OIL GAS LEASING - How Discretionary is Discretionary

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					      OIL & GAS LEASING –
How Discretionary is Discretionary?




       Barry Burkhardt              Melody Holm
    Minerals Team Leader       Energy/Leasable Minerals
    Intermountain Region          Program Manager
    USDA Forest Service         Rocky Mountain Region
                                 USDA Forest Service




                    January 28, 2002
                             OIL & GAS LEASING –
                  How Discretionary is Discretionary?


                                            SUMMARY
Since the passage of the 1920 Mineral Leasing Act, the federal government has
developed a statutory and regulatory framework for developing and managing specific
leasable mineral resources on federal lands. The Departments of Interior and Agriculture
have authority and responsibility for managing these leasable mineral resources,
including oil and gas, in partnership with private industry. Each department’s role in
leasing and administration is formalized through statute and regulation.
Language in the Mineral Leasing Act, as amended, as well as in other related laws, make
it clear that the policy of the federal government is to support and encourage the
development of minerals on federal lands belonging to the people of the United States.
Statutory and regulatory authorities, as well as federal court interpretations, allow for
some discretion in agency decisions about the management of oil and gas and other
leasable minerals. The purpose of this paper is to demonstrate that such discretion is
limited. We contend that in the case of National Forest System (NFS) lands,
discretionary decisions not to lease should be rare. Such decisions must be rationalized
with an adequate record containing clearly documented and justified scientific, economic,
and/or legal reasons based on direction provided through law, Congressional intent, and
the court system. The following discussion provides the rationale for our position.

                                      INTRODUCTION
Exploration for and development of leasable minerals1 are dependent on three factors: 1)
a land and resource base on which to explore and develop mineral and energy resources,
2) technical expertise, and 3) capital. The people of the United States, through the federal
 Federal government     government, own and manage a vast, resource-rich land base.
 and private industry   Private industry has technical expertise and access to capital.
 form a partnership
 under an oil & gas     Through a partnership that manifests itself in the form of a federal
 lease and develop      lease, the Federal Government and private industry bring together
 mineral resources to
 help meet national     land, expertise, and capital to provide for the needs of people by
 energy needs.          developing mineral resources. Such a partnership ultimately
                        benefits the public, industry, and the Federal Government. In the
context of this partnership, the perception of industry “exploiting” federal lands is false.
In fact, industry’s role in developing federal oil and gas resources is one of fulfilling the
requirements of the Mining and Minerals Policy Act of 1970. [30 U.S.C. 21a Sec. 2.]


1
 Under the 1920 Mineral Leasing Act, as amended, “leasable minerals” include oil, gas, coal, oil shale, tar
sands, gilsonite, phosphate, and sodium.


                                                     1
With respect to oil and gas, some individuals and groups believe that issuing oil and gas
leases on NFS lands is a completely unlimited discretionary Forest Service function,
while others believe such discretion is limited. In an attempt to clarify "how
discretionary is discretionary", the following provides a review of laws that evolved in
response to changes in the oil and gas industry and the historical context at the time. It
also provides some discussion of Congressional intent and a particularly relevant court
ruling. This review presents a detailed and clear picture of the extent of discretion
involved in oil and gas leasing.

