NOIA, IPAA, LMOGA & GEST file FOIA Requests to BOEM and DOI regarding NTL No. 2016-N01

On Nov. 7, 2016, four oil and gas industry trade groups submitted Freedom of Information Act (FOIA) requests to both the Bureau of Ocean Energy Management (BOEM) and the Department of the Interior (DOI) seeking information related to what the groups dubbed “the recent drastic changes to the financial assurances and bonding required of offshore oil and gas producers.”

Industry Groups File FOIA Request regarding New Financial Assurance Requirements for Offshore Drilling

BOEM’s NTL No. 2016-N01 – Requiring Additional Security of Offshore Leaseholders

The requests were in reference to the BOEM’s Notice to Lessees and Operators of Federal Oil and Gas, and Sulfur Leases, and Holders and Pipeline Right-of-Way and Right-of-Use and Easement Grants in the Outer Continental Shelf (known by the abbreviated name: NTL No. 2016-N01). The subtitle of the document is “Requiring Additional Security.” The new NTL outlines strict new requirements for operators and their partners on the U.S. outer continental shelf to put up supplemental bonding, collateral and/or other financial assurance for every OCS lease in which they participate according to strict definitions.

The new requirements were discussed at BOEM meetings over the months prior to when NTL No. 2016-N01 was to become effective—Sept. 12, 2016. But the strict new supplemental financial assurance requirements became law, essentially, on Sept. 12, 2016, and discussions were over and the new rules became effective. According to the BOEM, this month demand notices would begin to go to operators and lessees informing them of the amount they would need to put up, or show their companies were good for according to a strict BOEM formula, in order to meet the new financial requirements.

Industry Groups File FOIA Request regarding New Financial Assurance Requirements for Offshore Drilling

The four trade groups making today’s FOIA request are the National Ocean Industries Association (NOIA), the Independent Petroleum Association of America (IPAA), the Louisiana Mid-Continent Oil and Gas Association (LMOGA), and the Gulf Economic Survival Team (GEST). The four groups collectively represent the entirety of the offshore oil and gas industry in the Gulf of Mexico, according to a joint press release issued today.

The groups argue that (NTL) No. 2016-N01 dramatically changed the existing framework for securing decommissioning liability for the offshore oil and gas industry. Attorneys and other experts to whom Oil & Gas 360® has spoken for a series of articles since August have said the new government financial requirements could be devastating for the offshore drilling industry, particularly in the Gulf of Mexico, where the largest number of independents are currently holding leases and/or operating.

Industry Groups File FOIA Request regarding New Financial Assurance Requirements for Offshore Drilling

Today’s FOIA request comes on the heels of NOIA’s recent FOIA request to BSEE seeking information related to the agency’s revised estimates for future well plugging and abandonment and platform decommissioning costs in the Gulf of Mexico, which the groups said “varied wildly from actual and current decommissioning costs and BSEE’s own previous cost projections.”

The requests seek to gain clarity into how BOEM and DOI determined that new financial assurance requirements were necessary and the considerations underpinning and informing their decision-making process.

BOEM’s NTL process allows the rules to be changed with no formal rule making process, trade groups say

“Combined, these efforts represent our industry’s commitment to understand how DOI and BOEM determined that changing the rules via the NTL guidance was appropriate rather than undertaking a formal rulemaking process, a much more transparent and equitable process,” the groups said in their press release.

But BOEM’s Gulf of Mexico Regional Director Mike Celata disagrees.

“The NTL doesn’t change the regulations at all,” Celata told Oil & Gas 360®. “The regulations themselves have not changed. The regulations say that the financial assurance has to be based on five criteria, right? And those five criteria are not defined exactly how the regional director will look at that.

“This NTL is just giving some clarification of how we’re now looking at those five criteria: the financial capacity, projected strength, business stability, reliability and the record of compliance.

“The NTL is a clarification in plain English, a notice for the lessees as to how BOEM is going to implement those regulations,” Celata told Oil & Gas 360®.

