CHAPTER 8 OIL & GAS PERMITTING AND REGULATORY COMPLIANCE

JurisdictionUnited States
Due Diligence in Oil and Gas Transactions
(May 2011)

CHAPTER 8
OIL & GAS PERMITTING AND REGULATORY COMPLIANCE

Kenneth A. Wonstolen
William E. Sparks
Jamie Jost
Beatty & Wozniak, P.C.
Denver, Colorado

KENNETH A. WONSTOLEN joined Beatty & Wozniak, P.C. in Denver as senior counsel on January 1, 2009. Ken has more than 30 years of experience in energy policy and law, including geothermal and other renewable resources, and emphasizing a wide range of oil and gas matters. He has served as an oil and gas trade association executive, and as counsel to a number of oil and gas clients. Ken spent several years as a corporate officer responsible for project development, public affairs, investor relations, and environmental compliance. Ken has a wide range of transactional experience, including the negotiation of purchase and sale agreements, asset acquisition and related due diligence, including a leasing project in Ireland. He also has extensive environmental expertise, including design, oversight and implementation of environmental, health and safety compliance plans; coordination of reporting and response to spills, releases, accidents and resolution of enforcement actions; negotiation of site remediation and closure plans, and oversight of environmental contractors. Ken handles permitting, spacing, well density, pooling, regulatory compliance and other oil and gas commission matters. He also represents his clients before other administrative panels, as well as the courts. Ken is familiar with state and local permitting and negotiation with landowners, neighborhood groups, local governments and commercial developers. He has been instrumental in the development of air and water quality programs related to oil and gas. Ken is an expert bill drafter and frequent witness in legislative hearings. He has testified before the U.S. Congress on federal leasing reform; natural gas royalty valuation; regulation of gas transportation; the impact of Canadian gas imports, and access to federal lands. He is frequent speaker to professional societies on oil, gas and general energy issues, and has been cited as source in the Wall Street Journal and other publications.

WILLIAM E. SPARKS is with Beatty & Wozniak, P.C. in Denver. He represents clients on matters involving energy-related litigation and natural resources development on federal and Indian lands. Specifically, Bill has represented independent oil and gas producers in litigation involving the National Environmental Policy Act, Endangered Species Act, National Historic Preservation Act and Energy Policy Act. Bill also represents oil and gas producers before U.S. federal courts and the Interior Board of Land Appeals regarding the issuance and development of federal oil and gas leases and related environmental law compliance. Bill routinely advises companies on regulatory compliance at the state and federal level. Bill joined Beatty & Wozniak, P.C. in 2009 after practicing in the Washington, D.C. and Denver offices of Fulbright & Jaworski L.L.P. Bill earned his J.D. from the Texas Wesleyan University School of Law in 2003 and his undergraduate degree from Ole Miss in 1999. He is admitted to practice in Colorado, Wyoming, Texas and the District of Columbia. Bill is also admitted to practice in the U.S. District Court, District of Colorado and District of Columbia and the U.S. Court of Appeals for the D.C. Circuit and Tenth Circuit.

