BLM's retained rights: how requiring environmental protection fulfills oil and gas lease obligations.

• Jurisdiction: United States
• Author: Pendery, Bruce M.
• Date: 22 March 2010

1. INTRODUCTION II. OVERVIEW OF THE MINERAL LEASING ACT III. THE FEDERAL ONSHORE OIL AND GAS LEASING AND DEVELOPMENT PROCESS A. The Stages of BLM Oil and Gas Planning, Leasing, and Development 1. Land-Use Planning 2. Leasing 3. Exploration 4. Full-Field Development 5. Application for Permit to Drill B. The BLM Onshore Oil and Gas Leasing Process IV. THE TERMS AND CONDITIONS OF BLM ONSHORE OIL AND GAS LEASES A. Versions of the BLM Oil and Gas Lease Form B. The Terms of Federal Onshore Oil and Gas Leases C. BLM's 43 C.F.R. [section]3101.1-2 Regulation 1. The Provisions of the [section] 3101.1-2 Regulation 2. Reasonable Measures 3. Further BLM Guidance on the [section] 3101.1-2 Regulation D. Summary of Rights Granted and Rights Retained Under the Modern Lease Form and the [section] 3101.1-2 Regulation V. BLM's RETAINED RIGHTS UNDER A FEDERAL ONSHORE OIL AND GAS LEASE A. The Supreme Court's View of the Rights Granted and Rights Retained Under a Federal Onshore Oil and Gas Lease B. Applicable Laws and Specific, Nondiscretionary Statutes 1. The Mineral Leasing Act 2. The National Environmental Policy Act 3. The Federal Land Policy and Management Act 4. The Endangered Species Act 5. Other Laws Applicable to Protection of the Public Lands 6. Energy Policy Statutes C. Terms, Conditions, and Attached Stipulations of BLM Oil and Gas Leases D. Regulations and Formal Orders 1. Regulations a. The Regulations at 43 C.F.R. Part 3100 b. The Regulations at 43 C.F.R. Part 3160 and Other BLM Regulations 2. Formal Orders a. Resource Management Plans b. Onshore Oil and Gas Orders c. Notices to Lessees d. The BLM Manual and Handbook e. BLM Instruction Memoranda f. The BLM "Gold Book" g. Executive Orders h. Solicitor Opinions and Secretarial Orders E. Reasonable Measures VI. GENERAL PRINCIPLES OF CONTRACT LAW WILL HELP DEFINE BLM's RETAINED RIGHTS A. Court Decisions Related to Federal Oil and Gas Leases Have Relied on General Principles of Contract Law B. Contract Principles Presented in the Restatement of Contracts and American Jurisprudence VII. POTENTIAL LIMITATIONS ON BLM's ABILITY TO EXERCISE ITS RETAINED RIGHTS A. The Lessee Has Been Granted the Right to Use as Much of the Leased Lands as Is Necessary to Remove All of the Oil and Gas and the Right to Build Necessary Improvements B. Breach and Repudiation of Contract Claims C. Reasonable Measures D. Courts Have Found BLM Cannot Completely Prohibit Development When It Issues a Non-No Surface Occupancy Lease, Which Represents an Irreversible and Irretrievable Commitment of Resources That Requires Compliance with NEPA E. Takings Claims F. Lessees Must Exercise Diligence to Develop Leases G. Split Estate Issues VIII. MEANS BY WHICH BLM CAN EXERCISE ITS RETAINED RIGHTS A. Options Available for Regulating Oil and Gas Development on the Public Lands That Would Help Protect the Natural Environment B. Policy Changes IX. BLM HAS AN OBLIGATION TO FULLY ASSERT ITS RETAINED RIGHTS X. CONCLUSION I. INTRODUCTION

   There are large areas of the public lands in the western United States that are encumbered by federal oil and natural gas leases. In the eleven western states of New Mexico, Colorado, Wyoming, Montana, Idaho, Utah, Arizona, Nevada, California, Oregon, and Washington--where public lands are an important aspect of land use, economic development, and social structure and culture--there were 404,500,000 acres of federal mineral estate, and over 39,000,000 acres of that estate were subject to federal oil and gas leases in fiscal year 2008. (1)

   Given the large areas of public land encumbered by federal onshore oil and natural gas leases, a significant question relates to the "retained rights" enjoyed by the federal government in areas it has leased. This Article posits that the federal government has substantial retained rights allowing it to regulate oil and gas development in order to ensure protection of other resources on the lands it has leased. I define the term "retained rights" to mean powers the federal government maintains and has not ceded regarding public lands management when it issues an onshore oil and gas lease to a private party. As will be explained, the government has retained significant rights to protect the natural environment, including, for example, protection of threatened or endangered species, prevention of air and water pollution, the right to regulate operations in order to conserve surface resources, the ability to protect historic trails and other cultural and archeological resources, and the right to prevent unnecessary or undue degradation of the public lands.

