CHAPTER 2 STATUTORY CHANGES IN THE MINERAL LEASING ACT OF 1920 BY THE FEDERAL ONSHORE OIL AND GAS LEASING REFORM ACT OF 1987

• Jurisdiction: United States

Federal Onshore Oil and Gas Leasing Reform Act of 1987
(Mar 1988)
CHAPTER 2
STATUTORY CHANGES IN THE MINERAL LEASING ACT OF 1920 BY THE FEDERAL ONSHORE OIL AND GAS LEASING REFORM ACT OF 1987
Lyle K. Rising
U.S. Department of the Interior
Denver, Colorado

I. COMPETITIVE BIDDING

A. The Actual Sales

1. Oral Bidding

2. Royalties

3. Failure to Receive Bids

B. Minimum Acceptable Bid

1. $2 per Acre

2. May be Determined by Secretary After 2 Years

II. NONCOMPETITIVE LEASING

A. Land Not Receiving Competitive Bids

B. First Qualified Applicant

C. Royalty Rate

D. Terminated Leases

III. RENTAL RATES

A. $1.50 per Acre for First 5 Years

B. $2 per Acre for Second 5 Years

C. Minimum Royalty Not Less Than Rental Rate

IV. NOTICE AND RECLAMATION

A. Notice

1. Forty-five days for Lease Sales

2. Thirty days for Applications for Permission to Drill

B. Reclamation Requirements

1. Requirements for Bonding

2. Plan of Operations

3. Reclamation Plan

C. Prohibition of Leasing to Entity in Violation of a Reclamation Requirement

V. FRAUD PROVISIONS

A. Section 5103 — The Secretary May Not Approve Assignments of Less Than 640 Acres in the Lower 48 States Nor of Less Than 2,560 Acres in Alaska

B. Section 5108 — Criminal Violations

1. Fraud or Misrepresentations Are a Crime

2. Penalty of $100,000 or 5 years in Prison or Both

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C. Section 5108 — Civil Actions

1. By the U.S. Attorney General

2. By States Attorneys General

VI. MISCELLANEOUS PROVISIONS

A. Grandfather Clauses

B. Veto by Secretary of Agriculture for National Forest Lands

C. Lease Cancellation

D. ANILCA Provisions

E. New Regulations

F. Test Sale

G. Land Use Study

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The Federal Onshore Oil and Gas Leasing Reform Act of 1987

LYLE K. RISING, Attorney

Office of the Solicitor^* Department of the Interior

Denver, Colorado

A Discussion

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This morning I'm going to discuss how the new amendments to the Mineral Leasing Act actually work. I realize that it's fashionable these days to be cynical about the legislative process — and especially about the budgetary process. When I start having these cynical thoughts, which is often, I think of Germany's Iron Chancellor, Bismarck, who once remarked that there are two things no one should ever see being made — sausage and law.

As most of you know, these new amendments are part of the omnibus Budget Bill passed by Congress just before Christmas. For that reason, you might expect that these amendments are just hastily enacted legislation which does more harm than good. Happily, that is not the case. The new amendments are well thought out ways of dealing with existing problems in the award and administration of Federal oil and gas leases. If you ever have occasion to examine the legislative history of the bills introduced into the House and Senate, you will find extensive dissenting opinions, including an impassioned plea by Dick Cheney of Wyoming. Virtually all of his concerns were accommodated in the law as enacted. Let's turn to the new law with that in mind and see exactly what we have.

The new amendments make three fundamental changes in the Mineral Leasing Act. The first and most important change is that all land offered for leasing must first be offered competitively. The second major change requires that a plan of operations and reclamation be filed and approved before the operator may commence

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on-the-ground operations. This second change at first glance appears to be more cosmetic than real because the Congress enacted requirements that had previously been in the Department's regulations and orders. But this change also shifted authority over surface operations on Forest Service lands from the BLM (Bureau of Land Management) to the Forest Service. The third fundamental change adds to the Mineral Leasing Act extensive provisions for preventing fraud in the sale of Federal oil and gas leases. This includes both civil and criminal penalties. These three changes are the principal focus of this discussion.

As I said, the first and most important change in the law is the switch from what had been a mostly noncompetitive system of leasing to a mostly competitive system. The old system of leasing did have a provision for some competitive leasing — but only for those areas that were within a known geological structure of a producing oil field. I'm sure that most of you here today are familiar with the acronym for that kind of land — KGS. Under the old system, 7% of all land was leased competitively and 93% was leased noncompetitively. It was the fact that so much land was leased noncompetitively that led Congress to enact these new amendments. Some of that land leased noncompetitively was very valuable. Some of you may be familiar with the Amos Draw area located near Gillette, Wyoming. The BLM leased certain tracts in that area worth millions of dollars on a noncompetitive basis — in that case, through a drawing. And the noncompetitive leasing system had become a luck-of-the-draw sort of lottery with Byzantine rules

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providing ample opportunity for error on the part of the applicant. The Department also detected considerable fraud on the part of the unscrupulous in attempting to win valuable leases for a pittance. As one judge put it, "When you determine to give something away, you're going to draw a crowd." Thor-Westcliffe Development, Inc. v. Udall, 314 F.2d 257, 260 (D.C. Cir. 1963).

The old system also had problems with the competitive leasing scheme. First and foremost, the very notion of a known geological structure is a legal notion. It has no scientific basis, though geologists have done the best they could over the years with this legalism. Nevertheless, litigation on this issue over the years was extensive. See, e.g., Bender v. Clark, 744 F.2d 1424 (10th Cir. 1984). The other problem with the old competitive lease system was the difficulty in placing an accurate value on properties not yet drilled or in production. Where there had been comparable sales in the area, it was easy to determine the minimum bid which the BLM would accept. Where there had been no such comparable sales, the BLM's estimates were as inaccurate as industry's as to the worth of a parcel. See Harold Green v. Bureau of Land Management, 93 IBLA 237 (1986).

Congress attempted to solve all the foregoing problems by abolishing both parts of the old system, that is, the competitive and noncompetitive parts.

The competitive part of the new system is different from the old in several important respects. Congress abolished the entire concept of a known geological structure of a producing oil field for all future leases. From now on, all land will be first offered competitively. This includes land that has never before been leased as well as land in expiring leases.

Another significant change is that Congress has done away with evaluations by the BLM to determine whether an applicant has offered a minimum acceptable bid. Congress replaced the BLM determination of a minimum acceptable bid with a statutory minimum acceptable bid of $2 per acre for all competitive leases. 30 U.S.C. § 226(b)(1)(B). The House Bill called for an additional evaluation of the bid by BLM to determine whether the bid also met the public interest. This was one of the more vigorous points of dissent in the House by those like Dick Cheney of Wyoming who argued that having additional review simply retained what Congress was trying to abolish. See H.R. Rep. No. 100-378 (Pt.1), 100th Cong., 1st Sess. 38 (1987). During the Conference Committee, the conferees agreed that whatever was bid would be acceptable without further review by the BLM provided that it met the statutory minimum bid of $2 per acre. See H.R. Rep. No. 100-495, 100th Cong., 1st Sess. 780 (1987).

Another change in the competitive system is that all bidding will be done orally at public auctions held at least quarterly by the BLM. 30 U.S.C. § 226(b)(1)(A). As you know, the previous system

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used sealed bids which were opened on the day of the sale. Many states have apparently had great success with oral bidding and the Department anticipates no problems.

Some of the language of the previous statute has been retained. For example, in order to obtain a lease, a bidder must not only be the...