March 11, 2014 Articles

How to Speak Offshore Oil and Gas

What I wish I knew when I started practicing.

By Dana E. Dupre – March 11, 2014

Despite what you may still be reading about the 2010 Deepwater Horizon oil spill, the U.S. offshore oil and gas business is thriving. Last year, federal revenue attributable to Outer Continental Shelf (OCS) production equaled almost $9 billion, including $6.1 billion in royalties, over $2.6 billion in lease bonuses, and over $250 million in rentals. And with recent seismic, drilling, and production advances, companies operating on the OCS are seeing new deepwater opportunities in depths of 10,000 feet and drilling depths of 30,000 feet. But these exciting developments have generated many challenging legal issues.

To keep up with technological advances and to address traditional offshore risks such as location, weather events, and aging infrastructure, companies are spending billions of dollars a year to operate on the OCS. The desire to allocate costs and manage risks has resulted in complex business relationships, agreements, and financing mechanisms. Consider also that offshore operations are often subject to more than 40 federal and state statutes and thousands of regulations. These legal complexities can be rewarding for lawyers who know the OCS game; however, they can be intimidating for inexperienced lawyers.

I vividly remember the first time one of my partners called me into her office to discuss my assisting a client with offshore interests. She asked me whether a U.S. corporation wholly owned by a foreign LLC could be qualified as a DO on the GOM OCS—and if so, whether the entity has to file a special DOO. Exactly like that. I didn’t know what a DOO, a GOM, or an OCS was. I went straight to Google.

My hope is that this piece, while far from comprehensive, is a useful introduction to those of you with minimal exposure to offshore oil and gas law. You may still need Google, but here are a few things I can share with you that I wish I knew when I started out.

What Is the Outer Continental Shelf?
The OCS is all of the submerged lands under U.S. jurisdiction and lying seaward of state coastal waters. In 1953, Congress passed two important laws: (1) the Submerged Lands Act (SLA), which granted the coastal states ownership of all natural resources lying within three miles of their coast (except for the state of Texas and the Gulf Coast side of Florida, whose state-owned coastal waters extend three leagues, or approximately nine miles, into the Gulf of Mexico); and (2) the Outer Continental Shelf Lands Act (OCSLA), which defined the OCS as all submerged lands more than three miles from the state coastal boundaries (with this one exception for Texas and Florida). Among other things, the OCSLA empowers the Department of the Interior (DOI) to issue oil and gas leases through the Bureau of Ocean Energy Management (BOEM).

What Does the OCS Oil and Gas Leasing Scheme Look Like?
Parties acquire drilling rights on the OCS either directly from the U.S. government in competitive bidding lease sales or through private transactions (for example, by assignment, joint venture agreement, farm-out agreement, or prospect swap). An OCS block of acreage generally consists of either 5,000 acres (Louisiana Shelf) or 5,760 acres (all other OCS areas). The right to own an OCS lease is restricted to U.S. citizens, resident aliens, U.S. corporations, and associations (such as partnerships and limited liability companies) of U.S. citizens, resident aliens, or U.S. corporations.

The federal lease is the primary contract governing OCS activities. Unlike lessees with private lessors, lessees on the OCS do not negotiate with the federal government. BOEM, for example, establishes the lease provisions for each lease sale, including the royalty percentage for each lease. Federal royalties historically were 16.66667 percent in shallow water depths and 12.5 percent in deeper water (typically in depths of 400 meters or greater). For leases issued in or after March 2008, royalty rates were increased to 18.75 percent for all water depths (and for leases issued from August 2007 to March 2008, the royalty rate was 16.66667 percent for all water depths). The only variable at a lease sale is the bonus to be paid for the lease.

OCS leases typically contain primary terms between five and ten years depending on water depth. Before 2010, lease terms were five years in water depths of less than 400 meters, eight years for depths from 400 meters to 800 meters, and ten years for depths of greater than 800 meters. Beginning March 17, 2010, BOEM reduced the primary term to seven years for leases in water depths of 800 to 1600 meters.

OCS leases impose significant post-termination obligations. In light of aging infrastructure and the changing profile of certain lessees on the OCS, enforcement of post-termination decommissioning liabilities is one of BOEM’s top priorities. Typically, an OCS lease provides that within one year after termination, the lessee is responsible for plugging all wells, abandoning and removing all platforms and facilities, and clearing the seafloor. Co-lessees must designate a single operator to act on behalf of all lessees (the designated operator, or DO). The DO is responsible for fulfilling the lease-abandonment obligations (and more generally for complying with all applicable regulations under the lease), although BOEM can also look to lessees if a DO for any reason fails to fulfill these obligations.

