Here’s a brief follow up on the Offshore Financial Assurance Forum that the Bureau of Ocean Energy Management (BOEM) held last month.  On February 26, new BOEM Director, Abigail Ross Hopper, along with several other BOEM representatives, took time to answer stakeholders’ questions about BOEM’s proposal to update its risk management program for oil and gas operations on the Outer Continental Shelf (OCS).

Existing regulations (e.g., 30 C.F.R. § 556.52 et seq.) require lessees on the OCS to provide bonds or other alternative forms of financial assurance to cover current and future operations including the decommissioning of wells and facilities.  Due to aging offshore infrastructure, increasing decommissioning costs, hazard risks (hurricanes), and recent high-profile bankruptcies, BOEM has made modernizing its risk management program a top priority.  As BOEM put it in a press release:

Since the current bonding requirements were set nearly a quarter of a century ago … BOEM has recognized the need to update its requirements and develop a comprehensive program to assist in identifying, prioritizing, and managing the risks associated with industry activities on the Outer Continental Shelf.

To that end, BOEM issued an Advanced Notice of Proposed Rulemaking (ANPR) on Risk Management, Financial Assurance, and Loss Prevention to seek public input about revising the current bonding regulations.  The ANPR was published in the August 19, 2014 issue of the Federal Register, 79 Fed. Reg. 49,027.  It posed over 50 questions about BOEM’s financial security program.

In response, members of industry submitted nearly 40 comments.  The majority of the responses focused on the following points:

• Review criteria to evaluate company financial strength — the criteria should be in line with the standards set forth by the Financial Accounting Standards Board for financial strength.
• Decommissioning estimates — industry would like more information on how BSEE assesses decommissioning liabilities. BSEE decommissioning assessments should rely on third-party estimates and be timely updated.
• Give credit for other forms of financial assurance — BOEM should give credit to money already held in escrow, whether privately or federally-managed funds.
• Bonding amounts/levels — the current two tier bonding approach (general and supplemental) is preferable. BOEM should bond only present value of future costs, and adjust bond amounts for a lessee’s removal liabilities annually.
• Catastrophic events — BOEM should require proof of insurance for catastrophic events instead of increasing bond amounts.
• Bond timing requirements — financial assurance should not be required when permits are approved rather than at the planning stage.
• Allocation of financial responsibility by ownership percentage — BOEM should limit a company’s bonding obligations to that company’s proportionate share of its ownership in the lease and/or grant rights of subrogation to all parties in the chain of title to reduce the need for multiple lessees or assignors to obtain security for the same decommissioning liabilities.
• Access to bonds and timely releases of bonds — BOEM should permit those willing to decommission to access the funds of those lessee’s who fail to meet their obligations. BOEM should also promptly release bonds when replacement bonds are submitted or when a lessee fulfills its obligation.

The BOEM forum PowerPoint presentation (Offshore Financial Assurance Forum) provides additional detail on the ANPR responses. BOEM has stated that its priority areas for rulemaking include bonding amounts/levels, right of use (RUE) financial assurance, required filings and financial assurance appeals. BOEM is currently aiming to publish a draft rule by December 2015. Stakeholders will have an opportunity to comment on the draft rule before it becomes a final rule.

The forum also addressed certain near-term program revisions that BOEM is considering, including revisions to supplemental bonding procedures. According to BOEM, the current “waiver” self-insurance system is flawed and thus, it is working on creating a credit-based model for self-insurance.

Although the BOEM Risk Management group did not provide details about its credit model system, they did give an overview of what lessees can expect.

• Self-insurance will be based on a set amount of credit per company approved by BOEM—to be routinely adjusted.
• Publicly traded companies need a Baa3 or higher rating by Moody’s or BBB (or higher) rating by Standard & Poor’s.
• Private companies need composite credit appraisal rating of 1 (high) by Dun & Bradstreet (although there is some question whether this is appropriate and BOEM is seeking industry input to determine proper criteria for private companies).
• Criteria should not favor large or small companies, but rather sound business practices.
• Example components for the BOEM credit model include:
  • Balance sheet, cash flow and income statement key data
  • Credit rating agency ratings
  • Year to year comparison analysis
  • Quarterly financial analysis
  • Tangible net worth
  • Past decommissioning record
  • Number of leases
  • Debt of NPV of proven reserves
  • Management team experience

BOEM plans to implement these supplemental bonding changes via a “Revised Notice to Lessee” (NTL). Due to BOEM workload challenges and bonding market capacity, there will likely be phased implementation of the NTL, prioritizing those entities with high risk liabilities. BOEM has indicated that it will publish a final NTL in late 2015. In the meantime, companies on the OCS can continue to rely on the current supplemental bonding regime, as explained in NTL No. 2008-N07.

I encourage OCS lessees and operators to participate in the comment process as it develops. These proposed changes to the financial security program will affect how we do business on the OCS. For example, consider how these changes may affect parties entering into new joint bidding agreements, operating agreements, farmout agreements, participation agreements or any other agreement anticipating joint ownership of OCS leases or rights.

Of course, if you have any questions, please feel free to contact me or another member of our Gordon Arata team.