Laura has represented oil and gas producers, a large wind energy project, coal and geothermal operators and other natural resources developers during her more than 35-year career.  She has also served as an arbitrator on a number of matters involving contract disputes between natural resources developers.

REVISED BLM WASTE PREVENTION/METHANE REGULATIONS FINALIZED

Effective November 27, 2018, the revised Bureau of Land Management (BLM) regulations pertaining to waste prevention will take effect. 83 Fed. Reg. 49,184 (Sept. 28, 2018). This final rulemaking eliminates several of the more onerous burdens imposed by the regulations adopted at the end of the previous Administration. 82 Fed. Reg. 83,008 (Nov. 18, 2016) (the “2016 Rule”). The 2016 Rule (sometimes called the methane rule) was officially effective as of January 17, 2017, although many of its provisions called for delayed implementation. The 2016 Rule has been the subject of conflicting rulings from the federal courts in the District of Wyoming (now in the Tenth Circuit Court of Appeals) and the Northern District of California (and briefly in the Ninth Circuit Court of Appeals). Although the adoption of the new final rule would appear to moot that litigation, the States of California and New Mexico, followed by Sierra Club and a number of other non-governmental organizations, filed new lawsuits challenging the 2018 final rule in the U.S. District Court for the Northern District of California. State of California, et al. v. Zinke, et al., Case No. 4:18-cv-05712-YGR (filed Sept. 18, 2018); Sierra Club, et al. v. Zinke, et al., Case No. 4:18-cv-05984-SBA (filed Sept. 28, 2018). Western Energy Alliance and Independent Petroleum Association of America have moved to intervene in the State of California case. This post describes the terms of the 2018 rule that will take effect November 27, 2018, barring an injunction or order vacating the 2018 rule from the federal court in California.

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IBLA Upholds ONRR $3 Million+ Penalty For A Company’s Delay In Correcting Royalty Report Forms

A recent decision of the Interior Board of Land Appeals (IBLA) vividly makes the point that the Department of the Interior considers accurate royalty reporting to be equally if not more important than payment of the proper amounts. In Quinex Energy Corp., 192 IBLA 88 (2017), the operator underpaid royalties on several tribal and allotted leases covering lands on the Uintah and Ouray Indian Reservation in Utah in the amount of $120,242 because it used “erroneous gas prices.” The decision does not explain the reason for the erroneous prices but apparently the underpaid amount was promptly paid upon receipt of the Office of Natural Resources Revenue (ONRR) order to report and pay sent to Quinex. However, it took Quinex between 8 and 22 months to correct the royalty reports on the ONRR-2014 forms that it had filed relating to the royalty underpayments. The ONRR sent civil penalty notices to Quinex assessing penalties in the aggregate amount of $3,217,250 - more than 26 times the amount of the underpaid royalty! The penalty was assessed based on $25 per day for 229 reporting violations (one for each inaccurate line on the 2014 form) that continued for between 8 and 22 months.

The ONRR has statutory authority to assess civil penalties of up to $25,000 per day per violation for knowingly or willfully preparing, maintaining or submitting false, inaccurate, or misleading royalty reports. 30 U.S.C. § 1719(d). Under the Federal Civil Penalties Inflation Adjustment Act of 1990, that $25,000 statutory maximum is now $59,834 (30 C.F.R. § 1241.60(b)(2)). At the time of the events involved in the Quinex case, $25,000 was the maximum penalty, which ONRR reduced, in its discretion, based on the size of the payor (Quinex stated that it had five full-time and four part-time employees). Although there was no allegation that Quinex had behaved willfully, the IBLA stated that it did behave knowingly, because of the significant time between receipt of notice of the order to report and pay and final correction of the reports. The regulations define “knowingly or willfully” to include an act or failure to act committed with actual knowledge, deliberate ignorance, or reckless disregard of the facts surrounding the event or violation. 30 C.F.R. § 1241.3(b). No proof of specific intent to defraud is required as a condition to assessement of a civil penalty for knowing and willful violations of the regulations.

