[Federal Register Volume 63, Number 8 (Tuesday, January 13, 1998)]
[Proposed Rules]
[Pages 1936-1942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-563]


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DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Parts 3100, 3106, 3130, and 3160

[AA-610-08-4111-2410]
RIN 1004-AC54


Oil and Gas Leasing; Onshore Oil and Gas Operations

AGENCY: Bureau of Land Management, Interior.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would clarify the responsibilities of oil 
and gas lessees for protecting Federal oil and gas resources from 
drainage by operations on nearby lands that would result in lower 
royalties to the Federal government. It would specify when the 
obligations of the lessee or operating rights owner to protect against 
drainage begin and end and specify what steps should be taken to 
determine if drainage is occurring. It also would clarify the 
obligation of the assignor and assignee for drainage obligations, well 
abandonment and environmental remediation when the Bureau of Land 
Management (BLM) approves an assignment of record title or operating 
rights.

DATES: BLM may not necessarily consider comments postmarked, hand-
delivered, or received by electronic mail after March 16, 1998 the 
above date in the decisionmaking process on the final rule.

ADDRESSES: If you wish to comment, you may submit your comments by any 
one of several methods. You may mail comments to the Bureau of Land 
Management, Administrative Record, 1849 C Street, N.W., Room 401LS, 
Washington, D.C. 20240. You may also comment via the Internet to 
[email protected]. Please submit comments as an ASCII file avoiding 
the use of special characters and any form of encryption. Please also 
include ``Attn: AC54'' and your name and return address in your 
Internet message. If you do not receive a confirmation from the system 
that we have received your Internet message, contact us directly at 
(202) 452-5030.
    Finally, you may hand-deliver comments to Bureau of Land Management 
at 1620 L Street, N.W., Room 401, Washington, D.C. Comments, including 
names and street addresses of respondents, will be available for public 
review at this address during regular business hours (7:45 a.m. to 4:15 
p.m.), Monday through Friday, except holidays. Individual respondents 
may request confidentiality, which BLM will consider on a case-by-case 
basis. If you wish to request that BLM consider withholding your name 
or street address from public review or from disclosure under the 
Freedom of Information Act, you must state this prominently at the 
beginning of your comment. All submissions from organizations or 
businesses, and from individuals identifying themselves as 
representatives or officials of organizations or businesses, will be 
made available for public inspection in their entirety.

FOR FURTHER INFORMATION CONTACT: Donnie Shaw, (202) 452-0340.

SUPPLEMENTARY INFORMATION:

I. Public Comment Procedures
II. Background
III. Discussion of Proposed Rule
IV. Procedural Matters

I. Public Comment Procedures

    Written comments on the proposed rule should be specific, should be 
confined to issues pertinent to the proposed rule, and should explain 
the reason for any recommended change. Where possible, comments should 
reference the specific section or paragraph of the proposal which the 
commenter is addressing. BLM may not necessarily consider or include in 
the Administrative Record for the final rule comments which BLM 
receives after the close of the comment period (see DATES) or comments 
delivered to an address other than those listed above (see ADDRESSES).

II. Background

    The existing regulations in 43 CFR Part 3100 provide for agreements 
whereby the United States is compensated for oil or gas resources that 
are drained from Federal lands by operations on adjacent lands. These 
rules further require the lessee or operating rights owner to drill and 
produce wells necessary to prevent drainage or, in lieu thereof, to pay 
compensatory royalties. These regulations are based on BLM's authority 
under the Mineral Leasing Act of 1920, as amended and supplemented, and 
other cited authority to promulgate a rule to implement the Act. It and 
its implementing lease terms make express the covenant to protect the 
lessor against drainage implicit in the law of all oil and gas 
producing states. An audit by the Office of the Inspector General and 
an Internal Control Review by BLM in 1990, recommended that BLM revise 
the oil and gas regulations pertaining to drainage protection to 
clarify who is responsible for drainage protection, when that 
responsibility begins and ends, and to specify what actions are 
required on the part of Federal oil and gas lessees to ensure that 
their leases are protected from drainage. In 1995 the Director 
appointed a Bureau Performance Review Bonding and Unfunded Liability 
Team to review a broad range of liability issues. That Team recommended 
that BLM revise and clarify its regulations on lessee and operating 
rights owner liability with regard to prevention of drainage, payment 
of compensatory royalties, plugging and abandonment of wells, and 
reclamation and remediation of the lease site. This rulemaking should 
enable BLM to do an effective job in fulfilling its responsibility with 
regard to ensuring that the public receives full value for its oil and 
gas resources notwithstanding drainage. The rule would also insure that 
the Government's right to drainage compensation cannot be defeated by 
the expedient of lease assignment while the drainage continues.

