Department of Natural Resources

Recommendation

N-ewly proposed or amended statutes and rules developed under expedited rulemaking should focus solely on the development of the state’s gas resources.

Rationale

There is not currently any indication that there are crude oil resources in the state (see Minnesota Geological Survey, 1984), and there’s currently no industry interest in drilling for oil in Minnesota. Since Minnesota does have a known helium resource and there is high potential for natural hydrogen resources, the state should focus statutory and rulemaking efforts on gas production. If crude oil resources are discovered, or there is future interest in oil exploration in the state, the statutes and rules for gas production could be amended later to include oil.

Recommendation

Permits for gas resource development projects should be required before a gas well is drilled, rather than after drilling but before that gas well goes into production and extracts commercial quantities of a gas resource. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

DNR recommends a permitting process to be completed by DNR for a gas well project This process will require environmental review. Once a gas development project permit is approved by DNR, then the permittee will submit notification to MDH so MDH is made aware of the proposed gas wells and can inspect the construction of the gas well to ensure protection of public health and groundwater.

Some may suggest that drilling of gas wells be treated similarly to mineral exploration borings. The drilling of exploratory borings is not subject to environmental review and permitting requirements in state law. There are substantive differences between the drilling of a gas production well and a mineral exploration boring. Mineral exploratory borings are used to discover and define a subsurface resource but aren’t used to extract that resource during the production phase. Conducting permitting (and environmental review) before a well is drilled ensures that all proper environmental and public health and safety measures are in place for production of that well an allows an operator to bring that gas well into production relatively quickly, since it avoids a pause between drilling a gas well and being permitted to put the well into production.

• a degree of uniformity in how natural resource development projects are evaluated and, if they meet all requirements, permitted;
• statutory language and rules that are familiar to the legislature and Minnesotans, and,
• a regulatory design that has been tested in the courts.

Recommendation

A gas resource development permit should be required whenever gas resource development operations would disturb the ground surface. These areas, defined as “gas resource development locations,” are distinct from spacing units or extraction areas that are the undisturbed surface expression of subsurface gas extraction. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Gas wells are typically drilled on drill pads up to ten acres in size and, if the gas well goes into production, the site might be in operation for several years. As a result, the DNR is recommending that environmental review and permitting take place at gas resource development locations before any drilling takes place. DNR recommends and that these evaluations assess all gas resource development locations, including proximal ancillary buildings such as centralized gas enrichment plants that don’t sit on a gas well’s drill pad.

Recommendation

The extraction of gas resources from exploratory borings that are located outside of permitted gas resource development locations should be prohibited by statute. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Gas wells require blowout prevention systems and construction materials and methods that protect workers and the environment from potential risks associated with intersecting pressurized gas reservoirs. One need not look beyond Minnesota’s borders to gather support for this assertion; the 2011 discovery of helium in Minnesota occurred when a drill rig designed for metallic mineral exploration encountered a pressurized gas pocket that, when released, had enough energy to push the drill rod and mud more than 1,700 feet up to the surface, and then launch that drill rod into the air. The construction materials and methods typically used for drilling water wells and exploratory borings are also suboptimal for the production of gas resources, which increases the risk of groundwater impacts and cross-aquifer contamination. It therefore makes sense to limit gas production to gas wells located at permitted gas resource development locations. This ensures that operators looking to construct gas wells use the appropriate drilling equipment, materials, and methods, and that their drill locations are appropriately sited and permitted.

Recommendation

The DNR recommends a $50,000 application fee for a gas resource development permit as well as the ability to assess supplemental fees to cover the costs of reviewing an application above the application fee amount. The DNR also recommends that permittees for gas resource development projects pay a $75,000 annual permit fee. These recommendations would apply to both the temporary and post-rulemaking regulatory frameworks.

