[Federal Register Volume 66, Number 7 (Wednesday, January 10, 2001)]
[Rules and Regulations]
[Pages 1883-1894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-446]



[[Page 1883]]

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DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Parts 3100, 3106, 3108, 3130, and 3160

[WO-310-1310-01-24 1A-PB]
RIN 1004-AC54


Oil and Gas Leasing: Onshore Oil and Gas Operations

AGENCY: Bureau of Land Management, Interior.

ACTION: Final Rule.

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SUMMARY: The final rule will: Clarify the responsibilities of oil and 
gas lessees and operating rights owners for protecting Federal and 
Indian oil and gas resources from drainage; specify when the 
obligations of the lessee or operating rights owner to protect against 
drainage begin and end; clarify what steps to take to determine if 
drainage is occurring; and specify the responsibilities of assignors 
and assignees for reclamation and other lease obligations.

EFFECTIVE DATE: This rule is effective on February 9, 2001.

FOR FURTHER INFORMATION CONTACT: Donnie Shaw, Fluid Minerals Group, 
Bureau of Land Management, Mail Stop 401LS, 1849 ``C'' Street, NW, 
Washington, DC 20240; telephone (202) 452-0382 (Commercial or FTS). 
Individuals who use a telecommunications device for the deaf (TDD) may 
call the Federal Information Relay Service at 1-800-877-8339, 7 days a 
week, 24 hours a day, except holidays, for assistance in reaching Mr. 
Shaw.

SUPPLEMENTARY INFORMATION:

Contents

I. Background
II. Final Rule as Adopted.
III. Responses to Comments.
IV. Procedural Matters.

I. Background

    The existing regulations in 43 CFR part 3100 allow for agreements 
to compensate the Federal Government for drainage of (oil and gas) 
mineral resources. Those regulations and the regulations at part 3160 
require the lessee or operating rights owner to drill and produce wells 
necessary to prevent drainage or, instead, to pay compensatory 
royalties. These regulations are based on BLM's authority under the 
Mineral Leasing Act of 1920 (MLA), as amended and supplemented, and 
other cited authorities to issue a rule to carry out their purposes. 
The existing regulations and the standard oil and gas lease terms make 
express covenants to protect the lessor against drainage that is 
implicit in the law of all oil and gas producing states. An audit by 
the Department's Office of the Inspector General and a BLM Internal 
Control Review in 1990, both recommended we revise our regulations on 
drainage protection to clarify:
    (1) When the obligations of the lessee or operating rights owner 
begin and end; and
    (2) What steps to take to determine if drainage is occurring.
    In 1995, BLM's Director appointed the Bureau Performance Review 
Bonding and Unfunded Liability Team to review a broad range of 
liability issues. The Team recommended we revise and clarify our 
regulations on lessee and operating rights owner liability for drainage 
prevention, compensatory royalty payments, well plugging and 
abandonment, lease site reclamation and environmental remediation. This 
final rule enables BLM to fulfill its responsibility to ensure that the 
public and Indian lessors receive full value for their oil and gas 
resources.
    In addition to addressing drainage issues, the final rule clarifies 
the current regulations concerning the responsibilities of assignors 
and assignees of record title or operating rights interests. The 
current version of 43 CFR 3106.7-2 expressly states that an assignor is 
fully responsible after the assignment and prior to BLM approval of the 
assignment, but the current rule is not clear as to the responsibility 
of the assignor after approval. The final rule makes clear that the 
assignor continues to be responsible for satisfying those obligations 
that accrued prior to the approval of the assignment.
    The final rule clarifies that assignees have responsibilities for 
certain plugging and abandonment, reclamation and environmental 
liabilities that arose prior to their assignment and which were evident 
to a purchaser exercising due diligence.
    The final rule implements a change in the definition of the term 
``lessee'' to include the operating rights owner, consistent with the 
substantive provisions of the proposed rule.

II. Final Rule as Adopted

    The final rule reorganizes the order of the questions and answers, 
renumbers subpart 3162, and locates the sections into a more logical 
sequence. Some commenters suggested these regulations should also apply 
to Indian oil and gas leases. The final rule adopts the suggestion to 
make these regulations apply to both Federal and Indian oil and gas 
leases. To accomplish this result, the final rule consolidates all 
drainage provisions in part 3160. The following table lists the section 
numbers in the proposed and final rule.

------------------------------------------------------------------------
          Proposed rule section                  Final rule section
------------------------------------------------------------------------
3100.5...................................  3160.0-5
3100.21..................................  3162.2-2
3100.22..................................  3162.2-3
3100.23..................................  3162.2-4
3100.70..................................  3162.2-5
3100.50..................................  3162.2-6
3100.24..................................  3162.2-7
3100.40 and 3100.45......................  3162.2-8
3100.51..................................  3162.2-9
3100.52..................................  3162.2-10
3100.60..................................  3162.2-11
3100.61..................................  3162.2-12
3100.71..................................  3162.2-13
3100.80..................................  3162.2-14
3100.55..................................  3162.2-15
3165.3...................................  3165.3
3165.4...................................  3165.4
3106.7-2.................................  3106.7-2
3106.7-6.................................  3106.7-6
3108.1...................................  3108.1
3130.3...................................  3130.3
3160.....................................  3160
3162.2...................................  3162.2
3165.3...................................  3165.3
3165.4...................................  3165.4
------------------------------------------------------------------------

III. Responses to Comments

    On January 13, 1998, (63 FR 1936), BLM published in the Federal 
Register the proposed rule on oil and gas drainage. In a notice 
published on February 24, 1998, (63 FR 9171), we extended the comment 
period for 60 days. In response to several requests, we reopened the 
comment period for 60 days in a notice published on December 3, 1998, 
(63 FR 66776). We reopened the comment period to consult with Indian 
Tribes, under Executive Order 13084, on the issue of whether the 
proposed rule should apply to Tribal and individual Indian oil and gas 
leases. We extended the reopened comment period by notice published on 
January 13, 1999 (64 FR 2166), with the comment period ending April 5, 
1999, and extended the reopened comment period again in a notice 
published on April 12, 1999 (64 FR 17598) with the comment period 
ending on June 4, 1999. Some provisions were proposed for comment in 
another rule (see 63 FR 66840). We received 40 written comments on the 
proposed rule from industry, organizations, and individuals.

[[Page 1884]]

