FEDERAL AND INDIAN ROYALTY PAYMENTS ON HORIZONTAL WELLS

• Jurisdiction: United States

Horizontal Oil & Gas Development
(Nov 2012)
CHAPTER 13B
FEDERAL AND INDIAN ROYALTY PAYMENTS ON HORIZONTAL WELLS
Deborah Gibbs Tschudy
(with assistance from Brian Delehanty)
Office of Natural Resources Revenue
Denver, CO

DEBORAH GIBBS TSCHUDY serves as the Deputy Director of the Office of Natural Resources Revenue (ONRR) - an agency within the U.S. Department of the Interior. ONRR is responsible for the collection, disbursement, valuation, and audit of revenues associated with the leasing and production of minerals on Federal and American Indian lands, with collections of an estimated $10 billion annually. During her career with the Department of the Interior, Ms. Tschudy has directed regulatory and policy development in the areas of royalty valuation, Native American Indian trust management, hard rock mining, and information technology. From November 1992 to October 2000, Ms. Tschudy served as the agency's Chief, Royalty Valuation Division and oversaw the development of several valuation regulations governing Federal and Indian leases. From 2000 to 2004, she served as Program Director for ONRR's Audit and Compliance program, providing leadership over delegated and cooperative audit agreements with 11 States and 7 American Indian Tribes. She was responsible for implementation of the provisions of the Energy Policy Act of 2005 and the Gulf of Mexico Energy Security Act of 2006 that impact minerals revenue management. As Deputy Director, Ms. Tschudy oversees ONRR's operations in Lakewood, Colorado. Ms. Tschudy served on the Program Committee of the 1998 and 2000 Rocky Mountain Mineral Law Foundation (RMMLF) Special Institutes on Federal and Indian Oil and Gas Royalty Valuation and Management, and co-chaired the 2004 and 2007 Special Institutes. She has also served as a trustee-at-large for the RMMLF. Ms. Tschudy is a recipient of the President's Rank Award for Meritorious Service and was chosen as the Colorado Federal Executive Board's 2011 Executive of the Year. She received a Bachelor of Arts in Mathematics from the University of Colorado and a Master's of Science in Mineral Economics from the Colorado School of Mines.

Table of Contents

I. Introduction

II. Background

A. The Roles of Federal Agencies in Horizontal Oil and Gas Development on Federal and Indian Lands

B. Reporting and Paying Federal and Indian Royalties

C. Reporting Production on Federal and Indian Leases

D. Unit and Communitization Agreements

III. The Challenge with Horizontal Drilling on Indian Leases

IV. Pre- Communitization Agreements on Indian Allotted Leases

A. The Fort Berthold Indian Reservation

B. How the Pre- CA Process Works

C. Benefits of the Pre-CA Process

V. Future Actions/Next Steps

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I. Introduction

Over the past 10 years, there have been significant technological advances in horizontal drilling, which is frequently combined with hydraulic fracturing. This combination, together with the discovery that these techniques can release significant quantities of oil and gas from large shale deposits, has led to production from geologic formations in parts of the country that previously did not produce significant oil or gas.

Until quite recently, shale formations rarely produced oil or gas in commercial quantities because shale generally does not generate flow of hydrocarbons to well bores unless the operator can induce mechanical changes to the properties of the rock. The development of horizontal drilling, combined with hydraulic fracturing, has made the production of oil and gas from shale possible. The Bureau of Land Management (BLM) estimates that about 90 percent (approximately 3,400 wells per year) of wells currently drilled on Federal and Indian lands are stimulated using hydraulic fracturing techniques.¹

In general, royalty obligations and reporting and payment requirements for Federal and Indian leases are the same whether an operator drills a vertical or a horizontal well. A challenge arises with the distribution of royalties when the horizontal drilling occurs on Indian allotted lands and, for various reasons, the approval of a communization agreement or unit participating area lags behind production and the obligation to report and pay royalties.

II. Background

A. The Roles of Federal Agencies in Horizontal Oil and Gas Development on Federal and Indian Land

For over 90 years, the Department of the Interior has administered an oil and gas leasing program for Federal and Indian lands. For leases on Federal lands, States and local governments share roughly 50 percent of the leasing revenue, depending on land category and location, with the remainder going to the U.S. Treasury. Indian Tribes and individual Indian mineral owners (allottees) receive 100 percent of revenues derived from their lands. Responsibilities for leasing, environmental safety and enforcement, and revenue collection management are divided among the following Department agencies:

The Bureau of Land Management (BLM) is the Federal agency within the Department that administers onshore public lands and natural resources. The BLM programs provide for the protection, orderly development, and use of the public lands and resources under principles of multiple use and sustained yield. In addition to its surface management responsibilities,

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BLM is also responsible for onshore leasing and associated operational functions such as approving permits for drilling and production operations, diligence, drainage, production verification, onsite inspections, and enforcement.

Depending upon the location of an onshore lease, BLM may not be the surface management agency. Other agencies, such as the U.S. Forest Service or the U.S. Army Corps of Engineers, may be responsible for surface management. In these cases, BLM is still the leasing agent, responsible for related operational approvals.

The Bureau of Indian Affairs (BIA) is the operational supervisor for all mineral leases on Indian lands, ensuring onsite compliance, appraising the value of resources, and providing expert advice on drilling permits, diligence and other operational matters. Among other things, BIA 1) conducts advertised oil and gas lease sales, 2) approves and issues individual Indian/ Tribal leases and Indian Mineral Development communitization and unitization agreements, 3) determines minimum royalty rates, rental rates, and lease terms, 4) approves easements for all oil and gas activity on trust land, 5) recommends approval of Applications for Permit to Drill (APD) to BLM, 6) processes bi-monthly distribution of oil and gas royalties based on Office of Natural Resources Revenue data, and 7) collects all rents due on nonproducing Indian leases.

The Office of Natural Resources Revenue (ONRR) is the Federal Agency within the Department of the Interior that is responsible for the collection and disbursement of mineral revenues paid on Federal and Indian oil and gas, coal, and other mineral leases onshore and for leases on the Outer Continental Shelf (OCS). ONRR ensures that all revenues from Federal and Indian mineral leases are efficiently, effectively, and accurately collected, accounted for, verified, and disbursed to the appropriate recipients in a timely manner and in accordance with existing laws, regulations, lease terms, orders, and notices, and provides support for technical lease management functions.

The Office of Special Trustee (OST) was established by the American Indian Trust Fund Management Reform Act of 1994. OST provides Department-wide oversight for the reform of Indian trust management and the implementation of new fiduciary and accounting systems. Within two years of its inception, OST's oversight role was expanded by Secretarial order to include operational functions: accounting, investment and disbursement of beneficiary funds. In addition, OST maintains trust records, conducts land appraisals and provides beneficiary services including a call center and Fiduciary Trust Officers. Among other things, OST 1) makes royalty payments based on availability of funds from ONRR and payment instructions from BIA; 2) makes payments by direct deposit, debit card or mails checks to Indian mineral owners; and 3) mails Explanation of Payment to Indian mineral owners based on BIA instructions.

B. Reporting and

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