CURRENT REGULATORY DEVELOPMENTS AFFECTING OFFSHORE MIDSTREAM NATURAL GAS PIPELINES

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1 I. Introduction CURRENT REGULATORY DEVELOPMENTS AFFECTING OFFSHORE MIDSTREAM NATURAL GAS PIPELINES By: Jana Grauberger & Collette Gordon Liskow & Lewis, Houston, Texas Pursuant to the Outer Continental Shelf Lands Act ( OCSLA ), the Secretary of the United States Department of the Interior is authorized to grant federal rights-of-way ( ROWs ) through the submerged lands of the Outer Continental Shelf ( OCS ) for the purpose of natural gas pipeline transportation. 1 Regulations of the Bureau of Safety and Environmental Enforcement ( BSEE ), predominantly, and also the Bureau of Ocean Energy Management ( BOEM ) govern OCS pipeline ROWs. Yet, it can be difficult at best to navigate the applicable rules which are located in various sources, including subpart J of 30 C.F.R. Part 250 entitled Pipelines and Pipeline Rights-of-Way. To complicate matters, subpart J has remained largely unchanged in the 25 years since it was first promulgated in 1988, and so, is somewhat dated. This paper is of the nuts-and-bolts variety and is intended to provide the basics of how current issues facing pipeline ROW holders in federal waters on the OCS are handled under the regulations in hopes of providing practitioners with a solid starting place to help their clients in their day-to-day operations. After an overview of OCS ROW regulation basics, this paper examines requirements to obtain and assign ROWs, required bonding and financial assurance, decommissioning, and incidents of non-compliance and civil penalties. II. ROW Pipeline Regulation Basics As a starting place, different types of pipelines are subject to different requirements. Any holder of a natural gas pipeline on the OCS must first determine where the particular line fits into 1 43 U.S.C. 1334(e).

2 the regulatory scheme. The principal distinctions are between DOI and DOT pipelines and between lease term and ROW pipelines. Pursuant to a 1996 Memorandum of Understanding ( MOU ), 2 the Department of the Interior ( DOI ) and the Department of Transportation ( DOT ) divided much of their regulatory authority over pipelines on the OCS. The stated purpose of the MOU is to place pipelines operated by producers under DOI responsibility and pipelines operated by transporters under DOT responsibility to the greatest extent practicable. 3 To this end, BSEE s regulations regarding design, construction, operation, and maintenance of pipelines apply only to DOI pipelines. The term DOI pipelines is defined to include producer-operated pipelines extending upstream (generally seaward) from each point on the OCS at which operating responsibility transfers from a producing operator to a transporting operator, producer-operated pipelines that extend upstream (generally seaward) of the last valve (including associated safety equipment) on the last production facility on the OCS that do not connect to a transporteroperated pipeline on the OCS before crossing into State waters, and producer-operated pipelines that serve to connect production facilities on the OCS. 4 The regulations also provide a catch-all provision; any OCS pipeline that is not subject to DOT s design and construction requirements under DOT regulations will be considered a DOI pipeline. 5 BSEE s regulations require producing operators to identify and mark the point where operating responsibility transfers from a producer to a transporter, and that point serves as the regulatory boundary Outer Continental Shelf Pipelines, 62 Fed. Reg (Feb. 14, 1997). Id. 30 C.F.R Id. Id (c)(3)-(4). -2-

3 Transporter operated pipelines will typically qualify as DOT pipelines, and will not be subject to BSEE s pipeline design, construction, operation, and maintenance requirements. These lines must continue to adhere to DOT s standards as promulgated and enforced by the Pipeline and Hazardous Materials Safety Administration for such things as pipe design, testing, installation, and repair. 7 Classification as a DOT pipeline does not mean that a transporter on the OCS will not have to work closely with BSEE, however. DOT pipelines remain subject to BSEE s regulations that do not concern the design, construction, operation, and maintenance of pipelines, and BSEE retains a large amount of regulatory authority through the process of granting and administering ROWs. BSEE remains the primary regulatory body responsible for permitting the installation of structures on the OCS pursuant to its authority to grant and condition federal OCS ROWs. Under BSEE s regulations, pipelines are classified as either lease term or ROW pipelines. Lease term pipelines are those pipelines that are contained on a single lease, unitized leases, or contiguous leases that are held by the same lessee or operator. 8 All other pipelines are ROW pipelines. 9 Thus, most DOT pipelines will qualify as a ROW pipeline. As discussed in detail below, all ROW pipelines, whether DOI or DOT, require a ROW from BSEE before installation. 10 DOT pipelines must therefore adhere to all of BSEE s regulations imposed by virtue of its ROW, as well as any conditions or requirements contained in the ROW grant. 11 Finally, even where BSEE does not have jurisdiction in its own right, the MOU provides BSEE with broad inspection and enforcement power. Under the MOU, DOT granted DOI the right to See 49 C.F.R , et seq.; id , et seq. 30 C.F.R Id. Id (d). Id (e)(1). -3-

