CHAPTER 10 UNIT AND FEDERAL LEASE SUSPENSIONS AND EXTENSIONS

• Jurisdiction: United States

Federal Onshore Oil and Gas Pooling and Unitization
(Nov 2006)
CHAPTER 10
UNIT AND FEDERAL LEASE SUSPENSIONS AND EXTENSIONS
Laura Lindley
Attorney
Bjork Lindley Little PC
Denver, Colorado

LAURA LINDLEY

After earning her B.S. degree from Louisiana State University and working as an abstractor for a couple of years in south Louisiana, Laura Lindley came West to earn her law degree from the University of Denver (1980, Order of St. Ives). She was affiliated with the Denver firm of Poulson, Odell & Peterson until 1992, and since then has been a shareholder in Bjork Lindley Little PC, emphasizing oil and gas law and public land issues.

Laura is a past president of the Rocky Mountain Mineral Law Foundation and continues to participate in a number of Foundation efforts, including serving as a Trustee, writing papers for annual and special institutes and teaching at the Federal Oil and Gas Leasing Short Course. She has also written an article on the history of the Mineral Leasing Act for the ABA's Natural Resources & Environment, and contributed a chapter to The NEPA Litigation Guide published by the ABA.

I. INTRODUCTION

Federal oil and gas leases may be extended or suspended pursuant to a number of provisions of the Mineral Leasing Act. In addition, the unit operator's obligations under a unit agreement may be suspended or extended pursuant to the terms of the agreement. The critical point for lessees to remember is that a suspension or extension of a unit obligation does not automatically suspend or extend the federal leases committed to the unit, and vice versa. These are separate decisions under different statutory and contractual authorities and often the authorized officer who makes decisions on unit extensions or suspensions is different than the authorized officer who makes decisions on lease suspensions or extensions. Too often, a lessee has been surprised to learn that a decision suspending the deadline for drilling a unit obligation well did not also suspend the terms of its leases in the unit. This paper will outline the separate authorities pertaining to suspensions and extensions of federal leases and suspensions and extensions of unit obligations.

II. SUSPENSION/EXTENSION OF UNIT OBLIGATIONS

A. Extensions of Section 9 Drilling Deadlines

As discussed by Mickey Coulthard in the previous paper, the unit agreement (Section 9) requires the unit operator to commence the unit obligation well within six months after the approval of the unit agreement. Some unit agreements require two or more obligation wells. If any obligation well is not timely commenced, then the "public interest requirement" has not been satisfied, and the approval of the unit agreement will be void ab initio (i.e., as if the unit had never been formed).¹

There are a number of reasons why the unit operator might not be able to commence drilling by the deadline. For example, particularly in today's tight rig market, the operator may be unable to contract for a drilling rig by the deadline for the obligation well. Lease stipulations or conditions of approval on the APD (Application for Permit to Drill) which restrict surface use during certain times of the year (e.g., to protect big game habitat) may prevent drilling by the deadline in Section 9 of the unit agreement. Approval of the APD for the obligation well may

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be delayed while an environmental assessment (EA) or environmental impact statement (EIS) pursuant to the National Environmental Policy Act (NEPA) is prepared. In each of those cases, the unit operator can request an extension of the drilling deadline from the Bureau of Land Management (BLM).

Section 9 of the model form unit agreement² provides that the Authorized Officer ("AO") "may modify any of the drilling requirements of this section by granting reasonable extensions of time when, in his opinion, such action is warranted." BLM's Manual Handbook³ provides that such extensions may be granted for a reasonable period, "normally not to exceed 6 months, whenever matters beyond the reasonable control of the unit operator prevent that party from fulfilling its obligations."⁴ The unit operator should file its request for an extension of the drilling deadline before the applicable time period expires.

