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Federal Leases and Exploratory Units Tom McKee, Chelsey Russell and Scott Turner.

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Presentation on theme: "Federal Leases and Exploratory Units Tom McKee, Chelsey Russell and Scott Turner."— Presentation transcript:

1 Federal Leases and Exploratory Units Tom McKee, Chelsey Russell and Scott Turner

2 Federal Leasing Is Complex! This presentation is a very basic overview For more information: Two-day seminar in Federal Lease Pooling in 2009 Week long Rocky Mountain Mineral Law Institute course on Federal Leasing Many scholarly articles

3 Federal Leasing and Assignments – Scott Turner Federal Exploratory Units – Chelsey Russell Federal Exploratory Unit Issues – Tom McKee Presentation Roadmap

4 U.S. Federal Lands and U.S. Gas & Oil Shale Plays Source:

5 The BLM Leases Federal Onshore Lands The Mineral Leasing Act of 1920, as amended, and the Mineral Leasing Act for Acquired Lands of 1947, as amended, grant the Bureau of Land Management (BLM),within the Department of Interior (DOI), responsibility for leasing onshore lands. - See 30 U.S. §§ and U.S.C. §§ Federal Leasing Authority

6 BLM develops a Resource Management Plan (RMP) Analyzes impact of reasonably foreseeable development Identifies land as open for leasing and publishes Notice of Competitive Lease Includes stipulations or development restrictions to protect sensitive resources in the plan area Pre-Leasing Activities: Land Use Planning

7 A protest requests the BLM to reconsider its proposed decision to offer a parcel or parcels for development A protest can be brought by anyone Upon denial of a protest, the protester may appeal to the Interior Board of Land Appeals (IBLA) Pre-Leasing Activities: Protests

8 Definition: A provision that modifies standard lease rights and is made an enforceable part of the lease. Supersedes inconsistent standard lease terms or regulations. Examples: Controlled Surface Use, Timing Limitations Pre-Leasing Activities: Stipulations

9 The general public may nominate federal lands identified as open for leasing in the RMP Expression of Interest (EOI) BLM places nominated lands for leasing if: 1)The nominated parcels are actually available 2)The RMP stipulations are attached Nominations of Lands

10 Federal leases are required to be offered for sale at competitive auction under the Federal Onshore Oil and Gas Leasing Reform Act 1987 Must be purchased for a minimum bid specified by the Secretary of the Interior (Not less than $2.00/acre) Maximum Size: 2,560 acres in Lower 48, 5,760 in Alaska Competitive Leasing

11 1.Notice of Competitive Lease Sale – 90 days prior Place and date, parcels to be offered, stipulations, and minimum bidding requirements 2.BLM state offices must conduct an oral auction once per quarter if parcels are available 3.Lease awarded to highest bidder at or above minimum bidding requirement 4.The Successful Bidder must present: Properly executed lease bid form Payment of the administrative fee, the first years advanced rental ($1.50 per acre) Not less than $2-per-acre minimum bid Competitive Leasing Process

12 Arises when no bid received for minimum acceptable bid during competitive bidding process Available for leasing for two years following lease sale Maximum Size: 10,240 acres in all states Noncompetitive Leasing

13 1.Available for leasing for two years following the last day of the auction 2.Applicant must present: Properly executed lease offer form Payment of the administrative fee, the first years advanced rental ($1.50 per acre) 3.Priority determined by the time of filing Noncompetitive Leasing Process

14 Adult U.S. Citizens Associations of U.S. Citizens -Includes trusts, joint tenants, joint ventures, married parties U.S. Corporations incorporated under U.S. state law Restricted Ownership: Aliens, minors Prohibited Ownership: Congressman, DOI Employees, Sole Proprietorships Federal Lessee Qualifications

15 Lessee Rights Explore and drill for, extract, remove, and dispose of oil and gas deposits, except helium, that you may find on your lease Term 10 years, and for as long thereafter as oil and gas is produced in paying quantities Bonus Minimum bid of not less than $2.00 per acre Federal Leasing: Terms and Conditions