Rationale

The DNR’s recommended $50,000 application fee for a gas resource development permit, matches the application fee paid for a permit to mine for a nonferrous metallic minerals operation (93.481). This fee is, in practice, not so much a fee as it is an advance payment for the costs incurred by the DNR to review a permit application and prepare a draft permit. When the DNR determines the reasonable costs, the $50,000 application fee is subtracted from the total, and the applicant is assessed the balance (if due). The purpose of this application fee is to demonstrate firm intentions by the applicant, and to cover agency costs if the applicant decides to withdraw their application before a supplemental application fee is paid (but after the agency has incurred staff time and costs).

Should the reasonable costs of reviewing and preparing a gas resource development fee be less than the nonrefundable application fee, the remaining money may be used by the commissioner to cover the indirect costs incurred by the agency that may not be readily identifiable but are nonetheless necessary for permit review and preparation (e.g. wages for operational services, business office and administrative staff, office rent, equipment). A much more direct cost that is not assessed to permit applicants are costs of responding to lawsuits filed after a permit decision has been made. The $50,000 application fee paid by one nonferrous mine permittee, for example, has been dwarfed by orders of magnitude by the legal fees paid by the DNR to defend the related permit decision in court.

In Minnesota, annual permit fees for mining projects defray the salary costs incurred by the DNR to administer the permitted operations and complete tasks such as site inspections and the review of annual reporting. It is similar in scope and purpose to a supplemental application fee, except that it is a set fee that varies based on the type of mining operation involved. Annual permit fees range from $1000 per year for peat mining to $75,000 for nonferrous metallic mining operations. This range reflects the amount of staff time required to administer a permit, but also reflects, in part, the value of the natural resource that is developed under the permit.

The DNR recommends that permittees for gas resource development projects pay the same $75,000 annual permit fee charged for nonferrous metallic mining projects. While this is most likely higher than annual fees assessed to operators of oil and gas projects in other U.S. states, there are multiple reasons why this amount is justified:

• In most states with oil and gas resources, the programmatic costs of regulating oil and gas production can be borne by dozens or even hundreds of operators who are producing oil and gas from thousands of wells. In Minnesota, there is currently only one operator developing a potential gas resource, and it is uncertain whether the number of operators and gas wells and gas resource development projects will grow dramatically anytime soon.
• Gas resource development is a nascent industry in Minnesota, with a regulatory framework that is just as new. The costs required to build out a regulatory program of staff with expertise in gas resource development are not experienced in states with a mature oil and gas industry.
• Some states that do not charge annual permit fees for their gas regulatory programs and instead generate program-supporting revenue by other means, such as a production-based fee (e.g. Michigan), or a severance tax on oil and gas development (e.g. North Carolina). At this time, the DNR is not proposing a dedicated revenue stream linked to gas production.
• Finally, as mentioned above, the range of annual mine permit fees reflects, in part, the value of the resources being produced. A helium development company working in Minnesota has suggested that production from gas wells tapping into a helium-rich gas reservoir could potentially generate as much as a million dollars per day per well. That type of revenue generation from natural resource development is far more in line with nonferrous metallic mining projects than, by comparison, peat mining.

Recommendation

Gas resource development permits issued under a temporary regulatory framework should not be considered temporary, such that they would expire once rules for a permanent regulatory framework were promulgated. A person receiving a gas resource development permit should be able to operate under those permit conditions throughout the lifetime of their project, unless or until they require a permit amendment. At that point, a new permit would need to be issued based on the permanent regulatory framework.

Rationale

The enabling legislation for creating a regulatory framework for gas resource development in Minnesota instructed the DNR to provide recommendations and draft statutory language that would, if acted by the legislature, create a temporary regulatory framework that would, “support the issuance of permits issued under the temporary framework in a manner that benefits the people of Minnesota while adequately protecting the state’s natural resources.” (Laws of Minnesota 2024, Ch. 116, Art. 3, Secs. 55).

