Revision of Requirements Governing Surety Bonds for Outer Continental Shelf Leases

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 250, 251, and 256

RIN 1010-AB92

Revision of Requirements Governing Surety Bonds for Outer

Continental Shelf Leases

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The proposed rule would establish a deadline of 2 years for

all Outer Continental Shelf (OCS) oil and gas and sulphur lessees to

bring their bond coverage into compliance with the new levels of

coverage established in 1993; clarify MMS's position that assignees,

assignors, and co-lessees are jointly and severally liable for

compliance with OCS oil and gas and sulphur leases; establish a

regulatory framework for lease-specific abandonment accounts and

acceptance of a third-party guarantee; and update the bond coverage

required of right-of-way holders and Geological and Geophysical (G&G)

exploration permittees. These changes are needed to reduce the risk of

default by an underfunded company operating a lease or holding a right-

of-way.

DATES: Comments must be received or postmarked no later than March 7,

1996 to be considered in this rulemaking.

ADDRESSES: Written comments must be mailed or hand-carried to the

Department of the Interior; Minerals Management Service; 381 Elden

Street; Mail Stop 4700; Herndon, Virginia 22070-4817; Attention: Chief,

Engineering and Standards Branch.

FOR FURTHER INFORMATION CONTACT: Gerald D. Rhodes, Engineering and

Technology Division, telephone (703) 787-1609.

SUPPLEMENTARY INFORMATION: The MMS regulations at 30 CFR Part 250,

Subpart G, Abandonment of Wells, Subpart I, Platforms and Structures,

and Subpart J, Pipelines and Pipeline Rights-of-Way, specify that OCS

lessees, right-of-way holders, and G&G exploration permittees are

liable for all end-of-lease financial obligations including unpaid

royalties; costs of well plugging and abandonment; removal of pipe,

equipment, platform(s), and facilities; and clearance of obstructions

to other uses of the sea. The levels of bond coverage required by the

regulations do not limit the obligations of OCS oil and gas or sulphur

lessees, holders of an OCS pipeline right-of-way, or exploration

permittees conducting deep stratigraphic tests.

The transfer of OCS leases from large producing companies to

smaller producers, some of which are marginally financed, has increased

the risk that the responsible party will not be able to satisfy end-of-

lease obligations.

The MMS continues to investigate ways to provide more flexibility

to lessees in meeting bonding requirements. For example, MMS has

allowed third-party guarantees and escrow accounts as alternatives to

traditional bonds. These methods would be specifically addressed in

regulations to facilitate their use. The MMS encourages lessees to

suggest other alternatives to traditional bonds. The regulations

provide flexibility to the Regional Director to consider alternate

forms of surety.

Oil and Gas and Sulphur Lease Bond Coverage Requirements: To reduce

the number of cases of underfunded liabilities, MMS published revised

rules on August 27, 1993 (58 FR 45255), increasing the bond coverage

required for OCS oil and gas or sulphur leases.

The MMS is phasing in the increases in the minimum levels of bond

coverage as part of the process of reviewing requests for approval of

lease assignments, Exploration Plans (EP), Development and Production

Plans

[[Page 63012]]

(DPP), or Development Operations Coordination Documents (DOCD). The

1993 regulation replaced the requirement for a $50,000 bond for oil and

gas and sulphur leases with requirements based upon the drilling or

production stage of a lease as follows:

------------------------------------------------------------------------

Areawide

State 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

------------------------------------------------------------------------

This proposed rule would require lessees not already in compliance

with the higher bond levels to submit and maintain the higher lease or

areawide bonds within 2 years of the promulgation of a final rule.

Assignors, Assignees, and Co-Lessees Liable for Compliance: When

the designated operator is unable to meet end-of-lease obligations, MMS

will require any or all of the lessees to bring the lease into

compliance. If there is no lessee able to perform, MMS will require the

prior lessee(s) to perform these functions.

Relationship Between these Regulations and The Liability

Regulations Published by MMS's Royalty Management Program: This

proposed rule clarifies MMS's position with respect to the liability of

assignees, assignors, and lessees (record title owners) for the

plugging and abandonment of wells, removal of platforms and other

facilities, and clearance of well and platform locations. These

obligations are joint and several in nature. The obligations are not

divisible, and a degree of residual liability is attached (i.e., an

assignor may be required to perform lease and well abandonment and

clearance obligations when an assignee refuses or is unable to carry

out any or all of these responsibilities).

The indivisible nature of these obligations distinguishes them from

the royalty and other payment obligations addressed in the regulations

proposed for modification by the notice of proposed rulemaking (NPR)

published on June 9, 1995, by MMS's Royalty Management Program (RMP)

(60 FR 30492). The provisions of that NPR would establish liability for

the payment of royalty due on Federal and Indian leases and establish

responsibility to pay and report royalty and other payments.

The RMP's NPR dated June 9, 1995, proposes that royalty and other

payment obligations be treated as divisible according to the division

of the record title interests in a lease and proposes that a record

title owner's (lessee's) liability for the payment of royalty and other

payments be proportionate to percentage of the record title interest

owned. That NPR also points out that lease obligations such as

leasehold and well abandonment and reclamation are not divisible.

Neither of these NPR's address against whom MMS will take

enforcement action if MMS discovers noncompliance either in payments

due or required leases abandonment and reclamation activities. In every

instance, MMS retains the discretion to determine which person to

pursue. Once the lease has been brought into compliance, the person MMS

takes enforcement action against could seek contributions from other

liable persons.