The four organizations said that transparency typically afforded to companies under normal circumstances with NTLs has been at a premium with BOEM in this instance, as information central to the rationale of NTL No. 2016-N01 has not been released to the public or to companies attempting to meet the new financial assurance and bonding requirements.

The groups’ press release called the new rules are “a solution in search of a problem,” claiming that the existing framework has protected taxpayers for decades.

BOEM may have just caused the very problem it was trying so hard to avoid

“Offshore operators made significant investments based on the existing regulatory framework and BOEM has now changed the rules in a manner that threatens to trigger the very risk it is trying to protect against, as these new burdensome bonding requirements will tie up capital that would otherwise be available for exploration, development, jobs, revenues to states and the federal government – and most ironically – for actual plugging and abandonment work,” the trade groups said in today’s press release.

The upshot of NTL 2016-N01

By issuing NTL 2016-N01, BOEM now assigns 100% of decommissioning and other liability to a company for any lease, pipeline rights-of-way (ROW), and rights-of-use easement (RUE) in which that company has an ownership interest or for which that company acts as a guarantor.  This new NTL and its shifted requirements replaces BOEM’s previous policy that it outlined in NTL 2008-N07, in which BOEM allowed risk pooling among companies who shared interest in an OCS lease, ROW, or RUE.

The method that has worked for decades is where smaller companies who were partners in a lease with a large independent or an oil major would be able to share the risk with their financially much larger partner, because the financial standing and strength of the larger lease partner or operator would more than cover decommissioning costs for any platforms, wells and other assets involved in a particular lease on the OCS.

The new NTL 2016-N01, however, no longer allows the BOEM regional directors to issue waivers to smaller companies in these shared leases. Everybody involved, large or small, now has to prove their financial mettle or ante up a surety bond, collateral or Treasuries to cover the decom liability that may be incurred decades down the road after a production platform has depleted a reservoir and would require dismantling.

In September and October, Oil & Gas 360® published a series of articles highlighting the changes brought forth on operators by NTL 2016-N01, with several experts discussing potentially devastating effects these new requirements could have on oil and gas production on the OCS, particularly upon the independent operators in the Gulf of Mexico.

In one of the articles, Oil & Gas 360® interviewed BOEM Gulf of Mexico Regional Director Mike Celata about the new NTL and its possible effects on the offshore drilling industry in the U.S.

Exclusive interview with Michael Celata, BOEM’s Gulf of Mexico OCS regional director

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Mike Celata, Gulf of Mexico BOEM regional director, exclusive interview with Oil & Gas 360

Oil and Gas 360®:  In your view as BOEM’s director for the Gulf of Mexico OCS region, how will the new supplemental bonding/collateral requirements required by NTL 2016-N01 impact the independent oil and gas companies operating in your region?

Michael Celata:  I don’t think there’s one blanket answer for all the independents. Each company has a different financial position, different cash flows. I think one of the main points with the NTL is we want to work with each company individually and we’re looking to provide a mutually beneficial solution that can meet both our needs and the operator’s needs wherever possible.

OAG360: That sounds pretty flexible compared to how the actual rule reads. Is there a lot of flexibility available to you? Is that how you look at it?

MC:  If you go into the actual regulation, there is regional director discretion allowed in the regulation. There is some structure upfront to the NTL, especially around sole liabilities, so that’s the first thing that has to be provided for, but we would like the [joint] owners/operators to come in and look at a financial plan, a tailored plan approach. Under the tailored plan approach we have about a year to work out a solution for both BOEM and the operator.

OAG360: How will the new NTL affect the oilfield service companies in the Gulf?

MC:  It doesn’t have any direct impact. The NTL only applies to operators, record title holders, operating rights ROW and RUE holders.

OAG360:  What is the total number of rights holders and record title holders in the GOM who are subject to the new supplemental bonding requirements?