III. Proposed Rule

    The proposed rule would amend existing provisions on the 
responsibilities of lessees of Federal oil and gas leases. It would 
clarify and codify the responsibilities of oil and gas lessees for 
protecting Federal oil and gas resources from drainage by operations on 
nearby lands that would result in lower royalties from Federal leases. 
The rule would add definitions of the terms ``drainage'' and 
``protective well'', and clarify when and how lessees receive notice, 
either actual or constructive, that drainage from their leases may be 
occurring. The proposed rule would amend the regulations on transfers 
of leases and onshore oil and gas operations to allocate the 
responsibility for drainage protection and to clarify when the 
obligation to protect Federal leases from drainage begins. It would 
make it clear that once BLM has made a prima facie case that drainage 
is occurring, the lessee has the burden of

[[Page 1937]]

proving that drainage is not occurring or has not occurred. Moreover, 
the lessee has the burden of proving that it could not make a 
reasonable profit over and above the cost of drilling, producing, and 
operating a well to protect the leased lands from drainage. That 
prudent operator test would be applied once, when drainage was or 
should first have been known, and not each time there is an assignment 
of lease interests. Additionally, the proposed rule would renumber 
sections within subpart 3100 which were not being changed 
substantively, to make the numbering system consistent throughout that 
subpart. The proposed rule would also expressly recognize that a lessee 
can satisfy its obligation to protect against drainage by entering into 
unitization or communitization agreements.
    The rule would provide that once it is determined that a protective 
well is economic, the Government's receipt of compensatory royalties 
for continuing drainage would not be affected by transfers of lease 
interests. It would do so by fixing the point at which economic 
feasibility of a protective well is determined at the earliest time any 
lessee knew or should have known of drainage. Currently, a new 
determination is made every time an interest in the lease is assigned, 
cutting off compensatory royalty obligations sooner than if the lease 
is not assigned. Assignment should affect the identity of the person 
owing compensation, not whether there is a duty to compensate.
    The proposed rule would expressly state that where undivided record 
title interests or operating rights in the lease are held by more than 
one party, all such lessees and operating rights owners are jointly and 
severally responsible for drainage protection, including payment of all 
compensatory royalty due in lieu of drilling a protective well. Public 
comments are also requested on the requirement that, upon BLM's 
approval of an assignment of record title, a prospective assignee 
assumes the obligation to pay any compensatory royalties that accrue 
during its lease tenure, if a protective well would have been economic 
at the earliest time drainage was known or should have been known by 
the previous lessee. BLM will amend Oil and Gas Lease Form 3100-11, 
Assignment of Record Title Form 3000-3, and Transfer of Operating 
Rights (Sublease) Form 3000-3a to reflect this rulemaking.
    The Federal Oil and Gas Royalty Simplification and Fairness Act of 
1996 made a number of changes in the Federal Oil and Gas Royalty 
Management Act (FOGRMA). Section 6(g) of that legislation amended 
section 102(a) of FOGRMA, 30 U.S.C. 1712(a), to make an operating 
rights owner primarily liable for ``its pro rata share of payment 
obligations under the lease.'' Record title lessees were made 
secondarily liable for such pro rata shares.
    BLM's attorneys have concluded that this provision does not affect 
the joint and several obligation of lessees and operating rights owners 
to protect the lessor from drainage or pay damages in the form of 
compensatory royalties if they fail to do so. An ``obligation'' for 
FOGRMA purposes is a duty to pay, offset or credit monies, including 
any royalty, rental, interest, penalty or assessment. In contrast, the 
obligation addressed by these regulations is a joint and several duty 
to diligently develop to prevent the lessor's oil and gas from being 
drained by drilling on adjacent lands. A compensatory royalty is 
payable under the terms of the lease, in lieu of, or upon the failure 
to meet, the drilling obligation.
    Nor does compensatory royalty constitute interest owed on a sum not 
paid timely or a civil or criminal penalty as authorized by sections 
109 or 110 of FOGRMA. Nor is it an assessment, which is a ``fee or 
charge'' levied or imposed by the Secretary or a delegated State. Just 
as the other means of satisfying the obligation are joint and several, 
so is the alternative of paying compensatory royalty. Further, if BLM 
were to allow some portion to remain unpaid, by treating the liability 
as proportionate only, there would be little incentive to drill 
protective wells. This proposed rule conforms to the treatment of 
offshore leases in the final rule promulgated by the Minerals 
Management Service on May 22, 1997 (62 FR 27948).
    BLM is proposing the following specific changes to its oil and gas 
regulations that deal with drainage:
    Sections within subpart 3100 would be renumbered. The following 
discussion uses the new section designations.
    Section 3100.5  Definitions (previously Sec. 3100.0-5) would be 
amended by deleting paragraph designations, and alphabetizing the 
definitions for ease of reading. New definitions of ``drainage'' and 
``protective well'' would be added to the list of definitions.
    Section 3100.21  (previously Sec. 3100.2-1) would be amended to 
indicate what steps BLM will take to ensure that the government is 
compensated for drainage of oil and gas from federally-owned lands. It 
would retain the existing explanation of how the government seeks 
protection from drainage of unleased lands and add a provision to 
explain how the government seeks protection for leased lands.
    Section 3100.22  (previously Sec. 3100.2-2) would be amended to 
clarify under what circumstances lessees are responsible for protecting 
their leases on Federal lands from drainage, but the list of actions 
BLM might require a lessee to take to provide this protection would be 
made a separate Section 3100.23.
    Section 3100.24  would be added to specify that all record title 
lessees are jointly and severally liable for paying compensatory 
royalties when more than one such person owns interests in the same 
lease. Operating rights owners having an interest in the same area are 
jointly and severally liable with one another and with the record title 
owners for the compensatory royalties attributable to drainage from 
that area.
    Section 3100.40  would be added to specify that the duty of a 
lessee or operating rights owner to pay compensatory royalty for 
drainage begins a reasonable period after a reasonably prudent operator 
should or could have known that drainage was occurring, or when the 
lease is acquired from a lessee who knew or should have known of the 
drainage.
    Section 3100.45  would be added to clarify that after BLM approves 
an assignment, the assignor remains responsible for drainage 
obligations that accrued during its lease tenure.
    Section 3100.50  would provide that a party with interest in a 
Federal lease will have constructive notice that drainage is or is not 
occurring when well completion or first production reports are filed 
with State oil and gas commissions or regulatory agencies or become 
publicly available, whichever is earlier, or when that party completes 
drill stem, production, pressure analysis, or flow tests of the 
offending well, if that party owns any interest in the offending well 
or the lease.
    Section 3100.51   would provide that lessees and operating rights 
owners have duties to monitor the drilling of wells on adjacent lands 
and to gather sufficient information to determine whether drainage is 
occurring. This information may be in various forms, including but not 
limited to, well completion reports, sundry notices, or monthly 
production reports. The prudent lessee or operating rights owner must 
analyze and evaluate this information and make the necessary 
calculations to determine the drainage area of the offending well, the 
amount of oil and gas resources being drained by the offending well 
from their Federal

