for the Osage Agency where it can post 
the results of investigations and other information related to oil and 
gas operation in Osage County. However, this is being done outside the 
rulemaking and any information posted must be reviewed for compliance 
with the Freedom of Information Act. Additionally, the Office of 
Inspector General (OIG) issued a publicly available report on the Osage 
Agency in October 2014 (No, CR-EV-BIA-0002-2013) that discovered some 
of the same concerns, but many of the OIG's proposed recommendations 
and concerns will be addressed upon finalization of this rule. The 
Bureau is also making a number of operational changes that are 
discussed in that report in order to strengthen the management and 
administration of the Osage mineral estate.
    At least one commenter suggested that a new subsection should be 
added to Section 226.4 to require the Superintendent to adopt rules 
prohibiting Osage mineral headright holders from working in the lease 
inspection division of the Bureau to avoid conflicts of interest.
    Congress has recognized that Indian tribes and their members should 
have direct involvement in federal programs enacted for their benefit. 
Under 25 U.S.C. 472, Congress recognized that Indians should be 
involved in the day-to-day operations affecting them and the Bureau of 
Indians Affairs must apply Indian preference to positions open in the 
Osage Agency. The Department is not persuaded by the assertion that 
Osage headright holders who may be employed by the Osage Agency will 
refuse to enforce regulations simply to advance their alleged personal 
self-interests. In any event, employees are accountable to their 
supervisors and ultimately to the Secretary. If there are issues with 
non-compliance, members of the public may contact the Department to 
report such violations.

E. Comments Related to Section 226.5

    At least one commenter suggested that Section 226.5(c) be revised 
to require the Superintendent to notify the surface owner beneath whose 
land minerals are leased.
    This comment is adequately addressed in the rule. The Negotiated 
Rulemaking Committee agreed in response to similar public comments 
raised in the negotiated rulemaking process that surface owners should 
have access to information regarding whether an oil and gas lease 
covers their surface estate. Thus, as proposed and adopted in the final 
rule, Section 226.5(c) requires that the Superintendent post at the 
Agency, within 30 days following approval of a lease, a legal 
description of the mineral estate that was leased. This ensures that 
surface owners have access to information regarding lands leased, while 
reducing the burden of the Osage Agency in locating and notifying each 
individual surface owner.

F. Comments Related to Section 226.6

    At least one commenter suggested that in Section 226.6(a), 
regulatory language be included clarifying that a lessee that 
surrenders its lease is still liable for plugging, abandonment, and 
reclamation obligations associated with the lease area.
    In response to this and other comments concerning abandoned and 
unplugged wells, the Department has added a paragraph (c) to Section 
226.6, to require the Superintendent to ensure that the lessee has 
either plugged all wells and reclaimed the surface, in accordance with 
the regulations, or show in writing that upon surrender the future 
liability for all wells located within the lease or portion of the 
lease to be surrendered has been transferred to another party.

G. Comments Related to Section 226.8

    Some commenters suggested that the terms of an oil and gas 
agreement should be given primacy so that the regulations recognize 
that in the event of a conflict between the regulations and an oil and 
gas agreement, the terms of the oil and gas agreement control. These 
commenters expressed a lack of clarity in the intent behind Section 
226.8 and proposed to make clear whether 226.8 includes a pre-existing 
lease. One such commenter requested leaving existing leases as they are 
(highest posted price) and only making new leases subject to NYMEX, 
stating that otherwise there will be legal challenges.
    The Department does not believe a change in the rule is needed to 
address this comment. Section 226.8 has only been renumbered in the 
rule (previously numbered as Section 226.7). That provision specifies 
that amendments or changes to the regulations cannot change the terms 
of pre-existing approved leases with respect to the term of the lease, 
rate of royalty, rental or acreage, unless otherwise approved of by the 
parties and the Superintendent. Thus, the rate of royalty in pre-
existing approved leases will not change as a result of the rule, but 
the provision describing how royalty is calculated (i.e., NYMEX at 
Cushing), could properly apply to pre-existing leases. This rule could 
also affect such matters as lease operations and maintenance 
requirements, reporting requirements, and other aspects of pre-existing 
leases other than the key lease terms specified in Section 226.8.

H. Comments Related to Section 226.9

    Some commenters noted that the proposed rule requires each lessee 
to pay a new and unique bond for the development of the Osage minerals 
estate and does not include recognition or acceptance of already 
established and sufficiently protective nationwide bonds regularly 
posted by lessees. These commenters suggested that not allowing a 
nationwide bond would be completely atypical and singularly applicable 
to the Osage Agency and could hinder development.
    The Department agrees with this comment and has added the provision 
allowing nationwide bonds back into Section 226.9 of the rule.
    Several commenters objected to the increase in the amount of 
bonding required and asserted that requiring bonding at $5,000 per well 
is unaffordable. Some argued that lessees will have to plug wells 
because they won't be able to afford bonding or that the new amount 
will tie up capital available to the lessee to develop production.
    The Department disagrees with this comment and in reviewing the 
record has found that there is a need for increased bonding. The 
Department

[[Page 27005]]

found that the Committee looked at the actual cost to plug wells and 
tried to find a balance between covering the cost of plugging a well 
while, at the same time, not overly burdening lessees. The original 
bonding amounts were based on a quarter section and did not correspond 
in any way to plugging and remediation costs related to wells, which 
must be done on a per well basis. The new regulation ties bonding to 
the number of wells and caps the per well bonding requirement at 25 
wells for all leases, corresponding more directly to the fact that 
plugging costs are incurred on a per well basis. While some commenters 
requested that the Department include an allowance for nationwide 
bonding, none of public comments justified an alternative bonding 
amount. Thus, the Department found that overall, the Committee 
recommendation was reasonable and reduces administrative costs because 
the per well bonding streamlines implementation. The Department also 
found it necessary to maintain per well bonding requirements in light 
of a recent report on the Osage Agency issued by the Department OIG, 
which discussed and noted the historical failure to plug wells in Osage 
County and the need to ensure that this problem is addressed in the 
future.
    Some commenters argued that limiting bonding to $5,000 per well for 
up to 25 wells is inadequate to ensure sufficient remediation and 
recommended no less than $5,000 for shallow wells (less than 3,000 feet 
in depth) and $10,000 for deep wells (deeper than 3,000 feet) and 
deletion of any cap. Some of these commenters requested that the per-
well bonding amount should be defined as an amount sufficient to cover 
125% of the cost of (i) plugging a single well and (ii) reclaiming the 
well site and surrounding land impacted thereby.
    The Department believes that the rule sufficiently balances the 
need for increased bonding with the fact that bonding is only for 
insurance purposes and does not eliminate the lessee's obligations to 
plug abandoned wells and remediate surface lands in coordination with 
surface owners. Bonding is only intended to provide assurances to the 
Bureau that the lessee has incentive to plug a well and is not intended 
to create complete upfront funding for the plugging of a well at an 
unknown time in the future. Nor is bonding intended to cover surface 
remediation. To the extent that a surface owner is unsatisfied with 
remediation on the part of a lessee, he or she may seek damages in 
accordance with Sections 226.40-41, or pursue any other legal remedies 
available to him or her. The Department found that the Committee 
considered, but rejected after substantial public comment in 
opposition, the notion to require bonding at 125 percent the cost of 
plugging a well.
    Some commenters requested that a final rule provide a grandfather 
provision for bonds on existing leases that would also apply to any new 
leases that the same lessee may acquire.
    The Department has concluded that it is necessary to make changes 
to bonding with Osage County and there have been historical problems 
with adequate bonding in Osage County as found in the recent report 
issued by the OIG in October 2014. The Department found that the issue 
of bonding was discussed throughout the negotiated rulemaking process 
and that members of the Committee and the public noted that the current 
rate of bonding does not relate at all to the fact that costs for 
plugging occur on a per well and not per lease basis. Moreover, members 
of the public have commented that they believe there is a problem 
throughout Osage County with abandoned and unplugged wells and current 
bonding rates were not sufficient to address or encourage remedying 
these issues. Thus, the Department believes that it is reasonable to 
adopt the revised bonding amounts proposed by the Negotiated Rulemaking 
Committee to better relate bonding to the cost of plugging a well and 
incentivize lessees to plug wells that will no longer be used so that 
they can get a release of their bond. The rule also provides new 
provisions for ensuring that the Bureau releases bonds in a timely 
manner.
    Some commenters asserted that most insurance companies won't write 
oil and gas lease bonds now and the new regulation will make it more 
difficult.
    The Department does not believe that the rule will make it more 
difficult to obtain oil and gas lease bonds. Moreover, while the amount 
of bonding has increased, the rule caps the amount of the increased 
bond to a maximum of 25 wells. The rule allows for different ways to 
acquire a bond, including the ability to obtain a surety bond that 
meets the requirements of the rule, and the Department has further 
revised the rule to allow nationwide bonds, which are accepted 
elsewhere on other Indian and Federal lands. While the Department 
understands that there may be some lessees that for various reasons may 
not be able to get a bond, the Negotiated Rulemaking Committee 
discussed that some of the issues related to those failures were due in 
part to defaults caused by particular lessees and are not attributable 
to the cost of bonding. Bonding is a requirement throughout the oil and 
gas industry and those who want to engage in oil and gas operations 
must expect to be required to provide assurance that they will properly 
plug and reclaim their well sites.
    Some commenters asserted that bonding at $5,000 per well is 
unaffordable and will cause small lessees to go out of business because 
most wells are either not able to produce enough to cover the bonding 
amount or are inactive and pose no threat the environment.
    For many of the reasons addressed in other responses to comments on 
bonding, no additional changes are necessary in response to this 
comment. In addition, the unused and unplugged or abandoned wells do 
pose a threat to the environment such as possible pollution of fresh 
water formations due to migration of oil, gas, saltwater and other 
substances. For example, abandoned wells can provide pathways for oil, 
gas or brine-laden water to contaminate groundwater supplies or to 
travel up to the surface due to the deterioration of the casing or 
surface equipment deterioration or malfunction. If the production is 
insufficient to cover the cost of bonding, the Department is concerned 
that the production will also be insufficient to cover the cost of 
plugging and reclamation. Thus the increase in surety amounts will help 
ensure the operator's diligence in plugging and abandoning and 
reclaiming the surface.
    At least one commenter suggests that there should be a ceiling to 
the bonding requirement, like the State of Oklahoma's cap at $25,000 
per lessee.
    This comment is already addressed by the rule, which does provide a 
cap for bonding in Section 226.9(c) at $5,000 per well for a maximum of 
25 wells per lessee for all leases held within Osage County. 
Additionally, in response to public comment, the rule was further 
revised to allow nationwide bonding.
    At least one commenter suggested that the cap on bonding amounts 
should be eliminated from the regulations.
    The Department disagrees with this comment because it is generally 
accepted within the oil and gas industry that bonding is for insurance 
purposes and is not intended to cover the entirety of the costs 
associated with plugging and remediation of every well site, rather 
bonding provides an incentive to perform plugging and remediation of 
well sites and screens out unreliable lessees who fail to perform these 
duties because lessees that default on their responsibilities will not 
be able to get a bond in the future.

[[Page 27006]]

    At least one commenter suggests bonding should follow the Oklahoma 
Energy Resources Board model used in the rest of the State of Oklahoma.
    No changes to the rule are necessary with respect to this comment. 
The Oklahoma Energy Resources Board (OERB) does not bond or plug wells. 
The OERB is a State-incorporated surface restoration agency that 
lessees in the State of Oklahoma voluntarily contribute to for 
remediation and reclamation of abandoned well sites at no cost to 
surface owners. The Bureau has met with OERB and confirmed that OERB 
has historically been willing to operate within Osage County and 
currently works with surface owners and the Bureau for Remediation 
within Osage County in accordance with its normal process and 
procedures. The goal of the regulation is to prevent orphan wells that 
will further burden OERB and the responsible operators who fund it.
    Some commenters noted that they are generally pleased with the 
proposed regulations but noted their concerns with plugging wells. 
Specifically, commenters stated that bonding needs to be more proactive 
and well sites remediated because the proposed regulations do not 
address current abandoned wells and, rather than plugging the wells, 
lessees often just pass wells to the next lessee when they assign or 
sell their lease.
    This is an issue that cannot entirely be addressed in the 
regulations, which govern on-going oil and gas operations. The 
Department recognizes that there is an issue with respect to abandoned 
wells within Osage County and works with the Osage Minerals Council to 
address these issues. The Osage Minerals Council has contracted with 
the Bureau to take over the function of plugging orphaned or abandoned 
wells and currently operates the program within Osage County. In 
addition, as mentioned in previous responses, OERB operates in Osage 
County to remediate the surface area around orphaned or abandoned wells 
that have been plugged. To the extent that this issue can be remedied 
in the future by the rule, the Department has increased bonding to more 
closely relate to costs associated with plugging a well and reclamation 
(on a per well basis) to provide an incentive to ensure lessees 
properly plug and abandon wells and has also added a provision, Section 
226.6(c), requiring that before a lease can be surrendered or partially 
surrendered, the lessee retains any past liability incurred within the 
lease or partial lease to be surrendered, and must show that he has 
either properly plugged and abandoned all wells and/or that another 
party is taking full legal liability for the wells within the lease or 
partial lease to be surrendered. In addition, a new provision was added 
as Section 226.29(a)(i), clarifying that the assignment is subject to 
the continuing obligations of the assignor to meet its plugging and 
abandonment obligations, and a new Section 226.29(a)(ii) was added 
making clear that the assignee retains all responsibility for all 
unplugged wells under the lease or partial lease assigned.
    To address the abandoned well issue within Osage County, one 
commenter suggested that a company fund be established whereby lessees 
would pay in the value of 2 barrels of oil per year for each active 
well less than 4,500 feet and 3 barrels of oil for wells less than 
7,500 feet and the fund would be used to plug abandoned wells.
    The Department does not believe this is an issue within the scope 
of the rulemaking. The regulations govern on-going oil and gas 
operations. To the extent that there are historical issues with respect 
to abandoned wells and well sites, the Department can explore with the 
Osage Minerals Council whether or not a voluntary fund could be 
established to address the historical issues. The Department also 
reiterates that as stated in responses to other comments, OERB does 
operate within Osage County to remediate abandoned well sites and the 
Osage Minerals Council currently operates the program for plugging 
abandoned wells.

I. Comments Related to Section 226.14

    Numerous comments were received objecting to the termination for 
non-production in Section 226.14(e). Commenters suggested that the 
timeframe for termination for nonproduction needs to be increased and/
or kept at one year and not 90 days. One commenter noted that if a 
particular well produces very little, it is necessary to have the time 
to evaluate the upper and lower potential of the well regarding future 
oil and gas opportunities, as well as the ability to shut the well in 
for short periods when the price of the oil or gas becomes uneconomical 
to produce at that well without the lease being terminated. Another 
noted that the 90-day requirement will prevent companies from 
purchasing tracts because they will not have time to put the tracts 
into production. One commenter suggests that a more reasonable 
requirement would be a 180 day period, with notice to the 
Superintendent that the lessee needs an extension 20 days prior to the 
expiration of the 180 day period. Some commenters noted that people 
have other full time jobs and can't get work done quickly and it 
sometimes takes a few months to get work done. Another commenter stated 
that the one-year termination provision has been working fine and it is 
expensive to hire people to fix problems and lessees don't always have 
the money. Some commenters noted that oftentimes equipment is 
backordered or weather causes delay and they wouldn't be able to comply 
with the 90-day requirement.
    In response to comments, the Department has further revised the 
rule to change the time period for termination for non-production from 
90 days to 120 days and require that requests for extension of time be 
submitted at least 20 days prior to expiration of the 120-day period, 
but given the additional time for non-production and the need to reduce 
administrative burdens in enforcing this provision, the Department 
deleted the provision allowing the Superintendent to waive the 20 days 
advance notice requirement. For clarification purposes, the Department 
also added a standard for extending temporary suspensions to require 
good cause. The Department found that there was substantial discussion 
on this issue during the negotiated rulemaking and the Osage 
representatives on the Committee were opposed to allowing nonproduction 
for periods of 180 days or more. Although the Osage representatives on 
the Committee also rejected a 120-day timeframe during the negotiated 
rulemaking process, the Department had to balance the concerns of the 
Osage representatives with the concerns of the lessees regarding 
operation contingencies and its ability to administratively manage 
leases for nonproduction. The Department did not view as relevant, 
concerns that a lessee may have another job that inhibits his or her 
ability to produce within a particular timeframe or concerns that a 
particular lessee may not be able to afford equipment or staff because 
Section 226.14(c) states that all lessees have an obligation to 
diligently develop their lease. The Department also found that concerns 
regarding the ability to put a well into production were misplaced 
because Section 226.14(e) only contemplates termination for 
nonproduction after the primary term of the lease when the lessee is 
expected to begin production.
    At least one commenter suggested that lessees aren't in a rush to 
do business in Osage County and the Bureau needs to encourage lessees 
to keep their properties up, not terminate them.

[[Page 27007]]

    No response is necessary to this comment because it is not 
substantive and does not provide any recommendations.
    At least one commenter objected to 226.14(e) on the basis that some 
wells only produce one barrel per day and oil will not be picked up for 
sale within 90 days or for at least six months, and under this 
provision this producing well would be considered non-producing because 
no sale took place within 90 days and that is unfair.
    This comment misinterprets Section 226.14(e), which does not 
provide that wells that are producing in paying quantities would be 
terminated for nonproduction within the prescribed timeframe. It is 
understood that sales are intermittent in nature and that a well may be 
producing but that a sale may not occur within 90 or 120 days. So long 
as the lessee reports production, the lease will continue, it is only 
the failure to produce, not the failure to sell, that terminates a 
lease under this provision. The regulations, however, expressly provide 
that all lessees have an obligation to diligently develop their leases 
as set forth in Section 226.14(c).
    A commenter stated that the requirement to drill on every quarter 
section in order to hold a lease exposes lessee to excessive financial 
risk and causes excessive impacts to the land and wildlife. Leases 
should instead be structured to allow focused drilling.
    This comment does not accurately characterize Section 226.14(a). 
Section 226.14(a) requires a lessee to place a well in production 
within the land embraced by a lease within 12 months of the date of 
approval of the lease, or as otherwise provided for in the lease terms, 
but does not require a lessee to drill in every quarter section. A 
lease may encompass an entire quarter section or a larger land area. 
Lessees are required to act prudently in addition to diligently 
developing the mineral estate. The rule also includes provisions to 
ensure that lessees conduct all operations in a manner that protects 
other natural resources, environmental quality, life and property. See 
Section 226.33.
    At least one comment was received suggesting that the factors in 
Section 226.14, governing when the Superintendent may impose 
restrictions as to time of drilling and rate of production, should be 
expanded to encompass environmental, public health and safety concerns, 
and the interests of the Osage Tribe, because activity should not 
unduly interfere with surface uses.
    The Department disagrees with this comment. The Osage mineral 
estate is held in trust by the United States and was reserved by the 
United States for the purpose of mineral development. The rule also 
does not change the basic premise of law that a surface estate is 
subservient to a dominant mineral estate. The rule recognizes that a 
lessee is permitted to use as much of the surface estate that is 
reasonable for operations. See Section 226.37. Thus, the regulations 
provide limitations on size of drilling sites (Section 226.38(a)(3)) 
and require that lessees conduct operations to protect other natural 
resources and environmental quality, life and property (Sections 
226.33(a)(2)-(3) & 226.45), and require lessees to take certain steps 
to prevent pollution (Section 226.44). At the same time, lessees have 
an affirmative obligation to diligently produce a lease (Sections 
226.14(c) & 226.33(a)(4)) in accordance with the overall statutory and 
regulatory framework. In the event that a lessee is violating the 
regulations, the Superintendent has authority to take actions to remedy 
the violations (Sections 226.67 & 226.68).

J. Comments Related to Section 226.15

    At least one commenter objected to 226.15 with respect to drainage 
asserting that drilling offset wells to prevent drainage is not 
necessary because the Nation owns all the minerals in Osage County. 
Drilling offset wells would not only require considerable time, 
resources and expense, but this unnecessary drilling could adversely 
affect environmental damage. It was suggested that the Bureau should 
consider removing this section entirely or narrowing its scope to 
clarify the conditions where offset wells are necessary and also ensure 
that there is an appeal process to protect against arbitrary decision 
making.
    Under the 1906 Act, the mineral estate is held in trust by the 
United States for the benefit of the Osage. However, the drainage 
provision in the Rule is intended to ensure diligent development of all 
lease sites because not all leases have the same royalty rate. Thus, if 
a lessee holds multiple leases next to each other, the drainage 
provision will ensure that the lessee is not able to focus drilling 
only the lease site that has a lower royalty rate to the detriment of 
the Osage. However, to further clarify the provision and reduce the 
burden on lessees, subsection (b) was revised to clarify that drainage 
does not occur if the lessee can show that it could not produce a 
paying quantity of oil or gas ``for a reasonable profit'', rather than 
``in paying quantities.'' Usually ``in paying quantities'' only means 
enough to recover day to day operational costs. Subsection (d) was also 
amended to clarify that an assignee is responsible for drainage even if 
it would not be economic, at the time of assignment, to drill an offset 
well, to ensure that the Osage are protected if a lease is assigned. 
The Department also notes that 226.16(d)(1) is intended to clarify that 
a well drilled to protect against drainage must be in continuous 
production and the obligation to pay compensatory royalty can be 
revived if the protective wells cease production.

