Three Gulf Coast states are suing the US Department of the Interior to block the implementation of new bonding requirements for offshore operators in the Gulf of Mexico, saying the government's new rule is "arbitrary and capricious" and hurts small independent producers.
Texas and Mississippi joined Louisiana's June 17 suit against Interior and the Bureau of Ocean Energy Management (BOEM), asking the court to either toss the rule or enjoin any enforcement when it goes into effect June 29.
Investment grade or pay
The new rule would require current operators to procure bonds to cover any future costs to decommission their offshore operations if they do not have investment-grade credit ratings or sufficient oil and gas in reserve to cover the cost should they go bankrupt.
That requirement alone tips the scales in favor of large, well-financed major and large, independent operators with investment-grade credit ratings at the expense of smaller operators, costing the Gulf states jobs and tax revenue, the suit said.
The states say this is a departure from current rules, which hold every company that previously owned the wells or platforms liable for any decommissioning costs if the present operator goes out of business. The states claim that the motivation behind the rule is the Biden administration's pledge to reduce offshore oil and gas operations.
Cleanup costs
The states and trade groups said the rule change is a solution to a problem that does not exist: Taxpayers have had to pay little to decommission offshore exploration and production facilities.
Only about $58 million in costs have been charged to the taxpayer since offshore operations began 75 years ago, Gulf Energy Alliance Executive Director Kevin Bruce said in an interview. Bruce compared that figure to the $208 billion in taxes and royalties paid over the past 40 years.
Criticism for Biden
Louisiana Attorney General Liz Murrill said the regulatory move was a backdoor attempt by the Biden administration to cut oil and gas activity in the Gulf.
"Joe Biden is unlawfully attempting to kill Louisiana jobs and American energy security by making the financial burden required of offshore producers so exorbitant it is no longer feasible to operate," Murrill said in an email.
Murrill said federal agencies — Interior, BOEM and the Office of Management and Budget — ignored comments on the rule that pointed out that it is useless because the surety companies do not have the ability or desire to write the billions of dollars of bonds the new rule would require.
The attorney general for Mississippi said it does not comment on active litigation and the Texas attorney general did not respond to a request for comment. The Interior Department declined to comment.
Besides the government, smaller operators see the hand of Big Oil behind the change, which would relieve the majors of obligations on properties they sold.
"These losses go like this, a company goes bankrupt, can't pay the abandonment demand, then the bondholders pay, and then whatever's left, the major pays, because they're in the chain of title," Arena Energy LP Co-founder and CEO Mike Minarovic said June 18. "As long as you have a major in the chain of title, there is zero risk to the taxpayers at all, zero. Almost all the assets [in the Gulf] are in that scenario, because this whole thing was developed by the majors."
"The final rule attracted thousands of public comments, and the rule split the industry into competing positions," Holland & Knight LLP attorneys Jim Noe and Elizabeth Craddock said in an alert to their clients after the final rule was announced in April.
"The large, international oil and gas companies that have mostly divested their shallow water oil and gas properties ... but that nonetheless still carry joint and several liability for decommissioning liability supported the rule," the Holland & Knight attorneys said. "They argued that current lessees should be financially capable of performing all of their regulatory and lease obligations, including decommissioning."
BOEM estimated that 391 companies would be affected by the new rule. More than $7 billion in bonds would have to be written, BOEM estimated, an increase over the $1.5 billion to $2 billion in existing bonds to the federal government and the $3 billion in private bonds issued during Gulf of Mexico property transfers.