The phrase “temporary permit” could mean: a) a permit issued under the temporary regulatory framework, b) a permit that is revoked once rules are promulgated, and the temporary regulatory framework is replaced by a permanent framework, or c) the permit is only valid for a fixed period of time, irrespective of the term requested by the permittee (93.5174, Subd. 4.). The DNR recommends that the word “temporary” be removed from the phrase “temporary permit,” to make clear that a permit issued during rulemaking will not be limited to a term less than what is proposed by the applicant, nor revoked once rules are promulgated.

Given the significant costs and the unproven nature of gas resources in Minnesota, it is important to offer a clear regulatory path to a person considering exploring for or developing gas resources in our state. The risks that a permanent regulatory framework for gas resource development would be dramatically different than a temporary framework might be a strong disincentive to invest in a project if the permittee was forced to reapply for a new “permanent” permit once rules were promulgated. The benefit of being allowed to develop gas resources before rules are promulgated would also be limited by time; a permittee might only have a year or two to develop gas resources under the known regulatory framework. On balance, a prudent operator might decide to delay investing in gas resource development until rules are promulgated.

The legislature clearly desired a viable mechanism for enabling the permitting of gas resource development projects during rulemaking. We believe that a viable permitting mechanism requires a permit that doesn’t expire within months of being issued. To provide a level of regulatory certainty, a permit issued under the temporary framework should be for a term proposed by the applicant and determined necessary by the commissioner for the completion of the proposed gas resource development plan, including reclamation or restoration.

The rights of a permittee holding a permit issued under a temporary framework should not be absolute. While they should be allowed to operate under the permit terms, even after new rules are promulgated, the benefits of operating under the temporary framework should only extend to the project that was permitted under that temporary framework. If a permit amendment is required after rules are promulgated, it is reasonable to require the permittee to apply for a new permit under the permanent regulatory framework that covers their entire operation (instead of just that portion that triggered the need for a permit amendment). A permittee could continue operations under the original permit terms during this new permit application.

Recommendation

For the sunsetting statutory language Statutes that include regulatory language normally found in rules should be enacted to facilitate a robust temporary regulatory framework for permitting gas production projects. This “sunsetting” statutory language would only be in effect until rules are promulgated. For permitting gas resource development projects, the sunsetting statutory language should include the setbacks and separations used for non-ferrous mining projects.

Rationale

Statutes for permitting and related processes aren’t normally meant to create a regulatory framework for natural resource development all on their own. Rules derived from statutes are needed for an effective framework for permitting gas resource development projects. That said, rules aren’t available for a temporary regulatory framework. Statutes that include regulatory language normally found in rules are therefore necessary to construct an effective temporary regulatory framework. This “sunsetting” statutory language would only be in effect until rules are promulgated. For permitting gas resource development projects, the sunsetting statutory language needs to cover siting considerations and setbacks, preproduction reports, and annual reporting requirements.

Legislation passed in May 2024 requires the commissioner to develop rules for siting gas resource development projects (93.514). Gas resource development locations need to be at sites that minimize adverse impacts on natural resources and the public, with setbacks or separations that are needed to comply with environmental standards, local land use regulations, and requirements of other appropriate authorities.

During rulemaking, tailored setbacks or separations for gas resource development projects will be established that reflect the nature and scope of gas resource development operations at gas resource development locations. For the purposes of a temporary regulatory framework during permitting, the DNR proposes that the separation and setbacks established for nonferrous mining projects (6132.2000) be applied to gas resource development locations. While the potential impacts of gas resource development will likely be different than nonferrous mining projects, they are not likely to present higher risks (particularly for helium development, which is the most likely project to be permitted during rulemaking).

Recommendation

Statutes for the temporary permitting of gas resource development projects should include annual reporting requirements that are modeled after existing statutes and rules. Since this type of language is normally found in rules, the temporary annual reporting statute should sunset once rules are promulgated.

