The drilling industry knows all too well that
the pain of the current commodity down-cycle
extends far beyond E&P producers. The decline in rig counts and day rates have tracked
crude oil prices, leading to market capitalization and liquidity levels that threaten the future existence of many offshore drilling companies operating in the Gulf of Mexico’s outer
Now, a new and potentially devastating storm
is threatening the United States Gulf Coast and
the offshore drilling industry. Unlike the turbulence caused by the market forces of supply and
demand over the past two years, this is an economic storm fueled by ill-conceived changes in
Rather than using this opportunity to encourage future development of the OCS, while
still protecting the taxpayer, the US Department of the Interior has taken dead-aim at reducing drilling in the OCS. In April 2016, the
Interior Department’s Bureau of Safety and
Environmental Enforcement (BSEE) issued
final well control rules that will add extensive
costs and technological complexities to offshore drilling and production.
This past July, the Interior’s Bureau of Ocean
Energy Management (BOEM) issued a notice
to lessees which was a solution looking for a
problem, creating the potential to increase and
accelerate risk to the US taxpayers and Gulf
Coast economy in a way unseen since the 2010
moratorium on offshore drilling. Specifically,
the BOEM’s new rule will change the way the
oil and gas industry funds the decommissioning costs of wells, pipelines, and other facilities
(commonly referred to as plugging and abandonment, or P&A) in the OCS.
On July 14, 2016, BOEM issued a Notice
to Lessees (NTL) that will force companies
to post supplemental surety bonds or other
collateral to insure 100% of future P&A costs
for OCS oil and gas properties.
BOEM states that the new NTL is meant
to protect the US taxpayer from ever having
to pay decommissioning costs for an oil and
gas company that falls into bankruptcy. To
date, most companies have been exempt from
supplemental bonding, provided that their tangible net worth exceeds $65 million and is at
least two-times the amount of their estimated
Although BOEM claims the measure has
been taken to protect US taxpayers from having to pay decommissioning costs for bankrupt oil and gas companies, Opportune’s newly released research shows that the NTL is an
overreaching regulation that attempts to solve
a non-existent problem.
Opportune has conducted an independent
study to calculate potential risks to the US
taxpayer with the assistance of their valuation, petroleum engineering, and financial
reporting experts. Through analyzing P&A
cost data and market research, Opportune
has shown how the NTL could jeopardize independent businesses and communities.
For the most probable outcome, which assumes an oil price of $75/bbl, Opportune estimates that the offshore drilling and service
industries will lose approximately $9 billion
of future revenue over the next 10 years as a
direct result of the NTL.
The study’s key findings show clearly why
the BOEM should reassess this NTL; these
are outlined below.
The risk is strongly overstated. The US taxpayer has never been required to pay to P&A
an OCS property.
Flawed assumptions and inaccurate data.
The US Government Accountability Office acknowledges that the database used by BOEM
is limited in its ability to accurately and completely record cost estimates of decommissioning liabilities.
Exposes taxpayers to heightened risk. Smaller
independent oil and gas operators will be
unable to obtain the required supplemental
bonding: the NTL will become a catalyst to
spur the bankruptcy risk from which it was
intended to protect the US taxpayer.
Reduces OCS hydrocarbon production. The
NTL will result in reduced offshore drilling and
production, particularly in the shallow water of
Reduces royalty revenues to government. The
NTL will result in sharply lower US royalty
revenue as operators scale back production.
Jeopardizes communities and jobs. The NTL
will cause reduced revenues and operations
for companies serving the OCS offshore industry, resulting in a commensurate loss of
jobs and community/tax revenues along the
Gulf Coast, particularly Texas and Louisiana.
There is a better way. Current guidelines
can be modernized to encourage OCS development, as detailed in the study, which will
achieve BOEM’s goals without jeopardizing
the industry’s viability or increasing risk to
the US taxpayer.
The study proposes three potential areas
of improvement to the existing regulatory
structure that would provide support to OCS
operators as well as protect taxpayers:
• Reaffirm financial assurance vehicles
–Recognize existing and future private
bonds between current and previous
owners as additional financial assurance
to cover P&A obligations
–Improved bonding requirements through
a new cash reserve fund that is self-funded
by lessees through future production.
• Better accuracy in data gathering
–Require independent CPA firms to issue
annual agreed upon procedures reports
attesting to the lessees’ cost and collateral
–Better title transfer processes.
• Improved valuation processes
–Value P&A liabilities using the discounted
asset retirement obligation balance from
lessees’ audited financial statements
–Apply present value analysis, other steps to
avoid a double jeopardy effect on bonding
Without applying these recommended chang-
es, the proposed regulations could pose an exis-
tential threat to many independent oil and gas
operators and drilling companies on the OCS, as
well as for the communities and families that rely
on these companies for their livelihoods.
“The amount of governmental overreach
and regulation in our industry is unparalleled
and the negative effects will last for genera-
tions if they are not addressed with the utmost
urgency,” according to Beau Blake, president
and CEO of Blake International Rigs, LLC.
“Oil and gas companies are currently feeling
the strain of low commodity prices. If you add
the lack of capital in the market, coupled with
the new NTL bonding requirements, it will
surely drive companies out of business, ow-
ing to the fact that these new regulations will
strip O&G companies of their available cash to
invest in new projects which will in turn elimi-
nate more jobs.”
The study indicates that the US economy
will experience a decline in gross domestic
product of approximately $10 billion over a
10-year time horizon. Beyond the opportu-
nity cost of wells not drilled and the result-
ing overall impact to the Gulf Coast, the
reduction in development will result in lost
royalties to the Interior of approximately $4.6
billion. Total direct and indirect costs of the
NTL to the taxpayer are estimated to be ap-
proximately $14.6 billion. •
Josh Sherman is the partner in charge
of the complex financial reporting
group of Opportune. He has over 18
years of experience in providing clients
across the energy spectrum with technical research, capital markets and SEC
reporting assistance. Sherman specializes in initial public offerings, variable
interest entities, purchase price allocations, energy
trading and derivatives, stock-based compensation and
oil and gas disclosures. Prior to joining Opportune, he
worked in the audit and global energy markets department with Deloitte & Touche. He serves on the board of
directors as Audit Committee Chairman of JP Energy
GP II LLC (MLP) and Trans Energy, Inc.
New BOEM regulations threaten independent Gulf of Mexico operators