                    RELEVANT FEDERAL STATUTES
1872 Mining Law – Codified at 30 U.S.C. 22 and 28
   Oil and gas on lands owned by the United States were originally subject to the 1872
                                 Mining Law. Rights to oil deposits were gained by the
     Originally under the 1872   same "self-initiation" process as mining claims are today.
     Mining Law, oil and gas
     activities on federal lands The term "staking a well" (in contrast to "surveying a well"
     were not subject to any     or "locating a well") evolved from oil and gas being subject
     discretionary government
     management.                 to the Mining Law. Under that law, oil “claims” were
                                 staked in the same way that a mining claim is staked. The
   1872 Mining Law provided no governmental discretion to limit or prohibit oil and gas
   activity on federal lands.
Organic Act of 1897 – Codified at 16 U.S.C. 475, 477, 478 and 551
   The Organic Act established the system of Forest Reserves that later became the
   National Forest System. This act defines and describes the basic purposes for which
   National Forests are to be managed, specifically “… to improve and protect the forest
                                within the boundaries, or for the purpose of securing
    The Organic Act designated  favorable conditions of water flows, and to furnish a
    purposes for which national
    forests were to be managed  continuous supply of timber for the use and necessities of
    and addressed mineral       citizens of the United States.” However, the provision
    resources specifically in
    recognition of their value. continues with recognition of mineral values and indicates
                                that Congress did not intend for lands set aside for water
   and timber management to be so designated at the expense of mineral resources: "...it
   is not the purpose or intent of these provisions, or of said section, to authorize the
   inclusion therein of lands more valuable for the mineral therein, …” [16 U.S.C.
   475.] Finally, specific provision is made for regulations allowing free use of timber
   and stone for bona fide miners and prospectors [16 U.S.C. 477] and for access for
   prospecting, locating, and developing mineral resources on lands reserved as national
   forests under the Act [16 U.S.C. 478]. As discussed below under Mining and
   Minerals Policy Act of 1970, Congress continues to acknowledge the value of and
   need for mineral resources on federal lands, as first reflected in the Mining Law of
   1872 and Organic Act of 1897.




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Mineral Leasing Act of 1920 – Codified at 30 U.S.C. 181
       Under the Mineral Leasing Act of 1920, oil and gas were classified as leasable rather
       than locatable. Companies or individuals could conduct exploratory operations under
                                a prospecting permit issued through the Department of
         Department of Interior
         had sole authority to  Interior. If it could be shown under the prospecting permit
         administer provisions  that a valuable deposit had been discovered, the Department
         of the Mineral Leasing
         Act of 1920.           of Interior had no discretion about whether to issue a
                                “preference rights lease” by which the deposit could be
       developed and produced. Most deposits prior to this time were found based on oil
       seeps or other surface indications, as exploration and drilling technology was in its
       infancy. In most cases, if a permittee could show a presence of oil, it was deemed a
       valuable deposit that consequently was leased and developed.
       Oil and gas being classified as leasable minerals was a result of changes within the oil
       and gas industry. As the industry grew out of infancy, the mining community began
       to develop the concept of oil and gas occurring in "reservoirs", rather than in “lodes”
       or “deposits”, as reservoirs typically cover a much greater area than a mining claim
                                         (20 acres). Consequently, the 1920 Mineral Leasing
         Mineral Leasing Act of 1920
         specifically promoted the
                                         Act eliminated the practice of staking claims for oil.
         “mining” of oil & gas and other Following the practice that had developed on private
         minerals on public domain
         lands. The “promotional”
                                         lands, the Act established the use of prospecting permits
         aspect of the Act has not been  and leases involving rental fees for exploration and
         changed under numerous
         amendments.
                                         development of oil and gas resources. The Mineral
                                         Leasing Act of 1920 is officially described as "An Act to
       promote the mining of coal, phosphate, oil, oil shale, gas, and sodium on the public
       domain." The Act also states, "Be it enacted by the Senate and House of
       Representatives of the United States of America in Congress assembled, that deposits
       of coal, phosphate, sodium, oil, oil shale, or gas and lands containing such deposits
       owned by the United States, including those in national forests, ... shall be subject to
       disposition in the form and manner provided by this Act to citizens of the United
       States..." (emphasis added). [30 U.S.C. 181.] The language “shall be subject to
       disposition in the form and manner provided” does not afford broad discretion to
       preclude development of leasable minerals, including oil and gas.
       Section 13 of the original Act2 provided for the locating and monumenting of an area
       (up to 2,560 acres) on which an application for a prospecting permit would then be
       submitted within thirty days. This process is similar to the location of a mining
       claim, and it carried forward the “self-initiation” concept associated with mining
       claims located under the 1872 Mining Law. Staking such an area entitled the
       individual a “preference right” over others to a prospecting permit for the lands so
       identified. Under the prospecting permit, the permittee was obligated to drill an
       initial exploratory well within 6 months of the date of the permit. If “valuable
       deposits of oil or gas” were discovered in this process, permittee was entitled to a
       preference right lease for one-fourth of the land (at least 160 acres) covered by the
       prospecting permit. [30 U.S.C. 181 Sec. 14.]