Extensions of the Section 9 deadlines can be obtained not only for the unit obligation well or wells, but also for subsequent wells. If the initial unit well is not a well which can produce in paying quantities as defined in Section 9,⁵ then the unit agreement can be continued in effect if the unit operator commences a subsequent well within six months from the completion of the prior well. "Completion" is not defined in the regulations or in the unitization handbook; the BLM generally interprets it to mean the date on which the completion rig is released. Until the establishment of a participating area, the failure to commence a well subsequent to the initial obligation well within the allowed time "shall cause the agreement to terminate automatically."⁶ Note that this termination clause applies "until the establishment of a participating area." Often, the BLM may require several months of production in order to determine whether the initial well is in fact a paying unit well so as to justify the approval of a participating area. Also, it may take more than six months to construct a pipeline to the initial well in an exploratory unit producing gas. In either case, the six-month deadline for commencing a second well is not waived unless the unit operator requests and receives an extension of time from the AO. Therefore, particularly where the obligation well was dry or marginal but the parties are still interested in pursuing

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development of the unit, the unit operator should monitor the six-month deadline for commencing a subsequent well and request additional time, if necessary, from the BLM.

B. Suspensions for Unavoidable Delay

1. Language of Agreement

Section 25 of the model form unit operating agreement provides as follows:

UNAVOIDABLE DELAY. All obligations under this agreement requiring the Unit Operator to commence or continue drilling, or to operate on, or produce unitized substances from any of the lands covered by this agreement, shall be suspended while the Unit Operator, despite the exercise of due care and diligence, is prevented from complying with such obligations in whole or in part, by strikes, acts of God, Federal, State or municipal law or agencies, unavoidable accidents, uncontrollable delays in transportation, inability to obtain necessary materials or equipment in the open market, or other matters beyond the reasonable control of the Unit Operator, whether similar to matters herein enumerated or not.

Section 25 is a broad force majeure clause, and the BLM is generally quite reasonable in granting extensions of drilling deadlines for unavoidable delay.⁷ It is BLM's position that the unit operator must request such an extension prior to the pertinent drilling deadline.⁸ However, Section 25 provides that the obligation "shall be suspended" while the unit operator is prevented from complying with the obligation. Section 25 does not require the unit operator to request approval from BLM in order to obtain such a suspension. It is the author's opinion that such circumstances automatically suspend the drilling obligation so that a request to BLM for an extension of time is not necessary; BLM could acknowledge the suspension after the fact once the unit operator has furnished evidence of the event of unavoidable delay. A unit agreement is a contract and so should be subject to the same rules of contract interpretation as other contracts. The Interior Board of Land Appeals ("IBLA") has recognized that even though the model form unit agreement is printed in the Code of Federal Regulations, "the unit agreement itself is a consensual undertaking of the various interest holders, the unit operator, and

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the United States for joint operation of the area."⁹ Under general rules of contract interpretation,¹⁰ "obligations ... shall be suspended" means just that: the obligation will be suspended for so long as the unit operator is unable to comply despite the exercise of due care and diligence.

The IBLA considered the interpretation of Section 25 in dictum in a case involving the automatic elimination provision contained in Section 2(e) of the unit agreement. In Colorado Open Space Council,¹¹ the BLM had approved the suspension of the contraction of the Winter Flats Unit Agreement for two years because poor market conditions prevented sale of the gas. The unit operator explained that 12 gas wells had already been drilled in the unit, all of them shut-in for lack of a market (this was in 1985), and that it made no sense to continue to drill and shut-in wells in order to prevent contraction of the unit. The appellants, environmental groups who hoped that the unit would terminate as the lands were within a wilderness study area and a wild horse range, appealed the decision suspending automatic elimination of the non-participating acreage. The IBLA dismissed the appeal for lack of standing, concluding that the appellants were not adversely affected by the decision to suspend automatic elimination. The Board reasoned the appellants' injury would occur if the leases were developed, and development could have occurred if the suspension had been denied. What is relevant for purposes of this paper is the majority's discussion,¹² in dictum, of the BLM's decision to grant the suspension of automatic elimination for reasons beyond the operator's reasonable control, under Section 25. The majority stated that,

If this were a matter of statutory or regulatory interpretation, we would agree that [the unit operator] had failed to establish that the lack of a present market for its high carbon dioxide content gas has a causative relationship to its ability to drill...