December 2020, Vol. 247, No. 12

Features

BOEM/BSEE Seek to Change Offshore Decommissioning Financing

By Tom Ewing, U.S. Energy and Environmental Correspondent 

The Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE), both part of the Department of the Interior, published a proposed rule to revise and streamline certain financial requirements for oil, gas and sulfur operations on the U.S. Outer Continental Shelf (OCS).   

The agencies are trying to confirm that companies have the money to pay for offshore decommissioning obligations as the regulators seek a balance in protecting taxpayers while “providing certainty and needed flexibility for OCS operators.”   

The changes, published On Oct. 16, would apply to three groups: (1) oil, gas and sulfur lease holders (“lessees”), (2) right-of-use (RUE) and easement grant holders and (3) pipeline right-of-way (ROW) grant holders.   

Many of the revisions impact all three, and this proposal requires close scrutiny, because they come from two agencies with separate authorities. 

One critical proposed revision pertains to bonding, to financial security requirements for decommissioning. Currently, $500,000 surety bonds are required for leases and RUE grants, and pipeline ROW grants require a $350,000 bond.  

Those sums do not change; however, a BOEM regional director can require a higher surety bond, a relatively uncommon requirement, according to a BOEM spokesperson. A decision for a higher bond rests on five criteria: financial capacity, financial strength, business stability, reliability and regulatory compliance.  The five criteria would change. 

Going forward, higher bonds for pipeline ROW holders would depend on: 

• a credit rating, either from a Nationally Recognized Statistical Rating Organization (NRSRO), as identified by the United States Securities and Exchange Commission (SEC), or a proxy credit rating determined by BOEM using audited financial statements; 
• whether a co-grant holder has this credit rating; 
• whether a predecessor company does. However, that’s not the end of the story. A current owner still might need to pay more depending on the predecessor’s decommissioning obligations.

The reference to predecessor companies is important because it is central to BSEE’s proposals. 

It’s BSEE’s role to enforce “timely decommissioning of oil and gas wells, platforms and other facilities, and pipelines and related infrastructure.” 

Under current regulations, BSEE can require a predecessor to bring a lease into compliance, if the current “assignee” is not meeting obligations.  The proposed rule would create a new procedure for establishing the sequence in which predecessors will be ordered to carry out their accrued decommissioning obligations when current lessees or grant holders fail to do so.  

If a current lessee or grant holder defaults, BSEE would pursue liable predecessors in reverse chronological order through the chain-of-title to perform their accrued decommissioning obligations.  Under this approach, the most recent predecessors would receive orders to conduct decommissioning first, before BSEE turns to predecessors more remote in time. 

BSEE writes that “this proposed change may provide additional transparency and clarity for BSEE and BOEM, as well as for the public and the oil and gas industry, in ensuring that decommissioning requirements will be met.”  Importantly, this does not impact nor alter the demands inherent in joint and several liability among all lessees, current and past.  

BSEE contends that “defining an order of recourse among predecessors would eliminate some of the unpredictability perceived in the past. In addition, the proposed rule would help BSEE to better address maintenance and monitoring of facilities in cases where all current owners default.” 

BSEE also proposes to require a surety bond from companies that may appeal decommissioning orders and decisions, similar to the current requirement for a civil penalty.  BSEE’s concern is that a company that appeals a decommissioning order may not “have the wherewithal to decommission after a lengthy appeal has run its course,” presuming the order is sustained.  

BSEE will determine the amount but the basic criteria is assurance of enough money “to ensure completion of the specified decommissioning activities in the event that your appeal is denied, and you thereafter fail to perform any of your decommissioning obligations.” 

In their proposal, the Agencies note a long history of trying to get these rules right.  (References go back to 1998.)  The text calls current bond requirements “vague.”  BSEE and BOEM seek comments on how the proposal would affect existing contracts and agreements covering decommissioning. Another particular interest: the proposal will reverse the timeline to identify which company might be held responsible for decommissioning. 

The document is open for comment until December 15.  American Petroleum Institute Vice President of Upstream Policy Lem Smith said, “We are reviewing the proposal and are hopeful the final version will be equitable and bring needed clarity to the decommissioning process. BSEE has the authority to ensure decommissioning obligations are met that protect the environment and the taxpayer.  We believe a review of the current policy was warranted, and we look forward to reviewing details and offering more substantive feedback.”