Risk Management and Financial Assurance for OCS Lease and Grant Obligations, 42136-42176 [2023-12916]
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42136
Federal Register / Vol. 88, No. 124 / Thursday, June 29, 2023 / Proposed Rules
Bureau of Ocean Energy Management
30 CFR Parts 550, 556, and 590
[Docket ID: BOEM–2023–0027]
RIN 1010–AE14
Risk Management and Financial
Assurance for OCS Lease and Grant
Obligations
Bureau of Ocean Energy
Management (BOEM), Interior.
ACTION: Notice of proposed rulemaking
and request for comment.
AGENCY:
The Department of the
Interior (the Department or DOI), acting
through BOEM, proposes to modify its
criteria for determining whether oil, gas,
and sulfur lessees, right-of-use and
easement (RUE) grant holders, and
pipeline right-of-way (ROW) grant
holders may be required to provide
bonds or other financial assurance
above the current regulatorily
prescribed base bonds to ensure
compliance with their Outer
Continental Shelf Lands Act (OCSLA)
obligations. This proposed rule would
also remove existing restrictive
provisions for third-party guarantees
and decommissioning accounts and
would add new criteria under which a
bond or third-party guarantee that was
provided as supplemental financial
assurance may be canceled.
Additionally, this proposed rule would
clarify bonding requirements for RUEs
serving Federal leases. Based on the
proposed framework, BOEM estimates
that the aggregate amount of
supplemental financial assurance
required of lessees and grant holders
under this proposed rulemaking
available to the U.S. government for
decommissioning activities would
increase by an estimated $9.2 billion
over current levels. This value
represents less than one-quarter of all
offshore decommissioning liabilities,
which is currently estimated at $42.8
billion. This proposed rulemaking
would not apply to renewable energy
activities.
DATES: BOEM must receive your
comments on or before August 28, 2023.
BOEM has the discretion not to consider
comments received after this date. The
Office of Management and Budget
(OMB) and BOEM must receive your
comments on the information collection
(IC) burden in this rulemaking on or
before July 31, 2023. The IC burden
comment opportunity does not affect
the deadline for the public to comment
to BOEM on the proposed regulations.
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SUMMARY:
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You may submit comments
on the rulemaking by any of the
following methods. In your comments,
please reference ‘‘Risk Management and
Financial Assurance for OCS Lease and
Grant Obligations, RIN 1010–AE14.’’
Please include your name, and phone
number or email address, so we can
contact you if we have questions
regarding your submission.
• Federal rulemaking portal: https://
www.regulations.gov. In the entry titled,
‘‘Enter Keyword or ID,’’ enter BOEM–
2023–0027 then click search. Follow the
instructions to submit public comments
and view supporting and related
materials available for this rulemaking.
• Mail or delivery service: Send
comments on the BOEM proposed rule
to the Department of the Interior,
Bureau of Ocean Energy Management,
Office of Regulations, Attention: Kelley
Spence, 45600 Woodland Road,
Mailstop VAM–BOEM DIR, Sterling, VA
20166.
Submit comments on the IC in this
proposed rule to www.reginfo.gov/
public/do/PRAMain. From this main
web page, you can find and submit
comments on this particular information
collection by proceeding to the boldface
heading ‘‘Currently under Review,’’
selecting ‘‘Department of the Interior’’ in
the ‘‘Select Agency’’ pull down menu,
clicking ‘‘Submit,’’ then, checking the
box ‘‘Only Show ICR for Public
Comment’’ on the next web page,
scrolling to this proposed rule, and
clicking the ‘‘Comment’’ button at the
right margin. Or, you may use the search
function to locate the IC request related
to the proposed rule on the main web
page. Please provide a copy of your
comments to the Information Collection
Clearance Officer, Office of Regulations,
Bureau of Ocean Energy Management,
Attention: Anna Atkinson, 45600
Woodland Road, Sterling, Virginia
20166; or by email to anna.atkinson@
boem.gov. Please reference OMB Control
Number 1010–0006 in the subject line of
your comments.
Instructions: All submissions received
must include the agency name and
docket number or Regulatory
Information Number (RIN) for this
rulemaking (1010–AE14). All comments
received will be posted without change
to https://www.regulations.gov, including
any personal information provided. For
detailed instructions on sending
comments and additional information
on the rulemaking process, see the
‘‘Public Availability of Comments:’’
heading of the SUPPLEMENTARY
INFORMATION section of this document.
Docket: For access to the docket to
read background documents or
ADDRESSES:
DEPARTMENT OF THE INTERIOR
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comments received, go to
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Kelley Spence, Office of Regulations,
BOEM, at kelley.spence@boem.gov or at
(984) 298–7345; or Karen Thundiyil,
Chief, Office of Regulations, BOEM, at
Karen.Thundiyil@boem.gov or at (202)
742–0970.
To obtain a copy of the information
collection supporting statement,
contact: Information Collection
Clearance Officer, Office of Regulations,
Bureau of Ocean Energy Management,
Attention: Anna Atkinson, at
anna.atkinson@boem.gov or at (703)
787–1025.
SUPPLEMENTARY INFORMATION:
Public Availability of Comments:
BOEM may post all submitted
comments to regulations.gov. Before
including your name, return address,
phone number, email address, or other
personally identifiable information in
your comment, you should be aware
that your entire comment—including
your personally identifiable
information—may be made publicly
available. In order for BOEM to
withhold from disclosure your
personally identifiable information, you
must identify, in a cover letter, any
information contained in the submittal
of your comments that, if released,
would constitute a clearly unwarranted
invasion of your personal privacy. You
must also briefly describe in such cover
letter any possible harmful
consequences of the disclosure of
information, such as embarrassment,
injury, or other harm. While you can ask
us in your comment to withhold your
personally identifiable information from
public review, we cannot guarantee that
we will be able to do so. Even if BOEM
withholds your information in the
context of this rulemaking, your
submission is subject to the Freedom of
Information Act (FOIA) and any
relevant court orders, and if your
submission is requested under the FOIA
or such court order, your information
will only be withheld if a determination
is made that one of the FOIA’s
exemptions to disclosure applies or if
such court order is challenged. Such a
determination will be made in
accordance with the Department’s FOIA
regulations and applicable law.
Organization of this document. The
information in this preamble is
organized as follows:
I. Table of Acronyms and Terms
II. Executive Summary
III. Background of BOEM Regulations
A. BOEM Statutory and Regulatory
Authority and Responsibilities
B. History of Bonding Regulations and
Guidance
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C. 2020 Joint Notice of Proposed
Rulemaking
D. Purpose of BOEM’s Proposed
Rulemaking
IV. Proposed Revisions to BOEM
Supplemental Financial Assurance
Requirements
A. Leases
B. Right-of-Use and Easement Grants
C. Pipeline Right-of-Way Grants
V. Proposed Revisions to Other Types of
Supplemental Financial Assurance
A. Third-Party Guarantees
B. Decommissioning Accounts
C. Transfers of Lease Interests to Other
Lessees or Operating Rights Holders
VI. BOEM Evaluation Methodology
A. Credit Ratings
B. Valuing Proved Oil and Gas Reserves
VII. Phased Compliance With Supplemental
Financial Assurance Orders
VIII. Appeals Bonds
IX. Proposed Revisions to BOEM Definitions
X. Section-by-Section Analysis
XI. Additional Comments Solicited by BOEM
XII. Procedural Matters
A. Executive Order 12866: Regulatory
Planning and Review, as Amended by
Executive Order 14094—Modernizing
Regulatory Review, and Executive Order
13563: Improving Regulation and
Regulatory Review
B. Regulatory Flexibility Act (RFA)
C. Small Business Regulatory Enforcement
Fairness Act
D. Unfunded Mandates Reform Act
(UMRA)
E. Executive Order 12630: Governmental
Actions and Interference With
Constitutionally Protected Property
Rights
F. Executive Order 13132: Federalism
G. Executive Order 12988: Civil Justice
Reform
H. Executive Order 13175: Consultation
and Coordination With Indian Tribal
Governments
I. Paperwork Reduction Act (PRA)
J. National Environmental Policy Act
(NEPA)
K. Data Quality Act
L. Executive Order 13211: Actions
Concerning Regulations That
Significantly Affect Energy Supply,
Distribution, or Use
M. Clarity of This Regulation
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I. Table of Acronyms and Terms
Several acronyms and terms are
included in this preamble. To ease the
reading of this preamble and for
reference purposes, we list the following
acronyms and their meanings here.
ANCSA Alaska Native Claims Settlement
Act
ANPRM Advance Notice of Proposed
Rulemaking
BOEM Bureau of Ocean Energy
Management
BSEE Bureau of Safety and Environmental
Enforcement
DOI Department of the Interior
E.O. Executive Order
FASB Financial Accounting Standards
Board
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FDIC Federal Deposit Insurance
Corporation
FR Federal Register
GAAP Generally Accepted Accounting
Principles
GAO Government Accountability Office
IC Information Collection
INC Incidents of Non-Compliance
IRFA Initial Regulatory Flexibility Analysis
IRIA Initial Regulatory Impact Assessment
MMS Minerals Management Service
NAICS North American Industry
Classification System
NEPA National Environmental Policy Act
NRSRO Nationally Recognized Statistical
Rating Organization
NTL Notice to Lessees
OIRA Office of Information and Regulatory
Affairs (a component of OMB)
OMB Office of Management and Budget
OCS Outer Continental Shelf
OCSLA Outer Continental Shelf Lands Act
PRA Paperwork Reduction Act
RIA Regulatory Impact Analysis
RUE Right-of-Use and Easement
ROW Right-of-Way
SBA Small Business Administration
SEC Securities and Exchange Commission
S&P Standard and Poor’s
U.S.C. United States Code
II. Executive Summary
This proposed rule would require that
the holders of interests in Outer
Continental Shelf (OCS) leases and
grants provide financial assurance for
their own contractual and regulatory
obligations, including decommissioning
obligations, to prevent the Federal
Government from incurring costs to
perform those obligations and to avoid
the environmental or safety hazards
associated with delayed compliance.
This approach adheres to the general
principle that the private parties
enjoying the benefit of producing the
mineral resources of the OCS should not
shift the cost of satisfying their
contractual and environmental
obligations to the public. Based on the
proposed framework, BOEM estimates
that the aggregate amount of
supplemental financial assurance
required of lessees and grant holders
under this proposed rulemaking
available to the U.S. government for
decommissioning activities would
increase by an estimated $9.2 billion
over current levels. This value
represents less than one-quarter of all
decommissioning liabilities, which is
currently estimated at $42.8 billion.
This proposed rule is intended to
update BOEM’s criteria for determining
whether oil, gas, and sulfur lessees, RUE
grant holders, and ROW grant holders
may be required to provide surety bonds
or other financial assurance above the
prescribed base financial assurance to
ensure compliance with OCSLA.
Provisions of this proposed rulemaking
would change the existing criteria used
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to determine whether supplemental
financial assurance should be required
of OCS oil and gas lessees and grantees.
Under the existing regulations, BOEM
considers five criteria in making this
determination for lessees: financial
capacity; projected financial strength;
business stability; record of compliance
with existing rules and regulations; and
reliability. This rulemaking proposes to
eliminate those five criteria and replace
them with two new criteria: credit rating
and the ratio of the value of proved oil
and gas reserves on the lease to the lease
decommissioning liability associated
with those reserves.
Using the credit rating of the lessee (to
determine its financial strength) and the
value of proved oil and gas reserves
available to meet future financial
obligations, BOEM would not require
supplemental financial assurance in
three cases. First, under this proposed
rule, a lessee with an investment grade
credit rating would not be required to
post supplemental financial assurance
beyond a base bond to cover its lease
and regulatory obligations. These base
bonds can range from $50,000 for a
lease-specific bond with no approved
operational activity to $3 million for an
area-wide bond that includes a
development production plan. Second,
where there are multiple co-lessees on
a lease, if any one co-lessee meets the
credit rating threshold, none of the other
co-lessees would be required to post
supplemental financial assurance.
Finally, for any lease on which all
lessees are rated below investment
grade, BOEM would next look to the
value of the lease’s proved oil and gas
reserves relative to lease
decommissioning obligations associated
with the production of those reserves.
For any such lease, if a lease has proved
reserves with a value of at least three
times that of the estimated
decommissioning cost, no supplemental
financial assurance would be required.
In any case other than the three
mentioned here, supplemental financial
assurance would be mandatory.
Overall, this proposed rule would
impose greater supplemental financial
assurance requirements on lessees than
the amounts currently required. This
proposed rule also contains a provision
that would allow phased-in compliance
over a period of three years, which
could ease burdens on individual
lessees and operators in the short term.
This proposed rule would also make
other less significant changes. This
proposed rule would provide more
specific bonding requirements for
Federal RUEs and would remove
restrictive provisions for third-party
guarantees and decommissioning
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accounts. Finally, it would add new
criteria under which supplemental
bonds and third-party guarantees may
be cancelled.
On October 16, 2020, BOEM proposed
a joint rulemaking with the Bureau of
Safety and Environmental Enforcement
(BSEE) to update BOEM’s financial
assurance criteria and other BSEEadministered regulations. On January
20, 2021, President Biden signed
Executive Order (E.O.) 13990,
‘‘Protecting Public Health and the
Environment and Restoring Science to
Tackle the Climate Crisis.’’ This
Executive order, among other things,
instructs agencies to review actions
taken between January 20, 2017, and
January 20, 2021, and consider
publishing a notice of proposed
rulemaking suspending, revising, or
rescinding that action. Upon conducting
such a review of the 2020 proposal and
the record postdating the review, BOEM
has decided, as an exercise of its
judgment and expertise, not to move
forward with the BOEM-administered
portions of that 2020 proposed
rulemaking. BOEM has instead decided
to issue this new notice of proposed
rulemaking to address its financial
assurance policy concerns. BOEM is no
longer considering any BOEM-related
topics or proposals from that 2020
proposed joint rulemaking that are not
discussed in this current proposed rule.
BSEE finalized the BSEE-related
provisions of the 2020 joint proposed
rule on April 18, 2023 (88 FR 23569).
This proposed rulemaking takes a new
approach to update the financial
assurance criteria to ensure that current
lessees have sufficient resources to meet
their lease and regulatory obligations,
therefore providing more protection to
the taxpayer. BSEE is expected to
continue to exercise its regulatory
authority to issue decommissioning
orders to predecessor lessees, seek an
appropriation, or intervene as necessary
to address an environmental or safety
risk, regardless of the outcome of this
proposed rule. However, without this
proposed rule (i.e., without the financial
assurance fully in place), it could take
longer to arrange for decommissioning,
which could result in additional
environmental damage or increased
obstacles to navigation. A reduction in
decommissioning activity lead-time
could reduce environmental damage,
but BOEM cannot quantify this benefit
in this rulemaking.
This proposed rulemaking would not
apply to renewable energy activities.
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III. Background of BOEM Regulations
A. BOEM Statutory and Regulatory
Authority and Responsibilities
BOEM’s authority to promulgate this
rulemaking is granted by section 5 of
OCSLA, 43 U.S.C. 1334. That section
authorizes the Secretary of the Interior
(Secretary) to issue regulations to
administer OCS leasing for mineral
development. Section 5(a) of OCSLA (43
U.S.C. 1334(a)) authorizes the Secretary
to ‘‘prescribe such rules and regulations
as may be necessary to carry out’’ the
‘‘provisions of [OCSLA] relating to the
leasing of the’’ OCS. Section 5(b) of
OCSLA (43 U.S.C. 1334(b)) provides
that ‘‘compliance with regulations
issued under’’ OCSLA must be a
condition of ‘‘[t]he issuance and
continuance in effect of any lease, or of
any assignment or other transfer of any
lease, under the provisions of’’ OCSLA.
43 U.S.C. 1338a reflects Congress’
intent to authorize BOEM to collect
financial assurance by specifically
addressing the forfeiture of bonds and
financial assurances by an OCS
permittee, lessee, or right-of-way holder
that does not fulfill the requirements of
its permit, lease, or right-of-way or does
not comply with the regulations of the
Secretary, which includes defaulting on
decommissioning activities.
The Secretary, in Secretary’s Order
3299, as amended, delegated the
authority to BOEM to carry out offshore
conventional energy-related (e.g., oil
and gas) and renewable energy-related
functions including, but not limited to,
activities involving resource evaluation,
planning, and leasing. Thus, BOEM is
responsible for managing development
of the Nation’s offshore energy and
mineral resources in an environmentally
and economically responsible way.
Secretary’s Order 3299 also assigned
authority to BSEE, including, but not
limited to, enforcement of a lessee’s
obligation to perform decommissioning.
BSEE provides estimates of
decommissioning costs to BOEM so that
the financial assurance required by
BOEM will be sufficient to cover the
estimated cost to perform
decommissioning, thereby protecting
the Federal Government from incurring
financial loss. While BOEM also has
program oversight for the financial
assurance requirements set forth in 30
CFR parts 551, 581, 582, and 585, this
proposed rule pertains only to the
financial assurance requirements for oil
and gas or sulfur leases under 30 CFR
part 556, associated RUE grants and
ROW grants under 30 CFR part 550, and
appeals of supplemental financial
assurance demands under 30 CFR part
590.
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B. History of Bonding Regulations and
Guidance
BOEM’s existing financial assurance
requirements for oil and gas leases (30
CFR 556.900 through 556.907) and
pipeline ROW grants (30 CFR 550.1011),
published by BOEM’s predecessor, the
Minerals Management Service (MMS),
on May 22, 1997 (62 FR 27948),1
authorize the Regional Director to
require bonding for oil and gas leases
and pipeline ROW grants. Sections
556.900(a) and 556.901(a) and (b)
require lease-specific or area-wide base
bonds in prescribed amounts,
depending on the level of activity on a
lease or leases. Section 556.901(d)
authorizes the Regional Director to
require supplemental financial
assurance for leases above the amounts
for lease and area-wide base bonds
prescribed in the regulations. Similarly,
§ 550.1011 authorizes the Regional
Director to require an area-wide base
surety bond in a prescribed amount and,
when determined necessary,
supplemental financial assurance above
the prescribed amount, for ROW grants.
BOEM’s existing bonding regulations
for RUE grants (§§ 550.160 and 550.166),
published by MMS on December 28,
1999 (64 FR 72756),2 empower the
Regional Director to require surety
bonds or other financial assurance for
RUE grants. Section 550.160(c) states
that an applicant for a RUE serving an
OCS lease ‘‘must meet bonding
requirements.’’ See 30 CFR 550.160(c).
While no regulation prescribes a
particular bond amount for a RUE that
applies to an OCS lease, § 550.160
authorizes the Regional Director to
require financial assurance if, and in the
amount, the Regional Director
determines necessary.
Section 550.166(a) requires an
applicant for a RUE that serves a State
lease to provide a base surety bond of
$500,000. Section 550.166(b) provides
that the Regional Director may require
supplemental financial assurance above
the prescribed $500,000 base surety
bond from the holder of a such a RUE.
MMS and now BOEM have employed
the criteria used for determining
whether supplemental financial
assurance is required for leases to such
1 The 1997 rule amended 30 CFR parts 250 and
256; 30 CFR parts 550 and 556 did not exist at that
time. BOEM published the current regulations in 30
CFR parts 550 and 556 on October 18, 2011, 76 FR
64432. However, the 2011 rule did not make any
substantive changes to the bonding and financial
assurance requirements that were adopted in 1997;
thus, the 1997 rule represents the last substantive
update to the regulatory provisions for lessees.
2 The financial assurance regulations for RUE and
ROW grants, then at §§ 250.160 and 250.166, were
substantively modified in 1999. These provisions
were renumbered in October 2011.
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determinations for RUE and ROW grants
because specific criteria for grants do
not exist in the current regulations.
BOEM regulations at §§ 556.604(d)
and 556.605(e) and BSEE regulations at
§ 250.1701 hold predecessors and
current co-lessees responsible for
decommissioning when a current lessee
is unable to perform. The existing lease
bonding regulations under § 556.901(d)
provide five criteria 3 that the Regional
Director uses to determine whether a
lessee’s potential inability to carry out
present and future financial obligations
warrants a demand for supplemental
financial assurance. However, the
existing regulations do not specifically
describe how the agency weighs those
criteria. To provide guidance, MMS
issued Notice to Lessees (NTL) No. 98–
18N, effective December 28, 1998,
which provided details on how it would
apply the five criteria. This NTL was
superseded by NTL No. 2003–N06,
effective June 17, 2003, and that NTL
was later superseded by NTL No. 2008–
N07, which was effective August 28,
2008, but which was superseded on
September 12, 2016. The September 12,
2016, NTL was subsequently rescinded.
Pursuant to BOEM’s practice under
NTL No. 2008–N07, a lessee or grant
holder that did not pass established
financial thresholds 4 was required to
provide supplemental financial
assurance to cover its decommissioning
liabilities. However, a lessee or grant
holder that did pass such thresholds—
including an analysis whether its
cumulative potential decommissioning
liability was less than or equal to 50
percent of its net worth 5—did not have
to provide supplemental financial
assurance and was considered
‘‘waived.’’ Additionally, if one lessee on
a lease was waived, no other co-lessee
(regardless of its own financial strength)
would be required to provide
supplemental financial assurance to
cover the decommissioning liability for
the lease. In a situation involving
multiple lessees and two or more co3 The following are the five criteria: (i) Financial
capacity substantially in excess of existing and
anticipated lease and other obligations; (ii)
Projected financial strength significantly in excess
of existing and future lease obligations; (iii)
Business stability based on five years of continuous
operation and production of oil and gas or sulfur
in the OCS or in the onshore oil and gas industry;
(iv) Reliability in meeting obligations based on: (A)
Credit rating; or (B) Trade references; and (v)
Record of compliance with laws, regulations, and
lease terms.
4 The 2008 NTL mandated a minimum net worth
of $65 million and imposed a cap on the amount
of waived liability at 50% of net worth. Liability
covered by two qualified companies was not
counted against the 50% cap.
5 This is not a separate criterion but simply an
elaboration of criterion one.
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lessees that qualified for a waiver, none
of the co-lessees was required to provide
financial assurance, and the
decommissioning liability on the lease
was not attributable to any lessee.
Because companies in this situation
would not have the decommissioning
liability associated with their lease(s)
attributed to them (i.e., the
decommissioning liability would not be
attributed to any company), that liability
would not have been considered in
determining whether that company met
the net worth requirements to obtain a
waiver.
For a company in this situation, the
financial capacity of the lessee would
have appeared better than it actually
was, because its total decommissioning
liability appeared artificially low; the
lessee could potentially qualify for a
waiver to which it might not otherwise
be entitled. Undergirding this rationale
was an assumption that the chances of
two waived lessees becoming
financially distressed was unlikely. This
proposed rule addresses that potential
risk by allowing BOEM to obtain
additional data to take contingent
liabilities into consideration.
Since 2009, more than 30 corporate
bankruptcies have occurred involving
offshore oil and gas lessees with unbonded decommissioning liabilities.
The fact that bankruptcies and
reorganizations have involved unbonded decommissioning liabilities
demonstrates that the waiver criteria in
NTL No. 2008–N07 were inadequate to
protect the public from potential
responsibility for OCS decommissioning
liabilities, especially during periods of
low oil and gas prices. For example,
ATP Oil & Gas was a mid-sized
company with a supplemental financial
assurance waiver when it filed for
bankruptcy in 2012. Similarly, Bennu
Oil & Gas, LLC, had a waiver at the time
of its bankruptcy filing, and Energy XXI,
Ltd., and Stone Energy Corporation
obtained waivers within a year of filing
for bankruptcy. While most OCS leases
affected by the bankruptcies were
ultimately sold or retained by the
companies reorganized under chapter
11 of the U.S. Bankruptcy Code, these
bankruptcies highlighted the
weaknesses in BOEM’s supplemental
financial assurance program, including
the waiver criteria in NTL No. 2008–
N07, and BOEM’s inability to forecast
financial distress of these waived
operators with sufficient time to require
and receive financial assurance.
These bankruptcies involved a total
offshore decommissioning liability of
approximately $7.5 billion. This figure
includes properties with co-lessees and
predecessor lessees and properties held
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42139
by companies that successfully emerged
from a chapter 11 reorganization.
However, the actual financial risk to the
United States is significantly less than
the total offshore decommissioning
liability associated with offshore
corporate bankruptcies. This is in part
because other private parties may be
responsible for decommissioning costs.
Co-lessees and predecessors retain preexisting obligations to fund or perform
decommissioning. Also, a bankrupt
company’s assets were often sold to
financially stronger buyers who
assumed those liabilities.
Additionally, if BOEM has
insufficient supplemental financial
assurance at the time of an operator’s
bankruptcy, BOEM may pursue legal
avenues for obtaining performance or
funds in bankruptcy proceedings, such
as provisions for decommissioning in
the terms of the reorganization, the sale
of the leases to financially responsible
buyers, or limitations on debtor
attempts to abandon environmental
problems. However, in pursuing legal
avenues, favorable outcomes are not
assured, and additional funds may not
be obtained to cover decommissioning
obligations. It is possible that when
there are multiple co-lessees on a lease,
only one of them meets the credit rating
threshold. It is also possible that colessees are not required to provide
additional financial assurance and
predecessors lack sufficient capital to
fulfill unexpected decommissioning
obligations. In these scenarios, bankrupt
assets may prove less valuable than
anticipated and fail to generate new
buyers at auction. Components and
wells for which the bankrupt party is
the only liable party on the lease may
further complicate decommissioning
efforts. These challenges create a risk of
unplugged wells and orphaned
infrastructure. The American taxpayer
may pay the cost of plugging those wells
and reclaiming that abandoned
infrastructure. BSEE has identified
orphaned infrastructure without a
predecessor and no financial assurance
to cover the cost of decommissioning.
BSEE’s fiscal year 2023 budget request
included $30 million in order to address
this uncovered infrastructure.
On May 27, 2009, MMS issued a
proposed rule, ‘‘Leasing of Sulphur or
Oil and Gas and Bonding Requirements
in the Outer Continental Shelf’’ (74 FR
25177), to rewrite the majority of 30
CFR part 256 (now redesignated as 30
CFR part 556).6 However, BOEM (post
MMS restructuring) deferred revision of
the bonding regulations to a separate
rulemaking. The separate rulemaking
6 76
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commenced August 19, 2014, with an
advance notice of proposed rulemaking
(ANPRM), ‘‘Risk Management, Financial
Assurance and Loss Prevention’’ (79 FR
49027), to solicit ideas for improving the
bonding regulations.
In December 2015, the Government
Accountability Office (GAO) reviewed
BOEM’s supplemental financial
assurance procedures and issued a
report titled ‘‘Offshore Oil and Gas
Resources: Actions Needed to Better
Protect Against Billions of Dollars in
Federal Exposure to Decommissioning
Liabilities.’’ (GAO Report). While
acknowledging BOEM’s ongoing efforts
to update its policies, the GAO Report
recommended, inter alia, that ‘‘BOEM
complete its plan to revise its
supplemental financial assurance
procedures, including the use of
alternative measures of financial
strength.’’ 7
Following further analysis and a
series of stakeholder meetings in 2015
and 2016 to solicit industry input,
BOEM attempted to remedy the
weaknesses in its supplemental
financial assurance program with new
NTL No. 2016–N01, ‘‘Requiring
Additional Security,’’ which became
effective September 12, 2016. NTL No.
2016–N01 sought to clarify the
procedures and explain how BOEM
would use the regulatory criteria to
determine if and when supplemental
financial assurance would be required
for OCS leases and RUE and ROW
grants. The NTL used net worth of a
lessee as a measure of financial strength,
detailed several changes in policy, and
refined the criteria used to determine a
lessee’s or grant holder’s financial
ability to carry out its obligations. On
August 29, 2016, BOEM requested GAO
to close the above-stated
recommendation in the GAO Report,
stating that BOEM had implemented the
recommendation by issuance of the
NTL. The GAO found that the
recommendation had been implemented
and closed the audit recommendation
later in Fiscal Year 2016.
In December 2016, BOEM began
implementing the NTL and issued
numerous orders to lessees and grant
holders to provide supplemental
financial assurance for ‘‘sole liability
properties,’’ i.e., leases and RUE and
ROW grants for which the lessee or
grant holder was the only party liable
for meeting the lease or grant
obligations.
On January 6, 2017, BOEM issued a
note to stakeholders extending the
implementation timeline for NTL No.
2016–N01 for six months. The extension
7 https://www.gao.gov/products/gao-16-40.
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applied to leases and RUE and ROW
grants for which there were co-lessees,
predecessors in interest, or both, except
where BOEM determined there was a
substantial risk of nonperformance of
the interest holder’s decommissioning
obligations. The extension of the
implementation timeline allowed BOEM
to evaluate which leases and grants
would be considered sole liability
properties.
BOEM issued a second note to
stakeholders on February 17, 2017,
further extending the implementation
timeline. BOEM also announced in the
February note that it would withdraw
the December 2016 orders issued on
sole liability properties to allow time for
the then new administration to review
BOEM’s supplemental financial
assurance program.
In 2017, BOEM began to review its
supplemental financial assurance
program and NTL No. 2016–N01 to
determine whether modifications were
necessary and, if so, to what extent.
BOEM’s objective was ensuring operator
compliance with lease terms while
minimizing unnecessary burden on
industry. As a result of this review,
BOEM recognized the need to further
develop a comprehensive program to
assist in identifying, prioritizing, and
managing the risks associated with
industry activities on the OCS. This
included options for revising or
rescinding NTL No. 2016–N01 and
revising the financial assurance program
through rulemaking.
