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Introduction to the Outer Continental Shelf

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					Introduction to the Outer Continental Shelf
By Jack A. Newton, Sr., CPL

What is the OCS or Outer Continental Shelf?

The term “Outer Continental Shelf” (OCS) has both a scientific and a legal definition.
The scientific definition refers to the entire submerged extension of a continent as the
continental margin. In most areas the continental margin is comprised of the gentle
sloping continental shelf and the steeper gradient of the continental slope. Some areas
have an apron extending from the continental slope to the deep ocean floor referred to as
the continental rise. The contour, configuration and extent of the continental shelf varies
from one coastal area to another. The shelf area is relatively narrow along the Pacific
coast, wide along much of the Atlantic coast and the Gulf of Alaska and broad in the Gulf
of Mexico and around western and northern Alaska.

How Far Out Does the OCS Extend and What is Considered a Country’s Territorial
Waters?
        This was a question which had to be addressed and agreed to by the International
Community to avoid conflict over the use of the oceans. In 1958, in Geneva,
Switzerland, a Convention was held to discuss OCS jurisdiction. From this convention, it
was agreed by the international Community that the continental shelf would be defined as
those submerged offshore areas lying seaward of the territorial lands of the adjacent
country out to a water depth of at least 200 meters (656 ft.) and extending beyond that to
depths where there exists the likelihood of mineral exploitation of natural resources.
Under International Law, a country has the right to explore and exploit any resources
found its continental shelf. As you can imagine, there is still significant international
controversy over the outer limits of a nation’s jurisdiction of the continental shelf.
        In the United States the “Outer Continental Shelf” has been defined by a legal
term created by federal statute, the OCS Lands Act of 1953. Federal jurisdiction over the
OCS, including the leasing of energy resources, is guided by the OCS Lands Act of 1953
as amended in 1978. The federal leaseable area includes those submerged land that lie
beyond 3 geographic miles from a State’s coast (except approximately 9 miles for Texas
and the Florida west coast). A state’s outer boundary was established as the boundary
that existed at the time the state was admitted to the Union.

How Early Exploration for Oil and Gas Began in the Gulf of Mexico
        The State of Louisiana began leasing for oil and gas exploration and development
in the mid-1930s including the leasing of lands which extended into the Gulf of Mexico.
In 1945, President Truman issued a Presidential Proclamation asserting that the Federal
Government, not the coast states, had jurisdiction and full control over the lands and
natural resources in the submerged land areas seaward of the coasts. The coastal states
challenged this declaration however, and in a series of court cases between 1947 and
1950, the Supreme Court upheld the President’s Proclamation. With this decision,
exploration and development ceased due to the uncertainty of the ownership of the area
off the coasts. In response to demands and adverse reactions from the coastal states, in
1953 Congress enacted two laws, the Submerged Lands Act, which gave the coastal
states ownership of the submerged lands located 3 miles out from their coast (except for
Texas and the west coast of Florida which is approximately 9 miles) and the OCS Lands
Act which authorized the Secretary of the Interior to administer leasing, exploration and
development of the Federal OCS.

First Offshore Discovery
        The first discovery in the open waters of the gulf of Mexico was made by Kerr
McGee on a Louisiana State Lease on Ship shoal Block 32, off Terrebonne Parish on
November 14, 1947. The oil discovery produced 600 BBLS per day from perforation
1508’ to 1526’. The well was drilled from a fixed platform drilling tender combination
which was a major breakthrough in drilling unit design for offshore use. Leading up to
this event, in 1945 and 1946, several companies were conducting seismic work in the
shallow waters of the Gulf and at one time there were 18 crews at work. In order for Kerr
McGee to gather as much information as possible before starting this project, on March 4,
1947, they called meeting of representatives from all the major oil companies which were
contemplating offshore operations. Seven companies attended the meeting to discuss
mutual problems in connection with this huge and untried venture. One of the
approaches suggested was the joint construction of islands from which drilling operations
could be conducted. Soon after this meeting, Kerr McGee, proceeding with plans to drill,
approached Phillips Petroleum Company, with whom it had signed an exploration
agreement, about participating. Phillips at first declined, believing it was impossible to
drill profitably in deep water, being defined at that time as over 10 feet. But the highly
optimistic seismic reports convinced Phillips that it should participate. Phillips took 50
percent of the deal. Kerr McGee also approached Stanolind about supporting the project.
Stanolind agreed to contribute $300,000 and assume three-eighths of the expenses,
leaving Kerr McGee with only one-eighth. The official costs were set at $208,249 for
drilling, $224,031 for the platform and $17,950 for the derrick and superstructure, a total
of $450,230. This was truly a significant event in the history of the oil industry
comparable to Col. .Drake’s pioneer well in Pennsylvania. The Oil & Gas Journal story
that was published after the discovery was entitled Spectacular Gulf of Mexico Discovery
– Possible 100 Million barrel Field – 10 Miles at Sea. With this achievement by Kerr
McGee, exploration and development along the shore line of Louisiana continued. By
1952, 30 offshore fields had been found, nine of which turned out to be giant fields, each
containing at least 100 million barrels of oil or one trillion cubic feet of gas.

