BOEM increases decommissioning financial assurance requirements
Offshore staff
WASHINGTON, DC — The US Department of the Interior (DOI) has announced a final rule from the Bureau of Ocean Energy Management (BOEM) that “substantially strengthens” financial assurance requirements for the offshore oil and gas industry operating on the US Outer Continental Shelf (OCS).
The Interior Department says that the new rule is designed to protect taxpayers from covering costs that should be borne by the oil and gas industry when offshore platforms require decommissioning.
The DOI cited a Government Accountability Office (GAO) report which found that previous practices did not effectively ensure that operators met decommissioning deadlines for offshore wells and platforms at the end of their useful lives; a situation that potentially left 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 by substantially increasing the level of financial assurances that operators must provide in advance.
DOI said that 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.
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 that the 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.
BOEM says that this final rule follows a proposed rule issued in June 2023, which received over 2,000 public comments that informed its development.
04.16.2024
