CHAPTER 20 DEVELOPMENT CONTRACTS FOR OIL AND GAS
| Jurisdiction | United States |
(Jan 1990)
DEVELOPMENT CONTRACTS FOR OIL AND GAS
Bureau of Land Management
Reno, Nevada
Table of Contents
INTRODUCTION
AUTHORITY AND BACKGROUND
THE 1920 MINERAL LEASING ACT, AS AMENDED
Establishing Development Contracts
Acreage Limitation
Cooperative Plans and Excepted Acreage
REGULATIONS
DELEGATION TO THE BLM STATE DIRECTORS
WHAT IS A DEVELOPMENT CONTRACT?
DEVELOPMENT CONTRACTS VERSUS UNIT AGREEMENTS
THE 1968 POLICY STATEMENT
SOME CONTRACT SPECIFICS
BENEFITS TO THE PUBLIC AND CONTRACT PARTICIPANTS
DEVELOPMENT CONTRACTS, ANOTHER PLANNING AND CONSERVATION TOOL
SOME HISTORICAL NOTES
THE ALASKA CONTRACTS
DEVELOPMENT CONTRACTS IN THE 60'S AND 70'S
DEVELOPMENT CONTRACTS OF THE 80'S
THE CURRENT NEVADA SITUATION
CONTINUED EXPLORATION ACTIVITY
INDIRECT EFFECTS
A CASE STUDY, THE PANCAKE DEVELOPMENT CONTRACT
OIL AND GAS LEASE SALES IN NEVADA
THE FUTURE OF DEVELOPMENT CONTRACTS
THE GENERAL ACCOUNTING OFFICE INVESTIGATION
THE FUTURE
Appendix A
Appendix B
———————
[Page 20-1]
INTRODUCTION
This paper presents the regulatory guidelines concerning the use and application of development contracts, a brief historical background of development contracts and some practical suggestions regarding formation of development contracts for oil and gas. This paper is intended to give the reader some background on how development contracts have been used in the past, their current use and purpose and offers some guidelines to consider in the formation of a development contract.
AUTHORITY AND BACKGROUND
THE 1920 MINERAL LEASING ACT, AS AMENDED
Establishing Development Contracts
There was no mention of development contracts within the initial 1920 Mineral Leasing Act. The Act of March 4, 19311 amended Section 17 of the 1920 act to include:
The Secretary of the Interior is hereby authorized, on such conditions as he may prescribe, to approve operating, drilling, or development contracts made by one or more lessees of oil or gas leases, with one or more persons, associations, or corporations whenever, in his discretion, the conservation of natural products or the public convenience or necessity may require it or the interests of the United States may be best subserved thereby. All leases operated under such approved operating, drilling, or development contracts, and interests thereunder, shall be excepted in determining holdings or control under the provisions of this Act.
Acreage Limitation
[Page 20-2]
Acreage Limitation
The 1920 Mineral Leasing Act also contains provisions limiting the amount of federal oil and gas leases which may be held.2 These acreage restrictions are found at 43 CFR 3101.2-1(a):
Public domain lands — No person or entity shall take, hold, own or control more than 246,080 acres of Federal oil and gas leases in any one state at any one time.
The acreage limitation created problems in those active areas where gas fields were large and acquiring leases for the purpose of collection facilities would exceed the limitation. Companies could not join together to consolidate gas collection and storage facilities under one leasehold due to the restrictive acreage limitation. Amendments to the Mineral Leasing Act created the regulation terminology we see today at 43 CFR 3105.3 which alleviated the problem for large scale pipeline operations. There are currently a handful of gas field development contracts still active in the San Juan Basin in New Mexico.
Cooperative Plans and Excepted Acreage
The Mineral Leasing Act contains provisions to encourage operators and lessees to join with one another for the purpose of more properly conserving the natural resources.3 The definition of excepted acreage is found at 43 CFR 3101.2-3:
Excepted acreage — Leases which are committed to any unit or cooperative plan approved or prescribed by the Secretary and leases subject to an operating, drilling or development contract approved by the Secretary, shall not be included in computing accountable acreage.