[[Page 1938]]

lease, if any, and whether a protective well would be economic to drill 
after notice has been established. The lessee and operating rights 
owners would also be required within 60 days to provide BLM with their 
plans for drainage protection. Further they would be required to 
provide BLM with the analysis itself upon request from BLM.
    Section 3100.52   would be added to inform the lessee or operating 
rights owner that BLM will send a demand letter by certified mail once 
it has determined that drainage is occurring, but their liability for 
drainage protection commences from the date of actual or constructive 
knowledge under Section 3100.50, when earlier than BLM's demand.
    Section 3100.55   would be added to inform a party with interest in 
an oil and gas lease that BLM has the burden of establishing the 
existence of drainage and the operator's knowledge of that drainage, 
but once a prima facie case is established, the lessee or operating 
rights owner has the burden of proving that drainage has not occurred 
or it should not have known of the drainage.
    Moreover, the lessee/operating rights owner has the burden of 
proving that a protective well would not be economic.
    Section 3100.60   would be added to indicate that the party holding 
an interest in a Federal lease must begin to take protective action at 
the earliest reasonable time after an offending well begins to produce 
oil and gas resources on adjacent lands, with the actual time being 
determined case-by-case on the basis of specified factors. While you 
may contest BLM's determination, upon a final determination that 
protective measures were required, your liability for failure to 
protect the lessor will be calculated from the date established under 
3100.50 or the date of BLM's initial demand, whichever is earlier.
    Section 3100.61   would be added to describe the period of time for 
which the Department will assess compensatory royalties against a 
lessee or operating rights owner who does not drill and produce from a 
protective well or enter into a unitization or communitization 
agreement to protect the lease from drainage.
    Section 3100.70   would be added to indicate that a party holding 
an interest in a lease does not have to pay compensatory royalty if it 
can prove that drilling and producing from a protective well would not 
have been economically feasible when drainage first should have been 
known to be occurring.
    Section 3100.71   would be added to inform an assignee or 
transferee that if it acquires a lease that is being drained, it would 
be assessed compensatory royalty for all drainage occurring during its 
lease tenure, if it would have been economically feasible to drill and 
produce from a protective well at the time drainage was first known or 
should have been known by the parties holding the lease interest at 
that time.
    Section 3100.80   would be added to indicate that a lessee or 
operating rights owner may appeal a BLM decision to require that 
drainage protection measures be taken under the procedures outlined in 
43 CFR Parts 4 and 1840.
    Section 3106.7-2   would be revised to specify that an assignor or 
transferor remains responsible for all obligations accruing prior to 
the approval of the assignment or transfer, including the payment of 
compensatory royalties for drainage and the plugging and abandonment of 
any unplugged wells drilled or used prior to the effective date of the 
transfer.
    Section 3106.7-6   would be added to inform a transferee of its 
obligations with regards to complying with the original lease terms, 
plugging and abandonment of unplugged wells, reclamation of the lease 
site, remediation of environmental problems in existence and knowable 
at the time of assignment, as well as maintaining an adequate bond to 
ensure performance of those responsibilities.
    Section 3108.1   would be revised to add a requirement that where 
more than one party holds record title interest in the same lease, all 
such parties must sign the relinquishment form. In addition, all 
parties relinquishing the lease are still responsible for settling all 
outstanding obligations of the lease, including placement of all wells 
on the lease in proper condition for suspension or abandonment, and for 
reclamation of leased lands in a proper manner in accordance with an 
approved plan.
    Section 3130.3   would be revised to cross-reference these 
provisions of Subpart 3100, rather than the incorrectly cited 3100.3.
    Section 3162.2   would be revised to add ``lessees'' to the persons 
who must satisfy the requirement of drilling and producing operations 
related to drainage, whereas the current regulations list only the 
operating rights owners as being responsible for this requirement.
    Section 3165.3  would be revised to add ``lessee'' to the list of 
those parties who would be notified by BLM in the case that such 
parties are in violation of any agreements or regulations pertaining to 
operations on an oil and gas lease. Existing regulations only list the 
operating rights owner and the operator as being notified.
    Section 3165.4  would be amended to add a provision specifying that 
an appeal of BLM's determination of drainage does not stay the 
determination and that compensatory royalties and interest will accrue 
during the appeal. This provision is necessary to avoid preclusion of 
Minerals Management Service demands to pay compensation should the 
government prevail on appeal.
    The BLM also has the responsibility for enforcing those provisions 
in Indian oil and gas leases requiring lessees to protect the Indian 
mineral owner from drainage. The bulk of this proposal consists of 
amendments to 43 CFR Part 3100, which governs the leasing of Federal 
minerals. The proposal leaves largely unchanged 43 CFR 3162.2, which 
obliges the operating rights owners of Indian leases, as well as 
Federal leases, to protect the lessor from drainage. The Department is 
particularly interested in receiving comments from Indian mineral 
owners on the appropriateness of modifying Subpart 3162, which governs 
drainage of Indian mineral leases, in the same fashion as proposed here 
for Federal minerals. Depending on comments received, and discussions 
with Indian tribes and mineral owners, BLM may either adopt this 
proposal for Indian as well as Federal leases, or develop different 
regulations for the protection of Indian mineral owners from drainage.