C. 2020 Joint Notice of Proposed
Rulemaking
On October 16, 2020, BOEM and
BSEE issued a joint notice of proposed
rulemaking to revise certain BSEE
policies concerning decommissioning
orders and BOEM’s financial assurance
regulations. (See ‘‘Risk Management,
Financial Assurance and Loss
Prevention,’’ 85 FR 65904). As stated
above, under existing regulations,
BOEM requires lessees to provide a base
bond as financial assurance to ensure
that the cost of meeting OCS obligations
is not passed to the taxpayer. The
Regional Director may also order
supplemental financial assurance if
necessary to ensure performance of
offshore decommissioning obligations.
In the joint proposed rule, BOEM
proposed to adjust its supplemental
financial assurance criteria to reflect the
risk mitigation already provided by the
joint and several liability of financially
stable co-lessees and predecessor
lessees. BSEE and BOEM regulations
hold predecessors and current colessees responsible for decommissioning
when a current lessee is unable to
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perform.8 In the joint proposed rule,
BOEM would have taken into account
the financial stability of predecessor
lessees by waiving supplemental
financial assurance requirements for a
current lessee when there was a
financially strong predecessor lessee.
In the joint proposed rule, BOEM also
sought to change its methodology for
measuring financial strength to focus on
a lessee’s or its predecessor’s credit
rating and the value of proved oil and
gas reserves. These proposed criteria
would have relied on a company’s
nationally recognized statistical rating
organization (NRSRO) credit rating or an
equivalent BOEM proxy credit rating
determined by evaluating a company’s
submitted audited financial statements
through S&P Global’s Credit Analytics
credit model or a similar, widely
accepted credit rating model. Under the
joint proposed rule, a credit rating less
than or equal to either BB¥ from S&P
Global’s Credit Analytics ratings (S&P),
Ba3 from Moody’s Investor Service
(Moody’s) or a proxy credit rating less
than or equal to either BB¥ or Ba3, as
determined by the Regional Director,
could have constituted grounds for the
Regional Director to require a lessee to
provide supplemental financial
assurance. If a company did not meet
the minimum credit rating or proxy
credit rating level, BOEM would have
inquired into the credit or proxy credit
ratings of co-lessees and predecessor
lessees, which could be held liable
under joint and several liability. If one
of these co-lessees or predecessors met
the credit rating criteria, BOEM could
decide not to require supplemental
financial assurance from the lessee. If
there were no co-lessee or predecessor
lessee that met the credit rating criteria,
BOEM would then look to the value of
the proved oil and gas reserves on the
lease. If the value of those proved
reserves was equal to or greater than
three times the estimated cost of the
decommissioning associated with the
production of the reserves on any given
lease, supplemental financial assurance
would not have been required.
BOEM further proposed to use the
same credit rating criteria to determine
the financial assurance requirements for
RUE grants described in § 550.160 and
ROW grants in a revised § 550.1011.
This would have included consideration
of the credit and proxy credit ratings of
co- and predecessor grant holders but
would not have considered proved oil
and gas reserves, given that neither RUE
nor ROW grants entitle the holder to any
interest in oil and gas reserves.
8 See, for example, 30 CFR 556.604(d), 556.605(e),
and 250.1701.
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The joint proposed rule would have
also applied the same credit rating
criteria to its evaluation of potential
guarantors. The joint proposed rule also
would have removed the requirement
for a third-party guarantee to ensure full
compliance with the obligations of all
lessees, operating rights owners, and
operators on the lease and would have
allowed a third-party guarantee to be
used as supplemental financial
assurance for a RUE or ROW grant. The
former change would have allowed a
guarantor to limit its guarantee to a
subset of lease or grant obligations.
Additional proposed changes would
have applied to third-party guarantees
the same terms and conditions that
apply to cancellation of supplemental
financial assurance surety bonds and
return of pledged financial assurance, as
well as a clarification to reiterate that
‘‘guarantee’’ and ‘‘indemnity
agreement’’ both refer to the same
guarantee agreement.
On January 20, 2021, President Biden
signed Executive Order 13990,
‘‘Protecting Public Health and the
Environment and Restoring Science to
Tackle the Climate Crisis.’’ This
Executive order, among other things,
instructs agencies to review actions
taken between January 20, 2017, and
January 20, 2021, and consider
publishing a notice of proposed
rulemaking suspending, revising, or
rescinding that action. Upon conducting
such a review of the 2020 proposal and
the record postdating the review, BOEM
has decided, as an exercise of its
judgement and expertise, not to move
forward with the joint proposed rule
and acknowledges that NTL No. 2016–
N01 was never fully implemented and
has since been rescinded. This NPRM
parallels the approach in BOEM’s
portion of the 2020 proposal but, to
increase protection of the taxpayer, it
would require a higher threshold credit
rating and would not allow a current
lessee to avoid posting additional
assurance based on a predecessor
lessee’s strength.
D. Purpose of BOEM’s Proposed
Rulemaking
This proposed rule is intended to
update BOEM’s criteria for determining
whether oil, gas, and sulfur lessees, RUE
grant holders, and ROW grant holders
may be required to provide
supplemental financial assurance to
ensure compliance with their OCS
obligations. In its continued efforts to
address concerns with the financial
assurance program, BOEM has opted to
issue this new notice of proposed
rulemaking to better protect the
taxpayer from bearing the cost of facility
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decommissioning and other financial
risks associated with OCS development,
such as oil spill cleanup or other
environmental remediation. Although
the cases where taxpayers have actually
paid costs for decommissioning are rare,
some BOEM lessees have entered
bankruptcy without the resources to
cover decommissioning. In these cases,
BOEM is required to negotiate with
predecessors, co-lessees, and
bankruptcy courts to obtain the funds
needed for decommissioning. As
mentioned earlier, this process is not
always sufficient, as reflected in BSEE’s
request for additional appropriations to
cover decommissioning of facilities for
which there is no remaining liable
party. BOEM has decided not to set a
lower supplemental financial assurance
requirement for lessees with financially
strong predecessor lessees. Instead,
BOEM proposes to require supplemental
financial assurance for all leases owned
by lessees that do not meet the proposed
financial strength threshold or have
sufficiently valuable proved oil and gas
reserves on their leases that may attract
a buyer if the current lessees are in
financial distress. The omission of
predecessor lessees from this calculus
addresses several financial assurance
issues. It ensures the current lessees
have the financial capability to fulfill its
decommissioning obligations, and
discourages lessees from ignoring endof-life decommissioning costs. It also
simplifies potential administrative
demands, since it obviates the need for
parties to distinguish between wells
with predecessor lessees and more
recent sole-liability wells, side-track
wells, and other sole-liability
components. This proposed rule would
retain the authority to pursue
predecessor lessees for the performance
of decommissioning; however, this
proposed rule would not allow BOEM to
rely upon the financial strength of
predecessor lessees when determining
whether, or how much, supplemental
financial assurance should be provided
by current OCS leaseholders.
Under this proposed rule, instead of
relying primarily on net worth to
determine whether a lessee must
provide supplemental financial
assurance, BOEM’s primary
consideration would be a lessee’s credit
rating. Credit rating agencies account for
many factors when evaluating a
company, including cash flow, debt-toearnings ratios, debt-to-funds-fromoperations ratios, and other financial
factors. A credit rating considers the
past performance of a company,
including, but not limited to, the
income statement and cash flow
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42141
statement, which provide a broad
picture of how well a company may be
able to meet its liabilities. The rating
also considers forward-looking factors,
such as the anticipated loss of assets
and the anticipated highs and lows of
the company’s business cycle. Credit
ratings provide a measure of the
probability of a default on an obligation;
studies have shown a very close
correlation between the rating level and
the probability of default.9
On the other hand, a net worth
analysis (typically total assets minus
total liabilities) uses figures that reflect
the last day of the fiscal period. This
‘‘snapshot’’ is not adequate to predict a
lessee’s future financial position
because a lessee’s financial deterioration
can occur quickly due to volatility in oil
and gas prices, improper hedging of
risks, and other business and economic
reasons. Net worth is one financial data
point that may not accurately reflect the
overall financial risk posed by the
company, as compared to the more
comprehensive financial review
undertaken by the rating agencies. A
singular financial ratio analysis may
unintentionally penalize some corporate
structures where that particular ratio is
not as important or relevant to that
business, for example midstream master
limited partnerships, which the tax code
requires to distribute 90% of net income
to partners. Relying on the more
comprehensive and forward-looking
credit rating analysis—both to
determine whether supplemental
financial assurance may be necessary
and to determine whether a company
can be a guarantor of the financial
obligations of other companies
operating on the OCS—would better
allow BOEM to demand security before
a company becomes financially
distressed. For more discussion on
credit ratings, see section VI.A (BOEM
Evaluation Methodology—Credit
Ratings) of this preamble.
After accruing an obligation to
decommission certain infrastructure
(e.g., well, platform, pipeline), the
predecessor lessee remains jointly and
severally liable for decommissioning
that infrastructure, even in cases where
a predecessor lessee has divested its full
interest in a lease by assignment to
another company. This rulemaking
would retain BOEM’s existing right to
pursue predecessor lessees for the
performance of decommissioning;
however, this rulemaking would not
allow BOEM to rely upon the financial
9 See for example, ‘‘Ratings vs Default Rates’’,
Moody’s Annual Default Study—February 8, 2022,
Douglas J. Lucas, ‘‘Default Correlation and Credit
Analysis’’, The Journal of Fixed Income Mar 1995,
4 (4) 76–87; DOI: 10.3905/jfi.1995.408124.
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strength of predecessor lessees when
determining whether, or how much,
supplemental financial assurance
should be provided by current OCS
leaseholders. This change strengthens
the financial assurance program by
ensuring current lessees have the
financial strength or supplemental
financial assurance in order to fulfill all
their obligations.
In summary, BOEM is proposing this
rulemaking to clarify and simplify its
financial assurance requirements and to
provide greater protection to taxpayers.
These proposed regulatory changes
provide additional clarity that current
grant holders, lessees, and, when
appropriate, operating rights holders
(sublessees) bear the cost of ensuring
compliance with lease obligations,
rather than relying on prior owners.
IV. Proposed Revisions to BOEM
Supplemental Financial Assurance
Requirements
BOEM’s existing financial assurance
regulatory framework has two main
components: (1) Base bonds, generally
required in amounts prescribed by
regulation, and (2) Supplemental
financial assurance, above the
prescribed base bond amounts, that may
be required upon the Regional Director’s
determination that an increased amount
is necessary to ensure compliance with
OCS obligations. BOEM’s objective is to
ensure that taxpayers do not bear the
cost of meeting the obligations of lessees
and grant holders on the OCS,
particularly the costs of
decommissioning that must be met after
the cash flow from production ceases.
At the same time, BOEM also recognizes
the costs and disincentives to additional
exploration, development, and
production that are imposed on lessees
and grant holders by increasing the
required amounts of bonds and/or other
financial assurance. After taking these
considerations into account, BOEM is
proposing to: (1) Modify the evaluation
process for requiring supplemental
financial assurance by clarifying and
streamlining the evaluation criteria;
and, (2) Remove restrictive provisions
for third-party guarantees and
decommissioning accounts. This
proposed rule would allow the Regional
Director to require supplemental
financial assurance when a lessee or
grant holder poses a substantial risk of
becoming financially unable to carry out
its obligations under its lease or grant,
or when the property may not have
sufficient value to be sold to another
company that could assume those
obligations. In the former case, the risk
that the taxpayer might have to take on
the financial obligations of a lessee or
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grant holder is mitigated when there is
a co-lessee or co-grant holder that has
sufficient financial capacity to carry out
the obligations.
A. Leases
Lessees are jointly and severally liable
for the lease decommissioning
obligations that accrue during their
ownership, as well as those that accrued
prior to their ownership, which means
that each current co-lessee is liable for
the full obligation and BSEE may pursue
performance from any individual
current lessee. See, e.g., 30 CFR
556.604(d). In addition, a lessee that
transfers its interest to another party
continues to be liable for any
unperformed decommissioning
obligations that accrued prior to, or
during, the time that lessee owned an
interest in the lease. See, e.g., 30 CFR
556.710. This transferor liability
applies, however, only to those
obligations existing at the time of
transfer; new facilities, or additions to
existing facilities, that were not in
existence at the time of any lease
transfer are not obligations of a
predecessor company and are
considered obligations of the party that
built such new facilities and its co- and
successor lessees.
BOEM’s existing supplemental
financial assurance evaluation process,
contained in § 556.901(d), is based only
on the current lessee’s ability to carry
out present and future obligations.
BOEM proposes to codify that this
evaluation process includes an
evaluation of the ability of a co-lessee to
carry out present and future obligations.
This codification recognizes that all of
the current owners are benefiting from
ongoing operations and are jointly and
severally liable for compliance with DOI
requirements. A current co-lessee is
equally liable for present obligations
and future obligations that exist while it
is a co-lessee, including nonmonetary
obligations.
Under BOEM’s existing regulations,
the Regional Director’s evaluation of the
need for supplemental financial
assurance is based on the following five
criteria: financial capacity; projected
financial strength; business stability;
reliability in meeting obligations based
upon credit rating or trade references;
and record of compliance with laws,
regulations, and lease terms. BOEM is
proposing to streamline its evaluation
process by using only two criteria to
determine whether supplemental
financial assurance on a lease may be
required: (1) A credit rating, either from
an NRSRO, as identified by the United
States Securities and Exchange
Commission (SEC) pursuant to its grant
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of authority under the Credit Rating
Agency Reform Act of 2006 and its
implementing regulations at 17 CFR
parts 240 and 249, or a proxy credit
rating determined by BOEM based on a
company’s audited financial
statements; 10 or (2) The 3-to-1 ratio of
the value of proved oil and gas reserves
on a lease to the decommissioning
liability associated with these reserves.
These criteria better align BOEM’s
evaluation process with accepted
financial risk evaluation methods used
by the banking and finance industry.
Corporate credit ratings are intended to
evaluate the potential for a company to
default on its financial obligations and
are designed so that the higher the
credit rating, the lower the risk of
default. Credit ratings and proved oil
reserves are good indicators of the
likelihood that a company will be able
to meet its financial obligations.
Eliminating subjective or less precise
criteria—such as the length of time in
operation to determine business
stability, or trade references to
determine reliability in meeting
obligations—will simplify the process
and remove criteria that may not
accurately or consistently predict
financial distress. For more discussion
on credit ratings, see section VI.A
(BOEM Evaluation Methodology—
Credit Ratings) of this preamble.
BOEM proposes to eliminate the
‘‘business stability’’ criterion found in
the current version of
§ 556.901(d)(1)(iii). The existing
regulation bases business stability on 5
years of continuous operation and
production of oil and gas, but BOEM has
determined that there is little
correlation between such history and a
company’s ability to carry out its
present and future obligations. BOEM
conducted an analysis of offshore
bankruptcies, including an assessment
of the number of years incorporated
prior to bankruptcy, and determined
that whether a company was in business
for 5 or more years had no relationship
to the likelihood of bankruptcy.
BOEM also proposes to eliminate the
existing ‘‘record of compliance’’
criterion found in the current version of
§ 556.901(d)(1)(v). BOEM has
determined that the number of INCs a
company receives correlates with the
10 In order for BOEM to establish a proxy credit
rating, which can be used for the purpose of
waiving any supplemental financial assurance
requirements that would otherwise be required,
BOEM is requiring that any company seeking a
proxy credit rating provide audited financial
statements. If such statements are not provided,
BOEM will require supplemental financial
assurance because it will have insufficient basis for
concluding that the owners have sufficient capacity
to reliably and timely meet their lease obligations.
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number of OCS properties it owns, not
its financial stability, and therefore,
BOEM has concluded that it is not an
accurate predictor of its financial health.
BOEM reviewed BSEE’s Incidents of
Non-Compliance (INCs) records and its
Increased Oversight List, which
represent BSEE’s cumulative records of
violations of performance standards on
the part of OCS operators and lessees
and determined that the number of
incidents of non-compliance typically
increases with the size and complexity
of the operator’s or lessee’s operations,
including the ratio of incidents to
number of components. Because larger
companies (regardless of credit score)
tend to have more properties and
components and therefore more INCs,
BOEM determined that record of
compliance criterion does not
accurately predict financial default.
BOEM’s review of this information
confirmed the feedback BOEM received
in response to the 2016 NTL, namely
that companies with a large number of
properties and facilities tended to
receive a large number of INCs and had
more individual properties on the
Increased Oversight List.11 BOEM
specifically requests comments
regarding the use of fines and violations
as a criterion in the determination of a
company’s ability to fulfill
decommissioning obligations, and any
data or analysis addressing any
correlation between the number of
violations and the risk of financial
default. BOEM also requests comments
on whether the elimination of the INC’s
criteria would create a disincentive to
comply with regulations. BOEM also
requests comment on whether or not the
cost of decommissioning is likely to
increase based on the type, quantity,
and magnitude of previous violations.
BOEM proposes to replace the
existing ‘‘financial capacity’’ and
‘‘reliability’’ criteria in existing
§ 556.901(d)(1) with issuer credit rating
or proxy credit rating. BOEM has found
credit ratings, which are part of the
existing ‘‘reliability’’ criterion, to be a
more reliable indicator of financial
ability to meet obligations than previous
financial criteria issued by BOEM via
NTLs (ex. NTL 2008–N07, NTL 2016–
N01). Issuer credit ratings provided by
a NRSRO incorporate a broad range of
qualitative and quantitative factors, and
a business entity’s credit rating most
accurately represents its overall ability
to meet its financial commitments. An
issuer credit rating is a forward-looking
opinion about an obligor’s overall
creditworthiness. This opinion focuses
11 The
most recent data are available at https://
www.data.bsee.gov/Company/INCs/Default.aspx.
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on the obligor’s capacity and
willingness to meet its financial
commitments as they come due.
Under the proposal, if a lessee does
not have a credit rating from a NRSRO,
the lessee may instead submit audited
financial statements, and BOEM will
determine a proxy credit rating using a
commercially available credit model
determined by BOEM to fulfill its
financial risk analysis requirements,
such as the S&P Global’s Credit
Analytics credit model. Such audited
financial information is currently the
basis of one of the five criteria in
BOEM’s regulations, namely the
‘‘financial capacity’’ criterion. Under the
proposed rule, this information will be
the primary consideration used to
evaluate lessees that do not have a
NRSRO credit rating. BOEM has
concluded that audited financial
statements, prepared in accordance with
Generally Accepted Accounting
Principles (GAAP) and accompanied by
an auditor’s certificate, provide an
accurate representation of the
company’s economic position and
operational performance. Using this
audited financial information to
generate a proxy credit rating would
allow BOEM to accurately determine if
supplemental financial assurance is
needed when a NRSRO rating is not
available.
This proposed rule would provide the
Regional Director with the authority to
require a lessee to provide supplemental
financial assurance if the lessee or its
co-lessee does not have an investment
grade credit rating, i.e., a credit rating
from a NRSRO that is greater than or
equal to either BBB- from S&P or Baa3
from Moody’s, or its equivalent, or a
proxy credit rating greater than or equal
to either BBB- or Baa3, as determined by
the Regional Director, based on audited
financial information with an
accompanying auditor’s certificate.
BOEM has determined that having an
investment grade credit rating is
important to reliably ensure that a
company not pose a substantial risk of
default.
Under existing BOEM and BSEE
regulations that would not change in
this proposed rule, co-lessees are jointly
and severally liable for accrued
decommissioning obligations, and the
risk that the government will be
responsible for the decommissioning
cost is therefore lower when co-lessees
are financially viable. Hence, BOEM
will not require supplemental financial
assurance for properties where at least
one co-lessee has an investment grade
credit rating.
If BOEM determines that
supplemental financial assurance is
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required, BOEM bases the amount of
supplemental financial assurance
required on the BSEE decommissioning
cost estimate. Previously, BSEE
provided a single algorithm-based
deterministic estimate for OCS facilities.
In 2020, BSEE updated certain
decommissioning costs in the Technical
Information Management System
(data.boem.gov).12 The new estimates
were based on industry-reported
decommissioning costs pursuant to NTL
2016–N03—Reporting Requirements for
Decommissioning Expenditures on the
OCS, later superseded by NTL 2017–
N02. Based on the reported data, BSEE
has developed three probabilistic
estimates of decommissioning costs for
each OCS facility on any given lease.
The lowest cost estimate would have a
fifty percent likelihood of covering the
full cost of decommissioning a facility
and is thus referred to as ‘‘P50.’’ The
second lowest cost estimate, P70, would
have a seventy percent likelihood of
covering the full cost of
decommissioning a facility. The third
and highest cost estimate, P90, would
have a ninety percent likelihood of
covering the full decommissioning cost
of a facility. These BSEE-generated
estimates are based on actual
decommissioning expenditures reported
by offshore companies.
BOEM proposes to use the P70 value
to set the amount of any required
supplemental financial assurance. In
determining to use the P70 value, BOEM
considered using either the P50, P70, or
P90 decommissioning liability levels,
which respectively represent an
approximately 11 percent ($3.5 billion),
30 percent ($9.6 billion), and 55 percent
($17.9 billion) increase in total
estimated financial assurances available
to address offshore decommissioning
liability relative to the previous
algorithm-based estimate, based on an
analysis of industry-reported
decommissioning costs. BOEM weighed
the risk of being underfunded (greatest
at the P50 level) against the financial
impact of requiring more financial
assurance (greatest at the P90 level). As
an example, a supplemental financial
assurance set based on the P70 value
means that, based on the uncertainty
and risk applied by BSEE to its model,
there is a 70% probability of covering
the decommissioning cost of the facility
(and therefore a 30% probability of
exceeding it). The P70 value is not to be
confused with the figure representing
70% of the cost of decommissioning a
particular facility. Because it is a
12 BSEE decommissioning cost estimates are
available at the following URL: https://www.data.
bsee.gov/Leasing/DecomCostEst/Default.aspx.
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statistical concept, it relies on the
quality and size of the sample, as well
as the uncertainty (variance) existing in
these costs. There is also a real
possibility that the P70 figure exceeds
the actual decommissioning value of
many facilities, in which case excess
would cover some portion of
insufficient assurance in those cases
where the assurance is designed to
address that entity’s full range of
liabilities.
BOEM’s goal for its financial
assurance program continues to be the
protection of the American taxpayers
from exposure to financial loss
associated with OCS development,
while ensuring that the financial
assurance program does not
detrimentally affect offshore investment
or position American offshore
exploration and production companies
at a competitive disadvantage. BOEM’s
proposal to use P70 would reduce
offshore decommissioning risk to
taxpayers relative both to previous BSEE
decommissioning estimates and to a
methodology based on P50, while
reducing burden on available capital for
offshore investment, including both
conventional and renewable energy
activities, imposed by the use of P90.
BOEM requests comments on potential
unknown risks associated with the use
of P70. BOEM has examined the impact
that the different P values would have
on the amount of financial assurance
required but lacks the data to estimate
the impact that selecting a P90 value
might have on offshore capital expenses
and investments, and therefore has
selected P70 in this proposal. We are
also specifically seeking information
and data related to these impacts from
commenters.
For comparison, at BSEE’s P90 levels,
the total decommissioning liability is
approximately $51.2 billion, compared
with $42.8 billion at P70; of that total,
the liability estimate associated with
lessees who have sub-investment grade
credit ratings is approximately $24.7
billion at the P90 level and $20.2 billion
at the P70 level. The total liability
estimates for properties expected to
meet the three times reserves threshold
is approximately $9.0 billion at the P90
level and $7.8 billion at P70 level. The
difference between the full Tier 2
estimate and that of Tier 2 properties
meeting the three times the reserves
threshold provides BOEM’s total
expected bond portfolio value if the rule
were to be finalized. For P90 this would
be $15.7 billion, reflecting an increase of
$3.2 billion in bond demands (increased
from $12.5 billion at P70). The annual
premium estimate for the forecasted
Tier 2 bond portfolio would increase
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from $380 million to $494 million, an
increase of approximately $114 million
to bond lessees at the P90 level. This
additional burden would be realized by
the same population of lessees as at the
P70 level but would provide additional
certainty of sufficient bonding for that
population in the event the facility
owners (1) defaulted on their obligations
and (2) no viable predecessor is
available to fulfill their obligations.
BOEM requests comments and
additional data on the costs and benefits
of setting the supplemental financial
assurance requirements based on each
of the P50, P70, and P90
decommissioning liability levels. In
particular, BOEM would like
information on impacts to offshore
capital expenses and investments of
each liability level, as well as impacts
to potential taxpayer liability. BOEM
also solicits comment on whether
setting assurance requirements based on
different liability levels might be
appropriate for different circumstances.
BOEM also requests comments on costs
and benefits of otherwise considering
predecessor lessees or grantees in
determining the level of required
supplemental financial assurance.
Additionally, BOEM requests
comments on the possibility of using a
higher BSEE decommissioning estimate
(i.e., P90), including on how a P90
estimate would affect small entities.
An offshore oil and gas lease that has
a significant reserve-to-liability value
that is, a property that can generate a
cash flow significantly in excess of the
costs associated with the
decommissioning of its assets—is likely
to be purchased by another company in
the event of a default by the current
lessee. The acquiring company would
then become liable for existing
decommissioning obligations, but due to
the value of existing reserves, it would
acquire sufficient positive cash flow to
reduce the risk that the costs associated
with the decommissioning of the assets
would be borne by the government.
BOEM has determined that an adequate
threshold for the ratio of reserve value
to the level of decommissioning liability
should be three to one. This threshold
is discussed further in Section VI.B of
this preamble. Therefore, supplemental
financial assurance will not be required
for properties with a value of proved oil
and gas reserves (using SEC
methodology of reported value in the
notes to the publicly traded companies’
Form 10–Ks) exceeding three times the
decommissioning costs (using the BSEE
P70 estimated value) associated with the
production of those reserves, as these
properties pose minimal risk that the
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government will be required to bear the
cost of decommissioning.
BOEM is proposing to use and is
requesting comments on this test as the
criterion to replace the existing
generalized ‘‘projected financial
strength’’ criterion found currently at
§ 556.901(d)(1)(ii), which considers
whether the estimated value of a lessee’s
existing lease production and proved
reserves is significantly in excess of the
lessee’s existing and future lease
obligations.
B. Right-of-Use and Easement Grants
BOEM’s regulations concerning RUE
grants serving a Federal OCS lease or a
State lease are found in §§ 550.160
through 550.166. Section 550.160
provides that an applicant for a RUE
that serves an OCS lease ‘‘must meet
bonding requirements,’’ but the
regulation does not prescribe a base
surety bond amount. The proposed rule
would replace this requirement with a
cross-reference to the specific criteria
governing supplemental financial
assurance demands in proposed
§ 550.166.
BOEM is proposing to revise the
bonding regulations to clarify that any
RUE grant holder must provide base
financial assurance in a specific
amount, regardless of whether the RUE
serves a State lease or a Federal OCS
lease. BOEM is proposing to establish a
Federal RUE base financial assurance
requirement that matches the existing
$500,000 base financial assurance
requirement for State RUEs. BOEM is
also proposing to establish a
requirement for $500,000 area-wide
RUE financial assurance, which would
satisfy the base financial assurance
requirement for any RUE holder that
owns one or more RUEs within the same
OCS area, regardless of whether the RUE
serves a State or Federal lease. BOEM is
also proposing to allow any lessee that
has posted area-wide lease financial
assurance, pursuant to § 556.900(a)(1),
556.901(a)(2), or 556.901(b)(2) for the
areas specified in § 556.900(a)(2), to
modify that lease surety bond to also
cover any RUE(s) in the area owned by
the same lessee. The ability to use areawide lease financial assurance to cover
the RUE base financial assurance
obligation would be subject to the
requirement that the area-wide lease
financial assurance would be in an
amount equal to or greater than the RUE
base financial assurance requirement
(i.e., equal to or greater than $500,000).
For example, under the proposed
regulations a lessee with a $3 million
area-wide lease surety bond could
establish or acquire any number of
Federal or State RUEs in the area
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without having to post any additional
financial assurance, provided the lessee
agrees to modify the terms of its areawide lease surety bond to also cover any
State or Federal RUEs that it owns or
acquires. If the existing area-wide bond
is not modified, the lessee may satisfy
the requirement by providing new
financial assurance to cover its RUE(s).
The rule proposes to consider the
credit rating or proxy credit rating of a
RUE co-grant holder, mirroring the
proposed methodology used to
determine if a lessee must provide
supplemental financial assurance. These
credit rating standards provide the most
effective and proven method to evaluate
a company’s financial wherewithal and
are widely accepted as a significant
demarcation of credit risk between
investment and non-investment grade
rated companies. BOEM proposes to
include consideration of the credit
rating or proxy credit rating of coowners of RUE grants because, like colessees, they are jointly and severally
liable for accrued decommissioning
obligations for facilities and pipelines
on their RUE.
These changes to the RUE financial
assurance requirements are intended to:
(1) Clarify the bonding requirement for
Federal RUEs, which is not explicitly
defined in the existing regulations; (2)
Align the RUE bonding requirements for
RUEs serving State and Federal leases;
and (3) Ensure that all RUEs are duly
covered and that the risk of a RUE
holder defaulting on its
decommissioning obligations is not
transferred to the American taxpayer.
BOEM is also proposing a new
regulation to establish the conditions
under which the assignment of RUE
interests may be disapproved. BOEM
may disapprove the assignment of a
RUE when the assignee has not satisfied
all obligations under the regulations or
under any BOEM or BSEE order. BOEM
may disapprove the assignment when
the assignee has not satisfied the
financial assurance requirements.