4 conduct inspections of DOT regulated equipment in some circumstances as DOT s agent. 12 BSEE inspectors must also report any violations of DOT s regulations that they observe during any inspection. 13 Thus, any federal pipeline ROW holder on the OCS must be familiar with BSEE s pipeline regulations. BSEE s regulations governing pipelines and pipeline ROWs in 30 C.F.R. Part 250, subpart J have not been comprehensively updated since Further, many of the requirements applicable to ROW holders are contained in various other sections throughout the regulations, and, frequently, in guidance documents, such as Notices to Lessees ( NTLs ) and Letters to Lessees, or as a condition to approval of the ROW grant that is not in the regulations at all. BSEE s predecessor, the former Minerals Management Service ( MMS ), published a proposed rule in 2007 in an attempt to overhaul subpart J and capture all requirements in one body of regulations. 14 MMS accepted comments and held public meetings on the proposed rule throughout 2007 and Despite these efforts, the DOI has yet to issue a final rule revising subpart J, although BSEE continues to state that a revision is forthcoming. III. OCS ROWs, RUEs, and Assignments of Same A. Requirements to obtain a New ROW Grant 1. Qualified Entity A ROW grant is a prerequisite to the installation of any ROW pipeline on the OCS or to convert an existing lease-term pipeline into a ROW pipeline. 16 To obtain a ROW, an entity must Outer Continental Shelf Pipelines, 62 Fed. Reg. at Id. Oil and Gas and Sulphur Operations in the Outer Continental Shelf Pipelines and Pipeline Rights-of-Way, 72 Fed. Reg (Oct. 3, 2007). See Oil and Gas and Sulphur Operations in the Outer Continental Shelf-Pipelines and Pipeline Rights-of-Way; Reopening Public Comment Period, 73 Fed. Reg (Feb. 21, 2008). 30 C.F.R

5 first qualify as an eligible OCS lessee and ROW holder. This requires coordination with another DOI agency, BOEM. Pursuant to OCSLA, Congress delegated the administration of the offshore leasing program to the Secretary of the Interior. In turn, the Secretary of the Interior delegated that authority to the former MMS, and the responsibility to oversee the qualification requirements was transferred to BOEM during the reorganization of the MMS in As a result of OCSLA s silence on the criteria for acquiring OCS federal ROWs, the Secretary of the Interior has considerable discretion to adopt rules and standards that apply to those matters. Regulations promulgated by the former MMS implement DOI s statutory authority in this area. 30 C.F.R provides as follows: The right-of-way grant is issued pursuant to 43 U.S.C. 1334(e) and may be acquired and held only by citizens and nationals of the United States; aliens lawfully admitted for permanent residence in the United States as defined in 8 U.S.C. 1101(a)(20); private, public, or municipal corporations organized under the laws of the United States or territory thereof, the District of Columbia, or of any State; or associations of such citizens, nationals, resident aliens, or private, public, or municipal corporations, States, or political subdivisions of States. The regulations governing assignments incorporate these same criteria: (b) Any application for approval for an assignment, in whole or in part, of any right, title, or interest in a right-of-way grant must be accompanied by the same showing of qualifications of the assignees as is required of an applicant for a ROW in of this subpart and must be supported by a statement that the assignee agrees to comply with and to be bound by the terms and conditions of the ROW grant. 17 Although the regulations do not specifically mention limited liability companies ( LLCs ), the MMS/BOEM have long considered LLCs to fall within the regulatory phrase associations of such citizens C.F.R

6 For many years, the MMS (now BOEM) Adjudication Unit in the Gulf of Mexico Region has administered the process for natural and juridical persons to become qualified to own and operate ROWs in the Gulf of Mexico. Following are the basic requirements and filings with BOEM that are necessary for selected business entities to become qualified to own ROWs based on our experience in dealing with the Adjudication Unit. Because the documents required by the BOEM will depend on the type of entity attempting to become qualified, this paper will set forth the general list of documents required for the two most common types of business entities: (i) the corporation and (ii) the LLC. 18 In order to establish qualifications of a corporation to hold an OCS federal ROW, the following documents must be filed with the Gulf of Mexico Adjudication Unit: (1) Letter stating the name of the corporation exactly as it should appear on all legal documents; (2) Certified copy of the corporation s articles of incorporation and any amendments thereto; (3) Certificate of the corporation s Secretary or Assistant Secretary, over the corporate seal, certifying that the corporation is authorized to hold mineral leases and rights-of-way and identifying the state in which the corporation is incorporated; (4) Certificate of Incumbency, over the corporate seal, listing the officers authorized to bind the corporation, certified by the Secretary or the Assistant Secretary of the corporation; and (5) Certificate evidencing authority of persons authorized to bind the corporation certified by the corporation s Secretary or Assistant Secretary over the corporate seal. Said evidence would include either the copy of resolutions of the Board of Directors granting authority or copy of the power of attorney. 18 Although it is possible for other types of entities to become qualified to hold a ROW on the OCS, corporations and LLCs are the most common entities to attempt to qualify. -6-

