BSEE Considerations in Establishing Decommissioning Liability Estimates for Offshore Facilities
The federal Bureau of Safety and Environmental Enforcement (BSEE) directs decommissioning of facilities located in federal waters of the Outer Continental Shelf (OCS) that are used in performance of oil and gas exploration and production activities, once those facilities are no longer useful for operations. In connection with its administration of the decommissioning program, BSEE evaluates, develops and makes publicly available decommissioning cost estimates, which the federal Bureau of Ocean Energy Management (BOEM) uses to determine appropriate levels of financial assurance that it requires operators of those offshore oil and gas facilities provide and maintain.
While the end product of BSEE’s decision making process in estimating decommissioning costs serves as useful guidance in tracking the probable costs to decommission offshore facilities, questions often arise regarding the initial considerations made by BSEE in arriving at this output. The underlying methodology used by BSEE in arriving at these estimates is non-transparent and thus the public has often only received glimpses into the estimation process.
Background on BSEE’s Decommissioning Liability Estimates
BSEE makes these decommissioning cost estimates available to the public in an interactive database found on the BSEE website, entitled “Decommissioning Cost Estimates Online Query.” Briefly described, entry of a unique offshore lease, right-of-way (ROW) or right-of-use and easement (RUE) identifier number into the online query will return BSEE estimates for decommissioning of identified facilities, including wells, platforms and pipelines associated with the jurisdictional area.
The output currently displayed by BSEE in its decommissioning database is fairly straightforward. For each such identified lease, ROW or RUE, BSEE displays cost estimates as the sum of two different determinations: first, a probabilistic approach is used that results in a distribution of values (i.e., P50, P70 and P90) based on actual decommissioning expenditure data received from OCS operators since mid-2016 and, second, a deterministic approach that returns a deterministic value. A P50 (or P70 or P90) determination means that there is a 50% (or 70% or 90%) probability that the actual cost of decommissioning a particular lease, ROW or RUE will be less than the cost estimated and displayed by BSEE in the database. Greater certainty (as reflected by a P90 rather than a P70 or P50 value) comes at the expense of a greater cost estimate; thus P90 values are typically greater than P70 values, and P70 values are typically greater than P50 values. The second determination made is referred to as a deterministic value. The deterministic value approach is calculated by BSEE based on its evaluation of decommissioning cost data but the model does not include elements of randomness; given a particular input, the same output will be produced every time.
To obtain BSEE’s total decommissioning cost estimate for a particular lease, ROW or RUE, the deterministic and probabilistic (whether P50, P70 or P90) values are determined internally by the agency and summed. These two values are disclosed in the Online Query whenever the unique identifier number is inputted into the interactive database. To clarify, the same deterministic value is summed with the probabilistic value regardless if a P50, P70 or P90 value is considered. If there is insufficient data for BSEE to make a probabilistic or deterministic value determination, then no value is provided and BSEE notes that “no data” is displayed.
BSEE Transition to Reliance on Actual Decommissioning Expenditure Data
BSEE has historically relied upon existing algorithms and methodologies to calculate and establish decommissioning estimates for offshore leases, ROWs and RUEs. Primary sources of data used by BSEE to develop those processes have included BSEE-commissioned studies, industry publications and academic research, operator presentations to bankers and analysts, operator information gathered for cost challenges or bankruptcy processes, and professional experience – some of which are decades old and, as a result, more likely to be inaccurate when viewed under current conditions. Notably absent from this list of sources is a steady supply of recent operator data derived in the course of performing decommissioning activities. BSEE practice has been to consider decommissioning cost data as proprietary and energy companies conducting decommissioning activities generally did not voluntarily share this information with the agency. As a result, there has been limited opportunity for BSEE to substantially revise its decommissioning estimation process. For instance, in mid-2016, BSEE indicated that well and structure/facility decommissioning cost algorithms had not materially changed since 2011. Without a constant supply of real-time decommissioning-driven data, BSEE in the past has been unable to reduce estimate uncertainty in the costs of decommissioning, instead having to rely on rudimentary concepts of “mean,” “median,” or “most likely” based on the limited data at its disposal.
To address this insufficiency, the U.S. Department of the Interior pursued rulemaking, first proposed in 2009 and culminating in a December 2015 publication of a final rule obligating lessees and operating rights owners to submit summaries of actual decommissioning expenditures incurred. Specifically, the final rule requires lessees to submit certified summaries of actual decommissioning expenditures incurred for certain decommissioning activities that are required under Subpart Q (i.e., plugging and abandonment of wells, removal of platforms and other facilities, and site clearance) within 120 days of completion of each such activity. The December 2015 rule failed to include pipeline decommissioning activities, which omission was remedied with publication of a November 2016 final rule. BSEE issued a Notice to Lessees and Operators (NTL No. 2016–N03) in April 2016, superseded by a revised NTL (No. 2017-N02) in March 2017 to allow consideration of pipelines, that provides guidance to subject lessees and ROW and RUE grant holders regarding submission of the required decommissioning cost summaries. The information obtained from offshore operators pursuant to these final rules is intended to help BSEE better estimate future decommissioning costs related to OCS leases, ROWs and RUEs. Armed with actual decommissioning expenditure data arising from recent activities, the agency expects that uncertainty over estimated decommissioning liability will decrease, which translates into more reliable financial assurance levels established by BOEM and imposed on operators as supplemental bonding.
