Draft BLM Manual Section 3180 - Unitization (Exploratory)
BLM HANDBOOK H-3180-1 - UNITIZATION (EXPLORATORY)
NOTE TO USERS: The attached DRAFT BLM Handbook H-3180-1 is being issued as
INTERIM GUIDANCE for those involved in administration of the oil and gas units
program.
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H-3180-1 - UNITIZATION (EXPLORATORY)
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Table of Contents
Page
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. Guidelines and Procedures. . . . . . . . . . . . . . . . . . . . . . . 2
A. Procedures for Designation of Unit Area; Depth of Test Well. . . 2
1. Application Letter . . . . . . . . . . . . . . . . . . . . 2
2. Geologic Report. . . . . . . . . . . . . . . . . . . . . . 2
3. Land Ownership Map . . . . . . . . . . . . . . . . . . . . 3
4. Special Unit Provisions. . . . . . . . . . . . . . . . . . 3
5. Review of the Application. . . . . . . . . . . . . . . . . 3
B. Unit Area and Well Obligation. . . . . . . . . . . . . . . . . . 4
C. Approval of an Executed Unit Agreement . . . . . . . . . . . . . 5
D. Operating Rights . . . . . . . . . . . . . . . . . . . . . . . . 7
E. Exploratory Drilling Operations. . . . . . . . . . . . . . . . . 8
1. Diligent Drilling of a Unit Well . . . . . . . . . . . . . 8
2. Further Drilling and Development . . . . . . . . . . . . . 9
3. Multiple Test Well . . . . . . . . . . . . . . . . . . . . 9
4. Producible Wells Prior to Unitization. . . . . . . . . . . 9
F. Determining Production in Paying Quantities. . . . . . . . . . ..9
1. Paying Well Evaluations. . . . . . . . . . . . . . . . . .10
2. Non-Paying Well/Recompletion Evaluations . . . . . . . . .11
G. Establishment or Revision of Participating Areas . . . . . . . .12
1. Initial Participating Area . . . . . . . . . . . . . . . .12
2. Revision of Participating Area . . . . . . . . . . . . . .14
3. MMS Notification of Participating Area Approvals . . . . .16
H. Plan of Further Development and Operation. . . . . . . . . . . .17
1. Purpose. . . . . . . . . . . . . . . . . . . . . . . . . .17
2. Plan of Development. . . . . . . . . . . . . . . . . . . .17
3. Summary of Operations. . . . . . . . . . . . . . . . . . .18
I. Procedures for Expansion or Contraction of Unitized Areas. . . .18
1. Filing of the Request. . . . . . . . . . . . . . . . . . .19
2. Notification of Involved Parties . . . . . . . . . . . . .19
3. Request for Approval . . . . . . . . . . . . . . . . . . .19
4. Effective Date of Expansion or Contraction . . . . . . . .19
5. Submission of Exhibits and Joinders. . . . . . . . . . . .19
J. Suspensions. . . . . . . . . . . . . . . . . . . . . . . . . . .20
1. Unavoidable Delay. . . . . . . . . . . . . . . . . . . . .20
2. Suspension of Lease Terms. . . . . . . . . . . . . . . . .21
3. Suspension of Automatic Elimination Provisions of the
Unit Agreement . . . . . . . . . . . . . . . . . . . . . .21
K. Extensions of Time . . . . . . . . . . . . . . . . . . . . . . .22
L. Effect of Unit Agreement on Committed Lease Terms,
Lease Segregations and Lease Extensions. . . . . . . . . . . . .23
M. Unleased Federal Lands . . . . . . . . . . . . . . . . . . . . .25
N. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . .25
1. Automatic Termination. . . . . . . . . . . . . . . . . . .26
2. Voluntary Termination. . . . . . . . . . . . . . . . . . .27
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O. Amendment of Approved Unit Agreement . . . . . . . . . . . . . .27
P. Allocation of Production . . . . . . . . . . . . . . . . . . . .27
Q. Drainage - Compensatory Royalty. . . . . . . . . . . . . . . . .28
R. Treatment of Existing Wells. . . . . . . . . . . . . . . . . . .28
S. Reporting Format for Unit Wells. . . . . . . . . . . . . . . . .29
T. Unit Activity Report . . . . . . . . . . . . . . . . . . . . . .29
U. Lease Commitment Status. . . . . . . . . . . . . . . . . . . . .29
1. Fully Committed. . . . . . . . . . . . . . . . . . . . . .29
2. Effectively Committed. . . . . . . . . . . . . . . . . . .30
3. Partially Committed. . . . . . . . . . . . . . . . . . . .30
4. Not Committed. . . . . . . . . . . . . . . . . . . . . . .30
V. Designation of Agent . . . . . . . . . . . . . . . . . . . . . .30
W. Designation of Suboperator . . . . . . . . . . . . . . . . . . .31
X. Successor Unit Operator. . . . . . . . . . . . . . . . . . . . .31
Y. Bankrupt Unit Operator.. . . . . . . . . . . . . . . . . . . . .32
Z. Subsequent Joinder and Late Joinder. . . . . . . . . . . . . . .32
AA. Bond Requirements. . . . . . . . . . . . . . . . . . . . . . . .33
AB. Development or Operation of Nonparticipating Lands . . . . . . .34
AC. Non-Federal Form of Unit Agreement . . . . . . . . . . . . . . .34
AD. Indian Land. . . . . . . . . . . . . . . . . . . . . . . . . . .35
1. Special Provisions in Unit Agreement . . . . . . . . . . .35
2. Procedures for Unitization of Indian Lands . . . . . . . .36
AE. State Agencies . . . . . . . . . . . . . . . . . . . . . . . . .37
Illustrations
1. Form Letters and Notices Used in Units Administration
1-1. Unit Designation Letter
1-2A. Unit Approval Certification-Determination Page (Federal
Form Agreement)
1-2B. Unit Approval Certification-Determination Page (Non-
Federal Form Agreement)
1-2C. Unit Approval Letter
1-3. Non-Paying Well Determination Notice
1-4A. Initial Participating Area Approval Letter
1-4B. Participating Area Revision Approval Letter
1-5A. Request for Lands Automatically Eliminated From Unit
1-5B. Automatic Contraction Concurrence Letter
1-6A. Preliminary Approval for Unit Expansion Letter
1-6B. Final Approval for Unit Expansion Letter
1-7A. Automatic Unit Termination Notice for Cessation of
Production
1-7B. Automatic Unit Termination Notice for Failure to Meet
Drilling Requirements
1-7C. Voluntary Unit Termination Approval Letter
1-8A. Successor Operator Approval Letter
1-8B. Successor Operator Request Letter and Instrument
1-9A. Subsequent Joinder Approval Letter
1-9B. Late Joinder Approval Letter
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2. Guidelines and Suggested Formats for Operator Submissions
3. Numbering System for Approved Unit Agreements
4. Compensatory Royalty Provision in Unit Agreement for
Unleased Federal Lands
5. Communitization Agreements in Units
6. AIRS/MRO Reporting Format for Unit Wells
7. Guidelines for the Unit Activity Report
8. Sample Text for State Land Provisions in the Unit Agreement
Bibliography
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I. Introduction.
The objective of unitization is to proceed with a program that will
adequately and timely explore and develop all committed lands within the unit
area without regard to internal ownership boundaries. Exploratory units
normally embrace a prospective area that has been delineated on the basis of
geological and/or geophysical inference. Exploratory unit agreements normally
encompass all oil and gas interests in all formations within the unit area and
provide for the allocation of unitized production to the committed lands
reasonably proven to be productive of unitized substances in paying quantities
on the basis of the surface acreage included within the controlling
participating area. By effectively eliminating internal property boundaries
within the unit area, unitization permits the most efficient and cost-
effective means of developing the underlying oil and gas resources.
The BLM will approve the commitment of Federal lands to a unit agreement
in the interest of conserving the natural resources, when it is determined to
be necessary or advisable in the public interest. When such a determination
is made and Federal lands are committed to the unit, the authorized officer
has a responsibility to ensure that unit development proceeds in a way that
continues to serve the public interest, regardless of whether the Federal
lands comprise only a small fraction or a major part of the unit area.
The guidelines and procedures discussed in this Handbook apply generally
to all unit agreements involving Federally-supervised leases, but specifically
to those agreements that adopt the text of the form of agreement contained in
43 CFR 3186.1. While reference is made throughout this Handbook to specific
sections of the Federal form of unit agreement (43 CFR 3186.1), any such
reference should be understood as applying also to the equivalent provision in
a non-Federal form of agreement, if appropriate.
Section II of this Handbook discusses the general procedures to be
followed in administering oil and gas exploratory unit agreements. As an aid
to BLM personnel involved in units administration, the Handbook also provides,
in Illustration 1, a recommended format for the various notices and approvals
that are required during the life of a unit. Illustration 2 of the Handbook
provides general guidance and suggested formats for submissions required from
the unit operator. Further illustrations are included that provide
supplemental guidance for managing units information, for treating
communitized areas within units and for including special provisions in the
unit agreement.
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II. Guidelines and Procedures.
A. Procedures for Designation of Unit Area; Depth of Test Well.
When requesting designation of an area as logically subject to
development under a unit plan, an applicant must submit all required
information in duplicate to the authorized officer. An application for
designation of unit area should consist of an application letter accompanied
by a geologic report and land ownership map, as follows.
1. Application letter. In its request for designation, the applicant
must:
a. Accurately define the proposed unit area either by reference to
the accompanying map or by including a legal description of all lands in the
proposed unit area. The description should show lots and tracts, if any, and
the exact acreage thereof, including the total acreage in each section and the
entire unit area.
b. List in sequence (grouped by Land Office identities) the serial
numbers of all Federal leases and pending lease applications, Indian leases,
and the expiration date of each lease.
c. If geological and geophysical data and discussions are to be
confidential, the applicant should so state and clearly mark each page of such
documents as CONFIDENTIAL INFORMATION. The geologic report should be a
separate report supporting the application for designation of a unit area.
d. Cite the deepest formation that the proponent plans to test, the
projected depth that the initial test well(s) must reach to adequately test
that formation, and the number of initial wells to be required.
