BLM’s Operating Rights Mess

A paper in from the 2017 Rocky Mountain Mineral Law Institute draws attention to a truly alarming development in the way that transfers of operating rights are being processed by some offices of the Bureau of Land Management. The paper, written by Jared A. Hembree of the Hinkle Shanor firm in Roswell, and Uriah J. Price of the Crowley Fleck firm in Bozeman, is titled, “Holding a Wolf by the Ears: A Look into BLM’s Policy on the Retroactive Adjudication of Operating Rights Transfers” (63 Rocky Mt. Min. L. Inst. 11-1).

On December 30, 1985, as the paper recounts, BLM issued Instruction Memorandum No. 86-175, declaring that the adjudication of operating rights was not legally required, and directing that – so long as (1) the transferee was qualified (which would be satisfied by the transferee’s signature on the form self-certifying his qualifications), and (2) there was sufficient bond coverage – operating rights transfers should be approved by BLM without adjudication.

This policy, which looked only to BLM’s ability to enforce lease obligations against the record title owner, while disregarding the fact that the working interest – the primary value of the lease – resided with the operating rights owner (who might or might not be the same as the record title owner), was a disservice to the owners of interests in federal leases. (This policy was justified by BLM on the premise that an operating rights owner was a mere sublessee; but the paper observes that, at least since 2001, BLM’s position has been that “both the record title holder and the operating rights holder have a contractual relationship with the United States, and are responsible for compliance with the terms of the lease.”)

And in fact, although not noted by the paper, a still-worse policy, shirking the responsibility of the BLM State Offices in their role of the offices of record for federal leases, had been adopted a few months prior, in a Federal Register notice of August 23, 1985 (50 F.R. 34204). That notice provided that, under certain circumstances, the filing and approval of operating-rights transfers should be deferred altogether; and (as noted in status and title reports that have been prepared by this office on leases that were in effect during that period) the invitation not to file transfers of operating rights remained in place until the requirement to do so was unequivocally restored in a revision of the regulations (43 CFR Subpart 3106) effective June 15, 1988.

On April 4, 2013, though, BLM – after nearly 28 years of digging itself into a very deep hole in its evaluation and maintenance of records of operating rights ownership – did an abrupt about-face. On that date, as discussed in the paper, Instruction Memorandum No. 2013-105 was issued, directing the BLM State Offices (1) to adjudicate all operating rights transfers, for leases where production began on or after October 1, 2012 (the beginning of the then-current fiscal year); (2) to adjudicate operating rights transfers only to the extent necessary to enable ONRR to issue payment orders to the proper parties, for leases where production began prior to October 1, 2012; and (3) to “adjudicate all remaining unadjudicated operating rights assignments as time and staffing allow.”

The basic principle behind the 2013 IM – for BLM to resume its responsibility of ascertaining the ownership of working interests in federal leases, after a 28-year hiatus – was highly commendable. And to the extent that newly-filed operating rights transfers were to be adjudicated on the presumption that the previous conveyances of those lease interests (which were approved but not adjudicated by BLM, in accordance with its prior policy) were valid unless shown otherwise, BLM’s actions would be beneficial both to itself and to the owners of the operating rights interests.

What the paper is concerned with, however, is the way in which some BLM State Offices have taken the instructions to adjudicate pre-2013 operating rights transfers “only to the extent necessary to enable the Office of Natural Resources Revenue (ONRR) to issue proper orders,” and to “adjudicate all remaining unadjudicated operating rights assignments,” as a directive to go back and reconsider all operating rights transfers that were approved – but not adjudicated – between 1985 and 2013. It is difficult to believe that this interpretation was intended by the IM; and it is equally difficult, when the instruction goes on to say that all remaining transfers should be adjudicated “as time and staffing allow,” and BLM offices already are so short-staffed that they struggle to keep up with existing obligations, to comprehend how any of the offices can justify acting on this interpretation.

Nevertheless, the paper describes situations in which some State Offices have done exactly that, in the name of keeping ONRR from looking to the wrong parties for payment obligations. It is undoubtedly true that occasions have arisen where the parties who have had operating rights interests conveyed to them may differ from the parties who actually are responsible for payments to the United States. But that is a problem that is entirely of BLM’s making, and a highly-foreseeable consequence of BLM’s ill-advised practice of 28 years. For BLM to shift the burden for its failings to the lease parties, and to now act in a way that places those parties’ interests at risk, is unconscionable.

Perhaps the starkest example documented by the paper is the implementation of the new policy by BLM’s Colorado State Office. The article reports that, if discrepancies in prior operating rights transfers “are discovered while reviewing a case file, the Colorado State Office considers those transfers null and void from inception. Therefore, . . . it does not provide notice or send out unapproved operating rights decision letters because the transfers were never adjudicated. . . . As a result, curing transfers retroactively deemed invalid could prove difficult. For example, if the transferor of a retroactively invalidated transfer is a now-defunct entity, it will be necessary to determine entity succession and obtain corrective transfers from the proper parties. This could prove both time-consuming and costly at best, or practically impossible at worst” (emphasis added).

The paper goes on to discuss a number of legal arguments that may be made against BLM’s retroactive adjudication (particularly without notice to the parties) of previously-approved operating rights transfers, including whether it is contrary to the statutory provision (30 U.S.C. 187a) that an assignment or transfer may only be denied for lack of qualifications or lack of sufficient bond, and otherwise must be approved within 60 days; and whether it is either an unconstitutional taking or a violation of due process under the Fifth Amendment. The paper further makes clear that such retroactive adjudication may have consequences not only for lease title and for payment obligations, but also for lease operations: “For example, assume an operator files an application for permit to drill (APD), obtains approval of the APD, and drills a well on a federal lease with the understanding it owns 100% of the operating rights. Next, the operator communitizes the federal minerals with a fee lease owned by a third party and produces the well for an extended period of time. What happens if the operator’s entire interest in the federal oil and gas lease is retroactively extinguished administratively? Does the operator no longer possess the right to occupy the surface and produce the well? From BLM’s perspective, the operator no longer holds the federally recognized interest necessary to access the property, obtain the drilling permit, or communitize the federal interest. Thus, a few potential issues that immediately come to mind are trespass, the continued validity of approved APDs and communitization agreements (CA), and sufficient bonding.” And all because BLM had created a situation that complicated ONRR’s ability to collect royalties from the proper parties.

With all of this being said, however, one more point needs to be made. Even if BLM has gotten it wrong for 28 years, and is then further getting it wrong in trying to figure out what to do about it, there always has been something that the lease parties can do to protect themselves: examining the actual lease files at the BLM State Office, to determine the correct operating rights ownership – not the ownership based on what was approved by BLM over the years, but the ownership based on what the parties to those transfers really owned at the time as a result of all of the preceding transfers in the chain of title. Which is exactly what I do when a client asks me to furnish a status and title report on a lease.

Nonetheless, BLM has a moral obligation, going forward, only to reconsider its previous approvals of operating rights transfers in those specific cases where questions about ownership of lease interests have been brought to its attention by the lease parties or by ONRR – and to unfailingly notify the parties when it does so. BLM should issue a clarification to the 2013 IM to ensure that it meets this obligation.

August 2018


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