Oil and Gas II Flashcards
1
Q
Pay for Ops:
AFE Overruns
A
Problem: The terms of the various form JOAs have not eliminated fights over cost-overruns when costs exceed what the non-op expected.
Solution: Requirement that the op must give notice when it determines an op. in progress will cost more than a certain percent of AFE (often 125%) (Notice should be detailed enough for non-ops to make the decision whether to go on or go non-consent)
2
Q
Pay for Ops:
Pre- Payments
A
PROBLEM: When ops and contractors are very busy, must always be readily available to quickly settle expenses.
SOLUTION: Provisions allowing OP to collect from non-ops prepayment for the expenses foreseen in the AFE
Ex: Such prepaid costs should either be the est. dry hole cost, as shown on the applicable AFE, for any well to be drilled under the JOA except the initial well, or could include the est. cost for any other completion, reworking, side-tracking, or plugging back up
3
Q
Payments for Ops:
Deductions for Non-Payments (Net-Out)
A
PROBLEM: Ops not being paid for services rendered and procured
SOLUTION: Operator granted express right to “net out” costs from proceeds
- Allow deduction from proceeds any past-due payments related to operating costs and charges assessable to a non-op that are permitted by the JOA
- Useful as financing mechanism to deal w/non-ops w/o operations budget who want to receive proceeds instead of cash payment
4
Q
Non-Op Liability for Costs: Additional Development
A
Most JOAs limit the Op’s authority to commit to non-ops to the costs of drilling additional wells or other major operations such as reworking, fracing, or deepening
5
Q
Non-Ops who do not want additional development can go ….
A
“Non-Consent” but this has potential consequences
- May lose a portion of ops in new well or deepen portion
- May have to pay non-consent penalty
- Still subject to regulatory control
6
Q
Art. V - Operator 1989 Form
A
How you remove an operator:
- Op may be removed for good .. (KEY: Major Interest)
- Op’s vote does NOT count
- Written notice has been delivered .. (Usually where the issue occurs - the notice does NOT get sent)
- More protective of non-ops than the 82 form (This is the reason why additional financial stuff to “good cause”)
7
Q
What is “good cause” to remove an Operator on the 1989 form
A
Not only negligence or willful misconduct but also
- Art. 5A (Pay your contractor’s bills)
- If you don’t pay, get slapped w/M&M liens
8
Q
Resignation of Removal or Op and Selection of Successor
A
By the affirmative vote or two or more parties owning ..
Or votes only to succeed itself …
After excluding the voting interest of the Op that was removed or resigned
- Need EACH provision
9
Q
Gas Balancing Info
A
PROBLEM: Imbalance among producers in split-stream sales from a single well
SOLUTION: Gas balancing agreement settles on three methods of equitable balancing:
- Balancing in Kind
- Periodic Cash Balancing
-Cash Balancing Upon Reservoir Depletion
10
Q
Three Methods of Equitable Gas Balancing
A
Balance in Kind: The underproduced party takes a certain percent of the overproduced parties’ gas until the imbalance has been made up
Periodic Cash Balancing: Underproduced party receives cash, and the well is immediately brought to balance
Cash Balancing Upon Reservoir Depletion: Keep records for the life of the well. Upon depletion, there is accounting
11
Q
If you might be underproduced, what type of balancing do you want?
A
Periodic Cash Balancing
12
Q
Art. VI: Drilling Development (B) Sub. Ops
A
- If any party hereto should..
- The party desiring ..
- Shall give written …
- What do you have to put in the proposal - enough to give the other parties notice of what you want to do
- 30 days after receipt to get vote back (PROBLEM: JOA is not that responsive to on the fly operations)
- Failure of a party to whom such notice is delivered to reply w/in the period above fixed shall constitute an election by the party not to participate
DEFAULT: If you don’t response = Non Consent
Remember, non-consent comes w/penalties
13
Q
Art. VII: Expenditures and Liability of Parties
A
- Shall be several and not joint ..
- It is not the intention of these parties to create, nor shall this agreement be ..
- In their relations w/ea. other under this agreement, the parties shall be considered ..
14
Q
ARCO v. The Long Trust
A
LT Sues: “Best price obtainable in the area for such production” mandated that B&A keep in effective the “maximum lawful price” for the gas delivered under the 82 K.
ISSUE: By changing the gas purchase K, so LoneStar paid less for the gas purchase, did ARCO violate JOA
- ARCO = Agent/Trustee
- ARCO & B&A were alter egos
Problem w/the sale was B&A was selling ARCO’s gas to Lonestar for take or pay settlement profit and then not accounting to the LTs violated their duty
15
Q
1989: Art. VI. G. Taking Production in Kind
A
Each party shall take in kind or separately dispose of its ..
If any party fails to make the necessary arrangements ..
- Operator shall have the right - not the obligation to purchase such O&G or sell to others
Any purchase or sale by the Op..
16
Q
Opp Removal: 1956 Form
A
Not addressed
17
Q
Operator Removal: 1977 Form
A
Art. V.A.:
- Op. must conduct itself in a “good and workmanlike manner”
- Can be removed for failure to perform necessary “duties” (None are defined)
- Liability ONLY for “gross negligence or willful misconduct”
- HIGHER STANDARD
18
Q
Operator Removal: 1982 Form
A
Op. removal through the vote of two more non-ops owning majority interest
(Op. cannot vote)
- Sole non-ops are F’d
- Try to argue equity
19
Q
Operator Removal in TX
A
Not easy, courts are reluctant to rule on what is “good and workmanlike” operator
20
Q
Q: What happens if a non-op, who has allowed the op. to sell gas, wants to start taking its production in-kind, but the ops just signed a gas purchase K that commits the non-ops gas for an extended period? (Payment for Ops)
A
Solution: Insert clause that provides clarity on exactly how long the gas purchase Ks the op previously signed can run after a non-op decided to take in-kind gas dedicated to that K.
Suggestion: Provide length is the Op’s existing gas purchase Ks can last after an option to take in-kind by the non-op.
Could also require 6 mo. notice from non-op re: taking in-kind
21
Q
Op signs a year long K on 1/1 pledging BOTH all of his gas and the gas on his 50% WI non-op. Gas prices rise dramatically in April and the non-op wants to start taking in-kind. The op. may not be able to make up with other production.
