Interior Department’s latest attack on domestic energy

OPINION:

On June 29, the Biden administration, at the behest of the Bureau of Ocean Energy Management, or BOEM — which is part of the Department of the Interior — proposed a new rule that would hinder small, independent oil and gas producers while providing little benefit. The new rule says that small oil companies would have to provide further financial assurances (surety bonds) to cover the cost of decommissioning offshore wells and platforms.

While protecting taxpayers is laudable, the proposed changes appear to be a solution in search of a problem. More importantly, the proposed rule’s demands may not be possible, as no financial market is willing to underwrite these surety bonds.

To understand the rule, one should understand the history. Offshore drilling in the Gulf of Mexico began in 1947. Since then, more than 7,000 structures have been installed and over 55,000 wells have been drilled. As wells and structures became inactive, the industry has decommissioned the majority of the infrastructure, with over 85% of all wells and platforms fully removed, at a conservative cost of over $25 billion (in today’s dollars).

Oil companies that are and were parties to federal leases have always been collectively responsible for the decommissioning cost, which has protected taxpayers. But in 1989, a lessee declared bankruptcy, causing the government (taxpayers) to pay for decommissioning. In response, the federal government promulgated rules requiring some lessees to provide bonds to cover the cost of decommissioning if the company is unable to establish it can pay.

Because oil leases often change hands, the federal government’s rules ensure that all current and former lessees remain collectively responsible for decommissioning liabilities. Selling or transferring a lease does not relieve the seller of its continuing obligation to ensure that the wells and platforms on a lease are decommissioned.

This continuing obligation forces sellers to perform financial due diligence on buyers, enter into decommissioning security agreements, and often demand its own financial security in the form of surety bonds, letters of credit, or other security to reduce the risk of to the seller.

This comes at a cost, typically reducing the purchase price that a seller receives from a buyer. Sellers (typically major oil and natural gas companies) have sophisticated treasury teams that weigh the risks before executing a transaction.

The relatively insignificant losses to taxpayers to date have at least partially been due to this arrangement, in which the seller, called predecessors in title, maintains financial responsibility for decommissioning. This backstop has provided valuable protection to the taxpayers. Indeed, the taxpayer loss to date, as estimated by BOEM, comes to only about $58 million (out of more than $25 billion in retired obligations), all of which stemmed from leaseholders that never transferred the lease and had no predecessor in title.

Bizarrely, BOEM’s proposal appears to remove this protection by letting predecessors in title (think major oil companies such as Shell and BP) mostly off the hook, while forcing small oil and gas operators to buy over $9 billion worth of new insurance to continue operating.

The most significant problem is that this new insurance does not exist and the surety industry says creating such a product under BOEM’s proposed scheme is impossible. The surety industry is unwilling to underwrite the risk given recent energy losses, the ambiguity of the risk being transferred, and the limited number of remaining surety companies underwriting energy risk.

Even if the bonds were underwritten, the cost of this insurance would be extremely expensive to small businesses who would bear all of the cost. About 76% of the companies operating in the Outer Continental Shelf are small businesses subject to this rule. The cost of this insurance, according to BOEM, exceeds $6 billion over the next 20 years.

Consequently, even if surety bonds were available, this requirement would significantly reduce the number of companies capable of operating in the Outer Continental Shelf.

But is the risk of crippling these small businesses worth it? Perhaps not. What has been billed as a $42 billion taxpayer liability in remaining decommission costs carries only $750 million in liability from sole operators. Historically, only these operators have caused taxpayer liabilities, and the government has already received bonds for these potential costs.

All of this caution seems even more outlandish, given that the government has earned over $121 billion in lease royalties since 2004, making it the goose that continues to lay the golden egg.

These facts leave one wondering if there isn’t another basis driving the Interior Department’s latest salvo. One clue might be BOEM’s press release stating that “the changes being announced today continue to advance the Biden-Harris Administration’s federal oil and gas reform agenda.”

Given President Biden’s promise to end all new drilling on public lands, perhaps the government’s motives are clear.

• Curtis Schube is executive director of the Council to Modernize Governance, a think tank committed to making the administration of government more efficient, representative and restrained.