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IBLA Resolves Procedural Question for Review of Lease Suspension Decisions

Most decisions of the Bureau of Land Management (BLM) are appealable to the Interior Board of Land Appeals (IBLA). However, some decisions must first be reviewed by the applicable BLM State Director. Parties who wish to appeal from decisions issued under the oil and gas operating regulations (43 C.F.R. Part 3160) and unitization regulations (43 C.F.R. Part 3180) must first seek State Director review before appealing to the IBLA.

Until recently, it was unclear whether a decision granting, denying or lifting a suspension of a federal oil and gas lease was a decision issued under the Part 3160 regulations, and therefore subject to State Director review, or was a decision issued under the Part 3100 regulations appealable directly to the IBLA. The reason for this uncertainty was that regulations pertaining to suspensions of leases are found in both Part 3160 (43 C.F.R. §3165.1) and Part 3100 (43 C.F.R. § 3103.4-4). Consequently, in the past, if a suspension request was denied by the BLM, we advised clients to file both a State Director review request and a provisional notice of appeal with the IBLA. Of course, the duplicate processes added cost and time to the appeal. In their responses to such provisional notices of appeal, the solicitor’s office generally took the position that such decisions should first be reviewed by the State Director. Now there is a recent decision of the IBLA that clarifies that decisions challenging a BLM suspension decision should first be reviewed by the State Director under the State Director review regulations.

In Southern Utah Wilderness Alliance, 190 IBLA 152 (2017), the IBLA addressed the ambiguity as to the proper appeal route from suspension decisions. It acknowledged that suspsensions are addressed in both parts of the regulations but noted that the regulation at § 3165.1(b) directs the authorized officer to act on suspension applications filed under § 3103.4-4, so that the decision-making authority is more clearly placed in the Part 3160 regulations. The Board also noted that, historically, when the U.S. Geological Survey (USGS) managed operations on federal leases, suspension decisions were first appealable to the Director of the USGS and then to the IBLA. Finally, the IBLA cited to a few of its earlier decisions which, although not directly addressing the question of whether suspension decisions should first be reviewed by the State Director, at least assumed that was the proper route. With the Southern Utah Wilderness Alliance decision, it is now clear that review of any BLM decision granting or denying a suspension of an oil and gas lease must first be reviewed by the State Director under the regulation at § 3165.3(b).

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Standing to Challenge Decisions Approving Federal Units or Suspending Federal Leases

Non-governmental organizations that oppose oil and gas development have in the last few years begun to challenge not only Bureau of Land Management (BLM) decisions authorizing oil and gas drilling operations but also BLM decisions that could have the effect of continuing leases in effect that might otherwise expire. In two recent decisions, the Interior Board of Land Appeals (IBLA) reiterated its position that, in order to seek State Director review of a decision or to appeal a decision to the IBLA, the appellant must demonstrate that the “legally cognizable interests” of it or its members will be adversely affected by the decision under review. Southern Utah Wilderness Alliance, 190 IBLA 152 (2017) (SUWA); Citizens of Huerfano County, 190 IBLA 253 (2017) (Huerfano).

Legally cognizable interests can include cultural, recreational and aesthetic use and enjoyment of the lands. But there must be a causal relationship between the alleged injury to those interests and the BLM decision under review. In addition, the threat of injury must be real and immediate. In SUWA, the appellant challenged a BLM decision suspending leases committed to the Deseret Unit in the Uintah Basin. BLM granted the suspension because its approval of the drilling permit (APD) for the unit obligation well would be delayed for several months while analysis of the proposal under the National Environmental Policy Act (NEPA) was prepared. SUWA asserted that the suspension was improperly granted because the unit operator had allegedly delayed in developing the leases, its application was not supported by sufficient information, and the BLM should have prepared an environmental assessment or environmental impact statement on the suspsension application. The IBLA did not address the substance of SUWA’s allegations because it found that SUWA had failed to demonstrate that its members’ health, recreational, spiritual, educational, aesthetic and other interests would be directly harmed by BLM’s decision to approve the suspension. The Board concluded that SUWA’s interests would be harmed only if oil and gas development occurred (i.e., if the APD was approved). The suspension of the leases did not result in “real and immediate” harm to SUWA’s interests so there was no causal link between the alleged injury and the BLM decision to suspend the lease. Any injury to SUWA which might occur was contingent on a future decision to approve drilling. Therefore, the IBLA upheld the State Director’s decision dismissing SUWA’s State Director review request for lack of standing.

