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6 Oil and Gas Leasing and Management Procedures Basically, a successful oil and gas exploration and development pro- gram consist of a series of operations and decisions, including the following: Identification of an exploration target Land acquisition (lease) Approval of an Application for Permit to Drill (APD) Exploration drilling Well completion (for production) Additional APO approvals for development wells Full field development and production Cessation of economic production, well plugging, and reclamation This entire process generally occurs over a 20- to 40-year period, depending on the size of the field. While the process is predictable, the location and impacts of resource production are not, at lease at the early stages of exploration and development. OVERVIEW Onshore federal oil and gas leases are made available for exploration and development by means of a legal contract called a lease.) The terms 1 Seismic and other geophysical investigation, but not drilling, can generally take place on federal lands open to oil and gas leasing without a lease. A Notice of Intent is required by the BLM, except in Alaska, where a permit is required. The Forest Service requires a permit. Some states require permits or otherwise regulate seismic surveys. 87

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88 and process for issuing leases are set out in statute. Each lease contains a number of standard terms and conditions (Appendix C) and may also contain special stipulations. Moreover? the Department of the Interior periodically issues Onshore'' ()il and Gas Orders and~otices to Lessees (NTLs) that also may restrict how lease operations fare conducted. In addition to the APD review conducted by the BLM, a state may regulate operations on the lease through its own statutes and rules, including a separate review of the APD. Each of these conditions, whether in the statute, regulations, or the lease, defines or limits the property rights conveyed in the lease. Issuance of the lease does not, by itself, authorize on-the-ground activities. No drilling can take place under a lease except upon the BLM's approval of an APD (43 CFR 3162.3-1~. Nevertheless, it is generally assumed that the issuance of a lease conveys to the lessee some legitimate expectation amounting to a legal right to drill for, and extract mineral from, that leasehold, unless applicable law or the terms of the lease itself would prevent it. For example, a lease term may obligate the lessee not to violate the Endangered Species Act (16 USC 1531 et seq.) in carrying out activities under the lease. If it were subsequently determined that any surface activity on the lease would jeopardize an endangered species, then the lessee has no legal right to occupy the lease surface to drill that lease, nor presumably can the lessee: demand compensation for its investment in the lease. Probably the same result would be reached whether or not the lease contained -a specific term obligating the lessee to comply' with the Endangered Species Act, because the standard, lease 'form obligates the lessee to comply with all federal iaws,';of which the Endangered Species Act is one. - ' '' :; ' ' ' " Under current practices, even a condition~in a lease that generally would allow the government to deny permission to occupy''the surface In order to drill on that lease can be waived by the federal land man- agement agency. The no-surface-occupancy stipulation, for example, does not absolutely and forever bar the lessee from occupying that parts of the land surface identified in the stipulation. Rather, it says that there can be no occupancy without further express permission of the land management agency. However, the agency may be forbidden or restricted by statute or regulation from waiving certain stipulations. For example, the agency could not waive a stipulation protecting endangered species because of the Endangered Species Act. Further, as some federal courts have pointed out, an agency's proposal to waive a stipulation may result in significant environmental impact triggering NEPAs EIS requirement (e.g., Conner v. Burford, 848 F.2d 1441 at 1447-1448~. ~' ' '

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89 Unless the leases have been unitized, the location of the proposed well, as delineated in the APD, is dictated by drilling and spacing orders of a state oil and gas conservation commission.2 An APD on a federal lease is usually approved by the BLM and the state with conditions that are binding on the operator. These are aimed both at ensuring that the drilling comports with sound engineering practice and at protecting the environment through reclamation of the drill site and plugging of the well bore. If oil or gas production in paying quantities is discovered, then the well is completed in accordance with an approved procedure. In addition to federal review and approval, further plans for development of a well or field, including unitization and enhanced or secondary recovery, also require state as well as BLM approval OIL AND GAS LEASE ISSUANCE Current Oil and Gas Leasing Procedures for BLM and Forest Service Lands Under the Federal Onshore Oil and Gas Leasing Reform Act of 1987 (101 Stat. 1330-256), the BLM has established an orderly, well-defined oil and gas leasing process. Prior to passage of the Reform Act, the acreage of leases offered noncompetitively (both by lottery and over-the-counter) far exceeded competitive lease acreage (Figure 6.1~. The predominance of noncompetitive leases reflected the speculative nature of the resource and the lower front-end acquisition costs, as well as the specific process of leasing. Reform Act provisions were implemented in mid-fiscal year 1988 that required competitive offering of all parcels prior to any consideration for noncompetitive leasing. As a result, while total acreage under lease declined slightly, the acreage leased competitively increased significantly. As of the first half of 1989, 21 percent of the leases offered received bids during the competitive lease phase (Rocky Mountain Reporter, 1989~. While the range varies significantly from state to state, on the average, one-fourth of the leases and one-fifth of the acreage under lease are held by oil and gas production (see Figure 2.1, p. 20~. The ratio of leases is slightly higher in both Montana and Wyoming (1:5) and in Utah (1:6), and lower in New Mexico and Colorado (1:2~. 2 Unitization is a process of combining a group of leases undera single operating agreement that identifies the operator, how expenses and revenues will be shared, and how the unit will be operated. The spacing of wells within a unit is determined bar the unit operating agreement, not by state drilling and spacing rules.

