Offshore in depth
The Gulf of Mexico continues to be an important contributor to the U.S. energy supply, and the nation’s economy. Offshore fields in the Gulf produced 550 MMbbl of oil and 1.35 Tcf of natural gas during 2015. The offshore oil and gas industry is credited with providing 650,000 direct, indirect and induced jobs. According to the Congressional Budget Office, the Federal government collects an 18.5% royalty on hydrocarbons produced in the Gulf, about $2.7 billion per year, and has collected $1.8 billion from lease auctions since 2005. More than 600 companies have financial interests in around 3,000 fixed structures and thousands of miles of pipelines in the Gulf.
While the industry’s offshore infrastructure is a national asset, it also poses huge potential liabilities. According to the Bureau of Ocean Energy Management (BOEM), 40% of the Gulf’s platforms are at least 25 years old and are near the end of their economic lives. Hurricanes from 2005 to 2008 prompted the Minerals Management Service (BOEM’s predecessor agency) to create the “idle iron” program, to encourage decommissioning of non-working structures. While approximately 130 platforms per year have been retired under this initiative, the cost of plugging and abandoning wells and decommissioning the remaining Gulf structures is expected to cost between $30 billion and $40 billion.
Additional security required. In studying this situation, BOEM determined that rules in place since 2008 did not require operating companies and their partners to provide enough bonding, and other financial security, to cover decommissioning costs. Consequently, U.S. taxpayers potentially could have to pay for infrastructure removal, if owners went out of business once production ceased. To obtain “additional security” from leaseholders and shield taxpayers from this possible liability, BOEM issued Notice to Lessees (NTL) 2016-N01 in July 2016, with new financial requirements, to begin implementation on Sept. 12, 2016.
The complicated new rules apply to record title owners, operating rights holders, designated operators, pipeline right-of-way holders (ROW) and rights-of-use and easement holders (RUE). For each production lease, the designated operator will be held responsible for gaining the compliance of its partners. BOEM’s overall objective is to make sure that 100% of currently estimated decommissioning costs are covered by self-insurance, cash escrow or bonds issued by U.S. Treasury-certified institutions.
Previous waivers, based on financial strength that enabled companies to self-insure their decommissioning liability up to 50% of their net worth, were cancelled. Under the new rules, self-insurance cannot exceed 10% of a company’s tangible net worth, and self-insurers must have sound credit ratings. BOEM also will evaluate a company’s fundamental health, based on its “financial capacity” determined by: nine benchmark ratios; projected financial strength; business stability over at least five years, reliability based on credit ratings; and their record of compliance with laws and regulations.
Larger companies advantaged. It is likely that only super-majors, majors, and large independents will be eligible for the self-insurance option. BOEM has encouraged lessees to develop tailored financial assurance plans for the agency’s approval, but they must be in place within 360 days, and 100% coverage will be required.
With 600 leaseholders and thousands of assets to consider, the agency embarked on the huge, complex task of quantifying the additional amounts of security required for each property. BOEM intends to work with each company, to assure that financial resources are adequate for decommissioning wells and structures on each lease.
BOEM sent proposal letters to all lessees in October 2016 and subsequently determined the companies that qualified for self-insurance. Given the enormity of its mission, BOEM prioritized its efforts on the assets that posed the highest risk to taxpayers’ sole-liability properties with no other current or past co-owners. In December 2016, the agency issued “Orders to Provide Security” to these sole-liability properties, which were given 60 days to comply.
Time for tailored plans. When NTL 2016-N01 was issued, BOEM announced that it expected order letters to be sent to properties with co-lessees by June 30, 2017, but on Jan. 6, the agency decided to extend the timeline by six months, due to the fact that “navigating the multi-party business relationships that exist between co-lessees and predecessors-of-interest can prove challenging and time-consuming.” The agency has encouraged interest-holders of multiple-owner properties to propose, and negotiate, tailored plans with them in 2017.
In published interviews, BOEM’s GOM Regional Director, Mike Celata, has said that the agency does not expect the new requirements to drive operating companies out of the Gulf of Mexico. However, the increased financial security commitments could have the unintended consequence of forcing some smaller operators into bankruptcy, like the 15 companies that have failed since 2009. Also, there is some question as to whether there is enough capital from Treasury-approved institutions to cover $40 billion in bonds for an industry in recession.
Another possible unintended consequence of NTL 2016-N01 is that it could discourage lower-overhead “aftermarket” lease buyers that typically have purchased older assets to extend their productive lives. This could result in early abandonment of shelf properties, a significant decline in gas output, and a drop in royalties to the Federal government, hurting the taxpayers that BOEM is trying to protect. 
