Adjudicating Overlapping Communitization Agreements

UNITED STATES DEPARTMENT OF THE INTERIOR
BUREAU OF LAND MANAGEMENT
WASHINGTON, D.C. 20240
https://www.blm.gov

July 3, 2018

In Reply Refer To:
3160 (310) P

EMS TRANSMISSION
Permanent Instruction Memorandum No. 2018-012

To:                   All Field Office Officials

From:               Assistant Director, Energy, Minerals, and Realty Management

Subject:           Adjudicating Overlapping Communitization Agreements

Program Area:  Oil and Gas Reservoir Management and Operations.

Purpose:  This Instruction Memorandum (IM) establishes a process for adjudication and approval of a proposed Communitization Agreement (CA) when the area covered by the proposed CA would overlap an area covered by an existing CA or unit participating area (PA) for the same formation.  This IM directs offices to cease allocation of production and associated royalties from a new overlapping CA to an existing underlying CAs at the time the offices approve a new overlapping CA. 

Policy/Action:  This IM establishes consistent national policy and procedures for adjudicating overlapping CAs to avoid inconsistencies and other concerns that overlapping CAs have raised.  This IM supplements the policy in BLM Manual Section (MS) 3160-9, Communitization.

The BLM and the Bureau of Indian Affairs (BIA) (collectively, the Agencies) will implement the following procedures:

• New CA/Existing CA Overlap. The Agencies will approve a new CA that would overlap an existing CA(s) only when the new CA will allocate production and associated royalties from the new CA directly to the leases within the boundary of the new CA.  When approving a new CA that would overlap an existing CA, the Agencies will no longer allocate production and associated royalties from the new CA to the existing underlying CA(s) that the new CA may overlap.  Each new CA will be a “stand-alone” agreement.  At the same time, the new CA will not change the allocation of production or associated royalties from the underlying CA.  
• New CA/Existing PA Overlap.  The Agencies will continue to follow existing interim guidance to process a new CA that would partially overlap an existing PA for the same formation within an approved Federal or Indian exploratory oil and gas unit.  The existing interim guidance is in Illustration 5 of the BLM Draft Handbook 3180-1, Unitization (Exploratory). 
• Reporting.  For each lease or agreement (including serialized unleased lands within a CA), the reporter (operator, working interest owner, lessee, or purchaser) will report royalties at the lease/agreement level on Form ONRR-2014, and the operator will report production on Form ONRR-4054 for each lease, CA, or PA.  Where a proposed CA overlaps an existing PA, the reporter will report the royalties according to the PA allocation schedule for the portion of the newly approved CA allocated to the existing PA.  The operator will report all production from the newly approved CA on Form ONRR-4054.
• Coordination with States.  If language in State-issued spacing and/or pooling order differs from the above policy, as may be the case in North Dakota, the Agencies will work with the appropriate State and Federal oil and gas regulatory agencies to develop an overlapping CA policy that is consistent with that State’s orders, statutes, regulations, and practice, to the extent possible, while also protecting the Federal and/or Indian fluid mineral interest.  The Agencies may impose different requirements when it determines that the State’s well spacing and location are not in the public interest or in the best interest of Indian lessors. 

Timeframe:  This policy applies to any overlapping CA that has an effective date after this IM’s issuance date.  In accordance with MS 3160-9, the effective date of a CA is the date of the agreement or the date of the onset of production from the communitized parcels, whichever is earlier. 

Budget Impact:  Implementation of this IM will result in decreased time required for BLM’s adjudication of CAs.

Background:  Current BLM guidance (MS 3160-9) is silent regarding how the BLM should process a proposed CA that would overlap an existing CA(s).  As a result, BLM State Offices have developed varying procedures for adjudicating and processing overlapping CAs.  Typically, these overlapping CAs arise from operators requesting to drill lease-line, in-fill, or section-line wells to improve hydrocarbon recovery because the existing well spacing is insufficient to develop fully the mineral resource. 

The Agencies usually require operators of Federal and Indian leases to adhere to the State well spacing and location orders.  However, the Agencies may impose different requirements when the BLM determines that the State’s well spacing and location are not in the public interest or in the best interest of Indian lessors.  When necessary to develop fully the mineral resource, operators may seek and receive approval from the State regulatory agency for spacing units that overlap existing spacing units.  Although the Agencies do not amend existing CAs to adhere to subsequent spacing orders, the BLM does require a new CA to conform to the new overlapping spacing unit.  Some BLM offices have required the new CA, which would overlap an existing CA(s), to allocate production and associated royalties to the existing CA(s).  The operator would then allocate this production and the associated royalties to the leases within the existing CA(s).  For vertical well development, there is typically only one overlap of an existing CA; however, due to the large size of horizontal development spacing units, there may be multiple overlapping CAs.    

When the operator allocates production from the new CA to the existing CA(s) that it overlaps, the allocated production sometimes goes to leases outside the boundary of the new CA.  Allocated production from the new overlapping CA ends up holding these leases and preventing them from terminating, even after actual production on the existing CA(s) ceases.  With the large spacing units for horizontal development, and multiple overlapping CAs, this can occur even when the producing well is located several miles away from an existing CA previously approved in the overlap sequence/chain.    

Addressing overlapping CAs in this manner has created issues with production allocations and reporting.  The Office of Natural Resources Revenue (ONRR) expressed concerns that the BLM is not consistent in adjudicating overlapping CAs, both on a case-by-case basis and among the various BLM State Offices.  The work to calculate these allocations by ONRR is labor intensive because each overlapping CA requires individual review and accounting.  In addition, the BIA and industry identified issues of allocating production to leases that are outside of the overlap. 

The Agencies will continue to follow existing guidance to process a proposed CA that would overlap an existing PA within a Federal or Indian unit (refer to Draft H-3180-1).  Because there is existing guidance addressing overlapping CAs/PAs, and because overlapping CAs/PAs are typically limited to one overlap between agreements, there have not been issues with the adjudication of these overlaps. 

Manual/Handbook Section Affected:  The MS 3160-9 will incorporate the policy contained in this IM in its next revision.

Coordination:  The Washington Office Division of Fluid Minerals (WO-310) coordinated preparation of this IM with BLM State and Field Offices, the ONRR, the BIA, and the Office of the Solicitor.

Contact:  If you have any questions concerning the content of this IM, please contact me at 202-208-4201 or your staff may contact Lorenzo Trimble, Acting Chief, Division of Fluid Minerals, at 202-912-4324 or William Lambert, Petroleum Engineer, at 406-896-5328.

Signed by:
Timothy Spisak
Acting, Assistant Director
Energy, Realty, and Minerals Management

Authenticated by:
Catherine Emmett
WO-870, IT Planning and Policy