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Last updated: 04/04/03

Contacts :

Tom Gorey, (202) 452-5031              

Ian Senio, (202) 452-5049                 Click here to view the proposed regulation in the Federal Register.

For release: January 13, 1998

BLM Proposes Rule To Improve Protection of Federal Oil and Gas Resources From Drainage

The Bureau of Land Management today published a proposed rule that would clarify the obligations of Federal oil and gas lessees to protect Federal oil and gas resources from drainage by third parties.

"This proposal is aimed at ensuring that America's taxpayers receive all of the royalties owed to them from oil and gas production on Federal lands," said BLM Director Pat Shea. "While Federal oil and gas lessees have always been required, under the Mineral Leasing Act of 1920, to protect against drainage, this proposed rule more specifically identifies where a lessee's responsibilities begin and end."

Drainage occurs when an adjacent well causes oil and gas on Federal land to migrate across property lines. Such drainage removes oil and gas from Federal lands, which in turn reduces the royalties that are owed to the United States by those who hold Federal oil and gas leases. The proposed rule responds, in part, to an audit by the Interior Department's Inspector General, who recommended that the BLM revise its existing regulations to ensure better protection of Federal oil and gas resources from drainage.

The proposed rule, published in today's Federal Register, specifies that all Federal oil and gas lessees are "jointly and severally" liable for paying compensatory royalties when more than one party owns an interest in the same lease. The proposal also:

• States that the duty of a lessee or operator to pay compensatory royalties for drainage begins at a reasonable time after a prudent operator should have known that drainage was occurring.
• Informs lessees and operators of their duty to determine whether drainage is taking place and that the lessee is deemed to have knowledge that drainage may be occurring when production information becomes available about the third party's adjacent producing well. Under this provision, the lessee would have to monitor the drilling of wells on adjacent lands and gather sufficient information to determine whether drainage is occurring.
• Lays out the responsibilities for compliance with the BLM's operating regulations in cases where multiple parties hold a lease. The proposal makes clear that all parties are both "jointly and severally" responsible for performance of non-monetary lease obligations (such as plugging a well) or payment of all compensatory royalties due in lieu of drilling an "offset" or "protective" well. This means that each party that holds an undivided interest in the lease is responsible for the full amount of a liability if the other holders of the lease cannot satisfy the liability.
• Requires that a party holding an interest in a Federal oil and gas lease must start taking protective action at the earliest reasonable time after the party knows, or should know, that a nearby well would drain the Federal lease.

To protect a lease from drainage, a party must either drill and produce oil or gas from an "offset" or "protective" well, or must enter into an agreement with the owners of the adjacent well, or must pay compensatory royalties to the United States in an amount determined by the BLM. A lessee or operator would not have to drill an offset well or pay compensatory royalties if that party could prove to the BLM that it could not make a reasonable profit over and above the cost of drilling and operating a protective well.

The BLM encourages all interested parties to comment on the proposed rule. Comments, which must be submitted in writing, should be sent no later than March 14, 1998, to the following address: Director (630), Bureau of Land Management, Administrative Record, Room 401 LS, 1849 C Street, N.W., Washington, D.C. 20240. Comments may also be sent electronically via Internet to: WOComment@wo.blm.gov. Those submitting comments electronically should include "attn: AC54" in their message, along with the sender's name and address.

The BLM administers nearly 60,000 active oil and gas leases, of which more than 23,500 are in producing or producible status. Oil and gas produced from BLM-managed lands accounted for 5.6 percent of domestic oil production and 9.9 percent of domestic gas production in 1995, the latest year for which statistics are available.

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