CHAPTER 8 FORMING THE UNIT—FINAL APPROVAL OF EXPLORATORY UNIT AGREEMENTS
| Jurisdiction | United States |
(Jan 1990)
FORMING THE UNIT—FINAL APPROVAL OF EXPLORATORY UNIT AGREEMENTS
Bureau of Land Management
Denver, Colorado
Table of Contents
I. Primary Sources
II. Final Approval of the Unit Agreement
A. Action by the Unit Proponent
B. Action by the Bureau of Land Management
Classification of Tracts
a. Fully Committed
b. Effectively Committed
c. Partially Committed
d. Not Committed
Effective Control
Possibility of Requiring Joinder by Federal Lessee/Working Interest Owner
Final Approval
III. Effect of Approval of Unit Agreement Upon Federal Leases
A. Segregation
1. Vertical Segregation
2. Horizontal Segregation
3. Base, Segregated, and Parent Leases
B. Extension of Lease Affected by Segregation
1. Extension of the Term of the Base Lease
a. 20-year Leases and Renewals Thereof
b. Leases Other than 20-year Leases or Renewals
2. Continuation of the Term of the Segregated Lease
C. Rental/Royalty Status of Base and Segregated Leases Upon Segregation
1. Rentals
2. Producing Leases—(Minimum Royalties
D. The Public Interest Requirement; Possible Subsequent Invalidation of the Unit
———————
[Page 8-1]
This paper deals with the process followed by the Bureau of Land Management in determining to extend final approval to a unit agreement and the array of possible effects upon committed Federal oil and gas leases by that final approval.
I. Primary Sources.
(1) Bureau of Land Management H-3180-1 Handbook — Unitization (Exploratory), dated October 28, 1984.
(2) Bureau of Land Management 3107 Manual — Continuation, Extension, or Renewal, dated October 4, 1984.
(3) Bureau of Land Management H-3105-1 Handbook — Cooperative Conservation Provisions, dated March 20, 1985.
(4) 30 U.S.C. 226, as amended
(5) 43 CFR 3105 , 3107 , 3180 (1988)
II. Final Approval of the Unit Agreement
A. Action by the Unit Proponent.
Once the unit area has been designated and any modifications to the Model Form of the Unit Agreement approved by the Authorized Officer, the proponent of the unit (normally the unit operator) seeks to obtain joinder by all parties holding oil and gas interests in the unit area.
The regulations require that "all owners of any right, title, or interest in the oil and gas deposits to be unitized...must be invited to join the agreement."1 Parties holding royalty interests must be contacted and requested to join the unit agreement, while fee holders of unleased acreage, lessees, and working interest holders must be asked to join both the unit agreement and the operating agreement.
Pursuant to guidance for unit proponents provided in the Bureau of Land Management (BLM) Manual,2 joinders should be notarized or witnessed. Also, signatures by corporate official should be attested and bear the corporate seal and signatures by an agent or
[Page 8-2]
attorney-in-fact should be accompanied by evidence of his or her authority to act in that capacity.
Pursuant to Section 7 of the model form of the unit agreement, any working interest owner and the unit operator, if not the same on all tracts, must enter into a unit operating agreement to provide for payment and apportionment of the expenses of unit operations. Normally a single operating agreement is employed and the joinders executed by working interest owners will ratify both the unit agreement and the unit operating agreement in one document. However, neither the regulations nor the model form of the exploratory unit agreement require that all working interest owners enter into the same or identical operating agreements with the unit operator.3
Once the necessary joinders are obtained, the proponent must submit at least four4 copies of the unit agreement to the authorized officer. More copies may be required if state or Indian lands or other federal surface management agencies are involved. Duplicate originals of every joinder should be submitted, but Bureau guidance allows the submission of a list of overriding royalty holders who have joined the unit agreement in lieu of originals.5
B. Action by the Bureau of Land Management.
Once a request for final approval of a unit agreement is received, BLM makes an extensive review of the submitted material.6 BLM
[Page 8-3]
will insure that a sufficient number of the unit agreements and unit operating agreements are filed. It will also review the text of the agreement to assure that it conforms to the model form and any approved deviations from that format.
