United States: Do You Dare To Flare? A North Dakota Field Office Provides A View Into The Federal Regulatory Future

Last Updated: November 16 2015
Article by Mark Barron

While high-profile regulatory efforts focused on hydraulic fracturing, waters of the United States, sage grouse, and greenhouse gas emissions have grabbed media headlines over the last several months, a potent stew of seemingly mundane technical initiatives has been simmering under the noses of domestic energy companies. Taken individually, narrow regulatory proposals related to oil and gas accounting, permitting and planning requirements, procedural rules for administrative appeals, royalty reporting, weights and measures, bonding requirements, and infrastructure development have been of interest to only a small group of regulatory and legal technocrats. But understood collectively, these less glamorous initiatives have the potential to fundamentally change the scale and nature of oil and gas development in the United States.

I.                   BROAD REGULATORY INITIATIVES

In just the past three years, the Obama Administration has engaged in rulemaking and enforcement initiatives related to, among other topics:

  • The "unbundling" of processing costs necessary to put natural gas into "marketable condition" for the purposes of royalty reporting.1
  • Permitting and planning for private oil and gas development on National Wildlife Refuge System lands.2
  • Culpability standards for civil penalties associated with royalty reporting and civil procedure rules for administrative challenges to civil penalty assessments.3
  • Processing of rights-of-way on Indian lands.4
  • Royalty rates, annual rental payments, minimum acceptable bids, bonding requirements, and civil penalty assessments for federal onshore oil and gas leases.5
  • The application of "major portion" pricing for the calculation of royalties derived from production on Indian oil and gas leases.6
  • Facility measurement points, site facility diagrams, the use of seals, bypasses around meters, documentation, recordkeeping, commingling, off-lease measurement, and the reporting of incidents of unauthorized removal or mishandling of oil and condensate.7
  • Oil meter technology, proper measurement documentation, recordkeeping requirements, and penalties associated with measurement errors.8
  • Gas measurement at production facilities.9
  • Permitting and planning for private oil and gas development within National Parks.10

And within the next few months, the Bureau of Land Management ("BLM") is expected to propose at least one additional rule related to venting and flaring of natural gas from oil wells on federal and Indian lands. BLM had advised the public that the agency "is considering various options for addressing venting and flaring of gas and the loss of gas through fugitive emissions from onshore Federal and Indian oil and gas operations."11 BLM's proposal is expected to include rules governing well completions, production testing, liquids unloading, emissions control, gas conservation plans, and maintenance and repair obligations.12

Though segmented in implementation, each of these regulatory measures represents a reaction to a pair of related themes that run throughout the Administration's energy policy. The first theme is the idea that federal agencies have not kept pace with technological and economic developments that precipitated the contemporary boom in domestic oil and gas production. The result has been, according to the agencies, a proliferation of activities alleged to be either unregulated (or under-regulated), e.g., hydraulic fracturing, and long backlogs for federal permits and authorizations. The second theme is a concern that the current rules for calculating and collecting royalties on production are insufficient to ensure that the American people receive a fair return on development of the federal mineral estate. Regulatory efforts to address those concerns reflect a desire to control where and how oil and gas is produced, measured, transported, and sold.

Beyond the actual content of any individual rule, the actual segmentation itself has important implications for the impact of the Administration's regulatory program. The value of an oil and natural gas asset derives from the interplay of many aspects. Royalty rates, bonus bids, operational costs, regulatory costs, taxes, transportation, and distribution costs all impact an asset's value. Adjusting any one of these features in isolation, without consideration of the effect on other features, may have significant impact on an operator's decision to develop federal resources and is not tailored to optimize the value of the lease to the operator or the government.

Companies' investment decisions are based on reasonable expectations about what a company will earn from a proposed project. When development costs, operational costs, taxes, regulatory compliance costs, and other obstacles are manageable, higher rates of development can be expected. When operational requirements and regulatory policy undermine profitability, development is unrealistic. The most essential point is that companies choose to develop on the lands that promise to deliver the highest returns.

Nor are tHe government's returns shielded from the impact of burdensome regulations. Recent regulatory initiatives may produce higher revenue on production that occurs on federal leases, but royalties are paid only when production occurs. If regulatory requirements diminish the overall return producers earn on a project, the most likely result is less production on federal lands. Federal lands are in competition with state and private lands to attract investment and commercial activity; federal policy should therefore ensure that the terms of accessing federal lands encourage development, allowing federal lands to compete favorably with alternative development locations.

II.                THE NDFO FLARING DECISION.

While the full implications of these regulatory initiatives are not yet clear, a BLM field office in North Dakota has recently taken action that might provide industry observers with insight into the types of challenges energy companies could face if the Administration's policies are fully implemented. BLM's North Dakota Field Office ("NDFO") in Dickinson, North Dakota, is a subcomponent of BLM's Montana/Dakotas State Office.13 The NDFO has management authority over federal and Indian trust mineral estates in the western third of North Dakota. Consistent with that responsibility, the NDFO manages approximately 2,000 oil and gas leases, and has trust responsibility for over 3,000 Indian oil and gas leases located mostly on the Fort Berthold Reservation.

