The long-awaited proposed changes to the Department of Interior’s Financial Assurance Rule (“Proposed Rule”) were finally announced yesterday by the Trump Administration. The announcement provides, among other things, that the proposed rulemaking is in efforts to clarify, streamline and provide greater transparency to the financial assurance requirements (e.g., supplemental bonding) for OCS lessees and grant holders of pipeline rights-of-way (“ROW”) and rights-of-use and easement (“RUE”), while protecting U.S. taxpayers against picking up the tab for high-risk decommissioning liabilities. Once this Proposed Rule is published in the Federal Register (date yet to be announced), the public will have a 60-day comment period.
A few highlights of the Proposed Rule include the following:
1. Modifying and streamlining BOEM’s evaluation criteria when determining whether OCS lessees and/or grant holders must provide additional financial security above the prescribed base bonds to ensure compliance with their decommissioning obligations. These same criteria would also be used to determine whether a company can be a guarantor on the OCS.
Under the Proposed Rule, BOEM’s evaluation criteria will be based on only 2 factors: (1) a company’s credit rating (or a proxy credit rating if a company doesn’t have a credit rating), and (2) the value of oil and gas reserves – thereby eliminating less relevant factors, such as the “net worth,” “business stability” or “record of compliance” factors, found in current regulations.
2. Providing for BOEM’s ability to rely on the combined, joint and several responsibility of all current and predecessor lessees (and grant holders) to perform required decommissioning in the event the current lessee defaults, reducing the circumstances in which BOEM would need to require additional security.
3. Creating a new procedure to establish the sequence in which BSEE will order predecessors in title to fulfill their accrued decommissioning obligations when the current lessees or grant holders (or their predecessors) fail to do so. For example, upon default by a current lessee or grant holder of its decommissioning obligations, BSEE would essentially pursue liable predecessors in reverse chronological order through the chain-of-title to perform accrued decommissioning obligations, starting with the most recent predecessor before turning to more remote predecessors in time. The Proposed Rule also provides that BSEE may deviate from this reverse chronological order in certain situations specified therein.
The Proposed Rule does not include an exemption of any current lessee or grant holder, or their predecessors, from their joint and several liability for their accrued decommissioning liabilities. Each party remains liable for its own accrued obligations.
4. Including RUE grant holders to the parties that accrue decommissioning obligations, and providing that RUE holders must comply with the same bonding requirements (and supplemental bonding requirements) as other lessees or grant holders.
5. Allowing more flexibility in the use of third-party guarantees and decommissioning accounts by removing restrictive provisions in the current regulations. For example, the Proposed Rule would remove the requirement that a third-party guarantee ensure compliance with the obligations of all lessees, operating rights owners, and operators on the lease. It would also allow a third-party guarantee to be used as additional security for a ROW and RUE grant, as well as a lease, and would allow a guarantor to limit its guarantee to those obligations it wants to cover under such lease or grant (e.g., an amount sufficient to cover a percentage of the decommissioning liability in proportion to the ownership percentage of a particular lessee or grant holder, a specific dollar amount, or a specific facility).
6. Removing perceived limitations on the use of a decommissioning account for a single lease and allowing these accounts to be used to ensure compliance with additional security requirements for an RUE or ROW grant, as well as a lease, or a combination thereof. In addition, the Proposed Rule removes the requirements that Treasury securities be pledged to fund the decommissioning account before the amount of funds in the account equals the maximum amount insurable by the Federal Deposit Insurance Corporation (FDIC).
7. Adding 3 additional circumstances when BOEM may cancel a bond: (i) at any time, when BOEM determines, using certain criteria specified therein, that a lessee or grant holder no longer needs to provide the additional bond for its lease, RUE or ROW; (ii) when the operations for which the bond was provided ceased prior to accrual of any decommissioning obligation; and (iii) when cancellation of the bond is appropriate because BOEM determines such bond never should have been required under the regulations.
8. Providing the Regional Director the authority to cancel third-party guarantees, in certain circumstances not covered by the current regulations, under the same terms and conditions that apply to cancellation of additional bonds and return of pledged security.
9. Imposing a requirement on any party appealing a BSEE decommissioning decision or order to post a surety bond when seeking to obtain a stay of that decision or order during the pendency of the appeal. Under the Proposed Rule, this bond would be in an amount deemed sufficient by BSEE to ensure that the decommissioning obligations can be timely performed if the appellant loses the appeal and defaults on its obligations.
Additional information and specifics about the Proposed Rule, the highlights referenced, above, as well as additional proposed revisions can be found here.
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