BOEM is also proposing to revise the
financial assurance regulations to clarify
that any RUE grant holder, whether the
RUE serves a State or Federal lease, may
be required to provide supplemental
financial assurance for the RUE—above
the $500,000 RUE base financial
assurance discussed above—if the grant
holder does not meet the credit rating or
proxy credit rating criteria proposed to
be used for lessees. This change aligns
the supplemental financial assurance
criteria for RUEs with those used in
making the same determination for
leases. The value of proved oil and gas
reserves will not be considered because
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a RUE grant does not entitle the holder
to any interest in oil and gas reserves.
C. Pipeline Right-of-Way Grants
BOEM’s bonding requirements for
pipeline ROW grants, contained in
§ 550.1011, prescribe a $300,000 areawide base surety bond that guarantees
compliance with all the terms and
conditions of the pipeline ROW grants
held by a company in an OCS area.
BOEM may require a pipeline ROW
grant holder to provide supplemental
financial assurance if the Regional
Director determines that financial
assurance in excess of $300,000 is
needed, but, unlike with leases, the
regulation provides no factors for the
Regional Director’s consideration when
making this determination. Therefore,
BOEM is proposing to revise the
financial assurance regulations to
provide that the Regional Director will
demand that a pipeline ROW grant
holder provide supplemental financial
assurance when the grant holder does
not meet the same credit rating or proxy
credit rating criteria proposed to be used
for lessees. The value of proved oil and
gas reserves will not be considered
because a ROW grant does not entitle
the holder to any interest in oil and gas
reserves.
The rule also proposes to consider the
credit rating or proxy credit rating of a
co-grant holder. This change would
better align BOEM’s evaluation process
with accepted financial risk evaluation
methods used by the banking and
finance industry and with the process
used to determine if a lessee must
provide supplemental financial
assurance. BOEM proposes to include
consideration of the credit rating or
proxy credit rating of co-owners of ROW
grants because, like co-lessees, they are
jointly and severally liable for accrued
decommissioning obligations for
facilities and pipelines on their ROW
(§ 250.1701(b)).
V. Proposed Revisions to Other Types
of Supplemental Financial Assurance
A. Third-Party Guarantees
BOEM is proposing to evaluate a
potential guarantor using the same
credit rating or proxy credit rating
criteria proposed for lessees. The value
of proved oil and gas reserves of an
associated lease would not be
considered because that value is a
characteristic of the lease belonging to
the guaranteed lessee and not an asset
belonging to the guarantor.
The criteria to evaluate a guarantor
provided in the existing regulations
have proved difficult to apply. For
example, § 556.905(a)(3) provides that
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the guarantor’s total outstanding and
proposed guarantees may not exceed 25
percent of its unencumbered net worth
in the United States. Determining a
company’s total outstanding and
proposed guarantees depends on
accurate information provided by the
guarantor, and BOEM has no way to
confirm whether the 25 percent
threshold has been exceeded at the time
the guarantee is proffered or afterward.
The same provision requires BOEM to
consider the unencumbered net worth
of the company in the United States,
while another provision,
§ 556.905(c)(2)(iv), requires BOEM to
consider the guarantor’s unencumbered
fixed assets in the United States. Both
of these criteria are difficult to apply
when the company under evaluation
has domestic and international assets
that must be separated. Using the same
financial evaluation criterion, i.e., issuer
credit rating or proxy credit rating, to
assess both guarantors and lessees as the
most relevant measure of future capacity
would provide consistency in
evaluations and avoid overreliance on
net worth.
To allow more flexibility in the use of
third-party guarantees, the proposed
rule would allow a third-party guarantee
to be used as supplemental financial
assurance for a RUE or ROW grant, as
well as a lease. Most significantly, in
proposed § 556.902(a)(3), this proposed
rule would remove the requirement for
a third-party guarantee to ensure
compliance with the obligations of all
lessees, operating rights owners, and
operators on the lease, and would allow
a guarantee limited to a specific amount,
as agreed to by BOEM, or limited to the
liabilities of specific parties. Potential
guarantors are reluctant to provide a
guarantee if they cannot limit the
amount of their guarantee or choose the
entity for which they are guaranteeing
compliance. This change would allow a
guarantor to limit its guarantee to a
specific amount of the total financial
assurance requirement. The remaining
amount of required financial assurance
must be covered by additional security
from the guaranteed lessee/grant holder
or its co-lessees or co-grant holders, so
the amount of the requirement is fully
satisfied. BOEM is proposing this
change because the existing regulations
do not clearly limit the liability of a
guarantor to a fixed monetary amount
stated in the guarantee. Therefore, few
parties were willing to use third-party
guarantees in the past.
By allowing a third-party guarantor to
guarantee only the obligations it wishes
to cover, BOEM would provide industry
with the flexibility to use the guarantee
to satisfy supplemental financial
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assurance requirements without forcing
the guarantor to cover the risks
associated with all parties on the lease
or grant or operations in which the party
they wish to guarantee has no interest
and over which the guarantor may have
no control. Moreover, the proposal to
allow BOEM to accept a third-party
guarantee that is limited to specific
obligations does not reduce BOEM’s
protection because the regulations
would require that the financial
assurance provided secures all lease and
grant obligations.
The proposed rule would also allow
BOEM to cancel a third-party guarantee
under the same terms and conditions
that apply to cancellation of other types
of financial assurance, as provided in
proposed § 556.906(d)(2).
Lastly, the existing regulation refers to
both a ‘‘guarantee’’ and an ‘‘indemnity
agreement’’ (which BOEM intended to
mean the same thing), and the proposed
rule clarifies that the regulations
contemplate only one agreement: the
guarantee agreement.
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B. Decommissioning Accounts
Section 556.904 currently allows
lessees to establish a lease-specific
abandonment account to satisfy any
supplemental financial assurance
required by § 556.901(d). BOEM
proposes to rename these accounts
‘‘Decommissioning Accounts,’’ the
terminology used by the industry, to
remove any perceived limitation of this
type of account to a single lease, and to
signify that these accounts may be used
to ensure compliance with
supplemental financial assurance
requirements for a RUE and ROW grant,
as well as a lease. To make these
accounts more attractive to parties who
may desire to use this method of
providing supplemental financial
assurance, BOEM also proposes to
remove the requirement to pledge
Treasury securities to fund the account
before the funds equal the maximum
amount insurable by the Federal Deposit
Insurance Corporation (FDIC) (currently
capped at $250,000). BOEM notes that,
due to this current requirement, lessees
may have been unwilling to use
decommissioning accounts.
C. Transfers of Lease Interests to Other
Lessees or Operating Rights Holders
The proposed rule would update
subparts G and H of the Department’s
existing part 556 regulations to clarify
that BOEM will not approve the transfer
of a lease interest, whether a record title
interest or an operating rights interest,
until the transferee complies with all
applicable regulations and orders,
including the financial assurance
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requirements. As discussed above, many
of the facilities currently on the OCS
have decommissioning obligations
where the cost of performance greatly
exceeds the amount of financial
assurance currently available to the
Department of the Interior. To address
this problem, BOEM is proposing that it
may prohibit approval of any new
transfer or assignment of any lease
interest unless and until the financial
assurance demands have been satisfied.
VI. BOEM Evaluation Methodology
A. Credit Ratings
In this rulemaking, BOEM proposes to
use an ‘‘Issuer credit rating’’ to evaluate
the financial health of OCS lessees,
grant holders, and guarantors. A review
of S&P and Moody’s rating
methodologies showed that the analyses
they perform to determine an issuer
credit rating are wide-ranging and
include factors beyond corporate
financials (such as history, senior
management, and commodity price
outlook). An issuer credit rating
provides the rating agencies’ opinions of
the entity’s ability to honor senior
unsecured debt and debt-like
obligations. It is common for lessees to
have both an issuer credit rating and a
bond issuance rating. However, bond
issuance ratings are opinions of the
credit quality of a specific debt
obligation only, which can vary based
on the priority of a creditor’s claim in
bankruptcy or the extent to which assets
are pledged as collateral. Due to the
varying priority of claims associated
with debt and the limited purpose of
bond issuance ratings, BOEM proposes
to accept only issuer credit ratings from
a NRSRO, and references to credit rating
in this rulemaking refer only to an
issuer credit rating (or a ‘‘proxy rating’’
where so noted as appropriate). BOEM
proposes to add ‘‘Issuer credit rating,’’
as defined by S&P, as a newly defined
term in 30 CFR parts 550 and 556.
If an entity does not have an issuer
credit rating, BOEM proposes to permit
companies to request the Regional
Director to determine a proxy credit
rating based on audited financial
information for the most recent fiscal
year, including an income statement, a
balance sheet, a statement of cash flows,
and the auditor’s certificate. By ‘‘most
recent fiscal year’’ BOEM means a
period that includes a 12-month period
within the 24 months prior to the
Regional Director’s determination for
which supplemental financial assurance
is required. One benefit of this approach
is to reduce the adverse effects of the
rule on small businesses.
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BOEM proposes to use S&P Global’s
Credit Analytics credit model to
calculate proxy credit ratings.13
However, BOEM proposes to reserve the
right to use a different model if it
determines that a different model more
accurately reflects those factors relevant
to the financial evaluation of companies
operating on the OCS. The purpose of
using S&P Global’s Credit Analytics
credit models is to provide an accurate
and objective method to assess any
given company’s probability of default
on its financial obligations based on its
audited financial statements. S&P
Global’s Credit Analytics credit models
would allow BOEM to reliably score and
efficiently model BOEM’s potential risk
exposure from a lessee that could
potentially become unable to meet its
decommissioning obligations. Credit
modeling would allow BOEM to
compare the company with similar
public companies in the same industry
segment. BOEM invites comments on
the appropriateness of relying on S&P
Global’s Credit Analytics credit model,
or other similar, widely accepted credit
rating models to generate proxy credit
ratings. Additionally, BOEM invites
comments on the appropriateness of
using a proxy credit rating when
determining the need to provide
financial assurance.
BOEM’s financial assurance program
is intended to ensure that private
companies have the capacity to meet
their financial and non-financial (i.e.,
performance) obligations. In order to
both ensure that companies do not
‘‘cause [unmitigated] damage to the
environment or to property, or endanger
life or health,’’ 43 U.S.C. 1332(6), and to
promote ‘‘expeditious and orderly
development,’’ 43 U.S.C. 1332(3), BOEM
seeks to balance the financial risk to the
government and the taxpayer while
minimizing regulatory burdens. See also
43 U.S.C. 1801(7), 1802(1) & (2).
BOEM has determined that
establishing an issuer credit rating
threshold of BBB- (S&P) or Baa3
(Moody’s), an equivalent credit rating
provided by another SEC-recognized
NRSRO, or an equivalent proxy credit
rating, is the best means for
accomplishing these objectives. The
Moody’s Baa3 credit rating is equivalent
to the S&P BBB- credit rating. If S&P and
Moody’s provide different ratings for the
same company, BOEM will use the
higher rating as the lessee’s rating. As
discussed in the IRIA, out of the 276
companies analyzed, none of the
companies were rated at or above BBB13 https://www.spglobal.com/marketintelligence/
en/documents/mi_risk_609827_credit-analytics_
brochure_letter_fd.pdf.
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at the time of bankruptcy nor within 10
years prior to bankruptcy, therefore,
BOEM has selected BBB- as the credit
rating threshold for providing additional
financial assurance. Additionally, under
the proposed rule, BOEM would have
adequate time to secure needed
financial assurance if a company were
to drop below the proposed investment
grade threshold as BOEM monitors
company rating changes throughout the
year.
BOEM reviewed historical default
rates across the entire credit rating
spectrum, as well as the credit profile of
oil and gas sector bankruptcies arising
from the commodity price downturn in
2014, to determine an appropriate level
of risk. As would be expected, the
average S&P historical one-year default
rates increase significantly with lower
ratings. The average S&P one-year
default rate 14 for BBB- rated companies
from 1981 to 2020 was 0.24 percent.
Comparatively, the average one-year
default rate for BB- rated companies was
1.21 percent, for B¥ rated companies
was 8.73 percent, and for C rated
companies was 24.92 percent. BOEM
believes that one-year default rates are
an appropriate measure of risk, given
BOEM’s policy of reviewing the
financial status of lessees, ROW holders,
and RUE holders at least on an annual
basis (the review typically
corresponding with the release of
audited annual financial statements). In
addition, throughout the year, BOEM
monitors company credit rating
changes, market reports, trade press,
articles in major news media and
quarterly financial reports to review the
financial status of lessees, ROW holders,
and RUE holders, and the regulation
would not preclude a demand for
supplemental financial assurance
through the Regional Director’s
regulatory authority at any time.
BOEM has identified a circumstance
in which the use of a proxy credit rating
may not adequately account for the
potential risk of default. This
circumstance would occur in a situation
where a company has a substantial
contingent liability for
decommissioning OCS facilities (i.e.,
decommissioning exposure by virtue of
being a co-lessee) associated with its
minority ownership of such facilities if
the majority owners are unable or
14 The one-year default rate represents the
percentage of companies having any given credit
rating that have failed to meet their financial
obligations during any given twelve-month period.
For example, for companies having had BBB¥
rating in 2020, 0.24 percent defaulted on their
financial obligations in the subsequent twelvemonth period (i.e., approximately one out of every
400 companies having a BBB¥ credit rating).
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unwilling to meet their obligations. This
is particularly the case in the OCS
context because existing Department
regulations stipulate that all co-owners
of any OCS lease, regardless of their
ownership share, are jointly and
severally liable for all the obligations
associated with the lease. Contingent
liabilities that are deemed unlikely to
financially materialize are not required
to be booked as a liability on a balance
sheet under Financial Accounting
Standards Board (FASB) accounting
rules for Asset Retirement Obligations,
so would not be included in audited
financial statements, and therefore may
not be taken into consideration in the
generation of proxy credit ratings.
For offshore lessees with a NRSRO
issuer credit rating, the current average
net worth of investment grade lessees is
$115 billion dollars, with average book
assets of $155 billion dollars. This
implies that the financial risk of nonperformance on co-lessee liability
exposure from these companies is very
low. Given that total U.S. offshore
liability is lower than half the average
net worth of offshore investment grade
companies, such lessees are likely to
have the financial capacity to cover the
contingent liabilities of co-lessees that
have not themselves provided financial
assurance.
However, where a non-publicly
traded company (i.e., a company
without an issuer credit rating) has
substantial minority co-ownership
interests in OCS leases, the proxy credit
rating derived for the minority owner
may not adequately represent the risk
exposure in circumstances where (1)
The ownership interests of the other coowners are disproportionately large
compared to the ownership interest of
the minority owner, and; (2) The credit
ratings of the majority co-owners are not
investment grade. This possibility is
relatively likely due to BOEM’s
historical practice of declining to
require supplemental financial
assurance from any co-lessees who
share ownership of a lease with any
company with an investment grade
proxy credit rating, regardless of the
financial circumstance of the co-owner
or the relative ownership share of any
co-owner.
In these circumstances, a company
may have contingent decommissioning
liabilities that are not adequately
captured in the company’s financial
statements. It may be that such
decommissioning liabilities amount to a
disproportionate share compared to the
total assets of the company, such that
the company may not have the financial
capacity to satisfy these contingent
liabilities. If, for example, a small
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company with a high proxy credit rating
were a one percent co-lessee of a lease
with financially weak co-lessees, the
small company may not have sufficient
assets to meet its decommissioning
obligations for the remaining ninetynine percent of the decommissioning
costs (which it may be required to
satisfy under the joint-and-several
liability provisions of the regulations) in
the event that its co-lessees were to
default on their financial obligations.
For this reason, BOEM is proposing to
add a new provision to the regulations
that would authorize BOEM to require
a company requesting a proxy credit
rating to provide information on its
ownership of other OCS facilities and
leases. This new provision authorizes
BOEM to take the contingent liabilities
associated with the company’s coownership of these assets into
consideration in determining the
appropriate proxy credit rating.
BOEM invites comments on the
appropriateness of this approach of
relying on lessee and grant holder credit
ratings, including whether BOEM has
proposed an appropriate credit rating
threshold of BBB-, and if not, what
threshold or set of thresholds would
best protect taxpayer interests while not
imposing undue burdens on industry.
Also, BOEM invites comments on
alternative options for determining the
need for financial assurance other than
credit ratings. Additionally, BOEM
invites comments on whether financial
assurance should be required of all
companies, regardless of credit rating,
and the impacts such a requirement
might have on OCS investment and on
potential taxpayer liabilities.
B. Valuing Proved Oil and Gas Reserves
Under this proposed rule, if BOEM
considers the proved reserves on a
particular lease when determining
whether supplemental financial
assurance is required, BOEM would
require the lessee to submit a reserve
report for the proved oil and gas
reserves (as defined by the SEC
regulations at 17 CFR 210.4–10(a)(22))
located on a given lease. The reserve
report provided to BOEM would contain
the projected future production
quantities of proved oil and gas reserves
on a per lease basis, the production cost
for those reserves also on a per lease
basis, and the discounted future cash
flows from production. The reserve
report would also provide the value of
the proved oil and gas reserves per
lease, determined under the accounting
and reporting standards set forth in SEC
Regulation S–X at 17 CFR 210.4–10 and
SEC Regulation S–K at 17 CFR, subpart
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229.1200.15 BOEM proposes to use SEC
regulations on reserve reporting because
they are commonly accepted and
understood by offshore oil and gas
companies and are already produced by
publicly traded companies. This also
allows BOEM to rely on the established
SEC regulations on the definitions,
qualifications, and requirements for
proven reserves, rather than attempting
to recreate these regulations. BOEM
would use this proved oil and gas
reserves per-lease value when
determining whether the value of the
reserves on any given lease exceeds
three times the cost of the P70
decommissioning estimate associated
with the production of those reserves.
BOEM believes that a property with a
sufficient ‘‘reserves-to-decommissioning
cost’’ ratio would likely be purchased by
another company if a current lessee
defaults on its obligations, thereby
reducing the risk that decommissioning
costs would be borne by the
government, and consequently reducing
the need for supplemental financial
assurance.
A reserves-to-decommissioning cost
ratio of one-to-one would mean that the
estimated value of remaining oil and gas
reserves on a lease is equal to the cost
of decommissioning. BOEM does not
expect any other company to purchase
a lease interest with a ratio of one-toone, as the new lessee would not receive
any return on its investment once it
bears the cost of decommissioning. A
reserves-to-decommissioning cost ratio
below three-to-one might be considered
adequate to encourage a new lessee to
take on the cost of purchasing the lease
and assuming liability for all of the
existing decommissioning obligations,
however there may be other factors that
would reduce the lease’s commercial
appeal (e.g., macro-economic
conditions, maintenance conditions, or
higher than typical operating costs).
In BOEM’s judgment, a reserves-todecommissioning cost ratio that meets
or exceeds three-to-one provides enough
risk reduction to justify a Regional
Director determination that the lessee is
not required to provide supplemental
financial assurance for that lease.
Establishing an appropriate reserves-todecommissioning cost ratio protects the
taxpayer during periods of commodity
price volatility. If commodity prices
15 Unlike this proposed regulation, the SEC
regulations at 17 CFR 229.1202(a)(2) say: ‘‘Disclose,
in the aggregate and by geographic area and for each
country containing 15 percent or more of the
registrant’s proved reserves, expressed on an oilequivalent-barrels basis, reserves estimated . . . .’’
Although BOEM would require that lessees apply
the methodology of the SEC, it would require the
analysis on a lease-specific basis.
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decline in a manner similar to late 2014
through early 2016, for example, BOEM
believes a ratio of at least three-to-one
assures the property would most likely
retain its economic viability and
financial attractiveness to potential
buyers. BOEM requests comment on
whether this is an appropriate
threshold, or if there are better
approaches and/or data sets available
for analysis that would provide BOEM
with better certainty that taxpayer
interests will ultimately be protected.
VII. Phased Compliance With
Supplemental Financial Assurance
Orders
BOEM recognizes that the proposed
regulations may have a significant
financial impact on affected companies.
For that reason, BOEM is proposing to
phase in the new bonding requirements
over a three-year period for existing
leaseholders. As part of this proposal,
BOEM would require that any company
receiving a supplemental financial
assurance demand post one-third of the
total amount by the deadline listed on
the demand letter. A second one-third
would be required by the end of the
second year (i.e., within 24 months of
the receipt of the demand letter). The
final one-third payment would be due
within 36 months of the receipt of the
demand letter. If a lessee’s credit rating
improves to investment grade during the
three-year period, BOEM will
discontinue collection of the remaining
financial assurance and return any
supplemental financial assurance
previously provided.
BOEM is requesting comments from
potentially affected parties about this
phased approach and how it could most
effectively be implemented to minimize
any unnecessarily adverse effects from
an increased supplemental financial
assurance requirement.
VIII. Appeals Bonds
When BOEM issues a supplemental
financial assurance demand, the
affected party has the option to appeal
the demand to the Department of the
Interior’s Board of Land Appeals (IBLA).
In many cases in which an appeal is
filed, it is accompanied by a request to
stay BOEM’s supplemental financial
assurance order pending the outcome of
the appeal. Currently, if the stay is
granted, BOEM has no ability to ensure
that a facility is covered by adequate
financial assurance until the appeal is
decided. It is important that BOEM
ensure that the government’s interests
are protected immediately because IBLA
appeals may continue for several years.
If the company appealing the
supplemental financial assurance
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demand declares bankruptcy before its
appeal is resolved, BOEM has no
financial assurance to cover the costs of
corrective action. For this reason, BOEM
is proposing a new requirement
whereby any company seeking to stay a
supplemental financial assurance
demand pending appeal must, as a
condition of obtaining a stay of the
order, post an appeals bond in the
amount of supplemental financial
assurance required. If the appeal is
successful, the amount of the appeals
bond in excess of the amount of
supplemental financial assurance
determined to be required would be
released. If the appeal is unsuccessful,
the appeals bond could be replaced or
converted into bonds to cover the
supplemental financial assurance
demand.
IX. Proposed Revisions to BOEM
Definitions
To implement the changes proposed
above, BOEM proposes to add or revise
several definitions in 30 CFR parts 550
and 556. For proposed 30 CFR part 550,
BOEM proposes to add new terms and
definitions for ‘‘Issuer credit rating,’’
‘‘Investment grade credit rating,’’ and
‘‘Financial assurance,’’ and to revise the
definition of ‘‘You.’’ BOEM proposes to
add a new term and definition for
‘‘Right-of-Use and Easement (RUE)’’ and
remove the separate definitions of
‘‘Right-of-use’’ and ‘‘Easement’’ in 30
CFR part 550 because those terms are
not used separately in the existing or
proposed regulatory text. Similarly, for
30 CFR part 556, BOEM proposes to add
definitions for the new term ‘‘Issuer
credit rating’’ and ‘‘Investment grade
credit rating,’’ remove the existing term
and definition of ‘‘Security or
securities,’’ add a new term and
definition for ‘‘Financial assurance,’’
and revise the definitions of ‘‘Right-ofUse and Easement (RUE)’’ and ‘‘You,’’
all of which will match those in
proposed 30 CFR part 550.
Additionally, BOEM is replacing the
word ‘‘sulphur’’ with the more
contemporary spelling of ‘‘sulfur’’
throughout the regulatory text where it
has not been previously changed. This
edit is a technical correction and does
not change any meaning or intent of the
regulatory provisions. BOEM proposes
updating the word ‘‘sulfur’’ in
§§ 550.101, 550.102, and 550.105.
X. Section-by-Section Analysis
BOEM is proposing to revise the
following regulations:
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applicable to either a State or Federal
RUE would apply to the other.
Part 550—Oil and Gas and Sulfur
Operations in the Outer Continental
Shelf
The terms ‘‘bond,’’ ‘‘bonding,’’
‘‘surety bond,’’ ‘‘security,’’ and
‘‘securities’’ would be replaced
throughout this part with the new term
‘‘financial assurance.’’
Subpart A—General
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Section 550.105
Definitions
The proposed rule would add a
definition of ‘‘Issuer credit rating,’’
which is a newly defined term in 30
CFR part 550, for the reasons set forth
above.
BOEM would remove the terms
‘‘Easement,’’ and ‘‘Right-of-use,’’ neither
of which is used separately. In lieu of
these two terms, and to define the term
actually used in 30 CFR part 550, BOEM
would add a definition for ‘‘Right-of-Use
and Easement (RUE).’’
This proposed rule would also add a
new term and definition for ‘‘Financial
assurance’’ to list the various methods
that may be used to ensure compliance
with OCS obligations.
The proposed rule would add new
definitions for the terms ‘‘Transfer’’ and
‘‘Assign’’ to clarify that these terms are
used interchangeably throughout 30
CFR part 550. This change would also
serve to clarify that the related terms
‘‘transferee’’ and ‘‘transferor’’ are
interchangeable with ‘‘assignee’’ and
‘‘assignor’’ respectively.
The proposed rule would add a new
definition for the term ‘‘Investment
grade credit rating,’’ meaning ‘‘an issuer
credit rating of BBB- or higher, or its
equivalent, assigned to an issuer of
corporate debt by a nationally
recognized statistical rating organization
as that term defined by the United
States Securities and Exchange
Commission.’’ This definition would
become the threshold determination
according to which BOEM would define
whether financial assurance typically
would or would not be required.
BOEM would also revise the
definition of the term ‘‘You’’ to now
include, depending on the context of the
regulations, a bidder, a lessee (record
title owner), a sublessee (operating
rights owner), a Federal or State rightof-use and easement grant holder, a
pipeline right-of-way grant holder, an
assignor or transferor, a designated
operator or agent of the lessee or grant
holder, or an applicant seeking to
become one of the above. This change
to the definition of ‘‘You’’ would, in
concert with changes proposed in
§ 550.166, make explicit that any
financial assurance provisions
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Section 550.160 When will BOEM
grant me a right-of-use and easement
(RUE), and what requirements must I
meet?
The proposed rule would revise the
introductory text of this section to
clarify that a RUE grant need not cover
both leased and unleased lands. Instead,
BOEM may grant a RUE on leased lands
(i.e., leased to another party), or
unleased lands, or both. The paragraph
(a) introductory text would be expanded
to include additional activities
associated with a RUE, such as using or
modifying existing devices. The
paragraph (a) introductory text would
also be expanded to include the words
‘‘seafloor production equipment’’ and
‘‘facilities.’’ By expanding the RUE
requirement to additional activities and
devices, BOEM would ensure that all
associated activities that may have an
impact on the environment of the OCS
are included.
BOEM also proposes to revise
paragraph (b) to provide that a RUE
grant holder must exercise the grant
according to the terms of the grant and
the applicable regulations of 30 CFR
part 550, as well as the requirements of
30 CFR part 250, subpart Q.
BOEM also proposes to revise
paragraph (c) to update the crossreference to BOEM’s lessee qualification
requirements, §§ 556.400 through
556.402, and to replace the language in
this paragraph referencing ‘‘bonding
requirements’’ with a cross reference to
§ 550.166, which BOEM also proposes
to revise to add specific criteria for
financial assurance demands, as
provided below.
Section 550.166 If BOEM grants me a
RUE, what financial assurance must I
provide?
The proposed rule would revise the
section heading by removing the
reference to ‘‘a State lease’’ and
replacing ‘‘surety bond’’ with ‘‘financial
assurance.’’ This reflects the change in
the text of paragraph (b) of this section
that provides that the financial
assurance requirements of this section
would apply to both a RUE granted to
serve a State lease and one serving an
OCS lease. The term ‘‘surety bond’’
would also be replaced with ‘‘financial
assurance’’ throughout the section.
BOEM proposes to revise paragraph
(a) to require $500,000 in financial
assurance that guarantees compliance
with the terms and conditions of any
OCS RUEs you hold. Previously,
paragraph (a) only required $500,000 in
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42149
financial assurance for RUEs associated
with State leases.
BOEM proposes to add paragraph
(a)(1) to allow area-wide lease financial
assurance to satisfy the requirements of
paragraph (a), provided it is in excess of
the $500,000 base RUE financial
assurance requirement and is amended
to guarantee compliance with all the
terms and conditions of the RUE(s) it
covers.
BOEM proposes to add paragraph
(a)(2) to allow the Regional Director to
lower the required financial assurance
amount for research and other similar
types of RUEs, which reflects BOEM’s
past experience that the total liability
exposure can be well below $500,000
for such RUEs.
BOEM proposes to add paragraph
(a)(3) to ensure that the financial
assurance requirements of § 556.900(d)
through (g) and § 556.902 would apply
to the requirements stated in paragraph
(a).
BOEM would also add to paragraph
(b) in this section to provide that, if
BOEM grants a RUE that serves either an
OCS lease or a State lease, the Regional
Director may require the grant holder to
provide supplemental financial
assurance to ensure compliance with
the obligations under the RUE grant.
BOEM would use the same issuer credit
rating or proxy credit rating criteria
found in proposed § 556.901(d)(1) and
(2) to evaluate a RUE grant holder as
BOEM proposes to apply to lessees, i.e.,
the Regional Director may require
supplemental financial assurance if the
grant holder does not have an issuer
credit rating or a proxy credit rating that
meets the criteria set forth in proposed
§ 556.901(d)(1). Like lessees, most RUE
holders are oil and gas companies, and
BOEM would, therefore, use the same
financial criteria to determine the need
for additional financial assurance from
RUE holders to provide consistency.
BOEM proposes to revise paragraph
(b)(1) to update the regulatory citation
in existing § 550.166(b)(1) to provide
that the supplemental financial
assurance must meet the requirements
for lease surety bonds or other financial
assurance provided in § 556.900(d)
through (g) and § 556.902.