JAMIE JOST joined Beatty & Wozniak, P.C. on January 1, 2010, bringing with her eight years of experience focused primarily on oil and gas issues in the Rocky Mountain region. Jamie's practice at Beatty & Wozniak focuses on matters relating to exploration, production, and development of oil and gas as well as local, state, and federal permitting and regulatory issues. Jamie comes to Beatty & Wozniak from Suncor Energy (U.S.A.) Inc. where she served as Corporate Legal Counsel and was primarily responsible for legal issues for Suncor's pipeline affiliate's land, title, litigation and permitting matters. Specifically, Jamie worked closely with the business team on the expansion of its existing pipeline system and managed the easement acquisition, permitting, and eminent domain proceedings for the expansion project. She also advised Suncor's Terminal and Distribution Group, Retail Group, and Human Resources Group on various matters. Jamie was in private practice in Wyoming, New Mexico and Colorado prior to joining Suncor. During that time, she represented clients in federal and state courts on various energy issues, including oil and gas royalty litigation, subsurface trespass matters, and surface use issues. Jamie has also represented clients in front of the Colorado Oil & Gas Conservation Commission, the Wyoming Oil & Gas Conservation Commission, and the Interior Board of Land Appeals. In addition to advising clients on transactional oil and gas matters, she has advised both landowners and wind energy companies on the construction and development of renewable energy projects in the Rocky Mountain region. Jamie is excited to return to private practice with Beatty & Wozniak and apply her in-house background to her clients. "I am a true believer in being proactive, rather than reactive. Corporate directors, officers, and counsel are integral pieces of the business puzzle, and their advice and decisions affect their company on a day-to-day basis. Beatty & Wozniak's ability to provide corporate clients with the right answer, the first time, enables them to keep their business running proactively and efficiently." Jamie serves as a trustee for the Rocky Mountain Mineral Law Foundation and has co-authored several oil and gas related articles for the RMMLF. She is a member of the Wyoming Bar Association, Colorado Bar Association Natural Resources and Energy Law Section, and the American Bar Association. She is licensed to practice law in the federal and state courts of Colorado and Wyoming as well as the Tenth Circuit. Jamie received her J.D. from the University of Wyoming in 2002 and her undergraduate degree in Environmental Science from Indiana State University in 1998. Jamie is a member of the Board of Directors for Ronald McDonald House Charities, Inc. and is an active member of her church. She enjoys spending time with her husband and son, walking her two German Shepherds, reading, hiking, and essentially taking advantage of all Colorado has to offer.

Introduction

The influence of government regulation on asset transactions is pervasive. Companies spending tens or hundreds of millions of dollars in an asset acquisition or lease play are generally under considerable time pressure to start putting those assets to work earning a return on investment. However, inattention to issues relating to permitting and regulatory compliance can result in ugly surprises and obstacles to rapid development. Following is a brief list of examples - names have been withheld to protect the innocent:

• Dozens of leases in Montana "suspended" so that BLM can perform additional NEPA analysis of climate change impacts.

• A lessee being told, 8 years into the primary term, that a federal lease is invalid because it did not contain a "no surface occupancy" stipulation, a condition that was not specified in the lease sale notice, but can be found in a appendix to the resource management plan for the area.

• A company finding out that long-existing wells drilled by its predecessor-in-interest did not obtain "special use" permits from the county, and being dragged before the Board of Commissioner for chastisement and possible penalties.

• A company finding out that it was drilling, and had already drilled, wells in a "municipal watershed" without a permit, and having to negotiate a settlement to allow its project to proceed.

• A company having its Colorado air permit pulled for regional EPA review based on the notion of possible "source aggregation" of emissions from a compressor and all of its connected wells.

Just as it is essential to conduct environmental due diligence with respect to past contamination, it is vital to expand the investigation to identify these sort of regulatory roadblocks in asset transactions.

Outline of Topics

I. Overview

II. Federal Land Policy and Management Act

III. National Environmental Policy Act

IV. National Historic Preservation Act

[Page 8-2]

V. Permitting - Brief Overview of Onshore Order No. 1 and Applications for Permits to Drill

I. The Colorado Responsible Party Concept

II. The COGCC Regulatory Reform

III. Colorado Air Quality Regulations

I. Overview

Compliance will federal laws and the process of dealing with the federal regulatory scheme raises many intricate issues that should be considered as part of the due diligence process for oil and gas transactions involving federal oil and gas leases. This paper will discuss some of the important issues to consider in transactions involving federal oil and gas leases and related to due diligence related to the Mineral Leasing Act, Federal Land Policy and Management Act (FLPMA), and the National Environmental Policy Act (NEPA). This paper provides a broad overview of some of the federal statues and land management documents that form the basis of due diligence issues related to oil and gas development on federal lands. Environmental compliance issues related to the other federal statutes, such as the Clean Water Act and Clean Air Act, will be discussed by others as part of this special institute.

Due diligence on potential acquisition of federal oil and gas properties will require review and analysis of the federal oil and gas leases, federal land use plans, and other federal instruments prepared to regulate and guide the management and development of federal mineral resources. These documents will include those prepared in accordance with FLMPA and NEPA. When developing federal oil and gas resources, the lessee or operator must also comply with many other federal...

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