# Leasing of Osage Reservation Lands for Oil and Gas Mining

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-11314

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** May 11, 2015
- **Citation:** 80 FR 26994

## Text

DEPARTMENT OF THE INTERIOR
Bureau of Indian Affairs
25 CFR Part 226
[156A2100DD/AAKC001030/A0A501010.999900 253G]
RIN 1076-AF17
Leasing of Osage Reservation Lands for Oil and Gas Mining

AGENCY:

Bureau of Indian Affairs, Interior.

ACTION:

Final rule.

SUMMARY:

The Bureau of Indian Affairs is issuing its final revisions to the regulations addressing mineral development of the Osage minerals estate. This rule updates the leasing procedures and the rental, operations, safety and royalty requirements for oil and gas production on Osage mineral lands and is the result of a negotiated rulemaking.

DATES:

This rule is effective on July 10, 2015.

FOR FURTHER INFORMATION CONTACT:

Mr. Eddie Streater, Designated Federal Officer, Bureau of Indian Affairs, P.O. Box 8002, Muscogee, OK 74402; telephone (918) 781-4608; fax (918) 718-4604; or email
osageregneg@bia.gov.
Additional information on the negotiated rulemaking can be found at:
http://www.bia.gov/osageregneg.

SUPPLEMENTARY INFORMATION:

I. Executive Summary of Rule

II. Background

III. Detailed Explanation of Revisions

IV. Explanation of Changes Made in Response to Departmental Review

V. Comments on the Proposed Rule and Responses

A. Overview/General

B. Comments Related to Section 226.1

C. Comments Related to Section 226.3

D. Comments Related to Section 226.4

E. Comments Related to Section 226.5

F. Comments Related to Section 226.6

G. Comments Related to Section 226.8

H. Comments Related to Section 226.9

I. Comments Related to Section 226.14

J. Comments Related to Section 226.15

K. Comments Related to Section 226.18

L. Comments Related to Section 226.19

M. Comments Related to Section 226.20

N. Comments Related to Section 226.25

O. Comments Related to Section 226.27

P. Comments Related to Section 226.29

Q. Comments Related to Section 226.33

R. Comments Related to Section 226.34

S. Comments Related to Section 226.35

T. Comments Related to Section 226.36

U. Comments Related to Section 226.37

V. Comments Related to Section 226.38

W. Comments Related to Section 226.39

X. Comments Related to Section 226.40

Y. Comments Related to Section 226.41

Z. Comments Related to Section 226.45

AA. Comments Related to Section 226.46

BB. Comments Related to Section 226.47

CC. Comments Related to Section 226.48

DD. Comments Related to Section 225.53

EE. Comments Related to Section 226.56

FF. Comments Related to Section 226.57

GG. Comments Related to Section 226.59

HH. Comments Related to Section 226.60

II. Comments Related to Section 226.62

JJ. Comments Related to Section 226.63

KK. Comments Related to Section 226.65

LL. Comments Related to Section 226.66

MM. Subpart F (226.67 to 226.70)

NN. Abandoned Wells

V. Procedural Requirements

A. Regulatory Planning and Review (E.O. 12866 and 13563)

B. Regulatory Flexibility Act

C. Small Business Regulatory Enforcement Fairness Act

D. Unfunded Mandates Reform Act

E. Takings (E.O. 12630)

F. Federalism (E.O. 13132)

G. Civil Justice Reform (E.O. 12988)

H. Consultation with Indian Tribes (E.O. 13175)

I. Paperwork Reduction Act

J. National Environmental Policy Act

K. Effects on the Energy Supply (E.O. 13211)

I. Executive Summary of Rule

This rule updates the existing oil and gas regulations governing Osage County, Oklahoma as set forth in 25 CFR part 226. It is intended to strengthen the management and administration of the Osage mineral estate for the benefit of the Osage. These provisions strengthen the rule's reporting and inspection requirements, offer more specificity regarding a lessee's obligations with respect to its mining operations, and adjust royalty rate calculations and bonding amounts, in order to protect the best interests of the Osage mineral estate, ensure safety, and discourage future regulatory violations.

II. Background

On October 14, 2011, the United States and the Osage Nation (formerly known and referred to in Rule 226 as the “Osage Tribe”) signed a Settlement Agreement to resolve litigation regarding the United States' alleged mismanagement of the Osage Nation's oil and gas mineral estate, along with other unrelated claims. In the Settlement Agreement, the parties agreed “to address means of improving the trust management of the Osage Mineral Estate, the Osage Tribal Trust Account, and Other Osage Accounts.” The parties agreed that a review and revision of the existing regulations is warranted to better assist the Bureau of Indian Affairs (BIA or Bureau) in managing the Osage mineral estate. The parties agreed to engage in a negotiated rulemaking for this purpose. Pursuant to the required, applicable procedures, after the Tribal Trust Settlement was executed, the Department of the Interior (Department) established a Negotiated Rule Making Committee in July 2012 and commenced structured negotiations on the amendment and revision of Rule 226. For additional information on this negotiated rulemaking process, please visit
http://www.bia.gov/osageregneg/.

The Negotiated Rule Making Committee submitted its report to BIA on April 25, 2013. On August 28, 2013, BIA published a proposed rule based on the Committee's report.
See
78 FR 53083. In order to provide additional time for parties to comment on the proposed rule, BIA extended the original comment deadline until November 18, 2013.
See
78 FR 68859 (November 1, 2013). After a thorough evaluation of the many comments by various stakeholders with respect to the proposed rule, BIA revised and amended the proposed rule to incorporate those changes and amendments that BIA considered meritorious and beneficial in preparing the final rule as published herein.

III. Detailed Explanation of Revisions

This final rule revises the existing rule for “Leasing of Osage Reservation Lands for Oil and Gas Mining” with the textual and substantive changes as set forth in Table 1. The BIA's additional revisions to the proposed rule that resulted from the comment period and BIA's consideration and evaluation of those comments (as set forth in Section IV below) were adopted in BIA's final rule as published herein and as set forth in Table 2.

Table 1

Current 25 CFR section
Final rule section
Final rule change

Part 226
Part 226
Throughout the final rule the use of “Osage Tribal Council” has been deleted and replaced with “Osage Minerals Council” (“OMC”) because the former no longer exists and the latter holds the authority to make decisions regarding the Osage minerals estate. Similarly, all references to “lease cancellation” in the existing rule have been changed to “lease termination,” unless the reference in the final rule is to a voluntary lease cancellation by a lessee. Also, to clarify time deadlines, all references to due dates are to be uniformly calculated by calendar days, unless specifically noted otherwise. In addition, the final rule adds the term “other marketable product” to existing references to oil and gas in order that other minerals will not leave a gap and resulting in unregulated minerals.

226.1
226.1
The final rule deletes the terms “contract” and “agreement” and substitutes the term “lease”; provides definition for a “lease;” clarifies that “an authorized representative of a lessee” is bound by those regulations that apply to the lessee represented; deletes the definition for “major purchaser” because it is no longer relevant; replaces and combines the definitions for “casinghead gas” and “natural gas” into one definition for “raw natural gas” and “gas”; adds definitions for the additional following new terms: “avoidably lost,” “condensate,” “drainage,” “marketable condition,” “maximum ultimate economic recovery,” “natural gas liquids,” “notice to lessee,” “onshore oil and gas order,” “other marketable product,” “production in paying quantities,” “surface owner,” and “waste of oil and gas or other marketable product”.

N/A
226.2 (New)
The final rule sets forth sources of governing requirements for activities in Osage County related to oil and gas and the development of “other marketable products”.

N/A
226.3 (New)
The final rule sets forth the authority of Bureau of Indian Affairs (“BIA”) to issue certain notices and orders after consultation with the OMC.

N/A
226.4 (New)
The final rule enumerates the responsibilities and authority of the Superintendent with respect to management and administration of the Osage mineral estate.

226.2
226.5
The final rule breaks the prior regulation into subparts and removes references to oil and gas in paragraphs (b) and (d), extends the time for a successful bidder to deposit his/her payment, requires that payment be made in a specified form other than cash; increases the filing fee for submitting a completed lease form; enumerates the circumstances in which a portion of the bonus bid will be forfeited; requires that the Superintendent post legal descriptions within 30 days of a lease sale; and authorizes the OMC to request comparable lease sales data from the Superintendent.

226.3
226.6
The final rule increases the filing fee, adds requirements regarding lessee's responsibility for plugging and abandoning wells upon surrender, and deletes the reference to allowing surrender of separate horizons.

226.4
226.7
The final rule amends the provision to allow the Superintendent to specify the manner and method of payments due under a lease or regulation.

226.5
226.8
No substantive change from current rule.

226.6
226.9
The final rule sets forth each bonding requirement in its own paragraph to improve readability, it adds personal bonds to surety bonds as acceptable bonding methods, it sets forth the requirements for personal and surety bonds and changes the bonding amount from a per lease-area bond to a $5,000 per well bond for up to 25 wells. The final rule also adds back in nationwide bonding, which was not in the proposed rule.

226.6(d)
226.10
The final rule moves the provision allowing the Superintendent to increase the amount of a required bond to its own section and amends the previous provision under which the Superintendent can increase the amount of a bond.

N/A
226.11 (New)
The final rule sets forth the circumstances under which the Superintendent must release a bond.

226.7
226.12
No substantive change from current rule.

226.8
226.13
No substantive change from current rule.

226.9
226.14
The final rule sets forth each current requirement in its own paragraph to improve readability. It also increases rental rates, clarifies the lessee's responsibility for diligent development, adds a new provision allowing the Osage Minerals Council to request a determination as to the diligent development of a lease and new procedures for the automatic termination of a lease for failure to diligently develop.

N/A
226.15 (New)
The final rule sets forth lessee's new obligations to protect land from drainage of its oil or gas content by wells outside the lease

N/A
226.16 (New)
The final rule specifies the Superintendent's new remedies for requiring protective action once drainage has occurred.

226.10
226.17
No substantive change from current rule.

226.11
(See below)
The final rule divides the current section on royalties into several new sections to improve readability, as shown below.

226.11(a)
226.18
The final rule clarifies that royalty may be taken in-kind. It also amends the royalty rate calculation for oil, subject to a price adjustment for gravity.

N/A
226.19 (new)
The final rule sets forth how the gravity adjustment is calculated.

226.11(b)
226.20
The final rule amends the royalty rate calculation for gas and specifies how gross proceeds are calculated; allows the Superintendent to direct that gross proceeds be calculated in an alternative manner where reasonable cost of processing cannot be obtained; and adds a minimum royalty provision.

N/A
226.21 (new)
The final rule provides that royalty must be paid for any oil and gas avoidably lost and allows the Superintendent to determine the volume and quality of the lost oil and gas.

226.11(c)
226.22
The final rule amends the date for payment of royalties and adds provision for adjusting the minimum royalty.

226.11(e)
226.23 (New)
The final rule sets forth the minimum royalty due for “other marketable products” and clarifies that it is in addition to any royalty that may be due on oil or gas.

226.12
226.24
The final rule amends the reference to royalty payment to ensure that the federal government purchases oil consistent with the new requirements.

226.13(a)
226.25
The final rule requires lessees to provide a written agreement when purchaser is the party responsible for payment; provides procedure for making royalty payments and late payments; describes how royalty payments are made; and deletes the provision allowing the Osage Minerals Council to waive late charges with approval of the Superintendent.

