NTL No. 2003-N06 |
Effective
Date: June 17, 2003 |
Notice to Lessees and Operators (NTL) and Federal Oil, Gas, and Sulphur Leases in the Outer Continental Shelf
Supplemental Bond Procedures
NOTE:
NTL 2003-N06,
Attachment 1 and
Attachment 2
are
available for download in Adobe's Portable Document Format (PDF).
The Minerals Management
Service (MMS) is issuing this NTL to update the criteria MMS uses to
determine when a supplemental bond is required to cover potential lease
abandonment liability. The NTL has been revised to: 1) increase the
allowable cumulative lease abandonment liability amount of a lessee as a
percentage of its net worth provided other financial criteria are met; 2)
remove the current ratio from the criteria used to determine the financial
strength of a lessee; 3) allow a lessee to request the MMS to consider a
percentage of a lessee’s proved producing reserves in the calculation of
its net worth; 4) reduce the initial payment amount a lessee is required
to contribute to a lease-specific abandonment escrow account; and 5)
extend the time for a lessee to meet supplemental bond requirements after
notice from the MMS. This NTL supersedes and replaces NTL No. 98-18N,
effective December 28, 1998, and NTL No. 98-18N (Addendum 1), effective
September 12, 2000, on this subject.
Background
For
each OCS lease, 30 CFR 256.53(d) and (e) grant the Regional Director the
authority to require additional security [i.e. security above the amounts
prescribed in 30 CFR 256.52(a) and 256.53(a) and (b)] in the form of a
supplemental bond, based upon a calculation of the potential lease
abandonment liability and an evaluation of the lessee’s ability to carry out
present and future financial obligations. Each lease with lease abandonment
liability must be covered by a supplemental bond unless at least one lessee
demonstrates to the satisfaction of the MMS that it has the financial
ability to ensure that wells and platforms can be abandoned and removed and
the drilling and platform sites cleared of obstructions.
I.
General
This
NTL sets forth the procedures and criteria that all MMS OCS Regions will use
to calculate lease abandonment liability, determine the risk that the lessee
will be unable to carry out present and future financial obligations, and to
specify the types and terms of the supplemental bonds or other additional
security the MMS may require or accept. MMS reserves the right to vary from
the procedures or criteria in this NTL on a case-by-case basis within the
framework established in the governing regulations.
II.
Timing of Review of Potential Lease Abandonment Liability
Generally, MMS will conduct an initial review of the potential lease
abandonment liability when a lessee submits an Exploration Plan (EP) for
approval.
-
Subsequent reviews will be conducted when a lessee requests approval of
one of the following:
-
Assignment of a record title interest, or a portion thereof, in a lease.
-
Significant revision to an approved EP.
-
Development and Production Plan (DPP) or a significant revision to an
approved DPP.
-
Development Operations Coordination Document (DOCD) or a significant
revision to an approved DOCD.
-
Application for a pipeline right-of-way (ROW) or modification of an
existing pipeline ROW.
-
Assignment of an interest in a pipeline ROW grant with platform
amenities.
-
Significant revision to an approved pipeline installation plan for a
pipeline having platform amenities.
-
MMS
also may conduct reviews:
-
periodically;
-
when MMS becomes aware of information that indicates a change in the
financial strength of the company or potential cumulative abandonment
liability; or
-
when a Notice of an Incident of Noncompliance (INC) is issued related to
safety, environment, non-payment of royalty, or other violations of MMS
regulations.
-
If
the lessee takes an action that causes MMS to initiate a review and then
withdraws the action, at MMS’s discretion, the review may continue and, if
necessary, the submission of a supplemental bond be required.
III. Determination of Financial Strength and
Reliability
Generally, a supplemental bond will be required
for the lease unless it is determined that at least one lessee meets the
following conditions that demonstrate financial strength and reliability:
-
Cumulative lease
abandonment liability is less than or equal to 50 % of the most recently
available and independently audited calculation of net worth; MMS will use
the procedure in section IV to calculate the cost of performing
abandonment liability for each OCS lease for which the lessee owns a
record title interest.
