Issues » Comments on Rules and Regulations

Comments submitted by the:
American Petroleum Institute
National Ocean Industries Association
Independent Petroleum Association of America
United States Oil and Gas Association
Domestic Petroleum Council
Offshore Operators Committee

to the:
U.S. Department of the Interior
Minerals Management Service

Proposed Revision to Form MMS-2005
February 22, 1999

The American Petroleum Institute (API), the National Ocean Industries Association (NOIA), the Independent Petroleum Association of America (IPAA), the United States Oil and Gas Association (USOGA), the Domestic Petroleum Council (DPC), and the Offshore Operators Committee (OOC) welcome this opportunity to submit written comments concerning the MMS proposed revisions to Form MMS-2005, the OCS lease document used under the Outer Continental Shelf Lands Act (OCS Lands Act) for oil and gas exploration and production. These six Industry trade associations represent several thousand companies engaged daily in all aspects of the oil and natural gas industry. These associations also represent almost all companies that perform exploration and production activities in federal waters, and have a great interest in the proposed revision of the OCS lease form.

Industry appreciates the extensions granted by MMS, thereby allowing all interested parties the maximum opportunity to provide input. We also appreciate the agency’s decision not to use the proposed revised lease form in the March 17, 1999 Sale 172 for the Central Gulf of Mexico. In addition, we recommend that the existing OCS lease form be used until all issues surrounding the proposed revised lease form are resolved. We request MMS to provide Industry any future drafts of the lease form and to hold additional workshops or other appropriate discussions to resolve outstanding issues. We also request sufficient advance notice from MMS (beyond the existing 30-day notice for the lease sale) before the agency begins to use a revised lease form. Industry appreciates the MMS lease rewrite team’s willingness to provide as much notice as possible to provide meaningful time to analyze the important implications of any changes. Finally, Industry requests that the transcripts of the two workshops already conducted on this proposal be included in the record for future reference.

General Comments on Plain Language Objectives

In its November 9, 1998 proposal, MMS states that the form has been revised to reflect plain language and rewritten for clarity and organization. MMS also stated at the January 1999 workshop that the agency seeks to clearly identify the rights and obligations of all parties to the lease. Notwithstanding these objectives, the language in the proposed revised form would confuse rather than clarify the rights and obligations of all the parties of the lease, including some MMS personnel and management. This lack of clarity and certainty would lead to misinterpretations and conflicts, as parties seek to establish their understandings of their respective rights and obligations under the lease. This result is contrary to the objectives of the President’s memorandum, "Plain Language in Government Writing" 63 FR 31883 (June 10, 1998). This result would also be inconsistent with two other executive directives relevant to any revision of the OCS lease form. Under Executive Order 12988, "Civil Justice Reform" 61 FR 4727 (February 5, 1996), an agency’s proposed legislation and regulations "shall be written to minimize litigation." Under Executive Order 12866, "Regulatory Planning and Review" (September 30, 1993), "Each agency shall draft its regulations to be simple and easy to understand with the goal of minimizing the potential for uncertainty and litigation arising from such uncertainty."

More fundamental, the proposed revised lease form creates new obligations for the lessee and makes other substantive policy changes, despite MMS claims made at the January 1999 workshop that the agency did not intend any revisions in the lease form to result in any new obligations, and what industry believes to be new policies (Transcript, January 21, 1999 MMS workshop, p. 11).

In addition, the MMS team’s efforts to delete redundant language from the proposed revised lease form that is part of the OCS Lands Act or its regulations have been inconsistent and overreaching. For example, MMS proposes to delete those portions of the lease that are redundant with the regulations in that they re-state the rights of the lessee. However, in Sections 1, 2, and 5, MMS proposes revisions that restate the lessor’s rights, but are redundant with regulations. Industry urges MMS to address this inconsistency and eliminate this bias from the proposed plan.

Finally, Industry urges MMS to consider the intended audience and users of the OCS lease form. According the President’s plain English memorandum and the supporting guidance document, "Writing User-Friendly Documents," "plain language" requirements vary from one document to another, depending on the intended audience. Specifically, the President’s memorandum refers agencies to a guidance document and suggests that agencies use customer feedback and common sense to guide agencies’ plain language efforts. In this case, the audience for the OCS lease form is a limited one, consisting of about 200 active lessees, of whom about 160 are operators. In addition, the lease form is a legal contract which properly includes recognized and defined legal terms to be used within the document to ensure clarity and minimize disputes. Accordingly, Industry urges MMS to incorporate the concepts of contract law throughout the proposed revised lease form and utilize language suited to clearly define the rights and obligations of all parties to the lease contract.

