Interior Board of Land Appeals
The following are some notable recent decisions by the Interior Board of Land Appeals relating to oil and gas leasing and public lands:
Compensatory Royalty Agreements; appealable decisions: Kraken Oil & Gas, LLC, 198 IBLA 118 (2022), addresses a situation in which a lessee had submitted a communitization agreement that was approved by BLM, but then also requested that BLM enter into a compensatory royalty agreement covering unleased federal lands in the communitized area. The CRA would enable the lessee to retain revenues from production of the federal mineral interest, less the federal royalty; whereas under the CA, the lessee would instead pay the federal royalty and then place the remainder of the proceeds – less drilling, completion, and production costs – in an escrow account until the federal lands were leased. BLM declined to consider the lessee’s request, taking the position that BLM only has authority to enter into a CRA when the federal lands are unleasable. The Board, however, held that CRA’s are not limited to unleasable federal lands; and that a decision by BLM to address drainage through a CA does not preclude the use of a CRA. The statute cited by the Board, 30 U.S.C. 226(j) (which has been redesignated by the Inflation Reduction Act of 2022 as 226(i)), provides, “Whenever it appears to the Secretary that lands owned by the United States are being drained of oil and gas by wells drilled on adjacent lands, he may negotiate agreements whereby the United States, or the United States and its lessees, shall be compensated for such drainage.” (Note: The regulation cited by the Board as to BLM’s authority, 43 CFR 3120.7-3, was the wrong one: That regulation pertains only to future-interest leasing; and, under the Inflation Reduction Act, it would now appear to be a dead letter. The applicable regulation is 43 CFR 3100.2-2, which provides, “In lieu of drilling necessary [protective] wells, the lessee may, with the consent of the authorized officer, pay compensatory royalty.”) The CRA request accordingly was remanded to BLM “for further consideration . . . in light of the discretion available to BLM.” Note: This case also addresses a separate issue: whether the letter by which BLM declined to consider Kraken’s CRA request constituted an appealable decision. The Board found – notwithstanding BLM’s claim to the contrary – that BLM’s letter was “a decision subject to appeal” because it “marks the consummation of BLM’s decision-making process and has legal consequences for Kraken.”
Survey; lease cancellation: The corners and boundaries of tracts, as established on a plat of official survey, are binding on BLM when it issues an oil and gas lease describing those tracts. However, where a tract is partially bounded, on the official plat of survey, by the meander line of a body of water, that meander line does not ordinarily constitute a fixed boundary of that tract. Rather, as stated in Hardin v. Jordan, 140 U.S. 371 (1891), “the waters themselves constitute the real boundary;” and the ordinary high water mark of the body of water will remain the boundary of the tract, no matter how much it may shift through such gradual processes as erosion and accretion. Thus, while BLM acted correctly in partially cancelling a lease as to lands that were determined to have been brought within the bed of a navigable river by a shift in the river’s course several decades prior to lease issuance (and hence were no longer federally owned), BLM erred in attempting to delay the effective date of the cancellation (and to retain the royalties that had been paid in the meantime) until the filing, some seven years following lease issuance, of a supplemental plat which officially acknowledged the shift in the river’s course. Where the United States did not own lands at the time of lease issuance, BLM was required to cancel the lease for those lands as of that time: There was “no legal justification for maintaining the legal fiction of Federal ownership until 2016 in direct contradiction to BLM’s determination that the land in fact eroded out of Federal ownership no later than 1952.” XTO Energy, Inc., 198 IBLA 65 (2022).
Standing: In Wildearth Guardians, 198 IBLA 13 (2022), the Board reversed a BLM finding that an environmental organization lacked standing to seek State Director Review of a BLM decision approving an oil and gas development project. Standing requires that a party must be adversely affected – i.e., that the decision in question “has caused or is substantially likely to cause injury” to a legally cognizable interest. As to BLM’s approval of the development project, the Board found that, even though it was a programmatic decision which left further determinations to be made at a site-specific level, it nevertheless was “a decision advancing the development rights of third parties and restricting BLM’s discretion to deny applications for permits to drills [sic] (APDs) or rights-of-way (ROWs) filed in compliance with the approved project” (at 23). The decision further explained (at 26-27) that “the Board does not determine standing solely based on whether further approvals are necessary before on-the-ground activities may be conducted. Instead, the Board deems oil and gas decisions to be immediately appealable when the decisions convey new development rights or increase the risk of pre-existing development rights being exercised.” And in this case, the Board insisted (at 29), “BLM did not retain complete discretion to disapprove site-specific development activities. To the contrary, the entire point of its multi-year decision-making was to facilitate development by establishing the standards and conditions it would apply when reviewing and issuing APDs and ROWs.” Thus the decision was found to adversely affect the appellant. (The Board’s opinion also includes a table summarizing which types of decisions are, or are not, potentially subject to immediate appeal: Yes, for holding a lease sale, for extending a lease, and for approving a development plan. No, for opening an area to leasing, for directing a suspension of operations, and for approving a unit agreement.) Comment: The Board’s reasoning in this case appears questionable: Approval of the development plan in fact conveyed no third-party rights to develop – merely an expectancy of being able to do so. The issuance of an oil and gas lease, by contrast, does create a right of development somewhere on the leasehold (in the absence of stipulations providing otherwise); and it is for that reason that general environmental concerns must be resolved before the lease is issued, while leaving site-specific concerns for resolution at the APD stage. (To keep things in perspective, though, this case is only about standing – a party’s right to be heard on the issues – and not about how the merits of those issues should be decided.)
