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On June 17, 2024, the States of Texas, Louisiana and Mississippi, and four oil and gas trade associations sued the Department of Interior (“DOI”) and its Bureau of Ocean Energy Management (“BOEM”) in the U.S. District Court for the Western District of Louisiana, State of Louisiana, et al. v. Haaland, et al., No. 2:2024-cv-00820, challenging BOEM’s new final rule entitled Risk Management and Financial Assurance for OCS Lease and Grant Obligations, 89 Fed. Reg. 31544 (Apr. 24, 2024) (the “Final Rule”). BOEM’s Final Rule requires current federal offshore lessees without an investment-grade credit rating, or without a co-lessee/grantee with an investment-grade credit rating, provide billions of dollars in new supplemental financial assurance to cover the cost of potential future outer continental shelf (“OCS”) decommissioning liabilities, as previously reported on by Liskow’s The Energy Law Blog. Plaintiffs are asking the court for equitable relief from the agency action, seeking either: a stay of the effectiveness of BOEM’s new regulations, which go into effect June 29, 2024, 89 Fed. Reg. 47080 (May 31, 2024); or an injunction to prevent the agency from implementing them.

Plaintiffs claim BOEM’s Final Rule is unlawful and must be vacated “for dozens of independently sufficient reasons” contained in 15 causes of action under the Outer Continental Shelf Lands Act (“OCSLA”) (the enabling legislation which authorizes the DOI to issue and regulate federal offshore leases and grants); Administrative Procedure Act (“APA”); and Regulatory Flexibility Act (“RFA”).  For example, several of Plaintiffs’ causes of action allege that the Final Rule is “contrary to law,” because (1) it is not a permissible exercise of BOEM’s rulemaking authority under OCSLA.  To be permissible, the action must be “necessary and proper” to prevent of waste, conserve OCS natural resources, and protect correlative rights.  At a minimum, to meet the “necessary and proper limitation,” the benefits of the rule must outweigh its costs.  Plaintiffs assert that the Final Rule does not meet any of the foregoing factors of the “necessary and proper” limitation, nor is the cost of compliance with the Final Rule reasonably related to any benefit;  and (2) it is contrary to OCSLA’s express legislative requirements to expedite development of federal OCS oil and gas resources.  Plaintiffs assert that the Final Rule actually throttles OCS development, due to compliance costs, among other reasons, and that BOEM has repeatedly admitted its Final Rule may materially adversely affect the productivity, competition, and/or prices in the energy sector. 

Other causes of action asserted by Plaintiffs in the complaint as grounds for vacatur, include, but are not limited to, the following:

1. Final Rule Exceeds BOEM’s Statutory Authority

Plaintiffs allege that by issuing the Final Rule, BOEM exceeded its statutory jurisdiction or authority granted by Congress under OCSLA.  For the reasons noted in the complaint, Plaintiffs claim that Congress did not grant BOEM the authority to require new supplemental financial assurance as provided in the Final Rule, as it did under the parallel Mineral Leasing Act with respect to the onshore leasing of federal lands.

2. Final Rule Violates the RFA

Plaintiffs allege that BOEM violated the RFA because it failed to (a) justify why it did not choose an alternative that would be less detrimental to small businesses, and (b) describe the statutorily required steps it took to minimize the economic impact on such small businesses.

3. Final Rule is Arbitrary and Capricious

Plaintiffs allege that the Final Rule is arbitrary and capricious for the plethora of reasons recited in the complaint.  Plaintiffs claim, among other things, that (a) while the Final Rule imposes considerable costs on industry, BOEM did not quantify any benefit resulting thereunder and, therefore, BOEM failed to properly consider the costs and benefits associated with the issuance of the Final Rule; (b) the Final Rule is a “solution in search of a problem,” as it disregards the successful joint-and-several liability regime that has been used by BOEM to protect the American taxpayers from decommissioning liability since the beginning of drilling in the Gulf of Mexico; (c) BOEM, in issuing the Final Rule, disregarded OCSLA’s Congressional statutory factors as required by statute (e.g., development, competition, the balance of trade, and the Nation’s energy supply), while simultaneously (i) acknowledging that the Final Rule will negatively impact almost all of these statutory considerations, and (ii) promoting decommissioning concerns, a factor which, as alleged by Plaintiffs, Congress never meant BOEM to consider; (d) BOEM failed to consider an important aspect of the problem it seeks to redress, namely, the surety market’s inability to cover the amount of supplemental financial assurance required under the Final Rule, despite numerous comments made by the surety industry regarding the same; (e) the Final Rule arbitrarily targets small and mid-size businesses and ignores reliance interests, because, according to Plaintiffs’ complaint, (i) only the major oil companies will be able to meet the investment-grade credit rating criterion, (ii) even if the surety market had the capacity to issue the billions in bonds required under the Final Rule, because sureties cannot pool risk, they will likely require substantial cash collateral to induce insurance; collateral amounts smaller companies will be less likely to be able to source, and (iii)  BOEM disregarded the billions in private bonds or other security put in place by small businesses to guarantee their decommissioning obligations via private commercial transactions (in connection with purchasing offshore leases from their direct predecessor(s)), and therefore, will result in double bonding by these small businesses under the Final Rule; (f) BOEM failed to explain its change in its policy position – from its prior financial assurance policy, premised on joint-and-several liability, to its new policy under the Final Rule – or explain why this new policy is better, violating APA requirements; and (g) BOEM failed to consider many material and negative points raised in the public comments to the proposed final rule, such as the surety market’s lack of capacity to cover the financial assurance required under the Final Rule.

Each of the foregoing causes of action, in addition to each of the other claims set forth in the complaint, is asserted by Plaintiffs as an independent cause of action warranting vacatur, as requested by Plaintiffs.

The federal defendants now have 90 days from service on the U.S. Attorney to answer the complaint. But, in the interim, Plaintiffs filed a Motion for Leave to File Excess Pages, which was granted on June 20, 2024, allowing them to file their Motion for a Stay or Preliminary Injunction, together with their 70-page Memorandum in Support thereof. Plaintiffs’ Memorandum requests “expedited consideration” such that a stay or injunction could be issued even before the government’s answer deadline.

Contact Liskow attorneys Jana Grauberger, Kathleen Doody, and Kyrie Buffa for more information on this topic and visit the Federal Offshore Regulatory practice page on our website.

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