Industry urges MMS not to incorporate the new Notice of Sale requirement as part of the revised lease form. We concur with the MMS team's statement made at the January 1999 workshop that this issue is unresolved and needs further review and discussion. The requirement to maintain all sale notices with all leases will result in a significant and unnecessary record keeping burden. Lessees would not only have to maintain the notices of sale with every lease, but also all maps and other supporting documents referenced in the notices of sale. A problem related to the proposed inclusion of the Notice of Sale is that these notices, which should be consistent with the OCS Lands Act and its regulations, sometimes contradict regulatory and statutory requirements. Inconsistencies have included bid form conflicts, conflicts in envelope requirements, and in the lessee’s address. The bid form currently contained in the MMS regulations is not consistent with the bid form published in the Notice of Sale. Such inconsistencies could result in the next highest bidder challenging a bid as defective. Industry concurs with the MMS team's concern that it is bad for lessees and the lessor if the MMS lease form does not follow existing law and regulation. Industry supports the MMS team's effort to identify any items or issues not covered in the regulations that should be attached to the lease form without including the entire notice of sale.

MMS states that inclusion of the notice of sale in the lease form would make the obligations of the lessee more explicit, in some cases adding or making terms explicit that were previously implicit. Industry suggests that under the present system, stipulations specific to particular leases that are incorporated into the lease form resolve that problem. Industry also questions whether MMS included this requirement to address problems unrelated to potential lessees. If that is the case, Industry urges MMS to address those issues outside of the lease revision initiative. If situations exist where local communities expressed problems with the existing lease form, resulting in this proposed change, Industry requests MMS to provide examples of those problems.

Industry appreciates and concurs with the MMS team’s decision at the January 1999 workshop to delete the language that would have made the OCS lease subject to "all applicable Executive Orders issued by the President … or hereafter in effect." That "or hereafter" language, which would have allowed unilateral amendment of the lease contract by the lessor and would have represented a substantive change to the current OCS lease form, would have significantly devalued OCS leases.

Industry urges MMS to delete the language in the second sentence of Section 1 regarding the applicability of all laws, rules and regulations of the Secretary of the Interior "hereafter in effect." This language is inconsistent with the OCS Lands Act and would arguably allow both Congress and the MMS to unilaterally amend lease terms and take away the lessee’s property rights after the lease terms have been agreed to by both the lessor and the lessee. This proposed language represents another substantive change to the existing lease form. Section 1334(a) of the OCS Lands Act states that the Secretary can "at any time prescribe and amend such rules and regulations as he determines to be necessary and proper in order to provide for the prevention of waste and conservation of natural resources of the Outer Continental Shelf, and the protection of correlative rights therein…." Section 1 of the current lease form subjects lessees to future MMS regulations, but only under circumstances where the new regulations will provide for the prevention of waste, the conservation of the natural resources of the OCS, and the protection of correlative rights. That clear and unambiguous existing lease form language complies with the OCS Lands Act and should be retained in the OCS lease form. Industry also notes that MMS considered but rejected a similar proposed change in the last revision of the lease form.

Adoption of the MMS team’s proposed language subjecting leases to all future legislation and regulations also raises the issue of uncertainty of contracts. It is well established that parties to a contract need the terms of that contract, the fundamental agreement between the parties, to be both clear and fixed. The possibility that prospective legislation and regulations could result in unilateral amendment of an existing contract by the lessor would greatly diminish the certainty between the parties and would undoubtedly impact the monetary value of such OCS leases. When a potential lessee considers investing millions of dollars to explore and produce in the OCS, it must know that property rights contracted under the OCS leases will not change. Risks for OCS lessees and lease activity include geologic risk, engineering risk (especially for deep water), and product price risk for future market price. One risk not factored into current OCS lease bids is the unbridled risk that the government, as the lessor, will unilaterally amend an OCS lease by future laws or regulations, thereby impacting the economic value of the OCS lease. This risk of unilateral lease amendment by the government is a new and inappropriate contract risk that would carry its own negative economic value if used in future lease forms.