226.13(b), (c)
226.26
The final rule sets forth those reports that lessees must submit to the Superintendent and further specifies the format and content of those reports. The final rule also adds a requirement that the Osage Minerals Council be copied on all such reports, as well as establishing the date that the monthly reports are due.

226.14
226.27
The final rule sets forth each current requirement for division orders in its own paragraph to improve readability. It also extends the due date in paragraph (b) for submitting the reporting statement for oil and gas sold should the due date fall on a weekend or holiday.

226.15
(See below)
The final rule divides the current section on lease unitizations and assignments into several new sections to improve readability, as shown below.

226.15(a)
226.28
No substantive change from current rule.

226.15(b)
226.29
The final rule sets forth each current requirement in its own paragraph to improve readability. It also adds provisions relating to the responsibilities and liabilities of assignors and assignees and deletes the provisions that allowed for the assignment of separate lease horizons.

226.15(c)
226.30
No substantive change from current rule.

226.15(d)
226.31
No substantive change from current rule.

226.15(e)
226.32
No substantive change from current rule.

N/A
226.33 (New)
Sets forth the general requirements governing leasing operations.

226.16
226.34
The final rule sets forth each current requirement in its own paragraph to improve readability and adds specific reference to the existing requirement that the Superintendent comply with the National Environmental Policy Act and the National Historic Preservation Act where applicable.

226.17
226.35
No substantive change from current rule.

226.18
226.36
The final rule reformats this section to improve readability. It also adds requirements for notice to surface owners before lessees conduct certain activities and eliminates any difference in notice based on the surface owner's residence status as within or outside Osage County.

226.19(a)
226.37
The final rule sets forth in its own paragraph each current aspect of a lessee's rights and responsibilities in using the surface of the land to improve readability. It also adds a provision requiring notification to the lessee and surface owner before the Superintendent sets the routing of pipelines, electric lines, etc.

226.19(b), (c)
226.38
The final rule sets forth each current requirement with respect to commencement money into its own paragraph to improve readability. It also increases the amount of commencement money the lessee must pay the surface owner.

226.19(d)
226.39
The final rule increases per tank siting fees and provides for arbitration to determine fees to be paid for tanks occupying more than 2500 sq. feet if the parties are unable to agree.

226.20
226.40
No substantive change from current rule.

226.21
226.41
No substantive change from current rule.

N/A
226.42 (New)
The final rule sets forth additional obligations with respect to lessee's obligation for production and marketability.

N/A
226.43 (New)
The final rule requires documentation for transportation of oil, gas or other marketable product to enable the Superintendent to inspect and confirm proper transportation.

226.22
226.44
The final rule sets forth each current requirement in its own paragraph to improve its readability. It also adds provisions in paragraph (e) clarifying that pits or tanks used for collecting deleterious fluids must have fencing and be removed and reclaimed immediately after operations.

N/A
226.45 (New)
The final rule sets forth a lessee's specific environmental responsibilities and obligations while conducting operations.

N/A
226.46 (New)
The final rule requires certain safety standards and equipment for lessee operations, as well as compliance with the National Electric Code.

226.23
226.47
The final rule adds a provision requiring the Superintendent to notify or attempt to notify surface owners before decisions are made with respect to easements of leased premises.

226.24
226.48
No substantive change from current rule.

226.25
226.49
The final rule has reformatted this section on the responsibility of other types of lessees when they are not the lessee drilling in order to improve its readability. It also deletes prior/current requirements that wells be plugged if no apportionment agreement is accepted, making the Superintendent's decision on apportionment final.

226.26
226.50
No substantive change from current rule.

226.27
226.51
The final rule adds general requirement that gas for tribal use must be odorized and treated to ensure public safety.

226.28
226.52
The final rule provides new standards for determining whether a well may be permanently abandoned on a showing that it is incapable of future profitable production, as opposed to being capable of producing in paying quantities.

226.29
226.53
The final rule has reformatted this section to improve its readability. In paragraph (a), it also eliminates an exception for termination of a lease, other than for cause. In paragraph (c), it also adds a requirement that a Superintendent's orders for plugging a well must be in writing, as well as eliminating the fee for submitting an application to plug a well.

226.30
226.54
The final rule divides paragraph (b) into two provisions, thereby adding a paragraph (c). It also adds paragraph (d), which requires that lessees maintain records for a period of 6 years, unless notified to maintain certain records for a longer period.

226.31
226.55
The final rule deletes the provision applying when several parties own a lease jointly allowing the designation of a representative be made by the party in charge of operations when several parties own a lease jointly, to requiring that all of the parties must jointly designate the representative.

226.32
226.56
The final rule reformats this section to improve its readability.

226.33
226.57
No substantive change from current rule.

226.34
226.58
The final rule adds a requirement that wells and tank batteries be marked with lessee's name.

226.35
226.59
No substantive change from current rule.

226.36
226.60
The final rule adds paragraphs (b)-(f), which require safety precautions for drilling wells generally, drilling vertical wells, maintaining and controlling high pressure or loss of circulation in wells, protecting fresh water and other minerals and ensuring safety and protection when hydrogen sulfide gas is present at certain levels by adopting BLM On-Shore Oil and Gas Order 6.

226.37
226.61
No substantive change from current rule.

226.38
226.62
The final rule adds paragraphs (b)-(d), which specify requirements for measuring, calibrating and adjusting meters, including notice to and follow-up by the Superintendent; require notification to the Superintendent when an oil tank is ready for removal or for witnessing gaugings, and provide that repeated failures to comply with the new provisions subject the lessee to lease termination after consultation with the Osage Minerals Council.

226.39
226.63
The final rule adds paragraphs requiring measurement of gas to be done in accordance with BLM Onshore Oil and Gas Order 5, specify a lessee's obligations for calibrating, inspecting and adjusting meters, including notification and inspection by the Superintendent, and provide that repeated failures to comply will subject the lease to termination after consultation with the Osage Minerals Council.

226.40
226.64
No substantive change from current rule.

N/A
226.65 (New)
The final rule sets forth specific safety and other requirements to ensure proper site security.

226.41
226.66
The final rule adds requirements to ensure that incidents are reported in a timely manner, that notification is provided when environmental or other types of accidents occur, specifying who must be notified, including impacted surface owners.

226.42
226.67
The final rule allows lease provisions for different fines and penalties, and it deletes the provision allowing the Osage Minerals Council to waive late charges.

226.43
226.68
No substantive change from current rule.

226.44
226.69
No substantive change from current rule.

226.45
226.70
No substantive change from current rule.

226.46
226.71
The final rule adds information concerning approval of OMB and the assigned OMB Control Number.

Table 2 below sets forth the substantive changes made in the final rule to the text of the proposed rule as published August 28, 2013. The basis for each of these changes is discussed in the next section of this preamble.

Table 2

Section
Final rule's change to proposed rule

226.1
The final rule adds a definition for “surface owner”, references “other marketable product” in the definition of “lease” and “Osage Minerals Council” and amends the definition of “waste of oil or gas or other marketable product.”

226.2
The final rule adds a reference to other marketable products.

226.3
The final rule deletes the reference in 226.3(a) to the Administrative Procedure Act and replaces it with “applicable law and regulations” and also adds the phrase “where appropriate” after the reference to consultation with the Osage Minerals Council because not all of the items listed in the provision are subject to the APA or the Department's Consultation Policy.

226.4(a)(4)
The final rule deletes reference to “other” as unnecessary.

226.4(a)(10)
The final rule adds the phrase “unless otherwise approved by the Superintendent” at the end.

226.4(b)
The final rule removes provisions that allowed the Superintendent to issue oral orders.

226.4(c)
The final rule adds a requirement that any history of noncompliance be documented.

226.5(a)(4) (ii)
The final rule removes the phrase “twenty five percent of the bonus bid” at the beginning of the provision and adds a reference to paragraph 5 in subparagraph (c).

226.5(b)
Deletes references to oil and gas as unnecessary.

226.5(d)
Language added to end of the provision to clarify that the environmental analyses will be completed in accordance with existing Bureau procedures.

226.5(f)
Amends the reference to corporation

226.6
The final rule deletes the reference to “surrender of a separate horizon” in (b)(4). It also adds a paragraph (c) that requires the Superintendent to determine that wells have been plugged and abandoned or that legal liability therefore has been otherwise assumed before approving surrender or partial surrender of a lease.

226.9
The final rule adds paragraph (f), which allows for a bond for nationwide coverage in lieu of a surety or personal bond.

226.11
Paragraph (c) was deleted.

226.14
The final rule changed time period for non-production of a lease from 90 days to 120 days in paragraph (e) and the deadline for requesting a temporary suspension of operations to 20 days prior to the expiration of the 120-day period, rather than the 45th day in which the lease has not produced. The final rule also deletes waiver language and adds a requirement of good cause in order for the Superintendent to extend a temporary extension.

226.15
In paragraph (b), the final rule replaces the reference to “in paying quantities” with “for a reasonable profit”. It also adds that assignors are liable for drainage upon determination of the Superintendent

226.18
Paragraph (a) of the final rule was amended to allow royalty to be taken in kind. In paragraph (b) the provision regarding time for payment was deleted, and in subparagraph (b)(2) the reference to NYMEX was moved to subparagraph (b)(1).

226.20
In paragraph (b) of the final rule, the calculation for determining gross proceeds was amended and a method for determining the heating value of gas was added. In paragraph (c) the reference to 1206.173 was replaced with a reference to 1206.180(a)-(b).

226.20
The final rule defines how the minimum royalty is to be calculated, and it deletes paragraph (d).

226.25
In paragraph (a), the final rule adds a provision requiring that the Superintendent be notified if the purchaser is the responsible party for making payment. In paragraph (b), it deletes the provision stating “unless otherwise provided by the Osage Minerals Council and approved by the Superintendent,” in an effort to standardize and ensure prompt, consistent payments. Paragraph (c) was revised to reference back to paragraph (a) and to delete language allowing other rates to be set and the waiver of late fees.

226.27
In paragraph (a) at the end, the words “his lease” are replaced with “Section 226.25”. In paragraph (b), the provision allowing the Superintendent to authorize extensions was deleted.

226.29
The final rule deletes the provision allowing assignment of separate horizons. It also adds paragraphs (a)(i) and (a)(ii), which specify the liability and obligations of both the assignor and assignee when a lease is assigned.

226.34
The final rule explicitly requires compliance with NEPA and NHPA.

226.36
In paragraph (b), the final rule requires the Superintendent to notify or attempt to notify both the surface owner and the lessee of their opportunity to meet and submit information before the Superintendent issues a decision.

226.37
The final rule adds a requirement that the Superintendent to notify or attempt to notify both the surface owner and lessee before setting routes.

226.40(a)
The final rule deletes the last sentences referencing a court of competent jurisdiction and replaces it with an express reference to 226.41, which provides for the same relief after compliance with the dispute resolution provisions.

226.44
The final rule adds requirements for pits or tanks containing deleterious fluids in order to protect the environment.

226.46
The final rule adds a requirement for compliance with the National Electric Code.

226.47
The final rule adds a requirement for the Superintendent to notify or attempt to notify both surface owner and lessee before easements are granted.

226.52
The final rule amends the provision allowing wells to be permanently abandoned if they are no longer capable of producing in paying quantities rather than for lack of further profitable production.

226.53
In paragraph (a), the final rule deletes the provision that creates an exception for termination of a lease other than for cause, and paragraph (c) adds a requirement that the Superintendent's orders for plugging a well be in writing.

226.55(b)
In the final rule, the provision allowing the designation of the parties' representative to be made by the “party in charge of operations” was deleted and changed to require that all of the parties must jointly designate a representative.

