[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Rules and Regulations]
[Pages 27948-27960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13199]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Parts 250, 251, 256, 281, and 282
RIN 1010-AB92
Surety Bonds for Outer Continental Shelf Leases
AGENCY: Minerals Management Service, Interior.
ACTION: Final rule.
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SUMMARY: This rule amends the surety bond provisions of Minerals
Management Service (MMS) regulations to establish December 8, 1997, as
the deadline for Outer Continental Shelf (OCS) oil and gas and sulphur
lessees to comply with new levels of bond coverage established in 1993.
It also makes other changes that reduce the risk of default by an
underfunded entity who operates a lease or holds a pipeline right-of-
way or geological and geophysical (G&G) exploration permit to drill a
deep stratigraphic test well.
EFFECTIVE DATE: August 20, 1997.
FOR FURTHER INFORMATION CONTACT: John V. Mirabella, Engineering and
Operations Division, at (703) 787-1607.
SUPPLEMENTARY INFORMATION: This rule:
(1) Establishes December 8, 1997, as the deadline for every lessee
to comply with the bond coverage requirements established in the rule
published August 27, 1993 (58 FR 45255).
(2) Clarifies our position that co-lessees and operating rights
owners are
[[Page 27949]]
jointly and severally liable for compliance with our regulations and
the terms and conditions of their OCS oil and gas and sulphur lease for
nonmonetary obligations.
(3) Clarifies our position that an assignor of an OCS lease remains
responsible for all wells and facilities that were in existence at the
time the assignor assigns its interest until the wells are plugged and
abandoned, the facilities are decommissioned, and the site is
reclaimed.
(4) Establishes regulatory frameworks for acceptance of lease-
specific abandonment accounts and third-party guarantees.
(5) Sets a higher more realistic level of bond coverage to be
required of the holder of a G&G exploration permit to drill a deep
stratigraphic test well and authorizes a demand for a supplemental bond
from the holder of a G&G permit or pipeline right-of-way.
This rule is the product of our efforts to write regulations in
plain English and continue our attempts to provide optimum flexibility
for a lessee to meet our lease bond requirements and ensure that
lessees adequately fund their end-of-lease obligations.
We have, on a case-by-case basis, allowed an individual lessee to
furnish a third-party guarantee or to ensure funding for its lease
abandonment obligations by the establishment and funding of a lease-
specific abandonment account as alternatives to traditional
supplemental bonds. These alternatives are specifically addressed in
this rule. A third-party guarantor need not qualify as a surety with
the Department of the Treasury (Treasury) but must agree to fully
perform all lease obligations without the dollar limitation permitted a
surety under this rule.
Our objectives for this rule are to: (1) Ensure a lessee's
financial capability to perform its lease obligations; (2) protect the
environment from threat of harm that might result from a lessee's
failure to timely carry out proper well abandonment and site clearance
operations; (3) achieve a reasonable degree of protection from default
by a lessee, permittee, or pipeline right-of-way holder at a minimum
increase in costs for lease, permit, or pipeline operations; and (4)
select a method for attaining these goals that equitably affects all
parties.
This rule implements the changes proposed by our notice of proposed
rulemaking (NPRM) that was published December 8, 1995 (60 FR 63011). We
received 17 sets of comments and recommendations in response to that
NPRM. Four of those comments and recommendations were from industry
associations, and 13 were from lessees or operators. We have carefully
considered each of these comments and recommendations. We did not adopt
the recommendations that did not appear to be in the public's best
interest.
We rewrote the requirements of the rule in plain English and for
technical accuracy. These additional revisions describe more clearly
how the current rule works and do not affect the substance of the rule.
Nothing in this rule (e.g., the levels of bond coverage required)
is intended to limit the obligations of either a lessee, the holder of
an OCS pipeline right-of-way, or the holder of a G&G exploration
permit, to fulfill all the requirements of the lease, right-of-way, or
permit and any applicable regulations.
Discussion and Analysis of Comments
Comment: Many respondents indicated that they are ``supportive of''
or ``understand'' MMS's goal to insure against default of obligations
by underfunded entities owning leases, rights-of-way, or exploration
permits.
Response: We appreciate these expressions of understanding and
support for our goal to ensure that financial obligations are properly
addressed by the responsible party. Lessees must plug and abandon lease
wells, remove platforms and other facilities, and clear the seafloor of
obstructions at a time when their lease operations are no longer
generating income. We, therefore, need assurances that OCS lessees have
means for funding their lease abandonment and cleanup obligations.
Similarly, the holder of a pipeline right-of-way must remove all
platforms, structures, domes over valves, pipes, taps, and valves along
the right-of-way in compliance with our regulations at a time when its
pipeline operation no longer generates income. Thus, we need assurances
that the holder of an OCS pipeline right-of-way has a means for funding
its right-of-way abandonment obligations.
Section-by-Section Analysis
Part 250--Oil and Gas and Sulphur Operations in the OCS
Section 250.8 Designation of operator. We have combined a portion
of the provisions of proposed Sec. 256.62(f) with the current
provisions of Sec. 250.8 and modified the text of the resulting
provision to present the requirements in plain English. Since joint and
several liability is closely related to the requirement for the
designation of an operator, we have consolidated several provisions of
the proposed rule in a revised Sec. 250.8, though the proposed rule did
not propose amendment of Sec. 250.8. Every lessee or working interest
owner who executes the designation of operator required under the
provisions of Sec. 250.8, Form MMS-1123, acknowledges its joint and
several liability.
Comment: Twelve respondents expressed opposition to, or lack of
support for, what they characterized as ``the effort to establish joint
and several liability between co-lessees or between assignors and
assignees of OCS leases.''
Response: This rule simply clarifies our position that nonmonetary
lease obligations are joint and several among co-lessees (i.e.,
multiple lessees) and owners of operating rights. Section
5(a)(2)(C)(II) of the Outer Continental Shelf Lands Act (OCSLA) equates
multiple lessees to ``partners.''
Our position on this matter remains the same as it was May 10,
1954, the effective date of the regulations the Department of the
Interior (DOI) issued to implement the OCSLA of 1953. Section 250.31 of
the May 1954 regulations required a designation of operator just as the
current provisions of Sec. 250.8, Designation of operator, do today in
``all cases where operations are not conducted by an exclusive owner of
record * * *''
As previously noted, each party that executes a designation of
operator agreement recognizes the joint and several nature of OCS lease
obligations. The designation of operator (Form MMS-1123) designates the
entity that the co-lessees authorize to conduct lease operations as
each of the co-lessee's ``operator and local agent.'' Each lessee, by
execution of the designation of operator, agrees that ``In case of
default on the part of the designated operator, the signatory lessee
will make full and prompt compliance with all regulations, lease terms,
or orders of the Secretary of the Interior (Secretary) or his
representative.''
Section 250.110 General requirements. Comment: Two respondents
recommended that paragraph (b) of Sec. 250.110, General requirements,
be changed to clarify the extent of responsibility of prior lessees for
obtaining compliance with accrued obligations.
Response: We have modified the text of this provision to present
its contents in easily understood English. While this rule determines
who is liable to MMS for performance of nonmonetary obligations, it is
not our intention that this rule preclude private agreements concerning
the allocation of liabilities between and among the affected parties.
Nor does this rule specify against whom
[[Page 27950]]
we will take enforcement action if we discover noncompliance.
Comment: Two respondents expressed support for MMS's position on
joint and several liability as the ``most practical approach'' or as
``understandable and acceptable.'' One respondent observed that it
seems practical for multiple lessees of a single tract to police
themselves in assuring the financial capability of each participant and
in making appropriate arrangements to provide for property abandonment
through a joint operating agreement that could include, among other
things, escrow funds and third party guarantees.
Response: We appreciate these expressions of support. We agree that
multiple lessees of a single tract should, as a matter of good business
practice, police themselves in assuring the financial capability of
each participant. The multiple lessees of a single tract need to make
appropriate arrangements to provide for proper well abandonment and
lease clearance. These arrangements may be in the form of a joint
operating agreement that funds lease-specific abandonment accounts.
Comment: Eleven respondents urged MMS to abandon its joint and
several liability proposal and instead to adopt in full the
recommendations of the Ad Hoc Lease Abandonment and Bonding Issues
Committee as a more reasonable approach.
