Ms. Russell focuses her practice on mineral title examination, business transactions and regulatory matters before the Colorado Oil and Gas Conservation Commission. Prior to joining Welborn Sullivan Meck & Tooley, P.C., Ms. Russell served as a Judicial Intern for the Honorable Jack Berryhill, 1st Judicial District, Golden, Colorado as well as a... Legal Intern for the Honorable C. Jean Stewart, Denver Probate Court, Denver, Colorado. More

Who Determines What Constitutes a “Reasonable Offer to Lease” When it Comes to Involuntary Pooling? Another Example of Local Governments Attempting to Assert Control

One of the more loosely used terms from Colorado’s Conservation Act and Colorado Oil and Gas Conservation Commission (“COGCC”) Rules, and one of many lawyers’ favorite words to analyze, is the term “reasonable.” When filing for an involuntary pooling application in front before the COGCC, an applicant must comply with COGCC Rule 530, which requires the applicant to, among other things, provide an unleased owner with a “reasonable offer to lease.” In determining whether a lease offer is reasonable, the COGCC shall consider the: (1) date of the lease and primary term or offer with acreage in the lease, (2) annual rental per acre, (3) bonus payment or evidence of its non-availability, (4) mineral interest royalty, and (5) such other lease terms as may be relevant.

Despite the COGCC having been expressly tasked with determining what constitutes a reasonable offer to lease, protesting parties often try to assert themselves as the decider of what is reasonable. This issue recently came to a head. Weld County, as an unleased mineral owner, argued it was the ultimate decision-maker of what is “reasonable” when it comes to a lease offer subject to COGCC Rule 530. Section 30-11-303(1), C.R.S., grants the County the power to lease its oil and gas interests on terms as the County deems to be in its best interest. Accordingly, the County enacted Section 2-2-70, W.C.C., which established the minimum lease terms for tracts of County minerals larger than 40 acres, which are a 3-year primary term, $600 per-acre bonus, and a royalty of not less than 25%. The County therefore argued that any lease terms offered by an operator that are less than those provided in Section 2-2-70, W.C.C., are per se unreasonable because such terms would be contrary to the County’s determination of what is in its best interest. The County went so far as to argue that COGCC should defer to the terms and conditions of Section 2-2-70, W.C.C., as being dispositive as to the issue of whether or not a reasonable offer was made because the terms and conditions were "legislatively determined to be in the best interests of the citizens of Weld County".

In a prehearing order, the COGCC rejected Weld County’s claim that it could determine whether there was a reasonable offer to lease. In denying the protest, the COGCC reasoned that

Weld County cites no legal authority for the proposition that it, and not the Commission, is the appropriate political subdivision of the State of Colorado to determine what terms are just and reasonable in the context of the issuance of an involuntary pooling order. Weld County's position contradicts the plain language of §34-60-116(6), C.R.S., which authorizes the Commission to determine what terms and conditions are "just and reasonable," and §34-60-105(1), C.R.S., which rescinds county authority over all oil and gas conservation and unqualifiedly confers this authority on the Commission. To conclude otherwise would leave to Colorado counties the task of determining reasonableness of terms and conditions of pooling orders. This the legislature did not intend to do, as explained in the discussion in the preceding part of this order, and therefore, Weld County's legal argument is rejected.

Weld County’s protest and assertion that it, not the COGCC, should determine what constitutes a reasonable offer to lease under COGCC Rule 530 and the involuntary pooling statute, Section 34-60-116, C.R.S., are symptomatic of Colorado counties and municipalities desiring to assert more local control over oil and gas operations. As demonstrated by the COGCC’s recent rule making initiated by the Governor’s Oil and Gas Task Force, the counties and municipalities appear to be gaining an additional foothold on oil and gas regulation, which has been and should remain the exclusive jurisdiction of the COGCC. Indeed, allowing each county greater independent authority in regulating oil and gas development would lead to even greater unpredictability for operators, which is detrimental to efficient and economic development of the state’s oil and gas resources.

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Finally – A Policy to Streamline the BLM Communization Agreement Process – IM 2015-124

Dated and effective July 17, 2015, the Bureau of Land Management (“BLM”) issued Instruction Memorandum 2015-124 (“IM-2015-124”). This BLM guidance significantly changes the way federal Communization Agreements (“CAs”) are administered and, for the most part, eliminates some of the cumbersome issues for operators applying for CAs. CAs are used to combine isolated or small federal mineral and/or tribal parcels with fee minerals to form a spacing or proration unit that complies with state law and allows for development of tracts that could not be independently developed or operated on their own.

