BOEM Announces Updated Financial Assurance and Risk Management Requirements for Offshore Leases

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Source: Electro – Metal BOEM

Notice To Lessees addresses facility decommissioning liabilities

The Bureau of Ocean Energy Management (BOEM) today notified companies holding oil and gas leases in federal waters that it is updating financial assurance and risk management requirements to ensure that U.S. taxpayers never have to pay for decommissioning and removing a company’s offshore production facilities.

BOEM’s Notice to Lessees and Operators (NTL) details improved procedures to determine a lessee’s ability to carry out its lease obligations -- primarily the decommissioning of Outer Continental Shelf (OCS) facilities -- and whether to require lessees to furnish additional financial assurance.

“BOEM’s goal is to modernize its approach to risk management in a way that better aligns with the realities of the industry and protects the U.S. government and taxpayers from risk in a manner that isn’t overly burdensome to the oil and gas industry,” said BOEM Director Abigail Ross Hopper. “By implementing these changes, we will create comprehensive procedures to decrease risks to taxpayers while providing industry flexibility to negotiate adaptive solutions and use tailored financial plans to meet their financial assurance requirements.”

All OCS leases require that when decommissioning, the company must remove all facilities and restore the site to its pre-lease state. Due in part to the industry’s move into deepwater areas in the Gulf of Mexico, decommissioning costs have risen significantly. Moreover, as existing infrastructure ages, larger companies are transferring older facilities to smaller or less experienced companies. Current estimated routine decommissioning liabilities in the OCS are approximately $40 billion.

The NTL replaces NTL No. 2008-N07 and provides updated procedures for requiring additional financial security for oil and gas or sulphur leases. The revised NTL will provide updated criteria for determining a lessee's ability to self-insure its OCS liabilities based on the lessee's financial capacity and financial strength. It also provides new methods and additional flexibility for lessees to meet their additional financial security requirements through a tailored plan. The guidance and clarification will apply to all BOEM regions and planning areas. In addition to lease holders, the NTL also applies to right of use and easement holders.

“BOEM’s financial assurance regulations need to take into account current industry practices,” Hopper said. “We must ensure the U.S. taxpayer never pays to decommission an OCS facility and that the environment is protected. Managing risk in the early stages of a lease will provide lessees negotiated solutions that improve business certainty and leverage existing company strengths.”

BOEM will work with all lessees, both large and smaller individual lessees, to develop an approach that works best for the government and for each company while focusing on the highest risk properties first. The intent is to examine each company individually, assess its total financial assurance needs and then work with the company to determine the best financial assurance instrument(s) for its individual needs. After today’s publication, BOEM is providing a 60-day grace period before the NTL is implemented. BOEM will focus first on those properties that pose the highest risk to the government, namely, properties for which there is only one leaseholder responsible for decommissioning. Those leaseholders will have 60 days, from the date of an order requiring additional financial security, to comply.

Additionally, for all other holdings, lessees will have 120 days from the date they receive an order to provide additional security, if required. Alternatively, lessees can provide a tailored financial plan to BOEM, which will permit the use of forms of financial security other than surety bonds and pledges of treasury securities and allow companies to phase in funding of the additional security.

BOEM has engaged in a significant amount of outreach since the announcement of the proposed guidance on September 22, 2015, holding a bonding workshop, a financial assurance forum and many meetings with individual companies and industry associations. BOEM extended the initial 45-day comment period by two weeks in response to industry’s request for additional time to provide comments. The updated guidance is within the parameters of BOEM’s existing regulations so it was not necessary to propose a new rule.

More information about the NTL can be found here: http://www.boem.gov/Risk-Management/. The NTL is posted at http://www.boem.gov/Notices-to-Lessees-and-Operators/.

The Bureau of Ocean Energy Management (BOEM) manages development of U.S. Outer Continental Shelf energy and mineral resources in an environmentally and economically responsible way.

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