Federal Exploratory Units

Report
Federal Leases and
Exploratory Units
Tom McKee, Chelsey Russell and Scott Turner
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
Presentation Roadmap
Federal Leasing and Assignments – Scott Turner
 Federal Exploratory Units – Chelsey Russell
 Federal Exploratory Unit Issues – Tom McKee

U.S. Federal Lands and
U.S. Gas & Oil Shale Plays
Source: http://www.eia.gov/
Federal Leasing Authority

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. §§ 181- 263 and U.S.C. §§ 351-359.
Pre-Leasing Activities:
Land Use Planning
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: Protests
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: Stipulations
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

Nominations of Lands
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
Competitive Leasing
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 Process
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
Noncompetitive Leasing
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 Process
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 year’s
advanced rental ($1.50 per acre)

3. Priority determined by the time of filing
Federal Lessee Qualifications

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 Leasing:
Terms and Conditions

Lessee Rights


Term


Explore and drill for, extract, remove, and dispose of oil and
gas deposits, except helium, that you may find on your
lease
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

Bonding


Bond of $10,000.00 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:
Assignments

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

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:
Record Title

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:
Adjudication
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 Lease Extensions

“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 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-3180-1 (Exploratory)
 Procedures for Submitting an Exploratory Unit Agreement
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.
Federal Exploratory Units
Two Forms of the Unit Operating Agreement
1. FORM 1



Working interest owners fix costs and share of production for the term
of the unit
Interests remain constant despite expansion or contraction of
participating areas
This form is generally used when the extent and uniformity of the
prospect area are known
2. FORM 2



Working interest owner’s share in production and costs is determined
by its interests in a participating area
This form is generally used when the extent and uniformity of the
prospect area are unknown
Most commonly used form
Federal Exploratory Units
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
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
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
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
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
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
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
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
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)
Not Committed (NC): Less than 100% of the working
interest owners in a tract have committed their working
interest to the unit.
4.
Federal Exploratory Units
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
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
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
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. 3180.5



Paying Quantities: “Quantities sufficient to repay the costs of drilling,
completing and producing operations with a reasonable profit…”
Application to Establish PA: Generally an application to
establish a PA is filed within 3 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
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
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
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
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
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 landowner’s royalty interest in the non-participating lands.
Federal Exploratory Units
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!
Madden Deep Unit
Wind River Basin – Fremont and Natrona Counties, Wyoming
Size: Approximately 70,000 Acres
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
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
Market Value Royalty Clauses
In Leases

SPRATT AND OKIE FEE LEASES - 1964 - MARKET VALUE ROYALTY
CLAUSES

PROCEEDS - “PAY LESSOR AS A ROYALTY FOR ALL SUCH GAS OR
OIL SO PRODUCED AND SAVED AN AMOUNT EQUAL TO ONEEIGHTH 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”
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”?
Split Stream Gas Sales
LEASE A - FEE
LEASE B - FEE
LEASE C - FEDERAL
WI OWNER A
WI OWNER B
WI OWNER C
LEASE D - FEDERAL
LEASE E- FEDERAL
LEASE F - FEDERAL
WI OWNER D
WI OWNER E
WI OWNER F
LEASE G - FEDERAL
LEASE H - FEDERAL
LEASE I - FEDERAL
WI OWNER G
WI OWNER H
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
Split Stream Gas Sales
LEASE A - FEE
LEASE B - FEE
LEASE C - FEDERAL
WI OWNER A
WI OWNER B
WI OWNER C
LEASE D - FEDERAL
LEASE E- FEDERAL
LEASE F - FEDERAL
WI OWNER D
WI OWNER E
WI OWNER F
LEASE G - FEDERAL
LEASE H - FEDERAL
LEASE I - FEDERAL
WI OWNER G
WI OWNER H
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?
Green River Bend Unit
Lincoln and Sublette Counties, Wyoming
Size: Approximately 15,000 Acres
Operator: EOG RESOURCES, INC.
Green River Bend Unit
FORMATIONS
ALMY
MESAVERDE
BAXTER
FRONTIER
BEAR RIVER (MUDDY)
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
Leases with Entirety Clauses
TRACT A
TRACT B
Lease Q has an Entirety Clause
TRACT C
TRACT D
Lease Q –
MI Owner
W
OUTSIDE UNIT
LEASE Q –
MI OWNERS X, Y, Z
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.
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.
Pooled Area Partially within Unit
TRACT A
TRACT B
Participating Area – Tracts A, B, C. D
- Lands shaded in Green are pooled
TRACT C
TRACT D
Fee Lease Q –
MI Owner W
UNIT PRODUCTION ALLOCATED TO TRACT D FROM
WELL ON TRACT A, B OR C, LEASE Q ROYALTY PAID TO
MI OWNER W
OUTSIDE UNIT
FEE LEASE R –
MI OWNER X
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 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
Communitized Area Partially within Unit
TRACT A
TRACT B
Participating Area – Tracts A, B, C. D
- Lands shaded in Orange are communitized
TRACT C
TRACT D Federal
Lease S
OUTSIDE UNIT Federal Lease T
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
Communitized Area Partially within Unit
TRACT A
TRACT B
Participating Area – Tracts A, B, C. D
- Lands shaded in Orange are communitized
TRACT C
TRACT D Federal
Lease S
OUTSIDE UNIT Federal Lease T
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
A Note on Hydraulic Fracturing

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