Rationale

Statutes for permitting and related processes aren’t enough on their own to create a robust temporary regulatory framework for permitting gas resource development projects during rulemaking. Statutes that include regulatory language normally found in rules are necessary to construct an effective temporary regulatory framework for permitting gas production projects. This “sunsetting” statutory language would only be in effect until rules are promulgated.

During rulemaking, tailored rules for annual reporting requirements for gas resource development projects will be established that reflect the nature and scope of gas resource development operations at gas resource development locations. For the purposes of a temporary regulatory framework during permitting, the DNR proposes that annual reporting requirements for permitted gas production projects model those used for nonferrous mining projects (see 6132.1300).

Recommendation

The DNR recommends that prior to commercial production of gas resources, a permittee must (as a permit condition) submit to the commissioner pump test data and other information derived from the gas wells drilled under the permit. The data will be used to determine whether the associated spacing units and pool areas should be adjusted. This recommendation is only for the temporary regulatory framework, with sunsetting statutory language that expires once rules are promulgated.

Rationale

An operator that proposes a gas resource development project has to identify the amount of gas their project would extract, and where those gas resources would come from (in three-dimensions). This information is critical for establishing spacing units, issuing pooling orders, and to prevent unnecessary draining of reservoirs, prevent waste, and protect human health and the environment. When permits are issued and spacing units established before the operator drills their gas wells, the engineering and geological data needed to determine production rates and extraction areas must be estimated. In established or mature well fields, there might be logs and data available from dozens or even hundreds of wells drilled into the same reservoir, which allows operators to estimate with a great deal of accuracy the production rates and extraction areas of their new gas wells. Minnesota does not have a history of gas production within established well fields in the state, or even (at present) a good understanding of where gas resources might be located, or the size and shape of any gas reservoirs. This will increase the uncertainty of applicant-provided estimates for production and extraction areas.

Until more information is available about the nature and extent of Minnesota’s gas resources, the DNR recommends that gas resource development permittees submit to the commissioner, as a permit condition, a pre-production report that includes the engineering and geological data obtained from any gas wells drilled as part of their project (whether or not the permittee plans to take a gas well into production). The report must compare the hard data obtained from their gas wells against any estimates submitted to the commission before drilling. The commissioner will use the data to evaluate potential changes to an established spacing unit or pool unit and consider the potential impacts of bringing the project into production.

Recommendation

The DNR should assess the proposer of a gas resource development project the reasonable costs of preparing, reviewing, and distributing a mandated environmental assessment worksheet. No environmental review shall commence until this fee has been paid, and no state agency may issue a permit for a gas resource development project until the final costs of this environmental review have been paid in full.

This recommendation applies to both a temporary regulatory framework for permitting gas production projects during rulemaking, and the permanent regulatory framework once rules are promulgated. As a result, the draft statutory language associated with this recommendation does not contain sunset provisions.

Rationale

The EQB is recommending that a mandatory Environmental Assessment Worksheet (EAW) be prepared for a gas resource development permit application under the temporary regulatory framework (see EQB Recommendation EQB-1).

Minnesota statutes currently direct a responsible governmental unit (RGU) to assess the proposal of a specific action its reasonable costs for preparing, reviewing, and distributing an environmental impact statement (EIS) (116D.045 Subd. 1.). The RGU cannot start work on the EIS until at least one-half of the assessed cost has been paid, and no permit can be issued by a state agency for the proposer’s projects until a final EIS decision is made and the full costs of completing the EIS have been paid.

Comparable statutory language does not exist for payment by a project proposer of the reasonable costs of preparing, reviewing, and distributing an environmental assessment worksheet. As a result, those costs are borne by the RGU. We therefore recommend that the reasonable costs of preparing an EAW for gas production projects be borne by the applicant.

Gas resource development is new to Minnesota, so our environmental review staff don’t have the background and can’t draw on previously completed EAWs for similar projects. Review and preparation of an EAW for this sector will take more time and effort, but after doing the first one, potentially during rulemaking, we’ll have a much better idea of required time and effort.