MC:  There are actually over 600 individual qualified companies operating in BOEM that have some sort of financial liability. So ultimately it would impact all those companies. I think there are only about 66 companies at this point in time who’ve supplied us their accredited financials, so we’re reviewing those—their audited financials to see if they get the 10% self-insurance. That would be for the self-insurance, the 10%.

OAG360:  How will the agency proceed to begin enforcement of the new supplemental security rules? How do you see the steps starting forward from now?

MC:  Our goal is to work with operators, right, so we don’t want to need to use any enforcement procedures. We’ve been encouraging operators for a long time to come in and talk to us to better understand what the process is moving forward.

I think in November is when we send out the actual orders to the operators, and I think at that point it’s going to become a more formal process for a period of time. The companies have 60 days after that order to cover their sole liabilities, and then 120 days to cover their non-sole liabilities.

But, again, they also have that option—after the sole liabilities are covered—to come in and say they want to provide a tailored plan, and that gives us more flexibility to go beyond the 120 days [for jointly owned or operated properties].

OAG360:  How much time flexibility is there—if they are going to provide a tailored plan, how does that work, the timing on that?

MC:  We’ve actually talked to some companies already, pre-NTL, in terms of some companies that have recently had some financial issues and under the previous NTL had lost what at the time we termed the waiver. It really is dependent on the company and the situation. We negotiated with one company for a year before we signed an agreement. We’ve also taken less time—it depends on what kind of solutions companies want to provide, whether they just want to provide bonding or whether they want to work through some unique option that we really haven’t done in the past.

OAG360:  So that’s what you were getting at earlier, it’s sort of up to each company to work things out?

MC:  If a company has self-insurance at the 10% and that covers all of their properties, that’s fairly straight forward and they won’t need to go beyond that. Some companies like to just provide bonds to cover their liabilities if their liabilities aren’t that substantial, and then in other cases it’s more complex.

OAG360:  What’s the agency’s timeline to review operating company and leaseholder financials, to make determinations of the need for supplemental security, assign the amounts and send notices?

MC:  The audited financials—we’ve received those from about 66 companies and we’re in the process of trying to finalize their decision, so hopefully for those companies that decision will go out shortly.

Companies still can come in and decide to provide us their audited financials at a later date and we’ll make a decision at the appropriate time. But we had asked them to provide it up front because it helps us determine and be able to tell them what self-insurance they’ll have.

Part of the process is to whittle down those properties that need to actually have financial assurance. So if you have self-assurance and you tell us what properties you want to apply those to, then that limits the amount of properties that you have to deal with in the next step.

We tried to put a process together that narrowed the focus down  as we went, one that made the number of properties smaller and smaller as we went through the process.

OAG360:  After the notices go out, what do you expect? Do you expect a barrage of questions from those 600 companies you referenced earlier, other than the 66 companies that have already acted?

MC:  I think we’ll continue down the same path that we have. We get companies to come in and talk to us here in our office in the New Orleans area; we’ve also had companies reach out to our analysts. We have one person in Houston—we’re trying to answer all their questions.  The companies have ranged from smaller to majors, and they’re all just trying to better understand the NTL and how it’s going to impact them.

But I think we’ve been pretty consistent in our message for a while now—we’ve done some outreach for at least a couple of years over this. And then we met early last year. I gave a couple of talks, one here in New Orleans back in February at the Plano meeting.

Hopefully operators have that message now and they are working to make sure that their property list matches ours, so we can get that out of the way and then we can work through the process of sole liabilities and then a tailored plan process.

OAG360:  Looking at your slide presentation entitled Regulatory Considerations for Ensuring Decommissioning & Other Lease Obligations, Slide 11 – second page slide entitled: “30 CFR 556.53 Additional bonds.” It says: “The regional director will consider potential underpayment of royalty and cumulative obligations to abandon wells, remove platforms and facilities and clear the seafloor of obstructions in the regional director’s case-specific analysis.”