The proposed rule would also revise
§ 550.166(b)(2) to include ‘‘BOEM and
BSEE orders’’ in the list of costs and
liabilities, and clarify that RUE holders
should also comply with the
decommissioning regulations at 30 CFR
part 250, subpart Q.
The proposed rule would also add
new paragraph (c) to provide that if a
RUE grant holder fails to replace any
deficient financial assurance upon
demand, or fails to provide
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supplemental financial assurance upon
demand, BOEM may assess penalties,
request BSEE to suspend operations on
the RUE, and/or initiate action for
cancellation of the RUE grant. Proposed
paragraph (c) provides for actions
similar to those available to BOEM
pursuant to proposed § 556.900(h) if a
lessee fails to provide sufficient
financial assurance.
Section 550.167 How may I obtain or
assign my interest in a RUE?
The proposed rule would add
§ 550.167 to establish the ability to
assign a RUE interest. Previously, RUE
interests were not assigned, because
assignment of RUE interests was not
addressed in the existing regulations.
This change is being proposed to allow
RUE assignments. This new section
would also require a RUE assignee to
provide the information outlined in
existing § 550.161, which currently
must be provided only by applicants for
a new RUE. Paragraph (a) of § 550.167
would establish that BOEM must
approve all assignments of all or part of
a RUE interest. Paragraphs (b)(1)
through (4) would establish the
circumstances in which BOEM may
disapprove an assignment of a RUE,
mirroring the circumstances under
which BOEM may disapprove the
assignment of a lease or sublease
pursuant to § 556.704. These
circumstances are intended to prevent
the assignment of a RUE when, for
example, the assignment would result in
inadequate financial assurance.
Subpart J—Pipelines and Pipeline
Rights-of-Way
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Section 550.1011 Financial Assurance
Requirements for Pipeline Right-of-Way
(ROW) Grant Holders
The proposed rule would revise this
section in its entirety. The section
heading would be revised to read,
‘‘Financial assurance requirements for
pipeline right-of-way (ROW) grant
holders,’’ to clarify that a pipeline ROW
grant holder may meet the requirements
of this section by providing bonds or
other types of financial assurance, in
order to expand the language to include
forms of financial assurance in addition
to bonds.
Currently, § 550.1011(a) requires that
an applicant or a holder of a ROW must
provide and maintain a $300,000 bond
(in addition to bond coverage required
in 30 CFR parts 256 and 556), and
potentially additional security, if the
Regional Director determines the latter
is needed. The proposed rule would
revise this paragraph to require that
assignees, as well as applicants and
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holders, are required to provide and
maintain the $300,000 financial
assurance to make clear that financial
assurance requirements would apply to
an assignment of a ROW grant. The
proposed rule would remove the
reference to 30 CFR part 256 currently
in paragraph (a)(1) because 30 CFR part
256 does not contain pipeline bonding
requirements. The proposed rule would
clarify that the requirement to provide
area-wide financial assurance for a
pipeline ROW grant is separate and
distinct from the financial assurance
coverage required for leases in 30 CFR
part 556 and that required for RUEs in
30 CFR part 550. Existing paragraph
(a)(2) would be removed because
supplemental financial assurance
requirements would be covered by
proposed paragraph (d).
BOEM would also remove existing
paragraph (b), which defines the three
recognized OCS areas, because it is
made redundant by the reference to
§ 556.900(b) in revised paragraph (a).
BOEM proposes to replace the removed
paragraph (b) with a new paragraph (b)
to provide that the requirement under
paragraph (a) to furnish and maintain
area-wide financial assurance may be
satisfied if the operator or a co-grant
holder provides area-wide pipeline
right-of-way financial assurance in the
required amount that guarantees
compliance with the regulations and the
terms and conditions of the grant, as
discussed in Section IV.C of this
preamble.
BOEM also proposes to revise
paragraph (c) with a provision stating
that the requirements for lease financial
assurance in § 556.900(d) through (g)
and § 556.902 would apply to the areawide financial assurance required in
paragraph (a) of this section. This crossreference incorporates the financial
assurance provisions from 30 CFR part
556 that specify the required content,
form, and administrative handling of
financial assurance. BOEM would
remove existing paragraphs (c) and (d),
which would be made redundant by
proposed new paragraph (f).
BOEM would add paragraph (d) to
provide that the Regional Director may
determine that supplemental financial
assurance is necessary to ensure
compliance with the obligations under a
pipeline ROW grant based on an
evaluation of the grant holder’s ability
to carry out present and future
obligations on the pipeline ROW. BOEM
proposes to use the same issuer credit
rating or proxy credit rating criteria to
evaluate a pipeline ROW grant holder,
or co-grant holder, as BOEM proposes to
apply to lessees in § 556.901(d)(1).
BOEM, as noted earlier in this preamble,
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has found that reliance on credit ratings
better evaluates financial stability, and
is thus applying the same financial
criteria in evaluating financial stability
of grant holders.
BOEM also proposes to add additional
supplemental financial assurance
requirements in new paragraph (e)(1)
stating that the supplemental financial
assurance must meet the general
requirements for lease surety bonds or
other financial assurance, as provided in
§ 556.900(d) through (f) and the
proposed revisions to paragraph (g) and
§ 556.902. This cross-reference
incorporates the financial assurance
provisions from 30 CFR part 556 that
specify the required content, form, and
administrative handling of financial
assurance. New paragraph (e)(2)
proposes that any supplemental
financial assurance for a pipeline ROW
would be required to cover liabilities for
regulatory compliance and compliance
with BOEM and BSEE orders,
decommissioning of all pipelines or
other facilities, and clearance from the
seafloor of all obstructions created by
the pipeline ROW operations, in
accordance with the regulations set
forth in 30 CFR part 250, subpart Q. See
Section IV.C of this preamble for further
discussion.
The proposed rule would also add
new paragraph (f) to provide that if a
pipeline ROW grant holder fails to
replace any deficient financial
assurance upon demand or fails to
provide supplemental financial
assurance upon demand, the Regional
Director may assess penalties, request
BSEE to suspend operations on the
pipeline ROW, and/or initiate action for
forfeiture of the pipeline ROW grant in
accordance with § 250.1013.
Part 556—Leasing of Sulfur or Oil and
Gas and Bonding Requirements in the
Outer Continental Shelf
The proposed rule would make a
technical correction to the authority
citation for part 556 by removing the
citation to 43 U.S.C. 1801–1802, because
neither of these two sections contains
authority allowing BOEM to issue or
amend regulations.
The proposed rule would also remove
the citation to 43 U.S.C. 1331 note,
which is where the Gulf of Mexico
Energy Security Act of 2006 is set forth.
While this statute required BOEM to
issue regulations concerning the
availability of bonus or royalty credits
for exchanging eligible leases, the
deadline for applying for such a bonus
or royalty credit was October 14, 2010;
therefore, lessees may no longer apply
for such credits. BOEM no longer needs
the authority to issue regulations under
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that statute and has removed all
regulations on this topic from 30 CFR
part 556, except for § 556.1000, which
provides that lessees may no longer
apply for such credits.
The terms ‘‘bond,’’ ‘‘bonding,’’ and
‘‘surety bond’’ would be replaced
throughout this part with the new term
‘‘financial assurance,’’ as discussed
earlier in this preamble. This change
includes changing the Title of Part 556
from ‘‘Leasing of Sulphur or Oil and Gas
and Bonding Requirements in the Outer
Continental Shelf’’ to ‘‘Leasing of Sulfur
or Oil and Gas and Financial Assurance
Requirements in the Outer Continental
Shelf.’’
Subpart A—General Provisions
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Section 556.105
Definitions
Acronyms and
The proposed rule would add a
definition of ‘‘Issuer credit rating’’ and
‘‘Investment grade credit rating,’’ which
are identical to the proposed additions
in § 550.105.
The proposed rule would also revise
the definition of ‘‘Right-of-Use and
Easement (RUE)’’ to include the words
‘‘to construct, secure to the seafloor, use,
modify, or maintain platforms, seafloor
production equipment.’’ This definition
would be the same as the definition of
‘‘Right-of-Use and Easement (RUE)’’
proposed for § 550.105.
The proposed rule would also add a
definition for ‘‘Financial assurance’’ to
clarify that various methods can be used
to ensure compliance with OCS
obligations. This definition would be
the same as the definition of ‘‘Financial
assurance’’ proposed for § 550.105.
The proposed rule would add
definitions for the new terms ‘‘Transfer’’
and ‘‘Assign’’ to clarify that that these
terms are used interchangeably
throughout 30 CFR part 556. This
change would also serve to clarify that
the related terms ‘‘transferee’’ and
‘‘transferor’’ are interchangeable with
‘‘assignee’’ and ‘‘assignor,’’ respectively.
The proposed rule would also revise
the definition of the term ‘‘You’’ to
include, depending on the context of the
regulations, a bidder, a lessee (record
title owner), a sublessee (operating
rights owner), a Federal or State rightof-use and easement grant holder, a
pipeline right-of-way grant holder,
assignor or transferor, a designated
operator or agent of the lessee or grant
holder, or an applicant seeking to
become one of the above. This change
to the definition of ‘‘You,’’ in concert
with changes proposed in § 550.166,
would make explicit that any provisions
applicable to either a State or Federal
RUE would apply to the other, and that
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any distinctions between the two with
respect to financial assurance are being
removed. This change is in concert with
changes proposed in § 550.105.
Subpart G—Transferring All or Part of
the Record Title Interest in a Lease
Section 556.704 When may BOEM
disapprove an assignment or sublease of
an interest in my lease?
The proposed rule would revise
paragraph (a) to clearly state that all
parties involved in the assignment of a
record title interest in a lease must be
in compliance with all applicable
regulations and orders, including
financial assurance requirements, or
BOEM may disapprove an assignment or
sublease, consistent with changes to 30
CFR part 550 proposed in this
rulemaking. The proposed rule would
replace the word ‘‘would’’ in the section
title with ‘‘may’’ to better reflect this
discretion.
Subpart H—Transferring All or Part of
the Operating Rights in a Lease
Section 556.802 When may BOEM
disapprove the transfer of all or part of
my operating rights interest?
The proposed rule would revise the
existing section heading to replace
‘‘assignment’’ with ‘‘transfer’’ consistent
with the new definitions proposed for
both terms. The proposed rule would
revise paragraph (a) to clearly state that
for the transferee to receive approval for
the transfer of operating rights in a
lease, the transferee must be in
compliance with all applicable
regulations and orders to provide
financial assurance requirements before
BOEM may approve an assignment,
consistent with changes to 30 CFR part
550 proposed in this rulemaking. The
proposed rule would replace the word
‘‘would’’ in the section title with ‘‘may’’
to better reflect this discretion.
Subpart I—Bonding or Other Financial
Assurance
Section 556.900 Financial Assurance
Requirements for an Oil and Gas or
Sulfur Lease
The proposed rule would revise the
section heading to read, ‘‘Financial
assurance requirements for an oil and
gas or sulfur lease’’ in order to ensure
that the term ‘‘bonding’’ has been
consistently replaced with ‘‘financial
assurance’’ and to clarify that a number
of forms of financial assurance can be
provided, and not just surety bonds,
consistent with changes to 30 CFR part
550 proposed in this rulemaking.
BOEM proposes to add paragraph
(a)(4) to make clear that any
supplemental financial assurance
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required by the Regional Director must
be provided before a new lease will be
issued or an assignment of a lease
approved.
The proposed rule would also revise
the introductory text of paragraph (g) to
replace the word ‘‘security’’ with
‘‘financial assurance,’’ and to add the
word ‘‘surety’’ before ‘‘bond’’ in two
places to clarify that in those cases the
regulation is referring to a ‘‘surety
bond.’’
The proposed rule would revise the
introductory text of paragraph (h) to
replace the words ‘‘bond coverage’’ with
‘‘financial assurance’’ to clarify that
surety bonds are not the only means of
meeting the requirement. The proposed
rule would also revise paragraph (h)(2)
in recognition that BSEE, rather than
BOEM, is the agency with authority to
suspend production or other operations
on a lease.
The proposed rule would add
paragraph (i) to ensure consistency with
the RUE financial assurance
requirements by providing that areawide lease surety bonds pledged to
satisfy the financial assurance
requirements for RUEs may be called in
for performance of obligations on which
the holder of a RUE defaults.
Section 556.901 Base Financial
Assurance and Supplemental Financial
Assurance
The proposed rule would revise the
section heading to read, ‘‘Base financial
assurance and supplemental financial
assurance,’’ because this section covers
both base financial assurance and
supplemental financial assurance
requirements.
Section 556.901(a)
The proposed rule would also revise
paragraph (a)(1)(i) introductory text to
replace the word ‘‘bond’’ with ‘‘lease
exploration financial assurance’’ to be
consistent with the terminology used in
existing paragraph (a)(1)(ii), which
BOEM does not propose to change.
Section 556.901(b)
The proposed rule would eliminate
the parenthetical ‘‘(the lessee)’’ from the
introductory text as it is made
redundant by the proposed revised
definition of ‘‘You.’’ The proposed rule
would also revise paragraph (b)(1)(i)
introductory text to replace the word
‘‘bond’’ with ‘‘lease development
financial assurance’’ for consistency
with the terminology used in existing
paragraph (b)(1)(ii), which BOEM does
not propose to change.
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Section 556.901(c)
The proposed rule would also revise
paragraph (c) to remove the words
‘‘authorized officer’’ and replace them
with ‘‘Regional Director,’’ and remove
the words ‘‘lease bond coverage’’ and ‘‘a
lease surety bond’’ and replace them in
each instance with ‘‘financial
assurance’’ to clarify that the Regional
Director can review whether BOEM
would be adequately secured by a surety
bond, or another type of financial
assurance, for an amount less than the
amount proposed in paragraph (b)(1),
but not less than the estimated cost for
decommissioning.
Section 556.901(d)
BOEM proposes to combine the
provisions of the existing paragraph (d)
introductory text and the existing
introductory paragraph (d)(1) to provide
that the Regional Director may
determine that supplemental financial
assurance is required to ensure
compliance with the obligations under a
lease if the lessee does not meet at least
one of the criteria provided in proposed
paragraphs (d)(1) through (4) below. For
further discussion, see Section V of this
preamble.
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Section 556.901(d)(1)
BOEM proposes to revise paragraph
(d)(1) to set forth the criteria BOEM
would use to evaluate the ability of a
lessee to carry out present and future
obligations. Under this paragraph,
BOEM would use an issuer credit rating
from a NRSRO, as defined by the SEC,
greater than or equal to either BBB¥
from Standard & Poor’s (S&P) Ratings
Service or Baa3 from Moody’s Investor
Service, or the equivalent from another
NRSRO. If different NRSROs provide
different ratings for the same company,
BOEM would apply the higher rating, as
discussed in section IV.A of this
preamble.
Section 556.901(d)(2)
BOEM proposes to revise paragraph
(d)(2) stating that BOEM could also use
a proxy credit rating calculated by
BOEM based on audited financial
information from the most recent fiscal
year (including an income statement,
balance sheet, statement of cash flows,
and the auditor’s certificate) greater than
or equal to either BBB¥ from S&Ps
Ratings Service or Ba3 from Moody’s
Investor Service, or their equivalent
from another NRSRO. The proxy credit
ratings that BOEM would calculate on
behalf of lessees would be structured in
the same scale as the standard ratings
(i.e., AAA to D). The audited financial
information from the most recent fiscal
year that BOEM used to determine the
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proxy credit rating must include a
twelve-month period within the twentyfour months prior to the lessee’s receipt
of the Regional Director’s determination
that the lessee must provide
supplemental financial assurance. When
determining a proxy credit rating, the
Regional Director will consider any
additional liabilities that may encumber
a lessee’s ability to carry out future
obligations. Under the proposed rule,
the lessee would be obligated to provide
the Regional Director with information
regarding its joint-ownership interests
and other liabilities associated with
OCS leases, which might not otherwise
be accounted for in the audited financial
information provided to BOEM.
Section 556.901(d)(3)
BOEM proposes to add new paragraph
(d)(3) to address the situation where the
lessee does not meet the criteria in
proposed paragraphs (d)(1) or (2), but
one or more co-lessee(s) does meet those
criteria. The Regional Director may
require a lessee to provide supplemental
financial assurance on a lease-by-lease
basis if no co-lessee has an issuer credit
rating or proxy credit rating that meets
the threshold set forth in paragraphs
(d)(1) or (2), as discussed in Section
IV.A of this preamble.
Section 556.901(d)(4)
BOEM proposes to add new paragraph
(d)(4) to set forth the criterion the
Regional Director would use if the
lessee does not meet the criteria in
proposed paragraphs (d)(1), (2), or (3). In
this instance, the Regional Director
would assess each lease to determine
whether the value of the proved oil and
gas reserves on the lease exceed three
times the estimated cost of the
decommissioning associated with the
production of those reserves. Under
paragraph (d)(4), the Regional Director’s
assessment would be based on the
evaluation of proved oil and gas
reserves following the methodology set
forth in SEC Regulation S–X at 17 CFR
210.4–10 and SEC Regulation S–K at 17
CFR 229.1200. BOEM also proposes new
paragraphs (d)(4)(i) and (ii), which state
that, when implementing this criterion,
BOEM will use decommissioning cost
estimates, including a BSEE-generated
probabilistic estimate at the P70 level,
when available, or, if such estimate is
not available, BOEM will use the BSEEgenerated deterministic estimate.
Section 556.901(e)
BOEM proposes to redesignate
existing paragraph (d)(2) as paragraph
(e) and revise it to provide that a lessee
may satisfy the Regional Director’s
demand for supplemental financial
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assurance either by increasing the
amount of its existing financial
assurance or by providing additional
surety bonds or other types of
acceptable financial assurance.
Section 556.901(f)
BOEM proposes to redesignate
existing paragraph (e) as paragraph (f)
and revise to remove the word ‘‘bond’’
and replace it with ‘‘supplemental
financial assurance,’’ a term that
includes a surety bond or another type
of financial assurance. BOEM also
proposes to modify the language of new
paragraph (f) to establish that, in
determining the amount of
supplemental financial assurance, the
Regional Director will consider the
lessee’s potential underpayment of
royalty and the cumulative
decommissioning obligations as
established in the manner described in
proposed paragraph (d)(3) of this
section, i.e., the use of the appropriate
BSEE estimate.
Section 556.901(g)
BOEM proposes to redesignate
existing paragraph (f) as new paragraph
(g) and revise it to replace the word
‘‘security’’ with ‘‘financial assurance’’
throughout.
Existing 30 CFR 556.901(f)(2) includes
a statement to the effect that, if a
company requests a reduction of the
amount of the original bond required,
the Regional Director may agree to such
a reduction provided that he or she
finds that ‘‘the evidence you submit is
convincing.’’ BOEM proposes to replace
the current regulatory text with the
following statement in new paragraph
(g)(2): ‘‘Upon review of your
submission, the Regional Director may
reduce the amount of financial
assurance required,’’ as discussed in
Section IV of this preamble.
Section 556.901(h)
BOEM proposes to add a new
paragraph (h) to describe the limited
opportunity lessees will have to provide
the required supplemental financial
assurance in three phased installments
during the first three years after the
effective date of this regulation, subject
to the conditions of proposed
paragraphs (h)(1) and (2). A three-year
approach would allow companies to
raise the relevant capital through
operations over a longer period of time,
as discussed in section VII of this
preamble. Accordingly, it would reduce
bankruptcy risk and ensure a greater
level of financial protection for the
government and taxpayers.
BOEM proposes to add new
paragraphs (h)(1)(i) through (iii) to
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establish the timing and amounts of
phased supplemental financial
assurance that would need to be
provided. Payments would be required
in three installments of one-third that of
the demand, the first of which would be
required within the timeframe specified
in the demand letter, or within 60
calendar days of receiving the demand
letter if no timeframe is specified. The
second one-third would be required
within 24 months from the date of
receipt of the original demand letter,
and the final payment would be due
within 36 months from the date of the
receipt of the original demand letter.
BOEM proposes to add a new
paragraph (h)(2) to establish a procedure
in case a demand that has been
approved for phased compliance is not
met within the timeframes established
by paragraphs (h)(1)(i) through (iii). If a
payment is missed, the Regional
Director will notify the party of the
failure to meet the timeframe and that
it will no longer be eligible to meet the
supplemental financial assurance
demand by using the phased
compliance option set forth in proposed
paragraph (h). Moreover, the remaining
balance of the demand would become
due ten calendar days after the Regional
Director’s notification is received.
Section 556.902 General Requirements
for Bonds or Other Financial Assurance
The proposed rule would revise the
section heading to read, ‘‘General
requirements for bonds or other
financial assurance,’’ to recognize that
other types of financial assurance, such
as a dual-obligee bond or a pledge of
Treasury securities, may be provided
under 30 CFR part 556.
These revisions propose that the same
general requirements for surety bonds
provided by lessees, operating rights
owners, or operators of leases, also
apply to surety bonds provided by RUE
grant and pipeline ROW grant holders.
The proposed rule would therefore also
revise paragraph (a) to include ‘‘grant
holder’’ and to cover surety bonds
provided under 30 CFR part 550. The
requirements of this section are those
that apply broadly to all companies
having to provide financial assurance to
BOEM for an OCS oil and gas or sulfur
lease. Additional requirements
appliable specifically to RUEs and
ROWs are described in proposed
§§ 550.166 and 550.1011, respectively.
The proposed rule would add ‘‘or
grant’’ after ‘‘lease’’ to clarify the change
to include grant holders in paragraph
(a)(2). The rulemaking would also add
compliance with ‘‘all BOEM and BSEE
orders’’ as a requirement to ensure that
providers of financial assurance are
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aware that such financial assurance
guarantees compliance with BOEM and
BSEE orders as well as with the
regulations and the terms of a lease,
ROW, or RUE. This addition is
necessary because a requirement to
provide supplemental financial
assurance arises from a BOEM order.
‘‘BOEM and BSEE orders’’ would mean
any order issued by the relevant bureau,
such as a BSEE order to decommission,
or a BOEM order to provide
supplemental bond.
The proposed rule would revise
paragraph (a)(3) to include the
obligations of all record title owners,
operating rights owners, and operators
on the lease.
The proposed rule would also revise
paragraph (e)(2) to clarify that the use of
Treasury securities as financial
assurance requires a pledge of Treasury
securities, as provided in § 556.900(f).
The proposed rule would add a new
paragraph (g) to recognize the option to
seek an informal resolution of a surety
bond demand pursuant to 30 CFR 590.6,
which contains information regarding
informal resolutions. This paragraph
would further provide that a request for
an informal resolution of a dispute
concerning the Regional Director’s
decision to require supplemental
financial assurance will not affect the
applicant’s ability to request a phased
payment of its supplemental financial
assurance demand under proposed
§ 556.901(h).
The proposed rule would add a new
paragraph (h) to address risks arising in
connection with the lessee’s and grant
holder’s ability to appeal a demand for
supplemental financial assurance to the
Interior Board of Land Appeals (IBLA)
pursuant to the regulations in 30 CFR
part 590. The proposed rule would add
an additional requirement to the IBLA
appeals process whereby, if an appellant
requests that the IBLA stay the
supplemental financial assurance
demand, the appellant would be
required to post an appeals surety bond
equal to the amount of supplemental
financial assurance that the appellant
seeks to stay before any stay could go
into effect. Because IBLA appeals may
continue for several years, it is
important that BOEM ensure that the
government’s interests are protected.
The appeals surety bond requirement
would prevent the government from
being left with no security if the
appellant filed bankruptcy before the
appeal process ended.
Section 556.903 Lapse of Financial
Assurance
The proposed rule would replace the
word ‘‘bond’’ in the section title with
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42153
‘‘financial assurance’’ for consistency
with the terminology change made
throughout the rulemaking. The
proposed rule would revise paragraph
(a) to add after the word ‘‘surety’’,
‘‘guarantor, or the financial institution
holding or providing your financial
assurance’’ and to include references to
the financial assurance requirements for
RUE grants (§ 550.166) and pipeline
ROW grants (§ 550.1011). The proposed
rule would also revise paragraph (a) by
removing the words ‘‘terminates
immediately’’ and substituting ‘‘must be
replaced.’’ The proposed rule would
replace the word ‘‘promptly’’ with a
specific timeline of within seven
calendar days of learning of a negative
event for the financial assurance
provider and would also add a 30calendar day timeframe in which the
party must provide other financial
assurance from a different financial
assurance provider.
BOEM also proposes to revise the first
sentence of paragraph (b) by inserting
‘‘or financial institution’’ after
‘‘guarantor,’’ to make the provision
apply to all types of financial assurance
providers, including those offering
decommissioning accounts. BOEM also
proposes to revise the second sentence
of paragraph (b) for consistency in
terminology by inserting the words ‘‘or
other financial assurance’’ after the
word ‘‘bonds’’ and inserting the words
‘‘guarantor, or financial institution’’
after the word ‘‘surety’’, so that all
surety bonds or other financial
assurance instruments must require all
financial assurance providers to notify
the Regional Director within 72 hours of
learning of an action filed alleging that
the lessee or grant holder, or their
financial assurance provider, is
insolvent or bankrupt.
Section 556.904 Decommissioning
Accounts
The proposed rule would revise the
section heading and the term
‘‘abandonment accounts’’ throughout
the section to read ‘‘decommissioning
accounts,’’ in accordance with BOEM
policy and accepted terminology used
in the industry. The words ‘‘leasespecific’’ would be removed throughout
this section to remove the implication
that such an account could only pertain
to one lease, thereby clarifying that a
decommissioning account could be used
for one lease or several leases, a RUE
grant, or a pipeline ROW grant, or a
combination thereof, as discussed in
section V.B of this preamble.
BOEM proposes to revise paragraph
(a) to remove the term ‘‘lease-specific’’
and replace it with ‘‘decommissioning,’’
and to add references to the base and
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supplemental financial assurance
regulation (proposed § 556.901(d)), as
well as the financial assurance
regulations for RUE grants (proposed
§ 550.166(b)) and pipeline ROW grants
(proposed § 550.1011(d)), consistent
with the changes mentioned in the
preceding paragraph. Although the
paragraph (a) introductory text would
continue to allow a lessee or grant
holder to establish a decommissioning
account at a federally insured financial
institution, this proposed rule would
eliminate the existing restriction in
paragraph (d) that such deposits not
exceed the FDIC/FSLIC insurance limits
and the reference to paragraph (a)(3),
which is being revised and is no longer
relevant to withdrawal of funds from a
decommissioning account.
The proposed rule would re-arrange
the existing sentence constituting
§ 556.904(a)(1). The proposed rule
would also revise paragraph (a)(2) to
remove the words ‘‘as estimated by
BOEM’’ to clarify that BOEM does not
estimate decommissioning costs, but
rather uses the estimates of
decommissioning costs determined by
BSEE. The proposed rule would also
revise paragraph (a)(2) to require
funding of a decommissioning account
‘‘pursuant to a schedule that the
Regional Director prescribes,’’ as
opposed to ‘‘within the timeframe the
Regional Director prescribes’’ as existing
§ 556.904(a)(2) now states.
The proposed rule would revise
paragraph (a)(3) to remove the
requirement to provide binding
instructions to purchase Treasury
securities for a decommissioning
account under certain circumstances.
The proposed rule would replace the
existing language with a new provision
providing that if you fail to make the
initial payment or any scheduled
payment into the decommissioning
account, you must immediately submit,
and subsequently maintain, a surety
bond or other financial assurance in an
amount equal to the remaining
unsecured portion of your estimated
decommissioning liability. This change
reflects BOEM’s current policy to order
a surety bond or other financial
assurance in the event the payments
into the decommissioning account are
not timely made.
The proposed rule would revise
paragraph (b) by removing ‘‘leasespecific’’ and substituting
‘‘decommissioning.’’
The proposed rule would also remove
existing paragraphs (c) and (d), which
concern the use of pledged Treasury
securities to fund a decommissioning
account, as discussed in section V.B of
this preamble. Removing the
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requirement in existing paragraph (d)
that the account holder must purchase
Treasury securities when the amount in
the account equals the maximum
amount insurable by the Federal Deposit
Insurance Corporation or the Federal
Savings and Loan Insurance Corporation
will make these accounts more
attractive to parties who may desire to
use this method of providing
supplemental financial assurance. The
removal of existing paragraphs (c) and
(d) would not preclude the use of
Treasury securities to fund a
decommissioning account. Existing
paragraph (e) would be redesignated as
paragraph (c) except that the word
‘‘pledged’’ would be removed, and
‘‘other revenue stream’’ would be added
to the list of financial assurance options.
The proposed rule would add a
revised paragraph (d), which would
describe the Regional Director’s
discretion to authorize BOEM to provide
funds from a decommissioning account
to a liable party that performs the
decommissioning.
Section 556.905 Third-Party
Guarantees
The proposed rule would revise the
section heading to read, ‘‘Third-party
guarantees.’’ The proposed rule would
also revise the section throughout to
remove the introductory titles of each
paragraph to ensure consistency in the
proposed rule’s format.
Section 556.905(a)
BOEM proposes to revise paragraph
(a) to include a cross-reference to
proposed § 550.166(b) (related to RUEs)
and proposed § 550.1011(d)) (related to
pipeline ROWs) in addition to the
existing reference to proposed
§ 556.901(d) (related to base financial
assurance for leases), to clarify that a
third-party guarantee may be used as a
type of supplemental financial
assurance for not only leases, but for
RUE grants and pipeline ROW grants as
well. This is further discussed in
Section V.A of this preamble.