Specific Comments

    A commenter objected to the question and answer format and 
suggested these regulations were repetitive, poorly organized, and 
required a reader to look in multiple sections to find related 
information. The final rule simplifies the question and answer format 
and utilizes plain language in accordance with the Administration's 
Reinventing Government Initiative. We believe this format will help 
everyone find relevant topics more easily. We restructured the final 
rule to better group topic related sections.
    A commenter suggested we should not apply this rule to reinterpret 
the meaning of terms in existing leases. Except where changes are 
expressly acknowledged in this preamble, the final rule is consistent 
with and interprets existing lease provisions and so may lawfully apply 
to existing leases. In addition, all Federal and Indian oil and gas 
leases are subject to future regulations except to the extent such 
regulations are inconsistent with express lease provisions or the 
rights granted in the lease.
    A commenter suggested it was not worthwhile for BLM to adopt a rule 
that generates $250,000 in revenues while increasing Federal 
expenditures by $150,000 and driving industry to move to private lands 
or abroad. The final rule did not adopt this suggestion. Our previous 
estimates were based on the assumption that no revenues other than 
additional compensatory royalty assessments would be generated from 
drainage cases. In addition, the compensatory royalties estimates were 
understated due to insufficient data. Based on our recent survey of 
State offices, if the number of potential drainage cases and the 
success rate of case retirements remain at the 1998 level (1,665 cases 
and 8.82 percent respectively), we expect additional revenues around 
$9.2 million from the oil and gas drainage program. These revenues 
include royalties from protective wells, compensatory royalty 
assessments, unitization and communitization agreements, or bonus bid 
payments on previously unleased lands. Besides the additional revenues, 
lessees benefit from the implementation of this rule because they have 
a better understanding of when, why, and how to fulfill their 
obligations to protect Federal and Indian minerals from drainage. By 
adopting this final rule, the Federal Government benefits because it 
reduces the time needed to correspond with the lessees regarding 
procedural matters, and thus leads to greater efficiency in performing 
technical and economic analyses to determine whether prudent operators 
need to drill an offset well. Further, it reduces the need for reviews 
and appeals to the State Director. The estimate of $150,000 is 
equivalent to 10 percent of the annual expense for the oil and gas 
drainage program, and a one-time cost for implementing these 
regulations. These expenses may increase if we postpone the 
implementation of this rule.
    A commenter suggested this rule violates the Administrative 
Procedure Act because the preamble to the proposed rule was misleading 
in characterizing the rule as merely a clarification of existing law. 
The section-by-section analysis of the proposed rule described every 
modification to the existing rule so that all potentially affected 
parties were properly advised of its provisions. While the rule does 
provide greater detail than existing regulations with respect to both 
drainage and the duties of parties holding various interests in a 
lease, the substantive obligations remain those established in the 
lease and existing regulations.
    Some commenters suggested we should not cover plugging and 
abandonment issues in this ``drainage'' rule. The final rule retains 
the provision for well plugging and abandonment. Nothing precludes us 
from promulgating rules on several topics in a single rulemaking if we 
provide adequate notice to the affected public.
    Several commenters suggested the rule reverses IBLA interpretations 
of the lease and current regulations, particularly with respect to who 
bears the burden of proof of drainage. The final rule preserves IBLA's 
precedent that BLM bears the burden of proof that drainage exists and 
the lessee's notice or knowledge of drainage, but the rule shifts the 
burden of proof after BLM has established a prima facie case (i.e., 
sufficient evidence absent rebuttal by the lessee). This shift of the 
burden of proof to the lessee is warranted because the lessee, by 
undertaking the duty to protect, agreed to take the responsibility to 
monitor activities that could result in drainage of Federal or Indian 
mineral resources. Moreover, the lessee is in a better position to 
obtain and interpret relevant geologic and reservoir data.
    Some commenters suggested it is uneconomical for lessees who hold 
leases for speculative purposes, with no intent to drill, to monitor 
activity on adjacent leases for drainage. The final rule did not adopt 
this suggestion. The duty to detect drainage and drill to protect the 
Federal or Indian lessor from drainage is not a new requirement, but is 
a lease obligation voluntarily entered by lessees. A lessee who cannot 
protect the Federal or Indian lessor from drainage should not acquire a 
Federal or Indian lease. To allow anyone to hold a Federal or Indian 
lease without requiring an agreement to prevent the uncompensated loss 
of valuable mineral resources is not in the interest of the public or 
Indian mineral owners.
    A commenter suggested that if BLM directs the drilling of a 
protective well and the well does not return a reasonable profit to the 
lessee, BLM should pay the cost of drilling, completing and equipping 
the well. The final rule did not adopt this suggestion. However, we 
address the issue of uneconomic wells under Sec. 3162.2-5.
    Several commenters suggested economic self-interest leads lessees 
to drill protective wells when it is economic to do so. Therefore, the 
rule is not necessary. While we agree with the suggestion that economic 
self-interest motivates an operator to drill protective wells; we 
cannot permit a reluctant operator to allow the uncompensated loss of 
mineral resources that belongs to the American public or to an Indian 
mineral owner. We have the responsibility to issue regulations we feel 
in the best interest of the public and Indian mineral owners. We also 
have the responsibility to ensure that lessees drill all necessary 
wells to protect public and Indian mineral interest owners from 
drainage at the earliest possible time. This final rule better serves 
the oil and gas industry by ensuring it has a clearer understanding of 
obligations to protect its oil and gas leases from drainage.
    Several commenters believe that inasmuch as existing regulations 
provide for BLM to make drainage determinations, additional 
responsibilities for drainage detection could not be imposed on 
lessees. The final rule permits us to make drainage determinations and 
assess compensatory royalty damages against lessees as we have done in 
the past. Lessees are not excused from their lease obligations to take 
initiatives to protect the Federal or Indian lessors. This final rule 
simply provides additional detail on how a lessee should fulfill 
existing lease obligations.
    A commenter suggested we notify adjacent lessees when we approve an 
Application for Permit to Drill (APD). The final rule did not adopt the 
suggestion. However, we post APD's for 30 days in State Office public 
rooms before we approve them. The oil and gas data service industry 
publishes information on the approval status of APD's on a regular 
basis. It is the lessees' responsibility to monitor APD

[[Page 1885]]

approvals to ensure that they protect Federal and Indian lessors from 
drainage.
    One commenter suggested the arbitrary decisions about what 
constitutes drainage might be avoided by standardizing drainage 
parameters at 330 feet from the lease line. The final rule did not 
adopt the suggestion. The characteristics and performance of the oil 
and gas reservoir are primary factors which determine the necessary 
actions to take to protect the lease from drainage. Since each oil and 
gas reservoir is unique and has different characteristics and 
performance capabilities, it is inappropriate to adopt a single 
baseline standard for drainage.
    An Alaska environmental group recommended that these regulations 
state that BLM has the authority to address drainage by prohibiting the 
removal of its oil and gas. It also wanted these regulations to make 
clear that BLM is not obliged to lease or permit drilling. The final 
rule is quite clear that we have discretion when to lease and 
regulatory authority over drilling. We do not possess the practical 
ability to prohibit removing oil and gas from beneath Federal surface 
because fluid minerals follow no political or property boundaries. 
Where we cannot permit surface disturbance, lessees must pursue other 
means of protecting the lessor from drainage such as horizontal 
drilling or through communitization when feasible.
    An Alaska environmental group suggested that the authority 
citations be broadened to include additional sections of the Federal 
Land Policy and Management Act of 1976 (FLPMA) and the Mineral Leasing 
Act of 1920 (MLA), as well as the Alaska National Interests Lands 
Conservation Act, the National Wildlife Refuge Administration Act, and 
the Naval Petroleum Reserves Production Act of 1976. The final rule 
uses the appropriate citations to sections that grant relevant 
rulemaking authority to the Secretary of the Interior. BLM does not 
administer the Naval Petroleum Reserves. The National Wildlife Refuge 
Administration Act does not grant regulatory authority with respect to 
mineral production.

Section-by-Section Analysis

    The final rule renumbers many sections. In the following 
discussion, we reference the section number of the proposed rule and 
indicate in parentheses where the section appears in the final rule. We 
also describe the final rule and how, if at all, it differs from the 
proposed rule. Further, we respond to comments on the section.

Section 3100.5 (3160.0-5)

    The final rule amends Sec. 3160.0-5 to alphabetize and add these 
definitions: ``drainage,'' ``lessee,'' ``operating rights owner,'' 
``protective well'' and ``record title holder.'' We modified the 
definitions of ``lessee'' and ``operating rights owner'' and added new 
definitions for ``drainage,'' ``protective well,'' and ``record title 
holder.''
    Several commenters suggested that we modify the drainage definition 
to refer to ``oil or gas'' rather than hydrocarbons, inert gases or 
associated resources. The final rule did not adopt this suggestion 
because ``inert gases'' is needed to make clear that the rule applies 
to drainage of non-petroleum gases such as carbon dioxide.
    A commenter suggested that the drainage definition does not allow 
for the concept of counter drainage and suggested that we include the 
phrase ``and not offset by counter drainage'' at the end of the 
definition. The final rule did not adopt this suggestion because the 
drainage definition already contemplates only the net loss after 
consideration of counter drainage.
    Some commenters suggested that we modify the protective well 
definition to include the options of well deepening, plugging back an 
existing well bore, adding laterals to address drainage situations, or 
recompleting existing wells, and removing the language ``on nearby or 
adjacent lands'' from the definition. The final rule modifies the 
``protective well'' definition to provide for wells drilled ``or 
modified'' and by dropping the reference to nearby or adjacent lands. 
We agree with commenters that ways exist to protect the lease from 
drainage other than drilling new wells.

