U.S. looks to close liability loopholes for bankrupt offshore oil producers

By David Wethe and Jennifer A. Dlouhy on 9/18/2020

(Bloomberg) --The U.S. is looking to tighten requirements on bonds issued by a growing number of bankrupt oil producers to deal with abandoned offshore wells that could eventually become environmental disasters.

The Interior Department is proposing rules to strengthen the issuance criteria after companies have filed for Chapter 11 and escaped financial obligations to cap their non-producing wells, said Walter Cruickshank, acting director of the department’s Bureau of Ocean Energy Management. The measure, being proposed jointly with the Bureau of Safety and Environmental Enforcement, will be subject to a 60-day public comment period.

“Our current rules that were written back in the 1990s have fairly broad criteria and really left it up to our regional directors to interpret and apply them as they wanted, without necessarily getting public input on how we do so,” Cruickshank said in a phone interview. “We’ve come up with a design here that is much simpler than what is on the books now.”

Explorers are projected to spend about $1 billion a year for the next half decade to decommission hundreds of aging oil wells in the Gulf of Mexico that have petered out, according to the industry consultant Wood Mackenzie. The U.S. government is looking to make sure those costs don’t shift to taxpayers as the worst crude crash in history drives more companies to bankruptcy.

Costly Cleanup

The number of producers who filed for bankruptcy this year has climbed 62% from 2019, and that includes several last month who work in the Gulf of Mexico, according to the law firm Haynes and Boone LLP.

But it’s not necessarily the current low-oil price environment that pushed the Interior Department to tighten its bonding requirements. The issue has been on its radar for years, thanks to a so-called notice-to-lessees that dates back to 2008, Cruickshank said.

“What we saw is that there were companies going into bankruptcy that had met the criteria in that NTL to not have to provide any additional financial assurance,” he said. “That isn’t something that should be considered acceptable. That is really what led to the work on this issue.”

If the rule is finalized without changes, Cruickshank said some companies will have to seek additional financial assurance for their decommissioning responsibilities, based on department analysis of their credit ratings, the financial strength of co-owners on the leases, the value of the reserves and other factors.

Since late last year, a variety of oil companies have lobbied on the issue while it was under review at the White House Office of Information and Regulatory Affairs, from heavyweights including BP Plc and Royal Dutch Shell Plc.

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