Bud's Offshore Energy (BOE)

Some preliminary thoughts about BOEM’s proposed revision to the decommissioning financial assurance regulations for US offshore oil and gas operations:

1. BOEM has rather surprisingly proposed to eliminate consideration of a company’s compliance record in determining the need for supplemental financial assurance. An opposing view will be posted tomorrow.
2. If a lease has proved reserves with a value of at least three times that of the estimated decommissioning cost, no supplemental financial assurance would be required. Comparing two imprecise and variable estimates is neither a simple nor reliable method for determining the need for supplemental financial assurance. BOEM should look at the history of the Carpenteria field (Santa Barbara Channel) and the reserve estimates that were provided to discount decommissioning risks. More on this at a later date.
3. Transferor liability applies only to those obligations existing at the time of transfer; new facilities, or additions to existing facilities, that were not in existence at the time of any lease transfer are not obligations of a predecessor company and are considered obligations of the party that built such new facilities and its co- and successor lessees. This is a good policy, but is difficult to implement. Some of the complexities may need to be addressed. More later.
4. The “reverse chronological order” provision was withdrawn in April, so there is no defined process for issuing decommissioning orders to predecessor lessees. Is it good policy to first issue such orders to companies who may have owned leases decades ago, in some cases prior to the establishment of transferor liability in the 1997 MMS “bonding rule?”
5. The proposed rule would clarify that BOEM will not approve the transfer of a lease interest until the transferee complies with all applicable regulations and orders, including the financial assurance requirements. BOEM needs to be firmly enforce this policy. See tomorrow’s post.
6. The proposed rule would not allow BOEM to rely upon the financial strength of predecessor lessees when determining whether, or how much, supplemental financial assurance should be provided. This is a good provision.
7. BOEM proposes to use the P70 probabilistic value to set the amount of any required supplemental financial assurance. These estimates do not seem sufficiently conservative to protect other parties and the public in the event of default. This is particularly true after storm damage which can increase plugging costs more than tenfold.
8. The probabilistic cost estimates were updated in 2020 and are based on data submitted subsequent to 2016 and 2017 NTLs. How often will these estimates be updated?
9. The final rule should specify that funds may not be withdrawn from decommissioning accounts for operational purposes, and that BOEM approval is required for such withdrawals.

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