Venting and flaring: Royalties are due on gas that is vented or flared, except for gas that is unavoidably lost. However, under the governing Departmental interpretations – BLM Notice to Lessees 4-A and applicable Instruction Memoranda, along with ONRR regulations (at least those regulations that were in effect at the time in question) – ONRR may not bill for royalties on gas lost through venting or flaring unless and until BLM has determined that the loss was unavoidable. Hess Corporation, 197 IBLA 299 (2021).
Royalties; venting and flaring: A lessee must use all reasonable precautions to prevent waste of oil and gas. Consequently, royalties generally must be paid on all gas except gas unavoidably lost. To establish that vented or flared gas is unavoidably lost, and thus not subject to royalties, the lessee must provide BLM with adequate engineering, geologic, and economic data to show that there was no reasonable alternative to the venting or flaring. Petro-Hunt, L.L.C., 197 IBLA 100 (2021).
Reasonable diligence: Among the requirements of a federal oil and gas lease is the exercise of reasonable diligence in the development and production of the leased resources. In Terry Tempest Williams & Brooke S. Williams d/b/a Tempest Exploration Co., LLC, 196 IBLA 386 (2021), the Board upheld BLM’s rejection of noncompetitive lease offers based on the offeror’s stated unwillingness to diligently develop the leases, where the offeror had publicly and repeatedly announced an intention to keep the leased resources in the ground unless and until “science finds a way to use those fossil fuels in sustainable, nonpolluting ways,” or the price of the fossil fuels becomes equal to the social costs of consuming them.
Suspensions of operations and production: When a BLM decision approving a request for a suspension of operations and production states a date on which the suspension will expire, the suspension will expire on that date, even if the lessee could have obtained an extension of the suspension – which was warranted by the circumstances – through a timely request, but did not file such a request on verbal advice from BLM staff that it was not necessary; and even if BLM itself could and should have directed an extension of the suspension, but did not actually do so. (As the Board makes clear, written advice from BLM, in an official decision, possibly might, but probably would not, have led to a different outcome, given the Board’s virtually-insurmountable threshold for estoppel.) Knight Technical Services, LLC, 195 IBLA 333 (2020). Note: This case serves as a reminder that, in any transaction with BLM, a party that wants to preserve its rights must abide by all applicable requirements, even when BLM staff says otherwise.
Unit agreements; standing: Where an appellant had requested State Director Review of a BLM decision approving a unit agreement, the Board, in Southern Utah Wilderness Alliance, 195 IBLA 315 (2020), affirmed BLM’s dismissal of the SDR request for lack of standing. Although the appellant, having protested BLM’s approval of the unit agreement, was a party, and thus met one of the criteria for standing, the Board found that the appellant failed to meet the other criterion: it was not adversely affected because its interest was not likely to be substantially injured by BLM’s decision. Comparing the potentials for injury from unit approval and from lease issuance, the Board recognized a higher bar for standing in the former case, stating (at 325-326), “Unlike lease issuance, unitization does not create a risk of development where none existed before. It is even speculative whether unitization increases the risk of environmental harm. While unitization facilitates and may ultimately expedite development, it also ‘is likely to minimize surface disturbance across the unitized leases, because the cooperative development structure encourages the shared use of roads, well pads, and other infrastructure.’ This stands in stark contrast to leasing in the first instance, or to extending a lease where the record shows likely and imminent development as a result of the extension. . . . [T]he creation of a development risk is sufficient to confer standing when BLM issues a lease, [but] its mere continued existence is not sufficient.” In other words (at 329), “while unitization could ultimately result in the extension of individual leases that might not have otherwise been extended, and possible development on those leases, this possibility is too speculative to serve as a basis for standing to challenge BLM’s decision to approve a unit agreement.”
Standing: In an appeal from BLM decisions dismissing requests for State Director Review, the Board found it necessary to follow a circuitous route to arrive at a correct result. Even where an appellant had no standing to seek SDR in the first place, the Board found that such an appellant, having made the SDR requests, would be a party that is adversely affected by BLM’s dismissals of those requests, and thus can have standing to appeal the dismissals to the Board. But, because the appellant had not in fact been eligible to request SDR, the Board then affirmed the dismissals on the merits. Center for Biological Diversity, 195 IBLA 298 (2020).