OAG360:  Can you explain the reference to potential underpayment of royalty?

MC:  Additional bonding covers more than just decommissioning. Decommissioning is the largest liability—somewhere between as we’ve estimated $30 billion and $40 billion of outstanding liability.

But those additional bonds, actually, we can request those for any future lease obligations—so that can incur well plugging and abandonment, structure removal, site clearance, rents and royalties. So royalty payments are received by our Office of Natural Resource Revenue, ONRR. They can request at any time, if they’re not getting the appropriate royalty payments, that BOEM issue a demand for additional financial assurance. This request for additional financial assurance can be for more than just decommissioning, it can cover other outstanding liabilities of operators.

OAG360:  So is ‘case specific’ analysis when somebody is not paying royalties?

MC:  Yes, absolutely.

OAG360:  Is that something that is common? Is it something that has happened a lot in the past?

MC:  I’m not sure it’s common. It’s happened before, it’s happening now.  There’s been about 15 bankruptcies since 2009, where companies who have been qualified to operate in the Gulf of Mexico may have gone into bankruptcy voluntarily or been forced into bankruptcy of some kind. One of the most recent ones—Black Elk—I think there was an outstanding question of underpayment of royalties in that scenario. It does happen occasionally, at least.

OAG360:  On that topic, if a company goes into bankruptcy and let’s say they’re part of a group that doesn’t include a supermajor, how are you going to collect money if people are in bankruptcy?

MC:  The goal of the program is to make sure we have the appropriate financial assurance in place before the company goes into bankruptcy, right? That’s why we put a whole risk management program together. I think we have about 16 people in the Gulf of Mexico operations group plus we have a policy group in headquarters whose role is now to monitor companies’ financial strength on a more routine basis. We are working to get resolution for some of these issues before companies go into bankruptcy.

OAG360:  Are there any changes in the works for the stage 1- general lease surety bond requirements of before we get to the supplemental bonding stage?  Is that something that is being looked at?

We don’t have any immediate plans to adjust those values. I think that BOEM recognizes that some of those values are somewhat low. I think the maximum is a $3 million area-wide bond when you get to the development stage. But at this point in time we’ve been concentrating on this additional financial assurance program.

OAG360:  Your slide entitled “Sufficiency of Supplemental Bonds” says,  “BSEE is now in the process of reviewing and updating its decommissioning cost assumptions and BOEM is in the process of using those updated cost assessments for supplemental bond demands on a case by case basis.” What is your estimated timeline for the BOEM to receive the BSEE-determined decommissioning liability for each operator/lessee?

MC:  BSEE has actually updated their assessments as of Aug. 29th, or the last week of August. We’re using those updated costs in our assessments now. Companies can get those online athttp://www.boem.gov/property-lists/.

OAG360:  By what general percentage do you see the decom/P&A liabilities increasing based on the updated estimates from BSEE?

MC:  I haven’t looked at it in that much detail, but I think overall costs may have gone up. But one of the other things we did with the assessments that you wouldn’t know by just looking at our NTL, is that in the past when we did an assessment for decommissioning costs, we did it at the plan stage – the exploration plan stage or the development plan stage – so those assessments would include wells that a company may never drill.

So what we’ve done is move that assessment to the Application for Permit to Drill—the APD stage. So that as we move forward and also in the current assessments—those paper wells have been removed—and then all future additional assessments will only be at the time the well is going to be drilled.

OAG360:  One of your slides said, “However it is BOEM and BSEE’s intention to fully implement the higher cost assessments and related supplemental bond determinations (across the board) as soon as reasonable.”  Now that they are updated is it just up to the operator to go on the website and get the new assessments?

MC:  And then in November we’ll be sending out those order letters which will have the numbers in them, but I do recommend that the operators go out and look at their property list now because they can get that assessment now.