2. Geologic Report. The geologic report should include:
a. A map on the public land survey base showing the proposed unit
boundary and a detailed geologic map illustrating the limiting mechanism for
production of the objective formation, along with structural cross section(s)
and other geologic data as they relate to the proposed unit area. The
geologic map and the cross section(s) should show the strike and dip of all
pertinent faults. The map must show the location of all wells drilled in the
unit area and immediate vicinity thereof and should indicate the status and
depth of each well and the lowest formation penetrated.
b. Appropriate cross-sections and stratigraphic columns, identifying
prospectively productive formations and indicating expected depths.
c. Pertinent geophysical interpretations.
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d. The geologic basis for selecting the proposed unit area boundary,
such as closing structural or stratigraphic contour, fault, or pinch-out.
e. A brief discussion of the unit area, including (1) the location
of the prospect geographically and physiographically; (2) pertinent geologic
factors, including structure and stratigraphy, as they relate to the proposed
unit area; and (3) the location of existing wells with emphasis as to why the
prospect has not been evaluated by these tests.
f. The location of the initial test well, its proposed total depth,
projected formations to be tested, and a brief discussion of the rationale for
drilling the initial test well at the chosen location.
3. Land Ownership Map. The land ownership map, on a scale not less
than 1 inch to 1 mile, shall show:
a. The specified outline of the proposed unit area based on the
official public land survey, including the acreage and official number of each
lot, tract, and section, and total acreage of the unit area.
b. The boundary of each lease and unleased tract of land. Insofar
as possible, the lands should be identified with the same tract numbers that
will be used later in Exhibit B of the unit agreement.
c. By use of distinctive colors or symbols, the different types of
land, such as Federal, Indian, State, railroad, and other fee lands. Also
indicate different types of Federal lands, such as Forest Service, Fish and
Wildlife Service, and Indian allotted or tribal lands.
d. Working interest owners and lease numbers of Federal and Indian
leases and lease expiration dates.
4. Special Unit Provisions. Use of the model form of unit agreement
(43 CFR 3186.1) is encouraged. However, certain types of lands require the
inclusion in the unit agreement of special provisions, which must be approved
in advance unless recited in the designation letter. If any other deviations
from such form are deemed advisable, the proposed form, with Exhibits A and B,
or equivalents, attached to each copy and with all deviations from the model
form plainly marked and explained, must be submitted for approval by the
authorized officer.
5. Review of the Application. To ensure the adequacy of the
application, the authorized officer reviews the application for correctness
and acceptability as to format, unit area, initial well requirement(s), and
information presented in the geologic report. Individual Federal and Indian
leases are checked for expiration dates and for any special land stipulations
that should be included in the agreement. For unit agreements that contain
unleased right-of-way or other lands, additional steps should be taken to have
these lands leased prior to final approval of the unit.
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The proposed form of unit agreement is reviewed to determine if the
agreement language meets the needs of the specific case. The proposed
location of the initial unit well(s) should be reviewed and, if the location
is near the edge of the proposed area and it is not justified geologically,
the operator should be requested to select a more appropriate well site or to
consider revising the unit boundary.
Each application for designation submitted to the authorized officer for
approval must be accompanied by a report demonstrating that the proposed unit
outline is consistent with the geologic information submitted. Geologic
information should show that unitization is necessary and advisable in the
public interest.
Illustration 1-1 is a form letter recommended for use by the authorized
officer in notifying the applicant that the land identified in his application
has been designated a logical unit area.
B. Unit Area and Well Obligation
The general intent of unitization is to pool mineral interest ownership
in an entire geologic structure or area in order to provide for adequate
control of operations so that exploration, development, and production can
proceed in the most efficient and economical manner. It follows that a unit
area should encompass only those lands considered necessary for the proper
development of the unitized resources. An actual unit boundary may be
established by honoring structural, stratigraphic, or other limiting geologic
parameters. Administrative boundaries should not be used except in rare
circumstatunces such as an adjoining unit boundary. A unit area may extend
into designated Wilderness, Park System, Wildlife Refuge, or other protected
area. In that instance, the unit proponent should be made aware that
operations (surface or sub-surface) may be conducted within the protected area
only on lands that are leased and only if such operations are not precluded by
law, regulation, or by surface use restrictions imposed by the surface
management agency (SMA).
Historically, the ratio of one well per 25,000 acres has been used.
However, the authorized officer shall require the unit proponent to drill
sufficient number of wells to adequately test the trap or series of traps
identified in the geologic report and supporting maps. Contributing factors
would include the nature, extent and depth of the potential reservoir(s), and
pertinent information from any wells which have already been drilled in the
general area. If the unit agreement requires more than one obligation well,
then all obligation wells must be drilled to the formation/depth requirements
specified in the unit agreement in order to fulfill the public interest
requirement (43 CFR 3183.4[b]), unless the authorized officer determines that
the public interest requirement has been satisfied with the drilling of less
than the full multiple well commitment. Section 9(a) of the model form of
exploratory unit agreement (43 CFR 3186.1) contains substitute language that
should be used in agreements that incorporate a multiple well obligation.
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C. Approval of an Executed Unit Agreement.
When an executed unit agreement is received for approval, it is
processed as follows.
1. The application is reviewed for proper format, including the filing
of a sufficient number of copies. Unless specified otherwise in the
designation letter, a minimum of four signed counterparts are required.
2. The text of the executed agreement must be identical to that
approved in the designation letter. Any exceptions are noted and, if
significant, the application is returned unapproved for correction by the
applicant.
3. All tracts listed on Exhibit B (43 CFR 3186.1) are reviewed as to
proper arrangement, land description, and acreage. Lease numbers, expiration
dates, royalty rates, and lessees of record for all Federal and Indian leases
are verified from BLM and Bureau of Indian Affairs records. The subtotal of
acreage for each type of land and its percentage of the total unit area should
be shown.
4. The ratification and joinders submitted with the agreement are
checked against the lessees of record, basic royalty owners, and working
interest owners to determine the commitment status of each tract (see
paragraph II-U.) All lessees of record and working interest owners for each
Federal/Indian tract must submit a ratification and joinder before the tract
is considered fully committed. Since the basic royalty, lessee of record, and
working interest ownership in State and fee lands cannot be verified, joinders
by parties purported to own such interests are to be accepted as correct.
5. All signatures should be either witnessed or acknowledged before a
notary. Execution by a corporate officer should show that person's title and
carry proper attestation and the corporate seal. The commitment of overriding
royalty and production payment interests can be accomplished either by the
unit operator submitting a list of such owners which indicates those who have
executed the unit agreement, or by the filing of appropriate joinders. When
specific interests are held by different individuals or companies, each such
entity holding an interest should execute the agreement even where one company
may be wholly owned by another signatory party.
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6. To assure effective control over unit operations, generally at least
85 percent, on an acreage basis, of the lands within the unit area must be
fully, effectively, or partially committed to the unit agreement. Approval
may be granted with a lesser commitment when all or a substantial portion of
the noncommitted land is "fringe acreage", i.e., is located adjacent to the
outer boundary of the unit area or otherwise far removed from the site of the
initial unit well.
7. Every owner of an interest in the unit must be invited to join the
unit agreement. If any owner fails or refuses to join, evidence of reasonable
effort to obtain joinder should be submitted by the unit proponent, together
with a copy of each refusal giving the reasons for nonjoinder.
8. Two true copies of any unit operating agreement should accompany the
executed unit agreement.
9. Any lands in the unit area that are subject to an option agreement
should be identified in Exhibit B (43 CFR 3186.1), and the basic provisions of
the option should be described. In all cases, the person committing such
interest should exercise the option promptly after approval of the unit
agreement.
10. Fully and effectively committed Federal leases are subject to
segregation pursuant to 30 U.S.C. 226(m) and, where segregation is
appropriate, the lease is so noted on Exhibit B (43 CFR 3186.1). Horizontal
segregation is discouraged and should be avoided whenever possible.
Horizontal segregation normally can be averted if a statement is submitted by
the unit operator advising that it is not the intent of the signatory parties
to the unit agreement that horizontal segregation occur as a result of the
unitization (see Solicitor's Opinion M-36776, May 7, 1969.)
11. A Certification-Determination page (see Illustrations 1-2A and
1-2B for recommended format) and approval letter (Illustration 1-2C) are
prepared and signed by the authorized officer. Generally, if State, Indian,
and/or fee lands are involved, the unit agreement should be approved by the
appropriate State and Indian agency before the agreement is submitted for
approval by the authorized officer. However, where a majority of acreage
within the proposed unit is Federal, and where sufficient acreage has been
committed to assure effective control, the authorized officer may approve the
agreement prior to its approval by the appropriate State or Indian Agency. In
all cases, the State or Indian Agency should be notified of the proposed
unitization and be given the opportunity to commit its lands prior to
authorized officer approval. Unit agreements that contain only Indian lands
are not approved by the authorized officer. For such units, a memorandum
giving the reviewing officer's recommendations, with the unit instruments
filed for review, are transmitted to the appropriate BIA office for final
approval.
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12. Upon approval, the unit is assigned a Case Recordation System (CRS)
number (see Illustration 3) and entered into the CRS.
13. One complete copy of the unit agreement, unit operating agreement,
designation, approval, and associated papers is retained in the office of
record. Where the authorized officer is a State Office official, one copy of
such documents is transmitted to the appropriate District Office.