Establishment of Federal Offices in New Orleans
        Since no Federal leasing program was in place, the Bureau of Land Management
(BLM) and the U.S. Geological Survey, (USGS) agencies of the Department of the
Interior, opened offices in New Orleans in August 1954. In its preparation for offering
acreage fro leasing in the Federal waters of the Gulf of Mexico, the BLM blocked up the
area beyond the state’s boundary into 5000-acre blocks, following a pattern already put in
place by the State of Louisiana. In order to identify the blocks, the Gulf was divided into
areas such as West Cameron, East Cameron, etc. and the blocks were numbered
consecutively. The early blocked areas only extended out to the edge of the shelf area
(about 600 feet). In 1976, as exploration and development of oil and gas extended further
out into the Gulf, the Department of the Interior blocked up the deeper water areas and
these blocks generally contained 5,760 acres each. The OCS Official Leasing maps are
referred to as protraction diagrams and are available for all OCS areas which have been
made available for leasing.

How Do You Identify OCS Leases?
        To aid the Mineral Management Service (MMS) in its administration of all OCS
Areas, 26 planning areas have been established. Lease sales are held by planning areas or
a combination of planning areas. In the Gulf of Mexico there are three planning areas:
Western (Offshore Texas), Central (Offshore Louisiana), and Eastern (Offshore
Mississippi, Alabama and Florida). The Western Planning Area comprises about 35
million acres (6,358 blocks); the Central Planning Area comprises about 45 million acres
(8,579 blocks); and the Eastern Planning Area comprises about 72 million acres (12,824
blocks). Presently and for the past few years, annual, but separate, sales have been held
in the Western and Central Planning areas. There are four planning areas each in the
Atlantic and the Pacific OCS areas and 15 planning areas in Alaska’s outer continental
shelf.

First Gulf of Mexico Federal Lease Sale
        The first offshore Federal Lease Sale in the Gulf of Mexico was held on October
13, 1954. The Federal Government offered 199 tracts for competitive bidding. Industry
submitted 336 bids on 90 tracts. The highest bid per acre was $1,220, while the average
bid per acre was $294.84. Industry submitted 336 bids on 90 tracts. The highest bid per
acre was $1,220, while the average bid per acre was $294.84. Industry exposed $302
million and the high winning bids totaled $116 million. From that first sale in 1954
through 1991, 67 sales have been held in the Gulf of Mexico. Cash bonuses received by
the Federal Government from these sales have amounted to 42.8 billion. Over 10,000
leases have been issued covering approximately 50 million acres. To give you an
indication of the state of the industry in 1992, at the May 13, 1992, Central GOM sale, 64
companies participated but high bids on 151 tracts only totaled 56 million. This is the
smallest amount ever received in any Central GOM sale. The last Western GOM sale
held in August 1991 only brought in high bids of 58 million.

