The U.S. Bureau of Ocean Energy Management (BOEM) has notified companies holding oil and gas leases in US waters that it is updating financial assurance and risk management requirements for decommissioning and removing of offshore production facilities.

BOEM’s said on Thursday that its Notice to Lessees and Operators (NTL) details “improved procedures” to determine a lessee’s ability to carry out its lease obligations, primarily the decommissioning of Outer Continental Shelf (OCS) facilities, and whether to require lessees to furnish additional financial assurance.

Also, BOEM says that NTL ensures that U.S. taxpayers never have to pay for decommissioning and removing of offshore facilities.

Lower risk for taxpayers

BOEM Director, Abigail Ross Hopper, said: “BOEM’s goal is to modernize its approach to risk management in a way that better aligns with the realities of the industry and protects the U.S. government and taxpayers from risk in a manner that isn’t overly burdensome to the oil and gas industry.

“By implementing these changes, we will create comprehensive procedures to decrease risks to taxpayers while providing industry flexibility to negotiate adaptive solutions and use tailored financial plans to meet their financial assurance requirements.”

Decom liabilities at $40 billion

The Outer Continental Shelf leases require that the sites must be restored to their pre-lease state. Now, when the industry is moving towards deepwater sites in the Gulf of Mexico, decommissioning costs have risen significantly.

Current estimated decommissioning liabilities in the OCS are approximately $40 billion.

BOEM said the revised NTL will provide updated criteria for determining a lessee’s ability to self-insure its OCS liabilities based on the lessee’s financial capacity and financial strength.

Hopper said: “Managing risk in the early stages of a lease will provide lessees negotiated solutions that improve business certainty and leverage existing company strengths.”

The regulator said it would work with all lessees, both large and smaller individual ones, to develop an approach that works best for the government and each company while focusing on the highest risk properties first. The intent is to examine each company individually, assess its total financial assurance needs and then work with the company to determine the best financial assurance instruments for its individual needs.

Industry not happy

Responding to new rules, Independent Petroleum Association of America’s (IPAA) Senior Vice President of Government Relations and Political Affairs Dan Naatz said: “Today’s Notice to Lessees will change how the oil and gas industry provides financial security for its offshore operations. It’s widely known that offshore development is an economically challenging business. The Bureau’s new mandatory financial requirements will force each lease owner to fully insure upfront all of its exploration wells, despite the fact that these wells may never be drilled.

He said that the mandate unfairly places the burden on independent offshore producers, removing operators’ flexibility and making it as difficult as possible for these smaller, independent companies to remain in business.

Naatz added: “The new financial requirements will double the cost of insurance premiums for offshore companies and will tie up much-needed capital that would otherwise be available for development, American jobs, and revenues to states and the federal government.

“To date, industry has absorbed 100 percent of its liability with zero cost to U.S. taxpayers, proving that the current financial assurance system works. One thing is clear, today’s directive is not a ‘balanced’ solution for America’s independent producers and unfortunately, their voice has been ignored throughout the process of this rulemaking.

“What’s more, for an Administration that has prided itself on being the ‘most transparent administration’ in history, it’s extremely disappointing to witness a federal bureau initially move forward with a formal rulemaking process, only to change course halfway and instead issue an executive memorandum with no recourse, no appellate process, and no corresponding change to the Code of Federal Regulations. Not only is this new regulatory scheme the opposite of transparent, it’s disingenuous and simply bad policymaking.”

Grace period

BOEM said it is now providing a 60-day grace period before the NTL is implemented. BOEM will focus first on those properties that pose the highest risk to the government, namely, properties for which there is only one leaseholder responsible for decommissioning. Those leaseholders will have 60 days, from the date of an order requiring additional financial security, to comply.

BOEM added that, for all other holdings, the lessees will have 120 days from the date they receive an order to provide additional security if required, or a tailored plan which will permit the use of financial security forms other than bonds or pledges.