[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Rules and Regulations]
[Pages 27948-27960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13199]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 250, 251, 256, 281, and 282

RIN 1010-AB92


Surety Bonds for Outer Continental Shelf Leases

AGENCY: Minerals Management Service, Interior.

ACTION: Final rule.

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

SUMMARY: This rule amends the surety bond provisions of Minerals 
Management Service (MMS) regulations to establish December 8, 1997, as 
the deadline for Outer Continental Shelf (OCS) oil and gas and sulphur 
lessees to comply with new levels of bond coverage established in 1993. 
It also makes other changes that reduce the risk of default by an 
underfunded entity who operates a lease or holds a pipeline right-of-
way or geological and geophysical (G&G) exploration permit to drill a 
deep stratigraphic test well.

EFFECTIVE DATE: August 20, 1997.

FOR FURTHER INFORMATION CONTACT: John V. Mirabella, Engineering and 
Operations Division, at (703) 787-1607.

SUPPLEMENTARY INFORMATION: This rule:
    (1) Establishes December 8, 1997, as the deadline for every lessee 
to comply with the bond coverage requirements established in the rule 
published August 27, 1993 (58 FR 45255).
    (2) Clarifies our position that co-lessees and operating rights 
owners are

[[Page 27949]]

jointly and severally liable for compliance with our regulations and 
the terms and conditions of their OCS oil and gas and sulphur lease for 
nonmonetary obligations.
    (3) Clarifies our position that an assignor of an OCS lease remains 
responsible for all wells and facilities that were in existence at the 
time the assignor assigns its interest until the wells are plugged and 
abandoned, the facilities are decommissioned, and the site is 
reclaimed.
    (4) Establishes regulatory frameworks for acceptance of lease-
specific abandonment accounts and third-party guarantees.
    (5) Sets a higher more realistic level of bond coverage to be 
required of the holder of a G&G exploration permit to drill a deep 
stratigraphic test well and authorizes a demand for a supplemental bond 
from the holder of a G&G permit or pipeline right-of-way.
    This rule is the product of our efforts to write regulations in 
plain English and continue our attempts to provide optimum flexibility 
for a lessee to meet our lease bond requirements and ensure that 
lessees adequately fund their end-of-lease obligations.
    We have, on a case-by-case basis, allowed an individual lessee to 
furnish a third-party guarantee or to ensure funding for its lease 
abandonment obligations by the establishment and funding of a lease-
specific abandonment account as alternatives to traditional 
supplemental bonds. These alternatives are specifically addressed in 
this rule. A third-party guarantor need not qualify as a surety with 
the Department of the Treasury (Treasury) but must agree to fully 
perform all lease obligations without the dollar limitation permitted a 
surety under this rule.
    Our objectives for this rule are to: (1) Ensure a lessee's 
financial capability to perform its lease obligations; (2) protect the 
environment from threat of harm that might result from a lessee's 
failure to timely carry out proper well abandonment and site clearance 
operations; (3) achieve a reasonable degree of protection from default 
by a lessee, permittee, or pipeline right-of-way holder at a minimum 
increase in costs for lease, permit, or pipeline operations; and (4) 
select a method for attaining these goals that equitably affects all 
parties.
    This rule implements the changes proposed by our notice of proposed 
rulemaking (NPRM) that was published December 8, 1995 (60 FR 63011). We 
received 17 sets of comments and recommendations in response to that 
NPRM. Four of those comments and recommendations were from industry 
associations, and 13 were from lessees or operators. We have carefully 
considered each of these comments and recommendations. We did not adopt 
the recommendations that did not appear to be in the public's best 
interest.
    We rewrote the requirements of the rule in plain English and for 
technical accuracy. These additional revisions describe more clearly 
how the current rule works and do not affect the substance of the rule.
    Nothing in this rule (e.g., the levels of bond coverage required) 
is intended to limit the obligations of either a lessee, the holder of 
an OCS pipeline right-of-way, or the holder of a G&G exploration 
permit, to fulfill all the requirements of the lease, right-of-way, or 
permit and any applicable regulations.

Discussion and Analysis of Comments

    Comment: Many respondents indicated that they are ``supportive of'' 
or ``understand'' MMS's goal to insure against default of obligations 
by underfunded entities owning leases, rights-of-way, or exploration 
permits.
    Response: We appreciate these expressions of understanding and 
support for our goal to ensure that financial obligations are properly 
addressed by the responsible party. Lessees must plug and abandon lease 
wells, remove platforms and other facilities, and clear the seafloor of 
obstructions at a time when their lease operations are no longer 
generating income. We, therefore, need assurances that OCS lessees have 
means for funding their lease abandonment and cleanup obligations.
    Similarly, the holder of a pipeline right-of-way must remove all 
platforms, structures, domes over valves, pipes, taps, and valves along 
the right-of-way in compliance with our regulations at a time when its 
pipeline operation no longer generates income. Thus, we need assurances 
that the holder of an OCS pipeline right-of-way has a means for funding 
its right-of-way abandonment obligations.

Section-by-Section Analysis

Part 250--Oil and Gas and Sulphur Operations in the OCS
    Section 250.8 Designation of operator. We have combined a portion 
of the provisions of proposed Sec. 256.62(f) with the current 
provisions of Sec. 250.8 and modified the text of the resulting 
provision to present the requirements in plain English. Since joint and 
several liability is closely related to the requirement for the 
designation of an operator, we have consolidated several provisions of 
the proposed rule in a revised Sec. 250.8, though the proposed rule did 
not propose amendment of Sec. 250.8. Every lessee or working interest 
owner who executes the designation of operator required under the 
provisions of Sec. 250.8, Form MMS-1123, acknowledges its joint and 
several liability.
    Comment: Twelve respondents expressed opposition to, or lack of 
support for, what they characterized as ``the effort to establish joint 
and several liability between co-lessees or between assignors and 
assignees of OCS leases.''
    Response: This rule simply clarifies our position that nonmonetary 
lease obligations are joint and several among co-lessees (i.e., 
multiple lessees) and owners of operating rights. Section 
5(a)(2)(C)(II) of the Outer Continental Shelf Lands Act (OCSLA) equates 
multiple lessees to ``partners.''
    Our position on this matter remains the same as it was May 10, 
1954, the effective date of the regulations the Department of the 
Interior (DOI) issued to implement the OCSLA of 1953. Section 250.31 of 
the May 1954 regulations required a designation of operator just as the 
current provisions of Sec. 250.8, Designation of operator, do today in 
``all cases where operations are not conducted by an exclusive owner of 
record * * *''
    As previously noted, each party that executes a designation of 
operator agreement recognizes the joint and several nature of OCS lease 
obligations. The designation of operator (Form MMS-1123) designates the 
entity that the co-lessees authorize to conduct lease operations as 
each of the co-lessee's ``operator and local agent.'' Each lessee, by 
execution of the designation of operator, agrees that ``In case of 
default on the part of the designated operator, the signatory lessee 
will make full and prompt compliance with all regulations, lease terms, 
or orders of the Secretary of the Interior (Secretary) or his 
representative.''
    Section 250.110 General requirements. Comment: Two respondents 
recommended that paragraph (b) of Sec. 250.110, General requirements, 
be changed to clarify the extent of responsibility of prior lessees for 
obtaining compliance with accrued obligations.
    Response: We have modified the text of this provision to present 
its contents in easily understood English. While this rule determines 
who is liable to MMS for performance of nonmonetary obligations, it is 
not our intention that this rule preclude private agreements concerning 
the allocation of liabilities between and among the affected parties. 
Nor does this rule specify against whom