Response: We have not adopted this suggestion. Adoption of some of
the committee's recommendations does not appear to be in the public
interest. For example, the committee's report provided no supporting
justification for its recommendation for a reduction in royalty. A
royalty reduction to fund lease abandonment and clearance liabilities
would be a direct transfer of the lessee's financial obligations and
responsibilities to the American taxpayer. Also, we cannot support
severance of assignor liability. We do not have authorized funds
available to correct a noncompliance or default when an assignee
defaults. Correction of a noncompliance or default could be especially
troublesome if the cost of correction exceeds the funds available under
a forfeited bond and other security. Lastly, we are concerned that
implementation of the committee's recommendations on lessee pro-rata
responsibility would create a major increase in administrative burden
for industry and Government without an appreciable reduction in risk to
the Government.
Comment: A trade organization commented that the imposition of
joint and several liability should be prospective only because the
Secretary has no authority to issue retroactive rules.
Response: This rule merely codifies what has been the law under the
OCSLA, since enactment and the common law. As previously noted, section
5(a)(2)(C)(II) of the OCSLA describes those who jointly own interests
in a lease as ``partners.''
Comment: A trade organization stated, with respect to joint and
several liability, that absent an express rule on the subject at the
time of the lease, one should look to the common law to understand what
the parties understood their contract to mean. It cites Resolution
Trust Corporation v. Feldman, 3 F.3d 5 (1st Cir. 1993) for the
proposition that parties to a contract may agree to limit the liability
of each of several promisors.
Response: While parties to a contract may agree to limit liability,
neither Congress nor the Secretary ever agreed to limit the liabilities
of OCS lessees for operational obligations. The relevant common law
rule is that stated in Restatement of the Law of the Contracts, Second
Sec. 289(1):
Where two or more parties to a contract promise the same
performance to the same promisee, each is bound for the whole
performance thereof, whether his duty is joint, several, or joint
and several . * * * A promise in the first person singular, signed
by several persons, creates joint and several liability.
Indeed Resolution Trust Corporation concerned two different
obligations: one on which the parties had agreed to limit particular
parties to particular amounts of liability and another on which they
had not. Absent specific provisions limiting promisors to particular
sums, the court held the parties jointly and severally liable for the
full amount of costs and fees. 3 F.d at 10.
Moreover, under the common law and the jurisprudence of the oil
producing regions, when a lessee assigns an undivided interest in its
lease to another, each of them is jointly and severally responsible for
the performance of the lease covenants. Hafeman v. Gem Oil Co., 80 N.W.
139, 163 (Nebr. 1956); Problems Presented by Joint Ownership of Oil,
Gas, and Other Minerals, 32 Tex. L. Rev. 699, 715 (1954); Willis,
Thornton on the Law of Oil and Gas Sec. 341 (5th ed., 1932).
Comment: A trade association believes that when MMS requires
parties submitting joint bids to state on the bid form the
proportionate interest of each participating bidder, MMS limits the
liability of each joint bidder. The comment states that, by allowing
parties to designate percentage ownership interests, MMS has created a
``rule of property.''
Response: MMS has never given its imprimatur to efforts of lessees
to limit their liabilities to MMS, much less created a property right
to such limitations. The commenter does not point to any language in
the lease instrument, bid form, or regulations that suggests that the
opportunity for bidders to state their proportionate interests is
intended to limit the promise of each such bidder to perform fully the
terms of the lease. It is clear from the context of the lease sale
notice that the purpose of requiring such statements of proportionate
interest from joint bidders is to facilitate enforcement of the
restrictions on joint bidding in 30 CFR part 256, subpart G and 30 CFR
part 260, subpart D. Those regulations attribute proportionate shares
of production of jointly held leases in determining whether those
filing a joint bid exceed the average daily production limit of 1.6
million barrels a day.
Comment: A trade association criticized the joint and several
liability provision on the grounds that MMS relied on the concept of
``indivisibility,'' a concept drawn from the common law of torts, to
support its position that the operational obligations of a lease are
joint and several obligations.
Response: MMS does not rely on ``indivisibility'' as the legal
rationale for its regulation concerning the obligations of holders of
undivided interests but on the contract and oil and gas and property
law concepts cited in our responses to earlier comments. MMS used the
notion of ``indivisibility'' to explain its policy choice in treating
nonmonetary obligations differently than monetary obligations were
treated in the proposed payor liability rule and the Royalty
Simplification and Fairness Act. It does not serve the purposes of
OCSLA for lessees of undivided interests in a lease to be freed, after
mere partial performance, of the obligation to plug a well or remedy an
oil spill.
Section 250.159 General requirements for a pipeline right-of-way
grant.
Comment: A respondent expressed concern that the bond coverage
requirements for pipeline right-of-way holders ($300,000) and G&G
exploration permittees ($200,000) may prove to be troublesome for many
existing permit holders. Another respondent suggested that the decision
to require additional bonding should be tied to some of the same
factors that are used to determine that supplemental bond coverage is
needed for a lease.
[[Page 27951]]
Response: A properly funded holder of a pipeline right-of-way or
G&G permit to drill a deep stratigraphic test well (Sec. 251.6-4)
should not find compliance with this rule troublesome. This rule
continues the level of bond coverage required of an applicant for a
pipeline right-of-way at $300,000. The rule also provides specific
regulatory authority for the Regional Director to require the holder of
a right-of-way or the holder of a G&G permit to drill a deep
stratigraphic test well to provide additional bond coverage. We expect
the Regional Director to use factors similar to those used to determine
that a supplemental bond is required under a lease. However, due to the
differences between pipeline and lease operations, we have not adopted
language specifying the factors that the Regional Director will use to
determine that a supplemental bond is needed by a pipeline operator or
permit holder. We have revised the text of Secs. 250.159 and 251.6-4 to
present the requirements of these provisions in plain English.
Part 256--Leasing of Sulphur or Oil and Gas in the OCS
Section 256.7 Cross references. We have added a new paragraph (b)
to Sec. 256.7 that cross references MMS's regulations governing appeals
to orders and decisions issued under the regulations in 30 CFR part
256.
Subpart I--Bonding
Section 256.52 Requirement to file a bond.
Comment: One respondent suggested an editorial change to proposed
Sec. 256.52, Requirement to file a bond, to clarify the intent of the
provision.
Response: We have rewritten and renamed this provision to more
clearly state the intent of the provision. Section 256.52 (formerly
Sec. 256.58) has been renamed ``Bond requirements for an oil and gas or
sulphur lease.'' Our rewrite of the provisions of this section includes
a rewrite of paragraph (e) and a new paragraph (h) to consolidate
provisions addressing the need to replace a bond. We had not proposed
to revise paragraph (e). Paragraph (c) clarifies that while an
operator's bond may be substituted for a lease bond, an operator's bond
may not be substituted for an areawide bond. Paragraph (f) codifies in
our rule the Treasury Department's requirement that a pledge of
Treasury Securities must be accompanied by authority to sell the
securities in case of default. The new paragraph (h) incorporates
portions of former Sec. 256.58 (d) and (e) concerning the consequence
of failure to replace a bond. Our rewrite of the proposed section,
including our rewrite of former Sec. 256.58(e), does not alter the
requirements from those of the proposed rule.
Section 256.53 Additional bonds. We have revised the proposed text
of Sec. 256.53 (formerly Sec. 256.61) to present the requirements of
the provision in plain English.
We had proposed to require all OCS lessees to come into compliance
with the levels of bond coverage established in the 1993 rule for new
actions within 2 years of the final rule. This rule establishes
December 8, 1997, as the deadline for each OCS lessee to comply with
the lease bond coverage required at the development stage of its lease.
A full year has already lapsed, and MMS has concluded that all lessees
should be able to come into compliance by that date which is 2 years
from publication of the proposed rule and 4 years after these levels of
coverage became effective for new approvals.
The following table sets forth the levels of bond coverage required
for each stage of lease development.