BOEM would also revise paragraph
(a)(1) to require that the guarantor, not
the guarantee, as provided in the
existing regulation, must meet the
criteria in proposed § 556.901(d)(1), as
the factors in proposed § 556.901(d)
more properly apply to an entity, such
as a guarantor, than to a document, such
as a guarantee. See section V.A of this
preamble for further discussion. BOEM
would retain existing paragraph (a)(2),
but would revise it to include a
requirement, which is found in existing
paragraph (a)(4), that the guarantor or
guaranteed party must submit a thirdparty guarantee ‘‘containing each of the
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provisions in proposed paragraph (d) of
this section.’’ As discussed below,
paragraph (d) is being revised to no
longer use the term ‘‘indemnity
agreement’’ and to provide instead that
the provisions that BOEM previously
required a lessee or grant holder to
include in indemnity agreements must
be included in a third-party guarantee
agreement. This terminology is changed
to clarify that the government is not
required to incur the expenses of
decommissioning before demanding
compensation from the guarantor. The
proposed rule would also remove
existing paragraphs (a)(3) and (a)(4),
which would be superseded by other
revisions to this section.
Section 556.905(b)
The proposed rule would redesignate
existing paragraph (b) as paragraph (c)
and revise the introductory text to
remove the reference to existing
paragraph (c)(3) of this section because
the requirements in that paragraph
would be superseded in this proposed
rule. The proposed rule would replace
this reference with a reference to
paragraph (a)(1) of this section in
paragraph (c) as it is proposed to be
revised. The proposed rule would add
new paragraph (b) to allow guarantors to
limit their guarantees to a fixed dollar
amount as agreed to by BOEM. BOEM
is proposing this change because the
existing regulations do not clearly limit
the liability of a guarantor to a fixed
monetary amount stated in the
guarantee. Therefore, few parties were
willing to use third-party guarantees in
the past. Because the cessation of
production is neither desirable nor
easily accomplished by an operator, the
proposed rule would also revise existing
paragraph (b)(2) to remove the
requirement that, when a guarantor
becomes unqualified, you must ‘‘cease
production until you comply with the
surety bond coverage requirements of
this subpart.’’ Instead, the language in
revised redesignated paragraph (c)
would be revised to provide that you
must, within 72 hours, ‘‘[s]ubmit and
subsequently maintain a surety bond or
other financial assurance covering those
obligations previously secured by the
third-party guarantee.’’
The proposed rule would remove
existing paragraph (c) as the language
would be superseded by the new
language in § 556.905(a).
Section 556.905(d)
The proposed rule would revise
paragraph (d)(1) introductory text to
read ‘‘If you fail to comply with the
terms of any lease or grant covered by
the guarantee, or any applicable
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regulation, your guarantor must either:’’
to be consistent with the revision of
paragraph (a) to allow the use of a thirdparty guarantee for a RUE grant or a
pipeline ROW grant.
The proposed rule would revise
paragraph (d)(1)(i) to clarify that the
corrective action required is to bring the
lease or grant into compliance with its
terms, or any applicable regulation, to
the extent covered by the guarantee.
The proposed rule would revise
paragraph (d)(1)(ii) to clarify that the
liability only extends to that covered by
the guarantee and that payment does not
result in the cancelation of the
guarantee, but only a reduction in the
remaining value equal to the amount
provided.
The proposed rule would remove
existing subparagraph (d)(2) to be
consistent with the revision to remove
existing paragraph (c). As a result,
existing paragraph (d)(3) would be
redesignated as paragraph (d)(2) and
existing paragraph (d)(4) would be
redesignated as paragraph (d)(3).
The proposed rule would revise the
redesignated paragraphs (d)(2)(ii) and
(iii) to remove the words ‘‘your
guarantor’s’’ and replace them with the
word ‘‘the’’ to clarify that redesignated
paragraph (d)(2) would apply to the
guarantee itself.
The proposed rule would revise
proposed paragraph (d)(3) to replace the
term ‘‘a suitable replacement security
instrument’’ with ‘‘acceptable
replacement financial assurance’’ for
clarity and would include the
requirement that appears in existing
§ 556.905(d)(4) that any replacement
financial assurance must be provided
before the termination of the period of
liability of the third-party guarantee.
Section 556.905(e)
The proposed rule would also revise
paragraph (e) to provide that BOEM will
cancel a third-party guarantee under the
same terms and conditions as those
proposed in §§ 556.906(b) and (d)(3).
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Section 556.905(f) Through (k)
BOEM also proposes to add new
paragraphs (f) through (k) to replace the
provisions of existing paragraph (e). The
new paragraphs mirror the provisions of
existing paragraph (e) while making
minor adjustments to accommodate the
new format and add clarification. The
term ‘‘indemnity agreement’’ would be
replaced with ‘‘third-party guarantee
agreement’’ throughout.
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Section 556.906 Termination of the
Period of Liability and Cancellation of
Financial Assurance
The proposed rule would replace the
words ‘‘security’’ and ‘‘surety bond’’
with ‘‘financial assurance’’ and ‘‘surety’’
with ‘‘financial assurance provider’’ for
consistency with the changes
throughout the proposed rule. The
section title would also be revised so
that ‘‘a bond’’ is replaced with
‘‘financial assurance.’’
The proposed rule would revise
existing paragraph (b)(1) to remove the
word ‘‘terminated’’ in two instances and
replace it with ‘‘cancelled’’ to be
consistent with the existing paragraph
(b) introductory text, which provides
that the Regional Director will cancel
your previous financial assurance when
you provide a replacement, subject to
the conditions provided in existing
paragraphs (b)(1) through (3). BOEM
would also remove the word ‘‘for’’
before ‘‘by the bond’’ in paragraph (b)(1)
for grammatical reasons.
The proposed rule would revise
existing paragraph (b)(2) to also add
cross-references to § 550.166, which is
the financial assurance regulation for
RUE grants, and § 550.1011, which is
the financial assurance regulation for
pipeline ROW grants, and would revise
existing paragraph (b)(3) to also
reference supplemental financial
assurance regulations for RUE grants
(proposed § 550.166(b) and pipeline
ROW grants (proposed § 550.1011(d)).
BOEM proposes to delete the word
‘‘base’’ in front of financial assurance in
existing paragraph (b)(2) to propose that
the new financial assurance would
replace whatever financial assurance
that previously existed, whether that
financial assurance consisted of a base
bond and/or any prior supplemental
financial assurance.
The proposed rule would revise the
paragraph (d) introductory text to cover
financial assurance cancellations and
return of pledged financial assurance
and, in the table, would remove the
middle column entitled, ‘‘The period of
liability will end,’’ because it is
redundant with the provisions in
proposed paragraphs (a) through (c).
In existing paragraph (d), in the
column in the table entitled ‘‘For the
following type of bond,’’ BOEM
proposes to remove the words ‘‘type of
bond’’ and replace those words with a
colon at the top of the table so that this
paragraph would apply to surety bonds
or other financial assurance, as
applicable. Paragraph (d)(1) would also
be revised to include a cross-reference
to base financial assurance submitted
under proposed § 550.166(a) (for RUE
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grants) and proposed § 550.1011(a) (for
pipeline ROW grants). BOEM would
also revise paragraph (d)(2) in the same
column to include a reference to
supplemental financial assurance
submitted under proposed § 550.166(b)
and proposed § 550.1011(d).
The proposed rule would revise
paragraph (d) to amend the heading of
the column entitled, ‘‘Your bond will be
cancelled,’’ to read, ‘‘Your financial
assurance will be reduced or cancelled,
or your pledged financial assurance will
be returned,’’ to clarify that financial
assurance may be reduced or cancelled
and pledged financial assurance, or a
portion thereof, may be returned, and to
specify other circumstances under
which the Regional Director may cancel
supplemental financial assurance or
return pledged financial assurance.
While the existing criteria identify most
instances when cancellation of financial
assurance is appropriate, occasionally
there are other circumstances where
cancellation would be warranted. The
proposed rule would allow cancellation
when BOEM determines, using the
criteria set forth in proposed
§ 556.901(d), 550.166(b), or 550.1011(d),
as applicable, that a lessee or grant
holder no longer needs to provide
supplemental financial assurance for its
lease, RUE grant, or pipeline ROW grant
when the operations for which the
supplemental financial assurance was
provided ceased prior to accrual of any
decommissioning obligation; or when
cancellation of the financial assurance is
appropriate because BOEM determines
such financial assurance never should
have been required under the
regulations.
The proposed rule would add a new
paragraph (d)(3) in the table in
paragraph (d) to address the
cancellation of a third-party guarantee.
In the past, parties have expressed
concern to BOEM that the regulations,
although they expressly allow for the
termination of the period of liability, do
not clearly allow for the cancellation of
the guarantee. This addition would
allow BOEM to cancel a third-party
guarantee under the same terms and
conditions that apply to cancellation of
other types of financial assurance, as
provided in proposed § 556.906(d)(2).
The proposed rule would revise the
introductory text in paragraph (e) to
remove the words ‘‘or release’’ because
the term ‘‘release’’ is undefined and not
used in practice. Likewise, the proposed
rule would remove the words ‘‘or
released’’ from paragraph (e)(2). No
substantive change is intended; rather
BOEM seeks to clarify the meaning of
the existing provision.
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The proposed rule would also revise
paragraph (e) to reference RUE grants
and pipeline ROW grants to provide that
the Regional Director may reinstate the
financial assurance on the same grounds
as currently provided for reinstatement
of lease financial assurance.
Section 556.907 Forfeiture of Bonds or
Other Financial Assurance
The proposed rule would replace the
words ‘‘security,’’ ‘‘surety bond,’’ or
‘‘third-party guarantee’’ with ‘‘financial
assurance’’ and ‘‘surety’’ with ‘‘financial
assurance provider’’ for consistency
with the changes throughout the
proposed rule.
The proposed rule would revise the
section heading to read, ‘‘Forfeiture of
bonds or other financial assurance’’
because the use of ‘‘or’’ is sufficient in
this instance. The proposed rule would
revise paragraph (a)(1) to include surety
bonds or other financial assurance for
RUE grants and pipeline ROW grants, in
addition to leases, in the forfeiture
provisions of this section. BOEM also
proposes to clarify that the Regional
Director may call for forfeiture of all or
part of a surety bond or other form of
financial assurance, or demand
performance from a guarantor, if the
lessee or grantee covered by the
financial assurance refuses or is unable
to comply with any term or condition of
a lease, a RUE grant, or a pipeline ROW
grant, as well as any regulation.
Throughout this section, BOEM
proposes to add references to a grant, a
grant holder, and grant obligations to
implement the revisions in proposed
paragraph (a)(1). BOEM proposes to
revise (a)(2) to replace ‘‘other form of
security’’ with ‘‘other form of financial
assurance’’ for consistent terminology.
BOEM proposes to revise paragraph
(b) to include surety bonds ‘‘or other
financial assurance’’ so that BOEM may
pursue forfeiture of a surety bond or
other financial assurance. The word
‘‘lessee’’ would also be replaced with
‘‘record title holder’’ to ensure that colessees are included.
BOEM proposes to revise paragraph
(c)(1) to include ‘‘financial institution
holding or providing your financial
assurance’’ as one of the parties the
Regional Director would notify of a
determination to call for forfeiture
because a bank or other financial
institution may hold funds subject to
forfeiture.
The proposed rule would revise
paragraph (c)(1)(ii) to acknowledge
limitations authorized by § 556.902(a)(3)
by more precisely stating that the
Regional Director will use an estimate of
the cost of the corrective action needed
to bring a lease into compliance when
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determining the amount to be forfeited,
subject, in the case of a guarantee, to
any limitation authorized by proposed
§ 556.902(a)(3).
BOEM proposes to replace existing
paragraphs (c)(2)(ii) and (iii) with a new
paragraph (c)(2)(ii) that would specify
that to avoid forfeiture by promising to
take corrective action, any financial
assurance provider would have to agree
to, and demonstrate that it will
complete the required corrective action
to bring the relevant lease into
compliance within the timeframe
specified by the Regional Director, even
if the cost of such compliance exceeds
the limit of the financial assurance. The
proposed changes make clear that
existing paragraphs (c)(2)(ii) and (iii)
apply to all forms of financial assurance,
including the caveat that corrective
action must be completed even if the
cost of compliance exceeds the limit of
the financial assurance.
BOEM proposes to revise existing
paragraphs (d) and (e)(2) by replacing
‘‘leases’’ with ‘‘lease or grant’’ to extend
the applicability of these provisions to
include holders of RUE and ROW
grants.
BOEM proposes to revise paragraph
(f)(1) to include ‘‘grant’’ as well as lease.
BOEM also proposes to revise paragraph
(f)(2) to clarify that BOEM may recover
additional costs from a third-party
guarantor only to the extent covered by
the guarantee. This would be consistent
with the change made at § 556.902(a)(3)
to allow the use of limited third-party
guarantees.
This rulemaking would also reword
paragraph (g) for clarity.
In some circumstances, predecessor
lessees that have been notified about the
failure of their successor organizations
to fulfill their decommissioning
obligations will initiate the requisite
decommissioning activities. In these
cases, predecessor lessees or grantees
are likely to incur costs that could be
funded from financial assurance posted
with BOEM on behalf of the current
lessee. Some of this financial assurance
may be forfeited by the current lessee or
by other successor lessees. BOEM
proposes to add a paragraph (h) to make
clear that BOEM may provide funding
collected from forfeited financial
assurance to predecessor lessees or grant
holders or to third parties taking
corrective actions on the lease or grant.
Part 590—Appeal Procedures
Subpart A—Offshore Minerals
Management Appeal Procedures
Section 590.4 How do I file an appeal?
BOEM proposes to add paragraph (c)
to specify that, while a demand for
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supplemental financial assurance may
be appealed to the IBLA, a stay can only
be granted if an appeal surety bond for
an amount equal to the demand is
posted. This is intended to mitigate the
risk to the government that, after the
appeal is decided, a company will be
unable to perform its obligations
because of its financial deterioration
during pendency of the appeal.
Severability
BOEM proposes to include in the final
rule that, should any court hold
unlawful and/or set aside portions of
this rulemaking, the remaining portions
are severable and therefore should not
be remanded to the agency. The
proposed rule contains three main
components: (1) Streamlining
requirements for supplemental financial
assurance; (2) Establishing ‘‘P70’’ as the
relevant estimate for the amount of any
supplemental financial assurance, and
(3) Making several, less significant
changes to, among other things. right-ofuse and easement and right-of-way
grants and decommissioning accounts.
See preamble sections IV.B through V.C.
These three components operate
largely independent of each other: the
first component considers whether a
lessee is at risk of default based on the
lessee’s credit rating or the proved
reserves on the lease; the second
component considers the appropriate
requirements in light of that risk; and
the third component addresses several
longstanding and technical matters that
do not bear directly on the first two
components. Indeed, these three
components are sufficiently distinct that
their severability does not depend on
the specifics of this proposed rule. For
example, if, in the final rule, BOEM sets
the appropriate level of supplemental
financial assurance at a different Pvalue, that decision would remain
severable from the threshold
determination regarding whether to
collect supplemental financial
assurance and from the other separate
technical changes proposed by this rule.
XI. Additional Comments Solicited by
BOEM
In addition to those comment requests
stated above, BOEM also requests
comments on the topics below:
• BOEM is considering the inclusion
of offshore joint and several
decommissioning liabilities (of the colessees that would otherwise have
exempted the lessee from providing
supplemental financial assurance) in the
determination of a proxy credit rating
when these liabilities are
‘‘disproportionately high’’ and may
encumber that co-lessee’s ability to
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carry out future obligations. BOEM is
requesting comments on the appropriate
criteria to determine what constitutes
‘‘disproportionately high’’ offshore
liabilities, for example, a ratio of
decommissioning liabilities to the net
worth of the co-lessee above X times, or
other financially significant and
reasonable criteria on how these
liabilities should best be incorporated
into the proxy credit rating that BOEM
will derive.
• The use of End-of-Life (Years) in the
evaluation of asset value as an
alternative to using the
decommissioning costs ratio. BOEM
requests comments on the use of a
minimum number of years of
production remaining criterion to
qualify for an exemption from
supplemental financial assurance.
Possibly, End-of-Life criteria could be
an alternative to the 3:1 ratio of value
of reserves to decommissioning costs.
• The consideration of bond issuance
ratings, in addition to issuer credit
ratings, in determining the financial risk
posed by lessees and grant holders.
BOEM also invites comments on
determining an appropriate threshold
for bond issuance ratings, such as
general unsecured debt ratings.
• Should BOEM exclude third-party
guarantors from the requirement of
§ 556.902(a)(3) that guarantees must
‘‘guarantee compliance with all
obligations of all lessees, operating
rights, owners and operators on the
lease’’ in addition to allowing a thirdparty guarantee to be limited in amount?
XII. Procedural Matters
A. Executive Order 12866: Regulatory
Planning and Review, as Amended by
Executive Order 14094—Modernizing
Regulatory Review, and Executive Order
13563: Improving Regulation and
Regulatory Review
Executive Order 12866, as amend by
Executive Order 14094 provides that the
Office of Information and Regulatory
Affairs (OIRA) in OMB will review all
significant rules. OIRA has reviewed
this proposed rule and determined that
it is a significant action under Executive
Order 12866, as amend by Executive
Order 14094 Sec 3 (f)(1). This
rulemaking will result in an annual
effect on the economy of $200 million
or more (adjusted every 3 years by the
Administrator of OIRA for changes in
gross domestic product); or adversely
affect in a material way the economy, a
sector of the economy, productivity,
competition, jobs, the environment,
public health or safety, or State, local,
territorial, or tribal governments or
communities.
Executive Order 13563 reaffirms the
principles of Executive Order 12866, as
amend by Executive Order 14094, while
calling for improvements in the Nation’s
regulatory system to promote
predictability and reduce uncertainty,
and to use the best, most innovative,
and least burdensome tools for
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achieving regulatory ends. Executive
Order 13563 directs agencies to consider
regulatory approaches that reduce
burdens and maintain flexibility and
freedom of choice for the public where
these approaches are relevant, feasible,
and consistent with regulatory
objectives. BOEM has developed this
proposed rule in a manner consistent
with these requirements.
BOEM’s proposed changes are
estimated to increase the private cost to
lessees in the form of bonding or other
financial assurance premiums. BOEM
has drafted an initial regulatory impact
analysis (IRIA) detailing the estimated
impacts of this proposed rule. The IRIA
reflects both monetized and nonmonetized impacts; the costs and
benefits of the non-monetized impacts
are discussed qualitatively in the
document. BOEM’s IRIA is available in
the public docket for this rulemaking.
BOEM expects this proposed rule may
increase the total amount of financial
assurance, increasing the aggregate
private cost to lessees of financial
assurance premiums. The table below
summarizes BOEM’s estimate of the cost
in financial assurance premiums paid
by lessees over a 20-year time horizon
if this proposed rule is finalized less the
premiums associated with BOEM’s
existing current financial assurance
portfolio. Additional information on the
estimated transfers, costs, and benefits
can be found in the IRIA posted in the
public docket for this proposed rule.
TOTAL ESTIMATED INCREASE IN BONDING FINANCIAL ASSURANCE PREMIUMS ASSOCIATED WITH BOEM’S PROPOSED
AMENDMENTS
[2022–2041, 2021$ millions]
2022–2041
Total Compliance Cost ............................................................................................................................................
Annualized Compliance Cost ..................................................................................................................................
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B. Regulatory Flexibility Act (RFA)
The Regulatory Flexibility Act, 5
U.S.C. 601–612, requires agencies to
analyze the economic impact of
regulations when a significant economic
impact on a substantial number of small
entities is likely and to consider
regulatory alternatives that will achieve
the agency’s goals while minimizing the
burden on small entities. BOEM has
provided an initial regulatory flexibility
analysis (IRFA), which assesses the
impact of this proposed rule on small
entities. The IRFA is available in the
public docket for this rulemaking.
As defined by the Small Business
Administration (SBA), a small entity is
one that is ‘‘independently owned and
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operated and which is not dominant in
its field of operation.’’ What
characterizes a small business varies
from industry to industry. The proposed
rule would affect OCS lessees and RUE
grant holders and pipeline ROW grant
holders on the OCS. The analysis shows
that this includes roughly 536
companies with ownership interests in
OCS leases and grants. Entities that
would operate under this proposed rule
are classified primarily under North
American Industry Classification
System (NAICS) codes 211120 (Crude
Petroleum Extraction), 211130 (Natural
Gas Extraction), and 486110 (Pipeline
Transportation of Crude Oil and Natural
Gas). For NAICS classifications 211120
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327.1
$3,379
318.9
and 211130, the SBA defines a small
business as one with fewer than 1,250
employees; for NAICS code 486110, a
business with fewer than 1,500
employees.
Based on these criteria, approximately
407 (76 percent) of the businesses
operating on the OCS subject to this
proposed rule are considered small; the
remaining businesses are considered
large entities. All of the operating
businesses meeting the SBA ‘‘small
business’’ classification are potentially
impacted; therefore, BOEM expects that
the proposed rule would affect a
substantial number of small entities.
Small and large oil and gas companies
have different business models. Large
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oil and gas companies tend to focus
their business efforts on new
exploration and development projects.
Such projects tend to be large in scale,
low in frequency, and focused on deep
water operations; as a result, the rate of
their oil and gas reserve depletion is
low. In contrast, most small oil and gas
companies tend to focus on late-stage oil
and gas production intended to
maximize the residual output from
established facilities; as a result, the rate
of their oil and gas reserve depletion is
high. For this reason, smaller companies
tend to operate large numbers of old
facilities, which are likely to require
decommissioning sooner than newer
facilities. Accordingly, the prospective
decommissioning costs of small oil
companies are likely to be high relative
to their net tangible assets, making these
companies disproportionately
susceptible to any change in
decommissioning costs and the
associated costs of providing
supplemental financial assurance.
Because BOEM’s financial assurance
program is intended to ensure that all
current lessees meet their obligations,
and thereby avoid the need for the
taxpayer to assume these obligations in
the event of default, any action taken by
BOEM to ensure financial responsibility
of lessees would necessarily
significantly impact smaller companies.
BOEM estimated the annualized
increase in private costs to lessees and
allocated those costs to small and large
entities based on their decommissioning
liabilities. BOEM’s analysis concludes
that the proposed regulatory changes
could cause small companies to incur
$252.6 million (at a 7 percent discount
rate) in annualized compliance costs.
BOEM recognizes that there will be
incremental cost burdens to most
affected small entities. BOEM seeks
specific comment and feedback from
affected small entities on the costs
associated with this rulemaking.
Additional information about these
conclusions can be found in the IRFA
for this proposed rule.
ESTIMATED IMPACT IN PRIVATE COST FOR SMALL LESSEES
[2021, $millions]
2021–2041
Total Compliance Cost ............................................................................................................................................
Annualized Compliance Cost ..................................................................................................................................
(lessees with a credit rating below
BB¥) to provide bonds or other
financial assurance and only for their
sole liability properties.17 Only Tier 2
lessees that do not have another lessee
in the chain of title would be required
to provide supplemental financial
assurance. This alternative differs from
the proposed rule in that the proposed
rule would change the Tier 2
demarcation to those lessees with
ratings below BBB¥. The proposed rule
also would require supplemental
financial assurance for Tier 2 lessees
who do not have a Tier 1 (low risk) coRegulatory Alternatives
lessee, grant holder, or co-grant-holder
There are three regulatory alternatives regardless of the presence of any
to the proposed action analyzed in the
predecessor lessee or grantee, even a
IRIA:
Tier 1 predecessor. This alternative is
1. No Action Alternative: Continue
more fully described in the IRIA as the
the policies of partial implementation of baseline.
NTL No. 2016–N01.
Under the more stringent alternative,
2. More Stringent Regulatory
BOEM would fully implement NTL No.
Alternative: Full implementation of NTL 2016–N01. The NTL included guidance
No. 2016–N01.
on how BOEM would evaluate the five
3. Less Stringent Regulatory
criteria for determining a company’s
Alternative: Lower Tier 1 16 cutoff to
ability to meet its OCS obligations for
BB¥ and include a waiver for lessees
with Tier 1 predecessor lessees.
17 This does not fully reflect the current policy,
Under the no action alternative,
and therefore is not literally a ‘‘no action’’
alternative: BOEM broadened the scope of its
BOEM would continue to partially
financial assurance requirement relative to a partial
implement NTL No. 2016–N01, which
implementation of NTL No. 2016–N01 last year. See
only requires high-risk, Tier 2 lessees
BOEM Expands Financial Assurance Efforts |
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The proposed changes are designed to
balance the risk of non-performance
with the costs and disincentives to
production that are associated with the
requirement to provide supplemental
financial assurance. The IRIA and the
IRFA include three regulatory
alternatives which were considered and
not selected by BOEM. This section
walks through the alternatives (which
are discussed in more detail in the IRIA)
and discusses how these alternatives
impact small businesses and why they
were not selected.
16 The
IRIA alternatives describe lessees as Tier
1 or Tier 2 depending on whether BOEM would
require the lessee to provide supplemental financial
assurance. Tier 1 lessees are considered low risk
and would not be required to provide supplemental
financial assurance, while Tier 2 lessees are
considered high risk and would be required to do
so.
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Bureau of Ocean Energy Management, https://
www.boem.gov/newsroom/notes-stakeholders/
boem-expands-financial-assurance-efforts.
However, there have been relatively few companies
affected by the new policy to date, and it is too
recent for this policy change to have had a
discernible impact on financial assurance demands;
therefore, the alternative used in the IRIA best
estimates the baseline.
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Discounted at
7%
$3,820
256.8
$2,676
252.6
self-insurance, which are described in
more detail in the IRIA. The result of
NTL No. 2016–N01, as written, was that
not even the subsidiaries of highly rated
companies could provide sufficient
financial assurance for the full amount
of their OCS liabilities. More
information on the more stringent
alternative is included in the IRIA.
Under the less stringent alternative,
BOEM analyzed an alternative that
would maintain the baseline threshold
demarcation between Tier 1 and Tier 2
companies at BB¥. The less stringent
option also would include the baseline’s
consideration of predecessor lessees but
would require that at least one
predecessor lessee be a Tier 1 company
in order for the current lessee to avoid
having to provide supplemental
financial assurance. This alternative
would require Tier 2 lessees who have
Tier 2 predecessor lessees to provide
supplemental financial assurance; they
would not be required to do so under
the baseline. As opposed to the
proposed rule, lessees with a BB¥, BB,
or BB+ rating would not be required to
provide supplemental financial
assurance under this alternative.
Further, under this alternative, any Tier
2 lessee with a Tier 1 lessee in the chain
of title would not be required to provide
supplemental financial assurance,
unlike under the proposed rule. BOEM
fully outlines this alternative in the
IRIA.
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Discussion of Regulatory Alternatives
Under the no action alternative, the
current level of financial risk would
remain the same. However, BOEM
reviewed NTL No. 2016–N01 after
several recent bankruptcies and
determined that changes were necessary
to comprehensively identify, prioritize,
and manage the health, safety, and
environmental risks associated with
industry activities on the OCS.
In its IRIA analysis, BOEM estimates
that implementation of the more
stringent alternative would significantly
increase the compliance cost over the
baseline and over the proposed rule.
BOEM acknowledges that there could be
some additional risk reduction by
bonding a greater number of liabilities,
but, given joint and several liability
with multiple co-lessees and
predecessor lessees, the relative risk
reduction from this alternative would be
very small. Although the more stringent
option would reduce the risk that the
U.S. Government might have to assume
performance of the lessee’s obligations,
the $647 million annualized compliance
cost of this alternative could be a
significant cost burden on the U.S.
offshore oil and gas industry.
The less stringent alternative would
differ in two problematic ways from the
proposed action. First, the less stringent
option would maintain the baseline
demarcation between Tier 1 and Tier 2,
which is lower than that of the proposed
rule. This would not meaningfully help
to mitigate default risk to the taxpayer
on decommissioning liabilities. Second,
the less stringent alternative would not
require financial assurance should a
Tier 1 predecessor lessee be in the chain
of title. Although the less stringent
alternative would result in lower
bonding costs for industry and small
businesses than the proposed rule,
consideration of predecessor lessees and
grantees encourages moral hazard by
incentivizing current lessees to pass risk
to predecessors rather than proactively
prepare for decommissioning and
related obligations. Therefore, BOEM
did not select this alternative. See the
IRIA for more detailed information
about the alternative bonding and risk
profiles.
BOEM decided against the less
stringent alternative. Instead, BOEM
will require supplemental financial
assurance from all financially weak
lessees that lack either financially strong
co-lessees or sufficiently valuable
proved oil and gas reserves to attract a
buyer if needed. Eschewing reliance on
predecessor lessees ensures that
financial responsibility for
decommissioning rests with current
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lessees and encourages those lessees to
financially prepare for decommissioning
costs, rather than pass those expenses to
predecessor lessees and possibly the
taxpayer. BOEM finds the less stringent
alternative would not adequately reduce
default risk and would not require all
lessees to fully internalize the cost of
decommissioning. This alternative is
also discussed in more detail below and
in the IRIA.
As part of this less stringent
alternative, potential adverse impacts to
small businesses could be reduced if
BOEM kept the Tier 2 threshold at BB¥
relative to the proposed rule, which
increases such threshold to BBB¥ to
match the investment grade standard.
BOEM has determined that the use of an
investment grade standard for waiving
supplemental financial assurance is the
most appropriate threshold because this
approach minimizes credit default risk
to the taxpayer without overburdening
offshore companies with the cost of
providing financial assurance in low
credit risk scenarios.
BOEM finds that the less stringent
alternative would slightly increase the
likelihood that decommissioning costs
would be borne by the taxpayer as
lowering the floor of Tier 1 would
expand the number of companies not
subject to financial assurance to include
those with higher 1-year default rates.
