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October 28, 2013
In Reply Refer To:  
3200 (301) P         
Instruction Memorandum No. 2014-007
Expires: 09/30/2015  
To:                  State Directors
From:               Assistant Director, Minerals and Realty Management
Subject:           Geothermal Diligent Exploration Expenditure Requirement Violations
Program Area:  Geothermal Lease Management.
Purpose: This Instruction Memorandum (IM) establishes policy for administering diligent exploration expenditure provisions of geothermal leases that were not converted to the June 2007 geothermal regulations, as provided under the Energy Policy Act (EPAct) of 2005.
Policy/Action: The Bureau of Land Management (BLM) will allow a lessee to correct a violation of the diligent exploration expenditure (DEE) requirements in the 2006 former geothermal regulations (43 CFR 3210.13 through 3210.16) using any of the methods by which a lessee had been permitted to meet those requirements.  Consistent with the provisions of the new 2007 regulations at 43 CFR 3213.19 (moved from the former regulations at 43 CFR 3213.25 but unchanged), the BLM will allow the lessee 30 days to either pay additional rentals under the provisions of the former regulations at 43 CFR 3210.15, or submit DEE reports confirming previous diligent exploration expenditures, as described in the former regulations at 43 CFR 3210.14, and thus prevent the termination from becoming effective.
Lease termination for such a violation is not automatic or immediate, but requires a notice procedure and an opportunity to cure the violation before termination will become effective. The process the BLM will follow is to offer lessees that have failed to comply with the old DEE regulations two options, as noted below. Upon identification, the office will issue either a notice of Decision (attachment 1) stating the leases are in violation of the old DEE requirements and subject to termination under the new termination provision at 43 CFR 3213.17, or may issue a Notice of Violation/Lease Held for Termination letter (attachment 2). 
The attached examples offer two options for the format of the notice letter. By doing either of the following, the notice will provide the lessee the option to cure or remedy the failure within 30 days of receiving the notice, preventing the termination from becoming effective:  
(1)   Meet the expenditure reporting requirements by submitting written documentation (attachment 3) of diligent exploration expenditures made as required by 43 CFR 3210.14, for the years of violation within 30 days of receiving notice of the violation from the BLM; or
(2)   Pay additional rentals under the provisions of 43 CFR 3210.15, for the years of the violation within 30 days of receiving notice of the violation from the BLM. 
The notice of decision must inform the lessee of its appeal rights and the potential to extend the 30-day notice period if the circumstances in the regulations at 43 CFR 3213.19 can be met within an additional time period that is BLM-approved. The 2007 regulations at 43 CFR 3213.19 are substantively the same as the former regulations at 43 CFR 3213.25. In addition, the notice will also inform the lessee that the filing of an appeal has the effect of staying the effective date of a termination (or “cancellation” under the old regulations) while the appeal is pending (43 CFR 3213.19(b)(1)). 
Please note that similar DEE reporting requirements and similar remedies apply to unconverted (pre-EPAct) geothermal leases that are in a 5-year diligent efforts extension status. The 2006 regulations at 43 CFR 3208 describe procedures and documentation necessary to show “bona fide efforts to produce” and the alternative payments of “significant expenditures” on an annual basis during a lease extension.
Timeframe: This policy is effective immediately.
Budget Impact: None.
Background: The Geothermal Steam Act, as implemented in 43 CFR Part 3200, contains work requirements including the performance of minimum diligent exploration activities during each of the final 5 years in the primary term of the lease. Over time, this requirement has come to be expressed as a requirement that a lessee must either make certain “diligent exploration expenditures” or pay additional rentals in lieu of DEE and submit documentation of these expenditures or rentals to the BLM annually. Failure to carry out or to timely report the expenditures or payments may subject the lease to cancellation or termination.
The Energy Policy Act of 2005 amended the Geothermal Steam Act, 30 U.S.C. 1001 et seq., and led to the promulgation of new regulations for geothermal leasing that became effective on June 1, 2007. Section 3200.7(a)(1) of the new regulations explains that leases issued before the Energy Policy Act’s August 8, 2005, effective date are subject to the new regulations, except with respect to the regulatory provisions relating to royalties, minimum royalties, rentals, primary term and lease extensions, diligence and annual work requirements, and renewals.  

