[Federal Register Volume 66, Number 232 (Monday, December 3, 2001)]
[Rules and Regulations]
[Pages 60147-60151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29899]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 256

RIN 1010-AC68


Leasing of Sulphur or Oil and Gas in the Outer Continental 
Shelf--Revision of Requirements Governing Surety Bonds for Outer 
Continental Shelf Leases

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Final rule.

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SUMMARY: This rule modifies requirements governing surety bonds for 
activities on the Outer Continental Shelf (OCS). These changes codify 
the terms and conditions under which a surety will be relieved of 
responsibility when MMS terminates the period of liability of a bond. 
Codifying these terms and conditions is necessary to clarify the 
responsibilities of the lessee and the surety after the lease expires.

DATES: This rule is effective January 2, 2002.

FOR FURTHER INFORMATION CONTACT: John Mirabella, Engineering and 
Operations Division, (703) 787-1600.

SUPPLEMENTARY INFORMATION: OCS lessees must comply with regulations 
governing operations, payments of rents and royalties, and end-of-lease 
obligations. To ensure that the lessee will be financially able to meet 
all requirements, including end-of-lease requirements, MMS requires the 
lessee to post a bond. This rule amends the provisions of 30 CFR 256.58 
concerning the cancellation of a bond.
    It sometimes happens that a problem arising during the period 
covered by a bond is only discovered after the coverage period ends. 
For example, an audit may reveal that the lessee owes us additional 
royalty. As a rare example, a plugged well may start to leak. In either 
case, the lessee is responsible for correcting the problem.
    This rule addresses how long MMS will hold a bond to ensure that 
situations of this type are covered. The current regulation does not 
set a limit on the period that MMS may continue to hold the bond 
company responsible for a problem that occurs during the liability 
period.
    On January 8, 2001, MMS published a proposed rule in the Federal 
Register (66 FR 1277). The rule provides for a period of 7 years (plus 
such additional time taken for appeals or litigation) during which MMS 
may hold the bond to cover any claims based upon obligations that 
accrued during the liability period. During this 7-year period, we will 
retain security or collateral pledged to us in lieu of a surety. We 
will cancel the bond after 7 years. We believe that the 7-year period 
provides adequate protection to the Government and will provide a 
measure of certainty to bond companies.
    The 7-year provision applies to all base bonds, unless we find that 
less security needs to be retained. If you are a supplemental bond 
provider, this rule would release you from liability after completion 
of the bonded work, unless we find that potential liability is greater 
than the amount of the base bond. We will normally release the 
supplemental bond upon completion of the bonded work because, in most 
cases, we anticipate that the general bond will be sufficient to cover 
our estimate of potential residual liabilities.
    The rule does not change the provision in 30 CFR 256.58(c) that 
allows MMS to reinstate your bond in extraordinary circumstances. That 
provision allows us to reinstate your bond as if no cancellation or 
release had occurred if: (1) You make a payment under the lease and the 
payment is rescinded or must be repaid by the recipient because you are 
insolvent, bankrupt, subject to reorganization, or placed in 
receivership; or (2) you represent to us that you have discharged your 
obligations under the lease and your representation was materially 
false.
    The notice of proposed rulemaking requested comments during a 60-
day public comment period. MMS received three comment letters during 
the comment period--one from an oil company, one from a trade 
association representing companies that write surety bonds, and one 
from an individual representing two companies that provide surety bonds 
for the OCS.
    One comment requested clarification of how termination and 
cancellation of a bond will affect responsibilities of the surety and 
the lessee. Termination of the period of liability is important because 
it ends the surety's responsibility for further activities on a lease. 
The surety is responsible for all obligations that accrue during the 
period of liability. Accrued obligations include those associated with 
plugging of wells drilled and removal of