K. Comments Related to Section 226.18

    Several commenters suggested that measuring oil royalties based on 
NYMEX pricing is unattainable and that it is unfair to require lessees 
to pay a royalty based on a price they cannot obtain. One commenter 
suggested that NYMEX will gouge small lessees and others suggested that 
NYMEX will hurt Osage shareholders. A few commenters suggested, rather 
than NYMEX, royalty rates should be commensurate and competitive with 
those found in the region and in similar places around the country. One 
commenter suggested that only if the rule required lessees to be paid 
NYMEX prices would it be fair. Another noted that it is okay to use 
market center price as a reference point, but the market center price 
must be adjusted for location and quality. Another stated that because 
many wells in Osage County are stripper wells and produce low volumes 
and are only profitable under the existing regulations, NYMEX would 
harm profitability and shorten production life of leases, and suggested 
instead that royalty should be based only on the price paid to lessees, 
allowing the competitive marketplace to set the prices. One commenter 
noted that NYMEX will cost as much or more than $3 per barrel more than 
what is being paid now.
    In the Osage Tribal Trust Settlement, the Department agreed to 
engage in a negotiated rulemaking and, among other things, identify 
appropriate revisions to the methods for calculating royalty for oil 
and gas. The Negotiated Rulemaking Committee reviewed various indices 
to utilize for calculating royalty. The Committee sought a price 
benchmark that (1) was appropriate for oil sold in Osage County, (2) 
accurately reflected the oil market in Oklahoma, (3) was widely 
published, and (4) independent. The committee found that NYMEX was the 
only benchmark that met all four criteria. After public comment, the 
Committee decided to propose NYMEX at Cushing, Oklahoma, as the index 
for calculating oil royalties. The Bureau had the ONRR review and 
evaluate NYMEX

[[Page 27008]]

at Cushing to determine whether it was an appropriate market center for 
Osage County. The ONRR's report recommends using NYMEX at Cushing based 
on its review and analysis of price data from Osage County and the 
surrounding area coupled with ONRR's experience using different index 
prices for Federal oil valuation. Specifically, ONRR found that NYMEX 
is widely used and accepted by the industry and is representative of 
the value of oil and gas received on and near Osage County. ONRR also 
found that because Osage County is so close to Cushing, Oklahoma, 
adjusting NYMEX for location is unnecessary. The rule, in Section 
226.19 (gravity adjustment table) also provides for adjustments to 
NYMEX based on the quality of the oil. The Department also found that 
during the public comment process in the negotiated rulemaking meetings 
virtually no alternative indices for royalty valuation of oil were 
suggested by the public, other than keeping the highest posted price. 
The Department found that the Committee explained to the public that a 
change in royalty was needed because some on the Committee did not 
believe that the highest posted price was protective of the trust 
beneficiary and that highest posted price was subject to manipulation 
and did not protect the trust beneficiary from non-arms-length 
transactions. The Department is required to establish regulations 
concerning Indian oil valuation based on its federal trust 
responsibility to act in the best interests of the Indian beneficiary, 
including a duty to maximize revenue for Indian tribes and Indian 
mineral beneficiaries. The Department also found that during the 
negotiated rulemaking, a staff member to the Committee noted that in 
his view since 1994, the highest posted price was often below sale 
prices for many lessees and, as a result, Osage headright holders were 
not always receiving the full royalty amount that they were due. In 
conjunction with the Report from the ONRR and the recommendations from 
the Committee, the Department has determined that utilizing NYMEX at 
Cushing, Oklahoma to calculate royalty payments for oil protects the 
interests of head right holders and is not overly administratively 
burdensome to implement or enforce.
    A commenter suggested that the oil royalty benchmark be established 
at the highest rate that the market will bear on the basis of the sale 
of West Texas Intermediate (WTI) crude, not NYMEX futures contracts. 
Similarly, a commenter suggested the gas royalty benchmark be 
established at the highest rate that the market will bear. Both would 
allow leases to be competitively bid or negotiated to acquire the 
maximum ultimate economic recovery.
    The Department agrees that there is merit to the use of WTI as the 
pricing benchmark for Osage oil. That was considered during the sub-
committee evaluation of the various benchmark options. Use of WTI was 
ultimately rejected by the Committee because it would require location 
differential pricing and transportation adjustments that did not 
satisfy the request for simplicity and the need to minimize 
administrative burdens. Furthermore, WTI did not mirror the Oklahoma 
market as well as NYMEX settlement at Cushing. Benchmarks based on 
weighted average prices of arms-length transactions in a given market 
area are generally considered a fair representation of market value. 
Terms that require ``the highest rate the market will bear'' are, by 
their very nature, dismissive of transactions that occur below that 
threshold. As such, they would be unfair to parties that are able to 
negotiate satisfactory arms-length agreements below ``the highest rate 
the market will bear.'' Pricing based on such terms would not be 
considered fair market value.
    Several commenters requested that a transportation allowance for 
trucking or piping oil to Cushing should be factored into the 
calculations when the lessee uses the Cushing posted price in 
accordance with Section 226.18(b)(1). Some of these commenters stated 
that transportation allowances are also appropriate when, under Section 
226.18(b)(2), a lessee sells oil in a location other than Cushing and 
the actual sales price exceeds the Cushing price because of the 
transportation costs incurred by the lessee. Other commenters suggested 
that transportation costs need to be taken into account because of the 
economic fact that there is a cost involved if you want to sell oil.
    The Bureau had the ONRR review and evaluate NYMEX at Cushing, 
Oklahoma, to determine whether it was an appropriate market center for 
Osage County. The ONRR's report recommends using NYMEX at Cushing based 
on its review and analysis of price data from Osage County and ONRR's 
experience in using this process for Federal oil valuation. The ONRR 
also found that because Osage County is so close to Cushing, Oklahoma, 
adjusting NYMEX for location is unnecessary. The ONRR recommended 
against allowing transportation deductions and noted that eliminating 
transportations deductions would: (1) Increase revenue to the Osage, 
(2) reduce litigation costs to the Tribe and industry, (3) provide 
certainty to the industry and assure more contemporaneous compliance 
and (4) reduce administrative costs to the Federal government and the 
industry. Based on those recommendations and the Bureau's desire to 
reduce administrative costs while at the same time fulfilling its trust 
responsibility, the Department decided against allowing transportation 
allowances. The Department also found that there was discussion of 
whether to allow transportation allowances during the negotiated 
rulemaking, but the Committee also chose not to allow for such 
deductions for a variety of reasons, including the difficulty in 
developing a simple formula and the administrative burdens of enforcing 
accurate transportation deductions.
    One commenter noted that under Section 226.18(c), for royalty taken 
in kind, a lessee can be required to supply free storage for a period 
of 60 days, and this subsection should provide that if the lessor 
elects to exercise this right, the lessee should be indemnified or held 
harmless for losses of such oil by causes beyond the lessee's control.
    Section 226.18(c) was previously numbered as Section 226.11(a)(3), 
and has not been revised through this rulemaking. No further changes 
are necessary to this provision at this time and the Department has not 
been provided with sufficient information to reasonably support a 
change.

L. Comments Related to Section 226.19

    One commenter requested that Section 226.19 be clarified to provide 
that the Superintendent must comply with the rulemaking notice and 
comment process before the Superintendent may publish new gravity 
adjustments ``based on substantial evidence, that market conditions so 
warrant.''
    No changes are necessary in response to this comment because 
actions of the Department must comply with the Administrative Procedure 
Act. Moreover, it is uncertain whether or not the Superintendent would 
publish new gravity adjustments in the future or what process the 
Superintendent would follow to do so. If and when that occurs in the 
future, any final decision may be challenged in accordance with the 
Administrative Procedure Act.
    One commenter suggested that the Department of the Interior should 
not allow any exceptions or deductions that are not specifically 
permitted by the 1906 Act or other applicable laws.

[[Page 27009]]

    It is unclear whether this commenter was referring to deductions 
for oil (Section 226.19) or gas (Section 226.20). Regardless, the only 
deduction allowance for royalty paid on oil is based on a gravity 
adjustment. See Section 226.19. No deductions are allowed for royalties 
paid on residue gas produced on a lease, and the only deduction allowed 
for royalties on natural gas are the ``reasonable cost for processing 
not to exceed 50 percent of actual sales value of natural gas liquids 
produced from the lease (including drip condensate).'' See Section 
226.20(c).

M. Comments Related to Section 226.20

    One commenter noted that 226.20(a), which provides that royalties 
would be assessed and measured before water vapor is removed from the 
gas and the gas is in a marketable condition, and asserts that this 
would artificially inflate meter volumes without increasing the volume 
of gas produced.
    The Department is confused by this comment because nowhere does 
226.20 state that gas volumes must be determined prior to removing 
water vapor. It is assumed that the commenter was actually referring to 
226.20(b). The requirement in 226.20(b) was added to prohibit 
adjustment to the measured volume of gas for assumed water vapor 
content. This requirement does not prohibit the physical removal of 
water vapor or placing the gas into marketable condition prior to 
measurement, however. We agree with the commenter that the wording was 
unclear and have changed the wording in 226.20(b) to clarify this and 
have also added specific technical requirements that were previously 
missing to address calculating the heating volume of gas to aid the 
lessee in complying with this section.
    One commenter stated that Section 226.20(c) establishes a dual 
accounting system, but the use of a dual accounting system to calculate 
gross proceeds is an issue that is more properly addressed and 
negotiated by the Nation and the lessee in the lease document at the 
time it is signed. Empowering the Superintendent to change this 
calculation system on such short notice introduces substantial 
uncertainty into the calculation of royalties, discouraging prospective 
lessees from entering into agreements with the Nation.
    The Department disagrees with this comment. The Department did find 
that the reference for dual accounting in the proposed rule (30 CFR 
1206.173) was incorrect and has added the correct reference (30 CFR 
1206.180(a)-(b)). However, the purpose of the provision is so that if 
the actual reasonable cost of processing as required by this section 
cannot be determined, the lessee is required to perform the accounting 
for comparison (dual accounting) as outlined in 30 CFR 1206.180(a)-(b). 
On other Indian and Federal lands outside of Osage County, approval for 
the alternative methodology rests with ONRR, not the tribe. In Osage 
County, unless otherwise delegated, ensuring compliance with those same 
provisions is now vested in the Superintendent because this rule makes 
them applicable to Osage. In all cases, the application of alternative 
methodologies for accounting are directly tied to the lack of 
transparency of processing costs and an inability to determine those 
costs for allowance purposes. The requirement does not interfere with 
any agreements the lessee has or will make.
    One commenter asserted that Section 226.20 requires a double 
royalty to be paid where gas produced from one well is used for lift 
purposes on another well--solely because it passes the point of 
metering on both wells--and disagreed with this, noting that it is 
widely accepted that gas used on-site for beneficial purposes of the 
lease is not royalty-bearing and this proposal would run counter to 
that principle.
    Section 226.20 requires only that all gas removed from the lease be 
metered before removal and subject to a royalty of not less than 20 
percent, unless otherwise approved. That regulation ensures that the 
Osage get royalty for any gas moved off the lease site, even if it is 
used for operations at another location. The regulation does not 
prohibit gas developed from a lease site from being used for operations 
on the same lease site. On the other hand, Section 226.63 does require 
that all gas be measured in accordance with BLM Onshore Oil and Gas 
Order 5, to ensure that all gas that is required to be measured is 
properly accounted for, but royalty payments on gas are controlled by 
Sections 226.20, 226.21 & 226.22.
    A commenter expressed support for the attempt to provide for a 
royalty on residual and other marketable products and urged that the 
meaning of the relevant calculation be made clear.
    The Department is not certain it understands this comment, but 
notes that the determination of royalty on other marketable products is 
explained in Section 226.23, which is a provision that was contained in 
the prior regulations, but revised in the final rule to clarify that 
royalty due on other marketable products is in addition to any royalty 
that may be due on oil and gas in accordance with the regulations.

N. Comments Related to Section 226.25

    At least one commenter suggested that the due date for royalty 
payments doesn't need to be changed to accommodate any entity other 
than the Bureau.
    The due date for royalty was changed to make it consistent with the 
date that royalty payments are due to the ONRR, in the event that the 
Secretary delegates royalty collections and audits to ONRR to aid the 
Bureau in its management and administration of the Osage mineral 
estate. ONRR has the capacity to provide assistance to the Bureau 
without the Bureau having to duplicate services that ONRR already 
provides on other Indian and Federal lands.

O. Comments Related to Section 226.27

    At least one commenter objected to Section 226.27(a)(2), which 
requires the Superintendent to approve all division order and sales 
contracts before production may ``be removed from the leased 
premises.'' It was suggested that this provision would impose a 
substantial administrative burden on the Bureau when they already face 
backlogs and uncertain funding.
    Section 226.27(a)(2) was not substantively changed through this 
rulemaking, but was renumbered (from Section 226.14(a) in the old 
regulations to Section 226.27(a)(2)) and reformatted for readability 
only. Issues relating to staffing and funding are also outside the 
scope of this rulemaking, although the Bureau has worked with the Osage 
Agency over the last few years to address budget shortfalls and 
staffing needs.

P. Comments Related to Section 226.29

    At least one commenter objects to the provision in Section 
226.29(a) that requires lease assignments to be approved by both the 
Superintendent and the Osage Minerals Council because no procedure or 
standard is specified for obtaining those approvals or appealing the 
decisions. It is also not clear what happens if there is a disagreement 
between the Superintendent and the Minerals Council.
    The regulations have always required lease assignments to be 
approved by both the Osage Minerals Council and the Superintendent. 
This rule does not change that requirement, but deletes the provision 
allowing lessees to assign separate horizons because the Department 
found, in reviewing the rule, that such assignments do not generally 
occur at Osage and when they did, they were so administratively 
burdensome that the Agency could not

[[Page 27010]]

monitor those assignments. As a general matter, the Minerals Council is 
the entity that enters into and approves all leases and assignments in 
accordance with their governing authority and procedures. Once the 
Minerals Council approves a lease or lease assignment, it is submitted 
to the Superintendent for federal review and approval. Any final 
decision of the Superintendent is governed by 25 CFR part 2 and the 
Administrative Procedure Act.

Q. Comments Related to Section 226.33

    One commenter requested that there should be additional 
restrictions to protect natural resources and public safety and the 
restrictions should provide sufficient detail to allow lessees to 
comply and the Bureau to enforce. The commenter also suggested that 
best management practices should be developed to protect wildlife and 
other natural resources.
    This comment is already addressed in Section 226.33 of the final 
rule, which requires that lessees conduct all operations in a manner 
that protects other natural resources and environmental quality and 
protects life and property while also balancing those responsibilities 
with the requirement to maximize production of oil, gas and other 
marketable products. Sections 226.44-226.45 also provide additional 
protections for the prevention of pollution and environmental concerns 
and were added in response to similar concerns raised during the 
negotiated rulemaking process. To the extent that the commenter desires 
the Bureau to develop best management practices outside the 
regulations, those comments are beyond the scope of the rulemaking. 
However, the Bureau is currently engaged in a process with the U.S. 
Environmental Protection Agency (EPA) to revise and update an existing 
Osage Lessees Manual that addresses environmental protection and 
response, including best management practices. The Osage Minerals 
Council, Osage Nation, State of Oklahoma, lessees, and surface owners 
were involved in the public listening sessions as part of that process. 
Moreover, the rule does not replace other applicable environmental laws 
or regulations and EPA is responsible for overseeing certain aspects of 
oil and gas operations within Osage County.

R. Comments Related to Section 226.34

    One commenter noted that the Bureau should not approve a lease, 
installation, permit or other activity until an environmental impact 
assessment has been completed and any issues have been resolved. To 
that end, the Bureau should regularly consult with Federal, State, and 
local wildlife agencies to reduce conflicts between wildlife 
conservation and oil and gas production.
    Notwithstanding the regulations, the Bureau is required to ensure 
compliance with the National Environmental Policy Act (NEPA), 42 U.S.C. 
4321 et seq. Further, Section 226.5(d) makes clear that before approval 
of each oil and/or gas lease and activities and installations 
associated therewith must be assessed and evaluated for its 
environmental impact. Although the Bureau already undertakes 
environmental reviews before approving certain actions, Section 226.34 
has been further amended to expressly note that the NEPA is part of the 
environmental compliance review and must be completed before the 
Superintendent may grant authority under a lease to conduct certain 
operations.

S. Comments Related to Section 226.35

    At least one commenter suggested that Section 226.35 as written 
appears to reverse the ancient rule that the surface estate is 
subservient to the subsurface/mineral estate, thereby giving the 
surface owner a veto over mineral development. In particular, paragraph 
(b) only provides that the Superintendent will endeavor to bring the 
parties to terms so that a lessee may develop on a restricted homestead 
and this is different than allowing the lessor to enter upon surface 
lands and utilize subsurface rights and would delay development. 
Additionally, paragraph (c) provides that when no agreement between a 
surface owner and lessee can be reached for surface usage, the Minerals 
Council can make a final binding decision, but this paragraph does not 
include a requirement that the Minerals Council recognize the legal 
subservience of a surface owner's right or take into account the 
reasonableness of the lessee's request, or apply standard methods of 
valuation to the interests being adjudicated. This commenter notes that 
it is also unclear what appeals rights a lessee has to such 
determinations.
    Section 226.35 (previously numbered 226.17) was not substantively 
changed in the rule. References to the ``Osage Tribal Council'' to the 
``Osage Minerals Council'' were changed because the Osage Tribal 
Council no longer exists and it is the Osage Minerals Council that 
oversees the Osage Mineral Estate. Moreover, Section 226.35 governs the 
use of restricted homestead and not all surface lands within Osage 
County. The Bureau has a unique role with respect to operations that 
occur on a restricted homestead and this section ensures that the 
appropriate procedures are followed to enable the Bureau to participate 
in a decision impacting the restricted homestead in order to protect 
the restricted surface owner to which the United States has a trust 
responsibility, but those provisions do not change the legal principles 
related to the surface and subsurface mineral estate that are 
applicable in Osage County.

T. Comments Related to Section 226.36

    One commenter stated that Section 226.36 should also require that 
no operations may begin until the lessee can meet and negotiate in good 
faith with the surface owner to ensure the health and safety of the 
lessee and the health and safety of others using the State's wildlife 
management area.
    No change has been made in response to this comment. Section 226.36 
only relates to commencement of operations, and Section 226.33 of the 
rule provides that lessees are required to comply with all applicable 
laws and regulations, including protecting natural resources and 
environmental quality, and life and property during their operations. 
To the extent a surface owner believes that a lessee is engaged in 
operations that are harmful to the health and safety of humans, such 
actions should be reported immediately to the proper authorities and 
the Bureau maintains a 24-hour hotline for such purposes.
    One commenter disagreed with provision allowing the Superintendent 
to set routes of ingress and egress in Section 226.36(b)(2) if no 
agreement between lessee and surface owner can be made and suggests 
using an unbiased alternative decision maker.
    In response to comments, we have further revised Section 
226.36(b)(2) to allow both the surface owner and the lessee to meet 
with and submit information regarding such routes before a final 
determination is made. This will allow for the consideration of 
relevant parties before making a determination, which provides added 
protection for all parties.
    At least one comment was received noting that it is not clear how 
Section 226.36(b), requiring the lessee to meet with the surface owner 
or his/her representative, is met when there are tracts with multiple 
or numerous surface owners. The commenter proposes that the Bureau 
qualify that this provision is met by meeting with the majority 
owner(s).
    No change has been made in response to this comment. A particular 
lease could include multiple tracts of land that are owned by different 
surface owners and the owners of each surface

[[Page 27011]]

estate must be separately met with to ensure proper notice and due 
process.

U. Comments Related to Section 226.37

    Some commenters suggested requiring lessees to meet prior to 
operations and enter into a written surface use agreement to address, 
among other things: (a) Identify and limit the size and locations of 
well pads, roads, pipelines and power lines; (b) govern the timing and 
scope of operations to minimize disturbance to landowner's operations; 
and (c) outline reclamation and clean up obligations. In addition, some 
of these commenters suggested that lessees should adhere to BLM best 
practices and that any dispute should be governed by arbitration.
    Section 226.36(a) already requires the lessee to notify or attempt 
to notify surface owners prior to commencement of certain operations 
and Section 226.36(b) requires that lessee request a meeting with 
surface owners to provide information regarding location of wells, 
route of ingress and egress and contact information for damage claims. 
In response to comments, however, the Department has added a 
requirement to Section 226.36(b)(2), which requires that in the event 
that the surface owner and lessee cannot agree on a route of ingress or 
egress, both the surface owner and the lessee will be notified by the 
Superintendent and provided with an opportunity to meet and/or to 
submit any information in conjunction with that process. In addition, 
Section 226.37, governing use of surface lands, already provides 
standards for surface use without the need for an additional 
requirement of surface use plans between the surface owner and lessee. 
The rule has always implicitly provided that the lessee and surface 
owner should work together regarding locations of well pads, roads, 
pipelines and electric lines and expressly provides a process for the 
routing of rights-of-ways including, for example, pipelines and 
electric lines, in the event that the surface owner and lessee cannot 
agree on a particular route. However, in response to comments, the 
Department has also added a requirement to Section 226.37(a) (similar 
to Section 226.36(b)(2)) to provide that the Superintendent will notify 
or attempt to notify both the surface owner and lessee and provide them 
with an opportunity to meet and/or to submit any information in 
conjunction with that process. In addition, Section 226.38 provides 
limitations regarding the size of drilling sites that lessees must 
follow in conducting operations.
    A commenter suggested that Section 226.37(c) should also include a 
clause specifying the lessee's operational obligations be expanded 
beyond ``workmanlike manner'' to include avoiding waste, degradation of 
environmental quality, avoidable nuisance, threats to public safety and 
health.
    The rule sufficiently addresses this comment without requiring a 
change to Section 226.37(c). Section 226.37 governs the use of surface 
lands generally, but is not the only provision in the regulation 
regarding a lessee's duties and obligations. Section 226.33(a)(2)-(3) 
already requires that that the lessee conduct operations in a manner 
that protects other natural resources and environmental quality and 
that protects life and property. Section 226.44 further specifies 
requirements that lessees must follow to prevent pollution, and Section 
226.45 delineates lessee's other environmental responsibilities. In 
addition, Section 226.46 provides that a lessee must perform all 
operations and maintain equipment in a safe and workmanlike manner and 
take all precautions necessary to provide adequate protection for the 
health and safety of life and the protection of property.

