CHAPTER 7 SURVEY OF CURRENT OCS RELATED TOPICS

• Jurisdiction: United States

Oil and Gas Development on the Outer Continental Shelf
(Oct 1998)
CHAPTER 7
SURVEY OF CURRENT OCS RELATED TOPICS
F. Neelis Roberts ¹
Schully, Roberts, Slattery, Jaubert & Marino
New Orleans, Louisiana

I. INTRODUCTION

The goal of the Program Committee in presenting a Survey of Current OCS Related Topics was to, in effect, fill in the gaps left by the other papers presented at this Institute on Oil and Gas Development on the Outer Continental Shelf. The paper is not intended to be a presentation of "Hot Topics," because most of those topics are covered in depth elsewhere during the Institute. Rather, this survey presents important and relevant topics to those conducting operations, or owning interests on the Outer Continental Shelf ("OCS") which are not otherwise covered during the Institute.

There are several very important topics of interest which, although at different stages of legislative evolution, every operator/owner on the OCS should closely follow. Of tremendous significance on the OCS is the proposed legislation known as The Royalty Enhancement Act of 1998 and the somewhat parallel royalty in-kind pilot program sponsored by the MMS. These measures will, one day, significantly affect the manner in which some or all OCS lessees satisfy their royalty obligations to the federal government. In addition, and although still in a very preliminary stage, The Conservation and Reinvestment Act of 1998 is designed to amend the Outer Continental Shelf Lands Act² ("OCSLA"), in order to redirect federal revenues (including bonus, rentals, and royalty) generated by mineral production on the OCS into state and locally administered conservation programs. Although the substance of these topics is still evolving, these are topics which should be watched closely by the OCS operator/owner today, because each of them will have a significant impact in the future, if and when actually implemented by the federal government.

In addition to those emerging legislative topics noted above, there are several regulatory topics which are already near finalization and of significant importance to the OCS operator/owner. Much has been done on the regulatory front relating to establishing the value of oil produced on the OCS for federal royalty purposes. By the time this paper is presented, a final rule on this subject is expected from the MMS. The final rule will be the culmination of years of

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debate and significant industry involvement in the rulemaking process. In addition, the MMS has recently issued a suite of proposed regulations addressing post-lease operations safety. Not only do the Proposed Rules specifically address operational issues, but they also further delineate the liability hierarchy of owners and operators on the OCS. For many years, the MMS has wrestled with the industry over the lineage and scope of liability among lessees, prior owners and operating rights owners in federal leases, for both monetary obligations (such as royalty payment) and non-monetary obligations (such as plugging and abandonment). Much has been done recently to clarify this liability. These new regulations, designed to enhance operator accountability, have been proposed by the MMS in furtherance of its absolute commitment to protecting both the environment and human safety.

Finally, this presentation will address two topics which have not necessarily been the subject of any emerging legislation or recent regulatory developments, but which are confronted by the OCS operator/owner on a regular basis. Although aspects of these topics may border on the esoteric or academic, they must be analyzed and addressed at a very practical level almost daily. First, the interplay between the public records laws of coastal states and the filing requirements of the MMS is an area which remains ill-defined and largely subject to uncertainty. Although some coastal states have comprehensive and complex registry laws, their applicability on the OCS and their legal effect under OCSLA has not been widely tested. An additional topic of very practical importance on the OCS is the OCS operator/owner's ability to disclose and use confidential information. While this issue is customarily dealt with by contract, with the surge in confidential seismic information and the current ease of information transfer, questions of confidentiality have taken on an increased level of significance in the conduct of business on the OCS.

The above topics, those which are the subject of emerging legislation, those which are the subject of current rulemaking and those which require a more esoteric analysis, are surveyed below.

