Bureau of Ocean Energy Management Prioritizes Implementation of New Financial Assurance Requirements

January 11, 2017

On January 6, 2017, the Bureau of Ocean Energy Management (“BOEM”) announced a six-month delay in the implementation of the rigorous financial assurances required by Notice to Lessees and Operators NTL No. 2016-N01 (“NTL 2016-N01”). Although the NTL became effective in September 2016, BOEM has now provided notice that it is extending its implementation as a result, in part, from the objections of many lessees and operators to meeting the significant financial requirements necessary to comply with the NTL and meeting decommissioning liabilities on such short notice. In implementing the extension, BOEM expressly acknowledged that complicated multi-party business relationships exist in the Outer Continental Shelf (“OCS”) where decommissioning liabilities including plugging and abandoning wells are shared between co-lessees and predecessors-in-interest. The extension will give OCS operators valuable time to identify and distribute risk with other parties and develop viable plans to implement the new decommissioning obligations.

Since announcing the NTL, BOEM has faced significant headwinds as operators and producers have complained of difficulty in meeting the particularly intensive capital requirements with limited opportunities to self-insure. Under the NTL, lessees and operators can no longer rely on financially strong co-lessees or co-operators for the full amount of the decommissioning liability on OCS leases, pipeline rights-of-way (“ROWs”), and rights-of-use and easement (“RUEs”). As a result of the capital requirements that may, often are and, in some instances, must be shared by and among numerous interest-holders, BOEM quickly discovered that that the multi-party business relationships that exist between co-lessees and predecessors-in-interest have proven challenging and time-consuming in regard to analyzing decommissioning liability.

The six-month NTL extension is not absolute. Although it applies to leases, ROWs, and RUEs for which there are co-lessees or predecessors-in-interest, it does not apply in circumstances where BOEM determines that there is a substantial risk of nonperformance of the interest-holder’s decommissioning liabilities. Nor does the extension apply to sole-liability properties, which are leases, ROW, or RUEs for which the holder is the only liable party to meet the lease and/or grant obligations. The extension will provide an opportunity for BOEM to focus on sole liability properties and properties where there is a substantial risk of nonperformance in regard to decommissioning liabilities.

During the extension, operators and producers should expect continued engagement from BOEM in developing and implementing a program that enables industry to meet its legal obligations while recognizing the industry’s current economic realities and concerns. Nonetheless, this extension should provide much-needed time for interest-holders in OCS properties to review and analyze the various options for additional security requirements. BOEM continues to encourage interest-holders of non-sole liabilities properties to propose and negotiate tailored plans.

Notably, BOEM has still not addressed the issue of its reliance on decommissioning cost figures from the Bureau of Safety and Environmental Enforcement (“BSEE”), which are often significantly higher than estimates obtained from industry contractors. BSEE’s process in developing these estimates has posed problems for producers and operators to determine the accuracy of the lease decommissioning costs estimates and has led to considerable disagreement between industry and regulators over estimated decommissioning costs.

The January 6 Notice can be found here.

For more information contact one of the lawyers listed below.

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