-
Demonstrates reliability
as evidenced by the following:
-
number of years of
successful operations and production of oil and gas or sulphur in the
OCS or in the onshore oil and gas industry;
-
credit rating(s), trade
references, and verified published sources;
-
a record of compliance
with the current and previous governing laws, regulations, and lease
terms; and
-
other items that
indicate financial strength or reliability;
and, the lessee either:
-
Produces fluid
hydrocarbons in excess of an average of 20,000 barrels of oil equivalent (BOE)
per day from the OCS leases, based on calculations of production for the
most recent 12 months for which data and information are available. [For
the purposes of computing BOE for natural gas, 5.62 thousand cubic feet of
natural gas equals 1 barrel of oil equivalent, as measured fully saturated
at 14.73 psi and 60 degrees Fahrenheit according to 30 CFR 250.1203(b).]
or
-
Has stockholders’ equity
or net worth of at least $50 million and demonstrates meeting the criteria
set forth in the table below by providing audited financial statements,
(including an independent auditor’s report, balance sheet, and profit and
loss sheet).
For lessees with stockholders’ equity or net worth of: |
If the
lessee’s cumulative lease abandonment liability is < 25% of
stockholder’s equity or net worth, the lessee’s debt to equity ratio
(total liabilities/net worth) must be: |
If the
lessee’s cumulative potential lease abandonment liability is >25% but
< 50% of stockholder’s equity or net worth, the lessee’s debt to
equity ratio (total liabilities/net worth) must be: |
$50
Million to
$100 Million
|
<
2.5 |
<
2.0 |
Above
$100 Million |
< 3.0 |
<
2.5 |
-
The lessee may request
that the MMS consider the value of proved producing reserves in the
calculation of the lessee’s net worth by providing the following
information to the MMS for all OCS leases in which the lessee owns a
record title interest or operating rights interest:
-
an
independent third-party estimate of the total proved producing reserves.
This third-party reserve report shall break down proved producing
reserves on a lease, reservoir and well completion basis. It shall also
include a cash flow spreadsheet to show anticipated production,
expenses, and cash flow.
-
reservoir depth structure maps, net sand and oil/gas isopach maps;
-
production information for all producing wells for the last 12-month
period;
-
well
test information for the last 12-month period for all producing wells;
and
-
reservoir bottom-hole pressure information (this data must include the
well the pressure was recorded in, the date the pressure was recorded,
the depth in MD and TVD of the recorded pressure and the calculated
bottom-hole pressure corrected to reservoir datum depth).
Upon
receipt of this information, MMS will determine the value of the proved
producing reserves to be included in the net worth calculation. However,
should the lessee wish the MMS to include the proved producing reserves for
an operating rights interest, then the abandonment liability for such
operating rights interest also will be included in the calculation of the
lessee’s cumulative lease abandonment liability. Based on potential risk
associated with the reserves, MMS will include up to 50% of the reserve
value in MMS’s calculation of the lessee’s net worth.
-
The determination of the lessee’s financial strength is valid for 1 year.
MMS will extend the determination for 1 year at a time if:
-
an independent accountant submits verification of the lessee’s current
financial capacity at least 60 days prior to the expiration of the
determination; and
-
the lessee continues to meet the criteria established above.
IV. Determination of the
Lease Abandonment Liability
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:
-
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, and pipeline ROW's.
MMS assumes that the lessee will remove all facilities and abandon them
onshore.
-
Costs
will be estimated using available historical costs. The following
calculation is drawn from historical data for 4-pile platforms in the Gulf
of Mexico and includes costs for removing platforms from the lease and
scrapping the platform onshore, plugging and abandoning wellbores
according to the requirements of 30 CFR 250 Subpart G and Subpart Q, and
clearing the site according to 30 CFR 250 Subpart I and Gulf of Mexico NTL
No. 98-26. This estimate is based upon costs in the Gulf of Mexico and
assumes that a lessee will use a rig to plug and abandon all wellbores.
