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Governance of Federal OCS Oil & Gas Leasing
Introduction
The Outer Continental Shelf Lands Act (OCSLA),
enacted in 1953, empowers the Secretary of the Interior to administer
the leasing
and diligent development of oil and gas on the Outer Continental
Shelf (OCS).
Under this authority, the Secretary prescribes regulations as deemed
necessary to prevent waste and conserve natural resources of the
OCS. These regulations can be found in Title 30 of the Code of Federal
Regulations (CFR), Part 250. The Minerals Management Service (MMS),
which operates as a separate bureau within the U.S. Department
of the Interior, exercises primary regulatory oversight of leasing,
exploration, production, and abandonment of oil and gas fields on
behalf of the Secretary.
The process of leasing tracts on the OCS for oil and gas development
complies with the following regulatory guidance.
5-Year Oil and Gas Leasing Program
Section 18 of the OCSLA directs the Secretary of Interior to prepare
an oil and gas leasing program every five years (43, USC, 1344).
This program identifies a schedule of anticipated OCS leasing activities
for the five-year period that it covers and includes the anticipated
size, timing, and location of leasing activity. The OCSLA prescribes
eight factors the Secretary must consider in order to strike a balance
between environmental and developmental principles when projecting
the size and timing of lease sales:
- Geographic, Geological, and Ecological Characteristics
- Equitable Sharing of Developmental Benefits and Environmental
Risks
- Location with Respect to Regional and National Energy Markets
and Needs
- Location with Respect to Other Uses of the Sea and Seabed
- Interest of Potential Oil and Gas Producers
- Laws, Goals, and Policies of Affected States
- Relative Environmental Sensitivity and Marine Productivity
- Environmental and Predictive Information
The current five-year leasing program covers a period from July
1, 1997 through June 30, 2002. The Interior Department is currently
preparing the next leasing program to address the schedule of lease
sales between mid-2002 and mid-2007. As in the current five-year
leasing program, the Department of the Interior is not proposing
any new leasing offshore through mid-2007 because it is subject
to a moratorium on new leasing, effective through mid-2012.
The Interior Department provides several opportunities to the interested
public to comment on the preparation of the 5-Year Leasing Program
and the companion Environmental Impact Statement prepared for the
program pursuant to the National
Environmental Policy Act. A copy of Santa Barbara County's formal
comments on the initial scoping phase of the 2002-2007 leasing program
appears at the end of this informational paper.
Lease Sales
- Authorization to Lease via Competitive Bidding
The Outer Continental Shelf Lands Act (OCSLA) authorizes the Secretary
of the Interior to grant oil and gas leases to the highest responsible,
qualified bidder(s) via a competitive lease sale (see 43 USC §
1337). No lease sale may extent beyond the size or location of planned
leasing identified in the current 5-Year Leasing Program. Federal
revenue earned from the 10 lease sales offshore California between
1963 and 1984, encompassing 369 individual leases, was $3.9 billion.
To date, bonuses (the term given to lease sale revenues) represent
the highest source of federal revenue earned from OCS oil and gas
activities, compared to royalties and rents.
Adoption of the National Environmental Policy Act in 1970, subjected
lease sales to environmental review and public review. In 1989,
former President Bush cancelled proposed lease sales offshore California
and Florida, and asked the National Research Council (NRC) to assess
the adequacy of the available scientific and technical information
to assess the potential environmental effects of oil and gas development
offshore these two states. In its subsequent report, The Adequacy
of Environmental Information for Outer Continental Shelf Oil and
Gas Decisions: Florida and California, the NRC concluded that
more scientific and technical information was necessary in order
to make informed decisions about the environmental effects of future
lease sales. The Interior Department has since undertaken several
studies to address identified gaps in scientific and technical information.
Initial protective measures designed to reduce adverse environmental
effects are identified as lease-term stipulations. These stipulations
apply to all tracts leased in a particular sale throughout the life
of the project. These stipulations precede more detailed environmental
review and mitigation of exploration and development on individual
leases.
Leasing Moratoria
Two moratoria on new leasing offshore California and parts of the
Outer Continental Shelf (OCS) are in effect.
