CHAPTER 11 NUTS AND BOLTS OF FEDERAL OCS LEASING AND DEVELOPMENT

• Jurisdiction: United States

Federal Offshore Regulatory Enforcement
(Jan 2016)
CHAPTER 11
NUTS AND BOLTS OF FEDERAL OCS LEASING AND DEVELOPMENT

Collette R. Gordon ¹
Shareholder
Liskow & Lewis
Houston, TX

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COLLETTE R. GORDON is a Shareholder in the Oil & Gas Section of Liskow & Lewis, where her practice in energy focuses on oil and gas acquisitions and divestitures, onshore Louisiana and OCS title examination, energy-related contract drafting, and pipeline issues. Ms. Gordon has served as a member of the Board of Directors of the Professional Landmen's Association of New Orleans, and is an active member of the American Association of Professional Landmen, and the Rocky Mountain Mineral Law Foundation. Ms. Gordon advises clients regarding acquisitions and divestitures of OCS and onshore leases and rights-of-way ranging in size up to in excess of $1 billion. Ms. Gordon regularly provides guidance to clients regarding Bureau of Ocean Energy Management and Bureau of Safety and Environmental Enforcement requirements for acquisition and divestiture of OCS assets.

I. Introduction

Pursuant to the Outer Continental Shelf Lands Act, 43 U.S.C. § 1331 et seq. (the "OCSLA"), the Secretary of the United States Department of the Interior ("Interior") is authorized to issue mineral leases of submerged lands of the Outer Continental Shelf² ("OCS") for the exploration for, development, and production of minerals, and is authorized to grant federal rights-of-way ("ROWs") through the submerged lands of the OCS for the purpose of pipeline transportation of oil or natural gas. The Secretary of Interior is further authorized to issue rights-of-use and easement ("RUEs") to support exploration, development, and production of oil and gas, or the storage thereof.³ In turn, the Secretary of Interior delegated this authority to the former Minerals Management Service ("MMS").

During the reorganization of the MMS in 2010-2011, the responsibility to oversee certain requirements, such as those pertaining to qualifications, lease acquisition and assignment, the grant of RUEs, and responsibility for financial assurance, were transferred to the Bureau of Ocean Energy Management ("BOEM").⁴ At the same time, other duties, such as the responsibility to oversee the grant and assignment of OCS ROWs, unitization of OCS leases, and calculation of decommissioning liability, were assigned to the Bureau of Safety and Environmental Enforcement ("BSEE").⁵ As a result, regulations of both BOEM and BSEE are applicable to OCS leases, pipeline ROWs, and RUEs.

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This paper is intended to outline the basics of leasing and development on the Outer Continental Shelf. After an overview of how to become qualified to hold OCS leases, ROWs, and rights-of-use and easement ("RUEs"), this paper outlines requirements to obtain and assign leases, pipeline ROWs, and RUEs, then discusses generally lease development requirements, and concludes with a summary of required bonding and financial assurance.

II. Qualification to Hold OCS Mineral Leases, Rights-of-Way, and RUEs

Under the OCSLA, Congress delegated the administration of the offshore leasing program to the Secretary of Interior:

The Secretary shall administer the provisions of this subchapter relating to the leasing of the outer Continental Shelf, and shall prescribe such rules and regulations as may be necessary to carry out such provisions. ⁶

In turn, the Secretary of Interior delegated that authority to the former Minerals Management Service ("MMS"), now (for purposes of qualification to own OCS federal leases) the Bureau of Ocean Energy Management ("BOEM").

The OCSLA authorizes Interior to grant leases to "the highest responsible bidder," but the statute does not establish specific criteria for a "responsible bidder."⁷ The OCSLA also directs Interior to adopt regulations "for the assignment or relinquishment of a lease,"⁸ and provides that "[n]o lease ... may be sold, exchanged, assigned or otherwise transferred except with the approval of the Secretary."⁹ Again, the statute is silent as to applicable standards, criteria, and procedures for assignment.

As a result of the OCSLA's silence on the criteria for acquiring OCS federal leases through bidding or assignment, the Secretary of Interior has considerable discretion to adopt rules and standards that apply to those matters. Regulations promulgated by the former MMS implement Interior's statutory authority in this area. 30 CFR § 556.35 provides as follows:

§ 556.35 Qualifications of lessees

(a) In accordance with section 8 of the Act [ 43 U.S.C. § 1337 ], leases shall be awarded only to the highest responsible qualified bidder.