   With respect to onshore oil and gas leasing, management of the leasing program and the resulting leases is entrusted to the United States Bureau of Land Management (BLM) within the United States Department of Interior. (2) For purposes of this Article, I will focus on the retained rights enjoyed by BLM on the public lands and the mineral estate that it manages in the eleven western states. Because of my knowledge of and experience in the State of Wyoming, many of the examples that will be presented relate to Wyoming.

   BLM manages approximately 175,000,000 acres of surface estate in the eleven western states, as well as the above-mentioned mineral estate. (3) I will not specifically consider leasing in Alaska in this Article because some different legal provisions apply there, particularly in the National Petroleum Reserve in Alaska, but generally the analysis presented here also applies to BLM-managed oil and gas in Alaska. (4) While the focus of this Article will be on BLM and the lands it manages, similar lines of reasoning and the conclusions that will be presented here also apply to the over 158,000,000 acres managed by the United States Forest Service (Forest Service) in the eleven western states because similar leasing rules apply on those lands. (5) For purposes of this Article, I only consider federal onshore oil and gas leasing and leases. I will not consider offshore leasing managed by the Minerals Management Service under the direction of the Outer Continental Shelf Leasing Act. (6)

   In the following sections, I will first describe the Mineral Leasing Act (7) and the onshore oil and gas leasing system it created. I will then discuss the terms and conditions of BLM onshore oil and gas leases with an eye toward what those provisions mean relative to BLM's retained rights. Following that is a discussion of the retained rights BLM enjoys under applicable laws, lease terms and conditions, regulations, and other authorities a BLM oil and gas lease is made "subject to." Then I will consider general doctrines of contract law that may also help define BLM's retained rights. Following that is a discussion of issues that might limit BLM's exercise of its retained rights, such as Fifth Amendment takings claims. Last, I will consider means by which BLM could exercise its retained rights and policy changes it could make, and then argue that not only does BLM enjoy substantial retained rights, it also has an obligation to assert them.

2. OVERVIEW OF THE MINERAL LEASING ACT

   Onshore leasing of federally owned oil and gas is governed by the Mineral Leasing Act of 1920. (8) The leasing system it established, including provision for royalties to be paid on produced minerals, represented a marked departure from the provisions under the General Mining Law of 1872, (9) where minerals and the exclusive right to possession of the land were granted to the first prospector able to "locate[]" a "valuable" mineral on public lands. (10) The leasing system established by the Mineral Leasing Act for many nonmetalliferous minerals provides for a significant increase in governmental control and regulation of mineral disposition and development compared to the self-initiated system under the General Mining Law that applies to hardrock minerals such as "gold, silver, cinnabar, lead, tin, [and] copper." (11)

   Subject to enumerated exceptions, the Mineral Leasing Act provides that deposits of coal, phosphate, sodium, potassium, oil, oil shale, gilsonite, or gas, and lands containing such deposits that are owned by the United States, "shall be subject to disposition in the form and manner provided by this chapter." (12) The Act establishes qualifications for holding an oil and gas lease, establishes limits on the aggregate acreage of lease holdings, allows for cancellation and forfeiture of leases, allows for necessary rifles and regulations to be prescribed, provides for royalties and other income to the government and disposition of the moneys received, prescribes the maximum size of individual leases and lease term lengths, and makes many other provisions. (13)

   Most significantly for purposes of this Article, section 17 of the Mineral Leasing Act provides for leasing of oil and gas. Section 17(a) declares that "[a]ll lands subject to disposition under this [Act] which are known or believed to contain oil or gas deposits maybe leased by the Secretary [of the Interior]." (14) Section 17(b) then provides for a competitive leasing system via oral auction where parcels are leased to the "highest responsible qualified bidder." (15) If no qualified bids are received at competitive auction, lease parcels become available for sale noncompetitively. (16) Under the provisions for noncompetitive leases, "the person first making application for the lease who is qualified to hold a lease under this [Act] shall be entitled to a lease of such lands without competitive bidding." (17) In addition to specifying the leasing system, section 17 also makes several provisions related to environmental protection. (18)

   This system where leases are first offered at competitive auction before becoming available for noncompetitive sale is relatively new. It was established on December 22, 1987, when the Federal Onshore Oil and Gas Leasing Reform Act (FOOGLRA) (19) was enacted. This law is codified in several sections of the Mineral Leasing Act...