7 Of course, the corporate seal must be distinctly embossed on each certificate executed by the Secretary or Assistant Secretary of a corporate entity. In order to establish qualifications of a limited liability company to hold an OCS federal ROW, the following documents must be filed with the Gulf of Mexico Adjudication Unit: (1) Company Agreement or Operating Agreement, and any amendments thereto, of the limited liability company; (2) Certificate of formation of the limited liability company, and any amendments thereto; (3) Certificate certifying that the limited liability company is authorized to hold mineral leases and rights-of-way on the OCS and indicating the state in which the limited liability company was registered or formed; (4) Certificate listing each of the members of the limited liability company; (5) Certificate from each of the members of the limited liability company indicating that such member itself is authorized to hold mineral leases and rights-of-way on the OCS. This certificate should also state the member s state of incorporation 19 or formation. If the member is an individual, it should include a statement of citizenship; and (6) Certificate of incumbency, jointly executed by all of the members of the limited liability company, listing the persons authorized to bind the limited liability company, 20 as well as resolutions evidencing the authority of persons to bind the limited liability company if not specifically set forth in the Articles of Organization or Operating Agreement or Company Agreement. Nevertheless, because the filing requirements are not set forth in the regulations, because BOEM has tremendous discretion in this area, and because BOEM occasionally alters its internal Please note that the corporate seal must be distinctly embossed on each certificate executed by the Secretary or Assistant Secretary of a corporate entity. Some limited liability companies provide for officers in the Operating Agreement or Company Agreement. If officers are appointed, the officers can become the individuals authorized to bind the company and conduct the day to day operations and execute BOEM documents. If there are no officers, then a limited liability company often qualifies with a Member or Manager authorized to bind, which may in fact be another entity. -7-

8 procedures, it is recommended that representatives of the entity attempting to become qualified confer with BOEM Adjudication Unit personnel prior to submitting the qualification papers. Finally, we are unaware of any BOEM requirement that an entity be able to demonstrate a minimum financial worth in order for the BOEM to approve the entity s qualification to hold OCS ROWs. Of course, actually becoming a ROW holder is different than becoming qualified to hold such an interest. As discussed in further detail below, a qualified entity seeking to obtain a new ROW grant, or the assignment of an existing ROW, will have to satisfy BOEM bonding requirements, including potential requirements for supplemental bonding, and potentially a demonstration of Oil Spill Financial Responsibility ( OSFR ) pursuant to 30 C.F.R , et seq. In effect, MMS/BOEM has used the bonding requirements as a means of ensuring that ROW holders have the financial capacity required to satisfy the significant financial obligations arising from holding a ROW. 2. Applications for New ROW Grants A qualified entity may submit an application for a new pipeline ROW grant by submitting an original and three (3) copies of the application to BSEE. 21 The application must clearly identify the primary manner of use of the ROW grant, including diameter details of the pipeline to be constructed, operated, and maintained, and whether the pipeline will be used to transport oil or gas. 22 The application must further identify the proposed operator of the pipeline, plats drawn to scale indicating major features and pertinent data, a schematic drawing, and other general data required under 30 C.F.R If the ROW was used before the application was made, the application must state the date the use began, who used the ROW before the C.F.R Id. The reader is referred to the provisions of 30 C.F.R for detailed requirements regarding the plat, schematic drawing, and other general data required. -8-

9 application was made, and the date the entity filing the application gained control of the improvement. 24 The application must likewise include a listing of each lessee and ROW holder whose lease or ROW will be crossed by the proposed ROW, and an affirmative statement from the applicant that a copy of the ROW application has been sent via certified mail to each listed lessee or ROW holder. 25 Finally, the applicant must have on file an original and three (3) copies of a completed Nondiscrimination in Employment form, found at the BSEE regional office. 26 The standard size for a ROW is 200-feet in width, though the authors are aware of some ROWs granted several decades ago for a narrower width. Additionally, the applicant must include with its ROW grant application evidence (by way of a Pay.gov receipt) of the payment of required rentals for the ROW. As of the date of this paper, annual rentals are $15 for each statute mile, plus (a) $5 per acre per year (minimum of $450 per year) for an accessory located in waters with a depth of less than 200 meters; or (b) $7.50 per acre per year (minimum of $675 per year) for an accessory located in waters with a depth of 200 meters or greater. 27 It is the authors understanding that if the application for the ROW grant is denied, such rental payment will be refunded upon request. Evidence of the payment of the service fee to process the application for the new ROW grant, currently $2,771, by way of a Pay.gov receipt, must also be submitted with the application C.F.R Id. Id. Id

10 B. Requirements to Obtain a RUE 28 Although available for some time, in recent years industry has increasingly used the right-of-use and easement ( RUE ) to conduct leasehold-type activities at a more advantageous location off of an OCS lease. Where an entity needs to construct and maintain platforms, artificial islands, or other installations and devices permanently or temporarily attached to the seabed at an OCS site other than an OCS lease the entity owns, and the improvement will be used for conducting exploration, development, and production activities or other operations, or other purposes approved by BOEM, the entity may apply for an RUE. 29 For example, if a lessee is unable to place all of its Spar anchors within the physical confines of its lease, it may apply for a RUE on the adjacent block to do so. RUEs are granted at the discretion of BOEM to qualified entities. 30 While BSEE does not decide whether a RUE should be granted, where the RUE would support an existing platform or production facility, a party seeking a RUE may need to coordinate with BSEE on the structural integrity of the existing platform or facility. It is important to distinguish the purposes of a RUE from the purposes of a ROW. Unlike a pipeline ROW, a RUE will be granted where BOEM determines it supports leasehold production in some manner. Thus, where a pipeline company utilizes a platform on a lease that subsequently expires, if there exists a continuing logistical need for the facility, the pipeline company may wish to associate the platform as an accessory to its ROW. Because the pipeline company would use the platform for transportation, and not as a production platform, a RUE would not be the appropriate access right to keep the platform in place. conduct Note that the RUE discussed in this paper is the traditional RUE governed by 30 C.F.R , et seq. Those RUEs granted pursuant to 30 C.F.R , et seq., known as Alternative Use RUEs, are outside the scope of this discussion. 30 C.F.R Id. -10-