[[Page 27950]]

we will take enforcement action if we discover noncompliance.
    Comment: Two respondents expressed support for MMS's position on 
joint and several liability as the ``most practical approach'' or as 
``understandable and acceptable.'' One respondent observed that it 
seems practical for multiple lessees of a single tract to police 
themselves in assuring the financial capability of each participant and 
in making appropriate arrangements to provide for property abandonment 
through a joint operating agreement that could include, among other 
things, escrow funds and third party guarantees.
    Response: We appreciate these expressions of support. We agree that 
multiple lessees of a single tract should, as a matter of good business 
practice, police themselves in assuring the financial capability of 
each participant. The multiple lessees of a single tract need to make 
appropriate arrangements to provide for proper well abandonment and 
lease clearance. These arrangements may be in the form of a joint 
operating agreement that funds lease-specific abandonment accounts.
    Comment: Eleven respondents urged MMS to abandon its joint and 
several liability proposal and instead to adopt in full the 
recommendations of the Ad Hoc Lease Abandonment and Bonding Issues 
Committee as a more reasonable approach.
    Response: We have not adopted this suggestion. Adoption of some of 
the committee's recommendations does not appear to be in the public 
interest. For example, the committee's report provided no supporting 
justification for its recommendation for a reduction in royalty. A 
royalty reduction to fund lease abandonment and clearance liabilities 
would be a direct transfer of the lessee's financial obligations and 
responsibilities to the American taxpayer. Also, we cannot support 
severance of assignor liability. We do not have authorized funds 
available to correct a noncompliance or default when an assignee 
defaults. Correction of a noncompliance or default could be especially 
troublesome if the cost of correction exceeds the funds available under 
a forfeited bond and other security. Lastly, we are concerned that 
implementation of the committee's recommendations on lessee pro-rata 
responsibility would create a major increase in administrative burden 
for industry and Government without an appreciable reduction in risk to 
the Government.
    Comment: A trade organization commented that the imposition of 
joint and several liability should be prospective only because the 
Secretary has no authority to issue retroactive rules.
    Response: This rule merely codifies what has been the law under the 
OCSLA, since enactment and the common law. As previously noted, section 
5(a)(2)(C)(II) of the OCSLA describes those who jointly own interests 
in a lease as ``partners.''
    Comment: A trade organization stated, with respect to joint and 
several liability, that absent an express rule on the subject at the 
time of the lease, one should look to the common law to understand what 
the parties understood their contract to mean. It cites Resolution 
Trust Corporation v. Feldman, 3 F.3d 5 (1st Cir. 1993) for the 
proposition that parties to a contract may agree to limit the liability 
of each of several promisors.
    Response: While parties to a contract may agree to limit liability, 
neither Congress nor the Secretary ever agreed to limit the liabilities 
of OCS lessees for operational obligations. The relevant common law 
rule is that stated in Restatement of the Law of the Contracts, Second 
Sec. 289(1):

    Where two or more parties to a contract promise the same 
performance to the same promisee, each is bound for the whole 
performance thereof, whether his duty is joint, several, or joint 
and several . * * * A promise in the first person singular, signed 
by several persons, creates joint and several liability.
    Indeed Resolution Trust Corporation concerned two different 
obligations: one on which the parties had agreed to limit particular 
parties to particular amounts of liability and another on which they 
had not. Absent specific provisions limiting promisors to particular 
sums, the court held the parties jointly and severally liable for the 
full amount of costs and fees. 3 F.d at 10.
    Moreover, under the common law and the jurisprudence of the oil 
producing regions, when a lessee assigns an undivided interest in its 
lease to another, each of them is jointly and severally responsible for 
the performance of the lease covenants. Hafeman v. Gem Oil Co., 80 N.W. 
139, 163 (Nebr. 1956); Problems Presented by Joint Ownership of Oil, 
Gas, and Other Minerals, 32 Tex. L. Rev. 699, 715 (1954); Willis, 
Thornton on the Law of Oil and Gas Sec. 341 (5th ed., 1932).
    Comment: A trade association believes that when MMS requires 
parties submitting joint bids to state on the bid form the 
proportionate interest of each participating bidder, MMS limits the 
liability of each joint bidder. The comment states that, by allowing 
parties to designate percentage ownership interests, MMS has created a 
``rule of property.''
    Response: MMS has never given its imprimatur to efforts of lessees 
to limit their liabilities to MMS, much less created a property right 
to such limitations. The commenter does not point to any language in 
the lease instrument, bid form, or regulations that suggests that the 
opportunity for bidders to state their proportionate interests is 
intended to limit the promise of each such bidder to perform fully the 
terms of the lease. It is clear from the context of the lease sale 
notice that the purpose of requiring such statements of proportionate 
interest from joint bidders is to facilitate enforcement of the 
restrictions on joint bidding in 30 CFR part 256, subpart G and 30 CFR 
part 260, subpart D. Those regulations attribute proportionate shares 
of production of jointly held leases in determining whether those 
filing a joint bid exceed the average daily production limit of 1.6 
million barrels a day.
    Comment: A trade association criticized the joint and several 
liability provision on the grounds that MMS relied on the concept of 
``indivisibility,'' a concept drawn from the common law of torts, to 
support its position that the operational obligations of a lease are 
joint and several obligations.
    Response: MMS does not rely on ``indivisibility'' as the legal 
rationale for its regulation concerning the obligations of holders of 
undivided interests but on the contract and oil and gas and property 
law concepts cited in our responses to earlier comments. MMS used the 
notion of ``indivisibility'' to explain its policy choice in treating 
nonmonetary obligations differently than monetary obligations were 
treated in the proposed payor liability rule and the Royalty 
Simplification and Fairness Act. It does not serve the purposes of 
OCSLA for lessees of undivided interests in a lease to be freed, after 
mere partial performance, of the obligation to plug a well or remedy an 
oil spill.

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

    Comment: A respondent expressed concern that the bond coverage 
requirements for pipeline right-of-way holders ($300,000) and G&G 
exploration permittees ($200,000) may prove to be troublesome for many 
existing permit holders. Another respondent suggested that the decision 
to require additional bonding should be tied to some of the same 
factors that are used to determine that supplemental bond coverage is 
needed for a lease.

[[Page 27951]]

    Response: A properly funded holder of a pipeline right-of-way or 
G&G permit to drill a deep stratigraphic test well (Sec. 251.6-4) 
should not find compliance with this rule troublesome. This rule 
continues the level of bond coverage required of an applicant for a 
pipeline right-of-way at $300,000. The rule also provides specific 
regulatory authority for the Regional Director to require the holder of 
a right-of-way or the holder of a G&G permit to drill a deep 
stratigraphic test well to provide additional bond coverage. We expect 
the Regional Director to use factors similar to those used to determine 
that a supplemental bond is required under a lease. However, due to the 
differences between pipeline and lease operations, we have not adopted 
language specifying the factors that the Regional Director will use to 
determine that a supplemental bond is needed by a pipeline operator or 
permit holder. We have revised the text of Secs. 250.159 and 251.6-4 to 
present the requirements of these provisions in plain English.
Part 256--Leasing of Sulphur or Oil and Gas in the OCS
    Section 256.7  Cross references. We have added a new paragraph (b) 
to Sec. 256.7 that cross references MMS's regulations governing appeals 
to orders and decisions issued under the regulations in 30 CFR part 
256.
Subpart I--Bonding
    Section 256.52  Requirement to file a bond.
    Comment: One respondent suggested an editorial change to proposed 
Sec. 256.52, Requirement to file a bond, to clarify the intent of the 
provision.
    Response: We have rewritten and renamed this provision to more 
clearly state the intent of the provision. Section 256.52 (formerly 
Sec. 256.58) has been renamed ``Bond requirements for an oil and gas or 
sulphur lease.'' Our rewrite of the provisions of this section includes 
a rewrite of paragraph (e) and a new paragraph (h) to consolidate 
provisions addressing the need to replace a bond. We had not proposed 
to revise paragraph (e). Paragraph (c) clarifies that while an 
operator's bond may be substituted for a lease bond, an operator's bond 
may not be substituted for an areawide bond. Paragraph (f) codifies in 
our rule the Treasury Department's requirement that a pledge of 
Treasury Securities must be accompanied by authority to sell the 
securities in case of default. The new paragraph (h) incorporates 
portions of former Sec. 256.58 (d) and (e) concerning the consequence 
of failure to replace a bond. Our rewrite of the proposed section, 
including our rewrite of former Sec. 256.58(e), does not alter the 
requirements from those of the proposed rule.
    Section 256.53  Additional bonds. We have revised the proposed text 
of Sec. 256.53 (formerly Sec. 256.61) to present the requirements of 
the provision in plain English.
    We had proposed to require all OCS lessees to come into compliance 
with the levels of bond coverage established in the 1993 rule for new 
actions within 2 years of the final rule. This rule establishes 
December 8, 1997, as the deadline for each OCS lessee to comply with 
the lease bond coverage required at the development stage of its lease. 
A full year has already lapsed, and MMS has concluded that all lessees 
should be able to come into compliance by that date which is 2 years 
from publication of the proposed rule and 4 years after these levels of 
coverage became effective for new approvals.
    The following table sets forth the levels of bond coverage required 
for each stage of lease development.