IV. Procedural Matters

    The principal author of this proposed rulemaking is Donnie Shaw, 
Fluid Minerals Group, assisted by Annetta Cheek, Regulatory Affairs 
Group.

National Environmental Policy Act

    BLM has determined that this proposed rulemaking is not subject to 
the review process established by the National Environmental Policy Act 
(NEPA) of 1969, inasmuch as it is categorically excluded pursuant to 
516 Departmental Manual (DM), Chapter 2, Appendix 1, Item 1.10, and 516 
DM, Chapter 2, Appendix 2. It has further determined that the proposed 
rule does not meet any of the ten criteria for exceptions to 
categorical exclusion listed in 516 DM, Chapter 2, Appendix 2. Pursuant 
to Council on Environmental Quality regulations (40 CFR 1508.4) and the 
environmental policies and procedures of the Department of the 
Interior, the term ``categorical exclusions'' means a category of 
actions that do not individually or cumulatively have a significant 
effect on the human environment and that have been found to have no 
such effect in procedures

[[Page 1939]]

adopted by a Federal agency and for which neither an environmental 
assessment nor an environmental impact statement is required.
    The environmental effects of this rule are too speculative or 
conjectural to lend themselves to meaningful analysis. Although this 
rulemaking requires that BLM ensure that Federal lessees and operating 
rights owners protect their leases from drainage of oil and gas 
resources by producing wells on adjacent lands, there are several steps 
that must be taken before it is determined that an operator will take 
actions subject to NEPA review. The lessee must monitor well activities 
on adjacent lands and then conduct an analysis of information available 
to determine if the adjacent well is too far away to be capable of 
draining the Federal lease. Even if it is draining the Federal lease, 
the lessee might be able to exercise options such as forming a 
protective agreement with the owners of the draining well or paying 
compensatory royalties. These two options are exercised in over 80 
percent of the cases where there is economic drainage and a NEPA 
analysis is not required.
    In about 10 percent of all drainage cases identified, it might be 
determined that drilling a protective well is the only option for 
protecting the lease from drainage. However, the lessee might prove 
that even if it drilled a protective well, it might not be economic. 
This is perhaps true in 75 percent of the cases where drilling a 
protective well is considered. If the lessee determines it can drill an 
economic protective well, then obtaining approval to drill the well is 
subject to a review in accordance with procedures established by BLM to 
comply with NEPA.

Paperwork Reduction Act

    BLM has submitted an information collection clearance package to 
the Office of Management and Budget for its approval of the information 
requirements contained in 43 CFR Part 3100, Drainage Protection of the 
proposed rule, under the requirements of the Paperwork Reduction Act, 
44 U.S.C. 3501 et seq. Proposed changes in the regulations would 
increase the information burden by 2000 hours (2 hours for preliminary 
analysis by 1000 respondents); an additional 2400 hours (24 hours for 
detailed analysis by 100 of those 1000 respondents); and, finally, an 
additional 200 hours (20 hours for more extensive analysis by 10 of 
those 100 respondents). We estimate the total information burden to be 
4600 hours. The BLM expects the public reporting burden of these 
regulations to be as follows:
    Section 3100.51  requires the respondent to notify BLM of plans for 
drainage protection when there is drainage potential or provide 
information as to why no drainage protection is necessary.
    The information is required so that BLM can determine whether 
lessees and operating rights owners have complied with their lease 
agreements to monitor oil and gas drilling and production activities on 
nearby lands to determine whether there are any potential producing 
wells draining their Federal leases that would result in lower 
royalties to the Federal Government. If drainage is occurring, the 
lessee or operating rights owner must notify BLM of plans for drainage 
protection, and provide the analysis, if requested by BLM, that 
includes the drainage area of the ultimate recovery of the offending 
well, the amount of oil and gas resources drained from the lease, and 
whether a protective well would be economic to drill.
    We estimate it will take between 2 and 46 hours per respondent to 
comply with the requirements for drainage protection depending on the 
level of analysis required. The analysis on the potential for drainage 
may include drafting, analyzing, and evaluating well completion 
reports, sundry notices, and production reports. If drainage is 
occurring, the respondent must also submit plans for protection of the 
affected leases.
    These estimates include the time for reviewing the instructions, 
searching existing data bases, gathering and maintaining the data 
needed, and completing and reviewing the collection of information.
    We specifically request your comments on: (1) whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information will 
have practical utility, (2) the accuracy of BLM's estimate of the 
burden of the proposed collection, including the validity of the 
methodology and assumptions used, (3) ways to enhance the quality, 
utility and clarity of the information to be collected, and (4) ways to 
minimize the burden of the collection of information on those who are 
to respond, including the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology. BLM will analyze any comments sent in 
response to the notices and include them in preparing the final 
rulemaking.
    Send comments regarding this information collection, including 
suggestions for reducing the burden, to: Office of Management and 
Budget, Interior Desk Officer (1004-NEW), Office of Information and 
Regulatory Affairs, Washington, D.C. 20503 and Information Collection 
Clearance Officer, Bureau of Land Management, 1849 C St., N.W., Mail 
Stop 401 LS, Washington, D.C. 20240.

