BOEM Withdraws Financial Assurance Orders for Sole Liability OCS Operators/Lessees

March 1, 2017

Agency action delivers some breathing room, not a reversal: Haynes and Boone

In what might be called a surprise reversal—or at least a ‘hold on, let’s think about this’ moment—the Bureau of Ocean Energy Management (BOEM) announced on Feb. 17, 2017, that it will withdraw the sole liability orders that were issued to Outer Continental Shelf (OCS) oil and gas lease and grant holders in December. The agency said its reason was “to allow time for the new administration to review the complex financial assurance program.”

This news comes as a relief just months after the agency issued its controversial Notice to Lessees (NTL) 2016-N01 that detailed strict new requirements that all leaseholders had to prove the financial ability to cover all decom liabilities for platforms, pipelines and other infrastructure that oil and gas operators installed in the waters on the U.S. Outer Continental Shelf.

The BOEM also said that implementation issues associated with those orders will be discussed as part of the ongoing, six-month interactive process BOEM has initiated “to gather input on other components of the Notice to Lessees (NTL) 2016-N01.”

BOEM is not signaling the end of sole liability: it could reissue orders within 6 months

The agency—which is a part of the U.S. Department of Interior—said that it may re-issue sole liability orders before the end of the six-month period if it determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.

“While this administration reaffirms the program’s goal that the taxpayer should never have to shoulder any liability for decommissioning existing or future facilities on the OCS, and places a high priority on ensuring an effective financial assurance program is in place, it also acknowledges that financial assurance is a complex issue and welcomes continued industry engagement on this important issue,” the BOEM’s release said, referencing the Trump administration’s replacement of the Obama administration, under which BOEM’s regional directors had issued the new NTL last year to operators and lessees in the Gulf of Mexico, Pacific, Atlantic and Arctic.

Haynes & Boone issues a client alert to OCS operators

Robert (Bob) P. Thibault, Christopher J. Reagen and Ellen M. Conley authored an alert to Haynes and Boone energy clients on Feb. 28, discussing BOEM’s withdrawal of the December 2016 issued orders, saying the withdrawal was “in order to provide time for the Trump administration to reevaluate the requirements of the complex financial assurance program, which has received significant pushback from the offshore oil and gas industry.”

“The withdrawal comes on the heels of BOEM’s January decision to delay implementation of NTL 2016-N01 for non-sole liability properties by six months, which was intended to enable industry participants to identify and distribute risk in complicated multi-party business relationships and develop feasible plans to implement the new decommissioning obligations,” the Haynes and Boone attorneys said. “Any implementation issues associated with those orders will be discussed as part of the ongoing, six-month review process where BOEM is dialoguing with industry participants to gather input and feedback. BOEM reserves the right to re-issue the withdrawn sole liability orders if it determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities.

“Unless and until such a reissuance occurs, this withdrawal provides significant breathing room for operators and lessees in the immediate future and some hope that this burdensome program will be retailored,” the attorneys said.

Oil & Gas 360® spoke with Haynes and Boone energy attorney Robert Thibault this week about the new BOEM development.

“It certainly is a major development, but I’m not sure the final chapter has been written,” Thibault said.

“They have not completely abandoned it. They have in fact said that they will be able to continue as to troubled companies who are currently a risk. How aggressive they will be I don’t know, but by their own statement, BOEM has not fully stood down. However, that there’s a stand down suggests a significant re-evaluation.

“Companies working on the OCS will be well guided to keep working to make sure they have their financial exposures developed so that if and when this gets back on track they will be able to engage with BOEM about the amounts that they’re supposed to provide financial assurances for.

“This re-evaluation is important, but I think clients in the industry should take this as an opportunity to continue being diligent, not pretend the whole thing’s gone and squander this very valuable period to keep looking and getting it right.”

Background of the BOEM’s new notice to OCS operators

BOEM issued NTL 2016-N01 last July. It’s not a rule change, but it is a new requirement of operators and lessees operating in U.S. waters, which detailed what it says are “improved procedures” to determine a lessee’s ability to carry out its lease obligations – primarily the decommissioning of OCS facilities – and to make informed decisions about whether lessees should furnish additional security.

But in December 2016, BOEM issued Orders to Provide Additional Security for sole liability properties.

Sole liability leaseholders

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.

On January 6, 2017, BOEM announced that it was extending 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. The extension allows an opportunity for additional time and conversation regarding issues that arise in the context of non-sole liability properties.

BOEM said it has “changed how we manage financial assurance. NTL No. 2008-07 has been superseded and replaced with NTL No. 2016-N01 which puts into place new financial assurances for the Bureau. Key changes include:

Lessees will no longer be granted waivers, but may be eligible for self-insurance to meet some or all of their supplemental bond obligations.
Lessees may be eligible for self-insurance regardless of their Net Worth.
Waivers were available for those with a decommissioning liability up to 50% of their net worth, but self-insurance will not exceed 10% of tangible net worth.
BOEM will no longer waive bonds automatically based on the combined financial strength and reliability of co-lessees or operating rights holders, but will permit lessees qualifying for self-insurance to share it with co-lessees and operating rights holders.
The minimum credit rating that a party must have to be allowed to apply its self-insurance to sole liability properties will be A3 (Moody’s) or A- (Standard and Poor’s).
There will be a phase-in period to comply with these revised financial assurance requirements. We are implementing a strategy of dealing with the highest risk properties first (e.g. sole liability properties as defined in the NTL), and we are working with industry to prioritize their properties.
BOEM may consider alternative forms of financial assurance to provide additional flexibility for lessees to meet their additional security requirements. This will allow companies to create a tailored financial assurance plan that best meets their needs while ensuring their OCS liabilities are adequately covered.”