Industry urges that the phrase, "when not inconsistent with any express provision of this lease." be deleted from second sentence of Section 1 of the proposed revised lease form as it is ambiguous and goes beyond the authority of the OCS Lands Act. The language in the second sentence of Section 1 in the existing lease form, relating to the application of future MMS regulations to existing leases for provisions for the prevention of waste and conservation of natural resources of the OCS and the protection of correlative rights should be inserted in its place. As noted above, that language tracks Section 1334(a) of the OCS Lands Act. Furthermore, in its proposed revised lease form, MMS has removed many express provisions from the lease by relying on regulation. This provision would subject the lessee to further lack of certainty.

In the first section of Section 2 regarding the absolute right to drill, Industry concurs with the MMS team’s decision, stated at the January 1999 workshop, to put the word "drill" back in the first sentence to ensure a complete listing of rights granted to the lessee.

The second sentence of Section 2 conditions the existence of the very right to explore, drill, develop and produce on a future contingent event, the approval of permits and plans. This right, inherent as a contract term, is fundamental and is granted to the lessee upon issuance of the lease. Industry agrees with the MMS team’s comments made at the January workshop that this unintentional change in the meaning of the lease form can be fixed by the MMS team and strongly urges the team to make the needed changes. Industry suggests that what MMS intended to say is that the exercise of this right already granted is made subject to future contingent governmental action, through the approval of plans and permits. Approval of plans is in furtherance of the right to explore, drill and produce already granted in a lease. There is a substantial difference in legal meaning between conditioning the actual grant of a right on the occurrence of a future event (approval of plans and permits), and making the exercise of the right already granted subject to the approval of a future occurrence, i.e., approval of plans and permits. When the very existence of the right has been conditioned on the occurrence of a future event (permit and plan approval), then, if the event does not occur, the right is never granted and never comes into existence. In such a case, no compensation would arguably be due when the future event does not occur since the lessee knowingly purchased the lease subject to a contingent event.

The legal position created when a right is granted but the exercise of that right is made subject to a contingent future event (plan and permit approval) is entirely different. In the current lease form, the right has been granted. It is only the exercise of that right which is made subject to a future condition. If the future condition never occurs, there is a basis for the lessee’s recovery of compensation for denial of a right, since it is not the intention of the lessor or lessee at the time of granting the right under the lease contract to completely deny its exercise. The OCS Lands Act directs this logical process when Section 8(b), which describes the rights granted to the lessee, is read in conjunction with Section 25, which describes the plan and permit approval process and the rights conferred upon denial.

Industry urges MMS to adopt a lease form consistent with the OCS Lands Act. To do otherwise undermines a lessee’s ability to recover damages upon plan and permit denial and is therefore contrary to the OCS Lands Act and contract law. If the change is not made, the MMS should incorporate into the proposed revised lease form, appropriate references to compensation granted under Section 25 of the OCS Lands Act in order to clarify that this right has not been changed.

Industry urges MMS to continue to include the complete identification of the lease area in the granting clause of Section 2 rather than in the Preamble of the proposed revised lease form. As proposed, the lessee must assume that Section 2 applies to the leased area identified and described in the Preamble. The lease form would be simpler and clearer with the full identification of the lease area in the granting clause. This inclusion provides the lessee and lessor with the basic property description that ensures that all parties to the lease understand exactly what property is covered by the lease. This suggestion is consistent with the "plain English" Executive Order.

Section 2(c) of the proposed lease form would eliminate from the current lease the specifically enumerated right "to construct or erect and to maintain within the leased area artificial islands, installations, and other devices permanently or temporarily attached to the seabed." The following specific rights were eliminated: (1) the placement of artificial islands, i.e., fixed platforms; (2) placement of those platforms on the leased area; and (3) permanent placement of those platforms. While the proposed language may arguably be interpreted broadly enough to include the right to construct and maintain platforms and installations permanently or temporarily attached to the seabed, the proposed language is not as clear and straightforward as the existing language. As such, the language fails the simple plain English test. Furthermore, without any explanation that lessee rights have not been eliminated, only deleted from the lease form (since only redundant words were intended to be eliminated from the lease form), confusion and delay could result if nonlessees argue that the proposed lease form language is restrictive and does not grant rights for installing platforms on the leased premises. Elimination of the existing language may also lead to new requirements on the lessee by the lessor to install expensive subsea well completions and underground pipelines to transport production to facilities far removed from the leased area to satisfy the "scenic value" assertions of those who seek to preclude the presence of an offshore platform, whether fixed permanently or temporarily to the sea floor. Industry urges the MMS team to use the clear language in Section 2(c) of the existing lease form in place of the proposed language in Section 2(c) of the proposed revised form.

