OCS Platform Abandonment Issues

1. OCS Platform Abandonment Issues Houston Bar Association September 24, 2014 L. Poe Leggette Carey R. Gagnon

2. Denver corpse flower draws strong crowds despite weak odor 08/19/2015 The Denver Post

3. Assignments: OCS Regulations • Assignment of interest in OCS lease requires federal lessor’s approval. 30 C.F.R. § 556.62(a); OCS Lease Form § __ • Assignment effective as to the federal lessor on the date specified in the approval letter.

4. Assignments: OCS Regulations • “You, as assignor, are liable for all obligations that accrue under your lease before the date that the Regional Director approves your request for assignment….” 30 C.F.R. § 556.62(d). • “Your assignee and each subsequent assignee are liable for all obligations that accrue under the lease after the date that the Regional Director approves the governing assignment.” § 556.62. • (Emphasis in both added.)

5. BSEE Accrues; Lessees Lose • “It depends on what the meaning of ‘accrues’ is.” (Anonymous deposition testimony). • 30 C.F.R. § 250.1702: Decommissioning liability accrues when: • wells are drilled • platforms built • pipelines laid • Joint and several liability, § 250.1701 • The current regulations treat all lessees, operators, and operating rights interest owners as jointly and severally liable for all lease and RoW obligations.

6. Private Law Considerations • “The [federal OCS] regulations govern the parties’ joint and several liabilities vis-à-vis the Government, not amongst themselves.” Fruge ex. Rel. Fruge v. Parker Drilling Co., 337 F.3d 558, 563 (5th Cir. 2003). • Principle applied in context of decommissioning in GOM Shelf, LLC v. Sun Operating Ltd. P’ship, 2008 WL 901482 (S.D. Tex. 2008)

7. Texas Contract Law • Texas bellwether: Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006). • Lease subject to JOA. Non-operator “A” assigns its undivided interest to “B”. After assignment, B fails to pay operator certain post-op costs. Can operator hold A liable for B’s breach? • Plain English answer: yes, unless the JOA expressly says no.

8. Texas Contract Law • In less plain English, why? • Generally, unless the contract makes the contrary clear, assignment of a contract does not relieve the assignor’s obligation to the original “obligee.” 207 S.W.3d at 346. • “[A]s a general rule, a party who assigns its contractual rights and duties to a third party remains liable unless expressly or impliedly released by the other party to the contract.” Id. at 347 (citing authorities hoarier than your grandfather (may he be blessed)).

9. Texas Contract Law • What does an express release look like? • Something that says “release” or “novation.” • The following fails: “Any well abandonment or platform removal … shall be accomplished by Operator with the costs … to be shared by the Parties owning such well or platform in proportion to their Participating Interests.” • Lessee A argued that, because it no longer had a participating interest after the assignment, it had 0% PI and $0 obligation. • Lessee A thought wrong.

10. Texas Contract Law • The following succeeds (probably): [Upon “withdrawal” from the JOA and assignment of the party’s interests to the other JOA members], “the withdrawing Party shall thereafter be relieved from all further obligations and liabilities with respect to such Lease.” 207 S.W.3d at 346 n. 2 (dictum-ish). • What if the contract expressly makes the assignor liable for “obligations previously incurred [before the assignment]?” Is that enough to free the assignor from post-assignment obligations? • Yes, says Indian Oil Co., LLC v. Bishop Petroleum Inc., 406 S.W.3d 644, 657 (Tex. App. 14th Dist.) (Boyce, J.).

11. Texas Contract Law • So, does this common law rule on assignment operate “by cruel fate, and giddy Fortune’s furious fickle wheel?” Henry V, Act 3, Scene 6. • Why would I ask if the answer were not “yes?” • An assignor can be liable for damages caused post-assignment to the obligee; but cannot claim damages for post-assignment breaches by the obligee. Republic Petroleum LLC v. Dynamic Offshore Resources NS LLC, __ S.W.3d __, 2015 WL 5076700 at *4 (Tex. App. 1st Dist.). If the second half of the proposition is read in isolation, it makes good sense. It just seems asymmetrical.

12. Louisiana Civil Code • Because the Mineral Code does not address the “effects flowing from the transfer of working interests by one working interest owner to other working interest owners[,]” the Civil Code governs. Union Oil Co. of California v. Cheyenne Oil Properties, Inc., 839 So. 2d 1170, 1174-75 (La. App. 3rd Cir. 2003). • Civil Code art. 1821: “The obligee’s consent to the [assignment of the] agreement does not effect a release of the obligor. The unreleased obligor remains solidarily bound with the third person.” • So, Texas and Louisiana principles are similar.

