26.50-02 - Underground Gas Storage Leases - State-Owned Lands

(Issued:  07/11/2005)

Supersedes

Supersedes

• Natural Resources Commission Policy 5002 (dated August 10, 1989)
• Department Procedure 5002.1 (dated August 10, 1989)

Preamble:

The State of Michigan owns over 3.8 million acres of combined surface and mineral rights, and an additional 2.1 million acres of mineral rights only. In addition, the State owns 25 million acres of Great Lakes bottomlands. Under the provision of Act 17, P.A. 1921, as amended, and Act 280 P.A. 1909, as amended, the Natural Resources Commission is responsible for managing these land and mineral resources to ensure protection and enhancement of the public trust. In this context, the following policy statements provide the framework for the storage of gas on State-owned lands.

POLICY:

GENERAL POLICY:

It shall be the policy of the Natural Resources Commission to lease lands for the underground storage of gas, to encourage the private sector in the development of underground gas storage reservoirs, and to optimize revenue from State-owned storage leases and additional recovery of hydrocarbon consistent with other natural resource management objectives, and to provide for regular and systematic review of the gas storage leasing program.

Underground gas storage leasing on public lands shall be established in a manner to assure (1) protection of the environmental, recreational and other uses of the land, including lake bottomlands, and connecting bays, harbors, public access sites and waterways, (2) optimum economic return to the State, and (3) the optimum recovery of the State's liquid hydrocarbon reserves.

Underground gas storage affects and involves two separate property interests: a) gas storage rights are held by the surface owner and b) mineral rights are held by the mineral owner. Prior to establishment of an underground gas storage area, it is necessary for an operator to reach agreement with both the surface and mineral owners.

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Application to Offer State Land for Lease:

Any party may submit applications identifying state lands desired for gas storage leasing.

Applications for state lands desired to be considered for leasing shall be in writing and shall be submitted to the Department of Natural Resources, P.O. Box 30028, Lansing, Michigan 48909, or such other address as applicable. Applications shall include all of the following information:

(a) The specific land description, including private claims and submerged lands.
(b) County
(c) Section
(d) Township
(e) Range
(f) For platted subdivisions, the lot and block numbers, subdivision name, and county.
(g) Development plan

An application fee shall accompany the written application and shall be in schedule approved by the Commission.

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Applications to Offer State Lands for Gas Storage Leasing:

Qualified Parties

1. Submit application in writing to the Land and Mineral Services Division of the Department.

2. A fee of $1,050.00 plus $2.00/acre for State-owned surface and a fee of $950.00 plus $1.50/acre for State-owned minerals shall be paid by the applicant. All payments shall be to the State of Michigan.

Land and Minerals Service Division

3. Review all applications and determines those surface and mineral rights available for leasing.

Field Review for Classification of Lands Considered for Leasing:

All lands considered for leasing shall be thoroughly reviewed by the Department for classification as either development, nondevelopment or nonleasable in order to assure proper protection of lands having unique surface values or other important natural resource values.

The nondevelopment, lease classification shall apply to lands in the following categories, and to other lands designated by the Commission:

·        State Parks

·        State Forest Campgrounds

·        Dedicated Natural and Wilderness Areas

·        Areas of Special Environmental or Unusual Natural Values or recreational lands such as determined by the Department of Natural Resources (i.e., those land descriptions where (1) the presence of wetlands, rare and endangered species, historical and archaeological features are dispersed and/or utilize the entire acreage in such a manner that the location of a drilling site and associated roads and pipelines is precluded; and (2) State land that has unusual value other than the above, based on site-specific written documentation).

The conclusions and recommendations of the Department as to the appropriate classification shall be based on an evaluation of the affects gas storage would have on current and future land uses of lands, and shall be recorded on a field report form signed by the appropriate district supervisors - including Geological Survey, Land and Water Management, Forest Management, Wildlife, Parks, Recreation, Fisheries and Environmental Response - and others involved in the field review process. Final field recommendations shall be made and submitted by the Regional Deputy Director. All proposed classifications are then subject to Commission approval.

