Federal Lands and Leasing

Steptoe & Johnson PLLC

Texas & Oklahoma Webcast Series

June 17, 2020

By Brent Chicken & Jim Tartaglia

Overview

• Statutory background of federal mineral ownership and leasing

• Basics of federal/tribal leasing procedures

• Overview of federal leasehold title and operational issues

• Recent developments re: COVID-19 and market downturn

“… more than 90% of

federal lands in the Western

Mountain States have not

been leased for oil and gas.”

Key Regulators/Agencies

• Federal Mineral Lands– Bureau of Land Management (‘BLM’) and its regional offices

– Office of Natural Resources Revenue (‘ONRR’), f/k/a Office of Minerals Management Service

• Tribal Lands– Bureau of Indian Affairs (‘BIA’)

– Division of Land Titles and Records (‘DLTR’) and its Land Titles and Records Offices (‘LTROs’)

Background – BLM Statutes

- Primary Act = Mineral Leasing Act of 1920 (30 U.S.C. § 181, et seq.) (“MLA”)

- MLA later amended/supplemented by:- Right of Way Leasing Act of 1930 (30 U.S.C. § 301, et seq)- Acquired Lands Act of 1947 (30 U.S.C. § 351, et seq.)- Onshore O&G Leasing Reform Act of 1987 (see 30 U.S.C. § 226)

- Other statutes also in play - E.g. Federal O&G Royalty Management Act of 1982 (30 U.S.C. § 1701 et seq.);

Federal Land Policy & Management Act of 1976 (54 U.S.C. § 300101, et seq.); National Environmental Policy Act of 1969 (42 U.S.C. § 4321, et seq.)

BLM Leasing Pre/Post Reform• Before 1987 Reform Act

– Competitive only if in “known geological structure”

– Noncompetitive comprised large number of BLM leases governing by series of ill-fated leasing programs

• After 1987 Reform Act– All tracts start in a competitive lease sale

– Noncompetitive only in limited circumstances (including no bids at auction)

Competitive Leasing

Noncompetitive Leasing- Offers for noncompetitive leases may submitted in

certain circumstances- Lands were previously offered competitively at auction

without receipt of competing bids

- Lands were not recently leased (if prior lease terminated, lands must go through new competitive auction before noncompetitive offers are submitted)

- Two-year window after no-bid auction to submit noncompetitive offer (but early bird priority)

BLM Lease Form

General Lease Terms• Term and Expiration

– 10-year primary term with various conditions and avenues for lease maintenance

• Royalties and Rentals– BLM: sliding scale production royalty;

– BIA: allotted vs. tribal land; entireties clauses

• Ownership and Transfer of Leasehold Interests– Record Title (Assignments) vs. Operating Rights (Subleases)

*Statutes/Regulations incorporated by reference

Transfers of Leasehold Interest:“Assignment of Record Title”

Transfers of Leasehold Interest:“Transfer of Operating Rights”

Background – BIA Statutes

- Primary Act = Indian Mineral Leasing Act of 1920 (“MLA”) (30 U.S.C. § 181, et seq.)

- MLA later amended/supplemented by:- Right of Way Leasing Act of 1930 (30 U.S.C. § 301, et seq)- Acquired Lands Act of 1947 (30 U.S.C. § 351, et seq.)- Onshore O&G Leasing Reform Act of 1987 (see 30 U.S.C. § 226)

- Other statutes may also apply - E.g. Indian Mineral Development Act of 1982 (25 U.S.C. § 2101, et seq.);

National Historic Preservation Act of 1966 (54 U.S.C. § 300101, et seq.); National Environmental Policy Act of 1969 (42 U.S.C. § 4321, et seq.)