Although credit ratings are objective
criteria that are intended to accurately
reflect the risk of default and the
potential that the Federal Government
could be forced to undertake
performance obligations of OCS lessees,
BOEM recognizes that the proportion of
small companies adversely affected by
the proposed rule would be higher than
that of large companies. However, this
disproportionate effect on small
companies is not attributable to the
proposed rule, but results from the need
to ensure that decommissioning
obligations are fulfilled.
This less stringent alternative also
relies on predecessor lessees and
grantees when determining if and how
much supplemental financial assurance
will be required, which BOEM’s
proposed rule does not. By not allowing
reliance on predecessors to excuse
supplemental financial assurance,
BOEM requires that all lessees take into
account the full cost of
decommissioning as they will have
provided financial assurance that
prevents the need to turn to predecessor
lessees. Any entity that owned a lease
at any point in time is jointly and
severally liable for the costs of
decommissioning facilities on that lease
during their tenure, along with the
current and prior owners, until such
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time as the facility has been
permanently decommissioned.
Therefore, if the current lessee is unable
or unwilling to decommission it at the
end of its useful life, BSEE can order the
prior lessee to complete the
decommissioning obligations for
facilities that existed on the lease at the
time of ownership. If BOEM were to
take into account the financial capacity
of predecessor lessees in determining
the amount of supplemental financial
assurance required of a current owner,
the financial burden on small
companies would be substantially
reduced compared to that resulting from
the proposed rule, because a much
smaller number of them would be
required to post supplemental financial
assurance. Given that the required
amount of supplemental financial
assurance relative to the net assets of
such companies is often substantial, and
considering that the premiums on the
underlying bonds can be significant
relative to the net income of such
companies, taking into account
predecessor lessee strength could
substantially reduce the potential
adverse impacts of requiring financial
assurance from small business.
Though allowing the presence of a
predecessor lessee or grantee to change
financial assurance requirements would
reduce the potential adverse impacts to
small businesses, BOEM does not
recommend waiving supplemental
financial assurance from current lessees
based only on the existence of
financially viable predecessor lessees.
Financial consideration for the
decommissioning liability has already
been discounted from the asset purchase
price paid by the current lessee. As a
corollary, a lessee knows that BOEM
may demand supplemental financial
assurance from it to cover its
obligations, including decommissioning
obligations for which it shares liability
with a predecessor lessee. Armed with
this knowledge, all lessees can plan
ahead and include the possible need to
provide supplemental financial
assurance in their business plans.
Therefore, there is no need to insulate
current lessees from supplemental
financial assurance demands by relying
on the financial ability of strong
predecessor lessees. Along the same
lines, allowing current lessees not to
provide supplemental financial
assurance based on a predecessor
lessee’s strength may incentivize current
lessees to not consider
decommissioning costs in their business
decisions or to take risks they would not
have otherwise taken if they had
financial resources at risk in the event
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of non-performance. This ‘‘moral
hazard’’ could distort the market for
lease transfers by allowing a buyer and
seller to conduct a transaction without
calculating in end-of-life
decommissioning cash outflows, the
buyer relying on end-of-life bankruptcy
instead of decommissioning, and may
ultimately result in predecessor lessees
and grantees having to perform
decommissioning for which they had
not planned.
While waiving supplemental financial
assurance for companies having
financially viable predecessor lessees
and grantees would mitigate the impact
the proposed rule on small businesses,
BOEM has determined that this benefit
would not be acceptable given that,
under these circumstances, lessees may
not always fully internalize the cost of
their decommissioning obligations into
their operations as they can rely on the
predecessor lessee if needed and avoid
having to pay financial assurance
premiums. Additional moral hazard
implications of implementing such a
retroactive policy are described in more
detail in the IRIA. Reliance on
predecessor lessees would likely also
cause them to require the buyer provide
them financial assurance prior to selling
their leases to new owners (which
would also result in a cost for small
businesses). For these reasons, BOEM
has determined that any waiver of
financial responsibility based on
business relationships should be limited
to situations where the liable party
voluntarily becomes a current co-lessee
or co-grantee and therefore, knowingly
assumes its liabilities.
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C. Small Business Regulatory
Enforcement Fairness Act
This proposed rule would revise the
financial assurance requirements for
OCS lessees and grant holders and
would require supplemental financial
assurance where the risk is highest.
BOEM’s proposed changes would: (1)
Modify the evaluation process for
requiring additional security, (2)
Simplify and strengthen the evaluation
criteria, and (3) Remove restrictive
provisions for third-party guarantees
and decommissioning accounts. These
proposed changes reflect an interest in
relying on current lessees and grant
holders to provide required financial
assurance, aligning the evaluation
criteria with banking and finance
industry practices, providing greater
flexibility for industry, and protecting
taxpayers from exposure to the
consequences of noncompliance with
DOI regulations and OCS lease
obligations, particularly the
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nonperformance of decommissioning
obligations.
This proposed rule is a major rule
under 5 U.S.C. 804(2), the Small
Business Regulatory Enforcement
Fairness Act, because implementation of
this rulemaking will have an annual
effect on the economy of $100 million
or more.
For more information on the small
business impacts, see the IRFA analysis
and the discussion in section XII.B of
this preamble. Small businesses may
send comments on the actions of
Federal employees who enforce or
otherwise determine compliance with
Federal regulations to the Small
Business and Agriculture Regulatory
Enforcement Ombudsman, and to the
Regional Small Business Regulatory
Fairness Board. The Ombudsman
evaluates these actions annually and
rates each agency’s responsiveness to
small business. If you wish to comment
on actions by employees of BSEE or
BOEM, call 1–888–REG–FAIR (1–888–
734–3247).
compliance costs of $319 million
annually (7 percent discounting) but
provides strengthened financial
assurance to protect taxpayers from the
costs of decommissioning offshore
infrastructure. Under the proposed
action, BOEM will evaluate the financial
strength of OCS lessees and grant
holders that could affect their ability to
meet OCS obligations. The IRIA outlines
both a less stringent and more stringent
regulatory alternative. The more
stringent option was not selected as the
added benefits did not justify the
increased compliance burden. BOEM’s
less stringent option includes a lower
credit rating of BB¥ to be classified as
low risk and allows predecessor lessee
or grantee strength to be included in the
financial assurance evaluation. This
alternative was not selected as BB rated
companies are considered speculative
and below investment grade and relying
on predecessor lessees and grantees
introduces a moral hazard and does not
require each current lessee to internalize
its decommissioning obligations.
D. Unfunded Mandates Reform Act
(UMRA)
This proposed rule does not impose
an unfunded mandate on State, local, or
tribal governments of $85 million per
year.18 This proposed rule does not have
a significant or unique effect on State,
local, or tribal governments. Moreover,
the proposed rule would not have
disproportionate budgetary effects on
these governments.
BOEM has determined that this
proposed rule would impose costs on
the private sector of more than $182
million in a single year. The IRIA
includes information on the costs of the
proposed rule and its alternatives. The
UMRA (2 U.S.C. 1531 et seq.) requires
BOEM to perform a cost-benefit
assessment and to provide the legal
authority for the rulemaking, a
description of the macro-economic
effects, and a summary of the State,
local, or tribal government concerns.
These items are described in more detail
in the IRIA.
Because all of the anticipated private
sector expenditures that may result from
the proposed rule are analyzed in the
IRIA and IRFA (i.e., expenditures of the
offshore oil and gas industry), these
documents satisfy the UMRA
requirement to estimate any
disproportionate budgetary effects of the
proposed rule on a particular segment of
the private sector. As explained in the
IRIA, the rulemaking is anticipated to
have annualized net estimated
E. Executive Order 12630: Governmental
Actions and Interference With
Constitutionally Protected Property
Rights
This proposed rule does not affect a
taking of private property or otherwise
have takings implications under
Executive Order 12630. Therefore, a
takings implication assessment is not
required.
18 2021 values are available here: https://
crsreports.congress.gov/product/pdf/R/R40957.
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F. Executive Order 13132: Federalism
Under the criteria in section 1 of
Executive Order 13132, this proposed
rule does not have sufficient federalism
implications to warrant the preparation
of a federalism summary impact
statement. Therefore, a federalism
summary impact statement is not
required.
G. Executive Order 12988: Civil Justice
Reform
This proposed rule complies with the
requirements of Executive Order 12988.
Specifically, this proposed rule:
(1) Meets the criteria of section 3(a)
requiring that all regulations be
reviewed to eliminate errors and
ambiguity and be written to minimize
litigation; and
(2) Meets the criteria of section 3(b)(2)
requiring that all regulations be written
in clear language and contain clear legal
standards.
H. Executive Order 13175: Consultation
and Coordination With Indian Tribal
Governments
Executive Order 13175 defines
policies that have tribal implications as
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regulations, legislative comments or
proposed legislation, and other policy
statements or actions that will or may
have a substantial direct effect on one or
more Indian Tribes, or on the
relationship between the Federal
Government and one or more Indian
Tribes.
BOEM strives to strengthen its
government-to-government
relationships with American Indian and
Alaska Native Tribes through a
commitment to consultation with those
tribes and recognition of their right to
self-governance and tribal sovereignty.
The DOI’s consultation policy for Tribal
Nations, as described in Departmental
Manual part 512 chapter 4, expands on
the above definition from E.O. 13175,
and defines a Departmental Action with
Tribal Implications as—
‘‘[a]ny regulation, rulemaking, policy,
guidance, legislative proposal, plan,
programmatic or operational activity, or
grant or funding formula change that
may have a substantial direct effect on
a Tribe in matters including but not
limited to: (1) Tribal cultural practices;
lands; treaty rights; resources; ancestral
lands; sacred sites, including sites that
are submerged; and lands Tribes were
removed from, or access to traditional
areas of cultural or religious importance
on Federally managed lands and waters;
(2) the ability of a Tribe to govern or
provide services to its members; (3) a
Tribe’s formal relationship with the
Department, be it nation-to-nation or
beneficiary-to-trustee; or, (4) any action
planned by a non-federal entity that
involves funding, approval, or other
final agency action provided by the
Department, unless the Tribe is a party
to the action. Substantial direct effects
on Tribes may include, but are not
limited to, effects as shown in the
Consensus-Seeking Model (Figure 1).’’
512 DM 4.3.B. (November 30, 2022).
DOI’s procedures for consultation with
Tribal Nations also provide that:
‘‘Bureaus/Offices must invite Indian
Tribes early in the planning process to
consult whenever a Departmental plan
or action with Tribal Implications
arises. Bureaus/Offices should operate
under the assumption that all actions
with land or resource use or resource
impacts may have Tribal implications
and should extend consultation
invitations accordingly.’’ 512 DM 5.4.
(November 30, 2022).
Additionally, we are also respectful of
our responsibilities for consultation
with Alaska Native Claims Settlement
Act (ANCSA) Corporations. The DOI’s
consultation policy defines a
Departmental Action with ANCSA
Corporation Implications as—
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‘‘[a]ny regulation, rulemaking, policy,
guidance, legislative proposal, grant funding
formula changes, or operational activity that
may have a substantial direct effect on an
ANCSA Corporation, including but not
limited to: (1) any activity that may
substantially affect land, water, areas, or
resources owned or selected by ANCSA
Corporation; (2) any activity that may impact
the ability of an ANCSA Corporation to
participate in Departmental programs for
which it qualifies; (3) any activity that may
impact the ability of ANCSA shareholders to
access and use ANCSA lands, water areas, or
resources; (4) any activity that may impact
the ability of Alaska Native people to
maintain their traditional way of life and
subsistence practices on ANCSA Corporation
lands, waters, or adjacent federal lands; or,
(5) any activity that may have a direct effect
on the ability of an ANCSA Corporation to
fulfil the purposes for which it was
established under ANCSA.’’ 512 DM 6.3.C.
(November 30, 2022).
DOI consultation procedures for
ANSCA corporations also provides:
‘‘Bureaus and Offices should operate
under the assumption that all actions
with land or resource use or resource
impacts may have ANCSA Corporation
implications and should extend
consultation invitations accordingly.
When ANCSA Corporations indicate
that there is substantial and direct effect
of the Departmental Action with
ANCSA Corporation Implications, the
Department must engage in
consultation.’’ 512 DM 7.4.A.
(November 30, 2022).
This rulemaking proposes to modify
the criteria for determining whether oil,
gas, and/or sulfur lessees, RUE grant
holders, and pipeline ROW grant
holders may be required to provide
bonds or other financial assurance,
above the current regulatorily
prescribed base bond amounts, to
ensure compliance with their OCSLA
obligations. It also proposes to remove
certain restrictive provisions for thirdparty guarantees and decommissioning
accounts and would add new criteria
under which a bond, or third-party
guarantee, that was provided as
supplemental financial assurance, may
be cancelled. Additionally, this
proposed rule would clarify bonding
requirements for RUEs serving Federal
leases.
We have evaluated this proposed rule
under the DOI’s consultation policy and
under the criteria in Executive Order
13175, and have determined that, while
this rulemaking will likely not cause
any substantial direct effects on
environmental or cultural resources,
there may be resource or economic
impacts to one or more federally
recognized Indian tribes or ANCSA
Corporations as a result of this proposed
rule.
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In developing the 2020 Joint Notice of
Proposed Rulemaking (85 FR 65924),
BOEM determined that the rulemaking
would have no substantial direct effects
on environmental or cultural resources.
However, BOEM determined there was
the potential for economic impacts to
one Tribal Nation and one ANCSA
Corporation. In August 2018, BOEM
invited consultation with this Tribal
Nation and the ANCSA Corporation.
BOEM consulted with the Tribal Nation
in September 2018. The ANCSA
Corporation did not request to consult.
At that time, BOEM discussed the
possible impacts from the 2020
proposal, as documented in the
memorandum to the docket titled ‘‘2018
Outreach on the Financial Assurance
Proposal.’’
On March 31, 2023, BOEM sent letters
to all Tribes and ANCSA Corporations
to ensure they are aware of this
preparation for a new proposed
rulemaking, to answer any immediate
questions they may have, and to invite
formal consultation if they would like to
consult. To date, only one Tribe has
requested consultation, however we will
formally consult with any Tribes or
ANCSA corporations at any stage in this
rulemaking as it advances if
consultation is requested.
I. Paperwork Reduction Act (PRA)
This proposed rule references existing
information collections (ICs) previously
approved by OMB and adds new IC
requirements for BOEM regulations that
require OMB review and approval under
the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.). Therefore, an
information collection request for
BOEM is being submitted to OMB for
review and approval. The ICs related to
this rulemaking concern the
requirements under 30 CFR parts 550
and 556. BOEM may not conduct or
sponsor, and you are not required to
respond to, a collection of information
unless it displays a currently valid OMB
control number.
OMB has reviewed and approved the
information collection requirements
associated with risk management and
financial assurance for OCS lease and
grant obligations and assigned the
following OMB control numbers:
• 1010–0006 (BOEM), ‘‘Leasing of
Sulfur or Oil and Gas in the Outer
Continental Shelf (30 CFR parts 550,
Subpart J; 556, Subparts A through I,
and K; and 560, Subparts B and E)
(expires 03/31/2026), and
• 1010–0114 (BOEM), ‘‘30 CFR 550,
Subpart A, General, and Subpart K, Oil
and Gas Production Requirements
(expires 05/31/2026).
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This proposed rule would modify
collections of information under 30 CFR
part 550, subparts A and J, and 30 CFR
part 556, subpart I, concerning financial
assurance requirements (such as
bonding) for leases, pipeline ROW
grants, and RUE grants. OMB has
reviewed and approved the information
collection requirements associated with
financial assurance regulations for
leases (30 CFR 556.900 through 907),
pipeline ROW grants (30 CFR 550.1011),
and RUE grants (30 CFR 550.160 and
550.166).
BOEM estimates that the number of
information collection burden hours for
the proposed rule overall are close to
the same as for the existing regulatory
framework. If this proposed rule
becomes final and effective, the new
and changed provisions would increase
the overall annual burden hours for
OMB Control Number 1010–0006 by 77
hours (totaling 19,131 annual burden
hours) and 268 responses (totaling
10,575 responses) as justified below.
The changed provisions for OMB
Control Number 1010–0114 would add
new and revise requirements in 30 CFR
part 550, subpart A, but would not
impact the overall burden hours for this
control number because the burdens for
these provisions are counted under
OMB Control Number 1010–0006.
However, the regulatory descriptions of
new and modified requirements would
be extensive enough to require an
update of the OMB control number.
When needed, BOEM would submit
future burden changes (either increases
or decreases) of the OMB control
numbers with reasoning to OMB for
review and approval. Every 3 years,
BOEM would also review the burden
numbers for changes, seek public
comment, and submit any request for
changes to OMB for approval.
Title of Collection: 30 CFR part 550,
‘‘Oil and Gas and Sulfur Operations in
the Outer Continental Shelf,’’ and 30
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CFR part 556, ‘‘Leasing of Sulfur or Oil
and Gas and Bonding Requirements in
the Outer Continental Shelf.’’
OMB Control Number: 1010–0006 and
1010–0114.
Form Number: None.
Type of Review: Revision of currently
approved collections.
Respondents/Affected Public: Federal
OCS oil, gas, and sulfur operators and
lessees, and RUE grant and pipeline
ROW grant holders.
Total Estimated Number of Annual
Responses: 10,575 responses for 1010–
0006, and 5,302 responses for 1010–
0114.
Total Estimated Number of Annual
Burden Hours: 19,131 hours for 1010–
0006, and 18,323 hours for 1010–0114.
Respondent’s Obligation: Responses
to these collections of information are
mandatory or are required to obtain or
retain a benefit.
Frequency of Collection: The
frequency of response varies but is
primarily on the occasion or as per the
requirement.
Total Estimated Annual Non-hour
Burden Cost: No additional non-hour
costs.
The following is a brief explanation of
how the proposed regulatory changes
would affect the various subparts’ hour
and non-hour cost burdens for OMB
Control Number 1010–0114.
Right-of-Use and Easement
BOEM’s existing regulations
concerning RUE grants for an OCS
lessee and a State lessee are found in 30
CFR 550.160 through 550.166. The
burdens related to 30 CFR 550.160 and
550.166 are identified in OMB Control
Number 1010–0114 but accounted for in
OMB Control Number 1010–0006.
Section 550.160 provides that an
applicant for a RUE that serves an OCS
lease must meet bonding requirements,
but the regulation does not prescribe a
base surety bond amount. The proposed
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rule would replace this requirement
with a cross-reference to the specific
criteria governing financial assurance
demands in proposed § 550.166.
Therefore, BOEM is proposing to
establish a Federal RUE base financial
assurance requirement matching the
existing base surety bond requirement
for State RUEs. The annual burden hour
likely would not change since RUEs that
serve OCS leases are currently already
meeting bonding requirements under
BOEM’s agreement-specific conditions
of approval. The proposed regulations
will be more specific and clarify the
meaning of ‘‘meeting bonding
requirements.’’
BOEM is proposing to establish a
$500,000 area-wide RUE financial
assurance requirement for any RUEholder that owns one or more RUEs,
regardless of whether they serve a State
or Federal lease. BOEM is also
proposing to allow any lessee that has
posted an area-wide lease surety bond to
modify that lease surety bond to also
cover any RUE(s) held by the same
entity.
BOEM is also proposing to revise the
RUE regulations to clarify that any RUE
grant holder, whether the RUE serves a
State or Federal lease, may be required
to provide supplemental financial
assurance for the RUE if the grant
holders do not meet the credit rating or
proxy credit rating criteria. The existing
regulations authorized demands for
supplemental financial assurance but
specified no criteria. The annual burden
hour would not change based on these
clarifications.
The following is the revised burden
table and a brief explanation of how the
proposed regulatory changes would
affect the various subparts’ hour and
non-hour cost burdens for OMB Control
Number 1010–0006:
BILLING CODE P
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BILLING CODE C
Pipelines and Pipeline Right-of-Way
Grants
Proposed § 550.1011(d) relates to
BOEM’s determination of whether
supplemental financial assurance is
necessary to ensure compliance with the
obligations under a pipeline ROW grant.
This determination would be based on
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whether pipeline ROW grant holders
have the ability to carry out present and
future obligations. The criteria proposed
for the financial determination include
an issuer credit rating or a proxy credit
rating. The issuer credit rating and the
audited financial information on which
BOEM determines a proxy credit rating
already exist. The burden of
determining a proxy credit rating falls
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on BOEM. The annual burdens placed
on the grant holder would be minimal
(providing to BOEM information the
grant holder already has) and would be
included in the burden estimates for 30
CFR 556.901(d).
Proposed § 550.1011(d)(2) provides
that BOEM would consider the issuer
credit rating or proxy credit rating of a
co-grant holder, because they are liable
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for accrued decommissioning
obligations for facilities and pipelines
on their ROW. The burden for
determining credit rating falls mostly on
BOEM. The annual burdens placed on
the grant holder would be minimal
(providing to BOEM information the
grant holder already has) and would be
included in the burden estimates for 30
CFR 556.901(d).
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Bond or Other Financial Assurance
Requirements for Leases
Proposed § 556.900(a)(4) proposes to
add that supplemental financial
assurance required by the Regional
Director must be provided before a new
lease is issued or an assignment of a
lease is approved. The burden increase
for this requirement would be included
in OMB Control Number 1010–0006.
Supplemental financial assurance
required by this provision would likely
not significantly impact the burdens due
to low occurrence, but BOEM would
account for the change in the burden
table.
Base Financial Assurance and
Supplemental Financial Assurance
Proposed § 556.901(d) relates to
BOEM’s determination of whether
supplemental financial assurance is
necessary to ensure compliance with the
obligations under a lease. New proposed
§ 556.901(d)(1) would base this
determination on an issuer credit rating
or a proxy credit rating determined by
BOEM based on audited financial
information.
New § 556.901(d)(2) provides that
BOEM would consider the issuer credit
rating or proxy credit rating of a colessee, and new § 556.901(d)(3) provides
that BOEM would consider the net
present value of proved oil and gas
reserves on the lease. Lessees’
submission of information on proved
reserves would account for additional
annual burden hours. The lessee would
not need to submit proved reserve
information if supplemental financial
assurance is not required based on its
issuer credit rating or proxy credit
rating, or those of its co-lessees.
The existing OMB-approved hour
burden for each respondent to prepare
and submit the information for the
existing evaluation criteria requirements
is 3.5 hours. In this proposed rule, the
revision of the evaluation criteria would
likely result in requiring less time for
the respondents to prepare and submit
the information, particularly for issuer
credit rating. If companies choose to
demonstrate that the net present value
of proved oil and gas reserves on the
lease exceeds three times the
decommissioning cost associated with
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production of those reserves, then the
time necessary for companies to prepare
and submit information on the proved
oil and gas reserves would likely be
greater than 3.5 hours. Therefore, BOEM
proposes to retain the average 3.5-hour
burden to reflect the decrease in time
required to prepare and submit issuer
credit ratings and audited financials and
the increase in time required for
preparing and submitting information
on proved reserves. When the final rule
becomes effective, the related burden
hours for all respondents (lessee, colessee, grant holder, and co-grant
holder) would be included in OMB
Control Number 1010–0006.
The OMB-approved number of
respondents who currently submit
financial information under the existing
provision is 166 respondents. Recently,
BOEM has seen the number of leases
decrease in the Gulf of Mexico. BOEM
estimates the new number of
respondents would be between 150 and
160 respondents. For this request,
BOEM will use the higher number of
160 respondents (¥6 respondents). This
number will be reviewed during the
next IC renewal process. When the final
rule becomes effective, BOEM will
include the new number of respondents
in OMB Control Number 1010–0006.
The existing OMB-approved annual
burden hours for § 556.901 related to
demonstrating financial worth/ability to
carry out present and future financial
obligations is 581 hours (166
respondents × 3.5 hours). With the
changes provided in the proposed rule
and described above, BOEM estimates
that the annual hour burden would
decrease by approximately 21 annual
burden hours, and total annual burden
hours would be 560 hours (160
respondents × 3.5 hours). This decrease
in annual burden hours would be
reflected in OMB Control Number 1010–
0006 when the final rule becomes
effective.
BOEM proposes to add paragraph (h)
to § 556.901 to establish the limited
opportunity to provide the required
supplemental financial assurance
demanded in three installments during
the first 3 years after the effective date
of this regulation. This provision would
establish the timing and proportions of
phased supplemental financial
assurance that would be required in
each installment. The lessee would have
the option to submit the supplemental
financial assurance once or in
installments. If the lessee chooses to
provide supplemental financial
assurance in installments, the number of
submissions of supplemental financial
assurance would likely increase, but
only for the first 3 years after the
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effective date of this regulation. OMB
has currently approved 45 annual
burden hours for supplemental financial
assurance submissions (135 submissions
which take 20 minutes each to submit).
BOEM estimates the burden hours for
the proposed installment submissions
provision to be 135 annual burden
hours (405 submissions × 20 minutes),
which is an increase of 90 hours over
existing OMB approval.
General Requirements for Bonds and
Other Financial Assurance
The scope of proposed § 556.902(a)
would include ‘‘grant holder’’ and
financial assurance posted under the
requirements of 30 CFR part 550. This
change would clarify that the same
general requirements for financial
assurance provided by lessees, operating
rights owners, or operators also apply to
financial assurance provided by RUE
and pipeline ROW grant holders. BOEM
proposes to keep the burdens the same
as the existing OMB burdens.
Decommissioning Accounts
Proposed revisions to § 556.904
would allow the Regional Director to
authorize a RUE grant holder and a
pipeline ROW grant holder, as well as
a lessee, to establish a decommissioning
account as supplemental financial
assurance required under § 556.901(d),
or 550.166(b) or 550.1011(d). Because
this change represents a new
opportunity for grant holders, there are
no existing burdens related to this
provision under the current OMB
approval. BOEM is capturing the
requirement to establish
decommissioning accounts in the
burden table. BOEM estimates 24
annual burden hours for grant holders
and/or lessees to establish their
decommissioning account.
A new provision is proposed under
§ 556.904(a)(3), which would require
immediate submission of a surety bond
or other financial assurance in the
amount equal to the remaining
unsecured portion of the supplemental
financial assurance demand if the initial
payment or any scheduled payment into
the decommissioning account is not
timely made. In the context of
paperwork-burden, this provision
replaces the existing provision that
requires submission of binding
instructions. The annual burden hours
will remain the same but will shift to
the proposed requirement and would be
reflected in OMB Control Number 1010–
0006.
Third-Party Guarantees
Proposed § 556.905(a) relates to the
guarantor’s ability to carry out present
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and future obligations. Proposed
§ 556.905(a)(2) would require the
guarantor to submit a third-party
guarantee agreement. Paragraph (d)
would provide that the terms which the
existing regulation requires for
indemnity agreements must be included
in a third-party guarantee agreement.
This change is to avoid any inference
that the government must incur the
expenses of decommissioning before
being indemnified by the guarantor. It is
a change of the name of the agreement
and does not change the associated
burden.
Proposed § 556.905(c)(2) would
eliminate the requirement that a lessee
must cease production until
supplemental financial assurance
coverage requirements are met when a
guarantor becomes unqualified. The
regulatory provision would be replaced
with a requirement to immediately
submit and maintain a substitute surety
bond or other financial assurance. Both
the existing and proposed provisions
require the lessee to provide
replacement surety bond coverage;
however, BOEM’s current OMB Control
Number 1010–0006 does not quantify
the burdens. Therefore, BOEM would
add approximately 8 annual burden
hours to OMB Control Number 1010–
0006 for any lessee whose guarantor
became unqualified.
Proposed § 556.905(b) would remove
the requirement that a guarantee ensure
compliance with all lessees’ or grant
holders’ obligations and the obligations
of all operators on the lease or grant.
This revision would allow a third-party
guarantor to limit the obligations
covered by the third-party guarantee. In
some situations, this change could
result in additional paperwork burden
due to additional surety bonds or other
financial assurance that must be
provided to BOEM to cover obligations
previously covered by a third-party
guarantee. BOEM estimates the number
of additional financial assurance
demands resulting from this revision to
be low and the annual burdens would
be included in the existing burden
estimates for OMB Control Number
1010–0006, and revised in future IC
requests, if needed.
Proposed § 556.905 would replace the
indemnity agreement with a third-party
guarantee agreement with comparable
provisions. This change would not
impact annual burden hours. Proposed
§ 556.905(e) would provide that a lessee
or grant holder and the guarantor under
a third-party guarantee may request
BOEM to cancel a third-party guarantee.
BOEM would cancel a third-party
guarantee under the same terms and
conditions provided for cancellation of
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additional surety bonds in proposed
§ 556.906(d)(2). The current OMBapproved burden under §§ 556.905(d)
and 556.906 is 189 annual burden
hours. BOEM proposes to keep the
burdens the same as the current OMB
approved burdens at 189 annual burden
hours.
Termination of the Period of Liability
and Cancellation of Financial Assurance
Proposed § 556.906(d)(2) would be
revised to add additional circumstances
when BOEM may cancel supplemental
financial assurance. Proposed
§ 556.906(d)(2) would require a
cancellation request from the lessee or
grant holder, or the surety, based on
assertions that one of the stated
circumstances is present. BOEM already
receives these types of requests and has
approved the requests, where
warranted, as a departure from the
regulations. These burdens are already
counted in the existing OMB burden
estimate for OMB Control Number
1010–0006.
