“In the 1950s, Soviet engineers built a massive city in the Caspian Sea off the coast of Azerbaijan. It was a network of oil platforms linked by hundreds of kilometers of roads and housing 5,000 workers, with a cinema, a park and apartment blocks. Gradually disintegrating but still closely guarded, this astonishing place inspired a fiery scene in a James Bond movie.“
Neft Dashlari (Black Rock), as the town is known, is no doubt the most unique oil town in history – the oil patch’s Venice! 😉
“In Neft Dashlari’s heyday, some 2,000 drilling platforms were spread in a 30-kilometer circle, joined by a network of bridge viaducts spanning 300 kilometers. Trucks thundered across the bridges and eight-story apartment blocks were built for the 5,000 workers who sometimes spent weeks on Neft Dashlari. The voyage back to the mainland could take anything between six and twelve hours, depending on the type of ship. The island had its own beverage factory, soccer pitch, library, bakery, laundry, 300-seat cinema, bathhouse, vegetable garden and even a tree-lined park for which the soil was brought from the mainland.“
Decommissioning lesson: “Dismantling Neft Dashlari properly would probably be more expensive than simply keeping it going with a scaled-down oil production.” Sound familiar?
Decommissioning financial assurance issues are complex!
This blog has raised significant concerns about BOEM’s decommissioning financial assurance rule, and will continue to comment on decommissioning policy. That said, decommissioning issues are complex and have challenged industry and government in the US and internationally for decades. Add well plugging practices, corrosion, storm risks, reefing vs. total removal, alternative uses for old platforms, and pipeline and seafloor equipment abandonment to the myriad of financial issues and you get a sense of the breadth and complexity of decommissioning issues.
Decommissioning is unique in that the issues divide sectors of the offshore industry that are typically aligned (majors vs. smaller producers). The environmental community is also divided with the reefing and fishing advocates opposing those who insist on complete removal.
Given these divisions, and decommissioning’s operational, environmental, and political complexities, highly partisan assertions are common. A recent article about the financial assurance rule includes a number of such assertions, and provides a framework for discussing some of the more prominent issues. Excerpts from the article and my comments follow.
“This costly rule became final on April 15, 2024, but in the 10 months since its initial proposal, BOEM did nothing to alleviate concerns for smaller companies that comprise of 76 percent of oil and gas operators in the Gulf.“
Comments:
While I concur that shelf operations and the independent companies that conduct them are important, 94% of OCS oil production and 80% of the gas (2023 data) were from deepwater facilities (>1000′ WD) which are largely the domain of the majors (although the participation of independents in the deepwater sector is increasing).
In 2023, four majors – Shell, bp, Oxy (Anadarko) and Chevron – accounted for 2/3 of the Gulf’s total oil production.
1467 of the remaining 1527 GoM platforms are in <1000 feet of water and are almost exclusively operated by small producers. So 96% of the platforms are producing only 6% of the oil and 20% of the gas.
This dichotomy presents a major challenge for BOEM which must protect the public from decommissioning liabilities without unfairly penalizing small producers.
Having worked for respected political appointees from both parties, my experience has been that the smaller producers (somewhat surprisingly) have more political influence than the majors. For this reason, along with the general lack of attention to financial assurance issues in the early years of the offshore program, the standard bond requirement was ridiculously low for much of the program’s history, and supplemental financial assurance assessments were typically inadequate (and still are which is why the new rule was promulgated).
Attention to decommissioning issues grew exponentially in the early 1990s. Prior to that time, platform removal, like well plugging, was classified as “abandonment,” a term that was considered too harsh when bankruptcy issues and the Brent Spar controversy in the North Sea attracted worldwide attention.
“Records obtained via the Freedom of Information Act show private meetings between Interior officials and representatives of the major oil companies as they cooperated on this rule.“
Comments:
The linked FOIA records are not at all problematic. They pertain to meetings prior to the publication of the draft rule, which are appropriate and desirable.
Some of these meetings were in response to BOEM’s request for input regarding their review of the OCS oil and gas program. Such meetings are particularly helpful when a new administration is trying to assess the direction of the program.
Indeed 42 of the 71 pages in the FOIA were official industry comments in response to the BOEM request.