These figures will be adjusted when available information shows that the
numbers are not accurate. Other OCS Regions will base estimates on the
best available information. The lessee may provide additional information
for consideration when MMS estimates the lease abandonment liability.
When providing additional data, the lessee should explain the basis for
the data.
We
will estimate costs as follows:
-
Plugging and abandoning a wellbore will cost $100,000 per wellbore for
all water depths.
-
Dismantling and abandoning a platform will vary with water depth as
follows:
Estimated Costs of Removing
a Platform and Scrapping it Onshore (According to Water Depth)
Water depths of 150 feet
or less |
Water depths between 151
and 200 feet |
Water depths between 201
and 299 feet |
Water depths of 300 feet
or more |
$400,000 |
$600,000 |
$1,250,000 |
$2,000,000+ |
-
Site clearance will vary
with water depth as follows:
Estimated Cost of Site
Clearance (According to Water Depth) |
Water depths of 150 feet
or less |
Water depths between 151
and 249 feet |
Water depths of 250 feet
and greater |
$300,000 |
$400,000 |
$500,000+ |
-
The following procedure
will be used to estimate the need for and amount of supplemental bonds for
all companies that have provided a general bond for one or more leases:
-
Determine the
abandonment liability for all leases for which the lessee owns a record
title interest (and the abandonment 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 provided above).
-
Apply lease-specific
bonds (i.e., lease-specific general bonds, lease-specific supplemental
bonds, and lease-specific guarantees) to identified leases.
-
Exclude from the
lessee's abandonment liability calculation, for the purpose of
supplemental bond determination, the full amount of the abandonment
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. MMS will exclude less than
the full amount of the abandonment liability when it is determined that
additional security is needed based upon the financial or operational
history of the companies involved.
-
Deduct a reserve account
for the Minerals Revenue Management from the general bonds on file.
This account will be credited $50,000 per lease or $300,000 per
area-wide bond on file.
-
After calculating the
remaining potential liability, the financial strength and reliability of
the company will be evaluated using the procedures above. MMS will then
determine the need for a supplemental bond and the amount.
-
Request lease-specific
supplemental bonds through the designated operator who coordinates the
submittal with the lessees.
-
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
abandonment liability. This evidence may include:
-
the itemized data and
information by lease used as a basis for the estimate of the cumulative
potential abandonment liability represented by wells and facilities on
the lease(s), and
-
the itemized data and
information by lease on which a third party bases its estimate of
cumulative potential lease abandonment liability.
-
When conducting a
subsequent review of the need for a supplemental bond, MMS will consider
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
abandonment 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 the lessee’s cumulative potential lease abandonment
liability.
V. Acceptable Forms of Supplemental Bonds
Within 45 days following MMS written
notification, the lessee must submit one of the following to meet the
supplemental bond obligation:
-
A lease-specific supplemental bond, United
States Treasury Securities, or an alternate form of supplemental security
approved by us, in the full amount required. If the value of the lessee’s
security falls below this amount, or if the U.S. Treasury no longer
certifies that the company that issued the bond is acceptable, the lessee
must notify us within 15 days and take necessary action to meet the
supplemental bond obligation.
-
A plan to MMS for review and approval whereby
the lessee commits to fully fund a lease-specific abandonment escrow
account according to 30 CFR 256.56. Generally, the lessee must fully fund
a lease-specific abandonment account within four (4) years or by the
beginning of the year in which it is projected that 80 percent of the
originally recoverable reserves have been produced, whichever is earlier.
