Larry W. Nettles
Larry J. Pechacek
Vinson & Elkins, LLP
Oil and natural gas E&P companies operating on the outer continental shelf (OCS) are
awakening to the unwelcomed realization
that supplemental bonding waivers will soon
be a thing of the past. The Bureau of Ocean
Energy Management (BOEM) is expected
to formally issue its new notice to lessees
and operators (NTL) on supplemental bonding procedures no later than early summer
2016. The past practice of being exempted, or
“waived,” from certain offshore decommissioning obligations will come to an end.
While elimination of the waiver practice
represents a potentially onerous burden for
oil and gas companies accustomed to such
exemptions, this change is not expected to
be implemented immediately. The NTL will
likely take effect 60 days following its issuance. In addition, the NTL will call for a tailored plan, to be developed by the operator
and submitted to BOEM for approval, which
explains how the company will achieve the
required supplemental bonding. Only then,
following approval of the plan, will supplemental bonds be required.
Currently, the bureau envisions that
bonding amounts owed by OCS lessees and
operators will be posted in approximately
equal installments 120 days, 240 days, and
360 days after approval of the tailored plan.
Thus, it could be upwards of 18 months before these supplemental bonding amounts
must be paid in full.
Unfortunately, the price of oil has been
in sharp decline since mid-2015, and with
this erosion in commodity pricing, there is
a corresponding loss in company net worth.
Currently, issuance of a waiver depends, in
part, upon a company’s net worth. For an operator currently waived from supplemental
bonding for its decommissioning obligation,
a decline in net worth could result in that
company no longer being able to satisfy the
requirements upon which the waiver was
Upon a determination by BOEM that an
operator no longer satisfies the relevant financial strength and reliability criteria, the
likely outcome is that the bureau will revoke
the supplemental bonding waiver and require the company to post additional financial assurance.
With the threat of BOEM potentially taking
action in the near term to revoke a waiver, how
can an OCS operator act now, to be in the best
position for future negotiations with BOEM on
the posting of supplemental bonds?
There are several proactive measures that
all oil and gas companies may take. These
steps focus on obtaining a valid snapshot of
an operator’s decommissioning obligation,
based on its actual, real-time operations
occurring on the OCS. BOEM relies upon
joint and several liability concepts relative to
co-lessees and holders of operating rights in
assessing a particular company’s decommis-
sioning obligations vis-à-vis its co-lessees
or holders of operating rights. Nonethe-
less, the trick is to accurately demonstrate
to the satisfaction of the bureau the relative
obligations of each of the liable parties with
respect to decommissioning activities.
As a practical matter, BOEM (or, for that
matter, the federal Bureau of Safety and Environmental Enforcement, or BSEE, as it relates to the estimation of decommissioning
obligations on the OCS) has neither the staff
nor the resources to revisit or reconfirm
what decommissioning obligations may be
incurred by an OCS operator beyond what
is initially assessed, absent a clear trail documenting changes in these liabilities. Consequently, it is incumbent upon the operator to
determine what its actual decommissioning
obligations are (or should be) and take the
necessary steps now to rectify any inaccura-cies in BOEM or BSEE files. Many of these
tasks may seem relatively straightforward
but are often taken for granted or overlooked.
Step one. Confirm that the company’s asset base (including associated working interests amongst those assets) on the OCS
and associated working interests are properly reflected in BOEM’s records.
Important issues to verify include:
1. Are all lease interests properly reflected in the Bureau’s records?
2. Have all assignments of leases by the
company to third parties been correctly
addressed in the Bureaus’ records?
3. Are the relative working interests of
those leases (including both operated
and non-operated by the company) properly reflected in the Bureau’s records?
This task is necessary to ensure that both
the company and BOEM are comparing and
contrasting the same asset base and working
interests associated with those OCS properties.
Step two. Confirm what supplemental bonds
are held by the oil and gas company and
whether those bonds are properly reflected in
the bureau’s records.
Here, an energy company should review
internal and BOEM records to determine
whether there are any gaps in bonding cov-
erage or any “double-bonding” of proper-
ties. For leases where there are co-lessees
or multiple holders of operating rights, care
should be taken to confirm what financial
assurances are in place for which parties in
order to address the decommissioning obli-
gations of those leases.
Step three. Confirm that errors, discrep-
ancies, or other disputed items identified by
the company are resolved with BOEM.
If errors, discrepancies or other disputed
items are identified by an operator, those
matters should be brought to the attention
of BOEM and corrected and/or resolved.
For example, an energy company may
have assigned certain leases to a third
party, and the assignment was approved by
BOEM, but the bonds were never released
by BOEM, then the company will want to
request changes to BOEM’s records. Other-
wise, decommissioning obligations based on
incorrect or incomplete records will result.
Step four. Evaluate the decommissioning
obligations determined by BSEE and con-
sider whether an independent evaluation of
those liabilities is necessary.
BSEE, not BOEM, is charged with esti-
mating the decommissioning obligations for
an operator’s leases and other interests on
the OCS. However, an energy company may
have concerns as to how BSEE prepared the
initial estimated amount or whether those es-
timates should be revised downward based
on new information beneficial to the company
(e.g., cheaper labor or supplies, newer tech-
nologies or methods for decommissioning).
Compounding the problems described
above are demands made by surety companies for the provision of additional collateral
to bolster the bonds issued by those or other
surety companies on behalf of the OCS lessees and operators.
The ability of a company to post additional
collateral under circumstances where its assets are already mortgaged may present a
significant issue, and likely may force the
company to seek relief from its credit facilities. This would likely reduce the amount of
borrowings available under such credit facilities to use in exploration and production
The alternative is bleak, as any failure to
post the necessary added collateral may result in default under the surety agreements,
which in turn could result in loss of the associated bond coverage provided to BOEM. •
Larry W. Nettles is the
Practice Group Leader at
Vinson & Elkins.
Larry J. Pechacek is a
Counsel in the Environmental and Natural Resources Practice Group Leader
at Vinson & Elkins.
Financial assurance requirements, low oil
prices increase pressure on offshore lessees