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9o 1 ,00O,OOO,OOO ' ~oOo,Ooo Ol l ' ' o 1976 1S77 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1968 Excludes Alaska ~ A 0 - B _ c A - Competitive Leases Issued B - Noncompetitive Leases Issued C - Total Leases in Effect as of 9/30/yr FIGURE 6.1 Competitive and noncompetitive oil and gas leasing on federal lands, onshore continental United States, Fiscal Years 1976-1988. SOURCE: Bureau of I>nd Management (~977-1989). The current oil and gas leasing system for BLM and Forest Service lands is derived from the Mineral Leasing Act of 1920 (30 USC 181-287), the Mineral Leasing Act for Acquired Lands of 1947 (30 USC 351-359), the Federal Land Planning and Management Act of 1976 (43 USC 1701-1782), the National Forest Management Act of 1976 (16 USC 1600-1614), the National Environmental Policy Act of 1970 (42 USC 4321-4370), and the Reform Act. Important components of the system include the following requirements: 1. All leases will be offered competitively by oral bid, with a minimum bid of S2.00 per acre. 2. Lease sales will be held at least quarterly. 3. Tracts not leased by competitive bidding will be offered within 30 days noncompetitively, at the minimum royalty rate. 4. Parcels offered for lease may not exceed 2,560 acres for competitive leases or 10,240 acres for noncompetitive leases, outside Alaska. 5. Competitive leases carry a 5-year primary term, while noncompet- itive leases retain a 10-year primary term.

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91 6. Tracts not leased noncompetitively within 2 years are again offered competitively. 7. Notices of lease offerings and maps showing parcels proposed for leasing must be posted 45 days prior to sale. 8. The royalty (for all leases) is 12.5 percent. Rentals are $1.50 per acre for the first 1-5 years, and $2.00 per acre for all additional years. 9. Leases on Forest Service land will not be issued over the objection of the Secretary of Agriculture. 10. An APD, including a map of the lease area, must be posted for 30 days prior to approval. 11. The Secretary of the Interior and, for National Forest lands, the Secretary of Agriculture, will regulate all surface-disturbing activities to protect surface resources, and no APD will be approved "without the analysis and approval by the Secretary concerned of a plan of operations. 12. No leases may be issued on federal lands that are recommended for wilderness designation by the surface managing agency, BLM wilderness study areas, designated by Congress for wilderness study (unless Congress has otherwise provided), or allocated for wilderness further planning in Executive Communication 1504, 96th Congress, with some exceptions. The BLM adopted final regulations to implement changes in the leasing system under the Reform Act in June 1988. The final regulations reflected evaluation of a series of test sales, including variations in scheduling of sales, postcompetitive lease offering, and related options. The leasing procedure ultimately implemented by the BLM is delineated in Figure 6.2. Under the Reform Act there have been one or more competitive lease sales in every state with a significant federal land base (see Able 2.4, p. 30~. Furthermore, noncompetitive sales have proceeded on leases "left over" from competitive sales (Table 6.1~. The BLM procedure for conducting lease sales appears to be effective. The General Accounting Once (1989), in its recent review of the newly implemented leasing procedures, confirmed the increased percentage of competitive leases and the increased revenues from competitive leasing. While the Reform Act did not contain any statutory changes in land use planning procedures relative to oil and gas leasing, the Forest Service and the BLM recognized the need to revise their administrative procedures and regulations under existing law. Using the Supplemental Program Guidance, the BLM has continued to offer BLM tracts for leasing. It has, however, determined that some of its previously completed plans need to be revised. Some tracts that BLM has offered for lease have been challenged for