226.62
The final rule in paragraph (c) deletes the provision regarding penalties and the adjustment provision for penalties.

226.66
The final rule clarifies that accidents include environmental and other types of accidents. It also requires the reporting of thefts within one business day, rather than “promptly” and requires lessees to notify, or attempt to notify, the surface owner or agent in writing.

Subpart F (226.67-68)
The final rule reverts to the language in the current/prior version of the regulation and deletes the Committee's recommendations for penalties for violations of lease terms, instead adding a provision that the lease can specify alternative fines and penalties. In 226.68(j) the provision regarding criminal penalties was deleted as unnecessary because criminal laws are applicable irrespective of their inclusion or reference within these regulations.

IV. Explanation of Changes Made in Response to Departmental Review

In drafting the final rule, the Department made revisions to the proposed rule based on its own internal review, in addition to its review and analysis of the public comments. This section sets forth those the changes made as a result of that internal review. In Section 226.1, the Department added references to “other marketable product” in the definitions of “lease” and “Osage Mineral Council” in order to fully incorporate the addition of the term “other marketable product” into

the regulations. Without these changes, the Department was concerned that “other marketable product” would not have been fully and consistently referenced as part of the Osage minerals estate, which was the original intent of the Negotiated Rulemaking Committee. For the same reason, references to “other marketable product” were added to Section 226.2 and the words “oil and gas” were deleted from 226.5(b) and (d), so that the provision references all leases generally.

The Department revised the definition of “waste of oil or gas or other marketable product” to clarify that waste only occurs after the Superintendent makes a specific finding. The Department was concerned that without that change, the regulations would suggest that any production without the advance approval of the Superintendent would be considered waste, resulting in unnecessary administrative burdens.

In 226.3, the Department qualified that that consultation with the Osage Minerals Council is required where appropriate and notes that consultation must be conducted in accordance with the Department's Tribal Consultation Policy where applicable. Similarly, the notice and comment requirements of the Administrative Procedure Act (APA) do not apply to each of the proposed actions and the reference to requiring adherence to the APA has been removed to avoid any presumption that notwithstanding the limitations of the APA, it automatically applies. Rather, it should be noted that the APA only applies where required by law. For example, notices to lessees (NTLs) are interpretive rules that are not subject to the notice and comment requirements of the APA.
See e.g., Perez
v.
Mortgage Bankers Assoc.,
No. 13-1041, __ U.S. __ (March 9, 2015).

The Department deleted the word “other” from 226.4(a)(4) because it was confusing. The Superintendent is responsible for approving and monitoring all lease proposals, not “other” lease proposals.

The phrase “unless otherwise approved by the Superintendent” was added to the end of Section 226.4(a)(10) because as drafted it did not allow the Superintendent to approve actions that might have adverse effects on other mineral resources. However, there might be instances where the Osage Minerals Council wants to allow certain mining to have adverse effects on other lesser mineral resources, and the Department determined that the Superintendent must retain discretion to approve those actions depending on the circumstances.

In Section 226.5(a)(4)(ii), the phrase “twenty five percent of the bonus bid” at the beginning of the provision was deleted because it was inconsistent with subsection (a)(3). That subsection requires that a minimum deposit of twenty five percent of the cash bonus be offered, but it is possible for additional amounts to be deposited, and the intent of Section 226.5(a)(4)(ii) is for all of the deposit to be forfeited under certain circumstances. Section 226.5(a)(4)(ii)(C) was amended to add a reference to subsection 5 for clarification purposes. To address confusion within Osage County regarding the applicability of environmental laws, Section 226.5(d) was amended to clarify that the Agency must comply with applicable laws, including the National Environmental Policy Act (NEPA), before issuing leases and will do so by following applicable BIA regulations. Section 226.5(f) was amended to delete the reference to ownership of stock and instead reference an employee who acquires an interest in a corporation or business entity holding a lease, because one cannot acquire an “interest in a lease” by merely owning stock in a company.

In Section 226.6(b)(4), the Department deleted the reference to surrender of a separate horizon because the Osage Agency does not lease or sublease by separate horizons, in light of the administrative burdens those arrangements have caused in the past. Furthermore, allowing surrender of separate horizons causes similar problems and is not permitted elsewhere on other Indian and Federal lands.

The Department deleted subsection (c) in 226.11 because it was repetitive of the prior paragraph and the release language was moved to the beginning for clarification. In 226.14(c), the 90 day timeline for a determination on diligent production was deleted because it is considered overly burdensome, administratively. Instead, a provision was added that allows the Superintendent to require the lessee and Osage Minerals Council to submit additional information so that he/she can make an informed determination.

In Section 226.18, the Department amended subsection (a) to allow royalty to be taken in kind so that the provision is consistent with subsection (b). In 226.18(b), the provision regarding time for payment was deleted because timing of payment is governed by Section 226.25, and in subparagraph (b)(2) the provision relating to the availability of the average NYMEX daily price was moved to subparagraph (b)(1) to correct an error in the proposed rule.

In Section 226.22, the Department revised how minimum royalty is calculated because, as set out in the proposed rule, the provision confuses separate lease concepts. Minimum royalty is a separate lease term and not a subset of royalty, and Section 226.22 is not about underpayment of minimum royalty, but about the occurrence of a circumstance that triggers the obligation to pay minimum royalty.

In Section 226.25, the Department added a requirement to subsection (a) that requires lessees to provide a written agreement if the purchaser has agreed to be the responsible party for making payments. This change is intended to reduce the administrative burden placed on the Superintendent when having to determine the responsible party. Also, a cross-reference to subsection (a) was added to subsection (c) for consistency. In addition, the phrase “unless otherwise provided by the Osage Minerals Council and approved by the Superintendent” was deleted to standardize and ensure prompt, consistent payments. For the same reason, and to aid in the administrative implementation of the provision, the Department deleted the provisions in subsection (c), allowing the Superintendent to set other rates for late fees and allowing the Osage Minerals Council to waive late fees, with approval by the Superintendent.

In Section 226.27(a), the Department added that royalty payments on division orders or contracts must be made in accordance with Section 226.25, since it is Section 226.25 that governs payments of royalties and all leases are subject to the regulations. And, in subsection 226.27(b,) the provision allowing the Superintendent to authorize extensions was deleted in order to reduce the considerable administrative burden on the Superintendent of having to consider requests for extensions on a case by case basis.

The Department added provisions in 226.29 to clarify liability for wells and related facilities once a lease is assigned. The Department found that there has been a concern both by surface owners during the negotiated rulemaking and the Office of Inspector General with respect to the abandonment of wells within Osage County. The new provisions regarding liability will provide additional protections for enforcement after a lease is assigned and provide greater clarity and transparency regarding lessee obligations.

In 226.34, the Department added a new provision making clear that NEPA and the National Historic Preservation Act (NHPA) continue to apply within

Osage County. These are not new legal requirements and do not create new responsibilities over what is already required. However, the Department determined it was necessary to expressly recognize these responsibilities in the Rule given confusion within Osage County with respect to the Agency's and lessees' duties under NEPA and NHPA. The Department also added an express requirement that, where applicable, requires the lessee to submit certain information to aid the Agency in meeting its obligations under NEPA and NHPA.

The Department amended Section 226.52 to allow for the permanent abandonment of a well upon a showing that the well is no longer producing in paying quantities, rather than a showing of its lack of further profitable production of oil, because the standard for showing that a well is no longer producing in paying quantities is more objective, less administratively burdensome to determine, and consistent with the standard applied with respect to Indian leases outside of Osage County.

V. Comments on the Proposed Rule and Responses

A. Overview/General

Several commenters stated that it was not necessary to change the regulations and that the proposed changes to the regulations would make oil and gas operations in Osage County more cumbersome and costly to the industry because the burden is being put entirely on the lessees.

During the negotiated rulemaking it was explained that the United States was sued by the Osage for breach of trust with respect to management and administration of the Osage minerals estate. The United States settled with the Osage for $380 million and, as part of the settlement, agreed to engage in a negotiated rulemaking to revise the regulations governing Osage in order to improve the management and administration of the minerals estate. Further, not all of the regulations are being revised. To the extent that some of the regulations are revised, the Department acknowledges that there may be some additional upfront costs to ensure compliance with the regulations. However, the regulations are necessary to improve management and administration of the Osage mineral estate. Overall, given the Osage tribal trust litigation and resulting settlement, the Department had to balance the need to ensure that the regulations fulfill the United States trust responsibility to the Osage with some potential increased costs to industry. Moreover, this Rule brings Osage closer in line to how oil and gas operations are regulated on other Indian and Federal lands and reflects the availability of new technology and improved industry standards since the regulations were initially promulgated.

Some commenters stated that the proposed regulations should not be approved because the Bureau is already short-staffed and has no budgetary resources to handle the additional work and explained that the proposed changes will threaten oil lessees and have negative impacts on Osage headright owners quarterly payments.

These comments do not relate to the rule but to internal agency operations that are outside the scope of the rulemaking. However, the Osage Agency developed a staffing plan in 2013 to address concerns regarding lease enforcement and compliance issues. The Osage Agency requested additional funding as part of its Fiscal Year (FY) 2014 and 2015 budgets, which will be incorporated into its base funding for the FY 2016 budget cycle. The Osage Agency has also created 13 additional positions for inspections, enforcement and lease compliance, lease management and oil and gas accounting. While compliance with the regulations may result in some additional upfront costs to both industry and the Bureau, the majority of the new regulations address shortfalls that resulted in the Osage's lawsuit against the United States for breach of trust related to mismanagement of the Osage minerals estate, including royalty collection, auditing, accounting, record keeping, inspections and lease compliance. There was also no evidence presented to show that finalization of the rule would negatively impact royalty payments, rather the rule has increased protections for ensuring royalty collection and provisions to ensure that lessees are calculating royalty in a manner that minimizes third party manipulation.

Some commenters suggested that management and enforcement of regulations governing surface use and lease violations is key.

These comments relate to agency operations and implementation and do not relate to any particular regulation. The Department agrees that management and enforcement of the regulations is key and has worked over the last few years to address staffing concerns and budgetary limitations at the Osage Agency.

Numerous commenters suggested that the Department restart the negotiated rulemaking process and include all affected parties as part of the Negotiated Rulemaking Committee. Some of these commenters suggested that the actual process of the rulemaking normally takes 2 years to ensure that all interested parties may be properly notified of the proposed rule changes, be given adequate time to comment and understand how new regulations will impact private citizens. Whereas, commenters stated that in this circumstance the rule making was pushed through in a little over seven months resulting in a lack of due process and a one-sided nature of the proposed rules.

The Department does not believe it is necessary to restart the negotiated rulemaking process. Formation of the Negotiated Rulemaking Committee was first announced in the
Federal Register
on June 18, 2012, and the final Committee was announced on July 31, 2012. All meetings of the Committee were published in the
Federal Register
at least thirty (30) days in advance, as well as, posted at the Osage Agency and the Osage Minerals Council offices. Throughout the process, the Committee provided extensive opportunity for public comment during meetings and also welcomed written comment between meetings. Issues raised during that process included, but were not limited to, the benchmark index, bonding fees and requirements, and commencement fees. Other matters were also discussed across multiple meetings, recorded in meeting summaries, and proposals to the regulations were adjusted where the Committee determined it appropriate, in multiple drafts of the regulations during that process. The administrative record shows, through the meeting summaries from the Committee meetings, that the Committee not only provided substantial time for public comment, but the Committee also engaged extensively with commenters in dialogue. Committee members asked questions and explored options with the commenter, and sought to reach an accommodation or revision where appropriate. Overall, the Committee provided 21 public comment sessions totaling some 18.25 hours of public comment during the eight meetings over its August 2012 to April 2013 process. On April 2, 2013, the Committee met for its final meeting and concurrence on a proposed package of revised regulations was reached between the Federal caucus and Osage caucus.

