CHAPTER 5 BASIC PROCEDURES THROUGH RESOLUTION

• Jurisdiction: United States

Federal Drainage Protection & Compensatory Royalties
(Mar 1994)
CHAPTER 5
BASIC PROCEDURES THROUGH RESOLUTION
James D. Chase
Casper District Office Bureau of Land Management
Casper, Wyoming
James G. Pettengill
Roswell District Office Bureau of Land Management
Roswell, New Mexico

TABLE OF CONTENTS

SYNOPSIS

Page

I. INTRODUCTION

II. BASIC PROCEDURES

A. Drainage Case Identification

1. Well Review

2. Administrative Review

3. Tracking and Ranking Procedures

B. Initial Notification Letter

C. Technical Reviews (Initial)

1. Geologic

2. Engineering

D. Correspondence with Lessee(s) (Part 1)

E. Demand Letter

F. Technical Reviews (Final)

1. Geologic

2. Engineering

3. Economic

G. Correspondence with Lessee(s) (Part 2)

H. Drainage Case Resolution

I. Decision Letter

J. MMS Notification Letter

K. Indian Lands

1. Well Located in Same Spacing Unit

2. Well Not Located in Same Spacing Unit

3. Correspondence

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INTRODUCTION

This paper will discuss the Bureau's drainage procedures for protecting the royalty interest for leased and unleased Federal, Tribal and Allotted mineral interests from the loss of oil and gas resources by drainage. The objectives of the drainage program are to prevent substantial loss of oil and gas resources from jurisdictional lands due to drainage, and when such loss is not prevented, to ensure that the Federal or Indian lessors are not subjected to significant revenue losses through such drainage¹ .

Attached is a flowchart which illustrates the drainage procedures from identification of a potential drainage situation to the retirement of a potential drainage situation case when the Minerals Management Service (MMS) initiates collection for compensatory royalty.

This paper is not intended to represent official Bureau policy nor be a legal analysis. It is intended to be a practical guide for outlining the procedures that the Bureau follows in identifying and pursuing potential drainage situations.

BASIC PROCEDURES

A potential drainage situation (PDS) exists when Federal or Indian lands are offset by a producing well located on adjoining fee land, lower royalty, participation or allocation Federal or Indian land, different ownership Indian land, or Federal land for which the revenues are distributed to different accounts, provided the Federal or Indian spacing unit, or common well development or spacing pattern, is not protected by (1) a well that is then producing from the same reservoir(s); (2) a well that formerly produced from said reservoir(s) and is now exhausted; or (3) a well that sufficiently but unsuccessfully tested said reservoir(s)² . A PDS exists for Federal or Indian lands under the following four categories³ :

1. Ownership. A PDS exists for Federal or Indian lands where there is production of oil or gas resources from a well located on adjacent lands not owned by the United States, Indian tribe or allottee involved.

2. Royalty Rate. A PDS exists for Federal or Indian lands where there is production of oil or gas resources from a well located on adjoining Federal, tribal or allotted (same tribe or allottee) lands bearing a lower royalty rate.

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3. Lease Account. A PDS exists for Federal lands where there is production of oil or gas resources from a well located on adjoining Federal lands when the revenues from those lands are distributed to different accounts.

4. Participation. A PDS exists for Federal or Indian lands where there is production of oil or gas resources from a well located on adjoining Federal, tribal or allotted (same tribe or allottee) lands from which the lessor receives royalties, but at a smaller participation or allocation rate than the offended lands.

DRAINAGE CASE IDENTIFICATION

Most PDS are identified through examination of the Bureau's oil and gas field maps. The maps are continuously updated and include information on lease, unit agreement (participating areas), and communitization agreement (CA) boundaries, and well name and number, location, status and productive horizon. Note: If a offended lease expired more than six years ago, then a PDS will not be identified.

WELL REVIEW

All well completions and recompletions are identified and reviewed. A screen is then used to retire all PDS that are not likely to cause drainage. An example of a screen may include assigning points to a PDS based on the location...