By deleting the word "thereafter" from Section 3, the lessor has created a new obligation on the lessee to drill during the initial period, produce in paying quantities, or gain a suspension of operations or a suspension of production. Adoption of the proposed language would also make the initial period of the lease the full lease period and prevent lease extension beyond that initial period. This error can be remedied by using the clear and simple language in Section 3 of the existing lease form. Industry concurs with the MMS team's decision at the January 1999 workshop to revise the proposed language to remove this new obligation. The revised language should read: "This lease will continue from the Effective Date of the lease for the Initial Period and as long thereafter as oil and gas is produced from the leased area in paying quantities, or drilling or well reworking operations, as approved by the Lessor, are conducted on the leased area, or as otherwise extended under regulation."

Industry concurs with the recommendation of the MMS team that the language in Section 14 of the current lease form or comparable plain language that does not change the meaning of the existing language be used, instead of the proposed revised language in the new Section 4. The proposed language in Section 4(b) increases the lessee’s obligation by expanding the conditions under which the lessee will be obligated to indemnify the lessor. In order to be excused from the indemnification obligation, the lessee would have to (1) file an administrative appeal of a lessor order that causes damage before the cause of action for the claim arose, and (2) prevail in the administrative appeal or subsequent action for judicial review. This new language is a substantive change from the existing lease form language. This language would increase the lessee’s obligation to indemnify the lessor by adding a new requirement that the lessee must meet in order to be excused from damage claims arising from the lessee’s compliance with an erroneous and damage-causing order of the lessor. Ordinarily, appeals of operating decisions are not stayed pending administrative appeal. Under the existing language in Section 14, the lessee must pursue diligently, within the agency, its claim that the lessor’s order is wrong, but the lessee is not required to prevail.

Industry has several serious concerns regarding the language in the new Section 5 and urges MMS to delete this section in its entirety. However, if the section is included, Industry makes the following comments and recommendations. Under the proposed language of the new section, lessees would be contractually required to make available the books and records of their affiliates and agents to MMS, based on Industry’s understanding that the term "related entities" is to be dropped from the proposed revised lease form. Under this new requirement, lessees would be required to provide access to records of parties who are (1) not lessees--i.e, the affiliates and agents--and (2) parties over whom lessees have no actual control. MMS has authority under current law to promulgate regulations regarding records of affiliates or agents. These entities are not parties to the lease and lessees have no authority or ability to provide the books and records of their parent companies, over which they have no control. As a practical matter, a lessee should not be forced to accept an obligation that the lessee may not be able to meet. Section 5 creates a new obligation on the lessee and nonlessees that goes beyond existing statute and regulations and contradicts the agency’s stated goals to produce a simply written document that does not add additional obligations to the parties and does not incorporate substantive changes to the lease form.

Records that lessees would be required to turn over to MMS would also include information "relevant to operations, payments, disposition of the production, or any other activity occurring under this lease." This requirement places an obligation on the lessee to provide information that the lessee may not have. The potential lessee, in signing a contract with the proposed language, would know in advance that as a lessee, he would be unable to satisfy his obligation to the lessor under the terms of the contract. This provision substantially expands and redefines discovery duties under the Federal Oil and Gas Royalty Simplification and Fairness Act (FOGRSFA) and the Federal Oil and Gas Royalty Management Act (FOGRMA). According to the comments made at the January 1999 workshop by the MMS team, Section 5 is intended to incorporate rights defined in the Shell Oil case on production of documents. As such, this change is more in the nature of a rulemaking. In order to provide for complete comment under the Administrative Procedures Act (APA), this change, if pursued, should become the subject of a separate rulemaking. At that time, the regulated community would then be presented with a complete opportunity to comment. Finally, the terms "affiliate" and "agent" are not defined in the proposed revised lease form and need to be defined as they are used throughout the lease form.