A
This is a problem re: Payment for Ops. - Taking in-kind vs. gas purchasing k.
The op wants more protective language.
(Require 6 mo notice from non-op.)
22
Q
Is consent necessary to assign the lease?
A
Yes
23
Q
Texas Two-Step: The two step process used to get around consents required for assignment of lease
A
(1) Take whatever right is covered by preference right (stock) and set up a business entity (that contains only the stuff in the stock).
(2) Sell the company and change the name
- As for Forgiveness vs. Permission
24
Q
Preferential Right to Purchase Clause
Assignment, Texas Two Step, Consent to Assign.
A
Allows someone else to buy.
- Must be exercised exactly as stated.
- Cannot require preferential right holder to purchase any other unrelated items (stock, other lands, equipment, etc.)
25
Tennaco Inc. v. Enterprise Production Co. (Example of Texas Two-Step)
Owners of nat. gas. liq. fraction plant entered a "Reg. Op. Agreement"
- Contains provision that owners have preferential right of purchase if one of the co-owners proposed to sell the interest. Tennaco transferred its interest to a wholly owned subsidiary (sold all of its stock in the subsidiary to Enron - not an original owner of the fracing plant). Enterprise argues that the transfer violated a right of first refusal. Court: Rejected the argument that the nature of the transactions should be determined by looking to the intent of the parties to the stock sale. The court rules that right of first refusals should be narrowly construed. (Can be contracted around)
26
Drop Dead Consents
Consent provisions that require written consent or the assignment is considered null and void.
Must include correct names (exactly identical to the names of record) or the assignment is ipso facto void. (Includes commas, periods, & correct spelling)
Used to unravel deals in later litigation - like bankruptcy
27
Preferential Right to Assign
89 Form
X IT OUT! DROP IT
Usually "G" ("Should a party desire to sell all or any part of its interests under ...")
28
Liability AFTER Assignment:
A, non-op, under JOA assigns its interest to X. X did not pay the debts incurred after the assignment. Op. sued A. Is assignor liable even though it no longer owns an interest in the K area?
YES. Seagull E&P Inc. v. Eland Energy Inc.
Lease assignments when assigned w/P&S Agreement (To assignee:) "You assume all problems after .." In this case they did not sue under the L but the JOA. Used to go up the chain of O&G ownership.
29
Art. III (89)
Interests of the Parties:
| "Interests of the Parties in Costs and Productions, Unless.."
30
Art. VII (89)
Expenditures and ..
31
Art. XV.B. (89)
Successors and Assigns
32
Transfer of Interests (89): Problem: the TX SC in Seagull considered the form language of the JOA insufficient to absolute assignors of their LH w/in the K area of the JOA from liability. Therefore, such liability ...
Solution: Add provision to Art. 16 stopping continued liability. "Upon and after effective date of this JOA, no op or non-op shall be liable for, or bear any responsibility for any costs, debts, claims, judgments, fines, levies, obligations, or services subsequently incurred and arising from ..."
33
Art. VI.E: Transfer of Interests: Accrual of P&A Liabilities (Assignment)
Problem: P&G costs may be incurred when the well permit is issued by the appropriate authority. This means SURPRISE! LIability for plugging orphaned well falls back on parties who assigned the well while it was still producing.
SOLUTION: Add language to Art. 16 that expressly relieves assignor of K area interests of all costs and liabilities assoc. with P&A and remediation of any wells then existing or thereafter drilled or assigned LH.
34
Sinking Fund for P&AStates and fed. authorities require financial reassurance that wells will not be orphaned.
PROBLEM: Remediation costs may surpass the amts. set aside to properly P&A wells. Other costs might spring up. (Leaves op. holding the bag of money & previous parties held-up for cost. (Seagull)
SOLUTION: Est. "sinking" fund to be maintained throughout the life of the JOA for all P&A remediation costs.
Typical Schemes: Parties pay 10% of proceeds into an escrow account until a certain amt. of money is held per ea. well. Op. adjusts amt. held as number of wells charge, ea. party due monthly statements.
35
Op: Bankruptcy:
The JOA is an executory K.
When someone declares bankruptcy, then they can choose to disavow the "executory Ks" (Ks which have not been performed or for which there remains something to be done by all parties thereto)
36
(Bankruptcy)
| PROBLEM: JOAs are executory Ks meaning the debtor is no longer converted by its terms if it disavows the JOA.
SOLUTION: Not much can be done to stop this but you may try requiring that the bankrupt party make its decision to assume or disavow the JOA w/in 30 days of declaring bankruptcy. This helps the other parties make operational decisions more quickly. (Generally, JOAs can be disavowed, not much you can do)
37
AMI: Agreement Defined
(Area of Mutual Interest): Defined geographic area wherein the parties agree to share certain additional LH interests acquired in the future. (Typically seen as side agreement w/JOA or farmout agreement).
Parties acquiring gen. interest must share the i acquired in the same proportion of the presently-owned leases compromising the K area.
38
AMI (In gen)
Legal description is necessary (in the exhibit in the JOA).
Anyone who has a fee/MI in the AMI might have to share w/other parties (gen. w/JOA undivided interest principle)
The idea of a AMI is to prevent development in one area and encourage everyone to develop and have the same goal.
Goes into the future..
39
Purpose of AMI Agreement
Help insure the interest of the parties stays homogenous through the K area of the JOA or FO Agreement.
- Easier book keeping and accounting
- Prevents one of the parties from competing against the parties to the JOA or FO and not focusing on the group.
- Pools acquisition resources of all the parties to the JOA/FO
Descriptions in "Exhibit A" and associated w/AMIs that are not legally sufficient are void. (Ask geologist for assurance)
40
AMI must comply w/SOF
UCC 26.01 (In writing)
41
Is AMI a property interest?
Yes.
Must comply w/SOF (even non-recorded) and contain a valid legal description.
- Can reference another existing writing which may be IDed w/reasonable certainty.
- Anything dated after AMI = Not effective.
42
In LA - can you refer to an unrecorded document?
No. A reference to an unrecorded doc. in LA has no legal affect.
Get around through Memo of Sale Agreement
43
AMI Practical Considerations: Easiest, Cheapest Method to ensure the description is valid
Have AMI boundary follow the survey/block or TWP/range boundaries. (Or other man made boundaries, roads, powerlines, etc.)
- Contain complete metes and bounds description.
