The Bureau of Ocean Energy Management (BOEM) has recently announced a new rule that applies to all oil and gas companies operating in the Gulf of Mexico. The regulation provides new guidelines on how the oil and gas industry accounts for and provides the costs for the decommissioning of wells, pipelines and other facilities in their operations in the Gulf. Known as a Notice to Lessees (NTL), it requires companies to produce financial security for these cost requirements that guarantee 100% of the future decommissioning work for oil and gas properties.
This rule, which sidestepped a formal rulemaking process often employed by BOEM to ensure multi-stakeholder input, is a serious concern for Alliance members. Not only does it lack a clear rationale and data for the purpose of the regulation, but also it ignores decades of work where regulators and industry have worked together to ensure safe and responsible development.
The New Bureau of Ocean Energy Management Regulations Are An Overreach On An Unprecedented Scale
- The current financial assurance regime has protected U.S. taxpayers for decades.
- Recent bankruptcies by independent Gulf of Mexico operators prove the current system works.
- Despite the concerns expressed by the Bureau of Ocean Energy Management (BOEM) regarding the possibility of default by lease owners, the industry has, up to now, absorbed 100% of the plugging and abandonment (P&A) liability in these bankruptcies with zero cost to taxpayers.
- While Gulf of Mexico operators have made significant capital investments based upon the robust, existing regulatory framework, BOEM, in unprecedented fashion, completely discarded their original Notice of Proposed Rulemaking (ANPR) and instead overhauled current financial assurance programs without merit and absent a formal rule-making where stakeholder input could be received and considered by BOEM in a fully transparent manner. This action alone is likely a violation of the Administrative Procedures Act (APA).
- Financial assurance instruments such as insurance, escrow accounts, trust funds, letters of credit, bonds, and patent guarantees that sellers and buyers put in place when transferring properties—as well as BOEM’s ability to require prior owners in the chain-of-title to fund unperformed plugging and abandonment —ensure that taxpayers will never be on the hook for plugging and abandonment liability.
A Reliance on Misguided, Incorrect Data and Bloated Estimates Is Not a Prescription for Policy.
- BOEM estimates the outstanding Gulf of Mexico decommissioning liability at approximately $40 billion, of which $2.9 billion is secured by existing financial security with the government. The remaining liability has not been assessed or financial security was not required due to exempt parties under the existing “Notice To Lessees” (NTL).
- This new, revised estimate ignores the comprehensive financial security measures put in place between industry participants, fails to account for the P&A work that has already been completed, and in some cases significantly inflates actual P&A costs. The new rules will require full bonding upfront for all decommissioning liabilities despite the fact that those liabilities may not accrue for decades.
The Unintended Consequences of the New Regulations Must Be Considered.
- Given the already challenging economics for independent producers in the Gulf of Mexico, this will very likely trigger the purported risk prompting these changes by forcing independent operators to shut-in producing fields and default on P&A liability.
- The proposed changes will tie up capital that would otherwise be available for exploration, development, jobs, revenues to states and the federal government, and—most ironically—for actual P&A work.
- Independent operators simply do not have the resources to implement these drastic changes within the implementation period.
- BOEM must perform a thorough cost-benefit analysis—incorporating accurate data—to fully assess the impacts to the industry against the risk that any taxpayer dollars will ever be spent on plugging and abandonment.