The US Bureau of Ocean Energy Management notified federal offshore oil and gas leaseholders that it is updating financial assurance and risk management requirements to ensure that taxpayers never have to pay for decommissioning and removing a company’s offshore production facilities. Officials from two trade associations quickly criticized the agency’s action.
National Ocean Industries Association Pres. Randall B. Luthi said NOIA is reviewing the July 14 notice. He acknowledged that the notice’s provisions followed extensive discussions between BOEM and federal offshore lessees, but questioned whether they were necessary and suggested they possibly might be counterproductive.
An Independent Petroleum Association of America official warned that the new requirements could push many smaller producers off the US Outer Continental Shelf. “It’s widely known that offshore development is an economically challenging business,” IPAA Senior Vice-Pres. for Government Relations and Political Affairs Daniel T. Naatz said. “[BOEM’s] new mandatory financial requirements will force each lease owner to fully insure upfront all of its exploration wells, despite the fact that these wells may never be drilled.”
The US Department of the Interior agency said that its Notice to Lessees and Operators (NTL) details improved procedures to determine a lessee’s ability to carry out its lease obligations—primarily the decommissioning of OCS facilities—and whether to require lessees to furnish additional financial assurance.
The new requirements take effect on Sept. 12, it indicated. They replace those in NTL No. 2008-N07, and provide updated procedures for requiring additional financial security for oil and gas or sulfur leases.
All federal OCS leases require that when decommissioning, a company must remove all facilities and restore the site to its pre-lease state, BOEM said. Due in part to the oil and gas industry’s move into deeper Gulf of Mexico waters, decommissioning costs have risen significantly, it explained.
Liabilities around $40 billion
As existing infrastructure ages, some larger companies are transferring older facilities to smaller or less-experienced firms, it said. BOEM estimates that current routine decommissioning liabilities on the federal OCS are $40 billion.
BOEM said the revised NTL will provide updated criteria for determining a lessee’s ability to self-insure its OCS liabilities based on the lessee’s financial capacity and financial strength. It also provides new methods and additional flexibility for lessees to meet their additional financial security requirements through a tailored plan.
The guidance and clarification will apply to all BOEM regions and planning areas. In addition to leaseholders, the NTL also applies to right of use and easement holders, the agency said.
It said it would work with leaseholders to develop an approach that works best for the government and for each company while focusing on the highest-risk properties first—namely, properties for which there is only one leaseholder responsible for decommissioning. Those leaseholders will have to comply within 60 days from the date of an order requiring additional financial security.
BOEM said for all other holdings, lessees will have 120 days from the date they receive an order to provide additional security, if required. Alternatively, lessees can provide a tailored financial plan to BOEM, which will permit the use of forms of financial security other than surety bonds and pledges of treasury securities and allow companies to phase-in funding of the additional security.
The updated guidance is within the parameters of BOEM’s existing regulations so it was not necessary to propose a new rule, the agency noted.
Subject of extensive dialogue
Responding to BOEM’s announcement, NOIA’s Luthi said the association was reviewing the financial assurance and risk management requirements in BOEM’s NTL, which has been the subject of extensive dialogue between the federal offshore leasing regulator and the oil and gas industry for a long period.
“Existing laws and regulations allow federal regulators the flexibility to cooperate with operators to ensure that decommissioning costs are adequately covered, and we remain concerned that this is largely a solution in search of a problem, as US taxpayers have never been left on the hook for offshore decommissioning costs,” Luthi said. NOIA urges the federal regulators to recognize that private agreements between companies can fully address potential liability, he said.
“When a company purchases a lease from another company, funds or private bonds are a likely part of the purchase and transfer agreement, making additional supplemental bonding potentially unnecessary,” he explained. “Any additional bonding required by the regulator could create a lose-lose scenario by reducing the amount of capital a company could use to develop a successful well, and thereby decreasing the potential of future revenue to the federal government by what could be millions of dollars.
“This NTL could cause some of the very financial instability it purports to protect against,” Luthi warned.
IPAA’s Naatz said the requirements unfairly place the financial burden on independent producers, removing operators’ flexibility and making it much harder for these smaller offshore independents to stay in business. “The new financial requirements will double the cost of insurance premiums for offshore companies and tie up much-needed capital that otherwise would be available for development, American jobs, and revenue to states and the federal government,” Naatz said.
Contact Nick Snow at firstname.lastname@example.org.