In a statement posted on its website, the U.S. Department of the Interior (DOI) announced a final rule from the Bureau of Ocean Energy Management (BOEM) “to protect taxpayers from covering costs that should be borne by the oil and gas industry when offshore platforms require decommissioning”.
“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,” the DOI said in the statement.
“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,” it added.
In its statement, the DOI noted that the new rule establishes two metrics by which BOEM will “assess the risk that a company poses for American taxpayers”. These comprise the financial health of a company and reserve value.
“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,” the DOI added.
“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,” it continued.
“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,” it went on to state.
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 DOI warned. 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, it added.
The DOI highlighted in the statement that the final rule follows a proposed rule issued by BOEM in June 2023, “which received over 2,000 public comments that informed its development”.
“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),” the DOI said in its statement.
“The costs to decommission oil and gas facilities on the OCS are substantial, and if companies fail to meet their decommissioning obligations those costs fall to American taxpayers,” it added.
“The Government Accountability Office (GAO) found that previous practices did not effectively ensure that industry operators meet decommissioning deadlines for offshore wells and platforms at the end of their useful lives, potentially leaving the costs to be borne by American taxpayers,” it continued.
“The final Risk Management and Financial Assurance for OCS Lease and Grant Obligations rule amends existing regulations to respond to those concerns and reduce financial risks associated with OCS development by substantially increasing the level of financial assurances that operators must provide in advance,” the DOI went on to note.
Deb Haaland, the secretary of the DOI, said in the statement, “the American taxpayer should not be held responsible when oil and gas companies are unable to clean up after their own operations”.
“The Interior Department is committed to ensuring that the federal oil and gas leasing program is implemented fairly, with accountability and transparency,” Haaland added.
“This final rule updates, simplifies and strengthens outdated requirements to ensure that taxpayers are protected and current operators are held responsible for their end of lease cleanup obligations on the Outer Continental Shelf,” Haaland continued.
Principal Deputy Assistant Secretary for Land and Minerals Management, Steve Feldgus, said in the statement, “for far too long, the federal government has failed to follow through on measures to ensure accountability for oil and gas companies operating offshore”.
“Coupled with our recent announcement from the Bureau of Land Management, the Department is ensuring that we have a modern oil and gas leasing program that protects taxpayers’ interests,” he added.
BOEM Director Elizabeth Klein said in the statement, “the offshore oil and gas industry has evolved significantly over the last 20 years, and our financial assurance regulations need to keep pace”.
“[This] 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 added.
When Rigzone asked the American Petroleum Institute (API) for comment on the DOI’s statement, the organization’s VP of Upstream Policy, Holly Hopkins, said, “financial assurance is an important part of offshore energy development and our industry’s commitment to maintaining safe and responsible operations”.
“BOEM’s final rule appropriately balances the need to safeguard taxpayers from paying for decommissioning obligations while promoting the development of the Outer Continental Shelf’s abundant energy resources,” Hopkins added.
Rigzone has asked the DOI and BOEM for comment on the API’s statement. While the DOI declined to comment, BOEM has not yet responded to Rigzone’s request.
To contact the author, email andreas.exarheas@rigzone.com
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