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BLM and the onshore order impacts

RFP
I would like to say at the outset of this paper that the intent is not to be an exhaustive discussion on the replacement of the Onshore Oil and Gas Orders. These new rules are in excess of 600 pages with supplemental documentation, and with the rewrite of NTL-4A, Royalty or Compensation for Oil and Gas Lost, yet to be published, the total could well exceed 1,000 pages. The purpose of this paper is to help raise awareness within the industry that significant changes are coming from the Department of the Interior, and these changes will affect oil and gas operations on federal lands. Furthermore, these changes will touch many parts of an organization, including production operations, measurement, engineering, environmental, production and revenue accounting, royalty reporting, and even the gas and oil marketing groups. The effects will be broad, and organizations need to start discussing and preparing for these proposed changes.

Introduction

In the oil and gas industry, there are many aspects that are regulated by federal, state and local authorities. These agencies can impose significant regulations on various aspects of the business. This becomes especially true when a producer is planning to drill and produce from federal or state lands. In such circumstances, the rules surrounding how to obtain a lease, drill, operate, produce and measure hydrocarbons are generally more stringent than production on fee lands. Some regulating agencies, such as the Bureau of Land Management (BLM) and the Office of Natural Resources Revenue (ONRR), have significant additional rules that must be followed. These agencies work together to enforce federal regulations and ensure adequate and complete production accounting and collection of royalties due to the federal government and/or Native American tribes for production associated with tribal lands.

One of the cornerstones to production of any product — in this case hydrocarbons — is the measurement of the product. Production measurement and sales of the oil and natural gas (and byproducts that may result) produced are critical to an exploration and production company (E&P). First, production results can provide valuable reservoir information along with depletion and reserve data. Next, measurement allows the producer to accurately assess if a purchaser is paying them correctly for all of their sales volumes and whether revenues are appropriately reflecting produced and sold volumes. Similarly, a regulating entity — especially one charged with overseeing operations, measurement and royalty collections — must also have assurances that measurements are being taken in a sound and accurate manner.

The ONRR is the agency responsible for the collection and enforcement of royalty valuation standards. While the ONRR is not the topic of this paper, it works with and assists the BLM in its efforts to collect royalties and enforce the statutes applicable to oil and gas production, valuation and sales on federal lands. Many of the operational issues discussed will directly affect royalty valuation, production reporting and other back-office functions within an organization. As a result, one must always keep in mind the impact of such regulations outside of the operations context.

The BLM is the federal agency charged with oversight in this regard, however, its control extends far beyond measurement. The BLM manages multiple facets of land development within the energy space, from initial leasing to providing oversight on operations. It has published a series of documents that provide general guidance and a framework for operations for oil and gas companies. These are referred to as the Onshore Oil and Gas Orders.

The orders

Order No. 1: This order provides general operating guidance for the Application for Permit to Drill, right-of-way authorizations and operating on lands with federal minerals and a nonfederal surface, in addition to several other important areas of operation.

Order No. 2: This order provides oversight specifically related to drilling operations on federal and tribal lands.

Order No. 3: This order provides oversight regarding site facility, facility layout and production accountability. It also lays out specific penalties for noncompliance.

Order No. 4: This order provides oversight for oil measurement, laying out approved measurement techniques to ensure that both federal and Native American mineral owners receive royalties as specified in the governing leases.

Order No. 5: This order covers approved techniques for measurement of gas production to ensure federal and Native American mineral owners receive royalties due under the lease.

Order No. 6: This order provides oversight specifically related to hydrogen sulfide operations on federal and Native American lands.

Order No. 7: This order governs the disposal of produced water on federal lands.

Order No. 8: This is a proposed rule governing well completions, workovers and abandonment.

Order No. 9: This order was originally intended to be a replacement for NTL-4A. In reviewing the BLM site, there is a place for this order, but no publication is attached. As a result, it would seem NTL-4A is still the governing document related to such matters.

The focus of this discussion will be specifically related to Order Nos. 3, 4 and 5 and NTL-4A. These documents were published between 1980 and 1989, and since that time the industry has changed significantly. Measurement standards have changed for both oil and gas, yet the rules lack the flexibility necessary to implement newer and more accurate measurement techniques without seeking written exceptions and approval from the BLM. Furthermore, venting, flaring, beneficial use, commingling and several other operational considerations have recently come under closer scrutiny, and the results per the proposed rules will be significant to the industry.

