Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1883

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.

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.

1884 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

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 § 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 selfinterest 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

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 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 § 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 § 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

1886 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

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 § 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 colessees 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 § 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

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 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

§ 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 § 3162.2–6) and

allows the lessee to rebut the occurrence

of drainage (see § 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

§ 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 § 3100.50. We modified

paragraph (b) to change the cross

reference from ‘‘§ 3100.50’’ to

‘‘§ 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

1888 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

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 (§ 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 (§ 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 (§ 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 § 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

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 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 caseby-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 § 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 § 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 § 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

1890 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

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 ‘‘§ 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

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 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-togovernment 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 landsmineral 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.

1892 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

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 § 3106.7–2 to read as

follows:

§ 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 § 3106.7–6 to read as

follows:

§ 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 § 3108.1 to read as follows:

§ 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.

§ 3130.3 [Amended]

9. Amend § 3130.3 by revising the

cross reference of ‘‘§ 3100.3’’ to read

‘‘§ 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.

§ 3160.0–5 [Amended]

11. Amend § 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 § 3162.2 as follows by:

§ 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).

§ 3162.2 Drilling, producing, and drainage

obligations.

* * * * *

13. Add a new § 3162.2–1 and

redesignate paragraphs (b) and (c) of

Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations 1893

§ 3162.2 as paragraphs (a) and (b) of this

new section.

§ 3162.2–1 Drilling and producing

obligations.

* * * * *

14. Add new §§ 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?

§ 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

§ 3181.5.

§ 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.

§ 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.

§ 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 § 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.

§ 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.

§ 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.

§ 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.

§ 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

1894 Federal Register / Vol. 66, No. 7 / Wednesday, January 10, 2001 / Rules and Regulations

(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 § 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 § 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.

§ 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.

§ 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 § 3162.2–12.

§ 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.

§ 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.

§ 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.

§ 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.

§ 3165.3 [Amended]

13. Amend § 3165.3 by adding the

phrase ‘‘and the lessee(s),’’ after

‘‘appropriate party’’ in the first sentence

of paragraph (a).

14. Amend § 3165.4 by adding a new

paragraph (e)(4) to read as follows:

§ 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

DEPARTMENT OF TRANSPORTATION

Federal Railroad Administration

49 CFR Part 213

[Docket No. RST–90–1, Notice No. 9]

RIN 2130–AB32

Track Safety Standards

AGENCY: Federal Railroad

Administration (FRA), Department of

Transportation (DOT).

ACTION: Final rule.

SUMMARY: FRA amends the Track Safety

Standards to provide procedures for

track owners to use Gage Restraint

Measuring Systems (GRMS) to assess

the ability of their track to maintain

proper gage. Under the current Track

Safety Standards, track owners must

evaluate a track’s gage restraint

capability through visual inspections

conducted at frequencies and intervals

specified in the standards. With this

amendment, track owners may monitor

gage restraint on a designated track

segment using GRMS procedures.

Individuals employed by the track

owner to inspect track must be

permitted to exercise their discretion in

judging whether the track segment

should also be visually inspected by a

qualified track inspector.

DATES: Effective Date: This final rule is

effective April 10, 2001.

FOR FURTHER INFORMATION CONTACT:

Allison H. MacDowell, Office of Safety

Enforcement, Federal Railroad

Administration, 1120 Vermont Avenue,

NW., Mail Stop 25, Washington, DC

20590 (telephone: 202–493–6236), or

Nancy Lummen Lewis, Office of Chief

Counsel, Federal Railroad

Administration, 1120 Vermont Avenue,

NW., Mail Stop 10, Washington, DC

20590 (telephone: 202–493–6047).

SUPPLEMENTARY INFORMATION:

Introductory Statement

Historically, railroads assess a track’s

ability to maintain gage through visual

inspections of crossties and rail

fastening systems. The maintenance

decisions which determine crosstie and

rail fastener replacement within the