Interior Seeks to Bolster Protections Against Decommissioning Costs

June 3, 2024 by Dan McCue
Interior Seeks to Bolster Protections Against Decommissioning Costs
Corrosion on oil platform. (Bureau of Safety and Enforcement)

WASHINGTON — Since the 1940s, the U.S. offshore oil and gas industry has installed more than 55,000 wells and 7,000 platforms on the outer continental shelf, mostly in the Gulf of Mexico.

In their day, they were a symbol of American energy independence and support for an economy based on the internal combustion engine.

One of the challenges associated with the sector, however, has always been how to deal with wells, equipment and platforms when they’ve outlived or come to the end of their useful purpose.

By law, this infrastructure must be decommissioned when it is no longer useful; usually by plugging wells and removing platforms within set deadlines.

The trouble is, many of these decommissionings are delayed, and in some cases, that can leave the government — and the American taxpayer — on the hook.

According to the Government Accountability Office, as of June 2023, there were more than 2,700 wells and 500 platforms overdue for decommission in the Gulf of Mexico alone.

Most troublesome of all, the potential of companies defaulting on these projects hangs over the Interior Department like a dagger.

As of last June, the departments only held about $3.5 billion in bonds from the responsible companies to cover a potential cost of between $40 billion and $70 billion.

In a bid to resolve that dilemma, the Bureau of Ocean Energy Management last month published a final rule intended to prevent oil and gas companies from shirking their obligations and shifting them to taxpayers.

The rule does so by establishing two metrics by which the agency will assess the companies’ risk of default.

The first involves the overall financial health of the company.

The rule streamlines the number of factors the bureau 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.

Then there’s the reserve value of the company.

Going forward, the agency 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, the bureau said.. 

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. 

And the agency will continue to have the ability to pursue prior lessees to meet decommissioning obligations. 

“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 in a written statement.

“This final rule updates, simplifies and strengthens outdated requirements to ensure … current operators are held responsible for their end-of-lease cleanup obligations on the Outer Continental Shelf,” she said.

The final Risk Management and Financial Assurance for OCS Lease and Grant Obligations rule is an update of 20-year-old regulations and a response to a Government Accountability Office finding that the agency’s previous practices did not effectively ensure that industry operators meet decommissioning deadlines.

“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 in a written statement. 

“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,” Klein said.

Under the new rule, which goes into effect on June 29, the bureau 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. 

Dan can be reached at [email protected] and at https://twitter.com/DanMcCue

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  • costs
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  • Interior Department
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