(b) Mineral leases issued pursuant to section 8 of the Act may be held only by: (1) Citizens and nationals of the United States,

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(2) Aliens lawfully admitted for permanent residence in the United States as defined in 8 U.S.C. 1101(a)(20); (3) Private, public or municipal corporations organized under the laws of the United States or of any State or the District of Columbia or territory thereof, or (4) Associations of such citizens, nationals, resident aliens, or private, public, or municipal corporations, States, or political subdivisions of States.

The regulations governing assignments incorporate these same criteria:

BOEM may approve the assignment to you of the ownership of the record title to a lease or any undivided interest in a lease, or an officially designated subdivision of a lease, only if:

(1) You qualify to hold a lease under § 556.35(b).... ¹⁰

Although the regulations do not specifically mention LLCs, the MMS/BOEM have long considered limited liability companies ("LLCs") to fall within the regulatory phrase "associations of such citizens..."

For many years, the MMS (now BOEM) Adjudication Unit in the Gulf of Mexico Region has administered the process for natural and juridical persons to become qualified to own and operate OCS federal leases in the Gulf of Mexico. Following are the current requirements and filings with BOEM that are necessary for selected business entities to become qualified to own OCS federal leases based on recent experience in dealing with the Adjudication Unit. Because the documents required by the BOEM will depend on the type of entity attempting to become qualified, this paper will set forth the general list of documents required for the two of the most common types of business entities to become qualified: (i) the corporation and (ii) the LLC.¹¹

A. List of Documents for Qualification by the BOEM as a Corporation

In order to establish qualifications of a corporation to bid on and to hold an OCS federal lease, or to obtain the grant of a federal pipeline ROW or RUE, the following documents must be filed with the Gulf of Mexico Adjudication Unit:

(1) Letter stating the name of the corporation exactly as it should appear on all legal documents;

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(2) Certified copy of the corporation's articles of incorporation and any amendments thereto;

(3) Certificate of the corporation's Secretary or Assistant Secretary, over the corporate seal, certifying that the corporation is authorized to hold mineral leases and rights-of-way and identifying the state in which the corporation is incorporated;

(4) Certificate of Incumbency, over the corporate seal, listing the officers authorized to bind the corporation, certified by the Secretary or the Assistant Secretary of the corporation; and

(5) Certificate evidencing authority of persons authorized to bind the corporation certified by the corporation's Secretary or Assistant Secretary over the corporate seal. Said evidence would include either the copy of resolutions of the Board of Directors granting authority or copy of the power of attorney.

The corporate seal must be distinctly embossed on each certificate executed by the Secretary or Assistant Secretary of a corporate entity.

B. List of Documents for Qualification by the BOEM as an LLC

In order to establish qualifications of an LLC to bid on and to hold an OCS federal lease or to obtain the grant of a federal pipeline ROW or RUE, the following documents must be filed with the Gulf of Mexico Adjudication Unit:

(1) Company Agreement or Operating Agreement, and any amendments thereto, of the LLC;

(2) Certificate of formation of the LLC, and any amendments thereto;

(3) Certificate certifying that the LLC is authorized to hold mineral leases and rights-of-way on the OCS and indicating the state in which the LLC was registered or formed;

(4) Certificate listing each of the members of the LLC;

(5) Certificate from each of the members of the LLC indicating that such member itself is authorized to hold mineral leases and rights-of-way on the OCS. This certificate should also state the member's state of incorporation ¹² or formation. If the member is an individual, it should include a statement of citizenship; and

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(6) Certificate of incumbency, jointly executed by all of the members of the limited liability company, listing the persons authorized to bind the limited liability company,¹³ as well as resolutions evidencing the authority of persons to bind the limited liability company if not specifically set forth in the Articles of Organization or Operating Agreement or Company Agreement.

It is strongly recommended that representatives of the entity attempting to become qualified confer with BOEM Adjudication Unit personnel prior to submitting the qualification papers.

There are no BOEM requirements that an entity be able to demonstrate a minimum financial worth in order for the BOEM to approve that entity's qualification to hold offshore federal leases, ROWs, or RUEs. Of course, actually becoming the lessee, grantee, or assignee of such interests is different than becoming qualified to own such interests. As a practical matter, before BOEM will actually award or approve an assignment of an OCS lease, or before BSEE will approve...