Because of the explosive growth of production from shale, combined with federal budget restraints, the NDFO, like other BLM field offices around the country, has amassed long backlogs for administrative review and approvals of drilling permits, rights-of-way, and other authorization necessary for production. One such authorization often involves requests to vent or flare natural gas from oil wells. Development in western North Dakota is typically focused on production of oil from the Bakken and Three Forks formations.14 Although Bakken pools producing in North Dakota are oil reservoirs, gas is produced in association with the oil at the wellhead as a by-product of oil production.15 During oil production, it may be necessary to burn or release this gas for a number of operational reasons, including lowering the pressure to ensure safety. But the current gas-gathering infrastructure in North Dakota is insufficient to accommodate the volume of gas produced in the state because of, among other reasons, "the high liquid content of the gas, the prolific volumes of oil and gas during initial production, increasing pipeline pressure that requires installation of additional compressors, and in some cases undersized pipe."16

With limited exception, oil-well gas produced in the development of federal and Indian minerals "may not be vented or flared unless approved in writing by [BLM's Area Oil & Gas Supervisor]."17 Because producing valuable Bakken oil is often not possible without releasing natural gas, operators in North Dakota frequently seek the Supervisor's authority to vent or flare gas from their oil wells. Under the controlling Notice-to-Lessees, NTL-4A, the Supervisor may approve venting or flaring based on the submission of:

(1) an evaluation report supported by engineering, geologic, and economic data which demonstrates to the satisfaction of the Supervisor that the expenditures necessary to market or beneficially use such gas are not economically justified and that conservation of the gas, if required, would lead to the premature abandonment of recoverable oil reserves and ultimately to a greater loss of equivalent energy than would be recovered if the venting or flaring were permitted to continue or (2) an action plan that will eliminate venting or flaring of the gas within 1 year from the date of application.18

Particularly where gas cannot be gathered, transported, and sold economically, the Supervisor's approval is essential to oil and gas producers because no royalty obligation is incurred on gas that is "vented or flared with the Supervisor's prior authorization or approval during drilling, completing, or producing operations."19

On August 25, 2015, the NDFO issued a Record of Decision (the "ROD") effecting a summary disposition of 2,211 backlogged Sundry Notices, dating back to at least 2011 and still pending before the NDFO.20 Each of the Sundry Notices subject to the ROD either provides notice of the operator's intent to engage in authorized venting or flaring of natural gas consistent with the terms of NTL-4A § III or requests authority to vent or flare individual wells based on satisfaction of criteria articulated in NTL-4A § IV. The ROD mandates how the NDFO will treat two categories of Sundry Notices that request to flare gas from "Federal and Indian oil wells in the western portion of North Dakota": (i) pending Sundry Notice requests "that flared oil-well gas"; and (ii) pending Sundry Notice requests "with ongoing flaring and future flaring requests."21

For Sundry Notices involving wells that flared in the past, the ROD provides that, "[i]f the well flared oil-well gas for seven days or greater, the gas flared during the first six days would not be royalty bearing and the gas flared from day seven and beyond would be royalty bearing."22 For Sundry Notices concerning wells "with ongoing flaring and future flaring requests," the ROD indicates that the NDFO will determine whether "flaring requests are avoidable loss or unavoidable loss in accordance with NTL-4A."23

There are questions regarding whether there is a sufficient legal basis for the NDFO's ROD. The ROD creates without explanation a per se cut-off for royalty accrual. The ROD neither considers the operational parameters of any individual well nor identifies any legal or regulatory authority supporting the categorical imposition of a royalty obligation after six days of venting or flaring. And the ROD makes no findings to determine whether any venting or flaring that occurred was the product of operator negligence, is eligible for Supervisor approval, or has been determined to be "avoidable" or "unavoidable" under NTL-4A. It is not surprising that several legal challenges have been filed seeking to have the ROD set aside.24

III.             PREDICTING THE REGULATORY FUTURE.

More important than the legality of the ROD is what the ROD might foreshadow about federal regulatory policy in the future. Each of the themes driving the Administration's ongoing regulatory initiatives is reflected in the NDFO's decision. The NDFO's inability to complete the administrative review of Sundry Notices in a timely fashion required a blanket disposition of Sundry Notices. The ROD's categorical treatment of wells with distinct operational parameters suggests both an attempt to overcome BLM's lack of resources and expertise and an effort to clear a major backlog of administrative tasks that BLM does not realistically have the capacity to complete. As many of the Administration's proposed rules are finalized, operators should expect more bright line rules that are only loosely related to the operational and logistical details of any particular wellsite or project.

