[Federal Register Volume 60, Number 236 (Friday, December 8, 1995)]
[Proposed Rules]
[Pages 63011-63019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29864]



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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