Who May Bid at an Offshore Federal OCS Lease Sale?
         Whether you are an individual, partnership or corporation, you must first qualify
with the MMS office handling the sale before you can bid. The OCS Lands Act of 1953
states that OCS leases may be held only by citizens and nationals of the United States,
aliens lawfully admitted with permanent residence in the United States, private, public or
municipal corporations organized under the laws of the Untied States or of any state and
associations of any of the above. Each person, partnership or company who qualifies is
assigned a number: almost 1700 different entities have qualified to bid at Gulf of Mexico
sales since 1954. IT is necessary to re-qualify before each sale by signing and filing with
the MMS a compliance report certification form and an affirmative action representation
form.
Who is the Minerals Managements Service (MMS)?
        The Minerals Management Service, or MMS, is the agency of the Department of
the Interior which oversees leasing, exploration and development of the OCS. Under a
reorganization program implemented by DOI Secretary James Watt in 1982, the minerals
Management Service was established from the Conservation Division of the United
States Geological Survey (USGS) and the OCS offices of the Bureau of Land
Management (BLM) to handle all OCS regulatory functions of DOI. The MMS
headquarters is in Washington D.C. and its current director is Scott Sewell from Metairie,
Louisiana, a suburb of New Orleans. Coincidentally, its first director in 1982 was Harold
Doley, also of New Orleans.
        In addition to New Orleans, offices are located in Herndon, Virginia, Anchorage,
Alaska, and Camarillo, California. The Royalty Management Program is headquartered
in Denver, Colorado, and all rentals, minimum royalties and royalties are sent to that
office. The MMS administers the provisions of the OCS Lands Act of 1953 as amended
in 1978 through regulations found in Title 30 CFR 250 and 256. These regulations
govern all leasing, drilling and production operations on the OCS.

OCS Sale Requirements and Lease Issuance
         OCS Federal Lease Sales require sealed competitive bids and all of the bids are
read aloud in a public place – usually, in a local hotel, but a couple of sales have been
held in the Louisiana Superdome. The bids are read aloud by the local MMS Regional
Director. We have had only two Regional Directors since the opening of the office in
1954, John L. Rankin served from1954 to 1985, when he retired and moved to
Russellville, Arkansas. J. Rogers Pearcy assumed Mr. Rankin’s position and still serves
in that position. John Rankin used to amuse sale participants by wearing a bright red
sport coat when he anticipated a BIG lease sale in terms of money exposed and spent by
the industry. No one ever knew when John would show up on sale morning with his
bright red coat. There were a number of times in the early 1970s and again in the late
1970s and early 1980s when John had a chance to don his red sport coat a number of
times when several sales brought in form 1 to 3 billion dollars each.
         Bonus bidding with a fixed royalty, rental and minimum royalty, has been the
prevalent form of leasing over the years. Presently, the minimum bonus per acre is $25.
At one time, the minimum was $1j50 per acre. Primary lease terms vary by water depth.
Five-year lease terms are granted in water depths out to 400 meters. Eight-year lease
terms are granted in water depths from 400 to 900 meters and 10-year terms are granted
beyond 900 meters. A fixed royalty rate of one-sixth applies to all leases in water depths
of less than 400 meters and beyond the 400 meter water depth, the fixed royalty rate is
one-eighth. Rentals and minimum royalty payments are fixed at $3.00 per acre.
         Particular attention must be given to signing the bids since bids can only be
signed by those persons on file with the MMS who are qualified to bind the company.
One/fifth of the cash bonus, in cash or by cashier’s check, bank draft, or certified check
must be submitted with each bid. All companies participating in the bid must sign the bid
and their proportionate interest must be stated. The remaining four/fifths of the cash
bonus and the first year’s rental expense is tendered upon the awarding of the lease. To
win a lease, you must not only be the high bidder, but you have to meet the MMS
sufficient bid criteria. In order to comply with one of the requirements of the OCS Lands
Act as amended in 1978, the general public must receive a fair and equitable return on the
resources of the OCS. To meet these requirements, the MMS has developed a detailed
and thorough system of evaluating the adequacy of bids received. The MMS has all of
the technical data, including seismic, well logs, tests and production data on every well
that has been drilled on the OCS. They also have a very competent team of geologists,
geophysicists and engineers to evaluate this data. After a lease sale, the MMS has up to
90 days after receipt of bids to either accept or reject a bid. Although the bidding system
in place is very exacting and leaves no room for error, there is nothing quite as exciting as
participating in a sale especially on the sale day when Rod Pearcy starts reading the bids
and you find out how successful you have been. Of course, there are disappointments,
too; because with every winner, there can be many losers. As an example, let’s look at
these bids on Eugene Island Block 313 which has leased at Sale #33 in March 1974.

