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76% of Small Offshore Oil Companies at Risk

  • The new BOEM rule requires stricter financial assurance standards, impacting 76% of smaller oil and gas operators in the Gulf.
  • Small companies may face significant costs for surety bonds, potentially leading to a $379-800 million annual expense.
  • The rule's implementation could result in job losses, reduced federal royalties, and increased operational difficulties for small offshore oil firms.
Offshore Oil

Authored by Pete McGinnis via RealClearPolicy,

In June 2023, the Bureau of Ocean Energy Management proposed a rule that would require stricter financial assurance standards for oil companies operating in the Outer Continental Shelf. This costly rule became final on April 15, 2024, but in the 10 months since its initial proposal, BOEM did nothing to alleviate concerns for smaller companies that comprise of 76 percent of oil and gas operators in the Gulf. As a result, many of these companies could be forced out of business by extreme and unnecessary costs from this rule. The situation threatens an estimated 36,000 jobs, more than $570 million in federal government royalties, and $9.9 billion from our GDP.

Records obtained via the Freedom of Information Act show private meetings between Interior officials and representatives of the major oil companies as they cooperated on this rule. If you think that’s strange, you’re not alone. President Biden made clear in his campaign that he wanted to end oil and gas production on public lands. It’s baffling that Big Oil – among the administration’s most, if not the most, maligned businesses – would stand on the same side with environmental groups such as the Sierra Club who praised the rule. But needless government intervention makes strange bedfellows. Big Oil must think it won’t miss the small competitors the rule will drive from the market.

The conditions for obtaining an oil and gas lease include meeting obligations for decommissioning. Leaseholders must provide “financial assurance” that they can bear the costs to cap wells and restore the site. If the financial strength of the company is insufficient, costly surety bonds can be purchased to satisfy the requirements. However, a quiet omission is the larger threat for smaller operators.

Historically, joint and several liability protected these small businesses from the financial demands of surety bonds. Most small businesses operating in the OCS have assumed a lease started by a bigger oil company. Typically, a large company drills the well and harvests a large amount of oil (and profits), and then sells the lease. Under this system, all companies who have ever held the lease are liable for decommissioning. Accordingly, if any company who could be liable for decommissioning can prove capable of paying for decommissioning, no company is required to buy surety bonds.

The new rule is largely silent on joint and several liability, causing some uncertainty. It appeared that all present leaseholders will have to prove their financial strength on their own. BOEM’s director Liz Klein cleared up some confusion – and confirmed fears about the rule – at the Energy and Minerals Subcommittee hearing on May 23. She said that BOEM “would be going to those financial assurance requirements before we went to predecessors” when asked by Rep. Garret Graves (La.) about this issue. In short, the rule's dysfunction appears quite intentional.

Mega oil companies will have little problem with the rule’s new credit rating requirement. Smaller companies, with fewer assets, may be unable to meet the new standards and need to purchase surety bonds. Small oil companies will now have to spend, conservatively, $379 million per year on surety bonds, but some estimates are closer to $800 million.

But all that assumes the market exists for those bonds. The Surety and Fidelity Association of America informed BOEM that the rule is either impossible or extremely cost-prohibitive for underwriting. The market supply of surety bonds in the OCS had already contracted before the rule. The problem is only going to get worse. Companies may not be able to acquire the needed financial assurances because the market likely will not even exist.

What makes matters worse is that all this cost covers a risk that is effectively a rounding error historically and in the context of the royalties flowing from the offshore oil and gas industry. According to BOEM, taxpayers have borne decommissioning liability totaling $58 million – from a single company that lacked predecessor owners of the platform to call on to cover unfunded cleanup costs. Against a conservative estimate of roughly $25 billion in decommissioning costs borne solely by private companies over the years, and the contribution of billions each year from all oil and gas royalties, the public is left to wonder whether this rule is a solution in search of a problem. The existing system of joint and several liability has protected the taxpayers and could continue to do so. The new costs to small oil businesses are for naught – unless the motivation is to make energy more expensive and drive out more companies.

That motivation makes sense for the radical environmental special interests, who have made clear they intend to shutter energy production at every opportunity. It doesn’t make sense for Big Oil companies, who stand to lose customers who buy their leases. Their support for the rule is short sighted.

Since BOEM knew this outlook and finalized the rule anyway, the motive must be something other than protecting taxpayers. Agency leadership at BOEM appears more concerned with penalizing responsible energy producers than protecting American families and businesses from out-of-control inflation stemming from their policies. 

Peter McGinnis is the Communications Director for the Functional Government Initiative (FGI). He has worked for political campaigns and advocacy organizations at the state and national level. He holds a dual B.A. in Economics and Political Science from Temple University.

By Zerohedge.com 

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