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platforms installed during the period of liability. In addition, 
obligations accrue for all wells or platforms that were on the lease 
during any portion of the period of liability. Obligations can also 
accrue when the operator takes other actions, such as installing a 
piece of equipment, which must later be removed. When the period of 
liability is terminated, the surety continues to be liable for accrued 
obligations. When MMS cancels the bond, the cancellation ends all 
obligations for the surety, including previously accrued obligations.
    A commenter recommended that the rules provide for cancellation of 
a bond when a new lessee has sufficient financial strength to provide 
for security without a supplemental bond. We agree with the commenter. 
The proposed rules already had specified conditions for cancellation of 
a bond when the lessee obtains a replacement bond. We agree that the 
proposal should be broadened. When a new lessee has sufficient 
financial strength on the basis of which MMS determines that a 
supplemental bond is unnecessary, we will cancel the supplemental bond 
because that financial strength provides a similar level of security as 
a bond.
    A commenter recommended that a supplemental bond be cancelled when 
replaced by a new supplemental bond and that MMS not require the new 
bond issuer to accept all liabilities of the previous bond issuer. We 
revised the proposed rule so that accepting liabilities of the previous 
bond issuer applies only to base bonds and not to supplemental bonds, 
unless the Regional Director (1) determines that the base bond may not 
be adequate to cover liabilities accruing during the period of 
liability of the supplemental bond and which the replacement 
supplemental bond would not cover, and (2) notifies the provider of the 
bond that all or part of the supplemental bond will not be cancelled 
unless the issuer of the replacement bond accepts the liabilities of 
the previous supplemental bond issuer to the extent the Regional 
Director specifies.
    One commenter recommended that the bond be cancelled 7 years after 
the termination of the lease rather than 7 years after meeting all 
lease obligations. Another commenter recommended that the bond be 
cancelled after 6 years instead of 7. The time difference between the 
termination of the lease and the meeting of all obligations is 
typically less than 1 year but can be longer. The lease covering 
offshore operations requires that the lessee remove all devices, works, 
and structures from the lease within 1 year of lease termination. The 
lease provides that MMS can allow the devices, works, and structures to 
remain longer for drilling or producing on other leases. When MMS 
grants a lessee additional time to meet these end-of-lease obligations, 
we require that the lessee maintain the bond until the obligations are 
met. In this situation, the period of liability does not end until the 
lessee has met the obligations, and we believe that the time period 
should not start until the lessee has met the obligations. However, 
when more than a year has elapsed between the end of the lease and the 
meeting of all lease obligations, we believe that an additional 6 years 
will be sufficient. Accordingly, we have modified the rule to provide 
for bond cancellation at the latest of 7 years after the termination of 
the lease, 6 years after completion of all bonded obligations, or the 
conclusion of any appeals or litigation related to your bonded 
obligations.
    A commenter recommended that MMS make mandatory the provision that 
allows the Regional Director to reduce the amount of bond. MMS has 
maintained a policy of not requiring more bond than is necessary to 
ensure that obligations are met. The rule has been revised to address 
the commenter's concern. Under the final rule, the lessee may request a 
reduction in the level of the bond or the amount of security. The 
Regional Director will then reduce the bond or return a portion of the 
security if the Regional Director determines that the lessee needs less 
than the full amount of the base bond to meet any possible future 
obligation.
    A commenter recommended that the bond form should reflect the 90-
day termination provision in the rule. This notice addresses the rule 
and not the bond form. MMS will consider the comment during any 
revisions to the bond form. However, the provision for termination will 
be available and can be exercised by the surety whether or not the 
provision appears on the bond form.
    Editorial Corrections: With this final rule, MMS is also making two 
minor editorial corrections to 30 CFR 256.52.
    (1) Section 256.52(b) lists the three MMS OCS areas. We are 
correcting the first area listed to state that it is ``The Gulf of 
Mexico and the area offshore the Atlantic Coast.''
    (2) In several paragraphs under Sec. 256.52, the word ``alternate'' 
is used when referring to another form or type of security. This word 
is corrected to the more accurate term ``alternative'' in each place 
that it appears.