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Extension of Federal Oil and Gas Leases

Operators who do not regularly operate on federal lands may be surprised to discover that, unlike the typical private lands oil and gas lease, a federal lease does not contain a drilling operations clause that would extend the lease beyond the expiration of its primary term while drilling operations are being conducted. A recent decision of the Interior Board of Land Appeals (IBLA) drives home the importance of understanding exactly what facts are sufficient to extend a federal lease.

In Coastal Petroleum Company, 190 IBLA 347 (July 25, 2017), the IBLA upheld a decision of the Montana State Office of the Bureau of Land Management (BLM) which concluded that a lease had terminated at the end of its primary term because the lessee had not established that the well it had drilled and completed was capable of producing gas in paying quantities. Coastal’s lease would expire October 31, 2012. According to the decision, a well was spud prior to that date, the well was fracture treated on September 14, 2012, Coastal pulled two gas samples and determined that the well had good pressure and was able to flow on October 16, 2012, and Coastal received the gas analysis report on October 29, 2012. Based on these operations, Coastal concluded that at least two formations on the structure contained gas and that the well was capable of producing in paying quantities. But the BLM concluded that, without a flow test, BLM was unable to determine whether the amount of production would be of sufficient value to exceed operating costs; i.e., production in paying quantities. The IBLA agreed and noted that the burden is on the lessee to establish that a lease has been extended by a well capable of producing in paying quantities. The lesson for federal lessees is to plan operations that are intended to extend an expiring lease so that the well is completed for production and flow tested prior to the expiration date.

Another cautionary lesson from the Coastal decision is the need for a contingency plan in the event a well drilled near the end of the primary terms may not be completed as capable of producing in provable paying quantities prior to that date. Coastal argued in the alternative before the IBLA that it was engaged in testing and completing operations at the expiration of the primary term and so was entitled to a two-year extension of the lease under the "drilling over” provision of 30 U.S.C. §226(e). Coastal had not raised this argument in its request for State Director review of the BLM Field Office decision that the lease had terminated. It is not clear from the facts whether Coastal was actually conducting operations that would qualify as testing or completing under the regulation (43 C.F.R. §3100.0-5(g)) or whether Coastal had timely tendered the 11th year rental which is necessary in order to earn the drilling over extension. Instead, the IBLA refused to consider the argument at all because Coastal had not raised it before the State Director. The IBLA cited prior cases which establish that the Board will not consider issues raised for the first time on appeal except in extraordinary circumstances. The Coastal case appears to be a situation that easily could have been avoided by timing the drilling, completing and testing operations on the well to continue at the expiration of the primary term and by payment of the 11th year rental.

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Amended BLM Right Of Way Regulations

The Bureau of Land Management (BLM) published amended rules governing rights of way granted under Title V of the Federal Land Policy and Management Act (“FLPMA”) and under the Mineral Leasing Act (for oil or gas pipeline rights of way) on December 19, 2016, 81 Fed. Reg. 92,122 (https://www.gpo.gov/fdsys/pkg/FR-2016-12-19/pdf/2016-27551.pdf).  The rules take effect January 18, 2017, assuming they are not affected by Congressional efforts to undo “midnight rules” promulgated by the outgoing Administration.  The amended rules are most significant for their changes to the processes for obtaining authorizations to use federal lands for solar and wind energy development.  However, the amendments will also affect, to a lesser extent, oil and gas operators who seek FLPMA rights of way for roads or water pipelines, or Mineral Leasing Act rights of way for oil and gas pipelines.  Please see our earlier blog discussing the proposed rule amending the right of way regulations at http://www.wsmtlaw.com/blog/blm-buries-change-to-mla-rights-of-way-in-wind-and-solar-leasing-change.html.  