------------------------------------------------------------------------
                                                               Areawide 
              Stages 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
------------------------------------------------------------------------

    Comment: Three respondents indicated that MMS should review its 
policy of ``only requiring the operator'' to post a bond to cover lease 
obligations. They felt that everyone who owns a working or operating 
interest in a producing lease should have to post a bond and that, 
should the co-interest owners wish to agree voluntarily among 
themselves to allocate this responsibility, they should have the option 
to do so. Other respondents expressed the view that a requirement that 
each and every lessee and owner of other interests in an OCS lease 
submit and maintain a lease bond commensurate with its ownership in an 
OCS lease(s) could effectively deny independent producers sources of 
investment capital that historically have provided financial assistance 
for their conduct of oil and gas operations. Other respondents 
expressed the view that, from a practical standpoint, if a supplemental 
bond is not required because of the financial strength of one of the 
interest owners (i.e., one lessee), other lessees should not be 
required to furnish a supplemental bond.
    Response: We do not have a policy of ``only requiring the 
operator'' to post a bond to cover lease obligations. We require the 
lessee to provide a bond that guarantees compliance with all the terms 
and conditions of the lease (i.e., a bond that covers all lease 
operations and obligations). However, we do permit an operator to 
provide bond coverage for a lease. Where there are multiple lessees, 
the bond provided by a lessee or the operator protects against 
noncompliance by all lessees, operating rights owners, and operators. 
As noted by some respondents, a requirement that everyone who owns an 
interest in a lease post a separate bond could effectively deny 
independent producers sources of investment capital that historically 
have provided financial assistance for their conduct of oil and gas 
operations. Since lessees are jointly and severally responsible for 
compliance with lease terms and conditions, it is not necessary, 
desirable, or practical to require that every owner of an interest in a 
lease submit and maintain a separate lease bond that only addresses its 
interest.
    While this rule determines who is liable to MMS for performance of 
nonmonetary obligations, this rule is not intended to preclude 
agreements among the co-lessees or between assignors and assignees to 
apportion among themselves responsibility for such obligations. 
However, such agreements will not affect the parties' obligations to 
the United States under this rule.
    Comment: A trade association advocates that all working interest 
holders be required to post supplemental bonds and not be allowed to 
``hide behind'' a deep pocket.
    Response: MMS has not concluded that it is necessary to require 
bonding in an amount equal to 100 percent of lease obligations in every 
case. A supplemental bond will be required only when MMS has reason to 
believe that the usual security requirements are inadequate to ensure 
performance of lease obligations. However, nothing in these regulations 
precludes any party from entering into arrangements with its partners 
to ensure full participation in the costs of compliance or bonding. MMS 
agrees that all bonds accepted must guarantee compliance by all record 
title-holders, all operating rights owners, and all operators on the 
lease premises and has so amended the regulation at Sec. 256.54(a).
    Section 256.54 Bond form. We have added a new paragraph (a) to 
Sec. 256.54 ``General requirements for bonds,'' that more clearly 
states that any bond or other security provided under part 256 must be 
payable on demand by the Regional Director and guarantee compliance 
with all the lessee's obligations under the lease.

[[Page 27952]]

    Comment: One respondent questioned the intent of Sec. 256.54, which 
provides that surety bonds are to be noncancellable, since Secs. 256.58 
(a) and (b) allow for cancellation of bonds and MMS bond (Form MMS-
2028) contains a cancellation clause.
    Response: The commenter is correct that it was not our intention to 
preclude cancellation under the specific circumstances provided in 
Sec. 256.58(b). It was our intention to clarify that, as provided in 
the approved MMS bond (Form MMS-2028), an event that might give rise to 
a performance or payment defense by a surety, or serve to diminish, 
terminate, or cancel a surety obligation, under State surety law, does 
not modify the surety's obligation under an MMS approved bond. We 
expect the surety under an MMS bond to continue to waive such defenses 
and to avoid any risk it considers unacceptable by following the 
process provided in Sec. 256.58(a) to terminate the period of liability 
under its bond. We have modified Sec. 256.54(d) to clearly state that 
bonds continue in force even though an event occurs that could 
diminish, terminate, or cancel a surety obligation under State surety 
law. We have also revised the text of Sec. 256.58(b) to more clearly 
express the intent of Sec. 256.54 (i.e., a bond will be released only 
under circumstances that include the submission and maintenance of a 
replacement bond or other form of security that specifically assumes 
the liabilities of the ``canceled'' bond as provided in Sec. 256.58(b) 
or the Regional Director determines that there are no outstanding 
obligations).
    Section 256.55 General terms and conditions of bond. Comment: One 
respondent recommended changes to paragraphs (d) and (e) of 
Sec. 256.55, General terms and conditions of bond, to clarify that the 
rule was not intended to require notice of hearsay reports of 
insolvency.
    Response: We have revised this provision to address only actual 
court filings. We have renamed Sec. 256.55, ``Lapse of bond,'' and 
revised the text of the section to more clearly state that the lessee 
must promptly provide acceptable new bond coverage when its bond 
coverage lapses.
    Section 256.56 Lease-specific abandonment accounts. Comment: Three 
respondents recommended that MMS establish a type of account with the 
Federal banking system that would allow lessees to deposit the required 
amounts into lease-specific abandonment accounts on a fully insured 
basis in trust for the benefit of MMS in the event a lessee fails to 
fully meet its end-of-lease obligations.
    Response: We have revised the language of the rule to provide 
assurance that funds deposited in a lease-specific abandonment account 
will be available, if needed. The new language better describes the way 
funds in lease-specific abandonment accounts are to be handled. As 
funds accumulate in a lease-specific abandonment account in a federally 
insured institution, the managing institution will purchase Treasury 
securities pledged to MMS. The Treasury securities pledged to MMS will 
be purchased before the amount in the account equals the maximum 
insurable amount, as determined by the Federal Deposit Insurance 
Corporation or the Federal Savings and Loan Insurance Corporation. The 
managing institution and the Regional Director may establish a Federal 
Reserve Circular 154 account to hold Treasury securities pledged to 
MMS, or the Regional Director may allow the managing institution to 
hold the pledged Treasury securities in a separate trust account 
(Sec. 256.56(d)).
    Section 256.57 Third-party guarantee. The proposed text of 
Sec. 256.57 has been revised to present the requirements of that 
section in plain English, and Sec. 256.57 has been renamed ``Using a 
third-party guarantee instead of a bond.''
    Section 256.56, Lease-specific abandonment accounts and 
Sec. 256.57, Using a third-party guarantee instead of a bond, establish 
regulatory regimes under which we may accept alternate methods for 
funding lease abandonment and clearance obligations. A third-party 
guarantee or a supplemental bond may cover specific obligations, such 
as plugging and abandonment of specified leases or wells. However, the 
acceptance of a supplemental bond or guarantee limited to lease 
abandonment obligations will depend on how well the combination of all 
bonds and guarantees ensures that the full range of obligations will be 
met.
    Section 256.58 Termination of the period of liability and 
cancellation of a bond. Comment: One respondent requested clarification 
of a number of issues relating to the use of the current OCS bond (Form 
MMS-2028) under Sec. 256.58(a) and (b) and asked whether another form 
of bond would be needed under Sec. 256.58(b). The respondent also 
questioned whether other forms of security including the new forms of 
third-party guarantees and escrow accounts could be used as 
replacements under Sec. 256.58(a) and (b).
    Response: We have revised the text of Sec. 256.58, Termination of 
the period of liability and cancellation of a bond, to present the 
requirements of the rule in plain English. Subsection 256.58(b) spells 
out the circumstances under which a surety may be released from all 
further liability. Replacement security can be in any form that would 
be acceptable to MMS for a new lease, except that the security 
furnished in substitution for a terminated lease bond on which the 
Regional Director has not determined that all outstanding obligations 
have been performed will have to include a specific provision under 
which the surety agrees to assume all outstanding liabilities under the 
bond that is to be terminated under Sec. 256.58(b).
    Comment: One respondent recommended that, when all operations on a 
lease have ceased and abandonment and removal operations have been 
completed, MMS give a release to the lessees in a form that enables 
sureties and bonding companies to release their bond without further 
recourse or liabilities.
    Response: We have not adopted this recommendation. Lessees and the 
guarantors of lessee compliance with lease terms and conditions remain 
responsible for the effectiveness of their compliance efforts such as 
lease abandonment and clearance work, subject to any applicable statute 
of limitations. The current bond form specifies a period of 6 years 
during which, under specified circumstances, a bond may be reinstated 
to cover liabilities that accrued during the period of bond coverage. 
It may be that this provides sufficient protection for MMS without 
total prohibition of bond cancellation. We will continue to review this 
issue. If we determine that additional changes in the rule are 
appropriate, we will propose those changes in a new rulemaking. We 
welcome any comments you may want to provide concerning the need for 
additional changes to the rule or approved bond form concerning release 
of bonds.
    Section 256.59 Forfeiture of bonds and/or other securities. The 
proposed rule had provided that the Regional Director could require 
forfeiture of a bond upon the refusal or inability of ``a lessee'' to 
perform the obligations. Frequently, of course, there may be a number 
of record title owners, and the party providing the bond might be an 
operator who is not itself a lessee. As the singular language of the 
rule suggested, MMS intended to be able to pursue forfeiture of the 
bond after a demand against the single lessee or operator who provided 
the surety bond before proceeding against the bond. MMS should not have 
to pursue every interest holder for performance before