While these proposed rule should make it easier to determine who

the liable parties are, it is not MMS's intention that these rules

govern the relationship or liabilities between and among the affected

parties other than MMS.

Means for Financing Abandonment and Clearance Obligations: Since no

revenues are being generated from a lease at the time lease wells are

to be plugged and abandoned, platforms are to be removed, and the

seafloor cleared of obstructions, MMS wants assurances that OCS lessees

establish some means of funding their end-of-lease obligations.

Similarly, no revenues are generated by pipeline operations at the

time the right-of-way holder is called upon to remove all platforms,

structures, domes over valves, pipes, taps, and valves along the right-

of-way in compliance with MMS regulations. The MMS wants assurances

that holders of OCS pipeline right-of-way grants provide some means of

funding their right-of-way abandonment obligations.

Supplemental bonds: The MMS's Regional Directors may require OCS

lessees, on a case-by-case basis. To provide additional security in the

form of a supplemental bond or bonds or an increase in the amount of

coverage under an existing bond. The additional security is required

when the Regional director deems it necessary to ensure that the lessee

or its guarantor will be able to comply with all end-of-lease

obligations. The Regional Director will also consider the added

liability created when new leases are added to an existing areawide

bond.

The proposed rule would increase the level of bond coverage for G&G

exploration permittees drilling a deep stratigraphic test well and

would provide authority for MMS's Regional Directors to require right-

of-way holders and G&G exploration permittees, on a case-by-case basis,

to post additional bonds or other security in the form of a

supplemental bond or bonds or an increase in the amount of coverage

under an existing bond. These changes recognize that the current

bonding requirements found in Secs. 250.159(b) and 251.6-4 are

inadequate and also recognize the variation in costs associated with

the abandonment of deep stratigraphic test wells and pipelines

constructed on OCS right-of-ways.

Lease-Specific Abandonment Accounts and Third-Party Guarantee:

Proposed Sec. 256.56, Lease-specific abandonment accounts, and

Sec. 256.57, Third-party guarantee, would establish specific regulatory

authority under which MMS's Regional Director may approve these

alternate methods for funding end-of-lease abandonment obligations.

Regional Directors already accept lease-specific abandonment accounts.

A third-party guarantee or a supplemental bond may cover specific

obligations, such as plugging and abandonment of specified leases or

wells. However, the Regional Director's approval will depend on how

well the combination of all bonds and guarantees is able to ensure that

the lessee will meet all obligations.

Section-by-Section Discussion

Part 250--Oil and Gas and Sulphur Operations in the OCS

Section 250.110 General Requirements

Current rules at Sec. 256.62(d) provide that assignors remain

``liable for all obligations under the lease accruing prior to the

approval of the assignment.'' The rule at Sec. 250.110 of subpart G,

Abandonment of Wells, is being amended to clarify existing requirements

that when a well is drilled, a platform or other facility is installed,

or an obstruction is created, the lessee's obligation accrues to

properly plug and abandon the wellbore, remove the platform or other

facility, and clear the ocean of obstructions in accordance with

procedures specified in subpart G of 30 CFR part 250. When an

assignment occurs, the assignor continues to have residual liability

should the assignee fail to fully perform obligations that accrued

before assignment with respect to wells and structures in existence at

the time of the assignment.

The clarification also provides that when there are several

responsible lessees, they are jointly and severally liable for end-of-

lease obligations.

Section 250.159, General requirements for a pipeline right-of-way

grant, would be modified to add a

[[Page 63013]]

provision under which the Regional Director could require the holder of

a right-of-way to submit and maintain additional security in the form

of a supplemental bond or bonds or by increasing the amount of coverage

provided under an existing surety bond.

Part 251--G&G Explorations of the OCS

Section 251.6-4, Bonds, would be modified to increase the bond

coverage required to $200,00 for drilling a deep stratigraphic test

well unless an areawide bond is maintained. A provision would be added

under which the Regional Director could require a permittee under a G&G

Exploration permit to submit and maintain additional security in the

form of a supplemental bond or bonds or by increasing the amount of

coverage provided under an existing surety bond. Compliance with the

increased amount of bond coverage would be required for all permits

granted after the effective date of a final rule.

Part 256--Leasing of Sulphur or Oil and Gas in the OCS

Subpart I--Bonding

Section 256.52 Requirement to File a Bond

Proposed Sec. 256.52, Requirement to file a bond (current

Sec. 256.58, Acceptable bonds/alternate security instruments), expands

upon the provisions of Sec. 256.58 and establishes the bonding

requirements for lessees. This section establishes the time at which a

bond must be provided and recognizes alternate methods that a Regional

Director may approve for providing additional security.

Proposed Sec. 256.52(d) expands upon the provisions of current

Sec. 256.58(d) with regard to the results of a payment of a claim in

the face amount of the surety.

Proposed Sec. 256.52(f) expands upon the provisions of current

Sec. 256.58(f) with regard to the responsibility of the lessee to

monitor the value of U.S. Department of the Treasury (U.S. Treasury)

instruments provided to MMS and to submit additional U.S. Treasury

instruments if the value of the instruments previously provided falls

below the level of bond required.

In Sec. 256.52, new paragraph (i) requires the lessee to give

notice and to cease operations if the lease ceases to be in compliance

with bonding requirements. Paragraph (i) also authorizes the Regional

Director to allow continued operations when ceasing operations would

pose a danger to the environment or to the producing reservoir but with

all proceeds being paid into lease abandonment accounts.

