On April 15, 2024, the Bureau of Ocean Energy Management ("BOEM") released a prepublication of its highly anticipated final rule revising financial assurance requirements for oil, gas, and sulfur operations on the federal outer continental shelf ("OCS"). The new rule – designed to ensure OCS decommissioning obligations (i.e., permanent plugging of wells, removal of platforms, facilities, and obstructions, and environmental remediation) are not borne by the federal government – requires an OCS lessee and/or grant holder provide supplemental financial assurance beyond base level amounts if BOEM determines such lessee or grantee poses a substantial risk of becoming financially incapable of fulfilling its accrued decommissioning obligations under its respective lease, right-of-way ("ROW"), or right-of-use and easement ("RUE").
The new rule provides for a waiver from providing supplemental financial assurance, applicable to all lessees/grantees on a particular lease, ROW, or RUE, if at least one co-lessee/co-grantee has an investment grade credit rating issued by an NRSRO (at least BBB- on S&P Rating Services and Fitch Ratings, or at least Baa3 on Moody's Investors Service), or an equivalent proxy credit rating as determined by BOEM based on a company's audited financials. It also allows a waiver if the proven value of a lease's oil and gas reserves meets or exceeds three times that of estimated decommissioning costs associated with those reserves. If supplemental financial assurance is required under the new regulations, the Bureau of Safety and Environmental Enforcement's ("BSEE") "P70" probabilistic decommissioning estimate will dictate the amount that must be provided. Lessees and grantees that receive supplemental financial assurance demands within three years from the rule's effective date will be eligible to request phased compliance, and if approved by BOEM, may provide the full P70 amount over three years. BOEM estimates that $6.9 billion in new financial assurance will be required from lessees and grantees under this final rule.
The 2015 U.S. Government Accountability Office Report No. GAO-16-40 criticized the Department of the Interior's ("DOI") ability to protect the federal government from exposure to decommissioning liabilities in the event of default by OCS interest holders. In response, BOEM and BSEE issued a joint rulemaking back in 2020. 85 Fed. Reg. 65904. But that proposal was abandoned after President Biden's 2021 Executive Order No. 13990 required a review of all federal regulations promulgated by the Trump Administration that conflict with the national interests of promoting and protecting public health and the environment. The agencies then proceeded separately and each proposed replacement rules. BSEE finalized its new decommissioning regulations in April of 2023. 88 Fed. Reg. 23569. BOEM's new rule will take effect 60 days after publication in the Federal Register.
Notable changes in BOEM's new rule include:
- Adding a base level financial assurance requirement for RUEs of a $500,000 area-wide bond, guarantee, or other accepted financial assurance. The new rule does not change existing base level financial assurance requirements for ROWs ($300,000 area-wide assurance) and leases ($300,000 area-wide or $50,000 lease-specific bond + $200,000 lease exploration bond if applicable (unless $1 million area-wide bond on file) + $500,000 lease development bond if applicable (unless $3 million area-wide bond on file)). Based on comments received, BOEM will be considering increasing the base level amounts of financial assurance for OCS leases, ROWs, and RUEs in a forthcoming rulemaking.
- Amending the supplemental financial assurance requirements for leases to replace the existing criteria used by BOEM to evaluate if additional assurance beyond base level amounts will be required to two new criteria: (a) investment grade issuer or proxy credit rating; or (b) 3:1 ratio of proved oil and gas reserves value to decommissioning costs to produce those reserves. Previously, BOEM used five criteria for determining if lessees would be required to post additional financial assurance. Now, supplemental financial assurance is only required where no co-lessee has an investment grade issuer or proxy credit rating, or if the ratio of the value of the lease's proved reserves to decommissioning liabilities associated with those reserves is not greater than or equal to 3-to-1.
- Amending the supplemental financial assurance requirements for ROWs and RUEs to also utilize the credit rating criterion (but not the reserve value ratio because grantees do not have interests in reserves like lessees do). BOEM's responses to the public comments make clear that this means if a grantee or co-grantee does not have an investment grade issuer or proxy credit rating, additional financial assurance will be required even for ROW pipelines that are servicing and associated with high value leases, and even if a grantee owns an interest in the reserves that their ROW pipeline services.
- Using BSEE's P70 decommissioning estimate to determine the amount of required supplemental financial assurance. The P70 figure represents a 70% likelihood of covering the full cost of decommissioning of a platform, facility, or well. However, the final rule also establishes a procedure for requesting a reduction from the P70 amount, which must be approved by the BOEM Regional Director. If BSEE's probabilistic decommissioning estimates are not available, BOEM will use BSEE's deterministic decommissioning estimate. All such figures are available through the Decommissioning Cost Estimates Online Query on the BSEE Data Center.
- Allowing third party guarantees to be used as supplemental financial assurance for ROWs and RUEs (in addition to leases) and assessing a potential guarantor's financial health also using the credit rating criterion (but not the reserves value ratio, even if guaranteeing supplemental financial assurance for a lease). Also allowing a guarantor to limit its guarantee to a specific amount of the total financial assurance requirement or to one or more specific lease obligations, if approved by BOEM. The final rule removes the prior requirement that a guarantor ensure compliance with the obligations of all operators, lessees, operating rights owners, and grantees of a lease, ROW, or RUE (but the guaranteed party must still comply with all lease or grant terms and conditions and secure all obligations thereunder).
- Phasing in compliance with the new P70 amount over three years for any lessee or grantee that receives a supplemental financial assurance demand within three years of the new rule becoming effective (i.e., 60 days after publication in the Federal Register), in the event neither of the two new criteria allow for waiver (i.e., investment grade credit rating, or 3:1 lease reserves value to decommissioning costs).However, phased compliance is not automatic and must be requested by the company that received the supplemental financial assurance demand. If the BOEM Regional Director allows payment on a phased basis, 1/3 of the total will be due by the demand's deadline (or within 60 days of the receipt of the demand if no deadline is listed); the second 1/3 due within 24 months of the receipt of the demand; and the final 1/3 due within 36 months of the receipt of the demand. Failure to timely pay will result in phased compliance ineligibility and the remaining balance of the demand will become due 10 calendar days after receiving such notice from BOEM. Any party receiving a supplemental financial assurance demand more than three years after the new rule's effective date will be required to provide the P70 amount in full and by the demand's deadline with no phase in option.
- Allowing BOEM to reject a transfer of a record title or operating rights interest in a lease unless and until all financial assurance obligations are met, including satisfaction of any P70 supplemental financial assurance demands (accounting for phased compliance, if applicable). Also authorizing the assignment of an interest in a RUE for the first time ever under the regulations, but such transfers may similarly be rejected unless and until all base level and supplemental financial assurance requirements are satisfied.
- Requiring any entity appealing a supplemental financial assurance demand to the DOI's Interior Board of Land Appeals provide an appeal bond in the amount of the demand as a condition of obtaining a stay of the order. Absent a stay, BOEM can enforce the supplemental financial assurance demand against the lessee or grantee and implement enforcement actions for non-compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
