Update on Gulf of Mexico Leasing, Regulatory, and Enforcement Issues

Transcription

1 September 3, th Annual Energy Law Institute for Lawyers and Landmen South Texas College of Law Update on Gulf of Mexico Leasing, Regulatory, and Enforcement Issues Collette Gordon Jana Grauberger (713) Direct (713) Direct A Professional Law Corporation New Orleans Lafayette Houston 1

2 Topics to be Covered Suspensions of Production/Suspensions of Operations Enforcement Recent Cases What s on the Horizon Liability for Decommissioning Decommissioning Assessment Update BOEM Financial Security Perfection of JOA Mortgage/Security Rights New Orleans Lafayette Houston 2

3 Offshore Lease Suspensions Lease suspensions (Suspensions of Production and Suspension of Operations) are essential to the development of offshore leases this is especially true for deep water leases located in remote areas of the GOM. Congress mandated that DOI promulgate regulations for lease suspensions. See 43 USC 1334(a)(1) and 30 CFR New Orleans Lafayette Houston 3

4 Regulatory Authority for Suspensions 30 CFR Regulations authorize BSEE to issue requested and directed suspensions Suspensions of Operations (SOOs) Suspensions of Production (SOPs) DOI has granted thousands of suspensions (especially SOPs) See also NTL No G17, NTL No N02, NTL No N10 New Orleans Lafayette Houston 4

5 Regulatory Grounds for BSEE to Grant or Direct an SOP Must be in the National interest and meet one of the following criteria: (a) Will allow the lessee to properly develop lease, including time to construct and install production facilities; (b) Will allow the lessee time to obtain adequate transportation facilities; (c) Will allow the lessee time to enter into sales contract; (d) Will avoid premature abandonment of a producing well(s). New Orleans Lafayette Houston 5

6 Requesting an SOO or SOP Lessee must submit its request for a suspension before the end of the lease term i.e., before the end of the Initial Term, the end of the 180-day period, or the termination of an existing suspension. Union Pacific Resources Co., 149 IBLA 294 (1999) (SOP properly denied where request was submitted after lease expiration date). See Solicitor Opinion M (January 15, 2009) (attached); NTL No N02 (attached). New Orleans Lafayette Houston 6

7 Submission of Suspension Request Tolls Lease Expiration The lease term is not improperly extended, however, when the MMS grants, after a lease would expire, a request for a suspension that was filed before the lease expired. In that situation, the filing of the suspension request is timely, and the request tolls the expiration of the lease until the MMS acts on the request. DOI Solicitor Memorandum M (1/15/09) New Orleans Lafayette Houston 7

8 Requesting an SOO or SOP Request must include: (a) the justification for the suspension, including the length of suspension requested; (b)a reasonable schedule of work leading to the commencement or restoration of the suspended activity; (c) Payment of fee. New Orleans Lafayette Houston 8

9 SOP-Specific Criteria Lessee s request for an SOP must include a statement that a well has been drilled on the lease and determined to be producible in accordance with regulatory standards. Lessee s request for an SOP must include a commitment to production. See NTL 2000-G17 New Orleans Lafayette Houston 9

10 SOO-Specific Criteria Suspension is necessary to allow the lessee time to begin drilling or other operations when the lessee is prevented by reasons beyond your control, such as unexpected weather, unavoidable accidents, or drilling rig delays. 30 CFR (a). Specific rules authorize SOOs for subsalt drilling (30 CFR (b)) and ultra-deep drilling (below 25,000 feet TVD) (30 CFR (c)). New Orleans Lafayette Houston 10

11 ATP Oil & Gas Corp., 173 IBLA 250 (2008) Upheld MMS denial of request for SOO where lessee did not show it had a drilling rig contracted and scheduled to begin lease-holding operations prior to lease expiration; lessee also had not received approvals for EP and APD. Affirmed by the Eastern District of Louisiana and the Fifth Circuit Court of Appeal. See ATP Oil & Gas Corp. v. DOI, 2009 U.S. Dist. LEXIS (E.D. La. 8/26/09), aff d, 396 Fed. Appx. 93 (5 th Cir. 2010). New Orleans Lafayette Houston 11