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92 Parcel s n ot previously leased Parcels from lands beyond the 24 month period of noncompetitive eligibility Parcel s from al I I eases (Competitive and Noncompetitive) just expired, terminated, relinquished, cancelled, including 12 month old parcels received in over-the-counter applications , ~ 1 l Standard checks for availability, consent WSA, stipulations r Sale Notice Posted Parcels available for competitive sale | Competitive Sale | r _ N t Lease available Leased ~Over- t h e- Cou n t er for 24 mon ths EM ~I Bid I Issue Competitive No Lease ~ Production _ (5 year Primary Term) | Filing Received 1 1 r 1 | Issue Noncompetitive | Lease (10 yr Primary Term) Expl ora t ion, development, production, abandonment, and reclomation No Production, :: Exploration, developm en t, production, abandonment, and reclamation FIGURE 6.2 Fedem1 oil and gas leasing process, post-Reform Act. SOURCE: Clouded of Bureau of Island Management. alleged lack of NEPA compliance, but numerous tracts have been leased without challenge. The committee spent some time examining the process of issuing leases and administering them once issued. It appears that the Reform Act requirements for public notice (30 USC 226(f)) are being only minimally

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93 1 a a; 3 o D o. I: ._ ._ - Cal or .5 - To _ ~ to ~ ~_ - 8 8 lo, ~ _ lo, lo _ ~_ o ~o o o ~o ~o C, _ ~ . ~ Do lo Or _ To ~ o or _ ~o. lo - Do ~- , ret ~\4 or ~- . Cal - , - . o _ ; ~0 ~ID - - v) - C~ U. - o -, - ID vat an: At: or ~ Go C) o ~C~= 6 C~ O ,.0 _O - a' C) ._~ ._ _y,~ _ ~ . U' OCR for page 87
94 implemented in some cases. While this information is made available, the committee heard complaints from some members of the public as well as from state agencies that the information was not in a form that was readily usable. (The sale notices typically identify offered tracts only by legal descnption, requiring considerable deciphering.) The committee was also informed that listings and maps of tracts being offered for lease are sometimes not available at the regional or local BLM and Forest Service offices, or are not made available M a form that Is usable by the public. Congress dealt with these issues to some extent in the Reform Act. It requires the Secretary of the Interior to "provide notice by posting" in the appropriate local office of the leasing and land management agencies "at least 45 days before offering lands for lease, and at least 30 days before approving an APD" or "substantially modifying the terms of any lease." The notice must include "the terms or modified lease terms and maps or a narrative description of the affected lands.'' Where maps are impracticable in the notice, they should be available for public review and "shall show the location of all tracts to be leased, and of all leases already issued in the general area" (30 USC 226(f)~. While a similar requirement does not exist in statute for the Secretary of Agriculture, the proposed Forest Service regulations require notice for significant modification of stipulations. Proposed Forest Service Oil and Gas Leasing Procedures i] Prior to the Reform Act, the Forest Service established a procedure for reviewing oil and gas leasing and exploration development activities, as detailed in Figure 6.3. The Forest Service has now proposed rules by which it will implement the statutory responsibilities of the Reform Act for management of oil and gas leasing and attendant surface-disturbing activities conducted on National Forest System oil and gas leases. A controversial feature of the Forest Service proposal requires the nclusion of the following standard stipulation in all oil and gas leases issued for National Forest System land: The lessee must comply with the applicable rules and regulations of the Secretary of Agriculture set forth in Title 36, Chapter II of the Code of Federal Regulations governing use and management of the National Forest System and must submit to the authorized forest officer a surface use plan of operations for approval or disapproval in accordance with OFF, Part 228(e). The Secretary of Agriculture.. retains the authored under this lease to precede all operations on a leasehold where analysis of the environment indicates such action is appropriate. [Emphasized portion is new.] The potential impacts of this stipulation are discussed in more detail below under "Forest Service Proposed Stipulation." The proposed Forest Service regulations generally require public`'no- tice in a newspaper of general circulation" for any "decision to modify or

