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Current and Predecessor Lessees and Grant Holders Take Heed: BSEE and BOEM Propose Revisions in Offshore Decommissioning Obligations and Associated Financial Assurance Requirements

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On October 16, 2020, the Bureau of Safety and Environmental Enforcement (“BSEE”) and the Bureau of Ocean Energy Management (“BOEM”), both agencies of the U.S. Department of the Interior, published a joint notice of proposed rulemaking in the Federal Register, focusing on revising their respective regulations applicable to decommissioning obligations and financial assurances — subjects of critical importance to the offshore oil and gas exploration and production industry. Decommissioning of wells, facilities and other offshore facilities and the provision of sufficient amounts of supplemental bonding to demonstrate the ability to perform those tasks are core lease obligations and represent some of the most significant costs for operators pursuing exploration and production activities on the federal waters of the Outer Continental Shelf (“OCS”).

Having paused in mid-2017 the implementation of Notice to Lessees and Operators (“NTL”) No. 2016-N01, issued by BOEM under the Obama administration that significantly ramped-up secondary bonding in the offshore oil and gas sector, BOEM under the Trump administration has had the better part of three years to re-evaluate its financial assurance program applicable to oil and gas operators pursuing activities on the OCS. This proposal is the culmination of the current BOEM’s efforts, which include consideration of a lessee’s, or right-of-use and easement (“RUE”) or pipeline right-of-way (“ROW”) grant holder’s, credit rating (in replacement of historical metrics) for purposes of determining whether supplemental bonding is required of those parties and also clarifying the bonding obligations of RUE grant holders. Additionally, BSEE under the Trump administration takes the opportunity under this proposal to announce its planned revision of certain decommissioning requirements, including providing predecessor lessees and RUE and ROW grant holders with more certainty on the likelihood of being ordered to conduct decommission tasks when a current operator fails to perform decommissioning obligations by introducing a reverse-chronological order approach in selecting predecessors, requiring parties appealing decommissioning orders to first post surety bonds in order to obtain a stay of that order pending the appeal, and providing more clarity on the decommissioning obligations of grant holders.

With the election of Joe Biden as president of the United States in the November 3, 2020 general election, there exists uncertainty on the issuance of a final rule by the BOEM and BSEE agencies under a new administration. These agencies could elect to issue the proposed rulemaking as a final rule or, alternatively, pause issuance of the proposal until they have had an opportunity to review and make changes and then issue the rulemaking as a final rule. A third option would be to scrap the proposed rule in its entirety (or, perhaps, just the BOEM-proposed changes), re-issue NTL No. 2016-N01 (which without any known public notice, is now listed as “rescinded” on BOEM’s website) as an interim measure, and perhaps buy time for Biden’s BOEM to craft a new, more onerous regulation to operators that would support President Biden’s overall goal of limiting production of oil and gas on the OCS.

Public comments to the proposed rulemaking are required to be submitted to BSEE and BOEM on or before December 15, 2020, but the final rule is unlikely to be issued before Joe Biden takes office as president of the United States in January 2021. Accordingly, the time line for eventual issuance of a final rule is uncertain at this time.

Background on BSEE Decommissioning Activities and BOEM Financial Assurance Obligations.

BSEE’s Oversight of Decommissioning Activities on the OCS.

One of the core lease obligations of oil and gas lessees, owners of operating rights and pipeline right-of-way (“ROW”) grant holders conducting operations on the OCS is to decommission offshore facilities (including plugging and abandonment of wells, removal of platforms, decommissioning pipelines, and returning the lease or pipeline ROWs to a condition free of obstructions) when those facilities are no longer useful for continued operation. Decommissioning activities performed by these parties must comply with applicable BSEE regulations codified in Subpart Q of 30 C.F.R. Part 250. Those regulations were first adopted and implemented by a predecessor agency, the Minerals Management Services (“MMS”) and have been amended from time to time over the years as oversight transitioned in 2011 from the MMS to BOEM and BSEE in the aftermath of the Deepwater Horizon incident in 2010.

Moreover, a lessee’s obligation to decommission does not terminate upon assignment of its interests in the facilities to a successor. Under the federal Outer Continental Shelf Lands Act (“OCSLA”), from which BOEM derives much of its authority, lessees are jointly and severally liable for lease obligations, including decommissioning activities that accrued during their period of ownership of the facilities. Accordingly, BSEE may require those predecessors (indeed, historically, BSEE has typically ordered all predecessors, whether directly or indirectly assigning lease rights) to perform decommissioning obligations if a subsequent assignee fails to perform its decommissioning responsibilities.

