| Baker McKenzie’s North America Energy response team recently surveyed a number of key oil and gas producing jurisdictions across the United States — representing approximately 90% of domestic oil production — to assess how these jurisdictions are responding to the recent collapse in the oil price from a regulatory perspective.|
No two jurisdictions are identical in their response, and our analysis reveals a range of approaches. Texas, Oklahoma, and North Dakota are responding pro-actively, pursuing top-down solutions to address the crisis (e.g., considering mandatory production cuts, allowing operators to shut-in production, etc.) while New Mexico, Pennsylvania, and the Bureau of Land Management (BLM) are offering more limited, selective relief and typically doing so on a case-by-case basis (e.g., offering environmental compliance derogations upon request, issuing guidance to address specific issues, etc.). In a third group, California, Colorado, West Virginia, Wyoming, Ohio, and the Bureau of Ocean Energy Management (BOEM) are taking a non-interventionist, “business as usual” approach, abstaining from any substantial action for now.
In the course of our review, we detailed the actions taken by each of the jurisdictions surveyed with respect to production cuts, relief for state-owned lands, environmental enforcement, and contractual relief. We then grouped the jurisdictions by their level of engagement and responsiveness in facing the crisis — seeking to identify common themes and takeaways — and will discuss each group in turn.
| Texas, Oklahoma, and North Dakota|
Combined Oil and Gas Production: 7.3MMbpd oil production
Percentage of Domestic Oil & Gas Production: 57% of oil production
Our analysis reveals that Texas, Oklahoma, and North Dakota are taking the most aggressive steps to face the oil price crisis. The responsiveness of these jurisdictions is no doubt influenced by the significant amount of oil production attributable to these jurisdictions, at approximately 57% of total domestic oil production, and its contribution to their economies. Each of these jurisdictions is taking a multi-dimensional approach in their response. Some of the common themes in this group include: Proactive oil and gas regulatory bodies; Willingness to consider extraordinary regulatory intervention; Task forces, some in collaboration with industry participants, focused on finding solutions; Financial relief to oil and gas operators; Exercise of discretion by environmental authorities in enforcing non-compliance; Willingness of state land offices to grant contractual relief; and Lobbying of the federal government for domestic relief and international diplomacy.
Each of the oil and gas regulatory bodies in these states is highly engaged and have made their views known by holding public hearings and/or otherwise communicating with the public and their state’s oil and gas industry. They have either considered or are currently considering oil production cuts, among other measures. While the Texas Railroad Commission (TRRC) recently decided against ordering mandatory production reductions through prorationing, the TRRC very seriously and thoroughly considered many aspects of the proposal, seeking extensive input from representatives from the regulated industry, and has gone on to instruct its task force to focus on additional measures to limit production, including exploration of further flaring prohibitions. The Oklahoma Corporation Commission (OCC) held a hearing on May 11, 2020 to discuss potential productions cuts, but took no action. The OCC did enact an emergency rule prior to the May 11, 2020 hearing, authorizing operators to shut-in or curtail unprofitable oil production to avoid “waste.” The North Dakota Industrial Commission (NDIC) met on May 20, 2020 to discuss mandatory production reductions, but ultimately took no action.
In addition to direct actions by the respective oil and gas regulatory bodies in these states, some states are also assembling task forces comprising industry participants to develop immediately actionable solutions to address the crisis, focusing on regulatory relief, economic stimulus, storage options, as well as other measures. As mentioned above, in Texas, the TRRC formed a “Blue Ribbon Task Force” consisting of the state’s major trade associations to help the TRRC determine what can be done to assist operators, which in less than two weeks developed approximately 50 recommendations. The recommendations focused on a variety of ideas related to regulatory matters, storage/pipeline capacity, extensions/timelines, tax/fee policy, “other” category, as well as federal priorities. Meanwhile, the Department of Mineral Resources in North Dakota recently formed a “Bakken Restart Task Force,” which is similarly focused on solutions to facilitate recovery of the oil and gas industry and supporting sectors, including regulatory relief, economic stimulus, tax relief, and financing solutions. Oklahoma has not formed such a task force at this point.
All three states have taken other actions to face the crisis. Oklahoma’s Governor Stitt requested President Trump declare the coronavirus pandemic an “Act of God” in a letter dated April 24, 2020 to assist operators in the state. In Texas, certain organizations including the General Land Offices and University Lands —organizations with a combined 15 million mineral acres between them —are granting certain relief on development obligations and exercising discretion with lease terminations. In North Dakota, the NDIC has issued a policy allowing operators to leave wells uncompleted and granting operators a longer grace period before deciding whether to plug and abandon inactive wells. The NDIC’s policy was designed to prevent producers from either bringing more unwanted crude to market or being forced to abandon wells. Similarly, the TRRC recently passed an order extending the period by which operators must beginning plugging inactive wells from one year to two years after drilling or operations cease.