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95 Application for oil ond gas lease field with BLM.* State Director send to Reginal Forester Request for mineral report Regional Forester sends to Sote Director " mineral report -avail. of MFS lands -stipulations -EA prepared - ES need? -title report for acquired minerals District Ranger * ~1 Forest Supervisor _ , BLM issues oil and gas lease Lessee contact BLM | prior to entry on | FS land I 1 Operating Plan , FOREST SERVICE submitted to BLM REVIEW AND _ CONCURRENCE 1 Minerol exploration and development ! Operator files Notice of Abandonment to BLM 1 BLM terminates oil and gas lease i| FOREST SERVICE REVIEW | ~: AND CONCURRENCE | BLM initiates proposals requiring competitive bidding and simultaneous listing of oil and gas. FIGURE 6.3 Administration of federal oil and gas leases on national forest system lands. SOURCE: Courted of Forest Service. waive a lease stipulation that would result in a substantial modification of a lease term" (CF~ 228.104(c)~2~. The regulations also provide that Forest Service review of lessee's request for modification or waiver of a lease stip- ulation is subject to NEPA (see CF~ 228.104(b)~1~), which could provide an additional opportunity, for public comment. The courts have counseled

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96 that at least important lease stipulations "cannot be freely altered without an EIS" (see Conner v. Burford, 848 F.2d 1441 at 1447-1448 [9th Cir. 1987~. LEASE STIPUI^TIONS Stipulations, attached to the lease at the time of the lease sale, are used to prevent or mitigate impacts of oil and gas exploration and development on other resource values. These stipulations enable the surface manage- ment agencies to accommodate uncertainties in predicting and assessing environmental and other impacts at the planning stage. Since there may be as much as 15 years between plan approval and lease issuance (see Figure 1.2, p. 12), up-to-date data bases on resources are essential if stipulations are to be effective. The surface management agency should maintain the data base and ensure that the plan and the decisions to lease, with or without special stipulations, accurately reflect the current data. The committee heard considerable discussion concerning the impact of seismic exploration and drilling on threatened and endangered species, primarily grizzly bear, and big game, particularly elf. This type of surface land use information should be shared among state and federal agencies, environmental groups, industry, and public during the land use planning process. Furthermore, even after the plan is approved, wildlife data bases should be maintained and updated. Comments suggest that information is not being shared and, in fact, may be intentionally withheld in some cases. In addition to standard lease stipulations, terms, and conditions, special stipulations may control the timing of oil and gas activities, occupancy of the surface, use of the surface, and contingent rights to conduct any or all activities. While the wording of standard lease stipulations is established in the lease, the wording of other stipulations has varied. The Rocly Mountain Regional Coordinating Committee (1989), comprised of BLM and Forest Service representatives, has recommended standard wording and classification of stipulations. Standard Stipulations or Terms of the Lease The Over to Lease and Lease for Oil and Gas (Appendix C) contain the standard terms and conditions for all federal oil and gas leases. As noted, the lease states: Rights granted are subject to applicable laws, the terms, conditions, and attached stipulations to this lease, the Secretary of the Interior's regulations and formal orders in effect as of lease issuance, and to regulations and formal orders hereafter promulgated when not inconsistent with lease rights granted or specific provisions of this lease. Drilling is prohibited on any oil and gas lease until the BLM reviews

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97 and approves an APD. While these generic requirements make drilling on all leases contingent upon securing governmental approval of the APD, it is generally thought that on leases with standard stipulations the government must approve an APD where drilling will not violate specific environmental laws, such as the Clean Water Act or the Endangered Species Act. That is, it is generally believed that the lessee has some right to drill a lease Lath standard stipulations. In addition, the state oil and gas regulatory agency will frequently add operation-specific stipulations through its review and approval of the APD or development plan. These state-imposed requirements generally address environmental or conservation issues that are site specific and are not therefore considered at the lease stage. Timing Limitation (Seasonal) Stipulation One of the more common special stipulations limits the range or duration of time during which oil and gas exploration and development can be conducted on the lease. This stipulation is primarily designed to protect certain wildlife values, such as use of critical winter range, rutting and/or calving periods, eagle nesting, and similar activities that could be impaired by oil and gas operations, principally exploration. This stipulation might also limit activities near campgrounds or other seasonal recreation use areas, although it has not been widely used in that context. There is judicial authority for the idea that a stipulation forbidding lease activity to certain seasons, at least if not part of the original lease but instead attached as a condition to approval of an application for permit to drill, extends the lease term by an amount of time equivalent to the period of enforced inactivity (Copper Valley Machine Works v. Andrus, 653 F. 2d 595 [D.D. Cir. 1981~. The stipulation may be location-specific or leasewide, depending on the impacts and duration of the time limitation. Under current regulation, a waiver or modification may be granted if conditions can be proven to have changed or if impacts are acceptable. Controlled Surface Use Stipulation The controlled surface use stipulation does not prohibit surface use for oil and gas exploration and development, but does- strictly control how activities will be conducted. According to the Rocky Mountain Regional Coordinating Committee guidance (1989), a controlled surface use stipu- lation is designed to restrict or control a specific type of activity, not all activities. An example given is the restriction of access to the established