12 NTL No N10 Decision by OHA Director in Statoil Gulf of Mexico LLC ExxonMobil Corporation, DIR (May 31, 2011) is a binding agency interpretation applicable to SOP requests submitted after May 31, Statoil decision concerned MMS s denial of ExxonMobil s request for an SOP for the Julia Unit, a five-block deep water unit containing a Lower Tertiary discovery. MMS had never denied a request for an SOP for a deep water unit. MMS had never denied a request for an SOP for a Lower Tertiary prospect. New Orleans Lafayette Houston 12

13 Julia / Jack & St. Malo New Orleans Lafayette Houston 13

14 NTL No N10 ExxonMobil, as unit operator, requested the SOP to allow for time to tie-back to the Jack-St. Malo Host, a production facility that had not yet been constructed. MMS had already granted SOPs to the owners of the Jack and St. Malo units for this same purpose. MMS denied ExxonMobil s request, finding a lack of the commitment to production required by the regulations. New Orleans Lafayette Houston 14

15 Jack & St. Malo Production Facility New Orleans Lafayette Houston 15

16 MMS Rationale For Denying SOP In this case, Exxon states that there is a commitment to produce the WR 627 Unit; however, MMS concludes that your purported commitment is not based on activities within your control. This asserted commitment is contingent upon 1) the potential fabrication and installation of a facility by another operator for another field, 2) a proposed facility of which you are not a party and have no control, 3) the future success of obtaining a contract with the operator of the proposed facility in order to tie-back to WR 627 Unit wells, and 4) a proposed facility that would not likely be designed to handle WR 627 Unit production upon startup. New Orleans Lafayette Houston 16

17 NTL No N10 The Director, DOI Office of Hearings and Appeals, upheld MMS s SOP denial. DIR (May 31, 2011). ExxonMobil and Statoil filed suit against DOI for judicial review of the OHA Director s decision. Case No. 2:11-cv (W.D. La.). The parties entered into a Settlement Agreement that the federal district court approved on January 17, NTL No N10 adopts the OHA Director s decision as binding precedent applicable to SOP requests. New Orleans Lafayette Houston 17

18 Key Principles from the OHA Director Decision Deepwater host facility is a production facility which serves no transportation function. Neither OCSLA nor regulations authorize SOP to allow time for construction or negotiation for use of a production facility. Lessee cannot obtain an SOP to have time to tieback to a host facility unless the lessee either planned to build its own host facility or has executed a contract with the host facility owner prior to lease expiration. New Orleans Lafayette Houston 18

19 Lease Suspensions Unreliability/unpredictability of BSEE s administration of lease suspensions conflicts with management decisions re major capital commitments and long-lead planning. Some Lower Tertiary (Paleogene) developments require the development of new technologies (e.g., 20K) although BSEE plainly has legal authority grant suspensions to develop such technologies, so far BSEE has been resistant. New Orleans Lafayette Houston 19

20 Offshore Enforcement Increased offshore inspections, increased INCs, increased civil penalty assessments, increased appeals BSEE District inspections vs. Inspection and Review Unit (IRU) investigations Ambiguous role of the IRU Increased criminal enforcement for offshore violations Offshore enforcement parallels increased use of civil penalties in royalty enforcement New Orleans Lafayette Houston 20

21 Recent Cases Total E&P USA v. Kerr-McGee Oil & Gas, 2014 U.S. Dist. LEXIS (E.D. La. 2014) statutory penalties of double damages and attorneys fees not owed on unpaid overriding royalties during royalty relief period. Statoil USA E&P v. ONRR, 185 IBLA 302 (2015) civil penalty assessment based on failure to correct inaccurate royalty reporting after notice by ONRR upheld: FOGRMA, Section 109(d): [a]ny person who (1) knowingly or willfully prepares, maintains, or submits false, inaccurate, or misleading reports, notices, affidavits, records, data, or other written information [] shall be liable for a penalty of up to $25,000 per violation for each day such violation continues. New Orleans Lafayette Houston 21