------------------------------------------------------------------------
Areawide
Stages 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
------------------------------------------------------------------------
Comment: Three respondents indicated that MMS should review its
policy of ``only requiring the operator'' to post a bond to cover lease
obligations. They felt that everyone who owns a working or operating
interest in a producing lease should have to post a bond and that,
should the co-interest owners wish to agree voluntarily among
themselves to allocate this responsibility, they should have the option
to do so. Other respondents expressed the view that a requirement that
each and every lessee and owner of other interests in an OCS lease
submit and maintain a lease bond commensurate with its ownership in an
OCS lease(s) could effectively deny independent producers sources of
investment capital that historically have provided financial assistance
for their conduct of oil and gas operations. Other respondents
expressed the view that, from a practical standpoint, if a supplemental
bond is not required because of the financial strength of one of the
interest owners (i.e., one lessee), other lessees should not be
required to furnish a supplemental bond.
Response: We do not have a policy of ``only requiring the
operator'' to post a bond to cover lease obligations. We require the
lessee to provide a bond that guarantees compliance with all the terms
and conditions of the lease (i.e., a bond that covers all lease
operations and obligations). However, we do permit an operator to
provide bond coverage for a lease. Where there are multiple lessees,
the bond provided by a lessee or the operator protects against
noncompliance by all lessees, operating rights owners, and operators.
As noted by some respondents, a requirement that everyone who owns an
interest in a lease post a separate bond could effectively deny
independent producers sources of investment capital that historically
have provided financial assistance for their conduct of oil and gas
operations. Since lessees are jointly and severally responsible for
compliance with lease terms and conditions, it is not necessary,
desirable, or practical to require that every owner of an interest in a
lease submit and maintain a separate lease bond that only addresses its
interest.
While this rule determines who is liable to MMS for performance of
nonmonetary obligations, this rule is not intended to preclude
agreements among the co-lessees or between assignors and assignees to
apportion among themselves responsibility for such obligations.
However, such agreements will not affect the parties' obligations to
the United States under this rule.
Comment: A trade association advocates that all working interest
holders be required to post supplemental bonds and not be allowed to
``hide behind'' a deep pocket.
Response: MMS has not concluded that it is necessary to require
bonding in an amount equal to 100 percent of lease obligations in every
case. A supplemental bond will be required only when MMS has reason to
believe that the usual security requirements are inadequate to ensure
performance of lease obligations. However, nothing in these regulations
precludes any party from entering into arrangements with its partners
to ensure full participation in the costs of compliance or bonding. MMS
agrees that all bonds accepted must guarantee compliance by all record
title-holders, all operating rights owners, and all operators on the
lease premises and has so amended the regulation at Sec. 256.54(a).
Section 256.54 Bond form. We have added a new paragraph (a) to
Sec. 256.54 ``General requirements for bonds,'' that more clearly
states that any bond or other security provided under part 256 must be
payable on demand by the Regional Director and guarantee compliance
with all the lessee's obligations under the lease.
[[Page 27952]]
Comment: One respondent questioned the intent of Sec. 256.54, which
provides that surety bonds are to be noncancellable, since Secs. 256.58
(a) and (b) allow for cancellation of bonds and MMS bond (Form MMS-
2028) contains a cancellation clause.
Response: The commenter is correct that it was not our intention to
preclude cancellation under the specific circumstances provided in
Sec. 256.58(b). It was our intention to clarify that, as provided in
the approved MMS bond (Form MMS-2028), an event that might give rise to
a performance or payment defense by a surety, or serve to diminish,
terminate, or cancel a surety obligation, under State surety law, does
not modify the surety's obligation under an MMS approved bond. We
expect the surety under an MMS bond to continue to waive such defenses
and to avoid any risk it considers unacceptable by following the
process provided in Sec. 256.58(a) to terminate the period of liability
under its bond. We have modified Sec. 256.54(d) to clearly state that
bonds continue in force even though an event occurs that could
diminish, terminate, or cancel a surety obligation under State surety
law. We have also revised the text of Sec. 256.58(b) to more clearly
express the intent of Sec. 256.54 (i.e., a bond will be released only
under circumstances that include the submission and maintenance of a
replacement bond or other form of security that specifically assumes
the liabilities of the ``canceled'' bond as provided in Sec. 256.58(b)
or the Regional Director determines that there are no outstanding
obligations).
Section 256.55 General terms and conditions of bond. Comment: One
respondent recommended changes to paragraphs (d) and (e) of
Sec. 256.55, General terms and conditions of bond, to clarify that the
rule was not intended to require notice of hearsay reports of
insolvency.
Response: We have revised this provision to address only actual
court filings. We have renamed Sec. 256.55, ``Lapse of bond,'' and
revised the text of the section to more clearly state that the lessee
must promptly provide acceptable new bond coverage when its bond
coverage lapses.
Section 256.56 Lease-specific abandonment accounts. Comment: Three
respondents recommended that MMS establish a type of account with the
Federal banking system that would allow lessees to deposit the required
amounts into lease-specific abandonment accounts on a fully insured
basis in trust for the benefit of MMS in the event a lessee fails to
fully meet its end-of-lease obligations.
Response: We have revised the language of the rule to provide
assurance that funds deposited in a lease-specific abandonment account
will be available, if needed. The new language better describes the way
funds in lease-specific abandonment accounts are to be handled. As
funds accumulate in a lease-specific abandonment account in a federally
insured institution, the managing institution will purchase Treasury
securities pledged to MMS. The Treasury securities pledged to MMS will
be purchased before the amount in the account equals the maximum
insurable amount, as determined by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation. The
managing institution and the Regional Director may establish a Federal
Reserve Circular 154 account to hold Treasury securities pledged to
MMS, or the Regional Director may allow the managing institution to
hold the pledged Treasury securities in a separate trust account
(Sec. 256.56(d)).
Section 256.57 Third-party guarantee. The proposed text of
Sec. 256.57 has been revised to present the requirements of that
section in plain English, and Sec. 256.57 has been renamed ``Using a
third-party guarantee instead of a bond.''
Section 256.56, Lease-specific abandonment accounts and
Sec. 256.57, Using a third-party guarantee instead of a bond, establish
regulatory regimes under which we may accept alternate methods for
funding lease abandonment and clearance obligations. A third-party
guarantee or a supplemental bond may cover specific obligations, such
as plugging and abandonment of specified leases or wells. However, the
acceptance of a supplemental bond or guarantee limited to lease
abandonment obligations will depend on how well the combination of all
bonds and guarantees ensures that the full range of obligations will be
met.
Section 256.58 Termination of the period of liability and
cancellation of a bond. Comment: One respondent requested clarification
of a number of issues relating to the use of the current OCS bond (Form
MMS-2028) under Sec. 256.58(a) and (b) and asked whether another form
of bond would be needed under Sec. 256.58(b). The respondent also
questioned whether other forms of security including the new forms of
third-party guarantees and escrow accounts could be used as
replacements under Sec. 256.58(a) and (b).
Response: We have revised the text of Sec. 256.58, Termination of
the period of liability and cancellation of a bond, to present the
requirements of the rule in plain English. Subsection 256.58(b) spells
out the circumstances under which a surety may be released from all
further liability. Replacement security can be in any form that would
be acceptable to MMS for a new lease, except that the security
furnished in substitution for a terminated lease bond on which the
Regional Director has not determined that all outstanding obligations
have been performed will have to include a specific provision under
which the surety agrees to assume all outstanding liabilities under the
bond that is to be terminated under Sec. 256.58(b).
Comment: One respondent recommended that, when all operations on a
lease have ceased and abandonment and removal operations have been
completed, MMS give a release to the lessees in a form that enables
sureties and bonding companies to release their bond without further
recourse or liabilities.
Response: We have not adopted this recommendation. Lessees and the
guarantors of lessee compliance with lease terms and conditions remain
responsible for the effectiveness of their compliance efforts such as
lease abandonment and clearance work, subject to any applicable statute
of limitations. The current bond form specifies a period of 6 years
during which, under specified circumstances, a bond may be reinstated
to cover liabilities that accrued during the period of bond coverage.
It may be that this provides sufficient protection for MMS without
total prohibition of bond cancellation. We will continue to review this
issue. If we determine that additional changes in the rule are
appropriate, we will propose those changes in a new rulemaking. We
welcome any comments you may want to provide concerning the need for
additional changes to the rule or approved bond form concerning release
of bonds.