14. The effective date of a unit is not negotiable, and a retroactive
date may not be used even if justification is submitted by the proponent. A
unit agreement will be effective as of the date of the authorized officer's
approval signature. However, for non-Federal form units that are not
designated by the authorized officer, the effective date will be that date
specified in the agreement.
15. While it is desirable to have the owners of Federal overriding
royalty interest (ORRI) join in the unit, approval will not be denied if they
do not join. Private basic royalty owners must execute joinders to the unit
agreement unless the lease specifically authorizes the lessee to commit their
basic royalty interest to a unit agreement.
D. Operating Rights
Certain unit approvals (e.g., final unit agreement approval, successor
operators, subsequent joinders, etc.) depend on the consent of a sufficient
percentage of working interest owners. Since BLM does not verify present
working interest ownership, the most current Exhibit "B" must be accepted as
the unit operator's self-certification of ownership. If the actual working
interest ownership does not correspond with necessary consent or executed
instruments submitted with the approval request, then an updated Exhibit B
must be submitted by the unit operator. Any approval letter related to
working interest ownership, such as for the approvals noted above, must
contain the following, or similar, disclaimer:
"In accepting/approving this (unit agreement, designation,
etc.) the authorized officer neither warrants nor
certifies that the (unit operator, designated party, etc.)
has obtained all required approvals that would entitle it
to conduct operations or otherwise exercise its rights
under terms of the _____________________ Unit Agreement."
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E. Exploratory Drilling Operations.
Section 9 of the model form of unit agreement for unproven areas
(43 CFR 3186.1) contains the initial test well requirements for the unit.
Generally, this section requires the unit operator to commence an adequate
test well within 6 months of the effective date of the unit agreement and to
diligently drill such well to completion; to continue drilling one well at a
time, allowing not more than 6 months between the completion of one such well
and the commencement of the next such well; and to pursue such operations
until a well capable of producing unitized substances in paying quantities is
completed. Production in paying quantities is defined in the model agreement
as "quantities sufficient to repay the costs of drilling, completing, and
producing operations with a reasonable profit . . . ." A well that is
commenced prior to the effective date of the unit agreement may satisfy the
initial test well requirements if it is being drilled conformably with the
terms of the agreement on the effective date, i.e., the well can not have
penetrated the objective horizon specified in Section 9 (43 CFR 3186.1) prior
to the effective date of unitization (also, see paragraph R.)
1. Drilling to Discovery - Initial Test Well. In order for a well to
be considered as fulfilling the initial test well requirements under the unit
agreement, the well must be drilled diligently and meet one of the following
criteria:
a. Test the formation specified in Section 9 (43 CFR 3186.1).
b. Reach the depth requirement specified in Section 9.
c. Discover unitized substances which can be produced in paying
quantities at a lesser depth than the formation or depth requirement specified
in Section 9.
d. Establish to the satisfaction of the authorized officer that
further drilling of the well would be unwarranted or impracticable.
When a well satisfies the requirements of Section 9 (i.e., satisfies the
PIR under 43 CFR 3183.4[b]), then all committed unit leases would qualify for
extension by drilling. If a well fails to satisfy the Section 9 requirement,
yet was drilled diligently, then only the lease on which the well was drilled
would qualify for extension by drilling. The standard for diligent drilling
operations is that set out in 43 CFR 3107.1.
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2. Further Drilling and Development. The initial participating area
under an exploratory unit agreement is established by the completion of the
first unit well capable of producing unitized substances in paying quantities
(as defined in 43 CFR 3186.1, Section 9). After such discovery, further
drilling or development is to take place under an approved plan of development
(see paragraph II-H), except as may be necessary to protect the unit area from
drainage. The drilling to discovery provisions in Section 9 of the model form
permit the authorized officer to modify the drilling requirements by granting
reasonable extensions of time when, in his opinion, such action is warranted
(see paragraph II-K).
3. Multiple Test Well. When the unit agreement incorporates a multiple
well requirement, the operator is obligated to drill all required wells.
Failure to commence drilling all required wells beyond the first obligation
well, and to drill them diligently, may result in the unit agreement approval
being declared invalid ab initio by the authorized officer.
4. Producible Wells Prior to Unitization. Where producible wells exist
in the unit area prior to unitization, Section 11 (Participation After
Discovery) of the model form of unit agreement should be modified to provide
that wells completed prior to the effective date of the unit agreement will
not be recognized as unit wells until after an initial participating area is
established based on the completion of a unit well capable of producing
unitized substances in paying quantities as defined in Section 9 of the model
unit agreement (see also paragraph II-R).
F. Determining Production of Unitized Substances in Paying Quantities.
The term "paying quantities" is defined in the model form of unit
agreement as "quantities sufficient to repay the costs of drilling,
completing, and producing operations with a reasonable profit . . ." The cost
of producing operations is defined as "the cost of maintaining the lease and
producing the wells, including the cost of marketing the products." The
phrase "cost of marketing the products" is further defined as "the normal or
usual handling, treating, measurement, and transportation costs which a
responsible lessee could be expected to pay to market his leasehold
production. Such costs would not include abnormal or extraordinary charges,
such as construction of a lengthy pipeline." This definition of the cost of
producing operations, with the criteria applied to such definition, is also
applicable to unit operations. However, the definition of paying quantities
for unit purposes also includes the burden of return of drilling and
completing costs. Generally, the drilling and completion costs to be
considered will be the actual costs involved; however, consideration should
also be given to those reasonable costs which a responsible operator could be
expected to incur while drilling and completing the well in question.
Extraordinary costs, such as drill string failure, extensive coring and
testing programs, loss of well control, etc., normally should not be allowed.
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Generally, no more than 12 months of well production data should be
required to conduct a paying well analysis. On rare occasions, if additional
well production data beyond 12 months is necessary to conduct a paying well
analysis, a letter to the unit operator should be sent outlining the
reason(s). However, the requirement that additional wells be drilled with no
more than 6 months between wells shall continue in effect during any such test
period unless extensions are granted by the authorized officer.
1. Paying Well Evaluations. To evaluate a "paying well" determination
(PWD), a reserve-economic analysis showing a well's discounted pay-out and the
estimated ultimate recovery to be realized usually is required. To retain
quality and consistency in performing a paying well analysis, the use and
application of various economic input parameters should be uniform. At the
time of the paying well determination, the current market or contract price
should be used as the current product price. If the well has produced for a
period of time prior to the paying well determination, then the actual product
price should be used for that period of time. If no contract price for gas is
available, then the highest current gas price being paid for a majority of
like quality gas in the area or field should be used.
Since product prices and field operating costs will likely not remain
constant with time, reasonable projections of these economic variables should
be used in unit PWDs. For consistency in these analyses, a reliable and
readily available source of forecasting data is desirable. The Energy
Information Administration (EIA) in the U.S. Department of Energy is such a
source for oil and gas price forecasting, and publishes periodic reports, such
as their Annual Energy Outlook and Short-Term Energy Outlook, which contain
this information. These oil and gas price forecasts are normally developed
for a range of market assumptions. The product price forecasts developed by
EIA for the medium or base case scenario should be used in unit PWDs. Price
forecasts should be used for all future years to be analyzed. However, since
these forecasts are generally not reported for all future years, interpolating
price inputs for intervening years may be necessary. In addition, since oil
price forecasts are generally made for the world oil price, it may be
necessary to make price adjustments that reflect quality and market
differences between the forecasted product and the resource being analyzed. A
reasonable estimate of future operating costs can be deduced from the Producer
Price Index, published monthly by the Bureau of Labor Statistics, U.S.
Department of Labor.
2-16
H-3180-1 - UNITIZATION (EXPLORATORY)
Additional consistency in unit paying well determinations is achieved
through adoption of a standard discount factor for use in the economic
analysis. Normally, in evaluating the economics of a proposal through
discounted cash flow (DCF) analysis, a certain level of risk is assumed. This
degree of presumed risk is reflected in the discount rate selected for use in
the analysis. Since the well being evaluated in a PWD has already been
drilled and been shown to be producible, the risk of failure has been reduced
considerably. For consistency, the risk component of the discount rate used
in BLM's paying well determinations is assumed to be zero. Under that
assumption, an acceptable proxy for the discount rate used in a unit PWD would
be the yield on United States Government intermediate-term (10-year) bonds, an
essentially risk free investment that captures both inflation expectations and
the time value of money. The average yield (rounded up to the next whole
percent) on intermediate-term Government bonds, as reported in national
financial publications and many major newspapers, should be used as the
discount factor in the economic evaluation for a unit PWD. The discount rate
would continue unchanged for the life of the estimated ultimate recoverable
reserve projection. The use of a conservative discount rate favors the
operator's well in qualifying as a unit paying well and ultimately furthers
the resource conservation objectives of unitization.
The DCF analysis starts at the time the well is completed using actual
or projected production. There is no set limit on the number of years for a
well to payout. However, if payout is longer than 10 years, the economic
assumptions used in the paying well analysis should be reexamined. The use of
the windfall profits tax (repealed in 1988) should not be considered in the
paying well analysis. If such a tax is enacted in the future, however, it
would then be utilized in the analysis.
State Offices are responsible for assuring that adequate source
information for product price/operating cost forecasting and Government Bond
yields is available to offices responsible for conducting unit PWDs.
2. Non-Paying Well/Recompletion Evaluations. The drilling and
completion costs to be used in the economic analysis for a paying well
determination for a recompleted or reentered well should be the typical cost
of drilling and/or completing the same well at the time of recompletion or
reentry. The economic factors and the total remaining reserves at the time of
recompletion or reentry should be utilized. Each producing horizon in a
completed well should be evaluated separately. If a workover is performed in
the current horizon (e.g. additional perforations, frac job, etc.) then the
following guidelines for a non-paying well reevaluation would apply.
