BOEM Imposes Stricter Cleanup Bond Requirements for Offshore O&G

 

For the first time in 20 years, the Bureau of Ocean Energy Management has changed the rules on how offshore oil and gas operators guarantee that they will clean up after a platform is decommissioned. These costs are high, and BOEM says that it wants to ensure that the expense does not fall on the federal government. 

Before the change, the agency had financial assurance coverage for less than a tenth of an estimated $38 billion in potential decommissioning liabilities. A wave of aging platform shutdowns will be coming soon, according to the Government Accountability Office, and it may be accompanied by a wave of small-company failures and platform abandonments. 

"The American taxpayer should not be held responsible when oil and gas companies are unable to clean up after their own operations. The Interior Department is committed to ensuring that the federal oil and gas leasing program is implemented fairly, with accountability and transparency,” said Secretary of the Interior Deb Haaland in a statement.  

BOEM says that the offshore oil and gas business has changed since the rules were last updated, and that stronger requirements for security bonds are required. The practice of large oil majors selling their spent oil field leases to smaller, less-well-capitalized firms is of particular concern to BOEM, since these small independents may simply go out of business when its cleanup costs get too high, leaving the taxpayer on the hook. (The U.S. Coast Guard had considerable legal difficulty with one independent platform operator in particular, and ended up taking over the response itself after 14 years of leakage. The firm was forced to liquidate to pay for decommissioning.) 

The new rules are calibrated to the financial health of a company and the value of its oilfield assets. The less firmly-established the firm, and the less valuable its assets, the bigger the supplemental assurance they will have to post to make sure that they pay for decommissioning. Oil companies that do not have an investment-grade credit rating will have to set aside extra money to cover the cost of cleanup, without relying on the previous owner of the end-of-life oil field. Even companies that do have a high credit rating will have to post supplemental financial assurance if their proven reserves are worth less than three times as much as their decommissioning liability. (As a phase-in measure, current lessees only have to satisfy one of these two criteria.)

BOEM estimates that the changes will affect about 400 companies - mostly small businesses - and will prompt the industry to put up about $7 billion in new financial guarantees. The compliance cost will probably come to about $400 million a year at a seven-percent discounting rate for the time value of money; To smooth the transition, BOEM will phase in the requirements over the span of three years for current lessees.