The Department received numerous form letters generally opposing the regulations and suggesting that making the lessees within Osage County comply with Bureau of Land Management (BLM)

regulations will make Osage lose its appeal as a one-stop shop and asserting that the regulations will lengthen the drilling permitting process, diminish the Osage minerals estate and impact income generated.

The Department acknowledges that some of the new provisions in the regulations are modeled after existing Federal regulations governing oil and gas on other Indian and Federal lands governed by BLM. However, under the rule, BLM is not delegated with the responsibility for oil and gas operations within Osage County. Rather, BIA has that responsibility. Additionally, it is relevant to note that some commenters noted their disagreement with the form letters submitted opposing the proposed regulations.

At least one commenter requested that the Department amend the rules so that they properly recognize the State of Oklahoma's primacy and exclusive role in environmental regulation of oil and gas exploration and production activities in Osage County as well as the State's right to regulate the waters within its borders. The commenter asserted that the State is better equipped to design, administer and enforce laws and regulations related to oil and gas development.

The United States holds the Osage mineral estate in trust pursuant to the Act of June 28, 1906 § 3, 34 Stat. 539, 543-44, amended in relevant part by Act of March 2, 1929, 45 Stat. 1478 (extending restricted trust status of mineral estate to 1959); Act of June 24, 1938, 52 Stat. 1034 (extending restricted trust status of mineral estate to 1983); Act of Oct. 21, 1978, 92 Stat. 1660 (extending restricted trust status of mineral estate in perpetuity). Thus, the United States, through the Department, has a non-delegable fiduciary obligation to manage the mineral estate for the benefit of the Osage. It is relevant to note that one commenter disputed the assertion that the State is better equipped to address oil and gas leasing in Osage County and explains that the Osage Nation and the United States have more experience and knowledge in administering and enforcing oil and gas leases in Osage County. The first lease in Osage County was developed in 1896, eleven years before creation of the State, and the United States has regulated and managed the Osage mineral estate since 1896.

At least one commenter objected to references to “reservation lands” in Osage County and asserts that the reservation was disestablished in Osage Nation
v.
Irby, 597 F.3d 1117 (10th Cir 2010).

This is a legal issue outside the scope of the rulemaking. The Department does not need to address the impacts, if any, of the
Irby
case in order to revise these regulations. The United States holds the Osage mineral estate in trust and the Secretary has authority under the Act of June 28, 1906, § 3, 34 Stat. 539, as amended, to promulgate regulations to manage and administer the mineral estate, and this Rule is being promulgated pursuant to that authority.

At least one commenter requests that the Department and the Osage Minerals Council enter into a cooperative agreement with the State of Oklahoma to delegate responsibility for management and administration of oil and gas operations to the State.

This comment does not relate to the revised regulations and is outside the scope of the rulemaking process. It is relevant to note that one commenter disagreed with the request for a cooperative agreement that gives the State administrative jurisdiction in Osage County and cites, 25 U.S.C. 1a & 9, noting that Congress granted authority over Indian Affairs to the President. This commenter also cited 25 CFR 1.4(a), for the proposition that the President, acting on his authority, has specifically excluded States from exercising jurisdiction over Indian property, including Indian water rights; and further cited legal precedent for the proposition that the Department cannot delegate authority to a State without tribal consent and the Osage Nation has not consented to such jurisdiction or delegation.
See Assiniboine and Sioux Tribes of the Fort Peck Indian Reservation
v.
Bd. Of Oil and Gas Conservation of the State of Montana,
792 F.2d 782 (9th Cir. 1986).

At least one commenter suggested that the rule should reflect the separate and unique relationships (a) between the Department of the Interior, and the Osage headright holders, Osage Mineral Estate, and the Osage Minerals Council under the 1906 Act; and (b) between the Department and the Osage Nation under the 2004 Act.

This comment does not relate to the revised regulations and is outside the scope of the rulemaking process. The United States holds the Osage mineral estate in trust under the Act of June 28, 1906, § 3, 34 Stat. 539, as amended, and the revised regulations only pertain to the United States' responsibilities to the Osage as defined in that Act. The 2004 Act, Public Law 108-431, 118 Stat. 2609 (Dec. 3, 2004) speaks to tribal membership issues for purposes other than those defined by the 1906 Act.

At least one commenter suggested that the proposed rule likely violates Executive Orders 12866 and 13175 because it adversely affects the Nation and its members. The proposed rule also has tribal implications and requires the Bureau to incur new costs that require consultation with the Nation. There is no evidence that the Bureau has consulted with the Nation.

Pursuant to the Osage Tribal Trust Settlement, the Bureau is required to consult twice annually with the Osage Minerals Council, the duly elected governing body within the Osage Nation that oversees the Osage mineral estate. Throughout the Negotiated Rulemaking Process, the Bureau held its required consultations to discuss the rulemaking process and other issues with the Osage Minerals Council. During those meetings a tribal representative of the Nation was invited and present. Additionally, the Negotiated Rulemaking Committee was comprised of duly appointed members of the Osage Minerals Council.

At least one commenter requested that the Bureau make more information available to surface owners and the public with respect to operations within Osage County, including but not limited to freshwater aquifer maps, well location maps, mineral lease-holder maps and contact information, and lease inspection reports. The commenter suggested that lessees should be required to report the amount and type of chemicals used in any hydraulic fracturing operation to www.fracfocus.org.

These comments are not within the scope of this rulemaking. However, as an operational matter, the Bureau is exploring opportunities to make oil and gas operations more transparent by possibly developing a Web site that would contain pertinent information, consistent with the Freedom of Information Act requirements, with regards to oil and gas activities within the Osage County.

At least one commenter suggested that the Department commit to regularly publish monthly statistical data, provide headright holders with detailed statements regarding operational and royalty data, provide all relevant data to the Minerals Council, and develop an accessible and auditable database.

This comment is outside the scope of the rulemaking. The Osage Agency regularly provides detailed information regarding the Osage mineral estate to the Osage Minerals Council on a regular basis and, consistent with the Freedom of Information Act, headright holders may request information relating to the Osage mineral estate from the Osage Agency.

At least one commenter suggested that the mineral estate be independently audited under the auspices of the Department's Office of Inspector General and that the audit results be provided to headright holders.

This comment is outside the scope of the rulemaking process. The Department notes, however, that the Office of Inspector General (OIG) issued a publicly available report on the Osage Agency in October 2014 (No, CR-EV-BIA-0002-2013). That report states that the Osage Agency needs to institute substantial changes to improve the management and administration of the Osage mineral estate, and further provides that many of the OIG's proposed recommendations and concerns will be addressed upon finalization of this rule.

Some commenters requested that STRONGER should be invited to do an audit of the Osage Agency and provide recommendations for transparency, accountability and enforcement, as well as to strengthen regulations.

This comment is outside the scope of the rulemaking. Moreover, STRONGER is an organization that focuses on State, not Federal, reviews of oil and gas regulations and best management practices. As noted in response to other comments, the Department's OIG has recently performed an audit of the Osage Agency and has issued a public report providing specific recommendations to improve management and administration of the Osage mineral estate. That report notes that many of the areas in which improvement is needed will be addressed upon finalization of this rule, and other issues are being addressed operationally. In addition, the Negotiated Rulemaking Committee was comprised of a team of experts in all fields of Federal oil and gas operations (BLM, Office of Natural Resource Revenue (ONRR), BIA, and the Office of Indian Energy and Economic Development) to evaluate Osage Agency operations and to make recommendations for improving the management and administration of the Osage mineral estate.

At least one commenter suggested that the Department of the Interior provide for full end-to-end accounting to headright holders of withdrawals to the Osage mineral estate, royalty payments made, expenses withdrawn, interest earned and quarterly disbursements to headright holders.

This comment is outside of the scope of the rulemaking; however, the Department provides the Osage Minerals Council with a periodic statement, at least on a quarterly basis, that provides information regarding the source, type, and status of the funds in the mineral estate account, the beginning and ending balance for the period reported, all gains and losses in the account and all receipts and disbursements for the account.

At least one commenter suggested that in any provision where the regulations require consultation with the Osage Minerals Council, such references should be replaced with “approval by the Osage Minerals Council.”

The Secretary, not the Osage Minerals Council, has been delegated the authority to manage the Osage mineral estate by Congress. Thus, while the Bureau is willing to consult with the Osage Minerals Council on matters relating to the Osage mineral estate, it must retain its ability to take corrective actions against lessees that are in violation of the regulations, including termination of the lease after consultation with the Osage Minerals Council (Sections 226.25(c), 226.62(b)-(c), 226.63(c), 226.67, and 226.70). In addition, the Department must retain the discretion to make changes to the regulations in the future.

At least one commenter has requested that the reference to “for the benefit of the Osage” needs to be changed to “for the benefit of the Osage shareholder/headright owner.”

The phrase commented on is in the Executive Summary of the Rule that was proposed in the
Federal Register
on August 28, 2013, and is not a comment relating to the rule.

B. Comments Related to Section 226.1

At least one commenter suggested that the definition of “headright holders” be amended to reflect the distinction that Congress has made between (a) the Osage Mineral Estate and its headright holders and (b) the Osage Nation.

The rule does not define “headright holders” and the Department does not believe it is necessary to define this term because it is defined in the 1906 Act. Moreover, the distinction made by the commenter is not relevant to the rule. The rule only relates to the Osage mineral estate as defined in the 1906 Act and not to other purposes.

At least one commenter suggested that the definition of the “Osage Minerals Council” be amended to reflect the Council's role as the elected representative of the Osage headright holders, composed of headright holders, and vested with authority to enter leases and take other actions related to the mineral estate.

The Department believes the current definition of Osage Minerals Council in the Rule is consistent with this comment and reflects that the Osage Minerals Council is a duly elected governing body within the Osage Nation.

At least one commenter sought clarification on the definition of “Other Marketable Product” because it is unclear whether language “for which there is a market” refers to a local market or any national or international market. For example, simply because carbon-dioxide may be selling in Montana, does not mean there is a willing buyer or market for an Osage lessee.

The Department does not believe that there is a need to further expand the definition. “[F]or which there is a market” was intended to be left sufficiently broad to mean any market which there is a demand that makes it economically feasible to develop the non-hydrocarbon.

At least one commenter suggested that the definition of “royalty” be amended to reflect the many diverse types of payments made by lessees included in the draft regulations, save for tank fees and fees to arbiters.

Royalty is not defined in the definitions section of the rule, but is defined by the amount a lessee must pay on the amount of oil, gas, or other marketable product sold in accordance with Sections 226.18 through 226.23. Other fees paid under the regulations are for administrative costs or expenses.

At least one commenter suggested that the definition of “Superintendent” be amended to reflect the ability of the Superintendent to delegate authority only to employees of the Bureau and enumerate an extensive set of duties and responsibilities.

The Department does not believe that this level of specificity is required or necessary. The 1906 Act delegated to the Secretary of the Interior the responsibility to manage and administer the Osage mineral estate and such delegations are governed by applicable authority, including the Departmental Manual. If the Secretary delegates a specific duty to the Superintendent, the Superintendent may only further delegate that responsibility in accordance with the Departmental Manual. Further, to the extent that the Secretary delegates certain responsibilities to the Superintendent, those delegations may be changed by the Secretary, and this authority is expressly retained in the definition of “Superintendent” in Section 226.1.