11 C. Assignments 1. ROW Assignments BSEE allows the assignment of a pipeline ROW to an assignee who meets the qualification requirements and bonding requirements discussed in this paper. Historically, an undivided interest in an OCS ROW could be, and often was, assigned to multiple holders with one designated operator; however, MMS discontinued this practice several years ago in an effort to consolidate a ROW interest into one holder of record. Those holders who obtained a fractional undivided interest in the ROW prior to the change in policy are considered grandfathered in by BSEE, such that their interest in the ROW is still recognized, and the coholders of the ROW need not agree to assign their interests to one single holder. Nonetheless, such a holder must assign all of its undivided interest in the ROW to one entity going forward. Of note for ROWs with multiple segments, a current holder may execute a complete assignment of the ROW with all of its segments to one assignee, or it may execute a so-called partial assignment wherein only a selected segment (or segments) are assigned to the assignee. ROW assignments are to be executed on BSEE Form BSEE-0149, which must include legal description of the pipeline ROW being assigned, the percentage ownership being assigned out to five decimal places, the assignor and assignee s name and GOM qualification number, and must be executed officers of the assignor and assignee whose names are on the respective entity s incumbency certificate discussed above. Form BSEE-0149 is designed to satisfy many of DOI s statement requirements, including those under subpart B of 2 C.F.R. Part 1400 regarding debarment, certifications from assignor and assignee regarding compliance with Equal Opportunity Executive Order 11246, as amended, and the regulations implementing the order at 41 C.F.R. Part and 41 C.F.R. Part 60-2, and the requirement under 30 C.F.R

12 that the assignee provide a statement that it will comply with and be bound by the terms and conditions of the ROW grant. The legal description to be included on the BSEE Form BSEE-0149 should track the language of the original ROW grant and incorporate any modifications that have occurred to the ROW since it was granted. Initially, there was no uniformity to the form of legal descriptions used in ROW assignments. In an effort to streamline descriptions, BSEE has in recent years requested that those submitting ROW assignments revise the legal descriptions to meet new form requirements, even where those existing legal descriptions were formerly acceptable, 31 in order to gain approval of the assignment. In the authors experience, BSEE will no longer accept legal descriptions that include the phrase to construct, as the pipeline has already been placed at the time of an assignment. BSEE requires all legal descriptions going forward to use the language to operate and maintain a pipeline, to state the length and diameter of the pipeline on the ROW, to state the type of product (oil or natural gas) transported through the pipeline, and to state the beginning and ending points for the ROW. Where the ROW begins or ends at a platform, the company name of the owner (either current or historic) should be omitted from the description. Blocks crossed by the ROW should be specifically listed in the description. As a practical matter, parties to a ROW assignment often specify an effective date for the assignment, and include an Exhibit A attached to the ROW form that sets forth other terms and conditions of the assignment that the parties wish to place of record. It should be noted that BSEE will not review the contents of any Exhibit A attached to the ROW assignment and does 31 Where the legal description submitted was accepted in the past but does not now meet the new requirements, the filing of the ROW assignment triggers the BSEE engineers to revise the legal description and issue a letter to the current holder of the ROW providing the new description. BSEE then allows the parties to the ROW assignment to re-submit the assignment (with the revised legal description) without payment of an additional filing fee. -12-

13 not consider itself bound by any term or condition therein. The assignee must also designate an operator for the pipeline ROW, and this is commonly done in the cover or transmittal letter accompanying the application to BSEE. Unlike BOEM, which requires the Form BOEM-1123 to change the designated operator of an OCS lease or portion thereof, BSEE does not have a form to change the designated operator of a pipeline ROW. In the event the ROW is held by more than one party, as in the case of older ROWs discussed above, any change of operatorship must be agreed to by each holder of record in a letter submitted to BSEE in order for it to approve the change in designated operator. The ROW assignment application must be submitted in triplicate original and accompanied by a Pay.gov receipt evidencing payment of the filing fee, currently $201 per ROW assignment. During review of the assignment, BSEE will review the information contained on the Form BSEE Any deviation or error in the spelling or information contained on this form will result in the assignment being rejected and the forfeiture of the filing fee. BSEE will also examine its records to determine whether the pipeline ROW is active. 32 To be considered an active pipeline ROW, BSEE inquires as to whether the pipeline is flowing or transporting product. In the event the ROW originates or ends at an expired or terminated lease, BSEE will contact the party submitting the assignment (usually the assignee) to clarify where the flow being transported through the pipeline on the ROW in question originates or goes. BSEE will not approve the assignment of any ROW that it deems inactive for lack of flow, expired or terminated. Next, BSEE confirms with BOEM that any required bonding or OSFR coverage is 32 It should be noted that a DOT pipeline may be active under DOT standards in that it is being maintained and pressurized in accordance with DOT regulations, but may not be considered active by BSEE s standards, which BSEE interprets as requiring that the pipeline be actively flowing. The authors are aware of no publicly reported decision where industry has challenged BSEE s refusal to approve a ROW assignment where the pipeline was maintained and active in accordance with DOT regulations, but not actively flowing. -13-

