[Federal Register Volume 60, Number 236 (Friday, December 8, 1995)]
[Proposed Rules]
[Pages 63011-63019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29864]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 250, 251, and 256
RIN 1010-AB92
Revision of Requirements Governing Surety Bonds for Outer
Continental Shelf Leases
AGENCY: Minerals Management Service (MMS), Interior.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The proposed rule would establish a deadline of 2 years for
all Outer Continental Shelf (OCS) oil and gas and sulphur lessees to
bring their bond coverage into compliance with the new levels of
coverage established in 1993; clarify MMS's position that assignees,
assignors, and co-lessees are jointly and severally liable for
compliance with OCS oil and gas and sulphur leases; establish a
regulatory framework for lease-specific abandonment accounts and
acceptance of a third-party guarantee; and update the bond coverage
required of right-of-way holders and Geological and Geophysical (G&G)
exploration permittees. These changes are needed to reduce the risk of
default by an underfunded company operating a lease or holding a right-
of-way.
DATES: Comments must be received or postmarked no later than March 7,
1996 to be considered in this rulemaking.
ADDRESSES: Written comments must be mailed or hand-carried to the
Department of the Interior; Minerals Management Service; 381 Elden
Street; Mail Stop 4700; Herndon, Virginia 22070-4817; Attention: Chief,
Engineering and Standards Branch.
FOR FURTHER INFORMATION CONTACT: Gerald D. Rhodes, Engineering and
Technology Division, telephone (703) 787-1609.
SUPPLEMENTARY INFORMATION: The MMS regulations at 30 CFR Part 250,
Subpart G, Abandonment of Wells, Subpart I, Platforms and Structures,
and Subpart J, Pipelines and Pipeline Rights-of-Way, specify that OCS
lessees, right-of-way holders, and G&G exploration permittees are
liable for all end-of-lease financial obligations including unpaid
royalties; costs of well plugging and abandonment; removal of pipe,
equipment, platform(s), and facilities; and clearance of obstructions
to other uses of the sea. The levels of bond coverage required by the
regulations do not limit the obligations of OCS oil and gas or sulphur
lessees, holders of an OCS pipeline right-of-way, or exploration
permittees conducting deep stratigraphic tests.
The transfer of OCS leases from large producing companies to
smaller producers, some of which are marginally financed, has increased
the risk that the responsible party will not be able to satisfy end-of-
lease obligations.
The MMS continues to investigate ways to provide more flexibility
to lessees in meeting bonding requirements. For example, MMS has
allowed third-party guarantees and escrow accounts as alternatives to
traditional bonds. These methods would be specifically addressed in
regulations to facilitate their use. The MMS encourages lessees to
suggest other alternatives to traditional bonds. The regulations
provide flexibility to the Regional Director to consider alternate
forms of surety.
Oil and Gas and Sulphur Lease Bond Coverage Requirements: To reduce
the number of cases of underfunded liabilities, MMS published revised
rules on August 27, 1993 (58 FR 45255), increasing the bond coverage
required for OCS oil and gas or sulphur leases.
The MMS is phasing in the increases in the minimum levels of bond
coverage as part of the process of reviewing requests for approval of
lease assignments, Exploration Plans (EP), Development and Production
Plans
[[Page 63012]]
(DPP), or Development Operations Coordination Documents (DOCD). The
1993 regulation replaced the requirement for a $50,000 bond for oil and
gas and sulphur leases with requirements based upon the drilling or
production stage of a lease as follows:
------------------------------------------------------------------------
Areawide
State of development Lease bond bond
------------------------------------------------------------------------
Issuance of lease............................... $50,000 $300,000
EP approval..................................... 200,000 1,000,000
DPP and DOCD approval........................... 500,000 3,000,000
------------------------------------------------------------------------
This proposed rule would require lessees not already in compliance
with the higher bond levels to submit and maintain the higher lease or
areawide bonds within 2 years of the promulgation of a final rule.
Assignors, Assignees, and Co-Lessees Liable for Compliance: When
the designated operator is unable to meet end-of-lease obligations, MMS
will require any or all of the lessees to bring the lease into
compliance. If there is no lessee able to perform, MMS will require the
prior lessee(s) to perform these functions.
Relationship Between these Regulations and The Liability
Regulations Published by MMS's Royalty Management Program: This
proposed rule clarifies MMS's position with respect to the liability of
assignees, assignors, and lessees (record title owners) for the
plugging and abandonment of wells, removal of platforms and other
facilities, and clearance of well and platform locations. These
obligations are joint and several in nature. The obligations are not
divisible, and a degree of residual liability is attached (i.e., an
assignor may be required to perform lease and well abandonment and
clearance obligations when an assignee refuses or is unable to carry
out any or all of these responsibilities).
The indivisible nature of these obligations distinguishes them from
the royalty and other payment obligations addressed in the regulations
proposed for modification by the notice of proposed rulemaking (NPR)
published on June 9, 1995, by MMS's Royalty Management Program (RMP)
(60 FR 30492). The provisions of that NPR would establish liability for
the payment of royalty due on Federal and Indian leases and establish
responsibility to pay and report royalty and other payments.
The RMP's NPR dated June 9, 1995, proposes that royalty and other
payment obligations be treated as divisible according to the division
of the record title interests in a lease and proposes that a record
title owner's (lessee's) liability for the payment of royalty and other
payments be proportionate to percentage of the record title interest
owned. That NPR also points out that lease obligations such as
leasehold and well abandonment and reclamation are not divisible.
