CHAPTER 7 PRODUCTION ACCOUNTABILITY: THE STATUTES, REGULATIONS, AND POLICIES BEHIND BLM'S ROLE
| Jurisdiction | United States |
(Feb 2004)
PRODUCTION ACCOUNTABILITY: THE STATUTES, REGULATIONS, AND POLICIES BEHIND BLM'S ROLE
Bureau of Land Management
Billings, Montana
I. Introduction
Onshore oil and gas lease operations are subject to a variety of legislation, regulations, lease terms, Onshore Oil and Gas Orders, Notices to Lessees, written orders, and other instructions from federal authorities. Not only do many different rules exist affecting lease operators, but these requirements come from multiple sources. Generally, the Minerals Management Service (MMS), Department of the Interior, is responsible for the collection of royalties and related payments stemming from operations on oil and gas leases. 30 C.F.R. § 201.100 . This responsibility also includes maintaining oil and gas accounting records, conducting audits for royalty payments, and all other royalty management functions. Id. However, the Secretary has delegated much authority to the Bureau of Land Management (BLM) to oversee the production of oil and gas in order to ensure operator accountability and the accurate computation of those royalties. See 43 C.F.R. Part 3160. Thus, the impact of BLM on oil and gas royalty issues must not be ignored.
Section 32 of the Mineral Leasing Act of 1920, 30 U.S.C. § 189, as well as section 301 of the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA), 30 U.S.C. § 1751, confer upon the Secretary of the Interior the broad authority to "prescribe such rules and regulations as he deems reasonably necessary" to carry out these Acts. 30 U.S.C. § 1751(a). Among the reasons Congress enacted FOGRMA was concern over the accuracy of the production information submitted by operators to the federal government, especially its impact on royalties. 30 U.S.C. § 1701. Pursuant to this authority, the Secretary has promulgated rules which delegate to the Director of BLM the authority to regulate oil and gas production on leased federal and Indian land. 43 C.F.R. Part 3160. The BLM also has the authority to issue Onshore Oil and Gas Orders, which themselves prescribe additional rules and regulations for onshore oil and gas extraction operations. These Orders are promulgated through APA notice and comment rulemaking and therefore carry the force of law. See 43 C.F.R. § 3164.1.
This paper will review the role BLM plays in regulating oil and gas operations. First, this paper will discuss the record keeping responsibilities of oil and gas lease operators. Second, the paper will explore the oil and gas operating standards enforced by BLM. Third, this paper will describe BLM's statutory and regulatory investigatory powers and procedures. Fourth, the paper will discuss the penalties faced by operators who violate BLM's regulations. Finally, the paper will focus on some of the internal policies BLM follows in the exercise of its duties.
II. Operator Recordkeeping Requirements
In enacting FOGRMA, Congress established the basic recordkeeping standards for oil and gas lease operations. Operators, or those directly involved in transporting, buying, or selling oil or gas, must follow the reporting and record keeping requirements set by the Department of the Interior. 30 U.S.C. § 1713(a). Additionally, Congress has set the duration for which an oil and gas operation must maintain its records at seven years from the date a record is created. 30 U.S.C. § 1724(f). Interior may, however, initiate an investigation or audit of the operation. In such cases, operators must maintain indefinitely those records pertinent to the audit or investigation during the audit and any subsequent litigation involving the records. Id.
The BLM regulations describe in greater detail the types of records that operators must maintain for their oil and gas operations. The standard is a strict and broad one, "Ýt¨he operator shall keep accurate and complete records with respect to all lease operations..." 43 C.F.R. § 3162.4-1(a) . The phrase "all lease operations" encompasses, for example, documents relating to facilities and equipment, drilling, production, repairs, and abandonment. Id.
Besides these recordkeeping rules, oil and gas operators are required to submit monthly Oil and Gas Operations Reports (OGOR) that accurately disclose the operations that occurred on the lease and their current status to MMS., These reports are required from the time drilling operations are started and provide: the location of each well; the number of days each well produced; the quantity of oil, gas, and water produced; the disposition of production and "any other noteworthy information on operations." 30 C.F.R. § 216.50 .
Clearly, FOGRMA and BLM's regulations supplementing that statute place significant responsibility on oil and gas lease operators to maintain complete and accurate records of their operations and report production information to either BLM or MMS.