V. Comments Related to Section 226.38

    Some comments were received objecting to the amount of commencement 
money in Section 226.38 as grossly inadequate and stating it should be 
significantly increased to fairly compensate landowners for immediate 
and long term impacts and loss of land as a result of well pads, roads, 
pipelines, power lines, tanks and other infrastructure and operations.
    Commencement money is not intended to compensate surface owners for 
all damages to land as a result of oil and gas operations. Rather, it 
is intended to provide an upfront payment to surface owners that will 
be credited towards future damages. The rule has a process in Section 
226.40, by which surface owners may seek additional damages. A number 
of commenters also raised concerns that increased commencement fees 
would be overly burdensome to smaller lessees. However, the 
commencement fees are intended to provide all surface owners, 
regardless of whether the lessee is a small or large producer, with the 
same up front compensation for the initial use of surface lands. During 
the rulemaking the Committee heard from many surface owners that the 
amount of commencement money was inadequate to the surface cover damage 
the surface. Thus, there is a need to balance these concerns while 
ensuring that surface owners are treated equally and receive some 
measure of compensation before they are able to recover damages for 
actual impacts to the surface as a result of oil and gas operations. An 
increase in commencement fees in conjunction with the ability of 
surface owners to continue to recover full damages strikes this 
balance.
    At least one commenter suggested that no geophysical, geologic 
exploration or surveying or staking activities be allowed without the 
lessee entering into a written agreement with the surface owner 
regarding seismic activities.
    Section 226.38 governs commencement of operations and provides that 
a lessee may commence operations, including seismic activities, once 
the commencement fees are paid in accordance with that section. This 
section in particular, has been revised from the previous regulations 
to increase the fees in response to surface owner comments during the 
negotiated rulemaking process, but the majority of the section was not 
revised. The Department found that there was discussion during the 
negotiated rulemaking with respect to the concept of requiring some 
kind of a surface use agreement before operations could begin, but 
ultimately the Committee did not propose that approach. Based on the 
record, the Department believes the rule contains sufficient standards 
governing the use of surface lands (Sections 226.36(b) & 226.37), 
including provisions aimed at ensuring that surface owners are notified 
of operations (Section 226.5(c); Section 226.36; 226.38(b)) and have 
the opportunity to participate in the process where applicable. See 
e.g., Section 226.37(a). In addition, the rule continues to allow 
surface owners to seek compensation for damages caused by operations 
and provides an arbitration process to settle disputes between surface 
owners and lessees. See Section 226.40.
    Some comments were received requesting that the Bureau recognize 
that a surety performance bond is generally required by the surface 
owner prior to conducting oil and gas activities--a requirement that is 
applicable in the State of Oklahoma under State law.
    Oil and gas operations within Osage County are governed by federal 
law, including the 1906 Act and its implementing regulations. Under the 
rule, Section 226.38 requires commencement fees, rather than a surety 
performance bond, be paid to surface owners before operations may 
begin. During the negotiated rulemaking in response to public comment, 
the

[[Page 27012]]

Committee agreed to propose increases in the amount of commencement 
money due and this rule adopts those recommendations. Moreover, the 
regulations have always provided that the lessee and surface owner must 
negotiate settlement of damages after commencement of operations and 
these provisions remain unchanged in the final rule.
    At least one comment was received objecting to the increase 
commencement fees in Section 226.38(a) on the basis that it will only 
destroy small lessees who work in an old oil field.
    No evidence was submitted to support this comment. Further, this 
issue was discussed during the Negotiated Rulemaking Committee and this 
change was made in response to surface owner complaints regarding 
damages and lessee complaints regarding access. In particular, the 
Negotiated Rulemaking Committee explained that the increase in the 
commencement fee from $300 to $2,500 was made because $300 is an 
outdated amount and is creating development issues between the surface 
owners and lessees, as evidenced by the recurring issue in Osage County 
of surface owners blocking lessee access to lease sites because they 
believe the commencement fees are insufficient. Thus, the Committee 
increased the commencement fee to $2,500 to help mitigate this issue 
and believed it is a fair amount that would be applied to future 
damages, while at the same time balancing concerns of surface owners 
who are concerned about immediate damages to their surface estate. 
Committee members agreed that this fee should be paid before beginning 
operations, not at the time of permitting.

W. Comments Related to Section 226.39

    A commenter suggested that Section 226.39, re: tank fees, be folded 
into the commencement money provision at Section 226.38(a).
    Commencement money is not intended to cover fees for the siting of 
tanks. At the time that a lessee commences operations, he or she may 
not know how many tanks will be sited on the well site. Section 226.39 
provides that when a tank is sited on a well site, the lessee will pay 
the requisite fees in accordance with that section. This provision 
ensures that the surface owner will be compensated for the siting of a 
tank at the time they are placed on a well site, while allowing the 
lessee to begin operations after the payment of commencement fees and 
before he or she may know how many tanks will be placed at the well 
site.

X. Comments Related to Section 226.40

    One commenter noted that in his/her view, Section 226.40(a), 
regarding compensation to surface owners for damages encompassing ``all 
other surface damages as may be occasioned by operations,'' is open-
ended and could result in needless confrontations or litigation. The 
commenter suggests narrowing the provision to provide for damages to 
``growing crops [and] any improvements on the lands.''
    Section 226.40(a) was not changed substantively from the prior 
regulations (original 226.20(a)). Moreover, this comment contradicts 
the purpose of the damage provisions in the rule, which are intended to 
be broad enough to cover any claims for damages that a surface owner 
may have against a lessee. The provision is not intended to take a 
position on whether a particular claim for damages does or does not 
have merit, but allows for such issues to be worked out between the 
surface owner and the lessee.

Y. Comments Related to Section 226.41

    At least one commenter suggested that damage claims should be 
settled by the terms of surface use agreements and then, secondarily, 
by arbitration in Section 226.41.
    For the reasons stated in responses to other comments, the rule 
does not require a surface use agreement. The rule does provide for a 
surface owner to be compensated for damages as a result of operations 
and arbitration may be sought if issues between the surface owner and 
lessee cannot be resolved. Nothing in the rule prohibits the surface 
owner and lessee from discussing issues related to operations early in 
the process to minimize disagreements.

Z. Comments Related to Section 226.45

    Some commenters raised concerns that the proposed regulations fail 
to protect the land, environment, public health and safety and property 
rights of surface owners and suggested language to expand environmental 
protections.
    This comment was addressed during the negotiated rulemaking and 
there is no need to further revise the rule. In response to similar 
public comments during the negotiated rulemaking, the Committee 
proposed, and the Department is enacting in the final rule, several new 
provisions aimed specifically at protection of the land, environment, 
and public health and safety. Those provisions include, for example, 
clarifying and specifying the lessee's environmental responsibilities 
and obligations while conducting operations (Section 226.45), adding 
compliance with BLM Onshore Oil and Gas Order 6 regarding H2S safety 
(Section 226.60(f)), adding requirements for ensuring well safety 
(Section 226.60(b)-(e)), site security (Section 226.65), and safety 
standards for lessee operations and equipment (Section 226.46). 
Moreover, the regulations have always had provisions regarding damages 
to surface lands and an arbitration process for resolving disputes that 
remain in the rule. It is relevant to note that one commenter 
specifically noted that the proposed rule does provide protections for 
the surface owner, for example, Section 226.38 requires lessees to 
remit a $2,500 commencement fee for each well drilled which is credited 
to the final settlement, and is an increase from the past rule of only 
$300. In addition, the payment of commencement fees does not affect the 
surface owner's ability to seek additional monies for damages and 
Section 226.40 allows a surface owner to seek additional monies for 
damages. Specifically, Section 226.41 provides for an impartial 
arbitrator to resolve issues and allows for arbitration awards to be 
challenged in a court of competent jurisdiction. Lastly, all Osage 
leases require the lessee to conduct operations consistent with a 
prudent operator standard and failure to abide by that standard or 
regulations specifically aimed at protecting the environment can 
subject the lease to termination under Sections 226.67 and 226.68.

AA. Comments Related to Section 226.46

    A commenter suggested that a specific reference in Section 226.46 
be made to prohibit leaving REDA cable on the ground.
    The Department agrees that there is a need to address this issue, 
and has further revised Section 226.46 to include a provision requiring 
lessees to comply the National Electric Code with regard to the running 
and maintenance of electrical lines to ensure that minimum standards 
are required.

BB. Comments Related to Section 226.47

    A commenter suggested that in Section 226.47, the granting of 
easements for wells off the leased premises be at the consent of 
surface owners as well as the Osage Minerals Council.
    The Department disagrees with this comment. However, the Department 
does agree that a surface owner should be able to submit information as 
part of the process and has revised Section 226.47 to provide that the 
Superintendent will notify or attempt to

[[Page 27013]]

notify the affected surface owner(s) and provide an opportunity to meet 
and/or submit information before an easement is granted.

CC. Comments Related to Section 226.48

    Several comments were received asserting that all of the surface 
water within Osage County belongs to the State of Oklahoma, so all 
permits for surface and groundwater should be stopped.
    Section 226.48 governs the use of surface water and was not 
substantively changed as part of this rule. The ownership of surface 
water is a legal question that does not need to be, and cannot be, 
resolved as part of this rulemaking process.
    Several comments were received suggesting that Section 226.48 in 
its current form authorizes the un-permitted use of surface water in 
Osage County and, in effect, the regulation purports to preempt the 
State of Oklahoma's regulatory authority. These comments propose 
amending Section 226.48 to state that Oklahoma law applies to all uses 
of water within Osage County. These commenters also suggest that all 
use of water must be permitted by the State, including use in oil and 
gas exploration, production or other operations otherwise shortages 
could occur for those using the same water source pursuant to an 
Oklahoma Water Resources Board permit.
    As noted above, Section 226.48 governs the use of surface water and 
was not substantively changed as part of this rule. The ownership of 
surface water is a legal question that does not need to be, and cannot 
be, resolved as part of this rulemaking process. Comments were also 
received expressly disputing any comments asserting that all water use 
is subject to State law and this commenter notes that the Osage 
Nation's ownership and regulatory control of reserved waters within 
Osage County is a historical fact and without question, which is made 
clear by the creation of the Osage Reservation in 1872 and the Osage 
Mineral Estate in 1906. This comment further supports leaving Section 
226.48 unchanged; moreover Section 226.48 was originally codified in 
1974 and has remained unchanged for over 40 years.

DD. Comments Related to Section 225.53

    A commenter suggested that a lessee's permanent improvements and 
personal property should be removed from the site when a well is 
abandoned, that there should be an upper limit of perhaps three years 
up to which wells can be ``shut in,'' and that the lessee should 
remediate a site within 90 days of well plugging.
    These comments are adequately addressed in the rule to the extent 
necessary. Section 226.53(a) makes clear that any permanent 
improvements become the property of the surface owner and the only 
portion of that provision that was deleted was the exception for 
permanent improvement to become part of the surface when termination of 
a lease is for something other than cause, because it did not make 
sense to have such an exception as a legal matter. To the extent that a 
surface owner has been damaged by the siting of a permanent 
improvement, the regulations have always contemplated that the surface 
owner would seek damages in accordance with the damages provisions. 
Section 226.53(a) also already requires that a lessee remove all 
personal property within 90 days of termination of the lease. And, 
Section 225.53(c) requires that a lessee must plug all wells that are 
to be abandoned and Section 225.53(d)(4) requires that within 90 days 
of plugging the well, the lessee must clean up the premises around the 
well.

EE. Comments Related to Section 226.56

    One commenter requested that the Bureau ensure that well records 
and subsurface data required to be reported in Section 226.56 be made 
accessible in a database to the public and be accurate to ensure that 
groundwater is properly protected. The commenter suggests that all new 
wells should be logged and the electronic logs should be required and 
incorporated into the database.
    This comment is outside the scope of the regulations and relates to 
the internal procedures for how the Bureau should store information 
required to be submitted under the regulations and how such information 
is or can be disseminated to the public. However, Section 226.60(e) 
already requires the lessee to protect freshwater from contamination 
and the Bureau will further consider this comment as it considers the 
development of a Web site for information related to oil and gas 
operations within Osage County and evaluates the information that could 
be posted for the benefit of the public consistent with the Freedom of 
Information Act.

FF. Comments Related to Section 226.57

    A commenter suggested that in Section 226.57, minimum setbacks 
between oilfield activities and boundary lines of leased land, public 
roads, watering places, and dwellings, granaries, and barns be 
increased.
    This rule did not change Section 226.57 and it remains 
substantively the same as in the current regulations (previously found 
at Section 226.33). The Department also found a lack of information 
submitted in conjunction with this comment justifying the need to have 
an across the board minimum setback beyond 300 feet of the leased land 
boundary and 200 feet of public highways, established watering places, 
dwellings, granaries and barns. Moreover, it is relevant to note that 
Section 226.57 provides minimum setbacks and the lessee and surface 
owner may further discuss the need for an increase in the setback in 
any particular circumstance.

GG. Comments Related to Section 226.59

    A commenter suggested that the Bureau should undertake a 
comprehensive review and update of its freshwater data/maps and, until 
then, surface casing should be required to a depth 200 feet below that 
recommended by the Bureau's current data/maps.
    This comment does not relate directly to the rule and no change to 
the rule is necessary. Section 226.59 specifies that the lessee must 
take certain precautions to prevent damage or pollution to freshwater. 
The Department agrees that the Bureau should endeavor to work with the 
best available data regarding freshwater data and maps applicable in 
Osage County and it will work with the United States Geological Survey 
and EPA to ensure that it has the most up to date information. The 
Bureau must review and approve operations consistent with the best 
available information it has available and it would be arbitrary to 
require all surface casings to go to a depth greater than 200 feet 
irrespective of the data and information available to the Bureau. 
Instead, Section 226.59 gives the Superintendent broad authority to 
take necessary steps to protect fresh water or other mineral bearing 
formations depending on particular circumstances. For example, in some 
instances depending on the hydrology in a particular area, the 
Superintendent may require surface casing to a depth greater than 200 
feet. In other areas within Osage County, the hydrology may be such 
that freshwater and other mineral bearing formations are adequately 
protected if surface casing are set at a depth less than 200 feet. 
Nothing in the rule prohibits a person or entity from submitting for 
consideration by the Superintendent, information relating to the depth 
of nearby residential water wells that may require setting the depths 
for a particular well deeper than

[[Page 27014]]

shown on the best available maps that the Bureau has on file.
    Some commenters suggested that, in Section 226.56(a) and/or 226.59, 
lessees be mandated to report freshwater well drilling data to the 
Bureau and the Oklahoma Water Resources Board, that the Bureau require 
water well testing within 2,000 feet of oil or gas wellbores, and that 
lessees be required to keep cement well logs for all cement jobs across 
the freshwater zone.
    This rule did not change Section 226.59 and it remains 
substantively the same (previously found at Section 226.35). Further, 
Section 226.59 gives the Superintendent broad authority to address 
these types of concerns on a case by case basis because the regulations 
allow the Superintendent to take necessary steps to protect fresh water 
or other mineral bearing formations depending on the particular 
circumstances.

HH. Comments Related to Section 226.60

    A commenter suggested that well control requirements in Section 
226.60 are insufficient and that, instead, BLM Onshore Oil and Gas 
Order No. 2 should be substituted.
    No further revision to Section 226.60 is necessary in response to 
this comment. Section 226.60 was recommended by the Negotiating 
Rulemaking Committee in an attempt to balance the need to have 
additional safeguards for maintaining well control and the Committee 
specifically reviewed and examined BLM rules and procedures. The 
Department found that that section combines existing language from the 
regulations with language from BLM regulations governing well control. 
For example, paragraph (a) is text from the old regulations, but 
paragraphs (b) through (e) were adopted consistent with BLM regulations 
regarding well control. The Department believes that these new 
provisions provide additional protections to ensure well control that 
have not been in place before in Osage County. Moreover, if 
appropriate, under Section 226.3, in accordance with the Administrative 
Procedure Act the Bureau can adopt BLM's Onshore Oil and Gas Order No. 
2 in the future.
    Several commenters raised concerns regarding the venting of 
hydrogen sulfide gas at any level, and the flaring of hydrogen sulfide 
in excess of 10 parts per million. Some of these commenters suggested 
that if short term flaring must be slowed, the lessee should be 
required to use the best current flaring technology for the oil and gas 
industry, and any flaring of natural gas should be done in a manner to 
eliminate the visibility of the flame and a produced light using a 
closed-combustion chamber system. Other commenters suggested using 
current best industry standards for flaring following American 
Petroleum Institute guidelines and utilizing ``clean burn variable tip 
flare'' technology.
    These comments are adequately addressed in Section 226.60(f) of the 
rule and no further change in necessary. Section 226.60(f) requires 
compliance with BLM Onshore Oil and Gas Order No. 6. This Order 
identifies the Bureau of Land Management's requirements and minimum 
standards of performance expected from operators when conducting 
operations involving oil or gas that is known or could reasonably be 
expected to contain hydrogen sulfide (H2S) or which results in the 
emission of sulfur dioxide (S02) as a result of flaring H2S. This Order 
also identifies the gravity of violations, probable corrective 
action(s), and normal abatement periods. In addition, the Bureau has 
been working with EPA to develop an Environmental Compliance Manual for 
Osage County and has received comments from the public to include in 
that manual best management practices, including best practices for 
venting and flaring hydrogen sulfide gas.

II. Comments Related to Section 226.62

    A commenter suggested that the Department should require more 
detailed and timely reporting in both the final rule and in OMB-
approved forms. This reporting would be offset by the Department 
requiring routine inspections of all withdrawals from tank batteries 
and contemporaneous recordation of all of the appropriate data, 
periodic facility inspection, and spot inspection for compliance. The 
commenter also recommended that inspections be performed by qualified 
Bureau officers; that periodic, random, and risk-based inspections be 
performed; and that the Bureau inspect all oil withdrawals.
    The rule contains mechanisms that allow the Bureau to more 
efficiently perform inspections. For example, in Section 226.62(c), 
lessees are required to give notice to the Superintendent before a 
purchaser is notified to remove a tank of oil to allow Bureau employees 
to perform periodic and random inspections to ensure accountability. In 
addition, under Section 226.63(c), a lessee must provide 48 hour notice 
before a lessee calibrates or adjusts gas meters. Osage County is 
approximately 1.5 million acres and the Bureau cannot inspect all oil 
withdrawals or be at every gas meter calibration, but the notification 
system is intended to provide a better system that will enable Bureau 
employees to plan where they should be on any given day to ensure that 
field inspections include areas where tanks are ready to be picked up 
by lessees or meters will be calibrated. The Department has determined 
that the additional burden on the public of requiring more detail or 
increased frequency in reporting under the Paperwork Reduction Act is 
not clearly justified by any potential benefit. To the extent that the 
commenter suggests that Bureau employees be trained, such comments are 
outside the scope of the rulemaking. However, the Departmental 
employees must meet certain qualifications before they are hired by the 
Bureau and field inspectors are participating in the BLM's PET 
certification training.

JJ. Comments Related to Section 226.63

    Some comments were received suggesting that wells on a lease 
already have a meter at the well or near the wellhead and requiring 
installation of meters at other locations is unnecessary.
    The Negotiated Rulemaking Committee made the recommendation to 
adopt the standards in On-Shore Oil and Gas Order 5 because the 
regulations were too vague and did not provide guidance to lessees for 
the measurement of gas. This has resulted in lessees utilizing 
different standards for the measurement of gas, which has caused 
concern with respect to proper accounting of gas production and proper 
payment of royalties for gas. Ensuring proper measurement of gas was 
also an issue in the tribal trust litigation against the United States 
and was one of the issues that the Committee was tasked with addressing 
in this rulemaking. Adoption of On-Shore Oil and Gas Order 5, in 
Section 226.63, now specifies uniform standards consistent with how gas 
is measured on all other Indian and Federal lands. In particular, On-
Shore Oil and Gas Order 5 requires lessees to measure gas on the lease, 
unit, unit participating area or communitized area and that any 
measurements at locations off the lease, unit, unit participating area, 
or communitized area must be approved by the Superintendent. To the 
extent that a lessee already has installed meters on their lease 
consistent with On-Shore Oil and Gas Order 5, no changes will be 
required. However, the Department believes this change is necessary to 
bring uniformity throughout Osage County in the measurement of gas and 
ensure that it is fulfilling its trust responsibility to the 
beneficiaries of the Osage mineral estate.

[[Page 27015]]

    Some comments were received suggesting that the requirement in 
Section 226.62(c) to call the Bureau prior to running a tank of oil 
seems to serve no purpose. It was noted that if the intent is to 
inspect more runs, then the tribe will need to employ more inspectors, 
if there is no intent to inspect then this is another futile exercise 
in useless record keeping.
    The requirement that a lessee give notice to the Superintendent 
before a tank of oil is removed by a purchaser was added by the 
Negotiated Rulemaking Committee to specifically address concerns that 
the Bureau needs to more efficiently inspect and monitor operations 
within Osage County in order to verify accuracy of tank sales. Given 
that Osage County consists of 1.5 million acres, the Department agrees 
with the Committee that requiring notice will enable it to better 
assess where field inspectors need to be on any given day to maximize 
the number of inspections that can be done, rather than sending out 
field inspectors to random locations in the hopes of finding tanks that 
are full and will be picked up, as is the current practice. The Bureau 
has also created more positions for inspectors within Osage County to 
address staffing shortfalls. During discussions on this topic in the 
Negotiated Rulemaking, it was noted that lessees have to make calls to 
inform a purchaser that a tank is ready and the Department determined 
that the burden of calling the Bureau in addition to the purchaser 
seemed minimal.
    At least one commenter suggested that if the Bureau wants 
compliance with the current regulations, it would request more funds to 
install electronic monitoring of tanks.
    This comment is outside the scope of and does not relate to the 
rulemaking, rather it concerns internal budgetary operations.