Procedural Matters

Regulatory Planning and Review (Executive Order 12866)

    This document is not a significant rule and is not subject to 
review by the Office of Management and Budget (OMB) under Executive 
Order 12866.
    (1) This rule will not have an effect of $100 million or more on 
the economy. It will not adversely affect in a material way the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities. This rule, in many important ways, follows aspects of 
current policy. The rule will also extend that policy to other forms of 
security, such as escrow accounts, which are not currently used for 
base bonds. Since this rule normally will not apply to supplemental 
bonds without specific action by the Regional Supervisor, the impact of 
this change is minimal.
    (2) This rule will not create a serious inconsistency or otherwise 
interfere with an action taken or planned by another agency. Other 
agencies are not affected by the bonds and other forms of surety that 
protect the Department of the Interior's interests.
    (3) This rule does not alter the budgetary effects of entitlements, 
grants, user fees, or loan programs or the rights or obligations of 
their recipients. This rule will have no effect on the rights of the 
recipients of entitlements, grants, user fees, or loan programs.
    (4) This rule does not raise novel legal or policy issues. The rule 
more clearly conforms MMS practice to that of the private sector and 
provides certainty with respect to the cancellation of surety bonds and 
other lease security.

Regulatory Flexibility (RF) Act

    The Department certifies that this rule will not have a significant 
economic effect on a substantial number of small entities under the RF 
Act (5 U.S.C. 601 et seq.).
    This rule will affect lessees and operators of leases on the OCS. 
This includes about 130 different companies. These companies are 
generally classified under the North American Industry Classification 
System (NAICS) code 211111, Crude Petroleum and Natural Gas Extraction, 
which includes companies that extract crude petroleum and natural gas. 
For this NAICS classification, a small company is one with fewer than 
500 employees. Based on these criteria, we estimate that about 54 
percent of the companies are considered small. This rule, therefore, 
affects a substantial number of small entities.

[[Page 60149]]

    The companies that are considered small have an average of about 15 
offshore facilities. We estimate that the small companies have annual 
sales between $1 million and $380 million.
    As discussed above, we do not expect this rule to have a 
significant effect on any company, large or small. Under current 
regulations, when a lessee meets all of the lease requirements, the 
period of liability ends. If MMS later discovers a problem with the way 
the work was performed, we will hold the lessee responsible. If the 
lessee is not able to meet the obligation, we hold the bond company 
responsible. This regulation establishes a time period during which MMS 
will hold the bond before cancellation. The codification of a policy on 
bond cancellation is new. The other change from current practice is 
that MMS will retain pledged securities for the same length of time 
that we will wait before canceling surety bonds. While this new 
provision is needed to ensure consistency of agency practice, the 
provision will not have a significant effect since, in almost all 
cases, companies currently do not use instruments other than surety 
bonds to meet the basic bond requirement.
    This rule will also affect companies that sell surety bonds or 
provide other types of security to OCS lessees. For those companies, 
this rule will provide certainty with regard to residual liabilities. 
Since the provisions in this rule are generally the same as current 
practice, any effects on bonding companies will be minor. Those minor 
effects will be reflected in costs charged to oil and gas lessees and 
will ultimately be borne by oil and gas lessees. These effects are 
included in the estimates addressing the oil and gas lessees.
    Your comments are important. The Small Business and Agriculture 
Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were 
established to receive comments from small business about Federal 
agency enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to small 
business. If you wish to comment on the enforcement actions of MMS, 
call toll-free (888) 734-3247.

Small Business Regulatory Enforcement Fairness Act (SBREFA)

    This rule is not a major rule under SBREFA (5 U.S.C. 804(2)). This 
rule:
    (a) Does not have an annual effect on the economy of $100 million 
or more.
    (b) Will not cause a major increase in costs or prices for 
consumers, individual industries, Federal, State, or local government 
agencies, or geographic regions.
    (c) Does not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
United States-based enterprises to compete with foreign-based 
enterprises.
    We do not expect this rule to have a significant effect because, as 
discussed earlier, this rule would, generally, codify policies already 
in use. The substantive change for securities other than surety bonds 
will not have a significant effect because the rule applies to the 
general bond requirement, and surety bonds are used by almost all MMS 
lessees to satisfy the base bond requirement.

