Offshore
The Bureau of Ocean Energy Management (BOEM), part of the Department of the Interior (DOI), is updating financial assurance requirements for federal offshore oil and gas operations. The proposed changes require energy companies to post bonds that ensure decommissioning costs of wells and infrastructure without relying on taxpayer funding or prior leaseholder responsibility.
BOEM currently manages nearly 2,300 active oil and gas leases: Production in 2020 was 641 million barrels of oil (15% of US production) and 882 billion cubic feet of gas (2% of US production), primarily in the Gulf of Mexico.
Industry bankruptcies can leave the U.S. government responsible for decommissioning and site cleanup, and the proposed rule evaluates the financial stability of energy companies that operate in federal waters. The BOEM goal is to ensure that current lessees and operators provide funding to cover decommissioning and mitigate the risk of a corporate bankruptcy and abandoned wells.
A recent study (LSU and UC Davis) estimates that $30 billion is needed to plug and remediate the 14,000 unplugged and nonproducing wells in Gulf of Mexico waters.
BOEM is considering industry data in calculating decommissioning cost estimates. Regulatory changes in calculating financial assurance amounts will assess corporate ability to fund decommissioning via two primary factors:
- Company credit rating (corporate stability and resources)
- Value of proved lease site oil and gas resources (probability that site will be acquired by another operator if current operator fails)
Companies without investment-grade credit will be required to provide additional financial assurance funds as surety for well closure. BOEM estimates the average net worth of an investment-grade credit rating leaseholder is $115 billion — far larger than most independent drillers. This has some smaller companies protesting that they will be prevented from operating in the Gulf of Mexico under the new financial requirements.
Louisiana independent oil companies say that their bond prices may go from $3 million to $15 million, while the majors may not face any increases. The industry trade group Gulf Energy Alliance says domestic small businesses and local jobs will suffer if the new rule is implemented.
Onshore
The Bureau of Land Management, also part of the DOI, is proposing to update oil and gas leasing regulations. The changes will increase onshore federal oil and gas lease bonding requirements, royalty rates, and minimum bids to maximize public lands value and minimize risks of environmental damage from production activity.
Royalty rates and bonding levels for federal land usage have remained unchanged for decades. The new rules compel producers to account for well closing, with the goal of avoiding future taxpayer obligations. The proposed rule would:
- Increase minimum lease bond to $150,000 and statewide bond to $500,000
- Eliminate nationwide and unit bonds
- Minimize impact to wildlife or cultural sites
- Set royalty rates at 16.67%
- Raise national minimum bid from $2/acre to $10/acre
- Impose incrementally increasing rental fees ($3/acre to $15/acre)
- Charge “expression of interest” fees of $5/acre
The Future of Abandonment
New regulations are pushing the industry to include plugging and sealing wells as part of the cost of production. While decommissioning wells can be costly due to complications caused by annular gas leaks, new diagnostic and sealing technology can lower these costs and reduce risk. BioSqueeze delivers a wholistic sealing solution combining novel biomineralization technology with Advanced Cement Imaging (ACI) to deliver the most effective solution for permanently sealing annular gas leaks.