[[Page 27953]]

securing the benefits of a bond where the bonded party is jointly and 
severally liable for the obligations not performed. The surety would 
have the right to proceed against the responsible record title-holder 
or operating rights owners for contribution. In the final rule, we have 
added a paragraph (b) to make completely clear that making demands 
against obligors other than the party providing the bond is not a 
prerequisite to making a claim against the bond.
    Comment: One respondent recommended that Sec. 256.59(d)(1) be 
changed to clarify that it is the lessee(s) of the lease and its 
(their) third-party guarantor(s) at the time of a default who will 
first be required to bear the cost of compliance above the forfeited 
bond or security amount.
    Response: We have revised Sec. 256.59, Forfeiture of bonds and/or 
other securities, to present the requirements of the provision in plain 
English. The final provision clearly states that, when a surety chooses 
to take action to bring a lease into compliance in lieu of forfeiture 
of its bond, it commits to complete that action even if the cost 
exceeds the face amount of the bond or other security instrument. At 
the time of a default, or a threat of a default, we expect that we will 
look to the current lessee to bring the lease into compliance. However, 
if we determine that the current lessee is unable to perform, we will 
look to others.
    Section 256.62 Assignment of leases or interests therein. Comment: 
A trade association raises numerous policy arguments against the policy 
of holding assignors responsible after assignment for obligations that 
accrued before assignment.
    Response: The commenter is objecting to a rule that dates back to 
1954. See Sec. 201.60 of the May 1954 regulations and current 
Sec. 256.62(d), both of which state that assignors continue to be 
responsible for obligations that accrued before the approval of an 
assignment. MMS is not persuaded that that rule should be changed. This 
rulemaking simply amends Sec. 250.110 to specify when the obligation to 
plug and abandon accrues, so as to avoid confusion as to the 
application of existing Sec. 256.62(d) to these important obligations. 
While an assignee becomes responsible directly to the lessor for the 
performance of the lease obligations, under contract law the assignor 
is not relieved of its obligations unless the lessor expressly 
discharges the assignor in writing. We do not discharge the assignor of 
its accrued obligations when we approve the assignment of record title 
in a lease. We have renamed Sec. 256.62, ``Assignment of leases or 
interests in leases,'' and rewritten the text to present the 
requirements of the provision in plain English.
    Comment: Two respondents suggested that an assignor should not be 
liable for increases in the end-of-lease obligations arising during the 
period of time between the effective date of assignment and the 
approval date of assignment.
    Response: We have not adopted this recommendation. An assignor 
continues to be responsible for obligations that accrued before 
approval of the assignment. The parties to an assignment often ask that 
the effective date of the assignment be a date that is substantially in 
advance of the date that we receive the request for approval of the 
assignment. An assignor cannot escape its liability for an obligation 
by requesting an effective date for its assignment that predates the 
obligation.
    Comment: Several commenters urged that interest holders be given 
the opportunity to object to a co-lessee's proposal to assign its 
interest to a party whom the co-owner believes to present an 
unreasonable risk.
    Response: Nothing in MMS regulations precludes interest holders in 
leases from entering into agreements requiring co-owner concurrence in 
assignments. However, MMS does not believe it necessary or helpful to 
universally impose such a requirement. Also, we do not believe that MMS 
should be responsible for enforcing such agreements.
    Comment: Five respondents expressed the view that the requirement 
that assignors retain liability after the effective date of a 
subsequent assignment will and probably has caused the early plugging 
and abandonment of wells and facilities or the nondevelopment of 
properties that were uneconomic for larger companies to operate or 
develop but could or would have been economic for a smaller 
independent.
    Response: This requirement has been part of the offshore 
regulations since 1954, and we are not aware of evidence that it has 
resulted in premature abandonment of production. We have specific 
regulatory requirements that are designed to prevent the premature 
abandonment of recoverable reserves. Section 250.110, General 
requirements, specifically provides that ``no production well shall be 
abandoned until its lack of capacity for further profitable production 
of oil, gas, or sulphur has been demonstrated to the satisfaction of 
the District Supervisor.''
    Section 256.64 Requirements for filing transfers. Comment: One 
respondent recommended that Sec. 256.64(g) be revised to clarify the 
extent to which holders of operating rights and sublessees in a lease 
are jointly and severally liable with the lessees.
    Response: We have renamed Sec. 256.64, ``How to file transfers,'' 
and revised the text of paragraphs 256.64(a), (c), and (g) to present 
the requirements of the rule in plain English. The new style clearly 
describes the extent to which owners of working interests (e.g., the 
holders of operating rights) and sublessees are liable. We also 
clarified which assignments must be filed but need not be approved by 
the Regional Director.
    We modified Secs. 251.6-4, 256.54, 281.33 and 282.40 to reflect 
delegations of authority to the Associate Director for Offshore 
Minerals Management.

Authors

    This document was prepared by Gerald D. Rhodes and John V. 
Mirabella of the Engineering and Operations Division, MMS and M. Dennis 
Daugherty of the DOI's Office of the Solicitor.

Executive Order (E.O.) 12866

    This rule does not meet the criteria for a significant rule 
requiring review by the Office of Management and Budget (OMB) under 
E.O. 12866.

Regulatory Flexibility Act

    This rule will not have a significant effect on a substantial 
number of small entities. This rule establishes December 8, 1997, as 
the deadline for OCS oil and gas lessees to bring their bond coverage 
into compliance with the new levels of coverage established in 1993; 
clarifies our position that co-lessees are jointly and severally liable 
for compliance with nonmonetary obligations arising under OCS oil and 
gas and sulphur leases; clarifies our position on the responsibility of 
each assignor and assignee for compliance with lease obligations; 
establishes regulatory frameworks for acceptance of lease-specific 
abandonment accounts and third-party guarantees; and modifies the bond 
coverage that may be required of the holder of a pipeline right-of-way 
or of a G&G exploration permit to drill a deep stratigraphic test well.
    Offshore oil and gas lease exploration and development costs often 
exceed $10 million while typical abandonment and clearance costs for 
OCS oil and gas leases range from $3.25 million for leases in less than 
50 feet of water to $94 million for leases in excess of 400 feet of 
water. In general, the entities that engage in offshore oil and gas 
exploration, development, and production activities, including pipeline 
transportation across the OCS, are not firms that would be considered 
small

[[Page 27954]]

due to the technical expertise, financial resources, and experience 
necessary to safely conduct such activities in an environmentally 
responsible manner.
    Small entities who are likely to work on the OCS are primarily 
contractors who provide services such as catering and custodial 
services for manned facilities. This rule will not affect these 
activities.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.) 
provides that an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number. OMB previously approved the 
collection of information contained in the regulations affected by this 
rule. The OMB control number is 1010-0006 for 30 CFR part 256 (Leasing 
of Sulphur or Oil and Gas in the OCS). The OMB control numbers and 
pertinent information are included in Sec. 250.0 for 30 CFR part 250 
(Oil and Gas and Sulphur Operations in the OCS) and in Sec. 251.0 for 
30 CFR part 251 (Geological and Geophysical Explorations in the OCS). 
MMS has examined this rule under the Paperwork Reduction Act of 1995 
and determined that it contains no new information collection 
requirements.
    MMS collects the information under regulations implementing the 
OCSLA, as amended. MMS uses the information to determine the conditions 
under which the applicant filing for a lease on the OCS will be 
permitted to hold such a lease. The information is required to obtain 
or retain a benefit under 43 U.S.C. 1331 et seq. MMS will protect 
information considered confidential or proprietary under applicable law 
and under regulations at 30 CFR 251.14-1, Disclosure of information and 
data to the public; 30 CFR part 252, Outer Continental Shelf (OCS) Oil 
and Gas Information Program; and 30 CFR 256.10, Information to States.
    MMS estimates the annual reporting burden for 30 CFR part 256 to be 
approximately 17,000 hours--an average of 3.5 hours per response. This 
includes the time for reviewing instructions, searching existing data 
sources, gathering and maintaining the data needed, and completing and 
reviewing the information collection. Direct comments regarding the 
burden estimate or any other aspect of this collection to the 
Information Collection Clearance Officer, Mail Stop 2200, Minerals 
Management Service, 381 Elden Street, Herndon, VA 20170-4817; and to 
the Office of Management and Budget, Office of Information and 
Regulatory Affairs, Desk Officer for the Interior Department (1010-
0006), 725 17th Street, N.W., Washington, DC 20503.