14 in place. 33 Upon approval of the ROW assignment, the BSEE pipeline chief signs the ROW assignment and sends the original approved assignment to the party submitting the assignment. A copy of the approved assignment is also scanned and imported into BSEE s online records database. 2. No Assignment of RUEs There are occasions when an entity may want the rights that an operator has to an existing RUE. A common example is when an entity sells its rights to a platform that is located in whole or in part on a RUE. The acquiring entity would certainly want to acquire the rights to a RUE to keep the platform in place. At this time, however, RUEs are not transferable by assignment. An entity wishing to acquire the RUE currently held by another entity must submit a new application for the RUE and include a letter from the current RUE operator stating its support for the application and the reasons for the application (i.e., the acquisition of the platform located on the RUE). Upon approval of the new RUE, BOEM will terminate the old RUE number. IV. Bonding A. Bonding Requirements for ROWs 1. General Bonding All bonding matters for OCS pipeline ROWs are overseen by BOEM. Before BSEE will grant a new OCS federal ROW or approve the assignment of an existing ROW, the proposed ROW holder must have a $300,000 general ROW bond in place with BOEM in the form of Form BOEM The general bond guarantees compliance with the terms and conditions of the ROWs held in the Gulf of Mexico OCS area and the area offshore the Atlantic Coast. 35 Though C.F.R Id (a)(1). Id (b)(1). -14-

15 the issue was under consideration some time ago, currently, a single $300,000 bond is the only general bond necessary for one or more ROWs in the Gulf of Mexico. As such, it is the functional equivalent of an area wide bond for a mineral lease, in that it covers all ROWs in a given planning area. 36 The obligation to have a general bond in place must be satisfied by the ROW holder, and not the ROW s operator. 2. Supplemental Bonding In addition to the general bond discussed above, BOEM has discretion under 30 C.F.R (a)(2) to require additional security without limit. These so-called supplemental bonds are required to secure potential decommissioning obligations. The authors are not aware of BOEM requiring supplemental bonding with respect to pipeline ROWs for any other reason, though the applicable regulations are broad enough to allow for it. Required supplemental bonding amounts are reviewed periodically, and a review can be triggered by certain events, such as the submission of a ROW assignment to BSEE for approval or when an application or modification affecting the ROW is submitted for review. a. Calculating Estimated Decommissioning Amounts While BOEM administers the bonding program, BSEE actually determines the amount of the supplemental bonding required for a particular ROW. The standard that BSEE applies to determine the amount of a supplemental bond required for a ROW is somewhat unclear. Neither 30 C.F.R. Part 250 nor the BOEM s leasing guidelines address the issue in a comprehensive manner. However, NTL No N07 addressing supplemental bond procedures offers some general guidance. While the NTL is focused primarily on supplemental bonding for mineral 36 The BOEM was at one time considering changing bonding requirements for ROWs to a scheme closer to that imposed on mineral leases, whereby a single general bond is required for each lease with a lessee s option to provide an area-wide bond in some higher amount to cover every ROW in a planning area (i.e., the Gulf of Mexico). That said, the authors are not currently aware of any further agency discussion on moving ROW bonding toward the leasehold model. -15-

16 leases, it does on occasion refer to ROWs. As regards the determination of decommissioning liability, the NTL states: IV. Determination of the Decommissioning Liability Regardless of any assumptions made by MMS in estimating decommissioning costs, the lessee is responsible for ensuring that all decommissioning obligations on its lease are satisfied. When MMS requires the lessee to provide and maintain a supplemental bond, the amount of the supplemental bond for the lease will be determined as follows: (1) The MMS will estimate the cost to plug and abandon wells, remove platforms and other facilities, and restore the lease to its original condition by clearing the obstructions from wells, platform sites, RUEs, and ROWs. MMS assumes that all facilities will be removed and transported to shore for recycling or disposal. (2) The MMS calculations are drawn from best available data and include costs for removing and transporting the facility onshore, plugging and abandoning wellbores, and performing site clearance according to the requirements of 30 CFR 250 Subpart Q and Gulf of Mexico NTL No This estimate is based upon costs in the Region and assumes that a rig will be used to plug and abandon all wellbores. These figures will be adjusted when available information shows that the numbers are not accurate. The lessee may provide additional information for consideration when MMS estimates decommissioning liability. When providing additional data, the lessee should explain the basis for the data. (3) The following procedure may be used to estimate the need for and amount of supplemental bonds for all entities: A. Determine the decommissioning liability for all leases, RUEs, and ROWs for which the lessee owns record title interest or is a holder (and the decommissioning liability associated with the lessee s operating rights interest where the lessee has requested the MMS to include proved producing reserves for such operating rights interest in the calculation of its net worth as discussed herein). B. Apply lease-specific bonds (i.e., lease-specific general bonds, lease-specific supplemental bonds, and lease-specific guarantees) to identified leases. -16-