- Make boundary line thin (Not a thick black marker)
- Include all survey/block or TWP/range names on survey
44
Case Law: Landmarks: What has worked, what has not.
Worked: Series of docs that included an exhibit that was expressly incorp. into the AMI which included: Provided acreage encircled a black line on a survey, attached a commonly-used commercial map which included abstract numbers, survey info. and block ID.
Did NOT work: Survey with no scale and thick black border. Did not show size of tract or number of acres. Contained no ref. to recorded deeds or other instrument.
45
Incomplete and Unexecuted JOAs and Ancillary Docs:
PROBLEM: Kulander continues to come across incompletely executed JOAs, JOAs missing attachments and exhibits and AMI and Recording Memos that have been signed. This breeds litigation.
The JOA and its ancillary docs such as the Recording Memo and AMI should be signed by all parties and recorded as necessary. (Can be signed by proxy or electronically).
46
Unsigned Components: Do they belong in the docs compromising "The Agreement?"
- Main agreement must reference an unsigned one.
- Main agreement must reference existing doc.
- Oral testimony or mere estoppel claim is not enough to prove up unsigned, non-existing or incomplete agreement (ex. an AMI agreement)
- A unrecorded, unsigned hands-down plat does not provide cause for equitable estoppel to enforce an AMI (estoppel is NOT a COA but a defense)
47
COPAS: Council of Petro Accountants Societies
National Council of 24 Pet. Accting. Socieites.
Formed in 1961 to increase effectiveness of independent socieites and reduce conflicting and duplicative and differing local rules.
- Prior to 1962, ea. region had it's own accting. procedure.
- Desire to emulate the AAPL for JOA
Rumored to favor the op & is now in line w/the JOA
48
COPAS: The Op ....
Shall never profit nor suffer a loss.
- Distinct charges v. indirect charges (overhead)
- Question becomes whether an Op may charge the non-op for certain costs and expenses, of if those amts are included in the overhead amt.
- Op. wants direct
- Ex. cannot use affiliate to make money himself& profit for service that must be completed.
49
COPAs: The JOA controls ..
In the event of conflict (82/89 form)
- Under 82/89 form the OP is required to drill wells on competitive basis according to rates usually prevailing in the K area, and charges for use of its own equipment must not exceed the prevailing rates in the area.
50
The COPAscabana
Statements and Billing:
- Op is required to provide statements and summaries of charges w/unusual charges and credits IDed separated and described in detail.
- Failure to do so might permit excuse by non-ops to not pay amts. owed (Exxon v. Crosby - Miss). (IF you DON'T do this - you might have to pay).
Direct Charges and Overhead:
Direct: Labor, Equipment, and Facilities furnished by OP/affiliates
Overhead is either:
- Fixed Rate: Charged at certain dollar amt. per well per mo.
- Percentage Basis: Charged as certain percentage of the cost of development of the joint proposition (i.e. direct charges).
* * IF non-op, ask for fixed.
51
Drilling Ks - 3 Types
Turnkey: Flexible sum to complete a well "just so" - Driller makes day to day decisions. Op may not have someone onsite. (If it doesn't get done, doesn't get paid AT ALL).
Footage Basis: Driller paid per foot drilled even if the TD is not reached. Well owner provides non-drilling related materials. (Even if the driller doesn't get to full depth, still pay for what was reached).
Day Rate: Paid sum each day of drilling even if TD not reach, typically for offshore, arctic and international work. (Drilling K will probably have day rate, even if you have the other two - what's the point of showing up..)
52
Drilling Ks - In general
Ops typically hire a driller.
| Biggest Issue Addressed: What's to be done, indemnities, arbitration/forum selection and insurance.
53
Drilling Ks - Notes to Caza
K forms offered by IADC are often drafted from the perspective of one side of the K. (Place most risk of loss on the OP)
Ops may not take care to fully understand how much risk they assume under the Ks and may fail to negotiate for less risk.
- In this case, the OP negotiated for drilling K to pay motel expenses for the drilling crew (minor matter)
- Ops also neg. for drilling co. to maintain a $10M umbrella liability policy - a major matter, except that it probably provided little or no assistance where drilling co. was not responsible for the loss under the risk allocation terms of the K.
54
MSA
```
Master Service Agreement:
Agreement between OP and contractor that provide for gen. terms that apply for ea. rig ticket/job order.
- Choice of law/arbitration
- Measure of care
-Force Majure
Termination
```
Biggest Point: Cross indemnities between parties - ea. agrees to indemnify for their own ee's suits (knock for knock). Watch for oil field anti-indemnity laws (LA, NM, TX) and various state laws (boldface, all-caps, mention of the word indemnity, etc.) - that require this so all parties see.
- 3rd Party Indemnities : ea. party shares
- Environmental Indemnities: Depends on work being done
Second Biggest: Insurance Provisions (Ask Client if they want this) - Gen. liability, workers comp. etc.
55
Environmental Indemnities
Depends on work being done.
Example: Oil co hires driller, wants in MSA that you will idemnify the oil co if ee gets hurt or killed and sues oil co.
Problem for Working Man:
- Worker's comp
- Someone is not going to get paid if he goes bankrupt (Oil co is obviously more powerful)
IDEA: The oil co. would bully into the K (THINK: He has less ees and the contractor has more).
State stepped in and created an oil field anti-indemnity law that says we can't have "knock for knock." The industry can sometimes get around but watch for State laws.
56
The Problem w/Indemnities
TX Law: Exempts from canceling indemnity clause those which provide for mutual insurance.
LA Law: Similar, but requires the other co. to actually pay for insurance coverage.
Cross Indemnities must have "pass through" indemnity.
57
Forman v. Exxon (Indemnities)
Three Parties: Op, Drilling Co, Contractor.
EE of contractor is injured. He sues OP and drilling Co.
Op owes drilling co indemnity
Contractor owes OP indemnity (but not "pass through")
Drilling co. is hit w/5 times damages of Op.
Contractor indemnifies Op's damages but NOT drilling co's because the indemnity was not "pass though."
58
Federal Regulation of Gas
Natural Gas Act of 1983 (NGA): Regulated interstate transportation of gas (Phillips Pet. Co. v. WI added in wellhead price controls for gas sold on interstate mrks - abd news)
Natural Gas Policy Act of 1978 (NGPA): Designed to eliminate bifurcation of the nat. gas market inter v. intra state gas - Regulation of all gas sales, - killed off by price crash in 1986
Natural Gas Wellhead Decontrol Act of 1989 (NGWDA): Ends all price regulation on first sales of nat. gas by 1993.