KK. Comments Related to Section 226.65

    Some commenters noted that importing the requirements for site 
security plans that the BLM requires on other Indian and Federal lands 
will be too labor-intensive to afford for small lessees within Osage 
County.
    The Department received numerous comments regarding public safety 
concerns around well sites from surface owners and found that the site 
security plan requirements were added by the Committee to specifically 
address these concerns. Site security plans are not intended to be 
costly or labor intensive and are generally required for oil and gas 
operations on all other Indian and Federal lands.
    Several commenters noted that in their view, the new requirement 
for site security plans is duplicative of the SPCC Plans required by 
the EPA.
    The SPCC plans are required by the EPA and are submitted to the EPA 
only to prevent a spill of oil into navigable waters or shorelines, 
whereas site security plans are required by the Bureau and submitted 
for all oil and gas operations to proactively address a multitude of 
public safety concerns. For these reasons, the site security plans are 
not duplicative of the SPCC Plans. The site security plans will help 
promote lessee compliance with EPA's requirement for SPCC plans 
regarding oil spills, because lessees will have information more 
readily available from the site security plans to assist them in 
completing an SPCC Plan.
    Some commenters suggested that the requirement in site security 
plans requiring that all valves have seals is ``ridiculous,'' 
``arbitrary'' and ``totally impracticable'' and that lessees can't keep 
records for six years. Others noted that most lessees don't have the 
manpower or time to comply with this requirement and it would add costs 
that could force early abandonment.
    No evidence has been presented regarding estimated increased costs 
in relation to this comment. The United States has a legal obligation 
to maintain records regarding operations for which it is responsible. 
The Department must be able to go back for at least six years and 
collect documents and data related to operations because the statute of 
limitations for damage claims on behalf of or against the Department is 
six years. Furthermore, the Department finds it relevant that on all 
other Indian and Federal lands, the United States requires lessees 
adhere to minimum site security standards for oil and gas operations. 
The requirements in Section 226.65 were added in response to concerns 
from surface owners regarding well site safety, as well as, from the 
members of the Osage Minerals Council, who were concerned with ensuring 
accountability of oil and gas production. In response to these 
concerns, the provisions in Section 226.65(b) were added to provide a 
minimum standard for ensuring accountability regarding oil and gas 
operations. The rule is intended to bring Osage County in line with 
minimum requirements that are used on all other Indian and Federal 
lands. Section 226.65 mirrors the standard applicable to other Indian 
and Federal lands for oil and gas operations that is found in the BLM's 
regulations. In particular the Department finds paragraph (b) addressed 
concerns from the Osage Minerals Council relating to ensuring that 
there are uniform safeguards regarding accountability for oil and gas 
production within Osage County and it provides transparency and ensures 
that lessees are all following a minimum standard. Additionally, the 
Department has discovered through the negotiated rulemaking process and 
public comments that there are genuine concerns regarding well site 
safety and the new requirement in Section 226.65(c) will help with 
transparency and ensure that lessees have a uniform standard to comply 
with and are aware of their responsibilities.
    At least one commenter noted that site security plans will not stop 
stealing in Osage County.
    This comment does not suggest any changes to the rule. However, the 
Department's intended purpose of Section 226.65(b) is to provide a 
minimum standard to aid in accountability of oil and gas production and 
Section 226.65(c) adds new protections regarding site security that 
have not previously been required of all lessees.
    Some commenters suggested that surface owners should be consulted 
regarding site security and proposed site security plans should be 
included in surface use agreements.
    The Osage mineral estate is unique in that the entire subsurface is 
held in trust by the United States for the benefit of the Osage Tribe. 
Notwithstanding that, the public, including surface owners, were able 
to participate in the Negotiated Rulemaking process and the Committee 
added the site security provisions to the regulations in direct 
response to surface owner concerns. In addition, the Department has 
never required surface use agreements in Osage County, but there are 
provisions for the surface owner to work with the lessees and collect 
damages for use of surface lands. The Department encourages surface 
owners and lessees to work together to address issues related to 
surface lands.

LL. Comments Related to Section 226.66

    A commenter suggested that lessees be required to report accidents, 
fires, theft, vandalism, and environmental accidents to the 
Superintendent, the surface owner(s), and law enforcement (in case of 
theft) within one business day of discovery.
    In response to this comment, the Department has further revised 
Section 226.66 (previously numbered 226.41) to require that, in 
addition to requiring lessees to report fires, theft, and vandalism, 
lessees also report environmental accidents to the Superintendent and 
within one business

[[Page 27016]]

day after discovery provide notice to local law enforcement agencies 
and internal company security. The revisions also require the lessee to 
provide or attempt to provide notice to the surface owner or the 
current resident/occupant in writing by U.S. mail of any such 
incidents.

MM. Subpart F (226.67 to 226.70)

    One commenter recommended including a requirement that all sums due 
be paid to the Bureau.
    This comment is outside the scope of the regulatory process. The 
Anti-Deficiency Act, 31 U.S.C. 1341, requires that fees and penalties 
be transmitted to the United States Treasury. Absent specific 
legislation to the contrary, the Osage Agency must comply with the 
Anti-Deficiency Act and remit fees and penalties to the United States 
Treasury.
    Some commenters noted that fines in Subpart F of the Rule should be 
paid to the shareholder/headright owner and not the Bureau of Indian 
Affairs.
    The Bureau does not keep fines that are collected, but is required 
to transmit those to the United States Treasury in accordance with the 
Anti-Deficiency Act.
    Some commenters suggested that heavy fines will make Osage a less 
attractive place.
    Fines are not mandatory, but are only imposed when a lease is not 
operating in accordance with the regulations. Fines are intended to 
deter violations and encourage lessees to comply with the regulations.
    A commenter suggested that a penalty of $1,000/day should be levied 
for environmental pollution.
    The Department has decided not to change the fines and penalties 
section of the rule and the fines and penalties as stated in the prior 
regulations remain intact, unless otherwise set forth in a lease. To 
further encourage lessees to comply with the regulations, the 
Department has, however, deleted the provision in 226.67 allowing the 
Osage Minerals Council to waive late fees.

NN. Abandoned Wells

    Some comments regarding abandoned wells, abandoned pump-jacks and 
exposed pipes on land noted that these conditions cause damage and a 
hazard and stated that the existing requirements to clean-up abandoned 
wells needs to be enforced.
    To the extent that these comments can be addressed by the rule, the 
Department has further revised Section 226.46 to include a provision 
requiring lessees to comply with the National Electric Code with regard 
to the running and maintenance of electrical lines to ensure that 
minimum standards are required. If surface owners or others have 
concerns regarding exposed pipes or other health and safety issues they 
may contact the Bureau through its reporting hotline at 1-855-495-0373. 
Surface owners can contact OERB at 1-800-664-1301 and consistent with 
their process, OERB can remediate abandoned well sites in Osage County.

V. Procedural Requirements

A. Regulatory Planning and Review (E.O. 12866 and 13563)

    Executive Order (E.O.) 12866 provides that the Office of 
Information and Regulatory Affairs (OIRA) at the Office of Management 
and Budget (OMB) will review all significant rules. OIRA has determined 
that this rule is not significant.
    E.O. 13563 reaffirms the principles of E.O. 12866 while calling for 
improvements in the nation's regulatory system to promote 
predictability, to reduce uncertainty, and to use the best, most 
innovative, and least burdensome tools for achieving regulatory ends. 
The E.O. directs agencies to consider regulatory approaches that reduce 
burdens and maintain flexibility and freedom of choice for the public 
where these approaches are relevant, feasible, and consistent with 
regulatory objectives. E.O. 13563 emphasizes further that regulations 
must be based on the best available science and that the rulemaking 
process must allow for public participation and an open exchange of 
ideas. We have developed this rule in a manner consistent with these 
requirements. This rule is also part of the Department's commitment 
under the Executive Order to reduce the number and burden of 
regulations and provide greater notice and clarity to the public.

B. Regulatory Flexibility Act

    The Department of the Interior certifies that this rule 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.).

C. 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. It will not result in the 
expenditure by State, local, or tribal governments, in the aggregate, 
or by the private sector, of $100 million or more in any one year. The 
rule's requirements will not result in a major increase in costs or 
prices for consumers, individual industries, Federal, State, or local 
government agencies, or geographic regions. Nor will this rule have 
significant adverse effects on competition, employment, investment, 
productivity, innovation, or the ability of the U.S.-based enterprises 
to compete with foreign-based enterprises because the rule is limited 
to management and administration of the Osage mineral estate.

D. Unfunded Mandates Reform Act

    This 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 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.

E. Takings (E.O. 12630)

    Under the criteria in Executive Order 12630, this rule does not 
affect individual property rights protected by the Fifth Amendment nor 
does it involve a compensable ``taking.'' A takings implication 
assessment is therefore not required.

F. Federalism (E.O. 13132)

    Under the criteria in Executive Order 13132, this rule has no 
substantial direct effect on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among the various levels of government.

G. Civil Justice Reform (E.O. 12988)

    This rule complies with the requirements of Executive Order 12988. 
Specifically, this rule has been reviewed to eliminate errors and 
ambiguity and written to minimize litigation, and is written in clear 
language and contains clear legal standards.

H. Consultation With Indian Tribes (E.O. 13175)

    In accordance with the President's memorandum of April 29, 1994, 
``Government-to-Government Relations with Native American Tribal 
Governments,'' Executive Order 13175 (59 FR 22951, November 6, 2000), 
and 512 DM 2, we have evaluated the potential effects on federally 
recognized Indian tribes and Indian trust assets. This rule was 
developed by negotiated rulemaking with representatives of the affected 
tribe.

I. Paperwork Reduction Act

    This rule includes information collections requiring approval under 
the

[[Page 27017]]

Paperwork Reduction Act (PRA), 44 U.S.C. 3501 et seq. These information 
collections have not been approved previously because the last update 
to 25 CFR 226 was prior to amendments to the PRA subjecting these 
information collection requirements to OMB approval. In the Federal 
Register of August 28, 2013, the Department published the proposed rule 
and invited comments on the proposed collection of information. The 
Department submitted the information collection request to the Office 
of Management and Budget (OMB) for review and approval. The OMB did not 
approve this collection of information, but instead, filed comment. In 
filing comment on this collection of information, OMB requested that, 
before publication of the final rule, the Department provide all 
comments on the recordkeeping and reporting requirements in the 
proposed rule, the Department's response to these comments, and a 
summary of any changes to the information collections. We did not 
receive any public comments regarding the information collection burden 
estimates in response to publication of the proposed rule in the 
Federal Register; however, some of the comments on the rule related to 
information collections in sections 226.65 and 226.66. In response to 
comments on 226.66, the final rule specifies that reports of theft must 
occur within one business day of discovery, rather than ``promptly'' 
and the final rule adds a requirement to notify the surface owner under 
this section. The new requirement to notify the surface owner resulted 
in a small increase in the number of responses (14,436, as compared to 
the proposed estimate of 14,414) and hour burden (21,954, as compared 
to the proposed estimate of 21,932).
    OMB has approved the information collections in this final rule and 
assigned it OMB Control No. 1076-0180. This approval will expire on 03/
31/2018. Questions or comments concerning this information collection 
should be directed to the person listed in the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    OMB Control Number: 1076-0180.
    Title: Leasing of Osage Reservation Lands for Oil and Gas Mining, 
25 CFR 226.
    Brief Description of Collection: This part contains leasing 
procedures and requirements and rental, production, and royalty 
requirements for leasing the reservation lands of the Osage Nation for 
oil and gas mining. The Secretary must perform the information 
collection requests in this part to obtain the information necessary to 
complete leasing transactions and monitor leased property. Responses to 
these information collection requests are required to obtain a benefit 
(e.g., commercial transactions).
    Type of Review: New information collection.
    Respondents: Indians, businesses, and tribal authorities.
    Number of Respondents: 965.
    Frequency of Collection: On occasion.
    Estimated Hours per Response: Ranges from 15 minutes to 8 hours 
(see table below).
    Estimated Total Annual Responses: 14,436.
    Estimated Total Annual Burden Hours: 21,954.
    Non-Hour Cost Burden: $496.
    The table showing the burden of the information collection is 
included below for your information.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Annual       Hourly burden   Total annual
                    Section                               Information collection            Respondents      responses     per response    hourly burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
226.5..........................................  Lessee must submit completed lease form             160             160            0.5               80
226.9..........................................  Lessee must submit bonds...............             160             160            0.5               80
226.13.........................................  Corporate lessee must submit evidence               150             150            0.25            * 38
                                                  of its officers' authority to execute
                                                  papers and a copy of its Articles of
                                                  Incorporation.
226.26, 226.27(a)..............................  Lessee must provide certified monthly               700           8,400            0.5            4,200
                                                  reports covering operations and on
                                                  value of all oil/gas used off premises
                                                  for development and operation.
226.27(b)......................................  Purchaser of oil or gas to furnish                   45             540            0.5              270
                                                  statement of gross barrels of oil or
                                                  gross Mcf of gas sold and sales price
                                                  per barrel or gross Mcf during the
                                                  preceding month.
226.28.........................................  Submit agreement to unitize or                        1               1            1                  1
                                                  terminate unitization of oil or gas
                                                  leases to Secretary.
226.29.........................................  Submit assignment or transfer of lease              500             500            0.5              250
                                                  to Secretary.
226.34(b), 226.52..............................  Lessee must submit applications on BIA              600             600            8              4,800
                                                  forms for well drilling, treating, or
                                                  workover operations, removing casing
                                                  from well. Application to shut down or
                                                  plug well, with justification.
226.36.........................................  Lessee must notify and request meeting              160             160            1                160
                                                  with surface owners by certified mail,
                                                  provide copy to Superintendent, and
                                                  provide info at meeting.
226.40, 226.41.................................  Any person claiming an interest in the                1               1            1                  1
                                                  leased tract or in damages must
                                                  provide a statement showing the
                                                  claimed interest.
226.43.........................................  Drivers must carry documentation                     60              60            0.5               30
                                                  showing the amount, origin and
                                                  intended first purchaser of the oil or
                                                  gas or marketable product.
226.45(d)......................................  Lessee must submit a contingency plan,              160             160            5                800
                                                  when required.

[[Page 27018]]

 
226.54.........................................  Lessee must keep a full and correct                 700             700            1                700
                                                  account of all operations, receipts,
                                                  and disbursements and make reports
                                                  thereof, as required, make available
                                                  for inspection, and maintain for 6
                                                  years.
226.56.........................................  Lessee must keep records of drilling,               700             700            1                700
                                                  redrilling, deepening, repairing,
                                                  treating, plugging or abandonment of
                                                  all wells and furnish reports as
                                                  required in manner and method
                                                  specified by Superintendent.
226.56.........................................  Lessee must transmit to Superintendent              700             700            8              5,600
                                                  applicable information of completion
                                                  of operations on any well on BIA
                                                  forms; a copy of electrical,
                                                  mechanical or radioactive log, or
                                                  other types of survey of well bore,
                                                  and core analysis of well.
226.56.........................................  Upon request, Lessee must furnish plat              700             700            2              1,400
                                                  of wells in manner, form, and method
                                                  prescribed by Superintendent.
226.65.........................................  Lessee must maintain site security                  700             700            4              2,800
                                                  plan, including facility diagram.
226.66.........................................  Lessee must report accidents, fires,                 22              44            1                 44
                                                  vandalism including an estimate of the
                                                  volume of oil involved and notify
                                                  surface owner.
                                                --------------------------------------------------------------------------------------------------------
                                                    Total...............................  ..............          14,436  ..............          21,954
--------------------------------------------------------------------------------------------------------------------------------------------------------

J. National Environmental Policy Act

    This rule does not constitute a major Federal action significantly 
affecting the quality of the human environment. It is categorically 
excluded from further review under 43 CFR 46.210(i) because these are 
regulations ``whose environmental effects are too broad, speculative, 
or conjectural to lend themselves to meaningful analysis and will later 
be subject to the NEPA process either collectively or case by case.'' 
No extraordinary circumstances exist that would require greater NEPA 
review.

K. Effects on the Energy Supply (E.O. 13211)

    This rule is not a significant energy action under the definition 
in Executive Order 13211. A Statement of Energy Effects is not 
required.

List of Subjects in 25 CFR Part 226

    Indians--lands.

    For the reasons stated in the preamble, the Department of the 
Interior, Bureau of Indian Affairs, revises part 226 in Title 25 of the 
Code of Federal Regulations to read as follows:

PART 226--LEASING OF OSAGE RESERVATION LANDS FOR OIL AND GAS MINING

Sec.
226.1 Definitions.
226.2 What requirements govern?
Subpart A--Leasing Procedure
226.3 What orders and notices can BIA issue?
226.4 What responsibilities does the Superintendent have?
226.5 What are the requirements for lease sales and approvals?
226.6 How does a lessee surrender a lease?
226.7 What forms of payment are acceptable?
226.8 How do changes in the current regulations impact leases?
226.9 What are the bonding requirements for leases?
226.10 Can the Superintendent increase the amount of the bond 
required?
226.11 When can the Superintendent release a bond?
226.12 What forms are made a part of the regulations?
226.13 What information must a corporation submit?
Subpart B--Rental, Production and Royalty

Rental, Drilling and Production Obligations

226.14 What are the requirements for rental, drilling, and 
production?
226.15 What are the lessee's obligations regarding drainage?
226.16 What can the Superintendent do when drainage occurs?

Lease Term

226.17 What is the term of a lease?

Royalty Payments

226.18 What is the royalty rate for oil?
226.19 How is the gravity adjustment calculated?
226.20 How is the royalty on gas calculated?
226.21 Who determines royalty on lost or wasted minerals?
226.22 What is the minimum royalty payment for all leases?
226.23 What royalty is due on other marketable products?
226.24 What purchase options does the Federal Government have?
226.25 How are royalty payments made?
226.26 What reports are required to be provided?
226.27 Can a lessee enter into royalty payment contracts and 
division orders?

Unit Leases, Assignments and Related Instruments

226.28 When is unitization allowed?
226.29 How are leases assigned?
226.30 Are overriding royalty agreements allowed?
226.31 When are drilling contracts allowed?
226.32 When can an oil lease and a gas lease be combined?
Subpart C--Operations
226.33 What are the general requirements governing operations?
226.34 What requirements apply to commencement of operations on a 
lease?
226.35 How does a lessee acquire permission to begin operations on a 
restricted homestead allotment?
226.36 What kind of notice and information is required to be given 
surface owners prior to commencement of drilling operations?
226.37 How much of the surface may a lessee use?
226.38 What commencement money must the lessee pay to the surface 
owner?
226.39 What fees must lessee pay to a surface owner for tank siting?

[[Page 27019]]

226.40 What is a settlement of damages claimed?
226.41 What is the procedure for settlement of damages claimed?
226.42 What are a lessee's obligations for production?
226.43 What documentation is required for transportation of oil or 
gas or other marketable product?
226.44 What are a lessee's obligations for preventing pollution?
226.45 What are a lessee's other environmental responsibilities?
226.46 What safety precautions must a lessee take?
226.47 When can the Superintendent grant easements for wells off 
leased premises?
226.48 A lessee's use of water.
226.49 What are the responsibilities of an oil lessee when a gas 
well is drilled and vice versa?
226.50 How is the cost of drilling a well determined?
226.51 What are the requirements for using gas for operating 
purposes and tribal uses?
Subpart D--Cessation of Operations
226.52 When can a lessee shutdown, abandon, and plug a well?
226.53 When must a lessee dispose of casings and other improvements?
Subpart E--Requirements of Lessees
226.54 What general requirements apply to lessees?
226.55 When must a lessee designate process agents?
226.56 What are the lessee's record and reporting requirements for 
wells?
226.57 What line drilling limitations must a lessee comply with?
226.58 What are the requirements for marking wells and tank 
batteries?
226.59 What precautions must a lessee take to ensure natural 
formations are protected?
226.60 What are a lessee's obligations to maintain control of wells?
226.61 How does a lessee prevent waste of oil and gas and other 
marketable products?
226.62 How does a lessee measure and store oil?
226.63 How is gas measured?
226.64 When can a lessee use gas for lifting oil?
226.65 What site security standards apply to oil and gas and other 
marketable product leases?
226.66 What are a lessee's reporting requirements for accidents, 
fires, theft, and vandalism?
Subpart F--Penalties
226.67 What are the penalties for violations of lease terms?
226.68 What are the penalties for violation of certain operating 
regulations?
Subpart G--Appeals and Notices
226.69 Who can file an appeal?
226.70 Are the notices by the Superintendent binding?
226.71 Information collection.

    Authority: Sec. 3, 34 Stat. 543; secs. 1, 2, 45 Stat. 1478; sec. 
3, 52 Stat. 1034, 1035; sec. 2(a), 92 Stat. 1660.


Sec.  226.1  Definitions.

