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Royalty and Suspension Relief in Response to COVID-19

Royalty and Suspension Relief in Response to COVID-19

On April 21, 2020, the U.S. Bureau of Land Management (BLM) issued interim guidance providing for federal lease royalty reductions and suspensions in response to the COVID-19 pandemic. The initial guidance provided procedures whereby operators could apply for royalty rate reductions and suspension of operations or production due to force majeure in accordance with Section 17 of the Mineral Leasing Act of 1920 (MLA), 30 U.S.C. § 226(i), or in the interest of conservation under Section 39 of the MLA.

On May 7, 2020, the BLM amended this initial guidance providing additional regulatory and procedure information for suspensions and royalty rate reduction applications.

Highlights include:

Oil and Gas Lease Suspensions due to “force majeure”

    • Lessees must submit applications through the appropriate BLM State Office.
    • The application must be executed by all operating rights owners.
    • Applications must include lease number(s), any applicable federal unit or communitization agreement, expiration date of the lease or HBP date of the lease, current lessees and operating rights owners, and supporting evidence of COVID-19 impact.
    • Applications must be timely filed:
      • For suspension of operations the application must be filed prior to lease expiration.
      • For suspension of production the application must be filed prior to expiration of the time to place lease in production as outlined in 43 CFR 3107.2-3 – “Leases capable of production”.

Oil and Gas Lease Suspensions due to “conservation of natural resources”

    • Lessees must submit applications through the appropriate BLM State Office.
    • Applications must include lease number(s), any applicable federal unit or communitization agreement, expiration date of the lease or HBP date of the lease, current lessees and operating rights owners, and supporting evidence of COVID-19 impact.
    • If an operator has submitted an APD, and the BLM is experiencing unusual or unreasonable processing delays in completing the environmental review, analysis or consultations, the BLM may grant suspension under Section 39 of the MLA.
    • The suspension of operations and production tolls the running of the lease term, prevents the lease from expiring during the suspension, and tolls payment of rentals, but also bars operations and production.

Royalty Rate Reductions (RRR)

    • Operator must submit applications through the appropriate BLM State Office.
    • Applications must include:
      • A self-certification statement, with supporting evidence, that the lease(s) would be capable of production in paying quantities were it not for COVID-19.
      • Economic analysis table showing that the lease(s) would be uneconomical without the royalty rate reduction.
      • The requested temporary royalty rate. The BLM may reduce rates down to 0.5%.

Period of Suspension/Royalty Rate Reduction

    • Initial suspension approvals will sunset 60-days from BLM approval. [1]
    • In the case of a temporary royalty rate reduction, the lease will revert to the original royalty rate.
    • Suspensions may be extended or rescinded (with notice).
    • For both relief types, suspension of operations/production and royalty rate reductions, an operator may re-apply for an extension.
    • Applicants may also request the BLM to terminate suspension early so that they can resume operations.

Steps for BLM Approval

    • Complete application must be timely filed.
    • BLM will process within 5 business days.
    • BLM will notify operator when the suspension is effective, the type of suspension, and the sunset (termination) date of the suspension.

Predictably, operators have filed hundreds of royalty rate reduction and suspension of operations applications in the last quarter. Additionally, the BLM has widely granted its floated 0.5% reduced royalty rate [2], 60-days of relief, and processing applications within 5 days [3]. A review of BLM’s Land and Mineral System Reports database, LR2000, shows  a royalty rate reduction application filed on April 30 and approved by May 5 for lease Serial No.: UTSL 0065429, a relatively quick turnaround considering the 5-day period included the intervening weekend. In another instance, the Serial Register Page for Serial No.: WYW 058571 indicates an application for suspension of operations/production was granted the same day, May 1, 2020, as it was filed. A royalty rate reduction application on lease Serial No. WYW 134204 was filed May 13, 2020 and approved the same day, with a retroactive effective date of May 1, 2020, at the lowest royalty rate offered of 0.5% down from the standard 12.5%.

Based on a LR2000 records, the simplified application requirements and the procedures outlined above, the relief offered by the BLM should be seriously considered if you are an operator in need of relief during this downturn. Just this week, it has been widely reported that the BLM has granted Chesapeake Energy Corporation approval to suspend production on more than 100 federal leases, saving the company from uneconomical operations, even as they inevitably lurched into bankruptcy. Even though under the current guidance most approvals for reductions and suspension under this special relief are scheduled to terminate July 1, 2020, it is likely that, with the pandemic lingering, more operators will seek relief and the BLM will see another round of relief requests.

If you have any questions regarding this article or its potential application to your operations, please call our office at (832) 626-0215. Our Attorneys are licensed in multiple states, including New Mexico, Wyoming, Utah, North Dakota, Colorado, Texas and Oklahoma. We have the experience, attention to regulatory changes and insight to deliver efficient, creative and cost-effective solutions and counsel, which will allow you stay ahead in this ever changing and turbulent market.

The content of this publication and any attachments are an advertisement and are not intended to be and should not be relied upon as legal advice or to create an attorney-client relationship.

[1]              Several Serial Register pages accessed on June 23, 2020, indicated a sunset date of July 1, 2020 for approvals filed late April through mid-May.

[2]              Compare to the standard federal lease royalty rate of 12.5%.

[3]              It does appear that the application process generally has taken longer (in some instances up to 3 weeks).

The content of this publication and any attachments are an advertisement and are not intended to be and should not be relied upon as legal advice or to create a lawyer-client relationship.