On April 21, 2020, the Bureau of Land Management (BLM) released two sets of interim guidance intended to provide relief for operators of federal oil and gas leases during the COVID-19 emergency. One set of guidance relates to suspensions of operations or production on federal leases. The second set of guidance relates to reductions of royalty rates on federal leases.
Suspensions of Operations or Production
BLM’s Interim Guidance for Lease Suspension Requests During the COVID-19 National Emergency (“Interim Suspension Guidance”) outlines how federal lessees may obtain suspensions of operations or production under section 17 of the Mineral Leasing Act (MLA) because of the COVID-19 pandemic.
What are suspensions of operations and suspensions of production?
Section 17 of the MLA allows BLM to suspend operations or production when the lessee is prevented from operating on or producing from the lease by matters beyond its reasonable control (i.e., force majeure). 30 U.S.C. § 226(i). By contrast, section 39 of the MLA allows BLM to suspend operations and production on federal leases in the interest of conservation. 30 U.S.C. § 209.
A suspension of operations postpones the operational obligation of a lease and temporarily tolls the running of the lease term to prevent the lease from expiring during the suspension. A suspension of production postpones the production obligation of the lease to prevent it from expiring during the suspension.
How does the COVID-19 emergency affect a lessee’s ability to obtain a lease suspension?
BLM may only grant suspensions of operations or production when the lessee is prevented from operating on or producing from the lease by reasons of force majeure. 43 C.F.R. § 3103.4-4(a). The Interim Suspension Guidance specifies “COVID-19 pandemic social distancing orders and travel restrictions imposed by the federal, state, or local government, or the pandemic otherwise causing the unavailability of personnel, contractors or equipment needed to conduct operations” as force majeure reasons that justify a suspension of operations. Likewise, the Interim Suspension Guidance specifies “COVID-19 pandemic social distancing orders and travel restrictions” as force majeure reasons that justify a suspension of production. Importantly, the Interim Suspension Guidance only addresses operational difficulties as a basis for suspensions and does not address low commodity prices.
How long will a COVID-19 related suspension last?
COVID-19-related suspensions will terminate one year from the approval date or when the operator resumes operations, whichever is earlier.
Does COVID-19 provide a basis for section 39 suspension of operations and production?
Section 39 of the MLA authorizes suspensions of operations and production in the interest of conservation and not as force majeure. The Interim Suspension Guidance provides, however, that if BLM is experiencing unusual or unreasonable processing delays to complete the environmental review, analysis, or consultations for an application for permit to drill because of the COVID-19 emergency, BLM may direct or consent to a suspension of operations and production in the interest of conservation.
How does an operator apply for a COVID-19 related suspension of operations or production?
Whereas suspension requests are usually filed with BLM field offices, the interim guidance directs that lessees file COVID-19 suspension requests with the state office managing the lease(s). At a minimum, the application must include:
- Lease number(s) and applicable federal unit or communization agreement;
- Expiration date of lease(s) and/or Held by Production Date;
- Current lessee(s) and operating rights owners; and
- A full statement of the circumstances that render the suspension necessary because of the COVID-19 emergency. This must include supporting evidence of COVID-19’s direct impact(s), such as efforts to get personnel or service providers to the lease to conduct operations and their unavailability.
Additionally, other application requirements in BLM’s regulations and Manual 3160-10 – Suspension of Operations and/or Production (Rel. 3-150 Mar. 13, 1987) continue to apply. For example, the application for suspension must be executed by all operating rights owners.
How quickly will BLM issue a decision on a COVID-19 related suspension request?
The Interim Suspension Guidance directs BLM to process all suspension requests within five business days and will notify the operator of its decision within five business days.
Which leases are subject to the Interim Suspension Guidance?
The Interim Suspension Guidance only applies to federal oil and gas leases and does not apply to Indian tribes’ oil and gas leases.
Royalty Relief
Recognizing “an extreme situation due to the pandemic,” BLM’s Interim Guidance for Royalty Rate Reduction Requests for Oil and Gas Leases during the COVID-19 National Emergency (“Interim Royalty Reduction Guidance”) addresses operators’ ability to obtain reductions in the royalty rate on federal leases due to low oil prices and operational difficulties imposed by COVID-19.
What is a royalty reduction?
The MLA allows BLM, for the purpose of encouraging the greatest ultimate recovery of oil and gas and in the conservation of natural resources, to “waive, suspend, or reduce” the royalty rate on a federal oil and gas lease when “necessary . . . to promote development” or when the lease “cannot be successfully operated” under its current terms. 30 U.S.C. § 209. BLM’s regulations specify the requirements of an application for royalty relief. 43 C.F.R. § 3103.4-1.
How do the COVID-19 emergency and market conditions affect an operator’s ability to obtain a reduction in royalty rates?
With the Interim Royalty Relief Guidance, BLM will allow royalty rate reductions in an effort to avoid premature well abandonment that would otherwise be caused by the COVID-19 pandemic.
How much will BLM reduce the royalty rate?
The Interim Royalty Relief Guidance does not specify a particular rate; however, it uses the example of a reduction from 12.5 percent to 0.5 percent. This example suggests that BLM will consider requests to significantly reduce royalty rates.
How long will a COVID-19 related royalty rate reduction last?
Approved temporary royalty rate reductions will terminate one year from BLM’s approval of the application.
How does an operator apply for a COVID-19 related royalty rate reduction?
The operator/payor must file an application for a temporary royalty rate reduction with the BLM state office managing the lease(s). The application must include the following:
1. All regulatory requirements of 43 C.F.R. 3103.401(b), including, but not limited to, information about the lease(s), status of wells, statement of expenses and operating costs for the lease(s), and agreements with the holders of lease interests other than the U.S. to a reduction in royalties.
2. Specific information relating to hardship caused by the COVID-19 pandemic:
- Self-certification statement with supporting documentation from the operator that the lease(s) would be capable of production in paying quantities without the circumstances caused by the COVID-19 pandemic; and
- A simple economic analysis table showing the lease(s) is uneconomic at the current royalty rate but would be economic with the requested reduced royalty rate. This table must include: the relevant market oil price, current royalty rate for each lease, production capability, and operating cost for each lease.
3. The requested temporary royalty rate for each lease. BLM provided the example of reducing a royalty rate by 12.5% to 0.5%.
Operator/payor should mark trade secrets or other priority data such as operating costs as “confidential/proprietary.”
How quickly will BLM issue a decision on a COVID-19 related request for royalty relief?
BLM’s Interim Royalty Reduction Guidance states that BLM will process royalty relief requests within five business days and will notify the operator of its decision within five business days.
What relief does the Interim Royalty Reduction Guidance not address?
The MLA allows BLM to waive, suspend, or reduce the rental or minimum royalty on federal leases based on the same criteria as royalty rate reductions. See 30 U.S.C. § 209; 43 C.F.R. § 3103.4-1(a). The Interim Royalty Reduction Guidance, however, does not address modifications of rentals or minimum royalties.
Which leases are subject to the Interim Royalty Relief Guidance?
BLM’s Interim Royalty Reduction Guidance only applies to federal oil and gas leases and does not apply to Indian tribes’ oil and gas leases.
Operators/payors also may apply for temporary royalty rate reductions for Class II reinstated leases using the process described below.
If you have any further questions, please contact Katie Schroder or Courtney Shephard.