       Texaco/Gulf       $72,372,000
       Exxon              72,168,000
       Mobil              68,868,000
       Shell              58,834,000
       Sun                37,368,000

Texaco and Gulf were awarded the lease. After drilling a joint lease line test with Exxon,
Texaco, as Operator, set its first 18-shot platform on the lease in 1975. Another 18-slot
platform was set in 1976 and 1991, a smaller platform was set. Cumulative oil and gas
production from this lease since 1975 totals 32 MBO and 190 BCF of gas.

After the OCS Lease is Issued
         All exploration, development and production activities in the OCS must be
conducted in accordance with a Plan of Exploration or a Development and Production
Plan prepared by the lease operator and approved by the MMS. All owners of an interest
in the lease must designate one party to serve as Operator. Actual drilling on an OCS
Lease cannot begin until the Plan of Exploration is approved. The plan is very detailed
and must include the following documentation:

   (1) Type, sequence and timing of exploration activities
   (2) Description of rig, or platform to be used along with a discussion of the drilling
       program and important safety and pollution prevention features,
   (3) Approximate surface and bottom hole location of each well proposed, including
       proposed well depths and water depths at each location,
   (4) Supporting geological and geophysical information,
   (5) An oil spill contingency plan setting forth procedures, personnel and equipment
       for preventing, reporting and cleaning up oil spills or waste material; and
   (6) An environmental report.

When an oil or gas discovery is made and its extent has been reasonably determined by
delineation drilling, the Operator may commence the development and production phase
of operations. Before this can begin, a Plan of Development and Production must be
prepared by the Operator in coordination with his partners and approved by the MMS.
All operations are conducted under the terms of a joint operating agreement. The Plan of
Development and Production must contain detailed information like the POE. Also,
before any drilling can begin, an Application for a Permit to Drill must be submitted to
and approved by the MMS. Although the federal regulations are detailed and stringently
applied by the MMS, personnel in the offices handling the Gulf of Mexico are very
knowledgeable and experience and easy to communicate with in the event you have any
questions or problems.

The Five-Year OCS Lease Sale Schedule
         The OCS Lands Act of 1953 underwent major changes with an amendment in
1978. The amendment directs the Secretary of the Interior to prepare and maintain a
schedule of OCS lease sales. The present Five-Year Lease Schedule covers the period
from August, 1987 through June, 1992. It is important to remember that an OCS sale
cannot be held unless it is included on a schedule which has been approved by the
president and congress. On the other hand, sales do not have to be held just because they
are on the sale schedule. The current schedule provided for 35 sales, but only 15 sales
have been held, 10 of which were Gulf of Mexico sales. In preparing a new five-year
sale schedule, such as the new schedule covering the period from July 1992 to June 1997,
the Secretary of the Interior, through Federal Register Notices and mailouts, solicited
comments from all interested parties. This process began in 1990. The proposed plan
was submitted to Congress and the president on May 1, 1992. To bring this a little closer
to home for those landmen who work the Gulf, Sale 141, scheduled for August 1992
covering the Western Gulf cannot be held if the proposed schedule has not been finally
approved. More than 700 comments were received on the Draft Proposed Program
issued in February 1991. Responses included 488 from the general public, 41 from local
governments, 34 from environmental organizations, 15 from industry and 12 from
Governors of states. The comments and recommendations are considered by the MMS
staff as it proceeds forward in developing a final proposed plan. The new plan includes a
total of 18 sales in portions of 11 planning areas. Ten of these sales are scheduled for the
Central and Western Gulf of Mexico and one limited sale (maximum of 200 blocks) will
be considered in the western portion of the Eastern Gulf Planning Area. There are no
sales scheduled in the Pacific OCS, a very limited sale scheduled for the Atlantic OCS,
and the remainder of the sales are scheduled for various planning areas off Alaska. As
you can see, without the sales to be held in the Central and Western Gulf, there wouldn’t
be much need for a plan.