Leases issued before August 8, 2005, and those that were pending on that date, must follow the provisions of the 2006 regulations at 43 CFR Parts 3210.13 - 3210.16 unless the lessees have elected to “convert” (i.e., make their leases subject to all of the 2007 regulations under the provisions of 43 CFR. 3200.7(a)(2) or 43 CFR 3200.8(b)). Leases issued after August 8, 2005, in addition to converted leases, must follow the applicable portions of the 2007 regulations.

Under the new 2007 regulations, proof of diligent efforts need not be documented until the tenth year of the primary term. Because the new annual work requirements are more favorable to lessees in years 6 through 10 of the primary 10-year lease term than are the old DEE requirements, several lessees have sought to “convert” their leases to post-EPAct provisions under the 2007 regulations at 43 CFR 3200.7(a)(2), and thereby elect to be subject to all of the new regulations. After review of the existing leases, some offices have determined that many leases are not in good standing and, in fact, are “subject to termination” because they are out of compliance with DEE reporting requirements. 

The term used to describe the concept of lease termination in the geothermal regulations has fluctuated over time. The relevant provision in the Geothermal Steam Act (30 U.S.C. 1011) uses “termination,” and has not changed since 1970. For example, in the 1982 geothermal regulations, the relevant language was “failure to perform such exploration may subject the lease to termination.”  The 1998-2006 regulations used the term “cancellation,” whereas in the new 2007 regulations the term returned to “termination” in the otherwise corresponding provisions. Under the 2007 regulations, a lease issued in error is the only reason for lease “cancellation” (43 CFR 3213.16). Despite the use of the term “cancel” in section 3210.16 of the 2006 regulations, cancellation decisions for DEE violations now fall under the more general “termination” provisions of the new 2007 regulations (43 CFR 3213.17), and the termination provisions apply to all leases, regardless of the date of issuance or conversion (43 CFR 3200.7(a)(1)).
The “Termination of Leases” section in the Geothermal Steam Act, as implemented in the regulations, makes clear that decisions to terminate a lease do not become effective until 30 days after receipt by the lessee of the Notice (e.g., “Pending Termination” or “Lease Subject to Termination/Cancellation”). Under both the new “termination” provisions of the 2007 regulations (43 CFR 3213.17) and the former “cancellation” provisions of the 2006 regulations, a lessee may prevent termination of the lease if, within 30 days after receiving notice of the violation from the BLM (which may include a pending decision to terminate the lease), the lessee corrects the violation or shows that it cannot correct the violation within 30 days of receiving the notice, is making a good faith attempt to correct the violation as quickly as possible, and thereafter diligently proceeds to correct the violation (43 CFR 3213.19(a)). Moreover, the filing of an appeal has the effect of staying the effective date of a termination (or “cancellation” under the old regulations) while the appeal is pending (43 CFR 3213.19(b)(1)).  In addition, if a hearing is timely requested on either the violation finding or the termination decision, the period for correcting a violation is extended until 30 days after the decision on appeal is made (43 CFR 3213.19(b)(2)).  To restate, the new termination provisions apply to all existing leases, and replace the term “cancellation” under the old regulations. 
Manual/Handbook Sections Affected: The revised Geothermal manual and handbook will incorporate the interim policy transmitted in this IM. 
Coordination: The National Renewable Energy Coordination Office coordinated preparation of this IM with BLM field offices and the Solicitor’s Office.
Contact: If you have any questions concerning the content of this IM, please contact me at 202-208-4201, or your staff may contact Ray Brady, National Renewable Energy Coordination Office, at 202-912-7312, or by email at rbrady@blm.gov.  
Signed by:                                                       Authenticated by:
Michael Nedd                                                   Robert M. Williams
Assistant Director                                            Division of IRM Governance,WO-860
Minerals and Realty Management
3 Attachments

Last updated: 11-04-2013