CHAPTER 12 EXTENSIONS AND SUSPENSIONS OF FEDERAL OIL AND GAS LEASES
| Jurisdiction | United States |
(Nov 1980)
EXTENSIONS AND SUSPENSIONS OF FEDERAL OIL AND GAS LEASES
Poulson, Odell & Peterson
Denver, Colorado
The topic of extensions and suspensions of federal oil and gas leases is important no matter where you are dealing with federal leases, but it is, and will continue to be particularly important in planning and management of oil and gas exploration programs in the western Overthrust Belt. Recent discoveries confirm that the Overthrust Belt is one of the most promising areas in the United States for discovery of substantial new oil and gas reserves. It is also an expensive area in which to drill. The geology is complex, and a great deal of seismic work and drilling will be required to understand it and to locate the reserves. The high elevation and long and severe winters require long range planning. The time required to drill a well is substantially longer than most areas in the United States. A substantial portion of the lands are owned by the United States and administered by the U. S. Forest Service, the Bureau of Land Management and other federal agencies. The Overthrust Belt also includes some very scenic country, with Wilderness Areas, wilderness study areas, rare and endangered species and other wildlife. The mushrooming growth of
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environmental laws and regulations and often arbitrary and over zealous application of them make operations difficult, frustrating, expensive and time consuming. All of these factors will result in delays in exploration and drilling. They make it extremely important that a lessee obtain the benefit of the full term of his lease and the permitted extensions. I hope that this paper will be of aid to you in knowing when extensions and suspensions are available, and how to obtain them.1
Extensions of Federal Oil and Gas Leases
Extension By Production: On shore federal oil and gas leases are issued for a primary term of 5 years if the lease is issued competititively and a primary term of 10 years if the lease is issued non-competitively.2 The statute provides that, "Each such lease shall continue so long after its primary term as oil and gas is produced in paying quantities."3
To qualify for the production extension the lease must on the expiration date of the fixed term contain a "well capable of production." This phrase has been interpreted to mean that the oil or gas well must be completed and physically capable of producing oil or gas.4
The well must also be capable of producing oil or gas in paying quantities. Paying quantities on federal onshore
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leases has been defined in Departmental decisions as production sufficient to pay a profit to the lessee over and above cost of operating and marketing. It is not necessary that the well be capable of repaying the costs of drilling.5
The determination as to whether an oil or gas well is capable of producing in paying quantities is made by the U. S. Geological Survey. Such determination is subject to the right of appeal. If initial completion data furnished to the Survey is inconclusive the Survey will require additional testing or production history before it makes a determination that production has been had in paying quantities.
Although the statutes provide that the lease term will be continued so long thereafter as oil and gas is produced the Department has interpreted this to require only the completion of a well capable of producing oil and gas, not physical production from the well. Thus a completed shut-in oil or gas well and payment of minimum royalties will serve to extend the term of the lease.6
While a completed shut-in well together with payment of minimum royalties will serve to extend the term of the lease, the lessee is obligated to place the well on production within 60 days after receipt of registered notice from the Area Oil and Gas Supervisor to do so.7
Most shut-in wells result from completion of gas wells in areas where there is no adjacent or nearby gas pipeline.
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The Geological Survey understands the economics of the oil industry and that a gas line cannot be built until sufficient reserves have been established to justify construction of a line. It has not made unreasonable demands for production or construction of gas lines where there has been insufficient time to develop adequate reserves to economically justify a line. This does not mean that Geological Survey will disregard a shut-in gas well. It will use what limited means it has to encourage additional development drilling in an area. It has allowed reasonable periods for construction of pipelines before giving a formal notice of the demand to place the well in a producing status.
After a well is placed on production, the lessee may not shut-in the well unless and until a suspension of production is allowed by the Secretary.8 I will discuss suspensions of production in the second portion of this paper.
Communitization AgreementExtension by Commitment to a Producing Unit or
If leases are committed to an approved unit plan which provides for allocation of production and production is had in paying quantities under the unit plan prior to the expiration of the fixed term of the lease or leases such production will extend the lease "so long as the lease remains subject to the plan."9 "Paying quantities" however is
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defined in Section 9 of the federal form of unit agreement for unproved areas, as "quantities sufficient to repay the costs of drilling and producing operations with a reasonable profit."10
If a lease is committed to an approved communitization or drilling agreement providing for apportionment of production or royalties among the separate tracts within the drilling or spacing unit, operations and production pursuant to such agreement are deemed operations and production as to each lease committed thereto. Therefore, if the communitized area contains a well capable of producing in paying quantities from the communitized formation, the term of each committed lease will be extended by the production from the communitized area.11
Extensions of Primary Term In Absence of Production
There are a number of events, other than completion of a producing well, which will also serve to extend the primary term of a lease. It is important that a landman understand these extension events in planning lease acquisition and timing of drilling to obtain the maximum benefit from them.
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of the Primary TermTwo Year Extension by Drilling Over the Expiration
The most important extension provision is Section 17(e) of the Mineral Leasing Act which provides that a lessee who drills over the expiration date of the primary term earns a two year extension of the primary term of his lease.12 30 U.S.C. 226(e) provides in part:
Any lease issued under this section for land on which, or for which under an approved cooperative or unit plan of development or operation, actual drilling operations were commenced prior to the end of its primary term and are being diligently prosecuted at that time shall be extended for two years and so long thereafter as oil or gas is produced in paying quantities.
Actual Drilling Operations
The Department has construed the statutory language "actual drilling operations" to require actual penetration of the ground, prior to the end of the primary term. Building of roads, preparation of the drill site, moving in, or rigging up are not sufficient to earn the extension.13 The drilling must be commenced under an approved drilling permit.14 Bad weather, equipment failure, personnel shortages, etc, which have frustrated the lessee's ability to timely spud the well will not excuse the failure to commence actual drilling operations.15
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Diligent Operations
There has perhaps been undue emphasis on the idea that one must be drilling, i.e. "turning to the right", at midnight on the last day of the primary term which has resulted in a number of tests not being timely commenced because of unexpected delays and problems. What is required is that there must be some penetration of the ground before the end of the primary term and drilling operations thereafter must be conducted in a diligent manner.16 It is a normal industry practice to commence a well with a spudder, set surface casing, and thereafter move in a big rig to complete the drilling of the well, and upon reaching total depth to move in a completion rig for the completion attempt. I am frequently asked "How much time will the U. S. Geological Survey allow from the time the spudder is moved off until the big rig is moved on and commences drilling?" There is no fixed time, it is rather a question of whether a bona fide effort is being made to timely drill and complete a producing well.17 I believe that you are reasonably safe if not more than 30 days elapses from the time the spudder is moved off or the date it completes setting of surface casing and the big rig is moved in and drilling is resumed. The Geological Survey understands that rig scheduling can be and is difficult today, but if you are having problems, I advise you to keep
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the Geological Survey advised and to document your efforts to diligently continue good faith drilling operations.
There also seems to be a misunderstanding that additional drilling, i.e. additional footage must be made after the end of the primary term. The regulations provide that actual drilling operations include not only the physical drilling of a well, but the testing, completing or equipping of such well for the production of oil or gas.18 This period of testing and completion can be extremely important where a test well is drilled within a unitized or communitized area, and the operator seeks to extend the primary terms of several leases which may expire in successive months.
Reasonable Prospect of Success
The test well must also be drilled to a...
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