THE US government has this week updated 20-year-old regulations to ensure taxpayers are not hit with the cost of decommissioning offshore oil and gas rigs.
The Department of the Interior’s Bureau of Ocean Energy Management has substantially strengthened financial assurance requirements for the offshore oil and gas industry operating on the U.S. Outer Continental Shelf (OCS).
The new regulations should interest Australian authorities, given taxpayers have been left to pick up the multi-million dollar cost of decommissioning and removing the former Timor Sea FPSO Northern Endeavour after the collapse of its owners, and debate over the responsibility of its previous operators.
“The costs to decommission oil and gas facilities on the OCS are substantial, and if companies fail to meet their decommissioning obligations those costs fall to American taxpayers,” the US department said.
“The Government Accountability Office found that previous practices did not effectively ensure that industry operators meet decommissioning deadlines for offshore wells and platforms at the end of their useful lives, potentially leaving the costs to be borne by American taxpayers.
“The final Risk Management and Financial Assurance for OCS Lease and Grant Obligations rule amends existing regulations to respond to those concerns and reduce financial risks associated with OCS development by substantially increasing the level of financial assurances that operators must provide in advance.”
Existing regulations have not kept pace with industry changes, such as aging OCS infrastructure, the transfer of near end-of-life properties from large companies to smaller companies with fewer financial resources, or the complex financial security arrangements between and within companies, the BOEM said.
The new rule establishes two metrics by which BOEM will assess the risk that a company poses for American taxpayers:
Financial health of a company. The rule streamlines the number of factors BOEM uses to determine the financial strength of a company by using a credit rating from a Nationally Recognized Statistical Rating Organization, or a proxy credit rating equivalent.
Reserve value. BOEM will consider the current value of the remaining proved oil and gas reserves on the lease compared to the estimated cost of meeting decommissioning obligations. If the lease has significant reserves still available, then in the event of a bankruptcy, the lease will likely be acquired by another operator who will assume the plugging and abandonment liabilities.
Companies without an investment-grade credit rating or sufficient proved reserves will need to provide supplemental financial assurance to comply with the new rule.
Additionally, the rule clarifies that current grant holders and lessees must hold financial assurance to ensure compliance with lease obligations and cannot rely on the financial strength of prior owners. BOEM continues to maintain its ability to pursue prior lessees to meet decommissioning obligations.
Under the new rule, BOEM estimates industry will be required to provide US$6.9 billion in new financial assurances to protect American taxpayers from assuming industry decommissioning costs. To provide industry with flexibility to meet the new financial assurance requirements, BOEM will allow current lessees and grant holders to request phased-in payments over three years to meet the new supplemental financial assurance demands required by the rule.