Takings Implication Assessment

    DOI certifies that this rule does not represent a governmental 
action capable of interference with constitutionally protected property 
rights. Thus, a Takings Implication Assessment need not be prepared 
under E.O. 12630, Governmental Actions and Interference with 
Constitutionally Protected Property Rights.

E.O. 12988

    DOI has certified to OMB that the rule meets the applicable civil 
justice reform standards provided in sections 3(a) and 3(b)(2) of E.O. 
12988.

National Environmental Policy Act

    DOI determined that this action does not constitute a major Federal 
action significantly affecting the quality of the human environment; 
therefore, an Environmental Impact Statement is not required.

Unfunded Mandates Reform Act

    DOI has determined and certifies according to the Unfunded Mandates 
Reform Act of 1995, 2 U.S.C. 1502 et seq., that this rule will not 
impose a cost of $100 million or more in any given year on State, 
local, and tribal governments, or the private sector.

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.

30 CFR Part 281

    Administrative practice and procedures, Bonds, Continental shelf, 
Mineral royalties, Mines, Public lands--mineral resources, Reporting 
and recordkeeping requirements.

30 CFR Part 282

    Administrative practice and procedure, Bonds, Continental shelf, 
Environmental protection, Mineral royalties, Mines, Public lands--
mineral resources, Reporting and recordkeeping requirements.

    Dated: May 9, 1997.
Bob Armstrong,
Assistant Secretary, Land and Minerals Management.
    For the reasons stated in the preamble, Minerals Management Service 
(MMS) amends 30 CFR parts 250, 251, 256, 281 and 282 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. 1331, et seq.

    2. Section 250.8 is revised to read as follows:


Sec. 250.8  Designation of operator.

    This section explains the requirement for designation of an 
operator to conduct operations on a lease where the operator is not the 
sole lessee (record title owner) and owner of operating rights.
    (a) Each record title owner (lessee) or operating rights owner for 
a lease must provide the Regional Supervisor a designation of operator 
in each case where someone other than an exclusive record title and 
operating rights owner will conduct lease operations. The designated 
operator must not begin operations on the lease until the Regional 
Supervisor receives the designation of operator.
    (1) This designation of operator is authority for the operator to 
act on behalf of each lessee and operating rights owner and to fulfill 
each of their obligations under the Act, the lease, and the regulations 
in this part.
    (2) You must immediately notify the Regional Supervisor in writing 
if you terminate the designation of operator.
    (3) If you terminate a designation of operator or a controversy 
develops between you and your designated operator, you and the operator 
must protect the lessor's interests.

[[Page 27955]]

    (4) You or the lease operator must immediately notify the Regional 
Supervisor in writing of any change of address.
    (b) Lessees and operating rights owners are jointly and severally 
responsible for performing nonmonetary lease obligations, unless 
otherwise provided in the regulations in this chapter. If the 
designated operator fails to perform any obligation under the lease or 
the regulations in this chapter, the Regional Director may require any 
or all of the co-lessees and operating rights owners to bring the lease 
into compliance.
    3. 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) Lessees must plug and abandon all well bores, remove all 
platforms or other facilities, and clear the ocean of all obstructions 
to other users. This obligation:
    (1) Accrues to the lessee when the well is drilled, the platform or 
other facility is installed, or the obstruction is created; and
    (2) Is the joint and several responsibility of all lessees and 
owners of operating rights under the lease at the time the obligation 
accrues, and of each future lessee or owner of operating rights, until 
the obligation is satisfied under the requirements of this part.
    4. In Sec. 250.159, paragraph (b)(1) is revised to read as follows:


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

* * * * *
    (b)(1) When you apply for, or are the holder of, a right-of-way, 
you must:
    (i) Provide and maintain a $300,000 bond (in addition to the bond 
coverage required in part 256) that guarantees compliance with all the 
terms and conditions of the rights-of-way you hold in an OCS area; and
    (ii) Provide additional security if the Regional Director 
determines that a bond in excess of $300,000 is needed.
* * * * *

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

    5. The authority citation for part 251 is revised to read as 
follows:

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

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


Sec. 251.6-4  Bonds.

    (a) When you apply to the Minerals Management Service (MMS) for a 
permit authorizing the drilling of a deep stratigraphic test well, you 
must either:
    (1) Furnish a bond of not less than $200,000 that guarantees 
compliance with all the terms and conditions of the permit; or
    (2) Maintain a $1 million bond that guarantees compliance with all 
the terms and conditions of the permits you hold for the OCS area where 
you propose to drill.
    (b) You must provide additional security to MMS if the Regional 
Director determines that it is necessary for the permit or area.
    (c) The Regional Director may require you to provide a bond, in an 
amount the Regional Director prescribes, before authorizing you to 
drill a shallow test well.
    (d) Your bond must be on a form approved by the Associate Director 
for Offshore Minerals Management.

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

    7. The authority citation for part 256 continues to read as 
follows:

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

    8. In Sec. 256.7, paragraphs (b) through (h) are redesignated 
paragraphs (c) through (i), and a new paragraph (b) is added to read as 
follows:


Sec. 256.7  Cross references.

* * * * *
    (b) For MMS regulations governing the appeal of an order or 
decision issued under the regulations in this part, see 30 CFR part 
290.
* * * * *
    9. Section 256.47 is amended by revising the fourth sentence of 
paragraph (f) as follows:


Sec. 256.47  Award of leases.

* * * * *
    (f) * * * The bidder must also file a bond as required in 
Sec. 256.52 of this title. * * *
* * * * *
    10. Section 256.58 is redesignated as Sec. 256.52, and revised to 
read as follows:


Sec. 256.52  Bond requirements for an oil and gas or sulphur lease.

    This section establishes bond requirements for the lessee of an OCS 
oil and gas or sulphur lease.
    (a) Before MMS will issue a new lease or approve the assignment of 
an existing lease to you as lessee, you or another record title owner 
for the lease must:
    (1) Maintain with the Regional Director a $50,000 lease bond that 
guarantees compliance with all the terms and conditions of the lease; 
or
    (2) Maintain a $300,000 areawide bond that guarantees compliance 
with all the terms and conditions of all your oil and gas and sulphur 
leases in the area where the lease is located; or
    (3) Maintain a lease or areawide bond in the amount required in 
Sec. 256.53(a) or (b) of this part.
    (b) For the purpose of this section, there are four areas:
    (1) The Gulf of Mexico;
    (2) The area offshore the Pacific Coast States of California, 
Oregon, Washington, and Hawaii;
    (3) The area offshore the Coast of Alaska; and
    (4) The area offshore the Atlantic Coast.
    (c) The requirement to maintain a lease bond (or substitute 
security instruments) under paragraph (a)(1) of this section and 
Sec. 256.53 (a) and (b) is satisfied if your operator provides a lease 
bond in the required amount that guarantees compliance with all the 
terms and conditions of the lease. Your operator may not use an 
areawide bond under this paragraph to satisfy your bond obligation.
    (d) If a surety makes payment to the United States under a bond or 
alternate form of security maintained under this section, the surety's 
remaining liability under the bond or alternate form of security is 
reduced by the amount of that payment. See paragraph (e) of this 
section for the requirement to replace the reduced bond coverage.
    (e) If the value of your surety bond or alternate security is 
reduced because of a default, or for any other reason, you must provide 
additional bond coverage sufficient to meet the security required under 
this subpart within 6 months, or such shorter period of time as the 
Regional Director may direct.
    (f) You may pledge U.S. Department of the Treasury (Treasury) 
securities instead of a bond. The Treasury securities you pledge must 
be negotiable for an amount of cash equal to the value of the bond they 
replace.
    (1) If you pledge Treasury securities under this paragraph (f), you 
must monitor their value. If their market value falls below the level 
of bond coverage required under this subpart, you must pledge 
additional Treasury securities to raise the value of the securities 
pledged to the required amount.
    (2) If you pledge Treasury securities, you must include authority 
for the Regional Director to sell them and use the proceeds when the 
Regional Director determines that you fail to satisfy any lease 
obligation.