16 Bonding Bond of $10, to BLM prior to surface disturbance Rentals Rental Rate: $1.50 per acre Payment of first year filed with offer Subsequent payments are due annually on lease date Royalties Minimum of 12.5% for competitive and noncompetitive leases Federal Leasing: Terms and Conditions

17 Filing Lessee must file any assignment or transfer of interest with BLM state office within 90 days of execution Filed in triplicate, $75.00 per lease Acreage At least 640 acres outside of Alaska At least 2,560 acres in Alaska Federal Leasing: Assignments

18 Assignment of Record Title Upon BLM approval of record title, the assignee steps into the shoes of the assignor Assignee is treated as original lessee Operating Rights Transfers Assignor retains title to the lease Assignor responsible for all lease obligations An assignment of an ORT only filed after severance Federal Leasing: Assignments

19 BLM Case Files Each BLM Land office maintains a case file of all public land transactions The case file contains information related to the issuance, effectiveness, and current lease ownership County Records County records provide constructive notice under state recording acts BLM records do not impart constructive notice Review Both! Federal Leasing: Record Title

20 Adjudication Agency process for decisions or orders, determination of rights and liabilities Determined by the BLM on a case by case basis Rules are governed by the Administrative Procedure Act Interior Board of Land Appeals Issues final decisions of the DOI Review appeals from BLM decisions Headed by Administrative Judges Federal Leasing: Adjudication

21 Production in paying quantities Unit Well: Section 9, Federal Form Unit agreement requires quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit.... Yates Well: The Interior Board of Land Appeals holds commercial costs generally requires costs of production and marketing, but not drilling. Yates Petroleum Corp., 67 IBLA 246 (1982) A Yates Well will extend the leases within the Unit Term, But only a Unit Well will extend the life of the unit! Federal Lease Extensions

22 Federal Exploratory Units Proposal and Formation Under the Mineral Leasing Act the BLM may approve unit agreements for the purpose of more properly conserving the natural resources of any oil or gas pool, field, or like area, or any part thereof. 30 U.S.C. § 226(m). The BLM Website states that, Unitization provides for the exploration and development of an entire geologic structure or area by a single operator so that drilling and production may proceed in the most efficient and economic manner. Important Resources Available on the BLM Website: Oil and Gas Unit Agreements (43 CFR 3180) Unitization Manual 3180 (Exploratory) Unitization Handbook H (Exploratory) Procedures for Submitting an Exploratory Unit Agreement

23 Federal Exploratory Units Two Important Agreements 1. Unit Agreement Agreement between the BLM and the proponent (operator) of the unit. 2. Unit Operating Agreement Agreement between the operator and other working interest owners within the unit boundary. Governs allocation of costs and production between the working interest owners. All working interest owners must sign the operating agreement. A copy of the unit operating agreement must be filed with the BLM – but – the BLM is not a party to the agreement and cannot control the terms of the agreement.

24 Federal Exploratory Units Two Forms of the Unit Operating Agreement 1.FORM 1 Working interest owners fix costs and share of production for the term of the unit Interests remain constant despite expansion or contraction of participating areas This form is generally used when the extent and uniformity of the prospect area are known 2.FORM 2 Working interest owners share in production and costs is determined by its interests in a participating area This form is generally used when the extent and uniformity of the prospect area are unknown Most commonly used form

25 The Application Letter Request for designation of unit area should include the following: Identify the area proposed for unitization Identify the deepest formation to be tested and the depth to which the initial well must be drilled to test that formation List the serial numbers of all Federal leases, lease offers, Indian leases and lease expiration dates Must be in proper sequence Can be included as part of the land ownership map Indicate whether geological and geophysical data is to be kept confidential Federal Exploratory Units

26 The Application Letter Request for designation of unit area should include the following: Geologic Report – Map showing unit boundary with structural and stratigraphic data and prior well data; cross sections and stratigraphic columns identifying productive formations; geophysical interpretations; geologic discussion supporting boundary. Land Ownership Map – Show proposed unitization area; boundaries of each lease and each unleased tract of land including working interest owners and lease numbers of Federal and Indian leases (this will be the same info on Exhibit B to Unit Agreement); distinguishes between different types of land (Federal, Indian, State or Fee). Federal Exploratory Units