By far the most extensive review will be the scrutiny given to Exhibit B, in order to assure that the operator has effective control over the proposed unit exploration and subsequent development. Each tract described in Exhibit B is checked and verified to some extent for several items. All items are generally reviewed for proper arrangement, which normally requires listing of federal leases, in serial order sequence, first, followed by state tracts, and finally fee oil and gas tracts.
The current handbook indicates that all BLM and Indian tracts will be verified for serial numbers, expiration dates, royalty rates, lessees of record, and working interest owners.7 The verification of lessees is relatively routine, but verification of working interest owners is handled differently in BLM offices. In late 1985, intensive BLM review of transfers of operating rights was ordered discontinued by the Bureau. Some state offices have accordingly ceased to keep precise records as to the division of working interest ownership as reflected by such transfers. Guidance has been given to BLM offices to accept the listing indicated by the unit proponent as accurate and determine the status of a tract's commitment on the basis of the holdings indicated. Where such holdings are relatively simple or unchanged since close adjudicative scrutiny ceased, some offices may attempt to verify the working interest. The unit proponent or operator should, however, have BLM
[Page 8-4]
records carefully examined and insure that the holdings indicated are correct or cause the necessary transfers to be properly executed and filed for approval.
Frequently, in the process of obtaining joinders, interests in the leases within the unit area will be transferred to the unit operator or other parties, who are willing to commit the interest to the unit. Often a party with an interest in the area will gladly transfer his interest for some consideration and an overriding royalty, but will not want to execute the unit operating agreement that could subject him to high expenses without any certainty of a return. While such transfers can usually be reflected in Exhibit B immediately for fee and possibly state tracts, transfers and assignments in federal leases must be approved before they are effective, even though the effective date will be the first of the month after proper filing. When such transfers are made, they should be promptly executed on the required BLM transfer and assignment forms and filed for approval. Because high numbers of assignments or transfers are frequently pending approval before state offices, the unit operator or proponent should contact appropriate officials in the office to insure that such transfers are promptly approved. Most BLM offices can approve such assignments within a day or two, once the responsible personnel are aware of the need for quick action. If the leaseholds are nonproducing, as most within an exploratory unit agreement area ordinarily will be, approval is relatively simple. Absent such formal approval, or in cases where approval of the assignment can not be promptly given, the proponent may pursue the alternative of having the interest owner formally commit the interest to both the unit agreement and unit operating agreement, possibly with some sort of indemnification agreement.
The BLM review of the tracts is conducted with a view towards classifying each tract into one of four categories:8
a. Fully Committed. A lease covering a tract will be considered fully committed if all interest owners have joined the unit and all working interest owners have also executed the applicable operating agreement. With fee leases, this means that the underlying royalty owner must have committed his interest to the unit agreement or that the lease itself authorizes the lessee to make such a commitment on behalf of the fee holder of the oil and gas rights. Proof of such authority in the form of a copy of the applicable lease or an affirmative representation that such an authorizing clause appears in one or more identified leases.
[Page 8-5]
b. Effectively Committed. A lease covering a tract will be considered effectively committed if it is fully committed but for the failure of one or more parties owning an overriding royalty or production payment entitlement to have signed the unit agreement. From BLM's perspective, there is little difference between the fully and effectively committed tract. Both types of leases are considered committed to the unit agreement and treated identically for effective control determination and the receipt of any benefits from unitization, such as segregation, drilling and other extensions, and constructive production upon approval of a participating area.
The lack of the overriding royalty holder's joinder can be either advantageous or a detriment to the affected working interest owner. If a unit well is completed successfully, the uncommitted overrides on other leases receiving an allocated share of production will not be entitled to any revenues, but an uncommitted override on the lease where production occurs will be entitled to a payment based on all production from the well, even though some or most of the production is allocated to other leases.
c. Partially Committed. In the fee lease situation, this term is applied to tracts where all lessees of record and working...
To continue reading
Request your trial