At least one commenter suggested that the provision allowing the

Superintendent to delegate her authority needs to be clarified; it could be read to allow the Superintendent to delegate to the Osage Nation, which includes non-headright owners.

No changes were made in response to this comment. The question of the Superintendent's authority to delegate is not controlled by the regulation but is an independent question of Federal authority. The Superintendent can only make delegations consistent with applicable authorities including Departmental Manuals.

At least one commenter suggested that the term “surface owner” be defined in the regulations as “any person, firm, corporation or other entity that owns the surface of the land on which oil and gas development is proposed or occurs.”

In response to this comment, a definition of “surface owner” was added to Section 226.1 to include “any person or entity that owns a surface estate within Osage County, irrespective of whether the surface estate is held in fee, restricted fee or trust status.”

With respect to the definition of “waste of oil or gas or other marketable product” (226.1), one commenter suggested clarification, noting that even using a reasonable and prudent operating standard, subcategory (1) “a reduction in quantity or quality of product from a reservoir” may prove so vague and open to interpretation that it will be both unworkable and subject to disagreement whenever such a claim is made.

The definition of “waste of oil or gas or other marketable product” must be read in conjunction with Section 226.21, which specifies who makes a determination regarding royalty payments for lost or avoidably wasted materials. Section 226.21 allows the lessee to submit information in support of his/her position that gas was not wasted or avoidably lost before a finding is made. This provision ensures that the Superintendent has all relevant information from the lessee before making a final decision. In addition, during the Negotiated Rulemaking when this provision was discussed by the Committee and the public, it was noted that the Superintendent's decision is subject to appeal under 25 CFR part 2.

At least one commenter noted that references to the “Osage Nation” in the rule diminish the rights of the headright owners because the Nation includes non-headright holders. The commenter also stated that the Osage Tribe (under the 1906 Act) is not the same as the Osage Nation today.

The reference to the Osage Nation in the definition of Osage Minerals Council is an accurate reference because the Osage Minerals Council is a duly elected governing body within the larger Osage Nation. Only Osage headright holders are eligible to vote for candidates for the Osage Minerals Council.

C. Comments Related to Section 226.3

At least one commenter stated that the BLM regulations and on-shore oil and gas orders are onerous and costly to comply with and lessees don't know how to navigate them. This commenter suggested that it cost them over $87,400 for a drilling permit in Kay County, Oklahoma, and that following BLM requirements will make the decision to drill more cost-based rather than potential-based.

Section 226.3 allows the Bureau, in consultation with the Osage Minerals Council, to adopt BLM onshore oil and gas orders, notices to lessees or related onshore oil and gas regulations, but does not require adoption. Prior to adoption, the Bureau must comply with the Administrative Procedure Act. This rule does adopt two BLM onshore oil and gas orders that relate to the measurement of gas in Section 226.63(a), and hydrogen sulfide in Section 226.60(f), but neither of these relate to the drilling permit process. Moreover, while Section 226.34 (previously numbered Section 226.16), which relates to drilling permits, was amended to expressly provide that National Environmental Policy Act and the National Historic Preservation Act apply, those statues are already applicable within Osage County. The amendment only makes clear that lessees must submit certain environmental information to assist the agency in complying with those laws. To the extent that the comment could be interpreted to imply that Section 226.60 (previously numbered Section 226.36) is revised to add requirements regarding well safety, those requirements were adopted from the BLM regulations, but do not impact the drilling permit process. It is also relevant to note that the rule does not become effective until 60 days after publication and the Bureau is working on a plan to educate lessees in Osage County regarding the changes to the regulations to ensure compliance and understanding of any new requirements before the rules go into effect.

At least one commenter suggested that all seven of the BLM's current onshore orders be adopted immediately and that future onshore orders be adopted automatically by the Bureau without consultation with the Osage Minerals Council.

The Negotiated Rulemaking Committee reviewed all of the BLM's onshore orders and after much discussion and public comment only recommended adopting Orders 5 and 6. However, the Committee recommended, and the final rule adopts the recommendation, that the Bureau be expressly provided the authority to adopt other onshore oil and gas orders in the future. The requirement that the Bureau consult with the Osage Minerals Council prior to any such future adoption is consistent with Executive Order 13175 on tribal consultation. In addition, the Bureau must comply with the Administrative Procedure Act in adopting any future onshore oil and gas orders.

D. Comments Related to Section 226.4

At least one commenter suggested that in Section 226.4(a)(10), the Superintendent's responsibilities with respect to protection of the environment, public health, and safety need to be expanded and strengthened.

The rule already adequately addresses this comment, however, an additional change was made to Section 224.44(e) to further address this and other comments related to safety and the environment. For example, in addition to Section 226.4(a)(10), the rule has specific protections against hydrogen sulfide gas in Section 226.60(f), which was added during the negotiated rulemaking process to address concerns from the public regarding the existence of hydrogen sulfide within Osage County. Section 226.44 also provides additional requirements with respect to the lessee's obligations for preventing pollution and an additional provision was added for safety, to require fences around pits and tanks and that removal and remediation of tank and pit sites occur immediately after completion of operations. Section 225.45 provides additional requirements with respect to other environmental responsibilities. These are just some of the provisions that ensure lessees take steps to protect the environment and ensure public health and safety.

At least one commenter opposed Section 226.4(b) of the proposed rule because it allows oral orders, which could risk creating additional uncertainty in the supervision of operations and could be misinterpreted and/or unclear. It was suggested that a written order clearly identifying specific violations, necessary corrective actions, and the time for compliance would ensure full compliance and create a record in the event of an enforcement action or surface owner lawsuit.

The Department agrees that written orders are preferable and has removed

all references in the rule allowing oral orders so that it is clear that written orders must be issued.

Some commenters suggested that the Bureau should inspect oil and gas leases at least once annually and that the Bureau should promptly address and more frequently inspect non-compliant leases. It was suggested that there is a general lack of day-to-day oversight and that most ranches have old scars or current pollution issues associated with oil and gas production and saltwater spills. Commenters also suggested posting information regarding inspections like the BLM does because it allows landowners and the public to see when wells are inspected and violations reported.

To the extent that these comments relate to the rule, they are already addressed by the rule. In Section 226.4(c), leases with a history of noncompliance must be reviewed at least once annually. The Bureau has also established a toll-free 24 hour hotline (855) 495-0373 for reporting spills or accidents and a tracking system has been created to ensure that all calls are responded to in a timely manner and other officials are notified as appropriate. The Bureau has also discussed creating a Web site for the Osage Agency where it can post the results of investigations and other information related to oil and gas operation in Osage County. However, this is being done outside the rulemaking and any information posted must be reviewed for compliance with the Freedom of Information Act. Additionally, the Office of Inspector General (OIG) issued a publicly available report on the Osage Agency in October 2014 (No, CR-EV-BIA-0002-2013) that discovered some of the same concerns, but many of the OIG's proposed recommendations and concerns will be addressed upon finalization of this rule. The Bureau is also making a number of operational changes that are discussed in that report in order to strengthen the management and administration of the Osage mineral estate.

At least one commenter suggested that a new subsection should be added to Section 226.4 to require the Superintendent to adopt rules prohibiting Osage mineral headright holders from working in the lease inspection division of the Bureau to avoid conflicts of interest.

Congress has recognized that Indian tribes and their members should have direct involvement in federal programs enacted for their benefit. Under 25 U.S.C. 472, Congress recognized that Indians should be involved in the day-to-day operations affecting them and the Bureau of Indians Affairs must apply Indian preference to positions open in the Osage Agency. The Department is not persuaded by the assertion that Osage headright holders who may be employed by the Osage Agency will refuse to enforce regulations simply to advance their alleged personal self-interests. In any event, employees are accountable to their supervisors and ultimately to the Secretary. If there are issues with non-compliance, members of the public may contact the Department to report such violations.

E. Comments Related to Section 226.5

At least one commenter suggested that Section 226.5(c) be revised to require the Superintendent to notify the surface owner beneath whose land minerals are leased.

This comment is adequately addressed in the rule. The Negotiated Rulemaking Committee agreed in response to similar public comments raised in the negotiated rulemaking process that surface owners should have access to information regarding whether an oil and gas lease covers their surface estate. Thus, as proposed and adopted in the final rule, Section 226.5(c) requires that the Superintendent post at the Agency, within 30 days following approval of a lease, a legal description of the mineral estate that was leased. This ensures that surface owners have access to information regarding lands leased, while reducing the burden of the Osage Agency in locating and notifying each individual surface owner.

F. Comments Related to Section 226.6

At least one commenter suggested that in Section 226.6(a), regulatory language be included clarifying that a lessee that surrenders its lease is still liable for plugging, abandonment, and reclamation obligations associated with the lease area.

In response to this and other comments concerning abandoned and unplugged wells, the Department has added a paragraph (c) to Section 226.6, to require the Superintendent to ensure that the lessee has either plugged all wells and reclaimed the surface, in accordance with the regulations, or show in writing that upon surrender the future liability for all wells located within the lease or portion of the lease to be surrendered has been transferred to another party.

G. Comments Related to Section 226.8

Some commenters suggested that the terms of an oil and gas agreement should be given primacy so that the regulations recognize that in the event of a conflict between the regulations and an oil and gas agreement, the terms of the oil and gas agreement control. These commenters expressed a lack of clarity in the intent behind Section 226.8 and proposed to make clear whether 226.8 includes a pre-existing lease. One such commenter requested leaving existing leases as they are (highest posted price) and only making new leases subject to NYMEX, stating that otherwise there will be legal challenges.

The Department does not believe a change in the rule is needed to address this comment. Section 226.8 has only been renumbered in the rule (previously numbered as Section 226.7). That provision specifies that amendments or changes to the regulations cannot change the terms of pre-existing approved leases with respect to the term of the lease, rate of royalty, rental or acreage, unless otherwise approved of by the parties and the Superintendent. Thus, the rate of royalty in pre-existing approved leases will not change as a result of the rule, but the provision describing how royalty is calculated (
i.e.,
NYMEX at Cushing), could properly apply to pre-existing leases. This rule could also affect such matters as lease operations and maintenance requirements, reporting requirements, and other aspects of pre-existing leases other than the key lease terms specified in Section 226.8.

H. Comments Related to Section 226.9

Some commenters noted that the proposed rule requires each lessee to pay a new and unique bond for the development of the Osage minerals estate and does not include recognition or acceptance of already established and sufficiently protective nationwide bonds regularly posted by lessees. These commenters suggested that not allowing a nationwide bond would be completely atypical and singularly applicable to the Osage Agency and could hinder development.

The Department agrees with this comment and has added the provision allowing nationwide bonds back into Section 226.9 of the rule.

Several commenters objected to the increase in the amount of bonding required and asserted that requiring bonding at $5,000 per well is unaffordable. Some argued that lessees will have to plug wells because they won't be able to afford bonding or that the new amount will tie up capital available to the lessee to develop production.

