Presented byDana E. Dupre

Theme IIIOCS Lease Terms

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Overview• Lease Form• Transfers require BOEM approval • Lease Period• Extension by Lease Activities• Suspension of Lease Term• Unitization Authority• Designation of Operators• Duties of Prudent Operator• Sanctions and Penalties

Lease Form

Applicable Law• The lease is issued pursuant to OCSLA and subject to OCSLA and all

regulations promulgated thereunder in existence on the effective date of the lease.– Also subject to all statutes and regulations promulgated thereafter except

to the extent they conflict with express provisions of the specific lease– The “Lessee bears the risk that such may increase or decrease the Lessee’s

obligations under the lease.”

• OCSLA contains a mandatory choice of law provision providing, in relevant part, that if there is no federal law on point, adjacent state law shall serve as surrogate federal law under certain circumstances.

• Keep in mind that the US regulatory regime does not interfere with the ability of private parties to have their own contractual arrangements.

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Lease Form• BOEM uses standardized lease forms; the lease form

may be amended to conform with specific terms, conditions and stipulations– E.g.s of stipulations are biological surveys, protection of

endangered species, royalties relief provisions

• The lease is a contractual agreement with the US government and spells out lease provisions—including royalty payments, rental payments, transfers of the lease, bonding and other lease obligations—but lessee has no right to negotiate.

Transfer of Leasehold Interest• All assignments of OCS leasehold interest must be approved

by BOEM. For approval, an assignee must – qualify to hold a lease with BOEM; and– provide the required bond coverage.

• The BOEM will not accept an assignment conveying interest to a company not qualified to do business on the OCS.

• All merger documents must be filed with BOEM.• To process a merger of a qualified company with and into an

unqualified company, the unqualified company must first become qualified.– General, supplemental and ROW bonds requirements must also be

met.

Bonding Requirements

• Lessees are required to provide a general lease surety bond or ROW bond before the BOEM will issue a new lease, approve a lease transfer, ROW assignment or operational plan– The amount of the Operator Bond will vary depending upon the level

of activity on the lease. – The general lease surety bond by the DO does not relieve any of the

lessees of their obligations to comply with the terms and conditions of the lease

• Supplemental bonds for decommissioning are also authorized and will be required in BOEM/BSEE’s discretion – BOEM is in the process of updating the supplemental bonding regime

in light of recent bankruptcies

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Lease Time Periods • OCS leases are issued for primary terms of 5, 8 or 10 years,

depending on water depth• Most recent lease terms are:

– 0 to <400 meters• Standard initial period is 5 years; the lessee may earn an additional 3 years if a well is

spudded targeting hydrocarbons below 25,000 ft TVD during the 1st 5 years

– 400 to <800 meters• Standard initial period is 5 years; the lessee will earn an additional 3 years if a well is

spudded during the 1st 5 years

– 800 to <1600 meters• Standard initial period is 7 years; the lessee will earn an additional 3 years if a well is

spudded during the 1st 7 years

– 1600+ meters – 10 years

• Rentals are due each year before the discovery of oil or gas on the lease

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Extension of Primary Term by Lease Activity

• During the primary term (initial period), lessees do not have deadlines for conducting exploratory or development activities, • except leases issued with a primary term of 8 or 10 years require

commencement of an exploratory well within 5/7 years to avoid cancellation.

• Activities that can hold a lease beyond its primary term are • Production

• Once a lease commences production, the lease stays in effect as long as there is no lapse in production or other leaseholding operations for more than 180 days, or the lease is within the primary term

• Operations (drilling, completion or workover)

• According to NTL No. 2008-N09, “under prudent operator standards and historical oil and gas precedents, production in paying quantities… means the production of enough oil and gas to yield a positive stream of income after subtracting normal expenses (i.e. operating costs), which include the sum of: (1) minimum royalty or actual royalty payments, and (2) the direct lease operating costs.”

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Addlt. Types of Extensions of Lease Terms• Other activities that can hold a lease beyond its primary term

are: • Suspension of operations for up to 5 years per suspension

• BSEE may grant consecutive suspensions

• Suspension of production for up to 5 years per suspension (but most for 1 year or less)• BSEE may grant consecutive suspensions

• Participation in an approved unit that is held by similar operations

• BOEM may also extend a lease if a DPP is rejected• See 30 C.F.R. 550.183• Approximate 5 year extension

Reasons the Regional Supervisor may issue a suspension:

• When necessary to comply with judicial decrees prohibiting any activities or the permitting of those activities.

• When activities pose a threat of serious, irreparable, or immediate harm or damage. This would include a threat to life (including fish and other aquatic life), property, any mineral deposit, or the marine, coastal, or human environment. BSEE may require you to do a site-specific study

• When necessary for the installation of safety or environmental protection equipment;

• When necessary to carry out the requirements of NEPA or to conduct an environmental analysis; or

• When necessary to allow for inordinate delays encountered in obtaining required permits or consents, including administrative or judicial challenges or appeals.

