BOEM Seeking to Overhaul OCS Offshore Financial Assurance Requirements

On Tuesday August 19, 2014 the Bureau of Ocean Energy Management (BOEM) provided an advance notice of proposed rulemaking (ANPR) in the Federal Register. BOEM is seeking to update its regulations and program oversight for Outer Continental Shelf (OCS) financial assurance requirements, and has solicited comments from stakeholders to assist its efforts.  A full copy of the ANPR can be found at http://federalregister.gov/a/2014-19380.

Based on the assumption that existing bonding regulations are outdated and fail to adequately deal with the changed business landscape in which organizations now conduct offshore activities, the BOEM is seeking public input as it seeks to overhaul the current program encompassing risk management, financial assurance, and loss prevention requirements.

Currently, the BOEM requires lessees to provide performance bonds and/or one of various alternative forms of financial assurance to ensure compliance with the terms and conditions of leases, as well as Rights-of-Use and Easements, and Pipeline Rights-of-Way.  While the ANPR makes no formal proposed changes to the relevant regulations, the general impression the ANPR leaves is that BOEM is considering quite significant and comprehensive changes to the current framework of the OCS financial assurance regulations that may result in (1) increasing the classes of interested parties that are required to post financial assurances in favor of the BOEM (including potentially non-operating interest owners, ORRI holders and secured lenders), (2) requiring BOEM approval of a broader class of transfers (including ORRIs, NPIs and mortgages), (3) monitoring and imposing limits as to the debt of responsible parties and (4) increasing the amounts of the required coverage for activities and facilities.

Specifically, BOEM  is soliciting comments as to whether it should:

  • Require prior approval of all types of assignments between companies and/or lenders, including, but not limited to, assignments of overriding interests, royalty interests, net profits, production payments, or other types of lease interests;
  • Monitor and approve the total percentage of assignments of rights and obligations between companies and/or lenders;
  • Even if it does not approve all transfers of all types of rights and obligations between companies and/or lenders, require evidence of all such transfers to be filed with BOEM;
  • Monitor debt obligations; and
  • Require the recording and/or BOEM approval of all transfers of purely "economic" interests.

BOEM is also soliciting comments with respect to issues relating to long-lived OCS projects, those that span 40 to 50 years or more. BOEM has expressed concern that technological and financial challenges not evident at the inception of a project can arise over the lifespan of a project and as a result the amount of financial assurance needed may vary over time.  BOEM is seeking to implement practices that can be used to help better identify and demonstrate financial assurance over the life of these projects. Many of the questions posed by BOEM under this area suggest BOEM is considering a more qualitative-like assessment of the risk management and financial capabilities of each company that seeks to own or operating within the OCS. For example, BOEM has asked how it should consider the financial and technical qualifications of a company before the company is allowed to conduct business on the OCS as well as the corporate structure and offshore business performance and history of a company.

Other questions posed by the BOEM suggest a potential diversification in options for structuring financial assurance, along with increased oversight. For example, BOEM has asked whether it should tailor financial assurance requirements for OCS operations on a case-by-case basis. It has also sought comments on whether companies should be allowed to set up a decommissioning trust that is funded from a percentage of production. With respect to increasing its oversight, the ANPR notes that BOEM is considering assessing the financial strength of individual companies with active operations on the OCS to more than once per year.

The final area that the ANPR seeks comments on is with respect to bonding requirements. There is interest in comments on whether the current two-tiered bonding structure (an initial bond followed by an additional bond) should remain or be replaced with a one bond requirement. BOEM is also seeking comments on whether it should continue to allow self-insurance for companies who demonstrate the requisite financial strength. Another potentially relevant matter raised is whether the BOEM should continue to allow area-wide bonds.

Should you wish to submit comments on this ANPR, comments may be submitted using the Federal eRulemaking Portal: http://www.regulations.gov and the submission period is open up to and including October 20, 2014.

If you would like to discuss any of the matters raised in this note, or if you have any concerns arising from any other part of the ANPR, we would enjoy the opportunity to visit with you about them.