Until now, the BLM’s policy on processing right of way applications for renewable energy projects was contained in instruction memoranda.  Those policies, as modified in the final rule, are now contained in the regulations to be codified in 43 C.F.R. Part 2800.  

The rule seeks to focus wind and solar energy development in areas called designated leasing areas or “DLAs” which BLM has determined, through the land use planning process, as areas having high energy generation potential, access to existing or proposed transmission lines, and low potential for conflict with other resources. The preamble to the rule points to solar energy zones identified in the Solar Programmatic EIS and “development focus areas” identified in the Desert Renewable Energy Conservation Plan for southern California as examples of DLAs.  Outside of the southern California desert, no DLAs for wind energy development have yet been identified and, given the long timeline for BLM planning processes, it seems unlikely that any will be developed in the near term.  With some exceptions, lands within DLAs will be offered for competitive leasing, while solar or wind energy development proposals outside DLAs will be processed for right of way grants.  BLM believes that the issuance of a competitive 30-year lease will increase certainty for developers of wind and solar energy projects as compared to 30-year right of way grants, which are not issued until well into the project development process.  

Another goal of the rule is to ensure that the government receives fair market value for solar and wind energy development on public lands.  It does so by imposing both an acreage rent based on agricultural land values and a megawatt (MW) capacity fee.  The calculation of the MW capacity fee will result in a decrease in fees to solar energy producers but an increase in fees to wind energy developers as compared to current BLM policy.  In addition, the acreage rent had not previously been imposed on wind energy developers.  The fees for linear rights of way such as pipelines and transmission lines should not be significantly affected by the rule as compared to current policy.  

The new rule contains extensive provisions on bond requirements which will be codified in 43 C.F.R. §2805.20.  Solar and wind energy producers must post a performance and reclamation bond, which will be based on a reclamation cost estimate (RCE) but shall be no less than $10,000 per disturbed acre for solar projects or $10,000 per authorized wind turbine with less than 1 MW nameplate capacity or $20,000 per turbine with a nameplate capacity of 1 or more MW.  Although bonds are required for wind and solar projects, the BLM retains the discretion whether to require a performance and reclamation bond for other rights of way, including for oil and gas pipelines (§2885.11(b)(7)).  As in the existing regulation covering oil and gas pipeline rights of way, the BLM can require a bond, or an increased bond amount, either as a condition to the right of way grant or at any time during the term of the grant.  Amended §2885.11(b)(7) states that all “other provisions in §2805.12(b) of this chapter regarding bond requirements for grants and leases issued under FLPMA also apply to grants or [temporary use permits] for oil and gas pipelines issued under this part.”  The reference to §2805.12(b) appears to be in error; the preamble to the new rule notes that this sentence references “new section 2805.20” and §2805.20 is the regulation on bonding requirements.  Among those “other provisions” in §2805.20 is one that provides the bond amount will be determined based on the preparation of a RCE, which the BLM may require the applicant or grant holder to submit.  The RCE is defined as the estimate of costs to restore the land to a condition that will support pre-disturbance land uses, including the cost to remove all improvements made under the right of way authorization, return the land to approximate original contour, and establish a sustainable vegetative community.  The RCE must also include the cost to BLM to administer a reclamation contract.  It is likely that these requirements will result in larger bonds being required for linear rights of way, including oil and gas pipelines. 

The new rule provides that not only transfers of rights of way by assignment be submitted to BLM for approval but also “changes in ownership or other related change in control transactions,” including corporate mergers or acquisitions but not transactions within the same corporate family.  §2807.21.  This change also applies to Mineral Leasing Act rights of way for oil and gas pipelines, §2887.11.  BLM’s rationale for this requirement is that a merger or other corporate acquisition can result in material changes to corporate structure which could affect the financial or technical capability of the grant holder.  Because a change of control is not an “assignment,” we suspect that many grant holders may overlook this requirement to obtain BLM approval for “transfers” of right of way grants in cases of mergers or change of control by a stock transaction.

