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February 15, 2008

In Reply Refer To:
3100 /310) P
Instruction Memorandum 2008-073                                                                          
Expires: 09/30/2009
To:                   State Director, Alaska
From:               Assistant Director, Minerals & Realty Management
Subject:            Federal Reimbursement for Orphaned Well Reclamation – Section 349(f) of the
                         Energy Policy Act (EPAct)
Program Area:  Oil and Gas
Purpose:  This Instruction Memorandum (IM) establishes the procedure for the State of Alaska for a pilot program providing a royalty credit against the Federal share of royalties when a lessee plugs and/or reclaims an orphaned well on Federal lands in Alaska that the lessee is not legally responsible to reclaim. This pilot program is authorized by Section 349(f) of the EPAct.
Policy/Action:  The EPAct allows the Secretary to reimburse a lessee for “reasonable actual costs” for plugging and reclaiming orphaned wells. An orphaned well, for the purpose of this pilot program is defined as: 1) an abandoned well on Federal land that is not associated with a responsible or liable party and for which there is not sufficient bond coverage for plugging and surface restoration costs, or 2) any abandoned well drilled by the U.S. Department of the Navy or the U.S. Geological Survey in the State of Alaska (also known as legacy wells).
When any Federal lessee or its agent plugs an orphaned well or reclaims the surface of an orphaned well site on Federal lands, the lessee may enter into an agreement with the authorized officer (AO). The purpose of this agreement is to obtain a credit against a portion of the royalties due under the lessees’ Federal Outer Continental Shelf (OCS) leases in the Gulf of Mexico, as a method of reimbursing the lessee for the plugging or reclamation costs. The orphaned well may be a well on any leased or un-leased Federal land that the lessee is not legally responsible to reclaim. 
To implement the pilot program, the Alaska State Office (SO) should notify all lessees/operators within its administrative area of the pilot program.  This notification should include:
(1) The text of Section 349(f);
(2) A current list of the state’s orphaned wells;
(3)    A statement that the royalty credit may only be applied to leases which meet the  conditions identified below; and
The lease must:
               (a) Lie entirely outside the zone defined and governed by Section 8(g) of the Outer Continental Shelf Lands Act, and
               (b) Be issued prior to 2006 and therefore not be subject to the December 20, 2006 Gulf of Mexico Energy Security Act revenue sharing.
The lease must not be:
               (a) In the Minerals Management Service (MMS) Royalty-In-Kind Program (RIK) or be scheduled to be in the program over the next three years (the lessee should contact James Steward, the MMS RIK Director, at 303-231-3715, Jim.Steward @mms.gov, for a determination of eligibility), or
               (b) Subject to royalty relief.
(4)  A SO contact person for additional information. In addition, if any lands offered for lease contain an orphaned well(s) or orphaned well-related surface site(s), the lease sale notice shall list the location and other appropriate orphaned well/site information.
Before undertaking any plugging and reclamation work under this program, the lessee must enter into an agreement with the AO. The BLM will prescribe the form and content of this agreement. The lessee will need to obtain prior approval of the work planned and the type and estimated amount of costs before undertaking any plugging or reclamation work. After the work is completed, the lessee must submit an itemized statement of the costs incurred.  The AO must ensure that the lessee submits sufficient documentation to enable a determination that the costs are reasonable. If the AO determines that the costs are reasonable, the AO will approve the royalty credit amount. The AO must then notify by memorandum, the SO, the Washington Office (WO-310), and the Minerals Management Service, Chief, Financial Management, (MMS/FM) P.O. Box 5810, Denver, Colorado, 80217-5810, of the credit and the amount. 
Further, the terms of the agreement between the BLM and the lessee must expressly state that the lessee cannot claim the credit until MMS notifies the BLM that it has met all of its funding requirements on the OCS, for example, the Land and Water Conservation Fund, Ultra-deepwater and Unconventional Onshore Natural Gas and Other Petroleum Research and Development Fund, and the Coastal Impact Assistance Program.

A royalty credit earned by one party may be transferred or sold to any other party (who may further transfer or sell it again) on the condition that the transferee specifically agrees to the terms governing the credit to which the lessee agreed. The parties involved are responsible for notifying the MMS/FM of any royalty credit transfers and submit the transferee’s written agreement. The BLM will specify the form and content of the agreement.

The AO for this program is the State Director (SD). However, the SD may delegate the authority to Field Office Managers.
Timeframe:  The pilot program is effective upon issuance of this IM and will terminate at the end of fiscal year 2009. If the pilot program proves to be successful, regulations may be promulgated to carry out a permanent reimbursement program.
Budget Impact:  Although this involves a new workload item the overall budget impact is relatively minor.
Background:  Section 349(f) of the EPAct established the authority to provide for a royalty credit against “the Federal share” of royalties when a lessee plugs and reclaims any orphaned well on Federal lands.  Federal funds expended to plug and reclaim orphan wells would generally come entirely from the BLM’s operating budget in the absence of Section 349(f). Section 349(f) allows the plugging of orphaned wells without expending agency operating funds if a lessee decides it wants to participate in the program.
Manual/Handbook Sections Affected:  None.
Coordination:  This IM has been coordinated with the MMS/FM, the Office of the Solicitor and several State/Field Offices.
Contact:  If you have questions or concerns, please contact me at 202-208-4201, or your staff may contact Rudy Baier, WO-310, at 202-452-5024, or Rudy_Baier@blm.gov.
Signed by:                                                                    Authenticated by:
Michael D. Nedd                                                            Robert M. Williams
Assistant Director                                                         Division of IRM Governance,WO-560
Minerals & Realty Management

Last updated: 10-21-2009