Late 80s/Early 90s: Pipelines were to be "common carries" meaning they were to post tariffs and "unbundled" their services. Used to be transporters, marketers, and refiners tariffs and "unbundled" their services. Used to be transporters, makerters, and refiners. ("Unbundled" = Gas Co. owned all aspects)
59
Manchester Pipeline Corp. v. Nat. Gas Co.
After extensive neg. People's (a nat. gas Distrib.) sent 3 copies of a K titled "gas purchase K" to Manchester Pipeline, a corp. formed to sell nat. gas from an OK reservoir.
The K provided a 10 yr term.
M denies a K between the parties ever existed, arguing that M had reasons to know that P's did not intend to be bound by the K's until it had signed and executed them.
TC --> Manchester: COA: Where the K's delivered?
- Sufficient evidence existed to support a conclusion that submission by P's of the 3 ks to M constituted an offer that M accepted. (Damages: Rendered for redetermination of damages)
- M's claim for damages was based on the differences between the LTK and spot market price, which was volatile. (Should have been based on the difference between the price in the parties K and the MP of gas under similar LT Ks at the time M learned of P's repudiation of Ks)
60
M&M Liens
Ch. 56 Tex. Property Code
Allows mineral Ks and subcontractors to claim a lien if they perform labor or furnish materials in "mineral activities"
- Digging, drilling, operating, completing, maintaining, and repairing (all things that can be considered drilling ops that can allow a lien; there are other States that do not allow the lien).
Ex: Op--> Contractor --> Sub-Contractor (Non-ops on eac. side)
61
M &M Lien Covers:
Materials furnished or hauled, land, LH, well, pipeline, etc., other material and supplies used on the Ls, other wells on the land or LH
*Does NOT cover proceeds of production (in TX - Know this!)
The lien attaches only to the property of owner who contracted the work
(In NM lien attaches to ALL property - BIG DEAL!)
62
When does an M&M lien attach?
At filing but the lienholder must forelclose.
Must file an Affidavit of Lien in county property records
- Name of Mineral Prop. Owner
- Name and address of lien claimant
- Dates of perf/furnish of services/materials
- Description fo land, LH, pipeline, pipeline right of way
- Itemized list of amounts claimed (invoices)
- -- Exhibit A: List of items NOT paid
- If you are a subcontractor, filing the lien, you must serve the property owner notice no less than 10 days before filing the lien
- The affidavit relates back to the inception date (assignments after are sub. to the lien)
- All correctly drafted M&M liens have equal priority
63
How to list/itemize items not paid when liens are attached
Go through immediately when you receive them, make three piles (some missed, some close, and some no time crunch)
- Send e-mail to client immediately notifying them that you've looked at them and list out potential problems/missed deadlines
** All correctly drafted and recorded M&M liens have equal priority **
64
How do you miss deadlines w/ regard to liens & property attachment?
OG happens over a period of time (i.e. starting on Date X and ending on Day Y)
Date X: Inception of the lien is when the work was first performed
Date Y: End of work and date of which affidavits must be filed w/in six months (of end date, or you LOSE the right to file M&M)
*THIS IS BLACK LETTER LAW
180 days in other states -OK
One day later = SOL
If you're up against a time crunch, half ass it and file an amendment later (middle stack)
65
Timeline for subcontractors filing a lien
Must serve the PO notice NO LESS than 10 days before filing the lien
66
M&M Suits TPC 56.158
2 years after filing day
Within 1 year after the completion of the work under the original K
Whichever is later
TPC 56 - Owner cannot be liable for more than what's owned (If owner pays off contractor before subcontractor's lien is filed, the owner cannot be foreclosed upon - get the cancelled check from the owner).
67
Development of Federal Indian Lands
The feds received $11.2B in revenue in FY 2011 from domestic oil and gas ops on federal land (87% of offshore land is still unleased)
Largest source of income outside of the IRS
Probably could be a lot more with a more aggressive federal stance on leasing, royalties and bonuses.
The federal government is more lenient about lessee lapses and give more procedural remedies and notices unheard of in the private realm – federal leases may not be dominant.
68
Oil Production on Federal Land
About 35% of US oil production and 25% of US natural gas production comes from federal outer-continental- shelf (OCS) lands, though 85% of US offshore waters are off limits to drilling
States own land and severed MI also (TX owns nearly 20.5M MI – portions go to University funds for UT & A&M)
69
History of Public Lands - General Mining Law of 1872
Allows a person to enter upon federal land and explore for OG
Once a deposit was found, they could get a free patent to the land (This law still exists!)
After wind and coal, oil became the fuel choice for the nation. So Pres. Taft removed some oil reserves from the “location rule” of the Mining law of 1872.
Codified in the ML Act of 1920. This made a list of minerals “leasable” instead of “finable”
•Oil: All non-gaseous hydrocarbon sub. except coal and oil shale
•Gas: CBM, CO2, and other gas
Royalties: 12.5% is the minimum and most leases are 12.5%
70
The Min. Leasing Act of 2/25/1920
Lands under which BLM leases OG
As amended authorizes and governs mi. leases for gas, oil, coal, etc.
Replaced General Mining Act of 1872 for these substances
71
The Right of Way Leasing act of May 21, 1930
Authorizes lease of oil and gas deposits under railroad and other rights of way to the owner of the right of way
72
The Acquired Lands Leasing Act of Aug. 7 1947 (MLAAL)
Extends the provision of the ML Act and the authority of the Sec. of the Interior over OG operations to fed. “acquired lands”
“To promote the mining of coal, phosphate, sodium, potassium, oil, oil shale, gas, and sulfur on lands acquired by the U.S.”