Regulatory Flexibility Act

    Congress enacted The Regulatory Flexibility Act of 1980 (RFA), 5 
U.S.C. 601 et seq., to ensure that Government regulations do not 
unnecessarily or disproportionately burden small entities. The RFA 
requires a regulatory flexibility analysis if a rule would have a 
significant economic impact on a substantial number of small entities. 
BLM has determined that the proposed rule would not have a significant 
economic impact on a substantial number of small entities under the 
RFA. This rule does not add new requirements to protect the lessor from 
drainage, or impose new obligations on assignors, but simply clarifies 
ambiguities in the existing regulations.

Unfunded Mandates Reform Act

    Pursuant to requirements of section 205 of the Unfunded Mandates 
Reform Act of 1995, BLM has selected the most cost-effective and least 
burdensome alternative that achieves the objectives of the rule. These 
regulatory changes will not result in any unfunded mandate to State, 
local or tribal governments in the aggregate, or to the private sector, 
of $100,000,000 or more in any one year.

Executive Order 12866

    According to the criteria listed in section 3(f) of Executive Order 
12866, BLM has determined that the proposed rule is not a significant 
regulatory action and therefore the rule is not subject to Office of 
Management and Budget review under section 6 (a)(3) of the order. The 
proposed rule will not have an annual effect on the economy of $100 
million or more or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or State, local, or tribal 
governments or communities.
    Since Fiscal Year (FY) 1992, the drainage protection program has 
generated an average of about $25 million to the U.S. Treasury per 
year, with about 10 percent of these revenues attributed to 
compensatory royalty assessments. These funds are from payments by 
lessees and operating rights owners obligated to pay royalties

[[Page 1940]]

and compensatory royalties under the drainage protection program. The 
rule requirement to hold both the lessees and operating rights owners 
responsible for the obligation to pay compensatory royalties resulting 
from drainage could increase revenues to the Federal Government by as 
much as $250,000 per year if this provision of the rule is adopted. 
This is far below the $100 million threshold set out in the executive 
order. In addition, because the proposed rule clarifies the 
responsibilities of oil and gas lessees to protect Federal oil and gas 
resources from drainage, it may reduce the loss of future royalty 
revenues.
    Since FY 1992, Federal expenditures for the drainage protection 
program have averaged about $1.5 million per year. The clarification of 
the regulations to hold both lessees and operating rights owners 
responsible for drainage protection obligations may increase Federal 
expenditures for the management of the program by as much as 10 percent 
or about $150,000 per year. Again, this is below the $100 million 
threshold set out in the executive order. The increase in expenditures 
would be more than offset by an increase in revenues resulting from the 
compensatory royalty assessments. Also, clarifying what puts a party on 
notice that he or she is obliged to protect BLM from drainage will not 
increase expenditures. This proposal should actually decrease the 
number of challenges to the issue of notice of drainage because it 
would make it clear when a party is considered to have been notified 
that drainage is occurring.
    The rule will not adversely affect the ability of the oil and gas 
industry operating on BLM lands to compete in the marketplace, nor will 
it adversely affect the economy, a sector of the economy, or 
productivity. The rule does not add new requirements to protect the 
lessor from drainage, or impose new obligations on assignors, but 
simply clarifies ambiguities in the existing regulations. The net 
economic effects of this clarification will be beneficial to 
stakeholders as well as to the public, because the implementation of 
the proposed rule should decrease the number of drainage cases that are 
appealed or decided in courts, and should result in an increase of 
compensatory royalty assessments.

Executive Order 12988

    The Department has determined that these regulations meet the 
applicable standards provided in sections 3(a) and 3(b)(2) of Executive 
Order 12988.

List of Subjects

43 CFR Part 3100

    Government contracts, Land Management Bureau, Mineral royalties, 
Oil and gas exploration, Public lands-mineral resources, Reporting and 
recordkeeping requirements, Surety bonds.

43 CFR Part 3130

    Alaska, Government contracts, Mineral royalties, Oil and gas 
exploration, Oil and gas reserves, Public lands-mineral resources, 
Reporting and recordkeeping requirements, Surety bonds.

