Chapter 9A Critical Issues Associated with Leasing and Developing Federal Minerals in Southeast New Mexico
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KATHLEEN C. SCHRODER is a partner at Davis Graham & Stubbs LLP in Denver, where her practice focuses on all aspects of energy development on federal lands. Ms. Schroder counsels clients on oil and gas leasing and development on federal lands and agency compliance with the National Environmental Policy Act and the National Historic Preservation Act. She has extensive experience with the Endangered Species Act and advises on federal royalty issues. Ms. Schroder regularly represents oil and gas operators in administrative appeals before the Bureau of Land Management, Office of Natural Resources Revenue, and Interior Board of Land Appeals. She has defended and challenged agency decisions and rulemakings in federal courts across the country. Ms. Schroder is active with the Foundation for Natural Resources and Energy Law and has authored numerous papers. She has served on the Foundation's Board of Directors and chaired the 65th Annual Institute and the Foundation's Publications Committee; she currently serves on its Programs Committee. She is a member of Energy Outreach Colorado's Board of Directors and Western Energy Alliance's Board of Advisors. She previously chaired the Public Land and Resources Committee within the American Bar Association's Section of Environment, Energy, and Resources. Ms. Schroder began her career as an attorney-advisor in the U.S. Department of the Interior's Office of the Solicitor as part of the Solicitor's Honors Program. She then spent 10 years with a boutique law firm in Denver. She holds a B.A. from Rice University and a J.D. from the University of Colorado School of Law. After law school, she clerked for Justice Alex J. Martinez of the Colorado Supreme Court.
One of the most prolific oil-producing regions of the world straddles the boundary of Texas and New Mexico. On the New Mexico side of the border, the United States owns approximately one-third of the surface and mineral estates.1 The significant federal ownership requires oil and gas operators to plan for and manage their operations differently than in Texas or than on state and private lands in New Mexico.
The Foundation has an incredible wealth of scholarship on the complexities of developing federal oil and gas leases and operating on federal lands, and this Paper will not attempt to replicate or synthesize these materials. Instead, this Paper is aimed at those who are attempting to understand how to develop oil and gas on federal lands in southeast New Mexico, such as operators contemplating expansion into New Mexico, or Texas business units simply trying to decipher what their New Mexico counterparts are saying. Therefore, this Paper will provide an overview of some basic rules of developing on lands and minerals managed by the Bureau of Land Management (BLM) in southeast New Mexico and will attempt to identify regulatory potholes for the unwary.2 This Paper will also reference existing Foundation scholarship that provides a more comprehensive analysis of a particular issue.
This Paper is organized from the perspective of an operator attempting to plan development—starting with BLM's land use plans, proceeding to the leasing process, then addressing approvals of applications for permits to drill (APDs) and special status species considerations, and concluding with an overview of oil and gas lease administration.3
I. Ground Rules
An operator attempting to understand oil and gas development in southeast New Mexico must first familiarize themself with BLM, the Office of Natural Resources Revenue (ONRR), federal environmental laws, and the fundamental terms of federal oil and gas leases.
A. BLM in a Nutshell
BLM is one of several bureaus within the Department of the Interior. Other bureaus and offices within the Department of the Interior that are relevant to federal onshore oil and gas development include ONRR, the Bureau of Indian Affairs (BIA), and U.S. Geological Survey (USGS).
