FEDERAL OIL and GAS LEASING is performed by the federal government under three types of land: tribal lands and offshore public lands. This series will be focused on onshore public lands, and more specifically those that fall under the Bureau of Land Management’s (“BLM”) jurisdiction. Here is a short history of federal oil & gas leasing. It also includes a summary of some of the most popular types of oil & gas leases administered under the BLM (renewal/exchange leases and public domain leases and right-of-way leases), as well as a description of today’s federal oil & gas leasing process.
History of federal leasing. Before the Mineral Leasing Act of 20/20 (“MLA”), oil and gas development on public lands was accomplished by locating a placer under the General Mining Act of 1872. Leasing has become a method of developing oil and gas on public land since the passage of the MLA. The MLA authorized competitive leases to be issued for land within a geological structure (“KGS”) that is producing oil or gas fields. Prospecting permits were not allowed for land outside a KGS. This was until the Act on August 21, 1935, which replaced prospecting permits by non-competitive leases. The MLA was modified numerous times but the fundamental framework remained unchanged from 1935 to 1987 when the Federal Onshore Oil and Gas Leasing Reform Act (“FOOGLRA”) came into effect. Congress passed many laws that affected oil and gas development. These included the Multiple Mineral Development Act of 54, the National Environmental Policy Act of 1969, and the Federal Land Policy and Management Act of 1996. The Federal Oil and Gas Royalty Management Act of 2002 and the Energy Policy Act of 2012.
Renewal and exchange of leases. Generally, renewal and exchange leases can only be found in very old oil fields. The original MLA provided that oil and gas prospecting permits could be issued by the BLM for land not in a KGS. A permittee was entitled to a lease for the greater 160 acres, or 1/4 of the permit area, upon the discovery of oil and gas. The permittee also had a preference right to lease the remaining permit area. The MLA provided that earned leases and competitive leases before 1935 had 20-year fixed terms without Habendum clauses (i.e. no “and so far thereafter” language) but that the lessee had the right to a “renewal” lease for a fixed consecutive period of 10 years.
Certain conditions were required for renewal leases, including a limitation of existing overriding royalties interests at 5%. Although there is no limit to how many times a renewal contract can be renewed, a 1990 amendment of the MLA provides that renewal leases renewed after November 15, 1990, will continue in force for 20 years. Because of the uncertainty associated with operating under a fixed-term lease, subsequent amendments made to the MLA allowed the lessee of any 20-year lease (including renewals of such leasing) and any lease issued prior to August 8, 1946, to exchange the lease to an “exchange lease” that includes the customary habendum clause. These leases are primarily oil and gas leases that were issued before 1946. There are very few exchange and renewal leases.
Public domain leases. The most popular federal oil and natural gas leases are public domain leases. These leases cover mineral deposits or lands that the United States has never granted or patented into fee-ownership. They also allow the United States to dispose of lands and lands under any law. There are some exceptions like lands incorporated by cities or towns or lands in national parks or monuments or reserves or lands in wilderness areas. If consented to by the surface management agency, they can also be used to cover acquired lands. These are lands that have been patented and then reacquired from the federal government.
The MLA allows public domain leases. The MLA has many amendments that have made it possible for lease terms and history to vary. The primary term, rentals, or royalties, depends on many factors. These include whether the lease was issued in a competitive or non-competitive manner, the time period during which it was issued, as well as the time period during which the rental or royalty was required. It is therefore important to check the lease to verify the terms of a public-domain lease. It is important to review the history of the MLA as well as the applicable regulations in cases where the original lease grant has been lost or destroyed. We will discuss the current leasing of public domain land in this article, as most oil and gas leases today are public domain leases.
Leases of right-of-way. Federal rights-of-way lands that are not subject to oil and gas leases at the time of the right-of-way were issued may be leased only under the Right-of-Way Leasing Act of 30 (the ROW Act). The ROW Act seems to cover all rights of way, but the BLM usually only issues right-of-way leases under railways or reservoirs. The ROW Act states that the right-of-way owner is the only person who can lease the lands.
However, an owner or lessor of oil and gas rights in adjoining lands may submit a compensation royalty bid. The BLM will either issue a right-of-way lease to the right-of-way owner, or a compensatory royalties agreement to the lessee or adjoining owner, whichever is most beneficial to the United States. Right-of-way leases tend to be less common than public domain ones due to the few instances when lands are included in this category.
Today, oil and gas leasing. Today, the lease of public domain land for oil and natural gas is still governed by the MLA as amended and FOOGLRA. This is how such leasing takes place:
- Nominated land available for oil-and-gas leasing
- The BLM chooses tracts for a forthcoming lease sale
- Notification of the lease sale is given
- The BLM reviews all protests and creates a final list.
- The lease sale is now closed and the tracts will be available for oral bidding
- Each tract is leased by the BLM to the highest qualified bidder
If a tract is not offered or receives the minimum acceptable bid, it becomes non-competitive for two years. This occurs after the lease sale to the first qualified buyer. Current lease terms include a primary term for 10 years, a royalty of 12.5%, $1.50 per annum for the first five years, then $2 per annum thereafter. A minimum royalty of not lower than the annual rental will be due upon discovery of leased lands.