2
    Section 13 expired in 1946 in part due to new technology changing the nature of initial prospecting.


                                                       3
Mineral Leasing Act for Acquired Lands of 1947 – Codified at 30 U.S.C.
                                                                          351-359
      The Mineral Leasing Act for Acquired Lands amended the 1920 Act to provide
      authority for leasing minerals with "acquired" status, in contrast to public domain
                                     minerals. The 1947 Act differed from the 1920 Act in that
        Mineral Leasing Act for
        Acquired Lands gave          "no mineral deposit covered by this Section shall be
        Forest Service authority to  leased except with the consent of the head of the Executive
        consent to leasing of
        acquired lands under         Department having jurisdiction over the lands …" In
        Forest Service jurisdiction. other words, the 1947 Act gave authority to the Forest
                                     Service to consent to leasing acquired lands under Forest
      Service jurisdiction. Until the passage of a later amendment to the Mineral Leasing
      Act (Federal Onshore Oil and Gas Leasing Reform Act, 1987, discussed below), this
      “consent” for leasing acquired lands was the only decision point the Forest Service
      had relative to leasing or subsequent operations.

Mineral Leasing Act Revision of 1960 – Codified at 30 U.S.C. 226
      Under the Mineral Leasing Act Revision of 1960, lands became available for leasing
      through both competitive bidding and non-competitive leasing (lottery type system
        The Mineral Leasing Act
                                 and over-the-counter leases). The competitive bidding
        Revision of 1960         system applied only to Known Geologic Structures
        established a leasing
        system whereby the
                                 (“KGS”) as identified by the Conservation Division of the
        government could be      Department of Interior United States Geological Survey
        more assured to receive
        “fair market value” for
                                 (“USGS”).3 The non-competitive (over-the-counter)
        federal oil and gas      system applied to all other lands. This change in the
        resources.
                                 leasing process was made to ensure that the federal
      government received a "fair market value" for leases in areas of known oil and gas
      resources. Prior to this change, industry competition generated “bonus bids” for
      leases on non-federal lands while federal minerals were leased at a set rate of $.50 per
      acre.

Multiple-Use Sustained-Yield Act of 1960 – Codified at 16 U.S.C. 528 et seq.
      When individuals refer to the discretionary aspect of oil and gas leasing and an option
      to severely restrict or prohibit leasing, they often refer to meeting other multiple use
                                 objectives as described in the Multiple-Use Sustained-Yield
        Multiple-Use
        Sustained-Yield Act
                                 Act (MUSYA). That Act, however, specifically states:
        specifically stated that "Nothing herein shall be construed so as to affect the
        its provisions should
        not be interpreted to
                                 use or administration of the mineral resources of
        affect the use or        national forest lands …” Consequently, this Act does
        administration of
        mineral resources.
                                 not alter or restrict the wording in the Mineral Leasing
                                 Act of 1920 that states minerals "… shall be subject to
      disposition in the form and manner provided by this Act to citizens of the
      United States …”


3
    The Conservation Division has since been incorporated into the Bureau of Land Management.


                                                    4
Mining and Minerals Policy Act of 1970 – Codified at 30 U.S.C. 21a
   The Mining and Minerals Policy Act (the “Mineral Policy Act”) clearly establishes
   the Federal Government’s role to encourage and to administer mineral development
   on public lands, when it states:
        Mining and Minerals   "The Congress declares that it is the continuing
        Policy Act reaffirmed
        the “promotional”
                              policy of the Federal Government in the national
        aspect of the Mineral interest to foster and encourage private enterprise
        Leasing Act.
                              in (1) the development of economically sound and
      stable domestic mining, minerals, metal and mineral reclamation
      industries, (2) the orderly and economic development of domestic mineral
      resources, reserves, and reclamation of metals and minerals to help
      assure satisfaction of industrial, security and environmental needs... For
      the purpose of this Act ‘minerals’ shall include all minerals and mineral
      fuels including oil, gas, coal, oil shale and uranium."
   The Mineral Policy Act also states, "It shall be the responsibility of the Secretary of
   the Interior to carry out this policy when exercising his authority under such
   programs as may be authorized by law other than this Act." "Such programs"
   referenced in the latter quote from the Act include leasing public domain minerals for
   oil and gas on NFS lands. This Act is very clear in stating that the intent of the
   Federal Government is to encourage (not at its discretion prohibit or severely restrict)
   private enterprise in developing mineral resources, including oil and gas.