III. Operating Standards
In FOGRMA, Congress demanded that operators protect the oil and gas produced and stored through a site security plan to prevent theft of such oil or gas. 30 U.S.C. § 1712(b)(1). Congress called for the Department of the Interior to develop procedures to increase the accuracy of oil and gas production accounting in order to more accurately determine royalties due the federal government, Tribe or allottee. 30 U.S.C. § 1711(a). Pursuant to these statutory goals, the Department of the Interior has established regulations and BLM has created Onshore Oil and Gas Orders governing site security and the measurement of oil and gas.
A. Well Site Security
Regulations and Onshore Oil and Gas Orders set standards for operation facilities and procedures in order to ensure production accountability and avoid the theft of oil and gas. Critical to the accurate accounting of royalties is the proper measurement of the oil and gas produced. In pursuit of this goal, the Department of the Interior mandates operating standards for storage tanks, valves, and meters.
Several provisions seek to ensure that all oil and gas sold or transported is first measured.
The security and production accountability of oil storage tanks requires that all lines entering or exiting oil storage tanks must have valves capable of being effectively sealed during production and sales operations. 43 C.F.R. § 3162.7-5(b)(1). Seals are important in documenting the removal of production, as well as detecting unauthorized removal of oil and gas. Onshore Oil and Gas Order No. 3, 54 F.R. 8056. Generally, the controlling concept is that valves must be sealed closed during the production phase to prevent access to production and also during sales to prevent unmeasured removal of oil. Id. To supplement this requirement, all equipment needed to effectively seal those valves must be on hand at the operating site. 43 C.F.R. § 3162.7-5(b)(1). To properly account for the oil and gas removed from storage through Lease Automatic Custody Transfer (LACT) systems, the meter totalizer must be non-resettable and components of the LACT that are used for volume and quality determinations of the oil must be effectively sealed. 43 C.F.R. § 3162.7-5(b)(2), (4); Onshore Oil and Gas Order No. 3, 54 F.R. 8056. In the context of gas sales, likewise, no by-passing around meters is permissible. 43 C.F.R. § 3162.7-5(b)(3); Onshore Oil and Gas Order No. 3, 54 F.R. 8056.
Aside from these facility and equipment standards, lease operators are required to take affirmative procedural action. Operators must regularly inspect all lease sites to ensure that the site security standards are met, documenting each of these inspections. 43 C.F.R. § 3162.7-5(b)(6); Onshore Oil and Gas Order No. 3, 54 F.R. 8056. Additionally, should the operator become aware that oil has been stolen or mishandled, that operator must report the incident to BLM by the next business day. 43 C.F.R. § 3162.7-5(b)(8); Onshore Oil and Gas Order No. 3, 54 F.R. 8056.
Oil and gas lease operators have the option to seek a variance from these facility and procedural operating requirements. 43 C.F.R. § 3162.7-5(b)(9). Such a request must be in writing and contain the specific factors supporting the request. Id. BLM has the authority to approve such a variance, however, only where alternative measures ensure greater or equal production accountability and protection from theft of production. Id.
Alongside the requirements covering facilities and equipment, BLM's regulations mandate the creation and maintenance of a site security plan. 43 C.F.R. § 3162.7-5(c)(1). The purpose of security plans is to demonstrate that the oil and gas lease operation can and will meet each of the site security requirements discussed above. Id.; Onshore Oil and Gas Order No. 3, 54 F.R. 8056. Such a plan must be in effect within sixty days after completion of construction of a well site or its first production, whichever occurs first. 43 C.F.R. § 3162.7-5(c)(1). Operators need not submit these plans unless BLM requests to inspect them. Id. Oil and gas lease operators must also present BLM with a site facility diagram within sixty days of installation or modification of measuring facilities. 43 C.F.R. § 3162.7-5(d)(1). There is no set format for such a diagram, but the diagram must accurately identify the vessels, piping, metering system, pits, and sealing position of the valves during the production and sales phases. 43 C.F.R. § 3162.7-5(d)(3).
The role BLM plays in enforcing and monitoring the security of well site operations is important to royalty collection by the federal government.
B. The Measurement of Oil
Pursuant to Congress' request for increased accountability in royalty calculation, the Secretary promulgated regulations setting out basic guidelines for the measurement of oil production. 43 C.F.R. § 3162.7-2; Onshore Oil and Gas Order No. 4, 54 F.R. 8086. Allowable methods for the measurement of oil production are tank...
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