If this proposed rule becomes
effective and OMB approves the
information, BOEM would revise the
existing OMB control numbers to reflect
the changes. The IC does not include
questions of a sensitive nature. BOEM
will protect proprietary information
according to the Freedom of Information
Act (5 U.S.C. 552) and DOI
implementing regulations (43 CFR part
2), 30 CFR 556.104, Information
collection and proprietary information,
and 30 CFR 550.197, Data and
information to be made available to the
public or for limited inspection.
The PRA requires agencies to estimate
the total annual reporting and
recordkeeping non-hour cost burden
resulting from the collection of
information, and we solicit your
comments on this item. For reporting
and recordkeeping only, your response
should split the cost estimate into two
components: (1) total capital and startup
cost component; and (2) annual
operation, maintenance, and purchase
of service component. Your estimates
should consider the cost to generate,
maintain, and disclose or provide the
information. You should describe the
methods you use to estimate major cost
factors, including system and
technology acquisition, expected useful
life of capital equipment, discount
rate(s), and the period over which you
incur costs. Generally, your estimates
should not include equipment or
services purchased: (1) before October 1,
1995; (2) to comply with requirements
not associated with the information
collection; (3) for reasons other than to
provide information or keep records for
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42167
the Government; or (4) as part of
customary and usual business or private
practices.
As part of our continuing effort to
reduce paperwork and respondent
burdens, we invite the public and other
Federal agencies to comment on any
aspect of this information collection,
including:
(1) Is the proposed information
collection necessary or useful for BOEM
to properly perform its functions?
(2) Are the estimated annual burden
hour increases and decreases resulting
from the proposed rule reasonable?
(3) Is the estimated annual non-hour
cost burden resulting from this
information collection reasonable?
(4) Do you have any suggestions that
would enhance the quality, clarity, or
usefulness of the information to be
collected?
(5) Is there a way to minimize the
information collection burden on those
who must respond, such as by using
appropriate automated digital,
electronic, mechanical, or other forms of
information technology?
Send your comments and suggestions
on this information collection by the
date indicated in the DATES section to
the Desk Officer for the Department of
the Interior at OMB–OIRA at (202) 395–
5806 (fax) or via the www.reginfo.gov
portal (online). You may view the
information collection request(s) at
https://www.reginfo.gov/public/do/
PRAMain. Please provide a copy of your
comments to the BOEM Information
Collection Clearance Officer (see the
ADDRESSES section). You may contact
Anna Atkinson, BOEM Information
Collection Clearance Officer at (703)
787–1025 with any questions. Please
reference Risk Management, Financial
Assurance and Loss Prevention (OMB
Control No. 1010–0006), in your
comments.
J. National Environmental Policy Act
(NEPA)
A detailed environmental analysis
under NEPA is not required because the
proposed rule is covered by a
categorical exclusion (see 43 CFR
46.205). This proposed rule meets the
criteria set forth at 43 CFR 46.210(i) for
a Departmental categorical exclusion in
that this proposed rule is ‘‘of an
administrative, financial, legal,
technical, or procedural nature.’’ We
have also determined that the proposed
rule does not involve any of the
extraordinary circumstances listed in 43
CFR 46.215 that would require further
analysis under NEPA.
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K. Data Quality Act
In developing this proposed rule, we
did not conduct or use a study,
experiment, or survey requiring peer
review under the Data Quality Act (Pub.
L. 106–554, app. C, sec. 515, 114 Stat.
2763, 2763A–153–154).
L. Executive Order 13211: Actions
Concerning Regulations That
Significantly Affect Energy Supply,
Distribution, or Use
Under Executive Order 13211,
agencies are required to prepare and
submit to OMB a Statement of Energy
Effects for ‘‘significant energy actions.’’
This should include a detailed
statement of any adverse effects on
energy supply, distribution, or use
(including a shortfall in supply, price
increases, and increased use of foreign
supplies) expected to result from the
action and a discussion of reasonable
alternatives and their effects.
This action, which is a significant
regulatory action under Executive Order
12866,19 is likely to have a significant
effect on the supply, distribution, or use
of energy. BOEM has prepared a
Statement of Energy Effects for this
action. BOEM estimates that stronger
supplemental financial assurance
requirements will increase compliance
costs for non-investment grade
companies operating on the OCS by
approximately $319 million annually (7
percent discounting). Pursuant to
OMB’s memorandum M–01–27,20
BOEM recognizes that this action may
‘‘adversely affect[ ] in a material way the
productivity, competition, or prices in
the energy sector.’’ By increasing
industry compliance costs, the
regulation could adversely make the
U.S. offshore oil and gas sector less
attractive than regions with lower
operating costs. Additionally, increased
costs may depress the value of offshore
assets or cause continuing production to
become uneconomic sooner, leading to
shorter-than-otherwise useful life and
potentially a loss of production. For
additional discussion on the energy
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19 According
to E.O. 31211, ‘‘For purposes of this
order: (a) ‘‘Regulation’’ and ‘‘rule’’ have the same
meaning as they do in Executive Order 12866 or
any successor order. (b) ‘‘Significant energy action’’
means any action by an agency (normally published
in the Federal Register) that promulgates or is
expected to lead to the promulgation of a final rule
or regulation, including notices of inquiry, advance
notices of proposed rulemaking, and notices of
proposed rulemaking: (1)(i) that is a significant
regulatory action under Executive Order 12866 or
any successor order,’’.
20 https://www.whitehouse.gov/wp-content/
uploads/2017/11/2001-M-01-27-Guidance-forImplementing-E.O.-13211.pdf.
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effects and regulatory alternatives,
please refer to the IRIA for this proposal.
M. Clarity of This Regulation
PART 550—OIL AND GAS AND
SULFUR OPERATIONS IN THE OUTER
CONTINENTAL SHELF
1. The authority citation for part 550
continues to read as follows:
BOEM is required by Executive Order
12866, Executive Order 12988, and by
the Presidential memorandum of June 1,
1998, to write all rules in plain
language. This means that each rule
BOEM publishes must:
(1) Be logically organized;
(2) Use the active voice to address
readers directly;
(3) Use clear language rather than
jargon;
(4) Be divided into short sections and
sentences; and
(5) Use lists and tables wherever
possible.
If you feel that BOEM has not met
these requirements, send comments by
one of the methods listed in the
ADDRESSES section. To better help
BOEM revise the proposed rule, your
comments should be as specific as
possible. For example, you should
specify the numbers of the sections or
paragraphs that you find unclear, which
sections or sentences are too long, and
the sections where you feel lists or
tables would be useful.
■
List of Subjects
(a) This part contains the regulations
of the BOEM Offshore program that
govern oil, gas, and sulfur exploration,
development, and production
operations on the OCS. When you
conduct operations on the OCS, you
must submit requests, applications, and
notices, or provide supplemental
information for BOEM approval.
(b) * * *
30 CFR Part 550
Administrative practice and
procedure, Continental shelf,
Government contracts, Investigations,
Mineral resources, Oil and gas
exploration, Oil pollution, Outer
continental shelf, Penalties, Pipelines,
Public lands—rights-of-way, Reporting
and recordkeeping requirements, Rightsof-way, Sulfur.
30 CFR Part 556
Administrative practice and
procedure, Continental shelf,
Environmental protection, Government
contracts, Intergovernmental relations,
Mineral resources, Oil and gas
exploration, Outer continental shelf,
Public lands, Reporting and
recordkeeping requirements, Rights-ofway.
30 CFR Part 590
Administrative practice and
procedure.
Laura Daniel-Davis,
Principal Deputy Assistant Secretary, Land
and Minerals Management.
For the reasons stated in the
preamble, the Bureau of Ocean Energy
Management (BOEM) proposes to
amend 30 CFR chapter V as follows:
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Authority: 30 U.S.C. 1751; 31 U.S.C. 9701;
43 U.S.C. 1334
2. Revise the heading to part 550 to
read as set forth above.
■
Subpart A—General
3. Amend § 550.101 by revising the
introductory paragraph to read as
follows:
■
§ 550.101
Authority and applicability.
The Secretary of the Interior
(Secretary) authorized the Bureau of
Ocean Energy Management (BOEM) to
regulate oil, gas, and sulfur exploration,
development, and production
operations on the Outer Continental
Shelf (OCS). Under the Secretary’s
authority, the Director requires that all
operations:
*
*
*
*
*
■ 4. Amend § 550.102 by revising
paragraphs (a) and (b)(16) to read as
follows:
§ 550.102
What does this part do?
TABLE—WHERE TO FIND INFORMATION
FOR CONDUCTING OPERATIONS
For information about
Refer to
*
*
*
*
*
(16) Sulfur operations 30 CFR part 250,
subpart P.
*
*
*
*
*
5. Amend § 550.105 by:
a. Adding the definition ‘‘Assign’’ in
alphabetical order;
■ b. Revising the definitions ‘‘Criteria
air pollutant’’ and ‘‘Development
geological and geophysical (G&G)
activities’’;
■ c. Removing the definition
‘‘Easement’’;
■ d. Revising the definitions
‘‘Exploration’’ and ‘‘Facility’’;
■ e. Adding the definition ‘‘Financial
assurance’’ in alphabetical order;
■
■
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d. Revising the definition ‘‘Geological
and geophysical (G&G) exploration’’;
■ e. Adding the definitions ‘‘Investment
grade credit rating’’ and ‘‘Issuer credit
rating’’ in alphabetical order;
■ f. Revising the definitions ‘‘Minerals’’,
‘‘Nonattainment area’’, ‘‘Pipelines’’, and
‘‘Production areas’’;
■ g. Removing the definition ‘‘Right-ofuse’’;
■ h. Adding the definition ‘‘Right-of-Use
and Easement (RUE)’’ in alphabetical
order;
■ i. Removing the definition ‘‘Right-ofway pipelines’’;
■ j. Adding the definition ‘‘Right-of-way
(ROW) pipelines’’;
■ k. Adding the definition ‘‘Transfer’’ in
alphabetical order;
■ l. Revising the definition ‘‘You’’;
■ m. Adding the definition ‘‘Waste of
oil, gas, or sulfur’’ in alphabetical order;
and
■ n. Removing the definition ‘‘Waste of
oil, gas, or sulphur.
The revisions and additions read as
follows:
■
§ 550.105
Definitions.
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*
*
*
*
*
Assign means to convey an ownership
interest in an oil, gas, or sulfur lease,
ROW grant or RUE grant. For the
purposes of this part, ‘‘assign’’ is
synonymous with ‘‘transfer’’ and the
two terms are used interchangeably.
*
*
*
*
*
Criteria air pollutant means any air
pollutant for which the United States
Environmental Protection Agency
(USEPA) has established a primary or
secondary National Ambient Air Quality
Standard (NAAQS) pursuant to section
109 of the Clean Air Act.
*
*
*
*
*
Development geological and
geophysical (G&G) activities means
those G&G and related data-gathering
activities on your lease or unit that you
conduct following discovery of oil, gas,
or sulfur in paying quantities to detect
or imply the presence of oil, gas, or
sulfur in commercial quantities.
*
*
*
*
*
Exploration means the commercial
search for oil, gas, or sulfur. Activities
classified as exploration include but are
not limited to:
(1) Geophysical and geological (G&G)
surveys using magnetic, gravity, seismic
reflection, seismic refraction, gas
sniffers, coring, or other systems to
detect or imply the presence of oil, gas,
or sulfur; and
(2) Any drilling conducted for the
purpose of searching for commercial
quantities of oil, gas, and sulfur,
including the drilling of any additional
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well needed to delineate any reservoir
to enable the lessee to decide whether
to proceed with development and
production.
Facility, as used in § 550.303, means
all installations or devices permanently
or temporarily attached to the seabed.
They include mobile offshore drilling
units (MODUs), even while operating in
the ‘‘tender assist’’ mode (i.e., with skidoff drilling units) or other vessels
engaged in drilling or downhole
operations. They are used for
exploration, development, and
production activities for oil, gas, or
sulfur and emit or have the potential to
emit any air pollutant from one or more
sources. They include all floating
production systems (FPSs), including
column-stabilized-units (CSUs); floating
production, storage and offloading
facilities (FPSOs); tension-leg platforms
(TLPs); spars, etc. During production,
multiple installations or devices are a
single facility if the installations or
devices are at a single site. Any vessel
used to transfer production from an
offshore facility is part of the facility
while it is physically attached to the
facility.
Financial assurance means a surety
bond, a pledge of Treasury securities, a
decommissioning account, a third-party
guarantee, or another form of security
acceptable to the BOEM Regional
Director, that is used to ensure
compliance with obligations under the
regulations and under the terms of a
lease, a RUE grant, or a pipeline ROW
grant.
*
*
*
*
*
Geological and geophysical (G&G)
explorations means those G&G surveys
on your lease or unit that use seismic
reflection, seismic refraction, magnetic,
gravity, gas sniffers, coring, or other
systems to detect or imply the presence
of oil, gas, or sulfur in commercial
quantities.
*
*
*
*
*
Investment grade credit rating means
an issuer credit rating of BBB- or higher,
or its equivalent, assigned to an issuer
of corporate debt by a nationally
recognized statistical rating organization
(NRSRO) as that term defined by the
United States Securities and Exchange
Commission (SEC).
Issuer credit rating means a credit
rating assigned to an issuer of corporate
debt by Standard and Poor’s (S&P)
Ratings Services (or any of its
subsidiaries), by Moody’s Investors
Service Incorporated (or any of its
subsidiaries) or by another NRSRO, as
that term is defined by the United States
SEC.
*
*
*
*
*
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42169
Minerals include oil, gas, sulfur,
geopressured-geothermal and associated
resources, and all other minerals that
are authorized by an Act of Congress to
be produced.
*
*
*
*
*
Nonattainment area means, for any
criteria air pollutant, an area which is
show by monitored data or which is
calculated by air quality modeling (or
other methods determined by the
Administrator of the USEPA to be
reliable) to exceed any primary or
secondary NAAQS established by the
USEPA.
*
*
*
*
*
Pipelines are the piping, risers, and
appurtenances installed for transporting
oil, gas, sulfur, and produced waters.
*
*
*
*
*
Production areas are those areas
where flammable petroleum gas, volatile
liquids or sulfur are produced,
processed (e.g., compressed), stored,
transferred (e.g., pumped), or otherwise
handled before entering the
transportation process.
*
*
*
*
*
Right-of-Use and Easement (RUE)
means a right to use a portion of the
seabed, at an OCS site other than on a
lease you own, to construct, secure to
the seafloor, use, modify, or maintain
platforms, seafloor production
equipment, artificial islands, facilities,
installations, or other devices to support
the exploration, development, or
production of oil, gas, or sulfur
resources from an OCS lease or a lease
on State submerged lands adjacent to or
accessible from the OCS.
Right-of-way (ROW) pipelines are
those pipelines that are contained
within:
(1) The boundaries of a single lease or
unit, but are not owned and operated by
a lessee or operator of that lease or unit;
(2) The boundaries of contiguous (not
cornering) leases that do not have a
common lessee or operator;
(3) The boundaries of contiguous (not
cornering) leases that have a common
lessee or operator but are not owned and
operated by that common lessee or
operator; or
(4) An unleased block(s).
*
*
*
*
*
Transfer means to convey an
ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant.
For the purposes of this part, ‘‘transfer’’
is synonymous with ‘‘assign’’ and the
two terms are used interchangeably.
*
*
*
*
*
You, depending on the context of the
regulations, means a bidder, a lessee
(record title owner), a sublessee
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BOEM may grant you a RUE on leased
or unleased lands on the OCS, if you
meet these requirements:
(a) You must require the RUE to
construct, secure to the seafloor, use,
modify, or maintain platforms, seafloor
production equipment, artificial islands,
facilities, installations, or other devices
at an OCS site other than an OCS lease
you own, that are:
*
*
*
*
*
(b) You must exercise the RUE
according to the terms of the grant and
the regulations of this part, as well as
the regulations in 30 CFR part 250,
subpart Q.
(c) You must meet the qualification
requirements at 30 CFR 556.400 through
556.402 and the financial assurance
requirements in § 550.166 and 30 CFR
part 556, subpart I.
*
*
*
*
*
■ 7. Revise § 550.166 to read as follows:
if you furnish and maintain area-wide
lease financial assurance in excess of
$500,000 pursuant to 30 CFR 556.901(a),
provided that the area-wide lease
financial assurance also guarantees
compliance with all the terms and
conditions of the RUEs you hold.
(2) The Regional Director may reduce
the amount required in this paragraph
(a) upon a determination that the
reduced amount is sufficient to
guarantee compliance with the
regulations and the terms and
conditions of the RUE grant.
(3) The requirements for financial
assurance in 30 CFR 556.900(d) through
(g) and 30 CFR 556.902 apply to the
financial assurance required under this
paragraph (a).
(b) If BOEM grants you a RUE that
serves either an OCS lease or a State
lease, the Regional Director may require
supplemental financial assurance, above
the amount required by paragraph (a) of
this section, to ensure compliance with
the obligations under your RUE grant
based on an evaluation of your ability to
carry out present and future obligations
on the RUE using the criteria set forth
in 30 CFR 556.901(d)(1) and (2). This
supplemental financial assurance must:
(1) Meet the requirements of 30 CFR
556.900(d) through (g) and 30 CFR
556.902; and
(2) Cover costs and liabilities for
compliance with regulations,
compliance with BOEM and the Bureau
of Safety and Environmental
Enforcement (BSEE) orders, and well
abandonment, platform and structure
removal, and site clearance of the
seafloor of the RUE, in accordance with
the regulations at 30 CFR part 250,
subpart Q.
(c) If you fail to replace any deficient
financial assurance upon demand or fail
to provide supplemental financial
assurance upon demand, the Regional
Director may:
(1) Assess penalties under subpart N
of this part;
(2) Request BSEE to suspend
operations on your RUE; and/or
(3) Initiate action for cancellation of
your RUE grant.
■ 8. Add § 550.167 under the
undesignated center heading ‘‘Right-ofUse and Easement’’ to read as follows:
§ 550.166 If BOEM grants me a RUE, what
financial assurance must I provide?
§ 550.167 How may I obtain or assign my
interest in a RUE?
(a) Before BOEM grants you a RUE on
the OCS, you must maintain financial
assurance of $500,000 that guarantees
compliance with the regulations and the
terms and conditions of the RUEs you
hold.
(1) You are not required to submit and
maintain the financial assurance of
$500,000 pursuant to this paragraph (a)
(a) To obtain or assign a RUE, you
must file an application and provide the
information contained in § 550.161 and
you must obtain BOEM’s approval.
(b) BOEM may disapprove an
assignment in the following
circumstances:
(1) When the assignee has unsatisfied
obligations under the regulations in this
(operating rights owner), a Federal or
State RUE grant holder, a pipeline ROW
grant holder, an assignor or transferor, a
designated operator or agent of the
lessee or grant holder, or an applicant
seeking to become one of the above.
Waste of oil, gas, or sulfur means:
(1) The physical waste of oil, gas, or
sulfur;
(2) The inefficient, excessive, or
improper use, or the unnecessary
dissipation of reservoir energy;
(3) The locating, spacing, drilling,
equipping, operating, or producing of
any oil, gas, or sulfur well(s) in a
manner that causes or tends to cause a
reduction in the quantity of oil, gas, or
sulfur ultimately recoverable under
prudent and proper operations or that
causes or tends to cause unnecessary or
excessive surface loss or destruction of
oil or gas; or
(4) The inefficient storage of oil.
*
*
*
*
*
■ 6. Amend § 550.160 by
■ a. Revising the section heading;
■ b. Revising the introductory text; and
■ c. Revising paragraphs (a)
introductory text, (b), and (c).
The revisions read as follows:
lotter on DSK11XQN23PROD with PROPOSALS2
§ 550.160 When will BOEM grant me a
right-of-use and easement (RUE), and what
requirements must I meet?
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chapter or in 30 CFR chapters II or XII,
or under any BOEM or BSEE order;
(2) When an assignment is not
acceptable as to form or content (e.g.,
containing incorrect legal description,
not executed by a person authorized to
bind the corporation, assignee does not
meet the requirements of 30 CFR
556.401 through 556.405);
(3) When the assignment does not
comply with or would conflict with
these regulations, or any other
applicable laws or regulations (e.g.,
Departmental debarment rules);
(4) When the assignee does not meet
the applicable financial assurance
requirements in § 550.166 and 30 CFR
556.900 through 556.907, or an order
issued thereunder, with respect to the
interest being assigned.
■ 9. Amend § 550.199 by revising
paragraph (b) to read as follows:
§ 550.199 Paperwork Reduction Act
statements—information collection.
*
*
*
*
*
(b) Respondents are OCS oil, gas, and
sulfur lessees and operators. The
requirement to respond to the
information collections in this part is
mandated under the Act (43 U.S.C. 1331
et seq.) and the Act’s Amendments of
1978 (43 U.S.C. 1801 et seq.). Some
responses are also required to obtain or
retain a benefit or may be voluntary.
Proprietary information will be
protected under § 550.197, Data and
information to be made available to the
public or for limited inspection; 30 CFR
parts 551 and 552; and the Freedom of
Information Act (5 U.S.C. 552) and its
implementing regulations at 43 CFR part
2.
*
*
*
*
*
Subpart J—Pipelines and Pipeline
Rights-of-Way
10. Revise § 550.1011 to read as
follows:
■
§ 550.1011 Financial assurance
requirements for pipeline right-of-way
(ROW) grant holders.
(a) When you apply for, attempt to
assign, or are the holder of a pipeline
right-of-way (ROW) grant, you must
furnish and maintain $300,000 of areawide financial assurance that guarantees
compliance with the regulations and the
terms and conditions of all the pipeline
ROW grants you hold in an OCS area as
defined in 30 CFR 556.900(b). The
requirement to furnish and maintain
area-wide financial assurance for a
pipeline ROW grant is separate and
distinct from the requirement to provide
financial assurance for a lease or rightof-use and easement (RUE).
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(b) The requirement to furnish and
maintain area-wide pipeline ROW
financial assurance under paragraph (a)
of this section may be satisfied if your
operator or a co-grant holder provides
such financial assurance in the required
amount that guarantees compliance
with the regulations and the terms and
conditions of the grant.
(c) The requirements for lease
financial assurance in 30 CFR
556.900(d) through (g) and 30 CFR
556.902 apply to the area-wide financial
assurance required in paragraph (a) of
this section.
(d) The Regional Director, using the
criteria set forth in 30 CFR 556.901(d)(1)
and (2), may require supplemental
financial assurance (i.e., above the
amount required by paragraph (a) of this
section) to ensure compliance with the
obligations under your pipeline right-ofway grant based on an evaluation of
your ability to carry out present and
future obligations on the pipeline ROW.
(e) The supplemental financial
assurance required under paragraph (d)
of this section must:
(1) Meet the requirements of 30 CFR
556.900(d) through (g) and 30 CFR
556.902, and
(2) Cover costs and liabilities for
regulatory compliance and compliance
with BOEM and BSEE orders,
decommissioning of all pipelines or
other facilities, and clearance from the
seafloor of all obstructions created by
your pipeline ROW operations in
accordance with the regulations at 30
CFR part 250, subpart Q.
(f) If you fail to replace any deficient
financial assurance upon demand or fail
to provide supplemental financial
assurance upon demand, the Regional
Director may:
(1) Assess penalties under subpart N
of this part;
(2) Request BSEE to suspend
operations on your pipeline ROW; and/
or
(3) Initiate action for forfeiture of your
pipeline ROW grant in accordance with
30 CFR 250.1013.
PART 556—LEASING OF SULFUR OR
OIL AND GAS AND FINANCIAL
ASSURANCE REQUIREMENTS IN THE
OUTER CONTINENTAL SHELF
11. The authority citation for part 556
is revised to read as follows:
lotter on DSK11XQN23PROD with PROPOSALS2
■
Authority: 31 U.S.C. 9701; 42 U.S.C. 6213;
43 U.S.C. 1334.
12. Revise the heading to part 556 to
read as set forth above.
■
Subpart A—General Provisions
■
13. Amend § 556.105 by:
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a. In paragraph (a), removing the
acronym ‘‘EPA’’; and
■ b. In paragraph (b):
■ i. Adding the definition ‘‘Assign’’ in
alphabetical order;
■ ii. Revising the definition ‘‘Eastern
Planning Area’’;
■ iii. Adding the definitions ‘‘Financial
assurance’’, ‘‘Investment grade credit
rating’’, and ‘‘Issuer credit rating’’ in
alphabetical order;
■ iv. Revising the definition ‘‘Right-ofUse and Easement (RUE)’’;
■ v. Removing the definition ‘‘Security
or securities’’;
■ vi. Adding the definition ‘‘Transfer’’;
and
■ vii. Revising the definition ‘‘You’’.
The revisions and additions read as
follows:
■
§ 556.105
Acronyms and definitions.
*
*
*
*
*
(b) * * *
Assign means to convey an ownership
interest in an oil, gas, or sulfur lease,
ROW grant or RUE grant. For the
purposes of this part, ‘‘assign’’ is
synonymous with ‘‘transfer’’ and the
two terms are used interchangeably.
*
*
*
*
*
Eastern Planning Area means that
portion of the Gulf of Mexico that lies
southerly and westerly of Florida.
*
*
*
*
*
Financial assurance means a surety
bond, a pledge of Treasury securities, a
decommissioning account, a third-party
guarantee, or another form of security
acceptable to the BOEM Regional
Director, that is used to ensure
compliance with obligations under the
regulations and under the terms of a
lease, a RUE grant, or a pipeline ROW
grant.
*
*
*
*
*
Investment grade credit rating means
an issuer credit rating of BBB¥ or
higher, or its equivalent, assigned to an
issuer of corporate debt by a nationally
recognized statistical rating organization
(NRSRO) as that term defined by the
United States Securities and Exchange
Commission (SEC).
*
*
*
*
*
Issuer credit rating means a credit
rating assigned to an issuer of corporate
debt by Standard and Poor’s (S&P)
Rating Services (or any of its
subsidiaries), by Moody’s Investors
Service Incorporated (or any of its
subsidiaries), or by another NRSRO as
that term is defined by the United States
SEC.
*
*
*
*
*
Right-of-Use and Easement (RUE)
means a right to use a portion of the
seabed at an OCS site other than on a
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42171
lease you own, to construct, secure to
the seafloor, use, modify, or maintain
platforms, seafloor production
equipment, artificial islands, facilities,
installations, or other devices to support
the exploration, development, or
production of oil, gas, or sulfur
resources from an OCS lease or a lease
on State submerged lands adjacent to or
accessible from the OCS.
*
*
*
*
*
Transfer means to convey an
ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant.
For the purposes of this part, ‘‘transfer’’
is synonymous with ‘‘assign’’ and the
two terms are used interchangeably.
*
*
*
*
*
You, depending on the context of the
regulations, means a bidder, a lessee
(record title owner), a sublessee
(operating rights owner), a Federal or
State RUE grant holder, a pipeline ROW
grant holder, an assignor or transferor, a
designated operator or agent of the
lessee or grant holder, or an applicant
seeking to become one of the above.
Subpart G—Transferring All or Part of
the Record Title Interest in a Lease
14. Amend § 556.704 by revising the
section heading, and paragraphs (a)
introductory text and (a)(1) to read as
follows:
■
§ 556.704 When may BOEM disapprove an
assignment or sublease of an interest in my
lease?
(a) BOEM may disapprove an
assignment or sublease of all or part of
your lease interest(s):
(1) When the transferor, transferee, or
sublessee is not in compliance with all
applicable regulations and orders,
including financial assurance
requirements;
*
*
*
*
*
Subpart H—Transferring All or Part of
the Operating Rights in a Lease
15. Amend § 556.802 by revising the
section heading, introductory text, and
paragraph (a) to read as follows:
■
§ 556.802 When may BOEM disapprove the
transfer of all or part of my operating rights
interest?
BOEM may disapprove a transfer of
all or part of your operating rights
interest:
(a) When the transferee is not in
compliance with all applicable
regulations and orders, including
financial assurance requirements;
*
*
*
*
*
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Subpart I—Bonding or Other Financial
Assurance
16. Amend § 556.900 by:
a. Revising the section heading and
introductory text;
■ b. Revising paragraph (a)(3), and
adding paragraph (a)(4);
■ c. Revising paragraphs (g)
introductory text and (h); and
■ d. Adding paragraph (i).
The revisions and additions read as
follows:
■
■
lotter on DSK11XQN23PROD with PROPOSALS2
§ 556.900 Financial assurance
requirements for an oil and gas or sulfur
lease.
This section establishes financial
assurance requirements for the lessee of
an OCS oil and gas or sulfur lease.
(a) * * *
(3) Maintain a lease or area-wide bond
in the amount required in § 556.901(a)
or (b); and
(4) Provide any supplemental
financial assurance required by the
Regional Director.
*
*
*
*
*
(g) You may provide alternative types
of financial assurance instead of
providing a surety bond if the Regional
Director determines that the alternative
financial assurance protects the interests
of the United States to the same extent
as a surety bond.
*
*
*
*
*
(h) If you fail to replace deficient
financial assurance or to provide
supplemental financial assurance upon
demand, the Regional Director may:
(1) Assess penalties under part 550,
subpart N of this subchapter;
(2) Request BSEE to suspend
production and other operations on
your lease in accordance with 30 CFR
250.173; and/or
(3) Initiate action to cancel your lease.
(i) In the event you amend your areawide surety bond covering lease
obligations, or obtain a new area-wide
lease surety bond, to cover the financial
assurance requirements for any RUE(s),
your area-wide lease surety bond may
be called in whole or in part to cover
any or all the obligations on which you
default that are associated with your
RUE(s) located in the area covered by
such area-wide lease surety bond.