[[Page 27956]]

    (g) You may pledge alternate types of security instruments instead 
of providing a bond if the Regional Director determines that the 
alternate security protects the interests of the United States to the 
same extent as the required bond.
    (1) If you pledge an alternate type of security under this 
paragraph, you must monitor the security's value. If its market value 
falls below the level of bond coverage required under this subpart, you 
must pledge additional securities to raise the value of the securities 
pledged to the required amount.
    (2) If you pledge an alternate type of security, you must include 
authority for the Regional Director to sell the security and use the 
proceeds when the Regional Director determines that you failed to 
satisfy any lease obligation.
    (h) If you fail to replace a deficient bond or to provide 
additional bond coverage upon demand, the Regional Director may:
    (1) Assess penalties under part 250, subpart N of this chapter;
    (2) Suspend production and other operations on your leases in 
accordance with Sec. 250.10 of this chapter; and
    (3) Initiate action to cancel your lease.
    11. Section 256.61 of subpart I is redesignated as Sec. 256.53 of 
subpart I; introductory texts are added to paragraphs (a) and (b); 
paragraphs (a)(1), (b)(1), and (d) are revised; and paragraphs (e), 
(f), and (g) are added to read as follows:


Sec. 256.53  Additional bonds.

    (a) This paragraph explains what bonds the lessee must provide 
before lease exploration activities commence.
    (1)(i) You must furnish the Regional Director a $200,000 bond that 
guarantees compliance with all the terms and conditions of the lease by 
the earliest of:
    (A) The date you submit a proposed Exploration Plan (EP) for 
approval;
    (B) The date you submit a request for approval of the assignment of 
a lease on which an EP has been approved; or
    (C) December 8, 1997, for any lease for which an EP has been 
approved.
    (ii) The Regional Director may authorize you to submit the $200,000 
lease exploration bond after you submit an EP but before he/she 
approves drilling activities under the EP.
    (iii) You may satisfy the bond requirement of this paragraph (a) by 
providing a new bond or by increasing the amount of your existing bond.
* * * * *
    (b) This paragraph explains what bonds you (the lessee) must 
provide before lease development and production activities commence.
    (1)(i) You must furnish the Regional Director a $500,000 bond that 
guarantees compliance with all the terms and conditions of the lease by 
the earliest of:
    (A) The date you submit a proposed Development and Production Plan 
(DPP) or Development Operations Coordination Document (DOCD) for 
approval;
    (B) The date you submit a request for approval of the assignment of 
a lease on which a DPP or DOCD has been approved; or
    (C) December 8, 1997, for any lease for which a DPP or DOCD has 
been approved.
    (ii) The Regional Director may authorize you to submit the $500,000 
lease development bond after you submit a DPP or DOCD, but before he/
she approves the installation of a platform or the commencement of 
drilling activities under the DPP or DOCD.
    (iii) You may satisfy the bond requirement of this paragraph by 
providing a new bond or by increasing the amount of your existing bond.
* * * * *
    (d) The Regional Director may determine that additional security 
(i.e., security above the amounts prescribed in Secs. 256.52(a) and 
256.53 (a) and (b) of this part) is necessary to ensure compliance with 
the obligations under your lease and the regulations in this chapter.
    (1) The Regional Director's determination will be based on his/her 
evaluation of your ability to carry out present and future financial 
obligations demonstrated by:
    (i) Financial capacity substantially in excess of existing and 
anticipated lease and other obligations, as evidenced by audited 
financial statements (including auditor's certificate, balance sheet, 
and profit and loss sheet);
    (ii) Projected financial strength significantly in excess of 
existing and future lease obligations based on the estimated value of 
your existing OCS lease production and proven reserves of future 
production;
    (iii) Business stability based on 5 years of continuous operation 
and production of oil and gas or sulphur in the OCS or in the onshore 
oil and gas industry;
    (iv) Reliability in meeting obligations based on:
    (A) Credit rating(s); or
    (B) Trade references, including names and addresses of other 
lessees, drilling contractors, and suppliers with whom you have dealt; 
and
    (v) Record of compliance with laws, regulations, and lease terms.
    (2) You may satisfy the Regional Director's demand for additional 
security by increasing the amount of your existing bond or by providing 
a supplemental bond or bonds.
    (e) The Regional Director will determine the amount of supplemental 
bond required to guarantee compliance. The Regional Director will 
consider potential underpayment of royalty and cumulative obligations 
to abandon wells, remove platforms and facilities, and clear the 
seafloor of obstructions in the Regional Director's case-specific 
analysis.
    (f) If your cumulative potential obligations and liabilities either 
increase or decrease, the Regional Director may adjust the amount of 
supplemental bond required.
    (1) If the Regional Director proposes an adjustment, the Regional 
Director will:
    (i) Notify you and the surety of any proposed adjustment to the 
amount of bond required; and
    (ii) Give you an opportunity to submit written or oral comment on 
the adjustment.
    (2) If you request a reduction of the amount of supplemental bond 
required, you must submit evidence to the Regional Director 
demonstrating that the projected amount of royalties due the Government 
and the estimated costs of lease abandonment and cleanup are less than 
the required bond amount. If the Regional Director finds that the 
evidence you submit is convincing, he/she may reduce the amount of 
supplemental bond required.
    12. Section 256.59 of subpart I is redesignated as Sec. 256.54 of 
subpart I, and revised to read as follows:


Sec. 256.54  General requirements for bonds.

    (a) Any bond or other security that you, as lessee or operator, 
provide under this part must:
    (1) Be payable upon demand to the Regional Director;
    (2) Guarantee compliance with all of your obligations under the 
lease and regulations in this chapter; and
    (3) Guarantee compliance with the obligations of all lessees, 
operating rights owners and operators on the lease.
    (b) All bonds and pledges you furnish under this part must be on a 
form or in a form approved by the Associate Director for Offshore 
Minerals Management. Surety bonds must be issued by a surety that the 
Treasury certifies as an acceptable surety on Federal bonds and that is 
listed in the current Treasury Circular No. 570. You

[[Page 27957]]

may obtain a copy of the current Treasury Circular No. 570 from the 
Surety Bond Branch, Financial Management Service, Department of the 
Treasury, East-West Highway, Hyattsville, MD 20782.
    (c) You and a qualified surety must execute your bond. When either 
party is a corporation, an authorized official for the party must sign 
the bond and attest to it by an imprint of the corporate seal.
    (d) Bonds must be noncancellable, except as provided in Sec. 256.58 
of this part. Bonds must continue in full force and effect even though 
an event occurs that could diminish, terminate, or cancel a surety 
obligation under State surety law.
    (e) Lease bonds must be:
    (1) A surety bond;
    (2) Treasury securities as provided in Sec. 256.52(f);
    (3) Another form of security approved by the Regional Director; or
    (4) A combination of these security methods.
    (f) You may submit a bond to the Regional Director executed on a 
form approved under paragraph (b) of this section that you have 
reproduced or generated by use of a computer. If you do this, and if 
the document omits terms or conditions contained on the form approved 
by the Associate Director for Offshore Minerals Management the bond you 
submit will be deemed to contain the omitted terms and conditions.
    13. Sections 256.55 through 256.59 are added to subpart I to read 
as follows:


Sec. 256.55  Lapse of bond.

    (a) If your surety becomes bankrupt, insolvent, or has its charter 
or license suspended or revoked, any bond coverage from that surety 
terminates immediately. In that event, you must promptly provide a new 
bond in the amount required under Secs. 256.52 and 256.53 of this part 
to the Regional Director and advise the Regional Director of the lapse 
in your previous bond.
    (b) You must notify the Regional Director of any action filed 
alleging that you, your surety, or guarantor are insolvent or bankrupt. 
You must notify the Regional Director within 72 hours of learning of 
such an action. All bonds must require the surety to provide this 
information to you and directly to MMS.


Sec. 256.56  Lease-specific abandonment accounts.

    (a) The Regional Director may authorize you to establish a lease-
specific abandonment account in a federally insured institution in lieu 
of the bond required under Sec. 256.53(d). The account must provide 
that, except as provided in paragraph (a)(3) of this section, funds may 
not be withdrawn without the written approval of the Regional Director.
    (1) Funds in a lease-specific abandonment account must be payable 
upon demand to MMS and pledged to meet the lessee's obligations under 
Sec. 250.110 of this chapter.
    (2) You must fully fund the lease-specific abandonment account to 
cover all the costs of lease abandonment and site clearance as 
estimated by MMS within the timeframe the Regional Director prescribes.
    (3) You must provide binding instructions under which the 
institution managing the account is to purchase Treasury securities 
pledged to MMS under paragraph (d) of this section.
    (b) Any interest paid on funds in a lease-specific abandonment 
account will be treated as other funds in the account unless the 
Regional Director authorizes in writing the payment of interest to the 
party who deposits the funds.
    (c) The Regional Director may allow you to pledge Treasury 
securities that are made payable upon demand to the Regional Director 
to satisfy your obligation to make payments into a lease-specific 
abandonment account.
    (d) Before the amount of funds in a lease-specific abandonment 
account equals the maximum insurable amount as determined by the 
Federal Deposit Insurance Corporation or the Federal Savings and Loan 
Insurance Corporation, the institution managing the account must use 
the funds in the account to purchase Treasury securities pledged to MMS 
under paragraph (c) of this section. The institution managing the lease 
specific-abandonment account will join with the Regional Director to 
establish a Federal Reserve Circular 154 account to hold these Treasury 
securities, unless the Regional Director authorizes the managing 
institution to retain the pledged Treasury securities in a separate 
trust account. You may obtain a copy of the current Treasury Circular 
No. 154 from the Surety Bond Branch, Financial Management Service, 
Department of the Treasury, East-West Highway, Hyattsville, MD 20782.
    (e) The Regional Director may require you to create an overriding 
royalty or production payment obligation for the benefit of a lease-
specific account pledged for the abandonment and clearance of a lease. 
The required obligation may be associated with oil and gas or sulphur 
production from a lease other than the lease bonded through the lease-
specific abandonment account.