43 CFR Part 3160

    Government contracts, Hydrocarbons, Land Management Bureau, Mineral 
royalties, Oil and gas exploration, Public lands-mineral resources, 
Reporting and recordkeeping requirements.

    Dated: November 28, 1997.
Sylvia V. Baca,
Deputy Assistant Secretary, Land and Minerals Management.

    Under the authorities cited below and for the reasons presented 
above, BLM proposes to amend Parts 3100, 3130, and 3160, Group 3100, 
Subchapter C, Chapter II of Title 43 of the Code of Federal Regulations 
as set forth below:

SUBCHAPTER C--MINERALS MANAGEMENT (3000)

    1. Remove the heading and the note following Group 3000--Minerals 
Management.

PART 3000--MINERALS MANAGEMENT: GENERAL

    2. Revise the authority citation for Part 3000 to read as follows:

    Authority: 30 U.S.C. 189; 30 U.S.C. 359, and 40 Op. Atty. Gen. 
41.

    3. Remove the heading and the note following Group 3100--Oil and 
Gas Leasing.
    4. Revise the authority citation for Part 3100 to read as follows:

    Authority: 30 U.S.C. 189; 30 U.S.C. 359; 43 U.S.C. 1732(b); 43 
U.S.C. 1733; 43 U.S.C. 1740, and 40 Op. Atty. Gen. 41.

Subpart 3100--Onshore Oil and Gas Leasing: General


Sec. 3100.2  [Removed]

    5. Amend Subpart 3100 by removing Sec. 3100.2 and by redesignating 
existing sections as set forth in the following table:

------------------------------------------------------------------------
             Existing section                       New section         
------------------------------------------------------------------------
3100.0-3.................................  3100.3                       
3100.0-5.................................  3100.5                       
100.0-9..................................  3100.9                       
3100.1...................................  3100.10                      
3100.2-1.................................  3100.21                      
3100.2-2.................................  3100.22 and                  
                                           3100.23                      
3100.3...................................  3100.30                      
3100.3-1.................................  3100.31                      
3100.3-2.................................  3100.32                      
3100.3-3.................................  3100.33                      
------------------------------------------------------------------------

    6. Amend redesignated Sec. 3100.5 by removing the paragraph 
designations, revising the introduction, arranging the definitions in 
alphabetical order, and adding two new definitions, as follows:


Sec. 3100.5  Definitions.

    As used in this group, the term:
* * * * *
    Drainage means the migration of hydrocarbons, inert gases or 27 
associated resources from Federal lands caused by production from wells 
on adjacent lands.
* * * * *
    Protective well means a well drilled by or on the behalf of the 
lessee to prevent or offset drainage of oil and gas resources from its 
Federal lease by a producing well on adjacent or nearby lands.
    7. Revise redesignated Sec. 3100.21 to read as follows:


Sec. 3100.21  What steps may BLM take to avoid uncompensated drainage 
of oil and gas from federally owned lands?

    If BLM determines that wells drilled on adjacent lands are draining 
oil or gas from Federal lands, it may take any of the following 
actions:
    (a) If the lands being drained are leased Federal lands, BLM may 
require the lessee to drill and produce all wells that are necessary to 
protect the lease from drainage unless the conditions in Sec. 3100.70 
of this part are met. BLM alternatively may accept other equivalent 
protective measures as outlined in Sec. 3100.23;
    (b) If the lands being drained are either unleased or leased 
Federal lands, BLM may execute agreements with the owners of interests 
in the producing well under which the United States may be compensated 
for the drainage (with the consent of its lessees, if any); or
    (c) BLM may offer for lease any qualifying unleased lands under 
part 3120 of this chapter or enter into a communitization agreement 
under subpart 3105 of this part.
    8. Revise redesignated Sec. 3100.22 to read as follows:

[[Page 1941]]

Sec. 3100.22  What is my responsibility for protecting my lease on 
Federal lands from drainage?

    You must protect your lease from drainage if you are a lessee and 
your lease on Federal lands is being drained of oil or gas by wells:
    (a) Located on non-Federal lands;
    (b) Located on Federal leases with a lower royalty rate;
    (c) Located in another unit with a lower Federal participation 
factor than your lease; or
    (d) Located in a different communitization agreement area with a 
lower Federal allocation factor than your lease.
    9. Add new Sec. 3100.23 to read as follows:


Sec. 3100.23  What may BLM require me to do to protect the oil and gas 
on my lease from drainage?

    BLM may require you to:
    (a) Drill and produce all wells that are necessary to protect the 
leased lands from drainage, subject to the provisions of Sec. 3100.70;
    (b) Enter into a unitization or communitization agreement with the 
lease containing the draining well. BLM must approve the agreement 
under subpart 3105 of this part or part 3180 of this chapter; or
    (c) Pay compensatory royalties for drainage that has occurred or is 
occurring.
    10. Add new Sec. 3100.24 to read as follows:


Sec. 3100.24  Who is liable for drainage if more than one person holds 
undivided interests in the record title or operating rights for the 
same lease?

    If more than one person holds record title interests in the lease, 
each person is jointly and severally liable for taking any action BLM 
may require under this part to protect the lessor from drainage, 
including paying compensatory royalty, accruing during the period it 
holds its record title interest. Operating rights owners are jointly 
and severally liable with each other and with all record title owners 
for drainage affecting the area in which they hold operating rights 
accruing during the period they hold operating rights.
    11. Add new Sec. 3100.40 to read as follows:


Sec. 3100.40  When does my liability to pay compensatory royalties for 
drainage begin?