Energy Security Act of 1980 – Codified at 42 U.S.C. 8854 et seq.
   The Energy Security Act states in Sec. 262, "It is the intent of the Congress that the
   Secretary of Agriculture shall process applications for leases of National Forest
   System lands, notwithstanding the current status of any plan…" (emphasis added).
                              (42 U.S.C. 8855.) In other words, a federal land manager
    Under the Energy Security
    Act, the Secretary of
                              cannot delay or suspend actions on applications for leases
    Agriculture shall process and “hold” lease applications pending the completion or
    lease applications on NFS
    lands, regardless of plan
                              revision of a Forest Service Land and Resource
    status.                   Management Plan. Rather, the federal land manager must
                              proceed with processing applications under established
   procedures outside of the forest planning process. Upon submission of a request,
   following appropriate NEPA analysis (if required), the lease applications must be
   processed (configured and stipulated) and posted for sale, barring appropriate
   justifiable determination of unsuitability for leasing.
   Using contrasting language, Section 261 of the Act states, "The Secretary of
   Agriculture may make available the timber resources of the National Forest System in
   accordance with appropriate appraisal and sale procedures, for use by biomass
   energy projects." (emphasis added) (42 U.S.C. 8854.) In these two sections, one
   addressing leasing and one addressing timber, Congress distinguishes what the Forest
   Service "may" do and what it "shall" do. Congress makes it clear that the Secretary
   of Agriculture shall process applications for leases on NFS lands.



                                            5
Federal Onshore Oil and Gas Leasing Reform Act of 1987 – Codified in
part at 30 U.S.C. 226(g) and (h)
       The Federal Onshore Oil and Gas Leasing Reform Act (“Leasing Reform Act”) again
       amended the 1920 Mineral Leasing Act in a number of ways, primarily focusing on
       how leases are offered for sale. It also addressed the role the Forest Service would
       play in managing oil and gas resources on NFS Lands. Lost revenue to the Federal
       government, and thereby to the States 4, was the primary motivating factor behind the
       Leasing Reform Act. Both the Amos Draw situation in Wyoming and the Fort
       Chaffee situation in Arkansas triggered Congressional action to prevent financial
       losses from oil and gas leasing. In the Amos Draw case, leases were issued non-
       competitively on lands adjacent to a highly productive well during the time between
       the completion of the well and filing of the completion report. The day following the
       lease purchase, the original lessee sold them another party at roughly 100 times the
       price paid the federal government. The Fort Chaffee situation involved leases being
       sold non-competitively based on narrow criteria for delineating a Known Geologic
       Structure (KGS). The leases in question were on lands that should have been
       included in the KGS and sold competitively. Both the Amos Draw and Fort Chaffee
       cases resulted in the federal government not receiving a "fair market value" as
       intended under the Mineral Leasing Act Revision of 1960. Also, since 50% of lease
       bonuses on public domain lands are returned to the State, the failure to maximize
       those bonus bids became a sensitive political issue leading to the passage of the
       Leasing Reform Act. Because of these types of situations with non-competitive
       leasing, the Leasing Reform Act eliminated the speculative (lottery-style) non-
       competitive leasing system and made all leasing for oil and gas competitive by oral
       bid.
       With respect to the Forest Service, the Leasing Reform Act granted the agency
       specific authorities that it did not previously have. On the management of surface-
       disturbing activities on NFS Lands, the Act states, "The Secretary of the Interior, or
       for National Forest lands, the Secretary of Agriculture, shall regulate all surface-
       disturbing activities conducted pursuant to any lease issued under this Act." [30
       U.S.C. 226(g).]
       As for leasing, the Act states, "The Secretary of the Interior may not issue any lease
       on National Forest System Lands reserved from the public domain over the objection
       of the Secretary of Agriculture.” (Emphasis added.) [30 U.S.C. 226 Section
        The Leasing Reform Act granted the
                                             5102(h).] It should be noted that Congress chose to
        Forest Service authority and         use the language “over the objection of” rather than
        responsibility for making decisions  “consent” as they did in the Mineral Leasing Act for
        about leasing NFS lands and
        administering oil and gas operations Acquired Lands of 1947. Requiring “consent”
        on those leases.                     creates a specific point for a lease/no lease decision.
                                             Using the term “over the objection of” creates a
       “lease unless specifically objected to” situation. This would indicate that Congress
       intentionally used wording that expresses the intent to lease unless thorough analysis
       demonstrates a reasonable and justifiable reason to object to leasing. In light of