BOEM explains its new requirements

Documentation for Evaluation of a Lessee’s Ability to Carry out Present and Future Obligations

“30 CFR § 556.901(d) establishes that “The Regional Director may determine that additional security (i.e., security above the amounts prescribed in §556.900 (a) and paragraphs (a) and (b) of this section) is necessary to ensure compliance with the obligations under your lease, the regulations in this chapter, and the regulations in 30 CFR chapters II and XII. (1) The Regional Director’s determination will be based on his/her evaluation of your ability to carry out present and future financial obligations demonstrated by:

Financial capacity
Projected strength
Business stability
Reliability
Record of compliance

After analyzing these 5 criteria BOEM says it “will then determine the amount of bond required and self-insurance for which a company may be eligible for. A demand for bond will not be made without consideration of all information available to BOEM for all five criteria,” the agency states in bold, underlined italic typeface on its website.

BOEM looks at third-party guarantees

30 CFR §556.905(a) establishes that “The Regional Director may accept a third-party guarantee instead of an additional bond under §556.901(d) if:

(1) The guarantee meets the criteria in paragraph (c) of this section;

(2) The guarantee includes the terms specified in paragraph (d) of this section;

(3) The guarantor’s total outstanding and proposed guarantees do not exceed 25 percent of its unencumbered net worth in the United States; and

(4) The guarantor submits an indemnity agreement meeting the criteria in paragraph (e) of this section.”

The amount a guarantor will be able to guarantee will be calculated on the following:

3PG% = Continuous Operations + Bond Rating + Current Ratio + Fixed Assets

Total Acceptable Third-Party Guarantee = 3PG%* Lesser of Unencumbered Net Worth in the United States or Modified Net Worth

If BOEM determines that a lessee must provide additional security for its decommissioning liabilities, BOEM will send a demand letter to the lessee. If a third-party submits a guarantee to satisfy the demand, then the third-party guarantee can be limited to the decommissioning liability described in the demand letter.

BOEM’s support

News and Upcoming Events

· Note to Stakeholders: BOEM Withdraws Sole Liability Orders – Further Review of Complex Financial Assurance Issues Warranted (02/17/2017)

· The presentation from the Third-Party Guarantee workshops can be found through this link: www.boem.gov/3PG-Briefing-Slides/

· Documentation for evaluation of Third-Party Guarantees

· Note to Stakeholders: BOEM Prioritizes Implementation of Risk Management and Financial Assurance Program – Provides Additional Time and Welcomes Stakeholder Engagement (01/06/2017)

· Documentation for Evaluation of a Lessee’s Ability to Carry out Present and Future Obligations

The NTL implementation timeline

NTL Issue Date – July 14, 2016

– General Notification Letter, July 14, 2016 – In an effort to increase awareness of the new NTL, BOEM is sending out a general notification letter to all active Record Title Owners, Operating Rights Holders, and Designated Operators, Pipeline Right-of-Way (ROW) Holders, and Rights-of-Use and Easement (RUE) Holders.

– BOEM will begin evaluating all Lessees’ financial ability to carry out their present and future obligations based on the changes instituted by the new NTL.

NTL Effective Date – September 12, 2016

– Self-Insurance Letter, September-November, 2016 – If a Lessee has the ability to self-insure some portion of, or all of, their obligations, a Self-Insurance Letter will be mailed to each company including the determination amount. Lessees are then requested to submit their allocations to BOEM within 30 calendar days.

– Proposal Letter, October 20, 2016 – BOEM will begin sending out letters to all Designated Operators, ROW Holders and RUE Holders outlining the proposed amounts of additional security that will be required. Disputes are requested to be submitted to BOEM within 30 calendar days of this letter.

– Sole Liability Order Letter, December 30, 2016 – BOEM will begin sending out order letters to all Designated Operators, ROW Holders and RUE Holders for sole liability properties (leases or grants for which there is no other current or prior owner who is liable) o Within 60 calendar days of receipt of the order, additional security must be provided for Sole Liability Properties.

– Non-Sole Liability Order Letter, Approximately June 30, 2017, exact date TBD – BOEM will begin sending out order letters to all Designated Operators, ROW Holders and RUE Holders for non-sole liability properties. o In circumstances in which BOEM determines there is a substantial risk of nonperformance of the interest holder’s decommissioning liabilities, BOEM may send an order letter prior to this date.

EDITOR’S NOTE: Oil & Gas 360® provided extensive coverage of the NTL’s financial assurance requirements beginning last summer. These articles are linked below: