On June 29, 2023, the Bureau of Ocean Energy Management (BOEM) published proposed changes to additional financial assurance bond requirements for the offshore oil and gas industry. The proposed regulations would significantly alter BOEM’s methodology of determining whether pipeline right-of-way (ROW) holders must provide additional financial assurance.

Under the current regulatory framework, BOEM obligates a ROW holder to provide additional financial assurance if the Regional Director determines that it is needed. But the current regulations provide no factors for the Regional Director to consider when making this determination. BOEM’s new rules would require the Regional Director to demand additional financial assurance when the ROW holder does not meet certain credit rating or proxy credit rating criteria. The rules also propose to consider the credit rating or proxy credit rating of a co-grant holder because, like co-lessees, they are jointly and severally liable for accrued decommissioning obligations for facilities and pipelines on their ROW. BOEM has outlined in detail how this new credit-based methodology system would be implemented.

1. Assessing Additional Financial Assurance – Credit Rating Available

BOEM proposes to use an “issuer credit rating” to evaluate the financial health of ROW holders. Due to the varying priority of claims associated with debt and the limited purpose of bond issuance ratings, BOEM will accept issuer credit rankings only from a nationally recognized statistical ratings organization (NRSRO). BOEM will require an issuer credit rating threshold of BBB- from S&P, Baa3 from Moody’s, or an equivalent credit rating provided by another SEC-recognized NRSRO. If S&P and Moody’s provide different ratings for the same company, BOEM will use the higher rating for the ROW holder. Throughout the year, BOEM will monitor company credit rating changes, market reports, trade press, articles in major news media and quarterly financial reports to review the financial status of ROW holders.

2. Assessing Additional Financial Assurance – Proxy Credit Rating Criteria

When a pipeline ROW holder does not have access to a credit ranking, the proposed regulations allow BOEM to use a commercially available credit model system in order to determine a proxy credit rating for the company. The proxy credit ranking would be based on audited financial information for the most recent fiscal year. The financial information to be reviewed would include (1) an income statement, (2) a balance sheet, (3) a statement of cash flows, and (4) the auditor’s certification. If financial statements are not provided, BOEM must require additional financial assurance because it will have an insufficient basis for concluding that the owners have sufficient capacity to reliably and timely meet their obligations. After gathering this information, BOEM proposes to use S&P Global’s Credit Analytics credit model to calculate the final credit ratings. The final proxy credit rating must satisfy either S&P’s BBB- or Moody’s Baa3 threshold.

3. Phased Compliance

If a ROW holder does not pass the credit-based analysis described above and is required to provide additional financial assurance, BOEM would phase in the financial obligation over a three-year period. BOEM would require that any company receiving an additional financial assurance demand post one-third of the total amount by the deadline listed on the demand letter. The next one-third would be required by the end of the second year and so on in the third year. If a ROW holder’s credit rating improves to investment grade during the three-year period, BOEM would discontinue collection of the remaining financial assurance and return any supplemental financial assurance previously provided.

4. New Penalties Provision and Appeals

If a ROW holder fails to replace any deficient financial assistance upon demand or fails to provide supplemental financial assurance, the proposed changes would allow the Regional Director to assess penalties, request the Bureau of Safety and Environmental Enforcement (BSEE) to suspend operations on the ROW, and/or initiate action for forfeiture of the ROW grant. To challenge a penalty or even the supplemental financial assurance demand itself, a ROW holder may appeal BOEM’s decision to the Department of Interior’s Board of Land Appeals (IBLA).

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BOEM is accepting written comments on these proposed changes through August 28, 2023. If you would like to learn more about how these new regulations may affect you or your business, please contact Gordon Arata. Our team is ready to assist you.