73
The Federal Land Policy and Management Act of 1976 (FLMPA)
Generally governs how the BLM administers and manages public land
The National Forrest Service, National Park Service, and now, the BLM, are commissioned in FLPMA to allow a variety of uses on their land
FLMPA addresses topics such as land use planning, land acquisition, fees and payments, administration on fed. land, range management, and right of ways on federal land
o“Multiple Use” is the catchphrase
74
The Federal Onshore OG Leasing Reform Act (FOOGLRA)
Various methods of distributing the lease have been tried
First: Over the Counter leasing: Led to (1) speculation by LHs and (2) stampedes to the BLM office when a potentially lucrative lease expired
Second: Simultaneous Filing Program: Essentially, everybody gets one shot at the L. One winner is picked
Tricks: Bogus companies set up to change the odds and bogus “lottery filing services” which charged for doing what could have been directly done through the BLM
Third: The FOOGLA. Established a competitive leasing system. If a tract is not leased in a L sale, it can be leased non-competitively.
75
MAAL and RRC
Public Domain: Lands which never left the fed. domain
Acquired Lands: Land which left the fed. domain which were acquired back
MLAAL allows leasing on acquired lands
RR were deeded a lot of land, which came w/minerals. These gave rise to big domestic oil cos.
Rights of Leasing Act of 1930: Feds can L lands under rights of way
76
Alaska and OG Generally
Granted over 100m acres of federal land under the Alaska Statehood Act of 1958. Includes all minerals (except those already leased)
Alaska Native Claims Settlement Act of 1971: All American Indian claims were extinguished. In return, American Indians and Alaska could select 60M acres (w/mi) and 22M surface acres
Some of the most lucrative OG land will be found on Native American Land
- Under BIA (Bureau of Indian Affairs)
77
NPRA & ANWR
Final allocation of fed. lands in Alaska achieved by Alaska National Interest Land Conservation Act of 1980 (ANCILA)
Withdrew most remaining federal areas from federal oil and gas leases
Under this act the ANWR was theoretically opened for geological and geophysical exploration and w/further Congressional consent leasing
ANWR: About 19.3M acres – no roads, no towns
•Only part that is prospective is the 10022 area that is tiny
ANCILA: Designated 1.5M acres (6100km2) of the coastal plain as the 1002 area and mandated studies of nat. resources of this area, esp. petroleum
•Congress was supposed to open the 1002 area for study – not necessarily leasing but study
78
BLM Ls under FLPMA
Three step process:
(1) Resource Management Plan: Sets forth LT goals for resource management for mineral, timber, surface
(2) Lands w/in the RMP that cannot be leased: Parks, wildlife refuges, etc. are removed from consideration
(3) Lands which are “known or believed to contain O or G deposits” can be leased Scientific decisions (USGS)
79
Competitive leasing under the ML and MLAAL (After the 3 Step Process)
(1) Tracts cannot be lager than 2560 acres (5760 in AK). Term is 10 yrs!
(2) Notice of L (Time, date, and place of sale); Onshore: held quarterly at each BLM office
(3) Secret bidding process
- Highest bidder wins.
- Don’t want to win by a whole lot ($1 over – you win!)
(4) Must meet “National min. acceptable bid”
(5) Does a party have standing to receive a lease? Are the citizens?
(6) Payment of fees, delay rentals, and bdi
(7) If production is achieved, ½ the money goes to the state, ½ to the feds (AK gets 90%) Recall – This refers to onshore, not offshore!
80
Noncompetitive L Available Under the ML and MLAAL
Lands set for L that did not receive acceptable bids are available for non-competitive L (over the counter, except for the first day) for 2 years
p. 1098-99: Sometimes lands that haven’t been L in the prior year may be offered for non-competitive L prior to competitive bidding. In this case, if the land is not L, in the competitive bidding process, the non-competitive ee takes the land
This may allow some ee w/closely held geo date who does not want to participate in the competitive L process to step ahead of other potential ees.
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Federal OGL
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Acreage Limitations: Gen. 2560 acres (5760 acres in AK = 1 MI (EXAM))
ii. Delay Rental Clauses
oRentals must be paid for first year!
oGenerally a 10 year primary term
o$1.50 first five years, $2 there after
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Drilling Clause:
oExtends L 2 years if end of PT
Generally a 1/8 royalty
82
NEPA:
Environmental law that est. a US national policy promoting the enhancement of the enviro. (THINK: Umbrella/ Big Law)
NEPA’s most significant effect was to set up procedural requirements for all fed. governmental agencies to prepare environmental assessments (EAs) and Environmental Impact Statements (EIS).
b.=. Resource Management Plans (RMP) (mandated by NEPA)
•Covers all sorts of uses in an are (jet skiing, mining, deer hunting, og, ect.) and how it will impact the environment (good or bad)
•EIS is included in this plan:
Describes all uses and impacts each thing discussed in RPM
You cannot say that what is in your EIS is different than what will really be done.
EA is a shorter version of an EIS
83
MLA & NEPA
No permit to drill can be granted w/o analysis and approval by the Sec. of the Interior concering a plan of operations covering a proposed surface disturbance
This request = APD (Application for Permit to Drill)
Typically, APDs can be approved by BLM w/just an EA so long as they development does not entail new impacts not previously considered.
The industry feels APDs take too long.
•Under EPA of 2005: Action by Sec. of Interior w/re: to certain routine ops is sub to a “rebuttable presumption: that such use does not require an APD (p. 1108-09)
84
NEPA Triggered By:
Leasing feasibility study is conducted
App. for permit to drill
When new reserves are going to be developed
When a major new enhanced recovery project is going to occur
•Always a big fight whether EIS or EA is necessary
85
No Surface Occupancy (NSO)
NSP means no EA/EIS
Some fed. L say you can drill but not access the surface
•Drill off a tract and come in from the side (don’t need surface)
•Do need an APD but “permit by rule” just apply and get it
--- 30 day can be bumped to 60 day
86
RMPs and NEPA
RMP plan of development by BLM. Describes planned mineral, surface, and recreational use of the land. (Required – Covers OGL)
RMP’s require public participation. (OG leasing on fed. land triggers NEPA)
- “Major federal action that significantly affects the quality of the human environment” = Pre- Leasing Trigger in NEPA
- Requires federal agency to prepare “detailed statement” to be included in any action recommended by the fes.
•EAs/EIS are statements of enviro. Effects of proposed federal agency actions
•Finding of No Sub. Impact = FONSI
87
Documentation of Land Use Confirmation & NEPA Adequacy (DNAs)
After an RMP is complete (w/EIS/EA component), the BLM decides to go through with leasing, they must determine whether the EIS or EA in the RMP needs updating.