Recommendation

Procedures set in statute for contested case hearings for nonferrous permits-to-mine should be adapted for challenges to gas resource development permit decisions.

Rationale

A landowner who believes that a nonferrous metallic mine project will adversely affect them, or any federal, state, or local government having responsibilities affected by a proposed nonferrous mine project may file a petition with the commissioner to hold a contested case hearing on a completed permit application (93.483). If a petition is granted, disputed aspects of the permit decision can be heard by a neutral administrative law judge, who can then, based on the facts, make a recommendation to the commissioner on whether the permit should be issued (with or without modification) or rejected. The DNR believes, as a matter of consistency, that the same opportunities to dispute facts used to make nonferrous mine permit decisions should be provided for gas resource development permits.

Recommendation

The financial assurance requirements for gas resource development projects should largely mirror established statutes and rules for financial assurance of nonferrous metallic mining projects. This recommendation is for both the temporary and regulatory frameworks.

Rationale

Minnesota lacks a regulatory framework for requiring financial assurance for gas resource development projects. It does, however, have a robust regulatory framework for financial assurance for other types of mineral resource production, such as nonferrous metallic mine projects (see Mn Statutes 93.44-93.51, Mn Rules Chapter 6132). The DNR believes that new statutes and rules for gas resource development financial assurance in Minnesota should closely follow comparable regulations for mining projects, with modifications as needed to reflect the differences between gas resource development and the mining of solid minerals. This approach provides:

• a degree of uniformity in how natural resource development projects are financially assured;
• statutory language and rules that are familiar to the legislature and Minnesotans; and,
• statutory approach that has been tested in the courts.

The statutes and rules for nonferrous mine projects were established in the absence of active mine projects (as is the case for permitting gas resource development projects) and offer a clearer, robust regulatory framework.

Some might argue that would be inappropriate to apply nonferrous financial assurance rules for gas resource development projects, given the large differences in scope and scale between a large metallic mine project and a gas resource development project that could be as small as one gas well and one gas enrichment plant on one drill pad. This recommendation, however, focusses on the overall structure and scope of the financial assurance processes, and allows for customization.

Recommendation

The DNR recommends that corporate guarantees not be accepted as a stand-alone financial assurance instrument for gas resource development projects. This recommendation is for both the temporary and regulatory frameworks.

Rationale

Financial assurances are a source of funds to be used by the DNR if the permittee fails to perform:

• Reclamation activities including closure and post-closure maintenance needed if operations cease; and
• Corrective action as required by the DNR if noncompliance with engineering design and operating criteria occurs.

Corporate guarantees are one type of financial assurance instruments that allow a company to rely on its own financial strength to provide assurance that it can and will meet its reclamation obligations. Using this type of instrument requires having the necessary expertise to monitor and evaluate a company’s corporate structure assets, liabilities, and net worth to oversee such guarantees.

History shows that some companies are unable to meet corporate guarantee obligations, not having the financial capability to guarantee reclamation performance. Modern financial assurances include reclamation bonds and irrevocable letters of credit (ILOC), trusts and other bank issued financial assurance instruments to address reclamation and corrective action needs. Modern financial assurance instruments such as these are not dischargeable during a bankruptcy. Unlike modern financial assurance instruments, corporate guarantees typically do not allow regulators to access a specific financial asset if the operator cannot meet its reclamation obligations. Additionally, corporate guarantees can require considerable administrative oversight or reliance by third party auditors and are not recommended financial assurance instruments for other types of natural resource developments regulated by the DNR.

While the DNR does not recommend the use of corporate guarantees as a stand-alone financial assurance instrument, they can be useful in providing added layers of corporate accountability to a more comprehensive financial assurance package that includes modern financial assurance instruments as the primary sources of protection.

