Could new BOEM rule accelerate GOM decommissioning activity?
Written by Nick Blenkey
Image: BOEM
Back in January, the Government Accountability Office issued a report criticizing two U.S. Department of the Interior agencies (BOEM and BSEE) for delays in the decommissioning of end-of-life offshore wells and platforms in the U.S. Gulf of Mexico. In its report the GAO said that, as of June 2023, more than 2,700 Gulf wells and 500 platforms were overdue for decommissioning — an important market for a number of specialist offshore service providers.
GAO said that delays can increase environmental, safety, and financial risks. It noted that delays could indicate that companies are in financial trouble and might leave the government to pay for decommissioning.
“The Department of the Interior only holds about $3.5 billion in bonds from companies to cover a potential cost of $40-$70 billion,” noted GAO.
Yesterday the Department of the Interior announced publication of a final rule from BOEM that it said would “protect taxpayers from covering costs that should be borne by the oil and gas industry when offshore platforms require decommissioning. With this action – which updates 20-year-old regulations – BOEM has substantially strengthened financial assurance requirements for the offshore oil and gas industry operating on the U.S. Outer Continental Shelf (OCS).”
Interior says that the final Risk Management and Financial Assurance for OCS Lease and Grant Obligations rule amends existing regulations to respond to the concerns noted by GAO and reduce financial risks associated with OCS development by substantially increasing the level of financial assurances that operators must provide in advance.
“The offshore oil and gas industry has evolved significantly over the last 20 years, and our financial assurance regulations need to keep pace,” said BOEM Director Elizabeth Klein. “Today’s action addresses the outdated and insufficient approach to supplemental bonding that does not always accurately capture the risks that industry may pose for the American taxpayer – like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.”
“Existing regulations have not kept pace with industry changes, such as 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.” says Interior. “The new rule establishes two metrics by which BOEM will assess the risk that a company poses for American taxpayers.”
Financial health of a company. The rule streamlines the number of 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.
Reserve value. BOEM will consider the current value of the remaining proved oil and gas reserves on the lease compared to 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.
Companies without an investment-grade credit rating or sufficient proved reserves will need to provide supplemental financial assurance to comply with the new rule.
Additionally, the rule 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. BOEM continues to maintain its ability to pursue prior lessees to meet decommissioning obligations.
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. To provide industry with flexibility to meet the new financial assurance requirements, BOEM will allow current lessees and grant holders to request phased-in payments over three years to meet the new supplemental financial assurance demands required by the rule.
How soon any of this leads to an increase in decommissioning work remains to be seen
The new final rule (available HERE) follows a proposed rule issued by BOEM in June 2023, which received over 2,000 public comments that informed its development.
