1. Current Issues: BLM & BIA
David hampton
Jordan volino
OCAPL Educational luncheon
February 1, 2016

2. Current Issues: BLM & BIA
Lecture Contents:
Communitization Agreements
Applications for Permit to Drill
ONRR
Natural Gas Flaring
Onshore Rules 3, 4, & 5
Hydraulic Fracturing

3. Current Issues: BLM & BIA
Communitization Agreements
Purpose:
Allows for the pooling of federal oil/gas leases which cannot be independently developed
Provides for conformance with state spacing standards
Prevents drilling of unnecessary wells
Provides allocation of production and well costs on acre-by-acre basis
Problem:
Development of CAs did not
Federal Fee
State
640 Acre Spacing Unit
anticipate complex horizontal drilling

4. Current Issues: BLM & BIA
Communitization Agreements
Instruction Memorandum No (July 2015)
Purpose was to streamline the process for CA approval with updates to BLM Manual
This new policy was effective upon issuance of IM
New amendments:
BLM will only adjudicate federal mineral interests
BIA will only adjudicate Indian mineral interests
Surface rights granted to BLM agent

5. Current Issues: BLM & BIA
Communitization Agreements
Instruction Memorandum No (July 2015)
New amendments:
In situations where a proposed well does not penetrate Indian or federal minerals, an APD is not required
Modified terms of Exhibits

6. Current Issues: BLM & BIA
Communitization Agreements
Instruction Memorandum No (July 2015)
New amendments:
Operator allowed to self-certify all working interest owners and record title owners on federal or Indian land
Necessary Signature Clause:
I, the undersigned, hereby certify, on behalf __________, the Operator of the proposed Communitization Agreement, that all working interest owners show on Exhibit ____ attached to the Communitization Agreement are, to the best of my knowledge, the working interest owners of the Federal or Indian leases subject to the Communitization Agreement, and that the written consents of all of the named owners have been obtained and will be made available to the BLM immediately upon request.

7. Current Issues: BLM & BIA
Application for Permit to Drill (APD)
Application to drill on leased federal land
Currently:
2-3 month approval process
7,000 APDs currently
Good for two years
$9,500 (up from $6500 due to federal legislation)
Higher pricing in effect October 1, 2015
APDs provide BLM revenue estimates at $47.5 million per year
BLM & BIA has to provide their own analysis on the APD
Ramifications: Slow and tedious approval process with backlog of applications

8. Current Issues: BLM & BIA

9. Current Issues: BLM & BIA

10. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
ONRR is a unit of the U.S. Department of the Interior, established by Secretarial Order in 2010.
The new office exercises the royalty and revenue management functions formerly under the MMS, including royalty and revenue collection, distribution, auditing and compliance, investigation and enforcement, and asset management for both onshore and offshore activities.
Functions:
Valuation, Pricing, & Guidance
Unbundling
Reporting & Paying Resources
Compliance, Enforcement, & Appeals
Civil Penalties
Indian, Allottees, & Tribal Services

11. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Valuation, Pricing, & Guidance: (Marketable Condition)
Under the new enforcement initiative, ONRR promulgates its own calculations for how to “unbundle” these costs, including a much broader definition of the relevant Marketable Condition cost.
This initiative may sharply reduce the amount of fees and expenses that were previously deductible as processing or transportation allowances by reclassifying costs as Marketable Condition Costs.
Current Litigation:
In re Encana Oil & Gas USA, Inc., Case No. MMS O&G
Certain gas deductions are not allowed under ONRR

12. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Valuation, Pricing, & Guidance: (Marketable Condition)
The ONRR is proceeding by establishing presumptive costs of placing gas in a marketable condition for cases where a Lessee transports and processes gas under Unbundling Cost Allocations (UCAs).
ONRR is establishing UCAs on a region-by-region basis and has developed a priority schedule for the order of regions for which ONRR plans to calculate UCAs.
For regions without UCAs, ONRR has directed Lessees to calculate their own unbundling costs.

13. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Amendment to (30 CFR Parts 1202, 1206, and 1210)
Known as Consolidated Valuation or “Indian Oil Rule”
ONRR amended its regulations governing the valuation, for royalty purposes, of oil produced from Indian leases.
This rule will expand and clarify the major portion valuation requirement found in the existing regulations for oil production.
This rule also changes the form filing requirements necessary to claim a transportation allowance for oil produced from Indian leases.
The proposed rule has been published, but the final rule is currently being drafted.
The final rule will be promulgated sometime this summer.

14. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Indian, Allottees, & Tribal Services:
The (ONRR) serves as a trustee of royalty assets from Indian trust properties and as an advocate for the interests of Indian mineral owners by:
Accounting for and auditing royalty obligations on the Tribes' behalf.
Coordinating with BIA, BLM, and the Office of Special Trustee (Liaison).

15. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Indian, Allottees, & Tribal Services:
Leasing of Osage Reservation Lands for Oil & Gas Mining
(25 CFR 226)
ONRR collects royalty/revenues for tribes with the exception of the Osage Nation
Recently, Osage Nation to be included in Federal Oil and Gas Royalty Management Act’s (FOGRMA) statutory power to manage tribal royalty revenues
Regulations were promulgated into a final rule
Industry opposition quickly surfaced with protests and litigation
Implementation of the revised regulations have been postponed pending multiple lawsuits

16. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Civil Penalties)
To support ONRR’s Mission, it verifies reporting, conducts audits, enforces laws, regulations, lease terms and orders, and performs other compliance activities.
When ONRR identifies compliance issues, it will notify you if: payments are due, forms are late or missing, reports need correction, or additional information is required.

17. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Civil Penalties)
Note: This material is published by ONRR, it may not contain pending penalty assessments.

18. Current Issues: BLM & BIA

19. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Regulations)
Current Civil Penalty, before amendment:
Curing period of at least 20 days.
If after 20 days, penalty assessments can cost as much as $500 per day, with more series violations reaching $10-$25,000 per day.
(30 USC 1719d & 30 CFR 1241)
Amendments to Civil Penalty Regulations
This amendment is being put in final form after final notice/comment stage has concluded.
The final rule will be published this summer, taking effect 30 days after publication.

20. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Regulations)
(30 USC 1719d & 30 CFR 1241)
NONC: Notice of Noncompliance
FCCP: Failure to Correct Civil Penalty
ILCP: Immediate Liability Civil Penalty
A NONC states the violations and how to correct the violations to avoid civil penalties.
If you fail to correct the violations ONRR identifies in a NONC within the time period specified, ONRR may assess civil penalties by issuing a FCCP.
If a violation is knowing or willful, ONRR will issue an ILCP to assess civil penalties without giving you a prior opportunity to correct the mistake.

21. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Regulations)
(30 USC 1719d & 30 CFR 1241)
2014 amendment defining “knowing or willful” as the lowest possible standard so that it encompasses all higher standards.
Therefore, the definition of “knowing or willful” means gross negligence requiring only that it show a company or person has “failed to exercise even that care which a careless person would use.”

22. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Regulations)
(30 USC 1719d & 30 CFR 1241)
Removing “specific intent” places the standard as high as criminal recklessness, allowing for high civil penalties as well as criminal penalties to which the amendment does not define.
Current Litigation:
Statoil USA E&P Inc. v. O.N.R.R., Case No
Cabot Oil & Gas Corp. v. O.N.R.R, Case No. CP11-016
“Willfully” refers to acts with reckless disregard for the law

23. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Compliance, Enforcement, & Appeals: (Regulations)
Protest Comments Against 2014 Civil Penalty Amendment:
Overreach/overbreadth of amendment
Criminal action for simple reporting errors
Punitive treatment
Lack of time to amend error
Violation of due process for lack of time to explain error
Ultimate hesitation of oil and gas industry: “does the punishment fit the error?”
BLM/BIA responded noting that they received the complaints and hopefully came to an agreeable solution, however, solution not known until publication of the new rules

24. Current Issues: BLM & BIA
Natural Gas Flaring
Onshore Oil and Gas Order 9: Waste Prevention and Use of Produced Oil and Gas for Beneficial Purposes
Current Rule:
Allows a company to flare gas without payment of royalties if it uneconomical to build a pipeline
Gas may be also used royalty free for well site power generation
Alan Kovski, BLM Gas Waste Proposal Considers Royalty Changes, Jan. 27, 2016

