Bureau of Ocean Energy Management Proposes to Increase its Supplemental Bonding Requirements

09/29/2015

Under longstanding regulations governing its risk management program, Bureau of Ocean Energy Management (“BOEM”) may require an offshore oil and gas lessee or operator operating on the Outer Continental Shelf (“OCS”) to provide additional security, over and above standard security requirements, if BOEM determines that the security is necessary to ensure compliance with OCS lease obligations. On September 22, 2015, BOEM issued proposed “guidance” that would significantly revise its current procedures, primarily in connection with plugging, abandoning and decommissioning OCS wells, platforms and other facilities. While BOEM described its goal as modernizing its financial assurance regulations to match current industry practices, it also expressly stated the intent to ensure that U.S. taxpayers never pay to decommission an OCS facility and that the environment is protected. The proposed guidance significantly expands and tightens the effect of the criteria by which BOEM may determine and require supplemental security for these decommissioning obligations. Without clarifying whether the proposed guidance is formally subject to public notice and comment, BOEM did state that the proposed guidance would be posted on its website “for a 45 day review” and that it plans to hold a workshop on October 9 in Houston to field questions and discuss the proposed guidance with interested participants.

While it remains to be seen what impact the proposed guidance will have on the offshore industry, in which many participants are currently struggling under today’s low oil and gas prices, it could well be significant, especially on smaller and mid-sized operators. Affected companies should review the proposal carefully and evaluate its impact on their possible increased bonding requirements.

The proposed guidance is intended to be issued in the form of an upcoming Notice to Lessees and Operators (“NTL”) that will replace existing NTL No. 2008-N07. The revised NTL will provide “updated” criteria for determining a lessee's financial capacity and strength and its ability to self-insure its OCS liabilities. It is worth noting that the proposed changes to the existing NTL were not issued in the form of a unified document such as a draft revised NTL, but instead in four short documents summarizing the changes. As a result, there is a lack of clarity as to how the existing NTL will specifically be changed.

The new policy addresses BOEM’s goals in two major ways. First, it sets out an expanded list of criteria by which BOEM may determine a lessee’s financial ability to carry out all of its obligations on its leases, rights of way (“ROW”) and rights-of-use easements (“RUE”). In sum, BOEM will do so by determining a lessee's financial capacity based on an extensively longer list of criteria and then ensuring that this capacity is, as stated by its existing regulations (30 C.F.R. § 556.54(e)(3)), “significantly in excess of existing and anticipated” obligations. The Bureau of Safety and Environmental Enforcement (“BSEE”) will continue to perform the determination of decommissioning liabilities.

Second, the policy changes the degree to which a lessee can self-insure any shortfall in its financial capacity. On this front, the policy significantly revises criteria set forth in NTL No. 2008-N07 by which BOEM evaluates whether a particular lessee must provide additional security. These revised criteria are set out in a range based on metrics established by reference to financial ratios of current industry participants in two broad categories of independent and integrated companies. In general, if a lessee fits within the acceptable industry range of the criteria for its category, presumably it can expect to receive a positive credit for each such criterion. Similarly, if a company cannot demonstrate that it meets these criteria by fitting within the parameters for its industry category, it will need to provide security in the form of bonds from financially qualified third parties or otherwise obtain BOEM approval.

Substantively, the changes BOEM proposes to make to its current guidance concerning additional security for decommissioning obligations have their major impact in four overall areas:

1. A self-insurance program, with greatly reduced limits, will be substituted in place of the current practice of granting waivers for supplemental bond. Specifically:

  • Lessees will no longer be granted waivers of otherwise required supplemental bonding, but may apply for self-insurance.
  • The percentage of a lessee’s net worth that may be subject to this self-insurance will be substantially reduced to a maximum of 10 percent of tangible net worth from the current waiver system with an upper limit of 50 percent of net worth.
  • Lessees will be able to apply for self-insurance regardless of their net worth, as compared to the current NTL under which, at Section III.1, a lessee’s net worth must be at least $65 million in order to seek a waiver.

2. A lessee’s decommissioning liability will no longer be spread among various co-lessees, as it is under the current NTL:

  • When assessing a lessee’s decommissioning liability as determined by BSEE, the Regional Director will consider 100 percent of the decommissioning liability for every lease, pipeline ROW and RUE in which the company holds an interest.
  • BOEM will no longer consider the combined financial strength and reliability of co-lessees or operating rights holders when determining a lessee’s decommissioning liability.
  • In cases where there are multiple co-lessees, it will be up to the co-lessees to determine how best to fulfill BOEM’s requirement for 100 percent assurance of OCS decommissioning liabilities.

3. Any additional financial assurance that is required will not need to be satisfied immediately. Instead, the lessee may satisfy the required supplemental bonding over a 360-day phase-in period.

4. BOEM will continue to consider alternative forms of financial assurance, referred to as “Tailored Plans,” to provide additional flexibility for lessees to meet their financial obligations.

If you have any questions, please contact:

Bob Thibault
+1 303.382.6226
bob.thibault@haynesboone.com

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