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98 roadway (i.e.,~no new access roads may be constructed). This stipulation can also be waived or modified unless otherwise prohibited. No-Surface-Occupancy Stipulations No-surface-occupancy stipulations prohibit occupancy of all or part of the leased surface without express approval of the agency. Whereas a timing limitation prohibits access to an area for a specific period of time, a no-surface-occupancy stipulation limits surface use at all times. Leases with this stipulation convey a right to explore and develop if it can be done without occupying that part of the leased surface subject to the stipulation (e.g., by directional drilling). The shape and size of areas subject to a no-surface-occupancy stip- ulation may be such that much of the area under the stipulation could be directionally drilled. This appeared to be the case on the Lewis and Clark National Forest, for example, where no-surface-occupancy stipula- tions were applied to slopes greater than 40 percent. Such slopes generally were alongside long valleys where drilling would be permitted. Thus, much of the area could apparently be drilled from adjacent lands. However, the federal agencies have apparently sometimes used no- surface-occupancy stipulations in a blanket fashion, covering the entire surface of several lease tracts in an area. If the blanket use of this stipulation means there is no practical possibility that a lease can be developed by directional drilling (because neighboring leaseholds are also covered by stipulated leases or otherwise unavailable for occupancy), the stipulation is being used to reserve a contingent right. For example, in the Palisades area of the Argued National Forest Management Plan (Forest Service, 1985), approximately 80 percent of the leased acreage (219,000 of 247,000 acres) was covered by no-surface-occupangy stipulations. That is, stipulations were attached to all leases in areas the Forest Service had defined as "highly environmentally sensitive," which included lands necessary for the protection of threatened and endangered species, lands with slopes greater than 40 percent, lands with regionally unique plant or animal species, and lands with significant cultural resources (see Sierra Club v. Peterson, 717 F. 2d 1409, 1411, note 3, 1412 [D.C. Cir. 19833~. In Conner v. Bu~ord, the government issued some 709 leases covering 1.35 million acres: 57 leases had no-surface-occupancy stipulations covering the entire lease, and about 500 leases had no-surface-occupangy stipulations covering a portion of each lease's acreage (848 F. 2d 1441, 1447 [9th Cir. 1988~. In the Deep Creek Plan on the Lewis and Clark National Forest, 75 percent of the 42,000 acres leased was covered by a no-surface-occupancy stipulation (Bob Marshall Alliance v. Wan, 658 F. Supp. 1514, 1518 [D. Mont. 1986~.

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99 Contingent Right Stipulation Through the use of contingent rights stipulations, the government reserves the right to say no to any activity on the lease whether it be exploration or development. Disapproval of any activity may result in the lease never being drilled before it expires, but no compensation is owed to the lessee because the government had expressly reserved this right at the outset. The term came into general use in 1982 when the Department of the Interior approved the use of a contingent rights stipulation on noncompeti- tive oil and gas leases and the Forest Service, on April 22, 1982, announced the test of a contingent rights stipulation to be included in geothermal and noncompetitive oil and gas leases (see 47 Fed. Reg. 82 [April 28, 1982~. The stipulation proposed for the test included the following language: "All operations on this lease are subject to Government approval with such site specific stipulations as may be necessary to assure reasonable protection of or mitigation of effects on other values. A plan of operation shall not be approved if it results in unacceptable impact on other resources, land uses, and/or the environment . . .". This test was based on the premise that adequate NEPA analysis could not be conducted and proper stipulations could not be determined without some site-specific information on the nature of the exploration and development that would ultimately occur on the leasehold. Such a process clearly required the ability to stop exploration or development if it caused unacceptable environmental impact. Otherwise, neither NEPA compliance nor protection of the public interest could-be assured. By concentrating the analysis of potential impacts on a specific exploration or development proposal, use of the proposed stipulations avoided having the Forest Service spend large sums of money on analyses of exploration and development that both were speculative and had a low probability of ever happening. The courts have never squarely decided whether such a stipulation is within the broad powers over lease terms delegated to the federal agencies by the Mineral Leasing Act. A number of different courts have, however, necessarily assumed the validity of such a stipulation, in holding that its inclusion allows the agency to postpone full-fledged compliance with NEPA in issuing oil and gas leases (e.g., see Sierra Club v. Peterson and Conner v. Burford discussed in Chapter 4, pp. 46 if.) Legislation dealing both with oil and gas on the Outer Continental Shelf and with geothermal resources onshore contains explicit provisions making lease rights leases contingent upon agency approval of development proposals. The Outer Continental Shelf Lands Act (OCSLA) of 1982 (43 USC 1331-1356) provides specific procedures for reimbursing a lessee who is not allowed to proceed with development.