Operators of wind and solar energy projects on public lands will need to review the new rules in detail.  Because this rulemaking process focused on the changes to the right of way regulations that apply to wind and solar energy projects, it is likely that other current or prospective right of way holders such as pipeline, transmission line or communications facilities operators may not realize the effect of the revised rules on their projects. 

 

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BLM Proposes “Planning 2.0” Rules

On February 11, 2016, the Bureau of Land Management (“BLM”) announced significant proposed amendments to its land use planning rules as a part of its Planning 2.0 initiative. The stated goals of the proposed rules are to: (1) improve the BLM’s ability to respond to social and environmental change in a timely manner; (2) provide meaningful opportunities for other Federal agencies, State and local governments, Indian tribes, and the public to be involved in the development of BLM resource management plans (“RMPs”); and (3) improve the BLM’s ability to address landscape-scale resource issues and to apply landscape-scale management approaches.

The Federal Land Policy and Management Act of 1976 (“FLPMA”) requires that BLM develop land use plans “which provide by tracts or areas for the use of the public lands.” The BLM has historically prepared RMPs on a field office basis, but FLPMA does not prohibit the preparation of RMPs on larger or smaller areas of the public lands. The proposed rule allows the BLM Director to designate the area that will be covered by an RMP; presumably, those areas will generally be larger than the boundaries of a BLM field office’s jurisdiction so as to accommodate “landscape-scale management approaches.” However, the proposed rule does not establish any standards or guidelines for how the BLM Director will designate an area to be covered by an RMP; it simply states that the Director will “determine” the planning area for the preparation of each RMP.

A new step in the planning process will be the preparation of a “planning assessment.” The planning assessment will be prepared on the planning area so presumably will not be relied upon for the Director’s determination of the planning area. As a practical matter, BLM already prepares a form of planning assessment under the existing rules as it begins the process of preparing a new RMP, but the proposed rule formalizes that information gathering process and requires public involvement.

While the preamble to the proposed rule mentions the need for a more nimble approach to planning that is responsive to a rapidly changing environment and conditions, the expanded public involvement requirements that would be imposed by the rule will make the process anything but nimble. Public involvement, “appropriate to the areas and people involved,” is required (1) in the preparation of the planning assessment (both during the data gathering phase and on the report that documents the planning assessment which is to be made available for public review); (2) in identifying planning issues (the BLM will notify the public and make available for public review the preliminary statement of purpose and need); (3) by making the preliminary alternatives to be analyzed in the environmental impact statement (“EIS”) for the RMP and the preliminary rationale for those alternatives available for public review before the draft RMP and draft EIS are released for comment; (4) by making available for public review, before release of the draft RMP/EIS, the preliminary procedures, assumptions, and indicators that will be used to estimate the effects of implementing each alternative to be analyzed in the draft; (5) at the time the draft RMP is released for public comment; and (6) after the proposed RMP is released by providing for protests of the proposed RMP.

Although the current planning process provides for comments in response to the scoping notice published at the commencement of the EIS on the plan, comments on the draft RMP, and protests, the proposed rule adds at least three more occasions for which public involvement must be solicited. Interestingly, the proposed rule does not contemplate public involvement in the determination of what area will be covered by an RMP. As discussed by Rebecca Watson in her article on Planning 2.0, State and local governments and Indian tribes may be dissatisfied with what they are likely to view as the dilution of their input into the BLM planning process if RMPs cover “landscape” size areas, rather than the area administered by the BLM field office. See, Rebecca W. Watson and Joshua B. Cannon, “Toward Planning 2.0: The New Landscape of BLM Planning,” 93 Denv. U. L. Rev. Online 49, Nov. 2015. Moreover, the Director’s role in determining the area to be covered by an RMP (with that determination requiring no public involvement) creates the risk that the planning process will become more centralized in Washington—a development with which the word “nimble” is rarely associated.

There will be a 60-day comment period on the proposed rules beginning as of the date of publication of the draft rule in the Federal Register. Publication is anticipated by the end of February 2016.

The text of the proposed revisions to BLM planning regulations is available here.

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