The U.S. Department of the Interior’s Bureau of Ocean Energy Management (BOEM) has taken steps to shield taxpayers from being forced to pick up the decommissioning tab by bolstering financial assurance and risk management requirements for the offshore oil and gas industry.
Illustration. Source: BOEM
After laying the groundwork last year to keep American taxpayers safe from incurring the costs associated with the oil and gas industry’s responsibility to decommission offshore wells and infrastructure after they reach the end of their service life, BOEM has updated 20-year-old regulations with a final rule to ensure taxpayers will be protected from covering costs that should be borne by the oil and gas industry when offshore platforms require decommissioning. With this action, the U.S. has strengthened financial assurance requirements for the offshore oil and gas industry operating on the U.S. Outer Continental Shelf (OCS).
Deb Haaland, U.S. Secretary of the Interior, commented: “The American taxpayer should not be held responsible when oil and gas companies are unable to clean up after their own operations. The Interior Department is committed to ensuring that the federal oil and gas leasing program is implemented fairly, with accountability and transparency. This final rule updates, simplifies and strengthens outdated requirements to ensure that taxpayers are protected and current operators are held responsible for their end-of-lease cleanup obligations on the Outer Continental Shelf.”
This came after the Government Accountability Office (GAO) found that previous practices did not effectively ensure that industry operators meet decommissioning deadlines for offshore wells and platforms at the end of their useful lives. In the cases where companies failed to meet their decommissioning obligations, those costs would potentially fall to American taxpayers. However, the final ‘Risk Management and Financial Assurance for OCS Lease and Grant Obligations’ rule has now amended existing regulations to respond to those concerns and reduce financial risks associated with OCS development by raising the level of financial assurances that operators need to provide in advance.
Dr. Steve Feldgus, Principal Deputy Assistant Secretary for Land and Minerals Management, highlighted: “For far too long, the federal government has failed to follow through on measures to ensure accountability for oil and gas companies operating offshore. Coupled with our recent announcement from the Bureau of Land Management, the Department is ensuring that we have a modern oil and gas leasing program that protects taxpayers’ interests.”
Furthermore, the new rule establishes two metrics by which BOEM will assess the risk that a company poses for American taxpayers since the existing regulations have not kept pace with industry changes, such as aging OCS infrastructure, the transfer of near end-of-life properties from large companies to smaller companies with fewer financial resources, or the complex financial security arrangements between and within companies.
These two metrics entail examining the financial health of a company by using a credit rating from a nationally recognized statistical rating organization or a proxy credit rating equivalent and considering 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 bankruptcy, the lease will likely be acquired by another operator who will assume the plugging and abandonment liabilities.
Elizabeth Klein, BOEM’s Director, emphasized: “The offshore oil and gas industry has evolved significantly over the last 20 years, and our financial assurance regulations need to keep pace. Today’s action addresses the outdated and insufficient approach to supplemental bonding that does not always accurately capture the risks that industry may pose for the American taxpayer – like financial health of a company or the value of the assets that the lessee holds.”
According to the U.S. Department of the Interior, companies without an investment-grade credit rating or sufficient proven reserves will need to provide supplemental financial assurance to comply with the new rule. This rule also clarifies that current grant holders and lessees need to hold financial assurance to ensure compliance with lease obligations and cannot rely on the financial strength of prior owners.
Tackling multi-billion decom price tag
Earthjustice, an environmental NGO, points out that the government’s data shows the fossil fuel industry missed deadlines for decommissioning over 40% of wells out of 10,600 and 50% of platforms out of 2,300 between 2010 and 2022 in the Gulf of Mexico, which is the source of about 97% of all U.S. offshore oil and gas production. In addition, the government counted more than 1,000 delinquent idle wells in the Gulf, as of June 2023, with over 800 inactive for more than ten years while nearly 600 had not even been temporarily plugged, leaving them more prone to leaks.
The Government Accountability Office estimates that between $40-70 billion is needed to cover the costs of plugging wells, removing platforms, and cleaning up infrastructure. However, the government only holds about $3.5 billion in collective financial assurances from the fossil fuel industry to cover the costs of decommissioning all existing offshore oil and gas drilling projects, meaning taxpayers are on the line to cover that discrepancy.
Thanks to the new rule, BOEM estimates the oil and gas industry will now be required to provide $6.9 billion in new financial assurances to protect American taxpayers from assuming decommissioning costs. Due to this, current lessees and grant holders will be allowed to request phased-in payments over three years to meet the new supplemental financial assurance demands required by the updated rule.
Ava Ibanez Amador, Earthjustice’s attorney, underlined: “This rulemaking is a step in the right direction and will alleviate the financial burden on American taxpayers who foot the bill for cleaning up after the oil industry in our oceans. But more reforms are needed.
“The oil industry continues to get away with paying far too little up front, extracting maximum profit, and leaving the rest of us on the hook. The oil industry has shown itself to be an irresponsible tenant in our public waters and it should be required to pay a much larger security deposit before it can start drilling.”