Section 3100.21 (3162.2-2)

    This section indicates the steps BLM will take to ensure the 
Federal Government and Indian lessors are compensated for drainage of 
mineral resources. The final rule differs from the proposed rule. We 
modified the question of this section to make clear that Indian lessees 
must protect the leased resources from drainage. We changed the 
language in this section from ``wells draining oil or gas'' to ``wells 
draining mineral resources'' to clarify the rule applies to other 
mineral resources. We deleted the phrase ``on adjacent lands'' from the 
rule text as unnecessary. We modified paragraph (a) to clarify we will 
consider applicable Federal, State, or Tribal rules, regulations, and 
spacing orders when determining which drainage protective action to 
take. We modified paragraph (b) to clarify that the Secretary may enter 
into agreements with owners of the draining well to compensate for 
drainage of leased or unleased Federal minerals or (in consultation 
with the Indian mineral owner and BIA) leased or unleased Indian 
minerals. We also deleted the reference to ``Federal lands.'' We 
modified paragraph (c) to clarify we may offer for lease any qualifying 
unleased mineral resources under part 3120 and deleted the phrase 
referring to ``offering unleased lands'' from the rule text. We added 
paragraph (d) to conform to the provisions of Sec. 3181.5.
    Some commenters suggested that we apply these regulations to 
``Federal minerals'' instead of ``Federal lands.'' The final rule 
amends this section to clarify that these regulations apply to Federal 
minerals not Federal surface in a split-estate situation. The lessee of 
Federal minerals owes the duty of drainage protection and surface 
ownership is not relevant.
    Some commenters questioned whether BLM found owners of an adjacent 
well willing to enter into a drainage compensation agreement. We have 
found owners in the past willing to enter into such agreements. This 
final rule implements the provision of Section 17 of the MLA on 
agreements to compensate the Federal Government for drainage.
    One commenter wanted to know what we reported to Congress about 
drainage compensatory royalty agreements. We reported annually to 
Congress as required by statute until the reporting requirement was 
repealed in 1987.
    Some commenters questioned the BLM's authority to communitize an 
unleased tract. The final rule clarifies if spacing precludes us from 
authorizing the drilling of a well on our land, as a mineral owner, we 
have the right to communitize an unleased tract with others in the 
spacing unit. We recognize that a mineral owner who does not contribute 
to drilling costs is subject to receiving a smaller share of production 
than if BLM were able to share in the costs of drilling a well.
    A trade association suggested that BLM be required to notify 
prospective bidders that a sale tract was being drained and questioned 
the interest in bidding for such a tract. The final rule did not adopt 
this suggestion. We notify prospective bidders of drainage tracts in 
the oil and gas lease sale notices. In the past, there have been 
bidders who bid on such drainage tracts.
    Some commenters expressed concern over whether BLM had authority to 
order operators to drill protective wells or to order the lessees to 
enter into communitization agreements without

[[Page 1886]]

considering State spacing orders. These commenters suggested to BLM to 
include the following language ``When determining which action to take, 
the BLM will give consideration to the existing State rules, 
regulations, and spacing orders.'' The final rule modifies the language 
to adopt this suggestion. However, spacing determinations for Federal 
minerals are made by the BLM under 43 CFR 3162.2-2(a).

Section 3100.22 (3162.2-3)

    This section clarifies when lessees are responsible for protecting 
their leases from drainage. The final rule differs from the proposed 
rule. In response to comments, we modified this section to:

(a) Include Indian leases;
(b) Change lands to minerals; and
(c) Change oil and gas to mineral resources.

    We also combined the provisions concerning drainage by wells in 
other units or communitization agreements.

Section 3100.23 (3162.2-4)

    This section provides a list of actions BLM may require a lessee to 
take to provide drainage protection. The final rule differs from the 
proposed rule. We modified the question to make clearer what we may 
require the lessee to do to protect leases from drainage. We modified 
paragraph (a) to include the language ``drill or modify and produce all 
wells that are necessary to protect the leased mineral resources from 
drainage'' and deleted the language ``leased lands from drainage, 
subject to provisions of Sec. 3100.70'' to clarify that we refer to 
leased mineral resources not leased lands. We modified paragraph (b) to 
delete the cross reference to subpart 3105 and part 3180.
    A commenter suggested that we give lessees the option of paying 
compensatory royalty rather than drilling a protective well because BLM 
is not authorized to require either communitization or the drilling of 
a protective well. The final rule does not represent a change from the 
previous regulations that require the BLM's consent to propositions to 
pay compensatory royalty in lieu of drilling protective wells. We agree 
that a lessee may have to estimate the compensatory royalties due to 
compensate Federal or Indian lessors for all drainage that has 
occurred, is occurring, or will occur; however, there is no guarantee 
that such compensation is adequate. Requiring payment of royalties on 
production from an economic protective well is the most effective way 
of ensuring that the amount of compensation that is due for drainage is 
accurate. Additionally, certain spacing and mineral ownership scenarios 
dictate well drilling for correlative right protection. We did not 
adopt the suggestion.
    Some commenters expressed concern over whether lessees are liable 
for compensatory royalties if drainage involves an area in which BLM 
will not permit drilling due to a wilderness area, environmental 
reasons, or a no surface occupancy stipulation. In the final rule, we 
state a lessee who cannot, as a practical manner, drill a protective 
well for reasons not specified in the lease itself will not be required 
to pay compensatory royalties. The lessee will have an obligation to 
consider the feasibility of the other means of compliance: drilling 
directional or horizontal wells or entering into agreements with the 
owner of the well causing the drainage.

Section 3100.24 (3162.2-7)

    This section specifies that all record title holders are jointly 
and severally liable for paying compensatory royalties when more than 
one person owns record title interest in the same lease. Operating 
rights owners having an interest in the same lease are jointly and 
severally liable with one another and with the record title holders for 
the compensatory royalties attributable to drainage. The final rule is 
unchanged from the proposed rule.
    Several commenters suggested that only operating rights owners with 
an interest in the mineral resources in the horizon or formation being 
drained are responsible for drainage protection. The final rule did not 
adopt the suggestion. Operating rights owners with interest only in 
other formations are not liable; but a sublease does not exempt any 
record title holder from liability. The record title holder has an 
interest in all horizons and formations and the sublease of operating 
rights does not diminish the record title holder's responsibility for 
compliance with all lease terms.
    Several commenters suggested that the responsibility for drainage 
protection be imposed only on the operating rights owners and not on 
the record title holders. They argue that without operating rights, you 
have no right to drill a protective well. These commenters suggested we 
should not demand drainage protection from record title holders until 
we exhaust demands against the operating rights owners. The final rule 
continues the policy found at 43 CFR 3100.0-5 of the previous 
regulations which requires the lessee to retain the responsibility for 
complying with lease obligations when it subleases operating rights to 
another party. We do demand performance first of the designated 
operator who represents all parties with interest in the lease. It is 
the responsibility of the lessee who creates subleases of operating 
rights to make sure that the sublessee performs all lease obligations.
    Some commenters suggested that joint and several liability for 
compensatory royalties is contrary to 30 U.S.C. 1712(a) as amended by 
the Royalty Simplification and Fairness Act. These commenters suggested 
that IBLA has recognized that joint and several liability for drainage 
protection or compensatory royalty is unfair. We do not know of any 
IBLA cases on this point. The provisions in 30 U.S.C. 1712(a) address 
lease obligations to pay money such as rentals and royalties. The duty 
to protect from drainage is not an obligation to pay money. Rather, it 
is the nonperformance of an obligation of diligent development for 
which we may assess compensatory royalties. Compensatory royalties are 
not true royalties payable on lease production. Rather, they are 
liquidated damages for nonperformance of the obligation. We measure 
damages by the royalty value of resources the lessee has allowed to be 
drained. Each party to a BLM or Indian lease makes the same promise as 
every other lessee and is responsible for full performance of those 
obligations, regardless of the inability of its co-lessees to share in 
the performance. A lessee may choose to pay compensatory royalty 
instead of drilling a protective well or we may assess compensatory 
royalties as damages if the lessee does not take direct protective 
action. However, this action does not make the drainage obligation a 
monetary one.

