CHAPTER 11 MAKING SURE YOUR WELL IS THE ONLY THING GOING SIDEWAYS: PERMITTING ISSUES ASSOCIATED WITH HORIZONTAL DEVELOPMENT ON FEDERAL LANDS AND MINERALS
| Jurisdiction | United States |
(Nov 2012)
MAKING SURE YOUR WELL IS THE ONLY THING GOING SIDEWAYS: PERMITTING ISSUES ASSOCIATED WITH HORIZONTAL DEVELOPMENT ON FEDERAL LANDS AND MINERALS
Bjork Lindley Little PC
Denver, CO
KATHLEEN C. SCHRODER is a shareholder in the law firm of Bjork Lindley Little PC, Denver, Colorado, where she focuses on public lands law and, in particular, oil and gas leasing and development on federal lands. Katie advises oil and gas operators on issues related to the National Environmental Policy Act, Endangered Species Act, and National Historic Preservation Act, as well as federal royalty matters. Prior to joining Bjork Lindley Little PC, she served as an attorney-advisor in the Solicitor's Office of the U.S. Department of the Interior and as a clerk to Justice Alex J. Martinez of the Colorado. Supreme Court. Katie is a graduate of Rice University and the University of Colorado School of Law. She serves as a Trustee to the Rocky Mountain Mineral Law Foundation on behalf of Western Energy Alliance and is a co-author of Clean Air, Hazy Law: The Emerging Interplay between NEPA, FLPMA, and the Clean Air Act, 55 Rocky Mt. Min. Law Inst. 14-1 (2009).
I. Introduction
Horizontal development on federal lands managed by the U.S. Bureau of Land Management (BLM) and Forest Service presents unique issues for oil and gas operators. Often, these issues do not derive from special rules or procedures intended to address horizontal development. In fact, it is the opposite. BLM, as the manager of the federal mineral estate, often responds to emerging issues or technology less quickly than some of the agency's more nimble state counterparts. Therefore, the issues facing operators on federal lands often result from BLM's attempts to manage horizontal development within the existing federal regulatory regime.
This paper identifies some of the more common issues that operators encounter on federal lands. First, the paper identifies potential hazards of horizontal development on federal lands, such as drilling without a permit or a lease, failing to effectively secure an extension of a federal lease, and failing to schedule development to avoid timing stipulations. Second, the paper discusses how BLM will review wells that traverse federal subsurface in order to produce non-federal minerals. Third, the paper describes the reach of BLM's regulatory authority over wells that will produce federal minerals from off-lease locations not on federal lands. Finally, the paper discusses potential challenges to horizontal development on federal lands under the National Environmental Policy Act of 19691 (NEPA), the National Historic Preservation Act2 (NHPA), and the Endangered Species Act3 (ESA).
Notably, many of the issues described in this paper are still emerging, and BLM's management of these issues is evolving. Likely treatment of horizontal development and some of the issues identified in this paper will vary between BLM state and field offices. This paper attempts to identify issues in which management of horizontal development is unsettled and to highlight potential paths forward. As horizontal development continues to expand, both BLM and operators may benefit from updated guidance that will yield certainty and consistent treatment of these issues by the agency.
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II. Potential Pitfalls Associated with Horizontal Development on Federal Lands and Minerals - Same Rules, Sometimes with a Twist.
Most federal law and policies addressing oil and gas leasing and development have been written to address conventional, vertical development. The legal authorities related to oil and gas leasing and development accordingly are not always tailored to the unique issues presented by horizontal development--namely, the long reaches of horizontal wells and the correspondingly long times required to drill a well. As a result, operators face several potential stumbling blocks when conducting horizontal development on federal lands and minerals. First, operators drilling horizontal wells must take care to determine whether a horizontal well will traverse and produce any federal minerals and, if so, ensure that they have obtained lease rights and approved applications for permits to drill (APDs) prior to development. Second, cautious operators seeking to obtain a two-year extension of a federal lease by "drilling over" the expiration of the primary term should ensure that the drill bit has reached the lease boundary when the primary term expires. Finally, operators must pay close attention to timing stipulations, both contained in the lease and later imposed by BLM, to allow a sufficient window to accommodate drilling of a horizontal well.