2-17 12
H-3180-1 - UNITIZATION (EXPLORATORY)
Wells initially determined to be non-paying normally should not be
considered for reevaluation. However, if there is a significant change in
conditions (such as a sustained increase in product price or significant
increase of monthly production) a non-paying well may be considered for
reevaluation. A non-paying well may be reconsidered upon request by the unit
operator, or may be initiated by the authorized officer if it is believed it
would serve the public interest. When reevaluating a well previously
determined to be a non-paying well, the following economic factors should be
applied, as of the effective date the well potentially becomes paying: (1)
typical cost of drilling and/or completing the same well, (2) remaining
reserves, and (3) the applicable economic parameters. The historical data
prior to the effective date should not be considered in the reevaluation. The
effective date of any revision of a participating area caused by the
reevaluation of a non-paying well should be the first of the month on which
the changing condition occurred regardless of when the request for
reevaluation is received from the unit operator or when initiated by the
authorized officer. For wells completed before a unit was formed, the same
economic factors would apply. Illustration 1-3 may be used in notifying the
operator that a unit well has been determined to be a non-paying well, as
defined in Section 9 of the unit agreement.
G. Establishment or Revision of Participating Areas.
After the first unit well capable of producing unitized substances in
paying quantities is completed, a participating area is established in
accordance with Section 11, "Participation After Discovery", of the unit
agreement (43 CFR 3186.1).
1. Initial Participating Area. The land that is to be included in a
participating area is that land reasonably proven capable of producing
unitized substances in paying quantities or, if so provided in the unit
agreement, that land necessary for unit operations (most older units, i.e.,
prior to 1968, do not provide for such additional lands). In the event that
State spacing orders are still applicable to lands in the unit area, spacing
should be accepted in determining the participating area, unless the
authorized officer determines that it is not in the public interest.
Accordingly, participating areas should include the acreage within the spacing
unit established for every well that is included in the participating area.
Additional acreage is also included where the available information indicates
that such lands reasonably are proven to be capable of producing unitized
substances in paying quantities. The establishment of the initial
participating area causes the unit to convert to a producing status, and all
subsequent unit wells and operations are to be conducted under an approved
plan of operations. The effective date of the initial participating area
usually is the date the "discovery" well was completed, i.e., the date the
well was determined to be physically capable of producing unitized substances
in paying quantities. Illustration 2-2 presents a suggested format for use by
the unit operator in requesting approval of an initial participating area.
Illustration 1-4A is a form letter advising the unit operator that the initial
participating area has been approved.
2-18
H-3180-1 - UNITIZATION (EXPLORATORY)
If an application to establish an initial participating area has not
been filed within 3 months after completion of a unit well, the authorized
officer should contact the unit operator and follow up, as needed, until the
necessary actions are completed.
An application for the authorized officer's concurrence that a well is
not capable of producing unitized substances in paying quantities should be
submitted for every nonpaying unit well by the unit operator. Every unit well
completed for production should either be included in a participating area or
determined to be a non-paying well as soon as possible after completion.
A recommended method for establishing the initial participating area for
an exploratory unit should incorporate basic engineering and geologic
principles. The following equation can be used as a basis for determining the
size of the participating area:
Np = N x Er
Where Np is recoverable reserves, N is the original hydrocarbons in
place and Er is the recovery factor.
Recoverable reserves can be calculated by using decline curve analysis
based on the available production history. If gas reserves are involved, a
graph of P/Z versus cumulative production can be used where there is available
pressure and temperature data. An economic limit or cut-off point will also
need to be established when determining recoverable reserves. A substantial
amount of the calculation was probably accomplished while making the paying
well determination. If available, modeling can be used to determine
recoverable reserves.
A recovery factor can be determined by empirical correlation or through
field experience given a specific reservoir. The reservoir drive mechanism(s)
may have to be determined and used in estimating the recovery factor.
Once the recovery factor and recoverable reserves are determined, the
original hydrocarbons in place can be calculated. Using the volumetric
equation for oil or gas, the area necessary for the participating area can be
determined. Values for porosity, net pay thickness, water saturation, and
formation volume factor can and should be obtained from independent log and
reservoir analysis. If the area calculated compares favorably with what the
unit operator files for approval and the configuration is reasonable, the
application can be approved.
2-19 14
H-3180-1 - UNITIZATION (EXPLORATORY)
The actual configuration of the participating area should be consistent
with available geologic data. Since this configuration logically may be
something other than circular, detailed geologic mapping may be necessary if
adequate data exists. Radial drainage should be assumed when insufficient
data exists and when not contradicted by available information. Since
participating areas are based on subdivisions of the public land survey or
aliquot parts thereof, any subdivision cut 50 percent or more by the outer
boundary of the participating area configuration should be included in the
participating area.
The following table based on participating area size can be used as a
guideline to determine what subdivision should be considered for inclusion in
the participating area.
ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ¿
³ Participating Area Size-Acres ³ Subdivision Acres ³
ÃÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ´
³ Greater than or equal to 320 ³ 40 ³
³ Less than 320 ³ 10 ³
³ ³ ³
ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÁÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÙ
Smaller divisions of less than 10 acres can be considered when sizing
participating areas as well as cases involving metes and bound surveys. These
situations should be evaluated on a case-by-case basis.
The above method may not be appropriate in all circumstances and the
authorized officer should use discretion in determining the configuration of
the participating area.
2. Revision of Participating Area. A participating area will be
revised in accordance with Section 11 of the unit agreement (43 CFR 3186.1),
when additional paying wells are completed in the formation for which the
participating area has been established. When a revision brings in additional
lands, such lands will be contiguous to the existing participating area.
Although the additional geologic and engineering information obtained from the
completion of each new paying well is used, the amount of acreage that is
brought into the participating area by a revision is dependent on the same
criteria used in determining the initial participating area. Similarly, land
previously included in a participating area that is proven by the subsequent
completion of a dry hole to be incapable of producing unitized substances in
paying quantities should be eliminated from the participating area. The
completion of a well not capable of producing unitized substances in paying
quantities also may be grounds for eliminating acreage if there is no reason
to believe that drainage of the lands in question has occurred from other unit
wells. Since it is virtually impossible to delineate the exact limits of
production in paying quantities, any doubts as to whether or not a tract
should be placed in a participating area should be resolved against
participation, since a participating area can be enlarged more easily than it
can be reduced.
2-20
H-3180-1 - UNITIZATION (EXPLORATORY)
A request for the authorized officer's approval for the establishment or
revision of a participating area should be accompanied by comprehensive
engineering and geologic data that support and justify the unit operator's
proposed definition or redefinition of lands entitled to be in the
participating area. This information should include the status of all wells,
current rates of production, and cumulative volumes of oil and gas production.
Illustrations 2-3 and 1-4B are suggested formats for the application for and
approval of a revision to a participating area.
Separate participating areas should be established for each separate
productive reservoir, pool, formation, or zone covered by a unit agreement.
Separate participating areas should be established for the same producing
horizon when there is uncertainty as to whether the production is continuous
between the two areas. However, separate participating areas should be
combined into one contiguous participating area if subsequent information
shows them to be producing from a common reservoir. Lands may not be
eliminated from a participating area because of the depletion of unitized
substances. However, such lands may be eliminated when reasonable proven to
be nonproductive of unitized substances in paying quantities.
Lands not reasonably proven to be productive of unitized substances, but
which are shown to be necessary for unit operations, may be taken into
a participating area if such inclusion is provided for under terms of the unit
agreement. The phrase, "lands necessary for unit operations" is construed to
mean that the operations thereon would result in improved recovery of unitized
substances (see Champlin Petroleum Co., 100 IBLA 157, decided December 3,
1987.) Lands on which unit operations provide only an indirect benefit to the
participating area such as those that contain water disposal wells, water
supply wells, or product treatment equipment, should not be included in the
participating area. Any request for the inclusion of nonproductive lands
considered necessary for unit operations into a participating area shall
present a rational basis for such inclusion.
When it becomes necessary to revise a participating area by inclusion of
acreage to be determined necessary for unit operations, a detailed geologic
and engineering report will be necessary for justification of additional
acreage. The probability exists that nonproductive acreage will be included
in the participating area; hence, a rational basis should be used when adding
additional acreage. This may include a negotiated agreement between working
interest owners, and the unit operators with the acceptance of the authorized
officer on what acreage should be included. Another consideration would be to
analyze the reservoir area affected receiving the benefit of injection. In an
exploratory unit surface acreage will be used for expanding the participating
area.
2-21 16
H-3180-1 - UNITIZATION (EXPLORATORY)
The effective date for revision of a participating area is normally the
first of the month in which the information upon which the revision is based
is obtained, but a more appropriate date may be used when justified (older
units may specify a different effective date). After a discovery has been
made, the authorized office shall not approve an application for permit to
drill or to perform other operations (except routine operations such as
stimulation, well repair, etc.) under a unit unless the proposed operations
were included in the currently approved plan of development (see paragraph H
below), except where protective drilling is required.
State spacing may be used as a guide in determining the acreage to be
included in participating areas, unless the authorized officer determines that
such spacing is not in the public interest. Accordingly, participating areas
should include the drilling and spacing unit established for every well
included in the participating area. Additional acreage may also be included
if the lands meet the requirements of Section 11 of the model unit agreement.
3. MMS Notification of Participating Area Approvals. All BLM approvals
of Federal/Indian initial or revised participating areas will contain the
following notice from MMS notifying the unit operator to inform payers to make
adjustments to royalty payments within 90 days after a participating area has
been approved:
IMPORTANT NOTICE FROM THE MINERALS MANAGEMENT SERVICE
If this well(s) is producing, this approval
requires the submission of a Payor
Information Form MMS-4025 to the Minerals
Management Service (MMS) within 30 days (30
CFR 210.51). Please notify the designated
payor or payors (purchasers, working
interest owners, or others) as soon as
possible regarding this requirement. Any
production royalties that are due must be
reported and paid within 90 days of the
Bureau of Land Management's approval date
or the payors will be assessed interest for
late payment under the Federal Oil and Gas
Royalty Management Act of 1982 (See 30 CFR
218.54.) If you need assistance or
clarification, please contact the Minerals
Management Service at 1-800-525-9167 or
303-231-3504.