17 C. Exclude from the lessee s decommissioning liability calculation, for the purpose of supplemental bond determination, the full amount of the decommissioning liability for any lease(s) for which MMS has determined that one or more co-lessees have sufficient financial strength such that it is not necessary to require a supplemental bond. The MMS will exclude less than the full amount of the decommissioning liability when it is determined that additional security is needed based upon the financial or operational history of the companies involved. D. After calculating the remaining potential liability, the financial strength and reliability of the company will be evaluated using the procedures discussed herein. The MMS will then determine the need for a supplemental bond and the amount. E. Request lease-specific supplemental bonds through the designated operator who coordinates the submittal with the lessees. (4) The lessee may facilitate the review and approval of the request by providing detailed information on existing leasehold facilities. The lessee may provide evidence to support an adjustment in the estimate of the cumulative potential decommissioning liability. This evidence may include: A. the itemized data and information by lease, RUE, or ROW used as a basis for the estimate of the cumulative potential decommissioning liability represented by wells and facilities on the lease(s), and B. the itemized data and information by lease, RUE, or ROW on which a third party bases its estimate of cumulative potential decommissioning liability. (5) When conducting a subsequent review of the need for a supplemental bond, MMS will consider all pertinent information which affect bonding assessment, such as the number of wells drilled or plugged and abandoned in the time that has elapsed since the last review of the lessee s cumulative potential decommissioning liability the number of platform installations or removals since the last review, changes in the amount and value of reserves being produced, the projected rates of oil and gas production, inflation, and other changes in the market conditions. The objective of the review and analysis will be to ensure that the supplemental bond coverage or alternate form of security provided is not less than the amount established based upon lessee s cumulative potential decommissioning liability. -17-

18 It is the authors understanding that in determining supplemental bond amounts required for pipeline ROWs, BSEE assigns a potential decommissioning amount to each platform or other facility associated with a ROW, which will vary depending on the type of facility and water depth, and recently has begun to include in the calculation decommissioning the actual pipeline itself. Amounts attributable to the decommissioning of the pipeline itself are calculated based on water depth, pipeline size, and connecting points. b. Methods of Meeting Assurance Requirements for Supplemental Bonding Within 45 days of BOEM s written notification that supplemental security is required for a pipeline ROW, the ROW holder must provide security in the following forms unless the ROW holder can demonstrate to the satisfaction of BOEM that it (or its guarantor) has the financial ability to ensure that all structures can be abandoned, removed, and sites cleared of obstructions. 37 i. Supplemental Bonds If supplemental bonding is required, a ROW holder may submit a ROW-specific surety bond (in the form of Form BOEM-2028A), US Treasury Securities, or alternative form of supplemental security approved by the Regional Director, in the full amount. 38 ii. Decommissioning Trust In lieu of submitting a supplemental bond, the NTL allows lessees and RUE holders to submit a plan for BOEM approval to fully fund a decommissioning escrow, in accordance with the requirements in the NTL. 39 BOEM is not receptive to establishing a decommissioning NTL No N07. Id. NTL No N

19 escrow to cover supplemental bonding obligations for OCS ROWs because, unlike a lease or RUE, OCS ROWs do not have reserves that can be used as collateral. iii. Exemption Where an entity (or its guarantor) can demonstrate to the satisfaction of BOEM that it has the financial ability and business history to ensure that all structures can be abandoned, removed, and the sites cleared of obstructions, that entity is considered exempt from the obligation to provide supplemental bonds. 40 The BOEM maintains a list of those companies deemed exempt by virtue of the company s own financial strength or the strength of a financial guarantor. (A) Financial Exemption of Entity The NTL sets forth BOEM s current standards for determining financial strength sufficient to render a company exempt from the requirement to provide supplemental bonds. To be considered exempt, a BOEM qualified company must (i) provide independently audited financials showing the company s calculated net worth equal to or greater than $65 Million; (ii) have cumulative decommissioning liability less than or equal to 50% of its net worth; (iii) have a demonstrated history of reliability, taking into account its record of compliance and years of successful operations, and (iv) either produce fluid hydrocarbons in excess of 20,000 BOE per day (on average) from OCS leases where the company owns a record title interest, or provide audited financials meeting the following financial ratios: Id. Id. -19-

20 (B) Third Party Indemnity Agreement As mentioned above, an entity may rely on the strength of a guarantor to become exempt from providing supplemental bonds. A proposed guarantor must itself be a BOEM qualified entity who has qualified for a financial exemption as discussed in (A) above. 42 In addition, the proposed guarantor must not have outstanding or proposed guarantees that exceed 25% of its unencumbered net worth in the United States. 43 The guarantor and indemnified company must execute a Third Party Indemnity Agreement meeting the requirements of 30 C.F.R and submit the agreement to BOEM for approval. While NTL No N07 has a model form of Third Party Indemnity Agreement attached which meets all of the regulatory requirements, parties may submit their own form of agreement for BOEM s approval. However, parties are cautioned that submitting an indemnity agreement that differs substantively from the BOEM s model form may cause delays as it must be elevated within the agency for detailed review and approval Id. Id. -20-

