Oil & Gas Commission: A Regulatory Overview

The Arkansas Oil & Gas Commission's mission is to prevent waste, encourage conservation and protect the ownership rights associated with the production of oil, natural gas and brine while protecting the environment during the production process.

The commission's general regulatory functions include:

1. Issuing permits to drill and operate oil, natural gas and brine wells.

2. Issuing permits to drill and operate Class II UIC (Underground Injection Control) enhanced oil recovery injection and saltwater disposal wells and Class V UIC brine injection wells for the disposal of brine fluids, after removal of bromine and other minerals, under the authority of the federal Environmental Protection Agency.

3. Conducting compliance inspections during the drilling process and the operational life of wells and production facilities including supervision of the plugging of wells no longer used for production or injection purposes.

4. Issuing permits for seismic operations for oil and natural gas exploration.

5. Administering the federal Department of Transportation pipeline safety program for natural gas-gathering pipeline systems.

6. Administering the Arkansas Abandoned and Orphan Well Plugging Program. Under this program, which is funded by the industry, the commission oversees the plugging of abandoned and orphan wells and the cleanup and restoration of abandoned production sites and provides emergency response in the cleanup of leaks or spills if an operator doesn't respond.

The agency conducts monthly hearings to review and approve proposed rules and regulations; creates drilling and production units and establishes oil and gas production field rules to protect correlative rights, protect the oil- and gas-producing reservoir, prevent waste resulting from overproduction and establish a defined area for the sharing of production proceeds and production costs; hears applications for requests to integrate drilling units to protect the rights of mineral owners and leasehold working interests; and issues enforcement orders for non-compliance with oil and gas regulations and statutes.

The commission processes royalty and working interest owners' complaints, including those concerning nonpayment, late payment or improper amounts. It has the authority to audit in non-compliance situations and investigate improper assessment of expenses.

Concerning landowners' interests, the agency investigates landowner complaints, seeking both to enforce environmental regulations and facilitate discussions with the operators of energy companies. The commission does not interpret mineral leases or provide legal advice concerning leases, interpret landowner or operator agreements for land use or determine land damage costs resulting from drilling, adjudicate the validity of mineral leases or maintain records of mineral lease ownership.

To facilitate the orderly development of the Fayetteville Shale and other non-Fayetteville Shale gas-producing zones in the area, the commission adopted General Rule B-43, which defines the Fayetteville Shale-producing area and geologic-producing interval; establishes 640-acre production units; establishes 560 feet for well setbacks and well spacing; sets 16 wells as the maximum per 640-acre unit; and establishes well spacing and setbacks for other non-Fayetteville Shale-producing zones that may be discovered.

The Integration Process

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.)