27 The Unit Agreement An executed unit agreement must be identical to the terms approved in the designation letter for unit area, objective formation and drilling depths. 1.Exhibit A to the Unit Agreement Describes the outline of the proposed unit and the amount and percentage of Federal, State and Fee lands in the total unit area. Identifies individual tracts within the unit Usually in the form of a map Federal Exploratory Units

28 The Unit Agreement An executed unit agreement must be identical to the terms approved in the designation letter for unit area, objective formation and drilling depths. 2.Exhibit B to the Unit Agreement Schedule of ownership of all oil and gas interests within the unit lands including total acreage and percentage of total unit area. Lands should be listed in the following order: Federal, Indian, State and Fee Tracts should be identified by tract numbers and determined by order of listing in Exhibit B and appear in appropriate place on Exhibit A. Federal Exploratory Units

29 Preliminary Approval of Unit Agreement The Resources Management Group of the BLM will send a letter designating the outline of the unit as a reasonable unit area. The letter will also confirm the application for the depth and formation of the initial obligation well and it will include any special provisions and requirements. Federal Exploratory Units

30 Composition of Unit – Federal, Indian, State and Fee Generally, a federal unit is not comprised of only federal lands. A federal unit can include any combination of Federal, State, Indian and Fee tracts. The rule of thumb is that at least 10% of the minerals in a federal unit are federal minerals. After the proponent has received preliminary approval of the unit area and initial obligation well, the applicant must seek ratifications and joinders from each owner of an interest in the unit. Federal Indian State Fee Lands – Check lease for unitization clause Federal Exploratory Units

31 Tract Commitment Rule of Thumb: The proponent of the unit must have at least 85% of all tracts committed to the unit to demonstrate to the BLM effective control of the unit area. The BLM recognizes four categories of commitment of a tract to the unit. 1.Fully Committed 2.Effectively Committed 3.Partially Committed 4.Not Committed Federal Exploratory Units

32 Commitment Categories 1.Fully Committed (FC): All interest owners in the tract have committed their interests to the unit Includes the following owners: Lessee(s) of record, basic royalty owners in fee tracts, owners of overrides or production payments and working interest owners if different from the lessees of record RIGHTS: FC Receives all the benefits of the unitization 2.Effectively Committed (EC): All interest owners EXCEPT owners of overrides or production payments are committed to the unit. RIGHTS: EC Receives all the benefits of the unitization Federal Exploratory Units

33 Commitment Categories 3. Partially Committed (PC): Fee Tract – Lessee and all working interest are committed but the royalty interest owners are not committed Federal/State Tract – Operating rights owner (working interest owner) is committed but not the record title owner RIGHTS: PC no segregation upon unit approval and no off lease drilling extension (within the unit area, must drill on the lease to receive a drilling extension) and no off lease production status (must be HBP on a leasehold basis) 4. Not Committed (NC): Less than 100% of the working interest owners in a tract have committed their working interest to the unit. Federal Exploratory Units

34 Approval of Unit The BLM will issue a Certificate of Determination if a sufficient percentage (85% of more) of the land within the unit boundary is committed to the unit. Depending on the size of the unit, additional initial obligation wells may be required. Federal Exploratory Units

35 Segregation of Leases Federal Leases: Segregation occurs when lands within a lease are not included within the unit boundary. The lands outside of the unit boundary are segregated into a separate oil and gas lease dated effective as of the approval of the unit. Segregated leases continue for the term of the lease but not more than two (2) years from the date of the segregation. Fee Leases: Fee leases are not subject to segregation unless the Unit Agreement includes the optional paragraph 18(h). State Leases: Whether a state lease can be segregated depends on the statute and regulation of each specific state. Federal Exploratory Units