Regarding right-of-use and easement (“RUE”) grant holders who have failed to perform one or more conditions in their grants, BSEE has historically issued orders to applicable lessees or owners of operating rights that had accrued obligations during their respective periods of ownership of the RUE facilities to perform required decommissioning activities.

BOEM’s Oversight with Respect to Provision of Financial Assurance for Oil and Gas Activities on the OCS.

Pursuant to authority granted under the OCSLA, BOEM is empowered to lease the OCS for mineral development, including development of oil and gas resources. In carrying out the leasing function of those OCS tracts, a primary element of the underlying leases is that a lessee has sufficient financial assurance in place, typically in the form of performance bonds, to cover the costs of performing decommission obligations on the lease. BOEM’s duty in overseeing the establishment of such financial assurances is designed to protect the United States (i.e., the American taxpayer) from incurring financial obligations to the extent practicable.

The BOEM regulations addressing performance bonding and other forms of financial assurance are established under Subpart I of 30 C.F.R. Part 556 and are applicable to oil, gas and sulfur leases issued pursuant to Part 556, as well as associated RUE and pipeline ROW grants issued under Part 550. As was the case for decommissioning obligations, financial assurance requirements were developed and adopted under the MMS, with final rules applicable to lessees and pipeline ROW grant holders initially codified in 1997, providing for lease-specific base bonds or areawide base bonds required of lessees and grantees to guarantee fulfillment of decommissioning obligations, in addition to possible provision of additional or “supplemental” bonds in amounts in excess of the base bonds. The financial assurance requirements as currently imposed on RUE grant holders are not as explicit, providing only that grant holders “must meet bonding requirements,” although no express amounts of bonding are stated.

Moreover, unlike the case for lessees, BOEM is not obligated to utilize any specific assessment criteria in determining whether supplemental bonding is necessary for ROW and RUE grant holders. As a practical matter, first MMS, and then BOEM, has issued NTLs over the years, with the most recent fully implemented NTL on this subject made effective in 2008. The 2008 NTL provided that a lessee or ROW or RUE grant holder that passed established financial thresholds was waived from the requirement to provide supplemental bonding to cover decommissioning obligations. Additionally, co-lessees were not required to provide supplemental bonding for such obligations regardless of their own financial strength, so long as one lessee was waived.

BOEM under the Obama administration determined that the financial assurance program as implemented under the 2008 NTL, including the concept of waiver for lessees and co-lessees, was inadequate based on bankruptcies and reorganizations of energy companies with unbonded decommissioning liabilities that had occurred in the years following issuance of the 2008 NTL, as exemplified by the ATP Oil & Gas bankruptcy in 2012. After a series of stakeholder meetings with industry, BOEM under the Obama administration attempted to remedy perceived deficiencies with introduction of No. NTL 2016-N01 (made effective in September 2016) that, among other things, made lessees and grant holders responsible for 100% of decommissioning obligations through elimination of the waiver process (which allowed upwards of 50% of an eligible company’s net worth to be attributable to offsetting of bonding for decommissioning), introduced the concept of self-insurance in lieu of waivers (but capped at 10% of the tangible net worth of an eligible company), maintained the same five metrics to assess a company’s financial ability (but revised the analysis process for those metrics), and introduced the development and implementation of Tailored Plans to document that decommissioning obligations are adequately covered through supplemental bonding. Our prior, in-depth analysis of NTL No. 2016-N01 is available here.

However, BOEM under the Trump administration subsequently paused implementation of the 2016 NTL in June 2017 so that BOEM could (i) review existing regulations (including financial assurance regulations) and other actions (including the 2016 NTL) that potentially burden the development of domestic energy resources, and (ii) make recommendations to lessen or entirely eliminate aspects of applicable regulations and actions that unduly burden domestic oil and gas production. The October 16, 2020 proposed rulemaking is acknowledged by BOEM as being “another effort” to revise BOEM’s financial assurance procedures. Interestingly, with BOEM’s October 2016 proposed rulemaking published, NTL No. 2016-N01 is now listed as “rescinded” on the BOEM website. No public notice was found discussing BOEM’s decision to rescind this NTL.