Neither of these NPR's address against whom MMS will take
enforcement action if MMS discovers noncompliance either in payments
due or required leases abandonment and reclamation activities. In every
instance, MMS retains the discretion to determine which person to
pursue. Once the lease has been brought into compliance, the person MMS
takes enforcement action against could seek contributions from other
liable persons.
While these proposed rule should make it easier to determine who
the liable parties are, it is not MMS's intention that these rules
govern the relationship or liabilities between and among the affected
parties other than MMS.
Means for Financing Abandonment and Clearance Obligations: Since no
revenues are being generated from a lease at the time lease wells are
to be plugged and abandoned, platforms are to be removed, and the
seafloor cleared of obstructions, MMS wants assurances that OCS lessees
establish some means of funding their end-of-lease obligations.
Similarly, no revenues are generated by pipeline operations at the
time the right-of-way holder is called upon to remove all platforms,
structures, domes over valves, pipes, taps, and valves along the right-
of-way in compliance with MMS regulations. The MMS wants assurances
that holders of OCS pipeline right-of-way grants provide some means of
funding their right-of-way abandonment obligations.
Supplemental bonds: The MMS's Regional Directors may require OCS
lessees, on a case-by-case basis. To provide additional security in the
form of a supplemental bond or bonds or an increase in the amount of
coverage under an existing bond. The additional security is required
when the Regional director deems it necessary to ensure that the lessee
or its guarantor will be able to comply with all end-of-lease
obligations. The Regional Director will also consider the added
liability created when new leases are added to an existing areawide
bond.
The proposed rule would increase the level of bond coverage for G&G
exploration permittees drilling a deep stratigraphic test well and
would provide authority for MMS's Regional Directors to require right-
of-way holders and G&G exploration permittees, on a case-by-case basis,
to post additional bonds or other security in the form of a
supplemental bond or bonds or an increase in the amount of coverage
under an existing bond. These changes recognize that the current
bonding requirements found in Secs. 250.159(b) and 251.6-4 are
inadequate and also recognize the variation in costs associated with
the abandonment of deep stratigraphic test wells and pipelines
constructed on OCS right-of-ways.
Lease-Specific Abandonment Accounts and Third-Party Guarantee:
Proposed Sec. 256.56, Lease-specific abandonment accounts, and
Sec. 256.57, Third-party guarantee, would establish specific regulatory
authority under which MMS's Regional Director may approve these
alternate methods for funding end-of-lease abandonment obligations.
Regional Directors already accept lease-specific abandonment accounts.
A third-party guarantee or a supplemental bond may cover specific
obligations, such as plugging and abandonment of specified leases or
wells. However, the Regional Director's approval will depend on how
well the combination of all bonds and guarantees is able to ensure that
the lessee will meet all obligations.
Section-by-Section Discussion
Part 250--Oil and Gas and Sulphur Operations in the OCS
Section 250.110 General Requirements
Current rules at Sec. 256.62(d) provide that assignors remain
``liable for all obligations under the lease accruing prior to the
approval of the assignment.'' The rule at Sec. 250.110 of subpart G,
Abandonment of Wells, is being amended to clarify existing requirements
that when a well is drilled, a platform or other facility is installed,
or an obstruction is created, the lessee's obligation accrues to
properly plug and abandon the wellbore, remove the platform or other
facility, and clear the ocean of obstructions in accordance with
procedures specified in subpart G of 30 CFR part 250. When an
assignment occurs, the assignor continues to have residual liability
should the assignee fail to fully perform obligations that accrued
before assignment with respect to wells and structures in existence at
the time of the assignment.
The clarification also provides that when there are several
responsible lessees, they are jointly and severally liable for end-of-
lease obligations.
Section 250.159, General requirements for a pipeline right-of-way
grant, would be modified to add a
[[Page 63013]]
provision under which the Regional Director could require the holder of
a right-of-way to submit and maintain additional security in the form
of a supplemental bond or bonds or by increasing the amount of coverage
provided under an existing surety bond.
Part 251--G&G Explorations of the OCS
Section 251.6-4, Bonds, would be modified to increase the bond
coverage required to $200,00 for drilling a deep stratigraphic test
well unless an areawide bond is maintained. A provision would be added
under which the Regional Director could require a permittee under a G&G
Exploration permit to submit and maintain additional security in the
form of a supplemental bond or bonds or by increasing the amount of
coverage provided under an existing surety bond. Compliance with the
increased amount of bond coverage would be required for all permits
granted after the effective date of a final rule.
Part 256--Leasing of Sulphur or Oil and Gas in the OCS
Subpart I--Bonding
Section 256.52 Requirement to File a Bond
Proposed Sec. 256.52, Requirement to file a bond (current
Sec. 256.58, Acceptable bonds/alternate security instruments), expands
upon the provisions of Sec. 256.58 and establishes the bonding
requirements for lessees. This section establishes the time at which a
bond must be provided and recognizes alternate methods that a Regional
Director may approve for providing additional security.
Proposed Sec. 256.52(d) expands upon the provisions of current
Sec. 256.58(d) with regard to the results of a payment of a claim in
the face amount of the surety.
Proposed Sec. 256.52(f) expands upon the provisions of current
Sec. 256.58(f) with regard to the responsibility of the lessee to
monitor the value of U.S. Department of the Treasury (U.S. Treasury)
instruments provided to MMS and to submit additional U.S. Treasury
instruments if the value of the instruments previously provided falls
below the level of bond required.
In Sec. 256.52, new paragraph (i) requires the lessee to give
notice and to cease operations if the lease ceases to be in compliance
with bonding requirements. Paragraph (i) also authorizes the Regional
Director to allow continued operations when ceasing operations would
pose a danger to the environment or to the producing reservoir but with
all proceeds being paid into lease abandonment accounts.