An OCS lease is subject to all applicable law, including all regulations issued pursuant to the SLA and OCSLA, and other applicable statutes and regulations governing the drilling, developing, and operating of OCS leases.

What Laws Apply to the OCS?
The OCSLA provides that if there is no federal law on point, adjacent state law (other than state tax law) shall serve as surrogate federal law under certain circumstances:

To the extent that they are applicable and not inconsistent with . . . Federal laws and regulations . . . , the civil and criminal laws of each adjacent State . . . are declared to be the law of the United States for [the OCS]. . . .

43 U.S.C. § 1333(a)(2)(A).

This OCSLA choice-of-law provision trumps any contrary contractual choice-of-law provision. Because most OCS activity occurs in the central and western portions of the Gulf of Mexico (GOM), the majority of OCS case law tends to come out of the federal Fifth Circuit. In determining whether adjacent state law applies as surrogate federal law, the Fifth Circuit has focused on three main components: (1) whether the controversy arises on a situs covered by the OCSLA, (2) whether federal maritime law applies by its own force, and (3) whether the state law is inconsistent with federal law. See, e.g.Grand Isle Shipyards, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009) (en banc); Union Tex. Petroleum Corp. v. PLT Eng’g, Inc., 895 F.2d 1043 (5th Cir. 1990).

If state laws apply to an OCS dispute, the next question is what state is adjacent to the OCSLA situs. The problem here is that in many areas of the OCS, determining which state is “adjacent” to a given block of seabed or offshore platforms is difficult. The OCSLA provides that the president of the United States is to draw boundary lines to establish the adjacent states, but to date no president has issued any “projected lines” that would clarify which state’s laws apply to a given area of the OCS.

Acting in the absence of any action by the president, the Fifth Circuit has identified, strictly on a case-by-case basis, four types of evidence for determining the “adjacent” state: (1) geographic proximity to the states in question, (2) which state’s coast the federal agencies consider the subject platform to be “off of,” (3) prior court determinations, and (4) projected boundaries from other sources. Snyder Oil Corp. v. Samedan Oil Corp., 208 F.3d 521, 525 (5th Cir. 2000). The Fifth Circuit does not, however, consider the above factors to be a “specific test” and advises that in cases where parties present evidence of only one factor, that factor will control the court’s determination.

Importantly, although the OCSLA defines jurisdiction and regulatory responsibility on federal offshore lands, other federal laws must also be considered. Compliance with these laws is a major undertaking. See, for example, the following non-exhaustive list:

  • National Environmental Policy Act (NEPA):  Requires evaluation of the environmental effects of OCS activities. 42 U.S.C. § 4321 et seq.
  • Clean Air Act (CAA): Regulates the emission of air pollutants from OCS activities. 42 U.S.C. § 1857 et seq.
  • Coastal Zone Management Act (CZMA): Requires state review of federal activities affecting use of the coastal zone (on land and water). 16 U.S.C. §§ 1451–64.
  • Clean Water Act (CWA): Regulates the discharge of toxic and nontoxic pollutants into the surface waters of the United States. 33 U.S.C. § 1251 et seq.
  • Oil Pollution Act (OPA): Regulates the discharge of oil into or upon the “navigable waters” of the United States. 33 U.S.C. §§ 2701–20.
  • Federal Oil and Gas Royalty Management Act (FOGRMA): Regulates proper collection and disbursement of oil and gas revenues owed to the United States under OCS leases. 30 U.S.C. § 1701 et seq.
  • Marine Mammals Protection Act (MMPA): Provides for the protection and conservation of all marine mammals and their habitats. 16 U.S.C. §§ 1361–1423.
  • Endangered Species Act (ESA): Provides for the conservation of endangered or threatened species. 16 U.S.C. §§ 1531–44.

Who Is Primarily Responsible for Regulating the OCS?
The OCSLA grants the secretary of interior authority and responsibility to manage offshore activities on the OCS. 43 U.S.C. § 1334(a). The OCSLA also grants the secretary authority to prescribe rules and regulations necessary to administer leasing on the OCS. These regulations are codified in Title 30 of the Code of Federal Regulations.

Before June 2010, the Minerals Management Service (MMS) was responsible for managing offshore resources on behalf of the DOI. Following the Deepwater Horizon incident, Secretary Salazar separated the responsibilities previously performed by the MMS and reassigned those responsibilities to three new, separate agencies: (1) the Office of Natural Resources Revenue (ONRR), (2) the Bureau of Ocean Energy Management (BOEM), and (3) the Bureau of Safety and Environmental Enforcement (BSEE).