Section 256.59 Forfeiture of bonds and/or other securities. The
proposed rule had provided that the Regional Director could require
forfeiture of a bond upon the refusal or inability of ``a lessee'' to
perform the obligations. Frequently, of course, there may be a number
of record title owners, and the party providing the bond might be an
operator who is not itself a lessee. As the singular language of the
rule suggested, MMS intended to be able to pursue forfeiture of the
bond after a demand against the single lessee or operator who provided
the surety bond before proceeding against the bond. MMS should not have
to pursue every interest holder for performance before
[[Page 27953]]
securing the benefits of a bond where the bonded party is jointly and
severally liable for the obligations not performed. The surety would
have the right to proceed against the responsible record title-holder
or operating rights owners for contribution. In the final rule, we have
added a paragraph (b) to make completely clear that making demands
against obligors other than the party providing the bond is not a
prerequisite to making a claim against the bond.
Comment: One respondent recommended that Sec. 256.59(d)(1) be
changed to clarify that it is the lessee(s) of the lease and its
(their) third-party guarantor(s) at the time of a default who will
first be required to bear the cost of compliance above the forfeited
bond or security amount.
Response: We have revised Sec. 256.59, Forfeiture of bonds and/or
other securities, to present the requirements of the provision in plain
English. The final provision clearly states that, when a surety chooses
to take action to bring a lease into compliance in lieu of forfeiture
of its bond, it commits to complete that action even if the cost
exceeds the face amount of the bond or other security instrument. At
the time of a default, or a threat of a default, we expect that we will
look to the current lessee to bring the lease into compliance. However,
if we determine that the current lessee is unable to perform, we will
look to others.
Section 256.62 Assignment of leases or interests therein. Comment:
A trade association raises numerous policy arguments against the policy
of holding assignors responsible after assignment for obligations that
accrued before assignment.
Response: The commenter is objecting to a rule that dates back to
1954. See Sec. 201.60 of the May 1954 regulations and current
Sec. 256.62(d), both of which state that assignors continue to be
responsible for obligations that accrued before the approval of an
assignment. MMS is not persuaded that that rule should be changed. This
rulemaking simply amends Sec. 250.110 to specify when the obligation to
plug and abandon accrues, so as to avoid confusion as to the
application of existing Sec. 256.62(d) to these important obligations.
While an assignee becomes responsible directly to the lessor for the
performance of the lease obligations, under contract law the assignor
is not relieved of its obligations unless the lessor expressly
discharges the assignor in writing. We do not discharge the assignor of
its accrued obligations when we approve the assignment of record title
in a lease. We have renamed Sec. 256.62, ``Assignment of leases or
interests in leases,'' and rewritten the text to present the
requirements of the provision in plain English.
Comment: Two respondents suggested that an assignor should not be
liable for increases in the end-of-lease obligations arising during the
period of time between the effective date of assignment and the
approval date of assignment.
Response: We have not adopted this recommendation. An assignor
continues to be responsible for obligations that accrued before
approval of the assignment. The parties to an assignment often ask that
the effective date of the assignment be a date that is substantially in
advance of the date that we receive the request for approval of the
assignment. An assignor cannot escape its liability for an obligation
by requesting an effective date for its assignment that predates the
obligation.
Comment: Several commenters urged that interest holders be given
the opportunity to object to a co-lessee's proposal to assign its
interest to a party whom the co-owner believes to present an
unreasonable risk.
Response: Nothing in MMS regulations precludes interest holders in
leases from entering into agreements requiring co-owner concurrence in
assignments. However, MMS does not believe it necessary or helpful to
universally impose such a requirement. Also, we do not believe that MMS
should be responsible for enforcing such agreements.
Comment: Five respondents expressed the view that the requirement
that assignors retain liability after the effective date of a
subsequent assignment will and probably has caused the early plugging
and abandonment of wells and facilities or the nondevelopment of
properties that were uneconomic for larger companies to operate or
develop but could or would have been economic for a smaller
independent.
Response: This requirement has been part of the offshore
regulations since 1954, and we are not aware of evidence that it has
resulted in premature abandonment of production. We have specific
regulatory requirements that are designed to prevent the premature
abandonment of recoverable reserves. Section 250.110, General
requirements, specifically provides that ``no production well shall be
abandoned until its lack of capacity for further profitable production
of oil, gas, or sulphur has been demonstrated to the satisfaction of
the District Supervisor.''
Section 256.64 Requirements for filing transfers. Comment: One
respondent recommended that Sec. 256.64(g) be revised to clarify the
extent to which holders of operating rights and sublessees in a lease
are jointly and severally liable with the lessees.
Response: We have renamed Sec. 256.64, ``How to file transfers,''
and revised the text of paragraphs 256.64(a), (c), and (g) to present
the requirements of the rule in plain English. The new style clearly
describes the extent to which owners of working interests (e.g., the
holders of operating rights) and sublessees are liable. We also
clarified which assignments must be filed but need not be approved by
the Regional Director.
We modified Secs. 251.6-4, 256.54, 281.33 and 282.40 to reflect
delegations of authority to the Associate Director for Offshore
Minerals Management.
Authors
This document was prepared by Gerald D. Rhodes and John V.
Mirabella of the Engineering and Operations Division, MMS and M. Dennis
Daugherty of the DOI's Office of the Solicitor.
Executive Order (E.O.) 12866
This rule does not meet the criteria for a significant rule
requiring review by the Office of Management and Budget (OMB) under
E.O. 12866.
Regulatory Flexibility Act
This rule will not have a significant effect on a substantial
number of small entities. This rule establishes December 8, 1997, as
the deadline for OCS oil and gas lessees to bring their bond coverage
into compliance with the new levels of coverage established in 1993;
clarifies our position that co-lessees are jointly and severally liable
for compliance with nonmonetary obligations arising under OCS oil and
gas and sulphur leases; clarifies our position on the responsibility of
each assignor and assignee for compliance with lease obligations;
establishes regulatory frameworks for acceptance of lease-specific
abandonment accounts and third-party guarantees; and modifies the bond
coverage that may be required of the holder of a pipeline right-of-way
or of a G&G exploration permit to drill a deep stratigraphic test well.
Offshore oil and gas lease exploration and development costs often
exceed $10 million while typical abandonment and clearance costs for
OCS oil and gas leases range from $3.25 million for leases in less than
50 feet of water to $94 million for leases in excess of 400 feet of
water. In general, the entities that engage in offshore oil and gas
exploration, development, and production activities, including pipeline
transportation across the OCS, are not firms that would be considered
small
[[Page 27954]]
due to the technical expertise, financial resources, and experience
necessary to safely conduct such activities in an environmentally
responsible manner.
Small entities who are likely to work on the OCS are primarily
contractors who provide services such as catering and custodial
services for manned facilities. This rule will not affect these
activities.
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.)
provides that an agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number. OMB previously approved the
collection of information contained in the regulations affected by this
rule. The OMB control number is 1010-0006 for 30 CFR part 256 (Leasing
of Sulphur or Oil and Gas in the OCS). The OMB control numbers and
pertinent information are included in Sec. 250.0 for 30 CFR part 250
(Oil and Gas and Sulphur Operations in the OCS) and in Sec. 251.0 for
30 CFR part 251 (Geological and Geophysical Explorations in the OCS).
MMS has examined this rule under the Paperwork Reduction Act of 1995
and determined that it contains no new information collection
requirements.
MMS collects the information under regulations implementing the
OCSLA, as amended. MMS uses the information to determine the conditions
under which the applicant filing for a lease on the OCS will be
permitted to hold such a lease. The information is required to obtain
or retain a benefit under 43 U.S.C. 1331 et seq. MMS will protect
information considered confidential or proprietary under applicable law
and under regulations at 30 CFR 251.14-1, Disclosure of information and
data to the public; 30 CFR part 252, Outer Continental Shelf (OCS) Oil
and Gas Information Program; and 30 CFR 256.10, Information to States.
MMS estimates the annual reporting burden for 30 CFR part 256 to be
approximately 17,000 hours--an average of 3.5 hours per response. This
includes the time for reviewing instructions, searching existing data
sources, gathering and maintaining the data needed, and completing and
reviewing the information collection. Direct comments regarding the
burden estimate or any other aspect of this collection to the
Information Collection Clearance Officer, Mail Stop 2200, Minerals
Management Service, 381 Elden Street, Herndon, VA 20170-4817; and to
the Office of Management and Budget, Office of Information and
Regulatory Affairs, Desk Officer for the Interior Department (1010-
0006), 725 17th Street, N.W., Washington, DC 20503.
