Interior Department Proposes Rule to Secure Decommissioning of Offshore Oil, Gas Infrastructure
The U.S. Department of the Interior, through its Bureau of Ocean Energy Management (BOEM), published a proposed rule on June 29, 2023, to significantly modify how the agency assesses the offshore oil and gas industry's financial ability to decommission offshore oil and gas infrastructure at the conclusion of oil and gas operations, including the plugging and abandonment of wells and the removal of offshore platforms.1 The publication of the proposed rule opens a public comment process that concludes on Aug. 28, 2023.
The proposed rule would require the posting of additional financial assurance to the government to secure decommissioning obligations if the oil and gas lessee or grant holder does not have an investment grade credit rating using third-party credit rating agencies' methodology. Under the proposed rule, an oil and gas lessee or grant holder would be required to post financial assurance, usually in the form of surety bonds, to cover the estimated costs of decommissioning if the lessee or grant holder has a credit rating below BBB- (S&P Global) or Baa3 (Moody's). The proposed rule would also allow an oil and gas company to avoid posting additional financial security if the value of its oil and gas reserves is at least three times more than the estimated decommissioning costs. BOEM estimates that the proposed rule would require the posting of an additional $9.2 billion. Urging BOEM to take action stems from a 2015 report by the U.S. Government Accountability Office (GAO) that estimated the government held less than $3 billion in financial assurance to cover the estimated $38.2 billion in decommissioning exposure.2
The proposed rule points to the 30 corporate bankruptcies that have occurred in the offshore oil and gas industry since 2009. However, the government has avoided the lion's share of decommissioning liability by relying on the joint and several liability regime for decommissioning liability, which hold all previous lessees and grant holders joint and severally liable with the current lessee and grant holder for decommissioning liability.3 Many offshore oil and gas fields were originally developed by large, multi-national oil and gas companies, and the joint and several liability of these companies has been used to backstop decommissioning liability when the current owner of the properties defaults on the lease and fails to perform the decommissioning. The proposed rule would shift immediate reliance on this joint and several liability regime to the financial assurances posted by current lessees and grant holders, placing a higher burden on smaller businesses to post additional bonding.
In fact, BOEM estimates that 76 percent of the businesses operating on the Outer Continental Shelf will be impacted, leaving only a handful of current offshore oil and gas operators and lessees that would meet the investment grade credit rating requirements.
1 The proposed rule would revise various provisions found at 30 CFR Parts 550, 556 and 590. See Federal Register: Vol. 88, No. 124, June 29, 2023.
3 See 30 CFR 250.1701.