    Your liability for paying compensatory royalties begins a 
reasonable period after a reasonably prudent operator knew or should 
have known that drainage was occurring. If you acquire your lease 
interest after this time, your liability to pay compensatory royalties 
begins on the date you acquire the lease interest. See Sec. 3100.51 of 
this part for the circumstances when BLM considers that you should have 
knowledge that drainage may be occurring.
    12. Add new Sec. 3100.45 to read as follows:


Sec. 3100.45  Does my responsibility for drainage protection end when I 
assign the lease?

    If you assign your record title interest in a lease or transfer 
your operating rights, you are not liable for drainage that occurs 
after the date BLM approves the assignment or transfer. However, you 
remain responsible for the payment of compensatory royalties for any 
drainage that occurred when you held the lease interest.
    13. Add new Sec. 3100.50 to read as follows:


Sec. 3100.50  When will I have constructive notice that drainage may be 
occurring?

    You have constructive notice that drainage may be occurring when:
    (a) Well completion or first production reports are filed with BLM, 
State oil and gas commissions, or regulatory agencies and become 
publicly available, whichever is earlier; or
    (b) You complete drillstem, production, pressure analysis, or flow 
tests of the offending well, if you own any interest in that well or 
the lease.
    14. Add new Sec. 3100.51 to read as follows:


Sec. 3100.51  What is my duty to inquire about the potential for 
drainage and inform BLM of my findings?

    (a) When you first acquire a lease interest, and at all times while 
you hold the lease interest, you must monitor the drilling of wells on 
adjacent lands and gather sufficient information to determine whether 
drainage is occurring. This information can be in various forms, 
including but not limited to, well completion reports, sundry notices, 
or available production information. As a prudent lessee or operating 
rights owner, it is your responsibility to analyze and evaluate this 
information and make the necessary calculations to determine:
    (1) The drainage area of the ultimate recovery of the offending 
well;
    (2) The amount of oil and gas resources which will be drained from 
your Federal lease during the life of the offending well, if any; and
    (3) Whether a protective well would be economic to drill after a 
reasonable time following notice as established under Sec. 3100.50.
    (b) You must notify BLM, within 60 days from the date of notice 
established under Sec. 3100.50, of your plans for drainage protection, 
when the facts indicate a potential for drainage.
    (c) You must provide BLM with the analysis under paragraph (a) of 
this section within 60 days after BLM requests it.
    15. Add new Sec. 3100.52 to read as follows:


Sec. 3100.52  Will BLM notify me when it has determined that drainage 
is occurring?

    BLM will send you a demand letter by certified mail, return receipt 
requested, or personally serve you with notice, if BLM believes that 
drainage is occurring. However, your responsibility to take protective 
action arises when you first knew or should have known of the drainage 
under Sec. 3100.50 of this part, even when that date precedes the BLM 
demand letter.
    16. Add new Sec. 3100.55 to read as follows:


Sec. 3100.55  Who has the burden of proof if, as a lessee or operating 
rights owner, I contest BLM's drainage determination?

    BLM has the burden of establishing a prima facie case that drainage 
is occurring and that you should have known of such drainage. Then the 
burden of proof shifts to you to refute the existence of drainage or of 
sufficient information to put you on notice of the need for drainage 
protection. You also have the burden of proving that drilling and 
producing from a protective well would not be economically feasible.
    17. Add new Sec. 3100.60 to read as follows:


Sec. 3100.60  How soon after I know of the likelihood of drainage must 
I take protective action?

    You must take protective action at the earliest reasonable time 
after you knew or should have known that the offending well had begun 
to produce oil or gas from the lands adjacent or near to your Federal 
lease, or BLM issues a demand for protective action, whichever is 
earlier. Since the time required to drill and produce a protective well 
varies according to the location and conditions of the oil and gas 
reservoir, BLM will determine this time on a case-by-case basis. When 
it determines whether you took protective action at the earliest 
reasonable time, BLM will consider several factors including, but not 
limited to:
    (a) Time required to evaluate the offending well's production 
performance;
    (b) Rig availability;
    (c) Well depth;

[[Page 1942]]

    (d) Required environmental assessments;
    (e) Special lease stipulations which provide limited time frames in 
which to drill; and
    (f) Weather conditions.
    18. Add new Sec. 3100.61 to read as follows:


Sec. 3100.61  If I hold interests in a lease, for what period will the 
Department assess compensatory royalty against me?

    The Department will assess you compensatory royalty beginning on 
the first day of the month following the date of the earliest 
reasonable time BLM determines you should have taken protective actions 
under Sec. 3100.60, if you have not yet drilled a protective well or 
entered into a unitization or communitization agreement. You must 
continue to pay compensatory royalty until:
    (a) Sufficient protective wells are drilled and are in continuous 
production;
    (b) BLM approves a unitization or communitization agreement that 
includes the lands being drained;
    (c) The draining well ceases production; or
    (d) You relinquish the oil and gas lease interests in spacing 
units, lots, or aliquot parts of the Federal lands being drained.
    19. Add new Sec. 3100.70 to read as follows:


Sec. 3100.70  Are there any conditions under which I will not be 
assessed compensatory royalty?