22 Recent and Upcoming Regulatory Developments Oil and Gas and Sulphur Operations in the Outer Continental Shelf Revisions to Safety and Environmental Management Systems, 78 Fed. Reg (Apr. 4, 2013) (referred to as SEMS II) SEMS III? Oil and Gas and Sulphur Operations in the Outer Continental Shelf (OCS); Helideck and Aviation Fuel Safety for Fixed Offshore Facilities, 79 FR (Sep ) Oil and Gas and Sulphur Operations in the Outer Continental Shelf Blowout Preventer Systems and Well Control, 80 Fed. Reg (Apr. 17, 2015) Amendments to Civil Penalty Regulations, 79 Fed. Reg (May 20, 2014) Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform, 80 Fed. Reg. 607 (Jan. 6, 2015) ONRR audit initiative regarding unbundling of natural gas transportation and processing costs Requirements for MODUs and Other Vessels Conducting Outer Continental Shelf Activities With Dynamic Positioning Systems, 79 Fed. Reg (Nov. 28, 2014) USCG and BSEE draft policy requiring vessels doing certain well intervention work to meet MODU requirements New Orleans Lafayette Houston 22

23 Liability for Decommissioning 30 CFR Lessees and owners of operating rights are jointly and severally responsible for decommissioning obligations for facilities on leases, including lease-term pipelines Same for ROW holders as to facilities on ROW, including pipelines 30 CFR Decommissioning obligations accrue when: Drill a well Install a platform, pipeline, or other facility You are or become the lessee or the owner of operating rights of a lease on which there is a well that has not been permanently plugged, a platform, a lease term pipeline, or other facility Same for holders of pipeline ROWs New Orleans Lafayette Houston 23

24 Liability for Decommissioning 30 CFR Assignor liable for all obligations that accrue under your lease before BOEM approves assignment Assignee and subsequent assignees are liable for all obligations that accrue under the lease after BOEM approves assignment IF YOUR ASSIGNEE, OR A SUBSEQUENT ASSIGNEE, FAILS TO PERFORM ANY OBLIGATION UNDER THE LEASE OR THE REGULATIONS, BOEM MAY REQUIRE YOU TO BRING THE LEASE INTO COMPLIANCE TO THE EXTENT THAT THE OBLIGATIONS ACCRUED BEFORE YOUR ASSIGNMENT WAS APPROVED New Orleans Lafayette Houston 24

25 Liability for Decommissioning Decommissioning obligations terminate when work is completed and accepted by BSEE Joint and several liability: In event of default, BOEM order to decommission will likely come to all lessees/operating rights owners. BOEM does not limit to who drilled the well, etc. Liability up chain of title: Any former owner can be tapped to perform decommissioning and no rules about who BOEM will go to first, next, last Bonds and other financial security is considered last resort by BOEM New Orleans Lafayette Houston 25

26 Practical Realities of Default BOEM order to all current owners (or one or more former owners if no current other than defaulting party), 15 days to respond and indicate compliance and start maintaining wells and platforms Parties will discuss/negotiate who will perform work and sharing of costs At least currently, no requirement to be a designated operator to do the work Go back to BOEM with responses, need agreement between parties, and, potentially with BOEM New Orleans Lafayette Houston 26

27 ATP Bankruptcy Examples BOEM decommissioning trust provided security as to specified leases, as part of settlement agreement trust was dissolved and funds put in separate account to cover orphan leases, co-owner on leases covered jointly and severally liable for decommissioning work. Fortune Natural Resources v. ATP Oil & Gas, 2015 U.S. Dist. LEXIS (S.D. Tx. 2015) co-lessee objected to bankruptcy sale of assets that created trust to cover orphan leases as unfair, court found co-lessee had no standing, never would have had access to funds in any event, and appeal moot as purchaser acted in good faith and sale was not stayed pending appeal. New Orleans Lafayette Houston 27