WHO

DOES WHAT

Land and Mineral Services Division

1. Will prepare maps delineating lands in which the State owns fee or mineral rights only on which applications have been filed.

2. opies of the maps will be sent directly to Regional Directors and Division Chiefs with appropriate program directives or letters for review and recommendations.

Regional Directors, Division Chiefs and appropriate field staff

3. Review to classify the lands for leasing as either development, nondevelopment, or nonleaseable. In determining the classifications, will identify lands having unique surface values or other important natural resource values.

Nonleasable Leases

The nonleasable lease classification shall apply to lands in the following categories and to other lands designated by the Commission:

·        State Parks

·        State Forest Campgrounds

·        Dedicated Natural and Wilderness Areas

·        Areas of Special Environmental or Unusual Natural Values, or recreational lands as determined by the Department of Natural Resources (i.e., those land descriptions where the presence of wetlands, rare and endangered species, historical and archaeological features, designated sand dunes, designated shoreline, environmental or high risk erosion areas, inland lakes and streams, or other natural features.

Regional Director

4. Regional recommendations will be submitted to the Chief of the Forest Management Division within 60 days from the date of the program directive, together with the maps, supporting data and surface owner lists.

Any substantial differences in recommendations not resolved by the Regional Directors will be called to the attention of the Chief of the Forest Management Division, who will secure a resolution either through additional consultation or as determined by the Deputy Director involved.

Forest Management Div.

5. Division Chief submits to the Land and Mineral Services Division the recommendations finally agreed upon on behalf of the Department, together with copies of the supporting data on which the recommendations are based.

1. It will be the responsibility of the Division Chiefs to submit their written comments and recommendations as to the classification of any description to the appropriate Regional Director within 60 days from the date on which the maps are submitted for their review.

2. It will be the responsibility of the Regional Directors to coordinate field examinations with appropriate district and regional personnel and others as necessary, and to correlate all recommendations received.

3. Written documentation to support all regional classification recommendations (development, nondevelopment or nonleasable) must be made for each description. Comments to support the recommendations should be concise. Where the development classification is recommended and where it is determined that there are no unique surface values present, a general statement to that effect will be acceptable. All field review comments will be filed in the Forest Management Division in Lansing for review by interested parties on any business day.

Natural Res. Com.

6. The Commission shall approve or reject the classification of any description.

Public Review of Proposed Classification of Lands Considered for Leasing:

The Department shall publish a notice of proposed classifications of lands considered for leasing and provide the public adequate opportunity to review and comment on the classification of the lands. In the event anyone disagrees with the proposed classification of any description, that person shall have the opportunity to appear before the Commission to request a change in classification. The classification of any description shall be determined by the Commission. 

Land and Mineral Services Division

1. Will publish a public notice describing the general location of the lands for leasing and the proposed classifications in a newspaper not less than 10 days before the Commission meeting at which the offering of the lease rights are recommended for approval.

2. The notice will be published at least once in the county where the lands are situated. If a newspaper is not published in the county where the lands are located, the notice shall be published in a newspaper in a county adjoining the county in which the lands are located.

3. Shall prepare maps designating the lands being considered for leasing and their recommended lease classification.

4. These maps will be furnished to the Forest Management Division, the District and Regional offices of the Department of Natural Resources, and to the county seats for the areas in which the lands are located, for review and comment by interested parties.

Interested Party

5. Any party may question the Department's proposed classification of any of the lands, and request a change of classification. All requests for change of classification should be submitted to the Forest Management Division, Lansing, Michigan.

Forest Management Div.

6. Will be responsible for securing an additional field review, and a recommendation as to the classification of the land descriptions, and will submit its final classification recommendation to the Land and Mineral Services Division prior to the Commission meeting at which offering of the lease rights will be considered.

7. Will notify any party who submits written comments on the Department's classification of any description of their right to express their views to the Natural Resources Commission.

Direct Leasing:

The Commission may enter into leases (1) when it is determined to be in the best interest of the State, (2) for completion of a gas storage field area, or (3) for consolidation of fractional interests owned or controlled by the applicant.

