Interior Department Announces Rule on Financial Assurance for Offshore Oil and Gas

For a decade, the U.S. Department of the Interior has wrestled with financial assurance (or bonding) requirements for offshore oil and gas companies. Over the last 10 years, the Interior Department has released – and later revised and superseded – guidance on the requirement for offshore lessees to provide the department with financial assurance or bonding to secure end-of-life decommissioning obligations that secures the lessee's liability for plugging and abandoning wells and removing offshore platforms, pipelines and other infrastructure installed in federal waters.

In 2020, the Trump Administration proposed new financial assurance regulations, but the final rule was never published in the Federal Register.¹ In recent months, the Interior Department has faced criticism from government watchdogs to issue the long-awaited new financial assurance rules, especially after several high-profile bankruptcies involving offshore oil and gas companies left billions of dollars of decommissioning liability with former lessees, who remain jointly and severally liable for decommissioning liability.²

On April 15, 2024, the Interior Department's Bureau of Ocean Energy Management (BOEM) announced a final rule with new standards for when supplemental financial assurance or bonds will be required from offshore oil and gas companies operating in federal waters.

The Final Rule

The final rule requires offshore oil and gas lessees to post supplemental financial assurance in the amount of the estimated decommissioning liability – as determined by BOEM's sister agency, the Bureau of Safety and Environmental Enforcement – unless: 1) the current lessee or a current co-lessee carries an investment credit rating of at least BBB- (for S&P and Fitch) or Baa3 (for Moody's), or an equivalent "proxy" rating determined by BOEM using the lessee's or a co-lessee's financial statements or 2) the proven reserves of the relevant lease exceed the estimated decommissioning liability by three or more times.³

The final rule also requires lessees that file an administrative appeal of an order to provide the newly required supplemental financial assurance to post an appeal bond in the amount of the estimated decommissioning liability set forth in the order. If the lessee's appeal is successful, the amount of the appeal bond in excess of any required supplemental financial assurance would be returned to the lessee. If the appeal is unsuccessful, the appeal bond could be replaced with or converted into bonds or other forms of acceptable financial assurance to cover the supplemental financial assurance demand.

Additionally, the new rule clarifies that the Interior Department can disapprove an assignment of a lease when the transferor or transferee is not in compliance with applicable regulations, including the financial assurance requirements.

Comments on the Final Rule

The final rule attracted thousands of public comments, and the rule split the industry into competing positions. The large, international oil and gas companies that have mostly divested their shallow water oil and gas properties (which carry the most significant decommissioning liability, compared to the more recently developed deep water properties) but that nonetheless still carry joint and several liability for decommissioning liability supported the rule. They argued that current lessees should be financially capable of performing all of their regulatory and lease obligations, including decommissioning.

However, the independent oil and gas companies that have been purchasing the shallow water properties from the large, international oil and gas companies over the last 20 to 30 years almost uniformly opposed the final rule. They argued that it is unnecessary in light of the continuing liability of all former lessees of properties, including the large, international oil and gas companies, and that any additional supplemental financial assurance should be limited to properties where no such solvent former lessee exists.

The independent offshore oil and gas companies also argued that the unnecessary financial burden will significantly impact offshore oil and gas production and could further weaken the financial strength of the independent producers. The Interior Department's new rule states that 391 entities will be impacted by the final rule, of which approximately 279 (69 percent) are considered small businesses under the Regulatory Flexibility Act.⁴ According to the Interior Department's estimates, the final rule will result in the issuance of almost $7 billion in additional bonds or financial assurance – a significant increase over the approximately $1.5 billion to $2 billion in existing bonds issued to the federal government and the $3 billion in private bonds issued in the private sales transactions. Several surety industry representatives filed comment letters raising concern that the additional $7 billion in bonding or security capacity does not currently exist.

The final rule is expected to be published in the Federal Register in the coming days and will become effective 60 days from publication.

Notes

¹ See Risk Management, Financial Assurance and Loss Prevention, 85 Fed. Reg. 65904 (Oct. 16, 2020).

² See U.S. Government Accountability Office, Report to Congressional Requesters, Offshore Oil and Gas: Interior Needs to Improve Decommissioning Enforcement and Mitigate Related Risks (January 2024)(GAO-24-106229). See also Offshore Oil and Gas Resources: Actions Needed to Better Protect Against Billions of Dollars in Federal Exposure to Decommissioning Liabilities (December 2015)(GAO 16-40). All current and former lessees of offshore oil and gas properties are jointly and severally liable for decommissioning obligations, including the obligation to immediately perform maintenance and monitoring of wells and offshore facilities. 30 C.F.R. §§ 556.604(d), 556.605(e), 250.1701 and 250.1708. This joint and several liability attaches to decommissioning obligations that accrued during the former lessee's ownership period and continues to exist even if the lease has long been assigned to other parties. Id.; See also 30 C.F.R. § 250.1702. This joint and several liability regime has appeared to be effective in shielding the federal government from assuming decommissioning liability from bankrupt or insolvent lessees. Indeed, in the Fieldwood Energy LLC bankruptcy (Bankr. S.D. Tex. Case No. 20-33948), several billons of dollars of decommissioning liability was abandoned and absorbed by former lessees as a result of the joint and several liability regime without any significant liability being left to the federal government.

³ The new rule applies to lessees and other grant holders of offshore oil and gas properties.

⁴ The Biden Administration's U.S. Small Business Administration Office of Advocacy filed a comment letter opposing the Final Rule because of the disparate impact on small entities.

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