The plan must include the following:
-
An initial payment into
the lease-specific abandonment escrow account equal to or greater than
50 percent of the estimate of the cumulative potential lease abandonment
liability. At the lessee’s request, the MMS may approve an initial
payment of less than 50 percent following the review of a third-party
estimate of the proved producing reserves for the lease, if MMS
determines that the lesser amount doesn’t create a risk to the
Government.
-
A
prescribed time schedule for making specified incremental payments
(e.g., monthly payments) in amounts that will ensure that the amount in
the lease abandonment account will increase at a faster rate than the
rate at which the originally recoverable reserves are being produced
from the lease.
-
A
commitment by the financial institution in which the lessee established
the lease-specific abandonment account to notify us of the date and
amount of the initial deposit and of each incremental payment into the
account.
-
A
risk insurance policy for the benefit of MMS that covers the residual
liability in the event of any catastrophic failure that prevented the
completion of the remaining payments. This requirement has been met, in
the past, by including MMS as a beneficiary on existing policies.
MMS will
review the above-described information and will approve it either as
submitted or request specific revisions. For example, MMS will analyze both
the initial payment amount as well as the time schedule for making specified
incremental payments based on an analysis of current, past, and projected
rates of production from the leasehold(s), or cash flow for facilities
utilized by ROW, characteristics of the producing reservoir(s), plugging and
abandonment information available in MMS’s databases, and/or other
information provided.
The
lessee must immediately submit, and subsequently maintain, a supplemental
bond in an amount equal to the remaining portion of the estimate of the
amount of the lessee’s cumulative potential lease abandonment liability in
the event the lessee fails to:
-
make the initial payment
into a MMS approved lease-specific abandonment; or
-
pay on the date due an
incremental payment into the MMS-approved lease-specific abandonment
account in the amount agreed.
The following table provides
an example of an incremental payment schedule for a lease-specific
abandonment escrow account.
|
The following is an
example of a lease-specific abandonment account, the time schedule
prescribed, and the amount of each incremental payment, to fund the
account over a four-year period. This example describes a situation in
which, based on our estimate of your cumulative potential lease
abandonment liability, we required a $5 million supplemental bond.
|
|
Year |
Percent of Recoverable
Reserves Produced at
End of Year as a
Percentage
of Originally
Recoverable Reserves |
Dollar Amount
(Security)
Required at
Start of Year |
Quarterly Payment During
Year |
1 |
20% |
$2,500,000 |
$156,250 |
2 |
40% |
$3,125,000 |
$156,250 |
3 |
60% |
$3,750,000 |
$156,250 |
4 |
80% |
$4,375,000 |
$156,250 |
1.
Total Supplemental Bond Amount: $5,000,000
2.
The amount of the initial payment is 50 percent of the cumulative
potential lease abandonment liability since 50 percent is greater than
the percentage of the originally recoverable reserves projected to be
produced by the end of Year 1.
3.
By the end of Year 3, MMS projects that 60 percent of the originally
recoverable reserves will have been produced. Therefore, the lessee
will need to fund at least 60 percent of the total supplemental bond
($3,000,000 = 60% x $5,000,000) by the start of Year 3.
4. By the end of Year
4, MMS projects that the lease will have produced over 80 percent of the
originally recoverable reserves. Therefore, the lessee will need to
fund the entire $5,000,000 by the end of Year 4. Quarterly payments of
$156,250 during the 4-year period will increase the fund to $5,000,000
by the end of Year 4. |
VI. Using a Third-Party
Guarantee In Lieu of a Supplemental Bond
The lessee may submit a
third-party guarantee in lieu of a supplemental bond. The guarantee must be
provided by a third party (guarantor) who will guarantee compliance with all
lease obligations. The guarantor must also comply with all requirements in
30 CFR 256.57. MMS will accept a third-party guarantee only if the
guarantor and the indemnity agreement meet all of the criteria below.
-
The guarantor must:
-
meet the qualifications
for a lessee in 30 CFR 256.35(b);
-
demonstrate satisfactory
levels of financial strength and business history that exceed financial
and production thresholds in Section III; and
-
not have total
outstanding and proposed guarantees that exceed 25 percent of its
unencumbered net worth in the United States.