OAG360:  Mike, the stated goal is to protect the taxpayer from risk on the uncollateralized decommissioning liability on the OCS oil and gas production.  Before the new NTL went into effect, how much decom liability has been paid with taxpayer money in the past few decades?

MC:  I don’t have a good estimate for you. I do know that back in 1989 the Alliance bankruptcy was probably the first case in recent times where MMS had to use royalty payments to cover the cost of decommissioning, but I don’t know the exact figure.

We still have a lot of ongoing bankruptcies. ATP is one of those cases where it’s not a finished, completed bankruptcy. At the time the estimates for decommissioning and the amount of funds we got in the decommissioning trust, the decommissioning trust was insufficient to cover that cost. Many of these cases are still ongoing, so we’ll have to wait and see whether there are any additional costs for the federal government.

OAG360:  What do you think will happen to the offshore drilling industry once the notices are out and the higher obligations and supplemental bonding are at the enforcement stage, what’s your view as to how this is going to affect the industry?

MC:  I’m hoping that industry comes in and talks to us. If there are some potential problems they can identify those early on so that we can work with them. The goal of the program is to get financial assurance in place, not to send companies into bankruptcy. There’s not a lot of benefit to us if a company goes into bankruptcy and their obligations aren’t covered. It’s not in our best interest to have companies go into bankruptcy.

I really think the whole point of these tailored plans [is to generate] solutions that might meet people’s needs. We don’t require bonding of everything, we can look at other options like decommissioning trusts which we’ve had under the regulations for many years—the full cost of decommissioning can be funded over a number of years.

One of the things that we look at under those trust agreements would be some sort of a production profile and a decline curve estimate and then say that we want full funding five or ten years before the expected production ceases.

We’ve asked companies to look for new and unique ways to cover financial assurance. One of the things we’ve heard about from industry, though we’ve never had anybody come in and put a specific proposal in front of us, is about a pool of funds out there where all the operators could pay into this pool of funds and it would cover all of maybe the sole liabilities out there. So if a company went bankrupt, then that pool would be used, so that would probably put less financial obligation on each individual company, but it potentially could meet BOEM’s needs.

I still think we have a long way to go to figure out solutions for everybody, but that’s what we’re trying to achieve with this program.

Anything I can do to help get everybody to come in and talk to us and find resolutions to meet everybody’s needs, I think that would be helpful.

OAG360:  Slide No. 25 entitled “BOEM’s Financial Assurance Goals” – it lists “Protect the U.S. from financial loss or environmental damage when a leaseholder or operator is unable to pay rents and royalties or perform a required decommissioning.”  Could you give some examples of occasions when an operator or leaseholder has been unable to pay rents and royalties and what action was taken.

MC:  I know in the Black Elk bankruptcy there were definitely some outstanding royalty payments that most likely won’t be covered when the bankruptcy is completed.

OAG360:  If a company with federal OCS leases in the Gulf falls below the financial capacity, projected strength, business stability or reliability thresholds – if something financial triggers significantly higher collateral demand under NTL 2016-N01 and they are unable to meet the collateral demand, what happens in the case of a lessee or operator of a sole liability property, if they aren’t able to provide the security in 60 days?

MC:  The NTL outlines potential penalties including suspension of production and other operations, but again those aren’t necessarily in the mutual benefit of both BOEM and the operator. So, if they suspect they’re not going to meet those obligations they should come in and talk to us as soon as possible, so we can try to work something out.

One thing I can say about the NTL and the sole liabilities, is this: that’s one of the things—the time frame, the 60 days—that the regional director does not have discretion in changing, so they really need to come in and talk to us as soon as possible.

OAG360:  What about for a property with divided ownership, one that is other than sole liability?

MC:  For the divided ownership, we’re going to look to the operator to come up with a resolution on that. I know that there’s a lot of bonding out there in industry between predecessors already, so those are some of the things we’d like to give some sort of credit for, but we’ve never been party to those agreements in the past. And some of the operators have come in and talked to us about that, even some of the majors, in discussing how they’re going to share the risk. But ultimately we’re going to hold the operator responsible to try to bring together all the parties to find a solution.