Acceptable Bonds
        Prior to the issuance of a lease, the successful bidder must furnish a corporate
surety bond in the sum of $50,000 for each lease or a $300,000 bond for all of the OCS
leases he holds in a particular OCS area such as the Gulf of Mexico. In recent months,
the MMS has found it necessary to require supplemental bonds from many small
operators who might not have the financial means to pay for the abandonment of the
properties which they operate. The MMS has the authority under 30 CFR 256.61 to
require the supplemental bonds.
Section 8(g) Funds
         The OCS Lands Act Amendments of 1978 provide for certain coastal states to
share revenues generated from OCS leases located generally 3 –6 miles beyond a state’
coastal boundary. This area, known as the 8(g) zone, is named after enabling paragraph
of that legislation. Between 1978 and 1986, revenues earned from that zone were placed
in escrow, pending agreement on a formula for dividing those earnings. In April 1986,
Congress determined that coastal states would receive 27 percent of the 8(g) income held
in escrow with the remaining 73 percent going to the Federal Government. At that time,
the escrow account contained about $6 billion and $1.5 billion was paid to the states. The
remaining $4-5 billion went into the U.S. Treasury General Fund.
         Additionally, states receive monthly payments of newly earned income from the
8(g) zone. From April 15, 1986 through March 1991, those states have been paid $119.8
million as their share of post escrow revenues. The two largest recipients of this revenue
are Louisiana, which has received $58.6 million and Texas, which has received $48.9
million.

Other Laws Which Govern the OCS
       Leasing and operations activities on the OCS are subject to the requirements of
some 30 other Federal laws administered by numerous federal departments and agencies.
Among them are: National Environmental Policy Act, Endangered Species Act, Coastal
Zone Management Act, Federal Water Pollution Control Act, Clean Air Act, Marine
Mammal Protection Act and Many others.

Gulf of Mexico Highlights
   1. Furthermost offshore lease from land – 222 miles, Keathly Canyon Block 255,
        located south of Lafayette, LA.
   2. Furthermost distance from land that well has been drilled – 178 miles – Keathly
        Canyon Block 255, located south of Lafayette, LA.
   3. Deepest water depth that has been leased – 9,843' Alaminos Canyon Area Block
        998, offshore from Galveston, Texas.
   4. Deepest water depth in which a well has been drilled and also that has been
        determined by the MMS to be capable of production, 7,520' Mississippi Canyon
        Block 657, located about 80 miles out from the mouth of the Mississippi river.
   5. Deepest water depth which is currently on production 1,760' – Green Canyon
        Area Block 184, south of Lafayette, La.
   6. Deepest water depth that production is planned for 2,862' – Garden Bank Block
        426, offshore Cameron Parish Shell’s Auger Tension Leg Platform – scheduled to
        go on stream in 1993.

Wells Drilled
        According to the Offshore Oil Scouts Association, a total of 30,359 wells were
drilled in State and Federal waters of the Gulf of Mexico between January 1, 1938, and
December 31, 1991. Industry claims a 63.8 percent success ration with 36.6 percent oil,
27.2 percent gas and 36.2 percent dry. About 25,000 of these were in the Federal OCS.
The current rig count is about 60, down from about 125 a year ago.
Oil & Gas Production Reserves
        During 1990, production from Federal OCS Leases in the Gulf amounted to 324
million barrels of oil and condensate and 5 billion cubic feet of natural gas. This
represents about 12 percent of the oil and about 28 percent of the natural gas produced in
the United States during 1990. The major producers in the Federal OCS area of the Gulf
include: Chevron, Shell, Exxon, Conoco, Mobil, Marathon, Texaco, Union, Arco, British
Petroleum and Amoco.
        Original recoverable reserves in the Gulf of Mexico are estimated to have been
10.87 billion barrels of oil and 129.1 trillion cubic feet of natural gas from 739 fields
including 57 which have been depleted and abandoned. Remaining recoverable reserves
are estimated at 3.03 billion barrels of oil and 40.2 trillion cubic feet of natural gas.

The Future
        Since the first Federal OCS sale in the Gulf of Mexico in 1954, the OCS has
played a very important role in supplying this nation with oil and natural gas. The United
States now imports nearly 50 percent of the oil we use. That means we are sending about
$60 billion a year overseas. Not only are we sending our dollars, we are sending our jobs
to those oil producing countries; jobs that could be kept at home if we were allowed to
continue to explore, develop and produce from OCS areas which are not being made
available for leasing. Did you know that the Energy Bill recently passed by the House
prohibits any leasing in the Pacific and Atlantic Oceans and also off the west coast of
Florida for the next 10 years? Is it any wonder that more and more companies are going
to foreign countries in search of oil and gas? I guess we should be thankful that the
Central and Western Gulf of Mexico remain available for exploration, development and
production.

				
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