CHAPTER 6 OCS DUE DILIGENCE

• Jurisdiction: United States

Oil and Gas Development on the Outer Continental Shelf
(Oct 1998)
CHAPTER 6
OCS DUE DILIGENCE
David M. Hunter
Phelps Dunbar, L.L.P.
New Orleans, Louisiana

There is no secret that the chore of due diligence, as it relates to the status of a federal mineral lease covering an offshore property, starts with a close review of the appropriate MMS records. The MMS, or Minerals Management Service, acts in dual roles as lessor and regulator of federal offshore properties. The MMS does it all, really: it awards lease bids; approves lessees and issues leases; approves development and production plans; oversees drilling operations; well completions; well work-overs; and well abandonments; approves platform design; inspects facilities with regard to pollution protections; approves production rates; approves pipeline rights-of-way; collects and audits royalty payments; and approves any assignment of leasehold interests. See, generally, 30 CFR 250 , et seq.

That's a lot — and there's more. However, for purposes of this presentation, I'm limiting the focus to a narrow aspect of MMS lease oversight. This is the record keeping aspect of the MMS — that is, just what the MMS lease files and records reflect, what they don't reflect, and some related considerations concerning the status of title. Regardless of the nature of any proposed transaction — whether a lease assignment and related financing, a farmout, an assignment of operating rights, or an assignment of an overriding royalty interest — the wise course is to engage in a close review of the MMS records. But, as I discuss below, that's only part of the story. You also need to review the records of the adjacent parishes and, on very odd occasions, the suit records of the federal courts. Only then will you have a clear picture of what the status of title is — at least, as far as the public records show.

At the outset, I want to make a quick point about the appropriate level of due diligence. The seminar materials suggest that there may be a different level of due diligence, depending on the nature of the transaction. In some cases, that may be true. For instance, where one affiliate transfers its leasehold interest to another affiliate, there may be no need — for an in-house lawyer or land man — to resurrect title to the property. However, from the vantage of an independent title examiner, there is never a transaction where you don't resurrect title. Whether you're issuing a title opinion to the proposed assignee or a lending opinion to the bank financing the transaction, the level of title review should remain the same: make sure everything is as it should be.

I have organized this presentation into four parts, beginning with a description of the information that is available for public review at the MMS. From there, I shift the focus to 30 CFR 256 , which contains the fundamental MMS regulations concerning OCS leases, the bonding requirements for lessees, the procedures for approving assignments, and lease termination. In the third part, I review the interplay between the Outer Continental Shelf Lands Act, 43 U.S.C. 1331 et seq., and state law. And, finally, I review several sample comments and clauses from title and transaction opinions, which address the peculiarities of the MMS records and their relationship to state law. (A note about my frame of reference. Because I live in New Orleans and practice in Louisiana, I focus exclusively on the relationship between the MMS records, the Outer Continental Shelf Lands Act, and Louisiana law.)

I want to thank Ben Waring of Waring & Associates for his thoughtful and considerable assistance with this project. (Waring & Associates, 824 Elmwood Park Boulevard, Suite 145, New Orleans, Louisiana 70123; (04) 733-3117 (phone); (504) 733-6040 (fax).) I also want to acknowledge the regular counsel of my colleague, Robert U. Soniat, whose own standard of due diligence is one that I could never hope to match.

[Page 6-2]

I. The MMS Records: What Information Is Available, Where It's Located

The Gulf of Mexico Regional Office of the MMS is located in the Elmwood office park, just inside the New Orleans city limits. The address is 1201 Elmwood Park Boulevard, New Orleans, Louisiana 70123 (504/736-0557). The office is about fifteen minutes from downtown New Orleans and, likewise, about fifteen minutes from the New Orleans airport. Find the K-Mart and you'll find the MMS.