Section 256.53 Additional Bonds

Proposed Sec. 256.53, Additional bonds (existing Sec. 256.61,

Additional bonds), expands the provisions of current Sec. 256.61 to

establish a deadline (2 years after promulgation of a final rule) for

lessees of existing leases to provide the required increased amounts of

bond coverage.

Proposed Sec. 256.53(d) modifies the generic criteria used by the

Regional Director to assess the ability of a lessee to carry out its

present and future financial obligations and the need for supplemental

bond.

Proposed Sec. 256.53(e) would expand Sec. 256.61 to establish

regulatory provisions for determining the amount of additional bond

coverage to be required.

Section 256.54 Bond Form

Section 256.59, Form of bond, would be renumbered and renamed

Sec. 256.54, Bond form. New Sec. 256.54 establishes certain required

terms of surety bonds including a requirement that the bond be

noncancellable.

Proposed Sec. 256.54(d)(3) authorizes the submission of U.S.

Treasury securities in lieu of surety bond, in accordance with 31

U.S.C. 9303. It specifies that the lessee using such Treasury

securities shall also submit authorization for the Regional Director to

sell such securities upon the lessee's default on its lease

obligations.

The MMS is concerned that, should the lessee file for bankruptcy

and MMS merely have a security interest in the Treasury securities, it

will not be able to obtain prompt access to funds to provide for

remediation of leaking wells and or other critical environmental

problems. In that event, the Treasury bills or notes will not give MMS

the same assurance of timely performance of lease obligations that a

surety bond provides. Accordingly, MMS is exploring with the Department

of the Treasury alternative procedures under which the lessee would

transfer title to its book-entry Treasury bills to MMS or a third-party

escrow agent, so that the bills would not be property of the bankruptcy

estate in the event of insolvency. The MMS requests comments on its

alternative approach which it may adopt in the final version of this

rule.

Section 256.55 General Terms and Conditions of Bond

Proposed new Sec. 256.55 would establish general terms and

conditions of a bond and includes language which specifies that bonds

are to be payable to the MMS Regional Director and conditioned upon

compliance with all terms and conditions of the OCS oil and gas or

sulphur leases and governing regulations. Lessees or sureties may

propose alternate forms of bond for the Director's approval but should

submit therewith an opinion of qualified counsel that the proposed bond

form provides security equivalent to that of the standard MMS bond

forms.

Proposed Sec. 256.55(d) adds a requirement that the lessee give

prompt notice to the Regional Director of any action alleging the

insolvency or bankruptcy of the surety or alleging any matter which

could result in suspension or revocation of the surety's charter or

license to do business.

Section 256.56 Lease-Specific Abandonment Accounts

Proposed new Sec. 256.56, Lease-specific abandonment accounts,

establishes regulatory guidance for the establishment of lease-specific

abandonment accounts in addition to the Treasury pledge accounts

currently established to permit lessees to fund end-of-lease

abandonment and clearance costs through scheduled payments into a

lease-specific escrow account dedicated to lease abandonment and

cleanup.

Section 256.57 Third-Party Guarantee

The third-party guarantee provisions of proposed Sec. 256.57 would

establish a regulatory framework for identifying some of the criteria

that the Regional Director would use to approve a third-party guarantee

of a lessee's compliance with its lease obligations and for

establishing how MMS will obtain needed information.

Section 256.58 Termination of the Period of Liability and Cancellation

of a Bond

Proposed new Sec. 256.58(a) provides for termination of the period

of liability under a bond and allows the Regional Director to permit a

lessee to replace existing bonds with other forms of security that

provide equivalent protection. Replacement of a bond pursuant to

Sec. 256.58(b) would conditionally release the existing bond.

Section 256.59 Forfeiture of Bonds and/or Other Securities

Proposed new Sec. 256.59 specifies that if a lessee refuses or is

unable to comply

[[Page 63014]]

with lease terms or if the lessee defaults on the conditions under

which a bond and other security was accepted, the Regional Director

will take action to forfeit all or part of a bond or other security.

Section 256.62 Assignment of Leases or Interests Therein

Under the proposed rulemaking, Sec. 256.62 would be modified to

clarify and make explicit existing authority that--

(1) The approval of a lease assignment is subject to the lessee

furnishing bond coverage pursuant to the revised bonding requirements.

(2) Having a lease assignment become effective any date other than

the first day of the lease month following the filing of documents is

at the discretion of the Regional Director.

(3) Approval of an assignment by the Regional Director does not

relieve the assignor of accrued lease obligations if the assignee

subsequently fails to perform.

(4) Approval of an assignment will not be given until the assignee

submits an acceptable level of surety coverage.

(5) When the lessee is not the sole lessee, the Regional Director

will look first to the designated operator to perform lease

obligations, but all lessees are jointly and severally liable for their

performance.

(6) The assignee assumes a responsibility to remedy all existing

environmental problems on the tract and to properly abandon all wells

and reclaim the lease site.

Section 256.64 Requirements for Filing Transfers

Under the proposed rulemaking, Sec. 256.64 would be modified to

clarify that--

(1) Neither the transfer of operating rights, nor the creation of a

sublease(s), releases the lessee from performance of any obligation

under any lease or under any regulation.

