CHAPTER 8 INDIAN UNITS AND INDIAN COMMUNITIZATION AGREEMENTS

• Jurisdiction: United States

Onshore Pooling and Unitization
(Jan 1997)
CHAPTER 8
INDIAN UNITS AND INDIAN COMMUNITIZATION AGREEMENTS
James C.T. Hardwick
Hall, Estill, Hardwick, Gable, Golden & Nelson
Tulsa, Oklahoma

TABLE OF CONTENTS PageI. FRAMING THE ISSUE 8-1
II. THE QUADRIPARTITE: KENAI, COTTON, CHEYENNE-ARAPAHO AND WOODS 8-4
A. Kenai 8-4
B. The Kenai Guidelines 8-6
C. Cotton Petroleum 8-8
D. Cheyenne-Arapaho 8-10
(i) Background 8-10
(ii) District Court Action 8-11
(iii) Court of Appeals Decision 8-13
E. Woods 8-15
(i) Background 8-15
(ii) The Secretary's Reversal 8-17
(iii) District Court Action 8-18
(iv) The Panel's Decision 8-20
(v) The Solicitor's Concerns 8-22
(vi) The En Banc Decision 8-23
III. THE AFTERMATH 8-24
A. Critical Comments 8-24
B. Reconciling The Cases: The Author's Views and Comments On Other Consequences 8-26

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(i) The Secretary Is To Decide Communitization, Not Lease Perpetuation 8-26
(ii) Retroactive Communitization 8-29
(iii) Other Bases For Production Sharing 8-34
(iv) Conclusion 8-35
IV. THE NEW REGULATIONS 8-36

Appendix I- Lands Involved in Cheyenne-Arapaho

Appendix II- Lands Involved in Woods

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I. FRAMING THE ISSUE

The ownership of Indian land, whether by an Indian tribe or by an individual Indian, has long been subject to the supervision of the United States government. This supervision is derived from what has been termed a trustee or fiduciary relationship of the government to the Indians. As a result, various treaties and statutes have placed restrictions upon the ability of tribes and certain Indian allottees to alienate Indian land. The granting of oil and gas leases is included within such restrictions.

The basic authority for the leasing of unallotted lands (i.e., lands owned by an Indian tribe) is the Omnibus Leasing Act of 1938, also called the Indian Mineral Leasing Act of 1938. 25 U.S.C. §§ 396(a) -396(g).¹ The Secretary of the Interior has promulgated regulations for the leasing of lands of Indian tribes, bands, and groups for oil and gas. 25 C.F.R., Part 211.² The regulations recognize competitive leasing by public sale to the highest bidder, either by auction or sealed bid, as the only means for obtaining such leases. 25 C.F.R. § 211.3. Since this procedure mirrors the requirements of 25 U.S.C. § 396(b), it may not be waived by the Secretary so as to permit privately negotiated leases. However, under the Indian Mineral Development Act of 1982, 25 U.S.C. §§ 2101-2108 , tribes are authorized, with Secretarial approval (and subject to limitations contained in the tribe's Constitutional Charter), to enter into private negotiations for various types of agreements, including leases, for the development of tribal energy resources. 25 U.S.C. § 2102(a). This act has been implemented by regulations adopted at 25 C.F.R., Part 225, 59 Fed.Reg. 14971 (March 30, 1994).

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The leasing of allotted lands is authorized by 25 U.S.C. § 396.³ These provisions have been implemented by regulations adopted at 25 C.F.R., Part 212.⁴ These regulations also require competitive leasing, by public sale to the highest bidder. 25 C.F.R. § 212.4. However, since the competitive bidding requirement is not found in the statute but only in the regulations, it may be, and has been, waived in appropriate cases by the Secretary in order to permit private negotiation of leases.⁵

Parts 211 and 212 of the regulations, as the basic provisions governing the leasing of tribal and allotted lands, respectively, each recognized the need for the communitized development and operation of leases governed by those Parts. Prior to 1996 amendments⁶ , 25 C.F.R. § 211.21(b) regarding Tribal leases provided:

(b) All such leases shall be subject to any cooperative or unit development plan affecting the leased lands that may be required by the Secretary of the Interior, but no lease shall be included in any cooperative or unit plan without prior approval of the Secretary of the Interior and consent of the Indian tribe affected.

Prior to the 1996 amendments, 25 C.F.R. § 212.24(c) regarding allotted lands provided:

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(c) All leases issued pursuant to the regulations in this part shall be subject to a co-operative or unit development plan affecting the leased lands if and when required by the Secretary of the Interior.

