Opportune Publishes a Cost-Benefit Analysis of the BOEM NTL on OCS Bonding

Download the Full Study Here

Proposed BOEM regulation could force independent operators into bankruptcy

Opportune announced today the release of a cost-benefit analysis in response to regulatory changes proposed by the Bureau of Ocean Energy Management (BOEM) that could financially harm many of the independent oil and gas operators in the Gulf’s outer continental shelf (OCS).

On July 14, 2016, BOEM issued a Notice to Lessees (NTL) that will force companies to post supplemental surety bonds or other collateral to insure 100% of future plugging and abandonment (P&A) costs for OCS oil and gas properties. Although BOEM claims the measure has been taken to protect U.S. taxpayers from having to pay decommissioning costs for bankrupt oil and gas companies, Opportune’s research shows that the NTL is an overreaching regulation that attempts to solve a non-existent problem.

“In a current period of depressed commodity prices and industry liquidity, BOEM could have used this opportunity to encourage future development of the OCS, while still protecting the U.S. taxpayer.  Simple valuation, data gathering and forward-looking funding solutions are available and should be applied by BOEM," said Josh Sherman, Partner of Opportune's Complex Financial Reporting practice. "The NTL has the potential to increase and accelerate risk to the U.S. taxpayer and Gulf Coast economy in a way unseen since the 2010 moratorium on offshore drilling.”

Opportune has conducted an independent study to calculate potential risks to the U.S. taxpayer with the assistance of their valuation, petroleum engineering and financial reporting[1] experts. Through analyzing P&A cost data and market research, Opportune has shown how the NTL could jeopardize independent businesses and communities.

 The Opportune Study’s key findings show clearly why the BOEM should reassess this NTL:

  • The risk is strongly overstated: The U.S. taxpayer has never been required to pay to P&A an OCS property.
  • Flawed assumptions and inaccurate data:  The U.S. Governmental Accountability Office (GAO) acknowledges the database used by BOEM is limited in its ability to accurately and completely record cost estimates of decommissioning liabilities.
  • Exposes taxpayers to heightened risk: Smaller independent oil and gas operators will be unable to obtain the required supplemental bonding: the NTL will become a catalyst to spur the bankruptcy risk from which it was intended to protect the U.S. taxpayer.
  • Reduces OCS hydrocarbon production: The NTL will result in reduced offshore drilling and production, particularly in the shallow water of the OCS.
  • Reduces royalty revenues to government: The NTL will result in sharply lower U.S. royalty revenue as operators scale back production.
  • Jeopardizes communities, families and jobs:  The NTL will cause reduced revenues and operations for companies serving the OCS offshore industry, resulting in a commensurate loss of jobs and community/tax revenues along the Gulf Coast, particularly Texas and Louisiana.
  • There is a better way: Current guidelines can be modernized to encourage OCS development, as detailed in the Opportune Study, which will achieve BOEM’s goals without jeopardizing the industry’s viability or increasing risk to the U.S. taxpayer.
The Opportune Study proposes three potential areas of improvement to the existing regulatory structure that would provide support to OCS operators as well as protect taxpayers:
  • Reaffirm financial assurance vehicles.
    • Recognize existing and future private bonds between current and previous owners as additional financial assurance to cover P&A obligations.
    • Improved bonding requirements through a new cash reserve fund self-funded by lessees through future production
  • Better accuracy in data gathering
    • Require independent CPA firms to issue annual Agreed Upon Procedures reports attesting to the lessees’ cost and collateral information.
    • Better title transfer processes.
  • Improved valuation processes
    • Value P&A liabilities using the discounted Asset Retirement Obligation balance from lessees’ audited financial statements.
    • Apply present value analysis, other steps to avoid a double jeopardy effect on bonding requirements.
These proposed solutions would both support the health of OCS operators as well as ensure taxpayers are wholly protected. Click here to read the full study.

[1] Opportune LLP is not a CPA firm.

want more industry insights? subscribe below