Stricter financial assurance requirements for offshore oil and gas operations that are contained in a rule that took effect earlier this summer have prompted a lawsuit from a coalition composed of a couple of Gulf Coast states and independent producer representatives. However, even as the plaintiffs seek to freeze—and ultimately defeat—the new requirements, companies of all sizes are investigating new approaches to allocating decommissioning liability among working interest owners.

In April, the U.S. Bureau of Ocean Energy Management introduced updated financial assurance requirements for offshore oil and gas operations in the U.S. Gulf of Mexico through a new final rule titled “Risk Management and Financial Assurance for OCS Lease and Grant Obligations.” Effective since June 29, the rule amends the factors that BOEM considers in deciding whether to require Outer Continental Shelf lessees to provide or increase “supplemental” bonds.

Before the 2024 rule, BOEM would consider several factors (none determinative) in evaluating whether to require supplemental bonds, including financial capability, projected financial strength, business stability, credit rating and record of compliance with applicable laws. However, the 2024 rule indicates BOEM may require supplemental bonding if a lessee or its co-lessee does not satisfy one of two criteria:

• An investment-grade credit rating; or
• A 3-to-1 ratio of the value of proved reserves to decommissioning liability associated with those reserves.

BOEM has broad discretion to require companies unable to meet these financial capability tests to provide supplemental bonds or other forms of security. Moreover, under the 2024 Rule, the bureau may require a lessee to provide supplemental bonding if the aforementioned conditions are not satisfied even if a co-liable predecessor-in-title meets the creditworthiness threshold.

Lawsuit Filed

After the 2024 rule was published but before it became effective, the states of Louisiana and Texas, as well as various industry organizations that generally represent independent offshore operators, filed a lawsuit challenging it in the U.S. District Court for the Western District of Louisiana. The plaintiffs in State of Louisiana v. Deb Haaland also moved for a stay or preliminary injunction, in an effort to prevent the new requirements from taking effect, pending the litigation.

In their lawsuit and request for a stay, the plaintiffs’ primarily challenge the more limited criteria that BOEM considers in evaluating whether to require supplemental bonding and the inability to rely on creditworthiness of predecessors-in-title. According the plaintiffs, the potential for significantly greater bonding requirements under the 2024 Rule poses significant economic challenges for smaller independent operators, may hinder their ability to secure financing, and ultimately may deter their further investment in offshore activities.

The federal defendants, on the other hand, argue that the 2024 rule protects taxpayers from ultimately bearing the costs of decommissioning offshore infrastructure. The federal defendants also assert that a stay is unwarranted, arguing that the impact of the new provisions at issue is “still some time off.” On this basis, the federal defendants claim that the plaintiffs have not and cannot establish the sort of “imminent irreparable injury” that warrants a stay.

The federal defendants also express doubts about the lawsuit’s underlying merits, stating that the plaintiffs have “no likelihood of success on the merits,” which constitutes another necessary factor for obtaining a stay.

The federal defendants are supported by a diverse collection of amicus participants, including industry organizations that generally represent larger offshore operators (such as the American Petroleum Institute) and environmental organizations. Oral argument on the motion for stay was held on Oct. 3, and the motion is pending.

Spreading Liability

As the sector adapts to the 2024 rule, both small independent producers and large oil and gas companies are examining new ways to allocate decommissioning liability among working interest owners, potentially leading to new credit assurance mechanisms that one-day may be a piece of the bureau’s required financial assurances puzzle.

For example, use of decommissioning security agreements (DSAs) to allocate those risks is becoming more frequent. Under DSAs, each party may contribute to an abandonment account (that will be used to fund future decommissioning) or may provide security through bonding (including dual-obligee bonds). Sometimes DSAs are executed in connection with the execution of a joint operating agreement or unit operating agreement, in connection with an assignment of a lease interest, or otherwise on a stand-alone basis.

It seems likely that including DSAs as exhibits to operating agreements to allocate these risks will become more standard within the industry (and this may be the case regardless of the outcome of the pending litigation). Indeed, the OCS Advisory Board, a group of industry professionals from companies with interests in offshore and OCS exploration, is developing a standard-form DSA.

One thing is clear: this evolving regulatory environment offers an opportunity to foster creative solutions among partners to address decommissioning obligations.