Industry concurs with the MMS team’s statement at the January 1999 workshop that this issue is unresolved and that the issues raised in Section 5 need further review and discussion. Industry strongly suggests that if MMS determines language on this issue needs to be included in the revised lease form, the new language not create additional obligations on the lessee and track existing law.

The proposed language in Section 5 would undercut a portion of the existing protections given to proprietary information. Under the proposed language in the section, the lessee would be required to agree under the lease contract to provide proprietary information to MMS. This requirement conflicts with the provisions of the OCS Lands Act and the Trade Secrets Act, and would remove protections otherwise available under the Freedom of Information Act (FOIA). The new language states that information regarding disposition of production includes, but is not limited to, all records regarding the sale or other disposition of oil or gas produced from the leased area by the lessee or any of its affiliated or related entities. As written, a lessee could be required to provide records of corporate affiliates (e.g., a gas station in Herndon, VA) that are far removed from the lessee’s activities in the Gulf of Mexico. This is clearly beyond the intent of the law and proper scope of the lease form. Existing protections of proprietary information must be maintained. This language needs to be clarified to confirm the MMS team’s stated position at the January 1999 workshop that the language was not intended to reduce protection of proprietary information of lessees. Such broad-based requirements should become the subject of a separate rulemaking.

Section 6 in the proposed lease form is a revision of Section 19 and a portion of Section 13 of the existing lease form. The express reservations authorizing certain geological and geophysical explorations and the granting of easements and rights of way in the leased area, currently enumerated in Section 19(a), were revised into the new Section 6(a) for geological and geophysical exploration and into Section 6(b) for granting of easements and rights of ways. However, certain conditions now limiting the lessor’s grant of easements and rights of way were omitted from Section 6(b) of the proposed revised lease form. Those conditions on granting the easement or rights of way are: (1) they will "not unreasonably interfere with or endanger actual operations under the lease" and (2) they are "necessary or appropriate to the working of other lands or to the treatment and shipment of products thereof by or under authority of the Lessor." Industry concurs with the MMS team’s recommendation that the phrase in subsections (a) and (c) "which do not unreasonably interfere with or endanger actual operations under this lease;" should be inserted in Section 6(b) and suggest this language provides clarity and completeness. Industry also requests the phrase "as may be necessary or appropriate to the working of other lands or to the treatment and shipment of products thereby or under the authority of the lessor" be added to section 6(b).

Section 6 (d) of the proposed revised lease form, dealing with the provisions for the lessor to suspend operations, substantively changes the criteria for suspension of operations from the existing lease form. Under Section 19(c) of the existing lease form, the restrictions to operations occur in areas needed for national defense. This existing language tracks Section 12(d) of the OCS Lands Act. These national defense restrictions have been applied to areas offshore Florida and in other parts of the Gulf of Mexico. Section 6(d) of the proposed lease form requires a war or national emergency in order to have a suspension of operations. That language tracks Section 12(c) of the OCS Lands act that deals with national emergencies and war, and was addressed in Section 13 (b) of the existing lease form. However, by deleting Section 13 in its entirety, including the reference to the national defense, and only including the language concerning national emergencies and war in the proposed Section 6(d), the MMS has created a much higher threshold for MMS to meet to issue a suspension of operations. Language addressing suspension of operations for national defense purposes needs to be added as a condition allowing a suspension of operations by the lessor. Industry suggests that for clarity, the language for each condition for suspension be tied to the governing section of the OCS Lands Act and that the two conditions be treated in separate subsections of the proposed Section 6 and follow the language in the existing lease form for Sections 13(b) and 19(c).

The last sentence in Section 6 calls for the lessor to pay the lessee just compensation for suspensions for the lessor’s benefit as provided by the OCS Lands Act. The comparable language in the existing lease form in Section 19(c) provides for compensation to be paid as required by the Constitution for lessor ordered suspensions because of national defense. The language providing Constitutional guarantee of just compensation is stronger than language tying that right back to the OCS Lands Act. Industry urges that language calling for Constitutional rather than statutory guarantee of compensation be reinserted into the proposed revised lease form as is in the exiting lease form. (Compare Section 19(c) regarding compensation paid under the Constitution for suspension in areas needed for national defense; and Section 13(b) regarding "just compensation" for suspension during war or national emergency.) We concur with the MMS team's agreement at the January 1999 workshop to make this change.