BSEE’s Proposed Revisions to Decommissioning Regulations.

In the October 16, 2020 proposed rulemaking, BSEE recommends three major changes or clarifications to its decommissioning regulations, as further discussed below. While the reverse ordering of predecessor lessees and grant orders takes center stage, the other two matters — an obligation to post the full amount of disputed supplemental bonding during the pendency of an appeal, and clarification that RUE grant holders are among the parties that accrue decommissioning obligations — are critical items of which the oil and gas industry should take notice.

Predecessor Liability Would Now be Predicated on Reverse Chronological Order of Assignment . . . Maybe.

As alluded to above, if a lessee fails to perform decommissioning obligations, then BSEE, mindful of its primary duty — to protect the American taxpayer from incurring financial obligations — has relied upon the joint and several liability status of lessees, co-lessees, and predecessor lessees established under OCSLA and has historically ordered all predecessors (assuming no co-lessees exist) that accrued decommissioning obligations during their period of facility ownership to step up and perform those obligations. Here to date, BSEE has not really cared which prior assignor or group of assignors conducted the decommissioning activities — that was for the ordered parties to decide. BSEE only cared that the decommissioning activities were performed and completed.

BSEE has historically not differentiated between predecessor lessees because the agency is focused predominantly on timing; the agency seeks decommissioning of wells and removal of platforms and other obstructions that may represent a threat of harm to the environment, or other permitted users of the OCS, in as expeditious of a manner as possible. Rather than pursue litigation against one predecessor that could take years to resolve, and mindful of the specter of additional, subsequent litigation against another predecessor should the first predecessor prove unable or unwilling to conduct decommissioning, BSEE has simply pursued enforcement against all predecessors and left it up to the predecessors to decide how performance of the order would be accomplished.

In the October 16, 2020 proposed rulemaking, while acknowledging that the joint and several scheme imposed under OCSLA remains unchanged, BSEE is proposing a significant change in policy as it relates to issuing decommissioning orders to predecessors. First, the agency is proposing to establish a consistent definition of “predecessor” under its regulations, which definition is proposed to mean “a prior lessee or owner of operating rights, or a prior holder of a right-of-use and easement grant or a pipeline right-of-way grant, that is liable for accrued obligations on that lease or grant.”

Second, BSEE recommends the creation of a reverse chronological order of recourse among the defined predecessors. In particular, BSEE proposes to issue decommissioning orders to “groups” of predecessors who held interests in the lease or grant within the same general timeframe, but in reverse chronological order.  Under newly proposed rule 250.1708, BSEE would issue such orders to predecessors in groups organized by the following:

  • Changes in designated operator(s) over time (i.e., all predecessors who held relevant lease or grant interests during the tenure of a particular designated operator or during the tenure of contemporaneous designated operators); and
  • Predecessors who assigned interests to a lessee, owner of operating rights, or grant holder that subsequently defaulted.

Predecessors ordered by BSEE to conduct decommissioning activities would then be required to undertake the following work activities:

  • Within 30 days of receiving an order: Begin maintaining and monitoring (through a single entity identified to BSEE) those wells, pipelines and other facilities identified by BSEE in the order;
  • Within 60 days of receiving an order: Designate a single entity to serve as operator for the decommissioning operations;
  • Within 90 days of receiving an order: The entity designated as operator for decommissioning must submit a decommissioning plan for approval by BSEE that includes the scope of work and a reasonable decommissioning schedule for all wells, platforms and other facilities, pipelines, and site clearance, as identified in the order; and
  • As per the approved decommissioning plan: Perform the required decommissioning in the time and manner specified by BSEE in its decommissioning plan approval.

Any failure by the predecessors to maintain and monitor a facility or to submit a decommissioning plan may result in BSEE issuing a Notice of Incident of Noncompliance, pursuing other enforcement actions or assessing civil penalties and disqualifying such parties as an operator.