From an environmental perspective, states have been more cautious than the federal Environmental Protection Agency, which in March issued a temporary enforcement discretion policy under which the EPA may choose not seek penalties for noncompliance with routine monitoring and reporting obligations that are impacted by the COVID-19 pandemic. The Texas’ Commission on Environmental Quality (TCEQ) issued guidance on March 17, 2020 reiterating that operators must take all available actions necessary to ensure compliance with environmental regulations and permits requirements. That said, the TCEQ has set up a mechanism for operators to request enforcement discretion by email.
New Mexico, Pennsylvania, and the Bureau of Land Management
Combined Oil and Gas Production: 1.1MMbpd oil production
Percentage of Domestic Oil & Gas Production: 8% of oil production
In the next group, we consider New Mexico, Pennsylvania, and the Bureau of Land Management, who in contrast to Texas, Oklahoma, and North Dakota, have not taken holistic action to restrict production or address falling oil prices, but have nonetheless offered specific guidance highlighting existing regulatory procedures that operators may use on a case-by-case basis.
Some of the common themes in these jurisdictions include: Recognition of the need to assist the oil and gas industry; Providing potentially substantial relief on a case-by-case basis; and Oil and gas regulatory bodies issuing guidance.
For example, while New Mexico has declined to take action to cut production, the state’s Oil Conservation Division (OCD), which regulates oil and gas activity in New Mexico, has issued guidance to the oil and gas industry, indicating it has developed a process to allow wells to remain inactive due to economic hardship and is actively issuing allowances for inactivity, and considering extensions for various deadlines on a case-by-case basis.
The Pennsylvania Department of Environmental Protection (PADEP) has also developed guidance for those permit holders and operators who have questions about their obligations during this time. While the PADEP notes that all permittees and operators are expected to meet the terms and conditions of their environmental permits, including conditions applicable to cessation of operations, companies can request temporary suspension of regulations, noting that Governor Wolf has authority to suspend regulatory obligations and other legal obligations within his jurisdiction where strict compliance will prevent, hinder, or delay necessary action in coping with the COVID-19 crisis.
For federal lessees, the BLM has acknowledged that operators are facing economic challenges as a result of the COVID-19 related reductions in oil demand and price. However, despite requests for blanket relief from the oil and gas sector, the BLM has maintained that operators must apply for suspensions of production or a reduction in royalty rates on a case-by-case basis under the provisions of existing regulations.
The BLM recently circulated to operators two pieces of interim guidance, both dated April 21, 2020. The first provided additional guidance for how federal oil and gas lessees should apply for a suspension of operations due to force majeure in accordance with Section 17 of the Mineral Leasing Act (MLA) or due to “conservation of natural resources” under Section 39 of the MLA. Per the regulations at 43 C.F.R. 3103.4-4, suspensions can be granted when the BLM determines there are “matters beyond the reasonable control of the lessee.” In the BLM interim guidance, lessees must demonstrate that “despite the exercise of due care and diligence,” they are unable to continue operating the lease because of “COVID-19 pandemic social distancing orders and travel restrictions imposed by the federal, state or local government, or the pandemic otherwise causing the unavailability of personnel, contractors or equipment needed to conduct operations.”
The second interim guidance offered additional information for how to apply for a reduction in federal royalty rates, also pursuant to the Mineral Leasing Act. Under 43 C.F.R. Section 3103.4-1, royalty reductions can be granted when the BLM determines “it is necessary to promote development or that the leases cannot be successfully operated” under the lease terms.
Once received, the BLM will have five days to review and decide on either a suspension application under Section 17 or a request for royalty rate reduction. Notably, the BLM has indicated that this is not about “expediting” the review process but rather a continuation of “long-standing, lawful regulatory tools” used in a responsive and efficient manner.
California, Colorado, West Virginia, Wyoming, Ohio, and BOEM
Combined Oil and Gas Production: 3.3MMbpd oil production
Percentage of Domestic Oil & Gas Production: 25% of oil production
For California, Colorado, West Virginia, Wyoming, Ohio, and BOEM it is business as usual. The majority of smaller producing states remain largely inactive in taking steps to aid the industry. Colorado and Ohio’s regulatory bodies have even noted that inspections will continue as normal and that they expect operators to comply with all requirements.
Some of the common themes in these jurisdictions include: Limited public response by oil and gas regulatory bodies; and Minimal, if any, measures to address the crisis.
While Wyoming has not issued specific guidance for the oil and gas industry, Governor Gordon has approved a tax cut for oil and gas producers that would take effect if low prices for the commodities persist for twelve months. In California, the California Independent Petroleum Association requested temporary relief on a number of state testing requirements for wells, but no decision has been made yet on this request.
Jurisdictions are approaching the unprecedented crisis facing the oil and gas industry in different ways. While larger oil and gas producing states have taken a more pro-active approach and considered broader regulatory intervention, no state has yet to implement regulations such as production cuts or immediate tax relief for operators. It remains to be seen whether this may change if the crisis continues. For now, however, the day-to-day operations during crisis remain largely in the hands of the oil and gas companies to manage. Baker McKenzie’s North American Energy Response team will continue to monitor developments closely, and is available to engage with you regarding any questions you may have.