Applications may be rejected by the Commission when it has been determined that the applicant has failed to maintain good credit, has failed to make the bonus payment at time of sale, is in violation of the administrative rules or the terms of State leases previously acquired, or for any other stated reason.

Leasing of Lake Bottomlands:

Leases on state-owned bottomlands may be granted for completion of a gas storage field and with a specific provision prohibiting drilling or development activities on the surface of the bottomlands. No well shall be drilled nearer than 1,320 feet to any lake or stream without the written consent of the Lessor.

Lease Terms:

Except as hereafter provided, the following standard terms shall apply to leases on lands.

• A primary term of seven years.

• Rental of $5.00 per acre per year, subject to Increases based on the lease document. All rentals shall be paid annually in advance of the lease anniversary date.

Direct Lease:

Direct leases may be Issued (a) when it Is determined to be in the best Interest of the State, (b) for completion of a gas storage field area, or (c) for consolidation of fractional interests owned or controlled by the applicant.

Applicant

1. All applications shall be in writing and shall be submitted to the Land and Mineral Services Division.

2. Shall submit evidence that it owns or controls lease rights to the majority of the lands in the proposed storage area.

Land and Mineral Services Division

3. Will conduct additional market studies to determine the lease terms applicable to leases on lands in the immediate area.

   1. The bonus, royalty and rental rates for the state lease shall be equal to the highest rates provided in leases on, or in close proximity to, the lands in the proposed storage area.

   2. The primary term shall be limited so as to coincide with the term remaining in the leases on the balance of the lands in the storage area.

4. Will secure approval from the appropriate State agency or determine for leasing of lands under their jurisdiction.

5. If all necessary approvals are secured, will negotiate with the applicant to determine bonus payment and lease term.

6. No lease shall be negotiated for a bonus or other economic terms less than those prevailing in State leases offered at public auction.

7. Upon agreement by both parties to all lease terms, will submit a memorandum to the Commission recommending approval of the direct lease. Upon Commission approval, will submit a memorandum for State Administrative Board approval.

8. If a decision is made not to direct lease, the applicant will be so notified.

Lease Performance Bond:

A lease performance bond shall be required of each lessee of State gas storage lease rights in order to assure faithful compliance with the terms and conditions of the lease. The Commission shall establish a schedule of the amount of bond to be maintained by each lessee.

All Lease Working Interest Owners 

1. Must submit a lease performance bond guaranteeing faithful performance of the covenants, conditions and agreements specified in the lease and the laws and rules of the State of Michigan for operations under a State underground gas storage lease, unless waived by the Commission. The Lessor reserves the right to require each working interest owner to file a bond.

2. Must submit the bond to the Land and Mineral Services Division. The amount of bond and the maximum acreage allowed will be in accordance with the following schedule:

Acres	Amount of Bond
up to 500	$10,000.00
500 to 2000	$20,000.00
2000 to 5000	$30,000.00
5000 to 10,000	$40,000.00
10,000 or more	$50,000.00

Land and Mineral Services Division

3. Reviews bonds for adequacy. If all is in order, files bond in lease file.

Lease Assignments:

All assignments of leases or interests therein shall be submitted to the Department. No assignments will be valid without the written consent of the Lessor. The Commission shall establish a processing fee to be paid for each lease assignment. The present fee is $25.00 per assignment.

Applicant

1. Submits all assignments of leases or interests therein to the Land and Mineral Services Division In duplicate. Copies of all agreements or contracts to assign, or other agreements and contracts, must accompany the assignments.

2. A fee of $25.00 for each lease assignment, including working interests, must be paid at the time the assignment is submitted. All payments must be to the State of Michigan.

