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FARMINGTON — New Mexico oil and gas industry officials are pushing back against proposed changes that will update regulations and increase fees for the state's operators.

The Bureau of Land Management has announced that it is updating the rules and fees governing oil and natural gas extraction in an effort to catch up to advances in technology used by the energy industries.

Newly elected state Commissioner of Public Lands Aubrey Dunn wrote a Sept. 29 letter to BLM Director Neil Kornze.

In the letter, Dunn said the BLM's proposed rule update to Onshore Oil and Gas Order No. 3 — a 1989 rule that helps ensure that states, tribes and taxpayers get fair royalty returns on resources taken from public and tribal lands — exceeded the scope of the federal agency's statutory authority. The BLM announced proposed updates to the regulation on July 10.

"(The proposed rule change) represents an unwarranted and illegal intrusion into the (New Mexico office's) management of state trust-owned mineral resources," Dunn said in the letter.

Dunn said that — at 95 percent — oil and gas development represents the largest portion of the State Land Office's revenue.

He also complained that the proposed new rule makes oil and gas operators obtain a federal "Application for Permit to Drill," or APD, instead of a state-issued permit, likely resulting in longer wait times before companies can begin drilling operations.

When Gov. Susana Martinez came to Farmington to tout the state's new energy policy in September, she said that a state permit can be obtained in a week or less. BLM-issued permits can take weeks longer.

The State Land Office in Santa Fe is responsible for administering 9 million acres of surface and 13 million acres of subsurface estate that help fund public institutions such as schools, universities and hospitals.

In an Oct. 9 letter to Kornze, John Roe, engineering manager of Dugan Production Corp., a Farmington-based independent gas company, listed 22 objections to the proposed rule.

Roe's six-page, single-spaced letter criticized the BLM's proposed rules, including demands to comply with violation notices or directions to stamp identification numbers at well sites within 30 days or be fined.

Roe suggested an entire section of the proposed order that says existing BLM approval of an off-lease measurement — a method of measuring production that is not located at the source — can be terminated by the agency for any reason be thrown out.

"The operator needs to have some confidence that the existing off-lease measurement approval will allow continued operations as long as the operator follows the (condition of approval) for (it)," Roe said in the letter.

ConocoPhillips' D.G. Wrap, president of the company's Lower 48, and Nick Olds, vice president, wrote Kornze a 19-page letter dated Oct. 9 that pushed back against the order's proposed, and "unclear" changes on down-hole commingling, defined by the BLM as "the combining of production from different geologic intervals, formations, or state defined pools on the same lease or agreement."

"Eighty percent of our current economic new-drill inventory are commingles," the two said in the letter. "In (the) current low gas price environment, standalone wells are generally uneconomic."

Wrap and Olds said commingling was a common industry practice in the San Juan Basin and the rules that already exist were sufficient.

"Commingling exists in the San Juan Basin as it was the only way to economically develop a well or system," Wrap and Olds wrote in the letter. "To re-open the justification as an issue and apply these stringent requirements after the oil and gas industry has relied upon these approvals to invest billions of dollars to develop significant resources within the San Juan Basin could have the impact of significant loss of resource, as thousands of wells would be prematurely plugged and abandoned and the attendant reserves forever stranded."

On Oct. 1, the federal agency also increased fees charged to oil and gas companies for APDs. The price went up $3,000 from $6,500 to $9,500 for the non-refundable filing fee operators pay regardless of whether a permit is approved or not.  The updated APD fee was set by Congress in the Fiscal Year 2015 National Defense Authorization Act.

The BLM's proposed rule reflects advances in measurement technology and critical updates in standards and practices, according to a Sept. 29 press release. The drafted changes stem from concerns raised by the Government Accountability Office, the Department of the Interior’s Office of Inspector General and the Secretary’s Subcommittee on Royalty Management, that existing rules do not ensure that royalties from oil production are effectively tracked and paid.

On Oct. 1, the BLM announced another proposed rule updating and replacing its regulations, which have not been revised since 1989, related to the measurement of oil produced from federal and Indian onshore leases. The proposed rule would replace Onshore Oil and Gas Order Number 4 (Order 4), which sets minimum standards for the measurement of oil extracted from public lands.

BLM will take public comment on the rule for 60 days, through November 30.  People can submit comments on the proposed rule change by going to www.regulations.gov or by writing to the U.S. Department of the Interior, Director (630), BLM , Mail Stop 2134 LM, 1849 C Street NW, Washington, DC 20240 Attention: Regulatory Affairs.

“The proposed rule represents yet another important step in the BLM’s modernization of its oil and gas regulations,” said Janice M. Schneider, assistant secretary for Land and Minerals Management. “These updates address longstanding concerns about the adequacy of existing regulations and will help ensure that the oil produced from Federal and Indian leases is properly measured and accounted for — a critical component of ensuring that American taxpayers, Indian tribes and allottees, and states and local governments, receive the full royalties they are due.”

The revised rule would allow operators to use Coriolis flow meters — considered a "reliable and accurate" method of measuring oil flow and density —  without having to obtain special permission, according to the release.

The new rule also demands that operators verify with the federal agency the accuracy of high-producing wells more frequently. It also gives the BLM a stronger ability to verify and audit industry production records.

The BLM's oil and gas management program generates more than $3 billion in royalty revenue each year from oil and gas leasing activities on federal lands.

James Fenton is the business editor of The Daily Times. He can be reached at 505-564-4621.

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