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100 Outer Continental Shelf leases and to some extent geothermal leases are also contingent right leases in that development depends on the approval of development proposals. The OCSLA provides specific procedures for reimbursing a lessee who is not allowed to proceed to development. Forest Service Proposed Stipulation The Forest Service regulations to implement the 1987 Reform Act contained a proposed provision that some have called a contingent right stipulation. The 1987 Reform Act strengthened the authority of the Forest Service by giving it the right to disapprove leasing on National Forest land (30 USC 226 chid. The Forest Service already had such authority over acquired land. The Reform Act also provided that the responsible federal agencies "shall regulate all surface disturbing activities conducted (under leases) and shall determine reclamation or other actions as required in the interest of conservation of surface resources" (30 USC 226(g)~. This section also provided that no permit to drill shall be "granted without analysis and approval by the Secretary concerned (either Interior or Agriculture) of a plan of operation covering proposed surface disturbing activities within the lease area." The requirement for approval presumably includes the right to disapprove a proposed plan if the agency determines an unacceptable impact will result. The 1987 Reform Act is, thus, susceptible to the interpretation that it makes every onshore oil and gas lease contingent upon additional approval or potential disapproval by the agency if the agency determines that the impact is unacceptable. Because the Reform Act requires the federal agencies to approve sur- face operations on their leases, the Department of Agriculture apparently takes the position that the act requires, in effect, that all oil and gas leases on National Forest lands are contingent upon subsequent approval by the Forest Service of the environmental acceptability of plans of operations on the leases (see section 228.106 of the proposed regulations). Presumably this means that if approval is denied, the lessee can neither develop the lease nor obtain compensation for the loss of opportunity to develop. This position has not been tested in the courts to date, and the industry has vigorously challenged it in comments to the agency. Apart from questions of its legality, this stipulation appears to be based upon three considerations. First, it enables the Forest Service to comply with the Reform Act, which requires the federal agencies to analyze and approve a plan of operations before allowing any lease to be drilled (30 USC 226(g)~. That is, it reserves authority to the agency to deny approval if the environmental impacts are unacceptable. Second, the stipulation addresses the situation in which, before an area is leased, it is not feasible to determine all of the potential environmental

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101 impacts that might occur on the lease. Therefore, it reserves the authority of the Secretary of Agriculture to prevent activities that cause clearly unacceptable environmental impact. Third, it would allow staged or segmented environmental analysis of oil and gas leasing activities by specifically reserving the right to say no to an activity. This would appear to satisfy court decisions like Conner v. Buzzword where the court held that unless the ability to prohibit an unacceptable environmental impact is retained, the agency must prepare full NEPA documentation, including analysis of full field development, prior to issuance of a lease. The stipulation provides two public benefits. First, it enables the agency to retain the authority to prevent environmentally unacceptable impacts from oil and gas development. One" of the fears repeatedly expressed to this committee was that a lease allows developmental impacts that may be clearly unacceptable. This fear rests both on the idea that the lease conveys some form of legal properb right to develop and on the idea that the act of leasing establishes a momentum toward development that cannot be stopped, even if development is substantially different and causes more serious impact than that envisioned when the lease was issued. The fear is particularly strong in roadless and other environmentally sensitive areas, where not much is known about the potential oil and gas resource or the nature of the probable exploration and development activities. Second, the use of this stipulation simplifies NEPA documentation and makes it much less costly. It allows the agency to concentrate on a realistic analysis of the exploration and probable development on the lease, without engaging in speculation about possible full field development scenarios at a stage when very little is known about the area. It also could reduce the tendency to "boilerplate" the lease with stipulations to cover every conceivable condition that might be encountered. Apart from possible questions about legal authority to employ this kind of contingent rights stipulation, there are two concerns about it. First, there could be a reluctance to bid on leases with such clauses, and the amount of the bid could be reduced to reflect uncertainty. Second, with such a clause in the lease, the agency might be reluctant to say no to proposed leases in areas where the agency believes that development would likely result in unacceptable impact. The clause might, in other words, be seen as an easy way to put off decisions about unsuitability, even in areas likely to be unsuitable. General Concerns Regarding Stipulations The committee is concerned about two allegations regarding stipula- tions. First, restrictions and stipulations recommended in land use plans