4
    In general, states receive 50% of federal mineral revenues generated within their borders.


                                                        6
   Congress’ position to “promote the mining of coal, phosphate, oil, oil shale, gas, and
   sodium on the public domain” (1920 Mineral Leasing Act, as amended), the language
   in the Leasing Reform Act would also seem to mean that objection to leasing on NFS
   lands would occur only rarely and for limited areas.
   Forest Service implementing regulations of the Leasing Reform Act reflect a more
   complex relationship between the Secretary of Interior and Secretary of Agriculture,
    Forest Service implementing
                                  and sets up a process whereby the Forest Service has a
    regulations of the Leasing    formal role in determining whether and how leases will
    Reform Act require the Forest
    Service to analyze leasing in
                                  be issued on NFS lands. This responsibility, and
    the context of planning       associated NEPA and ESA requirements, has evolved not
    direction and NEPA.
                                  only from statute, but also from significant case law (i.e.,
   Connor v. Burford) involving Forest Service management of the development of oil
   and gas resources. The regulations specifically require analysis for leasing in
   accordance with planning direction and/or preparation of NEPA documents. [36 CFR
   228.102 (c).] Such analyses must include identification of areas closed to leasing,
   including areas closed "through exercise of management direction" (discretionary no-
   lease decisions) and areas closed under legal authority (Congressionally designated
   Wilderness, etc.). The regulations also require a discussion as to why any constraints
   applied to leasing are "necessary and justifiable". The Administrative Procedures Act
   requires all agencies not to be arbitrary and capricious in making such decisions. [5
   U.S.C. 557-558.]

                         CONGRESSIONAL INTENT
The existing statutory direction on how to proceed with administering oil and gas
activities on Federal lands makes it clear that Congress intends for oil and gas on Federal
lands, including NFS lands, to be leased and developed in an orderly and efficient
manner. The Mineral Leasing Act, in its original form and as amended, states in clear,
unequivocal language that federal lands “shall be subject to disposition” for mineral
                              development. The Mining and Minerals Policy Act declares
 The history of statutory
 direction on management of   that it is the policy of the federal government to encourage
 federal oil & gas resources  private industry to develop mineral resources on federal lands,
 makes it clear that Congress
 intends for federal oil and  conveying an assumption that mineral resources on federal
 gas resources to be          lands will be available for such development. The Energy
 developed.
                              Security Act specifically states that Congress expects that the
Secretary of Agriculture shall process applications for leases on NFS lands, regardless of
the status of forest plans.
A few specific categories of lands are not subject to leasing under statutory and
regulatory designations (I.e., Congressionally designated Wilderness areas, National
Parks, Indian reservations, incorporated areas, petroleum and oil shale reserves, and ski
areas). [16 U.S.C. 497c, 43 C.F.R. 3100.0-3 and 36 C.F.R. 228.102(b)]. The fact that
Congress has specifically identified certain types of areas not subject to leasing implies
that additional discretionary “off limits” designations without Congressional review or
involvement will be limited and must be made with clear justification.