Section 256.53 Additional Bonds
Proposed Sec. 256.53, Additional bonds (existing Sec. 256.61,
Additional bonds), expands the provisions of current Sec. 256.61 to
establish a deadline (2 years after promulgation of a final rule) for
lessees of existing leases to provide the required increased amounts of
bond coverage.
Proposed Sec. 256.53(d) modifies the generic criteria used by the
Regional Director to assess the ability of a lessee to carry out its
present and future financial obligations and the need for supplemental
bond.
Proposed Sec. 256.53(e) would expand Sec. 256.61 to establish
regulatory provisions for determining the amount of additional bond
coverage to be required.
Section 256.54 Bond Form
Section 256.59, Form of bond, would be renumbered and renamed
Sec. 256.54, Bond form. New Sec. 256.54 establishes certain required
terms of surety bonds including a requirement that the bond be
noncancellable.
Proposed Sec. 256.54(d)(3) authorizes the submission of U.S.
Treasury securities in lieu of surety bond, in accordance with 31
U.S.C. 9303. It specifies that the lessee using such Treasury
securities shall also submit authorization for the Regional Director to
sell such securities upon the lessee's default on its lease
obligations.
The MMS is concerned that, should the lessee file for bankruptcy
and MMS merely have a security interest in the Treasury securities, it
will not be able to obtain prompt access to funds to provide for
remediation of leaking wells and or other critical environmental
problems. In that event, the Treasury bills or notes will not give MMS
the same assurance of timely performance of lease obligations that a
surety bond provides. Accordingly, MMS is exploring with the Department
of the Treasury alternative procedures under which the lessee would
transfer title to its book-entry Treasury bills to MMS or a third-party
escrow agent, so that the bills would not be property of the bankruptcy
estate in the event of insolvency. The MMS requests comments on its
alternative approach which it may adopt in the final version of this
rule.
Section 256.55 General Terms and Conditions of Bond
Proposed new Sec. 256.55 would establish general terms and
conditions of a bond and includes language which specifies that bonds
are to be payable to the MMS Regional Director and conditioned upon
compliance with all terms and conditions of the OCS oil and gas or
sulphur leases and governing regulations. Lessees or sureties may
propose alternate forms of bond for the Director's approval but should
submit therewith an opinion of qualified counsel that the proposed bond
form provides security equivalent to that of the standard MMS bond
forms.
Proposed Sec. 256.55(d) adds a requirement that the lessee give
prompt notice to the Regional Director of any action alleging the
insolvency or bankruptcy of the surety or alleging any matter which
could result in suspension or revocation of the surety's charter or
license to do business.
Section 256.56 Lease-Specific Abandonment Accounts
Proposed new Sec. 256.56, Lease-specific abandonment accounts,
establishes regulatory guidance for the establishment of lease-specific
abandonment accounts in addition to the Treasury pledge accounts
currently established to permit lessees to fund end-of-lease
abandonment and clearance costs through scheduled payments into a
lease-specific escrow account dedicated to lease abandonment and
cleanup.
Section 256.57 Third-Party Guarantee
The third-party guarantee provisions of proposed Sec. 256.57 would
establish a regulatory framework for identifying some of the criteria
that the Regional Director would use to approve a third-party guarantee
of a lessee's compliance with its lease obligations and for
establishing how MMS will obtain needed information.
Section 256.58 Termination of the Period of Liability and Cancellation
of a Bond
Proposed new Sec. 256.58(a) provides for termination of the period
of liability under a bond and allows the Regional Director to permit a
lessee to replace existing bonds with other forms of security that
provide equivalent protection. Replacement of a bond pursuant to
Sec. 256.58(b) would conditionally release the existing bond.
Section 256.59 Forfeiture of Bonds and/or Other Securities
Proposed new Sec. 256.59 specifies that if a lessee refuses or is
unable to comply
[[Page 63014]]
with lease terms or if the lessee defaults on the conditions under
which a bond and other security was accepted, the Regional Director
will take action to forfeit all or part of a bond or other security.
Section 256.62 Assignment of Leases or Interests Therein
Under the proposed rulemaking, Sec. 256.62 would be modified to
clarify and make explicit existing authority that--
(1) The approval of a lease assignment is subject to the lessee
furnishing bond coverage pursuant to the revised bonding requirements.
(2) Having a lease assignment become effective any date other than
the first day of the lease month following the filing of documents is
at the discretion of the Regional Director.
(3) Approval of an assignment by the Regional Director does not
relieve the assignor of accrued lease obligations if the assignee
subsequently fails to perform.
(4) Approval of an assignment will not be given until the assignee
submits an acceptable level of surety coverage.
(5) When the lessee is not the sole lessee, the Regional Director
will look first to the designated operator to perform lease
obligations, but all lessees are jointly and severally liable for their
performance.
(6) The assignee assumes a responsibility to remedy all existing
environmental problems on the tract and to properly abandon all wells
and reclaim the lease site.
Section 256.64 Requirements for Filing Transfers
Under the proposed rulemaking, Sec. 256.64 would be modified to
clarify that--
(1) Neither the transfer of operating rights, nor the creation of a
sublease(s), releases the lessee from performance of any obligation
under any lease or under any regulation.
(2) The lessee(s) are jointly and severally liable with sublessees
and operating rights owners (to the extent of their interests) for the
performance of each obligation under the lease and under the governing
regulations with each party holding an interest at the time the
obligation was accruing.
