Federal judge postpones hearing in Osage oil case

Mike ErwinJournal-Capital

New oilfield regulations which were scheduled to take effect in Osage County last weekend have been put on hold pending an August hearing before a federal judge in Tulsa.

The revised rules for operating oil and gas leases on land of the former Osage Indian Reservation are being legally challenged on behalf of the county’s oil producers and by the tribal council elected to manage the valuable mineral estate of the Pawhuska-based Osage Nation.

In separate lawsuits filed July 1, the new regulations — which were announced May 11 by the Bureau of Indian Affairs — are called “arbitrary, capricious” and “ambiguous.” Both suits ask for a judicial review of the regulatory action and the negotiated rule-making process that produced it. Named as respondents/defendants in the suits are the U.S. Department of the Interior and Secretary of the Interior Sally Jewell, as well as the BIA and its director, Michael Black. (The BIA is one of nine technical bureaus operated as part of the Cabinet-level Interior Department.)

A hearing in the case was initially set for last Wednesday, which would have been two days before the rules were to be implemented. On Tuesday, however, Chief U.S. District Judge Gregory Frizzell ordered the proceeding postponed until Monday, Aug. 10, at 9:30 a.m. Frizzell also called for a corresponding moratorium on enforcement of the regulations.

The petition by the Osage Producers Association claims some of the new rules would “interfere with private contract rights in violation of the United States Constitution.” Another, it says, represents “an unlawful taking without just compensation.” The OPA suit further states that the new rules “are not properly tailored to achieve the BIA’s legitimate government purpose in Osage County, which is to manage the Osage mineral estate for the benefit of the Osage Nation, taking into account the right of the Lessees to produce oil and gas in an economic and efficient manner.”

“BIA essentially is giving Osage County the same rules it uses in the North Dakota Bakken region — where wells produce 1,000 barrels of oil a day rather than the one-to-four barrels a day that is yielded by many of the local stripper wells,” said the OPA’s former president, Rob Lyon.

Without proper and fair regulations, lease operators “will take their expertise and capital and will drill and operate wells elsewhere, and the Osage Nation mineral estate will suffer,” the OPA member added.

According to the Osage Mineral Council suit, the regulations impose “unreasonable costs” and “needlessly burdensome” requirements which would make it impossible for Osage County oil lease-holders to continue operating in a “financially profitable” manner.

The OMC petition states that input from the oil producers and landowners “fell on deaf ears, and the end result was higher royalty pricing would be imposed on all producers, thereby negatively impacting the returns to Osage shareholders.”

“Lessees are shutting down and preparing to abandon their wells and leases…thereby causing irreparable harm to the Osage Mineral Estate,” the OMC suit added.

The BIA’s announcement of the new rules came after an extended negotiations process resulting from a 2011 settlement agreement in which the U.S. Government paid the Osage Nation $380 million to resolve longstanding claims alleging federal mismanagement of tribal trust accounts — including many that involved the Osage Mineral Estate.

Oil-and-gas production in Osage County, unlike all other Oklahoma counties, is regulated by the federal government rather than the state. This is because of an arrangement tied to the 1906 Congressional Act which disestablished the Osage Indian Reservation. (Osage County generally includes all of the former reservation land, which the Osages purchased from the Cherokee Nation using their own tribal funds.)

In addition to providing for individual allotment of the reservation property, the 1906 Act created the unique Osage Mineral Estate by allowing tribal members to retain ownership of all subsurface minerals on the 1.47 million acres of the former reservation.

The U.S. Government (through the BIA’s Osage Agency in Pawhuska) was entrusted with managing Osage County mineral revenue and holding it in trust for tribal members. In addition to the duties assigned to any other BIA agency office, the Osage Agency is also responsible for processing and issuing drilling permits to oil and natural gas producers attempting to do business in Osage County.

Each of the 2,229 original Osage allottees was to have received and equal share of the mineral estate — which is referred to as a “headright.” These shares were supposed to be passed down to descendant heirs of the original allottees. The $4 billion Osage ME is the largest single-owner mineral estate in the nation.

A report issued by the Department of the Interior’s inspector general’s office called BIA’s management of the Osage oil and gas program “fundamentally flawed” and urged “sweeping changes” in the agency’s system of accounting and leasing activities. While making 33 recommendations for improving agency operations, the report acknowledged that there were numerous “competing interests” putting “significant pressures on Agency staff.”

In June, the BIA sponsored a half dozen training classes on the regulations at Pawhuska’s Wah-Sha-She Cultural Center. The informational sessions were supposed to familiarize lease operators with the new rules and procedures, but when the training ended “more questions had been left unanswered than were answered,” one participant said. Several highly confrontational situations reportedly arose during these sessions as oilmen and tribal members voiced complaints about the regulations.