The details

Order No. 3

Order No. 3 will be incorporated into the Code of Federal Regulations (CFR) as 43 CFR 3173. This change will eliminate the standalone nature of the documents, and the rules will be implemented directly into the CFR. The changes associated with this rule will be significant.

Order No. 3 focuses heavily on site/facility security, layout and associated operations, including seals, seal tracking and standards associated with hydrocarbon removal. The operator shall establish site security plans for all facilities. This plan must include a detailed self-inspection program, a system to ensure maintenance of accurate seal records, assurance that no bypass meters are in place, and documentation that the authorized officer has been notified of the completion of a plan and site/facility diagrams. The plan does not have to be submitted, but the officer must be notified of its location and the plan must be available upon request.

Perhaps most controversial, the BLM will designate the royalty measurement point (RMP) or facility measurement point (FMP) and will assign a number. This will be for all facilities, and companies will have 9–27 months to become compliant depending on facility production. Right now, the BLM thresholds are so low that many — perhaps most — sites would likely require approval and the FMP number assignment within 9 months. As currently proposed, wells producing in excess of 6,000 mcf or 40 barrels (bbls) per month would be considered very high producing and would require a compliance time of less than 9 months. With approximately 220,000 FMPs/RMPs to be issued and 3,700 operators affected (numbers from the BLM), it’s hard to imagine most of these could be done in such a short period of time. Not only would the industry struggle with such a time frame, but the BLM is not staffed to deal with the massive influx of paperwork and approvals that would be required. These FMP/RMP numbers would be required on all diagrams and a physical label on the FMP would also be required. Finally, the FMP/RMP number will likely be on the Oil and Gas Operation Reports (OGOR) submitted to the ONRR in order to assist the BLM in production tracking and reporting.

In addition to the new FMP/RMP assignment, another significant area of concern is that of commingling and allocation approval (CAA). The BLM is currently saying they will not grandfather any previously approved CAAs; they will require a new application for existing and all new commingling requests. The BLM says there are currently 10,541 CAAs on file and that 710 would be denied under the new rules. This begs the question, why go through the approval process and put additional burden on both the BLM staff and the industry? Under the current proposal, all would have to be refiled and approved. Denials of existing CAAs will result in additional or different measurement points and may require physical changes to facilities and metering locations in order to become compliant. This would also affect production reporting and potentially royalty reporting.

The final change we will focus on is the BLM’s increased focus on tank seals and seal tracking. Tank seal numbers will have to be reported and tracked with the BLM. Oilfield theft still happens and the BLM considers it a high priority, so you can expect increased scrutiny on tank seals and the associated reporting. Broken seals, seal numbers that are out of order or lack proper sequencing may result in assessments, penalties or facility audits from the BLM. It will be important for changes or issues associated with tank seals on federal land to be reported to BLM personnel in a timely manner. This rule will allow for immediate assessment and penalties for certain violations.

Order No. 4

Order No. 4 will be incorporated into 43 CFR 3174. These rules will deal with oil measurement and associated issues. It will also address proving requirements and thresholds.

Order No. 4 has no mechanism for dealing with technological changes. As a result, many new oil measurement techniques — specifically Coriolis measurement — will require approval from the field office and/or an authorized officer for the area (despite the fact that Coriolis is accepted by the industry and the American Petroleum Institute (API) as an accurate method for measuring oil). The old rule allows for tank gauging and positive displacement measurement. These will continue in the new rule, but hopefully with a significant increase in flexibility that will make it easier to incorporate technological improvements as the industry moves forward. The goal is to accept and use new measurement technology without the need to rewrite the entire rule.

When measuring oil, you must use the BLM-approved FMP/RMP; the same must be used for reporting production. This will affect OGOR and potentially 2014 reporting if measurement locations change or existing measurements are found to be inadequate, thereby necessitating prior period adjustments (PPAs).

The BLM will increase accountability and proving standards on high-volume wells. These properties will require proving any time the non-resettable totalizer increases by 50,000 bbls, or quarterly, whichever occurs first. Per the BLM, this affects roughly 5% of lease automatic custody transfer (LACT) systems on federal lands. On some larger wells, or perhaps in areas where the FMP represents more than one producing well or zone (with the BLM’s commingling approval), this could mean proving once a month or even more frequently.

Finally, the BLM proposes five changes to run tickets:

  1. Require the BLM-assigned FMP numbers on each measurement/run ticket
  2. Require operators to fully notify the BLM when they disagree with data documented on a measurement ticket
  3. Require operators, purchasers or transporters to fill out measurement tickets whenever a LACT or Coriolis measurement system is proven
  4. Allow submission of electronic-run tickets
  5. Require resetting of totalizers (accumulators) for fluids flowing through the LACT, and storing and reporting of raw data to determine average pressure and temperature whenever a ticket is closed. In this case, the BLM appears to expect two totalizers: one that never resets and one that resets upon proving and/or ticket closure.

