The Bureau of Ocean Energy Management (BOEM) has proposed changes to federal financial assurance requirements for offshore oil and gas companies to protect taxpayers from the costs of decommissioning offshore oil wells and infrastructure that are no longer in use.
The proposed changes will publish in the Federal Register later this week, kicking off a 60-day public comment period.
According to the Government Accountability Office, as of 2015 the Department of the Interior held less than $3 billion in bonds to cover $38.2 billion in estimated decommissioning costs, with $2.3 billion at highest risk of needing to be covered by taxpayers.
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Corporate bankruptcies in the offshore oil and gas industry have underscored the need for regulatory reform. If BOEM lacks financial assurance during bankruptcy, the government (i.e. taxpayers) may be on the hook for decommissioning costs. Any delays in decommissioning offshore oil and gas wells and infrastructure can also lead to environmental damage and other risks.
“These proposed updates to our financial assurance regulations will help ensure that energy companies that are operating in publicly-owned federal waters are able to fulfill their clean-up and decommissioning responsibilities, without taxpayers having to step in to foot the bill,” said BOEM Director Liz Klein. “The commonsense updates that we are proposing would modernize evaluation and financial criteria so that we are better protecting taxpayers from the decommissioning costs associated with aging oil and gas infrastructure on the Outer Continental Shelf.”
The Biden-Harris Administration’s federal oil and gas reform agenda includes changes to royalty rates, rental rates, onshore bonding requirements, and leasing practices, as outlined in a report developed by the Department of the Interior in response to an executive order in January 2021. The proposed rule would establish two metrics for BOEM to evaluate the risk that a company poses for American taxpayers.
First, BOEM would use credit ratings to predict financial distress and require additional financial assurance for companies without an investment-grade rating. Public feedback is sought on whether to rely on credit ratings and what threshold would best protect taxpayers without burdening industry.
Second, BOEM would consider the current value of proven oil and gas resources on a lease when assessing the financial risk of decommissioning, since a lease with significant reserves may be acquired by another operator who would assume liabilities in case of bankruptcy.
BOEM says the proposed regulatory changes would clarify that current grant holders and lessees are responsible for ensuring compliance with lease obligations, not prior owners, and is seeking public comments on considering predecessors when determining financial assurance requirements.
The proposed rule includes the use industry reported data to estimate decommissioning costs without being overly burdensome. It would also allow current lessees and grant holders to request phased-in payments over three years for new financial assurance amounts.
BOEM and BSEE proposed a rule in 2020 to update financial assurance criteria and other regulations. BSEE finalized some provisions from the proposal in April 2023, while BOEM rescinded its portion of the proposal and issued a new one.
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