(2) The lessee(s) are jointly and severally liable with sublessees

and operating rights owners (to the extent of their interests) for the

performance of each obligation under the lease and under the governing

regulations with each party holding an interest at the time the

obligation was accruing.

The provisions of these proposed rules have been designed to meet

the objectives to: (1) ensure lessee's financial capability to perform

lease obligations, (2) protect the environment from threat of harm

which might result from a lessee's failure to timely carry out proper

well abandonment and site clearance operations on a lease, (3) achieve

a reasonable degree of protection at a minimum increase in costs to the

lessee or lease operator, and (4) select a method of attaining these

goals which impact equitably on all parties who would be affected.

The MMS does not have authorized funds available to use to correct

a noncompliance or default when the cost of corrective action exceeds

the funds available under a forfeited bond and other security.

Author: This document was prepared by Gerald D. Rhodes, Engineering

and Technology Division, MMS.

Executive Order (E.O.) 12866

This proposed rule is not a significant rule under E.O. 12866.

Regulatory Flexibility Act

The Department of the Interior (DOI) has determined that this

proposed rule will not have a significant effect on a substantial

number of small entities because, in general, the entities that engage

in offshore exploration, development, and production activities

including pipeline transportation across the OCS are not considered

small due to the technical expertise, financial resources, and

experience necessary to safely conduct such activities in an

environmentally responsible manner.

Paperwork Reduction Act

This proposed rule does not contain new information collection

requirements which require approval by the Office of Management and

Budget (OMB). The information collection requirements in 30 CFR part

256 are approved by OMB under approval No. 1010-0006.

Takings Implication Assessment

The DOI certifies that this proposed rule does not represent a

governmental action capable of interference with constitutionally

protected property rights. Thus, a Takings Implication Assessment need

not be prepared pursuant to E.O. 12630, Government Action and

Interference with Constitutionally Protected Property Rights.

E.O. 12778

The DOI has certified to OMB that this proposed rule meets the

applicable civil justice reform standards provided in Sections 2(a) and

2(b)(2) of E.O. 12778.

National Environmental Policy Act

The DOI determined that this action does not constitute a major

Federal action significantly affecting the quality of the human

environment; therefore, an Environment Impact Statement is not

required.

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.

Dated: September 5, 1995.

Bob Armstrong,

Assistant Secretary, Land and Minerals Management.

For the reasons set forth in the preamble, MMS proposes to amend 30

CFR parts 250, 251, and 256 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. 1334.

2. 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) The obligations to plug and abandon wellbores, remove platforms

or other facilities, and to clear the ocean of obstructions accrue when

the well is drilled, the platform or other facility is installed, or

the obstruction is created and continue until the requirements of

subpart G are fully accomplished. These obligations are the joint and

several responsibility of all lessees.

3. In Sec. 250.159, paragraph (b)(1) is revised to read as follows:

[[Page 63015]]

Sec. 250.159 General requirements for a pipeline right-of-way grant.

* * * * *

(b) (1) When applying for a right-of-way grant, the applicant or

the right-of-way holder shall provide the surety bonds described in

this section in addition to the bonds required of a lessee in 30 CFR

part 256.

(i) Each applicant or holder of a right-of-way shall furnish the

Regional Supervisor a $300,000 corporate surety bond conditioned on

compliance with the terms of all right-of-way grants held by the

applicant in the Outer Continental Shelf (OCS) area in which the right-

of-way is located.

(ii) If the Regional Director determines that a surety bond in

excess of $300,000 is necessary to cover the costs and liabilities of

compliance with the terms of the right-of-way, he/she may require the

applicant or the holder of the right-of-way to submit additional

security in the form of a supplemental bond or an increase in the

amount of the existing surety bond.

* * * * *

PART 251--GEOLOGICAL AND GEOPHYSICAL (G&G) EXPLORATIONS OF THE

OUTER CONTINENTAL SHELF

4. The authority citation for part 251 is revised to read as

follows:

Authority: 43 U.S.C. 1331 et seq.

5. Section 251.6-4 is revised to read as follows:

Sec. 251.6-4 Bonds.

(a) Before the Minerals Management Service (MMS) will issue a

permit authorizing the drilling of a deep stratigraphic test well, the

applicant must either:

(1) Furnish MMS a bond of not less than $200,000 conditioned on

compliance with the terms of the permit; or

(2) Maintain with or furnish to MMS a $1 million bond conditioned

on compliance with the terms of the permit issued to him/her for the

area of the OCS where the applicant proposes to drill a deep

stratigraphic test.

(b) If the Regional Director determines that security in excess of

$1 million is needed, he/she may require the permittee to provide

additional security in the form of a supplemental bond or bonds or an

increase in the amount of the existing surety bond.

(c) The Director of MMS may require the submission of a bond before

authorizing shallow test drilling.

(d) Any bond furnished shall be on a form approved or prescribed by

the Director, MMS.

PART 256--LEASING OF SULPHUR OR OIL AND GAS IN THE OUTER

CONTINENTAL SHELF

6. The authority citation for part 256 is revised to read as

follows:

Authority: 43 U.S.C. 1331 et seq.

7. Section 256.58 is redesignated as Sec. 256.52.

8. Newly designated Sec. 256.52 is amended by revising the heading

and paragraphs (a), (c), (d), (f), and (g); and by adding a new

paragraph (i) to read as follows:

Sec. 256.52 Requirement to file a bond.