-
MMS will review the
financial information that the lessee or the guarantor submit to determine
a guarantor’s financial strength, business history, and compliance with
current financial and production thresholds. The lessee or the guarantor
will provide information MMS determines is necessary including the
guarantor's:
-
current rating for its
most recent bond issuance by either Moody's Investor Service or Standard
and Poor's Corporation;
-
net worth, taking into
account potential liabilities under its guarantee of compliance with all
the terms and conditions of the lease, MMS regulations, and any other
existing guarantees to the MMS;
-
ratio of current assets
to current liabilities, taking into account potential liabilities under
its guarantee of compliance with all the terms and conditions of the
lease, MMS regulations, and any existing guaranties to MMS; and
-
unencumbered fixed
assets in the United States.
-
If the guarantor’s
financial data are not publicly available, MMS will review the following
financial information that the lessee or the guarantor submits and that an
officer of the company certifies as correct:
-
Financial statements for
the most recently completed fiscal year verified by an independent
certified public accountant (CPA) using generally accepted accounting
principles and containing no adverse opinions by the CPA.
-
Yearly updates of the
financial statements submitted 90 days before the end of the guarantor’s
fiscal year or an annual date MMS sets.
-
An evaluation will be
based on of the stability of the guarantor In part on the length of time
that the guarantor has been in continuous operation. A guarantor’s
continuous operation:
-
is the time immediately
before submission of a guarantee; and
-
does not include periods
of interruption of operations not within guarantor’s control and that do
not affect the likelihood of the guarantor remaining in business during
the lessee’s exploration, development, production, plugging, removal,
and clearance operations on the lease.
-
The guarantor must meet
the criteria in Section III for financial strength and reliability.
-
The guarantor must submit
an indemnity agreement providing for compliance with all lease
obligations, the obligations of all operating rights owners, and the
obligations of all operators on the lease. A third-party guarantee must
contain each of the following provisions:
-
If the lessee, the
operator, or an operating rights owner fails to comply with any lease
term or regulation, the guarantor must take corrective action or provide
within seven (7) calendar days sufficient funds for us to complete
corrective action.
-
If the guarantor takes
corrective action to bring a lease into compliance with MMS requirements
or provides funds for us to bring the lease into compliance, these
actions do not reduce the guarantor's liability.
-
If a guarantor wishes to
terminate the period of liability under its guarantee, it must:
-
Notify the lessee and us
at least 90 days before the proposed termination date;
-
Obtain MMS approval for
the termination of the period of liability for all or a specified
portion of the guarantor’s guarantee; and
-
Remain liable for all
obligations accrued during the period that the guarantor’s guarantee is
in effect.
-
If MMS approves the
third-party guarantee, the guarantor must submit an indemnity agreement
that meets the following criteria, (see Attachment 1 for Example
Agreement):
-
The indemnity agreement
must be executed by the guarantor and all persons and parties bound by
the agreement.
-
The indemnity agreement
must bind each person and party executing the agreement jointly and
severally.
-
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.
-
The guarantor and the
other corporate entities bound by the indemnity agreement must provide
us copies of:
(1)
the authorization
of the signatory corporate officials to bind their respective
corporations;
(2)
an affidavit
certifying that the agreement is valid under all applicable laws; and
(3)
each
corporation’s corporate authorization to execute the indemnity
agreement.
-
If the third-party
guarantor or another party bound by the indemnity agreement is a
partnership, joint venture, or syndicate, the indemnity agreement must
bind each party who has a beneficial interest in the guarantor; and
provide that, upon MMS demand under the third-party guarantee, each
party is jointly and severally liable for compliance with all terms and
conditions of the lease.
-
The indemnity agreement
must provide that, within seven (7) calendar days of a demand for
forfeiture under 30 CFR 256.59, the guarantor will either commit itself
to take all necessary corrective action or provide sufficient funds for
us to take corrective action.
