Key Takeaways
The Biden Administration finalized a new rule increasing the size of bonding or other financial assurances to ensure the decommissioning of offshore rigs.
The Department of Interior argues that the current structure of financial assurance is inadequate, upping it to cover about one-quarter of the cost of decommissioning offshore rigs.
The action will hurt offshore oil production as larger oil companies fund initial exploration and development and sell the properties to smaller, mid-sized firms when oil flows diminish.
Increasing financial assurances will reduce interest for the smaller-sized firms to keep the well in production, driving some to bankruptcy and exacerbating the risk of abandoned offshore wells as the offshore bonding market does not exist at the level of anticipated demand for new insurance.
Fishing groups wonder why the government is demanding the removal of high-quality marine habitat since the rig structures provide artificial reefs that promote marine life.
On April 15, Biden’s Interior Department’s Bureau of Ocean Energy Management (BOEM) finalized a new rule requiring federal offshore oil and natural gas leaseholders to provide an estimated $6.9 billion in additional financial assurances to cover offshore decommissioning costs. The goal of the financial assurances is to limit the number of abandoned wells in the Gulf of Mexico’s Outer Continental Shelf (OCS) and to address concerns related to aging OCS infrastructure, property transfers from large companies to smaller ones, and complex financial security arrangements within the industry. According to BOEM, to facilitate compliance, companies can opt to make the payments in installments distributed over three years. Interior holds about $3.5 billion in bonds from companies to cover a potential cost of $40-70 billion. BOEM estimated in its draft rule that the new supplemental bonding would bring its bonding levels to less than a quarter of what it would cost to decommission all the oil and gas infrastructure currently in U.S. oceans that it estimated at $42.8 billion.
The Government Accountability Office (GAO) found that Interior was not doing enough to protect taxpayers from the costs of plugging wells and decommissioning platforms if a company abandons the lease. In its February 20 report, GAO indicated that over 75 percent of end-of-lease and idle infrastructure in federal waters of the Gulf of Mexico—more than 2,700 oil and gas wells and 500 platforms—are overdue for decommissioning. According to GAO, decommissioning delays can indicate that companies are in financial trouble and may leave the government to pay for plugging the well.
The BOEM’s new rule establishes two metrics—the financial health of the company and reserve values—by which BOEM will assess the risk that a company poses. The rule streamlines the 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.
Under the new rule, BOEM will consider the current value of the remaining proved oil and gas reserves on the lease compared with the estimated cost of meeting decommissioning obligations. If a lease has significant reserves still available, the lease will likely be acquired by another operator who will assume the plugging and abandonment liabilities in the event of a bankruptcy of the previous owner. Companies without an investment-grade credit rating or sufficient proved reserves must provide supplemental financial assurance to comply with the new rule. The rule also 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.
Midsized oil and gas companies will likely be most affected by the changes. Large offshore producers are often the original drillers of wells and builders of platforms offshore, but they sell them to smaller companies when the flow of oil or gas declines. The larger firms see the supplemental bonds as helping shield them from having to pick up decommissioning costs during bankruptcies of smaller firms. Under current regulations, Interior can seek cleanup costs from former owners when current owners dissolve. The increased cost, however, could drive some midsized operators toward bankruptcy and exacerbate the risk of abandoned offshore wells. According to midsized operators, the offshore bonding market does not exist for BOEM’s level of anticipated demand for new insurance.
Some groups including those representing sport fishermen question whether dismantling offshore rigs makes any sense since the structures provide some of the finest aquatic habitat in the ocean, acting as artificial reefs that promote marine life. Directing the habitat for fisheries and marine creatures be destroyed reduces the biodiversity the reefs provide.
Biden Continues to Support Offshore Wind
Earlier this month, the Interior Department announced its approval of the New England Wind offshore wind project – the nation’s eighth approval of a commercial-scale, offshore wind energy project under President Biden’s term in office. The Department of the Interior has now approved more than 10 gigawatts of offshore wind projects towards Biden’s goal of 30 gigawatts by 2030.
Offshore wind technology is not a panacea for Americans as it is very expensive—over 3 times as expensive as onshore wind and over twice as expensive as natural gas generation. Since President Biden took office, residential electricity prices have increased by 27 percent—not as much as gasoline prices, but still a hefty amount for Americans dealing with inflationary increases in most goods and services. Gasoline and electricity prices are not only affected by inflation but also by Biden’s onerous regulations and anti-fossil fuel policies that are forcing retirements of existing coal, natural gas and nuclear generators. Their demise is impacting the reliability of the grid with brownouts and blackouts getting increasingly likely.
An interesting question is why this new rule did not include additional financial assurances for decommissioning offshore wind projects as their expected life is about 25 years. The Energy Policy Act does establish specific financial security requirements for OCS projects and requires the lessee to provide a surety bond or other form of financial assurance that covers offshore wind as well as offshore oil and gas activities. A $100,000 basic lease-specific bond, or another BOEM-approved financial assurance of the same value, is required upon issuance of the lease, and more bonds or BOEM-approved financial assurances are supposedly required throughout the project’s phases. But exactly how much have offshore wind projects provided in financial assurances now that two or three projects have been completed and are operating? Since these wind projects are operating in the Atlantic does the Energy Policy Act apply?
Conclusion
BOEM is forcing a new rule on offshore oil and gas production, requiring companies for an additional $6.9 billion in new financial assurances for well decommissioning. The new rule affects midsized operators the most as large oil and gas companies sell their wells to smaller companies when the flow of oil and gas diminishes. The timing of the rule is being criticized because it is weakening U.S. energy development at a time of global energy insecurity.
The Biden administration is pursuing misguided energy policies during a time of geopolitical unrest in the Middle East. Recently, Biden has raised royalties, rents and fees on oil and gas development on federal lands, proposed the removal of about half the land from the National Petroleum Reserve Alaska from oil and gas development, and cut over 3000 acres from an oil and gas lease sale in New Mexico to be held this June. As the November election is nearing, President Biden wants his constituents to know that he is continuing his anti-oil and gas policies that he promised on the campaign trail in 2020.
