The final NTSB report on the 12/29/2022 GoM helicopter crashthat killed 4.To the NTSB’s credit, their preliminary report was timely. Hopefully, the NTSB is considering the muddled regulatory regime for helidecks (regulatory fragmentation).
Report on the Nord Stream sabotage: As the anniversary nears, the prospects for an official report are fading.The absence of a report from Sweden, Denmark, or Germany speaks volumes.
Per BSEE’s recent announcement, Federal funds will be used to plug wells in the Matagorda Island (MI) area of the Gulf of Mexico (see map below). Based on a BSEE presentation and BSEE borehole data, these wells were drilled by Matagorda Island Gas Operations LLC, a company that filed for bankruptcy in 2014.
Prior to the bankruptcy filing, Matagorda Island Gas was cited for 112 violations on 108 inspections. This INC/inspection rate is approximately double the Gulf of Mexico (all operators) rate in a typical year (0.52 in 2022), and is 4 to 25 times higher than the rate for the 2022 Honor Roll companies.
In a draft rule published on June 29, 2023, BOEM proposes to discontinue using a company’s record of compliance in determining the need for supplemental financial assurance for decommissioning. BOEM’s full explanation for this surprising change is pasted at the end of this post.
Opposing view:
BOEM should be more attentive, not less, to safety performance and compliance data. If they were, taxpayers would have been better protected from the risks associated with the lease acquisitions by Fieldwood, Cox, Black Elk, Signal Hill, and others, and their subsequent bankruptcies.
Safe operations, as reflected in compliance and performance data, are critical to a company’s financial success.
BOEM wrongly infers that Incidents of Noncompliance (INCs) are solely dependent on the number and complexity of facilities. Decades of normalized compliance data have told us that there are marked differences among operators in terms of compliance and safety performance. Companies at the bottom of the performance table don’t usually survive.
Accidents are not mere matters of chance; management and culture matter.
Honor Roll companies, large and small, have superior compliance records, and in 2022 these companies had 50-90% fewer INCs/facility-inspection than the Gulf of Mexico average.
Does BOEM expect noncompliance leaders to be concerned about decommissioning obligations? The record shows that they are not.
Cox’s 2023 bankruptcy was predictable given their past safety performance. In 2022, Cox was a violations leader by any measure, and was responsible for 9 of the 30 safety incidents that were significant enough to require investigation by BSEE.
Fieldwood’s terrible 2021 safety performance has been discussed, and there was ample evidence of performance problems prior to their bankruptcy declaration in 2018. In 2016 and 2017 Fieldwood was, by far, the GoM violations leader with 818 INCs, 401 of which required a facility or component shut-in.
Ironically (or maybe not), the only other company that was even in the same noncompliance ballpark as Fieldwood in 2016 and 2017 was future Cox affiliate Energy XXI GOM. Energy XXI earned 465 INCs (240 shut-ins) during that 2 year period. Did BOEM object to or otherwise comment on the 2018 Cox-Energy XXI merger?
Black Elk Energy was new in 2007 and quickly became a violations leader. Between 2010 and 2012, BSEE cited Black Elk 415 times. 218 of these violations were serious enough to require facility or component shut-ins. On November 16, 2012, explosions at Black Elk’s West Delta 32 platform killed 3 workers, and 2 others suffered severe burns. Criminal charges and a complex bankruptcy followed. BSEE records show 1107 INCs during the company’s short history, 464 of which required facility or component shut-ins.
The rapid growth of Fieldwood, Cox, and Black Elk was in part facilitated by lax lease assignment and financial assurance policies. Operating companies should have to demonstrate that they can operate safety and comply with the regulations before they are approved to acquire more properties.
The Signal Hill sagawas documented nearly 2 years ago, and none of the questions raised in that post have been answered. Violations data and inspector feedback predicted the Signal Hill/POOI failure. Nonetheless, and despite the objections of regional staff, Signal Hill was allowed to tap into its decommissioning account to cover operating expenses. Responsibility for decommissioning Platforms Hogan and Houchin is still uncertain.
Given that BSEE, not BOEM, is responsible for safety and compliance, I sincerely hope that regulatory fragmentationwas not a factor contributing to BOEM’s decision to discontinue the use of compliance data in determining financial assurance needs.
BOEM’s explanation for the proposal to eliminate the record of compliance criterion:
BOEM also proposes to eliminate the existing “record of compliance” criterion found in the current version of § 556.901(d)(1)(v). BOEM has determined that the number of INCs a company receives correlates with the number of OCS properties it owns, not its financial stability, and therefore, BOEM has concluded that it is not an accurate predictor of its financial health. BOEM reviewed BSEE’s Incidents of Non-Compliance (INCs) records and its Increased Oversight List, which represent BSEE’s cumulative records of violations of performance standards on the part of OCS operators and lessees and determined that the number of incidents of non-compliance typically increases with the size and complexity of the operator’s or lessee’s operations, including the ratio of incidents to number of components. Because larger companies (regardless of credit score) tend to have more properties and components and therefore more INCs, BOEM determined that record of compliance criterion does not accurately predict financial default. BOEM’s review of this information confirmed the feedback BOEM received in response to the 2016 NTL, namely that companies with a large number of properties and facilities tended to receive a large number of INCs and had more individual properties on the Increased Oversight List. BOEM specifically requests comments regarding the use of fines and violations as a criterion in the determination of a company’s ability to fulfill decommissioning obligations, and any data or analysis addressing any correlation between the number of violations and the risk of financial default. BOEM also requests comments on whether the elimination of the INC’s criteria would create a disincentive to comply with regulations. BOEM also requests comment on whether or not the cost of decommissioning is likely to increase based on the type, quantity, and magnitude of previous violations.