The provisions of these proposed rules have been designed to meet
the objectives to: (1) ensure lessee's financial capability to perform
lease obligations, (2) protect the environment from threat of harm
which might result from a lessee's failure to timely carry out proper
well abandonment and site clearance operations on a lease, (3) achieve
a reasonable degree of protection at a minimum increase in costs to the
lessee or lease operator, and (4) select a method of attaining these
goals which impact equitably on all parties who would be affected.
The MMS does not have authorized funds available to use to correct
a noncompliance or default when the cost of corrective action exceeds
the funds available under a forfeited bond and other security.
Author: This document was prepared by Gerald D. Rhodes, Engineering
and Technology Division, MMS.
Executive Order (E.O.) 12866
This proposed rule is not a significant rule under E.O. 12866.
Regulatory Flexibility Act
The Department of the Interior (DOI) has determined that this
proposed rule will not have a significant effect on a substantial
number of small entities because, in general, the entities that engage
in offshore exploration, development, and production activities
including pipeline transportation across the OCS are not considered
small due to the technical expertise, financial resources, and
experience necessary to safely conduct such activities in an
environmentally responsible manner.
Paperwork Reduction Act
This proposed rule does not contain new information collection
requirements which require approval by the Office of Management and
Budget (OMB). The information collection requirements in 30 CFR part
256 are approved by OMB under approval No. 1010-0006.
Takings Implication Assessment
The DOI certifies that this proposed rule does not represent a
governmental action capable of interference with constitutionally
protected property rights. Thus, a Takings Implication Assessment need
not be prepared pursuant to E.O. 12630, Government Action and
Interference with Constitutionally Protected Property Rights.
E.O. 12778
The DOI has certified to OMB that this proposed rule meets the
applicable civil justice reform standards provided in Sections 2(a) and
2(b)(2) of E.O. 12778.
National Environmental Policy Act
The DOI determined that this action does not constitute a major
Federal action significantly affecting the quality of the human
environment; therefore, an Environment Impact Statement is not
required.
List of Subjects
30 CFR Part 250
Continental shelf, Environmental impact statements, Environmental
protection, Government contracts, Incorporation by reference,
Investigations, Mineral royalties, Oil and gas development and
production, Oil and gas exploration, Oil and gas reserves, Penalties,
Pipelines, Public lands--mineral resources, Public lands--rights-of-
way, Reporting and recordkeeping requirements, Sulphur development and
production, Sulphur exploration, Surety bonds.
30 CFR Part 251
Continental shelf, Freedom of information, Oil and gas exploration,
Public lands--mineral resources, Reporting and recordkeeping
requirements, Research.
30 CFR Part 256
Administrative practice and procedure, Continental shelf,
Government contracts, Incorporation by reference, Oil and gas
exploration, Public lands--mineral resources, Reporting and
recordkeeping requirements, Surety bonds.
Dated: September 5, 1995.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
For the reasons set forth in the preamble, MMS proposes to amend 30
CFR parts 250, 251, and 256 as follows:
PART 250--OIL AND GAS AND SULPHUR OPERATIONS IN THE OUTER
CONTINENTAL SHELF
1. The authority citation for part 250 is revised to read as
follows:
Authority: 43 U.S.C. 1334.
2. In Sec. 250.110, the existing paragraph is designated as
paragraph (a) and a new paragraph (b) is added to read as follows:
Sec. 250.110 General requirements.
* * * * *
(b) The obligations to plug and abandon wellbores, remove platforms
or other facilities, and to clear the ocean of obstructions accrue when
the well is drilled, the platform or other facility is installed, or
the obstruction is created and continue until the requirements of
subpart G are fully accomplished. These obligations are the joint and
several responsibility of all lessees.
3. In Sec. 250.159, paragraph (b)(1) is revised to read as follows:
[[Page 63015]]
Sec. 250.159 General requirements for a pipeline right-of-way grant.
* * * * *
(b) (1) When applying for a right-of-way grant, the applicant or
the right-of-way holder shall provide the surety bonds described in
this section in addition to the bonds required of a lessee in 30 CFR
part 256.
(i) Each applicant or holder of a right-of-way shall furnish the
Regional Supervisor a $300,000 corporate surety bond conditioned on
compliance with the terms of all right-of-way grants held by the
applicant in the Outer Continental Shelf (OCS) area in which the right-
of-way is located.
(ii) If the Regional Director determines that a surety bond in
excess of $300,000 is necessary to cover the costs and liabilities of
compliance with the terms of the right-of-way, he/she may require the
applicant or the holder of the right-of-way to submit additional
security in the form of a supplemental bond or an increase in the
amount of the existing surety bond.
* * * * *
PART 251--GEOLOGICAL AND GEOPHYSICAL (G&G) EXPLORATIONS OF THE
OUTER CONTINENTAL SHELF
4. The authority citation for part 251 is revised to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
5. Section 251.6-4 is revised to read as follows:
Sec. 251.6-4 Bonds.
(a) Before the Minerals Management Service (MMS) will issue a
permit authorizing the drilling of a deep stratigraphic test well, the
applicant must either:
(1) Furnish MMS a bond of not less than $200,000 conditioned on
compliance with the terms of the permit; or
(2) Maintain with or furnish to MMS a $1 million bond conditioned
on compliance with the terms of the permit issued to him/her for the
area of the OCS where the applicant proposes to drill a deep
stratigraphic test.
(b) If the Regional Director determines that security in excess of
$1 million is needed, he/she may require the permittee to provide
additional security in the form of a supplemental bond or bonds or an
increase in the amount of the existing surety bond.