    As used in this part, terms have the meanings set forth in this 
section.
    Authorized representative of an oil lessee, gas lessee, or oil and 
gas lessee means any person, group, or groups of persons, partnership, 
association, company, corporation, organization, or agent employed by 
or contracted with a lessee or any subcontractor to conduct oil and gas 
operations or provide facilities to market oil and gas.
    Avoidably lost means the venting or flaring of produced gas or 
other marketable product without the prior authorization, approval, 
ratification, or acceptance of the Superintendent and the loss of 
produced oil or gas or other marketable product when the Superintendent 
determines that such loss occurred as a result of:
    (1) Negligence on the part of the lessee; or
    (2) The failure of the lessee to take all reasonable measures to 
prevent and/or control the loss; or
    (3) The failure of the lessee to comply fully with the applicable 
lease terms and regulations, applicable orders and notices, or the 
written orders of the Superintendent; or
    (4) Any combination of the foregoing.
    Condensate means liquid hydro-carbons (normally exceeding 40 
degrees of API gravity) recovered at the surface without resorting to 
processing. Condensate is the mixture of liquid hydrocarbons that 
results from condensation of petroleum hydrocarbons existing initially 
in a gaseous phase in an underground reservoir.
    Drainage means the migration of hydrocarbons, inert gases, or 
associated resources caused by production from other wells.
    Gas lessee means any person, firm, or corporation to whom a gas 
mining lease is made under the regulations in this part, or an 
authorized representative.
    Gas well means any well that:
    (1) Produces raw natural gas not associated with crude petroleum 
oil at the time of production; or
    (2) Produces more than 15,000 standard cubic feet of raw natural 
gas to each barrel of crude petroleum oil from the same producing 
formation.
    Lease means any contract approved by the United States under the 
Act of June 28, 1906 (34 Stat. 539), as amended, that authorizes 
exploration for, extraction of, or removal of oil or gas or other 
marketable product.
    Marketable condition means a condition in which lease products are 
sufficiently free from impurities and otherwise so conditioned that a 
purchaser will accept them under a sales contract typical for the field 
or area.
    Maximum ultimate economic recovery means the recovery of oil and 
gas and any other marketable product from leased lands that a prudent 
lessee could be expected to make from that field or reservoir given 
existing knowledge of reservoir and other pertinent facts and using 
common industry practices for primary, secondary or tertiary recovery 
operations.
    Natural gas liquids (NGLs) means those gas plant products 
consisting of ethane, propane, butane, or heavier liquid hydrocarbons.
    Notice to lessees (NTLs) means a written notice issued or adopted 
by the Superintendent. NTLs implement the regulations in this part and 
operating orders, and serve as instructions on specific item(s) of 
importance.
    Oil and gas lessee means any person, firm, or corporation to whom 
an oil and gas mining lease is made under the regulations in this part, 
or an authorized representative.
    Oil lessee means any person, firm, or corporation to whom an oil 
mining lease is made under the regulations in this part, or an 
authorized representative.
    Oil well means any well that produces one barrel or more of crude 
petroleum oil for each 15,000 standard cubic feet of raw natural gas.
    Onshore oil and gas order means a formal order issued or adopted by 
the Director of the Bureau of Indian Affairs, which implements and 
supplements the regulations in this part.
    Osage Minerals Council means the duly elected governing body of the 
Osage Nation or Tribe of Indians of Oklahoma vested with authority to 
enter into leases or take other actions on oil and gas mining and other 
marketable products pertaining to the Osage mineral estate.
    Other marketable product means a non-hydrocarbon product, including 
but not limited to helium, nitrogen, and carbon-dioxide, for which 
there is a market.
    Primary term means the basic period of time for which a lease is 
issued during which the lease contract may be kept in force by payment 
of rentals.
    Production in paying quantities means production from a lease of 
oil and/or gas of sufficient value to exceed direct operating costs and 
the cost of lease rentals or minimum royalties.
    Raw natural gas or gas means gas produced from oil and gas wells,

[[Page 27020]]

including all natural gas liquids before any treating or processing.
    Secretary means the Secretary of the Interior or the Secretary's 
authorized representative acting under delegated authority.
    Superintendent means the Superintendent of the Osage Agency, 
Pawhuska, Oklahoma, or the Superintendent's authorized representative 
acting under delegated authority, or such other person as the Secretary 
or Superintendent may delegate to fulfill the responsibilities and 
exercise the authorities under this part.
    Surface owner means any person or entity that owns a surface estate 
within Osage County, irrespective of whether the surface estate is held 
in fee, restricted fee or trust status.
    Waste of oil or gas or other marketable product means any act or 
failure to act by the lessee that the Superintendent finds was not 
necessary for proper development and production and that results in:
    (1) A reduction in the quantity or quality of oil and gas or other 
marketable product ultimately producible from a reservoir under prudent 
and proper operations; or
    (2) Avoidable surface loss of oil or gas or other marketable 
product.


Sec.  226.2  What requirements govern?

    All oil and gas activities or activities related to development of 
other marketable products conducted in Osage County are subject to:
    (a) The regulations in this part;
    (b) Lease terms;
    (c) Orders of the Superintendent; and
    (d) All other applicable laws, regulations, and authorities.

Subpart A--Leasing Procedure


Sec.  226.3  What orders and notices can BIA issue?

    (a) In accordance with applicable laws and regulations, the Bureau 
of Indian Affairs (BIA), after consultation with the Osage Minerals 
Council where appropriate, is authorized to:
    (1) Issue and make effective in Osage County oil and gas orders or 
notices to lessees (NTLs); or
    (2) Adopt onshore oil and gas orders, NTLs, or related oil and gas 
regulations issued by the Bureau of Land Management.
    (b) Adoptions by the Bureau of Indian Affairs remain in effect 
according to their terms and cannot be modified by any action of the 
Bureau of Land Management unless the Director issues further orders to 
that effect in accordance with the Administrative Procedure Act where 
applicable.


Sec.  226.4  What responsibilities does the Superintendent have?

    (a) The Superintendent is authorized and directed to:
    (1) Approve unitization, communitization, gas storage and other 
contractual agreements;
    (2) Assess compensatory royalty;
    (3) Approve suspensions of operations or production, or both;
    (4) Approve and monitor lessee proposals for drilling, development 
or production of oil and gas and any other marketable product;
    (5) Perform administrative reviews;
    (6) Impose monetary assessments or penalties;
    (7) Provide technical information and advice relative to oil and 
gas and any other marketable product development and operations;
    (8) Approve, inspect, and regulate the operations that are subject 
to the regulations in this part;
    (9) Require compliance with lease terms, with the regulations in 
this title and all other applicable regulations and laws; and
    (10) Require that all operations be conducted in a manner which 
protects natural resources and environmental quality, protects life and 
property, and results in the maximum ultimate recovery of oil and gas 
and any other marketable product with minimum waste and with minimum 
adverse effect on the ultimate recovery of other mineral resources 
unless otherwise approved by the Superintendent.
    (b) The Superintendent may issue written orders to govern specific 
lease operations. Before approving operations on a leasehold, the 
Superintendent must determine that the lease is in effect, that 
acceptable bond coverage has been provided, and that the proposed plan 
of operations is sound.
    (c) The Superintendent must establish procedures to ensure that 
each lease site which has a documented history of noncompliance with 
applicable provisions of law or regulations, lease terms, orders or 
directives be inspected at least once annually.


Sec.  226.5  What are the requirements for lease sales and approvals?

    (a) The steps in a lease sale are as follows:
    (1) A written application, together with any nomination fee, for 
tracts to be offered for lease shall be filed with the Superintendent.
    (2) The Superintendent, with the consent of the Osage Minerals 
Council, shall publish notices for the sale of oil leases, gas leases, 
and oil and gas leases to the highest responsible bidder on specific 
tracts of the unleased Osage mineral estate. The Superintendent may 
require any bidder to submit satisfactory evidence of his/her good 
faith and ability to comply with all provisions of the notice of sale.
    (3) A successful bidder must deposit with the Superintendent within 
5 business days following the sale, a cashier's check, money order, or 
electronic funds transfer in an amount not less than 25 percent of the 
cash bonus offered as a guaranty of good faith. Any and all bids are 
subject to acceptance by the Osage Minerals Council and approval by the 
Superintendent.
    (4) Within 20 days after being notified, the successful bidder must 
submit to the Superintendent the balance of the bonus, a $75 filing 
fee, and a completed lease form.
    (i) The Superintendent may extend the deadline for submitting the 
completed lease form, but no extension will be granted for remitting 
the balance of monies due.
    (ii) The deposit will be forfeited for the use and benefit of the 
Osage mineral estate if any of the following occur:
    (A) The bidder fails to pay the full consideration by the required 
deadline; or
    (B) The bidder fails to file the completed lease by the required 
deadline or extension thereof; or
    (C) The lease is rejected, pursuant to subsection 5, through no 
fault of the Osage Minerals Council or the Superintendent.
    (5) The Superintendent may reject a lease made on an accepted bid, 
upon satisfactory evidence of collusion, fraud, or other irregularity 
in connection with the notice of sale.
    (b) The Superintendent may approve leases made by the Osage 
Minerals Council in conformity with the notice of sale, regulations in 
this part, bonds, and other instruments required.
    (c) Within 30 calendar days following approval of a lease, the 
Superintendent shall post at the Agency, a legal description of the 
mineral estate that was leased.
    (d) Prior to approval by the Superintendent, each oil and/or gas 
lease shall be assessed and evaluated for their environmental impact in 
accordance with Bureau regulations implementing the National 
Environmental Policy Act and other applicable laws.
    (e) The lessee accepts a lease with the understanding that a 
mineral not covered by the lease may be leased separately.
    (f) No lease, assignment thereof, or interest therein will be 
approved to any employee or employees of the

[[Page 27021]]

Government and no such employee is permitted to acquire any interest in 
a corporation or other business entity holding a lease of the Osage 
mineral estate.
    (g) The Osage Minerals Council may utilize the following procedures 
among others, in entering into a lease:
    (1) A lease may be entered into through competitive bidding as 
outlined in paragraph (a)(2) of this section, negotiation, or a 
combination of both;
    (2) The Osage Minerals Council may request the Superintendent 
undertake the preparation, advertisement and negotiation of leases; 
and/or
    (3) The Osage Minerals Council may request the Superintendent to 
provide information regarding the current estimated value of any or all 
or each of the leases to the Osage Minerals Council based on comparable 
sales of Federal, Indian, State, and private leases.
    (h) The Superintendent may approve any lease made by the Osage 
Minerals Council.


Sec.  226.6  How does a lessee surrender a lease?

    (a) The lessee may, with the approval of the Superintendent and 
payment of a $75 filing fee, surrender all or any portion of any lease, 
have the lease cancelled as to the portion surrendered and be relieved 
from all future obligations and liabilities.
    (b) If the lease, or portion, being surrendered is owned in 
undivided interests by more than one party, then the following 
requirements apply:
    (1) All parties must join in the application for cancellation;
    (2) If the lease has been recorded, then the lessee must execute a 
release and record the same in the proper office;
    (3) Surrender does not entitle the lessee to a refund of the unused 
portion of rental paid in lieu of development, nor does it relieve the 
lessee and his or her sureties of any obligation and liability incurred 
prior to the surrender;
    (4) When there is a partial surrender of any lease and the acreage 
to be retained is less than 160 acres, the surrender is effective only 
with consent of the Osage Minerals Council and approval of the 
Superintendent.
    (c) The Superintendent cannot approve the surrender or partial 
surrender of a lease until a determination has been made that all wells 
have either been properly plugged and abandoned, and/or the future 
legal liability for plugging and abandoning wells within the lease or 
partial lease to be surrendered has been assumed in writing by another 
financially responsible party.


Sec.  226.7  What forms of payment are acceptable?

    Sums due under a lease contract and/or the regulations in this part 
must be paid in the manner and method specified by the Superintendent, 
unless otherwise specified in these regulations. Such sums constitute a 
prior lien on all equipment and unsold oil on the leased premises.


Sec.  226.8  How do changes in the current regulations impact leases?

    Leases issued pursuant to this part are subject to the current 
regulations of the Secretary, all of which are made a part of such 
leases: Provided, that no amendment or change of such regulations made 
after the approval of any lease operates to affect the term of the 
lease, rate of royalty, rental, or acreage unless agreed to by both 
parties and approved by the Superintendent.


Sec.  226.9  What are the bonding requirements for leases?

    Lessees shall furnish surety bonds or personal bonds acceptable to 
the Superintendent as follows:
    (a) The per-well ``Bonding Amount'' shall be $5,000.
    (b) A surety bond or personal bond equal to the Bonding Amount must 
be filed at the time an Application for Permit to Drill is approved 
and/or the lessee acquires liability for existing wells on a lease.
    (c) A lessee must at all times maintain on file with the 
Superintendent surety bonds and/or personal bonds in an amount equal to 
the Bonding Amount times the number of wells on the lessee's leases, up 
to a maximum of 25 wells.
    (d) To meet the requirements of this section, a surety bond must be 
issued by a qualified surety company approved by the Department of the 
Treasury (see Department of the Treasury Circular No. 570).
    (e) Personal bonds must be accompanied by at least one of the 
following:
    (1) A certificate of deposit issued by a financial institution, the 
deposits of which are federally insured, explicitly granting the 
Secretary full authority to demand immediate payment in case of default 
in the performance of the terms and conditions of the lease. The 
certificate must explicitly indicate on its face that Secretarial 
approval is required prior to redemption of the certificate of deposit 
by any party.
    (2) A cashier's check.
    (3) A certified check.
    (4) Negotiable Treasury securities of the United States of a value 
equal to the amount specified in the bond. Negotiable Treasury 
securities must be accompanied by a proper conveyance to the 
Superintendent of full authority to sell such securities in case of 
default in the performance of the terms and conditions of a lease.
    (5) An irrevocable letter of credit issued by a financial 
institution, the deposits of which are Federally insured, for a 
specific term, identifying the Superintendent as sole payee with full 
authority to demand immediate payment in the case of default in the 
performance of the terms and conditions of a lease. Letters of credit 
are subject to the following conditions:
    (i) The letter of credit must be issued only by a financial 
institution organized or authorized to do business in the United 
States;
    (ii) The letter of credit must be irrevocable during its term. A 
letter of credit used as security for any lease upon which drilling has 
taken place and final approval of all abandonment has not been given 
must be collected by the Superintendent if not replaced by other 
suitable bond or letter of credit at least 30 calendar days before its 
expiration date;
    (iii) The letter of credit must be payable to the Superintendent 
upon demand, in part or in full, upon receipt from the Superintendent 
of a notice of attachment stating the basis therefor, e.g., default in 
compliance with the lease terms and conditions or failure to file a 
replacement in accordance with paragraph (c)(5)(ii) of this section;
    (iv) The initial expiration date of the letter of credit must be at 
least 1 year following the date it is filed; and
    (v) The letter of credit must contain a provision for automatic 
renewal for periods of not less than 1 year in the absence of notice to 
the Superintendent at least 90 calendar days prior to the originally 
stated or any extended expiration date.
    (f) In lieu of a surety or personal bond required under this 
section, a bond in the penal sum of $150,000 may be filed with the 
Superintendent for full nationwide coverage of all leases to which the 
Lessee is or may become a party.


Sec.  226.10  Can the Superintendent increase the amount of the bond 
required?

    (a) The Superintendent may require an increase in the amount of any 
bond in appropriate circumstances, including, but not limited to, a 
history of previous violations, uncollected royalties due, or when the 
total cost of plugging existing wells and reclaiming lands exceeds the 
present bond amount based on the estimates determined by the 
Superintendent.

[[Page 27022]]

    (b) The increase in bond amount may be to any level specified by 
the Superintendent, but in no circumstances shall it exceed the total 
of the estimated costs of plugging and reclamation, the amount of 
uncollected royalties due, plus the amount of monies owed to the lessor 
due to previous violations remaining outstanding.


Sec.  226.11  When can the Superintendent release a bond?

    Within 45 calendar days of receiving written notice from a lessee 
that a well has been plugged or a lease has expired, the Superintendent 
must release the bond upon confirming that:
    (a) The well has been properly plugged and the well site has been 
reclaimed, or the lease site has been reclaimed;
    (b) All property has been removed (unless otherwise agreed to in 
writing by the surface owner).


Sec.  226.12  What forms are made a part of the regulations?

    Leases, assignments, and supporting instruments must be in the form 
prescribed by the Secretary, and such forms are hereby made a part of 
the regulations.


Sec.  226.13  What information must a corporation submit?

    (a) If the applicant for a lease is a corporation, it must file 
evidence of authority of its officers to execute papers; and with its 
first application it must also file a certified copy of its Articles of 
Incorporation and, if foreign to the State of Oklahoma, evidence 
showing compliance with the corporation laws thereof.
    (b) Whenever deemed advisable, the Superintendent may require a 
corporation to file any additional information necessary to carry out 
the purpose and intent of the regulations in this part, and such 
information must be furnished within a reasonable time.

Subpart B--Rental, Production and Royalty

Rental, Drilling and Production Obligations


Sec.  226.14  What are the requirements for rental, drilling, and 
production?

    (a) Oil leases, gas leases, and combination oil and gas leases. 
Unless the lessee completes and places in production a well producing 
and selling oil and/or gas in paying quantities on the land embraced 
within the lease within 12 months from the date of approval of the 
lease, or as otherwise provided in the lease terms, or 12 months from 
the date the Superintendent consents to drilling on any restricted 
homestead selection, the lease will terminate unless rental at the rate 
of not less than $3 per acre for an oil or gas lease, or not less than 
$6 per acre for a combination oil and gas lease, is paid at the 
beginning of the first year of the lease.
    (1) The lease may also be held for the remainder of its primary 
term without drilling upon payment of the specified rental annually in 
advance, commencing with the second lease year.
    (2) The lease will terminate as of the due date of the rental 
unless such rental is received by the Superintendent on or before said 
date.
    (3) The completion of a well producing in paying quantities will, 
for so long as such production continues, relieve the lessee from any 
further payment of rental, except that, should such production cease 
during the primary term the lease may be continued only during the 
remaining primary term of the lease by payment of advance rental which 
will be due on the next anniversary date of the lease. Rental must be 
paid on the basis of a full year and no refund will be made of advance 
rental paid in compliance with the regulations in this part.
    (b) The Superintendent may, with the consent of and under terms 
approved by the Osage Minerals Council, grant an extension of the 
primary term of a lease on which actual drilling of a well has 
commenced within the term thereof, or for the purpose of enabling the 
lessee to obtain a market for his/her oil and/or gas production.
    (c) Irrespective of whether the lessee has drilled or paid rental, 
the Superintendent in his/her discretion may order further development 
of any leased acreage or a specific horizon in any lease term if, in 
his/her opinion, a prudent lessee would conduct further development. A 
prudent lessee will diligently develop the minerals underlying the 
leasehold. The Osage Minerals Council has the right to request a 
determination of whether there is diligent development by the 
Superintendent as to any lease and may submit any materials or analysis 
to support its request. Upon receipt of a request, the Superintendent 
will evaluate the request and may require additional information be 
submitted by the lessee and the Osage Minerals Council before making a 
final determination.
    (d) If the lessee refuses to comply with an order by the 
Superintendent to diligently develop its leasehold as a result of a 
determination under paragraph (c) of this section, the refusal will be 
considered a violation of the lease terms and said lease will be 
terminated as to the acreage or horizon the further development of 
which was ordered, after any appeal of an order. The Superintendent 
will promptly notify the lessee of such termination.
    (e) Except for a lease during its primary term for which rental 
payment has been paid, a lease that does not produce in paying 
quantities for 120 consecutive calendar days is thereby terminated by 
operation of law, effective immediately. The Superintendent will notify 
the lessee of such termination.
    (1) The Superintendent has the authority before termination to 
approve in writing a temporary suspension of operations tolling the 
120-day period for a specified number of days, due to force majeure, 
other hardship, or other extenuating circumstance.
    (2) Any request for a temporary suspension of operations must be 
made in writing to the Superintendent at least 20 calendar days prior 
to the expiration of the 120-day period in which the lease has not 
produced in paying quantities.
    (3) The Superintendent, for good cause, may extend in writing the 
time of any temporary suspension of operations.
    (4) The Superintendent must provide a copy of any decision under 
this paragraph (e) to the Osage Minerals Council at the same time it is 
delivered to the lessee.
    (f) Whenever the Osage Minerals Council identifies any lease that 
has terminated or may be subject to termination for any reason, the 
Osage Minerals Council has the right to request in writing appropriate 
action by the Superintendent, including but not limited to the issuance 
of a notice of termination to the lessee, and may submit any materials 
or analysis in support of its request. Upon receipt of such a request, 
within 90 calendar days the Superintendent must either take the 
requested action or issue a written decision responsive to the request.
    (g) The Superintendent may impose restrictions as to time of 
drilling and rate of production from any well or wells when the 
Superintendent judges these restrictions to be necessary or proper for 
the protection of the natural resources of the leased land and the 
interests of the Osage mineral estate. The Superintendent may consider, 
among other things, Federal and Oklahoma laws regulating either 
drilling or production.
    (h) If a lessee holds both an oil lease and a gas lease covering 
the same acreage, such lessee is subject to the provisions of this 
section as to both the oil lease and the gas lease.

[[Page 27023]]

Sec.  226.15  What are the lessee's obligations regarding drainage?

    (a) Where lands in any leases are being drained of their oil or gas 
content by wells outside the lease, the lessee must drill or modify and 
produce all wells necessary to protect the leased lands from drainage 
within a reasonable time after the earlier of when the lessee knew or 
should have known of the drainage. In lieu of drilling or modifying 
necessary wells, the lessee may, with the consent of the 
Superintendent, pay compensatory royalty for drainage that has occurred 
or is occurring.
    (b) Actions under paragraph (a) of this section are not required if 
the lessee proves to the Superintendent that when it first knew or had 
constructive notice of drainage it could not produce a paying quantity 
of oil or gas from a protective well on the lease for a reasonable 
profit above the cost of drilling, completing and operating the 
protective well.
    (c) A lessee has constructive notice that drainage may be occurring 
when well completion or first production reports for the draining well 
are publicly available, or, if the lessee operates or owns any interest 
in the draining well or lease, upon completion of drill stem, 
production, pressure analysis, or flow tests of the draining well.
    (d) If a lessee assigns its interest in a lease or transfers its 
operating rights, it is liable for drainage that occurs before the date 
the assignment or transfer is approved by the Superintendent. Any 
lessee who acquires an interest in a lease on which the Superintendent 
has determined that the assignor was required to take action under 
paragraph (a) of this section is liable for paying compensatory 
royalties associated with production occurring on and after the date 
the assignment or transfer is approved by the Superintendent.


