Regulation of oil and gas (O&G) resources on federal and Indian lands is variously overseen by about 10 federal agencies.  In addition, Indian tribes themselves and many states exercise their rights to issue and enforce their own regulations, many of which are more stringent than the federal rules. 

This dizzying lineup of authorities encountered by energy companies is further complicated by a complex set of ownership rules typified by split estate rights, wherein surface rights and rights to underground mineral resources are owned by different parties.  Also, it can be difficult for a single party to develop mineral resources without the cooperation of other estate owners and developers, leading to the need for communitization agreements, wherein parties join together to develop tracts, creating another layer of legal complexity.

In addition, horizontal drilling technologies, which have reached a high level of sophistication, have raised complicated legal questions regarding drainage, the gradual removal of O&G from beneath a specific property by a producing well on an adjoining property. 

These issues in themselves can overwhelm the legal departments of companies even without touching the most contentious issue of all—the use of hydraulic fracturing and the associated regulatory actions being taken by state and federal agencies as well as the war of words being waged by industry and environmental groups over the potential risks to groundwater resources from fracking chemicals.

700 million acres

In this maze of issues, it may be somewhat consoling that the major responsibility for managing mineral resources on federal and Indian lands is held by one agency—the Department of Interior’s (DOI) Bureau of Land Management (BLM).  But BLM’s ability to manage and inspect the wells it has permitted for the 700 million subsurface acres for which the federal government holds mineral rights is often constrained by budgetary and staff-size limitations.  This has raised concerns about whether BLM is meeting its obligation to inspect the performance of high-priority wells (e.g., wells that may affect underground sources of drinking water).  BLM guidance calls for drilling inspections for all high-priority wells.

But according to a new report by the Government Accountability Office (GAO), from 2009 to 2012, the BLM failed to inspect 2,100 of the 3,702 wells identified as high priorities in one BLM database.  According to the GAO, BLM’s governance of O&G drilling on federal and Indian lands has also been hampered by BLM’s reliance on outdated rules and guidance, limited coordination with state regulatory agencies, incomplete data on the location of resources and industry activities, and delayed reviews of communitization agreements. 

In 2013, O&G leases on federal land generated $14 billion in revenue, and development of energy resources in Indian Country provided almost $1 billion to tribes and individual Indians.  Income from the federal leases is one of the largest nontax sources of federal revenue.  Moreover, the BLM is obligated to maximize the economic development of federal land resources to ensure that benefits accrue for the American public, which, the GAO says, may not be possible until the BLM improves its management.  Hence, allegations about BLM’s performance are serious charges. 

The GAO recommends that the BLM ensure that its rules governing O&G development are consistent with technological advances, improve coordination of inspections with the states, and improve the timeliness of revenue share agreement reviews.  The DOI has agreed with the recommendations. 

Other agencies

For decades the BLM has been responsible for ensuring that federal and Indian O&G resources are developed in a timely, economically efficient, and environmentally sound manner.  BLM’s responsibilities include:

• Reviewing drilling plans and issuing permits for wells developing federal and Indian resources
• Inspecting wells to ensure compliance with environmental, safety, and other regulations
• Approving communitization revenue-sharing agreements for federal and Indian resources
• Ensuring the maximum recovery of federal and Indian resources

Those tasks would appear to be sufficient to protect the public’s interests.  But, from there, the involvement of the federal government and its state partners in O&G development stretches in multiple directions.  For example:

• Under its underground injection control (UIC) program, the EPA either implements or approves authority to states and eligible Indian tribes to regulate the injection of fluids underground, including produced water from O&G development.
• The U.S. Army Corps of Engineers issues permits for the discharge of dredged or fill material into waters of the United States.  For example, construction of a well pad or access road may require a Corps permit. 
• Before O&G development may occur in a national park, the National Park Service must consent to the lease and permit and can do so only upon determination that the permitted activities will not have significant adverse environmental effect. 
• States also play a strong role in O&G development on federal land.  This may be most evident in states that are authorized by the EPA to implement federal Clean Air Act standards.  State authority will become increasingly evident as states implement and enforce EPA’s August 2012 New Source Performance Standards (NSPS) for the O&G sector.  The NSPSs include the first federal air standards for natural gas wells that are hydraulically fractured.  States may require operators to comply with regulations that exceed federal requirements in stringency.