(c) The Director of MMS may require the submission of a bond before
authorizing shallow test drilling.
(d) Any bond furnished shall be on a form approved or prescribed by
the Director, MMS.
PART 256--LEASING OF SULPHUR OR OIL AND GAS IN THE OUTER
CONTINENTAL SHELF
6. The authority citation for part 256 is revised to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
7. Section 256.58 is redesignated as Sec. 256.52.
8. Newly designated Sec. 256.52 is amended by revising the heading
and paragraphs (a), (c), (d), (f), and (g); and by adding a new
paragraph (i) to read as follows:
Sec. 256.52 Requirement to file a bond.
(a) Before an oil and gas or sulphur lease will be issued the
successful bidder must:
(1) Furnish the Regional Director a $50,000 lease surety bond,
conditioned on compliance with all the terms and conditions of the
lease;
(2) Maintain or furnish a $300,000 areawide bond, issued by a
qualified surety and conditioned on compliance with all the terms and
conditions of oil and gas and sulphur leases held by the bidder in the
OCS for the area in which the lease to be issued is situated;
(3) Maintain or furnish an areawide bond under Sec. 256.53 (a)(2)
or (b)(2) of this part; or
(4) Furnish a substitute security instrument in accordance with
paragraphs (f) and (g) of this section.
* * * * *
(c) The lessee shall maintain a separate areawide surety bond as
required by paragraph (a) of this section for each of the areas
identified in paragraph (b) of this section.
(1) If the Regional Director approves, the lessee may substitute
for its bond either:
(i) An operator's bond in the same amount as the lease bond
required under paragraph (a); or
(ii) Alternate security instruments as provided in paragraphs (f)
and (g) of this section.
(2) The lessee(s)' substitution of an operator's bond or an
alternate form of security for its bond does not relieve the lessee(s)
of its (their) obligation to comply with all the terms and conditions
of the lease.
(d) If a default causes the surety or other guarantor to pay the
United States any indebtedness under a lease secured by a bond or
alternate form of security, the face amount of the bond or alternate
form of security and the surety's liability will be reduced by the
amount of the payment.
* * * * *
(f) U.S. Department of the Treasury (Treasury) securities (U.S.
Bonds or Notes) may be submitted in lieu of a bond, provided the
Treasury instrument or legal tender submitted is negotiable at the time
of submission for an amount of cash equal to the value of the required
bond. The entity submitting Treasury instruments under this paragraph
is responsible for monitoring the value of those instruments. If the
value of those instruments falls below the level of bond required, the
entity must submit additional Treasury instruments or legal tender to
raise the value of the securities held by MMS to the value of the
required bond.
(g) As provided in Sec. 256.54, the Regional Director may accept
alternate types of security instruments in lieu of the surety bonds
required by this section if he/she determines that the interests of the
Government are protected to the same extent that these interests would
be protected by the required surety bond.
* * * * *
(i) Any time that a lease is not in compliance with bonding
requirements of this subpart, the Regional Director will notify the
lessee in writing and specify a reasonable period, not to exceed 90
days, to post an adequate bond.
(1) If an adequate bond or other guarantee is not provided by the
end of the period allowed, the lessee shall cease mineral production,
unless the Regional Director authorizes continued production from the
lease to avoid premature lease abandonment or damage to the environment
or to the producing reservoir(s).
(2) The lessee shall immediately begin preparation for lease
abandonment and clearance and shall submit to the Regional Director its
plans for paying outstanding royalty underpayments and for meeting all
regulatory and lease requirements.
(3) Mineral production shall not resume until the Regional Director
determines that an adequate bond has been posted or other guarantee
provided.
(4) When the Regional Director authorizes continued production
under this section, the net proceeds from that production, less the
royalties paid to the United States, shall be paid into one or more
lease-specific abandonment accounts approved by the Regional Director.
9. Section 256.61 is redesignated as Sec. 256.53; paragraphs
(a)(1), (b)(1), and (d) are revised; and paragraphs (a) introductory
text, (b) introductory text, (e), (f), and (g) are added to read as
follows:
[[Page 63016]]
Sec. 256.53 Additional bonds.
(a) Activities under an Exploration Plan (EP).
(1) When submitting a proposed EP, when submitting a proposed
assignment of a lease with an approved EP, or 2 years after publication
of a final rule, whichever is earliest, a lessee must submit a $200,000
surety bond issued by a qualified surety and conditioned on compliance
with all the terms and conditions of the lease shall be furnished to
the Regional Director. Approval of the EP or assignment shall be
conditioned upon receipt of a $200,000 lease surety bond, unless the
Regional Director authorizes the submission of the $200,000 lease
exploration bond after the submission of the EP but before approval of
drilling activities under the EP. This bond coverage may be provided by
increasing the bond coverage provided in Sec. 256.52(a) of this part.
(2) * * *
(b) Operations under a Development and Production Plan (DPP) or a
Development Operations Coordination Document (DOCD).
(1) When submitting a proposed DPP or DOCD, when submitting a
proposed assignment of a lease with an approved DPP or DOCD, or 2 years
after publication of a final rule, whichever is earliest, a lessee must
submit a $500,000 surety issued by a qualified surety and conditioned
on compliance with all the terms and conditions of the lease shall be
furnished to the Regional Director. Approval of a DPP, a DOCD, or an
assignment of a lease with an approved DPP or DOCD shall be conditioned
on receipt of a $500,000 lease surety bond, unless the Regional
Director authorizes the submission of the $500,000 lease development
bond after the submission of the DPP or DOCD, but prior to the approval
of platform installation or drilling activities under the approved DPP
or DOCD. The lessee may provide this additional bond by submission of a
new bond or by increasing the lease bond coverage provided under
paragraph (a) of this section.