(a) Before an oil and gas or sulphur lease will be issued the

successful bidder must:

(1) Furnish the Regional Director a $50,000 lease surety bond,

conditioned on compliance with all the terms and conditions of the

lease;

(2) Maintain or furnish a $300,000 areawide bond, issued by a

qualified surety and conditioned on compliance with all the terms and

conditions of oil and gas and sulphur leases held by the bidder in the

OCS for the area in which the lease to be issued is situated;

(3) Maintain or furnish an areawide bond under Sec. 256.53 (a)(2)

or (b)(2) of this part; or

(4) Furnish a substitute security instrument in accordance with

paragraphs (f) and (g) of this section.

* * * * *

(c) The lessee shall maintain a separate areawide surety bond as

required by paragraph (a) of this section for each of the areas

identified in paragraph (b) of this section.

(1) If the Regional Director approves, the lessee may substitute

for its bond either:

(i) An operator's bond in the same amount as the lease bond

required under paragraph (a); or

(ii) Alternate security instruments as provided in paragraphs (f)

and (g) of this section.

(2) The lessee(s)' substitution of an operator's bond or an

alternate form of security for its bond does not relieve the lessee(s)

of its (their) obligation to comply with all the terms and conditions

of the lease.

(d) If a default causes the surety or other guarantor to pay the

United States any indebtedness under a lease secured by a bond or

alternate form of security, the face amount of the bond or alternate

form of security and the surety's liability will be reduced by the

amount of the payment.

* * * * *

(f) U.S. Department of the Treasury (Treasury) securities (U.S.

Bonds or Notes) may be submitted in lieu of a bond, provided the

Treasury instrument or legal tender submitted is negotiable at the time

of submission for an amount of cash equal to the value of the required

bond. The entity submitting Treasury instruments under this paragraph

is responsible for monitoring the value of those instruments. If the

value of those instruments falls below the level of bond required, the

entity must submit additional Treasury instruments or legal tender to

raise the value of the securities held by MMS to the value of the

required bond.

(g) As provided in Sec. 256.54, the Regional Director may accept

alternate types of security instruments in lieu of the surety bonds

required by this section if he/she determines that the interests of the

Government are protected to the same extent that these interests would

be protected by the required surety bond.

* * * * *

(i) Any time that a lease is not in compliance with bonding

requirements of this subpart, the Regional Director will notify the

lessee in writing and specify a reasonable period, not to exceed 90

days, to post an adequate bond.

(1) If an adequate bond or other guarantee is not provided by the

end of the period allowed, the lessee shall cease mineral production,

unless the Regional Director authorizes continued production from the

lease to avoid premature lease abandonment or damage to the environment

or to the producing reservoir(s).

(2) The lessee shall immediately begin preparation for lease

abandonment and clearance and shall submit to the Regional Director its

plans for paying outstanding royalty underpayments and for meeting all

regulatory and lease requirements.

(3) Mineral production shall not resume until the Regional Director

determines that an adequate bond has been posted or other guarantee

provided.

(4) When the Regional Director authorizes continued production

under this section, the net proceeds from that production, less the

royalties paid to the United States, shall be paid into one or more

lease-specific abandonment accounts approved by the Regional Director.

9. Section 256.61 is redesignated as Sec. 256.53; paragraphs

(a)(1), (b)(1), and (d) are revised; and paragraphs (a) introductory

text, (b) introductory text, (e), (f), and (g) are added to read as

follows:

[[Page 63016]]

Sec. 256.53 Additional bonds.

(a) Activities under an Exploration Plan (EP).

(1) When submitting a proposed EP, when submitting a proposed

assignment of a lease with an approved EP, or 2 years after publication

of a final rule, whichever is earliest, a lessee must submit a $200,000

surety bond issued by a qualified surety and conditioned on compliance

with all the terms and conditions of the lease shall be furnished to

the Regional Director. Approval of the EP or assignment shall be

conditioned upon receipt of a $200,000 lease surety bond, unless the

Regional Director authorizes the submission of the $200,000 lease

exploration bond after the submission of the EP but before approval of

drilling activities under the EP. This bond coverage may be provided by

increasing the bond coverage provided in Sec. 256.52(a) of this part.

(2) * * *

(b) Operations under a Development and Production Plan (DPP) or a

Development Operations Coordination Document (DOCD).

(1) When submitting a proposed DPP or DOCD, when submitting a

proposed assignment of a lease with an approved DPP or DOCD, or 2 years

after publication of a final rule, whichever is earliest, a lessee must

submit a $500,000 surety issued by a qualified surety and conditioned

on compliance with all the terms and conditions of the lease shall be

furnished to the Regional Director. Approval of a DPP, a DOCD, or an

assignment of a lease with an approved DPP or DOCD shall be conditioned

on receipt of a $500,000 lease surety bond, unless the Regional

Director authorizes the submission of the $500,000 lease development

bond after the submission of the DPP or DOCD, but prior to the approval

of platform installation or drilling activities under the approved DPP

or DOCD. The lessee may provide this additional bond by submission of a

new bond or by increasing the lease bond coverage provided under

paragraph (a) of this section.

