Energy

Avoidable vs. Unavoidable O&G Losses: A Quick Reg Analysis

In the waning days of the Obama administration, the Bureau of Land Management (BLM) promulgated revisions to regulations at 43 CFR Subpart Section 3179, which are intended to reduce the waste of oil and natural gas (O&G) from venting, flaring, and leaks during O&G production on onshore federal and Indian leases. The main objective of the rule was to ensure that American taxpayers are not denied their rightful royalty receipts because of resource losses that were avoidable.

Oil and Gas, O&G

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The rule rescinded a 1979 document called Notice to Lessees and Operators of Onshore Federal and Indian Oil and Gas Leases, Royalty or Compensation for Oil and Gas Lost (NTL–4A), which established when the BLM would determine if a lessee would either need to pay a royalty for resources lost on public/Indian land because the loss was avoidable or not be required to pay a royalty because the loss was unavoidable.

In September 2018, the BLM promulgated another set of revisions that rescinded many of the 2016 amendments. Included in the second set of amendments was the reinstatement of NTL-4A.

2016 Rule

In its 2016 revisions, the BLM asserted that NTL-4A was not clear on which O&G losses were avoidable and which were unavoidable.

“NTL–4A distinguished between ‘avoidably lost’ and ‘unavoidably lost’ oil and gas, though it defined those terms in a general way that was subject to inconsistent application,” the BLM stated.

The BLM was also concerned that NTL-4A allowed losses to be considered unavoidable if the O&G operator claimed that the cost of correcting such losses was uneconomic. “There is no statutory or jurisprudential basis for the position that the BLM must conduct an inquiry into a lessee’s economic circumstances before determining a loss of oil and gas to be avoidable,” said the BLM.

The BLM decided to correct problems posed by NTL-4A by defining unavoidably lost to mean losses that occur in conjunction with 13 specific operations the agency listed at 43 CFR 3179.4. Generally, the BLM deemed loss of gas as unavoidable when an operator has complied with all applicable requirements and taken prudent and reasonable steps to avoid waste. The specified operations and sources that set the stage for unavoidable losses included emergencies; well drilling, completions, and tests; normal operations of pneumatic devices and storage vessels; liquids unloading; leaks; equipment or pipeline maintenance requiring depressurization; and residual gas after stripping natural gas liquids. A loss of gas was also deemed unavoidable when gas is flared from a well that is not connected to a gas pipeline, provided the BLM has not otherwise determined that the loss of gas is avoidable.

The rule included a novel provision that defined as unavoidable any loss from the flaring of gas, provided at least 50 percent of natural gas liquids have been removed and captured for market.

All other losses of gas, as well as any gas flared in violation of the capture requirement (regardless of whether the well is connected to a pipeline), were deemed avoidable and subject to royalties.

2018 Rule

In the 2018 revisions, the BLM took a new look at economic factors from the perspective of the operator.

“The BLM’s revision of the 2016 rule is consistent with the [Mineral Leasing Act] and with the BLM’s longstanding approach to regulating waste prior to the promulgation of the 2016 rule that considered the economic feasibility of marketing lost gas in making ‘avoidable loss’ determinations. And, even if the 2016 rule did not exceed the BLM’s statutory authority, it is nonetheless within the BLM’s authority to revise its ‘waste prevention’ regulations in a manner that balances compliance costs against the value of the resources to be conserved.”

Based on that interpretation, the 2018 rule addresses Section 3179.4 in two ways.

  • First, the rule reiterates provisions from the 2016 rule that a loss of oil or gas is avoidable if the operator failed to comply with the BLM’s applicable requirements or acted negligently.
  • Second, the 2018 rule mirrors some of the conditions of unavoidably lost production in the 2016 rule and changes others. For example, in reinstating NTL-4A, the rule restores the provision that O&G losses because of line failures, equipment malfunctions, blowouts, fires, or other similar circumstances are unavoidable unless the BLM determines otherwise. This language was excluded from the 2016 rule. Also, a 2018 provision removes the 2016 language that listed the flaring of gas from which at least 50 percent of natural gas liquids have been removed and captured for market as an unavoidable loss. The BLM stated that it rescinded this provision as part of its elimination of the gas-capture percentage requirements contained in the 2016 rule.