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102 are not always specified in the leases themselves. Furthermore, the state and federal-agencies, industry, and the public may fail to share data with each other, particularly concerning wildlife and geologic prospects. Indus- tIy considers its geologic data proprietary and may be reluctant to share them with the agency planners. Second, the process for rescinding, modifying, or suspending lease stipulations is poorly defined and actions are not well documented or justified. The committee heard complaints that this process was often a very informal one, without public notice or much environmental assessment. The question is of considerable concern because of the agencies' apparent tendency to "load up" leases with stipulations rather than make what might be controversial or difficult decisions about oil and gas development at the planning or lease issuance stage. For instance, no-surface-occupancy stipulations may be used to delay rather than confirm a planning decision. Further? such stipulations may be removed' administratively at the APD approval stage without public hearing. ANTICIPATING EXPLORATION AND DEVELOPMENT An exploration program is designed to' target an area where oil and/or gas may have been trapped. The resource is then tested to determine if it is present in "paying quantities." The expenditure of exploration time and money is predicated on the right to develop, transport, and sell the resource. While the goals seem simplistic, full field development is dependent on a variety of exploration and production scenarios. Unless there is previous exploration or development in an area, it is virtually impossible to accurately forecast a specific exploration and development scenario at the planning or leasing stage. At the planning and leasing stages, the potential types of oil and gas drilling targets may be defined. However, the criteria that determine the actual size and type of drilling operation (i.e., depth, specific geology, and type of wells will be determined only at the APD stage. Some impacts of exploration are determined by the geology of the exploration target. For instance, the size of the exploration site and the degree of disturbance will be dependent on the projected drilling depth, the type of mud systems, and the nature of the drilling (stratigraphic test versus borehole capable of production). However, surface impacts can be controlled or limited, often at significant cost to the operator, by requirements for self-contained mud systems, helicopter versus road access, seasonal time constraints, or requirements for directional drilling. Likewise, full field development is predicated' on the information pro- vided during exploration and ongoing development of a field. Again, the geologic nature of the field will determine the number and location of

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103 wells, the type of pumping or auxiliary equipment, equipment for special treatment of oil (e.g., waxy crude) or gas (e.g., sour gas), storage and trans- portation systems, and location and density of service roads. The impacts of full field development can be controlled, again at potentially significant cost to the operator, through requirements for multiple wells or completions from a single surface location, pipeline versus truck transport, specific site and road construction, timing of development, contemporaneous reclama- tion, and establishment of alternate habitat for wildlife. EXPLORATION DRILLING AND FULL FIELD DEVELOPMENT The BLM approved 1,772 APDs in 1988, down 53 percent from 1985 (Figure 2.3, p. 24~. The purpose of an environmental review at the APD or plan of operations stage is to capture concerns that were identified at the planning and leasing stages, and ensure that they are reflected in APD stipulations. As noted earlier, the agencies are hampered by the very nature of oil and gas resources. Unless there is a history of production in an area, neither the agency nor the industry can predict at the planning or leasing stages, the exact type and magnitude of activity necessary for exploration and development of a potential oil or gas resource. Review and approval of the APD and operations for full field development provide two opportunities for federal and state agencies to ensure, through-regulations and stipulations, that the oil and gas operations will be conducted in a manner consistent with sound conservation and environmental practices. Sometimes the agencies use the APD and other decision points after issuance of leases to insert new conditions or restrictions on lease activity that did not exist in the original lease. It is not easy to determine the extent to which this actually occurs. The standard lease form reserves a degree of continuing authority in the government to regulate activity on the lease. Sometimes what might appear to be "new" restrictions imposed at the APD stage are actually just more precisely articulated restrictions that can fairly be embraced in general stipulations in the lease itself. On the other hand, the restrictions can be beyond those contemplated in the original lease, but which the lessee accepts in order to secure agency approval to proceed. As this demonstrates, there is a continuing relationship between the lessor agency and the lessee that generally requires close cooperation between the two. The BLM is the agency responsible for review and approval or dis- approval of APDs on federal lands, Indian trust lands, and federal units. On Forest Service lands, APDs are not approved over the objection of the Secretary of Agriculture, in accordance with the Reform Act. The process is initiated by either a Notice of Staking or an APD, as outlined in the flow

