Oil and Gas II Flashcards

Question 1

Q

Pay for Ops:

AFE Overruns

Answer

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)

Question 2

Q

Pay for Ops:

Pre- Payments

Answer

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

Question 3

Q

Payments for Ops:

Deductions for Non-Payments (Net-Out)

Answer

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

Question 4

Q

Non-Op Liability for Costs: Additional Development

Answer

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

Question 5

Q

Non-Ops who do not want additional development can go ….

Answer

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

Question 6

Q

Art. V - Operator 1989 Form

Answer

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”)

Question 7

Q

What is “good cause” to remove an Operator on the 1989 form

Answer

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

Question 8

Q

Resignation of Removal or Op and Selection of Successor

Answer

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

Question 9

Q

Gas Balancing Info

Answer

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

Question 10

Q

Three Methods of Equitable Gas Balancing

Answer

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

Question 11

Q

If you might be underproduced, what type of balancing do you want?

Answer

A

Periodic Cash Balancing

Question 12

Q

Art. VI: Drilling Development (B) Sub. Ops

Answer

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

Question 13

Q

Art. VII: Expenditures and Liability of Parties

Answer

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 ..

Question 14

Q

ARCO v. The Long Trust

Answer

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

Question 15

Q

1989: Art. VI. G. Taking Production in Kind

Answer

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..

Question 16

Q

Opp Removal: 1956 Form

Answer

A

Not addressed

Question 17

Q

Operator Removal: 1977 Form

Answer

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

Question 18

Q

Operator Removal: 1982 Form

Answer

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

Question 19

Q

Operator Removal in TX

Answer

A

Not easy, courts are reluctant to rule on what is “good and workmanlike” operator

Question 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)

Answer

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

Question 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.

Answer

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.)

Question 22

Q

Is consent necessary to assign the lease?

Question 23

Q

Texas Two-Step: The two step process used to get around consents required for assignment of lease

Answer

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

Question 24

Q

Preferential Right to Purchase Clause

Assignment, Texas Two Step, Consent to Assign.

Answer

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.)

Question 25

Q

Tennaco Inc. v. Enterprise Production Co. (Example of Texas Two-Step)

Answer

A

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)

Question 26

Q

Drop Dead Consents

Answer

A

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

Question 27

Q

Preferential Right to Assign

Answer

A

89 Form
X IT OUT! DROP IT
Usually “G” (“Should a party desire to sell all or any part of its interests under …”)

Question 28

Q

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?

Answer

A

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.

Question 29

Q

Art. III (89)

Answer

A

Interests of the Parties:

“Interests of the Parties in Costs and Productions, Unless..”

Question 30

Q

Art. VII (89)

Answer

A

Expenditures and ..

Question 31

Q

Art. XV.B. (89)

Answer

A

Successors and Assigns

Question 32

Q

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 …

Answer

A

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 …”

Question 33

Q

Art. VI.E: Transfer of Interests: Accrual of P&A Liabilities (Assignment)

Answer

A

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.

Question 34

Q

Sinking Fund for P&AStates and fed. authorities require financial reassurance that wells will not be orphaned.

Answer

A

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.

Question 35

Q

Op: Bankruptcy:

Answer

A

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)

Question 36

Q

(Bankruptcy)

PROBLEM: JOAs are executory Ks meaning the debtor is no longer converted by its terms if it disavows the JOA.

Answer

A

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)

Question 37

Q

AMI: Agreement Defined

Answer

A

(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.

Question 38

Q

AMI (In gen)

Answer

A

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..

Question 39

Q

Purpose of AMI Agreement

Answer

A

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)

Question 40

Q

AMI must comply w/SOF

Answer

A

UCC 26.01 (In writing)

Question 41

Q

Is AMI a property interest?

Answer

A

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.

Question 42

Q

In LA - can you refer to an unrecorded document?

Answer

A

No. A reference to an unrecorded doc. in LA has no legal affect.

Get around through Memo of Sale Agreement

Question 43

Q

AMI Practical Considerations: Easiest, Cheapest Method to ensure the description is valid

Answer

A

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

Question 44

Q

Case Law: Landmarks: What has worked, what has not.

Answer

A

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.

Question 45

Q

Incomplete and Unexecuted JOAs and Ancillary Docs:

Answer

A

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).