Tribal, Trust and Allotted Lands• Managed by DOI Bureau of Indian Affairs

• Certain reservations maintain local tribal records; majority maintained by BIA at one of 18 regional LTROs– E.g. Rocky Mountain Region LTRO (Billings, MT)

• Ownership of minerals underlying reservation lands may be:

– “Tribal” = federal lands owned by a Tribe

– “Allotted” = individually owned federal trust acreage

– “Fee” = non-trust individuals who could be Indian or non-Indian who own lands on reservations

BIA Common Lease Form

Federal/Tribal Lands Lease Maintenance

- The recent fall of commodity prices worldwide, driven by both a commodity surplus and record decline in commodity demand due to the global COVID-19 pandemic, has hit the industry hard

- The situation has many operators desiring to shut-in production, delay well completion or otherwise take action designed to forgo production/sale until commodity prices improve

- With respect to oil and gas leases issued by the United States Department of the Interior, Bureau of Land Management and/or the Bureau of Indian Affairs, which cover federal or tribally-owned minerals, lessees have several specific lease maintenance/saving options

- Federal fugacious mineral leasing by the BLM is accomplished under the Mineral Leasing Act of 1920, as amended (30 U.S.C. §§ 181, et seq.) and the associated regulations promulgated by the BLM in the Code of Federal Regulations (43 C.F.R. §§ 3000, et seq.).

- Tribal fugacious mineral leasing by the BIA/BLM is accomplished under the Indian Mineral Leasing Act of 1938, as amended (25 U.S.C. §§ 391, et seq.) and the associated regulations promulgated by the BIA/BLM in the Code of Federal Regulations (25 C.F.R. §§ 211, et seq.).

- The primary federal and tribal lease maintenance options are: (i) a suspension of operations; (ii) a suspension of production; and (iii) a royalty rate decrease

- The concept of continuous operations also applies to federal and tribal lease maintenance, although in a different manner than usually seen with fee leases

Continuous Operations

- The concept of continuous operations under a fee lease generally involves a stated period of time in which, provided the lessee timely commences operations, the subject lease will not expire, provided those operations are diligently prosecuted

- In the event such operations result in production, the subject lease is extended into its secondary term, and if those operations do not result in production, the lessee is typically permitted to immediately start the process anew, i.e. timely commencement of operations and diligent prosecution to a producing well or dry hole

- A federal lease can be perpetuated by continuous operations, but those operations must generally occur over the expiration of the primary term, and thereafter be diligent in nature

- A tribal lease, however, typically requires the presence of actual production in paying quantities at the expiration of the primary term

Suspension of Operations

- A suspension of operations is provided for under Sections 17 and 39 of the Mineral Leasing Act of 1920, as amended, for federal leases (30 U.S.C. §§ 209, 226(i), et seq.)

- These suspensions are further governed by the Code of Federal Regulations (43 C.F.R. §§ 3165, 3103.4-4, et seq.)

- A suspension of operations is also provided for under Chapter 12 of the Indian Mineral Leasing Act of 1938, as amended (25 U.S.C. §§ 391, et seq.)

- These suspensions are also further governed by the Code of Federal Regulations (25 C.F.R. §§ 211.44, 212.44, et seq.)

- Under Sections 17 and 39 of the Mineral Leasing Act, a suspension of operations may be granted for two (2) reasons, respectively: (i) force majeure and (ii) conservation of natural resources

- A suspension of operations may be granted due to events beyond the reasonable control of the lessee under Section 17 of the Mineral Leasing Act, as amended (30 U.S.C. §§ 226(i), et seq.)

- A suspension of operations under Section 17 of the Mineral Leasing Act is thus in the nature of force majeure, but is also governed by the Code of Federal Regulations (43 C.F.R. §§ 3165, 3103.4-4, et seq.)

- A suspension of operations is appropriate where there has been no production in paying quantities from a lease at the time of the event, or if a lessee has an approved application for permit to drill

- Importantly, a suspension of operations under Section 17 of the Mineral Leasing Act, while capable of tolling the term of the subject federal lease: (i) does not toll the requirement to make timely payment of annual rentals and/or minimum royalty and (ii) actually suspends the lessee’s right to conduct operations

- A suspension of operations may also be granted by the BLM “in the interest of conservation” under Section 39 of the Mineral Leasing Act of 1920, as amended (30 U.S.C. §§ 209, et seq.)