Sec.  226.16  What can the Superintendent do when drainage occurs?

    (a) The Superintendent may send a demand letter by certified mail, 
return receipt requested, or personally serve the lessee with notice, 
if the Superintendent believes that drainage is occurring. However, the 
lessee's responsibility to take protective action arises when it first 
knew or had constructive notice of the drainage, even when that date 
precedes the demand letter.
    (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, the Superintendent will determine this on a case-by-case 
basis. The Superintendent will consider several factors, including, but 
not limited to:
    (1) The 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 that provide limited time frames in 
which to drill; and
    (6) Weather conditions.
    (c) If the Superintendent determines that a lessee did not take 
protective action in a timely manner, the lessee will owe compensatory 
royalty for the period of the delay.
    (d) The Superintendent will assess compensatory royalty beginning 
on the first day of the month following the earliest reasonable time 
the lessee should have taken protective action and continuing until:
    (1) The lessee drills sufficient economic protective wells and the 
wells remain in continuous production;
    (2) The draining well stops producing; or
    (3) The lessee relinquishes its interest in the lease.

Lease Term


Sec.  226.17  What is the term of a lease?

    Leases issued under this part are for a primary term as established 
by the Osage Minerals Council, approved by the Superintendent, and so 
stated in the notice of sale of such leases and so long thereafter as 
the minerals specified are produced in paying quantities.

Royalty Payments


Sec.  226.18  What is the royalty rate for oil?

    (a) The lessee must deliver to the Superintendent a royalty on 
production removed or sold from the lease, that proportion specified in 
the notice of sale (but not less than 20 percent) of the amount or 
value of the oil determined under paragraph (b) of this section.
    (b) Unless the Osage Minerals Council, with approval of the 
Superintendent, elects to take the royalty in kind, the settlement 
value per barrel is the greater of:
    (1) The average NYMEX daily price of oil at Cushing, Oklahoma, for 
the month in which the produced oil was sold, adjusted for gravity 
using the scale applicable under Sec.  226.19. The applicable average 
NYMEX daily price of oil at Cushing, Oklahoma and gravity adjustment 
scale will be available from the Superintendent upon request, on or 
before the fifth day of the month following production; or
    (2) The actual selling price for the transaction as adjusted for 
gravity.
    (c) Should the lessor, with approval of the Secretary, elect to 
take the royalty in kind, the lessee must furnish free storage for 
royalty oil for a period not to exceed 60 calendar days from date of 
production after notice of such election.


Sec.  226.19  How is the gravity adjustment calculated?

    (a) The gravity adjustment of Average Daily NYMEX Price of oil at 
Cushing, Oklahoma under Sec.  226.18(b)(1) is a deduction from the 
price per barrel, as follows:

------------------------------------------------------------------------
If the gravity of the oil is . .
                .                  the rate is . . .    for each . . .
------------------------------------------------------------------------
(1) At or between 40.0 and 44.9   zero.
 degrees.
(2) At or between 35.0 and 39.9   $ 0.02............  degree or fraction
 degrees.                                              thereof below
                                                       40.0.
(3) Below 35.0 degrees..........  $ 0.10 plus an      one-tenth of one
                                   additional $        degree below
                                   0.015               35.0.
(4) Above 44.9 degrees..........  $ 0.015...........  for each one-tenth
                                                       of one degree
                                                       above 44.9.
------------------------------------------------------------------------

    (b) The Superintendent may, on or before the fifth day of the month 
following production, publish a gravity adjustment scale for oil of 
gravity below 40.0 degrees or above 44.9 degrees that supersedes this 
paragraph, but only if the Superintendent determines, based on 
substantial evidence, that market conditions so warrant.


Sec.  226.20  How is the royalty on gas calculated?

    (a) All gas removed from the lease from which it is produced must 
be metered before removal unless otherwise approved by the 
Superintendent and be subject to a royalty of not less than 20 percent 
of the gross proceeds of the gas. Unless the Osage Minerals Council, 
with approval of the Superintendent, elects to take the royalty in 
kind, gross proceeds must be

[[Page 27024]]

calculated under paragraph (b) of this section; except that the 
Superintendent may direct (and the Osage Minerals Council may request 
that the Superintendent direct) any lessee, upon no less than 30 
calendar days notice, to calculate gross proceeds at the higher royalty 
value of paragraph (b) or paragraph (c) of this section.
    (b) Under this paragraph, gross proceeds of the gas must be 
determined by multiplying the measured volume of gas at the well (Mcf), 
times the heating volume of the gas (MMBtu/Mcf), times the index price 
of the gas ($/MMBtu) for Oklahoma Zone 1 published by the Department of 
the Interior's Office of Natural Resources Revenue. If that Monthly 
Index Price ceases to be published and/or is not otherwise available, 
the price must be calculated in a comparable manner to be determined by 
the Superintendent. The heating value of the gas shall be calculated in 
accordance with American Petroleum Institute MPMS Chapter 14, Section 
5, and shall be reported under the following conditions: Dry (no water 
vapor), real, gross, and adjusted pressure of 14.73 psi and a 
temperature of 60 degrees Fahrenheit. If any lessee supplies gas 
produced from one lease for operation and/or development of any other 
lease, including another lease held by the same lessee, the royalty 
calculated under this section must be paid on all gas so used.
    (c) Under this paragraph, gross proceeds of the gas will be 100 
percent of the actual proceeds from sales of all residue gas produced 
from the lease and one hundred percent of the actual proceeds from 
sales of all natural gas liquids produced from the lease minus the 
actual, reasonable cost of processing not to exceed 50 percent of the 
actual sales value of the natural gas liquids (including drip 
condensate). If the actual reasonable cost of processing cannot be 
obtained, upon approval by the Superintendent, the lessee may determine 
such cost in accordance with the alternative methodology and procedures 
in 30 CFR 1206.180(a) or (b). No other deductions of any kind, whether 
monetary or volumetric or otherwise, for any purpose, including but not 
limited to compression, dehydration, gathering, treating, or 
transportation are allowed.


Sec.  226.21  Who determines royalty on lost or wasted minerals?

    Royalty is due on all oil and gas wasted or avoidably lost, the 
volume and quality of which will be determined by the Superintendent 
after taking into consideration information provided by the lessee, but 
resolving all doubts about volume and quality in favor of the lessor.


Sec.  226.22  What is the minimum royalty payment for all leases?

    Minimum royalty will be owed in the event the royalty paid from 
producing leases during any year is less than the annual rental 
specified for the lease. Minimum royalty is due and payable at the end 
of the lease year in an amount equal to the annual rental less the 
amount paid in royalty on production.
    (a) After the primary term, the lessee must submit with his/her 
payment evidence that the lease is producing in paying quantities.
    (b) The Superintendent is authorized to determine whether the lease 
is actually producing in paying quantities or has terminated for lack 
of such production.
    (c) Payment for any underpayment not made within the time specified 
is subject to a late charge at the rate of not less than 1\1/2\ percent 
per month for each month or fraction thereof until paid, or such other 
rate as may be set by the Superintendent after consultation with the 
Osage Minerals Council.


Sec.  226.23  What royalty is due on other marketable products?

    A royalty on other marketable products must be paid at the rate of 
not less than 20 percent of the actual sales value of the other 
marketable products sold, in addition to any other royalty due on oil 
or gas.


Sec.  226.24  What purchase options does the Federal Government have?

    Any of the executive departments of the United States Government 
have the option to purchase all or any part of the oil produced from 
any lease at not less than the price as defined in Sec.  226.18.


Sec.  226.25  How are royalty payments made?

    (a) Royalty payments due may be paid by either the purchaser or the 
lessee, provided that the lessee must provide a written agreement to 
the Superintendent if the purchaser has agreed to be the responsible 
party for making royalty payments.
    (b) All payments are due by the end of the month following the 
month during which the oil and gas is produced and sold, except when 
the last day of the month falls on a weekend or holiday. In such cases, 
payments are due on the first business day of the succeeding month. All 
payments must cover the sales of the preceding month.
    (c) Failure to make such payments subjects the responsible party as 
provided in paragraph (a) of this section to a late charge at the rate 
of not less than 1\1/2\ percent for each month or fraction thereof 
until paid.


Sec.  226.26  What reports are required to be provided?

    The lessee must furnish certified monthly reports covering all 
operations in a form specified by the Superintendent, whether there has 
been production or not, indicating therein the total amount of oil, raw 
natural gas, and other products subject to royalty payment, by the end 
of the month following the month during which the oil and gas is 
produced and sold, except when the last day of the month falls on a 
weekend or holiday. In such cases, reports are due on the first 
business day of the succeeding month.
    (a) Reports covering oil production must include the date of each 
sale of oil, well or lease identity, lessee, purchaser, volume of oil 
sold, gravity of oil sold, price paid per barrel for the sale, 40-
degree price used for the sale, gravity adjustment scale used for the 
sale, and total amount paid for the sale.
    (b) Reports covering gas production must contain the total volume 
of raw natural gas measured at the well, the BTU value of raw natural 
gas produced at the well, the periodic gas analysis applicable to the 
sale, and the total value paid for the raw natural gas, residue gas, 
natural gas liquids, and condensate.
    (c) Report forms must be submitted in .csv (comma separated value) 
or ASCII format, or such other equivalent format specified by the 
Superintendent. The Superintendent must specify the method of 
transmittal. The Superintendent may specify that lessees must submit 
the reports and information required by this section directly to other 
agencies within the Department of the Interior, in lieu of the 
Superintendent.
    (d) The Superintendent must provide to the Osage Minerals Council 
copies of all reports under this section on at least a quarterly basis 
in the format originally received by the lessee. Upon written request 
by the Osage Minerals Council, the Superintendent will require lessees 
to provide to the Osage Minerals Council copies of run tickets.
    (e) Failure to remit reports subjects the lessee to further 
penalties as provided in Sec.  226.67 and Sec.  226.68 and subjects any 
royalty payment contract or division order to termination.


Sec.  226.27  Can a lessee enter into royalty payment contracts and 
division orders?

    (a) The lessee may enter into division orders or contracts with the 
purchasers of oil, gas, or derivatives therefrom that will provide for 
the purchaser to make payment of royalty in accordance with

[[Page 27025]]

Sec.  226.25. The following requirements apply in these cases:
    (1) The division orders or contracts do not relieve the lessee from 
responsibility for the payment of the royalty should the purchaser fail 
to pay.
    (2) No production may be removed from the leased premises until a 
division order and/or contract and its terms are approved by the 
Superintendent:
    (3) The Superintendent may grant temporary permission to run oil or 
gas from a lease pending the approval of a division order or contract.
    (4) The lessee must file a certified monthly report and pay royalty 
on the value of all oil and gas used off the premises for development 
and operating purposes.
    (5) The lessee is responsible for the correct measurement and 
reporting of all oil and/or gas taken from the leased premises.
    (b) The lessee must require the purchaser of oil and/or gas from 
its lease or leases to furnish the Superintendent, a statement 
reporting the gross barrels of oil and/or gross Mcf of gas sold and 
sales price per barrel and/or gross Mcf during the preceding month, by 
the end of the month following the month during which the oil and gas 
is produced and sold, except when the last day of the month falls on a 
weekend or holiday. In such cases, statements are due on the first 
business day of the succeeding month.

Unit Leases, Assignments and Related Instruments


Sec.  226.28  When is unitization allowed?

    The Osage Minerals Council and the lessee or lessees, may, with the 
approval of the Superintendent, unitize or merge, two or more oil or 
oil and gas leases into a unit or cooperative operating plan to promote 
the greatest ultimate recovery of oil and gas from a common source of 
supply or portion thereof embracing the lands covered by such lease or 
leases.
    (a) The cooperative or unit agreement is subject to the regulations 
in this part and applicable laws governing the leasing of the Osage 
mineral estate.
    (b) Any agreement between the parties in interest to terminate a 
unit or cooperative agreement as to all or any portion of the lands 
included must be submitted to the Superintendent for his/her approval.
    (c) Upon approval of unit termination under paragraph (b) of this 
section, the leases included under the cooperative or unit agreement 
will be restored to their original terms.
    (d) For the purpose of preventing waste and to promote the greatest 
ultimate recovery of oil and gas from a common source of supply or 
portion thereof, all oil leases, oil and gas leases, and gas leases 
issued under this part may be required to join a unit development plan 
affecting the leased lands by the Superintendent with the consent of 
the Osage Minerals Council. This plan must adequately protect the 
rights of all parties in interest, including the Osage mineral estate.


Sec.  226.29  How are leases assigned?

    Leases or any interest therein may be assigned or transferred only 
with the approval of the Superintendent. The assignee must be qualified 
to hold such lease under existing rules and regulations and furnish a 
satisfactory bond conditioned for the faithful performance of the 
covenants and conditions thereof.
    (a) The lessee must assign either his/her entire interest in a 
lease or legal subdivision thereof, or an undivided interest in the 
whole lease: Provided, however, that the Superintendent may approve an 
assignment that covers only a portion of a lease with the consent of 
the Osage Minerals Council. Approval by the Superintendent of a lease 
assignment or transfer of an interest in a lease or legal subdivision, 
is subject to the following:
    (1) After the Superintendent approves the assignment or transfer, 
the lessee who made the assignment will continue to be responsible, 
jointly and severally with the assignee, 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 that were drilled, 
installed, or used before the effective date of the assignment or 
transfer.
    (2) The assignee agrees to comply with the terms of the original 
lease as it applies to the rights that were acquired. Among other 
obligations, the assignee must plug and abandon all unplugged wells, 
reclaim the lease site, and remedy all environmental problems in 
existence that a purchaser exercising reasonable diligence should have 
known at the time of the transfer. The assignee must also maintain a 
bond in accordance with these regulations.
    (b) If a lease is divided by the assignment of an entire interest 
in any part, each part will become a separate lease and the assignee is 
bound to comply with all the terms and conditions of the original 
lease.
    (c) A fully executed copy of the assignment must be filed with the 
Superintendent within 30 calendar days after the date of execution by 
all parties. If requested within the 30-day period, the Superintendent 
may grant an extension of 15 calendar days.
    (d) A filing fee of $75 must accompany each assignment.


Sec.  226.30  Are overriding royalty agreements allowed?

    Agreements creating overriding royalties or payments out of 
production are not considered as an interest in a lease as such term is 
used in Sec.  226.29. Agreements creating overriding royalties or 
payments out of production are hereby authorized and the approval of 
the Department of the Interior or any agency thereof is not required 
with respect thereto, but nothing in any such agreement modifies any of 
the obligations of the lessee under its lease and the regulations in 
this part. All such obligations are to remain in full force and effect, 
the same as if free of any such royalties or payments.
    (a) The existence of agreements creating overriding royalties or 
payments out of production, whether or not actually paid, will not be 
considered in justifying the shutdown or abandonment of any well.
    (b) Agreements creating overriding royalties or payments out of 
production need not be filed with the Superintendent unless 
incorporated in assignments or instruments required to be filed 
pursuant to Sec.  226.29.


Sec.  226.31  When are drilling contracts allowed?

    The Superintendent is authorized to approve drilling contracts with 
a stipulation that such approval does not in any way bind or require 
the Department to approve subsequent assignments that may be 
contemplated or provided for in the particular drilling contract 
approved by the Department. Approval merely authorizes entry on the 
lease for the purpose of development work.


Sec.  226.32  When can an oil lease and a gas lease be combined?

    A lessee owning both an oil lease and gas lease covering the same 
acreage is authorized to convert such leases to a combination oil and 
gas lease.

Subpart C--Operations


Sec.  226.33  What are the general requirements governing operations?

    (a) The lessee must comply with applicable laws and regulations; 
with the lease terms; and with orders and instructions of the 
Superintendent. These include, but are not limited to, conducting all 
operations in a manner that:

[[Page 27026]]

    (1) Ensures the proper handling, measurement, disposition, and site 
security of leasehold production;
    (2) Protects other natural resources and environmental quality;
    (3) Protects life and property; and
    (4) Results in maximum ultimate economic recovery of oil and gas 
and other marketable products with minimum waste and with minimum 
adverse effect on ultimate recovery of other mineral resources.
    (b) The lessee must permit properly identified authorized 
representatives of the Superintendent to enter upon, travel across, and 
inspect lease sites and records normally kept on the lease pertinent 
thereto without advance notice. Inspections normally will be conducted 
during those hours when responsible persons are expected to be present 
at the operation being inspected. Such permission must include access 
to secured facilities on such lease sites for the purpose of making any 
inspection or investigation for determining whether there is compliance 
with applicable law, the regulations in this part, and any applicable 
orders, notices or directives.
    (c) For the purpose of making any inspection or investigation, the 
Superintendent has the same right to enter upon or travel across any 
lease site as the lessee.


Sec.  226.34  What requirements apply to commencement of operations on 
a lease?

    (a) No operations are permitted upon any tract of land until a 
lease covering such tract is approved by the Superintendent. The 
Superintendent may, however, grant authority to any party under such 
lease, consistent with the regulations in this part that he or she 
deems proper, to conduct geophysical and geological exploration work.
    (b) The lessee must submit applications on forms to be furnished by 
the Superintendent and secure approval before:
    (1) Well drilling, treating, or workover operations are started on 
the leased premises.
    (2) Removing casing from any well.
    (c) The lessee must notify the Superintendent a reasonable time in 
advance of starting work, of intention to drill, redrill, deepen, plug, 
or abandon a well.
    (d) Prior to approving any operations under this section, the 
Superintendent will determine whether an environmental assessment or 
other information is required to comply with applicable laws such as 
the National Environmental Policy Act. If an environmental assessment 
is deemed necessary, the Superintendent will notify the lessee that it 
must submit a draft environmental assessment, which will be reviewed 
and evaluated by the Superintendent before deciding whether to prepare 
an Environmental Impact Statement or issue a Finding of No Significant 
Impact. The Superintendent will also notify the lessee of any other 
information that must be submitted, such as cultural resources survey 
reports/archeological surveys when needed to comply with the National 
Historic Preservation Act and the Secretary's Standards and Guidelines 
for Archeology and Historic Preservation.


Sec.  226.35  How does a lessee acquire permission to begin operations 
on a restricted homestead allotment?

    (a) The lessee may conduct operations within or upon a restricted 
homestead selection only with the written consent of the 
Superintendent.
    (b) If the allottee is unwilling to permit operations on his/her 
homestead, the Superintendent will cause an examination of the premises 
to be made with the allottee and lessee or his/her representative. Upon 
finding that the interests of the Osage mineral estate require that the 
tract be developed, the Superintendent will endeavor to have the 
parties agree upon the terms under which operations on the homestead 
may be conducted.
    (c) In the event the allottee and lessee cannot reach an agreement, 
the matter must be presented by all parties before the Osage Minerals 
Council, and the Council will make its recommendations. Such 
recommendations will be considered as final and binding upon the 
allottee and lessee. A guardian may represent the allottee. Where no 
one is authorized or where no person is deemed by the Superintendent to 
be a proper party to speak for a person of unsound mind or feeble 
understanding, the Principal Chief of the Osage Nation will represent 
him.
    (d) If the allottee or his/her representative does not appear 
before the Osage Minerals Council when notified by the Superintendent, 
or if the Council fails to act within 10 calendar days after the matter 
is referred to it, the Superintendent may authorize the lessee to 
proceed with operations in conformity with the provisions of his/her 
lease and the regulations in this part.


Sec.  226.36  What kind of notice and information is required to be 
given surface owners prior to commencement of drilling operations?

    (a) The lessee must notify or attempt to notify the surface owner 
in one general written notification sent by certified mail with a copy 
to the Superintendent that it plans to begin conducting the following 
activities over the term of its lease: Archeological or biological 
surveys, or staking of wells.
    (b) No operations of any kind may commence until the lessee or its 
authorized representative meets with the surface owner or his/her 
representative. The lessee must request the meeting in writing by 
certified mail and provide a copy of the letter to the Superintendent. 
Unless waived by the Superintendent or otherwise agreed to between the 
lessee and surface owner, such meeting must be held at least 10 
calendar days prior to the commencement or any operations. At such 
meeting lessee or its authorized representative must comply with the 
following requirements:
    (1) Indicate the location of the well or wells to be drilled.
    (2) Arrange for a route of ingress and egress. Upon failure to 
agree on a route of ingress and egress, said route will be set by the 
Superintendent after the Superintendent has notified or attempted to 
notify both the surface owner and lessee in writing of their 
opportunity to meet and submit information for consideration before a 
final decision is made.
    (3) Furnish to said surface owners the name and address of the 
party or representative upon whom the surface owner must serve any 
claim for damages which he may sustain from mineral development or 
operations, and as to the procedure for settlement thereof as provided 
in Sec.  226.41.
    (4) Where the drilling is to be on restricted land, the lessee or 
its authorized representative must meet with and provide the 
information in paragraphs (b)(1)-(3) of this section to the 
Superintendent.
    (5) When the surface owner or its representative cannot be 
contacted at the last known address or has not accepted a meeting 
request within 30 calendar days of receipt of the request, the 
Superintendent is required to authorize lessee, in writing, to proceed 
with operations.


Sec.  226.37  How much of the surface may a lessee use?

    The lessee or its authorized representative has the right to use so 
much of the surface of the land within the Osage mineral estate as may 
be reasonable for operations and marketing. This includes, but is not 
limited to the right to, lay and maintain pipelines, electric lines, 
pull rods, other appliances necessary for operations and marketing, and 
the right-of-way for ingress and egress to any point of operations.

