Rig Decommissioning Concerns Rise

Decommissioning offshore rigs used to be an afterthought for energy companies as skyrocketing crude oil prices fueled the industry. But as oil prices have plummeted to around $45 per barrel, stockholders are no longer willing to absorb decommissioning costs. 

Rig life has been extended due to improved recovery methods and continued maintenance in the past. And as large operators exited fields, smaller oil companies often bought them and ended up with the decommissioning liability. 

As oil prices have bottomed, decommissioning has moved to the forefront of the industry’s concerns. The U.S. Department of Interior (DOI) has now proposed guidelines to ensure that companies set aside enough money to scrap older rigs in the Gulf of Mexico.

The Bureau of Ocean Energy Management’s (BOEM) has proposed that fewer companies be self-insure and that decommissioning costs be set aside via financial assurance bonds rather than surety bonds.

Click here to read BOEM’s proposal.

As decommissioning costs continue to rise, the federal government wants to ensure that taxpayers are not left paying the costs. 

Regulations currently stipulate companies put up at least $50,000 in surety bonds at initial exploration. Financial requirements then increase depending on the development of the field and the oil companies may have to put up at least $500,000. The companies can post bonds covering a single lease or for all of their activity in the region. Some of the largest companies are required to post up to $3 million.

Today, regulators are authorized to get supplemental bonds on top of those baseline requirements with calculations based on potential liabilities, royalties, rental fees and decommissioning costs.

But, BOEM can waive supplemental assurances as long as projected decommissioning cost is 50 percent or less than a company's net worth.

Under the new proposed guidelines, these type waivers will no longer be available but companies can self-insure if the decommissioning liabilities are 10 percent or less than their net worth.

While BOEM see the guidelines as increasing flexibility, oil companies have voiced their concerns that they may be forced to double or triple bond decommissioning liabilities. 

BOEM is planning to hold a workshop in Houston, Texas on October 9 to present the details of its proposal and accept public commentary.