Takings Implication Assessment
DOI certifies that this rule does not represent a governmental
action capable of interference with constitutionally protected property
rights. Thus, a Takings Implication Assessment need not be prepared
under E.O. 12630, Governmental Actions and Interference with
Constitutionally Protected Property Rights.
E.O. 12988
DOI has certified to OMB that the rule meets the applicable civil
justice reform standards provided in sections 3(a) and 3(b)(2) of E.O.
12988.
National Environmental Policy Act
DOI determined that this action does not constitute a major Federal
action significantly affecting the quality of the human environment;
therefore, an Environmental Impact Statement is not required.
Unfunded Mandates Reform Act
DOI has determined and certifies according to the Unfunded Mandates
Reform Act of 1995, 2 U.S.C. 1502 et seq., that this rule will not
impose a cost of $100 million or more in any given year on State,
local, and tribal governments, or the private sector.
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.
30 CFR Part 281
Administrative practice and procedures, Bonds, Continental shelf,
Mineral royalties, Mines, Public lands--mineral resources, Reporting
and recordkeeping requirements.
30 CFR Part 282
Administrative practice and procedure, Bonds, Continental shelf,
Environmental protection, Mineral royalties, Mines, Public lands--
mineral resources, Reporting and recordkeeping requirements.
Dated: May 9, 1997.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
For the reasons stated in the preamble, Minerals Management Service
(MMS) amends 30 CFR parts 250, 251, 256, 281 and 282 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. 1331, et seq.
2. Section 250.8 is revised to read as follows:
Sec. 250.8 Designation of operator.
This section explains the requirement for designation of an
operator to conduct operations on a lease where the operator is not the
sole lessee (record title owner) and owner of operating rights.
(a) Each record title owner (lessee) or operating rights owner for
a lease must provide the Regional Supervisor a designation of operator
in each case where someone other than an exclusive record title and
operating rights owner will conduct lease operations. The designated
operator must not begin operations on the lease until the Regional
Supervisor receives the designation of operator.
(1) This designation of operator is authority for the operator to
act on behalf of each lessee and operating rights owner and to fulfill
each of their obligations under the Act, the lease, and the regulations
in this part.
(2) You must immediately notify the Regional Supervisor in writing
if you terminate the designation of operator.
(3) If you terminate a designation of operator or a controversy
develops between you and your designated operator, you and the operator
must protect the lessor's interests.
[[Page 27955]]
(4) You or the lease operator must immediately notify the Regional
Supervisor in writing of any change of address.
(b) Lessees and operating rights owners are jointly and severally
responsible for performing nonmonetary lease obligations, unless
otherwise provided in the regulations in this chapter. If the
designated operator fails to perform any obligation under the lease or
the regulations in this chapter, the Regional Director may require any
or all of the co-lessees and operating rights owners to bring the lease
into compliance.
3. 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) Lessees must plug and abandon all well bores, remove all
platforms or other facilities, and clear the ocean of all obstructions
to other users. This obligation:
(1) Accrues to the lessee when the well is drilled, the platform or
other facility is installed, or the obstruction is created; and
(2) Is the joint and several responsibility of all lessees and
owners of operating rights under the lease at the time the obligation
accrues, and of each future lessee or owner of operating rights, until
the obligation is satisfied under the requirements of this part.
4. In Sec. 250.159, paragraph (b)(1) is revised to read as follows:
Sec. 250.159 General requirements for a pipeline right-of-way grant.
* * * * *
(b)(1) When you apply for, or are the holder of, a right-of-way,
you must:
(i) Provide and maintain a $300,000 bond (in addition to the bond
coverage required in part 256) that guarantees compliance with all the
terms and conditions of the rights-of-way you hold in an OCS area; and
(ii) Provide additional security if the Regional Director
determines that a bond in excess of $300,000 is needed.
* * * * *
PART 251--GEOLOGICAL AND GEOPHYSICAL (G&G) EXPLORATIONS OF THE
OUTER CONTINENTAL SHELF
5. The authority citation for part 251 is revised to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
6. Section 251.6-4 is revised to read as follows:
Sec. 251.6-4 Bonds.
(a) When you apply to the Minerals Management Service (MMS) for a
permit authorizing the drilling of a deep stratigraphic test well, you
must either:
(1) Furnish a bond of not less than $200,000 that guarantees
compliance with all the terms and conditions of the permit; or
(2) Maintain a $1 million bond that guarantees compliance with all
the terms and conditions of the permits you hold for the OCS area where
you propose to drill.
(b) You must provide additional security to MMS if the Regional
Director determines that it is necessary for the permit or area.
(c) The Regional Director may require you to provide a bond, in an
amount the Regional Director prescribes, before authorizing you to
drill a shallow test well.
(d) Your bond must be on a form approved by the Associate Director
for Offshore Minerals Management.
PART 256--LEASING OF SULPHUR OR OIL AND GAS IN THE OUTER
CONTINENTAL SHELF
7. The authority citation for part 256 continues to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
8. In Sec. 256.7, paragraphs (b) through (h) are redesignated
paragraphs (c) through (i), and a new paragraph (b) is added to read as
follows:
Sec. 256.7 Cross references.
* * * * *
(b) For MMS regulations governing the appeal of an order or
decision issued under the regulations in this part, see 30 CFR part
290.
* * * * *
9. Section 256.47 is amended by revising the fourth sentence of
paragraph (f) as follows:
Sec. 256.47 Award of leases.
* * * * *
(f) * * * The bidder must also file a bond as required in
Sec. 256.52 of this title. * * *
* * * * *
10. Section 256.58 is redesignated as Sec. 256.52, and revised to
read as follows:
Sec. 256.52 Bond requirements for an oil and gas or sulphur lease.
This section establishes bond requirements for the lessee of an OCS
oil and gas or sulphur lease.
(a) Before MMS will issue a new lease or approve the assignment of
an existing lease to you as lessee, you or another record title owner
for the lease must:
(1) Maintain with the Regional Director a $50,000 lease bond that
guarantees compliance with all the terms and conditions of the lease;
or
(2) Maintain a $300,000 areawide bond that guarantees compliance
with all the terms and conditions of all your oil and gas and sulphur
leases in the area where the lease is located; or
(3) Maintain a lease or areawide bond in the amount required in
Sec. 256.53(a) or (b) of this part.
(b) For the purpose of this section, there are four areas:
(1) The Gulf of Mexico;
(2) The area offshore the Pacific Coast States of California,
Oregon, Washington, and Hawaii;
(3) The area offshore the Coast of Alaska; and
(4) The area offshore the Atlantic Coast.
(c) The requirement to maintain a lease bond (or substitute
security instruments) under paragraph (a)(1) of this section and
Sec. 256.53 (a) and (b) is satisfied if your operator provides a lease
bond in the required amount that guarantees compliance with all the
terms and conditions of the lease. Your operator may not use an
areawide bond under this paragraph to satisfy your bond obligation.
(d) If a surety makes payment to the United States under a bond or
alternate form of security maintained under this section, the surety's
remaining liability under the bond or alternate form of security is
reduced by the amount of that payment. See paragraph (e) of this
section for the requirement to replace the reduced bond coverage.
(e) If the value of your surety bond or alternate security is
reduced because of a default, or for any other reason, you must provide
additional bond coverage sufficient to meet the security required under
this subpart within 6 months, or such shorter period of time as the
Regional Director may direct.
(f) You may pledge U.S. Department of the Treasury (Treasury)
securities instead of a bond. The Treasury securities you pledge must
be negotiable for an amount of cash equal to the value of the bond they
replace.
(1) If you pledge Treasury securities under this paragraph (f), you
must monitor their value. If their market value falls below the level
of bond coverage required under this subpart, you must pledge
additional Treasury securities to raise the value of the securities
pledged to the required amount.
(2) If you pledge Treasury securities, you must include authority
for the Regional Director to sell them and use the proceeds when the
Regional Director determines that you fail to satisfy any lease
obligation.
[[Page 27956]]
(g) You may pledge alternate types of security instruments instead
of providing a bond if the Regional Director determines that the
alternate security protects the interests of the United States to the
same extent as the required bond.
(1) If you pledge an alternate type of security under this
paragraph, you must monitor the security's value. If its market value
falls below the level of bond coverage required under this subpart, you
must pledge additional securities to raise the value of the securities
pledged to the required amount.
