Posted on July 4, 2023
The U.S.’ Bureau of Ocean Energy Management (BOEM) is proposing changes to modernize decommissioning financial assurance requirements for the offshore oil and gas industry.
BOEM said on June 27 the proposed changes were intended 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.
The proposed changes will be published in the Federal Register on June 29, triggering a 60-day public comment period that ends on August 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 in a press release.
The Government Accountability Office reported that as of 2015, the Department of the Interior held less than $3 billion in bonds to cover approximately $38.2 billion in decommissioning costs, with approximately $2.3 billion in costs at highest risk of needing to be covered by American taxpayers.
According to BOEM, recent corporate bankruptcies in the offshore oil and gas industry underscore 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 shouldered by the American taxpayer. Delayed decommissioning can lead to environmental damage and other risks, which can escalate costs.
Klein said the updates would modernize evaluation and financial criteria used in assessing risk the company poses to taxpayers.
First, to better predict financial distress, BOEM would use credit ratings or require companies without an investment-grade credit rating to provide additional financial assurance. BOEM said it is seeking public feedback on whether it should rely on credit ratings to make these determinations and what credit rating threshold would best protect taxpayer interests without imposing undue burdens on industry.
Second, BOEM said it would consider the current value of the proved oil and gas resources on the lease itself when determining the overall financial risk of decommissioning because any lease with significant reserves still available would likely be acquired by another operator that would then assume the liabilities in the event of bankruptcy.
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 is seeking public comments on the costs and benefits of considering predecessors when determining how much financial assurance a company must provide.
BOEM said it would use decommissioning estimates based on industry reported data collected by the Bureau of Safety and Environmental Enforcement (BSEE) at a level that would adequately cover estimated decommissioning costs without being overly burdensome. BOEM said it is seeking comments on whether the level it proposes strikes an appropriate balance. This proposed rule would allow current lessees and grant holders to request phased-in payments over three years for new financial assurance amounts.
In 2020, BOEM and BSEE proposed the Risk Management, Financial Assurance and Loss Prevention rule to update BOEM’s financial assurance criteria and other BSEE-administered regulations. BSEE finalized some provisions from the 2020 proposal on April 18, 2023, but BOEM rescinded its portion of the 2020 proposed rule and has issued the new proposed rule in its place.