The Department disagrees with this comment and in reviewing the record has found that there is a need for increased bonding. The Department

found that the Committee looked at the actual cost to plug wells and tried to find a balance between covering the cost of plugging a well while, at the same time, not overly burdening lessees. The original bonding amounts were based on a quarter section and did not correspond in any way to plugging and remediation costs related to wells, which must be done on a per well basis. The new regulation ties bonding to the number of wells and caps the per well bonding requirement at 25 wells for all leases, corresponding more directly to the fact that plugging costs are incurred on a per well basis. While some commenters requested that the Department include an allowance for nationwide bonding, none of public comments justified an alternative bonding amount. Thus, the Department found that overall, the Committee recommendation was reasonable and reduces administrative costs because the per well bonding streamlines implementation. The Department also found it necessary to maintain per well bonding requirements in light of a recent report on the Osage Agency issued by the Department OIG, which discussed and noted the historical failure to plug wells in Osage County and the need to ensure that this problem is addressed in the future.

Some commenters argued that limiting bonding to $5,000 per well for up to 25 wells is inadequate to ensure sufficient remediation and recommended no less than $5,000 for shallow wells (less than 3,000 feet in depth) and $10,000 for deep wells (deeper than 3,000 feet) and deletion of any cap. Some of these commenters requested that the per-well bonding amount should be defined as an amount sufficient to cover 125% of the cost of (i) plugging a single well and (ii) reclaiming the well site and surrounding land impacted thereby.

The Department believes that the rule sufficiently balances the need for increased bonding with the fact that bonding is only for insurance purposes and does not eliminate the lessee's obligations to plug abandoned wells and remediate surface lands in coordination with surface owners. Bonding is only intended to provide assurances to the Bureau that the lessee has incentive to plug a well and is not intended to create complete upfront funding for the plugging of a well at an unknown time in the future. Nor is bonding intended to cover surface remediation. To the extent that a surface owner is unsatisfied with remediation on the part of a lessee, he or she may seek damages in accordance with Sections 226.40-41, or pursue any other legal remedies available to him or her. The Department found that the Committee considered, but rejected after substantial public comment in opposition, the notion to require bonding at 125 percent the cost of plugging a well.

Some commenters requested that a final rule provide a grandfather provision for bonds on existing leases that would also apply to any new leases that the same lessee may acquire.

The Department has concluded that it is necessary to make changes to bonding with Osage County and there have been historical problems with adequate bonding in Osage County as found in the recent report issued by the OIG in October 2014. The Department found that the issue of bonding was discussed throughout the negotiated rulemaking process and that members of the Committee and the public noted that the current rate of bonding does not relate at all to the fact that costs for plugging occur on a per well and not per lease basis. Moreover, members of the public have commented that they believe there is a problem throughout Osage County with abandoned and unplugged wells and current bonding rates were not sufficient to address or encourage remedying these issues. Thus, the Department believes that it is reasonable to adopt the revised bonding amounts proposed by the Negotiated Rulemaking Committee to better relate bonding to the cost of plugging a well and incentivize lessees to plug wells that will no longer be used so that they can get a release of their bond. The rule also provides new provisions for ensuring that the Bureau releases bonds in a timely manner.

Some commenters asserted that most insurance companies won't write oil and gas lease bonds now and the new regulation will make it more difficult.

The Department does not believe that the rule will make it more difficult to obtain oil and gas lease bonds. Moreover, while the amount of bonding has increased, the rule caps the amount of the increased bond to a maximum of 25 wells. The rule allows for different ways to acquire a bond, including the ability to obtain a surety bond that meets the requirements of the rule, and the Department has further revised the rule to allow nationwide bonds, which are accepted elsewhere on other Indian and Federal lands. While the Department understands that there may be some lessees that for various reasons may not be able to get a bond, the Negotiated Rulemaking Committee discussed that some of the issues related to those failures were due in part to defaults caused by particular lessees and are not attributable to the cost of bonding. Bonding is a requirement throughout the oil and gas industry and those who want to engage in oil and gas operations must expect to be required to provide assurance that they will properly plug and reclaim their well sites.

Some commenters asserted that bonding at $5,000 per well is unaffordable and will cause small lessees to go out of business because most wells are either not able to produce enough to cover the bonding amount or are inactive and pose no threat the environment.

For many of the reasons addressed in other responses to comments on bonding, no additional changes are necessary in response to this comment. In addition, the unused and unplugged or abandoned wells do pose a threat to the environment such as possible pollution of fresh water formations due to migration of oil, gas, saltwater and other substances. For example, abandoned wells can provide pathways for oil, gas or brine-laden water to contaminate groundwater supplies or to travel up to the surface due to the deterioration of the casing or surface equipment deterioration or malfunction. If the production is insufficient to cover the cost of bonding, the Department is concerned that the production will also be insufficient to cover the cost of plugging and reclamation. Thus the increase in surety amounts will help ensure the operator's diligence in plugging and abandoning and reclaiming the surface.

At least one commenter suggests that there should be a ceiling to the bonding requirement, like the State of Oklahoma's cap at $25,000 per lessee.

This comment is already addressed by the rule, which does provide a cap for bonding in Section 226.9(c) at $5,000 per well for a maximum of 25 wells per lessee for all leases held within Osage County. Additionally, in response to public comment, the rule was further revised to allow nationwide bonding.

At least one commenter suggested that the cap on bonding amounts should be eliminated from the regulations.

The Department disagrees with this comment because it is generally accepted within the oil and gas industry that bonding is for insurance purposes and is not intended to cover the entirety of the costs associated with plugging and remediation of every well site, rather bonding provides an incentive to perform plugging and remediation of well sites and screens out unreliable lessees who fail to perform these duties because lessees that default on their responsibilities will not be able to get a bond in the future.

At least one commenter suggests bonding should follow the Oklahoma Energy Resources Board model used in the rest of the State of Oklahoma.

No changes to the rule are necessary with respect to this comment. The Oklahoma Energy Resources Board (OERB) does not bond or plug wells. The OERB is a State-incorporated surface restoration agency that lessees in the State of Oklahoma voluntarily contribute to for remediation and reclamation of abandoned well sites at no cost to surface owners. The Bureau has met with OERB and confirmed that OERB has historically been willing to operate within Osage County and currently works with surface owners and the Bureau for Remediation within Osage County in accordance with its normal process and procedures. The goal of the regulation is to prevent orphan wells that will further burden OERB and the responsible operators who fund it.

Some commenters noted that they are generally pleased with the proposed regulations but noted their concerns with plugging wells. Specifically, commenters stated that bonding needs to be more proactive and well sites remediated because the proposed regulations do not address current abandoned wells and, rather than plugging the wells, lessees often just pass wells to the next lessee when they assign or sell their lease.

This is an issue that cannot entirely be addressed in the regulations, which govern on-going oil and gas operations. The Department recognizes that there is an issue with respect to abandoned wells within Osage County and works with the Osage Minerals Council to address these issues. The Osage Minerals Council has contracted with the Bureau to take over the function of plugging orphaned or abandoned wells and currently operates the program within Osage County. In addition, as mentioned in previous responses, OERB operates in Osage County to remediate the surface area around orphaned or abandoned wells that have been plugged. To the extent that this issue can be remedied in the future by the rule, the Department has increased bonding to more closely relate to costs associated with plugging a well and reclamation (on a per well basis) to provide an incentive to ensure lessees properly plug and abandon wells and has also added a provision, Section 226.6(c), requiring that before a lease can be surrendered or partially surrendered, the lessee retains any past liability incurred within the lease or partial lease to be surrendered, and must show that he has either properly plugged and abandoned all wells and/or that another party is taking full legal liability for the wells within the lease or partial lease to be surrendered. In addition, a new provision was added as Section 226.29(a)(i), clarifying that the assignment is subject to the continuing obligations of the assignor to meet its plugging and abandonment obligations, and a new Section 226.29(a)(ii) was added making clear that the assignee retains all responsibility for all unplugged wells under the lease or partial lease assigned.

To address the abandoned well issue within Osage County, one commenter suggested that a company fund be established whereby lessees would pay in the value of 2 barrels of oil per year for each active well less than 4,500 feet and 3 barrels of oil for wells less than 7,500 feet and the fund would be used to plug abandoned wells.

The Department does not believe this is an issue within the scope of the rulemaking. The regulations govern on-going oil and gas operations. To the extent that there are historical issues with respect to abandoned wells and well sites, the Department can explore with the Osage Minerals Council whether or not a voluntary fund could be established to address the historical issues. The Department also reiterates that as stated in responses to other comments, OERB does operate within Osage County to remediate abandoned well sites and the Osage Minerals Council currently operates the program for plugging abandoned wells.

I. Comments Related to Section 226.14

Numerous comments were received objecting to the termination for non-production in Section 226.14(e). Commenters suggested that the timeframe for termination for nonproduction needs to be increased and/or kept at one year and not 90 days. One commenter noted that if a particular well produces very little, it is necessary to have the time to evaluate the upper and lower potential of the well regarding future oil and gas opportunities, as well as the ability to shut the well in for short periods when the price of the oil or gas becomes uneconomical to produce at that well without the lease being terminated. Another noted that the 90-day requirement will prevent companies from purchasing tracts because they will not have time to put the tracts into production. One commenter suggests that a more reasonable requirement would be a 180 day period, with notice to the Superintendent that the lessee needs an extension 20 days prior to the expiration of the 180 day period. Some commenters noted that people have other full time jobs and can't get work done quickly and it sometimes takes a few months to get work done. Another commenter stated that the one-year termination provision has been working fine and it is expensive to hire people to fix problems and lessees don't always have the money. Some commenters noted that oftentimes equipment is backordered or weather causes delay and they wouldn't be able to comply with the 90-day requirement.

In response to comments, the Department has further revised the rule to change the time period for termination for non-production from 90 days to 120 days and require that requests for extension of time be submitted at least 20 days prior to expiration of the 120-day period, but given the additional time for non-production and the need to reduce administrative burdens in enforcing this provision, the Department deleted the provision allowing the Superintendent to waive the 20 days advance notice requirement. For clarification purposes, the Department also added a standard for extending temporary suspensions to require good cause. The Department found that there was substantial discussion on this issue during the negotiated rulemaking and the Osage representatives on the Committee were opposed to allowing nonproduction for periods of 180 days or more. Although the Osage representatives on the Committee also rejected a 120-day timeframe during the negotiated rulemaking process, the Department had to balance the concerns of the Osage representatives with the concerns of the lessees regarding operation contingencies and its ability to administratively manage leases for nonproduction. The Department did not view as relevant, concerns that a lessee may have another job that inhibits his or her ability to produce within a particular timeframe or concerns that a particular lessee may not be able to afford equipment or staff because Section 226.14(c) states that all lessees have an obligation to diligently develop their lease. The Department also found that concerns regarding the ability to put a well into production were misplaced because Section 226.14(e) only contemplates termination for nonproduction after the primary term of the lease when the lessee is expected to begin production.

At least one commenter suggested that lessees aren't in a rush to do business in Osage County and the Bureau needs to encourage lessees to keep their properties up, not terminate them.

No response is necessary to this comment because it is not substantive and does not provide any recommendations.

At least one commenter objected to 226.14(e) on the basis that some wells only produce one barrel per day and oil will not be picked up for sale within 90 days or for at least six months, and under this provision this producing well would be considered non-producing because no sale took place within 90 days and that is unfair.

This comment misinterprets Section 226.14(e), which does not provide that wells that are producing in paying quantities would be terminated for nonproduction within the prescribed timeframe. It is understood that sales are intermittent in nature and that a well may be producing but that a sale may not occur within 90 or 120 days. So long as the lessee reports production, the lease will continue, it is only the failure to produce, not the failure to sell, that terminates a lease under this provision. The regulations, however, expressly provide that all lessees have an obligation to diligently develop their leases as set forth in Section 226.14(c).