Why is BSEE proposing to change its enforcement approach towards predecessors? In the regulatory preamble to the October 16, 2020 proposed rule, BSEE states that meetings with stakeholders have indicated, among other things: (i) predecessor uncertainty (which affects planning) on the prospect of being tagged as responsible for interests sold years before; (ii) reduced incentive amongst ordered predecessors to timely comply, as assignors from many years previously resist taking the lead when there are more recent assignors available; and (iii) predecessor perception that more recent assignors may be more knowledgeable as to facility operating conditions and potential safety, environmental decommissioning risks. BSEE states in the regulatory preamble that it does not necessarily agree with all of these assertions made by stakeholders; however, it has elected to introduce a reverse chronological ordering among predecessors, concluding that the change policy may be “a reasonable approach” to ensuring that decommissioning goals are met in a transparent manner, with the caveat that BSEE can deviate from the approach under certain scenarios.

Moreover, and this is a significant detail, BSEE does allow for exceptions to the proposed reverse chronological ordering. Acknowledging that critical circumstances might arise that would otherwise frustrate the purposes of decommissioning, BSEE allows for exceptions to the proposed process in situations where:

  • Previously ordered predecessors fail to obtain necessary BSEE approvals of a decommissioning plan or fail to timely perform decommissioning activities pursuant to an approved plan;
  • BSEE determines emergency conditions, safety concerns or environmental threats exist; or
  • BSEE determines that proceeding in accordance with the proposed new approach would unreasonably delay decommissioning.

In particular, the third scenario, where BSEE determines that the proposed approach would unreasonably delay decommissioning, points to how when things change, they continue to remain the same. Under the proposed rulemaking, BSEE continues to retain final say (although the agency may now need to document its decision making) as to why certain predecessors are ultimately selected to perform decommissioning obligations.

Legal Challenges to BSEE Decommissioning Orders will First Require Posting of Surety Bonds.

A predecessor’s receipt of an order from BSEE to perform decommissioning activities is never welcome news and there are occasions where a predecessor may wish to dispute its responsibility. Existing BSEE regulations allow for parties adversely affected by a final BSEE order or decision to administratively appeal that decision to the Interior Board of Land Appeals (“IBLA”). Under the regulations, a party appealing a civil penalty order issued by BSEE must post a surety bond pending the appeal but the rules do not otherwise stipulate any bonding requirement for appeals, including with respect to decommissioning orders.

However, with concern over a relatively smaller pool of potential predecessors responsible for performing decommissioning activities (owing to implementation of a reverse chronological ordering approach), BSEE has proposed requiring any predecessor who appeals a decommissioning order or decision to first post a surety bond in order to obtain a stay of that order or decision pending the appeal. While this change would impose a new, potentially significant, burden on an appealing predecessor, BSEE’s perspective is that the reduced pool of lessees or grant holders in the designated group of predecessors as well as the potential for delays in decommissioning associated with pursuing the appeal process, could exacerbate the possibility that the ultimately responsible party or parties might be unable to perform decommissioning if the appeal is unsuccessful.

Some may ask whether BSEE has come “full circle” and is waffling on its convictions to change the approach for selecting predecessors to perform decommissioning if one considers its rationale for not pursuing a reverse chronological selection process in years past — i.e., an issue of timing so as to conduct decommissioning in a timely manner. Of course, BSEE is incorporating a “safety valve” in the proposed rulemaking in that it could select all of the predecessors, same as it has done historically, in the event that it determines that emergency conditions, safety concerns or environmental threats exist or that proceeding in accord with the proposed reverse chronological process would unreasonably delay decommissioning. Nonetheless, the proposal under consideration now contains a burdensome obligation imposed on appealing parties to post a surety bond to stay a decommissioning order or decision while it is being appealed before the IBLA.

RUE Grant Holders Would Now be on Notice That They are Jointly and Severally Liable for Decommissioning Activities.

Under existing BSEE decommissioning regulations, RUE grant holders are not expressly included among the parties obligated to conduct decommissioning activities. Rather, lessees, owners of operating rights and ROW grant holders are the only parties expressly listed in the regulations as currently obligated to perform those activities. Accordingly, BSEE seeks to clarify the decommissioning obligations of RUE grant holders.

Accordingly, BSEE proposes to revise its decommissioning regulations to require applicants seeking RUE grants to expressly accept decommissioning obligations as a condition to receiving grant approval. With this clarification, RUE grant holders will be treated in a manner consistent with ROW grant holders. Moreover, it should be noted that any lessees having accrued decommissioning obligations on the RUE grant area would be jointly and severally liable for satisfying those obligations.

BOEM’s Proposed Revisions to Financial Assurance Regulations.