[[Page 27027]]

    (a) If the lessee and surface owner are unable to agree as to the 
routing of pipelines, electric lines, etc., said routing will be set by 
the Superintendent after the Superintendent has notified or attempted 
to notify both the surface owner and lessee in writing of their 
opportunity to meet and submit information for consideration before a 
final decision is made.
    (b) The right to use water for lease operations is established by 
Sec.  226.48.
    (c) The lessee must conduct its operations in a workmanlike manner, 
commit no waste and allow none to be committed upon the land, nor 
permit any avoidable nuisance to be maintained on the premises under 
its control.


Sec.  226.38  What commencement money must the lessee pay to the 
surface owner?

    (a) Before commencing actual exploration and/or development, the 
lessee must pay or tender to the surface owner commencement money in 
the amount of $25 per shot hole for explosive source (for the 
acquisition of Single Fold (100 per cent Seismic)), or $400 per linear 
mile for surface source data acquisition. For the purpose of conducting 
a 3D seismic survey, the lessee must pay commencement money in the 
amount of $10 per acre occupied during the time the survey is 
conducted. The lessee must also pay commencement money in the amount of 
$2500 for each well.
    (1) After payment of commencement money the lessee will be entitled 
to immediate possession of the drilling site.
    (2) Commencement money will not be required for the redrilling of a 
well which was originally drilled under the current lease.
    (3) A drilling site must be held to the minimum area essential for 
operations and not exceed one and one-half acres in area unless 
authorized by the Superintendent.
    (4) Commencement money is a credit toward the settlement of the 
total damages.
    (5) Acceptance of commencement money by the surface owner does not 
affect its right to compensation for damages as described in Sec.  
226.40, occasioned by the drilling and completion of the well for which 
it was paid.
    (6) Since actual damage to the surface from operations cannot 
necessarily be ascertained prior to the completion of a well as a 
serviceable well or dry hole, a damage settlement covering the drilling 
operation need not be made until after completion of drilling 
operations.
    (b) Where the surface is restricted land, commencement money must 
be paid to the Superintendent for the landowner. All other surface 
owners must be paid or tendered such commencement money directly.
    (1) Where such surface owners are neither residents of Osage 
County, nor have a representative located therein, such payment must be 
made or tendered to the last known address of the surface owner at 
least 5 calendar days before commencing drilling operation on any well.
    (2) If the lessee is unable to reach the owner of the surface of 
the land for the purpose of tendering the commencement money or if the 
owner of the surface of the land refuses to accept the same, the lessee 
must deposit such amount with the Superintendent by check payable to 
the Bureau of Indian Affairs. The Superintendent must thereupon advise 
the owner of the surface of the land by mail at his/her last known 
address that the commencement money is being held for payment to him 
upon his/her written request.


Sec.  226.39  What fees must lessee pay to a surface owner for tank 
siting?

    The lessee must pay fees for each tank sited at the rate of $500 
per tank, except that:
    (a) No payment is due for a tank temporarily set on a well location 
site for drilling, completing, or testing; and
    (b) The sum to be paid for a tank occupying an area more than 2500 
square feet will be agreed upon between the surface owner and lessee 
or, on failure to agree, the same will be determined by arbitration as 
provided by Sec.  226.41.


Sec.  226.40  What is a settlement of damages claimed?

    (a) The lessee or its authorized representative or geophysical 
permittee must pay for all damages to growing crops, any improvements 
on the lands, and all other surface damages as may be occasioned by 
operations. Commencement money will be credited toward the settlement 
of the total damages occasioned by the drilling and completion of the 
well for which it was paid. Such damages must be paid to the owner of 
the surface and by him apportioned among the parties interested in the 
surface, whether as owner, surface lessee, or otherwise, as the parties 
may mutually agree or as their interests may appear. If the lessee or 
its authorized representative and surface owner are unable to agree 
concerning damages, the same will be determined by arbitration as 
provided by Sec.  226.41.
    (b) Surface owners must notify their lessees or tenants of the 
regulations in this part and of the necessary procedure to follow in 
all cases of alleged damages. If so authorized in writing, surface 
lessees or tenants may represent the surface owners.
    (c) In settlement of damages on restricted land, all sums due and 
payable must be paid to the Superintendent for credit to the account of 
the Indian entitled thereto. The Superintendent will make the 
apportionment between the Indian landowner or owners and surface lessee 
of record.
    (d) Any person claiming damages to an interest in any leased tract, 
must furnish to the Superintendent a statement in writing showing its 
claimed interest. Failure to furnish such statement will constitute a 
waiver of notice and estop said person from claiming any part of such 
damages after the same has been disbursed.


Sec.  226.41  What is the procedure for settlement of damages claimed?

    Where the surface owner or his/her lessee suffers damage due to the 
oil and gas operations and/or marketing of oil or gas by lessee or its 
authorized representative, the procedure for recovery is as follows:
    (a) The party or parties aggrieved will, as soon as possible after 
the discovery of any damages, serve written notice to lessee or its 
authorized representative. The written notice must describe the nature 
and location of the alleged damages, the date of occurrence, the names 
of the party or parties causing said damages, and the amount of 
damages. This requirement does not limit the time within which action 
may be brought in the courts to less than the 90-day period allowed by 
section 2 of the Act of March 2, 1929 (45 Stat. 1478, 1479).
    (b) If the alleged damages are not adjusted at the time of such 
notice, the lessee or its authorized representative must try to adjust 
the claim with the party or parties aggrieved within 20 calendar days 
from receipt of the notice. If the claimant is the owner of restricted 
property and a settlement results, a copy of the settlement agreement 
must be submitted to the Superintendent for approval. If the settlement 
agreement concerning the restricted property is approved by the 
Superintendent, payment must be made to the Superintendent for the 
benefit of said claimant.
    (c) If the parties fail to adjust the claim within the 20 calendar 
days

[[Page 27028]]

specified, then within 10 calendar days thereafter each of the 
interested parties must appoint an arbitrator who immediately upon 
their appointment must agree upon a third arbitrator. If the two 
arbitrators fail to agree upon a third arbitrator within 10 calendar 
days, they must immediately notify the parties in interest. If said 
parties cannot agree upon a third arbitrator within 5 calendar days 
after receipt of such notice, the Superintendent will appoint the third 
arbitrator.
    (d) As soon as the third arbitrator is appointed, the arbitrators 
must meet; hear the evidence and arguments of the parties; and examine 
the lands, crops, improvements, or other property alleged to have been 
injured. Within 10 calendar days they will render their decision as to 
the amount of the damage due. The arbitrators will be disinterested 
persons. The fees and expenses of the third arbitrator must be borne 
equally by the claimant and the lessee or its authorized 
representative. Each lessee or its authorized representative and 
claimant must pay the fee and expenses for the arbitrator appointed by 
him.
    (e) When an act of an oil or gas lessee or its authorized 
representative results in injury to both the surface owner and his/her 
lessee, the parties aggrieved must join in the appointment of an 
arbitrator. Where the injury complained of is chargeable to more than 
one oil or gas lessee, or its authorized representative, all such 
chargeable lessees or representatives must join in the appointment of 
an arbitrator.
    (f) Any two of the arbitrators may make a decision as to the amount 
of damage due. The decision must be in writing and served forthwith 
upon the parties in interest. Each party has 90 calendar days from the 
date the decision is served in which to file an action in a court of 
competent jurisdiction. If no such action is filed within said time and 
the award is against the lessee or its authorized representative, he/
she must pay the same, together with interest at an annual rate 
established for the Internal Revenue Service from date of award, within 
10 calendar days after the expiration of said period for filing an 
action.
    (g) The lessee or its authorized representative must file with the 
Superintendent a report on each settlement agreement, setting out the 
nature and location of the damage, date, and amount of the settlement, 
and any other pertinent information.


Sec.  226.42  What are a lessee's obligations for production?

    (a) The lessee must put into marketable condition at no cost to the 
lessor, all oil, gas, and other marketable products produced from the 
leased land.
    (b) Where oil accumulates in a pit, such oil must either be:
    (1) Recirculated through the regular treating system and returned 
to the stock tanks for sale; or
    (2) Pumped into a stock tank without treatment and measured for 
sale in the same manner as from any sales tank in accordance with 
applicable orders and notices.
    (c) In the absence of prior approval from the Superintendent, no 
oil may be pumped into a pit except in an emergency. Each such pumping 
occurrence must be reported to the Superintendent and the oil promptly 
recovered in accordance with applicable orders and notices.


Sec.  226.43  What documentation is required for transportation of oil 
or gas or other marketable product?

    (a) Any person engaged in transporting by motor vehicle any oil 
from any lease site, or allocated to any such lease site, must carry on 
his/her person, in his/her vehicle, or in his/her immediate control, 
documentation showing at a minimum; the amount, origin, and intended 
first purchaser of the oil.
    (b) Any person engaged in transporting any oil or gas or other 
marketable product by pipeline produced from or allocated to any lease 
site, must maintain documentation showing, at a minimum, the amount, 
origin, and intended first purchaser of such oil or gas or other 
marketable product.
    (c) On any lease site, any authorized representative of the 
Superintendent who is properly identified may stop and inspect any 
motor vehicle that he/she has probable cause to believe is carrying oil 
produced from or allocated to any such lease site, to determine whether 
the driver possesses proper documentation for the load of oil.
    (d) Any authorized representative of the Superintendent who is 
properly identified and who is accompanied by an appropriate law 
enforcement officer, or an appropriate law enforcement officer alone, 
may stop and inspect any motor vehicle which is not on a lease site if 
he/she has probable cause to believe the vehicle is carrying oil 
produced from or allocated to a lease site, to determine whether the 
driver possesses proper documentation for the load of oil.


Sec.  226.44  What are a lessee's obligations for preventing pollution?

    (a) All lessees, contractors, drillers, service companies, pipe 
pulling and salvaging contractors, or other persons, must at all times 
conduct their operations and drill, equip, operate, produce, plug, and 
abandon all wells drilled for oil or gas, service wells or exploratory 
wells (including seismic, core, and stratigraphic holes) in a manner 
that will prevent pollution and the migration of oil, gas, salt water, 
or other substance from one stratum into another, including any fresh 
water bearing formation.
    (b) Pits for drilling mud or deleterious substances used in the 
drilling, completion, recompletion, or workover of any well must be 
constructed and maintained to prevent pollution of surface and 
subsurface fresh water. These pits must be enclosed with a fence of at 
least four strands of barbed wire, or an approved substitute, stretched 
taut to adequately braced corner posts, unless the surface owner, user, 
or the Superintendent gives consent to the contrary. Immediately after 
completion of operations, pits must be emptied, reclaimed, and leveled 
unless otherwise requested by surface owner or user.
    (c) Drilling pits must be adequate to contain mud and other 
material extracted from wells and must have adequate storage to 
maintain a supply of mud for use in emergencies.
    (d) No earthen pit, except those used in the drilling, completion, 
recompletion or workover of a well, may be constructed, enlarged, 
reconstructed or used without approval of the Superintendent. Unlined 
earthen pits may not be used for the storage of salt water or other 
deleterious substances.
    (e) Deleterious fluids other than fresh water drilling fluids used 
in drilling or workover operations, which are displaced or produced in 
well completion or stimulation procedures, including, but not limited 
to, fracturing, acidizing, swabbing, and drill stem tests, must be 
collected into a pit lined with plastic of at least 30 mil or a metal 
or fiberglass tank and maintained separately from above-mentioned 
drilling fluids to allow for separate disposal. These pits or tanks 
must be enclosed with a fence of at least four strands of barbed wire, 
or an approved substitute, stretched taut to adequately braced corner 
posts, unless the surface owner or the Superintendent gives consent to 
the contrary. Immediately after completion of operations, tanks must be 
removed and any pits must be emptied, reclaimed, and leveled unless 
otherwise requested by surface owner.

[[Page 27029]]

Sec.  226.45  What are a lessee's other environmental responsibilities?

    (a) The lessee must conduct operations in a manner which protects 
the mineral resources, other natural resources, and environmental 
quality. The lessee must comply with the pertinent orders of the 
Superintendent and other standards and procedures as set forth in the 
applicable laws, regulations, lease terms and conditions, and the 
approved drilling plan or subsequent operations plan.
    (b) The lessee must exercise due care and diligence to assure that 
leasehold operations do not result in undue damage to surface or 
subsurface resources or surface improvements.
    (1) All produced water must be disposed of by injection into the 
subsurface, in approved pits, or by other methods which have been 
approved by the Superintendent.
    (2) Upon the conclusion of operations, the lessee must reclaim the 
disturbed surface in a manner approved or prescribed by the 
Superintendent.
    (c) All spills or leakages of oil, gas, other marketable products, 
produced water, toxic liquids, or waste materials, blowouts, fires, 
personal injuries, and fatalities must be reported by the lessee to the 
Superintendent as soon as discovered, but not later than the next 
business day.
    (1) The lessee must exercise due diligence in taking necessary 
measures, subject to approval by the Superintendent, to control and 
remove pollutants and to extinguish fires.
    (2) A lessee's compliance with the requirements of the regulations 
in this part does not relieve the lessee of the obligation to comply 
with other applicable laws and regulations.
    (d) When required by the Superintendent, a contingency plan must be 
submitted describing procedures to be implemented to protect life, 
property, and the environment.
    (e) The lessee's liability for damages to third parties is governed 
by applicable law.


Sec.  226.46  What safety precautions must a lessee take?

    The lessee must perform operations and maintain equipment in a safe 
and workmanlike manner, including compliance with National Electrical 
Code for the installation, running, maintenance and use of all electric 
lines. The lessee must take all precautions necessary to provide 
adequate protection for the health and safety of life and the 
protection of property. Such precautions do not relieve the lessee of 
the responsibility for compliance with other pertinent health and 
safety requirements under applicable laws or regulations.


Sec.  226.47  When can the Superintendent grant easements for wells off 
leased premises?

    The Superintendent, with the consent of the Osage Minerals Council, 
may grant commercial and noncommercial easements for wells off the 
leased premises to be used for purposes associated with oil and gas 
production; provided that the Superintendent notifies or attempts to 
notify both the surface owner and lessee in writing of their 
opportunity to meet with and submit information for consideration 
before a final decision is made. Rents payable to the Osage mineral 
estate for such easements must be in an amount agreed to by Grantee and 
the Osage Minerals Council, subject to the approval of the 
Superintendent. The Grantee is responsible for all damages resulting 
from the use of such wells and settlement for any damages must be made 
as provided in Sec.  226.41.


Sec.  226.48  A lessee's use of water.

    The lessee or his/her contractor may, with the approval of the 
Superintendent, use water from streams and natural water courses to the 
extent that such use does not diminish the supply below the 
requirements of the surface owner from whose land the water is taken. 
Similarly, the lessee or his/her contractor may use water from 
reservoirs formed by the impoundment of water from such streams and 
natural water courses, if such use does not exceed the quantity to 
which they originally would have been entitled had the reservoirs not 
been constructed. The lessee or his/her contractor may install 
necessary lines and other equipment within the Osage mineral estate to 
obtain such water. Any damage resulting from such installation must be 
settled as provided in Sec.  226.41.


Sec.  226.49  What are the responsibilities of an oil lessee when a gas 
well is drilled and vice versa?

    Prior to drilling, an oil or gas lessee must notify the other 
lessees of its intent to drill. When an oil lessee in drilling a well 
encounters a formation or zone having indications of possible gas 
production, or the gas lessee in drilling a well encounters a formation 
or zone having indication of possible oil production, the lessee must 
immediately notify the other lessee and the Superintendent. The lessee 
drilling the well must obtain all information that a prudent lessee 
would utilize to evaluate the productive capability of such formation 
or zone.
    (a) Gas well to be turned over to gas lessee. If an oil lessee 
drills a gas well, it must, without removing from the well any of the 
casing or other equipment, immediately shut the well in and notify the 
gas lessee and the Superintendent.
    (1) If the gas lessee does not, within 45 calendar days after 
receiving notice and determining the cost of drilling, elect to take 
over such well and reimburse the oil lessee the cost of drilling, 
including all damages paid and the cost in-place of casing, tubing, and 
other equipment, the oil lessee must immediately confine the gas to the 
original stratum. The disposition of such well and the production 
therefrom will then be subject to the approval of the Superintendent.
    (2) If the oil lessee and gas lessee cannot agree on the cost of 
the well, the Superintendent will apportion the cost between the oil 
and gas lessees.
    (b) Oil well to be turned over to oil lessee. If a gas lessee 
drills an oil well, then it must immediately, without removing from the 
well any of the casing or other equipment, notify the oil lessee and 
the Superintendent.
    (1) If the oil lessee does not, within 45 calendar days after 
receipt of notice and cost of drilling, elect to take over the well, it 
must immediately notify the gas lessee. From that point, the 
Superintendent must approve the disposition of the well, and any gas 
produced from it.
    (2) If the oil lessee chooses to take over the well, it must pay to 
the gas lessee:
    (i) The cost of drilling the well, including all damages paid; and
    (ii) The cost in place of casing and other equipment.
    (3) If the oil lessee and the gas lessee cannot agree on the cost 
of the well, the Superintendent will apportion the cost between the oil 
and gas lessees.
    (c) Lands not leased. If a gas lessee drills an oil well upon lands 
not leased for oil purposes or vice versa, the Superintendent may, 
until such time as said lands are leased, permit the lessee who drilled 
the well to operate and market the production therefrom. When said 
lands are leased, the lessee who drilled and completed the well must be 
reimbursed by the oil or gas lessee for the cost of drilling said well, 
including all damages paid and the cost of in-place casing, tubing, and 
other equipment. If the lessee does not elect to take over said well as 
provided above, the disposition of such well and the production 
therefrom will be determined by the Superintendent. In the event the 
oil lessee and gas lessee cannot agree on the cost of the well, such 
cost will be apportioned between

[[Page 27030]]

the oil and gas lessee by the Superintendent.


Sec.  226.50  How is the cost of drilling a well determined?

    The term ``cost of drilling'' as applied where one lessee takes 
over a well drilled by another, includes all reasonable, usual, 
necessary, and proper expenditures. A list of expenses mentioned in 
this section must be presented to proposed purchasing lessee within 10 
calendar days after the completion of the well. In the event of a 
disagreement between the parties as to the charges assessed against the 
well that is to be taken over, such charges will be determined by the 
Superintendent.


Sec.  226.51  What are the requirements for using gas for operating 
purposes and tribal uses?

    All gas used in accordance with this section must first be odorized 
and treated in accordance with industry standards for safe use.
    (a) Gas to be furnished to oil lessee. The lessee of a producing 
gas lease must furnish the oil lessee sufficient gas for operating 
purposes at a rate to be agreed upon, or on failure to agree, the rate 
will be determined by the Superintendent: Provided, that the oil lessee 
must at his/her own expense and risk, furnish and install the necessary 
connections to the gas lessee's well or pipeline. All such connections 
must be reported in writing to the Superintendent.
    (b) Use of gas by Osage Tribe. (1) Gas from any well or wells must 
be furnished to any Tribal-owned building or enterprise at a rate not 
to exceed the price being received or offered by a gas purchaser, less 
royalty. This requirement is subject to the determination by the 
Superintendent that gas in sufficient quantities is available above 
that needed for lease operation and that no waste would result. In the 
absence of a gas purchaser, the rate to be paid by the Osage Nation 
will be determined by the Superintendent based on prices being paid by 
purchasers in the Osage mineral estate. The Osage Nation is to furnish 
all necessary materials and labor for such connection with the lessee's 
gas system. The use of such gas is at the risk of the Osage Nation at 
all times.
    (2) Any member of the Osage Nation residing in Osage County and 
outside a corporate city is entitled to the use at his/her own expense 
of not to exceed 400,000 cubic feet of gas per calendar year for his/
her principal residence at a rate not to exceed the amount paid by a 
gas purchaser plus 10 percent. This requirement is subject to the 
determination by the Superintendent that gas in sufficient quantities 
is available above that needed for lease operation and that no waste 
would result. In the absence of a gas purchaser, the amount to be paid 
by the Tribal member will be determined by the Superintendent. Gas 
delivered to Tribal members is not royalty free. The Tribal member is 
to furnish all necessary material and labor for such connection to the 
lessee's gas system, and must maintain his/her own lines. The use of 
such gas is at the risk of the Tribal member at all times.
    (3) Gas furnished by the lessee under paragraphs (b)(1) and (2) of 
this section may be terminated only with the approval of the 
Superintendent. A written application for termination must be made to 
the Superintendent showing justification.

Subpart D--Cessation of Operations


Sec.  226.52  When can a lessee shutdown, abandon, and plug a well?

    No well may be permanently abandoned until it is no longer 
producing oil and/or gas in paying quantities and such a showing has 
been demonstrated to the satisfaction of the Superintendent. The lessee 
may not shut down, abandon, or otherwise discontinue the operation or 
use of any well for any purpose without the written approval of the 
Superintendent. All applications for such approval must be submitted to 
the Superintendent on forms furnished by the Superintendent.
    (a) An application for authority to permanently shut down or 
discontinue the use or operation of a well must set forth the 
justification, the means by which the well bore is to be protected, and 
the contemplated eventual disposition of the well. The method of 
conditioning such well is subject to the approval of the 
Superintendent.
    (b) Prior to permanent abandonment of any well, the oil lessee or 
the gas lessee, as the case may be, must offer the well to the other 
for his/her recompletion or use under such terms as may be mutually 
agreed upon but not in conflict with the regulations. Failure of the 
lessee receiving the offer to reply within 10 calendar days after 
receipt thereof will be deemed a rejection of the offer. If, after 
indicating acceptance, the two parties cannot agree on the terms of the 
offer within 30 calendar days, the disposition of such well will be 
determined by the Superintendent.
    (c) The Superintendent is authorized to shut in a lease when the 
lessee fails to comply with the terms of the lease, the regulations, 
and/or orders of the Superintendent.


Sec.  226.53  When must a lessee dispose of casings and other 
improvements?

