Tougher US funding rules aim to prevent costly bailouts

Concern over potential insolvencies was behind the US Bureau of Ocean Energy Management’s decision to tighten financial security regulations for offshore oil and gas operators, BOEM Risk Management Operations Group’s Wanda Lilly told DecomWorld.

Amid low oil prices and a trend of bigger firms selling aging properties to smaller firms, BOEM is increasingly concerned about the ability of operators to carry out their obligations – and is keen to make sure the final bill for decommissioning is not picked up by US taxpayers.

The Gulf of Mexico (GoM) decommissioning market was estimated to be worth $37 billion as of January 2015. Whenever a well is drilled and infrastructure installed, the value of the market expands, and when wells are abandoned and infrastructure decommissioned, the value contracts.

“The current policies for supplemental assurance date back to the early 1990s and in many cases are no longer adequate to cover operators’ liabilities,” said Lilly. “The existing infrastructure is aging and decommissioning costs are rising.”

Away with the waivers

Several of the changes will have a marked effect, particularly on small and medium-sized operators. The agency has not yet set a date for when the new rules will kick in, but said that once they do, operators will have more than a year to comply.

Key changes include the removal of waivers from providing supplementary financial assurance, a lower self-insurance threshold, and scrutiny of every participant in an offshore lease. Until now, BOEM could grant companies an exemption under certain circumstances from having to have supplemental bonds in place to finance decommissioning liabilities. About 50 companies are currently entitled to such an exemption.

“Owners will no longer be granted waivers but may be eligible for self-insurance to meet financial obligations,” explained Glenn Legge, Partner at Legge Farrow Kimmitt McGrath & Brown law firm in Houston.

Operators will be able to apply for self-insurance regardless of the size and the value of their company; but unlike before, when they could self-insure to a maximum of 50% of the net worth of their company, they will now be able to self-insure only up to 10% of their net worth. BOEM will make an assessment of each company and set this level anywhere between 0-10%.

The GoM decommissioning market is worth about $37 billion (Image credit: DecomWorld’s Ofshore Decommissioning Report 2015, Gulf of Mexico)

It is not unusual to have more than one company involved in the lease, particularly at mid-depth projects. In such cases BOEM’s regional director will consider 100% of the decommissioning liability for every lease, rights of way and rights-of-use easements rather than look at the combined financial strength and reliability of joint leaseholders or operating rights holders. It will be up to the joint leaseholders to determine how best to fulfil BOEM’s requirements for decommissioning liabilities, Lilly said. However, the agency may allow alternative forms of financial assurance to provide them with additional flexibility.

Former leaseholders may also come in for more scrutiny under the new regulations, according to Legge.

“Sometimes to sweeten the deal the sellers, typically bigger operators, would offer to throw in bonds or assurance for covering decommissioning costs. The new regulation is written in such a way that even if the contract of sale states that the seller has no more liability BOEM can still look at the previous owner and ask for contributions,” he said.

BOEM is working with the Office of the Solicitor to develop standardized clauses for individualized bond contracts to decommission specific properties.

“These types of bonds would need to be used in conjunction with other financial assurance to ensure that all lease obligations as required by 30 CFR 556.54(a)(2) are covered,” said Lilly.

Phased-in compliance

The new regulations will be issued through a revised Notice to Lessees and Operators (NTL) by early next year, with BOEM to offer a 90-day grace period for operators to present their own tailored financial plans to come up with the supplemental financial assurance.

Once a plan is approved by the regional director, leaseholders will have 120 calendar days from the date of the regional director’s approval to provide at least one-third of the required additional security, said Lilly. They will have an additional 120 days to provide the next third of the security, followed by another 120 to provide the final third.

Although BOEM claims the new rules will not raise the barrier for entry for securing a GoM lease, it is hard to see how the tougher financial requirements will not make it harder for smaller and medium-sized operators to cover all of the financial obligations for decommissioning.

For its part, BOEM said “we are not in the business of putting anybody out of business,” adding that it would consider each case on its own merit.

By Vanya Dragomanovich

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