Section 7 of the proposed revised lease form raises issues that are of serious concern to Industry. At the January 1999 workshop, MMS stated that the revised lease form was drafted in anticipation that the pending oil valuation rule would be implemented. However, the pending rule is subject to a Congressionally-imposed moratorium that will not be lifted until June 1, 1999. Industry and MMS strongly disagree as to the meaning of controlling statutes, and whether MMS’s most recent interpretation of its valuation regulation is permitted by law. We believe it is inappropriate at this time to extend that controversy to the lease form by including provisions in the proposed revised lease form which are currently subject to existing litigation between MMS and Industry. Final valuation language for the lease form should be developed after the issues are conclusively resolved in another forum. Additionally, Industry adopts by reference in these comments earlier industry comments included in the pending MMS federal crude oil valuation rulemaking. Among others, these comments include API May 27, 1997 comments on the MMS’ initial proposal at 62 FR 3742 (January 24, 1997); API August 1, 1997 comments on the MMS’ supplementary proposal at 62 FR 16116 (April 4, 1997); API November 4 1997 comments on the alternatives for rulemaking and related workshops at 62 FR 49460 (September 22, 1997); Joint Association December 5, 1997 comments on the rulemaking issues in general; API April 3, 1998 comments on MMS Supplemental Proposal at 63 FR 6113 (February 6, 1998); and API July 31, 1998 comments on Further Supplementary Proposal at 63 FR 38343 (July 16, 1998).

However, Industry offers these specific comments regarding the oil valuation language contained in Section 7(c) and (d) of the proposed revised lease form. The proposed language in section 7(c) deletes the provision for payment of fixed royalties as stated in Section 6(a) of the existing lease form and gives the lessor the authority to establish the value of all production for royalty purposes. The 1988 royalty regulations limit royalty to gross proceeds of the lessee and create no clear right to proceeds of a lessee affiliate. The definition of "lessee" does not include affiliate. Therefore, there is no existing authority to issue a lease with a royalty provision as proposed in the new Section 7(c). Under Section 6 of the existing lease form, the lessee owes and pays a fixed royalty as shown on the face of the lease form. The goals of the plain English initiative are furthered by the retention of the Section 6 that clarifies the obligations of the parties.

Under the proposed language in Section 7(d), the lessee would be obligated to market the production at no cost to the lessor. Current oil valuation regulations require the lessee to market production for the mutual benefit of the lessee and lessor but do not require that this be done at no cost to the lessor. The lessor’s royalty is based on the market value of production at the lease. If the lessee markets production away from the lease, the lessor must pay its proportionate cost to market its share of production. There is no statutory authority allowing MMS to include the proposed language in Section 7(d) and no previous OCS lease form has contained such a provision. Also, the requirement to market at no cost to the lessee is presently undergoing judicial review in American Petroleum Institute v. Babbitt, Civil No. 98-631 (D.D.C.) and Independent Petroleum Association of America v. Armstrong, Civil No. 98-531 (D.D.C.). The revised lease form should not incorporate controversial provisions subject to judicial change in ongoing litigation.

Under the proposed language of the new Section 7(e) the lessee would be required to deliver royalty oil and gas resources taken in kind to a delivery point designated by the lessor. This language is a substantive change and is a very serious problem to Industry. This language eliminates the provision under Section 6(c) of the existing form that acknowledges the lessee’s right to be reimbursed for the reasonable cost of transporting the royalty-in-kind production to delivery points away from the lease designated by MMS. This change creates a specific implication that costs of delivery would be borne by a lessee. This is a dramatic alteration of rights between the parties. Under the new language, the lessor would have broad authority to determine where the oil would be delivered since it would no longer be restricted to "a more convenient point onshore". Exercise of this right could result in a duty being imposed that the lessee cannot reasonably meet without substantial added costs. The effect of a delivery order to an onshore point could require a producer to deliver production that is dissimilar in characteristic or quality to what was produced from the lease. If that situation occurred, MMS should provide for the difference in quality between production at the lease and production at the delivery point and recognize that the lessee has the right to make an adjustment, positively or negatively to make up for differences in quality and location. This issue is not addressed in the lease and there are no regulations that address this issue other than those for small and independent refineries. In light of the extensive pilots being carried out involving RIK, MMS should not address this issue in the revision of the OCS lease form but in a full regulatory process.