Accordingly, BSEE now asserts in its Decommissioning Cost Estimates Online Query that it relies upon actual decommissioning expenditure data received from OCS operators since mid-2016 in developing its cost estimates. BSEE continues to make use of algorithms in developing these estimates but the algorithms are periodically reviewed and tweaked based on agency receipt and analysis of decommissioning data received from offshore operators.
BSEE Considerations in Determining Estimated Decommissioning Liabilities
As BSEE-estimated decommissioning liabilities are relied upon by BOEM in establishing supplemental financial assurance obligations imposed on a lessee on the OCS, there is keen interest amongst offshore operators in better understanding what factors are used by BSEE in deriving these estimates. In particular, a lessee faced with what it believes is an overly conservative BSEE decommissioning cost estimate that translates into BOEM demands for sizeable supplemental bonding of offshore facilities will want to better understand what assumptions were made by BSEE in determining its estimate.
Key elements of the BSEE cost estimates include:
- Estimates are prepared for individual leases, ROWs and RUEs. BSEE determines decommissioning cost estimates on a lease-by-lease basis or for individual ROWs or RUEs. There is no aggregation of costs reflecting multiple units. Each lease, ROW and RUE located on the OCS has a unique identifier number associated with the lessee or ROW or RUE grant holder in a given block and area, and agency-estimated costs are cross-linked with those numbers.
- Estimates are built from the ground, up. BSEE decommissioning cost estimates for leases (and to the extent applicable, ROWs and RUEs) are built up by summing the appropriate well abandonment, platform/facility removal, site clearance and verification and pipeline segment decommissioning costs of each individual facility. Costs are not apportioned for multiple facilities.
- Estimates are based on “fair value,” not lowest, cost. BSEE’s decommissioning cost estimates are not based on the lowest cost for which an oil and gas company can do the decommissioning work. Rather, the estimate is based on a cost that the U.S. taxpayer would potentially incur under a scenario whether there is no other viable party to conduct decommissioning (e.g., bankruptcy of a sole lessee of a lease where there is no assignor of the lease) and a third-party contractor must be hired. BSEE aims to determine a “fair value” decommissioning cost estimate that reasonably approximates the amount a third party would demand to assume the decommissioning obligation today.
- Estimates will include third-party profit and risk assumption expenses. BSEE’s reliance on third-party contractors to carry out decommissioning activities not satisfied by the applicable lessee requires factoring in a reasonable profit and risk-assumption expenses.
- Estimates do not allow for economies of scale. BSEE decommissioning cost estimates assume that all decommissioning activities are performed on a “one off” basis rather than as part of a multi-asset project. Economies of scale are not recognized by the agency as it is unable to determine when and in what order multi-asset decommissioning projects will occur.
- Estimates do not consider salvage value. Salvage or resale value of structures, pipelines or power cables are not considered for purposes of offsetting decommissioning estimates.
Operator Recourse Over BSEE Decommissioning Liability Estimates
Because BSEE’s perspective in establishing decommissioning cost estimates are different for those of, say, an individual lessee, it is not surprising that the lessee may view those cost estimates as overly conservative, which translates into relatively higher BOEM supplemental bonding requirements. A lessee often expects to conduct decommissioning activities at a lower cost, owing significantly to economies of scale in addressing multiple wells or facilities, together with possible cost savings attributable to limiting third-party profit and risk assumption contingencies. While a lessee instinctively may want to meet with BOEM representatives to discuss reducing the supplemental bonding amount, BOEM almost certainly will point back to the BSEE estimate and thus it is important that the lessee first consult with BSEE in hopes of reducing the estimate.
However, while lessees or other responsible parties may be afforded an opportunity to validate applicable decommissioning cost estimates with BSEE, owing to BSEE’s increased reliance on actual decommissioning cost summaries pursuant to the BSEE 2015-2016 rules, there is expected to be less agency tolerance for granting reductions in estimates. As a result, a party will be confronted with a relatively high hurdle to overcome in attempting to reduce a decommissioning estimate, which BSEE will view as reasonably defensible. Outside of factual errors made by BSEE in identifying covered facilities or estimating the costs, a party seeking to reduce a cost estimate should be prepared to provide substantive evidence if it hopes to successfully reduce the estimate.1 Such evidence may arise from industry publications, verified sources of past decommissioning activities using alternative techniques, or operator experience. The agency is unlikely to accept theoretical or non-verifiable work activities; confirmable evidence of work activities suitable to achieve BSEE objectives are required, with the understanding that the agency now has a growing repository of data supporting its estimate.
Over time, technologies will change or become more efficiently implemented, and BSEE may revise the factors used in developing its decommissioning estimates. But with the agency’s algorithms and methodologies now actively supported by a relatively constant flow of decommissioning cost summaries from fairly recent work activities, the agency viewpoint is that BSEE procedures have now converged into a more refined process for developing decommissioning cost estimates, and reductions to those estimates is the rare exception, rather than the rule.
1 One example of such evidence would be a signed contract (not a proposal or estimate of costs, but a signed contract) with a contractor for facility decommissioning activities that sets a fixed price to conduct the work. Unfortunately, such contracts typically are not entered into at the time of satisfying supplemental bonding requirements for the facilities in question.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.