The ROD also represents an aggressive attempt to increase the federal government's take of the revenue associated with oil and gas production on federal and Indian lands. Unlike NTL-4A, which accounts for economic and engineering factors that may require the release of natural gas, the ROD attaches a royalty obligation to all natural gas that comes out of a well after more than six days after completion, regardless whether that gas is marketable and without considering whether oil can be produced without venting or flaring. As such, the ROD's approach is entirely consistent with regulatory efforts aimed at producing, measuring, capturing, and accounting for gas in a manner that ensures the government a revenue stream from any gas that is produced during any phase of the production process, regardless how that gas is used or sold.

One consideration that appears to be missing from the ROD's analysis, of course, is the economic impact the deviation from NTL-4A is likely to have on oil and gas producers in western North Dakota. Given the limited infrastructure and high development costs in North Dakota, it is not unreasonable to assume that generally applicable restrictions on venting and flaring could undermine the profitability of at least some federal and Indian oil wells– particularly in the depressed commodity price environment that operators currently face.

Similar impacts can be expected in conjunction with the Administration's regulatory agenda. Disguised as narrow, logistical, and even "boring" regulatory updates, the Administration's current regulatory agenda could have sweeping implications for domestic producers and consumers. And even before all the regulations are finalized, anecdotal evidence from operators across the country suggests that the legal, operational, and accounting costs associated with the new regulations have impacted the bottom line, threatening the economics of developing federal lands. While no operator can ignore the splashier regulatory activity that steals the media headlines, prudent operators will not underestimate the impact of more mundane, but no less important, policy initiatives that have the potential to reshape domestic oil and gas production.

Footnotes

1 See Inderbitzin, The Marketable Condition Rule (presented to the Petroleum Accountants Society of Okla., Feb. 6, 2013), at 23; Inderbitzin, The Marketable Condition Rule (presented at the ONRR Unbundling Workshop, June 24-25, 2013), at 24.

2 79 Fed. Reg. 10,080 (Feb. 24, 2014).

3 79 Fed. Reg. 28,862 (May 20, 2014).

4 79 Fed. Reg. 34,455 (June 17, 2014).

5 80 Fed. Reg. 22,148 (Apr. 21, 2015).

6 80 Fed. Reg. 33,553 (June 12, 2015).

7 80 Fed. Reg. 40,767 (July 13, 2015).

8 80 Fed. Reg. 58,952 (Sept. 30, 2015).

9 80 Fed. Reg. 61,646 (Oct. 13, 2015).

10 80 Fed. Reg. 65,572 (Oct. 26, 2015).

11 Bureau of Land Mgmt., Pub. Events on Oil & Gas, available at http://www.blm.gov/wo/st/en/prog/energy/public_events_on_oil.html.

12 Bureau of Land Mgmt., Venting & Flaring Pub. Outreach at 6 (May 15, 2014), available at http://www.blm.gov/live/pdfs/V&F_Outreach_04302014_public_FINAL.pdf.

13 See Bureau of Land Mgmt., Montana/Dakota: North Dakota Field Office, available at http://www.blm.gov/mt/st/en/fo/north_dakota_field.html.

14 See Environmental Assessment, DOI-BLM-MT-C030-2013-229-EA § 1.1, at 1 (Aug. 25, 2015)  (the "EA").

15 See In re Hr'g Called on a Mot. of the Comm'n to Consider Amending the Current Bakken, Bakken/Three Forks, and/or Three Forks Pool Field Rules to Restrict Oil Prod. and/or Impose Such Provisions as Deemed Appropriate to Reduce the Amount of Flared Gas, Case No. 22058, Order No. 24665 ¶ 10, at 3 (N. Dakota Indus. Comm'n, July 1, 2014) ("Order 24665"), available at https://www.dmr.nd.gov/oilgas/or24665.pdf.

16 Id. ¶ 9, at 3; see also EA supra, § 3.7, at 22 (identifying difficulty obtaining rights-of-way and inadequate infrastructure as common reasons for the need to flare oil-well gas).

17 Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases § IV(B) (Jan. 1, 1980) ("NTL-4A"). Flaring is authorized, and may be conducted without incurring a royalty obligation, under the following circumstances: (i) emergencies; (ii) well-purging and evaluation tests not to exceed twenty-four hours; (iii) initial production tests not exceeding a period of thirty days or the production of 50 MMcf of gas, whichever occurs first; and (iv) routine and special well tests for which the operator has received the Supervisor's approval. See id. § III(A)-(D) (Jan. 1, 1980).

18 Id.

19 Id. § I.

20 The ROD is available at http://www.blm.gov/style/medialib/blm/mt/field_offices/north_dakota.Par.57089.File.dat/Decision_Record_Sundry%20Notice%20Flaring%20Requests_DOI-BLM-MT-C030-2013-229-EA.pdf.

21 ROD at 1.

22 Id.

23 ROD at 1.

24 BakerHostetler is counsel to a major Bakken producer in the legal action challenging the legality of the ROD.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.