Sec. 256.57  Using a third-party guarantee instead of a bond.

    (a) When the Regional Director may accept a third-party guarantee. 
The Regional Director may accept a third-party guarantee instead of an 
additional bond under Sec. 256.53(d) if:
    (1) The guarantee meets the criteria in paragraph (c) of this 
section;
    (2) The guarantee includes the terms specified in paragraph (d) of 
this section;
    (3) The guarantor's total outstanding and proposed guarantees do 
not exceed 25 percent of its unencumbered net worth in the United 
States; and
    (4) The guarantor submits an indemnity agreement meeting the 
criteria in paragraph (e) of this section.
    (b) What to do if your guarantor becomes unqualified. If, during 
the life of your third-party guarantee, your guarantor no longer meets 
the criteria of paragraphs (a)(3) and (c)(3) of this section, you must:
    (1) Notify the Regional Director immediately; and
    (2) Cease production until you comply with the bond coverage 
requirements of this subpart.
    (c) Criteria for acceptable guarantees. If you propose to furnish a 
third party's guarantee, that guarantee must ensure compliance with all 
lessees' lease obligations, the obligations of all operating rights 
owners, and the obligations of all operators on the lease. The Regional 
Director will base acceptance of your third-party guarantee on the 
following criteria:
    (1) The period of time that your third-party guarantor (guarantor) 
has been in continuous operation as a business entity where:
    (i) Continuous operation is the time that your guarantor conducts 
business immediately before you post the guarantee; and
    (ii) Continuous operation excludes periods of interruption in 
operations that are beyond your guarantor's control and that do not 
affect your guarantor's likelihood of remaining in business during 
exploration, development, production, abandonment, and clearance 
operations on your lease.
    (2) Financial information available in the public record or 
submitted by your guarantor, on your guarantor's own initiative, in 
sufficient detail to show to the Regional Director's satisfaction that 
your guarantor is qualified based on:
    (i) Your guarantor's current rating for its most recent bond 
issuance by either Moody's Investor Service or Standard and Poor's 
Corporation;
    (ii) Your guarantor's net worth, taking into account liabilities 
under its guarantee of compliance with all the

[[Page 27958]]

terms and conditions of your lease, the regulations in this chapter, 
and your guarantor's other guarantees;
    (iii) Your guarantor's ratio of current assets to current 
liabilities, taking into account liabilities under its guarantee of 
compliance with all the terms and conditions of your lease and the 
regulations in this chapter and your guarantor's other guarantees; and
    (iv) Your guarantor's unencumbered fixed assets in the United 
States.
    (3) When the information required by paragraph (c) of this section 
is not publicly available, your guarantor may submit the information in 
the following table. Your guarantor must update the information 
annually within 90 days of the end of the fiscal year or by the date 
prescribed by the Regional Director.

------------------------------------------------------------------------
       The guarantor should submit--                   that--           
------------------------------------------------------------------------
(i) Financial statements for the most       Include a report by an      
 recently completed fiscal year.             independent certified      
                                             public accountant          
                                             containing the accountant's
                                             audit opinion or review    
                                             opinion of the statements. 
                                             The report must be prepared
                                             in conformance with        
                                             generally accepted         
                                             accounting principles and  
                                             contain no adverse opinion.
(ii) Financial statements for completed     Your guarantor's financial  
 quarters in the current fiscal year.        officer certifies to be    
                                             correct.                   
(iii) Additional information as requested   Your guarantor's financial  
 by the Regional Director.                   officer certifies to be    
                                             correct.                   
------------------------------------------------------------------------

    (d) Provisions required in all third-party guarantees. Your third-
party guarantee must contain each of the following provisions.
    (1) If you, your operator, or an operating rights owner fails to 
comply with any lease term or regulation, your guarantor must either:
    (i) Take corrective action; or
    (ii) Be liable under the indemnity agreement to provide, within 7 
calendar days, sufficient funds for the Regional Director to complete 
corrective action.
    (2) If your guarantor complies with paragraph (d)(1) of this 
section, this compliance will not reduce its liability.
    (3) If your guarantor wishes to terminate the period of liability 
under its guarantee, it must:
    (i) Notify you and the Regional Director at least 90 days before 
the proposed termination date;
    (ii) Obtain the Regional Director's approval for the termination of 
the period of liability for all or a specified portion of your 
guarantor's guarantee; and
    (iii) Remain liable for all work and workmanship performed during 
the period that your guarantor's guarantee is in effect.
    (4) You must provide a suitable replacement security instrument 
before the termination of the period of liability under your third-
party guarantee.
    (e) Required criteria for indemnity agreements. If the Regional 
Director approves your third-party guarantee, the guarantor must submit 
an indemnity agreement.
    (1) The indemnity agreement must be executed by your guarantor and 
all persons and parties bound by the agreement.
    (2) The indemnity agreement must bind each person and party 
executing the agreement jointly and severally.
    (3) When a person or party bound by the indemnity agreement is a 
corporate entity, two corporate officers who are authorized to bind the 
corporation must sign the indemnity agreement.
    (4) Your guarantor and the other corporate entities bound by the 
indemnity agreement must provide the Regional Director copies of:
    (i) The authorization of the signatory corporate officials to bind 
their respective corporations;
    (ii) An affidavit certifying that the agreement is valid under all 
applicable laws; and
    (iii) Each corporation's corporate authorization to execute the 
indemnity agreement.
    (5) If your third-party guarantor or another party bound by the 
indemnity agreement is a partnership, joint venture, or syndicate, the 
indemnity agreement must:
    (i) Bind each partner or party who has a beneficial interest in 
your guarantor; and
    (ii) Provide that, upon demand by the Regional Director under your 
third-party guarantee, each partner is jointly and severally liable for 
compliance with all terms and conditions of your lease.
    (6) When forfeiture is called for under Sec. 256.59 of this part, 
the indemnity agreement must provide that your guarantor will either:
    (i) Bring your lease into compliance; or
    (ii) Provide, within 7 calendar days, sufficient funds to permit 
the Regional Director to complete corrective action.
    (7) The indemnity agreement must contain a confession of judgment. 
It must provide that, if the Regional Director determines that you, 
your operator, or an operating rights owner is in default of the lease, 
the guarantor:
    (i) Will not challenge the determination; and
    (ii) Will remedy the default.
    (8) Each indemnity agreement is deemed to contain all terms and 
conditions contained in this paragraph (e), even if the guarantor has 
omitted them.


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

    This section defines the terms and conditions under which the 
Regional Director may terminate the period of liability of a bond or 
cancel a bond.
    (a) When the surety under your bond requests termination of the 
period of liability under its bond, the Regional Director will 
terminate the period of liability under your bond and demand that you 
provide a replacement bond of equivalent amount.
    (1) Termination of the period of liability under a bond does not 
release the surety of that bond.
    (2) Your surety is responsible for all obligations and liabilities 
that accrue before the effective date of the Regional Director's 
termination of the period of liability under its bond.
    (b) The Regional Director's cancellation or release of a bond may 
include lease obligations that accrue before the effective date of the 
cancellation only when:
    (1) The Regional Director determines that there are no outstanding 
obligations; or
    (2) You furnish a replacement bond:
    (i) In which your new surety agrees to assume all outstanding 
liabilities under the bond that is to be canceled; and
    (ii) That is in an amount equal to or greater than the amount of 
the bond that is to be canceled.
    (c) The Regional Director will issue a written instrument to cancel 
or release your bond. This instrument will subject the bond to 
automatic reinstatement, as if no cancellation or release had occurred, 
if:
    (1) A person makes a payment under the lease and the payment is 
rescinded or must be repaid by the recipient because the person making 
the payment is insolvent, bankrupt, subject to reorganization, or 
placed in receivership; or
    (2) The responsible party represents to MMS that it has discharged 
its obligations under the lease and the representation is materially 
false when the bond is canceled, or released.