- Congressional moratoria. Congress has imposed an annual
moratorium on new leasing offshore California, as well as other
selected areas of the OCS, since 1991, by restricting use of the
Interior Department's annual operating budget.
- Presidential moratoria. In 1990, former President Bush
issued an Executive Order, excluding most federal waters offshore
California and other specific areas of the OCS from new leasing
until the year 2001. He extended this moratorium in 1992 to include
all federal waters offshore California. Former President Clinton
extended this moratorium through mid-2012. The current Bush administration
has upheld the moratorium during its preparation of the 2002-2007
oil and gas leasing program.
Terms and Provisions of Oil and Gas Leases
The OCSLA limits each oil and gas lease to an initial period of
five years, or for a longer period not to exceed 10 years, if necessary,
to encourage exploration and development in areas of unusually deep
water or with other unusually adverse conditions (43 USC §
1337(b)(2)).
Once a tract is leased, the lessee is entitled to explore, develop
and produce the oil and gas contained within the leased area, conditioned
upon due diligence requirements and the approval of a development
and production plan (43 USC § 1337(b)(4)). The Interior Department
has not precisely defined the term "due diligence" in
the applicable regulations, lease stipulations, or lease instruments.
The Pacific OCS Regional Office of the MMS offers the following
definition and explanation of its discretionary implementation of
"due diligence" conditions:
"Due diligence" means reasonable progress towards
production of oil and gas in paying quantities. The MMS requires
operators [of oil and gas leases] to proceed toward agreed-upon
objectives (e.g., exploration or development /production) in a
safe, timely, and orderly manner. The completion of analysis of
seismic or well data, the development or modification of a plan,
or the drilling of a well do not have prescribed time frames across
the offshore program. To have such criteria would preclude the
application of the program in a manner that is sensitive to the
constraints of particular situations and/or regions. In California,
an example of a constraint that influences the length of a suspension
and the timing of activities within a suspension is the request
by the State and counties that the proposals for both plan review
and exploration/development activity be staggered to ensure that
local, regional, and State administrative functions are not overwhelmed
and, later, that the environmental risks are minimized.
Extensions of the Lease Period
The OCSLA also directs the Secretary to prescribe provisions for
extending the period of an oil and gas lease (43 USCS 1334(a)).
Implementing regulations allow extensions when the lessee is producing
oil or gas in commercial quantities consistent with applicable regulations,
or drilling or reworking wells (30 CFR 256.37, 256.70, and 256.71).
In such cases, the period of the lease will continue until such
time that oil and gas operations have ceased for more than 180 days,
unless the MMS approves a longer grace period (30 CFR 250.180(d,
e)).
Leases situated in a producing unit are subject to the term
of the unit agreement. The period of all leases within a unit will
continue as long as oil and gas operations (i.e., production of
oil or gas in paying quantities; or drilling or re-working wells)
continue on any lease within the unit (30 CFR 250.1301(g)).
Regulations also provide for extension of lease periods in the
following cases:
- The MMS extends a non-producing lease automatically when its
approves a suspension
of production or suspension of other operations. The MMS may impose
a suspension on the lessee or grant a lessee's request for a suspension
under the conditions listed below (30 CFR 250.172-175).
- Avoid a threat of serious, irreparable, or immediate
harm or damage to life (including fish and other aquatic life),
to property, to any mineral deposits or to the marine, coastal,
or human environments.
- Facilitate proper development of a lease or field,
including reasonable time to construct production facilities,
construct or negotiate for use of transportation facilities
(including onshore processing and storage capacity), negotiate
contracts for sale of oil or gas. In these cases, suspensions
may only be issued if a well on the lease has been drilled
and determined to be producible in paying quantities (30 CFR
250.171(c) and 250.115).
- Approve a request for an extension by the lessee
to mitigate delays in commencing drilling or other operations
for reasons beyond the lessee's control, such as unexpected
weather, unavoidable accidents, or drilling rig delays.
- Serve the national interest such as in times of
war.
- Address the lessee's non-compliance with a provision
of any applicable law, regulations, order, or provision of
the lease or permit. However, an extension of the lease period
will not result if the MMS directs a suspension of a lease
due to gross negligence or willful violation of a provision
of the lease, governing statutes, or regulations by the lessee
or operator.