BOEM’s goals for its financial assurance program are two-fold. First, the program must protect the American taxpayer from exposure to financial loss arising from the liabilities of oil and gas exploration and production lessees on the OCS. Second, the program should not detrimentally affect offshore investment or otherwise put offshore oil and gas operators at a competitive disadvantage. With these goals in mind, and upon re-assessing how the financial assurance program is implemented, BOEM proposes two potentially significant changes to the program:

  • Replacing the historical metrics used for assessing the financial strength of an oil and gas entity for purposes of determining whether that entity must post supplemental bonds; and
  • Clarifying certain bonding obligations of RUE and ROW grant holders.

Additionally, BOEM proposes several tweaks to the program, including (i) revising the manner in which the financial strength of third party guarantors are assessed by BOEM; (ii) renaming and relaxing certain of the requirements included in lease-specific abandonment accounts that are used in lieu of supplemental bonding; and (iii) expanding on the scenarios under which BOEM may cancel a supplemental bond.

BOEM’s Evaluation of a Lessee to Provide Supplemental Bonding Would be Based on the Lessee’s Credit Rating Coupled with the Value of its Reserves.

As described in the regulatory preamble to the October 16, 2020 proposed rulemaking, BOEM would streamline the process for determining when supplemental bonding is required of a lessee. Under a revised process, BOEM would only require supplemental bonding when: (i) a lessee poses a substantial risk of becoming financially unable to carry out its obligations under the lease; (ii) there is no co-lessee or predecessor that is liable for those obligations and that has sufficient financial capacity to carry out the obligations; and (iii) the property does not have sufficient value to be sold to another company that would assume those obligations.

An essential element of this revised process would be BOEM’s determination of a lessee’s financial strength to carry out its lease obligations. BOEM proposes to revamp the evaluative criteria used in making that determination. Under the current regulations, BOEM considers five criteria: financial capacity, projected financial strength, business stability, reliability in meeting obligations based on credit rating or trade references, and record of compliance with law. Finding use of certain of the criteria to be difficult or not as useful as first expected, BOEM proposes to replace these five criteria with two metrics:

  • A credit rating, whether from a Nationally Recognized Statistical Rating Organization (NRSRO) or a proxy credit rating determined by BOEM using audited financial statements; and
  • The value of proved oil and gas reserves on the lease.

BOEM contends that the proposed metrics are an improved measure of a party’s current financial strength, with the metrics better aligned with the financial risk evaluation methods used by the banking and finance industry. Critically, BOEM considers a company’s credit rating to be among the more reliable indicators of financial ability because credit ratings provided by NRSRO typically incorporate a broad range of qualitative and quantitative factors not necessarily covered under the existing process. In the event a lessee does not have a credit rating from NRSRO, then it may instead submit audited financial statements and BOEM will determine a “proxy credit rating,” using an S&P Credit Analytics Credit Model or similar credit rating model.

A typical supplemental bonding determination as proposed by BOEM would generally incorporate the following multi-step process:

  1. Determine the credit rating or proxy credit rating of lessee: Lessees would have to meet the following credit thresholds in order to avoid supplemental bonding:
  • From a NRSRO: greater than or equal to BB from S&P Global Ratings;
  • From a NRSRO: greater than or equal to Ba3 from Moody’s Investor Services; or
  • From a proxy credit rating: greater than or equal to either BB or Ba3, as described above, based on audited financial information (including, e.g., income statement, balance sheet and statement of cash flows, with an accompanying auditor’s certificate).
  1. If lessee satisfies the applicable credit rating or proxy credit rating thresholds: No supplemental bonding is required as the lessee meets the applicable rating threshold. End of supplemental bonding review process.
  2. BOEM Alternative Pathway #1: Lessee fails to satisfy the applicable credit rating or proxy credit rating threshold – Consider the co-lessee: Owing to the joint and several liability status of co-lessees for lease obligations under the OCSLA, if a lessee does not satisfy the applicable credit rating or proxy credit rating threshold necessary to avoid supplemental bonding, then BOEM proposes to take the following measures:
  • BOEM would review the lessee’s obligations at the lease level and determine the amount of additional security that could be required for each lease owned by that lessee; and
  • BOEM would assess the credit rating or proxy credit rating threshold of any co-lessees on a lease shared with the lessee, with a co-lessee needing to satisfy the above-referenced credit rating or proxy credit rating thresholds.
  1. If co-lessee satisfies the applicable credit rating or proxy credit rating thresholds: No supplemental bonding is required as the co-lessee meets the applicable rating threshold. End of supplemental bonding review process.
  2. BOEM Alternative Pathway #2: Co-lessee fails to satisfy the applicable credit rating or proxy credit rating threshold – Determine the value of proved reserves: If a co-lessee does not satisfy the applicable credit rating or proxy credit rating threshold necessary to avoid supplemental bonding, then BOEM proposes to take the following measures:
  • BOEM would review the proved oil and gas reserves on the subject lease, with a net present value1 of those proved reserves required to be more than three times the cost of the decommissioning (as estimated by BSEE) associated with the production of the reserves.
  1. If value of lease oil and gas reserves exceed three times the applicable decommissioning costs: No supplemental bonding is required as there is sufficient oil and gas value in the leasehold to avoid supplemental bonding. End of supplemental bonding review process.
  2. BOEM Alternative Pathway #3: Oil and gas reserves on a subject lease do not exceed the applicable net present value threshold – consider predecessor lessee(s): If neither a lessee nor a co-lessee satisfy the applicable credit rating or proxy credit rating thresholds and the requisite oil and gas reserves on the subject lease do not satisfy the applicable net present value threshold, then, as a last measure, BOEM proposes to assess the credit rating or proxy credit rating threshold of any predecessor lessee(s) of a subject lease (assuming there exists an accrued obligation for decommissioning), with a predecessor lessee(s) needing to satisfy the above-referenced credit rating or proxy credit rating thresholds.
  3. If predecessor lessee(s) satisfies the applicable credit rating or proxy credit rating thresholds: No supplemental bonding is required as to accrued lease liabilities because the predecessor lessee(s) meets the applicable rating threshold. End of supplemental bonding review process as it applies to those accrued lease liabilities. However, BOEM could require the lessee to provide supplemental bonding for decommissioning obligations for which the predecessor lessee(s) has no accrued liabilities.
  4. BOEM Alternative Pathway #4: Predecessor lessee fails to satisfy the applicable credit rating or proxy credit rating threshold – Circle back to the lessee. If a predecessor lessee does not satisfy the applicable credit rating or proxy credit rating threshold necessary to avoid supplemental bonding, then BOEM proposes to circle back to the lessee and compel the lessee to provide the requisite supplemental bonding.

Industry participants may conclude that the proposed new process harkens back to the historical practice of issuing “waivers,” as authorized under the former NTL made effective in 2008. BOEM does not equate this historical practice with the proposed process but there are similarities to the two methods. Under the waiver approach, a lessee or grant holder that passed established financial thresholds (in addition to any co-lessee, regardless of its own financial strength) was waived from providing additional security to cover its decommissioning obligations. Under the proposed process, BOEM could avoid the need to require a lessee to provide supplemental bonding if the lessee (or its co-lessee or any predecessors) satisfies one of the applicable credit rating or proxy credit rating thresholds.

RUE Grant Holders are Now Responsible for Decommissioning Liabilities and are Evaluated by BOEM in the same fashion as Lessees.

Under current BOEM financial assurances regulations, while there is a requirement that an applicant for a RUE serving an OCS lease “must meet bonding,” there is no express requirement that a RUE grant holder provide a specified amount of base bonding or that it is even potentially responsible for supplemental bonding.

To clarify this potential gap in the bonding process,2 BOEM is proposing to add new language to the regulations imposing a $500,000 base bonding requirement on the grant holder (regardless of whether the RUE serves an OCS lease or a state lease) as well as obligating the grant holder to provide supplemental bonding, should BOEM determine such additional bonding is necessary, based on decommissioning estimates made by BSEE.

BOEM would utilize the same credit ratings and proxy credit rating process as used for lessees, except that if RUE grant holders do not satisfy the applicable thresholds, BOEM’s only recourse is to consider the credit rating or proxy credit ratings of any predecessor RUE grant holder or any predecessor lessee that held interests in the lease upon which the RUE is now located, but only to the extent such predecessors have accrued liabilities for such RUE-related facilities. Unlike the practice for evaluation of lessees, the value of proved oil and gas reserves would not be considered by BOEM in evaluating the financial strength of RUE grant holders with respect to supplemental bonding, because a RUE grant does not entitle the grant holder to any interest in the oil and gas reserves.