On a related note, BOEM/BSEE should consider a followup to the John Shultz thesis which found that INCs are a very good predictor of accidents and spills.
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.
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.
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.
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?”
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.
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.
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.
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?
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.
The Bureau of Ocean Energy Management (BOEM) today announced proposed changes to modernize financial assurance requirements for the offshore oil and gas industry, in order to better protect American taxpayers from incurring the costs associated with the oil and gas industry’s responsibility to decommission offshore wells and infrastructure, once they are no longer in use. The proposed changes will publish in the Federal Register on June 29, which will open a 60-day public comment period that ends on August 28.
It looks like BOEM punted on the contentious issue of considering predecessors when determining financial assurance requirements:
The proposed regulatory changes would provide additional clarity and reinforce that current grant holders and lessees bear the cost of ensuring compliance with lease obligations, rather than relying on prior owners to cover those costs. BOEM is interested in public comments on the costs and benefits of considering predecessors when determining how much financial assurance a company must provide.
As illustrated in the charts below, Cox has the distinction of being the Gulf of Mexico (world?) leader in aging offshore platforms. Per BOEM data, Cox (includes affiliates Energy XXI GOM and EPL) operates more than 1/4 of all GoM platforms. 44% of these platforms were installed prior to 1980, 114 of which are major structures (defined in notes below). 27 of these major structures were installed prior to 1960!
Notes: (1) A major structure contains at least 6 well completions or more than 2 pieces of production equipment. (2) The platform numbers in an earlier post are incomplete in that they include only structures with helidecks.
Along with Cox Operating, six affiliates also filed: MLCJR , M21K, EPL Oil & Gas, Cox Oil Offshore, Energy XXI Gulf Coast, and Energy XXI GOM.
The BOEM platform data base lists only Cox Operating (276 platforms), EPL (10 platforms), and Energy XXI GOM (26 platforms) as current operators of OCS platforms. However, according to the Cox Operating website, the company operates 600 producing wells on 500 structures. Presumably, ~200 of those structures are in State waters.
In 2020, the OPEC price war drove oil prices down, while stay-at-home orders and well shut-ins associated with the COVID-19 global pandemic sharply reduced production.
The debtors’ assets suffered significant damage from five named storms and hurricanes during 2020 and 2021, leading to further reductions in production. Comment: According to BSEE, 7 tropical systems affected GoM operations in 2021, so the number of storms is not in dispute. The extent to which maintenance or preparedness issues contributed to the damage is unknown.
In 2020, a foreign-flagged vessel struck a platform owned by one of the debtors resulting in major damage and substantial losses of production. Comment: Apparently, this is the incident being cited. According to the BSEE report, the operator (Cox) was not at fault. Per BSEE: (1) The navigational lights and foghorn on the platform were maintained and in operational order, (2) the allision was not due to any platform related error, and (3) the platform’s operator and safety system responded in accordance with the regulations.
At this time, the debtors’ production volume is half what it was in 2019. Comment: Comparing the 2019 and 2022 production data, OCS oil and gas production are down by about 30% and 40% respectively. However, the 50% reduction figure seems reasonable given the likelihood of further reductions in State water production and in 2023.
A Metairie-based oil company that’s one of the largest independent operators still working in the state’s shallow coastal waters has filed for bankruptcy protection, leaving dozens of south Louisiana service and supply companies facing potential bankruptcies of their own.
Bankruptcy court documents show Cox’s estimated liabilities are close to $500 million – more than $200 million of which is owed to small businesses in the Houma-Thibodeaux and Acadiana areas.
Court documents indicate that Cox followed a path that led to financial trouble for other companies in recent years: using debt to acquire large fields of aging wells in shallow Gulf waters.
This blog is primarily concerned with the potential impacts of the bankruptcy on safety performance, the plugging of wells, and the decommissioning of old facilities. Per BOEM’s data base, Cox currently operates 276 Gulf of Mexico platforms, all in shallow shelf waters. The company is reported (Nola.com) to owe $8 million in bond premiums needed to support well plugging operations.
Cox has not been an active driller of late with only 2 well starts since 1/1/2022 (BSEE borehole file).
Cox has been a major generator of INCs (incidents of noncompliance) with 437 INCs YTD. Cox has been responsible for 47% of all GoM INCs in 2023. Cox’s INC to inspection ratio was 2.46 vs. a combined ratio of 0.50 (490/972) for all other GoM operators.
Cox is currently ranked 11th and 18th respectively in GoM gas and oil production with 7.2 billion cu ft and 1.8 million barrels produced YTD.
Bud's Offshore Energy (BOE) 