A commenter stated that the requirement to drill on every quarter section in order to hold a lease exposes lessee to excessive financial risk and causes excessive impacts to the land and wildlife. Leases should instead be structured to allow focused drilling.

This comment does not accurately characterize Section 226.14(a). Section 226.14(a) requires a lessee to place a well in production within the land embraced by a lease within 12 months of the date of approval of the lease, or as otherwise provided for in the lease terms, but does not require a lessee to drill in every quarter section. A lease may encompass an entire quarter section or a larger land area. Lessees are required to act prudently in addition to diligently developing the mineral estate. The rule also includes provisions to ensure that lessees conduct all operations in a manner that protects other natural resources, environmental quality, life and property.
See
Section 226.33.

At least one comment was received suggesting that the factors in Section 226.14, governing when the Superintendent may impose restrictions as to time of drilling and rate of production, should be expanded to encompass environmental, public health and safety concerns, and the interests of the Osage Tribe, because activity should not unduly interfere with surface uses.

The Department disagrees with this comment. The Osage mineral estate is held in trust by the United States and was reserved by the United States for the purpose of mineral development. The rule also does not change the basic premise of law that a surface estate is subservient to a dominant mineral estate. The rule recognizes that a lessee is permitted to use as much of the surface estate that is reasonable for operations.
See
Section 226.37. Thus, the regulations provide limitations on size of drilling sites (Section 226.38(a)(3)) and require that lessees conduct operations to protect other natural resources and environmental quality, life and property (Sections 226.33(a)(2)-(3) & 226.45), and require lessees to take certain steps to prevent pollution (Section 226.44). At the same time, lessees have an affirmative obligation to diligently produce a lease (Sections 226.14(c) & 226.33(a)(4)) in accordance with the overall statutory and regulatory framework. In the event that a lessee is violating the regulations, the Superintendent has authority to take actions to remedy the violations (Sections 226.67 & 226.68).

J. Comments Related to Section 226.15

At least one commenter objected to 226.15 with respect to drainage asserting that drilling offset wells to prevent drainage is not necessary because the Nation owns all the minerals in Osage County. Drilling offset wells would not only require considerable time, resources and expense, but this unnecessary drilling could adversely affect environmental damage. It was suggested that the Bureau should consider removing this section entirely or narrowing its scope to clarify the conditions where offset wells are necessary and also ensure that there is an appeal process to protect against arbitrary decision making.

Under the 1906 Act, the mineral estate is held in trust by the United States for the benefit of the Osage. However, the drainage provision in the Rule is intended to ensure diligent development of all lease sites because not all leases have the same royalty rate. Thus, if a lessee holds multiple leases next to each other, the drainage provision will ensure that the lessee is not able to focus drilling only the lease site that has a lower royalty rate to the detriment of the Osage. However, to further clarify the provision and reduce the burden on lessees, subsection (b) was revised to clarify that drainage does not occur if the lessee can show that it could not produce a paying quantity of oil or gas “for a reasonable profit”, rather than “in paying quantities.” Usually “in paying quantities” only means enough to recover day to day operational costs. Subsection (d) was also amended to clarify that an assignee is responsible for drainage even if it would not be economic, at the time of assignment, to drill an offset well, to ensure that the Osage are protected if a lease is assigned. The Department also notes that 226.16(d)(1) is intended to clarify that a well drilled to protect against drainage must be in continuous production and the obligation to pay compensatory royalty can be revived if the protective wells cease production.

K. Comments Related to Section 226.18

Several commenters suggested that measuring oil royalties based on NYMEX pricing is unattainable and that it is unfair to require lessees to pay a royalty based on a price they cannot obtain. One commenter suggested that NYMEX will gouge small lessees and others suggested that NYMEX will hurt Osage shareholders. A few commenters suggested, rather than NYMEX, royalty rates should be commensurate and competitive with those found in the region and in similar places around the country. One commenter suggested that only if the rule required lessees to be paid NYMEX prices would it be fair. Another noted that it is okay to use market center price as a reference point, but the market center price must be adjusted for location and quality. Another stated that because many wells in Osage County are stripper wells and produce low volumes and are only profitable under the existing regulations, NYMEX would harm profitability and shorten production life of leases, and suggested instead that royalty should be based only on the price paid to lessees, allowing the competitive marketplace to set the prices. One commenter noted that NYMEX will cost as much or more than $3 per barrel more than what is being paid now.

In the Osage Tribal Trust Settlement, the Department agreed to engage in a negotiated rulemaking and, among other things, identify appropriate revisions to the methods for calculating royalty for oil and gas. The Negotiated Rulemaking Committee reviewed various indices to utilize for calculating royalty. The Committee sought a price benchmark that (1) was appropriate for oil sold in Osage County, (2) accurately reflected the oil market in Oklahoma, (3) was widely published, and (4) independent. The committee found that NYMEX was the only benchmark that met all four criteria. After public comment, the Committee decided to propose NYMEX at Cushing, Oklahoma, as the index for calculating oil royalties. The Bureau had the ONRR review and evaluate NYMEX

at Cushing to determine whether it was an appropriate market center for Osage County. The ONRR's report recommends using NYMEX at Cushing based on its review and analysis of price data from Osage County and the surrounding area coupled with ONRR's experience using different index prices for Federal oil valuation. Specifically, ONRR found that NYMEX is widely used and accepted by the industry and is representative of the value of oil and gas received on and near Osage County. ONRR also found that because Osage County is so close to Cushing, Oklahoma, adjusting NYMEX for location is unnecessary. The rule, in Section 226.19 (gravity adjustment table) also provides for adjustments to NYMEX based on the quality of the oil. The Department also found that during the public comment process in the negotiated rulemaking meetings virtually no alternative indices for royalty valuation of oil were suggested by the public, other than keeping the highest posted price. The Department found that the Committee explained to the public that a change in royalty was needed because some on the Committee did not believe that the highest posted price was protective of the trust beneficiary and that highest posted price was subject to manipulation and did not protect the trust beneficiary from non-arms-length transactions. The Department is required to establish regulations concerning Indian oil valuation based on its federal trust responsibility to act in the best interests of the Indian beneficiary, including a duty to maximize revenue for Indian tribes and Indian mineral beneficiaries. The Department also found that during the negotiated rulemaking, a staff member to the Committee noted that in his view since 1994, the highest posted price was often below sale prices for many lessees and, as a result, Osage headright holders were not always receiving the full royalty amount that they were due. In conjunction with the Report from the ONRR and the recommendations from the Committee, the Department has determined that utilizing NYMEX at Cushing, Oklahoma to calculate royalty payments for oil protects the interests of head right holders and is not overly administratively burdensome to implement or enforce.

A commenter suggested that the oil royalty benchmark be established at the highest rate that the market will bear on the basis of the sale of West Texas Intermediate (WTI) crude, not NYMEX futures contracts. Similarly, a commenter suggested the gas royalty benchmark be established at the highest rate that the market will bear. Both would allow leases to be competitively bid or negotiated to acquire the maximum ultimate economic recovery.

The Department agrees that there is merit to the use of WTI as the pricing benchmark for Osage oil. That was considered during the sub-committee evaluation of the various benchmark options. Use of WTI was ultimately rejected by the Committee because it would require location differential pricing and transportation adjustments that did not satisfy the request for simplicity and the need to minimize administrative burdens. Furthermore, WTI did not mirror the Oklahoma market as well as NYMEX settlement at Cushing. Benchmarks based on weighted average prices of arms-length transactions in a given market area are generally considered a fair representation of market value. Terms that require “the highest rate the market will bear” are, by their very nature, dismissive of transactions that occur below that threshold. As such, they would be unfair to parties that are able to negotiate satisfactory arms-length agreements below “the highest rate the market will bear.” Pricing based on such terms would not be considered fair market value.

Several commenters requested that a transportation allowance for trucking or piping oil to Cushing should be factored into the calculations when the lessee uses the Cushing posted price in accordance with Section 226.18(b)(1). Some of these commenters stated that transportation allowances are also appropriate when, under Section 226.18(b)(2), a lessee sells oil in a location other than Cushing and the actual sales price exceeds the Cushing price because of the transportation costs incurred by the lessee. Other commenters suggested that transportation costs need to be taken into account because of the economic fact that there is a cost involved if you want to sell oil.

The Bureau had the ONRR review and evaluate NYMEX at Cushing, Oklahoma, to determine whether it was an appropriate market center for Osage County. The ONRR's report recommends using NYMEX at Cushing based on its review and analysis of price data from Osage County and ONRR's experience in using this process for Federal oil valuation. The ONRR also found that because Osage County is so close to Cushing, Oklahoma, adjusting NYMEX for location is unnecessary. The ONRR recommended against allowing transportation deductions and noted that eliminating transportations deductions would: (1) Increase revenue to the Osage, (2) reduce litigation costs to the Tribe and industry, (3) provide certainty to the industry and assure more contemporaneous compliance and (4) reduce administrative costs to the Federal government and the industry. Based on those recommendations and the Bureau's desire to reduce administrative costs while at the same time fulfilling its trust responsibility, the Department decided against allowing transportation allowances. The Department also found that there was discussion of whether to allow transportation allowances during the negotiated rulemaking, but the Committee also chose not to allow for such deductions for a variety of reasons, including the difficulty in developing a simple formula and the administrative burdens of enforcing accurate transportation deductions.

One commenter noted that under Section 226.18(c), for royalty taken in kind, a lessee can be required to supply free storage for a period of 60 days, and this subsection should provide that if the lessor elects to exercise this right, the lessee should be indemnified or held harmless for losses of such oil by causes beyond the lessee's control.

Section 226.18(c) was previously numbered as Section 226.11(a)(3), and has not been revised through this rulemaking. No further changes are necessary to this provision at this time and the Department has not been provided with sufficient information to reasonably support a change.

L. Comments Related to Section 226.19

One commenter requested that Section 226.19 be clarified to provide that the Superintendent must comply with the rulemaking notice and comment process before the Superintendent may publish new gravity adjustments “based on substantial evidence, that market conditions so warrant.”

No changes are necessary in response to this comment because actions of the Department must comply with the Administrative Procedure Act. Moreover, it is uncertain whether or not the Superintendent would publish new gravity adjustments in the future or what process the Superintendent would follow to do so. If and when that occurs in the future, any final decision may be challenged in accordance with the Administrative Procedure Act.

One commenter suggested that the Department of the Interior should not allow any exceptions or deductions that are not specifically permitted by the 1906 Act or other applicable laws.

It is unclear whether this commenter was referring to deductions for oil (Section 226.19) or gas (Section 226.20). Regardless, the only deduction allowance for royalty paid on oil is based on a gravity adjustment.
See
Section 226.19. No deductions are allowed for royalties paid on residue gas produced on a lease, and the only deduction allowed for royalties on natural gas are the “reasonable cost for processing not to exceed 50 percent of actual sales value of natural gas liquids produced from the lease (including drip condensate).”
See
Section 226.20(c).

M. Comments Related to Section 226.20

One commenter noted that 226.20(a), which provides that royalties would be assessed and measured before water vapor is removed from the gas and the gas is in a marketable condition, and asserts that this would artificially inflate meter volumes without increasing the volume of gas produced.

The Department is confused by this comment because nowhere does 226.20 state that gas volumes must be determined prior to removing water vapor. It is assumed that the commenter was actually referring to 226.20(b). The requirement in 226.20(b) was added to prohibit adjustment to the measured volume of gas for assumed water vapor content. This requirement does not prohibit the physical removal of water vapor or placing the gas into marketable condition prior to measurement, however. We agree with the commenter that the wording was unclear and have changed the wording in 226.20(b) to clarify this and have also added specific technical requirements that were previously missing to address calculating the heating volume of gas to aid the lessee in complying with this section.

