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.
John Smith, a decommissioning specialist who retired from BOEM, has published numerous professional papers on the topic. He has kindly shared his comments (below) on the new GAO report.
The Appeal Process is Broken – The GAO should have emphasized this point. Companies routinely appeal orders to decommission platforms to forestall having to spend money on plugging wells and removing platforms, pipelines and other facilities. The appeal process commonly takes 5 or more years to reolove (e.g., DCOR appeal of BSEE order to decommission Platform Habitat).
Well P&A – BSEE has been negligent in requiring operators to plug and abandon wells no longer useful for operations. I’m shocked BSEE has curtailed or stopped issuing Inc’s for the failure of operators to P&A wells. That’s a major failure on the part of BSEE management. That may explain why operator performance criteria was proposed to be eliminated for financial assurance.
Failure to Issue Civil Penalties for Well P&A – From GAO Report “BSEE officials explained that their reluctance to pursue civil penalties stems in part from concerns about whether inducing financial harm against an operator is an effective approach to compel decommissioning. They expressed reservations about taking actions—such as issuing civil penalties—that might strain the financial resources of operators to the point of pushing them into bankruptcy.” This attitude underscores a real problem – an abrogation of regulatory and enforcement responsibility by BSEE.
POCS Well P&A – More than 700 wells have been drilled from the 23 California OCS platforms. The GAO report notes that approximately 200 are in the process of being plugged and abandoned – about 50% of those are probably associated with Gail, Grace, Harvest, Hermosa, Hidalgo, where P&A work has largely been completed by Chevron and Freeport McMoRan. The vast majority of the remaining 500 wells are no longer useful for operations and have been idle for several decades. Note POCS was never part of the Idle Well and Idle Iron Program, which was exclusive to the GOM. GAO gave POCS BSEE a pass by not highlighting that problem in POCS. It would have been interesting to know how many of the remaining 500 POCS wells are considered no longer useful for operations, and how many of those have been temporarily plugged and abandoned pursuant to regulations. The GAO report broke that down for the GOM.
Footnote 46 of GAO Report – “Two of the eight platforms due for decommissioning in the Pacific—platforms Hogan and Houchin—have posed serious safety, environmental, and financial risks, including poor safety compliance records, severe corrosion, and ongoing disputes about who will assume decommissioning liabilities for the platforms and their associated wells, according to BSEE officials and documentation. According to BSEE, these platforms are currently being attended, monitored, and maintained as part of an agreement between BSEE, BOEM, Interior’s Office of the Solicitor, and the three predecessor operators pending a decision from the Interior Board of Land Appeals on the predecessors’ appeal. BSEE estimates that approximately $5 million of the estimated costs to decommission 21 orphaned sidetrack wells associated with these platforms are uncovered by financial assurances.” $5 million divide 21 = $238,000 per well – extremely conservative cost estimate given age of wells, likely collapsed casing, and downwhole equipment that needs to be removed. The cost could easily be 3-4 times higher and there is no bonding so the federal government and taxpayers are on the hook for those costs.
Platform Hogan and Houchin Wells – approximately 75 wells were drilled from the platforms. It would be interesting to know the status of those wells. How many have been properly temporarily plugged and abandoned with long-term barriers installed to prevent leaks before decommissioning pursuant to OCS regulations? Are the 21 orphaned wells mentioned above the Signal wells? What about the other 54 wells? Have the predecessor lessees agreed they are responsible for plugging and abandoning those wells?
Platform Habitat – GAO could have noted this is another example of the broken appeal process. It would be interesting to know whether the 21 wells (primarily if not all gas wells) on Habitat have been temporarily abandoned. There are likely to be significant fugitive emission levels at the platform. Hopefully the APCD is on top of that. Note – the platform is unmanned and as I previously mentioned a potential catastrophe was avoided several years ago when a fire broke out on the platform.
Offshore facility decommissioning is a frequent target of Federal auditors given the complex financial and regulatory challenges. Unfortunately, the reviews have done little to better protect the public interest. As have previous inquiries, the new GAO report (attached for your convenience) calls for improved regulations and enforcement practices. That, of course, has been the objective for decades, but the problems have only worsened.
While the GAO recommendations are unsurprising, the body of the report is informative. Most notably, GAO (p. 29) raises a significant inconsistency on a key provision in the proposed decommissioning financial assurance regulations published last year:
One of the five criteria BOEM would no longer use under the proposed rule is demonstrated reliability, as shown by record of compliance with laws, regulations, and lease terms, among other factors. BOEM’s June 2023 regulatory analysis concluded this criterion is not a good predictive indicator of default on decommissioning obligations. However, BOEM and BSEE officials we spoke with told us that poor compliance records—such as safety and maintenance issues or delayed decommissioning obligations—can be an indicator of potential decommissioning noncompliance or financial stress.
Why was there such a disconnect between the opinions of BOEM and BSEE officials (who are directly involved with decommissioning) and BOEM’s decision not to include a company’s compliance record among the factors to be considered in determining the need for supplemental financial assurance? As pointed out here and here, safety performance is arguably the most important predictor of financial failure and decommissioning noncompliance.