Under Section 5(e) and (f) of the OCS Lands Act, the Secretary is required to prohibit transportation practices that discriminate against other shippers and that may cause the lessee to violate tariffs and contractual agreements. All parties using pipelines on the OCS are required to receive fair treatment on rates that are charged to move production through the pipeline. Industry concurs with the MMS team recommendation that this issue needs more review to avoid the issues and problems raised above. Industry also notes that MMS is currently in the process of revising its transportation regulations and suggests that changes to the OCS lease form should await conclusion of that process.

Section 7(b) of the proposed revised lease form fails to provide certainty as to the mechanics of payment of rent and royalty. Specific language should be included in the proposed revised lease form specifying when, where and to whom payments should be made, as stated in Sections 4,5,6, and 7 of the existing lease form. This information is fundamental to the terms of a contract and should be stated in the contract itself in addition to the regulations. In addition, under Section 7 of the existing lease form, several forms of payment are specifically enumerated. Under the proposed revised Section 7, the right to pay by check, for example, is not clearly stated. Language in Section 7 of the existing lease form regarding forms of payment should be inserted in the new Section 7 to provide clarity to ensure that all reasonable payment methods will still be available to the lessee and that changes will not be made in methods of payment without proper notice to the lessee.

Also, in Section 7(b) of the proposed revised lease form, the timetable for payment of the minimum royalty has been advanced, and possibly as much as one year, as payment would be due the day before the next anniversary of the lease. Under Section 5 of the existing lease form, minimum payment is due at the expiration of each lease year after the discovery of oil and gas in paying quantities. Industry urges deletion of the new language and insertion of the existing language and concurs with the MMS team’s agreement to do so.

As noted in comments regarding the proposed new Section 5, Industry notes that the use of the terms such as "affiliate" in the new Section 7(c) is unclear. The terms "affiliate" and "agent" need to be defined as they are used throughout the lease form. It is also unclear in the proposed revised form if the use and meaning of these terms are the same as those in other regulations affecting offshore activities. Industry concurs with MMS that these definitions need to be clarified in all sections of the lease form and in conjunction with other related regulations.

Section 7(c) contains the term "other considerations," which the MMS team stated at the January 1999 workshop has been deleted and replaced with the word "criteria." Regardless of which term is used, the language in this section is still unclear. Section 6(b) of the existing lease form provides clear criteria that set boundaries on the discretion exercised by the Secretary in determining the value of royalty to be paid by the lessee. The key is that some boundary on the Secretary’s discretion to set royalty valuation must be provided to the lessee in order to give the lessee some certainty regarding rent and royalty valuation payments. Industry urges inclusion of more precise royalty valuation language to provide clarity and to insure there is a clear meeting of the minds between the lessor and lessee regarding determination of royalty valuation and payments. Otherwise the lease remains vague and is arbitrary in assessing royalty.

The proposed revised Section 7 eliminates the provision in Section 6(a) of the existing lease form, which calls for payment of a fixed royalty. Under the language in proposed revised Section 1 regarding the MMS’s right to change the terms of an existing lease based on changes in the laws and regulations, MMS could arguably change the royalty terms at anytime throughout the period of the lease. Obligations of the lessee, including certainty of the amount of royalty due, is essential information potential lessees must have to evaluate the economic viability associated with bidding and subsequently drilling that lease. Modification of the royalty provision in the proposed revised lease is another substantive change that goes beyond plain English requirements. Industry urges MMS to reinsert the royalty language from the existing lease form or comparable language. The OCS Lands Act itself uses the term "fixed" and is designed to distinguish royalty rates from other possible royalty schemes. The term "fixed" is also used in Section 6(a) of the existing lease form and is omitted from Section 7 of the proposed revised lease form.

Industry concurs with the MMS team’s decision to retitle Section 8 "Performance" as the comparable Section 10 in the existing lease form is titled. Industry strongly recommends the language in the proposed Section 8 be deleted in its entirety and replaced with the language in Section 10 of the existing lease form. Under current statute and regulation, the lessee is under no obligation during a primary term other than to tender rentals. In fact, a lessee may not drill every lease but may choose to evaluate a geologic trend. This new language opens the door to misinterpretation. The language in the existing lease form ties the lessee’s subsequent obligation to drill (after discovery) to the timely and proper development of the lease and the lessee’s obligation to produce in accordance with sound operating principles. This simple, clear, complete language does not need to be rewritten for clarity. Industry also strongly recommends the phrase "due diligence requirements" that MMS proposes to insert in the second sentence of Section 2, "Rights Granted to Lessee" between the words "to" and "the" not be included in Section 2. Using the language in Section 10 of the existing lease form provides sufficient instruction to the lessee of his performance obligations.