DNAs assess the adequacy of RMP (EIS) – Does not supplement and probably cannot amend
Function of time and unanticipated developments
•Old RMP – New Technology (Fracing for example)
88
Preemption: State and Local Law & Fed. Land
OG development on federal lands is encroaching on other uses
State and local land authorities cannot reg. development on fed. lands but can pass “reasonable envoi. reg.” on such lands.
MLA L are different than claims under Mining Law of 1872>
- The first is an affirmative decision to L
- The other is a public land statute p. 1114
Feds & State often cooperate for communization
89
National Historic Preservation Act (NHPA):
Fed. agencies must consider effects on historic and cultural resources when considering an “undertaking” which may affect such things. O&G L count as such undertaking. (RMP/EIS must consider this issue as well)
90
L Termination:
Fed. L requires a bit more due process than reg. leases
Following cessation of production – L is Saved – If reworking or drilling ops are begun w/in 60 days …
91
Offshore Development In Gen.
Fed. gov. controls beyond the “State Waters” out to continental shelf
At irregular intervals, the fed. gov. will offer large number of “blocks” or acreage for L
Bids are taken in advance and the winners are announced (used to be MMS)
Offshore discoveries barely account for the majority of new dev. In US
- Broad areas of the shelf are off-limits to drilling and likely to remain so for awhile after the Deepwater Horiz. Disaster of 2010.
- Devel. continues to march deeper into the Gulf
- Most prolific areas of current exploration are off Northern AK
92
MMS
(RIP)
Created in 1982 to admin. OCS lands
Had 3 Broad Functions:
•Conducting L sales and watching over intake of royalty and other payments due to the gov.
•Record keeping and approval of assignments, exploration, development, and production plans
•Regulation of cradle to grave (From exploration to Decommission) equipment, operation, safety, and performance standards.
Complains arose re: Conflicts of Interest (Change in personnel, lax enforcement and agreed to be “captured” by OG co)
93
BOEM (Under which are):
Bureau of Ocean Mngment: Responsible for leasing areas of the outer content. Shelf for conventional and renewable energy resources.
Bureau of Safety and Enviro. Enforcement: Responsible for ensuring comprehensive oversight, safety, and enviro. protection in all offshore energy activities.
Office of Nat. Resources: Responsible for royalty and revenue mng. Including collection and distribution of revenue, auditing and compliance and asset mngmt.
10/11 – BOEMRE, formerly MMS replaced by OMR.
94
"Other" Enviro. Agencies
EPA
•Air Permits: Clean Air Act
•Water Permits: Clean Water Act
Army Corp. of Engineers: Authority to prevent obstruction of navigable waters
Office of Fisheries/National Marine Fisheries Service (Under NOAA – National Oceanic and Atmospheric Admin.)
State agencies for onshore development
95
Suspension and Cancellation (Production/Cancellation Fed. L)
Reg. supervisor can suspend production (including the requirement to produce) by himself or when requested by ee. Reasons for such a request p. 1128.
Cancellation – For failure to comply w/law, reg. or L
- Non-Productive L: Sec. of Interior can cancel, sub. to juridical review
Productive L: Requires a Fed. DC
L can be cancelled before development and production begin.
Example: If exploration plans are not submitted or if said plan if deemed an environmental threat, the L can be cancelled.
•Issue because – Spend all the money getting it then told, can’t develop
96
OSCLA of 1953
Governs L of fed. offshore areas
Est. competitive leasing game
Interior makes 5 year leasing plan for ea. new region
•See Outline for Process p. 1122
•Again EIS required for L plan. EA for subsequent sales
If clean, a FONSI is issued
Requires interior to consider an Exploration Plan to be submitted by the oil co.
•Must be approved w/in 30 days if no finding of no probable harm to life, prop., national sec., etc.
97
CZMA of 1972
Requires interior to consider and (maybe) approve exploration plan to be submitted by the oil co.
Requires “cert.” by DOI that an Exploration Plan is consistent w/ CZM program of the appropriate state.
If the State affected does not approve – can only be gotten by the Sec. of Commerce override the objection of the State(s). If overridden, the Interior may give the permit
Purple State – can go either way (Politics)
98
Indian Lands
Communal Ownership: Held by all members of the tribe. No inheritance.
Tribal Lands:
- Aboriginal: Right to occupy lands after discovery and title passage. Subject to termination by discovering sovereign and successors.
- Treaties (pre 1871): Often recognized Indian rights to land and minerals
- Acts of Congress (Post 1871): Replaced treaties w/status
- Exec. Orders (1871-1919): Presidents set aside land for tribes
- Purchase: Tribes and individuals purchase land like anyone else
- Prior Gov . (e.g. Spain/Mexico): Recognition of prior grants
99
Allotted Lands: Gen. Allotment (Dawes) Act of 1887:
Trust or Restricted Fee: To void fraud. Held in trust for 25 yrs (and since extended)
Continues to be extended
Typical Scenario Today: Tract held in trust for several descendants of the original allottee. Fractionalization is a worry.
AI Land: Not subject to communal ownership
If you want to buy it or L it or OG development, you must get approval from the BIA.
Ended w/ Indian Reservation Act of 1934.
100
Indian Nations are ______
Semi-Sovereign w/tribal ownership:
Federal government has plenary powers but owes duty of trust
•Fiduciary Duty
Allotted and communal ownership interspersed w/non-Indian
101
Three Types of Indian Land
Communal Land
Allotted Land
Ownership by non-tribal (Still sub. to the tribe, if they’re based on health, safety, welfare)
102
Special Tribes - Not Under Dawes Act (5 Civilized Tribes)
Restricted Fee Patents
- NY
- Nebraska
- Osage (“head rights”)
In June 1906, the Fed. government enacted a law under 2,229 members of the Osage tribe were to receive an equal number of shares known as “head rights.” The Osage Indian Reservation consisted of …
103
Indian Law Basic for OG
Sovereignty (domestic, dependent nations)
Trust Doctrine: Feds owe strictest fiduciary duty to tribes & Indians
Indian Non-Intercourse Acts: Allotted Lands Leasing Acts of 1990
Omnibus Indian Mineral Leasing Act of 1938
Indian Mineral Development Act of 1982
- Created: SDWA, CWA, & CAA
104
Indian MLA of 1938
Oversight of oil and gas operations by the federal gov.
- Reigned supreme for 45 years
Tribes only decision is to lease and to approve final agreement. BIA (under DoI does all the administrative work.)