Per the Regulations.gov docket on the financial assurance rule, BOEM also met with stakeholders after the proposed rule was published. Those meetings are allowed as long as the regulator simply receives input and does not signal decisions regarding the content of the final rule.
The docket shows that BOEM had 8 listening sessions with advocates for independent producers. These included 2 sessions with the Gulf Energy Alliance and 6 sessions with individual independent producers.
BOEM also had 2 listening sessions with Oceana, a prominent environmental organization, and multiple sessions with tribal organizations.
The only sessions with representatives from major producers were a single session with API and a single session with Shell, the Gulf’s largest producer.
These meetings (after the proposed rule was published) are noted in the docket as required.
I am concerned that many listening session documents (from all sides of the decommissioning financial assurance issue) were removed from the docket at the direction of OIRA/OMB, purportedly because they included privileged information. This is rather troubling given the number of deletions and the complete absence of information about those meetings. What types of privileged information were these organizations providing and why is there no information whatsoever on these meetings? At a minimum, a list of attendees and general summary for each meeting should have been posted, as was our practice in the past.
“Big Oil must think it won’t miss the small competitors the rule will drive from the market.“
Comments:
There is important synergy between the major producers and independents, and no reason for driving smaller companies from the market.
The independents are critical to sustaining the shelf infrastructure and the associated service companies, which helps to facilitate deepwater development. Majors also benefit from partnering with independents on lease acquisitions, development projects, and lease assignments.
Financial assurance for decommissioning of transferred assets is the one area of significant conflict, particularly when there have been multiple ownership changes since the facilities were initially transferred.
“Historically, joint and several liability protected these small businesses from the financial demands of surety bonds.”
Comments:
Surety bonds, or other forms of financial assurance, have always been required. As previously noted, the amounts were often inadequate.
Joint and several liability was not established in the regulations until May 22,1997. Whether companies are liable for facilities transferred prior to that date has yet to be considered in court.
1130 of the 1527 remaining GoM platforms were installed prior to May 22,1997. Many of these platforms were no doubt transferred prior to that date, which means the liability of the initial owner is uncertain.
Predecessor liability does not apply to new wells and platforms constructed by the current lessees.
Joint and several liability was never intended to relieve current lessees from their financial assurance responsibility, which is why assignors were required to provide such assurance. BOEM is correct in strengthening their enforcement of this requirement.
“The new rule is largely silent on joint and several liability, causing some uncertainty.”
Comment: The joint and several liability provision remains in place at 30 CFR 250.1701(a) BOEM has added language to part 556.704, to clarify, correctly in my opinion, that they may withhold approval of any transfer or assignment of any lease interest if the financial assurance requirements have not been satisfied.
Companies may not be able to acquire the needed financial assurances because the market likely will not even exist.
Comment: The history of small producer failures is no doubt a concern to financial institutions. BOEM offers multiple financial assurance options, some of which have been questioned on this blog. If a company can’t qualify, it’s not the responsibility of the public to assume their decommissioning risks.
What makes matters worse is that all this cost covers a risk that is effectively a rounding error historically and in the context of the royalties flowing from the offshore oil and gas industry. According to BOEM, taxpayers have borne decommissioning liability totaling $58 million – from a single company that lacked predecessor owners of the platform to call on to cover unfunded cleanup costs.
Those who seek to minimize the Federal government’s risk exposure should consider the findings in the 2024 GAO report. Per that report, “BOEM held about $3.5 billion in supplemental bonds to cover between $40 billion and $70 billion in total estimated decommissioning costs as of June 2023.”
When will we find out who will be paying the hundreds of millions needed to decommission long-idled Platforms Hogan and Houchin in the Santa Barbara Channel?
Decommissioning financial assurance is a responsibility of lessees, not the taxpayer.
Illustration credit: Kellen Riell / The New Bedford LightGlauconite has been identified within the boundaries of lease areas marked with green. Credit: Kellen Riell / The New Bedford Light
Anastasia Lennon has published several informative articles in the New Bedford Light on the challenges posed by the presence of glauconite on North Atlantic wind leases. The above illustrations explain those challenges and identify where glauconite has been found to date. Per her latest article:
Preliminary geotechnical analysis for New England Wind, an Avangrid project, showed a risk of turbine pile foundation refusal in 50 of nearly 130 turbine locations, or about 40%, according to 2023 records obtained through a Freedom of Information Act request.