    The Department will not assess you compensatory royalty if you can 
prove to BLM that when you first knew or should have known of drainage, 
there was not a sufficient quantity of oil or gas producible from a 
protective well on your lease to pay a reasonable profit above the cost 
of drilling, completing, and operating the protective well at that 
time.
    20. Add new Sec. 3100.71 to read as follows:


Sec. 3100.71  If I am assigned an interest in a lease that is being 
drained, will the Department assess me for compensatory royalty?

    If you acquire an interest in a Federal lease through an assignment 
of record title or transfer of operating rights, you are liable for all 
drainage obligations under this part accruing on or after the date BLM 
approves the assignment or transfer.
    21. Add new Sec. 3100.80 to read as follows:


Sec. 3100.80  May I appeal BLM's decision to require protective 
measures?

    All of BLM's decisions requiring that you take drainage protection 
measures are subject to review and appeal in accordance with provisions 
of 43 CFR part 4 and subpart 1840.
    22. Revise Sec. 3106.7-2 to read as follows:


Sec. 3106.7-2  If I transfer my lease, when do my obligations under the 
lease end?

    You are responsible for the performance of all obligations under 
the lease until the date BLM approves an assignment of your record 
title interest or transfer of your operating rights. You will continue 
to be responsible for obligations that accrued prior to the approval 
date, whether or not they were identified at the time of the assignment 
or transfer, including the payment of compensatory royalties for 
drainage. As the assignor or transferor, you remain responsible for 
plugging wells and abandoning facilities you drilled, installed or used 
prior to the effective date of the assignment or transfer.
    23. Add new Sec. 3106.7-6 to read as follows:


Sec. 3106.7-6  If I acquire a lease by an assignment or transfer, what 
obligations do I agree to assume?

    If you acquire a Federal lease interest by assignment or transfer, 
you agree to comply with the terms of the original lease during your 
lease tenure, notwithstanding any terms of your assignment or sublease. 
Also, you must plug and abandon all unplugged wells, reclaim the lease 
site, and remedy all environmental problems in existence and knowable 
to a purchaser exercising reasonable diligence at the time you receive 
the assignment or transfer. You must also maintain an adequate bond to 
ensure performance of these responsibilities.
    24. Revise Sec. 3108.1 to read as follows:


Sec. 3108.1  As a lessee, may I relinquish my lease?

    You may relinquish your lease or any legal subdivision of your 
lease at any time. You must file a written relinquishment with the BLM 
State Office with jurisdiction over your lease. All lessees holding 
record title interests in the lease must sign the relinquishment. A 
relinquishment takes effect on the date you file it with BLM. However, 
you and the party that issued the bond will continue to be obligated 
to:
    (a) Make payments of all accrued rentals and royalties, including 
payments of all compensatory royalty, which may be due for all drainage 
that occurred prior to the relinquishment;
    (b) Place all wells on the lands to be relinquished in condition 
for suspension or abandonment as required by BLM; and
    (c) Complete reclamation of the leased lands in a timely manner 
after cessation or abandonment of oil and gas operations on the lease, 
in accordance with a plan approved by the appropriate surface 
management agency.

PART 3130--OIL AND GAS LEASING: NATIONAL PETROLEUM RESERVE, ALASKA

    25. Revise the authority citation for part 3130 to read as follows:

    Authority: 42 U.S.C. 6508; 43 U.S.C. 1732(b); 43 U.S.C. 1733; 43 
U.S.C. 1740, and 40 Op. Atty. Gen. 41.


Sec. 3130.3   [Amended]

    26. Revise Sec. 3130.3 by substituting ``Secs. 3100.21-3100.80'' 
for ``Sec. 3100.3.''

PART 3160--ONSHORE OIL AND GAS OPERATIONS

    27. Revise the authority citation for part 3160 to read as follows:

    Authority: 25 U.S.C. 396d; 30 U.S.C. 189; 30 U.S.C. 359; 43 
U.S.C. 1733; 43 U.S.C. 1740, and 40 Op. Atty. Gen. 41.


Sec. 3162.2  [Amended]

    28. Amend Sec. 3162.2 by adding the term ``lessee(s) and'' before 
``operating rights owner'' in the second sentence of paragraph (a) and 
by adding an ``(s)'' after ``operating rights owner'' each time it 
appears.


Sec. 3165.3   [Amended]

    29. Amend Sec. 3165.3 by adding the term ``a lessee(s),'' after 
``Whenever'' and deleting the word ``an'' before ``operating rights 
owner'' in the first sentence of paragraph (a).
    30. Amend Sec. 3165.4 by adding a new paragraph (e)(4) to read as 
follows:


Sec. 3165.4  Appeals.

* * * * *
    (e) * * *
    (4) When an appeal is filed under paragraph (a) of this section 
from a decision to require drainage protection, BLM's drainage 
determination will remain in effect during the pendency of the appeal, 
notwithstanding the provisions of 43 CFR 4.21. Compensatory royalty and 
interest determined under 30 CFR part 218 will continue to accrue 
throughout the pendency of the appeal.
* * * * *
[FR Doc. 98-563 Filed 1-12-98; 8:45 am]
BILLING CODE 4310-84-P