Further, since 1938 the basic form authorized by the Secretary for the leasing of tribal Indian lands contains the following provision, commonly called a "unit operations" clause:

9. Unit Operation. — The parties hereto agree to subscribe to and abide by any agreement for the cooperative or unit development of the field or area, affecting the leased lands, or any pool thereof, if and when collectively adopted by a majority operating interest therein, and approved by the Secretary of the Interior, during the period of supervision.⁷

Paragraph 11 of the basic form for the leasing of allotted lands contains an identical provision.

It has long been recognized that the perpetuation of Indian leases is unaffected by state conservation laws. 25 C.F.R. § 1.4(a) provides (with limited exceptions found in subsection (b)) that the laws, rules and regulations of any state or its political subdivisions regulating or controlling the use or development of real or personal property are inapplicable to any property held or leased under an agreement with or belonging to an Indian or Indian Tribe if held in trust by the United States or subject to any restriction on alienation imposed by the United States. In Samedan Oil Corp. v. Cotton Petroleum Corp.⁸ , Cotton drilled a well on a non-Indian tract in a 640-acre drilling and spacing unit established by the Oklahoma Corporation Commission. Sun had a lease on a 40-acre Indian tract with a primary term expiring October 14, 1974 which Sun agreed to farmout to Cotton. However, Cotton did not submit a communitization agreement encompassing this lease until November 8, 1974. Reasoning that the regulations placed Indian leases under Secretarial jurisdiction, conditioned Indian leases subjection to cooperative agreements to approval of the Secretary and 25 C.F.R. § 1.4 expressly foreclosed the effectiveness of state laws and regulations over restricted Indian property, the court concluded that the Indian lease could not be included in and thus could not be effected by the Oklahoma drilling and spacing unit until such time as authorized by the Secretary of the Interior pursuant to an approved communitization agreement. Since there was no approval of the Cotton communitization agreement

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prior to the end of the primary term of the Indian lease, production from Cotton's non-Indian tract well did not extend the term of the Indian lease.⁹

Similarly, production from Indian leases included within the boundaries of a state drilling and spacing unit will not perpetuate non-drillsite fee or private leases in absence of an approved communitization agreement. In Kardokus v. Walsh¹⁰ , Ward commenced and successfully completed a well on a restricted Indian tract within the boundaries of an Oklahoma Corporation Commission drilling and spacing unit. The Secretary subsequently approved a communitization agreement for the unit. However, the court held that the well on Indian land did not serve to perpetuate non-Indian leases covering non-drillsite unit tracts whose primary terms expired prior to Secretarial approval, reasoning that Indian land could not be considered a part of the state created unit until the communitization agreement had been approved by the Secretary. Thus the well on Indian land could not be considered the unit well until that time.

II. THE QUADRIPARTITE: KENAI, COTTON, CHEYENNE-ARAPAHO AND WOODS

A. Kenai

Prior to the court's decision in Kenai Oil & Gas, Inc. v. Department of Interior¹¹ a lessee could expect to receive approval for the communitization of his Indian leases if the proposed plan of communitization and relevant accompanying paperwork were timely submitted to the applicable BIA Superintendent or Area Director prior to the expiration of the lease and the plan of communitization complied with state's spacing requirements. This likely resulted from a judicially sanctioned Department of Interior policy of deciding communitization approvals based on whether "such agreement is necessary and advisable in the public interest and for

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the purpose of more properly conserving natural resources."¹² The evidence to support this decision was derived almost exclusively from geological, geophysical and other technical data. Not only was unitization viewed primarily as a conservation measure, but it was seen as one "which benefits both lessor and lessee..."¹³ Further, there was a belief that "what would serve the best interest of [the lessee] would likewise serve the best interest of its lessors."¹⁴ For Indian leases, this changed with Kenai.

In Kenai, lessees held several oil and gas leases given by the Ute Indians on lands on the Uintah and Ouray Indian Reservations which were approved by the BIA and had primary terms ending on various dates in 1981. Shortly before the leases were to expire, the lessees submitted to the Superintendent a proposed plan of communitization which would, if approved, have kept the Indian leases in effect by communitizing them with a producing well drilled by lessees on non-Indian land. The Superintendent refused approval because he determined communitization did not serve the best interests of the Indians. Just before the first lease was to expire, lessee filed suit in federal district court seeking a declaration that the Superintendent's actions were invalid and an injunction ordering the Superintendent to approve the agreements. After entering a temporary restraining order, the district court denied a preliminary injunction on the basis that lessees had failed to show that they were likely to prevail on the merits.¹⁵

Preliminarily, the court rejected the Superintendent's contention...