ROW Grant Holder Evaluations are Expanded to include any Co-Grant Holders or Predecessor Grant Holders on the OCS.

Unlike the rules applicable to RUE grant holders, the current BOEM financial assurance regulations do expressly state a base bonding requirement for ROW grant holders in an OCS area. Currently, ROW grant holders are obligated to provide an area-wide base bond of $300,000. Additionally, the current regulations obligate ROW grant holders to provide supplemental bonding in the event that BOEM determines that a bond in excess of $300,000 is necessary.

Accordingly, the only change envisioned under the proposed regulations for ROW grant holders is a revision of the process used to evaluate financial strength of those grant holders. Not surprisingly, BOEM seeks to align the criteria used in determining whether supplemental bonding is required of a ROW grant holder in a manner similar to that used for lessees. Under the revised process, BOEM could demand supplemental bonding of a ROW grant holder if the grant holder failed to satisfy the same credit ranking or proxy credit ranking threshold used for lessees.

Additionally, to further align with the lessee evaluation process, BOEM proposes to allow consideration of the credit rating or proxy credit rating of: (i) any co-grant holders; and (ii) predecessor ROW grant holders, to the extent such grant holders have accrued liability for facilities and pipelines on the ROW.

BOEM Proposes Tweaks to Other Aspects of the Financial Assurance Regulations.

Finally, there are several other proposed changes to the BOEM financial assurance regulations that are relatively less significant than those discussed above. These proposed changes include: (i) a relaxation of third-party guarantor requirements; (ii) no longer allowing pledges of Treasury securities to fund lease-specific abandonment accounts, which abandonment accounts would also undergo a name change; and (iii) provision of additional bases for BOEM’s cancellation of supplemental bonds.

  1. Third-party Guarantors. Under existing BOEM regulations, a qualified third party may provide a guarantee in lieu of financial assurance on behalf of a lessee operating on the OCS. Traditionally, BOEM has evaluated the financial strength of third-party applicants using the same criteria used in evaluating the strength of lessees. Thus, it is not surprising that, under the proposed rulemaking, BOEM seeks to revise its approach for assessing third-party guarantor financial strength in a manner similar to that proposed for lessees. Accordingly, applicants seeking to be third-party guarantors will have to satisfy the applicable credit rating or proxy credit rating thresholds discussed above. However, BOEM will not consider the value of proved oil and gas reserves because, as is the case for RUE and ROW grant holders, proved reserves are solely a measure of the marketability of a lease, in which a third-party guarantor would not have an interest.

Additionally, in a move that would benefit third-party guarantors, BOEM proposes to remove the regulatory requirement that obligates a third-party guarantor to ensure compliance with the obligations of all lessees. Instead, BOEM seeks to allow a third-party guarantor to limit its guarantee to a subset of all lease obligations. Under this approach, a third party guarantor would have the option of only guaranteeing:

  • An amount sufficient to cover a percentage of the decommissioning liability in proportion to the ownership percentage of a particular lessee;
  • A specific dollar amount; or
  • A specific facility.

Also, in a departure from traditional use of third-party guarantees, BOEM would allow a third-party guarantor to be used in lieu of supplemental bonding for RUE and ROW grant holders. Consequently, to sync up with the added flexibility afforded guarantors of lessees, third-party guarantors of RUE and ROW grant holders would be allowed to limit their guarantee to a subset of lease obligations.

BOEM’s rationale in limiting the exposure of third-party guarantors to lease, RUE and ROW liabilities is that the change affords added flexibility in an area where there is sometimes difficulty in getting guarantors to step up and provide guarantees when those guarantors cannot choose the entity for which they are guaranteeing compliance or limit the amount of their guarantee.

  1. Lease-Specific Abandonment Accounts. Under existing BOEM regulations, lessees are allowed to establish lease-specific abandonment accounts instead of providing supplemental bonding. No substantive changes are planned to use of these accounts but there are a couple of tweaks. First, BOEM proposes to rename the accounts as “Decommissioning Accounts” to reflect current terminology used in the industry to decommission offshore facilities. Second, BOEM proposes eliminating the need for lessees to pledge Treasury securities to fund the account before the amount of funds in the account equals the maximum amount insurable by the Federal Deposit Insurance Corporation. Currently, the maximum amount insurable is $250,000.
  2. Cancellation of Additional Bonds. Under existing BOEM regulations, BOEM may cancel a supplemental bond (i) 7 years after the termination of the lease, (ii) 6 years after completion of all bonded obligations, or (iii) at the conclusion of any appeals or litigation related to the bonded obligation. In the October 16, 2020 proposed rulemaking, BOEM proposes to clarify that supplemental bonds obtained with respect to RUE and ROW grants are subject to these cancellation requirements.