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

    This section explains how a bond or other security may be 
forfeited.

[[Page 27959]]

    (a) The Regional Director will call for forfeiture of all or part 
of the bond, other form of security, or guarantee you provide under 
this part if:
    (1) You (the party who provided the bond) refuse, or the Regional 
Director determines that you are unable, to comply with any term or 
condition of your lease; or
    (2) You default under one of the conditions under which the 
Regional Director accepts your bond, third-party guarantee, and/or 
other form of security.
    (b) The Regional Director may pursue forfeiture of your bond 
without first making demands for performance against any lessee, 
operating rights owner, or other person authorized to perform lease 
obligations.
    (c) The Regional Director will:
    (1) Notify you, the surety on your bond or other form of security, 
and any third-party guarantor, of his/her determination to call for 
forfeiture of the bond, security, or guarantee under this section.
    (i) This notice will be in writing and will provide the reasons for 
the forfeiture and the amount to be forfeited.
    (ii) The Regional Director must base the amount he/she determines 
is forfeited upon his/her estimate of the total cost of corrective 
action to bring your lease into compliance.
    (2) Advise you, your third-party guarantor, and any surety, that 
you, your guarantor, and any surety may avoid forfeiture if, within 5 
working days:
    (i) You agree to, and demonstrate that you will, bring your lease 
into compliance within the timeframe that the Regional Director 
prescribes;
    (ii) Your third-party guarantor agrees to, and demonstrates that it 
will, complete the corrective action to bring your lease into 
compliance within the timeframe that the Regional Director prescribes; 
or
    (iii) Your surety agrees to, and demonstrates that it will, bring 
your lease into compliance within the timeframe that the Regional 
Director prescribes, even if the cost of compliance exceeds the face 
amount of the bond or other surety instrument.
    (d) If the Regional Director finds you are in default, he/she may 
cause the forfeiture of any bonds and other security deposited as your 
guarantee of compliance with the terms and conditions of your lease and 
the regulations in this chapter.
    (e) If the Regional Director determines that your bond and/or other 
security is forfeited, the Regional Director will:
    (1) Collect the forfeited amount; and
    (2) Use the funds collected to bring your leases into compliance 
and to correct any default.
    (f) If the amount the Regional Director collects under your bond 
and other security is insufficient to pay the full cost of corrective 
actions he/she may:
    (1) Take or direct action to obtain full compliance with your lease 
and the regulations in this chapter; and
    (2) Recover from you, any co-lessee, operating rights owner, and/or 
any third-party guarantor responsible under this subpart all costs in 
excess of the amount he/she collects under your forfeited bond and 
other security.
    (g) The amount that the Regional Director collects under your 
forfeited bond and other security may exceed the costs of taking the 
corrective actions required to obtain full compliance with the terms 
and conditions of your lease and the regulations in this chapter. In 
this case, the Regional Director will return the excess funds to the 
party from whom they were collected.
    14. In Sec. 256.62, the section heading is revised, introductory 
text is added, paragraphs (a), (d), and (e) are revised, and paragraph 
(f) is added to read as follows:


Sec. 256.62  Assignment of lease or interest in lease.

    This section explains how to assign record title and other 
interests in OCS oil and gas or sulphur leases.
    (a) MMS 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 Sec. 256.35(b);
    (2) You provide the bond coverage required under subpart I of this 
part; and
    (3) The Regional Director approves the assignment.
* * * * *
    (d) You, as assignor, are liable for all obligations that accrue 
under your lease before the date that the Regional Director approves 
your request for assignment of the record title in the lease. The 
Regional Director's approval of the assignment does not relieve you of 
accrued lease obligations that your assignee, or a subsequent assignee, 
fails to perform.
    (e) Your assignee and each subsequent assignee are liable for all 
obligations that accrue under the lease after the date that the 
Regional Director approves the governing assignment. They must:
    (1) Comply with all the terms and conditions of the lease and all 
regulations issued under the Act; and
    (2) Remedy all existing environmental problems on the tract, 
properly abandon all wells, and reclaim the lease site in accordance 
with part 250, subpart G.
    (f) If your assignee, or a subsequent assignee, fails to perform 
any obligation under the lease or the regulations in this chapter, the 
Regional Director may require you to bring the lease into compliance to 
the extent that the obligation accrued before the Regional Director 
approved the assignment of your interest in the lease.
    15. In Sec. 256.64, the section heading is revised, introductory 
text and paragraph (a) introductory text are added, paragraph (a)(1) is 
revised, paragraph (a)(2) is redesignated (a)(8), new paragraphs (a)(2) 
through (a)(7) are added, paragraphs (d) through (h) are redesignated 
as paragraphs (e) through (i), paragraph (c) and redesignated paragraph 
(h) are revised, and a new paragraph (d) is added to read as follows:


Sec. 256.64  How to file transfers.

    This section explains how to file instruments with MMS that create 
and/or transfer interests in OCS oil and gas or sulphur leases.
    (a) You must submit to the Regional Director for approval all 
instruments that create or transfer ownership of a lease interest.
    (1) You must submit two copies of the instruments that create or 
transfer an interest. Each instrument that creates or transfers an 
interest must describe by officially designated subdivision the 
interest you propose to create or transfer.
    (2) You must submit your proposal to create or transfer an 
interest, or create or transfer separate operating rights, subleases, 
and record title interests within 90 days of the last date that a party 
executes the transfer agreement.
    (3) The transferee must meet the citizenship and other 
qualification criteria specified in Sec. 256.35 of this part. When you 
submit an instrument to create or transfer an interest as an 
association, you must include a statement signed by the transferee 
about the transferee's citizenship and qualifications to own a lease.
    (4) Your instrument to create or transfer an interest must contain 
all of the terms and conditions to which you and the other parties 
agree.
    (5) You do not gain a release of any nonmonetary obligation under 
your lease or the regulations in this chapter by creating a sublease or 
transferring operating rights.
    (6) You do not gain a release from any accrued obligation under 
your lease or the regulations in this chapter by

[[Page 27960]]

assigning your record title interest in the lease.
    (7) You may create or transfer carried working interests, 
overriding royalty interests, or payments out of production without 
obtaining the Regional Director's approval. However, you must file 
instruments creating or transferring carried working interests, 
overriding royalty interests, or payments out of production with the 
Regional Director for record purposes.
* * * * *
    (c) When you request approval for an assignment that assigns all 
your record title interest in a lease or that creates a segregated 
lease, your assignee must furnish a bond in the amount prescribed in 
Secs. 256.52 and 256.53 of this part.
    (d) When you request approval for an assignment that assigns less 
than all the record title of a lease and that does not create a 
separate lease, the assignee may, with the surety's consent, become a 
joint principal on the surety instrument that guarantees compliance 
with all the terms and conditions of the lease.
* * * * *
    (h) Your heirs, executors, administrators, successors, and assigns 
are bound to comply with each obligation under any lease and under the 
regulations in this chapter.
    (1) You are jointly and severally liable for the performance of 
each nonmonetary obligation under the lease and under the regulations 
in this chapter with each prior lessee and with each operating rights 
owner holding an interest at the time the obligation accrued, unless 
this chapter provides otherwise.
    (2) Sublessees and operating rights owners are jointly and 
severally liable for the performance of each nonmonetary obligation 
under the lease and under the regulations in this chapter to the extent 
that:
    (i) The obligation relates to the area embraced by the sublease;
    (ii) Those owners held their respective interest at the time the 
obligation accrued; and
    (iii) This chapter does not provide otherwise.
* * * * *

PART 281--[AMENDED]

    16. The authority citation for part 281 is revised to read as 
follows:

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

    17. Section 281.33 is amended by revising the first sentence of the 
introductory text of paragraph (b) to read as follows:


Sec. 281.33  Bonds and bonding requirements.

* * * * *
    (b) All bonds to guarantee payment of the deferred portion of the 
high cash bonus bid furnished by the lessee must be in a form or on a 
form approved by the Associate Director for Offshore Minerals 
Management. * * *
* * * * *

PART 282--[AMENDED]

    18. The authority citation for part 282 is revised to read as 
follows:

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

    19. Section 282.40 is amended by revising the first sentence of 
paragraph (b) to read as follows:


Sec. 282.40  Bonds.

* * * * *
    (b) All bonds furnished by a lessee or operator must be in a form 
approved by the Associate Director for Offshore Minerals Management. * 
* *
* * * * *
[FR Doc. 97-13199 Filed 5-21-97; 8:45 am]
BILLING CODE 4310-MR-P