How New Rules Affect Existing Oil and Gas Leases
| Publication year | 1990 |
| Pages | 2073 |
1990, October, Pg. 2073. How New Rules Affect Existing Oil and Gas Leases
The Department of the Interior ("DOI"), through the Bureau of Land Management and the Minerals Management Service ("MMS"), is responsible for implementing the Federal Oil and Gas Royalty Management Act of 1982(fn1) ("FOGRMA") and other federal statutes applicable to oil and gas leases issued under the Mineral Leasing Act of 1920.(fn2) The regulations promulgated under FOGRMA are subject to frequent revision and may impose operational restrictions or alter royalty accounting methods, either of which may be to the economic detriment of existing lessees. This article discusses limitations on the retroactive application of these regulations.
FOGRMA § 305 states that [t]he provisions of this Act shall apply to oil and gas leases issued before, on, or after the date of the enactment of this Act [enacted Jan. 12, 1983], except that in the case of a lease issued before such date, no provision of this Act or any rule or regulation prescribed under this Act shall alter the express and specific provisions of such a lease.(fn3) A plain reading of this section indicates that the statute and any implementing regulations are applicable to pre-existing oil and gas leases. The legislative history confirms such interpretation.(fn4) FOGRMA was enacted to remedy the shortcomings of the royalty management system, which had fallen into disarray under the U.S. Geological Survey ("USGS"), the predecessor to MMS. The federal government had been suffering significant losses in petroleum royalties due to royalty underpayment and to theft of oil and gas from federal lease sites.(fn5) An overhaul of the entire royalty management system could not be accomplished if FOGRMA were inapplicable to existing leases.
FOGRMA § 2 states that the purpose of the Act is "to clarify, reaffirm, expand, and define" both the responsibilities and obligations of lessees and the authorities and responsibilities of the Secretary of the Interior.(fn6) Nevertheless, the statute does minimize the impact of its changes on pre-existing oil and gas leases by providing that it is not applicable if its implementation would be contrary to "express and specific provisions" of such leases. It is unclear what constitutes a "specific lease provision" for purposes of applying a FOGRMA-generated rule. However, the Interior Board of Land Appeals ("IBLA") has interpreted that limitation as precluding only a direct conflict between the statutory or regulatory language and the lease language.
In Chevron U.S.A., Inc.,(fn7) the DOI sought to assess royalty on gas avoidably lost during a blow-out prior to completion of Chevron's well. Chevron's lease provided for the payment of royalty on "production saved, removed, or sold," and Chevron argued that "production" applied only to activities occurring after successful completion of a well. The IBLA held that the lease provisions were not sufficiently specific to prevent application of the regulation. It also held that an interpretation so narrow as to exclude gas avoidably lost prior to achieving production status formally would frustrate Congressional policy. The IBLA further stated that application of FOGRMA § 308 to avoidably lost gas "complement[ed], rather than alter[ed]" Chevron's existing duties.(fn8)
The specific provisions limitation was again interpreted narrowly by the DOI in Coastal Oil and Gas Corp.(fn9) In this case, the DOI sought to assess interest charges on late royalty payments pursuant to FOGRMA § 111(a). Coastal argued that the provisions in FOGRMA providing for interest charges were inconsistent with their lease terms because no provisions in their lease or in the regulations in existence at the time of lease issuance allowed such charges. The
IBLA held that FOGRMA § 305 did not preclude application of § 111(a). It further held that regulations in effect at the time of lease execution are not incorporated by reference into the lease and do not become specific provisions of the lease. Inconsistency could arise only if the leases contained an "express and specific" provision precluding such charges.(fn10)
The current offer to lease form issued by the federal government provides that the lessee's rights are subject to future regulations and formal orders promulgated by the Secretary of the Interior when not "inconsistent with lease rights granted."(fn11) Because the lease holder does not own the minerals in fee, the property right created may be conditioned retroactively, provided the new restrictions do not unreasonably interfere with the enjoyment of the interest. Because the lease form specifically forewarns the lessee of possible future regulations, the IBLA is unlikely to find such restrictions an "unreasonable" burden on lease...
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