13. Louisiana Civil Code • Davis Oil Co. v. TS, Inc., 145 F.3d 305 (5th Cir. 1998), is relevant, but so factually remote that it is not intrinsically noteworthy. But it pitted two Titans of the Fifth Circuit—Jerry Smith and Edith Jones—against one another. How can we not discuss it? • State of Louisiana issues lease to Davis in 1976. Lease requires clean up of site upon termination. • Davis assigns all its interest in 1981. Assignee agrees to assume all of Davis’s obligations under the lease. • Lease is assigned three more times, expires in 1985. • Last assignee fails to restore the site.

14. Louisiana Civil Code • In 1988, Canadian liquor maker, Hiram Walker, acquires Davis’ assignee, making it a sub of a sub of a sub, and assumed the assignee’s oil and gas businesses. • “In 1992, the State of Louisiana summoned all listed operators [in the title chain] to a hearing to determine which should pay for cleanup. Only Davis Oil appeared.” 145 F.3d at 307. State gives Davis the full bill. • Could Davis make Walker’s sub pay? • Judge Smith (plus one): yes. Judge Jones, no (“majority cites the applicable law but evidently does not understand what it means”).

15. Back to Texas OCS Briefly and California OCS Oddly • Darn little case law on assignments of OCS leases in context of platform abandonment. • GOM Shelf, LLC v. Sun Operating Ltd. P’ship, cited earlier, conerned JOA for OCS lease off Texas. • JOA had language about assignor retaining liability for obligations “accruing on or prior to” Interior’s approval of the assignment. JOA relieved assignor of “all obligations … which accrue subsequent” to approval. • By operation of § 4(a) of OCSLA, 43 U.S.C. § 1333(a), federal law “adopted” Texas law as federal for purpose of interpreting the contract.

16. Back to Texas OCS Briefly and California OCS Oddly • Court says the “no liability for obligations accrued after” assignment language is “not a valid release.” 2008 WL 901482 at *10. [Would Judge Boyce agree with that?] • Court appeared influenced by JOA’s repeated references to OCS regulations and noted the federal rule approach to “accrue.” • Held: assignors still liable for plugging and abandoning the lease and its wells.

17. … and to California OCS Oddly • If the Department of the Interior breaches an OCS lease, is the lessee relieved of its lease duty to abandon the site? • Hah, are you kidding? Of course not. So far…. • Noble Energy, Inc. v. Jewell, __ F. Supp.3d __, 2015 WL 3544371 (D.D.C. June 8, 2015). • Court refuses to interpret lease contract in light of common law doctrine, but instead gives Interior “substantial deference” to its interpretation of the decommissioning regulations. • Held: Interior’s breach did not discharge Noble’s duty to abandon under the regulations.

18. Summing Up So Far • To avoid these problems when drafting for a client who wants to further liability, some rules of thumb: • Mere assignment doesn’t get you off the hook. • Express language making you free of obligations after assignment may—or may not—get you off the hook. • Obligee’s mere consent to assignment probably does not get you off the hook. • Express release by obligee is the only sure way. • And what are the odds of that? • “It’s not 98%. It’s 100%.”

19. But That’s Just Between Private Parties • The feds ignore efforts to contract around the regulations. • The feds hold all for whom decommissioning duty has accrued jointly and severally liable. • Those companies which haven’t filed for bankruptcy still want to have good relations with the federal lessor. • So, pop quiz: How much taxpayer money has been spent to decommission OCS lease sites? • Multiple choice: is it nichts, rien, nada, or zilch? • Is it any wonder?

20. Bonding for OCS Decommissioning • Lessees must post bonds as condition of having a federal lease. • BOEM can require a lessee to post a supplemental bond to assure the government has funds to decommission the site. 30 C.F.R. § 556.53(d). • If BOEM calls on the bond, does it have authority to spend the money to decommission? • Will BOEM assign the bond to a private party who will perform the defaulted abandonment duty? • So what exactly is the supplemental bond for?

21. General Bonding

22. Supplemental Bonding • Exempt v. Non-Exempt • Companies which demonstrate a threshold of financial strength and reliability may receive an exemption from the supplemental bonding requirement. • Notice to Lessees No. 2008-N07, Supplemental Bond Procedures (August 28, 2008)

23. Exemption Eligibility • Step 1: Independently audited Net Worth ≥ $65 million • Step 2: Cumulative Decommissioning Liability <= 50% of Net Worth • Step 3: Demonstrated Reliability

24. Exemption Eligibility • Step 4: Either: • GOM production in excess of an average of 20,000 BOE per day; or • Total liabilities/net worth ratio

25. Supplemental Bond Amount • Calculating the Bond Amount • Determine decommissioning liability • Apply lease-specific bonds • Exclude financially capable co-lessees • Apply financial strength and reliability analysis