Recommendation

The DNR recommends that any money collected as part of financial assurance for gas resource development projects be allowed to be invested by the State Board of Investment.

Rationale

Under current statute, the State Board of Investment, when requested by the commissioner of natural resources, may invest money collected by the commissioner as part of financial assurance provided under a metallic mineral permit to mine. That money is then allowed to gain investment earnings, rather than sit in a non-interest-bearing account, typically for several years. The DNR recommends that money collected as part of financial assurance for gas resource development projects be similarly allowed to be invested by the SBI, for the same purposes and benefits.

Recommendation

To support a temporary regulatory framework for permitting gas resource development projects during rulemaking, new statutory language is recommended that would only be in effect until rules are adopted for financial assurance requirements for gas production projects, as required under 93.514.

Rationale

Financial assurance requirements for mining projects in Minnesota are established by statutes and rules. The statutes alone, if adapted for permitting gas resource development projects, would not be sufficient for a temporary regulatory framework. The GTAC recommendations for that temporary regulatory framework can only be taken up by the legislature in statutory language. One way to address this is to take regulatory language that would normally be in rules and place it within a statute that sunsets once rules for financial assurance for gas production projects are promulgated. GTAC’s recommended statutory language for financial assurance within the temporary framework (93.5177 Subd. 3) includes a sunsetting subdivision that accomplishes that goal.

Recommendation

The DNR recommends that a statutory definition be provided for correlative rights, and that the protection of correlative rights be identified as a compelling state interest within a declaration of state policy and called out when appropriate in statutory language covering pooling and spacing units for gas resource development projects. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

"Correlative rights" means that each owner and producer in a common pool or source of supply of gas must have an equal opportunity to obtain and produce the owner's or producer's just and equitable share of the gas underlying the pool or source of supply. This is the antidote to “Rule of Capture” and protects landowner interests. Respect for the correlative rights of all owners of mineral interests within a gas resource development area is cornerstone of establishing spacing units and issuing pooling orders.

Recommendation

The DNR recommends that the DNR commissioner be given statutory authority to establish spacing units, with each spacing unit including the maximum area that can be efficiently and effectively extracted by an operator’s gas well or set of gas wells. The commissioner should also have statutory authority to modify those spacing units when warranted. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

While the commissioner of natural resources has rulemaking authority to adopt rules governing the spacing of gas wells to regulate the density of drilling to prevent unnecessary draining of a gas reservoir and to prevent economic waste of products from gas wells (93.515), there is no statutory authority for the commissioner (or any other entity) to actually establish spacing units that support this goal. The DNR believes that the authority to create or modify spacing units for the development of gas resources should be derived from statute, rather than rule. And since the legislature gave the commissioner of natural resources rulemaking authority over spacing units, it follows that the commissioner also be given the authority to establish or modify spacing units that encompass the maximum area that can be efficiently and effectively developed by an operator’s gas well or set of gas wells.

Recommendation

The DNR recommends that the commissioner of natural resources be given statutory authority to establish a process by which a person can propose the creation of a spacing unit. This authority includes, but is not limited to, identifying application requirements, determining the timing of applications if they are part of a gas resource development permit application, reviewing and approving spacing unit applications, and altering the size or shape of an established spacing unit, as necessary to ensure that a spacing unit closely matches the maximum area that could be drained by the operator’s gas well or set of wells. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

This recommendation covers a lot of ground. It gives the commissioner statutory authority to create spacing units, by determining how an applicant can propose a spacing unit for their wells or set of wells, as well as the information that needs to be included in that application. It gives the commissioner standards for approving spacing unit applications, and the right to alter the size and shape of an established spacing unit if new information comes to light about the maximum area that could be drained by the operator’s gas wells or set of wells. While all of this might be implied should the commissioner be given statutory authority to establish spacing units, the intention of this recommendation is to provide clarity.