REGULATIONS
Regulations pursuant to development contracts are found at 43 Code of Federal Regulations (CFR) subpart 3105.3—Operating, drilling or development contracts:
Purpose — Approval of operating, drilling or development contracts ordinarily shall be granted only to permit operators or pipeline companies to enter into contracts with a number of lessees sufficient to justify operations on a scale large enough to justify the discovery, development, production or transportation of oil or gas and to finance the same.
[Page 20-3]
Requirements — The contract shall be accompanied by a statement showing all the interest held by the contractor in the area or field and the proposed or agreed plan for development and operation of the field. All the contracts held by the same contractor in the area or field shall be submitted for approval at the same time and full disclosure of the projects made.
DELEGATION TO THE BLM STATE DIRECTORS
The authority to enter into development contracts was delegated to each BLM State Director after the merger of the Minerals Management Service and BLM in 1983.4
WHAT IS A DEVELOPMENT CONTRACT?
The definitions of development contracts have evolved through time. The regulations specify that operating, drilling and development contracts permit operations on a scale large enough to justify discovery, development, production or transportation of oil and gas. Use of development contracts in Alaska demonstrated the flexibility of the legislation to accommodate exploration needs in frontier areas as well as to solve acreage limitation constraints in large producing fields.
The purpose of a development contract for oil and gas is to provide for exploration in a horizontally or vertically remote area relative to current oil and gas development.
DEVELOPMENT CONTRACTS VERSUS UNIT AGREEMENTS
Due in part to the paucity of information commonly available concerning development contracts and a relative abundance of knowledge and experience in the industry with unit agreements, there is a natural tendency to draw parallels between the two. In order to learn more about development contracts, it is helpful to draw a comparison from something about which we know, namely unit agreements. However, there are significant differences between the two.
All of the exploration-type development contracts which are in effect today have provisions to allow for the formation of unit agreements within each development contract. The fact that unit agreements are used regularly within development contracts helps to illustrate the differences between them.
[Page 20-4]
The development contract is most useful early in the exploration phase, while unit agreements are a logical next step. The amount of data which are available up front in a proposed development contract area are limited. For example, the basic geological components for oil and gas accumulation could be present in the proposed contract area but the level of knowledge necessary to form a unit agreement, might be lacking.
Although similar in effect, i.e., acreage excepted from chargeability, unit agreements and development contracts are basically different:
-Development contracts do not cause lease segregation or extension in any manner.
-Drilling operations upon a unit area may benefit other committed leases within the unit with lease extensions but development contracts provide no similar benefit.
-Unit agreements call for a drilling commitment, development contracts may not.
-Although changes have been recommended in the size of units, the current Bureau guidelines call for a limit on the number of acres which should be committed to a unit agreement; development contracts are not limited in regards to size.
-Unit agreements by themselves do not call for sharing data with the BLM during or after approval.
Some Bureau offices have asked for a review of the geologic basis for the development contract to identify the size and boundaries of the area under consideration. Without some understanding of the purpose of the exploration effort, namely the nature of the geologic play, it is difficult to determine if the proposal is or is not in the interest of the public.
THE 1968 POLICY STATEMENT
A policy statement signed by David Black,5 Undersecretary of the Interior, gave notice that the Department of the Interior would entertain requests for approval of operating, drilling or development contracts. This policy statement gave broad guidelines as to the requirements and criteria:
1. The contract area should be relatively unexplored.
2. The contract is designed to insure approval will be beneficial to the public.
3. The contract calls for definite exploratory objectives, a timetable, significant financial expenditures and a definite drilling obligation. Information gathered relative to the contract shall be made available to the Geological Survey, and
[Page 20-5]
relief from these obligations shall be limited to exceptional situations.
It is this policy statement that defines the basic development contract criteria.
SOME CONTRACT SPECIFICS
Each contract provides definite obligations and timetables to meet the development objectives. The specific obligations are flexible for each contract but should include either a definite exploration commitment in dollars or a drilling commitment. If a commitment is not met for a specific year or phase in Nevada, the company would write a check to BLM for the agreed upon amount. This provision is a safeguard only; and the emphasis is on development.
In identifying specific timetables, BLM has allowed spillover of a certain percentage of dollar commitments into later years or phases. In all cases however, some sizable independent development commitment is required for each phase. Although most Nevada development contracts do not have well commitments...
To continue reading
Request your trial