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Oil and Gas Leasing Instructions

Lands Available For Leasing

Public lands are available for oil and gas leasing only after they have been evaluated through the BLM's multiple-use planning process. In areas where development of oil and gas resources would conflict with the protection or management of other resources or public land uses, mitigating measures are identified and may appear on leases as either stipulations to uses or as restrictions on surface occupancy.

Lessee Qualifications and Limitations

Federal oil and gas leases may be obtained and held by any adult citizen of the United States. No lease may be acquired by a minor, but a lease may be issued to a legal guardian or trustee on behalf of a minor. Associations of citizens and corporations organized under the laws of the United States or of any State also qualify.

Aliens may hold interests in leases only by stock ownership in U.S. corporations holding leases and only if the laws of their country do not deny similar privileges to citizens of the United States. They may not hold a lease interest through units in a publicly traded limited partnership.

Types of Oil and Gas Leases

The BLM issues two types of leases for oil and gas exploration and development on lands owned or controlled by the Federal Government - competitive and noncompetitive.

The Congress passed the Federal Onshore Oil and Gas Leasing Reform Act of 1987 to require that all public lands that are available for oil and gas leasing be offered first by competitive leasing. Noncompetitive oil and gas leases may be issued only after the lands have been offered competitively at an oral auction and not received a bid.

The maximum competitive lease size is 2,560 acres in the lower 48 States and 5,760 acres in Alaska. The maximum noncompetitive lease size in all States is 10,240 acres.

Since passage of the Energy Policy Act of 1992, both competitive and noncompetitive leases are issued for a 10-year period. Both types of leases continue for as long thereafter as oil or gas is produced in paying quantities.

Competitive Leasing Process

Oral auctions of all oil and gas leases are conducted by most BLM State Offices not less than quarterly when parcels are available. A Notice of Competitive Lease Sale, which lists lease parcels to be offered at the auction, will be published by each BLM State Office at least 45 days before the auction is held. Lease stipulations applicable to each parcel are specified in the Sale Notice.

Lands Included In The Sale Notice Come From three Sources:

(1) Existing leases that have expired, terminated, or been cancelled or relinquished;
(2) Parcels identified by informal expressions of interest from the public or by the BLM for management reasons; or
(3) Lands included in offers filed for noncompetitive leases.

All auctions are conducted with oral bidding. Bidders must attend the auction to obtain a competitive lease or provide for someone to represent them. No sealed or mailed bids are accepted.

On the day of the auction, the successful bidder must submit a properly executed lease bid form, which constitutes a legally binding lease offer, and pay a share of the sale costs ($130 per lease); the first year's advance rental ($1.50 per acre or fraction thereof); and not less than the $2-per-acre minimum bonus bid. The balance of the bonus bid must be received within 10 working days of the auction. Those bidders who fail to submit the balance of the bonus on time will forfeit their entire deposit money.

Remittances associated with the leasing process may be made by personal check, cashier's check, certified check, or money order, made out to Department of the Interior-BLM. VISA or MasterCard may also be used. Cash is not accepted.

Lease Terms And Conditions

The lease grants the lessee the right to explore and drill for, extract, remove, and dispose of oil and gas deposits, except helium, that may be found in the leased lands.

Subject to special restrictions as noted above, the leases are granted on the condition that the lessee will have to obtain BLM approval before conducting any surface-disturbing activities. The oil and gas lease conveys the right to develop those resources on the leased land. The lessee or his/her operator cannot build a house on the land, cultivate the land, or remove any minerals other than oil and gas from the leased land.

Bonding

Before any surface-disturbing activities related to drilling can begin, the lessee or his/her operator must furnish a bond in the amount of at least $10,000 to ensure compliance with all the lease terms, including protection of the environment. With the consent of the surety and principal, the operator may use the bond of another party such as the lessee. Each time there is a new operator, that operator must notify the BLM that he/she is the responsible operator, giving the particulars of the bond under which he/she will operate.

Acceptable instruments of bonding are surety bonds, or personal bonds accompanied by negotiable Treasury securities, cashier's check, certified check, certificate of deposit, or irrevocable letter of credit.

The BLM may require an increase in the bond amount any time conditions warrant such an increase.

Rentals

Annual rental rates for both competitive and noncompetitive leases are $1.50 per acre (or fraction thereof) in the first 5 years and $2.00 per acre each year thereafter. After the lease is issued, rentals must be received at the Department of the Interior's Minerals Management Service (MMS), Royalty Management Program, PO Box 5810, Denver, Colorado 80217 on or before the lease anniversary date to prevent statutorily required automatic termination of the lease. This requires mailing of the annual rental at least a week or 10 days in advance of the lease anniversary date to ensure timely receipt by the MMS.

Royalties

Royalty on production is 12.5 percent for both competitive and noncompetitive leases.

Assigning A Lease

Some people who acquire an oil and gas lease will assign the lease to another party. The value of oil and gas leases varies greatly. None of the parcels offered has been evaluated by the BLM for oil and gas potential prior to the competitive auction or to being made available for noncompetitive leasing. All of the lands included in noncompetitive leases have been offered at auction and received no bids.

Leases may be transferred by assignment or sublease. The transfer must be submitted to the BLM for approval within 90 days from the date of execution by the transferor. The rights of any transferee will not be recognized by the Government, and the transferor will remain responsible for the lease, until the transfer has been approved by the BLM. An assignment either of a separate zone or deposit or of part of a legal subdivision will not be approved. An assignment of less than 640 acres outside of Alaska or of less than 2,560 acres within Alaska will be approved by the BLM only if the assignment constitutes the entire lease or is demonstrated to further the development of oil and gas.

How A Lease Expires Or Terminates

Oil and gas leases expire at the end of their primary term - the 10th year - unless diligent drilling operations are in progress on or for the benefit of the lease; the lease contains a well capable of producing oil or gas in paying quantities; or the lease is receiving or is entitled to receive an allocation of production under the terms of an approved communitization agreement or unit agreement.

Leases without a producible well automatically terminate if the lessee fails to make full and timely payment of the annual rental. The rental must be received by the proper Federal office on or before the anniversary date of the lease. The automatic termination is specifically prescribed by law, is not the result of BLM action, and cannot be waived.

The owner of a lease also may surrender the lease in whole or in part by filing a written relinquishment with the proper BLM State Office having jurisdiction over the lands. A relinquishment takes effect on the date it is filed. However, the lessee must plug any abandoned well, perform other work as may be required by the BLM to place the leasehold in proper condition for abandonment, and bring his/her account into good standing. If the lessee fails to perform the necessary work, the lessee's bond will be used to do so, and the lessee will be prohibited from leasing any additional Federal lands.

A nonproducing lease may be canceled for failure to comply with lease terms.