II. EMERGING LEGISLATION

A. The Royalty Enhancement Act of 1998.

In the Spring of 1998, legislation known as the Royalty Enhancement Act of 1998, was proposed in both the house and the senate.³ The stated purpose of the legislation is to provide certainty for, reduce administrative and compliance burdens associated with, and streamline and improve, the collection of royalties from federal and OCS oil and gas leases, and for other purposes.⁴ The core provisions of the proposed legislation mandate that the federal government take its royalty in-kind, an idea that has been subject to in-depth assessment by the MMS and the

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subject of various pilot programs since 1995.⁵ Under the proposed legislation, the federal lessor's right to take its royalty share of production in-kind is not optional. The United States must take its royalty share in-kind, both offshore and onshore.⁶ The bill envisions a delivery point, at which the possession of the royalty share of oil is transferred to the United States. At and beyond the delivery point, the United States has custody, possession and responsibility attendant to the royalty share, in all respects.

(1) Qualified Marketing Agents.

The proposed legislation envisions the selection of qualified marketing agents, with whom the Secretary of the Interior will contract. These marketing agents will, on behalf of the Secretary, market and dispose of all royalty production. Marketing agents will be selected by the Secretary based on competitive bids. All marketing agents must have the expertise necessary to receive, handle, transport, deliver, market, process, dispose, broker or sell royalty production. The marketing agent shall receive compensation to be determined by the Secretary and established in the contract between the agent and the Secretary. The Secretary is specifically granted "the greatest latitude in contracting with qualified marketing agents" and the resulting marketing contracts are exempt from otherwise applicable federal procurement and property disposition laws.⁷

(2) Transportation and Processing Costs.

Under the proposed legislation, transportation costs associated with sale of royalty production are borne by the United States.⁸ "Transportation" is defined to mean any movement of royalty production (including associated or related activities to facilitate movement such as compression and dehydration), upstream or downstream of the delivery point of royalty production, that is not gathering.⁹ "Gathering" is defined to mean the movement of unseparated, unidentifiable lease production upstream of the delivery point to a central accumulation point on, or immediately adjacent to, the lease premises, unit or communitized area.¹⁰

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Calculation of transportation charges is directly addressed by the proposed legislation.¹¹ The bill allows for reimbursement to the lessee of transportation costs incurred by the lessee in transporting royalty production, depending upon whether the transportation was by: (i) regulated pipeline or facility, (ii) shipment-by-shipment tariff jurisdiction pipeline or facility, or (iii) unregulated pipeline or facility.¹² Transportation costs downstream of the delivery point shall be based upon a negotiated rate that shall not exceed the highest rate charged for transportation provided to third parties or shall be the fair commercial value of the transportation services.¹³

Nothing in the bill is intended to alter or abridge the current rights of a lessee under existing oil and gas leases, including the rights to explore for, operate, drill for, produce oil and gas or otherwise operate the lease. Similarly, a lessee's right to use gas on the leased premises for purposes of production from and operations on the leased area or unavoidably lost prior to the delivery point, are not affected, abridged or altered by the bill.¹⁴

Processing costs are also borne by the United States under the proposed legislation.¹⁵ "Processing" is defined in the bill as meaning any process designed to remove elements or compounds from oil or gas, including adsorption or refrigeration, but excluding lease or field processes, such as natural pressure reduction, mechanical separation, heating, cooling, dehydration and compression on the upstream side of the delivery point.¹⁶

(3) State Involvement.

The bill also provides that a State entitled to revenues under the provisions of Section 35 of the Mineral Leasing Act¹⁷ or Section 8(g) of the Outer Continental Shelf Lands Act¹⁸ may elect to act on behalf of the United States in selecting qualified marketing agents to sell or dispose of royalty production. The right only extends, however, to royalty production produced from leased premises within the state or from Section 8(g) lease premises adjacent to the state.¹⁹

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(4) Rights, Obligations and Responsibilities of the Lessee.

With respect to the rights, obligations and responsibilities of the lessee, the bill obligates a lessee to tender royalty production at the delivery point for each lease premises. It further provides that, upon such tender, "all royalty obligations of the lessee shall be considered fulfilled and fully satisfied for the amount tendered, including any express or implied obligation or duty to market." Even where the United...