Bud's Offshore Energy (BOE)

John Smith‘s excellent comments on the BOE post about the proposed revisions to decommissioning financial assurance regulations warrant a separate post. John’s comments are pasted below.

It’s clear the proposed rules have been designed to reduce financial burdens on OCS oil and gas operators, especially small independents. The proposed rules do this by:

1. Waiving the requirement of the operator/lessees to obtain supplemental financial assurance to cover decommissioning obligations if jointly and severally liable predecessors are determined to have the financial capability to cover the obligations.
2. Lowering the credit rating threshold BOEM uses for evaluating the financial health lessees and grantees from BBB- to BB- from S&P Global Ratings (S&P) or Baa3 to Ba3 from Moody’s Investor Service Inc.
3. Revising the level of BSEE probabilistic estimates of decommissioning cost used for determining the amount of supplemental financial assurance required from P70 to P50.

I don’t see any rationale for lowering the credit rating threshold, which would apply to both current and predecessor lessees.  A BB- and a Ba3 rating is considered “non-investment grade” or “junk,” meaning the company is more vulnerable to adverse economic conditions, such as a downturn in oil and gas prices.  Current market estimates place the 3-year probability of default for a BB- rating at approximately 12.5% to 13%. Lowering the credit rating significantly increases the risks of default by lessees and transfers the risk to the federal government and taxpayers.

Reducing the BSEE probabilistic criteria for determining the amount of supplemental financial insurance required from P70 to P50 means there is a 50% chance BSEE cost estimates for decommissioning are underestimated further increasing risks borne by the federal government and taxpayer.  

BOEM should reverse course and maintain the current credit rating threshold (BBB- and Baa3) and the P70 criteria.