A. Ground Rules: Permits to Drill (and Leases!) are Required to Drill Into and Produce from the Federal Mineral Estate.
BLM requires an APD whenever a well intersects and produces from the federal mineral estate.4 The fact that a lease may be within a federal unit or communitized area does not exempt operators from having a lease and obtaining a permit to drill from the BLM when drilling into and producing federal minerals.5 Drilling into and producing from leased lands without a permit carries heightened penalties,6 and drilling into and producing from unleased lands carries potential liability for civil and criminal penalties.7
Surprisingly, the issue of drilling without an APD arises more frequently than one might expect. Even more surprisingly, horizontal development has created situations in which
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operators have drilled into federal minerals without a lease (let alone an APD). These situations have arisen with some frequency in areas outside of the Rockies, where isolated tracts of federal minerals exist.8 These situations may involve wells that traverse and produce multiple tracts with different ownership. These errors may be due to operators' lack of awareness that a separate federal APD is required to drill into and produce federal minerals or, where a well is drilled into unleased lands, a lack of awareness of the existence of federal minerals.
Additionally, some BLM offices have suggested that federal leases and APDs are required to develop minerals when BLM owns less than 100% of the mineral estate.9 In some instances, BLM has threatened to pursue penalties against the operator of the well. BLM's position that a cotenant must obtain a federal lease and APD, however, is contrary to the common law of many states, which generally allow one cotenant (or its lessee) to develop the mineral estate without the consent of other cotenants, subject to the duty to account to the other cotenants for their proportionate share of the value of production.10 Presently, there is no judicial authority or agency guidance on BLM's ability to prevent a cotenant from developing the mineral estate or to assess civil and/or criminal penalties for development of unleased minerals in which BLM owns less than 100% of the mineral estate. Therefore, in the absence authority on this issue, an operator seeking to drill into and produce a tract in which the United States owns a fraction of the mineral estate should obtain a federal lease as well as an APD in order to drill on and produce from the tract without risking civil and/or criminal penalties.
When wells are drilled without approved APDs or into unleased federal minerals, BLM appears to be assessing penalties, requiring the operator of the well to submit an APD and all accompanying materials, completing NEPA analysis for the well, and, if a lease has not issued,
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making the lands available for lease.11 To avoid delays and potential civil and criminal liability associated with unauthorized development of federal minerals, operators should take care to determine whether a well will traverse and produce federal minerals and, if so, ensure that they have both a federal lease and an approved APD prior to drilling a well.
B. When Drilling Over the Primary Term of a Lease, Avoid Coming Up Short.
The fact that federal oil and gas leasing statutes and regulations contemplate conventional, vertical wells or, at best, directional wells rather than horizontal development is most obvious when operators attempt to obtain extensions to a federal lease by diligently prosecuting drilling operations at the end of the lease's primary term (known as "drilling over" the primary term).12 Section 17(e) of the Mineral Leasing Act, as amended, allows the extension of any lease in its primary term if "actual drilling operations" are commenced prior to, and are being diligently prosecuted, at the end of the primary term.13 This provision, however, does not adequately address horizontal development commenced off of the federal lease. The Mineral Leasing Act allows lessees to obtain an extension of a "lease . . . on which . . . actual drilling operations were commenced prior to the end of its primary term and are being diligently prosecuted at that time . . . ."14 Read literally, this language could be interpreted to require that drilling operations occur on the federal lease at the end of the primary term. Therefore, if drilling operations commence at an off-lease surface location but the drill bit does not reach the federal lease prior to midnight of the last day of primary term, as shown on Figure 1, there is a risk that the lease will not be extended.15
No federal court or Interior Board of Land Appeals (IBLA) decision or BLM guidance document addresses whether the commencement of drilling operations at an off-lease location will earn an extension if the operations are intended to intersect and produce from a federal lease. Courts interpreting savings clauses in non-federal leases, however, have been reluctant to require physical entry of the lease by the well prior to lease expiration and instead have been willing to find commencement of off-lease operations satisfactory to...
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