36 Initial Obligation Well Upon approval of the unit the operator will have six (6) months to commence to drill an initial test well at the approved location. Must have diligent and continuous drilling of the initial obligation well. Operator may drill additional test wells, with not more than six (6) months between the drilling of wells until a discovery of an unitized substance is made in paying quantities. If the initial well is not capable of producing in paying quantities, the failure to drill additional wells until discovery will cause the unit agreement to terminate automatically. Depending on the unit size, additional wells may be required. Federal Exploratory Units

37 Participating Areas (PAs) Definition: Land reasonably proven capable of producing unitized substances in paying quantities, or if so provided in the unit agreement, that land necessary for unit operations. 43 C.F.R Paying Quantities: Quantities sufficient to repay the costs of drilling, completing and producing operations with a reasonable profit… Application to Establish PA: Generally an application to establish a PA is filed within 3 months after the completion of the unit well. Determination of PA: Once the BLM is satisfied that a well is producing in paying quantities it will approve a PA surrounding that well. Federal Exploratory Units

38 Participating Areas (PAs) Cont. Effective Date of PA: The effective date is usually the date the well was determined to be capable of producing the unitized substances in paying quantities. Method for Establishing Size PA: There are no regulations that dictate the size or shape of a PA – scientific evidence controls. In most states the BLM uses the circle/tangent method for radial drainage. Circle/Tangent – Draw a circle around the well in the size of the drainage area. Subdivision – If the unit covers a 40-acre subdivision of which at least 50% of the lands are within a drainage circle, the entire subdivision will be included. Federal Exploratory Units

39 Participating Areas (PAs) Cont. Revising a PA A PA is revised pursuant to the terms of the Unit Agreement (Section 11) when additional wells capable of producing in paying quantities in the unitized formation are completed. Any addition of lands to a PA must be lands that are contiguous to the existing PA. Similarly, the completion of a well that is NOT capable of producing in paying quantities can result in a contraction of the PA. Federal Exploratory Units

40 Participating Areas (PAs) Cont. Supporting Documents: Must have comprehensive engineering and geologic data to support/justify the request. Revised Exhibits A and B should be submitted concurrently with revisions so that commitment status of the new unit tracts can be established. Plan of Development Once a PA is approved, the unit operations must be conducted in accordance with a Plan of Development (POD) that is filed by the unit operator with the BLM annually. Annual Summary of Operations When a unit has been fully developed the operator may be required to file an annual summary of operations in lieu of an annual POD. Federal Exploratory Units

41 Participating Areas (PAs) Cont. Contraction of PA If continuous operations are not occurring on non-PA lands, the unit will automatically contract to the boundaries of the PA on the fifth anniversary of the initial PA. If operations are occurring on non-PA lands after the fifth anniversary the unit will remain in effect so long as diligent operations are being conducted with not more than 90 days elapsing between the completion of one well and the commencement of the next. Revised Exhibits A and B should be submitted concurrently or shortly after approval for contraction. Federal Exploratory Units

42 Termination of a Federal Unit The Term of a Unit: The unit will remain in effect for five years (5) from the effective date of the Initial PA. After the initial well is drilled and proven there is no drilling obligation during the initial five (5) year term. If the initial well is a dry hole or a Yates well, then the unit operator must commence operations for a second well within six (6) months after completion of the first well in order to keep the unit in effect. An operator can diligently and continuously develop the unit for an additional five (5) years, for a total of ten (10) years. The ten (10) year term can then be extended for a single two (2) year term with the consent of 90% of the working interest owners in the non-participating land and 60% of the landowners royalty interest in the non-participating lands. Federal Exploratory Units

43 Termination of a Federal Unit Automatic Termination: A Federal unit will automatically terminate five (5) years after its effective date unless the operator has proven there is production of the unitized substance in paying quantities. There are always exceptions! Federal Exploratory Units