(2) If you pledge an alternate type of security, you must include
authority for the Regional Director to sell the security and use the
proceeds when the Regional Director determines that you failed to
satisfy any lease obligation.
(h) If you fail to replace a deficient bond or to provide
additional bond coverage upon demand, the Regional Director may:
(1) Assess penalties under part 250, subpart N of this chapter;
(2) Suspend production and other operations on your leases in
accordance with Sec. 250.10 of this chapter; and
(3) Initiate action to cancel your lease.
11. Section 256.61 of subpart I is redesignated as Sec. 256.53 of
subpart I; introductory texts are added to paragraphs (a) and (b);
paragraphs (a)(1), (b)(1), and (d) are revised; and paragraphs (e),
(f), and (g) are added to read as follows:
Sec. 256.53 Additional bonds.
(a) This paragraph explains what bonds the lessee must provide
before lease exploration activities commence.
(1)(i) You must furnish the Regional Director a $200,000 bond that
guarantees compliance with all the terms and conditions of the lease by
the earliest of:
(A) The date you submit a proposed Exploration Plan (EP) for
approval;
(B) The date you submit a request for approval of the assignment of
a lease on which an EP has been approved; or
(C) December 8, 1997, for any lease for which an EP has been
approved.
(ii) The Regional Director may authorize you to submit the $200,000
lease exploration bond after you submit an EP but before he/she
approves drilling activities under the EP.
(iii) You may satisfy the bond requirement of this paragraph (a) by
providing a new bond or by increasing the amount of your existing bond.
* * * * *
(b) This paragraph explains what bonds you (the lessee) must
provide before lease development and production activities commence.
(1)(i) You must furnish the Regional Director a $500,000 bond that
guarantees compliance with all the terms and conditions of the lease by
the earliest of:
(A) The date you submit a proposed Development and Production Plan
(DPP) or Development Operations Coordination Document (DOCD) for
approval;
(B) The date you submit a request for approval of the assignment of
a lease on which a DPP or DOCD has been approved; or
(C) December 8, 1997, for any lease for which a DPP or DOCD has
been approved.
(ii) The Regional Director may authorize you to submit the $500,000
lease development bond after you submit a DPP or DOCD, but before he/
she approves the installation of a platform or the commencement of
drilling activities under the DPP or DOCD.
(iii) You may satisfy the bond requirement of this paragraph by
providing a new bond or by increasing the amount of your existing bond.
* * * * *
(d) The Regional Director may determine that additional security
(i.e., security above the amounts prescribed in Secs. 256.52(a) and
256.53 (a) and (b) of this part) is necessary to ensure compliance with
the obligations under your lease and the regulations in this chapter.
(1) The Regional Director's determination will be based on his/her
evaluation of your ability to carry out present and future financial
obligations demonstrated by:
(i) Financial capacity substantially in excess of existing and
anticipated lease and other obligations, as evidenced by audited
financial statements (including auditor's certificate, balance sheet,
and profit and loss sheet);
(ii) Projected financial strength significantly in excess of
existing and future lease obligations based on the estimated value of
your existing OCS lease production and proven reserves of future
production;
(iii) Business stability based on 5 years of continuous operation
and production of oil and gas or sulphur in the OCS or in the onshore
oil and gas industry;
(iv) Reliability in meeting obligations based on:
(A) Credit rating(s); or
(B) Trade references, including names and addresses of other
lessees, drilling contractors, and suppliers with whom you have dealt;
and
(v) Record of compliance with laws, regulations, and lease terms.
(2) You may satisfy the Regional Director's demand for additional
security by increasing the amount of your existing bond or by providing
a supplemental bond or bonds.
(e) The Regional Director will determine the amount of supplemental
bond required to guarantee compliance. The Regional Director will
consider potential underpayment of royalty and cumulative obligations
to abandon wells, remove platforms and facilities, and clear the
seafloor of obstructions in the Regional Director's case-specific
analysis.
(f) If your cumulative potential obligations and liabilities either
increase or decrease, the Regional Director may adjust the amount of
supplemental bond required.
(1) If the Regional Director proposes an adjustment, the Regional
Director will:
(i) Notify you and the surety of any proposed adjustment to the
amount of bond required; and
(ii) Give you an opportunity to submit written or oral comment on
the adjustment.
(2) If you request a reduction of the amount of supplemental bond
required, you must submit evidence to the Regional Director
demonstrating that the projected amount of royalties due the Government
and the estimated costs of lease abandonment and cleanup are less than
the required bond amount. If the Regional Director finds that the
evidence you submit is convincing, he/she may reduce the amount of
supplemental bond required.
12. Section 256.59 of subpart I is redesignated as Sec. 256.54 of
subpart I, and revised to read as follows:
Sec. 256.54 General requirements for bonds.
(a) Any bond or other security that you, as lessee or operator,
provide under this part must:
(1) Be payable upon demand to the Regional Director;
(2) Guarantee compliance with all of your obligations under the
lease and regulations in this chapter; and
(3) Guarantee compliance with the obligations of all lessees,
operating rights owners and operators on the lease.
(b) All bonds and pledges you furnish under this part must be on a
form or in a form approved by the Associate Director for Offshore
Minerals Management. Surety bonds must be issued by a surety that the
Treasury certifies as an acceptable surety on Federal bonds and that is
listed in the current Treasury Circular No. 570. You
[[Page 27957]]
may obtain a copy of the current Treasury Circular No. 570 from the
Surety Bond Branch, Financial Management Service, Department of the
Treasury, East-West Highway, Hyattsville, MD 20782.
(c) You and a qualified surety must execute your bond. When either
party is a corporation, an authorized official for the party must sign
the bond and attest to it by an imprint of the corporate seal.
(d) Bonds must be noncancellable, except as provided in Sec. 256.58
of this part. Bonds must continue in full force and effect even though
an event occurs that could diminish, terminate, or cancel a surety
obligation under State surety law.
(e) Lease bonds must be:
(1) A surety bond;
(2) Treasury securities as provided in Sec. 256.52(f);
(3) Another form of security approved by the Regional Director; or
(4) A combination of these security methods.
(f) You may submit a bond to the Regional Director executed on a
form approved under paragraph (b) of this section that you have
reproduced or generated by use of a computer. If you do this, and if
the document omits terms or conditions contained on the form approved
by the Associate Director for Offshore Minerals Management the bond you
submit will be deemed to contain the omitted terms and conditions.
13. Sections 256.55 through 256.59 are added to subpart I to read
as follows:
Sec. 256.55 Lapse of bond.
(a) If your surety becomes bankrupt, insolvent, or has its charter
or license suspended or revoked, any bond coverage from that surety
terminates immediately. In that event, you must promptly provide a new
bond in the amount required under Secs. 256.52 and 256.53 of this part
to the Regional Director and advise the Regional Director of the lapse
in your previous bond.
(b) You must notify the Regional Director of any action filed
alleging that you, your surety, or guarantor are insolvent or bankrupt.
You must notify the Regional Director within 72 hours of learning of
such an action. All bonds must require the surety to provide this
information to you and directly to MMS.
Sec. 256.56 Lease-specific abandonment accounts.
(a) The Regional Director may authorize you to establish a lease-
specific abandonment account in a federally insured institution in lieu
of the bond required under Sec. 256.53(d). The account must provide
that, except as provided in paragraph (a)(3) of this section, funds may
not be withdrawn without the written approval of the Regional Director.
(1) Funds in a lease-specific abandonment account must be payable
upon demand to MMS and pledged to meet the lessee's obligations under
Sec. 250.110 of this chapter.
(2) You must fully fund the lease-specific abandonment account to
cover all the costs of lease abandonment and site clearance as
estimated by MMS within the timeframe the Regional Director prescribes.
(3) You must provide binding instructions under which the
institution managing the account is to purchase Treasury securities
pledged to MMS under paragraph (d) of this section.
(b) Any interest paid on funds in a lease-specific abandonment
account will be treated as other funds in the account unless the
Regional Director authorizes in writing the payment of interest to the
party who deposits the funds.
(c) The Regional Director may allow you to pledge Treasury
securities that are made payable upon demand to the Regional Director
to satisfy your obligation to make payments into a lease-specific
abandonment account.