(2) * * *

* * * * *

(d) The Regional Director may require additional security (i.e.,

security over and above the amounts prescribed in Secs. 256.52(a) and

256.53 (a) and (b) of this part) in the form of a supplemental bond or

bonds or increased amount of coverage of an existing surety bond when

he/she determines that additional security is necessary to cover

royalty due the Government, penalties and interest assessed against the

lessee, and/or costs and liabilities of the lessee for regulatory

compliance. The Regional Director shall base the decision on an

evaluation of the ability of the lessee to carry out its present and

future financial obligations as demonstrated by factors such as:

(1) Financial capacity substantially in excess of existing and

anticipated lease and other obligations (e.g., costs of well

abandonment and platform removal, amount of underpaid royalties, and

penalties and interest assessed by the Government), as evidenced by

audited financial statements (including auditor's certificate, balance

sheet, and profit and loss sheet);

(2) Projected financial strength as evidenced by existing OCS

production and proven reserves of future production valued

significantly in excess of existing and future lease obligations;

(3) Business stability as evidenced by 5 years of continuous

operation and production of oil and gas or sulphur in the OCS or in the

onshore oil and gas industry;

(4) Reliability in meeting obligations as evidenced by:

(i) Credit rating; or

(ii) Trade references including names and addresses of other

lessees, drilling contractors, and suppliers with whom lessee has

dealt; and

(5) Record of compliance with laws, regulations, and lease terms.

(e) The amount of the bond shall be sufficient to ensure the

compliance with all lease terms and conditions, including any

outstanding underpayment of royalty and cumulative end-of-lease

obligations to abandon wells, remove platforms and facilities, and

clear the seafloor in the event of default. The Regional Director will

determine the amount of supplemental bond required based on an analysis

conducted by MMS. The lessee may submit data for consideration by MMS.

(f) The Regional Director may adjust the amount of supplemental

bond or deposit required and the terms for the acceptance of the

lessee's bond if the liability for outstanding underpaid royalties and

end-of-lease abandonment and clearance either increases or decreases.

The Regional Director shall:

(1) Notify the lessee and the surety of any proposed adjustment to

the amount of bond required; and

(2) Give the lessee an opportunity to submit written or oral

comment on the adjustment.

(g) A lessee may request a reduction of the amount of supplemental

bond required by submitting to the Regional Director evidence

demonstrating that the projected royalties and costs of end-of-lease

abandonment and clearance of the seafloor are less than the specified

bond coverage.

10. Section 256.59 is redesignated as Sec. 256.54 and revised to

read as follows:

Sec. 256.54 Bond form.

(a) All bonds must be on a form or in a form approved by the

Director. Bonds submitted after November 26, 1993, must be issued by a

qualified surety certified by the U.S. Treasury as an acceptable surety

on Federal bonds and listed in the current U.S. Treasury Circular No.

570 which is available from the Surety Bond Branch, Financial

Management Service, Department of the Treasury, 401 14th Street SW.,

Washington, D.C. 20227.

(b) A surety bond must be executed by the lessee and a qualified

surety.

(c) Surety bonds must be noncancellable.

(d) Lease bonds must be:

(1) A surety bond;

(2) A lease-specific abandonment account in accordance with

Sec. 256.56;

(3) United States Treasury securities negotiable for an amount

equal to the amount of bond required, accompanied by a conveyance of

full authority to the Secretary to sell the securities in case of

default;

(4) A combination of these security methods; or

(5) Another form of security approved by the Regional Director.

11. Sections 256.55, 256.56, 256.57, 256.58, and 256.59 are added

to read as follows:

Sec. 256.55 General terms and conditions of bond.

(a) The Regional Director shall determine the amount of the lease

bond as provided in Secs. 256.52 and 256.53 of this part.

(b) A lease bond must be payable to MMS.

(c) A lease bond shall be conditioned upon compliance with all the

terms and conditions of the lease and governing regulations.

(d) Lessees must notify the Regional Director of any action filed

alleging the insolvency or bankruptcy of the lessee, a surety company,

or a third-party guarantor. The lessee shall notify the Regional

Director within 72 hours of any such action filed or within 72 hours of

learning of an action that involves a company other than the lessee.

Lease bonds must require the surety to provide this information to the

lessee and directly to MMS.

(e) Upon the incapacity of a surety company by reason of

bankruptcy, insolvency, or suspension or revocation of its charter or

license, the lessee is deemed to be without bond coverage

[[Page 63017]]

and must promptly notify the Regional Director.

Sec. 256.56 Lease-specific abandonment accounts.

(a) The Regional Director may authorize the lessee or guarantor to

supplement its bond(s) by establishing a lease(s)-specific abandonment

account in one or more federally insured accounts made payable upon

demand to the Regional Director. The total security, including the

lease-specific abandonment account(s), shall not be less than the

amount required to meet outstanding underpayments of royalty and

lessee's end-of-lease abandonment and clearance obligations.

(b) Any interest paid on an abandonment account shall be retained

in the account unless the Regional Director approves the payment of the

interest to the lessee or guarantor.

(c) When authorized by the Regional Director, U.S. Treasury

obligations may be substituted for payments into an abandonment

account.

(d) An individual abandonment account shall not contain more than

$100,000 or the maximum insurable amount as determined by the Federal

Deposit Insurance Corporation or the Federal Savings and Loan Insurance

Corporation.

(e) The Regional Director may require the lessee to make an

overriding royalty or production payment into an escrow account. The

required overriding royalty or payment out of production may be

associated with production from a lease(s) other than the lease(s)

bonded through the escrow account.

Sec. 256.57 Third-party guarantee.

