The US Department of the Interior announced a final rule from the Bureau of Ocean Energy Management (BOEM) to protect taxpayers from covering costs of decommissioning offshore platforms. With this action, which updates 20-year-old regulations, BOEM updates financial assurance requirements for the offshore oil and gas industry operating on the US outer continental shelf (OCS).
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. 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. 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 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. “The Interior Department is committed to ensuring that the federal oil and gas leasing program is implemented fairly, with accountability and transparency. This final rule updates, simplifies, and strengthens outdated requirements to ensure that taxpayers are protected and current operators are held responsible for their end-of-lease cleanup obligations on the outer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.”
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 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 likely will 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 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 3 years to meet the new supplemental financial assurance demands required by the rule.