BOEM Publishes Final Rule for Leasing in the OCS

On March 30, 2016, the Bureau of Ocean Energy Management (BOEM) published its Final Rule for Leasing of Oil and Gas or Sulfur in the Outer Continental Shelf (OCS).  This particular rulemaking process began with the publication of a proposed rule in 2009 by the Minerals Management Service (MMS) – after the 2010 and 2011 reorganizations and divisions of the MMS, the leasing program for OCS oil and gas fell under the authority of BOEM.

BOEM intends for these new regulations to update and streamline the existing OCS leasing regulations by reducing redundancy and organizing the various regulations for clarity.  BOEM also seeks to codify many existing bureau policies and practices.  The final rule does not make substantive changes to bonding and other further assurance regulations – any changes to bonding regulations will be part of a separate rulemaking currently in progress.

Although we don’t list all changes, we highlight several changes to regulations or codifications of BOEM’s practices:

  • Obligations:
    • Operating rights owners are primarily liable for any monetary obligation arising from such rights and record title owners are secondary liable for such obligations. However, the operating rights and record title owners are joint and severally liable for non-monetary obligations.  30 C.F.R. §§ 556.604(d) and 556.605(e).
  • Operating Rights:
    • Regulations now explicitly address the subleasing of a lease through the creation of operating rights. A maximum of two depths divisions (resulting in up to three different depth intervals) are allowed and depth divisions must be defined by a beginning and ending depths.  30 C.F.R. § 556.604(c).
  • Effective Date of Transfer or Assignment:
    • A transfer is effective on the first day of the month after BOEM approves it, unless the parties request an earlier effective date and BOEM approves that earlier date. 30 C.F.R. § 556.712.
  • Qualifications:
    • Limited liability companies and trusts are now expressly recognized as entities that may become qualified. 30 C.F.R. § 556.401.
  • Notice of Mergers, Name Changes or Change of Business Form:
    • Qualified entities must notify BOEM of any merger, name change or change of business form as soon as practicable, but in no case later than one year after the earlier of the effective date or the date of the appropriate filing of the change or action with the authorized state official. 30 C.F.R. § 556.405.
    • Regulations address documentation required to avoid the requirement of a corporate seal. 30 C.F.R. § 556.107.
  • Definitions of Lease Interests:
    • Clarifies three types of lease interests: (1) record title interest, (2) operating rights interest and (3) economic interest. 30 C.F.R. § 556.105.
    • A copy of each instrument creating, transferring or assigning an economic interest must be sent to BOEM within ninety days of the last execution. 30 C.F.R. §§ 556.715(a) and 808(a).
    • Economic interests are defined to include any right to or dependent upon production of oil or gas, and expressly include overriding royalty interests, net profits interests, production payments and carried working interests. Arguably, mortgages, UCC financing statements and statutory liens and privileges also constitute economic interests and thus must be timely filed with the BOEM.  Because operating agreements generally contain non-consent penalties that give consenting parties certain rights as to a non-consenting party’s leasehold interests, such agreements may create economic interests.  Also, because farmout agreements, participation agree­ments and similar agreements generally give one or more parties rights in leases owned or acquired by another party, it is arguable that these types of agreements must also now be timely filed with BOEM; a question arises whether filing a notice or memorandum of any such agreement satisfies this new rule.
  • Transfer Rules, Recordation and Services Fees:
    • Clarifies when more than one instrument (and multiple service fees) will be required to transfer interests. g., 30 C.F.R. §§ 556.105 and 106.
  • Designation of Operator:
    • Clarifies existing regulations regarding designation of an operator for transfers or record title interest and transfers of operating rights interest. 30 C.F.R. §§ 556.701, 716, 801 and 810.

The final rule becomes effective May 31, 2016.  These new regulations will affect potential bidders, lessees and operators of OCS leases.  If you have questions regarding compliance with these new regulations, please contact a Gordon Arata attorney.

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