Government prioritizing implementation of new OCS financial assurance rule

On January 6, 2017, the Bureau of Ocean Energy Management (BOEM) announced a six-month delay in the implementation of the rigorous financial assurances required by Notice to Lessees and Operators NTL No. 2016-N01, Haynes and Boone attorneys Robert Thibault and  Christopher J. Reagen announced in a notice to clients yesterday.

BOEM Issues Delay for New Financial Assurance Requirements for Offshore Operators

Deconstructing a platform in the Gulf of Mexico. Photo: BSEE

BOEM Issues Delay for New Financial Assurance Requirements for Offshore Operators

Haynes and Boone’s Bob Thibault

“Although the NTL became effective in September 2016, BOEM has now provided notice that it is extending its implementation as a result, in part, from the objections of many lessees and operators to meeting the significant financial requirements necessary to comply with the NTL and meeting decommissioning liabilities on such short notice,” the attorneys said.

“In implementing the extension, BOEM expressly acknowledged that complicated multi-party business relationships exist in the Outer Continental Shelf (OCS) where decommissioning liabilities including plugging and abandoning wells are shared between co-lessees and predecessors-in-interest. The extension will give OCS operators valuable time to identify and distribute risk with other parties and develop viable plans to implement the new decommissioning obligations.”

Since announcing the NTL, BOEM has faced significant headwinds as operators and producers have complained of difficulty in meeting the particularly intensive capital requirements with limited opportunities to self-insure, Haynes and Boone summarized in its note.

“Under the NTL, lessees and operators can no longer rely on financially strong co-lessees or co-operators for the full amount of the decommissioning liability on OCS leases, pipeline rights-of-way (ROWs), and rights-of-use and easement (RUEs). As a result of the capital requirements that may, often are and, in some instances, must be shared by and among numerous interest-holders, BOEM quickly discovered that that the multi-party business relationships that exist between co-lessees and predecessors-in-interest have proven challenging and time-consuming in regard to analyzing decommissioning liability,” the attorneys said.

To whom does the BOEM extension apply?

The six-month NTL extension is not absolute, Haynes and Boone said in its note.

BOEM Issues Delay for New Financial Assurance Requirements for Offshore Operators

Haynes and Boone’s Chris Reagen

“Although it applies to leases, ROWs, and RUEs for which there are co-lessees or predecessors-in-interest, it does not apply in circumstances where BOEM determines that there is a substantial risk of nonperformance of the interest-holder’s decommissioning liabilities. Nor does the extension apply to sole-liability properties, which are leases, ROW, or RUEs for which the holder is the only liable party to meet the lease and/or grant obligations. The extension will provide an opportunity for BOEM to focus on sole liability properties and properties where there is a substantial risk of nonperformance in regard to decommissioning liabilities.”

Haynes and Boone commented that during the extension, operators and producers should expect continued engagement from BOEM in developing and implementing a program that enables industry to meet its legal obligations while recognizing the industry’s current economic realities and concerns. BOEM continues to encourage interest-holders of non-sole liabilities properties to propose and negotiate tailored plans.

The attorneys said that BOEM has still not addressed the issue of its reliance on decommissioning cost figures from the Bureau of Safety and Environmental Enforcement (BSEE), which are often significantly higher than estimates obtained from industry contractors. BSEE’s process in developing these estimates has posed problems for producers and operators to determine the accuracy of the lease decommissioning costs estimates and has led to considerable disagreement between industry and regulators over estimated decommissioning costs.


EDITOR’S NOTE:  The BOEM Jan. 6 notification is reproduced below.

BOEM Prioritizes Implementation of Risk Management and Financial Assurance Program

Provides Additional Time and Welcomes Stakeholder Engagement

01-06-2017

Contacts: Connie Gillette
202-208-5387

After months of careful consideration and industry engagement, in July 2016, the Bureau of Ocean Energy Management (BOEM) issued Notice to Lessees (NTL) 2016-N01, with a 60-day grace period before implementation on September 12th, 2016.  In this guidance document the agency detailed improved procedures to determine a lessee’s ability to carry out its lease obligations – primarily the decommissioning of Outer Continental Shelf (OCS) facilities – and to make informed decisions about whether lessees should furnish additional security.

BOEM has continued to engage with industry since the issuance and subsequent implementation of the NTL. BOEM conducted presentations on the NTL at two industry trade group forums in August 2016.   In October 2016, BOEM sent out proposal letters covering all decommissioning liability and allowing offshore companies to analyze and respond to their proposed assessments.  During the fall, BOEM determined the amount of self-insurance for those companies that requested the ability to use self-insurance. BOEM has also been working with companies on an individual basis.

Most recently in December 2016, BOEM issued Orders to Provide Additional Security for sole liability properties. Sole liability properties are leases, rights-of-way, or rights of use and easements for which the holder is the only liable party, i.e., there are no co-lessees, operating rights owners and/or other grant holders, and no prior interest holders liable to meet the lease and/or grant obligations. This most recent action reflects BOEM’s continued assessment that sole liability properties represent the greatest programmatic risk to the American taxpayer.

Additionally, through BOEM’s continued engagement with industry, it has become apparent that navigating the multi-party business relationships that exist between co-lessees and predecessors-in-interest can prove challenging and time-consuming. Further, because the non-sole liability properties may include several co-lessees and prior interest owners, their existing financial arrangement may require assessing the extent to which these existing financial arrangements can be considered in determining whether BOEM needs additional security.

Therefore, in order to provide BOEM and industry the opportunity to focus on providing additional security for sole liability properties, and to allow an opportunity for additional time and conversation, including with interested stakeholders, regarding issues that arise in the context of non-sole liability properties, BOEM will extend the implementation timeline for NTL 2016-01 by an additional six months as to leases, rights-of-way and rights of use and easement for which there are co-lessees and/or predecessors in interest, except in circumstances in which BOEM determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.  Interest holders of non-sole liability properties are encouraged, however, to propose and negotiate tailored plans during this period.

BOEM will continue its interactive process to gather additional input from all interested parties. Our goal is to ensure industry’s continued engagement in developing and implementing a risk management program that enables industry to meet its legal obligations and protects the American taxpayers from shouldering any liability for decommissioning the existing or future facilities on the OCS, while recognizing the industry’s current economic realities and concerns.

More information about the NTL can be found at: http://www.boem.gov/Risk-Management/.


Oil & Gas 360® covered the initial implementation of NTL No. 2016-N01 in a series of articles last fall.


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