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When is an OCS commitment a commitment? BSEE publishes appeal decision that agency says clarifies conditions for extending offshore lease term through commitment to produce Alan Bailey Petroleum News
As illustrated by a long-standing dispute between the State of Alaska and oil companies over delays in the development of the Point Thomson field on the North Slope, governments expect firms owning oil and gas leases on public lands to actively explore for and develop publicly owned resources. And a recent “notice to lessees” published by the Bureau of Safety and Environmental Enforcement, or BSEE, illustrates something of the federal government’s expectations for activity by leaseholders on the federal outer continental shelf.
On Nov. 15 the agency published an appeal decision over a request to extend the terms of some leases in the Gulf of Mexico. The decision will act as guidance over the circumstances under which the term of an OCS lease may be extended, a procedure known as a “suspension of production,” BSEE said.
“Suspensions can be granted to leaseholders to extend a lease past the primary term for oil and gas leases on the outer continental shelf,” BSEE said. “Typically a lease will have a primary term of five, eight or 10 years, depending on the water depth.”
The appeal decision published by BSEE related to three leases owned by ExxonMobil Corp. and Statoil Gulf of Mexico LLC in an area of the Gulf of Mexico known as Walker Ridge.
Due diligence Under the terms of the Outer Continental Shelf Lands Act, a lessee has the right to explore for, develop and produce oil and gas in an OCS lease, provided that the lessee shows “due diligence” in doing so. If a lessee requests a lease term extension the federal government determines whether the due diligence criterion is being met by assessing what is termed the lessee’s “commitment to produce,” a criterion that requires the lessee to have completed sufficient exploration and appraisal work within the leased land to enable a decision to proceed to the production of oil and gas.
Apparently, ExxonMobil and Statoil purchased the Walker Ridge leases in June 1998. About three years later the companies abandoned an initial plan to drill into rocks of Miocene age in their leases after exploratory wells in neighboring leases had failed to encounter oil in equivalent rock units. But in December 2006, prompted by some nearby oil discoveries in older and deeper Paleocene rocks, the companies drilled a well into the Paleocene within their Walker Ridge leases and found oil. That well was completed in April 2007, by which time the leases were in the ninth year of their 10-year terms.
In February 2008, with only a few months of life left in the leases, MMS approved lease unitization, with ExxonMobil as operator. At about the same time ExxonMobil started drilling a second well in the new unit, again finding producible oil.
That second well was completed in June 2008. And under federal regulations ExxonMobil had 180 days from that date to apply for an extension of the lease beyond the original lease termination date.
Extension request
In October 2008 the company duly applied for a seven-year lease extension, “to allow for proper development,” the appeal decision says. The company said that this timeframe would accommodate a development concept in which production wells from the new unit would be tied back to facilities to be developed by Chevron for some adjacent fields.
However, ExxonMobil’s extension application expressed some caution about whether Chevron’s development would actually take place. The company said that it was also considering other options for its own field, including the possibility of a standalone development, but that it could not commit to a standalone development using the information that it currently had available.
In February 2009 MMS turned down the application for the lease extension, saying that, because ExxonMobil’s plan depended on Chevron’s facility development, a development not yet under way and not subject to any form of agreement between the two companies, ExxonMobil’s commitment to produce claim was not based on activities within the company’s control.
Decision appealed
Following an appeal by ExxonMobil, the Interior Board of Land Appeals, the Department of the Interior’s internal land decision review body, subsequently overturned the MMS decision, saying that an agreement between ExxonMobil and Chevron to share the cost of front-end engineering design for shared field facilities demonstrated a commitment to produce. The board also said that MMS had previously granted lease extensions in situations where there was even less evidence for that “commitment to produce” criterion.
In February 2010 MMS asked Robert More, the director of Interior’s Office of Hearings and Appeals, to review the board’s decision — the board is a section within the Office of Hearings and Appeals. And on May 31 2011, More issued his review decision, upholding the original MMS decision to decline the lease extension. It is this decision that BSEE has now issued as guidance over the circumstances under which lease extensions may be granted.
Lack of commitment More said that the lack of commitment by ExxonMobil to either a tie-in to the proposed Chevron facility or to a standalone field development demonstrated, at most, a commitment to development, but not the required commitment to produce. Moreover, under federal regulations, the requested lease extension of seven years exceeded a five-year extension limit, he said.
The signing of the agreement between ExxonMobil and Chevron to share the cost of developing the facility engineering design came after the date by which ExxonMobil had to establish a commitment to produce from its unit, More said. And, although by May 2009 MMS had satisfied itself that Chevron was going to build its facility for its fields, at that point ExxonMobil had not come to an agreement with Chevron for the use of that facility, nor had ExxonMobil committed to a standalone development should negotiations with Chevron fail, More said. Under the terms of the Outer Continental Shelf Lands Act, negotiations to use a third-party production facility are not considered to be field development, he said.
More also said that previous MMS decisions over lease extensions did not set a precedent for the decision under appeal. He additionally said that the Interior Board of Land Appeals had erred in not referring the board’s decision back to MMS for verification that the decision met the national interest in resource development on public lands.
Agency duty On Nov. 15, in commenting on the appeal decision, Michael Bromwich, the then director of BSEE, emphasized his agency’s duty to ensure appropriate development of public resources.
“BSEE takes its responsibilities as trustee of offshore public lands extremely seriously,” Bromwich said. “The energy resources that are located on the outer continental shelf belong to all American taxpayers, and BSEE’s responsibilities include ensuring that public resources are developed in an expeditious and orderly way. The Office of Hearings and Appeals decision highlighted in this notice to lessees underscores the need for lessees to take concrete steps to develop their holdings in a manner that is consistent with the terms of their lease agreements.”
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