The mineral’s behavior poses a “significant risk” to offshore wind development, said BOEM, the federal regulator of offshore wind, in a paper last year.
As summarized below and explained in the attachment, the more realistic independent estimates were 2-3 times higher than the operators’ “high end” estimates.
BOEM’s “Rule to Streamline and Modernize Offshore Renewable Energy Development” is intended to “make offshore renewable energy development more efficient, [and] save billions of dollars. Unfortunately, the savings associated with relaxed decommissioning financial assurance requirements translates to increased risk for customers and taxpayers.
BOEM signaled their intentions on offshore wind (OSW) decommissioning three years ago when they granted a precedent setting financial assurance waiver to Vineyard Wind. Despite compelling concerns raised by commenters, the “streamlining” regulations have codified this decision.
Cape May County, New Jersey, was among the commenters objecting to BOEM’s departure from the prudent “pay as you build” financial assurance requirement. The County commented as follows (full comment letter attached):
“[e]nergy-utility projects are in essence traditional public-private partnerships where technical and financial risks are transferred to the private sector in exchange for the opportunity to generate revenues and profit. Under the proposed rule, the Federal government is instead transferring risks associated with decommissioning to the consumer rather than to the private sector.”
Cape May added:
“[w]hile BOEM believes that if a developer becomes insolvent during commercial activity that a solvent entity would assume or purchase control, the County believes this is a risky assumption as the most likely reason for default is that a constructed wind farm developer is unable to meet its contractual obligations set forth under a Power Purchase Agreement (PPA) because its energy production revenues are not in excess of its operating costs. A change of hands would not remove these circumstances or make the project profitable.”
Cape May and others also commented on the threat of premature decommissioning as a result of storm damage. In response, BOEM asserts that these risks have been addressed in the latest standard for North American offshore wind turbines (Offshore Compliance Recommended Practices: 2022 Edition (OCRP-1-2022)). However, design standards, particularly those for offshore facilities, are not static. The recommended practice for OSW is likely to change multiple times in the coming years as storm, operating, and turbine performance data are updated and analyzed. The design standard for Gulf of Mexico platforms has been repeatedly refined and improved and is now in its 22nd edition.
In their response to public comments on the decommissioning risks, BOEM repeatedly asserts that they can adjust the amount and timing of required financial assurance as they monitor a lessee’s financial health. Unfortunately, a company’s finances can change quickly and BOEM’s options will be limited when it does. Increasing the financial burden on a struggling company that is providing power to a regional power grid will not be a simple proposition.
Decommissioning specialist John Smith has summarized the major provisions of BOEM’s decommissioning financial assurance rule for OCS oil and gas operations. He has highlighted his comments in red.
Proved reserves should not be a basis for reducing supplemental assurance. The uncertainty associated with reserve estimates and decommissioning costs can easily negate the assumed buffer in BOEM’s 3 to 1 reserves to decommissioning costs ratio. That approach failed completely at the Carpinteria Field in the Santa Barbara Channel (Platforms Hogan and Houchin). See other points on this issue.
Given that the reverse chronological order process for determining predecessor liability was dropped from consideration last April, there is no defined procedure for issuing decommissioning orders to prior owners. The absence of such a procedure increases the likelihood of confusion, inequity, and challenges, particularly when orders are first issued to companies that owned the leases decades ago, in some cases prior to the establishment of transferor liability in the 1997 MMS “bonding rule.”
BOEM’s concern (below) about investment in US offshore exploration and production is interesting given that their 5 year leasing plan strongly implies otherwise.
BOEM’s goal for its financial assurance program continues to be the protection of the American taxpayers from exposure to financial loss associated with OCS development, while ensuring that the financial assurance program does not detrimentally affect offshore investment or position American offshore exploration and production at a competitive disadvantage
I’m just guessing here, but my sense is that BOEM was pressured to finalize this rule in a timely manner (<10 months is timely for such a complex rule) and was thus reluctant to make any significant changes to the proposal published last summer. A public workshop during the comment period would have been a good idea to facilitate informed discussion on the important issues addressed in this rule. Such workshops were once commonplace for major rules.
Bud's Offshore Energy (BOE) 