Paperwork Reduction Act (PRA) of 1995

    The PRA provides that an agency may not conduct or sponsor a 
collection of information unless it displays a currently valid OMB 
control number. Until OMB approves a collection of information and 
assigns a control number, you are not required to respond. OMB approved 
the information collection requirements in current 30 CFR part 256 
regulations under OMB control number 1010-0006, with a current 
expiration date of March 31, 2004. The information collection aspects 
of this rule remain unchanged from current regulations, contain no 
additional paperwork requirements, and an OMB form 83-I submission to 
OMB under the PRA is not required.

Federalism (Executive Order 13132)

    With respect to Executive Order 13132, the rule does not have 
Federalism implications. This rule does not substantially and directly 
affect the relationship between the Federal and State governments. The 
bonding requirements apply to leases between the Federal Government and 
its oil and gas lessees. The bond does not affect obligations between 
the lessee and any State or local government. This rule does not impose 
costs on States or localities. State or local governments do not 
provide bonds and do not need to comply with bonding requirements.

Takings (Executive Order 12630)

    With respect to Executive Order 12630, this rule does not have 
significant Takings implications. A Takings Implication Assessment is 
not required. This rulemaking is not a governmental action capable of 
interfering with constitutionally protected property rights.

Energy Supply, Distribution, or Use (Executive Order 13211)

    This rule is not a significant rule and is not subject to review by 
OMB under Executive Order 12866. The rule does not have a significant 
effect on energy supply, distribution, or use because the rule, in many 
important ways, follows aspects of current policy for bonds. The rule 
will also extend that policy to other forms of security such as escrow 
accounts. The new policy will apply only in the rare times when the 
other forms of security are used for a base bond. Thus, a Statement of 
Energy Effects is not required.

Civil Justice Reform (Executive Order 12988)

    With respect to Executive Order 12988, the Office of the Solicitor 
has determined that this rule does not unduly burden the judicial 
system and meets the requirements of sections 3(a) and 3(b)(2) of the 
Executive Order.

National Environmental Policy Act of 1969

    This rule does not constitute a major Federal action significantly 
affecting the quality of the human environment. A Categorical Exclusion 
Review determined that this action is considered a categorically 
excluded action, as it results only in administrative effects causing 
no significant impacts on the environment and does not require 
preparation of an environmental assessment. The rulemaking does not 
represent an exception to the established criteria for categorical 
exclusions.

Unfunded Mandate Reform Act (UMRA) of 1995

    This rule does not impose an unfunded mandate on State, local, or 
tribal governments or the private sector of more than $100 million per 
year. This rule does not have a significant or unique effect on State, 
local, or tribal governments or the private sector. A statement 
containing the information required by the UMRA (2 U.S.C. 1531 et seq.) 
is not required.

List of Subjects in 30 CFR Part 256

    Administrative practice and procedure, Continental shelf, 
Government contracts, Oil and gas exploration, Public lands--mineral 
resources, Reporting and recordkeeping requirements, Surety bonds.


[[Page 60150]]


    Dated: November 7, 2001.
J. Steven Griles,
Acting Assistant Secretary, Land and Minerals Management.

    For the reasons stated in the preamble, the Minerals Management 
Service (MMS) amends 30 CFR part 256 as follows:

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

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

    Authority: 43 U.S.C. 1331 et seq., 42 U.S.C. 6213.

    2. Section 256.52 is amended as follows:
    A. Paragraph (b)(1) is revised to read as set forth below:
    B. In paragraphs (d), (e), (g) introductory text, and (g)(1) and 
(2), remove the word ``alternate'' and add, in its place, the word 
``alternative''.