By implementing higher standards for proving, accuracy, FMP, run-ticket rigor and the use of more advanced technology, the BLM hopes to improve its ability to verify and audit production of oil-producing properties. It’s also important to point out that as with the new rules replacing Order No. 3, there will be provisions for immediate assessment and penalties for certain violations.

Order No.5

Order No. 5 will be incorporated into 43 CFR 3175. As is the case with the new rules regarding oil measurement, the rules for gas measurement will also require the incorporation of the FMP/RMP into production reporting. This will affect OGORs and potentially 2014 reporting if PPAs are required, measurement locations are changed or existing measurements are found to be inadequate. Like oil, gas measurement has changed considerably since the 1980s. These changes have resulted in the inconsistent application of measurement technology and standards across federal leases. The goal of these new rules is to account for measurement changes and technological advancements without needing to rewrite the entire rule.

Over the past several years, there have been issues surrounding gas sampling for BTU measurement or gas quality. The BLM requires annual sampling, while the ONRR prefers twice-a-year sampling. This discrepancy results in audit issues during ONRR production and royalty audits. As a result, the BLM is moving to biannual sampling and is implementing a dynamic sampling requirement. This sampling will be determined based on well production and BTU variability over specific periods of time, in addition to establishing an appropriate sampling frequency.

In conjunction with additional testing, the BLM is planning more frequent site and facility inspections. In instances of very high volumes, the BLM is proposing monthly verification. High-volume FMPs will require quarterly verification. Low-volume systems would require verification every six months and very low or marginal FMPs would require annual proving. The BLM defines very high volume as wells that produce in excess of 1,000 mcf/day and high volume as 100–1,000 mcf/day. Various trade groups are pushing hard on these volumes for both oil and gas production in an attempt to get them raised. For example, in Texas, wells producing less than 90 mcf/day are considered marginal, and wells producing less than 250 mcf/day in Louisiana may qualify for marginal or incapable well incentives.

Electronic measurement of gas is preferred by the BLM and will be required for all high-volume and very high-volume wells, most already meet this requirement. In addition to the electronic requirement, the BLM is considering further requirements related to transducer type and calibration requirements and approved software revision information for installation on federal properties. Chart recorder use will be limited to marginal and low-volume FMPs.

As with all of the revisions, an increased ability to issue assessments and penalties will be incorporated into these new rules. The BLM is proposing the removal of civil penalty caps associated with these rules — it wants assessments to more accurately reflect changes to oil and gas drilling and operations. The BLM argues that small assessments do not provide a deterrent when the cost to drill ranges from $3 million to $10 million per well.

NTL-4A/ Order No. 9

The BLM has recently published the proposed rule for venting/flaring and replacement of NTL-4A. With increased focus on environmental issues at the Environmental Protection Agency (EPA) and a similar focus at the Department of the Interior, it appears that much of NTL-4A has been replaced with more stringent guidelines for the venting, flaring and capturing of tank vapors. This proposed rule was published in late January. Look for a more comprehensive update when all of the rules are finalized.

Summary

Publishing these rules has placed a significant burden on the industry and the government to ensure adequate rollout and compliance with the details contained in the proposals. Additionally, it would be helpful for the BLM to reopen the comment period on all of the proposed rules at that time. Since these rules are interdependent and require almost all facets of an organization to be involved and aware, they must be viewed and commented on in their entirety.

These rules will have significant operational impacts on organizations operating on federal land, in addition to their effect on regulatory compliance, accounting, production reporting and marketing. They should be reviewed in totality by affected parties within the organization, and discussion about how to comply should start now. If an organization believes compliance is not possible within the BLM’s specified time frames, they should consider reaching out to the local BLM office to discuss a viable path forward for the organization.

Industry trade groups such as Western Energy Alliance, the API and the Independent Petroleum Association of America have provided significant and excellent comments to the BLM regarding these proposed rules. I would strongly urge those in the oil and gas industry to read these comments and the proposed rules. The proposed rules are quite long, and additional proposed rules are on the way. Become familiar with these requirements — their impact will be critical to ensuring compliance with the new operating standards imposed by the federal government.

Contact
Trey Thee
Tax Senior Manager, Indirect Tax
+1 918 877 0792