Thought Leadership

Changes to the Bonding Rules in the Gulf of Mexico

Client Updates
  1. Introduction

    On December 15, 2020, the Bureau of Ocean Energy Management (“BOEM”) and the Bureau of Safety and Environmental Enforcement (“BSEE”) concluded the comment period for proposed rulemaking with implications for those with a current or past interest in an oil and gas lease, right-of-use and easement (“RUE”) or pipeline right-of-way (“ROW”) on the Outer Continental Shelf of the Gulf of Mexico. A final rule is now pending, the ultimate form of which may differ from what was originally proposed.

    Among other changes, BOEM’s proposed rulemaking eliminates the requirement for a lessee or ROW or RUE grant holder to post additional security if there is a creditworthy co-lessee or co-grant holder or predecessor lessee or grant holder or (in the case of lessees) if the proved reserves on the lease are sufficiently valuable. The proposed rules would supersede prior guidance regarding additional security requirements, including NTL No. 2016-N01. 

    In addition, BSEE’s proposed rulemaking would create a new procedure for establishing the sequence in which BSEE will order predecessors to carry out decommissioning obligations when the current lessee or grant holder fails to do so. BSEE’s proposal would also require a lessee or grant holder to post a surety bond in order to stay an administrative ruling pending appeal and clarify that RUE grant holders are also responsible for decommissioning obligations.

    A client alert (available at https://bit.ly/35vp4Yu) describes the proposals in greater detail.

  2. BOEM Rulemaking

    1. Simplify Evaluation Criteria for Additional Security Requirements

      Pursuant to the existing rules, BOEM uses several criteria to determine whether to require additional security. BOEM’s proposed rules simplify this process by focusing on the credit rating of the lessees and any predecessor lessee, and the value of proved reserves.

      For leases, the proposed rules would require BOEM to consider the following criteria sequentially to determine whether additional security is required:


      1. First, the lessee’s credit rating is at least BB- from S&P, Ba3 from Moody’s or an equivalent credit rating (or a proxy rating determined by BOEM based on audited financial information);

      2. Second, the credit or proxy credit rating of any co-lessee of the lessee meets or exceeds the criteria immediately above;

      3. Third, the proved oil and gas reserves on the lease has a net present value that exceeds three times the estimated decommissioning cost associated with the production of those reserves; and

      4. Fourth, the credit or proxy credit rating of prior lessees that are jointly and severally liable for the decommissioning obligations is at least equal to the above criteria (provided, BOEM may require the lessee to provide additional security with respect to decommissioning obligations for which that prior lessee is not liable).

      For RUEs and ROWs, the proposed rules would require BOEM to consider the grant holder’s or co-grant holder’s credit or proxy credit rating and those of each predecessor grant holders (or, in the case of RUEs, previous lessees on the lease where the RUE is located) that is liable for the decommissioning.

    2. Remove Restrictions on Third-Party Guarantees

      The existing rules allow only a lessee to submit a third-party guarantee in lieu of other security as additional security, with separate qualifications for the guarantor. BOEM believes that the separate qualifications have proven difficult to apply. The proposed rules would instead apply the credit rating criteria used to assess lessees and grant holders to evaluate guarantors. The option to provide a third-party guarantee as additional security has also been extended to ROWs and RUEs under the proposed rules.

      The proposed rules also allow guarantors to choose whose and what obligations to cover rather than all obligations of all lessees, operating rights owners, and operators on the lease.

      Finally, the proposed rules allow BOEM to cancel a third-party guarantee on the same terms that apply to additional bonds and pledged security.

  3. BSEE Rulemaking
  1. Clarify Order of Responsibility for Decommissioning Obligations

    Under BSEE’s proposed rulemaking, BSEE will issue decommissioning orders to liable predecessors in reverse chronological order if the current lessee defaults, with more recent predecessors receiving orders to conduct decommissioning first.

    The proposed rule allows BSEE to depart from the above framework, and issue orders to any or all other predecessors for the performance of their respective accrued decommissioning obligations under certain circumstances.

  2. Require Bond for Appeals

    In addition, BSEE has proposed that parties who file administrative appeals of decommissioning decisions or orders must post a surety bond in order to seek a stay of that decision or order pending the appeal. The surety bond would be in an amount deemed sufficient by BSEE to ensure completion of decommissioning in the event of a default.

    BSEE is also proposing to revise the decommissioning regulations with respect to OCS facilities used under RUE grants to expressly include RUE grant holders as parties that can accrue decommissioning obligations.

 

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