-
The indemnity agreement must contain a
confession of judgment. It must provide that, if it is determined that
the lessee, the operator, or an operating rights owner is in default of
the terms of the lease or in violation of the OCS Lands Act (OCSLA) or
its implementing regulations, the guarantor will not challenge the
determination and will remedy the default.
-
Each indemnity agreement
is deemed to contain all terms and conditions above, even if the guarantor
has omitted them.
VII.
Termination of Supplemental Bond or Third-Party Guarantee, or Determination
that a Supplemental Bond is Not Necessary
MMS
reserves the right to deny the lessee’s request for a finding that a
supplemental bond is not necessary, even though an independent accountant
provides an audit and certification that the lessee meets the financial
strength and performance criteria described herein. Normally, such a denial
or revocation of a previous finding will be based on a review of
independently audited information that indicates that recent or anticipated
future events may adversely affect the lessee’s ability to comply with
current and/or future lease abandonment obligations. MMS may also require a
supplemental bond on any lease, regardless of any prior determination under
these requirements, if it is determined that the designated operator has not
fully and consistently complied with MMS regulations.
-
When
any of the following occur, the lessee must take necessary action
immediately to meet these requirements. If the lessee does not, MMS may
issue a civil penalty, stop operations on the lease, or take any other
action authorized by the OCSLA or the implementing regulations.
-
MMS
requires the lessee to provide a supplemental bond when it was
previously determined that the lessee’s financial strength was
sufficient such that a bond was not required. In such cases, the lessee
will have a minimum of 40 days notice before the lessee must furnish a
supplemental bond.
-
The
lessee’s third-party guarantor ends the period of the guarantee.
-
The
lessee’s bonding company ends the period of bond protection.
-
The
value of the lessee’s security falls below the required amount of the
supplemental bond
-
The
U.S. Treasury no longer certifies that the company that issued the bond
is acceptable.
-
If
the lessee chooses to provide a lease specific abandonment escrow account
instead of providing a bond, the lessee may be allowed up to an additional
70 days to prepare and allow MMS to review a plan for incremental payments
and to contribute funds to the account, according to the plan.
VIII. Addresses
Use the
following addresses to obtain further information or to submit information:
Alaska OCS:
Minerals Management Service
Alaska OCS Region
Attn: Jeffrey Walker, RS/FO
949 East 36th Avenue, Third Floor
Anchorage, AK 99508-4302
Jeffrey.Walker@mms.gov
(907) 271-6190
Gulf of Mexico OCS or Atlantic OCS:
Minerals Management Service
Gulf of Mexico OCS Region
Attn: Carrol Williams, MS 5421
1201 Elmwood Park Boulevard
New Orleans, LA 70123-2394
Carrol.Williams@mms.gov
(504) 736-2803
Pacific OCS:
Minerals Management Service
Pacific OCS Region
Attn: Frederick L. White, MS 7300
770 Paseo Camarillo
Camarillo, CA 93010-6064
Frederick.white@mms.gov
(805) 389-7830 |
Paperwork Reduction Act of
1995 (PRA) Statement
The information collection
referred to in this NTL provides clarification, description, or
interpretation of requirements in 30 CFR 256. The Office of Management and
Budget (OMB) has approved the information collection requirements in these
regulations and assigned OMB control number 1010‑0006. This NTL also refers
to approved information collection requirements in 30 CFR 250, subparts B,
Q, and I. The respective OMB control numbers are 1010‑0049, 1010‑00142, and
1010‑0058. This NTL does not impose additional information collection
requirements subject to the PRA.
Contact
Please contact Mr. Carrol
Williams at (504) 736-2803 or
Carrol.Williams@mms.gov if you have any questions regarding this NTL.
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Attachments:
1.
Model form for
“Third Party Indemnity Agreement”
2.
Internet
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