25. Current Issues: BLM & BIA
Natural Gas Flaring
Onshore Oil and Gas Order 9: Waste Prevention and Use of Produced Oil and Gas for Beneficial Purposes
Proposed Rule (to be codified at 43 CFR ):
Promulgated to reduce flaring, venting, and leaking of gas
The rule would apply to payment of royalties, either granting or increasing royalties on flared gas to a minimum of 12.5%
The rule would place a limit on allowable flaring, with any flared gas above that limit subject to royalty and penalties
This proposed rule could affect up to 36,700 wells, a majority of which are in the Bakken
Notice/Comment period available once rule is initially published in the CFR
Alan Kovski, BLM Gas Waste Proposal Considers Royalty Changes, Jan. 27, 2016

26. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Proposed rule to modernize oil and gas onshore regulations to ensure accurate measurement, accountability, and royalty payments on federal and Indian leases
These rules were last updated in 1989, so the BLM is updating these regulations to align with modern technologies
Current amendment to rule was proposed July 2015, comment was sought through August 2015
Once BLM finishes reviewing comments, it will send a proposed rule to the Government Accountability Office (GAO) for final drafting
The BLM anticipates a final rule in June 2016

27. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Amendments to Order 3 (43 CFR 3173)
Establish a national process for designating official points for royalty measurement, known as facility measurement points
New standards for commingling approvals
Use of seals
Meter by-passes
Reporting incidents of unauthorized removal or mishandling of production
Site facility diagrams
Off-lease measurements

28. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Amendments to Order 4 (43 CFR 3174): Oil Measurement
Enhanced requirements for oil sales for tank gauging
Vapor tight tanks
Lease automatic custody transfer components and requirements
Allowing the use of the Coriolis measurement systems, which measure output flow, temperature, density, and viscosity

29. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Amendments to Order 5 (43 CFR 3175): Gas Measurement
Enhanced requirements for electronic gas meters
Enhanced inspection requirements for gas meters
Improved standards for gas sampling and thermal content determinations
Improved testing and review standards for BLM gas and oil measurement team
Overall performance goals for gas measurement meters based on the volume of gas measured

30. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Potential revisions for all orders would include:
More clearly implementing statutory record-keeping requirements and expanding the number and types of violations that would be subject to immediate assessments and making transporters and pipeline operators subject to the record-keeping requirements and assessments related to those requirements
By the above revisions BLM is trying to improve their share of royalty collections.
The BLM is desirous of obtaining value added royalty payments on their share of production.

31. Current Issues: BLM & BIA
Onshore Orders 3, 4, & 5
Problems associated with the revisions include:
Undo burden on companies to obtain, install and maintain measurement instruments on their leaseholds.
The BLM seeks to have each operator in a communitized area retroactively install these devices as to old wells and as to future wells.
Cost and timing are of paramount concern
Once finalized, the rules would target high production wells shifting to lower producing wells over time
Proposed rule greatly disincentivizes operates from producing on federal or Indian land due to the currently low oil prices which were not anticipated when this rule was originally promulgated

32. Current Issues: BLM & BIA
Hydraulic Fracturing
In March, 2015, the BLM introduced final fracking rules for federal lands
Question posed:
Does the federal government possess the authority to override state laws on groundwater and hydraulic fracturing?
Answer through litigation:
North Dakota, Colorado, Utah, the Independent Petro. Assoc. of America, the Western Energy Alliance, and others quickly sued
On a ruling of a preliminary injunction, the judge stated that the BLM cannot proceed with the regulations as currently drafted
The judge stated that the proposed rules violated the federal legislation which delegates power to the states to regulate such activity

33. Current Issues: BLM & BIA
Federal money rightly appropriated?
“Donkey Money”

34. Current Issues: BLM & BIA
Office of Natural Resources Revenue (ONRR)
Contact Information:
Oklahoma City Office
4013 NW Expressway Ste 230
Audit and Compliance Office - (405)
State and Indian Outreach Office - (405)
Tulsa Office
7615 E 63rd Place Ste 105
(918)

35. Current Issues: BLM & BIA
Bureau of Land Management
Contact Information:
Oklahoma City Field Station
200 NW 4th St.
(405)
Tulsa Office
7906 E. 33rd St., Suite 101
(918)

36. Current Issues: BLM & BIA
Bureau of Indian Affairs
Contact Information:
Oklahoma City Office
200 NW 4th St.
(405)
Anadarko Office
Highway 281 N.
(405)