Sealed bid or oral auctions. Tribe must approve lease – 640 acres max. PT = 10 yrs.
Last Step: BLM MUST APPROVE OPERATIONS
105
Application of State Laws on Indian Nations
In general, State laws have no application on Indian Nations
- This includes, generally, the State OG Commission
- Can apply if Sec. of DoI determines that laws or regs would be in the best interest of the tribe or allottee
States have been allowed to tax mineral development along with tribes (double taxation)
State workers’ comp. laws apply in Indian Country by the Fed. law
- Injured Indian can get worker’s comp. from non-Indian developer
106
Allotted Lands Leasing Act of 1909:
Allows indiv. allottee Indians to lease MI
Allows Sec. of DoI to L allotted lands where allottee in unknown
- Superintendent can L for minors or incompetent
- Mult. co-alloteees? Certain number needed per formula
1939 Act Leasing:
- Follows standard development regs. as for other fed. lands
107
Drilling Permits on Indian Lands
Must be approved by the BLM
Employ an architect if there is no survey on file for that tract
Co. negotiates entry w/SO
108
Indian Law Complexities
Choice of Law: Tribal Court? -- (Kulander – NEVER GO THERE)
Get the right tribal officials to sign
Tribal Official & Entity Sovereign Immunity
Tribal Taxation Power (Add State Taxation Power also)
Tribal Employment Laws (State worker’s comp.)
Tribal Zoning
Tribal health, safety, environmental (“HSE”) laws
Tribal Courts (Exhaustion)
109
Secretarial Approval - Indian Laws:
Exposure of Env. Review Costs
- Developer and may be costly and time consuming. Tribe can opt-out of development up to Secretarial approval. Time and money lost.
“Best Interests” Standards for Approval
- Secretary has fiduciary duty to tribes to only approve agreements that are in “best interests” of the tribe. After approval, tribes have successfully asserted an agreement didn’t meet the standard.
Failure to Obtain Sec. Approval:
- L, mineral agreement, etc. w/o Sec. of DoI approval is void
- This includes assignments!!!!! Lots of these have been assigned in the county records w/o approval. Could be attacked!!
- Violation of any applicable reg. could lead to agreement cancellation, so the ENTIRE lease may be void – not just the assignment!!!
110
Sovereign Immunity
Tribal:
- Tribes are domestic, dependent nations. Immune from suit unless immunity is waived, lost through act of Congress, etc.
- May be waived by K, but must be approved by Sec. of DoI and unequivocally expressed.
Immunity of Tribal Officials:
- Shield tribal officials when they are acting in their official rep. capacity, w/in the scope of their authority
- Producer who does not K around this is still protected if authority acted outside his power
Immunity of Other Tribal Entities
- Tribal corp. & business may enjoy sovereign immunity
111
Unitization and Exhaustion of Tribal Court
Tribes have their own courts, laws, and procedural rules. These outlets must be exhausted before going to fed. court.
oStay out of tribal court!!
oIf you assign, re-up … to go to DC
Choice of Law & Venue Provisions
oIndustry View: K out of these courts. Only binding on the parties to the agreement, however.
112
Dual Taxation
Tribes can tax non-Indian mineral development
Could be hit up both tribal and non-preempted State tax w/only case law landmarks to determine if State tax is valid
Ask for a tax holiday from State and tribal authorities
113
Tribal Employment Laws
Quotas, job training programs, etc. IMDA developers have more leverage
114
Tribal Zoning, Health, & Environmental Laws:
Tribes can develop their own zoning, SDAs, frac disclosure and other health and safety laws
oCan be subject to Indian law even if you are not an Indian
115
Production Requirements
Most Indian leases require actual production at end of PT. So, continuous ops and dry hole classes will likely not work.
116
Second Largest OG Producing State (Indian land)
North Dakota
117
Royalty Valuation
Sec. of Interior sets valuation of royalty
Fed. Leases: Typically, 1/8 min. lessor’s royalty
- 1/6 is most common offshore
Amt. Owed = Volume * Royalty Value * Royalty Fraction
Sec. sets the “Royalty Value”
- Sub. to admin/judicial review
Royalty valuation categories: (1-2) Indian Oil & Gas, (3-4) Fed. Oil & Gas
Royalty Valuation based on several factors
- Largest factor is the relation between the ee and the first POP (Is the POP associated with the producer? Is it an arms length transaction? )
Rule: Value of production cannot be less than gross proceeds.
- What about PoP paying ee reimbursement for State severance tax? Is that “GPs?” It’s not money that the ee pockets.
118
Gross Proceeds (& Royalty Valuation)
Value: With gross proceeds min.
Assoc. Director’s “Est. reasonable value” but never less than gross proceeds
Est. reasonable value may be determined by looking to:
Comparable Sales
•What are other people paying
Objective Value Formula (By feds)
Netback Method
•The same gas may have mul. markets and value
119
Royalty Take or Pay Payments
**
120
Royalty Valuation/Payment - Transportation Continued:
Limited to “reasonable actual costs”
Arm’s length transaction costs: Ee deducts
Non-arm’s-length transportation costs: Allowance calculated by reg. or FERC tariff (if applicable)
- Almost always higher than the arm’s length price
“Gathering” which is not deductible – is moving gas as to a centralized accumulation/treatment point on or off L or “communitized” area
121
Affiliate Transactions: Oil:
If there is no sale prior to refining: Royalty valuation depends on location of the L: AL, CA, Rocky Mountains, Other (Including Gulf and PB)
Affiliate Sales: Gen. look to affiliate resale price w/”work back” method applied, subject to ee electing to use a spot-market option
•Actual market they can tie to a 3rd party
122
Affiliate Transactions: Gas
Look to affiliates re-sale price (with “work back method” applied) unless affiliate also purchases like gas from other producers at arm’s length
For affiliates who also purchase gas at arm’s length, which are not “marketing affiliates” under the regs 3 benchmarks:
•GP of affiliate sale if comparable to arm’s length sales
•Other relevant info: “Information relevant in valuing like- quality gas “ including “other reliable public sources of information”
•Does not have to be local if it is “like quality”
•But not less than GP accruing to the “ee” (Catchall)
123
Enforcement of Royalty/Valuation (FORGMA)
1982
Record retention for 6 years to facilitate gov. inspection
Timely payment requirements w/civil and criminal penalties
Interest on late payments (penal rate)
State as well as fed. audits (due to revenue sharing)
124
RSFA (Royalty Simplification and Fairness Act of 1996)
No application to Indian Ls
Expanded State audits
- States can issues demands and subpoenas
Time limits on royalty actions
- 7-year statute of repose; 6 –year for seeking refunds and credits
Six year limit for ees seeking a refund or credit …
125
Rules re: Federal Ls
Generally, federal Ls are required to protect the LH from drainage by drilling offset (if profitable) or paying compensatory royalty.