Establishing spacing units is prerequisite to issuing pooling orders, and both are required to protect correlative rights of landowners within a gas well’s extraction area.

Recommendation

The DNR recommends that the rights of landowners to voluntarily pool their mineral interests for the joint development of a shared gas resource be recognized in statute. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

The best way to fully protect the correlative rights of landowners with mineral interests within a spacing unit is to encourage (or, at a minimum, allow) the landowners to voluntarily pool those interests for the joint development of gas resources with that spacing unit. Most gas leases offered to private landowners include provisions that allow the lessee to pool the leased mineral interests with other landowners, without government order or intervention. The DNR also expects to have voluntary pooling provisions within negotiated gas leases issued for state-managed mineral rights.

Recommendation

The DNR recommends that the commissioner of natural resources be given statutory authority to issue pooling orders that allow for the equitable and efficient development of gas resources while minimizing waste and the drilling of unnecessary wells. A person that owns or has secured the consent of the owners of at least fifty percent of the mineral interests within an established spacing unit should be able to apply for a pooling order that would combine all of the mineral interests within a spacing unit for the development of gas resources within the unit. The DNR also recommendations that the commissioner be given statutory authority to determine the application process for pooling orders and the required components of the application, and that application fees for pooling orders be set in statute. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Spacing units established by statute will encompass the maximum area that can be efficiently and effectively developed by an operator’s gas well or set of gas wells. If all mineral interests within that spacing unit are owned by the operator, then there is no need to pool the ownership interests within that spacing unit, since there is only one owner. If there is more than one owner of mineral interests within the spacing unit, and if all of the owners agree to jointly develop the gas resources, then there is no need for the state to pool the ownership interests, since they would already be voluntarily pooled. However, if there are owners within the spacing unit that are unwilling to have their equitable share of the gas resource developed, or refuse to jointly develop the identified gas resource, then the state may have a compelling interest to pool the interests of both consenting and nonconsenting owners, subject to the conditions identified by statute. Pooling prevents wasteful and scattered gas resource development and the drilling of unnecessary wells, and keeps the decisions of nonconsenting owners from infringing on the right of their consenting neighbors to develop their proportionate share of the gas resource. Pooling orders necessarily protect the correlative interests of nonconsenting owners, who are still provided an equitable share of the profits from gas resource development.

The DNR recommends that a person applying for a pooling order control at least fifty-percent of the mineral interests within an established spacing unit. Many states do not have a minimum percentage ownership requirement for pooling, while the thresholds in other states are as high as seventy-five percent (based on a 2015 state-by-state summary of pooling and spacing requirements). DNR believes that control of at least one-half of the ownership interests is reasonable, with slight allowances made for the slight variations in acreage within sectional units and subunits that reflect the curvature of the Earth.

Recommendation

The DNR recommends that the rights of the owners of unleased mineral interests within a spacing to challenge a proposed pooling order be protected in statute. Policies and procedures must be put in place by the commissioner to allow for such challenges, and a pooling order should not be issued until a challenge is resolved. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

An applicant for a pooling order has to assert that they control at least fifty percent of the mineral interests within a spacing unit. While the state will make a good-faith effort to verify this assertion by reviewing the supplemental information provided by the applicant, the owners of mineral interests located inside a spacing unit should have the right and opportunity to independently challenge those assertions, and for their challenges to be fairly considered by the commissioner, and resolved before a pooling order is issued.

Recommendation

The DNR recommends that the drilling of a gas well not be permitted until a pooling order tied to that gas well is issued. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

With policies and procedures established that allow the owners of mineral interests within a spacing unit to challenge a pooling order application, it makes sense to require the resolution of those challenges before allowing a gas well or set of wells to be drilled. This is because a successful challenge to the assertion made by the applicant that they control at least half of the mineral interests within a spacing unit would prevent a pooling order from being issued (at least until the operator obtains control of enough additional mineral interests to meet the established threshold).

