BLM sets tighter rules against drainage

The U.S. Bureau of Land Management has proposed a rule to clarify the obligations of federal oil and gas lessees to protect against drainage by third parties. BLM Director Pat Shea said, "This proposal is aimed at ensuring that America's taxpayers receive all of the royalties owed to them from oil and gas production on federal lands. "While federal oil and gas lessees have always been required, under the Mineral Leasing Act of 1920, to protect against drainage, this proposed rule more

Feb. 2, 1998

3 min read

The U.S. Bureau of Land Management has proposed a rule to clarify the obligations of federal oil and gas lessees to protect against drainage by third parties.

BLM Director Pat Shea said, "This proposal is aimed at ensuring that America's taxpayers receive all of the royalties owed to them from oil and gas production on federal lands.

"While federal oil and gas lessees have always been required, under the Mineral Leasing Act of 1920, to protect against drainage, this proposed rule more specifically identifies where a lessee's responsibilities begin and end."

Drainage occurs when an adjacent well causes oil and gas on federal land to migrate across property lines, reducing production and royalties owed the U.S. government.

The Interior Department's Inspector General had urged BLM to revise its existing regulations to ensure better protection against drainage.

What the rule does

The proposed rule specifies that all federal oil and gas lessees are "jointly and severally" liable for paying compensatory royalties when more than one party owns an interest in the same lease.

It said lessees must pay compensatory royalties for drainage, beginning a reasonable time after a prudent operator should have known that drainage was occurring.

The proposed rule said lessees and operators have a duty to determine if drainage is occurring and the lessee is deemed to know drainage has occurred when production data become available about a third party's adjacent well.

BLM said that would require lessees to monitor the drilling of wells on adjacent lands and gather sufficient information to determine whether drainage is occurring.

The proposed rule sets responsibilities when multiple parties hold a lease. It holds all parties jointly and severally responsible for performance of non-monetary lease obligations (such as plugging a well) or payment of compensatory royalties due in lieu of drilling an "offset" or "protective" well.

BLM said, "This means that each party that holds an undivided interest in the lease is responsible for the full amount of a liability if the other holders of the lease cannot satisfy the liability."

Protective action

The rule requires a party holding an interest in a federal lease to take protective action at the earliest reasonable time after the party knows, or should know, about potential drainage.

To protect against drainage, an operator must either drill and produce from an offset well, reach an agreement with the owners of the adjacent well, or pay compensatory royalties set by BLM.

Those actions would not be required if the lessee could prove it could not make a reasonable profit above the cost of drilling and operating a protective well.

BLM administers nearly 60,000 active oil and gas leases, of which more than 23,500 are in producing or producible status. Production from BLM-managed lands accounted for 5.6% of U.S. oil and 9.9% of gas output in 1995, the latest year for which data are available.