The GAO report correctly acknowledges the difficulties in disqualifying operating companies. However, the regulations at 30 CFR § 250.135 specifically provide for disqualification for poor performance. While the regulations could be tighter, enforcing disqualifications regulations is dependent on persistence and strong support from management and DOI attorneys. Given the political risks associated with disqualifying operators, that support is often lacking.
Disqualification difficulties make it imperative that BOEM carefully consider past performance before approving lease assignments or determining financial assurance amounts. Provisions in 30 CFR §585.408 and §585.107 could have been used to disapprove assignments to Signal Hill, Fieldwood, Cox, and other problem operators. The failure to do so has significantly delayed decommissioning and increased public exposure to financial risks.
In some cases, lease assignments to unqualified companies have not only been approved but they have been facilitated by BOEM/MMS. The case of Platforms Hogan and Houchin, in the Santa Barbara Channel, is a particularly good example. (Did GAO inquire about the Inspector General report on this matter or ask why that report has still not been released?)
Most operating companies are responsible about planning for and fulfilling their decommissioning obligations. The problem is the exceptions, and they are not difficult to identify if you look at compliance data and obtain input from BSEE inspection personnel.
Other important decommissioning questions that need to be considered:
Given that decommissioning responsibility is divided between BSEE and BOEM, is regulatory fragmentation limiting their efficiency and effectiveness? Is coordination between BSEE and BOEM delaying action on fitness to operate and disqualification matters?
Updated BSEE incident data tables. The last data are for 2021. The public should have timely access to information about safety and pollution events on Federal lands and the performance records of companies conducting these operations. During the MMS era, these tables were updated quarterly and the Directors (all administrations) did not tolerate delay.
The final NTSB report on the 12/29/2022 GoM helicopter crashthat killed 4. The preliminary report was timely, but the final report has yet to be published. Is the NTSB considering the muddled regulatory regime for helidecks. (Regulatory fragmentation is a safety risk factor).
Corrected IRF performance data. This is arguably the IRF’s most important work stream and the data should be accurate. Some commentary about safety performance would also be helpful. What do the incident trends tell us? How does safety performance compare internationally?
Data on safety incidents associated with the OCS wind program during the site assessment, construction, and operational phases.
Information on the mysterious sinking of the Aban Pearl semi-submersiblein May 2010. We know an investigation was conducted. 14 years have now elapsed and the report has still not been shared.
Alternative 1 (the preferred alternative) calls for “the complete removal of platforms, topside, conductors, the platform jackets to at least 4.6 m (15 ft) below the mud line, and the complete removal of pipelines, power cables, and other subsea infrastructure (i.e., wells, obstructions, and facilities).”
Ironically, the ROD correctly acknowledges that alternative 2 (partial removal) is environmentally preferable. So what drove the decision to select the alternative that destroys “the most productive marine habitats per unit area in the world?” Was there pressure to choose the alternative that is most punitive to an industry that is despised by California activists? If so, their schadenfreude is certain to be delayed by administrative and legal challenges that draw further attention to the social costs and environmental damage associated with “complete removal.”
Below is a report summary that was referenced in the Office of the Inspector General, Dept. of the Interior, Semiannual Report to Congress (9/30/2023). The summary does not identify the company that committed the violations.
Failing to identify the responsible company is not in the best interest of the OCS program or the many operators and contractors that are committed to safe operations and compliance with the regulations.
Presumably, BSEE has issued civil penalties, so we may be able to piece this case together when those penalties have finally been paid.
Summary: Offshore Servicing Company Failed to Conduct Mandated Safety Tests and Submitted False Information to BSEE Report Date: August 29, 2023 Report Number: 20-0425
The OIG investigated allegations that an offshore oil and gas servicing company bypassed safety valves and falsified mandated safety tests associated with an oil and gas production platform located in the Gulf of Mexico. The safety tests are required by Federal regulations enforced by the Bureau of Safety and Environmental Enforcement (BSEE) to ensure that equipment aboard the platform functions properly and prevents the discharge of hydrocarbons into Federal waters.
We found that the servicing company did not perform the mandated safety tests but submitted documentation to BSEE that falsely represented that the safety tests had been conducted. We also determined that multiple safety valves aboard the offshore platform were bypassed and remained in that condition for at least 59 days but potentially as long as 223 days. We presented our findings to the U.S. Department of Justice, which declined prosecution.
This is a summary of an investigative report we issued to the Director of BSEE for action as deemed appropriate.
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.
As we approach the end of 2022, I’m still waiting for:
Nord Stream Pipelines sabotage report(s): Will Denmark, Germany, and Sweden publish reports? Will the responsible parties be identified? I surely hope this wasn’t a US/UK operation.
Huntington Beach Pipeline Spill investigation report: >14 months since the spill and still no report. What vessel(s) struck the pipeline? The pipeline operator seems to have had minimal responsibility but has been vilified. How will the vessel owner(s) be penalized?
Offshore Incident Statistics (BSEE): Still no data for 2021 or 2022. The previous OCS safety regulator (MMS) updated these tables at the end of each quarter.
BSEE/Coast Guard investigation reports for two 2020 GoM occupational fatalities that have yet to be documented. Also waiting for the reports on a 1/24/2021 fatality, a 5/15/2021 explosion and fatality, and a 3/25/2022 fatality. Lives were lost. When will we find out what happened and why?
Bud's Offshore Energy (BOE) 