- Here, the focus is not on force majeure concepts, but rather on “conservation,” and as such, matters such as delays in applications for permit to drill processing, NEPA review, etc. become appropriate bases for the suspension of operations

- Chapter 12 of the Indian Mineral Leasing Act of 1938, as amended (25 U.S.C. §§ 391, et seq.), and the promulgated Code of Federal Regulations provisions implementing the same (25 U.S.C. §§ 211.44, 212.44, et seq.), provide suspension of operations for tribal leases that are roughly equivalent to those in place for federal leases

- The basis for a suspension of operations under Chapter 12 of the Indian Mineral Leasing Act differs from the basis under both Sections 17 and 39 of the Mineral Leasing Act

- Specifically, a suspension of operations concerning a tribal lease may be approved “for remedial purposes which are necessary for continued production, to protect the resource, the environment or for other good reasons”

- Similar to Mineral Leasing Act Section 17 suspension of operations in terms of request, tolling of tribal lease term, continuing obligation to make payment of annual rental and/or minimum royalty, and inability to conduct operations

Suspension of Production

- In both the federal and tribal lease context, the right to a suspension of production: (i) arises from the same statutory and administrative regulations as do suspensions of operations and (ii) carries roughly the same operation and effectiveness as the same, i.e. tolling of lease term, inability to produce, requirement to make payment of annual rental/minimum royalty remains, etc.

- The primary difference between a suspension of operations and a suspension of production is lease status at the time of the request

- Specifically, while a suspension of operations is more closely tied to leases within their primary term, without production in paying quantities, where the ability to operate has been frustrated by circumstances beyond the lessee’s reasonable control; a suspension of production focuses instead on federal and tribal leases where there are wells capable of producing in paying quantities

Royalty Rate Decrease

- Section 39 of the Mineral Leasing Act of 1920, as amended (30 U.S.C. §§ 209, et seq.), in additional to allowing the suspension of operations and/or production, also contains provisions allowing the reduction of royalty rates in federal leases “in the interest of conservation” (43 C.F.R. 3403.4)

- Specifically, the BLM is permitted to “waive, suspend or reduce the rental or minimum royalty or reduce the royalty on an entire leasehold, or any portion thereof” where the same is necessary to either promote development or where the lease cannot be successfully operated

- Requests for federal lease royalty rate reduction are only applicable to leases capable of producing in paying quantities, and must be made in writing to the BLM

- Such request must include a self-certification: (i) that the subject federal lease cannot be successfully operated due to a recognized event or condition; (ii) that such lease would be capable of producing in paying quantities but for the payment of the applicable royalty rate; (iii) that the included economic analysis supports the same; and (iv) that the new, temporary royalty rate will allow continued production in paying quantities

Questions?

Thank You!

Brent D. ChickenSteptoe & Johnson PLLC

Dominion Towers600 17th Street, Ste. 2300 South

Denver, CO 80211brent.chicken@steptoe-johnson.com

303-389-4364

Jim M. TartagliaSteptoe & Johnson PLLC

Dominion Towers600 17th Street, Ste. 2300 South

Denver, CO 80211jim.tartaglia@steptoe-johnson.com

303-389-4323

Materials DisclaimerThese materials are public information and have been prepared solely foreducational purposes. These materials reflect only the personal views of the authorsand are not individualized legal advice. It is understood that each case and/or matteris fact-specific, and that the appropriate solution in any case and/or matter will vary.Therefore, these materials may or may not be relevant to any particularsituation. Thus, the authors and Steptoe & Johnson PLLC cannot be bound eitherphilosophically or as representatives of their various present and future clients tothe comments expressed in these materials. The presentation of these materialsdoes not establish any form of attorney-client relationship with the authors orSteptoe & Johnson PLLC. While every attempt was made to ensure that thesematerials are accurate, errors or omissions may be contained therein, for which anyliability is disclaimed.