Oil & Gas Commission: A Regulatory Overview

by Larry Bengal  on Monday, Aug. 27, 2007 12:00 am  

When a mineral owner chooses not to enter into a lease with a company wanting to produce oil and gas, state law provides for an "integration" of the unleased mineral interest to allow the well to be drilled. The integration provisions were adopted to ensure that all mineral owners receive proper payment of production royalties.

The commission expects that energy companies will try in good faith to negotiate a satisfactory mineral lease with mineral owners before resorting to the integration provisions. But if the company or person wanting to develop the oil and gas and the mineral owner can't agree on lease terms, the company or person can apply to the commission for an integration order.

All interested parties are then given notice of when and where the commission will hear the integration application. At the hearing the commission takes testimony from the applicant and any other interested parties. The commission decides whether or not to grant the integration application and what terms should be granted to the unleased mineral royalty and leasehold working interest owners.

Most integration orders contain three "active" options and one "passive" option. Unleased mineral owners typically have a 15-day election period from the date the order is signed to choose one of the options.

The active options are:

1. Lease. Sign a lease with the applicant for the bonus and royalty specified by the Oil & Gas Commission, which is usually the highest amount offered and accepted by other mineral owners in the unit, which has a primary term of one year or as long thereafter after production from the unit, or sign a lease covering the unleased mineral interests with any party on mutually agreed terms. Under most leases, as well as the lease form approved by the commission, the mineral owner gives up the option to participate in future wells drilled in the unit.

2. Participate. Participate in the unit by signing an operating agreement, which generally follows the Model Form Operating Agreement, A.A.P.L. 610-1989 with COPAS 1984 Accounting Procedure, as amended and adopted by the commission. Under this option the mineral owner will receive the proportionate share of the one-eighth royalty and will also pay the proportionate share of the well cost whether the well is successful or not. If the well is successful, the mineral owner will receive the proportionate share of the well proceeds.

3. Elect non-consent. This option is similar to the "participate" option, except that the costs of participation in the well are carried by the operator. Under this option, the unleased mineral owner will receive the proportionate share of the one-eighth royalty but will not receive the lease bonus. In addition, the unleased mineral owner will receive the proportionate share of the production revenue from which the operator will withhold the necessary proceeds to pay the operator for the drilling cost plus any risk factor deemed appropriate by the commission. The risk factor or penalty is variable based on the potential risk of drilling a successful well but is commonly 400 percent to 600 percent.

4. No response. All of the above options require the unleased mineral owner to notify the operator of the selected choice. The "no response" option requires no action on the part of the mineral owner. If the unleased mineral owner does not notify the operator and select one of the above options within the election period specified in the Integration Order, the unleased mineral interest will be deemed integrated and the mineral owner will receive a lease bonus and royalty amount specified by the commission. Under the "no response" option, the mineral owner will lose the chance to elect participation in future wells drilled in the unit.

(Larry Bengal is the director of the Arkansas Oil & Gas Commission.)



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