44 Madden Deep Unit Wind River Basin – Fremont and Natrona Counties, Wyoming Size: Approximately 70,000 Acres

45 Madden Deep Unit OPERATOR - CONOCOPHILLIPS (BURLINGTON RESOURCES OIL & GAS COMPANY) 1968 NON-OPERATORS STONEHENGE OIL COMPANY (W. A. MONCRIEF) SENTINEL DEVELOPMENT COMPANY (MONSANTO) SOHIO PETROLEUM COMPANY NORTH CENTRAL OIL CORPORATION YATES DRILLING COMPANY W. R. GRACE & CO. INTERNATIONAL NUCLEAR (INEXCO) HAROLD B. EHRLICH FORMATIONS FORT UNION LANCE CODY BIGHORN SPRATT FAMILY - OKIE FAMILY - TOWNS OF LYSITE AND LOST CABIN

46 Multiple Formations and Participating Areas LARGE PARTICIPATING AREAS WITH MANY WORKING INTEREST OWNERS TRACT ALLOCATION OF PRODUCTION PARTICIPATING AREA WI AND NRI CALCULATION (TRACT WI AND NRI TIMES TRACT PERCENT OF PARTICIPATION) EACH FORMATION HAS DIFFERENT WORKING INTEREST OWNERSHIP HAROLD EHRLICH NON-CONSENT - $$$ PENALTY OTHER NON-CONSENTS - ACREAGE FORFEITURE PENALTY FORFEITED ACREAGE INCONSISTENT WITH PARTICIPATING AREAS

47 Market Value Royalty Clauses In Leases SPRATT AND OKIE FEE LEASES MARKET VALUE ROYALTY CLAUSES PROCEEDS - PAY LESSOR AS A ROYALTY FOR ALL SUCH GAS OR OIL SO PRODUCED AND SAVED AN AMOUNT EQUAL TO ONE- EIGHTH OF THE GROSS SALES PROCEEDS REALIZED BY LESSEE FROM THE SALE OF SUCH PRODUCTS MARKET VALUE - PAY TO THE ROYALTY OWNER OR OWNERS MONTHLY THE REASONABLE MARKET VALUE OF ALL ROYALTY GAS OR OIL PRODUCED AND MARKETED

48 Market Value Royalty Clauses In Leases LARGE FEDERAL UNIT NUMEROUS WORKING INTEREST OWNERS GAS PURCHASE CONTRACTS OR SPOT SALES REGULATED GAS PRICES FOR DIFFERENT FORMATIONS WORKING INTEREST OWNERS SELLING OR STORING WHAT IS THE MARKET VALUE?

49 Split Stream Gas Sales LEASE A - FEE WI OWNER A LEASE B - FEE WI OWNER B LEASE C - FEDERAL WI OWNER C LEASE D - FEDERAL WI OWNER D LEASE E- FEDERAL WI OWNER E LEASE F - FEDERAL WI OWNER F LEASE G - FEDERAL WI OWNER G LEASE H - FEDERAL WI OWNER H LEASE I - FEDERAL WI OWNER I WI OWNER A SELLING GAS AT $3.00/MCF UNDER A LONG TERM CONTRACT WI OWNER B STORING GAS PURSUANT TO GAS BALANCING AGREEMENT WI OWNER C SELLING GAS AT $2.50/MCF UNDER A LONG TERM CONTRACT WI OWNERS D - F SELLING GAS ON SPOT MARKET, CURRENT MONTH $3.50/MCF WI OWNERS G - I STORING GAS PURSUANT TO GAS BALANCING AGREEMENT

50 Split Stream Gas Sales LEASE A - FEE WI OWNER A LEASE B - FEE WI OWNER B LEASE C - FEDERAL WI OWNER C LEASE D - FEDERAL WI OWNER D LEASE E- FEDERAL WI OWNER E LEASE F - FEDERAL WI OWNER F LEASE G - FEDERAL WI OWNER G LEASE H - FEDERAL WI OWNER H LEASE I - FEDERAL WI OWNER I ISSUES: WHO PAYS LESSOR OF LEASE A? WHAT VOLUME? WHAT PRICE? DOES LESSOR OF LEASE B GET PAID? IF SO, WHO PAYS? VOLUME? PRICE? DOES UNITED STATES GET PAID ITS SHARE OF ALL PRODUCTION? PRICE?

