Theme III
OCS Lease Terms
Presented by
Dana E. Dupre
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Overview
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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:
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When necessary to comply with judicial decrees prohibiting any activities or the
permitting of those activities.
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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
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When necessary for the installation of safety or environmental protection
equipment;
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When necessary to carry out the requirements of NEPA or to conduct an
environmental analysis; or
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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:
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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