CHAPTER 14 THE LIFE CYCLE OF A FEDERAL UNIT
| Jurisdiction | United States |
(Jan 1997)
THE LIFE CYCLE OF A FEDERAL UNIT
Bjork, Lindley & Danielson, P.C.
Denver, Colorado
Table of Contents
I. Introduction
II. Potential Changes to Unitization Procedures
III. Requirements to Maintain and Extend Unit
A. Obligation Well(s)
B. Public Interest Requirement
C. Initial Five Year Term
D. Plan of Development
E. Continuous Drilling Term
F. Expansions and Contractions of Units
G. Suspensions and Extensions of Time
H. Amendment of Unit Agreement
IV. Participating Areas
A. Historical Background
B. Formation of Initial Participating Area
C. Revision, Consolidation and Termination of Participating Areas
1. Revisions
2. Circle-Tangent Method
3. Combining PA's
4. Exclusion of Lands from PA
5. Lands Necessary for Unit Operations
6. Effective Date of Revision
D. Allocation of Production
V. Rentals, Minimum Royalties and Production Royalties
VI. Lease Extensions as a Result of Unitization
A. Fee Leases
B. Extension for Drilling Over the Lease Expiration Date
C. Extensions by Production
D. Segregation Extension
E. Unit Termination Extensions
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I. INTRODUCTION
This paper will cover the timeframes applicable to operations under the model form onshore federal exploratory unit1 and the extensions which can be earned for leases committed to such units. The starting point for this discussion is the effective date of an approved unit agreement. The paper does not attempt to discuss offshore, non-federal, or secondary recovery units. Although the interplay of federal unit obligations and lease extensions can be confusing to someone unfamiliar with such units, the unit can provide a valuable vehicle for extending federal (and fee) leases. In this age of increasing delays in offering federal acreage for lease and increasing restrictions on surface use when the lands are offered, knowing how to extend existing federal leases is an important skill for managing federal lease acreage.
II. POTENTIAL CHANGES TO UNITIZATION PROCEDURES
This paper is based on the unitization regulations which presently appear at 43 C.F.R. Part 3180 (1995) and the model form published at 43 C.F.R. § 3186.1 (1995). The reader should be aware, however, that the Secretary of the Interior signed Secretarial Order No. 3199 on April 4, 1996 directing BLM to "re-engineer Federal and Indian oil and gas unitization into a more efficient and flexible process."2 The Order was issued as a part of Vice-President Gore's National Performance Review of agency regulations, but little has changed in BLM's unit administration processes since issuance of the order. The Secretary specifically authorized the BLM to waive the provisions of 43 C.F.R. §§ 3181.2 (area and depth application), 3183.2 (area and depth application), 3183.3 (submission of four executed counterparts of unit agreement), 3183.5 (submission of two copies of substantiating geologic report with participating area application), and 3183.6 (plan of development) "regarding the submission of information or documents specified."3 However, an operator is free to follow existing procedures. The order is to remain in effect until regulations modifying 43 C.F.R.
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Part 3180 are adopted, but it will terminate on September 30, 1997.4 To date, no proposed rules for amending the unitization regulations have been published by the BLM, and the Secretarial Order seems to have had little impact on BLM's unit processing procedures. Nonetheless, the BLM is drafting revisions to streamline the unit regulations and, if and when they are adopted, those regulations could significantly alter some of the regulatory obligations discussed in this paper.
The Manual for the Rocky Mountain Mineral Law Foundation's Federal Onshore Oil and Gas Pooling and Unitization institute which was held seven years ago included a copy of BLM's Manual and Handbook provisions on unitization5 which were released on October 28, 1984. Those Manual and Handbook provisions have not been officially revised but, by Instruction Memorandum No. 93-66, the Director of the BLM issued interim guidance on unit administration6 in the form of a draft Manual Section 3180 and a draft Handbook Section H-3180-1.7 Although the interim guidance was issued in 1992, it is to remain in effect until final versions of the Manual and Handbook are released. No doubt, the "reengineering" effort delayed completion of the revised Manual and Handbook. This paper cites to the draft Manual and Handbook which still provide interim guidance to the BLM (subject to Secretarial Order No. 3199). While the Manual and Handbook are not binding on the public or on the Interior Board of Land Appeals ("IBLA"), they are binding on the BLM.8