2-22
H-3180-1 - UNITIZATION (EXPLORATORY)
H. Plan of Further Development and Operation.
1. Purpose. The main purpose of a plan of development and operation is
to provide for the progressive exploration and development of the unit area in
an orderly and timely manner until such time as the productive limits of each
participating area have been defined as fully as practicable. Generally,
plans of development and operation should be designed to ensure that the
exploration and development drilling needed to delineate the unitized land
capable of producing unitized substance in paying quantities will be
accomplished as early as 5 years from the effective date of the initial
participating area, and certainly within 10 years from such date. Until the
limits of paying production in each participating area have been determined,
the number of proposed exploratory wells should approximate the number of
proposed development wells. However, the authorized officer should exercise
reasonable judgment in determining this ratio.
2. Plan of Development. Section 10 of the model form of unit agreement
(43 CFR 3186.1) requires that a plan of development and operation be filed for
approval within 6 months after the effective date of the initial participating
area (see paragraph II-G1.) This plan should describe all anticipated unit
operations for the next 6 to 12 months, including the drilling, completing,
conversion, and producing of unit wells, and other surface disturbing
operations, and may be supplemented as necessary. Prior to the expiration of
the initial or any subsequent plan of development and operation, a new plan
covering the next period (the following calendar year) should be submitted on
a calendar year basis not later than March 1 of each year, for the authorized
officer's approval. Any proposed modification or addition to the existing
plan should be filed as a supplement to the plan. Plans of development and
operation should be approved with a notation that the authorized officer's
approval of specific operations must be obtained prior to commencement of such
operations.
A plan of development should describe the exploratory and development
drilling operations and other related operations proposed to be performed
within the unit during the coming year and should be revised or supplemented
as necessary. Generally, all work that would change a well's producing
formation or status, or operations that would require the prior approval of
the authorized officer (such as drill deeper, plug back, abandonment, or
conversion to an injection well), should be included in the plan of
development. Routine stimulation and workover operations need not be covered
by a plan of development as long as the resulting producing interval of the
well remains within the productive limits of the participating area for the
well. Each annual plan must provide for additional exploration and/or
development drilling necessary to fully delineate the productive limits within
the unit area, or must fully justify the lack of such drilling during the
period covered by the plan. Since all proposed wells must be included under
an approved plan of development once the initial participating area is
established, subsequent unit operations should not be approved by the
authorized officer if these operations were not included in the latest
approved plan, unless drilling is necessary to protect the unit from
drainage. 2-23 18
H-3180-1 - UNITIZATION (EXPLORATORY)
When the annual plan of development and operation is reviewed, the
authorized officer shall determine whether the exploration and development of
the unit, in accordance with good oil field practice, requires the drilling
and/or producing of additional wells or the commencement of pressure
maintenance or enhanced recovery operations. If further exploration of unit
lands outside the participating area(s) is believed necessary, the authorized
officer may approve the plan of development, subject to the condition that
additional exploratory drilling operations will be required and that a
supplemental plan covering such operations must be submitted for approval.
The operator may also be requested to submit a new plan which provides for
such additional exploratory drilling operations.
Upon approval, one approved copy of the plan of development will be
returned to the unit operator; the original will be retained by the approving
office; and, if the authorized officer is a State Office official, one copy
will be sent to the appropriate District Office.
3. Summary of Operations. Section 10 of the model form of unit
agreement (43 CFR 3186.1) requires that a summary of operations be included
with the annual plan of development. Such summary should include complete up-
to-date maps showing the latest structural and geologic interpretations; all
participating area boundaries; a field map showing all wells, flow-lines, and
roads; status of all wells; and a summary of all operations conducted during
the past year. Any proprietary geologic information should be submitted as a
separate report and should be clearly marked by the unit operator on each page
as CONFIDENTIAL INFORMATION. Performance graphs covering the productive life
of each horizon or reservoir for which a participating area has been
established should also be included. The operations summary should be
reviewed by the authorized officer to determine that all well completion and
production data agree with the data contained in the authorized officer's
records.
When additional unit drilling operations are no longer necessary because
the area has been fully developed, the authorized officer may require an
annual summary of operations to be submitted in lieu of the annual plan of
further development and operations. All annual plans and/or summaries should
be submitted in triplicate. A plan of development or summary of operations
may be requested but not required for a non-Federal form of unit agreement,
since BLM supervision is maintained only over Federal and Indian leases in
such units.
I. Procedures for Expansion or Contraction of Unitized Areas.
Applications for the expansion or contraction of a unit area should be
filed with the authorized officer in accordance with the following procedures.
2-24
H-3180-1 - UNITIZATION (EXPLORATORY)
1. Filing of the Request. The unit operator shall file two copies of
the request with the authorized officer. The request should describe the
contemplated changes in the boundary of the unit area, the reasons therefor,
and the proposed effective date. Any geologic report justifying the proposed
expansion or contraction should be similar to the one that accompanied the
application for designation of unit area as logically subject to unitization.
2. Notification of Involved Parties. After the authorized officer has
given preliminary concurrence to the request, the unit operator should send
out notices of the.proposed change of unit area to each working interest
owner, lessee, lessor, and State or Federal agency whose interests are
affected, advising that 30 days will be allowed for submission to the unit
operator of any objections. A copy of the notice should be submitted to the
authorized officer. The date on which the expansion or contraction is to be
effective should be specified in the notice. Normally, the effective date
should be either the first of the month following approval by the authorized
officer, or the first of the month following expiration of the 30-day period.
A plat clearly showing the current area and the area to be added and/or
deleted should be included with the notice.
3. Request for Approval. After the expiration of the required 30 days,
an application should be filed in quadruplicate with the authorized officer
requesting final approval of the proposed action. The application should
include a statement that all principals were provided proper notice, with a
copy of any objections that were received by the unit operator. The
application should also contain a copy of the notice indicating the proposed
effective date.
4. Effective Date of Expansion or Contraction. After due consideration
of all pertinent information, the expansion or contraction shall, upon
approval by the authorized officer, become effective as of the date prescribed
in the notice. The authorized officer should notify the personnel responsible
for realty actions of the contraction or expansion so that appropriate action
can be taken.
5. Submission of Exhibits and Joinders. Revised Exhibits A and B
(43 CFR 3186.1) should be submitted concurrently with or shortly after
approval for contractions, but always concurrently for expansions so that the
commitment status of new unit tracts can be established. Tract numbers of the
new tracts included in the unit area by an expansion should follow the
original tract numbers on Exhibits A and B in proper sequence. Tracts that
existed prior to the expansion should not be renumbered. For effective
commitment of new tracts, in the case of expansions, current signatory parties
to the unit agreement who also own interests in the expanded area, and new
parties, must submit joinders to the unit agreement and, if a working interest
owner, a joinder to the unit operating agreement.
2-25 20
H-3180-1 - UNITIZATION (EXPLORATORY)
Section 2(e) of the model form of unit agreement provides for the
automatic elimination of lands not entitled to be in a participating area at
the end of the initial or extended unit term, if diligent drilling operations
are not underway on such nonparticipating lands. Within 90 days of any such
automatic elimination of lands, the unit operator must describe to the
satisfaction of the authorized officer, all eliminated lands and must also
promptly notify all parties in interest. Illustration 1-5A is a suggested
format for the authorized officer to request a description of lands
automatically eliminated under Section 2(e); while Illustration 1-5B may be
used for authorized officer concurrence in the operator's land description.
Illustrations 1-6A and 1-6B are suggested formats for the authorized
officer's preliminary and final approval for a unit expansion.
J. Suspensions.
1. Unavoidable Delay. There are three general circumstances that may
qualify as unavoidable delay. The three are: (1) when actions by the BLM (or
other surface management agency) taken in the interest of conservation
prohibit the unit operator from beneficially using the unit area; (2) when
events beyond the control of the operator prevent operations in the unit area
(force majeure); and (3) when there is a lack of product market due to remote
location or, in certain cases, a lack of sufficient demand.
Under Section 25 of the model unit agreement (43 CFR 3186.1), a
suspension of the unit operator's drilling obligations for the initial
obligation well, multiple obligation wells, and wells required to be drilled
under Section 2(e) of the model agreement must be granted when events beyond
the operator's reasonable control result in unavoidable delays that prevent
the operator from complying with such obligations. Subsequent test well
requirements under Section 9 (Drilling to Discovery) may also be suspended for
unavoidable delay under Section 25; however, more commonly, the operator will
request an extension of time under Section 9 if additional time is required to
commence drilling the well. If obligatory drilling has not commenced,
temporary relief of drilling obligations may be granted for a period generally
not to exceed 6 months, upon receipt of a statement from the unit operator
that it has been unable to obtain the necessary rig, casing, or associated
equipment, or that adverse weather or other conditions beyond its control
prevent commencement or continuance of operations. No unit obligation that is
suspended under this section shall become due less than 30 days after such
suspension is terminated.
Where a product market is available but the operator wants more for the
oil and gas than a purchaser will offer, a suspension should not be granted
unless the AO determines that the price offered is significantly less than
what that purchaser and other purchasers are offering for like quality oil and
gas in the area. Compelling the operator to sell at such an artificially
depressed price would not be in the public interest since the royalty value to
the Government would be similarly depressed.