BLM has two functions relevant to onshore federal oil and gas development. First, BLM is a land management agency. It manages the "public lands," which include both federally owned surface and
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mineral estates.4 "Public lands" do not include lands administered or managed by other federal agencies, such as the National Park Service, Forest Service, Bureau of Reclamation, or the U.S. Army Corps of Engineers.5 Second, BLM administers federal onshore oil and gas leases, including federal oil and gas leases authorized by other federal agencies such as the Forest Service and BIA. USGS historically administered federal oil and gas leases, and BLM assumed this function in 1983.6
BLM has a decentralized structure relative to other agencies. BLM currently is headquartered in Washington, D.C.7 BLM has state offices that report to the Washington Office, district offices that report to the state offices, and field offices that report to the district offices.8 The New Mexico State Office administers public lands and minerals in New Mexico, Oklahoma, Texas, and Kansas.9 Southeast New Mexico is within BLM's Pecos District and managed by the Carlsbad and Roswell Field Offices.10
B. ONRR in a Nutshell
ONRR collects and accounts for royalties on federal minerals, including federal oil and gas. Like BLM, ONRR is a bureau within the Department of the Interior. ONRR was created in 2010; it assumed royalty administration from the Mineral Management Service (MMS), which assumed royalty administration functions from the USGS.11
ONRR is headquartered in Denver.12 Although ONRR has some field offices, most correspondence related to royalties on federal oil and gas production from southeast New Mexico comes from the Denver office. ONRR has delegated certain audit and investigatory functions to the New Mexico Taxation and Revenue Department, Oil and Gas Bureau.13
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C. Relevant Environmental Laws at 30,000 Feet
All federal agencies are subject to the requirements of the National Environmental Policy Act (NEPA), National Historic Preservation Act (NHPA), and Endangered Species Act (ESA) when making decisions14 ; thus, BLM must comply with this trio of statutes when leasing and approving oil and gas development.15
NEPA and the NHPA impose procedural requirements on BLM. NEPA and its implementing regulations require federal agencies to prepare an environmental impact statement (EIS), or an environmental assessment (EA) analyzing the environmental effects of their actions, unless an action is categorically excluded from such analysis.16 The NHPA requires federal agencies to take into account the effects of their actions on historic properties.17 By contrast, the ESA imposes both substantive and procedural obligations on BLM. It requires BLM to consult with the U.S. Fish and Wildlife Service (FWS) to insure BLM decisions are "not likely to jeopardize the continued existence" of a listed species or "result in the destruction or adverse modification" of designated critical habitat of listed species.18
Whereas NEPA, the NHPA, and ESA apply to all federal agencies, the Federal Land Policy and Management Act (FLPMA) uniquely applies to BLM.19 FLPMA is considered BLM's organic act and directs the agency to manage the public lands for "multiple use and sustained yield."20 Most significant for oil and gas operators, it requires BLM to prepare land management plans that allocate which lands will be open or closed to oil and gas leasing and under what terms.21 FLPMA also authorizes BLM to issue rights-of-way over federal lands.22
D. Fundamental Terms of Federal Oil and Gas Leases
The Mineral Leasing Act of 1920, as amended, (MLA) establishes the terms of federal oil and gas leases.23 A company seeking to acquire existing federal oil and gas leases should not assume that all leases are uniform or have the same terms.24 Leases issued before the MLA amendments in the Federal Onshore Oil and Gas Leasing Reform Act of 1987 ("Reform Act") require particular attention because
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these are subject to different terms than leases issued after 1987.25 For example, pre-Reform Act leases may be subject to variable royalty rates, rather than fixed royalty rates.26
Leases issued after the Reform Act are slightly more standard. Between 1987 and 2020, onshore leases were issued with a 12½ percent royalty rate and rentals of $1.50 per acre for a lease's first five years and $2 per acre after then.27 A handful of leases issued in 2022 are subject to an 18¾ percent royalty rate.28 Leases issued after August 16, 2022 are subject to a 16? percent royalty rate and rentals of $3 per acre for a lease's first two years, $5 per acre for a lease's third through eighth years, and $15 per acre for every year thereafter.29
After 1987, leases were first offered though a competitive leasing process and, if a lease did not receive the minimum bid, then could be leased noncompetitively.30 In the Inflation Reduction Act of 2022, Congress eliminated noncompetitive leasing.31 Therefore, all new federal oil and gas leases must be issued following a competitive bidding process.
II. Where Can I Do What? The Effects of BLM Land Use Plans
When an operator is contemplating or planning for development on federal lands, the operator should first consult BLM's land use plans, which are also known as "resource management plans" or "RMPs." RMPs outline the general rules of developing federal lands or minerals in a particular region by outlining where development may occur and under what terms. All BLM authorizations, including issuances of leases, approvals of APDs, and grants of rights-of-way, must conform to the governing land use plan.32 Operators planning development on federal lands should be aware of the decisions made in BLM's RMPs, the effect of these decisions, and BLM's processes for amending and revising RMPs.
Southeast New Mexico is...