- Allow a reasonable period of time to comply with
requirements of the National Environmental Policy Act.
- Allow a reasonable period of time to facilitate
the installation of equipment necessary for safety and environmental
reasons.
- Address inordinate delays encountered by the lessee
in obtaining requires permits and consents, including administrative
or judicial challenges or appeals.
- Comply with judicial decrees prohibiting production
or any other operation or activity, or the permitting of those
activities, effective the date set by the court for that prohibition.
- Avoid continued operations that would result in
premature abandonment of a producing well.
- Leases subject to a unit agreement continue for the
term provided in the lease and as long thereafter as any portion
of the leases remains part of the unit area and as long as operations
continue the unit in effect (30 CFR 1301(g), see description of
unitization below).
Each suspension is limited to a period of five years or less; however,
a lease may be suspended for longer periods of time through the
granting of consecutive suspensions (30 CFR 250.170). The MMS may
also terminate a suspension at any time if circumstances no longer
exist to justify the suspension.
Relinquishment, Expiration, or Termination
of Leases
The OCSLA directs the Secretary to prescribe rules and regulations
for the cancellation of leases, including the following provisions:
- Termination or relinquishment by the lessee. Corresponding
regulations (30 CFR 256.76) and provisions of the lease instrument
provide lessees the opportunity to surrender a lease. Termination
or relinquishment takes effect on the date filed, subject to the
lessee's continued obligations to make all payments due (rentals,
royalties, deferred bonuses), to abandon all wells, and condition
or remove all platforms and other facilities on the lease to the
satisfaction of the MMS. The lessee is not entitled to compensation
when relinquishing a lease.
- Expiration of the lease period. A non-producing lease
will expire at the end of its period unless the MMS Regional Director
or the Secretary of the Interior has approved a suspension or
if production, drilling, or well reworking activities are in progress.
The lessee might not be entitled to compensation when the lease
expires, if the lessee did not pursue drilling or other oil and
gas operations diligently as required by the OCSLA.
- Cancellation of the lease with compensation. The Secretary
may terminate a suspension and cancel a lease after notice and
opportunity for hearing when the following conditions are present
(30 CFR § 250.181):
- Continued activity pursuant to the lease or permit
would probably cause serious harm or damage to life (including
fish and other aquatic life), property, other mineral deposits,
or the marine, coastal, or human environments.
- The threat of harm or damage will not disappear
or decrease to an acceptable extent within a reasonable period
of time.
- The advantages of cancellation outweigh the advantages
of continuing the lease or permit in force.
- The suspension has been in effect for at least
5 years (or a shorter period of time if cancellation is requested
by the lessee).
Cancellation of a lease pursuant to these conditions entitles the
lessee to compensation as stipulated in 30 CFR 250.184. Such cancellations
have not occurred in any of the four OCS Regions (i.e., Alaska,
Pacific, Atlantic, and Gulf of Mexico).
- Cancellation of the lease without compensation. The
Secretary may cancel a lease without any obligation to compensate
the lessee, under one or more of the following circumstances (30
CFR 250.185):
- The MMS disapproves a Development and Production Plan because
the State did not find it to be consistent with its coastal
management program pursuant to the Coastal
Zone Management Act, and the Secretary of Commerce does
not overturn this finding upon appeal.
- The lessee fails to submit a Development and Production
Plan in accordance with 30 CFR 250.204 or fails to comply
with an approved DPP.
- The lessee of a non-producing lease fails to comply
with the OCSLA, regulations issued thereof, or the provisions
of the lease and such default continues for a period of 30
days after notification of such default.
- The MMS disapproves a Development and Production
Plan because of failure to demonstrate compliance with the
requirements of applicable federal law.
- The lessee of a producing lease fails to comply
with the OCSLA, regulations issued thereof, or the provisions
of the lease and cancellation is upheld through an appropriate
proceeding in any U.S. district court having jurisdiction
under the provisions of the OCSLA.
The OCSLA allows the Secretary of the Interior to exercise discretion
in the cancellation of leases. Accordingly, the Secretary may not
find cancellation to always be in the national interest, even though
the criteria for cancellation are present (see Federal Register,
Volume 53, April 1, 1988, p. 10606).
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