Sections 3100.40 and 3100.45 
(3162.2-8)

    This section specifies the responsibility for drainage protection 
and compensatory royalties after assignment or transfer of operating 
rights. The final rule combines two sections of the proposed rule 
(3100.40 and 3100.45) to form Sec. 3162.2-8. The final rule differs 
from the proposed rule. We modified the question of these two sections 
to read ``Does my responsibility for drainage protection end when I 
assign or transfer my lease interest?'' to specify the responsibility 
for drainage protection and compensatory royalties after assignment or 
transfer. We modified the section to address lessee obligations for 
drainage protection and payment of compensatory royalties after 
assignment or transfer.
    One commenter suggested that it was not clear whether BLM is to 
assess compensatory royalty against an

[[Page 1887]]

assignee for drainage that occurred before acquiring the interest. The 
final rule clarifies that as an assignee, your liability to pay 
compensatory royalties begins on the date you acquire the lease 
interest. We believe this rule makes clear that an assignee is not 
responsible for drainage that occurred before acquiring the lease 
interest.
    Some commenters suggested that we include the following language in 
this section: ``Your liability for paying compensatory royalties will 
begin a reasonable period of time after notice from the BLM or 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 the date you acquire the 
lease interest.'' The final rule adopts the language ``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 we 
approve the assignment or transfer'' in response to comments.
    Some commenters suggested that BLM uses an undefined and arbitrary 
standard for when a prudent operator should have known when drainage 
began. These commenters believe that BLM sets an impossible compliance 
standard in drainage situations. The final rule clarifies when a 
prudent operator has constructive notice that drainage may be occurring 
under Sec. 3162.2-6. When a lessee signs a lease, the lessee has agreed 
to protect the lessor (the United States or an Indian mineral owner) 
against drainage. Nothing in the lease terms conditions this obligation 
on BLM notifying lessees of drainage. We believe it is reasonable to 
expect that a lessee will:
    (1) Evaluate the potential for drainage at the earliest time it can 
receive information about a well drilled on an adjacent lease; and
    (2) Immediately consider the economic feasibility of taking 
protective action.
    A commenter suggested that the responsibilities of an assignor for 
drainage should end the earlier of 30 days after an assignment is 
properly submitted to BLM or on the approval date. The final rule did 
not adopt this suggestion because we disagree with the commenter. In 
section 30a of the MLA, 30 U.S.C. 187a, it is clear that an assignor of 
a partial interest remains responsible for all lease obligations that 
accrued before BLM approved the assignment. We believe Congress 
intended not to release the assignor of accrued obligations upon 
assigning all record title interest.

Section 3100.50 (3162.2-6)

    This section clarifies when we deem a party with interest in a 
lease to have constructive notice that drainage may be occurring. The 
final rule is unchanged from the proposed rule except to change the 
order of the clauses in paragraph (b).
    Some commenters suggested that we should not utilize the 
information in this section as constructive notice to lessees because 
such information does not reflect drainage occurrence. These commenters 
believe that lessees need enough time to evaluate production 
information from the well to determine if drainage is occurring. The 
final rule did not adopt the suggestion because IBLA has long 
recognized that a lessee may be on constructive notice of drainage. 
This final rule clearly defines what constitutes constructive notice of 
potential drainage (see Sec. 3162.2-6) and allows the lessee to rebut 
the occurrence of drainage (see Sec. 3162.2-9). It also allows a lessee 
to state that the information then available is not adequate to make a 
conclusive determination of drainage; but will continue to monitor the 
situation and make a further report at a later date (see Sec. 3162.2-
9(c)).
    Several commenters suggested that a well completion report never 
gives enough information to determine if a well is capable of draining 
the minerals covered by the adjacent Federal lease. The commenters also 
suggested that drainage protection should not be required until 
sufficient production information is available to show potential 
drainage, including information adequate to determine the type of 
reservoir, the drive mechanism, the depletion rate, the permeability 
and porosity of the formation, and many other factors before you can 
determine if drainage is occurring. A commenter suggested that 
impressive initial production may not be sustained and encouraging 
drill stem results may be disproved by later well performance. 
Therefore, the rule should not use these items as a basis for 
constructive notice. The final rule did not adopt these suggestions. 
Well completion reports and first production reports from a draining 
well provide sufficient information to alert a prudent operator or 
lessee that drainage may be occurring. If the lessee does not have an 
interest in the draining well, the lessee is not required to take 
action to protect the lease from drainage until information sufficient 
to determine whether an economic well can be drilled becomes publicly 
available. Drill stem tests may be one factor used to determine well 
performance; but the lessee must gather other information as soon as it 
is available to determine whether to drill an economic well.

Section 3100.51 (3162.2-9)

    This section clarifies the duty of lessees and operating rights 
owners to monitor the drilling of wells in the same or adjacent spacing 
units and gather sufficient information to determine whether drainage 
may be occurring. The final rule differs from the proposed rule. We 
modified paragraph (a) to include the language ``in the same or 
adjacent spacing units'' and deleted the phrase ``on adjacent lands'' 
from the rule text to establish clear limits of responsibility on a 
lessee. We modified this section to change the words ``offending well'' 
to ``draining well'' to establish a clearer description of a well 
draining Federal or Indian mineral resources. Commenters suggested we 
modify paragraph (a)(1) to include the language ``specify the amount of 
drainage from production of the draining well.'' We modified paragraph 
(a)(3) to delete the cross reference to Sec. 3100.50. We modified 
paragraph (b) to change the cross reference from ``Sec. 3100.50'' to 
``Sec. 3162.2-4'' to clarify that an election of remedies is 
envisioned, not a detailed plan of action. We modified paragraph (c) to 
indicate that if you do not have sufficient information to comply, you 
must indicate when you will provide the information to BLM. We added 
paragraph (d) to clarify that you must provide BLM with the analysis 
within 60 days after we request it.
    One commenter objected to requirements to monitor wells on adjacent 
lands and to gather information sufficient to determine whether 
drainage is occurring. The commenter suggested that such monitoring was 
impossible and the requirement would lead many to relinquish their 
Federal or Indian leases because such requirements prevent operators 
from having sufficient time to pursue exploration and production. As 
stated above, the final rule adopts a change to specify that you must 
monitor wells in the same or adjacent spacing units. This change better 
defines the area which a lessee and operating rights owner must 
normally protect from drainage. When a lessee undertook the duty to 
protect against drainage, the lessee agreed to be responsible for, and 
aware of, activities that might result in drainage of Federal or Indian 
oil and gas. In addition, the lessee is in a better position to obtain 
and interpret geologic and reservoir data than the BLM.
    A commenter suggested that basing the prudent operator economic 
analysis on the facts at a time when the lease is

[[Page 1888]]

owned by another party is an illegal retroactive application of a new 
law to events of years past. It is not. The rule only applies to those 
who acquire an interest hereafter. It will not change the prudent 
operator standard for those who already hold interests.
    A commenter suggested that we should not apply these regulations to 
prior lessees unless the lessees or operating rights owners had an 
interest in the draining well or BLM notified them of potential 
drainage before they assigned their lease interest. The final rule did 
not adopt this suggestion. The final rule does not change the 
obligations of those who disposed of their interest before these 
regulations take effect. Under existing law, constructive notice 
triggers the obligation to protect against drainage. It is not 
necessary for BLM to notify the lessee of such drainage.
    A commenter suggested that we should not require lessees to develop 
plans in all instances since the duty to take protective action arises 
only when drilling an economic well. The commenter also suggested that 
BLM be more concerned with the lessee taking protective measures rather 
than filing ``useless'' plans. The final rule did adopt a change in 
response to the comment. The final rule clarifies that operators need 
only inform BLM of the form of drainage protection they will provide, 
not a detailed plan. Further, the lessee must choose a remedy only when 
drilling a protective well is economic.
    Some commenters suggested that the 60-day time period is 
unrealistic to provide BLM with drainage protection plans. These 
commenters indicated that much of the required information may be 
confidential or unavailable within 60 days. The final rule did adopt a 
change from this suggestion. We added paragraph (c) to this section to 
allow you to choose an appropriate schedule.
    A commenter suggested that we replace ``is'' with the word ``may 
be'' prior to the word ``occurring'' in the first sentence. The final 
rule did not adopt this suggestion because the purpose of this section 
is to determine if you must protect the lease from drainage.