26. How does this work?

27. BOEM’s Advance Notice of Proposed Rulemaking • Risk Management, Financial Assurance and Loss Prevention “Due to increasingly complex business, functional, organizational and financial issues and vast differences in costs associated with expanded and varied offshore activities, BOEMhas recognized the need to develop a comprehensive program to assist in identifying, prioritizing, and managing the risks associated with industry activities on the OCS.” 79 Fed. Reg. 49,027 (August 19, 2014)

28. Pacific OCS Region Esri, DeLorme, FAO, USGS, EPA, NPS | MarineCadastre.gov

29. Pacific OCS Region • Updated Cost Report • NTL No. 2010-P05 • Proserv Offshore, Decommissioning Cost Update for Removing Pacific OCS Region Offshore Oil and Gas Facilities (January 2010). • Assumptions • Complete removal of platforms • Pipelines abandoned in place

30. Pacific OCS Region • $1.2 Billion to Remove all 23 Platforms • Fixed platforms means direct relationship between location, weight and removal cost • Deep - $150 million • Shallow - $12 to $35 million • Middle - $88 million

31. Pacific OCS Region • 15% of the total cost is barge mobilization ($180 million of $1.2 billion)

32. Gulf of Mexico OCS Region Esri, DeLorme, FAO, USGS, NOAA, EPA, NPS | MarineCadastre.gov

33. Gulf of Mexico OCS Region • Three Complicating Events: • (1) Idle Iron (NTL No. 2010-G05) Source: Dr. Robert C. Byrd, Donald J. Miller & Steven M. Wiese, 2014 AACE International Technical Paper, EST.1648 Cost Estimating for Offshore Oil & Gas Facility Decommissioning, 1648.16 (2014).

34. Gulf of Mexico OCS Region • Three Complicating Events: • (2) ATP Bankruptcy

35. Gulf of Mexico OCS Region • Three Complicating Events: • (3) Hurricane Ivan and Taylor Energy’s MC20 Platform Source: Mark J. Kaiser, Gulf cleanup continues after five major hurricanes, Oil & Gas Journal (July 7, 2014).

36. Inadequate response? • Government expenditure to decommission? Source: Mark J. Kaiser, Gulf cleanup continues after five major hurricanes, Oil & Gas Journal (July 7, 2014).

37. Recommendation No. 1 • Allocation • When determining “cumulative decommissioning liability” for purposes of exemption from supplemental bonding, limit liability to the company’s proportionate share of lease ownership.

38. Recommendation No. 2 • Credit for Existing Escrow • When assessing exemption eligibility give companies credit for security in place for cumulative abandonment obligations.

39. Recommendation No. 3 • Revise Metrics for Cumulative Decommissioning Liability • Cumulative decommissioning liability must be less than or equal to 50% of Adjusted Net Worth (defined as GAAP based Shareholders’ Equity + Current and Long-term ARO Liability) OR • Cumulative Decommissioning Liability <= 100% of Adjusted Net Worth (defined as GAAP based Shareholders’ Equity + Current and Long-term ARO Liability); and • “Adjusted Debt” to “EBITDA(X)” ratio < 4.0x; and • EBITDA(X) to “Cash Interest Expense” ratio > 3.0x.

40. Recommendation No. 4 • Bonding Only Incremental Value for Exempt Status • Permit companies to bond the delta between the company’s actual net worth and the net worth thresholds set forth in NTL No. 2008-N07.

41. Recommendation No. 5 • Access to Bonds and Release of Bonds • Make supplemental bonds available to those who share in joint and several liability so they can be used towards proper abandonment.

42. Recommendation No. 6 • Timing • Tie supplemental bonding requirements to accrual of decommissioning liability – i.e. at the time the operator files for a final APD or final authorization before emplacing a facility.

43. Recommendation No. 7 • Amount • Adopt a methodology for calculating supplemental bonding amount like that set forth in FASB 143 under which BOEM would: • Look at when the asset/platform is likely to be no longer used and need to be decommissioned; and • Estimate the cost of decommissioning at that time using a discount rate to bring that back to present value.

44. Recommendation No. 8 • The “Catastrophic Event” Concern • Not one federal dollar has been spent on the P&A of well or removal of platforms following the five hurricanes which hit the Gulf of Mexico between 2004 and 2008.

45. Breaking News • BOEM Pacific OCS Region 2015 report is out. Total cost of decommissioning 23 platforms has risen from $1.25 billion to $1.46 billion over the last five years. • This just in. September 22 BOEM released proposed “guidance” for 45-day public “review” period. Guidance revises how agency will interpret existing rules. • BOEM workshop on the guidance on October 9 at Houston Airport Marriott.