OAG360:  Mike, what is the industry going to look like if in a few years if a significant portion of the small to medium sized operators are out of the picture, if because of the more strict financial requirements they’re not incented to go out and work in the Gulf. As a historic practice the majors usually take the leases at the beginning and work them however they want to, and after that they sell them in the aftermarket to the smaller operators. If a lot of these smaller operators are out of the picture, how is the overall business going to look out there?

MC:  I really kind of disagree with the premise, right? I don’t think that small and medium-sized companies will be out of the picture moving forward.

I hundred percent agree with you that’s the way the Gulf has progressed over the years, that the majors have sold leases to smaller companies and the majors move out to deeper water. And the smaller companies can produce at a lower cost and continue with that production, which benefits not only the companies but the U.S. resource base and BOEM and the American taxpayer for getting royalties.

 

Industry Groups File FOIA Request regarding New Financial Assurance Requirements for Offshore Drilling

Drilling and production in the Gulf of Mexico, U.S. outer continental shelf.

There are currently still small companies out there who are entering the Gulf today, as we speak. I think one of the companies is Cox. Even though there are lower oil prices now, there are still companies entering the Gulf buying properties from the majors, and I expect that to fully continue. It may not be the same companies that are out there today, but I think there are always opportunities in the Gulf for these smaller companies to continue producing and get some return on their investment.

OAG360:  At the end of NTL 2016-N01, “Reservation of Rights,” it says: BOEM reserves the right to modify the procedures and/or criteria in this NTL on a case-by-case basis, as necessary…”  Can you explain, give examples, of how modifying the procedures/criteria might apply on a case-by-case basis?

MC:  I think this goes to some of the discussions in a tailored plan. Number one, one of the things we’ve done in the past before BSEE updated their costs was that we would defer financial obligations if there was a disagreement between the operator and BSEE’s assessment. We’d ask for the financial assurance—the dollar amount they agreed on while they resolved the problem with BSEE.

One of the other things that operators have come in and talked to us about is they want some credit for the decommissioning contracts. So that they don’t necessarily have to provide some financial assurance if they have a contract in place and they plan to decommission these properties over a year. So we’d like to get some credit for that. I think that potentially reduces some of the risk for the government.

One of the things we haven’t done yet—we’re asking for the contract, we asking for assurances—what metrics are in those contracts that we know you’re going to meet those obligations.  And if they didn’t meet the obligations, what would that mean in terms of our tailored plan.

We’re going to look at this in a year. And see what the impacts are, what are the lessons learned, and I think that’s one of the reservations or rights is that we may update the procedures after a year as we all get more experience moving forward this NTL.

I was just at an international upstream regulatory forum for other countries, and I know the UK is also looking at financial assurance around decommissioning, so we agreed that we would go back there in a year and talk about our lessons learned.

OAG360:  Is NTL 2016-N01 subject to Executive Order 12866–the review by the Office of Management and Budget or the Office of Information and Regulatory Affairs?

MC:  The NTL doesn’t change the regulations at all. The regulations themselves have not changed. The regulations say that the financial assurance has to be based on five criteria, right? And those five criteria are not defined exactly how the regional director will look at that.

This NTL is just giving some clarification of how we’re now looking at those five criteria: the financial capacity, projected strength, business stability, reliability and the record of compliance.

The NTL is a clarification in plain English, a notice for the lessees as to how BOEM is going to implement those regulations.

Regardless of whether a company is a large operator or small fractional participant in an OCS lease, the U.S. offshore drilling industry is likely to morph into vastly different animal in the next few years. One industry professional told Oil & Gas 360®, “The Gulf is filled with dead men walking.”

For further detail regarding the issues surrounding NTL No. 2016-N01, read these articles/interviews:

The BOEM NTL No. 2016-N01 is available for download here.


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