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104 NOS OPTION APD OPTION Step I Staking Notice Submitted Step II Onait. Inapt on Stop III APD Sub: and Procesalug Application for P.r~t to Drill Onai te Inspectlon APD Review and Proceas~g . APPROVED DRILLING PLAN Step iv uperat~ one ~;os~ducted Under an Approved Plan Step Y Production/Dry Elole-Subaequent Action. Step Vl A"ndonment FIGURE 6.4 Procedures for approval of lease operations. SOURCE: Bureau of Island Management and Forest Service (1989~. chart (Figure 6.4~. As indicated, the review process includes evaluations of the engineering of the well, proposed completion, reclamation, archeo- logical survey, environmental impacts, wildlife impacts, and water use. The state's responsibility may include ensuring that the well location comports with drilling and spacing orders, approving use of a water source, and designating other requirements as necessary to protect the environmental value and ensure reclamation. Drilling activities, as well as certain geophysical surveys, are moni- tored through BLM, and often state, inspection and enforcement. Such monitoring is done in part to ensure that the operations on the ground are consistent with permits and regulations. Evaluation of the exploration drilling results in either plugging of the well and reclamation of the site, or plans to complete the well for production and initiate further exploration or development of the lease. The generalized scenario for exploration through production to reclamation is illustrated in Figure 5.4 (see p. 64~. The term full field development is used generally to describe all sur- face facilities necessary to establish and maintain oil and/or gas production within the field or area of production. This might include pump jacks, tanks, pipelines, compressors, heater treaters, storage sheds, offices, hydro- gen sulfide abatement equipment, roads, drillingJproduction pads, equip- ment storage areas, and vehicles. However, full field development is not automatically initiated by the first successful well. Furthermore, the size and character of the field are often not certain until a number of wells have been drilled. Most companies can and do attempt to estimate the size and character of the target field on the basis of seismic work prior to drilling the first well. However, the uncertainties of economic production and the exact requirements of the field make any planning projections expensive and speculative for both the agency and industry. Completion of the well for production is usually based on preapproved plans in the APD. Any changes, on a well-by-well basis, are handled through Sundry Notices, which describe proposed changes in previously approved

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105 activities. Support facilities that are not part of a well site would generally require special use permits. Pipelines are reviewed and approved through right-of-way or special use permits. All such approvals, under the Reform Act, must be secured from both the BLM and the surface management agency. A field may be unitized in order to more efficiently produce oil and/or gas from the field, often by utilizing enhanced or secondary recovery processes. Unix may include a variety of surface and subsurface land ownership. In most cases, unitization and enhanced or secondary recovery processes also require approval by a state oil and gas conservation com- mission. The plan is updated and reviewed on an annual basis. While the bunk of the plan addresses engineering and conservation practices, it also reflects any stipulations or reclamation requirements. REFERENCES Bureau of Land Management. 1977-1989. Public Land Statistics, 197~1988. Bureau of Land Management. 1989. Onshore Oil and Gas Leasing Report, Fiscal Year 1988. BLM Facts. Bureau of Land Management and Forest Sentence. 1989. Surface Operating Standards for Oil and Gas Exploration and Development. January. Forest Service. 1985. Targhee National Forest Management Plan. General Accounting Office. 1989. Mineral Revenues, Implementation of the Federal Onshore Oil and Gas Leasing Reform Act of 1987. GAO/RCED-89-108. May. Rocly Mountain Regional Coordinating Committee. 1989. Uniform Format for Oil and Gas Lease Stipulations. March. Rocly Mountain Reporter. July 28, 1989.