Indian Country

Federal agencies that manage aspects of O&G development on Indian lands include:

• The Bureau of Indian Affairs, which administers O&G leasing of Indian resources, maintains current surface and subsurface ownership records, approves communitization agreements, and approves agreements for all surface-related actions
• The Office of Natural Resource Revenue, which manages revenues from federal and Indian resources
• The Office of Indian Energy and Economic Development, which assists with the exploration, development, and management of energy resources on Indian lands to generate new jobs and economic self-sufficiency.

In addition, Indian tribes may have their own set of laws and regulations covering O&G development and may also implement and enforce various federal regulations.

Applicable regs

The GAO report provides a summary of specific regulatory actions federal agencies are directing at O&G development.  The major recent action by the BLM is a May 2012 proposal to regulate hydraulic fracturing on federal land.

One intent of the proposal is to give the BLM more power to impose requirements relating to well integrity and wastewater and would compel operators to disclose chemicals present in fracturing fluids.  The BLM is also revising some of its onshore orders and developing notices to lessees concerning O&G measurement, site security, and production accountability.

In addition to the NSPS for O&G development, the EPA has finalized a New Source Review (NSR) rule for Indian Country, which covers preconstruction permitting of air pollution control requirements for facilities, including permits for O&G development.  The EPA is also planning to revise rules for wastewater discharges related to O&G development.

Currently, the Fish and Wildlife Service is drafting rules to consistently manage activities associated with nonfederal O&G development by private parties on lands and waters of the National Wildlife Refuge System, and the National Park Service is updating its “9B Regulations,” which govern nonfederal O&G development in national parks.  The GAO says that all 14 state O&G programs reviewed for the report included changes over the past 5 years related to disclosure of chemicals used in hydraulic fracturing, baseline testing, well integrity, water and waste management, setback distances, well spacing, and air emissions.

Two decades behind

Within this entanglement of regulations, it would seem to rest with the BLM to provide consistency and order in the context of a sharp awareness of industry developments.  But the GAO said the BLM is falling short in this role in critical areas.  For example, according to the GAO:

• Most of BLM’s rules governing O&G have not been updated in over 2 decades to reflect technological advances.  For example, the BLM has not recently reviewed its guidance on communitization agreements, which addresses well spacing.  BLM’s guidance states that the agency usually will not approve or, in the case of Indian lands, recommend approval of agreements combining more than 640 acres for O&G production irrespective of well location and federal or Indian acreage within a unit.  But the guidance is inconsistent with industry practices because the limit of 640 acres does not accommodate horizontal drilling.
• Continuing with communitization agreements, the BLM does not always complete reviews in the required time frames.   The BLM is statutorily obligated to issue all determinations of allocations of production for units within 120 days of a request for determination.  In addition, DOI’s interagency standard operating procedures direct that the BLM review communitization agreements for Indian leases within 30 days of a request.  However, based on data for 61 Indian and federal wells drilled between 2009 and 2012 in Oklahoma, the GAO found that the BLM averaged 229 days to approve Indian communitization agreements and 126 days to review federal communitization agreements.
• Overlapping state and BLM authority to inspect wells is inefficiently coordinated.  The BLM and state regulatory agency officials told the GAO that some wells have been inspected by both BLM and state regulatory inspectors, and other wells have not been inspected at all.  In addition, state regulatory officials said that the growing number of horizontal wells that will likely traverse federal or Indian resources and state or private resources is expected to increase the number of duplicative inspections.  The BLM has developed formal agreements through memorandums of understanding (MOUs) with some state regulatory agencies—including California, Colorado, Nevada, and Wyoming—which are intended to improve coordination of inspection activities and, in some cases, minimize duplication of O&G inspections. However, the BLM has not developed formal agreements in other states with O&G development activities, including New Mexico, North Dakota, Oklahoma, and Utah, and not all existing MOUs address coordination of inspections.
• Of the more than 14,000 federal and Indian O&G wells drilled from 2009 to 2012 on lands managed by the BLM, BLM’s database is missing data on whether 1,784 wells were identified as high or low priority.  Without these data, the extent to which the agency inspects high-priority wells is not known.  BLM officials said the agency is in the process of developing a new tracking system that will require staff to indicate whether a well is high or low priority.

The BLM says that in 2014, it intends to review and update guidance for communitization agreements, mineral trespass, and well spacing.  Given BLM’s budget constraints, a comprehensive update would be a significant achievement.  Regarding other deficiencies listed above and other issues identified in the GAO report, it would be overly optimistic to expect effective changes anytime this year.

GAO’s report

William C. Schillaci
BSchillaci@blr.com