A. Introduction

On September 17, 2020, the Bureau of Ocean Energy Management (“BOEM”) and the Bureau of Safety and Environmental Enforcement (“BSEE”) issued a notice of proposed rulemaking with implications for those who own or have owned an 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.

Most notably, BOEM’s proposed rulemaking eliminates the requirement for a financially unstable lessee or any other lessee to post additional security if there is a creditworthy co-lessee or predecessor lessee or if the proved oil and gas reserves on the lease are sufficiently valuable. The same rule applies with respect to ROW and RUE grant holders, though oil and gas reserves are not taken into account. 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.

Among other changes, BOEM’s proposed rulemaking also (i) eliminates certain restrictions on third-party guarantees submitted as additional security in lieu of other security; (ii) removes the requirement that lease-specific abandonment accounts be funded with treasury securities; and (iii) adds three circumstances in which BOEM will return a lessee or grant holder’s additional security.

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. 

B. BOEM Rulemaking

1. Simplify Evaluation Criteria for Additional Security Requirements

Under the current bonding and security rules contained in 30 CFR Part 556: Subpart I, in addition to the base bonding requirements for holding an oil and gas lease, ROW or RUE, BOEM may require additional security if the lessee or grant holder may be financially incapable of meeting its decommissioning and other obligations. Pursuant to the existing rules, BOEM uses several criteria to determine whether to require additional security, including financial capacity, projected financial strength, business stability, reliability in meeting obligations based on credit rating or trade references and record of compliance with laws, regulations and lease terms. BOEM’s proposed rules simplify this process by focusing on the following two criteria: the credit rating of the lessees and, for the first time, any predecessor lessee, and the value of proved oil and gas reserves.

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

i. First, the lessee’s credit rating from a nationally recognized statistical rating organization (“NRSRO”) or a proxy credit rating determined by BOEM based on audited financial information must be at least BB- from S&P, Ba3 from Moody’s or an equivalent credit rating provided by an NRSRO recognized by the Securities and Exchange Commission;

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

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

iv. 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 criteria first set forth above (provided, even if any prior lessee meets this criteria, 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 credit or proxy credit rating and those of each predecessor grant holders that is liable for the decommissioning. With respect to RUEs, BOEM would also consider the credit or proxy credit rating of previous lessees on the lease on which the RUE is located to the extent they have accrued decommissioning obligations for facilities located on that lease. For ROWs, BOEM would also consider the credit or proxy credit rating of any co-grant holder of the ROW.

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. BOEM uses separate criteria to evaluate third-party guarantors, including a requirement that the amount of the guarantee cannot exceed 25% of the guarantor’s unencumbered net worth. Because BOEM believes that this requirement has proven to be difficult for it to apply, the proposed rules would instead apply the credit and proxy credit ratings 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 (e.g., a fixed dollar amount or a percentage of decommissioning liability in proportion to the ownership interest of a particular lessee or grant holder) rather than being required to guarantee all obligations of all lessees, operating rights owners, and operators on the lease. If the amount of the guarantee is less than the total additional security required by BOEM, the lessee or grant holder would be required to cover the difference.

Finally, the proposed rules allow BOEM to cancel a third-party guarantee on the same terms that apply to cancellation of additional bonds and return of pledged security (described in more detail below).

3. Other Changes

Under the current rules, if a lessee elects to use a lease-specific abandonment account in lieu of additional security, then the account must be funded with Treasury securities before the amount on deposit reaches the maximum amount insurable by FDIC (currently $250,000). Because BOEM has determined that the risk of loss by virtue of a bank failure is minimal and because it believes that funding these accounts with low-yield Treasury securities may act as a disincentive to lessees to use them, the proposed rules remove this requirement.  The proposed rules also rename these accounts “Decommissioning Accounts” to make clear that they are not limited to a single lease.

Finally, the proposed rules allow BOEM to cancel additional security if (i) BOEM determines additional security is no longer required (based on the above-described criteria); (ii) the operations for which the bond was provided ceased prior to accrual of any decommissioning obligations; or (iii) cancellation is appropriate because BOEM determines such bond never should have been required.

C. BSEE Rulemaking

1. Clarify Order of Responsibility for Decommissioning Obligations

BSEE is proposing to revise the existing 30 CFR Part 250: Subpart Q decommissioning regulations to address the order in which predecessors will be ordered to perform decommissioning if the current lessees or grant holders fail to do so. Under this proposal, BSEE will issue decommissioning orders to liable predecessors in reverse chronological order.   The most recent predecessors would receive orders to conduct decommissioning first, before BSEE turns to predecessors more remote in time. In addition to these predecessors, BSEE will issue orders to predecessors who assigned interests to a defaulted lessee.

The proposed rule allows BSEE to depart from the strict reverse chronological order framework, and issue orders to any or all other predecessors for the performance of their respective accrued decommissioning obligations, when: (i) none of the predecessors who were ordered to perform obtains approval of the decommissioning plan or executes the decommissioning according to the approved decommissioning plan; (ii) the Regional Supervisor determines that there is an emergency condition, safety concern, or environmental threat, such as improperly maintained and monitored facilities, leaking wells or vessels, sustained casing pressure on wells, or lack of required valve testing; or (iii) the Regional Supervisor determines that applying the reverse chronological sequence would unreasonably delay decommissioning.

2. Require Bond for Appeals

In addition, BSEE is proposing to require parties who file administrative appeals of decommissioning decisions or orders to post a surety bond in order to seek to obtain 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 if the lessee or grant holder loses its appeal and subsequently defaults on its obligation.

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. BSEE’s proposal would revise the current definition of the term “you” to include RUE grant holder and predecessors among the list of parties categorized as “you” or “I” for purposes of the Subpart Q decommissioning regulations. While the proposed revisions would expressly extend decommissioning obligations to RUE grant holders, lessees that have also accrued such obligations for facilities and equipment on the RUE would retain their joint and several liability for satisfying those obligations. Accordingly, BSEE is proposing to amend Subpart Q to state that RUE grant holders will accrue decommissioning obligations in the same way as lessees, operating rights holders, and ROW grant holders. 

D. Conclusion

The proposed rules described above respond to Executive Orders 13783 and 13795, which called for federal agencies to review ways to reduce potential burdens on the development of domestic energy resources while ensuring operators’ compliance with lease terms. To that end, the proposed rules generally narrow the circumstances in which current lessees and grant holders must provide additional security, provide greater flexibility in how such security may be supplied, and clarify the responsibilities of current and former lessees and grant holders with respect to decommissioning and other obligations.

The public will have 60 days to comment after the proposed rules have been published in the Federal Register. Once the agencies have taken public comments, there is typically no date by which the agencies must act on the proposed rule. If the agencies decide to issue a final rule, it would take effect after review by the Office of Management and Budget and any other applicable procedures have been followed, including public notice. During the course of the above procedures, the rule is subject to change from the form originally proposed.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.