Section 3100.52 (Sec. 3162.2-10)

    This section clarifies when BLM will provide a demand letter to 
lessees on drainage protection. The final rule is substantively 
unchanged from the proposed rule. Ordinarily, BLM will serve record 
title holders, operators, and operating rights owners.
    A commenter suggested that the question might mislead operators 
into thinking that they may wait until they received the demand letter 
from BLM before taking action. The final rule was not changed in 
response to this suggestion. We disagree with the comment, because the 
rule clearly states that the duty of the lessee to take protective 
measures is not dependent on the BLM sending a demand letter.
    Some commenters suggested that we retain the current regulations, 
which anticipate BLM sending a drainage demand letter. The final rule 
did not adopt this suggestion. The lessee has the duty to monitor and 
take protective action. IBLA already recognizes that a lessee may have 
constructive notice of drainage without a BLM demand letter. 
Significant Federal and Indian oil and gas resources may already be 
drained before the lessee receives BLM's demand letter. The lessee is 
in a better position than BLM to know whether drainage is occurring.
    Some commenters expressed concern with BLM's demand letter time 
frame and the assessing of compensatory royalty damages. The lessee or 
operating rights owner is allowed a reasonable time from when the 
draining well establishes production to take protective action. Since 
there is no average reasonable time for every drainage situation, we 
will determine what is a reasonable time on a case-by-case basis.

Section 3100.55 (Sec. 3162.2-15)

    This section clarifies the burden of proof in a drainage contest. 
BLM has the burden in a drainage contest of establishing a prima facie 
case that drainage is occurring. The burden then shifts to the lessee 
and operator to refute the existence of drainage, to prove the lessee 
could not have known of drainage or to prove that a protective well is 
not economic. The final rule is substantively unchanged from the 
proposed rule.
    Some commenters expressed concern that lessees are at a distinct 
disadvantage in their ability to refute BLM's prima facie case that 
drainage is occurring. These commenters oppose shifting the burden of 
proof for drainage to the lessees. The final rule did not adopt this 
comment. Once we establish the existence of drainage and constructive 
notice, the lessee and operating rights owner under current precedent 
have the burden of proving that drainage has not occurred or that they 
could not have known of drainage. Under current precedent, the lessee 
and operating rights owner have the burden of proving that a protective 
well would not be economic.
    BLM is also confident that we and IBLA will continue to fairly 
consider all geological and engineering data that the operator 
furnishes on the existence of drainage and will not hold lessees to an 
impossible standard of proof.

Section 3100.60 (Sec. 3162.2-11)

    This section clarifies what is a reasonable time to take protective 
action after a draining well begins to produce oil or gas resources 
with the actual time determined on a case-by-case basis. The final rule 
differs from the proposed rule. We modified this section to delete 
these words ``earliest,'' ``oil or gas,'' ``offending wells,'' and 
``lands adjacent or nearby'' to establish a clearer understanding of 
this section as commenters suggested. We changed the format and the 
leading sentences to the answer to form paragraph (a). We added 
paragraph (b) to clarify some of the factors we consider when 
determining whether the lessee took protective action within a 
reasonable time. We added paragraph (c) to clarify that if you take 
protective action but do not do so in a timely fashion, you are 
responsible for compensatory royalty for the period of the delay as 
provided in Sec. 3162.2-12. In response to comments, we modified 
paragraph (d) to change the word ``assessments'' to ``analysis,'' which 
is a more accurate term.
    A commenter suggested that we add ``split estate'' to the list of 
factors we consider in determining what might be a reasonable time to 
take protective action. The final rule did not adopt this suggestion. 
It is not practical to attempt to list all of the relevant data on cost 
and revenue in the regulation. Depending on the circumstances of each 
case, it may or may not require a different amount of time to take 
protective action where there is separate surface estate ownership.
    A commenter suggested that it is impractical to interrupt an 
ongoing drilling schedule to drill an offset well. The final rule did 
not change in response to this comment. The lessee is obligated by its 
lease terms to take protective action. If the lessee does not want to 
interrupt its drilling schedule, it can request BLM's approval to pay 
compensatory royalty or communitize the lease with the tract containing 
the draining well.
    Some commenters suggested that the title question of this section 
should read: ``How soon must I take protective action?'' The commenters 
also suggested that we delete the first sentence of the section. The 
final rule adopted the language to change the question to read ``How 
soon after I know of the likelihood of drainage must I take protective 
action?'' We adopted the suggestion to delete the first sentence of 
this section. We reformatted this section

[[Page 1889]]

and formed new paragraphs (a) and (b). The lessee or operating rights 
owner is responsible for initiating action at a reasonable time after 
constructive notice that drainage is occurring.
    Some commenters suggested that we establish a time frame for 
protection instead of the ``earliest reasonable time.'' These 
commenters also suggested that BLM provide specific guidelines or 
criteria for determining what is the ``earliest reasonable time.'' The 
final rule did not adopt the suggestion to establish a specific time 
frame. We deleted the word ``earliest'' because all reasonable time 
requirements vary greatly for each situation. We must determine the 
reasonable time on a case-by-case basis.
    A commenter suggested that we include ``time required for 
acquisition and evaluation of geological and/or geophysical data'' in 
paragraph (b). The final rule adopted the language time required to 
evaluate the characteristics and performance of the draining well'' for 
paragraph (b)(1), but did not include the geological/geophysical data.

Section 3100.61 (3162.2-12)

    This section describes 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. The final rule differs from the proposed rule. We 
deleted the word ``earliest'' to establish a clearer time frame for 
which the Department will assess compensatory royalties against a 
lessee or operating rights owner. We deleted the cross reference to 
Sec. 3100.60. In response to comments, we modified paragraph (a) to 
include the word ``economic.'' In response to comments, we modified 
paragraph (b) to change the language ``the lands being drained'' to 
``the mineral resources being drained'' to clarify that we refer to 
mineral resources not lands. In response to comments, we modified 
paragraph (c) to change the phrase ``ceases production'' to ``stops 
producing.'' In response to comments, we modified paragraph (d) to 
change the language ``the oil and gas lease interests in spacing units, 
lots, or aliquot parts of the Federal lands being drained'' to ``your 
interest in the Federal or Indian lease.''
    A commenter suggested that we change the language to add 
``economic'' before ``protective'' in paragraph (a) and add ``until 
drainage ceases in the offending well'' to paragraph (c). The final 
rule adopted a change to paragraph (a) to add the word ``economic,'' 
but not to paragraph (c). We did not change paragraph (c) because the 
duty to pay compensatory royalty stops when the draining well stops 
producing. The level of compensation required is based on determining 
the percentage of the draining well's overall production attributed to 
the lease with mineral resources being drained.
    A commenter suggested that the obligation to pay compensatory 
royalty ends when the drilling of a protective well demonstrates 
insufficient production to recover drilling and operating costs. The 
final rule did not adopt this suggestion because it was unnecessary. No 
compensatory royalty is to be paid because drilling a protective well 
satisfies the obligation to protect against drainage. In the lease, the 
lessee has promised to protect the Federal or Indian lessor from 
drainage.
    A commenter suggested that we change paragraph (d) to read ``You 
relinquish the oil and gas lease interests in spacing units, lots, or 
aliquot parts in the geological horizon(s) of the Federal land being 
drained.'' We do not recognize the division of record title by 
geological horizon(s). Therefore, we did not adopt that comment.

Section 3100.70 (3162.2-5)

    This section, as in the proposed rule, states that you do not have 
to take action under Sec. 3162.2-4 if you can demonstrate that it is 
not possible to do so and get a reasonable profit above the cost of 
drilling, completing, and operating the protective well. The final rule 
differs from the proposed rule. We modified the question of this 
section to read ``Must I take protective action when a protective well 
is uneconomic?'' We modified the first sentence to change the language 
``will not assess you compensatory royalty'' to ``you are not required 
to take any of the actions listed in Sec. 3162.2-4'' to establish a 
clearer understanding of when a lessee does not take action for 
drainage protection.

Section 3100.71 (3162.2-13)

    This section informs an assignee or transferee that if they acquire 
a lease being drained, they will be assessed compensatory royalty for 
all drainage obligations accruing on and after the approval date of the 
assignment of record title or transfer of operating rights. The final 
rule is substantively unchanged from the proposed rule with the 
exception of including the word ``Indian'' to clarify that this section 
applies to Indian assignees or transferees.
    A commenter suggested that we notify an assignee or transferee of a 
lease interest that is subject to drainage and the obligation to pay 
compensatory royalty or drill a protective well. The final rule did not 
adopt this suggestion because a prudent purchaser of a lease interest 
should examine the lease file prior to purchase. After BLM approves an 
assignment of record title or transfer of operating rights, the 
assignee or transferee assumes all lease obligations including the 
obligation to protect the lease from drainage.

