Global advisory firm Opportune has conducted an independent study of plugging and abandonment (P&A) liability on the US Outer Continental Shelf (OCS) and the resulting risk to US taxpayers.
The study conducted a cost-benefit analysis of a proposed rule by the Bureau of Ocean Energy Management (BOEM) to revise previously proposed regulations to increase bond requirements, all to protect taxpayers.
“Regardless of the genuine intent of all stakeholders, additional restrictions on oil and gas capital are the greatest threat to the American taxpayer,” the study said.
The proposed rule, according to Opportune, would financially impact the offshore oil and gas industry, particularly in the Gulf Coast.
Main findings
The Opportune study found that the risk is greatly exaggerated with the Bureau of Safety and Environmental Enforcement (BSEE) announcing for the first time in industry history a proposal seeking bids to decommission 15 orphan wells located in Matagorda Island, High Island and the west. Delta zones of the OCS.
The related P&A liability for orphan wells is about 0.8 percent or about $37.7 million of the $4.5 billion in royalties and revenue received by the US government in 2021 alone of offshore production in the Gulf of Mexico, according to the study.
In 2016, a notice was issued to lessees to protect taxpayers from having to pay offshore decommissioning costs of a failing oil and gas company.
BOEM published a new proposed rule on June 29, 2023 to increase the industry’s financial assurance requirements. BOEM stated that the proposed changes “advance the Biden-Harris Administration’s federal oil and gas reform agenda, which was outlined in a Department of the Interior report developed in response to Executive Order 140087 “.
The proposed rule requires OCS companies to provide additional financial collateral (bonds), according to Opportune. However, the advisory firm warned that additional bonding requirements would spur bankruptcies.
According to the study, collateral markets have recently threatened to exit the offshore sector, thereby drastically reducing available collateral capacity. The cost of the additional additional obligations and the lack of capacity in the surety bond market will ensure that small independent lessees will not be able to obtain the additional collateral required, becoming a catalyst to stimulate the bankruptcy risk that the regulations are intended to address. protect taxpayers.
Additionally, the study found that tie-in requirements would result in reduced offshore drilling and production, particularly in the shallow waters of the OCS. The Opportune 2023 study estimated that the resulting decrease of approximately 55 million barrels of oil equivalent in OCS production would reduce associated US royalty revenues by approximately $0.5 billion.
Additionally, additional bonding requirements would also cause reduced revenue and operations for businesses serving the OCS, resulting in a loss of jobs and community/tax revenue along the Gulf Coast, particularly Texas and Louisiana, according to the study. Opportune estimated that the additional bonus requirements would reduce the country’s gross domestic product (mostly in the Gulf Coast states) by approximately $9.9 billion over a 10-year time horizon.
Correction proposal
The study says there is a better way. “Instead of implementing the proposed rule, BOEM should continue its increased communication with operators and focus on sole responsibility properties. Continued collaboration will further the development of OCS and achieve BOEM’s goals without endanger the viability of the industry or increase the risk to the American taxpayer,” the advisory firm said.
The Opportune 2023 study proposed three potential areas for improvement in the existing regulatory structure that would support OCS tenants and protect ratepayers, which are improved valuation processes, better accuracy in data collection, and replacement and rethinking of financial guarantee vehicles.
The study proposed valuing P&A liabilities using the discounted balance of the asset retirement obligation from the lessees’ audited financial statements, and using the forward selling price to determine the present value of the lessees’ oil and gas reserves. lessees and add their audited P&A liabilities to avoid double. dangerous effect on lessees when assessing their financial strength and respective collateral requirements.
In addition, the study suggested that it should be a requirement that public and private operators report audited estimates of future P&A costs and dates, by property. In addition, the reported audited amounts must be uploaded to a national BSEE database, similar to federal reformulated blend reporting requirements for US refineries.
The Opportune 2023 study also suggested replacing the additional bonding requirements with a cash reserve to be self-funded by OCS lessees through future production until that reserve equals the unbonded P&A liability associated with properties owned by small independents without other co-owners or previous owners. chain of title tenants (sole liability properties).
The study also suggested the creation of a federal agency to issue unsecured bonds on single liability properties, allowing U.S. taxpayers to participate in the monetary float created to insure P&A’s future liabilities.
To contact the author, please email andreson.n.paul@gmail.com
