The Bureau of Ocean Energy Management (BOEM) recently announced revisions to its financial assurance and risk management requirements for companies holding oil and gas leases in federal waters.  BOEM regulations establish a multi-tiered financial assurance system for oil and gas leases, right-of-ways, and easements located on the outer continental shelf.  In 2008, BOEM issued guidance to clarify the procedures and criteria BOEM uses to determine if additional financial assurance is required under the regulations.  Effective September 12, 2016, BOEM is replacing the 2008 financial guidance with Notice to Lessees No. 2016-N01, which requires higher levels of financial assurance for decommissioning obligations and other potential liabilities.  NTL 2016-N01 inexplicably bypasses a proposed rulemaking BOEM initiated in 2014, and appears to impose substantive changes that call into question whether BOEM can issue such “interpretive” guidance without a formal advance notice and public comment.

One of the primary changes in NTL 2016-N01 is to criteria that will be used to determine the financial ability of a lease holder to carry out its decommissioning obligations.  Previously, a lessee could self-insure up to 50% of the lessee’s net worth.  Under the new guidance, the lessee may only self-insure up to 10% of the company’s “tangible net worth,” which the guidance defines as the company’s total assets less the companies liabilities and intangible assets such as copyrights, patents, and intellectual property.  

Additionally, BOEM is discontinuing its previous policy of considering the combined strength and reliability of co-lessees when determining if additional security is required.  Now, BOEM will consider whether each individual lessee with an ownership interest in a lease, right-of-way, or easement is capable of addressing the financial responsibility for 100% of the decommissioning and other liability costs.  In essence, BOEM will treat each co-lessee as though it is the sole lessee.  

If BOEM determines a company does not have the ability to cover the financial obligations of decommissioning and other liability costs, the agency will send the company a written order requiring additional financial assurance.  In implementing the new guidance, BOEM states it will initially focus on high risk properties, such as those where there is only one leaseholder responsible for decommissioning costs.  These lessees will have 60 days from the date of BOEM’s order to obtain the required additional financial assurance.  Lessees, that are not considered high risk, will have 120 days from the date of the order to provide additional financial security.  

Overall, BOEM’s new financial assurance guidance is a substantial change from past policy and in many cases will require lessees to provide significantly more financial assurance.  NTL 2016-N01 could adversely affect the value of offshore lease assets, particularly fractional interests, in the minds of potential buyers, and in the current environment of depressed prices impose major new costs on current interest owners.  Smaller owners might now be precluded from self-insuring their decommissioning and related liabilities.  BOEM is conducting workshops to assist companies with understanding the new financial assurance requirements.