(2) * * *
* * * * *
(d) The Regional Director may require additional security (i.e.,
security over and above the amounts prescribed in Secs. 256.52(a) and
256.53 (a) and (b) of this part) in the form of a supplemental bond or
bonds or increased amount of coverage of an existing surety bond when
he/she determines that additional security is necessary to cover
royalty due the Government, penalties and interest assessed against the
lessee, and/or costs and liabilities of the lessee for regulatory
compliance. The Regional Director shall base the decision on an
evaluation of the ability of the lessee to carry out its present and
future financial obligations as demonstrated by factors such as:
(1) Financial capacity substantially in excess of existing and
anticipated lease and other obligations (e.g., costs of well
abandonment and platform removal, amount of underpaid royalties, and
penalties and interest assessed by the Government), as evidenced by
audited financial statements (including auditor's certificate, balance
sheet, and profit and loss sheet);
(2) Projected financial strength as evidenced by existing OCS
production and proven reserves of future production valued
significantly in excess of existing and future lease obligations;
(3) Business stability as evidenced by 5 years of continuous
operation and production of oil and gas or sulphur in the OCS or in the
onshore oil and gas industry;
(4) Reliability in meeting obligations as evidenced by:
(i) Credit rating; or
(ii) Trade references including names and addresses of other
lessees, drilling contractors, and suppliers with whom lessee has
dealt; and
(5) Record of compliance with laws, regulations, and lease terms.
(e) The amount of the bond shall be sufficient to ensure the
compliance with all lease terms and conditions, including any
outstanding underpayment of royalty and cumulative end-of-lease
obligations to abandon wells, remove platforms and facilities, and
clear the seafloor in the event of default. The Regional Director will
determine the amount of supplemental bond required based on an analysis
conducted by MMS. The lessee may submit data for consideration by MMS.
(f) The Regional Director may adjust the amount of supplemental
bond or deposit required and the terms for the acceptance of the
lessee's bond if the liability for outstanding underpaid royalties and
end-of-lease abandonment and clearance either increases or decreases.
The Regional Director shall:
(1) Notify the lessee and the surety of any proposed adjustment to
the amount of bond required; and
(2) Give the lessee an opportunity to submit written or oral
comment on the adjustment.
(g) A lessee may request a reduction of the amount of supplemental
bond required by submitting to the Regional Director evidence
demonstrating that the projected royalties and costs of end-of-lease
abandonment and clearance of the seafloor are less than the specified
bond coverage.
10. Section 256.59 is redesignated as Sec. 256.54 and revised to
read as follows:
Sec. 256.54 Bond form.
(a) All bonds must be on a form or in a form approved by the
Director. Bonds submitted after November 26, 1993, must be issued by a
qualified surety certified by the U.S. Treasury as an acceptable surety
on Federal bonds and listed in the current U.S. Treasury Circular No.
570 which is available from the Surety Bond Branch, Financial
Management Service, Department of the Treasury, 401 14th Street SW.,
Washington, D.C. 20227.
(b) A surety bond must be executed by the lessee and a qualified
surety.
(c) Surety bonds must be noncancellable.
(d) Lease bonds must be:
(1) A surety bond;
(2) A lease-specific abandonment account in accordance with
Sec. 256.56;
(3) United States Treasury securities negotiable for an amount
equal to the amount of bond required, accompanied by a conveyance of
full authority to the Secretary to sell the securities in case of
default;
(4) A combination of these security methods; or
(5) Another form of security approved by the Regional Director.
11. Sections 256.55, 256.56, 256.57, 256.58, and 256.59 are added
to read as follows:
Sec. 256.55 General terms and conditions of bond.
(a) The Regional Director shall determine the amount of the lease
bond as provided in Secs. 256.52 and 256.53 of this part.
(b) A lease bond must be payable to MMS.
(c) A lease bond shall be conditioned upon compliance with all the
terms and conditions of the lease and governing regulations.
(d) Lessees must notify the Regional Director of any action filed
alleging the insolvency or bankruptcy of the lessee, a surety company,
or a third-party guarantor. The lessee shall notify the Regional
Director within 72 hours of any such action filed or within 72 hours of
learning of an action that involves a company other than the lessee.
Lease bonds must require the surety to provide this information to the
lessee and directly to MMS.
(e) Upon the incapacity of a surety company by reason of
bankruptcy, insolvency, or suspension or revocation of its charter or
license, the lessee is deemed to be without bond coverage
[[Page 63017]]
and must promptly notify the Regional Director.
Sec. 256.56 Lease-specific abandonment accounts.
(a) The Regional Director may authorize the lessee or guarantor to
supplement its bond(s) by establishing a lease(s)-specific abandonment
account in one or more federally insured accounts made payable upon
demand to the Regional Director. The total security, including the
lease-specific abandonment account(s), shall not be less than the
amount required to meet outstanding underpayments of royalty and
lessee's end-of-lease abandonment and clearance obligations.
(b) Any interest paid on an abandonment account shall be retained
in the account unless the Regional Director approves the payment of the
interest to the lessee or guarantor.
(c) When authorized by the Regional Director, U.S. Treasury
obligations may be substituted for payments into an abandonment
account.
(d) An individual abandonment account shall not contain more than
$100,000 or the maximum insurable amount as determined by the Federal
Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation.