The Gulf of Mexico Regional Office oversees the leasing and production of natural gas, oil, and other mineral resources on the Outer Continental Shelf. The records here cover all federal leases in the Gulf of Mexico, stretching from offshore Texas eastward to offshore Alabama. For purposes of a due diligence review, there are two sections in this Regional Office that house the majority of the public information concerning the title and production status of federal leases. These are the Adjudication and Public Information Sections. Here, in some detail, is what you'll find in each one:

1. The Adjudication Unit (504-736-2580)

The Adjudication Unit, located on the first floor, is responsible for maintaining OCS lease files, for maintaining a data base on OCS qualification and bonding status, for maintaining the records on certain non-required filings, and, generally, for overseeing and administering OCS leases and pipeline rights-of-way.¹ With that general comment, here is the specific information that is available in the Adjudication Unit:

a. The Serial Register. The Serial Register gives chronological information for each OCS lease, active or inactive, including lease date, lease description, owner, operator, changes in the designation of operator, changes in lease status — a history of the significant actions affecting the lease.

b. OCS Lease Files. These lease files are available by request. Each lease file contains all "required" filings — and usually includes the lease, any approved assignments (both of record title and operating rights), merger and corporate name change filings, bonding information, designations of operator, and all MMS action letters relative to lease ownership and lease operations. The MMS considers all documents relative to record title and operating rights to be "required" filings. As such, they must be submitted for MMS approval before they actually cause changes in record title or operating rights.

c. Company Qualification Information. There is, in Adjudication, a series of "hanging binders" with information regarding Company Qualifications (as well as pending assignments and expired leases). Current real time information on Company Qualifications is available via the Internet i) from the Outer Continental Shelf Bulletin Board System or ii) OCS BBS^SM , a website of MMS information dedicated to OCS exploration departments, located on the Internet at http://www.ocsbbs.com.

[Page 6-3]

d. Non-Required Filings. The MMS will accept other "non-required" documents for filing — that is, documents that title examiners usually regard as directly affecting lease ownership. The MMS does not include these documents in the official lease files, but it does maintain them, nonetheless. These documents are organized by category:

• Mortgage, Deeds of Trust and Security Agreements

• Release of Mortgages and Liens

• UCC Filings and Financial Statements

• Abstract of Judgment

• Overriding Royalty, Production Payment, Net Profit Agreements

• Contracts, Agreements, and Conveyances

• Miscellaneous

• Pipeline Filing Documents

• Non-Specific Document Filings

The MMS indexes these documents on a "Non-Required Documents Filing Report". Anyone reviewing the lease records can request this report and, from there, has access to the listed documents (usually through a document imaging system).

e. Pipeline Rights of Way Tract Books. The joint interest ownership of rights-of-way on the Outer Continental Shelf used to be maintained by the Adjudication Unit, but now a substantial amount of this information is in Public Information. Each right of way is assigned a "G" number; these "G" numbers are cross-referenced to the more commonly referred to Pipeline Segment Numbers; and the majority of this data is now in Public Information. The Tract Books, however, are in Adjudication.

f. Bonding Information. Bonding information is available in both the Adjudication and Public Information. In Adjudication, this information is generally posted in the lease file and in the Company Qualification Database. The list of companies that are exempt from Supplemental Bonding is posted on the wall.

g. Pending Assignments. The Adjudication Unit administers the approval of lease assignments, operating rights, and pipeline rights-of-way. There is a green book, hanging near the Serial Register Pages that tracks Pending Assignments in two ways — first, through a weekly report that reflects those assignments that were filed during the preceding week, and second, through a report, organized by OCS lease number, reflecting all of the currently pending assignments.

A word of caution here. This second report is run sporadically, only once or twice a month. The report may not reflect assignments that the MMS has received in the last few days or even in the last several weeks. Consequently, you should ask the Customer Representative to run the lease number in the MMS master database and, also, to inquire as to the filings "on the floor" on a given day.

2. The Public Information Unit (504-736-2484)

The Public Information Unit, which is also on the first floor, houses information on leases, wells, production, platforms, and units — all of which is available in a variety of reports, publications, maps, and digital files.

[Page 6-4]

There are two computer systems in Public Information, an ICON system and a Customer Computer Database. The ICON system tracks information developed since January 1, 1994, concerning Maximum Efficient and Production Rates (MER and MPRO...