Section 3100-80 (3162.2-14)

    This section indicates that a lessee or operating rights owner may 
request BLM State Director review as outlined in 43 CFR 3165.3, and 
appeal to IBLA as outlined in 43 CFR Parts 4 and 1840, a BLM decision 
to require drainage protective measures. The final rule includes 
language that a lessee or operating rights owner may request for a BLM 
State Director review. This language was omitted in the proposed rule 
in anticipation of a new appeals rule.

Section 3106.7-2

    This section specifies 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 of the transfer. The final rule 
differs from the proposed rule. We modified this section to change the 
question to read ``If I transfer my lease, what is my continuing 
obligation?'' to better reflect that the purpose of the section is to 
inform the lessee of its continuing obligations. Also, we reformatted 
the section to make it easier to understand.
    A commenter suggested that we recognize the terms of assignment 
agreements that specify which responsibilities are assigned or 
transferred. The final rule did not adopt this suggestion because we 
cannot be bound by agreements to which we are not a party.
    A commenter suggested that we clarify that the assignee merely 
assumes reclamation responsibilities and not all wells must immediately 
be plugged when we approve the assignment. The final rule did not adopt 
this suggestion. We do not believe that the rule implies otherwise. If 
additional beneficial uses for the wells exist, you do not need to plug 
the wells immediately.
    Some commenters suggested that the original lessee or operator 
should not be responsible for plugging and abandoning when control and 
all

[[Page 1890]]

obligations have been conveyed to other parties. The final rule did not 
adopt this suggestion. While we first look to the current lessee for 
lease compliance, we believe it prudent to reserve our rights against 
all parties who had the potential to benefit from the well's existence.

Section 3106.7-6

    This section informs a transferee of its obligations to comply with 
the original lease terms, including plugging and abandonment of 
unplugged wells, reclaiming the lease site, remediating environmental 
problems in existence which should have been known at the time of 
assignment, as well as maintaining an adequate bond to ensure 
performance of those responsibilities. The final rule differs from the 
proposed rule. We modified this section to add paragraphs (a) and (b) 
to differentiate between record title holders and operating rights 
owners.

Section 3108.1

    This section adds 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 lease 
obligations, including placement of all wells on the lease in proper 
condition for suspension or abandonment, and for reclaiming leased land 
in accordance with an approved plan. The final rule is substantially 
unchanged from the proposed rule. In response to comments, we deleted 
the phrase ``leased land'' in the rule text.

Section 3130.3

    This section amends the cross reference of these provisions. The 
final rule amends the cite to read ``Sec. 3162.2.''

Section 3162.2

    This section adds ``lessees'' to the persons who must satisfy the 
requirement of drilling and producing operations related to drainage. 
The final rule differs from the proposed rule. We modified this section 
to consolidate the previous drainage requirements of Part 3100 with 
those of Part 3160. We also modified this section to remove paragraph 
(a) and to redesignate current paragraphs (b) and (c) as paragraphs (a) 
and (b).
    A commenter suggested that we should not require the lessees to 
have the same development responsibilities as the operating rights 
owners if they are not the same entity. The final rule did not adopt 
this suggestion because we must ensure that if either party is 
negligent in its responsibilities, we have a recourse by holding the 
other party responsible for fulfilling the lease obligations. A 
sublease does not relieve the lessee of the responsibility for lease 
performance.

Section 3165.3

    This section adds ``lessee'' to the list of parties notified by BLM 
in the case of an alleged violation of the lease or regulations 
pertaining to operations on an oil and gas lease. The final rule 
differs from the proposed rule. We modified this section to add the 
phrase ``and the lessee(s)'' after ``appropriate party'' in the first 
sentence of paragraph (a) to clarify that we will notify lessees of 
alleged violations of the lease or regulations.

Section 3165.4

    This section adds 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. The 
final rule is substantively unchanged from the proposed rule.

IV. Procedural Matters

Executive Order 12866

    In accordance with the criteria in Executive Order 12866, this rule 
is not a significant regulatory action and is not subject to review by 
the Office of Management and Budget (OMB).
    (a) This rule will not have an annual economic effect of $100 
million or adversely affect an economic sector, productivity, jobs, the 
environment, or other units of government. Since fiscal year 1996, the 
drainage protection program has generated an average of about $16.1 
million to the U.S. Treasury per year, with about 10 percent of these 
revenues attributed to compensatory assessments. These revenues are 
from payments by lessees and operating rights owners obligated to pay 
royalties and compensatory royalties under the drainage protection 
program. The adoption of this final rule could result in the generation 
of additional revenues from compensatory royalty assessments, royalties 
from the drilling of new protective wells, and royalties from entering 
unitization or communitization agreements totaling about $2 million. 
This is far below the $100 million threshold set out in the Executive 
Order.
    (b) This rule will not create inconsistencies with other agencies' 
actions. This rule does not change the relationships of the drainage 
protection program with other agencies' actions.
    (c) This rule will not materially affect entitlements, grants, user 
fees, loan programs, or the rights and obligations of their recipients. 
This final rule clarifies ambiguities in the existing regulations and 
does not add new requirements to protect the lessor from drainage to 
those in the lease itself or impose new obligations on lessees and 
operating rights owners. Since the final rule merely clarifies how a 
lessee meets the terms in the lease that created their property 
interest, and imposes no limits on the use of the property, there will 
be no rights or obligations impaired as a result.
    (d) This rule will not raise novel legal or policy issues.

Regulatory Flexibility Act

    Congress enacted the Regulatory Flexibility Act of 1980 (RFA), as 
amended (5 U.S.C. 601-612), to ensure that government regulations do 
not unnecessarily or disproportionately burden small entities. The RFA 
requires a Regulatory Flexibility Analysis if a rule has a significant 
economic impact, either detrimental or beneficial, on a substantial 
number of small entities. The Department certifies that this document 
will not have a significant economic effect on a substantial number of 
small entities under the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). A Regulatory Flexibility Analysis and a Small Entity Compliance 
Guide are not required. This final rule does not produce an impact of 
$100 million or more on the economy. Its initial annual impact is 
estimated at $20.2 million or about one-third of one percent of 
revenues generated by oil and gas leases. Our estimate on the drainage 
liabilities is based on the average yearly amount of revenues recovered 
by BLM from successfully retired drainage cases. These revenues include 
royalties on protective wells, compensatory royalty assessments, 
royalties generated through protective agreements, or bonus bid 
payments on unleased lands.

Small Business Regulatory Enforcement Fairness Act

    This rule is not a major rule under 5 U.S.C. 804(2), the Small 
Business Regulatory Enforcement Fairness Act. This rule:
    a. Does not have an annual effect on the economy of $100 million or 
more.
    b. Does not cause a major increase in costs or prices for 
consumers, individual industries, Federal, State, or local government 
agencies, or geographic regions. This final rule would not affect costs 
or prices for consumers that are associated with the actions of this 
rulemaking.
    The Department has determined that this final rule is not a major 
rule under

[[Page 1891]]

5 U.S.C. 804(2), the Small Business Regulatory Enforcement Fairness 
Act. This final rule is not a major rule because annual total royalty 
revenues we anticipate receiving through drainage protections, 
including any increases as a result of these regulations, barely exceed 
$25 million.

Unfunded Mandates Reform Act

    We have determined that in accordance with the Unfunded Mandates 
Reform Act (UMRA) (2 U.S.C. 1501, et seq.):
    a. This rule will not ``significantly or uniquely'' affect small 
governments. A Small Government Agency Plan is not required. The final 
rule would not change the relationship between BLM and small 
governments.
    b. This rule will not produce a Federal mandate of $100 million or 
greater in any year, i.e., it is not a ``significant regulatory 
action'' under the Unfunded Mandates Reform Act. This final rule does 
not impose an unfunded mandate on State, local, or tribal governments, 
or the private sector of more than $100 million per year. The final 
rule does not have a significant or unique effect on State, local, or 
tribal governments, or the private sector. A statement containing the 
information required by the Unfunded Mandates Reform Act (2 U.S.C. 1531 
et seq.) is not required.

