The federal outer continental shelf (OCS) has generated a large amount of America’s oil and gas production, but each platform eventually reaches the end of its useful life. OCS leases require that the improvements be decommissioned when the term expires. Decommissioning, the return of the leased property to the condition required by law in an environmentally sound manner, is expensive and difficult. A January 2016 Government Accountability Office (GAO) study reported an estimate of $38.2 billion in future decommissioning costs for the Gulf of Mexico region alone.
The Bureau of Ocean Energy Management (BOEM) within the Department of the Interior, which regulates OCS oil and gas leasing, requires lessees to furnish surety bonds or other security to guarantee these costs. In most cases, decommissioning will not occur until years or decades after the leases originally impose the duty, but the costs to furnish the required security and pledge the accompanying collateral are immediate, substantial and ongoing.
This combination of high exposure, high expense, and long time periods has made for a strong exchange of views among companies, regulators and legislators on financial security. When BOEM sought last summer to step up its scrutiny and security requirements, many industry participants objected strenuously. In the wake of the November 2016 election, several members of Congress urged that the enhancements be rescinded and re-examined in the new administration. On Jan. 6, 2017, the agency suspended application of the new rule as to leases with multiple lessees, but required lessees that are solely liable on their leases to comply on schedule.
The decommissioning task remains a certain future liability, regardless of how much financial assurance is mandated in advance. While the cost and other impacts of increasing the security levels have been much discussed, there have been fewer contributions to a broader public understanding of why the security is being sought in the first place. This article describes the context—in Part One by detailing the security requirements and current controversy, and in Part Two by providing background on what decommissioning is and why the scope, liability and expense are of concern to lessees, government representatives and the public.