(e) The Regional Director may require the lessee to make an
overriding royalty or production payment into an escrow account. The
required overriding royalty or payment out of production may be
associated with production from a lease(s) other than the lease(s)
bonded through the escrow account.
Sec. 256.57 Third-party guarantee.
(a) The Regional Director may accept a third party's written
guarantee as surety for a lessee's lease obligations, following a
review of:
(1) The period of time that the guarantor has been in continuous
operation as a business entity;
(i) Continuous operation is the time that business was conducted
immediately preceding the posting of a guarantee.
(ii) Continuous operation excludes periods of interruption in
operations that were beyond the guarantor's control and that do not
affect the guarantor's likelihood of remaining in business during lease
exploration, development, production, abandonment, and clearance
operations.
(2) Financial information available in the public record or
submitted by the guarantor, on its own initiative, in sufficient detail
to show to the Regional Director's satisfaction that the guarantor is
qualified based on:
(i) The guarantor's current rating for its most recent bond
issuance by either Moody's Investor Service or Standard and Poor's
Corporation;
(ii) The guarantor's net worth taking into account liabilities
under this and other guarantees.
(iii) The guarantor's ratio of current assets to current
liabilities taking into account liabilities under this and other
guarantees; and
(iv) The guarantor's unencumbered fixed assets in the United
States.
(3) When the information required by paragraph (2) is not publicly
available, the guarantor may submit the information voluntarily. If
this is done, the guarantor must update the information annually within
90 days of the end of the fiscal year or as otherwise approved by the
Regional Director. The information should include:
(i) Financial statements for the most recently completed fiscal
year accompanied by a report prepared by an independent certified
public accountant in conformance with generally accepted accounting
principles and containing the accountant's audit opinion or review
opinion of the financial statements, with no adverse opinion;
(ii) Financial statements, certified to be correct by the
guarantor's financial officer, for completed quarters in the current
fiscal year; and
(iii) Additional information, certified to be correct by the
guarantor's financial officer, as requested by the Regional Director.
(b) The terms of a third-party guarantee shall provide for the
following:
(1) If the lessee fails to comply with any governing lease term,
the guarantor shall take corrective actions or be liable under the
indemnity agreement to provide funds to the Regional Director
sufficient to complete the required corrective action.
(2) If the guarantor wishes to terminate the period of liability
under a third-party guarantee it must:
(i) Notify the Regional Director and the lessee at least 90 days
before the proposed termination date; and
(ii) Obtain the Regional Director's approval for the termination of
the period of liability for all or a specified portion of its
guarantee.
(3) The lessee must obtain a suitable replacement security
instrument before the proposed termination date or if no activities
have taken place on the lease(s) for which the guarantee was approved,
before any activities take place.
(c) The total amount of all outstanding and proposed guarantees by
the guarantor must not exceed 25 percent of that guarantor's
unencumbered net worth in the United States.
(d) If the Regional Director approves a third-party guarantee, the
guarantor must submit an indemnity agreement.
(1) The indemnity agreement shall be executed by all persons and
parties who are to be bound by it, including the guarantor, and shall
bind each jointly and severally.
(2) Two corporate officers who are authorized to bind their
corporation must sign the indemnity agreement.
(3) The guarantor must provide the Regional Director copies of:
(i) The authorization of the signatory officials to bind the
corporation;
(ii) An affidavit certifying that the agreement is valid under all
applicable laws; and
(iii) The corporate authorization, demonstrating that the
corporation can guarantee the obligation and execute the indemnity
agreement.
(4) if the third-party guarantor is a partnership, joint venture,
or syndicate, the agreement shall:
(i) Bind each partner or party who has a beneficial interest,
directly or indirectly, in the guarantor; and
(ii) Provide that, if the third-party guarantee is forfeited, each
partner or party shall be jointly and severally liable for compliance
with all terms and conditions of the lease(s).
(5) Pursuant to Sec. 256.59 of this chapter, the guarantor shall
bring the lease into compliance or pay the Regional Director the amount
necessary to bring the lease into compliance. The indemnity agreement,
upon default by the lessee or operator, shall operate as a judgment
against those parties liable under the indemnity agreement.
(e) If during the life a third-party guarantee the guarantor no
longer meets the criteria of paragraphs (a)(3) and (c) of this section,
the lessee must:
(i) Notify the Regional Director immediately; and
(ii) Bring the lease into compliance with the requirements of this
subpart within 90 days.
Sec. 256.58 Termination of the period of liability and cancellation of
a bond.
(a) The Regional Director shall terminate the period of liability
under a bond upon the request of the surety and demand a replacement
bond of equivalent amount from the lessee. The termination of the
period of liability under a bond does not constitute release of the
bond. The surety continues to be responsible for all obligations and
liabilities accruing before the effective date of the termination of
the period of liability.
(b) The Regional Director will cancel or release a bond as to
obligations that
[[Page 63018]]
accrued before the cancellation only upon:
(1) Being furnished a replacement bond in which the surety agrees
to assume all outstanding liabilities under the bond to be cancelled,
in an amount equal to or greater than the amount of the bond to be
cancelled; or
(2) The determination that all outstanding obligations have been
fulfilled. Such cancellation shall be by a written instrument that
subjects the bond to automatic reinstatement, as if no cancellation had
occurred, if at any time within 6 years of such cancellation:
(i) Any payment made by the principal(s) is rescinded or must be
restored due to insolvency, bankruptcy, reorganization, or
receivership; or
(ii) The principal's representation to MMS that it has paid its
financial obligations or performed the other obligations of the lease
in accordance with MMS specifications is materially false at the time
of cancellation.