(a) The Regional Director may accept a third party's written

guarantee as surety for a lessee's lease obligations, following a

review of:

(1) The period of time that the guarantor has been in continuous

operation as a business entity;

(i) Continuous operation is the time that business was conducted

immediately preceding the posting of a guarantee.

(ii) Continuous operation excludes periods of interruption in

operations that were beyond the guarantor's control and that do not

affect the guarantor's likelihood of remaining in business during lease

exploration, development, production, abandonment, and clearance

operations.

(2) Financial information available in the public record or

submitted by the guarantor, on its own initiative, in sufficient detail

to show to the Regional Director's satisfaction that the guarantor is

qualified based on:

(i) The guarantor's current rating for its most recent bond

issuance by either Moody's Investor Service or Standard and Poor's

Corporation;

(ii) The guarantor's net worth taking into account liabilities

under this and other guarantees.

(iii) The guarantor's ratio of current assets to current

liabilities taking into account liabilities under this and other

guarantees; and

(iv) The guarantor's unencumbered fixed assets in the United

States.

(3) When the information required by paragraph (2) is not publicly

available, the guarantor may submit the information voluntarily. If

this is done, the guarantor must update the information annually within

90 days of the end of the fiscal year or as otherwise approved by the

Regional Director. The information should include:

(i) Financial statements for the most recently completed fiscal

year accompanied by a report prepared by an independent certified

public accountant in conformance with generally accepted accounting

principles and containing the accountant's audit opinion or review

opinion of the financial statements, with no adverse opinion;

(ii) Financial statements, certified to be correct by the

guarantor's financial officer, for completed quarters in the current

fiscal year; and

(iii) Additional information, certified to be correct by the

guarantor's financial officer, as requested by the Regional Director.

(b) The terms of a third-party guarantee shall provide for the

following:

(1) If the lessee fails to comply with any governing lease term,

the guarantor shall take corrective actions or be liable under the

indemnity agreement to provide funds to the Regional Director

sufficient to complete the required corrective action.

(2) If the guarantor wishes to terminate the period of liability

under a third-party guarantee it must:

(i) Notify the Regional Director and the lessee at least 90 days

before the proposed termination date; and

(ii) Obtain the Regional Director's approval for the termination of

the period of liability for all or a specified portion of its

guarantee.

(3) The lessee must obtain a suitable replacement security

instrument before the proposed termination date or if no activities

have taken place on the lease(s) for which the guarantee was approved,

before any activities take place.

(c) The total amount of all outstanding and proposed guarantees by

the guarantor must not exceed 25 percent of that guarantor's

unencumbered net worth in the United States.

(d) If the Regional Director approves a third-party guarantee, the

guarantor must submit an indemnity agreement.

(1) The indemnity agreement shall be executed by all persons and

parties who are to be bound by it, including the guarantor, and shall

bind each jointly and severally.

(2) Two corporate officers who are authorized to bind their

corporation must sign the indemnity agreement.

(3) The guarantor must provide the Regional Director copies of:

(i) The authorization of the signatory officials to bind the

corporation;

(ii) An affidavit certifying that the agreement is valid under all

applicable laws; and

(iii) The corporate authorization, demonstrating that the

corporation can guarantee the obligation and execute the indemnity

agreement.

(4) if the third-party guarantor is a partnership, joint venture,

or syndicate, the agreement shall:

(i) Bind each partner or party who has a beneficial interest,

directly or indirectly, in the guarantor; and

(ii) Provide that, if the third-party guarantee is forfeited, each

partner or party shall be jointly and severally liable for compliance

with all terms and conditions of the lease(s).

(5) Pursuant to Sec. 256.59 of this chapter, the guarantor shall

bring the lease into compliance or pay the Regional Director the amount

necessary to bring the lease into compliance. The indemnity agreement,

upon default by the lessee or operator, shall operate as a judgment

against those parties liable under the indemnity agreement.

(e) If during the life a third-party guarantee the guarantor no

longer meets the criteria of paragraphs (a)(3) and (c) of this section,

the lessee must:

(i) Notify the Regional Director immediately; and

(ii) Bring the lease into compliance with the requirements of this

subpart within 90 days.

Sec. 256.58 Termination of the period of liability and cancellation of

a bond.

(a) The Regional Director shall terminate the period of liability

under a bond upon the request of the surety and demand a replacement

bond of equivalent amount from the lessee. The termination of the

period of liability under a bond does not constitute release of the

bond. The surety continues to be responsible for all obligations and

liabilities accruing before the effective date of the termination of

the period of liability.

(b) The Regional Director will cancel or release a bond as to

obligations that

[[Page 63018]]

accrued before the cancellation only upon:

(1) Being furnished a replacement bond in which the surety agrees

to assume all outstanding liabilities under the bond to be cancelled,

in an amount equal to or greater than the amount of the bond to be

cancelled; or

(2) The determination that all outstanding obligations have been

fulfilled. Such cancellation shall be by a written instrument that

subjects the bond to automatic reinstatement, as if no cancellation had

occurred, if at any time within 6 years of such cancellation:

(i) Any payment made by the principal(s) is rescinded or must be

restored due to insolvency, bankruptcy, reorganization, or

receivership; or

(ii) The principal's representation to MMS that it has paid its

financial obligations or performed the other obligations of the lease

in accordance with MMS specifications is materially false at the time

of cancellation.

(c) Failure of the lessee to replace a deficient bond could result

in penalties under subpart N of part 250 of this Title or suspension of

production or other operations in accordance with Sec. 250.10.

