CHAPTER 6 FINAL DECISIONS AND APPEAL PROCEDURES IN DRAINAGE CASES

• Jurisdiction: United States

Federal Drainage Protection & Compensatory Royalties
(Mar 1994)
CHAPTER 6
FINAL DECISIONS AND APPEAL PROCEDURES IN DRAINAGE CASES


Gregory J. Nibert
Hinkle, Cox, Eaton, Coffield & Hensley
Roswell, New Mexico

TABLE OF CONTENTS

SYNOPSIS

Page

I. PRELIMINARY DRAINAGE NOTICE—INITIAL NOTIFICATION LETTER

II. DECISION BY BLM THAT DRAINAGE IS OCCURRING

A. Adverse Decision

B. Commencement of an Administrative Appeal

1. Request for an Administrative Review

2. Time Limitation

3. Place of Filing

4. Supporting Evidence

(a) Written Record

(b) Oral Hearing

5. Service

C. Negotiations with District Office

1. Must Timely Commence an Administrative Review

2. BLM Methodology

3. Negotiations

4. Satisfactory Settlement

D. Administrative Review Proceedings and Hearings Before the State Director

1. Develop a Record

2. Burden of Proof

3. Methodology

4. Settlement

5. State Director Decision

III. APPEAL OF AN ADVERSE STATE DIRECTOR'S DECISION

A. Notice of Appeal

1. Time Limitation

2. Place of Filing

3. Service

4. Proof of Service

5. The Notice of Appeal Commences the Appeal Process to IBLA

B. Statement of Reasons

1. Filing

2. Service on the Solicitor

C. Answer by the Solicitor

D. Reply

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E. Burden of Proof

1. De Novo Review

2. Preponderance of the Evidence

3. Preference to BLM Experts

4. Presumption of the Regularity

5. Procedural Discrepancies

6. BLM Record Review

F. Oral Hearings and Appointment of an Administrative Law Judge

G. Proceedings Before the IBLA

1. Great Deference and Discretion Accorded IBLA

2. Motions

3. IBLA Decision

H. Ex parte Communications

IV. COMMON LEGAL ARGUMENTS IN DRAINAGE DETERMINATION CASES

A. BLM Failed to Meet its Burden of Proof

1. Substantial Drainage

2. Percentage of Production

3. Economic Protection Well

B. BLM Failed to Assess Compensatory Royalty for a Proper Time Period

C. BLM Methodology is Not Correct

1. Drainage

2. Drainage Factor Not Properly Calculated

3. Protection Well

D. Common Lessee Complications

V. APPEALS OF ADVERSE IBLA DECISIONS TO THE UNITED STATES DISTRICT COURT

A. Final Agency Decision

B. Commencement of an Action in District Court

VI. MINERALS MANAGEMENT SERVICE APPEALS

VII. CONCLUSION

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I. PRELIMINARY DRAINAGE NOTICE — INITIAL NOTIFICATION LETTER

Upon the determination by the Bureau of Land Management ("BLM") that a potential drainage situation exists, the BLM will generally send to the record lessee and/or operator (the "lessee") of an adjacent federal or Indian tract an initial notification letter for the purpose of "informing it of the potential drainage situation and the drainage protection obligations, and requesting protective action or technical data."¹ This preliminary notice merely reflects that BLM has identified that a producing well offsets federal or Indian acreage and there is a potential drainage situation. This notice is not a decision that drainage has or is occurring.

The importance of the notice is two-fold. First, it notifies the lessee of a potential drainage situation and is intended to prompt an analysis of whether an economic protection well could be drilled. Second, the notice commences the time that BLM may properly assess compensatory royalty.² The obligation to protect a lease from drainage arises only after a reasonable time following notification that an adjacent well is draining the leased land.³

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The lessee is not required to respond to the preliminary drainage notice. Hastily disregarding the notice, however, may result in foregoing the best opportunity to negotiate with the BLM in the event it is ultimately determined that substantial drainage is occurring and an economic protection well could be drilled. Following the notice, BLM will commence a technical review in an effort to establish whether drainage is occurring, the percentage of production from the offending well attributable to the adjacent federal or Indian acreage, the areal extent of drainage and whether an economic protection well could be drilled. If the lessee disregards the notice, BLM will conduct its technical review without input. If the lessee determines that drainage is occurring or has evidence that drainage is not occurring, it should discuss the matter with BLM. Specifically, the lessee should advise BLM of facts why drainage is not occurring such as the existence of a fault, inadequate production by the offending well, the existence of a dry hole or depleted well on the allegedly drained acreage, or its plans to drill a protection well. If drainage is probably occurring, then the lessee should request the opportunity to make a presentation to BLM regarding geologic, engineering and economic considerations that will be utilized in calculating the drainage allocation factor and the compensatory royalty owed or to establish that an economic protection well could not be drilled. An effort should also be made to encourage BLM to adopt a methodology that will be favorable in reducing the allocation factor or finding that an economic protection well could not be drilled.

If an economic protection well can be drilled, the lessee has a reasonable period of time to commence the drilling of the protection well without incurring any obligation to pay compensatory royalty.⁴ The reasonable time period will be judged by the standard of a reasonably prudent operator under similar facts and circumstances. BLM should be apprised of all efforts to commence the drilling of a protection well, including any delays in the processing of the applications for permits to drill or other matters that could be resolved within the agency.

The preliminary drainage notice is not a decision that can be appealed to the state director or to the Interior Board of Land Appeals (hereinafter referred to as the "Board" or "IBLA"). If the technical review indicates that drainage may exist, BLM may submit a demand letter requiring a response within 60 days.⁵ If there is no response, BLM will conduct an independent technical analysis with available data and could impose a noncompliance assessment.⁶ BLM will either conclude that no drainage is occurring, or a protection well will not be economic, or will issue a decision determining that drainage is occurring and an economic well could be drilled.⁷ The lessee should respond at this level

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regardless of whether it responded to the preliminary drainage notice. BLM will consider the materials submitted by the lessee in making its findings whether drainage is occurring and an economic protection well could be drilled.⁸ If BLM's findings indicate that both drainage is occurring and an economic protection well could be drilled, a decision will be issued assessing compensatory royalty.⁹

II. DECISION BY BLM THAT DRAINAGE IS OCCURRING

A. Adverse Decision.

A decision by BLM assessing compensatory royalty will stand unless it is timely and properly appealed.¹⁰ The decision assessing compensatory royalty is generally a decision of the appropriate BLM district office.¹¹

B. Commencement of an Administrative Appeal.

1. Request for Administrative Review. The first step in appealing a drainage determination decision is the filing of a request for administrative review by the state director.¹² Such a request allows the state director to review decisions of the authorized officer of BLM before a formal appeal is taken to the IBLA.

2. Time Limitation. The request for administrative review must be filed, if at all, within 20 business days of the date the decision was received.¹³ Failure to timely request an administrative review precludes BLM's requirement to conduct an administrative review and further jeopardizes any appeal rights to IBLA.¹⁴

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3. Place of Filing. The request for administrative review must be filed in writing with the appropriate state director, not the authorized officer who made the decision.¹⁵ The appropriate state director is the BLM state director having jurisdiction over the district or area office where the decision was made. The request must be in writing and should be sent certified mail, return receipt requested. However, there may be instances where reliance must be made on an overnight courier receipt slip or hand delivery receipt to prove the date of service. In certain instances, the state director's office may have the capacity of receiving facsimile transmissions and if such form of communication is utilized, it is suggested that the state director acknowledge receipt of the instrument in writing showing the time and place of its receipt and filing.

4. Supporting Evidence. The request for administrative review should generally include all supporting documentation.¹⁶ In addition, if an oral hearing is desired, the request for administrative review should include a request for an oral presentation to the state director.¹⁷ If the supporting documentation cannot be assembled in time or cannot be included within the request for administrative review, the state director, upon request and a showing of good cause, may grant an extension for submitting the supporting data.¹⁸ Any request for an extension should be submitted with the request for administrative review. Generally, the state director will allow supporting documentation to be submitted after the actual receipt of the request for administrative review, particularly where an oral presentation is allowed.

a. Written Record. The supporting documentation, when submitted, will constitute a portion of the written record. In addition, supporting affidavits and reports by experts may be submitted to supplement the supporting documentation or

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summarize and explain the supporting documentation. Once submitted all of the documentation will become part of the record.¹⁹

b. Oral Hearing. The request for an oral hearing, if desired, should be made within the...