The US Department of the Interior’s Bureau of Ocean Energy Management (BOEM) Apr. 15 increased the financial assurances federal offshore oil and gas leaseholders must demonstrate in an effort to limit the number of abandoned wells in the Gulf of Mexico’s Outer Continental Shelf (OCS).
The final rule is partly in response to Government Accountability Office (GAO) reports that found that Interior was not doing enough to protect taxpayers from the enormous costs of plugging wells and decommissioning platforms if a company abandons the lease.
Over 75% of end-of-lease and idle infrastructure in federal waters of the Gulf of Mexico—more than 2,700 oil and gas wells and 500 platforms—are overdue for decommissioning, GAO said in a Feb. 20 report (OGJ Online, Feb. 22, 2024). The same report explained that decommissioning delays can indicate that companies are in financial trouble and may leave the government to pay for plugging the well.
It noted that Interior only holds about $3.5 billion in bonds from companies to cover a potential cost of $40-70 billion.
Under the new rule, BOEM estimates industry will be required to provide $6.9 billion in new financial assurances to protect American taxpayers from assuming industry decommissioning costs.
BOEM said it would allow current lessees and grant holders to request phased-in payments over 3 years to meet the new supplemental financial assurance demands required by the rule.
“The American taxpayer should not be held responsible when oil and gas companies are unable to clean up after their own operations,” said Interior Secretary Deb Haaland.
BOEM Director Elizabeth Klein added that the bureau’s financial assurance regulations have failed to keep pace with the evolving offshore oil and gas industry changes like aging OCS infrastructure, the transfer of near end-of-life properties from large companies to smaller companies with fewer financial resources, or the complex financial security arrangements between and within companies.
“Today’s action addresses the outdated and insufficient approach to supplemental bonding that does not always accurately capture the risks that industry may pose for the American taxpayer – like financial health of a company or the value of the assets that the lessee holds.”
The new rule establishes two metrics—the financial health of the company and reserve values—by which BOEM will assess the risk that a company poses for American taxpayers:
The rule streamlines the factors BOEM uses to determine the financial strength of a company by using a credit rating from a Nationally Recognized Statistical Rating Organization, or a proxy credit rating equivalent.
Under the new rule, BOEM also will consider the current value of the remaining proved oil and gas reserves on the lease compared with the estimated cost of meeting decommissioning obligations.
“If the lease has significant reserves still available, then in the event of a bankruptcy, the lease will likely be acquired by another operator who will assume the plugging and abandonment liabilities,” BOEM explained.
Companies without an investment-grade credit rating or sufficient proved reserves must provide supplemental financial assurance to comply with the new rule.
The rule also clarifies that current grant holders and lessees must hold financial assurance to ensure compliance with lease obligations and cannot rely on the financial strength of prior owners.