Sec. 256.59 Forfeiture of bonds and/or other securities.

(a) If a lessee refuses or is unable to comply with lease terms or

defaults on the conditions under which a bond, third-party guarantee,

and/or other form of security was accepted, the Regional Director

shall:

(1) Notify in writing the lessee, third-party guarantor, and any

surety on the bond or other form of guarantee of the determination to

call or forfeit all or part of the bond or guarantee, the reasons for

the forfeiture, and the amount to be forfeited. The amount shall be

based on the estimated total cost of correcting the lessee's

noncompliance or default.

(2) Advise the lessee, third-party guarantor, and any surety that

they can avoid forfeiture by:

(i) Agreeing to correct the noncompliance or default and

demonstrating that they have the ability to do so; or

(ii) Agreeing that the surety will complete actions required for

compliance in accordance with a schedule that meets the conditions of

the lease and governing regulations if the surety can demonstrate the

ability to carry out the action required.

(b) If there is a default, the Regional Director may cause the

forfeiture of any and all bonds or other security deposited on

condition of compliance with all the terms and conditions of the lease

or leases.

(c) If forfeiture of the bond or security is required by this

section, the Regional Director shall:

(1) Collect the forfeited amount, and

(2) Use funds collected from bond or security forfeiture to correct

the noncompliance or default.

(d) If the amount forfeited is insufficient to pay for the full

cost of corrective actions:

(1) the lessee(s) and any third-party guarantor(s) are jointly and

severally liable for the remaining costs of obtaining full compliance

with the terms and conditions of the lease, and

(2) The Regional Director may take or authorize required corrective

action to obtain full compliance and may recover from the lessee(s) and

any third-party guarantor(s) all costs in excess of the amount

forfeited.

(3) If the amount of bond or security forfeited exceeds the total

costs of the corrective actions required to obtain compliance, the

Regional Director shall return the excess amount to the party from whom

it was collected.

12. In Sec. 256.62, paragraphs (a), (d), and (e) are revised, and

paragraph (f) is added to read as follows:

Sec. 256.62 Assignment of leases or interests therein.

(a) Subject to the approval of the Regional Director and the

furnishing of bond coverage pursuant to the requirements of subpart I

of this part, leases, or any undivided interests therein, may be

assigned in whole, or as to any officially designated subdivision, to

anyone qualified under Sec. 256.35(b) of this part to hold a lease.

* * * * *

(d) The assignor is liable for all obligations under the lease

accruing before the approval of the lease assignment. Approval of the

assignment by the Regional Director does not relieve the assignor of

accrued lease obligations which the assignee subsequently fails to

perform.

(e) After the Regional Director approves a lease assignment, the

assignee is liable for all obligations under the lease and must comply

with all regulations issued under the Act. The assignee must remedy all

existing environmental problems on the tract, properly abandon all

wells, and reclaim the lease site in accordance with part 250, subpart

G. Before MMS approves an assignment, the assignee must submit

acceptable bond coverage as required by Secs. 256.52 and 256.53 of this

part.

(f) Where there is more than one lessee, the lessees are jointly

and severally responsible for performing the obligations of the lease,

unless provided otherwise in these regulations. The Regional Director

will look to the designated operator to perform lessee obligations

under any lease and under any regulations in this chapter. Should the

operator fail or be unable to perform any obligation of the lessee(s),

the Regional Director will require any or all the lessee(s) to bring

the lease into compliance. If there is no lessee able to perform, the

Regional Director will require prior lessees to bring the lease into

compliance to the extent that the obligation accrued before assignment.

13. In Sec. 256.64, paragraphs (a)(1), (c), and (g) are revised to

read as follows:

Sec. 256.64 Requirements for filing transfers.

(a) All instruments of transfer of a lease or of an interest

therein as to any officially designated subdivision, including

operating rights, subleases and record title interests, shall be

submitted in duplicate to the Regional Director for approval within 90

days from the date of final execution. Instruments of transfer shall

include a statement over the transferee's own signature with respect to

citizenship and qualifications similar to that required of a lessee and

shall contain all of the terms and conditions agreed upon by the

parties thereto.

(1) Neither the transfer of operating rights or creation of a

sublease(s) releases the lessee from any obligation under the lease or

regulations.

(2) The assignment of record title interests does not release the

lessee from any accrued obligation under any lease or regulations.

(3) Carried working interests, overriding royalty interests, or

payments out of production may be created or transferred without filing

an approval.

* * * * *

(c) Where an assignment is of all the lease title interest in a

lease or creates a segregated lease, the assignee must furnish a bond

in the amount prescribed in Secs. 256.52 and 256.53 of this part. Where

an assignment is of less than all the lease title and the assignment

does not create separate leases, the assignee, if the assignment

provides and the surety consents, may become a joint principal on the

bond with the assignor.

* * * * *

(g) Each obligation under any lease and under the regulations in

this part binds the heirs, executors, administrators, successors, and

assignees of the lessee. Except as otherwise provided in the

regulations in this chapter, the lessee(s) (and to the extent of their

interests, sublessees and operating rights owners) are jointly and

severally liable for the performance of each obligation under the lease

and

[[Page 63019]]

under the governing regulations with each prior lessee and operating

rights owner holding an interest when the obligation was accruing.

* * * * *

[FR Doc. 95-29864 Filed 12-07-95; 8:45 am]

BILLING CODE 4310-MR-M