                                              7
                                     COURT DECISION
The court system has also provided legal interpretation of how much discretion is
allowed under the above statutory authorities. In Mountain States Legal Foundation v.
                       Hodel (Civ. No. 86-0022, District of Wyoming, 1986), the federal
 Courts have clarified district court held that the Bridger-Teton National Forest had
 that FS discretion is
 limited on how and    violated the Energy Security Act when they decided to use their
 when to make          discretion not to lease until completion of the forest plan. In other
 decisions about
 leasing .             words, despite the administrative practicality of delaying leasing
                       until completion of the forest plan, the Forest Service simply did not
have the discretion to do so. The Courts consider no-lease decisions lacking specific
resource analysis and justification, as well as decisions not to lease broad areas, as de
facto withdrawals. Such decisions must comply with withdrawal procedures under
Section 204 of the Federal Land Policy and Management Act (Public Law 94-579).
The District Court of Wyoming issued the following strong ruling stating in pertinent
part:
       ...[It] is
          FURTHER ORDERED that defendant Secretary of Agriculture be, and is, hereby
      required to comply with the mandatory provision of the Energy Security Act, by
      ‘processing’ all lease applications and offers notwithstanding the status of the
      proposed Forest Plan: it is
          FURTHER ORDERED that the suspension of mineral leasing in the
      National Forests as initiated by the Forest Service and followed by the BLM
      as it now exists, be, and the same is, hereby set aside as unlawful: it is
          FURTHER ORDERED that the Secretary of Interior shall report the
      withdrawal of the affected lands in the National Forest to Congress within
      thirty (30) days from the date of this Order pursuant to 43 U.S.C. 1714(c) 5, or
      cease withholding said lands from oil and gas leasing exploration and
      development for the purpose of elevating environmental concerns pending the
      completion of the Forest Plan…

                                        CONCLUSION
As has been shown in reviewing applicable laws and regulations, Congressional intent,
and court rulings, leasing decisions that prohibit oil and gas leasing or activity on broad
areas of NFS lands is not within the agency’s discretion, unless clearly justified. Except
when legally prohibited, such as for designated Wilderness and ski areas, leasing is
clearly the Congressional intent as expressed in the development of laws regulating how
leasing and related oil and gas activities are to be managed. The Forest Service’s
discretion is limited in objecting to BLM issuing leases, and in regulating surface use for
oil and gas leasing, exploration, and development on NFS lands. Changes in the
management of federal oil and gas resources have occurred over the years, largely due to
economic and technological changes in the oil and gas industry. However, management
5
    Section 204 of Federal Land Policy and Management Act.


                                                    8
discretion allowed through evolving laws relates mainly to how leasing and related
activities are permitted, not to severely restricting or prohibiting leasing, exploration, and
development. In addition, discretion allowed under statutory and regulatory direction
does not provide an avenue for undue delays in decision-making.
Decisions to lease or not to lease legally available NFS lands must be made in accordance
with planning regulations and appropriate NEPA analysis. [36 CFR 228.102(c).]
Objecting to leasing is within the discretionary authority of the Forest Service under
justifiable conditions, such as when the analysis clearly demonstrates that special lease
stipulations cannot satisfactorily mitigate potential impacts to other resource values. In
making decisions not to lease or allow oil and gas development, a manager must clearly
demonstrate, based on scientific evidence, that oil and gas leasing and subsequent
development would be unacceptably detrimental to other resources. In such cases, the
manager should also document that the social and economic value of the mineral resource
was given due consideration. Ultimately, discretionary “no lease” decisions and
decisions that severely restrict access to oil and gas resources over broad areas should be
rare. Such decisions should take into consideration direction for management of oil and
gas resources provided in statute, regulation, court decisions, and Congressional intent.



       Any opinion or interpretation expressed or implied in the preceding discussion is
       solely that of the authors.
       Co-Authors:
           Barry Burkhardt, Minerals Team Leader, Intermountain Region
           Melody Holm, Energy/Leasable Minerals Program Manager, Rocky Mountain
           Region




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