2-26
H-3180-1 - UNITIZATION (EXPLORATORY)
Suspensions under Section 25 apply only to unit requirements and will
not serve to extend leases that otherwise would expire. However, if actual
drilling operations had commenced and were being diligently conducted when the
above referenced problem arose, similar relief could be granted that would
serve to hold expiring leases until operations resume or the relief period
otherwise is terminated.
2. Suspension of Lease Terms. Pursuant to 43 CFR 3103.4-2(f), the
authorized officer may grant a suspension of operations and/or production for
any or all leases effectively or fully committed to the unit agreement due to
existing circumstances that prohibit the unit operator from drilling and/or
producing on unitized land. If suspension of the terms of the Federal leases
is desired, the unit operator, on behalf of the lessees, must submit an
application requesting such suspension of operations and/or production and
indicating whether the suspension is being requested for all or only some of
the committed leases. Circumstances that warrant suspension approval must be
deemed to be beyond the control of the unit operator, despite the operator's
exercise of due diligence.
If a suspension of production and/or operations is granted for a lease
in a unit and the unit is subsequently declared invalid, the suspension is
valid for the period prior to the unit being declared invalid. This would be
true even if the application for suspension was executed only by the unit
operator and not by the working interest owners. When a unit that is
benefitting from a suspension of production and/or operations is declared
invalid, working interest owners must be notified that the suspension will be
terminated as of the date the unit is declared invalid, unless sufficient
justification for continuation of the suspension is provided. The working
interest owners should be given a reasonable period of time to submit this
justification.
Manual 3160-10, Suspension of Operations and/or Production, provides
additional guidance on the various types of lease suspensions.
3. Suspension of Automatic Elimination Provisions of the Unit
Agreement. A suspension of the automatic elimination provisions of Section
2(e) may be granted, if justified, due to unavoidable delay. In order to
receive this relief, the unit operator must obtain consent from the owners of
90 percent of the working interest and 60 percent of the basic royalty
interest (exclusive of the basic royalty interests of the United States) in
the current nonparticipating lands.
2-27 22
H-3180-1 - UNITIZATION (EXPLORATORY)
A request for this type of suspension may be submitted at any time after
the establishment of an initial participating area, but prior to the effective
date of the automatic elimination of lands not entitled to participation. If
the suspension is approved, it would be effective the first of the month in
which the request is received. This type of suspension is normally granted
for not more than a two-year period, but may be extended thereafter, subject
to an annual review as to whether continuation is warranted. The authorized
officer may terminate the suspension at any time it is decided that
circumstances warranting the suspension have been resolved. The operator
should be provided notice of termination and granted a minimum of sixty days
in which to resume unit operations, in order to forestall automatic
elimination.
A suspension of the automatic elimination provision serves to extend the
initial or second five-year development term for the period of time covered by
the suspension. Note that if suspension of the automatic elimination
provision is granted during the initial five-year development term of the
unit, the operator will likely have additional time to resume drilling to
forestall automatic elimination. This time period would be equivalent to the
amount of time remaining in the first five-year term at the time the
suspension was granted. Of course, if diligent drilling operations are
commenced timely in accordance with Section 2(e) after a suspension is
terminated, then the automatic elimination date would be further extended by
the terms of the unit agreement.
Suspension of the Section 2(e) automatic contraction provision would not
serve to suspend the operating and producing requirements of any leases
committed to the unit agreement, and committed Federal lessees would need to
continue making minimum royalty and advanced rental payments during the term
of suspension. However, suspension of the automatic contraction date would
serve to extend the life of a committed lease since such leases are held by
unit production during the period of the suspension.
K. Extensions of Time.
There are certain provisions in the model unit agreement (43 CFR 3186.1)
under which the automatic elimination date (Section 2(e)), the time within
which to fulfill certain drilling requirements (Section 9), and the fixed term
of the unit agreement (Section 20) may be extended.
Under Section 2(e) of the model agreement, the automatic exclusion of
nonparticipating acreage at the end of the initial five-year unit term may be
postponed and an additional five years in the unit term may be obtained if
diligent drilling is occurring and pursued on nonparticipating unitized lands
within the timeframes stated in the agreement. Section 2(e) allows the
authorized officer to approve a further, two-year waiver of the automatic
elimination provision, upon consent of the owners of 90 percent of the working
interests and 60 percent of the basic royalty interests (exclusive of the
basic royalty interests of the United States) in the nonparticipating unitized
lands.
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H-3180-1 - UNITIZATION (EXPLORATORY)
Section 9 of the model unit agreement details the unit operator's
drilling requirements and provides for automatic termination of the agreement
if these requirements are not satisfied. Except for unit obligation wells,
this section of the agreement gives the authorized officer the authority and
discretion to grant reasonable extensions of time to meet these requirements.
Such an extension (if approved prior to expiration of the initial term of the
unit) is granted for a period normally not to exceed 6 months, unless a longer
period is deemed justifiable by the authorized officer.
Section 20 of the model agreement provides for extension of the initial
five-year unit term upon request of the unit operator and approval of the
authorized officer, or upon the discovery of unitized substances in paying
quantities on unitized lands. Such a discovery serves to extend the effective
term of the unit agreement for so long as unitized substances can be produced
in quantities sufficient to pay production costs.
Extensions granted for meeting unit drilling requirements do not toll
the running of lease terms. Thus, depending upon the circumstances, a
suspension of operations and/or production pursuant to 43 CFR 3103.4-2 and 43
CFR 3165.1 may also be needed to preserve any committed lease that would
otherwise expire.
L. Effect of Unit Agreement on Committed Lease Terms, Lease Segregations
and Lease Extensions.
When only a portion of a Federal lease is made subject to an approved
unit agreement, the lease is segregated into two separate leases, one
containing the committed land within the unit, and the other containing the
(uncommitted lands) [land outside the unit]. The segregated lease covering
the nonunitized portion continues for the term of the base lease or for 2
years, whichever is greater, pursuant to 43 CFR 3107.3-2.
The effect of lease segregation on the term of the resultant unitized
and nonunitized leases will depend on whether or not the original lease was in
extended term by reason of production. A producing Federal lease in its
primary term, upon segregation, results in two leases that are separate and
distinct. Production on one will not extend the term of the other.
Conversely, the segregation of a producing Federal lease in its extended term
by production, creates a situation where the production on either lease will
serve to extend the term of the other (See Anadarko Production Co., 92 IBLA
212, June 16, 1986, and Celsius Energy Co., Southland Royalty Co., 99 IBLA 53,
September 8, 1987.)
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H-3180-1 - UNITIZATION (EXPLORATORY)
If the unit agreement does not provide for unitization of all
formations, Federal leases may be subject to horizontal as well as vertical
segregation. Horizontal segregation should be avoided whenever possible and
can be averted if a statement advising that it is not the intent of the
parties to the agreement that horizontal segregation occur as a result of
unitization is submitted by the unit operator with its application for final
approval. Upon final approval, the authorized officer should advise the
appropriate BLM office that horizontal segregation is not desired.
Once a discovery of unitized substances is made that can be produced in
paying quantities (as defined under Section 9 of the model form of unit
agreement, 43 CFR 3186.1), a committed Federal lease will continue in force
for as long as it remains subject to a unit agreement. In accordance with an
Interior Board of Land Appeals (IBLA) decision (67 IBLA 246) dated September
24, 1982 (Yates Petroleum Corp., et al.), a committed Federal lease can be
extended by production if a unit well on any lease committed to a unit
agreement is capable of production in paying quantities on a lease basis i.e.,
production in quantities sufficient to cover the cost of production and
marketing, but not drilling. This would serve to extend leases committed to a
unit plan only for the initial 5-year fixed term of the agreement so long as
production in paying quantities on a lease basis is maintained and the unit is
still in effect (i.e., all unit obligations are continued throughout the five-
year term of the unit.)
Upon the authorized officer's approval of the initial participating
area, the unit plan assumes a producing status as defined under Section 11 of
the model unit agreement. Once a unit plan is in this status, any Federal
lease committed to the plan will remain in effect for as long as it remains
subject thereto. However, if production of unitized substances in paying
quantities ceases prior to the end of the initial five-year unit term, and
operations are not in progress to restore production or to establish new
production within 60 days, any individual lease that is in its extended term
at that point, solely by reason of its commitment to a producing unit plan,
would expire.
Federal leases committed to a unit agreement also are eligible for a
2-year extension pursuant to 43 CFR 3107.1, if drilling operations are
commenced on unitized land and are being diligently prosecuted across the end
of the primary term of the lease. (See also paragraph II-E1 of this
Handbook.)
Any Federal lease issued for a fixed term of 20 years, or any renewal
thereof (or any portion of such lease) that is committed to a unit plan,
will continue beyond its term for as long as it remains committed to the plan
(43 CFR 3107.3-3).
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H-3180-1 - UNITIZATION (EXPLORATORY)
Indian leases are not subject automatically to the Section 18 (Leases
and Contracts Conformed and Extended) provisions of the model Federal unit
agreement. Accordingly, BIA may insert appropriate language in Section 18
that modifies the terms and conditions which apply to committed Indian leases,
with approval of the involved tribe and/or allottees. For this reason, the
text of the specific unit agreement must always be consulted to determine the
effect of unitization on committed Indian leases.
M. Unleased Federal Lands
On January 29, 1990, BLM field offices were instructed to include in all
new Federally-approved oil and gas exploratory unit agreements, a provision
requiring the payment of drainage compensation to the Government whenever a
unit participating area contains unleased Federal lands. Illustration 4
provides the modified text of sections 12 and 17 that should be used in new
agreements.
At the time of designation of a unit area, every effort should be made
to identify and, if possible, lease any unleased Federal lands within the
designated area. When a unit with unleased Federal lands is approved, an
increased effort should be made to lease the Federal acreage, with a
requirement for joinder to the unit and unit operating agreements prior to
lease issuance (see 43 CFR 3101.3-1.)