In addition to attempting to “clean-up” the CA Process, IM-2015-124 addresses some questionable jurisdictional issues. Before IM-2015-124 was issued, there were concerns by industry that the BLM was attempting to expand its management beyond its authorized jurisdiction over federal minerals to fee minerals. For example, in some instances, the language in approved CAs appeared to require the operator to account to the BLM not only for federal minerals but for all minerals, including fee. However, IM-2015-124 now limits the CA responsibilities of the BLM to federal minerals and the Bureau of Indian Affairs to tribal minerals. We note that many of the jurisdictional issues the IM attempts to clarify were called into question by the BLM’s recently proposed rule modifying Onshore Oil and Gas Order No. 3. For more information on these inconsistencies, see Western Energy Alliance’s comment letter on the proposed changes to Onshore Order No. 3:

http://cdn.westernenergyalliance.org/sites/default/files/FINAL%2010.9.15%20OO3%20comment%20letter.IPAA_.WEA_.pdf

In any event, until the changes proposed in Onshore Order No. 3 are made final, the components of IM-2015-124 will govern. Some of the notable changes to the CA process in IM-2015-124 include:

1. An operator may self-certify that the necessary signatures have been obtained (working interest owners and record title owners in the Federal and Indian leases). Rather than submit all of the necessary signatures, an operator can submit the certification statement, word for word from IM-2015-124, to the BLM with its CA, and the BLM will rely on that statement;

2. CA: Exhibit A – the operator may identify all non-Federal/non-Indian interests as a single tract;

3. CA: Exhibit B – An operator may aggregate all of the non-Federal/non-Indian interests into a single entry entitled “Other Interests,” with total aggregate acreages; and

4. CA: Exhibit B – Due to the revisions to non-Federal/non-Indian interests in Exhibits A and B, an operator does not need to provide the lease information for those interests.

The BLM’s goal is to have all CAs in place prior to the date of first production. In fact, the BLM has required applicants appearing before the Colorado Oil and Gas Conservation (“COGCC”) to include specific language in spacing orders that addresses CAs and timing for the operator to apply and comply with the CA process. The COGCC order language usually requires an operator to submit a CA concurrent with the filing of an APD or at least 90 days before the anticipated date of first production.

Any operators actively submitting CAs to the BLM should be well-versed in the changes addressed in IM-2015-124 affecting BLM Manual 3160-9 and be prepared to submit a CA prior to production of a well affecting Federal or Indian interests.

IM-2015-124 can be found at:  http://www.blm.gov/wo/st/en/info/regulations/Instruction_Memos_and_Bulletins/national_instruction/2015/IM_2015-124.html

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At Last: A Federal Oil and Gas Lease Sale in the Pawnee National Grasslands

Developing federal lands in the Northern Denver Julesburg Basin (“DJ Basin”), Colorado, has been a challenge for many operators active in the area because of the presence of the Pawnee National Grasslands (“PNG”), an area that has been largely off-limits to oil and gas development. While development of fee minerals in the DJ Basin has been occurring at a rapid pace, leasing in the U.S. Forest Service-managed PNG has been on hold since 2010, when the federal government began preparation of a new oil and gas plan amendment. However, this may be about to change with the finalization of the Forest Service oil and gas plan and the BLM’s decision to include certain parcels in the PNG in the upcoming May 2015 oil and gas lease sale.

The BLM’s delay in leasing was triggered by a lawsuit initiated in 2010 by WildEarth Guardians that argued that the BLM failed to consider the impacts of oil and gas development on air quality in the Front Range non-attainment area, which includes the PNG. The Forest Service responded to the litigation with a decision that the 1997 Forest Plan and NEPA were out of date based largely on the increased oil and gas development in the Northern DJ Basin.

Three years later, in 2013, the Forest Service initiated work on the PNG, Colorado; Oil and Gas Leasing Analysis Environmental Impact Statement (“EIS”), completed the EIS and issued a Record of Decision in 2013. The Record of Decision permits oil and gas leasing to go forward, but places a “no surface occupancy” stipulation on all PNG parcels. As such, all of the parcels located in the PNG will have no surface occupancy lease stipulations in addition to the standard stipulations to protect air, water, wildlife habitat, historic and cultural resources, and reclamation requirements. With the advent of horizontal and directional drilling, access to most of the offered parcels appears possible from adjacent, lands.

On February 13, 2015, the BLM posted an oil and gas lease sale notice offering 42 parcels (containing a total of 25,215 PNG mineral acres) in the PNG to be leased on May 14, 2015. On March 16, 2015, Rocky Mountain Wild and WildEarth Guardians filed protests on the parcels. WildEarth Guardians’ protest focused on the May 2015 lease sale Environment Assessment (“Lease Sale EA”), arguing that the Lease Sale EA violates NEPA and that the BLM has not complied with its obligations under the Clean Air Act and Endangered Species Act. On April 20, 2015 Western Energy Alliance filed a Response to WildEarth Guardians’ protest arguing that the (1) BLM has complied with the requirements of NEPA in preparing the Lease Sale EA, (2) the Lease Sale EA comports with the conformity analysis requirements of the Clean Air Act, and (3) the Lease Sale EA complies with the Section 7 consultation requirements of the Endangered Species Act.

The BLM has not yet ruled on the protest, so it is not yet certain if some, all, or none of the parcels will in fact be offered at the sale. The BLM has until 60 days following the sale to decide the protests.

BLM May 14, 2015 Lease Sale Information: http://www.blm.gov/co/st/en/BLM_Programs/oilandgas/oil_and_gas_lease/2015/may_2015_lease_sale.html

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