Section 9, which deals with platform decommissioning, concerns issues that are not clearly addressed in either that section or in Section 22 of the existing lease form. Section 9 appears to have been revised substantively from existing Section 22 at least in part to address the agency’s concerns about the potential for under-capitalized lessees who, after conducting operations on the OCS, may file for bankruptcy or otherwise avoid their obligations. Section 9 also requires the lessee to submit a plan for platform decommissioning within three months after termination of the lease in whole or in part, unless the lessor approves a longer period. The timeframe under this new requirement is too short, particularly regarding potential rigs to reef donations. Industry recommends the plan be increased by a specific number of days i.e., 180 days, unless the lessor approves a longer period.

The proposed language in Section 9 is also unclear as to how title to the decommissioned property would revert to the government. Under this proposed language, MMS would have the ability to take title to a platform, but there is no mechanism for MMS to go forward and actually carry out the decommissioning. In addition, if a platform could be donated in a rigs to reef program for example, it is unclear who has the authority to allow the platform to remain in place after a year and who is responsible for the decommissioning procedures. At the January 1999 workshop, the MMS team accepted Industry’s offer to assist the agency in resolving these issues. In the meantime, Industry strongly urges MMS to delete the language in the proposed Section 9 and use the language in Section 22 of the existing lease form until these issues can be resolved.

Industry urges MMS to revise subsection (a)(2) of Section 10 to read, "Suspensions or cancellation under Section 5(c) and 5(d) of the Act;" as found in Section 23 of the existing lease form. Referencing all of Section 5 is not accurate or appropriate in the proposed revised lease form.

Industry appreciates the MMS team’s willingness to consider reinserting the following sections into the existing lease form.

Industry recommends that Section 11 be left in as the section provides important information as a reference to the surface location of a directional well. Inclusion of the language confirms that the lessee has the right to maintain the lease by directional drilling to a bottomhole location under the lease from another lease.

See comments under Section 6. These rights are critical to lease maintenance and should form part of the contract.

Industry recommends that this section, particularly subsection (c), be retained in the revised lease form. This language is a specific requirement under Section 8(b) (7) of the OCS Lands Act for every OCS lease. It is clearer and more complete to show potential lessees what the lessee’s obligations are for the disposition of production. Section 15 lists required dispositions other than the market place for production. Lack of information on distribution triggers questions, particularly by potential lessees, about how production will be disposed. The present Section 15 clearly flags the administrators of the OCS lease to certain governmental rights and adds clarity to administration.

Industry recommends that all of Section 16 from the existing lease form be included in the proposed revised form. Particularly important is the last sentence of this section that clearly states that provisions of unitization, pooling and drilling agreements govern when provisions of such an agreement, approved by the lessor, are inconsistent with a provision of the lease. This section is already written in plain English, and leaving this language in the controlling document will provide certainty and clarity for all parties and will avoid unnecessary and potentially costly delays. The section should be included so that a lessee can contractually secure the right to unitize. Unitization disputes can alter and change the meaning of regulation. While litigation processes are in flux, it is vitally important to establish the right to unitize in the lease contract and not just in the regulations.

Industry recommends that these sections be left in the revised lease to ensure equal opportunity in all aspects of operations. Under the 1997 amendments to the Code of Federal Regulations, the equal opportunity language is made part of the contact by operation of law. Since that language is part of the contract, it should be included in the written agreement. Section 18 language, which imposes the language regarding nonsegregated facilities directly on contractors, should remain in the contract for completeness and clarity.

Industry recommends that both sections remain in the revised lease form since both sections confirm the lessee’s rights to transfer and surrender and provide specific information on how lessees can transfer or surrender leases. Industry needs a clear statement about where to file an assignment or transfer and wants the lease to clearly state that all or a portion of the lease may be surrendered when appropriate to do so. It is also important to clarify who is responsible for the lease obligation at the time of surrender. This information provides certainty and avoids unnecessary delays and litigation.