Gulf of Mexico: Shelf Life
New decommissioning regulations threaten the survival of offshore operators in the name of protecting U.S. taxpayers. But how great is the actual risk?
By Annie Gallay | Oil & Gas Investor
Small independent E&Ps operating in the Gulf of Mexico’s Outer Continental Shelf are struggling to find their sea legs as they cope with volatile commodity prices, and new regulations regarding decommissioning of offshore facilities could take them out at the knees. The Notice to Lessees (NTL), “NTL 2016-NO1, Requiring Additional Security,” was released by the Bureau of Ocean Energy Management (BOEM) in September. It was crafted to protect U.S. taxpayers from any financial burden arising from offshore operators’ potential inability to fund the decommissioning of offshore oil and gas platforms, subsea wells and associated assets—but exposes operators to more stringent financial requirements than ever before.
Some E&Ps say the bonding requirements are prohibitive. Fieldwood Energy LLC, Talos Energy LLC, Energy XXI and Arena Energy LP formed Gulf Energy Alliance, a coalition aimed at supporting policies that protect, assist and encourage the offshore industry. The coalition is working with regulators on the subject of the NTL.
This new rule, effective as of September 2016, could put offshore operators out of commission themselves, as companies are now required to guarantee 100% of future decommissioning costs for oil and gas properties in which they have a working interest, through surety bonds or other forms of collateral. “The financial bonding requirements, the regulations—all that comes at a cost,” said Jim Wicklund, managing director, Credit Suisse. Over the past four years, activity in the Gulf has dropped by more than 90% in shallow water, he added. “We’ve never had spending down for more than two years in a row in the industry, ever,” but in offshore, “this will be the third year.”
Despite the drop in activity and rigs, the last few years provided amenable bonding conditions to E&Ps. Under the former policies, “if BOEM determined that one or more co-lessees or co-owners had sufficient financial strength and reliability, it was not necessary to provide additional security,” the BOEM reported in September. E&P companies were exempt from the supplemental bonding requirements as long as their tangible net worth exceeded $65 million and was twice the amount of their estimated Plugging & Abandonment (P&A) liabilities, according to the Opportune report, “A Cost-Benefit Analysis of the BOEM NTL on OCS Bonding.”
Gauging risk Overall, this swift elimination of exemptions has left operators, consultants and analysts reeling. The BOEM and Bureau of Safety and Environmental Enforcement (BSEE), which is responsible for generating the liability assessments, maintain that this measure will safeguard taxpayers, but operators continue to question the degree of risk. Is this P&A paranoia, a minor overreaction or a practical response?
“There’s always some risk; you can never eliminate the risk completely,” said Josh Sherman, partner at Opportune and one of the writers of the firm’s report on decommissioning. Yet “over 80 years of offshore operations and drilling in the Gulf, there has been only one case in which the taxpayer has arguably had to pay for P&A liabilities,” and that liability was paid out of future revenues from those assets. “It didn’t come out of the taxpayer’s pocket.”
How big could the problem be?
According to IHS Markit’s “Offshore Decommissioning Study Report,” the Gulf of Mexico ranks as the largest region in the world when it comes to the number of platforms decommissioned, with approximately 4,000 plugged and abandoned so far. It currently has more than 5,000 oil and gas structures in place. Historical costs for decommissioning facilities in the area “have been in the $500,000 to $4 million range for shallow-water structures.”
Opportune pegs the net present value of the liability of all OCS leases’ P&A costs at roughly $23.8 billion, and $589 million has already been posted in bonds. Majors and large independents (companies with more than $4 billion in net worth, in Opportune’s study) are part of the current or previous chain-of-title in almost every case. “Uncovered properties,” in which they are not included in the chain-of-title, only make up $1.4 billion—meaning that the uncovered risk to the taxpayer is $829 million.
The NTL demands that small independents obtain supplemental bonding to the tune of $2.2 billion, the report said, an untenable amount. “My view is that it takes the small independents from the hospital to hospice,” Sherman said...click below to download the full article from Oil & Gas Investor.