(d) Before the amount of funds in a lease-specific abandonment
account equals the maximum insurable amount as determined by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation, the institution managing the account must use
the funds in the account to purchase Treasury securities pledged to MMS
under paragraph (c) of this section. The institution managing the lease
specific-abandonment account will join with the Regional Director to
establish a Federal Reserve Circular 154 account to hold these Treasury
securities, unless the Regional Director authorizes the managing
institution to retain the pledged Treasury securities in a separate
trust account. You may obtain a copy of the current Treasury Circular
No. 154 from the Surety Bond Branch, Financial Management Service,
Department of the Treasury, East-West Highway, Hyattsville, MD 20782.
(e) The Regional Director may require you to create an overriding
royalty or production payment obligation for the benefit of a lease-
specific account pledged for the abandonment and clearance of a lease.
The required obligation may be associated with oil and gas or sulphur
production from a lease other than the lease bonded through the lease-
specific abandonment account.
Sec. 256.57 Using a third-party guarantee instead of a bond.
(a) When the Regional Director may accept a third-party guarantee.
The Regional Director may accept a third-party guarantee instead of an
additional bond under Sec. 256.53(d) if:
(1) The guarantee meets the criteria in paragraph (c) of this
section;
(2) The guarantee includes the terms specified in paragraph (d) of
this section;
(3) The guarantor's total outstanding and proposed guarantees do
not exceed 25 percent of its unencumbered net worth in the United
States; and
(4) The guarantor submits an indemnity agreement meeting the
criteria in paragraph (e) of this section.
(b) What to do if your guarantor becomes unqualified. If, during
the life of your third-party guarantee, your guarantor no longer meets
the criteria of paragraphs (a)(3) and (c)(3) of this section, you must:
(1) Notify the Regional Director immediately; and
(2) Cease production until you comply with the bond coverage
requirements of this subpart.
(c) Criteria for acceptable guarantees. If you propose to furnish a
third party's guarantee, that guarantee must ensure compliance with all
lessees' lease obligations, the obligations of all operating rights
owners, and the obligations of all operators on the lease. The Regional
Director will base acceptance of your third-party guarantee on the
following criteria:
(1) The period of time that your third-party guarantor (guarantor)
has been in continuous operation as a business entity where:
(i) Continuous operation is the time that your guarantor conducts
business immediately before you post the guarantee; and
(ii) Continuous operation excludes periods of interruption in
operations that are beyond your guarantor's control and that do not
affect your guarantor's likelihood of remaining in business during
exploration, development, production, abandonment, and clearance
operations on your lease.
(2) Financial information available in the public record or
submitted by your guarantor, on your guarantor's own initiative, in
sufficient detail to show to the Regional Director's satisfaction that
your guarantor is qualified based on:
(i) Your guarantor's current rating for its most recent bond
issuance by either Moody's Investor Service or Standard and Poor's
Corporation;
(ii) Your guarantor's net worth, taking into account liabilities
under its guarantee of compliance with all the
[[Page 27958]]
terms and conditions of your lease, the regulations in this chapter,
and your guarantor's other guarantees;
(iii) Your guarantor's ratio of current assets to current
liabilities, taking into account liabilities under its guarantee of
compliance with all the terms and conditions of your lease and the
regulations in this chapter and your guarantor's other guarantees; and
(iv) Your guarantor's unencumbered fixed assets in the United
States.
(3) When the information required by paragraph (c) of this section
is not publicly available, your guarantor may submit the information in
the following table. Your guarantor must update the information
annually within 90 days of the end of the fiscal year or by the date
prescribed by the Regional Director.
------------------------------------------------------------------------
The guarantor should submit-- that--
------------------------------------------------------------------------
(i) Financial statements for the most Include a report by an
recently completed fiscal year. independent certified
public accountant
containing the accountant's
audit opinion or review
opinion of the statements.
The report must be prepared
in conformance with
generally accepted
accounting principles and
contain no adverse opinion.
(ii) Financial statements for completed Your guarantor's financial
quarters in the current fiscal year. officer certifies to be
correct.
(iii) Additional information as requested Your guarantor's financial
by the Regional Director. officer certifies to be
correct.
------------------------------------------------------------------------
(d) Provisions required in all third-party guarantees. Your third-
party guarantee must contain each of the following provisions.
(1) If you, your operator, or an operating rights owner fails to
comply with any lease term or regulation, your guarantor must either:
(i) Take corrective action; or
(ii) Be liable under the indemnity agreement to provide, within 7
calendar days, sufficient funds for the Regional Director to complete
corrective action.
(2) If your guarantor complies with paragraph (d)(1) of this
section, this compliance will not reduce its liability.
(3) If your guarantor wishes to terminate the period of liability
under its guarantee, it must:
(i) Notify you and the Regional Director at least 90 days before
the proposed termination date;
(ii) Obtain the Regional Director's approval for the termination of
the period of liability for all or a specified portion of your
guarantor's guarantee; and
(iii) Remain liable for all work and workmanship performed during
the period that your guarantor's guarantee is in effect.
(4) You must provide a suitable replacement security instrument
before the termination of the period of liability under your third-
party guarantee.
(e) Required criteria for indemnity agreements. If the Regional
Director approves your third-party guarantee, the guarantor must submit
an indemnity agreement.
(1) The indemnity agreement must be executed by your guarantor and
all persons and parties bound by the agreement.
(2) The indemnity agreement must bind each person and party
executing the agreement jointly and severally.
(3) When a person or party bound by the indemnity agreement is a
corporate entity, two corporate officers who are authorized to bind the
corporation must sign the indemnity agreement.
(4) Your guarantor and the other corporate entities bound by the
indemnity agreement must provide the Regional Director copies of:
(i) The authorization of the signatory corporate officials to bind
their respective corporations;
(ii) An affidavit certifying that the agreement is valid under all
applicable laws; and
(iii) Each corporation's corporate authorization to execute the
indemnity agreement.
(5) If your third-party guarantor or another party bound by the
indemnity agreement is a partnership, joint venture, or syndicate, the
indemnity agreement must:
(i) Bind each partner or party who has a beneficial interest in
your guarantor; and
(ii) Provide that, upon demand by the Regional Director under your
third-party guarantee, each partner is jointly and severally liable for
compliance with all terms and conditions of your lease.
(6) When forfeiture is called for under Sec. 256.59 of this part,
the indemnity agreement must provide that your guarantor will either:
(i) Bring your lease into compliance; or
(ii) Provide, within 7 calendar days, sufficient funds to permit
the Regional Director to complete corrective action.
(7) The indemnity agreement must contain a confession of judgment.
It must provide that, if the Regional Director determines that you,
your operator, or an operating rights owner is in default of the lease,
the guarantor:
(i) Will not challenge the determination; and
(ii) Will remedy the default.
(8) Each indemnity agreement is deemed to contain all terms and
conditions contained in this paragraph (e), even if the guarantor has
omitted them.
Sec. 256.58 Termination of the period of liability and cancellation of
a bond.
This section defines the terms and conditions under which the
Regional Director may terminate the period of liability of a bond or
cancel a bond.
(a) When the surety under your bond requests termination of the
period of liability under its bond, the Regional Director will
terminate the period of liability under your bond and demand that you
provide a replacement bond of equivalent amount.
(1) Termination of the period of liability under a bond does not
release the surety of that bond.
(2) Your surety is responsible for all obligations and liabilities
that accrue before the effective date of the Regional Director's
termination of the period of liability under its bond.
(b) The Regional Director's cancellation or release of a bond may
include lease obligations that accrue before the effective date of the
cancellation only when:
(1) The Regional Director determines that there are no outstanding
obligations; or
(2) You furnish a replacement bond:
(i) In which your new surety agrees to assume all outstanding
liabilities under the bond that is to be canceled; and
(ii) That is in an amount equal to or greater than the amount of
the bond that is to be canceled.
(c) The Regional Director will issue a written instrument to cancel
or release your bond. This instrument will subject the bond to
automatic reinstatement, as if no cancellation or release had occurred,
if:
(1) A person makes a payment under the lease and the payment is
rescinded or must be repaid by the recipient because the person making
the payment is insolvent, bankrupt, subject to reorganization, or
placed in receivership; or
(2) The responsible party represents to MMS that it has discharged
its obligations under the lease and the representation is materially
false when the bond is canceled, or released.
Sec. 256.59 Forfeiture of bonds and/or other securities.
