The U.S. offshore oil and natural gas industry, from unmanned platforms to massive production facilities, is facing higher federal financial assurance rules to cover the cost of decommissioning a well or infrastructure.
Under a proposal by the Biden administration, the Bureau of Ocean Energy Management (BOEM) said the proposed rule would “modernize financial assurance requirements…to better protect American taxpayers from incurring the costs associated with the oil and gas industry’s responsibility to decommission offshore wells and infrastructure, once they are no longer in use.”
Nearly all domestic offshore oil and gas infrastructure is in the Gulf of Mexico. The public comment period is run through Aug. 28.
“These proposed updates to our financial assurance regulations will help ensure that energy companies that are operating in publicly owned federal waters are able to fulfill their clean-up and decommissioning responsibilities, without taxpayers having to step in to foot the bill,” BOEM Director Liz Klein said.
“The commonsense updates that we are proposing would modernize evaluation and financial criteria so that we are better protecting taxpayers from the decommissioning costs associated with aging oil and gas infrastructure on the Outer Continental Shelf.”
High Costs
The Government Accountability Office said as of 2015, the Interior Department had less than $3 billion in bonds to cover an estimated $38.2 billion in offshore infrastructure decommissioning costs, BOEM noted.
Around $2.3 billion in costs are considered at the “highest risk of needing to be covered by American taxpayers.”
In issuing its updated rule, BOEM cited “recent corporate bankruptcies in the offshore oil and gas industry” as underscoring the need for regulatory reform.
“If BOEM holds insufficient financial assurance at the time of bankruptcy, the government may end up having to perform the decommissioning, with the cost being borne by the American taxpayer. Delays in decommissioning can lead to environmental damage and other risks.”
In response to President Biden’s Executive Order 14008, designed to reform federal oil and gas oversight, Interior agencies have proposed revising oil and gas royalty rates, onshore bonding requirements and leasing practices.
BOEM’s proposed financial assurance revisions would establish two metrics by which the agency “would assess the risk any company poses for the American taxpayer.”
To “accurately and consistently predict financial distress,” BOEM has proposed using nationally recognized credit ratings or a proxy credit rating generated through a statistical model. Companies without an investment-grade credit rating would be required to provide additional financial assurance.
BOEM also is looking for feedback from the public about whether credit ratings are adequate to make determinations “and what credit rating threshold would best protect taxpayer interests without imposing undue burdens on industry.”
What’s It Worth?
In addition, BOEM is proposing to use the “current value of the proved oil and gas resources on the lease itself to determine the overall financial risk of decommissioning.”
The reasoning behind valuing the proved resources is that even if a well or infrastructure are decommissioned, the federal lease still could hold substantial oil and gas reserves.
If there were enough reserves in a lease, it would “likely be acquired by another operator that would then assume the liabilities in the event of bankruptcy,” BOEM noted.
The proposed regulatory changes “would provide additional clarity and reinforce that current grant holders and lessees bear the cost of ensuring compliance with lease obligations, rather than relying on prior owners to cover those costs,” BOEM noted.
The decommissioning estimates used would be “based on industry reported data” collected by BOEM’s sister agency, the Bureau of Safety and Environmental Enforcement (BSEE). The estimates would be “at a level that would adequately cover estimated decommissioning costs without being overly burdensome.”
The proposed rule also would allow current lessees and grant holders to request phased-in payments over three years for the new financial assurance amounts. After financial assurance proposals were withdrawn in 2017 by the Trump administration, BOEM and BSEE in 2020 began to revamp the rules. BSEE in April finalized some provisions, but BOEM had rescinded its portion.