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

* * * * *
    (b) * * *
    (1) The Gulf of Mexico and the area offshore the Atlantic Coast.
* * * * *

    3. Section 256.58 is revised to read as follows:


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

    This section defines the terms and conditions under which MMS will 
terminate the period of liability of a bond or cancel a bond. 
Terminating the period of liability of a bond ends the period during 
which obligations continue to accrue but does not relieve the surety of 
the responsibility for obligations that accrued during the period of 
liability. Canceling a bond relieves the surety of all liability. The 
liabilities that accrue during a period of liability include 
obligations that started to accrue prior to the beginning of the period 
of liability and had not been met and obligations that begin accruing 
during the period of liability.
    (a) When the surety under your bond requests termination:
    (1) The Regional Director will terminate the period of liability 
under your bond within 90 days after MMS receives the request; and
    (2) If you intend to continue operations, or have not met all end 
of lease obligations, you must provide a replacement bond of an 
equivalent amount.
    (b) If you provide a replacement bond, the Regional Director will 
cancel your previous bond and the surety that provided your previous 
bond will not retain any liability, provided that:
    (1) The new bond is equal to or greater than the bond that was 
terminated, or you provide an alternative form of security, and the 
Regional Director determines that the alternative form of security 
provides a level of security equal to or greater than that provided for 
by the bond that was terminated;
    (2) For a base bond submitted under Sec. 256.52(a) or under 
Sec. 256.53(a) or (b), the surety issuing the new bond agrees to assume 
all outstanding liabilities that accrued during the period of liability 
that was terminated; and
    (3) For supplemental bonds submitted under Sec. 256.53(d), the 
surety issuing the new supplemental bond agrees to assume that portion 
of the outstanding liabilities that accrued during the period of 
liability which was terminated and that the Regional Director 
determines may exceed the coverage of the base bond, and of which the 
Regional Director notifies the provider of the bond.
    (c) This paragraph applies if the period of liability is terminated 
for a bond but the bond is not replaced by a bond of an equivalent 
amount. The surety that provided your terminated bond will continue to 
be responsible for accrued obligations:
    (1) Until the obligations are satisfied; and
    (2) For additional periods of time in accordance with paragraph (d) 
of this section.
    (d) When your lease expires or is terminated, the surety that 
issued a bond will continue to be responsible, and the Regional 
Director will retain other forms of security as shown in the following 
table:

------------------------------------------------------------------------
                                  The period of
For the following type of bond    liability will     Your bond will be
                                       end            cancelled . . .
------------------------------------------------------------------------
(1) Base bonds submitted under  When the Regional  Seven years after the
 Sec.  256.52(a), Sec.           Director           termination of the
 256.53(a), or (b).              determines that    lease, 6 years after
                                 you have met all   completion of all
                                 of your            bonded obligations,
                                 obligations        or at the conclusion
                                 under the lease.   of any appeals or
                                                    litigation related
                                                    to your bonded
                                                    obligation,
                                                    whichever is the
                                                    latest. The Regional
                                                    Director will reduce
                                                    the amount of your
                                                    bond or return a
                                                    portion of your
                                                    security if the
                                                    Regional Director
                                                    determines that you
                                                    need less than the
                                                    full amount of the
                                                    base bond to meet
                                                    any possible future
                                                    problems.
(2) Supplemental bonds          When the Regional  When you meet your
 submitted under Sec.            Director           bonded obligations,
 256.53(d).                      determines that    unless the Regional
                                 you have met all   Director:
                                 your obligations  (i) Determines that
                                 covered by the     the future potential
                                 supplemental       liability resulting
                                 bond.              from any undetected
                                                    problems is greater
                                                    than the amount of
                                                    the base bond; and
                                                   (ii) Notifies the
                                                    provider of the bond
                                                    that the Regional
                                                    Director will wait 7
                                                    years before
                                                    cancelling all or a
                                                    part of the bond (or
                                                    longer period as
                                                    necessary to
                                                    complete any appeals
                                                    or judicial
                                                    litigation related
                                                    to your bonding
                                                    obligation).
------------------------------------------------------------------------

    (e) For all bonds, the Regional Director may reinstate your bond 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 was materially 
false when the bond was canceled or released.

[FR Doc. 01-29899 Filed 11-30-01; 8:45 am]


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BILLING CODE 4310-MR-W