Lessees are required to pay rental or minimum royalty for or during the suspension period

Suspension of Operations• Requested SOOs are discretionary and granted on case by case basis• There does not have to be a well capable of producing hydrocarbons in

paying quantities• Usually granted to allow reasonable time to commence drilling

operations when good faith and diligent efforts have been made, but work is prevented by reasons beyond the operator’s control—like bad weather, rough seas or accidents– Of if additional time is necessary to complete processing or interpretation of

existing geophysical data or information or acquire, process, or interpret new geophysical data or information; or

– Or necessary for certain deepwater drilling

• Used much like a force majeure provision but must be requested or directed; not a unilateral right of lessee– SOOs following Deepwater Horizon – hybrid under NTL No. 2011-N05

Suspension of Production• To receive SOP, there must be a demonstrated firm

commitment to develop and produce proven reserves diligently such that– the lease must have a well capable of producing

hydrocarbons in paying quantities; and – conditions beyond an operator’s control have occurred– Query: would lease shut-ins for financial reasons be

appropriate suspensions?

• SOPs for co-development, phased development, geophysical acquisition and analysis

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Lease Provision Re: Unitization, Pooling, and Drilling Agreements

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Unitization Authority• OCSLA tasks the Secretary with the duty to prevent waste of

natural resources by federal lessees • Unitization regulations are permissive• Two types under 30 C.F.R. 250.1301:

– Voluntary unitization- when lessee asks the Regional Supervisor to approve unitization leases or portions of leases under the terms of a Unit Agreement

– Compulsory unitization – when Regional Supervisor requires lessee to unitize operations to prevent waste, conserve natural resources or protect correlative rights

• To my knowledge, compulsory authority has never been formally used

• Lessees use the OCS model unit agreement

Specific Duty to Protect from Drainage• The DOI Secretary may prescribe rules/regs for prevention

of waste and conservation of natural resources on the OCS and to protect correlative rights therein– Courts have interpreted this to mean that the Secretary may

promulgate regulations to protect a federal lessee from drainage by another federal lessee or as between state and federal lessees But this is discretionary and to date, DOI has never promulgated rules (other than the unitization ones discussed above) regarding correlative rights or negligent drainage between adjacent lessees

– La. v. Guste held state lessees have no private cause of action against feds for drainage

– Cf. Tidelands Royalty B Corp. v. Gulf Oil which suggests that state law drainage claims may exist between private OCS lessees

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Designation of Operator• Co-lessees are required to designate a single operator to act

on behalf of all lessees. – BOEM does not maintain right to approve the operator but– the Operator must be qualified to do business on the OCS

• The designated operator, with the authority granted in the DOOs, acts as the lessees’ agent; it is the policy of the BOEM to work directly with the DO for all matters affecting the lease and the BOEM will look first to operator for compliance.

• Lessees and operating rights owners, however, remain jointly and severally responsible for performing lease obligations and if the operator fails to perform, they may be required to do so

• BOEM/BSEE does maintain the right, however, to remove the operator

Duties of Lessee as Prudent Operator• To protect health, safety, property, and the

environment an operator must:– Perform all operations in a safe and workmanlike manner;

and– Maintain all equipment and work areas in a safe condition.

• An operator must immediately control, remove, or otherwise correct any hazardous oil and gas accumulation or other health, safety, or fire hazard.

• An operator must use the best available and safest technology (BAST) whenever practical on all exploration, development, and production operations.

Duties of Lessee as Prudent Operator• Section 9 provides that the lessee shall conduct all

operations in accordance with approved EP, DPP or DOCD.

• BOEM reviews all plans for compliance with regulations to determine if proposed activities will cause serious or undue harm or damage to:– Life– Property– Any other mineral deposits in leased or unleased areas– National security or defense – Marine coastal or human environment

Duties of Lessee as Prudent Operator

• In the wake of the Deepwater Horizon explosion and subsequent oil spill, DOI put in place significant new safeguards to protect the environment beyond what had ever existed before

• Increased focus on: – Worst Case Discharge (WCD)

• Century Exploration New Orleans, LLC v. United States

– Oil Spill Response Plan (OSRP)– Air quality (AQ)

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Power to Sanction Lessee• Lease may be cancelled for breach of lease or failure

to comply with any provision of OCSLA/regulations• A lessee may also sue the government for

contractual damages for breach• Suspension and debarment – powerful government

tools used to deter poor performance, fraud, waste, abuse; also implicated where there are criminal convictions or civil judgments

Civil Penalties• OCSLA/regs provide for regime of civil and criminal

penalties for violation of lease, OCSLA or regulations– Civil penalties will be assessed if, after notice of failure and

reasonable time to correct the noncompliance, lessee does not correct a violation

– if a violation constitutes a “threat of serious irreparable, or immediate harm to or damage to life” property, minerals or environment or related to oil spill financial responsibility, a civil penalty may be imposed without allowing a corrective period

Criminal Penalties• OCSLA/regs also provide that any person who knowingly and

willingly– Fails to comply with OCSLA, lease, permits or regulations – Makes false statements, reps, or certifies any application, record, report

or other document required under OCSLA– Falsifies or tampers with devices required by OCSLA– Reveals any data required to be confidential under OCSLA

Shall be fined up to $100,000 or imprisoned up to 10 years or both

• Additionally, when a corporation/entity is subject to criminal prosecution, any officer or agent who knowingly or willfully organized or carried out such activity shall be subject to the same criminal penalties