Question 46

Q

Unsigned Components: Do they belong in the docs compromising “The Agreement?”

Answer

A

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)

Question 47

Q

COPAS: Council of Petro Accountants Societies

Answer

A

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

Question 48

Q

COPAS: The Op ….

Answer

A

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.

Question 49

Q

COPAs: The JOA controls ..

Answer

A

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.

Question 50

Q

The COPAscabana

Answer

A

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.

Question 51

Q

Drilling Ks - 3 Types

Answer

A

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..)

Question 52

Q

Drilling Ks - In general

Answer

A

Ops typically hire a driller.

Biggest Issue Addressed: What’s to be done, indemnities, arbitration/forum selection and insurance.

Question 53

Q

Drilling Ks - Notes to Caza

Answer

A

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.

Question 54

Q

MSA

Answer

A

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.

Question 55

Q

Environmental Indemnities

Answer

A

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.

Question 56

Q

The Problem w/Indemnities

Answer

A

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.

Question 57

Q

Forman v. Exxon (Indemnities)

Answer

A

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.”

Question 58

Q

Federal Regulation of Gas

Answer

A

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)

Question 59

Q

Manchester Pipeline Corp. v. Nat. Gas Co.

Answer

A

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)

Question 60

Q

M&M Liens

Answer

A

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)

Question 61

Q

M &M Lien Covers:

Answer

A

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!)

Question 62

Q

When does an M&M lien attach?

Answer

A

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

Question 63

Q

How to list/itemize items not paid when liens are attached

Answer

A

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 **

Question 64

Q

How do you miss deadlines w/ regard to liens & property attachment?

Answer

A

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)

Answer 64

A

Must serve the PO notice NO LESS than 10 days before filing the lien

Answer 65

A

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).

Answer 66

A

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.

Answer 67

A

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)

Answer 68

A

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%

Answer 69

A

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

Answer 70

A

Authorizes lease of oil and gas deposits under railroad and other rights of way to the owner of the right of way

Answer 71

A

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.”

Answer 72

A

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

Answer 73

A

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.

Answer 74

A

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

Answer 75

A

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)

Answer 76

A

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

Answer 77

A

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)

Answer 78

A

(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!

Answer 79

A

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.

Answer 80

A

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

Drilling Clause:
oExtends L 2 years if end of PT

Generally a 1/8 royalty

Answer 81

A

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

Answer 82

A

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)

Answer 83

A

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

Answer 84

A

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

Answer 85

A

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

Answer 86

A

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)

Answer 87

A

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

Answer 88

A

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)

Answer 89

A

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 …

Answer 90

A

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

Answer 91

A

(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)

Answer 92

A

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.

Answer 93

A

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

Answer 94

A

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

Answer 95

A

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.

Answer 96

A

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)

Answer 97

A

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

Answer 98

A

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.

Answer 99

A

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

Answer 100

A

Communal Land

Allotted Land

Ownership by non-tribal (Still sub. to the tribe, if they’re based on health, safety, welfare)

Answer 101

A

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 …

Answer 102

A

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

Answer 103

A

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

Answer 104

A

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

Answer 105

A

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

Answer 106

A

Must be approved by the BLM

Employ an architect if there is no survey on file for that tract

Co. negotiates entry w/SO

Answer 107

A

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)

Answer 108

A

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!!!

Answer 109

A

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

Answer 110

A

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.

Answer 111

A

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

Answer 112

A

Quotas, job training programs, etc. IMDA developers have more leverage

Answer 113

A

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

Answer 114

A

Most Indian leases require actual production at end of PT. So, continuous ops and dry hole classes will likely not work.

Answer 115

A

North Dakota

Answer 116

A

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.

Answer 117

A

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

Answer 118

A

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

Answer 119

A

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

Answer 120

A

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)

Answer 121

A

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)

Answer 122

A

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 …

Answer 123

A

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

Answer 124

A

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.

Answer 125

A

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

Answer 126

A

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

Answer 127

A

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

Answer 128

A

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

Answer 129

A

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

Answer 130

A

(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.

Undivided FEU (Less Common) – Formula:
- All tracts w/in FEU participate in revenues from all wells

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

Answer 131

A

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

Participating should be separated out from beneficial because formula should favor interest owners …

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