Land and Mineral Services Division

3. Will review each assignment submitted and will make a determination to approve to deny based on, but not limited to, the following:

   3. Whether the assignee is a qualified party as defined in the lease rules.

   4. Whether the lease to which the assignment applies is in good standing, or

   5. Whether either party is in substantial violation of the regulations or the terms of any other State lease.

4. A copy of each approved assignment will be retained and recorded.

Change of Lease Classification:

The classification of any land under public review may be reclassified by the Commission, upon submission of additional Information, based on field review conducted by the Department following receipt of requests for reclassification, and on additional Information submitted by the applicant. The Department will notify interested parties of the request for change of classification at the same time field review is requested.

If the Commission determines that a classification is no longer applicable, the land may be reclassified.

Any proposed change of classification shall be on the regular printed agenda of the Commission.  

Lessee

1. Submits requests for change of a lease classification for any lands, in writing, to the Land and Mineral Services Division.

2. Information to substantiate the need or desirability for the classification change should accompany the request.

Land and Mineral Services Division

3. Will be responsible for securing a field review under current procedures and criteria to determine whether a change in the classification is justified.

This field review will ascertain whether the prior classification was substantially in error and will reveal any change in circumstances that may have since occurred.

4. Will notify interested parties based on a mailing list maintained by the Land and Mineral Services Division of the request for the change of classification.

5. If the change of classification involves lands in which the State owns mineral rights only, will also notify the surface owner of record of the proposed change of classification.

6. If a change of lease classification is justified on the basis of the field review, will demonstrate to the Commission why the change is justified and will recommend that the Commission approve the change.

All Commission memorandums recommending a proposed change in classification will be on the regular printed agenda of the Commission.

Monitoring of Storage Activities:

The Department will continue to study and update methods of monitoring storage activities on State leases and make field inspections to assure that the State is receiving just compensation and that there is compliance with the terms of the lease.  

Land and Mineral Services Division

1. Will cooperate with its auditors, the Geological Survey Division, other State departments and agencies, the Federal government, and others in developing, reviewing and keeping updated on automatic data processing system for monitoring underground gas storage on State leases for the purpose of assuring that the State is receiving just and adequate compensation for storage involving State leased lands.

Underground Gas Storage Leasing Program - Annual Review:

The Department will continue to evaluate and review the gas storage leasing program. Market studies will be conducted by the Department in order that trends and patterns can be established as guidelines for policy and management decisions by the Commission and Department.

These studies will be for the purpose of continued improvement in the leasing method and the overall leasing program on State-owned lands, to (1) assure that the State lease is competitive, (2) acquire and maintain expertise in the management of gas storage leases, and (3) provide that changing conditions are reflected in the overall gas storage leasing program.

The Department shall provide to the Commission in February each year a report of the complete State leasing program activities for the preceding fiscal year which shall include, but not be limited to, (1) the number of leases, (2) relevant data obtained by the Department on gas storage activities in Michigan, (3) a summary of the revenues generated and their ultimate disposition, (4) a summary and forecast of activities for the current fiscal year, and (5) a summary and assessment of any identified problems and any recommendations for changes in the leasing program.

The complete report will be made available to all interested parties and shall be on the regular printed agenda of the Commission. If there are any recommendations for changes in the leasing program as a result of this report, they will be enacted upon no sooner than the following Commission meeting.

Land and Mineral Services Division

1. Will cooperate with other divisions in developing a data processing system capable of storing, retrieving and analyzing the overall leasing process and the Information generated therefrom.

2. The Land and Mineral Services Division, in cooperation with the other divisions and the Administrative Services Division, shall prepare an annual report on the Underground Gas Storage program for the preceding fiscal year.

1. The form and content of existing reports and analyses will be incorporated to the extent practical to avoid duplication of effort.

2. All recommendations for changes must be based on the determination that they are in the best interests of the State, and should, to the extent possible, be substantiated by the information supplied in the report.

3. In addition, the basis for the analysis and any subsequent recommendations shall include consideration of information obtained from monitoring and the auditing of gas storage area, and market studies of private and State leasing transactions.

Director and Division Chiefs

The report will be reviewed by the Director and Division Chiefs prior to submittal to the Commission.

1. Members of the Executive Office will be responsible for notifying their constituent organizations concerned about the leasing program that the report is available.

2. The report will also be made available to all other interested parties.