As a result of the response to COVID-19, the demand for oil and gas has dropped dramatically, and with it prices and production. This drop has led operators to reduce or even halt operations, as questions on prices, transportation and storage make for an uncertain future. Recently, the Bureau of Land Management postponed the first scheduled lease sale since oil prices began to fall; the sale in New Mexico was set to offer more than 45,000 acres for leasing.1 In addition, the BLM is using its authority to provide relief for those operating on public lands by reducing federal lease royalty rates and allowing lease suspensions. In this blog post, we will review the steps that operators of a federal oil and gas lease need to take in order to obtain a temporary reduction in their royalty rate or a lease suspension.
Generally, the royalty rate for federal leases is set at 12.5%. The Secretary of the Interior has the discretion to waive, suspend or reduce the minimum royalty for a lease or a portion thereof.2 In order for operators to receive the reduction, they must apply to their local BLM state office; the Secretary will not issue a blanket reduction for all federal leases.
Operators must provide lease information such as the lease serial number, the record title holder, operating rights owners, the lands, and the level of royalty reduction.3 The operator must also provide production numbers, the volume subject to the federal royalty,4 and a detailed accounting of costs and expenses for operation of the lease, in order to illustrate that the lease may be successfully operated with a royalty reduction, as well as all information regarding overriding royalties or similar interests paid to parties other than the government, as well as the efforts taken by operators to reduce them.5
The BLM issued guidance on its website indicating that applications will be addressed within five days and that the temporary reduction will be active for 60 days once approved, but it could be extended if necessary.6 If the reduction is approved, the operator must then share the approval with the Office of Natural Resources Revenue; otherwise, the operator risks penalties for insufficient payments. If the reduction is not approved, the operator may bring an appeal before the Interior Board of Land Appeals for review.
Where a royalty reduction would not be sufficient to resolve the challenges faced by an operator, the BLM permits a suspension of operations and production in the interests of conservation of natural resources, or, alternatively, when “force majeure” occurs. Force majeure occurs when despite exercising due care and diligence, lessees are prevented from producing on the lease due to matters beyond the control of the lessee.7
Effectively, a lease suspension acts like a pause button. While the lease is suspended, the primary term is tolled, the lease term is extended for the duration of the suspension, rentals and royalties are not due, and there can be no production.8 Suspensions will terminate of their own accord, and the BLM notes that suspensions approved due to the impacts of COVID-19 will terminate 60 days from the date of BLM approval.9 The BLM also notes, however, that a suspension may be extended or could be cut short if the lessee submits a written request to the BLM.
In order to obtain a suspension, the operator must submit a suspension application to the relevant BLM State Office, executed by all operating rights owners. For each lease, the application must identify the operating rights owners, the date of the expiration of the primary term and/or the Held by Production Date. The application must include additional information about the operations and leases, as well as evidence of COVID-19 impacts on operations. For additional details you should refer to the guidance from the BLM listed in the footnotes below.
Suspensions may be requested for approved units or cooperative plans of development and operation by the Unit Operator on behalf of committed tracts. We note that all leases committed to units must also file for a suspension individually. Just like a royalty reduction, in the event a suspension application is denied, the applicant may request a review completed by the IBLA.
In these uncertain times, relief in the form of reduced royalties or a suspension of operations provide an option for operators on public lands. With the BLM beginning to postpone lease sales, there is a high likelihood that operators will receive the relief requested, so long as applications are submitted in a timely manner and with complete information. If you have questions or need additional information please contact our office.
Tjornehoj & Hack LLC, 2020
- “Trump Administration Abruptly Postpones New Mexico Oil and Gas Auction,” Reuters, published May 20, 2020. https://www.reuters.com/article/us-usa-drilling-lease-sale/trump-administration-abruptly-postpones-new-mexico-oil-and-gas-auction-idUSKBN22W1J4
- 43 C.F.R. 3103.4-1(a)
- 43 C.F.R. 3103.4-1(b)(1)
- 43 C.F.R. 3103.4-1(b)(2)
- 43 C.F.R. 3103.4-1(b)(3)
- COVID-19 Guidance for Royalty Rate Reduction https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/covid-royalty-rate-reduction-guidance
- 43 C.F.R. 3103.4-4.
- 43 C.F.R. 3103.4-4(b-e).
- COVID-19 Guidance for Lease Suspension https://www.blm.gov/programs/energy-and-minerals/oil-and-gas/covid-lease-suspension-guidance