21 B. Demonstration of Oil Spill Financial Responsibility In addition to the general and supplemental bonding requirements, potential ROW holders need to be cognizant of the OSFR requirements in 30 C.F.R. Part 553. OSFR coverage is required for each Covered Offshore Facility ( COF ), which is a facility that has the potential to spill more than 1,000 barrels of oil. The amount of OSFR coverage required is determined by the worst case spill scenario for the COF. Under 30 C.F.R (c), for a pipeline facility, the volume of oil of the worst case discharge scenario is as follows: (c) For a pipeline facility, the size of your worst case discharge scenario is the volume possible from a pipeline break. You must calculate this volume as follows: (1) Add the pipeline system leak detection time to the shutdown response time. (2) Multiply the time calculated in paragraph (c)(1) of this section by the highest measured oil flow rate over the preceding 12-month period. For new pipelines, you should use the predicted oil flow rate in the calculation. (3) Add to the volume calculated in paragraph (c)(2) of this section the total volume of oil that would leak from the pipeline after it is shut in. Calculate this volume by taking into account the effects of hydrostatic pressure, gravity, frictional wall forces, length of pipeline segment, tie-ins with other pipelines, and other factors. The table below shows the applicable amount of OSFR coverage required for a COF located on the OCS: -21-

22 Each COF has one or more responsible parties. For a pipeline, any person owning or operating the pipeline is a responsible party. For a COF that is not a pipeline, a responsible party means either the lessee or permittee of the area in which the COF is located, or the holder of a right-of-use and easement granted under applicable state law of the OCSLA (43 U.S.C ) for the area in which the COF is located (if the holder is a different person than the lessee or permittee). 44 The designated applicant is responsible for satisfying the OSFR financial requirements. Under the regulations, [e]ach COF must have a single designated applicant. 45 The responsible party(ies) must therefore designate one party to be the designated applicant. If the COF is a pipeline, the designated applicant must be the holder or operator of the pipeline. 46 C. Impact of Advanced Notice of Proposed Rulemaking on ROW Holders On August 19, 2014, BOEM published an advance notice of proposed rulemaking ( ANPR ), seeking comments and information regarding its effort to update its regulations and program oversight for Outer Continental Shelf (OCS) financial assurance requirements. The C.F.R Id (a). Id (d). -22-

23 ANPR is largely focused on identifying and securing decommissioning costs that would otherwise be covered by supplemental bonds. Input solicited by BOEM in the ANPR include whether the financial exemption from supplemental bonding should be eliminated and how decommissioning liability should be calculated. While the ANPR has no immediate impact on ROW holders, it is clear that new regulations or guidance is forthcoming that will change the manner in which OCS ROW holders satisfy bonding requirements. V. Decommissioning of ROWs A. Duration and Termination of a ROW A pipeline ROW continues for as long as the pipeline associated with the ROW is properly maintained and being used for the purpose for which the grant was made. 47 A temporary cessation in the use of the ROW generally will not cause termination of the grant. However, if the purpose for the ROW ceases to exist or use of the pipeline is permanently discontinued then the ROW will be deemed to have expired without the necessity of any further action. 48 As discussed, BSEE s current practice is to interpret a ROW as expired and nonassignable if there is no production flowing through the pipeline other than due to a temporary cessation at the time that an assignment is filed. BSEE thus interprets a ROW grant to construct, operate, and maintain a pipeline as including a flow requirement to maintain the ROW. Meanwhile, a DOT pipeline could be maintained pursuant to DOT s regulations without necessarily flowing production. Thus, the same types of problems regarding whether the ROW is active may arise in the decommissioning context as well C.F.R Id. -23-

24 A pipeline ROW may also be voluntarily relinquished. An OCS federal ROW holder who no longer desires to maintain the ROW may file a written relinquishment with BSEE. 49 The relinquishment must show compliance with the decommissioning obligations provided in 30 C.F.R , and is generally considered effective upon filing. 50 When a pipeline ROW terminates (whether relinquished, cancelled, or forfeited), a ROW holder has one year to remove all platforms, structures, domes over valves, pipes, taps, and valves along the right-of-way, but this requirement can be waived by BSEE and such facilities abandoned in place or reefed. 51 In the event that a ROW holder does not remove these structures within the one-year time period, the improvements become property of the United States. However, the regulations also provide that, despite this transfer of ownership, the former ROW holder remains liable for any accidents or damages caused by the failure to remove the structures. 52 B. Decommissioning of ROW Pipelines and Facilities Decommissioning is a separate matter covered in another part of BSEE s regulations. 53 Facially, these requirements are limited to DOI pipelines. 54 However, the regulations do require all ROW holders to submit full decommissioning information in an application for relinquishment. 55 Pursuant to BSEE a decommissioning regulations, pipelines may be decommissioned in place if BSEE determines that the pipeline does not constitute a hazard C.F.R Id. Id (h). Id (h). See id Id (c)(1) ( Department of Interior (DOI) pipelines, as defined in , must meet the requirements in through ). Id