28 Decommissioning Assessment Update BSEE now assessing decommissioning liability for pipelines located on OCS leases and ROWs. Cost-drivers include pipeline diameter, water depth, location, and how long expected until decommissioned. BSEE requiring pipelines located in certain sands to be removed (instead of abandoned in place) Ability to contest an assessment. New Orleans Lafayette Houston 28

29 BOEM/Financial Security BOEM requires general bonds to guarantee compliance with all the terms and conditions of the OCS lease General bond ($3 million areawide) must be posted by record title owner in lease or designated operator before lease issued or assignment approved by BOEM BOEM has discretion to require additional (supplemental) security above the amount of the general bond to guarantee compliance with terms of the lease (See 30 CFR (d)-(e)) Additional security can be required for a variety of purposes, but used to secure estimated decommissioning costs New Orleans Lafayette Houston 29

30 BOEM/Financial Security New Orleans Lafayette Houston 30

31 BOEM/Financial Security ANPR on Risk Management, Financial Assurance and Loss Prevention (August 2014) Revised NTL to replace current NTL No N07, which determines when supplemental bonds are necessary and sets forth test for determining qualification for company financial waiver or exemption Draft Revised NTL to be circulated soon and first; status quo until new NTL is finalized New Orleans Lafayette Houston 31

32 Scenario #1 (Current) Operator is exempt company that loses its exempt status: BOEM initiated action Operator initiated change in business structure Exempt status is all or nothing If another lessee is exempt, then nothing happens. If not, BOEM sends letters out to all co-lessees on all leases and gives them 30 days to post supplemental bonds or otherwise provide security to cover 100% potential decommissioning liability New Orleans Lafayette Houston 32

33 Scenario #2 (Potential) Operator is exempt company that loses its exempt status: BOEM initiated action as a result of new NTL Exempt status no longer all or nothing; company has certain $ amount of exemption Company notifies BOEM leases where it will apply its exemption; requires coordination with partners If another lessee applies its exemption for full amount of estimated decommissioning costs, then obligation is covered Any leases not covered by exemption will need security posted BOEM intends to add flexibility and will potentially consider as part of a security package escrow account with BOEM as beneficiary, LOCs, bonds, insurance Security could be posted by one party or a combination of parties so long as 100% of estimated decommissioning costs are covered New Orleans Lafayette Houston 33

34 BOEM Financial Security Double-bonding and BOEM attempts to address this industry-wide issue: Co-obligee bonds Area-wide supplemental bonds Other arrangements New Orleans Lafayette Houston 34

35 Perfection of JOA Mortgage/Security Rights Texas: File executed mortgage memoranda as exhibit to JOA in real property records of adjacent county or counties Louisiana is more complicated: Mortgage memoranda attached as exhibit to JOA must be executed and filed in mortgage records of adjacent parish or parishes File UCC financing statements (covers fixtures and as extracted collateral), as well as equipment and accounts UCCs filed where property is located and where debtor is located Both also filed in the BOEM non-required files New Orleans Lafayette Houston 35

36 Perfection of JOA Mortgage/Security Rights Currently in GoM: Low oil prices Smaller companies as partners in deepwater prospects Everyone thinking about what happens if one of my partners stops paying their share Security Rights granted in JOA are enforceable between the parties Issue is third parties with claims or rights that absent notice will take precedence over JOA New Orleans Lafayette Houston 36

37 Perfection of JOA Mortgage/Security Rights Must file continuation of UCCs every 5 years Must reinscribe LA mortgage every 10 years If you are unsure of your current rights: can undertake a review, search back 5 years for existing UCCs, abstractor search of parish/county records in coastal parishes/counties (10 years for LA; to beginning of operations offshore TX) to assess your status Fix by executing and filing the required documents; partners each have interest in doing so New Orleans Lafayette Houston 37

38 Questions? A Professional Law Corporation New Orleans Lafayette Houston 38