  • ONRR handles all revenue collection functions including asset management, auditing and compliance, and investigation and enforcement. This is one of the federal government’s largest sources of non-tax revenues. ONRR is supported by five regional offices including its main office in Denver, Colorado.
  • BOEM is responsible for all leasing, plan administration, environmental studies, resource evaluation, and economic analyses. BOEM’s key functions include developing the Five-Year OCS Oil and Natural Gas Leasing Program; supervising oil and gas lease sales, lease assignments, and bonding; managing renewable-energy programs; establishing risk-management programs, including financial security for lessees; and conducting environmental reviews, including NEPA analyses and compliance documents for each major stage of energy-development planning.
  • BSEE handles all field operations including permitting and research, inspections, oil-spill response, training and environmental compliance functions, and pipeline right-of-way activities. BSEE’s key functions include developing standards and regulations for offshore operators’ oil-spill response plans (OSRPs) and for the Offshore Regulatory Program to enhance operational safety and environmental protection on the OCS and ensure operators’ compliance with all applicable environmental regulations.

BSEE and BOEM each have regional offices in New Orleans, Louisiana; Camarillo, California; and Anchorage, Alaska.

As part of the 2010 restructuring effort, Secretary Salazar also reorganized applicable regulations relating to OCS operations. Currently, see 30 C.F.R. parts 200–299 for regulations affecting BSEE, 30 C.F.R. parts 500–599 for regulations affecting BOEM, and 30 C.F.R. parts 1200–1299 for regulations affecting ONRR.

Where Can I Find Federal Leasing Information?
BOEM maintains the leasing records for all federal OCS leases. These records are available at www.boem.gov (and also at www.bsee.gov and on industry-created databases, such aswww.ocsbbs.com). Under applicable regulations, lessees must obtain BOEM approval for transfer of any leasehold interest on the OCS. There are two types of leasehold ownership interest on the OCS. The first is a “record title” interest, which means a lessee’s interest in a lease, including the obligation to pay rent, and the rights to assign and relinquish the lease. The second and more limited type is an “operating right interest,” which is severable from a record-title interest. An operating right (or working interest) is an interest created out of a lease authorizing the holder of that right to enter upon the leased lands to conduct drilling and related operations, in accordance with the terms of the lease. Typically, operating rights that are severed from record title are limited by certain aliquots (square subdivisions) within a lease and/or by depth restriction. BOEM has authority to approve or deny requested transfers of both record-title interest and operating rights.

Often, the best place to start researching a lease is BOEM’s serial-register page, which reflects the historic and current ownership of an OCS lease. BOEM also maintains all lease files for active and inactive leases; these files contain, for example, copies of the lease, approved lease-transfer documents, designation of operator (DOO) forms, and bonds for the lease. Lease information may be searched on the BOEM website in several ways, including by company name, company identification, GOM number as provided by BOEM, lease block, or lease serial number. A tip I wish someone had told me when I started is that when you search by lease number, you will have to insert a letter before the lease serial number. That letter will depend on the OCS region where the lease is located. For example, a GOM lease numbered 12345 is identified by G and thus must be searched asG12345.

Certain transactions, such as mortgages, liens, other security/financing agreements, net-profits interests, and overriding royalty interests, do not require BOEM approval. Nonetheless, these documents are generally filed in the BOEM records and can be found in the “Non-required” files maintained on the BOEM website. Indeed, BOEM requires that instruments creating overriding royalty interests and production payments be filed within these inaptly named “Non-required” files.

You may also want to consult the “adjacent state’s” public records for lease information because parties should file all title documents affecting OCS properties in the adjacent parish and/or county.

Conclusion
In writing this introductory piece, I realized I could go on and on with basic OCS information. I hope, however, that you find this curated guide helpful (for the office or, heaven forbid, a cocktail party). My apologies for using so many acronyms, but as I learned the hard way years ago, this is how lawyers (and clients) involved in the OCS speak to each other. And because I am sure you’ve been wanting to know whether that foreign-owned corporation could act as a DO on the GOM OCS, please let me share the short answer to my first OCS legal issue. Yes. A U.S. corporation (even though wholly owned by a foreign LLC) can hold title to a lease on the Gulf of Mexico (GOM) Outer Continental Shelf (OCS) and, therefore, can also be selected by its co-lessees as the designated operator (DO). No special designation of operator (DOO) needed.


Keywords: energy litigation, offshore, oil, gas, OCS, OCSLA, leases


Dana E. Dupre is an attorney at Gordon Arata McCollam Duplantis & Eagan LLC in New Orleans, Louisiana.


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