OFFSHORE OIL AND GAS INDUSTRY TO FOOT $6.9 BILLION DECOMMISSIONING COSTS UNDER NEW BOEM REGULATION

(WO) — On Monday, April 15th, the Department of the Interior announced a final rule from the Bureau of Ocean Energy Management (BOEM) that requires the oil and gas industry to raise nearly $7 billion for decommissioning offshore platforms.

The final Risk Management and Financial Assurance for OCS Lease and Grant Obligations rule amends existing regulations by substantially increasing the level of financial assurances that operators must provide in advance.

The new rule establishes two metrics by which BOEM will assess the risk that a company poses for American taxpayers:

• Financial health of a company. The rule streamlines the number of factors BOEM uses to determine the financial strength of a company by using a credit rating from a Nationally Recognized Statistical Rating Organization, or a proxy credit rating equivalent.
• Reserve value. BOEM will consider the current value of the remaining proved oil and gas reserves on the lease compared to the estimated cost of meeting decommissioning obligations. If the lease has significant reserves still available, then in the event of a bankruptcy, the lease will likely be acquired by another operator who will assume the plugging and abandonment liabilities.

Companies without an investment-grade credit rating or sufficient proved reserves will need to provide supplemental financial assurance to comply with the new rule.

Additionally, the rule clarifies that current grant holders and lessees must hold financial assurance to ensure compliance with lease obligations and cannot rely on the financial strength of prior owners. BOEM continues to maintain its ability to pursue prior lessees to meet decommissioning obligations.

Under the new rule, BOEM estimates the oil and gas industry will be required to provide $6.9 billion in new financial assurances. To provide the industry with flexibility to meet the new financial assurance requirements, BOEM will allow current lessees and grant holders to request phased-in payments over three years to meet the new supplemental financial assurance demands required by the rule.

“The offshore oil and gas industry has evolved significantly over the last 20 years, and our financial assurance regulations need to keep pace,” said BOEM Director Elizabeth Klein.