25 (obstruction) to navigation and commercial fishing operations, unduly interfere with other uses of the OCS, or have adverse environmental effects. 56 The regulations provide the specifics for decommissioning in place or by removing the pipeline, both of which require an application to BSEE and a follow-up written report, including a signed statement by a company representative certifying that the decommissioning was performed in accordance with the approved application, within 30 days after decommissioning work is performed. 57 The regulations further state that BSEE retains the authority to order a former ROW holder to remove a pipeline decommissioned in place if BSEE determines the pipeline is an obstruction. 58 BSEE s decommissioning regulations state that [a]ll holders of a right-of-way are jointly and severally liable for meeting decommissioning obligations for facilities on their rightof-way, including right-of-way pipelines. 59 These obligations accrue when one becomes a holder of the ROW. 60 Since, with limited exceptions, BSEE does not currently recognize joint ownership of ROWs, joint and several liability will generally only be relevant between current and former holders of the ROW. With respect to BSEE, a ROW holder retains its decommissioning obligations that accrued prior to the approval of any assignment notwithstanding the transfer. 61 Between the parties, responsibility for payment of costs associated with decommissioning obligations should be addressed in private agreements. Due to the possibility of continued liability to BSEE for decommissioning obligations as to ROW Id Id Id Id (b). Id (e). See Nippon Oil Exploration U.S.A. Ltd. v. Murphy Exploration & Prod. Co. USA, 2011 U.S. Dist. LEXIS 63445, at *10 (E.D. La. 2011). -25-

26 pipelines and facilities transferred to other parties, in current practice it is common for assignors to require security in the form of performance bonds or escrow accounts in their private agreements with assignees in order to protect against the possibility of boomerang decommissioning liability. These forms of financial assurance generally continue in existence following a transfer until submission of proof that decommissioning obligations have been satisfied. Before decommissioning takes place, the ROW holder must submit a decommissioning application to BSEE and receive approval to decommission the pipeline. Decommissioning may not begin without BSEE s approval of the application. 62 The decommissioning application must be submitted in triplicate and must be accompanied by payment of the applicable service fee (currently $2, for ROW pipelines). 63 The substantive requirements of the application differ, depending on whether the pipeline will be decommissioned in place or removed and scraped. An application to decommission the pipeline in place must include: the reason for the operation; the proposed decommissioning procedures; the length of the segment to be decommissioned (in feet); and the length of the segment that will remain (in feet). 64 Applications to decommission by removal must include: the proposed removal procedures; if required, a description of the vessel that will be used to remove the pipeline, including anchor patterns; the length of the segment to be removed (in feet); the length of the segment that will remain in place (in feet); the plans for transportation of the removed pipe for disposal or salvage; the plans to protect archaeological and sensitive biological features during removal operations, including a brief assessment of the environmental impacts of the removal operations and C.F.R (d). Id Id

27 procedures and mitigations measures that will be used to minimize these impacts; and the projected removal schedule and duration of the removal operation. 65 BSEE s regulations on decommissioning contain no guidance on coordination of efforts between federal lessees and ROW holders or pipelines regulated by DOT. If, for example, a lessee needs to decommission a producer-operated platform on an expired lease, but cannot do so until and unless a connecting DOT pipeline is disconnected from the platform, the lessee has no ability to require BSEE to force the pipeline owner to decommission its pipeline. Such coordination efforts are generally left to the parties private agreements. Therefore, it is crucial that those agreements address the timing and access issues that may pop up when one party must decommission its facilities. Parties should also consider providing for the ability of one party to perform necessary decommissioning work on behalf of the non-performing party such that neither the lessee nor the pipeline owner is ever faced with being in violation of BSEE decommissioning regulations solely due to the failure of another party to perform its own prerequisite decommissioning work. Reimbursement of costs and indemnity may also need to be addressed in these agreements. VI. Incidents of Noncompliance ( INCs ) and Civil Penalties A. INCs OCSLA authorizes the Secretary of the Interior to impose civil penalties for statutory violations, as well as violations of any regulation, order, lease, license, or permit issued pursuant to OCSLA. 66 BSEE has adopted regulations, NTLs, and guidelines that implement this statutory Id See 43 U.S.C. 1350(b)(1). -27-

28 authority. 67 The issuance of an Incident of Noncompliance or INC is often a prerequisite to the imposition of civil penalties. BSEE has the right to issue an INC whenever it has reliable, probative, and substantial evidence to believe that a regulation has been violated or that there has been noncompliance. 68 Federal regulations define violations as any failure to comply with OCSLA, or any other applicable laws, with any regulations issued under the OCSLA, or with the terms or provisions of leases, licenses, permits, rights-of-way, or other approvals issued under the OCSLA. 69 An INC operates as a violation notice or citation. Typically, the party receiving an INC will be given 14 days to bring the cited violation into compliance, however, this time period can be adjusted depending on the nature of the violation. There are three different types of INCs, the issuance of which depends upon the severity of the violation. Warning INCs ( W INC ) are issued when the violation does not pose an immediate danger to personnel, equipment, or the environment. If an inspector determines that a specific piece of equipment or location is part of an unsafe situation or poses an immediate danger to personnel or other equipment, and that component can be shut-in without affecting the overall safety of the facility, a Component Shut- In INC ( C INC ) may be issued. Finally, if an unsafe situation poses an immediate danger to the entire facility or personnel and the specific piece of equipment or location cannot be shut-in without affecting the overall safety of the facility, the inspector will issue a Structure Shut-In See 30 C.F.R , et seq. BOEM has adopted parallel provisions, which are generally located at 30 C.F.R For ease of reference, BSEE is referenced in the text throughout this section. Yet, in certain instances such as with respect to bonding, BOEM may be the enforcing agency. Apache Corp., 183 IBLA 273 (2013). 30 C.F.R