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Posts Tagged ‘reverse chronological order’

Revisions to decommissioning financial assurance regulations are well intended, but important issues need to be addressed

Posted in California, decommissioning, energy policy, Gulf of Mexico, Offshore Energy - General, Regulation, tagged , , , , , , on March 26, 2026| 4 Comments »

Alliance Operating bankrutcy (1989)

For 40 years, challenges associated with bankruptcies (or the threat thereof), a divided offshore industry, political pressure, hurricane damage, and unresolved legal issues have hindered initiatives to better protect the public from decommissioning liabilities. Nonetheless, regulators and industry were able to prevent taxpayers from incurring any decommissioning costs. Unfortunately that is no longer the case.

For the first time in history, the govt has funded decommissioning on the OCS (and bragged about it – photo below).

Federally funded decommissioning operation in the Matagorda Area of the Gulf.

BOEM’s proposed revisions to the decommissioning regulations (attached) would facilitate the transfer of aging structures to companies with limited assets, and in some cases, poor or undemonstrated safety records.

The proposal would reduce or eliminate the supplemental financial assurance requirement if a predecessor lessee has a strong credit rating. For that strategy to work, related decommissioning issues must be addressed. and clarifications and boundaries provided to ensure taxpayers are protected from decommissioning liabilities.

Predecessor liability, which is important because it helps prevent companies from assigning leases for the purpose of avoiding decommissioning obligations, was not established in the regulations until much of the OCS infrastructure was already installed. In a final rule that was effective on 8/20/1997, my office (thanks to the perseverance of Gerry Rhodes, John Mirabella, and Dennis Daugherty) codified the joint and several liability principle in 30 CFR 250.110 as follows:

(b) Lessees must plug and abandon all well bores, remove all platforms or other facilities, and clear the ocean of all obstructions to other users. This obligation:
    (1) Accrues to the lessee when the well is drilled, the platform or other facility is installed, or the obstruction is created; and
    (2) Is the joint and several responsibility of all lessees and owners of operating rights under the lease at the time the obligation accrues, and of each future lessee or owner of operating rights, until 
the obligation is satisfied under the requirements of this part.

Prior to the that rule, the official policy of the Dept. of the Interior, as expressed in a 1988 letter from the Director of the Minerals Management Service (see excerpt pasted below), was that lease assignors would NOT be held accountable should their successors fail to fulfill their decommissioning responsibilities.

A major unanswered question regarding decommissioning obligations is thus the extent to which predecessor liability applies to leases assigned prior to the 1997 regulation. According to BOEM data, 771 remaining platforms were installed at least 10 years before the rule change, and 504 were installed at least 20 years prior. For assets transferred prior to the rule change, do the predecessors retain liability? BOEM should explain its position on this issue.

Other predecessor liability questions that need to be answered:

  • Now that the reverse chronological guidance has been scrapped, what will be the process for determining which predecessors will be held responsible?
  • If the govt doesn’t ensure that the new lessees fulfill their performance obligations (e.g. funding escrow accounts, well plugging, insurance, etc.), are predecessors still liable?
  • What if the structures were poorly maintained by the new lessees, complicating decommissioning and increasing the costs
  • Should a predecessor several transfers removed from operating the facilities still be held responsible?

Two examples of what can happen (and has happened):

Example 1: Big AAA Oil assigns a lease to Proud Production, a reputable independent. After years of operations, Proud can no longer profitably produce from the lease. Proud assigns the lease to CCC Oil & Gas, a small and highly efficient operator. After the lease is no longer profitable, even for a company with a low cost structure, CCC assigns the lease to Elmer’s E&P, a sketchy, barely solvent operating company with a poor compliance record. Elmer rather predictably neglects maintenance and declares bankruptcy after a decline in oil prices. Should Big AAA Oil, which had no say in the last 2 transfers in the assignment chain, be financially responsible for decommissioning the facilities?

Example 2: Big AAA Oil assigns a lease to DDD Development Company. Per the terms of the assignment, DDD establishes an Abandonment Escrow Account, as provided for in 30 CFR 556.904. BOEM allows DDD to withdraw funds from the account for purposes not authorized in the regulations. Should Big AAA Oil be liable for decommissioning costs after DDD is no longer solvent? (See “The troubling case of Platforms Hogan and Houchin.”)

For predecessor liability to be fairly and effectively implemented, and survive legal challenges, BOEM should:

  • Before approving lease assignments, verify that the assignors and assignees have contractually specified, to BOEM’s satisfaction, how the decommissioning of assigned assets will be funded.
  • Not approve subsequent lease assignments until the predecessor that is being held financially responsible has approved a funding agreement with the new lessees.

Another important concern is that BOEM’s proposal does not correct two prior changes that further expose the public to decommissioning liabilities:

2026-04517Download

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BOEM’s decommissioning financial assurance rule is arguably a step backward in protecting the public interest

Posted in decommissioning, Gulf of Mexico, Offshore Energy - General, Regulation, tagged , , , , , , , on April 17, 2024| Leave a Comment »

The final decommissioning financial assurance rule has been published and is largely unchanged from the proposed rule that we reviewed last summer.

Major concerns:

  • Despite ample evidence regarding the importance of compliance and safety performance in determining the need for supplemental financial assurance, BOEM has dropped all consideration of these factors. Did BSEE field personnel concur with this decision?
  • 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

final decommissioning rule, p. 40

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.

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BOEM’s proposed financial assurance rule (decommissioning): preliminary observations

Posted in California, decommissioning, energy policy, Gulf of Mexico, Regulation, tagged , , , , on July 10, 2023| Leave a Comment »

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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