Federal oil and gas leases require annual rental payments until a discovery of oil or gas in paying quantities on the leased lands. This means that, upon the completion of a well capable of producing oil and gas in paying quantities, the lease is transferred into producing status and annual rentals are no longer required. However, thereafter in lieu of rentals, the lessee is required to make a minimum royalty payment of not less than the amount of the annual rental that would otherwise be required prior to the end of each lease year.
The annual rentals required under all oil and gas leases issued since December 22, 1987 is $1.50 per acre (or partial acre) for the first five lease years and $2.00 per acre (or partial acre) thereafter. For older leases, the amount of the rental payment can be determined from the lease form and/or the regulations in effect at the time the lease was issued. Although likely well past its primary term, it is possible that annual rentals could still be required for a lease issued prior to 1987. For example, annual rentals may be required for a lease without production on the leased premises that was recently eliminated from a federal unit or, in some cases, on a lease that is currently suspended.
The annual rentals for the first lease year are typically paid to the proper BLM office with the lease bonus and other administrative fees required at the time of the lease sale. Subsequent annual rentals, starting with the second lease year, are paid to Office of Natural Recourses Revenue (ONRR) online through the “Rental Information” tab on the ONNR eCommerce website. The website will populate a list of rental obligations due within the next 90 days according to the payor code. The list may not be all-inclusive. A payor may add a lease for which they have a rental obligation that is not listed. eCommerce payments must be submitted before 8:55 pm ET for the payment to post to ONRR the next business day. Failure to submit electronically may subject the payor to civil penalties.
Lessees should be aware that the BLM no longer sends courtesy notices for rental payments. Lessees are accountable to make rental payments on time and in the correct amount. Failure to pay annual rentals can result in automatic termination of the lease by operation of law. However, if the rental payment is made on time and deficient by no more than 5% or $100, whichever is less, ONNR will send a Notice of Deficiency to the lessee and allow the lessee 15 days or until the due date to submit the full balance due before terminating the lease.
If a lease is terminated for failure to pay annual rentals on time or in the correct amount, it may be reinstated under either a Class I or a Class II reinstatement. Class I reinstatements reinstate the lease at the existing rental and royalty rate and are only available if: (1) the rental is paid within 20 days after the anniversary date; (2) the reason for not paying on time is justified or not due to a lack of reasonable diligence; and (3) a petition for reinstatement is submitted within 60 days after receipt of Notice of Termination of Lease. Class II reinstatements reinstate the lease at a higher rental and royalty rate if the payment was not made within 20 days after the anniversary date. Specifically, terminated leases that were originally issued noncompetitively and are reinstated through a Class II reinstatement will have an annual rental of $5.00 per acre, terminated leases that were originally issued competitively and are reinstated through a Class II reinstatement will have an annual rental of $10.00 per acre, and each succeeding termination will increase the rental $5.00 and $10.00 per acre, respectively. It is important to note that reinstatement is only available if no valid lease has been issued prior to filing the petition for reinstatement and, for Class II reinstatements, additional environmental analysis may be required.
The requirement to pay annual rentals can be affected by the commitment of a lease to a federal unit. Generally, if only a portion of the lease is committed to a unit, the lease will be segregated into two separate leases. As for the segregated lease within the unit, annual rentals are required until the segregated lands are included in a participation area. If the lease is partially in a participation area, annual rentals are still required on the lands outside the participation area, but the lease will not automatically terminate for failure to pay the annual rentals. As for the segregated lease outside the unit, annual rentals are required until there is a discovery of oil or gas in paying quantities on the segregated lands. If a unitized lease is subsequently eliminated from the unit and there has never been a discovery on the leased lands, the lease will revert to rental paying status, even if it was previously committed to a participation area with a producing well.
Finally, lessees should be aware of some additional factors relating to annual rentals. First, annual rentals are calculated on a per acre basis rounded up to the nearest whole acre. Second, annual rentals are not be prorated for any lands in which the United States owns an undivided fractional (i.e., the United States owns 50% of the mineral estate). Third, the full year’s rental is due regardless of whether the lease term ends before the next anniversary date, unless the reason is because operations and production were suspended.