III. REQUIREMENTS TO MAINTAIN AND EXTEND UNIT
A. Obligation Well(s).
The effective date of the unit agreement is the date that the authorized officer of the Bureau of Land Management ("BLM") executes the Certification-Determination document9 . The unit operator has a period of six months after the effective date to
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commence drilling the unit obligation well to the designated formation.10 If the initial well is a dry hole or a Yates well,11 then the unit operator must commence a second well within six months after completion of the first well in order to continue the unit in effect. Unless the drilling operations result in a well capable of producing unitized substances in paying quantities,12 the operator must continue drilling with no more than six months elapsing between the completion of one well and the commencement of the next in order to maintain the unit in effect. Of course, few operators are willing to drill more than a couple dry holes before terminating the unit but, under § 20 of the model form, the unit operator could continue such drilling for as long as five years from the effective date of the unit.
Some unit agreements covering a particularly large area may provide for the drilling of multiple obligation wells.13 In that case, completion of the first well as a paying unit well does not excuse the obligation to commence the second well or any subsequent obligation wells prescribed by Section 9 of the unit agreement.
B. Public Interest Requirement
As will be discussed in detail in Part VI. E. below, the Mineral Leasing Act provides that any federal lease which is in effect at the termination of a unit (or communitization) agreement shall continue in effect for the original term thereof, but for not less than two years, and so long thereafter as oil or gas is produced in paying quantities.14 Section 20 of the unit agreement provides that the unit can be voluntarily terminated prior to the discovery of unitized substances in paying quantities by approval of 75% of the working interest owners, on an acreage basis. Because a federal lease can receive multiple two year extensions for unit termination, there were occasional situations in the past where a unit would be formed solely for the purpose of then voluntarily terminating it and thereby earning a two year extension for each committed federal lease. The U.S. Geological Survey ("USGS"), the BLM's predecessor agency for administering units, objected to this practice and some USGS offices attempted to avert the problem by making unit terminations effective on the date they were actually approved, rather than the
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date the request for termination was filed with the USGS.15
Effective June 15, 1988, the BLM enacted a regulation which prevents lessees from obtaining any extensions if a unit is voluntarily terminated without drilling the obligation well(s). On that date, BLM added the "public interest requirement" as a precondition to the validity of a unit or communitization agreement.16 As BLM explained in the preamble to the regulation, the Secretary's authority to approve unit agreements requires a finding that the agreement is "necessary or advisable in the public interest."17 BLM concluded that the public interest is not served by approving unit agreements which, as a practical matter, do not promote exploration and production but only extend leases.18 Consequently, all unit approvals are now subject to the unit operator's satisfaction of the public interest requirement which requires the commencement and diligent prosecution of drilling operations in accordance with the terms of the agreement.19 If the public interest requirement is not satisfied then the unit approval is deemed to be void ab initio and thus the unitized leases are ineligible for any extensions which might otherwise have been earned.20
C. Initial Five Year Term
When unit drilling operations result in the completion of a well capable of producing unitized substances in paying quantities (as that term is defined in § 9 of the model form)21 then a participating area will be established, as discussed in detail in Part IV below. The effective date of the initial participating area marks the start of the initial five
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year term of the unit agreement.22 There is no continuous drilling obligation during this five year term. However, any drilling must conform with the plan of development on file with the BLM.
D. Plan of Development
§ 10 of the model form requires the unit operator to submit for BLM's approval "an acceptable plan of development and operation for the unitized land which, when approved by the authorized officier [sic], shall constitute the further drilling and development obligations of the Unit Operator under this agreement for the period specified therein."23 The first plan of development is due within six months after completion of the first unit well capable of producing in paying quantities,24 although that deadline can be extended as, for example, where a long testing period is required to determine whether the well is, in fact, capable of producing in paying quantities...
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