If after discovery of unitized substances in paying quantities, the
established participating area includes unleased Federal lands, the following
steps should be taken. If not already underway, initiate actions to lease the
unleased tracts with a stipulation requiring joinder to the unit and unit
operating agreements. Advise potential lease applicants that negotiations
with the unit operator will be necessary.
Once a successful applicant has been chosen to acquire the lease and
evidence of an acceptable joinder has been received, the lease can be issued.
In some cases, an acceptable joinder to the unit will not be obtained (e.g.,
if the unit operator and successful lease applicant can not come to terms on
monetary settlements). In such cases, the applicant must provide a statement
giving reasons for non joinder that are acceptable to the authorized officer
before the lease can be issued. Upon lease issuance without joinder, the
lessee must be advised that protection of the Federal lease from drainage will
be required. Protection of the Federal lease can be accomplished by drilling
an offset well, paying compensatory royalty, entering into a communitization
agreement or obtaining a pooling order through the appropriate State agency.
N. Termination.
Most unit agreements contain provisions for automatic or voluntary
termination. However, each agreement must be reviewed to determine the
circumstances under which such terminations may occur.
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H-3180-1 - UNITIZATION (EXPLORATORY)
1. Automatic Termination. A Federal exploratory unit agreement will
normally terminate 5 years after its effective date unless production of
unitized substances in paying quantities, as defined in Section 9 of the unit
agreement, has been established, or the term is otherwise extended pursuant to
Section 20(a) of the unit agreement. If production of unitized substances in
paying quantities is established, the agreement remains in effect for as long
as unitized substances can be produced in quantities sufficient to pay for the
cost of operation or for the initial 5-year term, whichever is longer. Should
production cease beyond the initial 5-year term, the unit agreement will
terminate automatically unless diligent operations are in progress within 60
days for the restoration of production or discovery of new production (see
Section 20(c) of the model agreement at 43 CFR 3186.1.)
Section 9 of the model unit agreement provides for the drilling of an
initial test well within 6 months after unit approval. If the initial well
fails to discover unitized substances in paying quantities, the unit operator
is required to commence and continue drilling additional wells, allowing not
more than 6 months between the completion of one such well and the beginning
of the next such well, until a well capable of producing unitized substances
in paying quantities is completed to the satisfaction of the authorized
officer.
General conditions for satisfying the public interest requirement
under an approved unit agreement for unproven areas can be found at
43 CFR 3183.4(b). Failure to commence drilling the initial obligation well,
or the first of multiple obligation wells, on time and to drill it diligently
shall result in the unit agreement approval being declared invalid ab initio
by the AO. In the case of a multiple well requirement, failure to commence
drilling the required wells beyond the first well, and to drill them
diligently, may also result in the unit agreement approval being declared
invalid ab initio by the AO. Failure to timely commence any well required
under Section 9 subsequent to the drilling of the initial obligation well or
wells (in the case of a multiple well requirement) will result in automatic
termination of the unit agreement.
Automatic termination for failure to perform certain required unit
actions requires no formal advance notice by the authorized officer or
operator. However, the authorized officer must concur in all determinations
of automatic termination made by the unit operator. The unit operator should
then notify all other interested parties. All terminations by the authorized
officer shall be in writing to the unit operator. Illustration 1-7A is an
acceptable format for use by the authorized officer in notifying the unit
operator of automatic unit termination for failure to meet the production
requirements of the unit agreement, while the format shown in Illustration
1-7B may be used in notification of automatic unit termination for failure to
meet the drilling requirements of Section 9 of the agreement. Where required
by the unit agreement, prior approval by appropriate State officials should be
obtained before the authorized officer approves the termination.
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2. Voluntary Termination. Section 20(d) of the model unit agreement
states that the parties to the unit agreement may initiate a request for
voluntary termination of the agreement at any time prior to the discovery of
unitized substances which can be produced in paying quantities, provided the
public interest requirement has been satisfied. If the public interest
requirement is not met, the approval of the unit by the authorized officer
would be invalid. In cases where voluntary termination is requested, the
application should be reviewed to ensure that the requisite percentage of
working interest approvals has been obtained. The effective date of the
termination may not be a date prior to the receipt of an approvable
application by the authorized officer. Illustration 1-7C provides a format
for the approval of a request for voluntary unit termination. Further
clarification as to when a voluntary termination is effective may be found in
Aquarius Resources Corp., 64 IBLA 153, May 24, 1982.
0. Amendment of Approved Unit Agreement.
A unit agreement may be amended when such action is justified by
circumstances or events not previously anticipated. Amendment of a unit
agreement is accomplished in much the same manner as the designation and
approval of a unit agreement. A request for preliminary approval of the text
of the proposed amendment with supporting data normally is submitted to the
authorized officer. After the authorized officer approves the text of the
proposed amendment, it is circulated by the unit operator for signature by the
owners of interest that are subject to the unit agreement. All parties
committed to the agreement must sign or consent to the amendatory language
before it may be approved by the authorized officer.
P. Allocation of Production.
Unitized substances normally are allocated to the committed working
interest owners in the manner prescribed in the unit operating agreement.
Royalty proceeds on this production are allocated to each tract of unitized
land within the controlling participating area, normally on the basis of the
surface acre percentage each committed tract in the participating area
contributes to the total acres of unitized land within the participating area.
While noncommitted tracts within a participating area generally receive no
allocation from production under the unit agreement, compensatory royalty
payments are due the Government for any unleased Federal lands located within
a participating area, when provided for in the unit agreement (see
Illustration 4 for model text of this provision.)
A situation may be encountered where a communitized area (CA) and a unit
participating area (PA) overlap. Illustration 5 shows several examples to
follow in allocating production under those circumstances.
2-33 28
H-3180-1 - UNITIZATION (EXPLORATORY)
Q. Drainage - Compensatory Royalty.
Section 17 of the model unit agreement provides that the unit operator
will take such measures as are necessary to prevent drainage of unitized
substances by wells on land not subject to the agreement. Accordingly, any
producing non-unit well offsetting unitized land, regardless of the ownership
of the land on which such well is located, subjects the unit to possible
drainage. Prompt drilling of necessary unit protective wells and/or payment
of an appropriate compensatory royalty, as determined by the authorized
officer, may be required. Compensatory royalty payments may be due for
presumed drainage of unleased Federal lands in a participating area. While
all exploratory unit agreements approved since January 29, 1990, should
provide for such compensation, older agreements may not. The specific unit
agreement must be examined to see if it provides for drainage compensation for
unleased lands.
Communitization agreements that include unitized and nonunitized lands
in conformity with State spacing requirements also may be used to remedy
potential drainage situations. Manual Handbook H-3160-2 provides additional
guidelines concerning drainage determinations and computations.
R. Treatment of Existing Wells.
At times, producing or producible oil or gas wells may be present within
the area proposed for unitization. When such wells indicate a discovery of
questionable significance, the following paragraph should be added to Section
11, Participation After Discovery, of the model unit agreement for unproven
areas (43 CFR 3186.1):
Determination as to whether a well
completed within the unit area prior to the
effective date of this agreement is capable
of producing unitized substances in paying
quantities shall be deferred, until an
initial participating area is established
as the result of the completion of a well
for production of unitized substances in
paying quantities in accordance with
Section 9 hereof.
This determination should be made at the time the previously completed
well(s) is to be included in a participating area and should be based on the
same criteria applied in making any paying well determination. Existing wells
should be evaluated for inclusion in a participating area as of the effective
date of the initial participating area.
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H-3180-1 - UNITIZATION (EXPLORATORY)
In unusual cases, where an existing well indicates that a significant
discovery of oil or gas has been made on land proposed for unitization, but
where additional exploration and development is necessary, an initial
participating area based on the information from such wells may be established
effective as of the effective date of the unit agreement. However, a
participating area application based on such well(s) should not be approved
until after a unit test well has been drilled and completed as a paying well
under the terms of Section 9 of the unit agreement (43 CFR 3186.1). In this
situation, all committed leases including those that otherwise would expire
are extended automatically, since the effective date of the participating area
and the unit agreement would be the same date. A requirement for the
concurrent submission of a plan of operations and development may be added to
Section 9, if warranted.
S. Reporting Format for Unit Wells.
For reporting purposes, the unit operator or his delegated party is
responsible for submitting all required reports for unit wells, be it a paying
or non-paying unit well as long as the well remains on land that is considered
committed to the unit agreement. Wells located on non-committed lands or
lands that have been automatically eliminated from the unit area, would be
reported on a lease basis. A chart detailing how the Automated Inspection
Record Systems (AIRS) should be set up for unit wells is presented in
Illustration 6.
T. Unit Activity Report.
A unit activity report similar in format to that shown in
Illustration 7, should be prepared monthly by the BLM Office having
jurisdiction over well operations. This report will be used by the BLM Office
that administers the unit agreement to fulfill its responsibilities concerning
wells drilled to meet unit obligations, establishment and revision of
participating areas, automatic elimination dates, and unit terminations.
Guidelines for completing the activity report are also included in
Illustration 7.
U. Lease Commitment Status.
Before a Federal lease can be considered for segregation or for benefits
by unitization, it must be fully or effectively committed to the unit
agreement.
1. Fully Committed (FC). Fully committed indicates that all interest
owners in that tract have committed their interests therein. This includes
the lessee(s) of record, basic royalty owners in fee tracts, owners of
overrides or production payments, if any, and working interest owners if
different from the lessee of record. The working interest owners also must
have signed the operating agreement. A fully committed tract is subject to
segregation, if applicable, and is eligible for all benefits under the unit.