This section explains how a bond or other security may be
forfeited.
[[Page 27959]]
(a) The Regional Director will call for forfeiture of all or part
of the bond, other form of security, or guarantee you provide under
this part if:
(1) You (the party who provided the bond) refuse, or the Regional
Director determines that you are unable, to comply with any term or
condition of your lease; or
(2) You default under one of the conditions under which the
Regional Director accepts your bond, third-party guarantee, and/or
other form of security.
(b) The Regional Director may pursue forfeiture of your bond
without first making demands for performance against any lessee,
operating rights owner, or other person authorized to perform lease
obligations.
(c) The Regional Director will:
(1) Notify you, the surety on your bond or other form of security,
and any third-party guarantor, of his/her determination to call for
forfeiture of the bond, security, or guarantee under this section.
(i) This notice will be in writing and will provide the reasons for
the forfeiture and the amount to be forfeited.
(ii) The Regional Director must base the amount he/she determines
is forfeited upon his/her estimate of the total cost of corrective
action to bring your lease into compliance.
(2) Advise you, your third-party guarantor, and any surety, that
you, your guarantor, and any surety may avoid forfeiture if, within 5
working days:
(i) You agree to, and demonstrate that you will, bring your lease
into compliance within the timeframe that the Regional Director
prescribes;
(ii) Your third-party guarantor agrees to, and demonstrates that it
will, complete the corrective action to bring your lease into
compliance within the timeframe that the Regional Director prescribes;
or
(iii) Your surety agrees to, and demonstrates that it will, bring
your lease into compliance within the timeframe that the Regional
Director prescribes, even if the cost of compliance exceeds the face
amount of the bond or other surety instrument.
(d) If the Regional Director finds you are in default, he/she may
cause the forfeiture of any bonds and other security deposited as your
guarantee of compliance with the terms and conditions of your lease and
the regulations in this chapter.
(e) If the Regional Director determines that your bond and/or other
security is forfeited, the Regional Director will:
(1) Collect the forfeited amount; and
(2) Use the funds collected to bring your leases into compliance
and to correct any default.
(f) If the amount the Regional Director collects under your bond
and other security is insufficient to pay the full cost of corrective
actions he/she may:
(1) Take or direct action to obtain full compliance with your lease
and the regulations in this chapter; and
(2) Recover from you, any co-lessee, operating rights owner, and/or
any third-party guarantor responsible under this subpart all costs in
excess of the amount he/she collects under your forfeited bond and
other security.
(g) The amount that the Regional Director collects under your
forfeited bond and other security may exceed the costs of taking the
corrective actions required to obtain full compliance with the terms
and conditions of your lease and the regulations in this chapter. In
this case, the Regional Director will return the excess funds to the
party from whom they were collected.
14. In Sec. 256.62, the section heading is revised, introductory
text is added, paragraphs (a), (d), and (e) are revised, and paragraph
(f) is added to read as follows:
Sec. 256.62 Assignment of lease or interest in lease.
This section explains how to assign record title and other
interests in OCS oil and gas or sulphur leases.
(a) MMS may approve the assignment to you of the ownership of the
record title to a lease or any undivided interest in a lease, or an
officially designated subdivision of a lease, only if:
(1) You qualify to hold a lease under Sec. 256.35(b);
(2) You provide the bond coverage required under subpart I of this
part; and
(3) The Regional Director approves the assignment.
* * * * *
(d) You, as assignor, are liable for all obligations that accrue
under your lease before the date that the Regional Director approves
your request for assignment of the record title in the lease. The
Regional Director's approval of the assignment does not relieve you of
accrued lease obligations that your assignee, or a subsequent assignee,
fails to perform.
(e) Your assignee and each subsequent assignee are liable for all
obligations that accrue under the lease after the date that the
Regional Director approves the governing assignment. They must:
(1) Comply with all the terms and conditions of the lease and all
regulations issued under the Act; and
(2) Remedy all existing environmental problems on the tract,
properly abandon all wells, and reclaim the lease site in accordance
with part 250, subpart G.
(f) If your assignee, or a subsequent assignee, fails to perform
any obligation under the lease or the regulations in this chapter, the
Regional Director may require you to bring the lease into compliance to
the extent that the obligation accrued before the Regional Director
approved the assignment of your interest in the lease.
15. In Sec. 256.64, the section heading is revised, introductory
text and paragraph (a) introductory text are added, paragraph (a)(1) is
revised, paragraph (a)(2) is redesignated (a)(8), new paragraphs (a)(2)
through (a)(7) are added, paragraphs (d) through (h) are redesignated
as paragraphs (e) through (i), paragraph (c) and redesignated paragraph
(h) are revised, and a new paragraph (d) is added to read as follows:
Sec. 256.64 How to file transfers.
This section explains how to file instruments with MMS that create
and/or transfer interests in OCS oil and gas or sulphur leases.
(a) You must submit to the Regional Director for approval all
instruments that create or transfer ownership of a lease interest.
(1) You must submit two copies of the instruments that create or
transfer an interest. Each instrument that creates or transfers an
interest must describe by officially designated subdivision the
interest you propose to create or transfer.
(2) You must submit your proposal to create or transfer an
interest, or create or transfer separate operating rights, subleases,
and record title interests within 90 days of the last date that a party
executes the transfer agreement.
(3) The transferee must meet the citizenship and other
qualification criteria specified in Sec. 256.35 of this part. When you
submit an instrument to create or transfer an interest as an
association, you must include a statement signed by the transferee
about the transferee's citizenship and qualifications to own a lease.
(4) Your instrument to create or transfer an interest must contain
all of the terms and conditions to which you and the other parties
agree.
(5) You do not gain a release of any nonmonetary obligation under
your lease or the regulations in this chapter by creating a sublease or
transferring operating rights.
(6) You do not gain a release from any accrued obligation under
your lease or the regulations in this chapter by
[[Page 27960]]
assigning your record title interest in the lease.
(7) You may create or transfer carried working interests,
overriding royalty interests, or payments out of production without
obtaining the Regional Director's approval. However, you must file
instruments creating or transferring carried working interests,
overriding royalty interests, or payments out of production with the
Regional Director for record purposes.
* * * * *
(c) When you request approval for an assignment that assigns all
your record title interest in a lease or that creates a segregated
lease, your assignee must furnish a bond in the amount prescribed in
Secs. 256.52 and 256.53 of this part.
(d) When you request approval for an assignment that assigns less
than all the record title of a lease and that does not create a
separate lease, the assignee may, with the surety's consent, become a
joint principal on the surety instrument that guarantees compliance
with all the terms and conditions of the lease.
* * * * *
(h) Your heirs, executors, administrators, successors, and assigns
are bound to comply with each obligation under any lease and under the
regulations in this chapter.
(1) You are jointly and severally liable for the performance of
each nonmonetary obligation under the lease and under the regulations
in this chapter with each prior lessee and with each operating rights
owner holding an interest at the time the obligation accrued, unless
this chapter provides otherwise.
(2) Sublessees and operating rights owners are jointly and
severally liable for the performance of each nonmonetary obligation
under the lease and under the regulations in this chapter to the extent
that:
(i) The obligation relates to the area embraced by the sublease;
(ii) Those owners held their respective interest at the time the
obligation accrued; and
(iii) This chapter does not provide otherwise.
* * * * *
PART 281--[AMENDED]
16. The authority citation for part 281 is revised to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
17. Section 281.33 is amended by revising the first sentence of the
introductory text of paragraph (b) to read as follows:
Sec. 281.33 Bonds and bonding requirements.
* * * * *
(b) All bonds to guarantee payment of the deferred portion of the
high cash bonus bid furnished by the lessee must be in a form or on a
form approved by the Associate Director for Offshore Minerals
Management. * * *
* * * * *
PART 282--[AMENDED]
18. The authority citation for part 282 is revised to read as
follows:
Authority: 43 U.S.C. 1331 et seq.
19. Section 282.40 is amended by revising the first sentence of
paragraph (b) to read as follows:
Sec. 282.40 Bonds.
* * * * *
(b) All bonds furnished by a lessee or operator must be in a form
approved by the Associate Director for Offshore Minerals Management. *
* *
* * * * *
[FR Doc. 97-13199 Filed 5-21-97; 8:45 am]
BILLING CODE 4310-MR-P
