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“A Solution in Search of a Problem.” States and Industry Groups Sue to Stop BOEM’s New Bonding Requirements

 

The GOM oil industry has exhaustively addressed the BOEM’s proposed Financial Assurance Rulemaking (the “Final Rule”) since it first proposed in June of 2023.[1]  The  Final Rule[2] goes into effect June 29, 2024. In an effort to stop the implementation of the Final Rule, an alliance of GOM States and industry groups have sued the Department of The Interior, BOEM and government officials, seeking a preliminary injunction in federal court.

The Final Rule (among other provisions not discussed here) imposes hefty new or additional bonding requirements on current federal offshore lessees to guarantee future decommissioning obligations.  These requirements affect exclusively independent oil & gas producers, as lessees with an investment-grade credit rating are exempt from the new requirements.  (Only the majors are currently large enough to have such a rating.)  Also, exempt are lessees whose co-lessees possess an investment-grade credit rating, and lessees whose proven reserves on the lease in question are greater than three times larger than their estimated decommissioning liabilities.  The Final Rule allows lessees who are ordered to provide additional bonding to request that the new bonding requirements be met in stages over the following three years.

On June 1, 2024, Texas, Louisiana, and Mississippi, as well as the Louisiana Oil & Gas Association, Gulf Energy Alliance, Independent Petroleum Association of America, and U.S. Oil & Gas Association filed State of Louisiana, et al. v. Haaland, et al, No. 2:24-cv-00820 in the Western District of Louisiana.  The 80-page, 15-count lawsuit makes multiple arguments to invalidate and block the Final Rule under the Outer Continental Shelf Lands Act (“OCSLA”), the Administrative Procedure Act (“APA”), and the Regulatory Flexibility Act (“RFA”).  The causes of action include:

1. Claims that the Final Rule is contrary to law and contradicts OCSLA because:

a. The cost of compliance outweighs its benefits.

b. The Final Rule contradicts OCSLA directive that the DOI must make the OCS “available for development;” and

c. Congress did not grant BOEM the authority to demand decommissioning bonds. While the Minerals Leasing Act expressly authorizes the DOI to require bonds to secure onshore lease  restoration obligations by lessees, OCSLA does not.  (As BOEM has been demanding decommissioning bonds for decades, this may be an uphill argument.)

2. An APA claim that the Final Rule exceeds BOEM’s statutory authority;

3. Multiple APA claims that the Final Rule is arbitrary and capricious; and

4. The Final Rule violates the RFA mandate to minimize its impact on small businesses.

A detailed summary of Plaintiffs’ objections to the Final Rule would be nearly as long as their hefty complaint but is best summed up by their argument that the Final Rule is “a solution in search of a problem.”  The Final Rule imposes immense and at times impossible burdens on independent oil producers offshore.  (Plaintiffs allege, inter alia, that the new bonds will not just be expensive but impossible to acquire.)  But BOEM’s justification for those burdens- preventing taxpayers from shouldering decommissioning costs when an independent offshore operator folds- doesn’t hold water.

“Why Impose Billions of Dollars in Extra Costs to Solve a Problem That So Far Has Only Cost in the Tens of Millions?” 

Since the 1930s, about 6,900 oil and gas structures have been erected in the GOM and about 5,300 (76%) were decommissioned.[3]  During that same time period, about 46,000 wells were drilled in the Gulf and about 38,000 (83%) were decommissioned.  During the last 75 years, the government has only assumed $58 million dollars of decommissioning obligations in the GOM- well below .3% (one-third of a percent) of the total decommissioning costs.  On the other hand, in just the last 40 years, the government has received over $208 billion in royalties from GOM petroleum production.

Offshore lessees are jointly and severally liable with all other lessees for decommissioning costs.  If a Major and XYZ Oil Co. are co-lessees, both are liable for the full cost to decommission the wells and platforms on the lease.  If the Major assigns its interest to ABC Oil Co., it is no longer a co-lessee, but neither is it excused from its decommissioning liabilities; now all three companies are liable for the full decommissioning costs.  As a result, most leases (and most future decommissioning liabilities) have a Major with an investment-grade credit rating in the chain-of-title, which has full responsibility with its co-lessees and successors to clear the lease.

While there are leases without an investment-grade major in the chain-of-title guaranteeing the decommissioning, Plaintiffs allege BOEM has clearly overestimated the decommissioning costs associated with leases by a factor of more than ten, and that over half of those actual costs are already covered by bonds in favor of BOEM.

Plaintiffs claim that there are only $391 million in decommissioning liabilities in the GOM which are not guaranteed either by a major in the lease chain or already-posted bonds.  In contrast, even assuming independent producers can acquire the bonds, BOEM’s own figures estimate they will cost over $500 million a year to procure.

Further, the Final Rule ignores the fact that many lease assignments included private security arrangements to protect the larger assignor from decommissioning liability to BOEM if its smaller assignee failed to decommission the lease facilities.  These private bonds would not be credited to the current lessees under the Final Rule; instead, lessees would need to acquire new bonds, doubly guaranteeing their liabilities.

Finally, Plaintiffs point out that the effect of the Final Rule is to shift the risk of decommissioning liability further from the major to independent oil companies.  The Final Rule imposes billions in new costs on independents, and none on the majors, while at the same time causes the creation of billions in bonds which will prevent BOEM from having to go up the chain of title looking for solvent lessees if a current lessee defaults.

But Wait, There’s More!

On June 20, 2024, three days after Plaintiffs filed suit, the court granted leave for Plaintiffs to file a seventy-page motion for stay or preliminary injunction to prevent the Final Rule from going into effect.  On June 26, 2024, the court granted defendants until July 19, 2024, to respond to the motion from preliminary injunction, as well as expanding their page limit to seventy pages.

The Case by the Numbers.

“There are lies, damned lies, and statistics.” 

Again, all figures are as alleged by Plaintiffs unless otherwise noted.  Many of Plaintiffs’ figures, from the well documented “Opportune Study,” were apparently accepted by BOEM.[4]

[1] 88 Fed. Reg. 42136 (June 29, 2023).

[2] 89 Fed. Reg. 31544 (April 24, 2024).

[3] All figures cited in this blog are as alleged by Plaintiffs unless otherwise noted.  It is further worth noting that many of Plaintiffs’ figures, from the “Opportune Study,” were apparently accepted by BOEM.  Opportune, A Cost-Benefit Analysis of Increased OCS Bonding 10 (July 13, 2023).  See Complaint, p. 53, nt. 3.

[4] Opportune, A Cost-Benefit Analysis of Increased OCS Bonding 10 (July 13, 2023).  See Complaint, p. 53, nt. 3.

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