Government-to-Government Relationship With Tribes

    We have considered the impact of this rule on the interests of 
Tribal governments under the President's memorandum of April 29, 1994, 
``Government-to-Government Relations with Native American Tribal 
Governments'' (59 FR 22951) and Department of the Interior Manual (512 
DM 2). BLM did consult with Indian Tribes, under Executive Order 13084, 
on the issue of whether these regulations should apply to Tribal and 
individual Indian oil and gas leases. This complies with Executive 
Order 13175 which takes effect on January 6, 2001. However, we have 
determined the government-to-government relationship will not be 
affected as a result of the consultation on the applicability of these 
regulations. This rule will enhance the protection of Indian oil and 
gas resource owners.

Executive Order 12630

    In accordance with Executive Order 12630, the final rule does not 
represent a government action capable of interfering with 
constitutionally protected property rights. A takings implication 
assessment is not required. The Department has determined that the 
final rule would not cause a taking of private property or require 
further discussion of takings implications under this Executive Order. 
Since the final rule merely clarifies how a lessee meets the terms in 
the lease that created their property interest, and imposes no limits 
on the use of the property, there will be no private property rights 
impaired as a result.

Executive Order 13132

    We have considered the effect of the final rule in accordance with 
Executive Order 13132 and have determined that it does not have 
sufficient Federalism implications to warrant the preparation of a 
Federalism summary impact statement. The final rule does not have 
substantial direct effects on the States, on the relationship between 
the national government and the States or on the distribution of power 
and responsibilities among various levels of government.

Executive Order 12988

    In accordance with Executive Order 12988, the Office of the 
Solicitor has determined that this final rule does not unduly burden 
the judicial system and meets the requirements of sections 3(a) and 
3(b)(2) of the Order. This final rule clarifies the drainage 
obligations of lessees and operating rights owners and ambiguities in 
the existing regulations.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.), the information collection required by these regulations 
has been approved by the Office of Management and Budget under Approval 
No. 1004-0185 which expires May 31, 2002.

National Environmental Policy Act

    BLM has determined that this final rule is not subject to the 
review process established by the National Environmental Policy Act 
(NEPA) of 1969, since it is categorically excluded under 516 
Departmental Manual (DM), Chapter 2, Appendix 1, Item 1.10, and 516 DM, 
Chapter 2, Appendix 2. We also determined that the final 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 exclusion'' means a category of actions that have been 
found not individually or cumulatively to have a significant effect on 
the human environment and in procedures adopted by a Federal agency 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 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 draining the Federal lease, the 
lessee might be able to exercise options such as forming a unitization 
or communitization agreement with the owners of the draining well or 
paying compensatory royalties. These two options are exercised in more 
than 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 under procedures established by BLM to comply with 
NEPA.
    Authors: The principal author of this rule making is Donnie Shaw, 
Fluid Minerals Group, assisted by Shirlean Beshir, Regulatory Affairs 
Group.

List of Subjects

43 CFR Part 3100

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

[[Page 1892]]

43 CFR Part 3160

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

    Dated: January 2, 2001.
Sylvia V. Baca,
Assistant Secretary, Land and Minerals Management.

    Accordingly, under the authorities cited below, BLM adopts as final 
the amendments to Parts 3100, 3106, 3108, 3130, and 3160, Group 3100, 
Subchapter C, Chapter II of Title 43 of the Code of Federal Regulations 
to read as follows:

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 and 359; and 40 Opinion of the Attorney 
General 41.

    3. Remove the heading and the note following Group 3100--Oil and 
Gas Leasing.

PART 3100--OIL AND GAS LEASING

    4. Revise the authority citation for part 3100 to read as follows:

    Authority: 30 U.S.C. 189 and 359; 43 U.S.C. 1732(b), 1733, and 
1740; and 40 Opinion of the Attorney General 41.

    5. Revise Sec. 3106.7-2 to read as follows:


Sec. 3106.7-2  If I transfer my lease, what is my continuing 
obligation?

    (a) You are responsible for performing all obligations under the 
lease until the date BLM approves an assignment of your record title 
interest or transfer of your operating rights.
    (b) After BLM approves the assignment or transfer, you will 
continue to be responsible for lease obligations that accrued before 
the approval date, whether or not they were identified at the time of 
the assignment or transfer. This includes paying compensatory royalties 
for drainage. It also includes responsibility for plugging wells and 
abandoning facilities you drilled, installed, or used before the 
effective date of the assignment or transfer.

    6. 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?

    (a) If you acquire record title interest in a Federal lease, you 
agree to comply with the terms of the original lease during your lease 
tenure. You assume the responsibility to plug and abandon all wells 
which are no longer capable of producing, reclaim the lease site, and 
remedy all environmental problems in existence and that a purchaser 
exercising reasonable diligence should have known at the time. You must 
also maintain an adequate bond to ensure performance of these 
responsibilities.
    (b) If you acquire operating rights in a Federal lease, you agree 
to comply with the terms of the original lease as it applies to the 
area or horizons in which you acquired rights. You must plug and 
abandon all unplugged wells, reclaim the lease site, and remedy all 
environmental problems in existence and that a purchaser exercising 
reasonable diligence should have known at the time you receive the 
transfer. You must also maintain an adequate bond to ensure performance 
of these responsibilities.

    7. 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 compensatory royalty due for all drainage that occurred 
before the relinquishments;
    (b) Place all wells to be relinquished in condition for suspension 
or abandonment as BLM requires; and
    (c) Complete reclamation of the leased sites after stopping or 
abandoning oil and gas operations on the lease, under a plan approved 
by the appropriate surface management agency.

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

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

    Authority: 42 U.S.C. 6508; 43 U.S.C. 1732(b), 1733, and 1740; 
and 40 Opinion of the Attorney General 41.


Sec. 3130.3  [Amended]

    9. Amend Sec. 3130.3 by revising the cross reference of 
``Sec. 3100.3'' to read ``Sec. 3162.2.''

PART 3160--ONSHORE OIL AND GAS OPERATIONS

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

    Authority: 25 U.S.C. 396d; 30 U.S.C. 189 and 359; 43 U.S.C. 1733 
and 1740; and 40 Opinion of the Attorney General 41.


Sec. 3160.0-5  [Amended]

    11. Amend Sec. 3160.0-5 as follows by:
    a. Removing the paragraph designations (a) through (w) and 
alphabetizing all definitions;
    b. Adding new definitions for Drainage, Protective well, and Record 
title holder, and revising the definitions of Lessee and Operating 
rights owner to read as follows:
* * * * *
    Drainage means the migration of hydrocarbons, inert gases (other 
than helium), or associated resources caused by production from other 
wells.
* * * * *
    Lessee means any person holding record title or owning operating 
rights in a lease issued or approved by the United States.
* * * * *
    Operating rights owner means a person who owns operating rights in 
a lease. A record title holder may also be an operating rights owner in 
a lease if it did not transfer all of its operating rights.
* * * * *
    Protective well means a well drilled or modified to prevent or 
offset drainage of oil and gas resources from its Federal or Indian 
lease.
* * * * *
    Record title holder means the person(s) to whom BLM or an Indian 
lessor issued a lease or approved the assignment of record title in a 
lease.
* * * * *

    12. Amend Sec. 3162.2 as follows by:


Sec. 3162.2  [Amended]

    a. Revising the heading;
    b. Adding ``(s)'' after ``operating rights owner'' in paragraph (b) 
and (c) each time it appears, and by adding the term ``a lessee(s) 
and'' before ``operating rights owners'' each time it appears; and
    c. removing paragraph (a).


Sec. 3162.2  Drilling, producing, and drainage obligations.

* * * * *

    13. Add a new Sec. 3162.2-1 and redesignate paragraphs (b) and (c) 
of

[[Page 1893]]

Sec. 3162.2 as paragraphs (a) and (b) of this new section.


Sec. 3162.2-1  Drilling and producing obligations.