51 Green River Bend Unit Lincoln and Sublette Counties, Wyoming Size: Approximately 15,000 Acres Operator: EOG RESOURCES, INC.

52 TOWN OF LA BARGE WITHIN UNIT ISSUE - UNLEASED STREETS ISSUE - SEPARATE LEASES OF TOWN LOTS - ALL ONE TRACT ISSUE - ACREAGE OF LOTS ADJACENT TO RIVER Green River Bend Unit FORMATIONS ALMY MESAVERDE BAXTER FRONTIER BEAR RIVER (MUDDY )

53 Lease Q has an Entirety Clause Participating Area – Tracts A, B, C Unit production allocated to Tract D paid to MI Owner W (1/3) and MI Owners X, Y, and Z (2/3) even though X, Y, and Z own MI outside of the Unit. Leases with Entirety Clauses TRACT ATRACT B TRACT CTRACT D Lease Q – MI Owner W OUTSIDE UNIT LEASE Q – MI OWNERS X, Y, Z Entirety Clause: If the leased premises shall hereafter be owned in severalty, the premises, nevertheless shall be developed and treated as an entirety and shall be divided among and paid to such separate owners in the proportion that the acreage owned by each separate owner bears to the entire leased acreage.

54 Participating Area – Tracts A, B, C. D - Lands shaded in Green are pooled UNIT PRODUCTION ALLOCATED TO TRACT D FROM WELL ON TRACT A, B OR C, LEASE Q ROYALTY PAID TO MI OWNER W UNIT PRODUCTION ALLOCATED TO TRACT D FROM WELL ON TRACT D, LEASE Q ROYALTY PAID TO MI OWNER W AND EXCESS ROYALTY IN AN AMOUNT OF 50% OF LEASE R ROYALTY PAID TO MI OWNER X Pooled Area Partially within Unit TRACT ATRACT B TRACT CTRACT D Fee Lease Q – MI Owner W OUTSIDE UNIT FEE LEASE R – MI OWNER X POOLED AREA PRODUCTION FROM WELL OUTSIDE UNIT, 50% OF PRODUCTION ALLOCATED TO TRACT D TREATED AS UNIT PRODUCTION, ALLOCATED TO TRACTS A, B, C AND D, AND ROYALTY IN AN AMOUNT OF 50% OF LEASE R ROYALTY PAID TO MI OWNER X

55 Participating Area – Tracts A, B, C. D - Lands shaded in Orange are communitized Communitized Area Partially within Unit PER BLM MANUEL: COMMUNITIZATION AGREEMENT (CA) ENTIRELY OR PARTIALLY OVERLAPPED BY A PARTICIPATING AREA ALL OVERLAPPED CA LANDS COMMITTED TO UNIT AGREEMENT OR SOME OVERLAPPED LANDS NOT COMMITTED TO UNIT AGREEMENT LOCATION OF CA WELL MAKES NO DIFFERENCE ASSUME LEASE S COMMITTED TO UNIT TRACT ATRACT B TRACT CTRACT D - Federal Lease S OUTSIDE UNIT - Federal Lease T

56 Participating Area – Tracts A, B, C. D - Lands shaded in Orange are communitized Communitized Area Partially within Unit CA PRODUCTION ALLOCATED TO TRACT D FROM WELL ON CA, ROYALTY ON 50% OF CA PRODUCTION ALLOCATED TO TRACTS A, B, C AND D (USA GETS 1/4 UNDER LEASE S) AND ROYALTY ON 50% OF PRODUCTION PAID TO USA UNDER LEASE T UNIT PRODUCTION ALLOCATED TO TRACT D FROM WELL ON TRACT A, B OR C, APPARENTLY USA GETS ROYALTY ON 1/4 OF UNIT PRODUCTION ALLOCATED TO TRACT D UNDER LEASE S AND USA GETS NO SHARE OF THAT ROYALTY UNDER LEASE T TRACT ATRACT B TRACT CTRACT D - Federal Lease S OUTSIDE UNIT - Federal Lease T

57 A Note on Hydraulic Fracturing


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