2-35 30
H-3180-1 - UNITIZATION (EXPLORATORY)
2. Effectively Committed (EC) or (FC ex OR)). Effectively committed
indicates that all interest owners, except the owners of overrides or
production payments have signed. An effectively committed tract is also
subject to segregation, if applicable, and is eligible for all benefits under
the unit.
3. Partially Committed (PC). In reference to a fee tract, partially
committed indicates that the basic royalty interest owner has not signed the
unit agreement, but the lessee and working interest owner have committed their
interests. Absent joinder by the basic royalty owner, such interest may be
considered committed only if the underlying lease empowers the lessee/working
interest owner to commit that interest to the unit agreement. A State or
Federal tract is considered partially committed to the unit agreement when the
lessee of record has not signed but the working interest owner has committed
its interests (Note: In some States, commitment under a State or fee tract by
a lessee of record who owns no working interest is considered unnecessary, and
the tract may be considered as fully or effectively committed without such
signature.) A partially committed lease is not subject to segregation or any
benefit by unit operations unless there are actual operations and/or
production on the lease itself, or it is included within and receives an
allocation of production from an approved participating area. Unitized
drilling is permissible on a partially committed tract, however, if unitized
production is obtained on such a tract and a participating area is established
on the basis thereof, the entire production must be allocated to the
participating area, and the responsible working interest owner must pay the
noncommitted parties their just royalty on a leasehold basis.
4. Not Committed (NC). Any tract in which a working interest has not
committed, regardless of other committed interest, is considered as not
committed and is not subject to the unit agreement.
V. Designation of Agent.
Whenever a party other than the unit operator files an application for
permit to drill a well on unitized land, the application must include an
acceptable Designation of Agent from the unit operator (Illustration 2-4).
This designation covers only the drilling and completion of the well, and must
clearly state who has authority to operate the well, once completed. If the
well encounters unitized substances capable of being produced in paying
quantities, as defined in Section 9 of the unit agreement (43 CFR 3186.1),
then either the unit operator will take over operation of the well or the
designated agent will be named as successor unit operator and assume
responsibility for operating the well. If a well is completed as a nonpaying
unit well and a party other than the unit operator is designated to operate
the well, the unit operator will remain ultimately responsible for all legal
and regulatory obligations related to such operations, as long as the well is
located on land that is considered committed to the unit agreement.
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H-3180-1 - UNITIZATION (EXPLORATORY)
Illustration 2-5 provides a model form for the delegation of authority
to operate a non-paying unit well. If a form different from that in
Illustration 2-5 is submitted for approval, either the form itself or the
authorized officer's approval must clearly reference the responsibilities and
obligations retained by the unit operator for operation of this well.
W. Designation of Suboperator.
Except as provided above, all operations on unitized land must be
performed by the unit operator, and designations of a suboperator will not be
accepted or approved unless it is the only way to (1) allow operations in a
unit involving special projects or operating techniques that could be handled
more appropriately by a party other than the unit operator; or (2) prevent the
premature termination of a unit agreement or the abandonment of marginal
production. In such cases, suboperators must file all necessary reports
covering all unit operations and production for which they are responsible as
designated suboperators.
In extreme cases, the authorized officer may accept certain unit work to
be performed and reports filed in behalf of or under the unit operator's name
by a nonunit operator. This is considered as work performed by the unit
operator, and acceptance of such work or reports does not relieve the unit
operator of any obligation or responsibility under the unit agreement.
X. Successor Unit Operator.
Procedures for selecting a successor unit operator are included in
Section 6 of the model unit agreement (43 CFR 3186.1) to provide orderly
succession if the unit operator resigns or is removed. Generally, this
succession is accomplished through the approval of an instrument executed by
or on behalf of the unit operator, the successor unit operator, and the owners
of committed working interests. That instrument provides for the resignation
of the unit operator, acceptance by the successor unit operator of the duties
and responsibilities of unit operator, as described in Section 4 of the model
form, and approval of the new unit operator by owners of committed working
interests in the manner prescribed in the unit agreement (Section 6 of the
model form) or unit operating agreement, as appropriate.
The authorized officer may accept a Designation of Successor Operator
which has not been formally ratified by working interest owners, provided the
successor operator certifies in writing that it has obtained the required
working interest owner approvals. The authorized officer's written approval
of such a designation (see Illustration 1-8A) shall include and be subject to
the following, or similar disclaimer:
"In approving this designation, the Authorized Officer
neither warrants nor certifies that the designated party
has obtained all required approvals that would entitle
it to conduct operations under the
Unit Agreement."
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H-3180-1 - UNITIZATION (EXPLORATORY)
Normally, if no successor unit operator is selected and qualified within
a reasonable period of time, the authorized officer shall declare the unit
agreement terminated. The Successor Operator Instrument in Illustration I-8B
may be used for the concurrent resignation of a unit operator and designation
of a successor operator.
Y. Bankrupt Unit Operator.
A unit operator who declares bankruptcy may continue to operate the unit
if he so desires. The Bureau lacks the authority to unilaterally remove a
unit operator simply because they have declared bankruptcy. Section 5 of the
model form of unit agreement (43 CFR 3186.1) provides for such removal of a
unit operator, for whatever reason, by consent of a majority of the working
interest owners.
If a unit operator declares bankruptcy, then the Bureau may accept an
appointed agent to act on behalf of the operator to ensure compliance with all
applicable requirements of the unit agreement and regulations. Acceptance of
an agent can occur even if the unit operating agreement is rejected as an
executory contract. Our acceptance of an agent does not relieve the unit
operator of his/her ultimate responsibility for compliance with all the terms
and conditions of the unit agreement. Our acceptance of an agent should
terminate if a sale of the unit properties is consummated because the
purchaser should assume all unit responsibilities. Where unassumed
liabilities exist, the BLM may be able to take action against a bankrupt
operator's unit bond, since a bond is not considered an asset of the bankrupt
debtor's estate.
Z. Subsequent Joinder and Late Joinder.
The commitment of oil and gas interests in lands within the unit area
subsequent to final approval of the unit agreement is governed by the
appropriate provisions of the agreement (Section 28 of the model form,
43 CFR 3186.1).
Usually, once operations are commenced, the unit agreement allows the
commitment of a working interest by the owner who signs joinders to both the
unit and unit operating agreements and obtains such approvals of the owners of
committed working interests as may be required by the unit operating
agreement. Such joinders should be accompanied by a statement from the unit
operator that the terms of the unit operating agreement have been satisfied.
A nonworking interest may be committed to a unit agreement by the owner
of the interest signing a joinder to the unit agreement and the owner of the
corresponding committed working interest approving the commitment of said
interest. Normally, a nonworking interest may not be committed to a unit
agreement unless the corresponding working interest is committed thereto. In
order for a working interest to be committed to a unit agreement, it must also
be committed to the unit operating agreement.
2-38
H-3180-1 - UNITIZATION (EXPLORATORY)
Illustrations 1-9A and 1-9B are suggested formats for use by the
authorized officer in approving subsequent and late joinders to the unit
agreement.
AA. Bond Requirements.
The operator of a Federally approved unit must furnish a bond prior to
the commencement of any surface disturbing activities on a Federal lease.
Such a bond must be conditioned on faithful performance of duties and
obligations under the unit agreement and the terms and conditions of all
Federal leases subject thereto, and be for an amount that the authorized
officer shall determine to be adequate to protect the interests of the United
States. The bond may be posted by one of the following three methods:
1. The unit operator may post a unit bond to cover operations on
Federal leases committed to a specific unit in the language of the sample at
43 CFR 3186.2. The amount of the unit bond must not be less than $25,000. In
the event of unit contraction, lands excluded from the unit area should be
checked for proper bond coverage.
2. The unit operator may use his own statewide/nationwide bond to cover
operations on Federal leases committed to the unit. If his
statewide/nationwide bond was filed on a pre-1987 edition of the bond form,
the unit operator should attach an operator rider which extends coverage of
the bond to all leases he operates, whether or not he owns an interest in the
leases. The unit operator in accordance with 43 CFR 3104.4 may submit a unit
operator rider covering his operations on that specific unit to the
statewide/nationwide bond.
3. The unit operator may be covered on Federal leases committed to the
unit under another lessee/sublessee's individual lease/statewide/nationwide
bond provided that, in accordance with regulations at 43 CFR 3104.2, a consent
of surety, or the obligor in the case of a personal bond, to include the
operator under the coverage of the (lessee's) bond is furnished to the BLM
Office maintaining the bond. If the unit operator utilizes his own individual
lease bond, the coverage will only apply to that specific lease and will not
cover operations on other committed Federal leases within the unit.
A designated agent (or sub-operator) may conduct operations under his
own bond or under the unit operator's bond or under the lessees bond with
consent of surety. A statement must be submitted by the unit operator
identifying the type of bond coverage to be used to cover operations on the
Federal leases committed to the unit, including the BLM Bond Number. A bond
is not required for Federal leases receiving allocated production. The
authorized officer may, when justified, require an increase of the bond amount
in accordance with 43 CFR 3104.5.
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AB. Development or Operation of Nonparticipating Lands.
Whenever the owner of a working interest in unitized land and the unit
operator are unable to reach agreement providing for the drilling of a desired
test well, the working interest owner may cause the well to be drilled at its
sole risk and expense. If the well is to test a formation for which a
participating area has been established, it must be drilled at a location
outside the existing participating area. Operations on noncommitted land not
subject to the unit agreement are approved on an individual lease basis.
Whenever a party other than the unit operator files an application for a
permit to drill a well on unitized land, it may be accompanied by a
Designation of Agent from the unit operator. Adequate bond coverage must be
provided. Such designation must clearly state, or be approved conditioned
upon the requirement that the unit operator will assume the operation of such
well if it is determined to be capable of producing unitized substances in
paying quantities. If the completed well is capable of producing unitized
substances in paying quantities, it must either be turned over to the unit<
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