    (a) Upon termination of a lease, permanent improvements, unless 
otherwise provided by written agreement with the surface owner and 
filed with the Superintendent, remain a part of said land and become 
the property of the surface owner upon termination of the lease. This 
rule does not apply to personal property, including but not limited to, 
tools, tanks, pipelines, pumping and drilling equipment, derricks, 
engines, machinery, tubing, and the casings of all wells. When any 
lease terminates, all such personal property must be removed within 90 
calendar days or such reasonable extension of time as may be granted by 
the Superintendent. Otherwise, the ownership of all casings reverts to 
the lessor and all other personal property and permanent improvements 
to the surface owner. This should not be construed to relieve the 
lessee of responsibility for removing any such personal property or 
permanent improvements from the premises if required by the 
Superintendent and restoring the premises as nearly as practicable to 
the original state.
    (b) Upon termination of lease for cause. When there has been a 
termination for cause, the lessor is entitled and authorized to take 
immediate possession of the lease premises and all permanent 
improvements and all other equipment necessary for the operation of the 
lease.
    (c) Wells to be abandoned must be promptly plugged as prescribed in 
writing by the Superintendent. Applications to plug must include a 
statement affirming compliance with Sec.  226.52 and must set forth 
reasons for plugging, a detailed statement of the proposed work, 
including the kind, location, and length of plugs (by depth), plans for 
mudding and cementing, testing, parting and removing casing, and any 
other pertinent information. The lessee must submit a written 
application for authority to plug a well.
    (d) The lessee must plug and fill all dry or abandoned wells in a 
manner to confine the fluid in each formation bearing fresh water, oil, 
gas, salt water, and other minerals, and to protect it against invasion 
of fluids from other sources. Mud-laden fluid, cement, and other plugs 
must be used to fill the hole from bottom to top.
    (1) If a satisfactory agreement is reached between the lessee and 
the surface owner, subject to the approval of the Superintendent, the 
lessee may condition the well for use as a fresh

[[Page 27031]]

water well and must so indicate on the plugging record.
    (2) The manner in which plugging material will be introduced and 
the type of material used is subject to the approval of the 
Superintendent.
    (3) Within 10 calendar days after plugging, the lessee must file 
with the Superintendent a complete report of the plugging of each well.
    (4) When any well is plugged and abandoned, the lessee must, within 
90 calendar days, clean up the premises around such well to the 
satisfaction of the Superintendent.

Subpart E--Requirements of Lessees


Sec.  226.54  What general requirements apply to lessees?

    (a) The lessee must comply with all orders or instructions issued 
by the Superintendent. The Superintendent or his/her representative may 
enter upon the leased premises for the purpose of inspection.
    (b) The lessee must keep a full and correct account of all 
operations, receipts, and disbursements and make reports thereof, as 
required.
    (c) The lessee's books and records must be available to the 
Superintendent for inspection.
    (d) The lessee must maintain and preserve records for 6 years from 
the day on which the transaction recorded occurred unless the 
Superintendent notifies the lessee of an audit or investigation 
involving the records and that they must be maintained for a longer 
period. When an audit or investigation is underway, records must be 
maintained until the lessee is released in writing from the obligation 
to maintain the records.


Sec.  226.55  When must a lessee designate process agents?

    (a) Before actual drilling or development operations are commenced 
on leased lands, the lessee or assignee, if not a resident of the State 
of Oklahoma, must appoint a local or resident representative within the 
State of Oklahoma on whom the Superintendent may serve notice or 
otherwise communicate in securing compliance with the regulations in 
this part, and notify the Superintendent of the name and post office 
address of the representative appointed.
    (b) Where several parties own a lease jointly, the parties must 
designate one representative or agent whose duties are to act for all 
parties concerned.
    (c) The lessee must appoint a substitute to serve in his/her stead 
in the event of the incapacity or absence from the State of Oklahoma of 
such designated local or resident representative. In the absence of 
such representative or appointed substitute, any employee of the lessee 
upon the leased premises or person in charge of drilling or related 
operations thereon will be considered the representative of the lessee 
for the purpose of service of orders or notices as herein provided.


Sec.  226.56  What are the lessee's record and reporting requirements 
for wells?

    (a) The lessee must keep accurate and complete records of the 
drilling, redrilling, deepening, repairing, treating, plugging, or 
abandonment of all wells. These records must show:
    (1) All the formations penetrated, the content and character of the 
oil, gas, other marketable product, or water in each formation, and the 
kind, weight, size, landed depth, and cement record of casing used in 
drilling each well;
    (2) The record of drill-stem and other bottom hole pressure or 
fluid sample surveys, temperature surveys, directional surveys, and the 
like;
    (3) The materials and procedure used in the treating or plugging of 
wells or in preparing them for temporary abandonment; and
    (4) Any other information obtained in the course of well operation.
    (b) The lessee must take such samples and make such tests and 
surveys as may be required by the Superintendent to determine 
conditions in the well or producing reservoir and to obtain information 
concerning formations drilled, and furnish such reports as required in 
the manner and method specified by the Superintendent.
    (c) Within 10 calendar days after completion of operations on any 
well, the lessee must transmit to the Superintendent:
    (1) All applicable information on forms furnished by the 
Superintendent;
    (2) A copy of the electrical, mechanical or radioactive log, or 
other types of surveys of the well bore; and
    (3) The core analysis obtained from the well.
    (d) The lessee must also submit other reports and records of 
operations as may be required and in the manner, form, and method 
prescribed by the Superintendent.
    (e) The lessee must measure production of oil, gas, other 
marketable product, and water from individual wells at reasonably 
frequent intervals to the satisfaction of the Superintendent.
    (f) Upon request and in the manner, form and method prescribed by 
the Superintendent, the lessee must furnish a plat showing the 
location, designation, and status of all wells on the leased lands, 
together with such other pertinent information as the Superintendent 
may require.


Sec.  226.57  What line drilling limitations must a lessee comply with?

    The lessee may not drill within 300 feet of the boundary line of 
leased lands, or locate any well or tank within 200 feet of any public 
highway, any established watering place, or any building used as a 
dwelling, granary, or barn, except with the written permission of the 
Superintendent. Failure to obtain advance written permission from the 
Superintendent will subject the lessee to termination of the lease and/
or plugging of the well.


Sec.  226.58  What are the requirements for marking wells and tank 
batteries?

    The lessee must clearly and permanently mark all wells and tank 
batteries in a conspicuous place with the number, legal description, 
operator's name, lessee's name and telephone number, and must take all 
necessary precautions to preserve these markings.


Sec.  226.59  What precautions must a lessee take to ensure natural 
formations are protected?

    The lessee must, to the satisfaction of the Superintendent, take 
all proper precautions and measures to prevent damage or pollution of 
oil, gas, fresh water, or other mineral bearing formations.


Sec.  226.60  What are a lessee's obligations to maintain control of 
wells?

    (a) In drilling operations in fields where high pressures, lost 
circulation, or other conditions exist which could result in blowouts, 
the lessee must install an approved gate valve or other controlling 
device in proper working condition for use until the well is completed. 
At all times, preventative measures must be taken in all well 
operations to maintain proper control of subsurface strata.
    (b) Drilling wells. The lessee must take all necessary precautions 
to keep each well under control at all times, and must utilize and 
maintain materials and equipment necessary to insure the safety of 
operating conditions and procedures.
    (c) Vertical drilling. The lessee must conduct drilling operations 
in a manner so that the completed well does not deviate significantly 
from the vertical without the prior written approval of the 
Superintendent. Significant deviation means a projected deviation of 
the well bore from the vertical of 10[deg] or more, or a projected 
bottom hole location which could be less than 200 feet from the spacing 
unit or lease boundary. Any well which deviates more than 10[deg] from 
the vertical or could

[[Page 27032]]

result in a bottom hole location less than 200 feet from the spacing 
unit or lease boundary without prior written approval must be reported 
promptly to the Superintendent. In these cases, a directional survey is 
required.
    (d) High pressure or loss of circulation. The lessee must take 
immediate steps and utilize necessary resources to maintain or restore 
control of any well in which the pressure equilibrium has become 
unbalanced.
    (e) Protection of fresh water and other minerals. The lessee must 
isolate freshwater-bearing and other usable water containing 5,000 ppm 
or less of dissolved solids and other mineral-bearing formations and 
protect them from contamination. Tests and surveys of the effectiveness 
of such measures must be conducted by the lessee using procedures and 
practices approved or prescribed by the Superintendent.
    (f) The lessee must conduct activities in accordance with the 
standards and procedures set forth in Bureau of Land Management Onshore 
Oil and Gas Order No. 6, Hydrogen Sulfide Operations.


Sec.  226.61  How does a lessee prevent waste of oil and gas and other 
marketable products?

    (a) The lessee must conduct all operations in a manner that will 
prevent waste of oil and gas and other marketable products and must not 
wastefully utilize oil or gas or other marketable products.
    (b) The Superintendent has the authority to impose such 
requirements as he deems necessary to prevent waste of oil and gas and 
other marketable products and to promote the greatest ultimate recovery 
of oil and gas and other marketable products.
    (c) For purposes of this section, waste includes, but is not 
limited to, the inefficient, excessive or improper use or dissipation 
of reservoir energy which would reasonably reduce or diminish the 
quantity of oil or gas or other marketable product that might 
ultimately be produced, or the unnecessary or excessive surface loss or 
destruction, without beneficial use, of oil, gas or other marketable 
product.


Sec.  226.62  How does a lessee measure and store oil?

    (a) All production run from the lease must be measured according to 
methods and devices approved by the Superintendent. Facilities suitable 
for containing and measuring accurately all crude oil produced from the 
wells must be provided by the lessee and must be located on the 
leasehold unless otherwise approved by the Superintendent. The lessee 
must furnish to the Superintendent a copy of 100-percent capacity tank 
table for each tank. Meters and installations for measuring oil must be 
approved.
    (b) The lessee must ensure that each Lease Automatic Custody 
Transfer (LACT) meter is inspected, calibrated, and adjusted at least 
twice in each calendar year. Each inspection, calibration, and 
adjustment must be separated by a period of not less than five months. 
The lessee must give the Superintendent at least 48 hours prior notice 
of all LACT meter inspections, calibrations, and adjustments. The 
Superintendent has the right to witness, unannounced, all LACT meter 
inspections, calibrations, and adjustments. The lessee must fully 
cooperate with such witnessing. If the Superintendent is not present, 
then he may request records relating to all LACT meter inspections, 
calibrations, and adjustments. Repeated failures to comply with this 
subparagraph will render the lease subject to termination after 
consultation with the Osage Minerals Council.
    (c) When a tank of oil is ready for removal by the purchaser, the 
lessee must ensure that the Superintendent is informed of that fact 
before the purchaser is so informed via an electronic or telephonic 
method established by the Superintendent for reporting pursuant to this 
subparagraph. Repeated failures to inform the Superintendent will 
render the lease subject to termination after consultation with the 
Osage Minerals Council.
    (d) The Superintendent has the right to witness all gaugings, 
unannounced, on each lease. The lessee must fully cooperate with such 
gaugings and repeated failures to comply will render the lease subject 
to termination after consultation with the Osage Minerals Council.


Sec.  226.63  How is gas measured?

    (a) All gas required to be measured must be measured in accordance 
with the standards, procedures, and practices set forth in Bureau of 
Land Management Onshore Oil and Gas Order No. 5, Measurement of Gas. To 
the extent that Onshore Oil and Gas Order 5 conflicts with any 
provision of these regulations, these regulations control.
    (b) All gas, required to be measured, must be measured by orifice 
meter unless otherwise agreed to in writing by the Superintendent. All 
gas meters must be approved by the Superintendent and installed at the 
expense of the lessee or purchaser at such places as may be agreed to 
in writing by the Superintendent. For computing the volume of all gas 
produced, sold or subject to royalty, the standard of pressure is 14.65 
pounds to the square inch, and the standard of temperature is 60 
degrees F. All measurements of gas must be adjusted by computation to 
these standards, regardless of the pressure and temperature at which 
the gas was actually measured, unless otherwise authorized in writing 
by the Superintendent.
    (c) The lessee must ensure that each meter is inspected, 
calibrated, and adjusted at least twice in each calendar year. Each 
inspection, calibration and adjustment must be separated by a period of 
not less than five months apart. The lessee must give the 
Superintendent at least 48 hours prior notice of all meter inspections, 
calibrations, and adjustments. The Superintendent has the right to 
witness, unannounced, all meter inspections, calibrations, and 
adjustments. The lessee must fully cooperate with such witnessing. If 
the Superintendent is not present, he may request records relating to 
all meter inspections, calibrations, and adjustments. Repeated failures 
to comply with this subparagraph will render the lease subject to 
termination after consultation with the Osage Minerals Council.


Sec.  226.64  When can a lessee use gas for lifting oil?

    The lessee must not use raw natural gas from a distinct or separate 
stratum for the purpose of flowing or lifting oil, except where the 
lessee has an approved right to both the oil and the gas, and then only 
with the approval of the Superintendent of such use and of the manner 
of its use.


Sec.  226.65  What site security standards apply to oil and gas and 
other marketable product leases?

    (a) Definitions. The following definitions apply to terms used in 
this section.
    Appropriate valves. Those valves in a particular piping system, 
i.e., fill lines, equalizer or overflow lines, sales lines, circulating 
lines, and drain lines that must be sealed during a given operation.
    Effectively sealed. The placement of a seal in such a manner that 
the position of the sealed valve may not be altered without the seal 
being destroyed.
    Production phase. That period of time or mode of operation during 
which crude oil is delivered directly to or through production vessels 
to the storage facilities and includes all operations at the facility 
other than those defined as being in the sales phase.
    Sales phase. That period of time or mode of operation during which 
crude

[[Page 27033]]

oil is removed from the storage facilities for sales, transportation or 
other purposes.
    Seal. A device, uniquely numbered, which completely secures a 
valve.
    (b) Minimum standards. Each lessee must comply with the following 
minimum standards to assist in providing accountability for oil or gas 
production:
    (1) All lines entering or leaving oil storage tanks must have 
valves capable of being effectively sealed during the production and 
sales operations unless otherwise modified by other subparagraphs of 
this paragraph. Any equipment needed for effective sealing, excluding 
the seals, must be located at the site. For a minimum of 6 years the 
lessee must maintain a record of seal numbers used and must document on 
which valves or connections they were used as well as when they were 
installed and removed. The site facility diagram(s) must show which 
valves will be sealed in which position during both the production and 
sales phases of operation.
    (2) Each LACT system must employ meters that have non-resettable 
totalizers. There may not be any by-pass piping around the LACT. All 
components of the LACT that are used for volume or quality 
determinations of the oil must be effectively sealed. For systems where 
production may only be removed through the LACT, no sales or equalizer 
valves need be sealed. However, any valves which may allow access for 
removal of oil before measurement through the LACT must be effectively 
sealed.
    (3) There must not be any by-pass piping around gas meters. 
Equipment which permits changing the orifice plate without bleeding the 
pressure off the gas meter run is not considered a by-pass.
    (4) For oil measured and sold by hand gauging, all appropriate 
valves must be sealed during the production or sales phase, as 
applicable.
    (5) Circulating lines having valves which may allow access to 
remove oil from storage and sales facilities to any other source except 
through the treating equipment back to storage must be effectively 
sealed as near the storage tank as possible.
    (6) The lessee, with reasonable frequency, must inspect all leases 
to determine production volumes and that the minimum site security 
standards are being met. The lessee must retain records of such 
inspections and measurements for 6 years from generation. Such records 
and measurements must be available to the Superintendent upon request.
    (7) Any lessee may request the Superintendent to approve a variance 
from any of the minimum standards prescribed by this section. The 
variance request must be submitted in writing to the Superintendent who 
may consider such factors as regional oil field facility 
characteristics and fenced, guarded sites. The Superintendent may 
approve a variance if the proposed alternative will ensure measures 
equal to or in excess of the minimum standards provided in paragraph 
(b) of this section will be put in place to detect or prevent internal 
and external theft, and will result in proper production 
accountability.
    (c) Site security plans. (1) Site security plans, which include the 
lessee's plan for complying with the minimum standards enumerated in 
paragraph (b) of this section for ensuring accountability of oil/
condensate production are required for all facilities and the lessee 
must maintain such facilities in compliance with the plan. For new 
facilities, notice must be given that it is subject to a specific 
existing plan, or a notice of a new plan must be submitted, no later 
than 60 days after completion of construction or first production, 
whichever is earlier, and on that date the facilities must be in 
compliance with the plan. At the lessee's option, a single plan may 
include all of the lessee's leases, units, and communitized areas, 
provided the plan clearly identifies each lease, unit, or communitized 
area included within the scope of the plan and the extent to which the 
plan is applicable to each lease, unit, or communitized area so 
identified.
    (2) The lessee must retain the plan and notify the Superintendent 
of its completion and which leases, units, and communitized areas are 
involved. Such notification is due at the time the plan is completed as 
required by paragraph (c)(1) of this section. Such notification must 
include the location and normal business hours of the office where the 
plan will be maintained. Upon request, plans must be made available to 
the Superintendent.
    (3) The plan must include the frequency and method of the lessee's 
inspection and production volume recordation. The Superintendent may, 
upon examination, require adjustment of the method or frequency of 
inspection.
    (d) Site facility diagrams. (1) Facility diagrams are required for 
all facilities which are used in storing oil/condensate. Facility 
diagrams must be filed within 60 calendar days after new measurement 
facilities are installed or existing facilities are modified.
    (2) No format is prescribed for facility diagrams. They are to be 
prepared on 8\1/2\'' x 11'' paper, if possible, and be legible and 
comprehensible to a person with ordinary working knowledge of oil field 
operations and equipment. The diagram need not be drawn to scale.
    (3) A site facility diagram must accurately reflect the actual 
conditions at the site and must, commencing with the header if 
applicable, clearly identify the vessels, piping, metering system, and 
pits, if any, which apply to the handling and disposal of oil, gas and 
water. The diagram must indicate which valves must be sealed and in 
what position during the production or sales phase. The diagram must 
clearly identify the lease on which the facility is located and the 
site security plan to which it is subject, along with the location of 
the plan.


Sec.  226.66  What are a lessee's reporting requirements for accidents, 
fires, theft, and vandalism?

    Lessees must make a complete report to the Superintendent of all 
accidents environmental or otherwise, fires, or acts of theft and 
vandalism occurring on the leased premises as soon as discovered, but 
not later than the next business day. Said report must include an 
estimate of the volume of oil involved. Lessees also are expected to 
report such thefts within one business day to local law enforcement 
agencies, internal company security. Lessees must also notify or 
attempt to notify the surface owner or his/her designated agent in 
writing by U.S. mail of any such incident covered under this section.

Subpart F--Penalties


Sec.  226.67  What are the penalties for violations of lease terms?

    Unless otherwise set forth in a lease, violations of any of the 
terms or conditions of any lease or of the regulations in this part 
will subject the lease to termination by the Superintendent, or Lessee 
to a fine of not more than $500 per day for each day of such violation 
or noncompliance with the orders of the Superintendent, or to both such 
fine and termination of the lease. Fines not received within 10 
business days after notice of the decision will be subject to late 
charges at the rate of not less than 1\1/2\ percent per month for each 
month or fraction thereof until paid.


Sec.  226.68  What are the penalties for violation of certain operating 
regulations?

    Unless otherwise set forth in a lease, in lieu of the penalties 
provided under Sec.  226.67, penalties may be imposed by

[[Page 27034]]

the Superintendent for violation of certain sections of the regulations 
of this part as follows:
    (a) For failure to obtain permission to start operations required 
by Sec.  226.34(a), $50 per day.
    (b) For failure to file records required by Sec.  226.56, $50 per 
day until compliance is met.
    (c) For failure to mark wells or tank batteries as required by 
Sec.  226.58, $50 per day for each well or tank battery.
    (d) For failure to construct and maintain pits as required by Sec.  
226.44(b)-(d), $50 for each day after operations are commenced on any 
well until compliance is met.
    (e) For failure to comply with Sec.  226.60 regarding control of 
wells, $100 per day.
    (f) For failure to notify Superintendent before drilling, 
redrilling, deepening, plugging, or abandoning any well, as required by 
Sec. Sec.  226.34(b)-(c) and 226.49, $200 per day.
    (g) For failure to properly care for and dispose of deleterious 
fluids as provided in Sec.  226.44(e), $500 per day until compliance is 
met.
    (h) For failure to file plugging reports as required by Sec.  
226.53(d) and for failure to file reports as required by Sec.  226.26, 
$50 per day for each violation until compliance is met.
    (i) For failure to perform or start an operation within 5 calendar 
days after ordered by the Superintendent in writing under authority 
provided in this part, if said operation is thereafter performed by or 
through the Superintendent, the actual cost of performance thereof, 
plus 25 percent.

Subpart G--Appeals and Notices


Sec.  226.69  Who can file an appeal?

    Any person, firm or corporation aggrieved by any decision or order 
issued by or under the authority of the Superintendent, by virtue of 
the regulations in this part, may appeal pursuant to 25 CFR part 2.


Sec.  226.70  Are the notices by the Superintendent binding?

    Notices and orders issued by the Superintendent to the 
representative are binding on the lessee. The Superintendent may in 
his/her discretion increase the time allowed in his/her orders and 
notices.


Sec.  226.71  Information collection.

    The collections of information in this part have been approved by 
the Office of Management and Budget under 44 U.S.C. 3501 et seq. and 
assigned OMB Control Number 1076-0180. Response is required to obtain 
or retain a benefit. A Federal agency may not conduct or sponsor, and 
you are not required to respond to, a collection of information unless 
it displays a currently valid OMB Control Number.

    Dated: May 4, 2015.
Kevin K. Washburn,
Assistant Secretary--Indian Affairs.
[FR Doc. 2015-11314 Filed 5-8-15; 8:45 am]
 BILLING CODE 4337-15-P