Additionally, BOEM proposes to expand the bases for cancellation of a supplemental bond. Newly proposed bases include (i) BOEM’s determination that a lessee or grant holder no longer needs to provide the supplemental bond for its lease, RUE or ROW grant; (ii) when the operations for which the bond was provided ceased prior to accrual of any decommissioning obligation; and (iii) when cancellation of the bond is appropriate because BOEM determines such bond never should have been required under the regulations.

Looking Ahead.

Public comments to the proposed rulemaking are required to be submitted to BSEE and BOEM on or before December 15, 2020. Upon consideration of the comments, BSEE and BOEM ordinarily would be expected to publish a final rule sometime in mid-2021. However, with the election of Joe Biden as president of the United States in the November 3, 2020 general election, there exists uncertainty on the issuance of a final rule by the BOEM and BSEE agencies under a new administration. These agencies could elect to issue the proposed rulemaking as a final rule. Alternatively, BOEM and BSEE could elect to pause issuance of the proposal until they have had an opportunity to review and make changes and then issue the rulemaking as a final rule. Any forthcoming changes could weigh more heavily on the BOEM side of the proposal rather than on the BSEE side, as the BOEM proposal may be at odds with the program of the incoming presidential administration.

A third option could be to scrap the proposed rule in its entirety, re-issue NTL No. 2016-N01 – currently listed by BOEM as “rescinded” on its website – in lieu of the currently proposed changes as a final solution or, more likely, as an interim measure to allow time for Biden’s BOEM to craft a new, more onerous program for oil and gas operators working on the OCS in furtherance of President Biden’s overall goal of limiting oil and gas production. Having pledged to battle climate change and reduce greenhouse gas emissions, the incoming president is on record as planning to place restrictions on the oil and gas industry. As noted by the U.S. Energy Information Administration, in the United States, most of the emissions of human-caused greenhouse gases come primarily from burning fossil fuels for energy use. Accordingly, the incoming president’s platform acknowledges plans to ban new permitting on federal lands, including on the OCS, ending hydraulic fracturing on such lands, and barring new leases for oil and gas activity on such lands.

There will remain significant existing activities which President Biden will also want to restrict. One such way to restrict existing oil and gas activities is to make day-to-day operations more burdensome and costly through more rigid executive orders or regulatory initiatives designed to address public and worker safety or protection of the environment. One such opportunity to craft more burdensome and costly requirements, thereby slowing oil and gas production, would be to focus on more stringent BOEM financial assurance initiatives that, at least initially, could be something as simple as re-issuing NTL No. 2016-N01, which almost certainly (once again) trigger the issuance of decommissioning orders requiring the provision of substantial amounts of supplemental bonds, and putting the oil and gas industry at risk of not being able to continue operating at a sustainable economic level. Accordingly, while no clear consensus emerges on the future of this proposed rulemaking, whether limited to the BOEM-suggested changes, a mixture of BOEM and BSEE-suggested changes, or the rulemaking as a whole, there remains one constant – change in the scope and extent of offshore requirements, including notably in financial assurance requirements, is a-coming.

1 Under the proposed rulemaking, BOEM indicates that it would rely on a reserve report submitted by a lessee to determine the net present value of the proved oil and gas reserves on the lease where decommissioning activities are required. The reserve report would be expected to contain projected future production quantities of proved oil and gas reserves, the production cost for those reserves, and the discounted future cash flows from production. Moreover, the reserve report should provide the net present value of the proved oil and gas reserves determined in accordance with accounting and reporting standards set forth in SEC Regulation S–X at 17 CFR 210.4–10 and SEC Regulation S–K at 17 CFR 229.1200.

2 BOEM only addresses any perceived gap relating to specified amounts of bonding required. As previously described, BSEE provides clarifying language indicating that a RUE grant holder has responsibility for RUE-related decommissioning obligations.

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.