Recommendation

The DNR recommends that statutory language should be adopted that describes how pooled mineral interests are managed during gas development operations, and how the correlative interests of nonconsenting mineral interest owners are protected by ensuring they receive a proportionate share of the profits from a gas resource development project. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Statutory language that sets requirements for the management of pooled mineral interests and describes in sufficient detail the rights and responsibilities of the operator of wells within a spacing unit is needed to protect the correlative interests of both nonconsenting owners of mineral interests within a spacing unit and those landowners who have voluntarily pooled their mineral interests for joint development of a gas resource.

Recommendation

The DNR recommends that person applying for a pooling order must present evidence to the DNR commissioner that they have made reasonable offers, in good faith, to lease all of the mineral interests within a spacing unit. They should also prove that they provided each owner relevant information about their ownership interests within the pooled area, and informed them about the pooling procedures described in these new statutes and their options under these statutes. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

This recommendation protects the correlative interests of landowners within a spacing unit by ensuring that the owners of mineral interests that are not under control of the operator were given a fair and reasonable offer to voluntarily pool their interests by accepting a lease offer by that operator. Landowners who refuse to lease their mineral interests should know that their mineral interests could still be included within a state-issued pooling order, understand their rights under that pooling order (including the right to challenge a pooling order application), and realize that they will receive fair compensation for the development of their proportionate share of the pooled gas resource. Requiring the operator to provide a state-created document that explains correlative rights and the pooling order process will ensure that a nonconsenting owner receives the right information and contact information at the DNR if they have any questions.

Recommendation

The DNR recommends that the operator of wells under a pooling order in which there is a nonconsenting owner furnish the nonconsenting owner with a monthly statement of all costs incurred, together with the quantity of gas produced, and the amount of proceeds realized from the sale of production during the preceding month.

Rationale

This recommendation protects the correlative rights of nonconsenting owners by requiring monthly statements by the operator of wells under a pooling order that provide financial and production data needed to ensure that those rights are protected.

Recommendation

The DNR recommends that unleased mineral interests tied to an American Indian tribe or band owning reservation lands in Minnesota should be shielded by state law from state-issued pooling orders. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Under federal law, state-issued pooling orders for the development of gas resources do not apply to unleased “Federal or Indian oil and gas.” While a state statute that shields unleased American Indian tribe or band owned reservation lands in Minnesota from pooling orders might therefore seem redundant, such a statute would serve as an effective backstop if there were changes to federal law. The recommended application of this proposed statutory language to “American Indian tribe or band owning reservation lands” is based on the statutory language in 93.52, Subd. 2.

We note that this recommendation is only for unleased reservation lands. Tribes are free to lease their mineral interests (including oil and gas rights) to operators seeking to develop gas resources, and operators who are applying for a pooling order for a spacing unit that includes Tribal lands must obtain a lease from the Tribes.

Recommendation

The DNR recommends that existing statutory language for forfeited severed mineral interests be amended to say that neither mining nor extraction of gas or other mineral resources can occur on forfeited severed mineral interests until a court determines the forfeiture of those mineral interests to be absolute. This recommendation is for both the temporary and post-rulemaking regulatory frameworks.

Rationale

Under current statute, the DNR is allowed to lease forfeited severed mineral interests for mineral exploration and development, but the lessee is barred from mining on those mineral interests until a court determines the forfeiture of those mineral interests to be absolute. While gas resources such as helium or hydrogen are tied to the mineral estate, these gases are not “mined;” instead, gas resources are commonly describes as being “produced” or “extracted” from the subsurface. Amending this statute to say that, “A lessee holding a lease issued under this subdivision may not mine or extract mineral resources under the lease until the commissioner completes the procedures…” clarifies that neither mining solid minerals nor extracting gas resources is allowed on forfeited severed mineral interests until the commissioner of natural resources completes a legal process and, “…a court has adjudged the forfeiture of the mineral interest to be absolute.”