(c) Failure of the lessee to replace a deficient bond could result
in penalties under subpart N of part 250 of this Title or suspension of
production or other operations in accordance with Sec. 250.10.
Sec. 256.59 Forfeiture of bonds and/or other securities.
(a) If a lessee refuses or is unable to comply with lease terms or
defaults on the conditions under which a bond, third-party guarantee,
and/or other form of security was accepted, the Regional Director
shall:
(1) Notify in writing the lessee, third-party guarantor, and any
surety on the bond or other form of guarantee of the determination to
call or forfeit all or part of the bond or guarantee, the reasons for
the forfeiture, and the amount to be forfeited. The amount shall be
based on the estimated total cost of correcting the lessee's
noncompliance or default.
(2) Advise the lessee, third-party guarantor, and any surety that
they can avoid forfeiture by:
(i) Agreeing to correct the noncompliance or default and
demonstrating that they have the ability to do so; or
(ii) Agreeing that the surety will complete actions required for
compliance in accordance with a schedule that meets the conditions of
the lease and governing regulations if the surety can demonstrate the
ability to carry out the action required.
(b) If there is a default, the Regional Director may cause the
forfeiture of any and all bonds or other security deposited on
condition of compliance with all the terms and conditions of the lease
or leases.
(c) If forfeiture of the bond or security is required by this
section, the Regional Director shall:
(1) Collect the forfeited amount, and
(2) Use funds collected from bond or security forfeiture to correct
the noncompliance or default.
(d) If the amount forfeited is insufficient to pay for the full
cost of corrective actions:
(1) the lessee(s) and any third-party guarantor(s) are jointly and
severally liable for the remaining costs of obtaining full compliance
with the terms and conditions of the lease, and
(2) The Regional Director may take or authorize required corrective
action to obtain full compliance and may recover from the lessee(s) and
any third-party guarantor(s) all costs in excess of the amount
forfeited.
(3) If the amount of bond or security forfeited exceeds the total
costs of the corrective actions required to obtain compliance, the
Regional Director shall return the excess amount to the party from whom
it was collected.
12. In Sec. 256.62, paragraphs (a), (d), and (e) are revised, and
paragraph (f) is added to read as follows:
Sec. 256.62 Assignment of leases or interests therein.
(a) Subject to the approval of the Regional Director and the
furnishing of bond coverage pursuant to the requirements of subpart I
of this part, leases, or any undivided interests therein, may be
assigned in whole, or as to any officially designated subdivision, to
anyone qualified under Sec. 256.35(b) of this part to hold a lease.
* * * * *
(d) The assignor is liable for all obligations under the lease
accruing before the approval of the lease assignment. Approval of the
assignment by the Regional Director does not relieve the assignor of
accrued lease obligations which the assignee subsequently fails to
perform.
(e) After the Regional Director approves a lease assignment, the
assignee is liable for all obligations under the lease and must comply
with all regulations issued under the Act. The assignee must remedy all
existing environmental problems on the tract, properly abandon all
wells, and reclaim the lease site in accordance with part 250, subpart
G. Before MMS approves an assignment, the assignee must submit
acceptable bond coverage as required by Secs. 256.52 and 256.53 of this
part.
(f) Where there is more than one lessee, the lessees are jointly
and severally responsible for performing the obligations of the lease,
unless provided otherwise in these regulations. The Regional Director
will look to the designated operator to perform lessee obligations
under any lease and under any regulations in this chapter. Should the
operator fail or be unable to perform any obligation of the lessee(s),
the Regional Director will require any or all the lessee(s) to bring
the lease into compliance. If there is no lessee able to perform, the
Regional Director will require prior lessees to bring the lease into
compliance to the extent that the obligation accrued before assignment.
13. In Sec. 256.64, paragraphs (a)(1), (c), and (g) are revised to
read as follows:
Sec. 256.64 Requirements for filing transfers.
(a) All instruments of transfer of a lease or of an interest
therein as to any officially designated subdivision, including
operating rights, subleases and record title interests, shall be
submitted in duplicate to the Regional Director for approval within 90
days from the date of final execution. Instruments of transfer shall
include a statement over the transferee's own signature with respect to
citizenship and qualifications similar to that required of a lessee and
shall contain all of the terms and conditions agreed upon by the
parties thereto.
(1) Neither the transfer of operating rights or creation of a
sublease(s) releases the lessee from any obligation under the lease or
regulations.
(2) The assignment of record title interests does not release the
lessee from any accrued obligation under any lease or regulations.
(3) Carried working interests, overriding royalty interests, or
payments out of production may be created or transferred without filing
an approval.
* * * * *
(c) Where an assignment is of all the lease title interest in a
lease or creates a segregated lease, the assignee must furnish a bond
in the amount prescribed in Secs. 256.52 and 256.53 of this part. Where
an assignment is of less than all the lease title and the assignment
does not create separate leases, the assignee, if the assignment
provides and the surety consents, may become a joint principal on the
bond with the assignor.
* * * * *
(g) Each obligation under any lease and under the regulations in
this part binds the heirs, executors, administrators, successors, and
assignees of the lessee. Except as otherwise provided in the
regulations in this chapter, the lessee(s) (and to the extent of their
interests, sublessees and operating rights owners) are jointly and
severally liable for the performance of each obligation under the lease
and
[[Page 63019]]
under the governing regulations with each prior lessee and operating
rights owner holding an interest when the obligation was accruing.
* * * * *
[FR Doc. 95-29864 Filed 12-07-95; 8:45 am]
BILLING CODE 4310-MR-M
