US to shield taxpayers from decom costs by strengthening financial assurance for offshore oil & gas

The U.S. Department of the Interior’s Bureau of Ocean Energy Management (BOEM) has set the wheels into motion to put better safeguards in place to protect taxpayers from being forced to pay decommissioning costs by proposing fortified financial assurance requirements for the offshore oil and gas industry.

A 60-day public comment period, ending on 28 August 2023, has been opened for BOEM’s proposed changes to modernise financial assurance requirements for the offshore oil and gas industry, published in the Federal Register on 29 June 2023. This is being undertaken to keep American taxpayers safe from incurring the costs associated with the oil and gas industry’s responsibility to decommission offshore wells and infrastructure, once they are no longer in use. However, it would not apply to renewable energy activities.

Liz Klein, BOEM Director, commented: “These proposed updates to our financial assurance regulations will help ensure that energy companies that are operating in publicly-owned federal waters are able to fulfil their clean-up and decommissioning responsibilities, without taxpayers having to step in to foot the bill. The common sense updates that we are proposing would modernise evaluation and financial criteria so that we are better protecting taxpayers from the decommissioning costs associated with ageing oil and gas infrastructure on the Outer Continental Shelf.”  

Furthermore, BOEM explains that the Government Accountability Office (GAO) claims that the Department of the Interior held less than $3 billion in bonds as of 2015 to cover approximately $38.2 billion in decommissioning costs, with approximately $2.3 billion in costs at the highest risk of needing to be covered by American taxpayers.

According to BOEM, recent corporate bankruptcies in the offshore oil and gas industry have underscored the need for regulatory reform, since, if there is an insufficient financial assurance at the time of bankruptcy, the government may end up having to perform the decommissioning, with the cost being borne by the American taxpayer. The delays in decommissioning can lead to environmental damage and other risks.   

“Together with reforms to royalty rates, rental rates, onshore bonding requirements, and leasing practices, the changes being announced today continue to advance the Biden-Harris administration’s federal oil and gas reform agenda, which was outlined in a report that the Department of the Interior developed in response to Executive Order 14008,” outlined BOEM.

The proposed rule would establish two metrics, which would assess the risk any company poses to the American taxpayer. Based on the first metric, BOEM would use credit ratings from a nationally recognised statistical rating organisation, or a proxy credit rating generated through a statistical model to accurately and consistently predict financial distress.

As BOEM would require companies without an investment-grade credit rating to provide additional financial assurance, it is seeking public feedback on whether it should rely on credit ratings to make these determinations and what credit rating threshold would best protect taxpayer interests without imposing undue burdens on industry. 

The second metric would enable BOEM to consider the current value of the proved oil and gas resources on the lease itself when determining the overall financial risk of decommissioning, given that any lease with significant reserves still available would likely be acquired by another operator that would then assume the liabilities in the event of bankruptcy.  

These proposed regulatory changes are anticipated to provide additional clarity and reinforce that current grant holders and lessees bear the cost of ensuring compliance with lease obligations, rather than relying on prior owners to cover those costs. In line with this, BOEM is also interested in public comments on the costs and benefits of considering predecessors when determining how much financial assurance a company must provide.  

Moreover, BOEM would use decommissioning estimates based on industry-reported data collected by the Bureau of Safety and Environmental Enforcement (BSEE) at a level that would adequately cover estimated decommissioning costs without being overly burdensome. This proposed rule would allow current lessees and grant holders to request phased-in payments over three years for new financial assurance amounts. BOEM is seeking comments on whether the level it is proposing strikes an appropriate balance.

In 2020, BOEM and BSEE published a proposed rule entitled ‘Risk Management, Financial Assurance and Loss Prevention’ to update BOEM’s financial assurance criteria and other BSEE-administered regulations. Upon review of the 2020 joint proposed rule and analysis of public comments, BSEE finalised some provisions from the 2020 proposal in April 2023, however, BOEM rescinded its portion of the 2020 proposed rule and is issuing this new proposed rule in its place.