* * * * *

    14. Add new Secs. 3162.2-2 through 3162.2-15 to read as follows:

Sec.
3162.2-2   What steps may BLM take to avoid uncompensated drainage 
of Federal or Indian mineral resources?
3162.2-3   When am I responsible for protecting my Federal or Indian 
lease from drainage?
3162.2-4   What protective action may BLM require the lessee to take 
to protect the leases from drainage?
3162.2-5   Must I take protective action when a protective well 
would be uneconomic?
3162.2-6   When will I have constructive notice that drainage may be 
occurring?
3162.2-7   Who is liable for drainage if more than one person holds 
undivided interests in the record title or operating rights for the 
same lease?
3162.2-8   Does my responsibility for drainage protection end when I 
assign or transfer my lease interest?
3162.2-9   What is my duty to inquire about the potential for 
drainage and inform BLM of my findings?
3162.2-10   Will BLM notify me when it determines that drainage is 
occurring?
3162.2-11   How soon after I know of the likelihood of drainage must 
I take protective action?
3162.2-12   If I hold an interest in a lease, for what period will 
the Department assess compensatory royalty against me?
3162.2-13   If I acquire an interest in a lease that is being 
drained, will the Department assess me for compensatory royalty?
3162.2-14   May I appeal BLM's decision to require drainage 
protective measures?
3162.2-15   Who has the burden of proof if I appeal BLM's drainage 
determination?


Sec. 3162.2-2  What steps may BLM take to avoid uncompensated drainage 
of Federal or Indian mineral resources?

    If we determine that a well is draining Federal or Indian mineral 
resources, we may take any of the following actions:
    (a) If the mineral resources being drained are in Federal or Indian 
leases, we may require the lessee to drill and produce all wells that 
are necessary to protect the lease from drainage, unless the conditions 
of this part are met. BLM will consider applicable Federal, State, or 
Tribal rules, regulations, and spacing orders when determining which 
action to take. Alternatively, we may accept other equivalent 
protective measures;
    (b) If the mineral resources being drained are either unleased 
(including those which may not be subject to leasing) or in Federal or 
Indian leases, we may execute agreements with the owners of interests 
in the producing well under which the United States or the Indian 
lessor may be compensated for the drainage (with the consent of the 
Federal or (in consultation with the Indian mineral owner and BIA) 
Indian lessees, if any);
    (c) We may offer for lease any qualifying unleased mineral 
resources under part 3120 of this chapter or enter into a 
communitization agreement; or
    (d) We may approve a unit or communitization agreement that 
provides for payment of a royalty on production attributable to 
unleased mineral resources as provided in Sec. 3181.5.


Sec. 3162.2-3  When am I responsible for protecting my Federal or 
Indian lease from drainage?

    You must protect your Federal or Indian lease from drainage if your 
lease is being drained of mineral resources by a well:
    (a) Producing for the benefit of another mineral owner;
    (b) Producing for the benefit of the same mineral owner but with a 
lower royalty rate; or
    (c) Located in a unit or communitization agreement, which due to 
its Federal or Indian mineral owner's allocation or participation 
factor, generates less revenue for the United States or the Indian 
mineral owner for the mineral resources produced from your lease.


Sec. 3162.2-4  What protective action may BLM require the lessee to 
take to protect the leases from drainage?

    We may require you to:
    (a) Drill or modify and produce all wells that are necessary to 
protect the leased mineral resources from drainage;
    (b) Enter into a unitization or communitization agreement with the 
lease containing the draining well; or
    (c) Pay compensatory royalties for drainage that has occurred or is 
occurring.


Sec. 3162.2-5  Must I take protective action when a protective well 
would be uneconomic?

    You are not required to take any of the actions listed in 
Sec. 3162.2-4 if you can prove to BLM that when you first knew or had 
constructive notice of drainage you could not produce a sufficient 
quantity of oil or gas from a protective well on your lease for a 
reasonable profit above the cost of drilling, completing, and operating 
the protective well.


Sec. 3162.2-6  When will I have constructive notice that drainage may 
be occurring?

    (a) You have constructive notice that drainage may be occurring 
when well completion or first production reports for the draining well 
are filed with either BLM, State oil and gas commissions, or regulatory 
agencies and are publicly available.
    (b) If you operate or own any interest in the draining well or 
lease, you have constructive notice that drainage may be occurring when 
you complete drill stem, production, pressure analysis, or flow tests 
of the well.


Sec. 3162.2-7  Who is liable for drainage if more than one person holds 
undivided interests in the record title or operating rights for the 
same lease?

    (a) If more than one person holds record title interests in a 
portion of a lease that is subject to drainage, each person is jointly 
and severally liable for taking any action we may require under this 
part to protect the lease from drainage, including paying compensatory 
royalty accruing during the period and for the area in which it holds 
its record title interest.
    (b) Operating rights owners are jointly and severally liable with 
each other and with all record title holders for drainage affecting the 
area and horizons in which they hold operating rights during the period 
they hold operating rights.


Sec. 3162.2-8  Does my responsibility for drainage protection end when 
I assign or transfer my lease interest?

    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 we approve 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.


Sec. 3162.2-9  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 in 
the same or adjacent spacing units 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, it is your responsibility to analyze and evaluate this 
information and make the necessary calculations to determine:
    (1) The amount of drainage from production of the draining well;
    (2) The amount of mineral resources which will be drained from your 
Federal or Indian lease during the life of the draining well; and

[[Page 1894]]

    (3) Whether a protective well would be economic to drill.
    (b) You must notify BLM within 60 days from the date of actual or 
constructive notice of:
    (1) Which of the actions in Sec. 3162.2-4 you will take; or
    (2) The reasons a protective well would be uneconomic.
    (c) If you do not have sufficient information to comply with 
Sec. 3162.2-9(b)(1), indicate when you will provide the information.
    (d) You must provide BLM with the analysis under paragraph (a) of 
this section within 60 days after we request it.


Sec. 3162.2-10  Will BLM notify me when it determines that drainage is 
occurring?

    We will send you a demand letter by certified mail, return receipt 
requested, or personally serve you with notice, if we believe that 
drainage is occurring. However, your responsibility to take protective 
action arises when you first knew or had constructive notice of the 
drainage, even when that date precedes the BLM demand letter.


Sec. 3162.2-11  How soon after I know of the likelihood of drainage 
must I take protective action?

    (a) You must take protective action within a reasonable time after 
the earlier of:
    (1) The date you knew or had constructive notice that the 
potentially draining well had begun to produce oil or gas; or
    (2) The date we issued a demand letter for protective action.
    (b) 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 on a case-by-case basis. When we 
determine whether you took protective action within a reasonable time, 
we will consider several factors including, but not limited to:
    (1) Time required to evaluate the characteristics and performance 
of the draining well;
    (2) Rig availability;
    (3) Well depth;
    (4) Required environmental analysis;
    (5) Special lease stipulations which provide limited time frames in 
which to drill; and
    (6) Weather conditions.
    (c) If BLM determines that you did not take protection action 
timely, you will owe compensatory royalty for the period of the delay 
under Sec. 3162.2-12.


Sec. 3162.2-12  If I hold an interest in a lease, for what period will 
the Department assess compensatory royalty against me?

    The Department will assess compensatory royalty beginning on the 
first day of the month following the earliest reasonable time we 
determine you should have taken protective action. You must continue to 
pay compensatory royalty until:
    (a) You drill sufficient economic protective wells and remain in 
continuous production;
    (b) We approve a unitization or communitization agreement that 
includes the mineral resources being drained;
    (c) The draining well stops producing; or
    (d) You relinquish your interest in the Federal or Indian lease.


Sec. 3162.2-13  If I acquire 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 or Indian lease through an 
assignment of record title or transfer of operating rights under this 
part, you are liable for all drainage obligations accruing on and after 
the date we approve the assignment or transfer.


Sec. 3162.2-14  May I appeal BLM's decision to require drainage 
protective measures?

    You may appeal any BLM decision requiring you take drainage 
protective measures. You may request BLM State Director review under 43 
CFR 3165.3 and/or appeal to the Interior Board of Land Appeals under 43 
CFR part 4 and subpart 1840.


Sec. 3162.2-15  Who has the burden of proof if I appeal BLM's drainage 
determination?

    BLM has the burden of establishing a prima facie case that drainage 
is occurring and that you knew of such drainage. Then the burden of 
proof shifts to you to refute the existence of drainage or to prove 
there was not 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.


Sec. 3165.3  [Amended]

    13. Amend Sec. 3165.3 by adding the phrase ``and the lessee(s),'' 
after ``appropriate party'' in the first sentence of paragraph (a).

    14. 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 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 
appeal.
* * * * *

[FR Doc. 01-446 Filed 1-9-01; 8:45 am]
BILLING CODE 4310-84-P