- Common ee is not entitled to notice (you should know you’re draining from your own tract.
However, if the offset well would not be profitable, it is not necessary to drill or to unitize (or it seems, pay compensatory royalty)
Fed. ees are also obligated to develop a productive L after notice
126
SEC Powerpoint
P & P: Involving possible categories (probable 90%)
Table of Categories of Reserves (NEED TO KNOW)
- PDP
- PUD
- Proved – Developed Shut- In (Bc geologist said so)
- Proved – Developed – Non Producing
•Know it is there – Drilled it, but haven’t developed
•Est. when you do perp it – you’re going to get _______
PSA
- 1 Thing: Can list out various ____ at specific prices (savy investors can come in and do the math), likely to see a specific range of prices
12- Mo. Average
- Old: End of Year = Dumb
- New: Average, makes sense
Recent Update
- Removal of PUDs (Changes your worth)
- Why? It hurts if everyone overbooks reserves – eventually you might spend more paying lender than drilling.
127
Federal Units (Important for NM)
Development Unit: Typically precedes an exploratory unit and requires geological & geophysical studies.
Exploratory Unit “FEU” (Federal Exploratory Unit): Allows for exploration of drilling and gradual orderly development of a common “commercial” (profitable) reservoir encompassing multiple federal onshore leases.
Secondary Recovery Unit: Used to increase in a fully developed field
128
FSU'S Key Benefit:
Unit operator can operate unitized area as single L
Federal Form UA (Unit Agreement), Sec. 18:
- “Operations performed upon any tract of unitized lands will be deemed to be performed upon, and for the benefit of, eac. and every tract of unitized land, and no L shall eb deemed to expire by reason of failure to drill or produce well situated on the land therein embraced.”
•Like a big pool
•Pooling generally based on getting enough L for a spacing unit – Units are more field based and based on geologic structure and squeezing out for primary recovery
Allows participants who make new “wildcat” discovery to reap full (most) benefits of discovery because reservoir is “unitized” prior to drilling.
Allows participants to hold mult. fed. Ls through compliance w/FEU regulations
- May also include private, state, tribal Ls w/in FEU area
Allows wells to be strategically located and eliminates need for offset wells to prevent drainage – thus limits undesirable effects of development under ROC
Allows use of central tank batteries and other centralized facilities because all production is pooled
Less overall surface use and thus, less environmental impact
129
FEU Approval:
First Steps:
Company geologists ID prospects area, boundary, and target formations
Landman determines mineral and LH ownership for target formations
- Whether federal, state, tribal, or fee (private)
- Proposed unit area must be at least 10% fed.
- Co. submits proposal to BLM for “public interest” determination
Second Step:
After BLM approves FEU in “public I” company submits formal application letter to BLM
- Map showing unit boundary and ownership (federal, state, tribal, and fee)
- Ownership schedule of unit area
- List of fed., tribal, & state L numbers and expiration dates
- Statement of initial drilling obligations
- Map showing proposed well locations of initial well(s)
- Description of unitized land and substances, depths, formations
- Geologic report
- Any special provisions the BLM may require
BLM issues “prelim approval”
Third Step:
Get Unit Agreement executed by participating parties
Submit to BLM for final approval
- BLM/State Land = GLO
•If you’re going to out to run title, you need to go to county BLM & State
Until final approval, FEU is established
130
FEU Unit Agreement - Federal UA between Unit Op and BLM but ratified by all affected ees and RO
Authorizes FEU
Provides for means of allocating production
UA includes exhibits: Map or unit, land ownership & list of federal, tribal, and State Ls and expiration dates
•THINK: Fee can be pulled in w/pooling & unitization clause
BLM may force unitization up to 15% of unit acreage (non-consenting WI parties)
- To count toward 85%, tract must be “fully” or “effectively” committed
•Fully – All interest owners have committed
•Effectively – All interests except ORR and production-payment interest holders have committed
- NEED TO KNOW: To count 85% must be fully or effectively
•Partially – Means all IW have committed.
---Non-WI (NPRIs) don’t count
•Uncommitted – Means less than all WI have committed
---Op must provide evidence of efforts to gain voluntary approval and explanation for lack of approval
•Lands w/in unit boundaries that are not unitized continue to be governed by L provisions only
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FEU UOA:
Agreement of Op and WI owners committed to FEU
Empowers Op
Allocates Cost
Voting Procedures
Similar to JOA – but contemplates ongoing ops over a large area
132
Two RMMLF Forms:
(Divided and Undivided)
Undivided fixes costs and producers share among WI owners determined from outset and for like of unit (used where extend an uniformity of prospect are known, (not the usual situation).
Divided – Fixes costs and production among WI owners on basis of “participating area” (more common not to know extent and uniformity prospect) which changes as field area changes.
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Undivided FEU (Less Common) – Formula:
- All tracts w/in FEU participate in revenues from all wells
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WIO “Participating” Interest
Acreage/Total Acreage
50/100 = Participating Interest of 50%
200/1000 = 20% participating i
WIO “Beneficial” Interest
Net Revenue Interest (NRI) (Take royalty out) / Total Acreage
5 people in unit have different royalty in L
Changes net royalty interest
133
FEU Operrating Agreement:
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Ex: Assume 6400 acre FEU & 2 WIO
- A has 4800 acres, carrying 12.5% cumulative royalty burdens
• 4800/6400 or 75% PI
• (1 - .125 =).875 * 4800 =
4200; 4200/6400 (total
unit area) = 65.625%
- B has 1600 acres, carrying 25% cumulative royalty burdens
• 1600/6400 or 25%PI
• (1 - .25=) .75 * 1600 =
1200; 1200/6400 =
18.75%BI
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Participating should be separated out from beneficial because formula should favor interest owners …