One commenter stated that Section 226.20(c) establishes a dual accounting system, but the use of a dual accounting system to calculate gross proceeds is an issue that is more properly addressed and negotiated by the Nation and the lessee in the lease document at the time it is signed. Empowering the Superintendent to change this calculation system on such short notice introduces substantial uncertainty into the calculation of royalties, discouraging prospective lessees from entering into agreements with the Nation.

The Department disagrees with this comment. The Department did find that the reference for dual accounting in the proposed rule (30 CFR 1206.173) was incorrect and has added the correct reference (30 CFR 1206.180(a)-(b)). However, the purpose of the provision is so that if the actual reasonable cost of processing as required by this section cannot be determined, the lessee is required to perform the accounting for comparison (dual accounting) as outlined in 30 CFR 1206.180(a)-(b). On other Indian and Federal lands outside of Osage County, approval for the alternative methodology rests with ONRR, not the tribe. In Osage County, unless otherwise delegated, ensuring compliance with those same provisions is now vested in the Superintendent because this rule makes them applicable to Osage. In all cases, the application of alternative methodologies for accounting are directly tied to the lack of transparency of processing costs and an inability to determine those costs for allowance purposes. The requirement does not interfere with any agreements the lessee has or will make.

One commenter asserted that Section 226.20 requires a double royalty to be paid where gas produced from one well is used for lift purposes on another well—solely because it passes the point of metering on both wells—and disagreed with this, noting that it is widely accepted that gas used on-site for beneficial purposes of the lease is not royalty-bearing and this proposal would run counter to that principle.

Section 226.20 requires only that all gas
removed from the lease
be metered before removal and subject to a royalty of not less than 20 percent, unless otherwise approved. That regulation ensures that the Osage get royalty for any gas moved off the lease site, even if it is used for operations at another location. The regulation does not prohibit gas developed from a lease site from being used for operations on the same lease site. On the other hand, Section 226.63 does require that all gas be measured in accordance with BLM Onshore Oil and Gas Order 5, to ensure that all gas that is required to be measured is properly accounted for, but royalty payments on gas are controlled by Sections 226.20, 226.21 & 226.22.

A commenter expressed support for the attempt to provide for a royalty on residual and other marketable products and urged that the meaning of the relevant calculation be made clear.

The Department is not certain it understands this comment, but notes that the determination of royalty on other marketable products is explained in Section 226.23, which is a provision that was contained in the prior regulations, but revised in the final rule to clarify that royalty due on other marketable products is in addition to any royalty that may be due on oil and gas in accordance with the regulations.

N. Comments Related to Section 226.25

At least one commenter suggested that the due date for royalty payments doesn't need to be changed to accommodate any entity other than the Bureau.

The due date for royalty was changed to make it consistent with the date that royalty payments are due to the ONRR, in the event that the Secretary delegates royalty collections and audits to ONRR to aid the Bureau in its management and administration of the Osage mineral estate. ONRR has the capacity to provide assistance to the Bureau without the Bureau having to duplicate services that ONRR already provides on other Indian and Federal lands.

O. Comments Related to Section 226.27

At least one commenter objected to Section 226.27(a)(2), which requires the Superintendent to approve all division order and sales contracts before production may “be removed from the leased premises.” It was suggested that this provision would impose a substantial administrative burden on the Bureau when they already face backlogs and uncertain funding.

Section 226.27(a)(2) was not substantively changed through this rulemaking, but was renumbered (from Section 226.14(a) in the old regulations to Section 226.27(a)(2)) and reformatted for readability only. Issues relating to staffing and funding are also outside the scope of this rulemaking, although the Bureau has worked with the Osage Agency over the last few years to address budget shortfalls and staffing needs.

P. Comments Related to Section 226.29

At least one commenter objects to the provision in Section 226.29(a) that requires lease assignments to be approved by both the Superintendent and the Osage Minerals Council because no procedure or standard is specified for obtaining those approvals or appealing the decisions. It is also not clear what happens if there is a disagreement between the Superintendent and the Minerals Council.

The regulations have always required lease assignments to be approved by both the Osage Minerals Council and the Superintendent. This rule does not change that requirement, but deletes the provision allowing lessees to assign separate horizons because the Department found, in reviewing the rule, that such assignments do not generally occur at Osage and when they did, they were so administratively burdensome that the Agency could not

monitor those assignments. As a general matter, the Minerals Council is the entity that enters into and approves all leases and assignments in accordance with their governing authority and procedures. Once the Minerals Council approves a lease or lease assignment, it is submitted to the Superintendent for federal review and approval. Any final decision of the Superintendent is governed by 25 CFR part 2 and the Administrative Procedure Act.

Q. Comments Related to Section 226.33

One commenter requested that there should be additional restrictions to protect natural resources and public safety and the restrictions should provide sufficient detail to allow lessees to comply and the Bureau to enforce. The commenter also suggested that best management practices should be developed to protect wildlife and other natural resources.

This comment is already addressed in Section 226.33 of the final rule, which requires that lessees conduct all operations in a manner that protects other natural resources and environmental quality and protects life and property while also balancing those responsibilities with the requirement to maximize production of oil, gas and other marketable products. Sections 226.44-226.45 also provide additional protections for the prevention of pollution and environmental concerns and were added in response to similar concerns raised during the negotiated rulemaking process. To the extent that the commenter desires the Bureau to develop best management practices outside the regulations, those comments are beyond the scope of the rulemaking. However, the Bureau is currently engaged in a process with the U.S. Environmental Protection Agency (EPA) to revise and update an existing Osage Lessees Manual that addresses environmental protection and response, including best management practices. The Osage Minerals Council, Osage Nation, State of Oklahoma, lessees, and surface owners were involved in the public listening sessions as part of that process. Moreover, the rule does not replace other applicable environmental laws or regulations and EPA is responsible for overseeing certain aspects of oil and gas operations within Osage County.

R. Comments Related to Section 226.34

One commenter noted that the Bureau should not approve a lease, installation, permit or other activity until an environmental impact assessment has been completed and any issues have been resolved. To that end, the Bureau should regularly consult with Federal, State, and local wildlife agencies to reduce conflicts between wildlife conservation and oil and gas production.

Notwithstanding the regulations, the Bureau is required to ensure compliance with the National Environmental Policy Act (NEPA), 42 U.S.C. 4321
et seq.
Further, Section 226.5(d) makes clear that before approval of each oil and/or gas lease and activities and installations associated therewith must be assessed and evaluated for its environmental impact. Although the Bureau already undertakes environmental reviews before approving certain actions, Section 226.34 has been further amended to expressly note that the NEPA is part of the environmental compliance review and must be completed before the Superintendent may grant authority under a lease to conduct certain operations.

S. Comments Related to Section 226.35

At least one commenter suggested that Section 226.35 as written appears to reverse the ancient rule that the surface estate is subservient to the subsurface/mineral estate, thereby giving the surface owner a veto over mineral development. In particular, paragraph (b) only provides that the Superintendent will endeavor to bring the parties to terms so that a lessee may develop on a restricted homestead and this is different than allowing the lessor to enter upon surface lands and utilize subsurface rights and would delay development. Additionally, paragraph (c) provides that when no agreement between a surface owner and lessee can be reached for surface usage, the Minerals Council can make a final binding decision, but this paragraph does not include a requirement that the Minerals Council recognize the legal subservience of a surface owner's right or take into account the reasonableness of the lessee's request, or apply standard methods of valuation to the interests being adjudicated. This commenter notes that it is also unclear what appeals rights a lessee has to such determinations.

Section 226.35 (previously numbered 226.17) was not substantively changed in the rule. References to the “Osage Tribal Council” to the “Osage Minerals Council” were changed because the Osage Tribal Council no longer exists and it is the Osage Minerals Council that oversees the Osage Mineral Estate. Moreover, Section 226.35 governs the use of restricted homestead and not all surface lands within Osage County. The Bureau has a unique role with respect to operations that occur on a restricted homestead and this section ensures that the appropriate procedures are followed to enable the Bureau to participate in a decision impacting the restricted homestead in order to protect the restricted surface owner to which the United States has a trust responsibility, but those provisions do not change the legal principles related to the surface and subsurface mineral estate that are applicable in Osage County.

T. Comments Related to Section 226.36

One commenter stated that Section 226.36 should also require that no operations may begin until the lessee can meet and negotiate in good faith with the surface owner to ensure the health and safety of the lessee and the health and safety of others using the State's wildlife management area.

No change has been made in response to this comment. Section 226.36 only relates to commencement of operations, and Section 226.33 of the rule provides that lessees are required to comply with all applicable laws and regulations, including protecting natural resources and environmental quality, and life and property during their operations. To the extent a surface owner believes that a lessee is engaged in operations that are harmful to the health and safety of humans, such actions should be reported immediately to the proper authorities and the Bureau maintains a 24-hour hotline for such purposes.

One commenter disagreed with provision allowing the Superintendent to set routes of ingress and egress in Section 226.36(b)(2) if no agreement between lessee and surface owner can be made and suggests using an unbiased alternative decision maker.

In response to comments, we have further revised Section 226.36(b)(2) to allow both the surface owner and the lessee to meet with and submit information regarding such routes before a final determination is made. This will allow for the consideration of relevant parties before making a determination, which provides added protection for all parties.

At least one comment was received noting that it is not clear how Section 226.36(b), requiring the lessee to meet with the surface owner or his/her representative, is met when there are tracts with multiple or numerous surface owners. The commenter proposes that the Bureau qualify that this provision is met by meeting with the majority owner(s).

No change has been made in response to this comment. A particular lease could include multiple tracts of land that are owned by different surface owners and the owners of each surface

estate must be separately met with to ensure proper notice and due process.

U. Comments Related to Section 226.37

Some commenters suggested requiring lessees to meet prior to operations and enter into a written surface use agreement to address, among other things: (a) Identify and limit the size and locations of well pads, roads, pipelines and power lines; (b) govern the timing and scope of operations to minimize disturbance to landowner's operations; and (c) outline reclamation and clean up obligations. In addition, some of these commenters suggested that lessees should adhere to BLM best practices and that any dispute should be governed by arbitration.

Section 226.36(a) already requires the lessee to notify or attempt to notify surface owners prior to commencement of certain operations and Section 226.36(b) requires that lessee request a meeting with surface owners to provide information regarding location of wells, route of ingress and egress and contact information for damage claims. In response to comments, however, the Department has added a requirement to Section 226.36(b)(2), which requires that in the event that the surface owner and lessee cannot agree on a route of ingress or egress, both the surface owner and the lessee will be notified by the Superintendent and provided with an opportunity to meet and/or to submit any information in conjunction with that process. In addition, Section 226.37, governing use of surface lands, already provides standards for surface use without the need for an additional requirement of surface use plans between the surface owner and lessee. The rule has always implicitly provided that the lessee and surface owner should work together regarding locations of well pads, roads, pipelines and electric lines and expressly provides a process for the routing of rights-of-ways including, for example, pipelines and electric lines, in the event that the surface owner and lessee cannot agree on a particular route. However, in response to comments, the Department has also added a requirement to Section 226.37(a) (similar to Section 226.36(b)(2)) to provide that the Superintendent will notify or attempt to notify both the surface owner and lessee and provide them with an opportu

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-11314. Public record. Not legal advice.