■ 17. Amend § 556.901 by:
■ a. Revising the section heading;
■ b. Revising paragraphs (a)
introductory text and (a)(1)(i);
■ c. Revising paragraphs (b)
introductory text and (b)(1)(i);
■ d. Revising paragraphs (c) through (f);
and
■ e. Adding paragraphs (g) and (h).
The revisions and additions read as
follows:
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§ 556.901 Base financial assurance and
supplemental financial assurance.
(a) This paragraph (a) explains what
financial assurance you must provide
before lease exploration activities
commence.
(1) * * *
(i) You must furnish the Regional
Director $200,000 in lease exploration
financial assurance that guarantees
compliance with all the terms and
conditions of the lease by the earliest of:
*
*
*
*
*
(b) This paragraph (b) explains what
financial assurance you must provide
before lease development and
production activities commence.
(1) * * *
(i) You must furnish the Regional
Director $500,000 in lease development
financial assurance that guarantees
compliance with all the terms and
conditions of the lease by the earliest of:
*
*
*
*
*
(c) If you can demonstrate to the
satisfaction of the Regional Director that
you can satisfy your decommissioning
and other lease obligations for less than
the amount of financial assurance
required under paragraphs (a)(1) or
(b)(1) of this section, the Regional
Director may accept financial assurance
in an amount less than the prescribed
amount but not less than the amount of
the cost for decommissioning.
(d) The Regional Director may
determine that supplemental financial
assurance (i.e., financial assurance
above the amounts prescribed in 30 CFR
550.166(a), 30 CFR 550.1011(a),
§ 556.900(a) or paragraphs (a) and (b) of
this section) is required to ensure
compliance with your lease obligations,
including decommissioning obligations;
the regulations in this chapter; and the
regulations in 30 CFR chapters II and
XII. The Regional Director may require
you to provide supplemental financial
assurance if you do not meet at least one
of the following criteria:
(1) You have an Investment grade
issuer credit rating. If any SECrecognized NRSRO provides a credit
rating that differs from any other SECrecognized NRSRO credit rating, BOEM
will apply the highest rating for the
purposes of determining your financial
assurance requirements.
(2) You have a proxy credit rating
determined by the Regional Director,
which must be based on audited
financial information for the most recent
fiscal year (which must include an
income statement, balance sheet,
statement of cash flows, and the
auditor’s certificate).
(i) The audited financial information
for your most recent fiscal year must
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cover a continuous twelve-month period
within the twenty-four-month period
prior to the lessee’s receipt of the
Regional Director’s determination that
you must provide supplemental
financial assurance.
(ii) In determining your proxy credit
rating, the Regional Director may
include the value of the contingent
liabilities associated with any lease(s) or
grants in which you have an ownership
interest. Upon the request of the
Regional Director, you must provide the
information that the Regional Director
determines is necessary to properly
evaluate your contingent liabilities,
including joint ownership interests and
liabilities associated with your OCS
leases and grants.
(3) Your co-lessee or co-grant-holder
has an issuer credit rating or a proxy
credit rating that meets the criteria set
forth in paragraph (d)(1) of this section;
however, the Regional Director may
require you to provide supplemental
financial assurance for
decommissioning obligations for which
such co-lessee or co-grant-holder is not
liable.
(4) There are proved oil and gas
reserves on the lease, as defined by the
SEC Regulation S–X at 17 CFR 210.4–10
and SEC Regulation S–K at 17 CFR
229.1200, the value of which exceeds
three times the estimated cost of the
decommissioning associated with the
production of those reserves, and that
value must be based on reserve reports
submitted to the Regional Director and
reported on a per-lease basis. BOEM
will determine the decommissioning
costs associated with the production of
your reserves on a per-lease basis, and
will use the following decommissioning
cost estimates:
(i) Where BSEE-generated
probabilistic estimates are available,
BOEM will use the estimate at the level
at which there is a 70 percent
probability that the actual cost of
decommissioning will be less than the
estimate (P70).
(ii) If there is no BSEE probabilistic
estimate available, BOEM will use the
BSEE-generated deterministic estimate.
(e) You may satisfy the Regional
Director’s demand for supplemental
financial assurance by increasing the
amount of your existing financial
assurance or providing additional surety
bonds or other types of acceptable
financial assurance.
(f) The Regional Director will
determine the amount of supplemental
financial assurance required to
guarantee compliance. In making this
determination, the Regional Director
will consider potential underpayment of
royalty and cumulative
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decommissioning obligations using the
methodology set forth in paragraph
(d)(3) of this section.
(g) If your cumulative potential
obligations and liabilities either increase
or decrease, the Regional Director may
adjust the amount of supplemental
financial assurance required.
(1) If the Regional Director proposes
an adjustment, the Regional Director
will:
(i) Notify you and your financial
assurance provider of any proposed
adjustment to the amount of financial
assurance required; and
(ii) Give you an opportunity to submit
written or oral comment on the
adjustment.
(2) If you request a reduction of the
amount of supplemental financial
assurance required, or oppose the
amount of a proposed adjustment, you
must submit evidence to the Regional
Director demonstrating that the
projected amount of royalties due to the
United States Government and the
estimated costs of decommissioning are
less than the required financial
assurance amount. Upon review of your
submission, the Regional Director may
reduce the amount of financial
assurance required.
(h) At any time during the first three
years from the effective date of this
regulation, you may request that the
Regional Director allow you to provide,
in three equal installments payable
according to the schedule provided
under this paragraph (h), the full
amount of supplemental financial
assurance required.
(1) If the Regional Director allows you
to provide the amount required on such
a phased basis, you must comply with
the following:
(i) You must provide the initial onethird of the total supplemental financial
assurance required within the timeframe
specified in the demand letter or, if no
timeframe is specified, within 60
calendar days of the date of receipt of
the demand letter.
(ii) You must provide the second onethird of the required supplemental
financial assurance to BOEM within 24
months of the date of receipt of the
demand letter.
(iii) You must provide the final onethird of the required supplemental
financial assurance to BOEM within 36
months of the date of receipt of the
demand letter.
(2) If the Regional Director allows you
to meet your supplemental financial
assurance requirement in a phased
manner, as set forth in this section, and
you fail to timely provide the required
supplemental financial assurance to
BOEM, the Regional Director will notify
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you of such failure. You will no longer
be eligible to meet your supplemental
financial assurance requirement in the
manner prescribed in this paragraph (h),
and the remaining amount due will
become due 10-calendar days after such
notification is received.
■ 18. Amend § 556.902 by revising the
section heading, paragraphs (a) and
(e)(2), and adding paragraphs (g) and (h)
to read as follows:
§ 556.902 General requirements for bonds
or other financial assurance.
(a) Any surety bond or other financial
assurance that you, as record title
owner, operating rights owner, grant
holder, or operator, provide under this
part, or under 30 CFR part 550, must:
(1) Be payable upon demand to the
Regional Director;
(2) Guarantee compliance with all
your obligations under the lease or
grant, the regulations under 30 CFR
chapters II and XII, and all BOEM and
BSEE orders; and
(3) Guarantee compliance with the
obligations of all record title owners,
operating rights owners, and operators
on the lease, and all grant-holders on a
grant.
*
*
*
*
*
(e) * * *
(2) A pledge of Treasury securities as
provided in § 556.900(f).
*
*
*
*
*
(g) If you believe that BOEM’s
supplemental financial assurance
demand is unjustified, you may request
an informal resolution of your dispute
in accordance with the requirements of
30 CFR 590.6. Your request for an
informal resolution will not affect your
right to request to meet your
supplemental financial assurance
requirement in a phased manner under
§ 556.901(h).
(h) You may file an appeal of a
supplemental financial assurance
demand with the Interior Board of Land
Appeals (IBLA) pursuant to the
regulations in 30 CFR part 590.
However, if you request that the IBLA
stay the demand pending a final ruling
on your appeal, you must post an appeal
surety bond equal to the amount of the
demand that you seek to stay before any
such stay is effective.
■ 19. Revise § 556.903 to read as
follows:
§ 556.903
Lapse of financial assurance.
(a) If your surety, guarantor, or the
financial institution holding or
providing your financial assurance
becomes bankrupt or insolvent, or has
its charter or license suspended or
revoked, any financial assurance
coverage from such surety, guarantor, or
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42173
financial institution must be replaced.
You must notify the Regional Director
within 7 calendar days of learning of
such event, and, within 30 calendar
days of learning of such event, you must
provide other financial assurance from a
different financial assurance provider in
the amount required under §§ 556.900,
556.901, 30 CFR 550.166, or 30 CFR
550.1011.
(b) You must notify the Regional
Director within 72 hours of learning of
any action filed alleging that you are
insolvent or bankrupt or that your
surety, guarantor, or financial
institution is insolvent or bankrupt or
has had its charter or license suspended
or revoked. All surety bonds or other
financial assurance must require the
surety, guarantor, or financial
institution to timely provide this
required notification both to you and
directly to BOEM.
■ 20. Revise § 556.904 to read as
follows:
§ 556.904
Decommissioning accounts.
(a) The Regional Director may
authorize you to establish a
decommissioning account(s) in a
federally insured financial institution to
satisfy a supplemental financial
assurance demand made pursuant to
§ 556.901(d), 30 CFR 550.166(b) or 30
CFR 550.1011(d). The decommissioning
account must be set up in such a
manner that funds may not be
withdrawn without the written approval
of the Regional Director.
(1) Funds in the account must be
pledged to meet your decommissioning
obligations and payable upon demand
to BOEM.
(2) You must fully fund the account,
pursuant to a schedule that the Regional
Director prescribes, to cover all
decommissioning costs estimated by
BSEE.
(3) If you fail to make the initial
payment or any scheduled payment into
the decommissioning account, you must
immediately submit, and subsequently
maintain, a surety bond or other
financial assurance in an amount equal
to the remaining unfulfilled portion of
the supplemental financial assurance
demand.
(b) Any interest paid on funds in a
decommissioning account will become
part of the principal funds in the
account unless the Regional Director
authorizes in writing the payment of the
interest to the party who deposits the
funds.
(c) The Regional Director may require
you to create an overriding royalty,
production payment obligation, or other
revenue stream for the benefit of an
account established as financial
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assurance for the decommissioning of
your lease(s) or RUE or pipeline rightof-way grant(s). The required obligation
may be associated with oil and gas or
sulfur production from a lease other
than a lease or grant secured through the
decommissioning account.
(d) BOEM may provide funds from the
decommissioning account to the liable
party that performs the
decommissioning to cover the costs
thereof.
■ 21. Revise § 556.905 to read as
follows:
lotter on DSK11XQN23PROD with PROPOSALS2
§ 556.905
Third-party guarantees.
(a) The Regional Director may accept
a third-party guarantee to satisfy a
supplemental financial assurance
demand made pursuant to § 556.901(d),
30 CFR 550.166(b), or 30 CFR
550.1011(d), if:
(1) The guarantor meets the credit
rating or proxy credit rating criterion set
forth in § 556.901(d)(1); and
(2) The guarantor or guaranteed party
submits a third-party guarantee
agreement containing each of the
provisions in paragraph (d) of this
section.
(b) A third-party guarantor may limit
its cumulative obligations to a fixed
dollar amount as agreed to by BOEM at
the time the third-party guarantee is
provided.
(c) If, during the life of your thirdparty guarantee, your guarantor no
longer meets the criterion referred to in
paragraph (a)(1) of this section, you
must, within 72 hours of so learning:
(1) Notify the Regional Director; and
(2) Submit, and subsequently
maintain a surety bond or other
financial assurance covering those
obligations previously secured by the
third-party guarantee.
(d) Your third-party guarantee must
contain each of the following
provisions:
(1) If you fail to comply with the
terms of any lease or grant covered by
the guarantee, or any applicable
regulation, your guarantor must either:
(i) Take corrective action to bring the
lease or grant into compliance with its
terms or any applicable regulation, to
the extent covered by the guarantee; or
(ii) Be liable under the third-party
guarantee agreement to provide, within
seven calendar days, sufficient funds for
the Regional Director to complete such
corrective action to the extent covered
by the guarantee. Such payment does
not result in the cancellation of the
guarantee, and instead reduces the
remaining value of the guarantee in an
amount equal to the payment.
(2) If your guarantor wishes to
terminate the period of liability under
its guarantee, it must:
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(i) Notify you and the Regional
Director at least 90-calendar days before
the proposed termination date;
(ii) Obtain the Regional Director’s
approval for the termination of the
period of liability for all or a specified
portion of the guarantee; and
(iii) Remain liable for all liabilities
that accrued prior to the termination
and responsible for all work and
workmanship performed during the
period of liability.
(3) Before the termination of the
period of liability of the third-party
guarantee, you must provide acceptable
replacement financial assurance.
(e) If you or your guarantor request
BOEM to cancel your third-party
guarantee, BOEM will cancel the
guarantee under the same terms and
conditions provided for cancellation of
supplemental financial assurance and
return of pledged financial assurance in
§ 556.906, paragraphs (b) and/or (d)(3).
(f) The guarantor or guaranteed party
must submit a third-party guarantee
agreement that meets the following
criteria:
(1) The third-party guarantee
agreement must be executed by your
guarantor and all persons and parties
bound by the agreement.
(2) The third-party guarantee
agreement must bind, jointly and
severally, each person and party
executing the agreement.
(3) When your guarantor is a
corporate entity, two corporate officers
who are authorized to bind the
corporation must sign the third-party
guarantee agreement.
(g) Your corporate guarantor and any
other corporate entities bound by the
third-party guarantee agreement must
provide the Regional Director copies of:
(1) The authorization of the signatory
corporate officials to bind their
respective corporations;
(2) An affidavit certifying that the
agreement is valid under all applicable
laws; and
(3) Each corporation’s corporate
authorization to execute the third-party
guarantee agreement.
(h) If your third-party guarantor or
another party bound by the third-party
guarantee agreement is a partnership,
joint venture, or syndicate, the thirdparty guarantee agreement must:
(1) Bind each partner or party who
has a beneficial interest in your
guarantor; and
(2) Provide that each member of the
partnership, joint venture, or syndicate
is jointly and severally liable for those
obligations secured by the guarantee.
(i) When forfeiture is called for under
§ 556.907, the third-party guarantee
agreement must provide that your
guarantor will either:
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Fmt 4701
Sfmt 4702
(1) Take corrective action to bring
your lease or grant into compliance with
its terms, and the regulations, to the
extent covered by the guarantee; or
(2) Provide sufficient funds within
seven calendar days to permit the
Regional Director to complete such
corrective action to the extent covered
by the guarantee.
(j) The third-party guarantee
agreement must contain a confession of
judgment. It must provide that, if the
Regional Director determines that you
are in default of the lease or grant
covered by the guarantee or not in
compliance with any regulation
applicable to such lease or grant, the
guarantor:
(1) Will not challenge the
determination; and
(2) Will remedy the default to the
extent covered by the guarantee.
(k) Each third-party guarantee
agreement is deemed to contain all
terms and conditions contained in
paragraphs (d), (f), and (j) of this section,
even if the guarantor has omitted these
terms from the third-party guarantee
agreement.
■ 22. Revise § 556.906 to read as
follows:
§ 556.906 Termination of the period of
liability and cancellation of financial
assurance.
This section defines the terms and
conditions under which BOEM will
terminate the period of liability of
financial assurance. Terminating the
period of liability ends the period
during which obligations continue to
accrue, but does not relieve the financial
assurance provider of the responsibility
for obligations that accrued during the
period of liability. Canceling a financial
assurance instrument relieves the
financial assurance provider of all
liability. The liabilities that accrue
during a period of liability include
obligations that started to accrue prior to
the beginning of the period of liability
and had not been met, and obligations
that begin accruing during the period of
liability.
(a) When you or your financial
assurance provider request termination:
(1) The Regional Director will
terminate the period of liability under
your financial assurance within 90
calendar days after BOEM receives the
request; and
(2) If you intend to continue
operations, or have not met all
decommissioning obligations, you must
provide replacement financial assurance
of an equivalent amount.
(b) If you provide replacement
financial assurance, the Regional
Director will cancel your previous
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financial assurance and the previous
financial assurance provider will not
retain any liability, provided that:
(1) The amount of the new financial
assurance is equal to or greater than that
of the financial assurance that was
cancelled, or you provide an alternative
form of financial assurance, and the
Regional Director determines that the
alternative form of financial assurance
provides a level of security equal to or
greater than that provided by the
financial assurance that was cancelled;
(2) For financial assurance submitted
under § 556.900(a), § 556.901(a) or (b),
30 CFR 550.166(a), or 30 CFR
550.1011(a) the new financial assurance
provider agrees to assume all
outstanding obligations that accrued
during the period of liability that was
terminated; and
(3) For supplemental financial
assurance submitted under
§ 556.901(d), 30 CFR 550.166(b), or 30
CFR 550.1011(d), the issuer of such
financial assurance agrees to assume
that portion of the outstanding
obligations that accrued during the
period of liability that was terminated
and that the Regional Director
determines may exceed the coverage of
the base financial assurance. The
Regional Director will notify the
provider of the new financial assurance
of the amount required.
42175
(c) This paragraph (c) applies if the
period of liability is terminated, but the
financial assurance is not replaced with
an equivalent amount. The financial
assurance provider will continue to be
responsible for accrued obligations:
(1) Until the obligations are satisfied;
and
(2) For additional periods of time in
accordance with paragraph (d) of this
section.
(d) BOEM will cancel the financial
assurance for your lease or grant, and
the Regional Director will return any
pledged financial assurance, as shown
in the following:
TABLE 1 TO PARAGRAPH (d)
For the following:
Your financial assurance will be reduced or cancelled, or your pledged financial
assurance will be returned:
(1) Financial assurance submitted under § 556.900(a),
§ 556.901(a) or (b), 30 CFR 550.166(a), or 30 CFR
550.1011(a).
7 years after the lease or grant expires or is terminated, 6 years after the Regional
Director determines that you have completed all covered obligations, or at the conclusion of any appeals or litigation related to your covered obligations, whichever is
the latest. The Regional Director will reduce the amount of your financial assurance or return a portion of your pledged financial assurance if the Regional Director determines that you need less than the full amount of the financial assurance
or pledged financial assurance to cover any potential obligations.
(i) When the lease or grant expires or is terminated and the Regional Director determines you have met your covered obligations, unless the Regional Director: (A)
Determines that the future potential liability resulting from any undetected problem
is greater than the amount of the financial assurance submitted under
§ 556.900(a), § 556.901(a) or (b), 30 CFR 550.166(a), or 30 CFR 550.1011(a); and
(B) Notifies the provider of financial assurance submitted under § 556.901(d), 30
CFR 550.166(b), or 30 CFR 550.1011(d) that the Regional Director will wait 7
years before canceling all or a part of such financial assurance (or longer period
as necessary to complete any appeals or judicial litigation related to your secured
obligations).
(ii) At any time when:
(A) BOEM has determined, using the criteria set forth in § 556.901(d)(1) of this part,
as applicable, that you no longer need to provide the supplemental financial assurance for your lease, RUE grant, or pipeline ROW grant.
(B) The operations for which the supplemental financial assurance was provided
ceased prior to accrual of any decommissioning obligation; or,
(C) Cancellation of the financial assurance is appropriate because, under the regulations, BOEM determines such financial assurance never should have been required.
When the Regional Director determines you have met your obligations secured by
the guarantee (or longer period as necessary to complete any appeals or judicial
litigation related to your obligations secured by the guarantee).
(2) Financial assurance submitted under § 556.901(d), 30
CFR 550.166(a), or 30 CFR 550.1011(d).
lotter on DSK11XQN23PROD with PROPOSALS2
(3) Third-party Guarantee under § 556.901(d), 30 CFR
550.166(b), or 30 CFR 550.1011(d).
(e) For all financial assurance, the
Regional Director may reinstate your
financial assurance as if no cancellation
had occurred if:
(1) A person makes a payment under
the lease, RUE grant, or pipeline ROW
grant, and the payment is rescinded or
must be returned by the recipient
because the person making the payment
is insolvent, bankrupt, subject to
reorganization, or placed in
receivership; or,
(2) The responsible party represents to
BOEM that it has discharged its
obligations under the lease, RUE grant,
or pipeline ROW grant and the
representation was materially false
VerDate Sep<11>2014
17:45 Jun 28, 2023
Jkt 259001
when the financial assurance was
cancelled.
■ 23. Revise § 556.907 to read as
follows:
§ 556.907 Forfeiture of bonds or other
financial assurance.
This section explains how a bond or
other financial assurance may be
forfeited.
(a) The Regional Director will call for
forfeiture of all or part of the bond, or
other form of financial assurance,
including a guarantee you provide
under this part, if:
(1) You, or any party with the
obligation to comply refuse to comply
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Frm 00041
Fmt 4701
Sfmt 4702
with any term or condition of your
lease, RUE grant, pipeline ROW grant,
or any applicable regulation, or the
Regional Director determines that you
are unable to so comply; or
(2) You default on one of the
conditions under which the Regional
Director accepts your bond, third-party
guarantee, and/or other form of financial
assurance.
(b) The Regional Director may pursue
forfeiture of your surety bond or other
financial assurance without first making
demands for performance against any
other record title owner, operating rights
owner, grant holder, or other person
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lotter on DSK11XQN23PROD with PROPOSALS2
authorized to perform lease or grant
obligations.
(c) The Regional Director will:
(1) Notify you, your surety, guarantor,
or the financial institution holding or
providing your financial assurance, of a
determination to call for forfeiture of
your financial assurance, whether it
takes the form of a surety bond,
guarantee, funds, or other type of
financial assurance.
(i) This notice will be in writing and
will provide the reason for the forfeiture
and the amount to be forfeited.
(ii) The Regional Director will
determine the amount to be forfeited
based upon an estimate of the total cost
of corrective action to bring your lease
or grant into compliance, subject in the
case of a guarantee to any limitation in
the guarantee authorized by
§ 556.902(a)(3).
(2) Advise you and your financial
assurance provider that forfeiture may
be avoided if, within five business days:
(i) You agree to and demonstrate that
you will bring your lease or grant into
compliance within the timeframe the
Regional Director prescribes; or
(ii) The provider of your financial
assurance agrees to and demonstrates
that it will complete the corrective
action to bring your lease or grant into
compliance within the timeframe the
Regional Director prescribes, even if the
cost of compliance exceeds the amount
of that financial assurance.
(d) If the Regional Director finds you
are in default, the Regional Director may
VerDate Sep<11>2014
17:45 Jun 28, 2023
Jkt 259001
cause the forfeiture of any financial
assurance provided to ensure your
compliance with the terms and
conditions of your lease or grant and the
regulations in this chapter and 30 CFR
chapters II and XII.
(e) If the Regional Director determines
that your financial assurance is
forfeited, the Regional Director will:
(1) Collect the forfeited amount; and
(2) Use the funds collected to bring
your lease or grant into compliance and
to correct any default.
(f) If the amount the Regional Director
collects under your financial assurance
is insufficient to pay the full cost of
corrective actions, the Regional Director
may:
(1) Take or direct action to obtain full
compliance with your lease or grant and
the regulations in this chapter; and
(2) Recover from you, any co-lessee,
operating rights owner, grant holder or,
to the extent covered by the guarantee,
any third-party guarantor responsible
under this subpart, all costs in excess of
the amount the Regional Director
collects under your forfeited financial
assurance.
(g) If the amount that the Regional
Director collects under your forfeited
financial assurance exceeds the cost of
taking the corrective action required to
bring your lease or grant into
compliance with its terms and the
regulations in this chapter and 30 CFR
chapters II and XII, the Regional
Director will return the excess funds to
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Frm 00042
Fmt 4701
Sfmt 9990
the party from whom they were
collected.
(h) The Regional Director may pay the
funds from the forfeited financial
assurance to a co- or predecessor lessee
or third party who is taking the
corrective action required to obtain
partial or full compliance with the
regulations and the terms of your lease
or grant.
Subchapter C—Appeals
PART 590—APPEAL PROCEDURES
24. The authority citation for part 590
continues to read as follows:
■
Authority: 5 U.S.C. 301 et seq.; 31 U.S.C.
9701; 43 U.S.C. 1334.
Subpart A—Offshore Minerals
Management Appeal Procedures
25. Amend § 590.4 by adding
paragraph (c) to read as follows:
■
§ 590.4
How do I file an appeal?
*
*
*
*
*
(c) You may file an appeal of a BOEM
supplemental financial assurance
demand with the IBLA. However, if you
request that the IBLA stay the demand
pending a final ruling on your appeal,
you must post an appeal surety bond
equal to the amount of the demand that
you seek to stay before any such stay is
effective.
[FR Doc. 2023–12916 Filed 6–28–23; 8:45 am]
BILLING CODE P
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Agencies
[Federal Register Volume 88, Number 124 (Thursday, June 29, 2023)]
[Proposed Rules]
[Pages 42136-42176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12916]
[[Page 42135]]
Vol. 88
Thursday,
No. 124
June 29, 2023
Part II
Department of the Interior
-----------------------------------------------------------------------
Bureau of Ocean Energy Management
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30 CFR Parts 550, 556, and 590
Risk Management and Financial Assurance for OCS Lease and Grant
Obligations; Proposed Rule
Federal Register / Vol. 88, No. 124 / Thursday, June 29, 2023 /
Proposed Rules
[[Page 42136]]
-----------------------------------------------------------------------
DEPARTMENT OF THE INTERIOR
Bureau of Ocean Energy Management
30 CFR Parts 550, 556, and 590
[Docket ID: BOEM-2023-0027]
RIN 1010-AE14
Risk Management and Financial Assurance for OCS Lease and Grant
Obligations
AGENCY: Bureau of Ocean Energy Management (BOEM), Interior.
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Department of the Interior (the Department or DOI), acting
through BOEM, proposes to modify its criteria for determining whether
oil, gas, and sulfur lessees, right-of-use and easement (RUE) grant
holders, and pipeline right-of-way (ROW) grant holders may be required
to provide bonds or other financial assurance above the current
regulatorily prescribed base bonds to ensure compliance with their
Outer Continental Shelf Lands Act (OCSLA) obligations. This proposed
rule would also remove existing restrictive provisions for third-party
guarantees and decommissioning accounts and would add new criteria
under which a bond or third-party guarantee that was provided as
supplemental financial assurance may be canceled. Additionally, this
proposed rule would clarify bonding requirements for RUEs serving
Federal leases. Based on the proposed framework, BOEM estimates that
the aggregate amount of supplemental financial assurance required of
lessees and grant holders under this proposed rulemaking available to
the U.S. government for decommissioning activities would increase by an
estimated $9.2 billion over current levels. This value represents less
than one-quarter of all offshore decommissioning liabilities, which is
currently estimated at $42.8 billion. This proposed rulemaking would
not apply to renewable energy activities.
DATES: BOEM must receive your comments on or before August 28, 2023.
BOEM has the discretion not to consider comments received after this
date. The Office of Management and Budget (OMB) and BOEM must receive
your comments on the information collection (IC) burden in this
rulemaking on or before July 31, 2023. The IC burden comment
opportunity does not affect the deadline for the public to comment to
BOEM on the proposed regulations.
ADDRESSES: You may submit comments on the rulemaking by any of the
following methods. In your comments, please reference ``Risk Management
and Financial Assurance for OCS Lease and Grant Obligations, RIN 1010-
AE14.'' Please include your name, and phone number or email address, so
we can contact you if we have questions regarding your submission.
Federal rulemaking portal: https://www.regulations.gov. In
the entry titled, ``Enter Keyword or ID,'' enter BOEM-2023-0027 then
click search. Follow the instructions to submit public comments and
view supporting and related materials available for this rulemaking.
Mail or delivery service: Send comments on the BOEM
proposed rule to the Department of the Interior, Bureau of Ocean Energy
Management, Office of Regulations, Attention: Kelley Spence, 45600
Woodland Road, Mailstop VAM-BOEM DIR, Sterling, VA 20166.
Submit comments on the IC in this proposed rule to www.reginfo.gov/public/do/PRAMain. From this main web page, you can find and submit
comments on this particular information collection by proceeding to the
boldface heading ``Currently under Review,'' selecting ``Department of
the Interior'' in the ``Select Agency'' pull down menu, clicking
``Submit,'' then, checking the box ``Only Show ICR for Public Comment''
on the next web page, scrolling to this proposed rule, and clicking the
``Comment'' button at the right margin. Or, you may use the search
function to locate the IC request related to the proposed rule on the
main web page. Please provide a copy of your comments to the
Information Collection Clearance Officer, Office of Regulations, Bureau
of Ocean Energy Management, Attention: Anna Atkinson, 45600 Woodland
Road, Sterling, Virginia 20166; or by email to [email protected].
Please reference OMB Control Number 1010-0006 in the subject line of
your comments.
Instructions: All submissions received must include the agency name
and docket number or Regulatory Information Number (RIN) for this
rulemaking (1010-AE14). All comments received will be posted without
change to https://www.regulations.gov, including any personal
information provided. For detailed instructions on sending comments and
additional information on the rulemaking process, see the ``Public
Availability of Comments:'' heading of the SUPPLEMENTARY INFORMATION
section of this document.
Docket: For access to the docket to read background documents or
comments received, go to www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Kelley Spence, Office of Regulations,
BOEM, at [email protected] or at (984) 298-7345; or Karen
Thundiyil, Chief, Office of Regulations, BOEM, at
[email protected] or at (202) 742-0970.
To obtain a copy of the information collection supporting
statement, contact: Information Collection Clearance Officer, Office of
Regulations, Bureau of Ocean Energy Management, Attention: Anna
Atkinson, at [email protected] or at (703) 787-1025.
SUPPLEMENTARY INFORMATION:
Public Availability of Comments: BOEM may post all submitted
comments to regulations.gov. Before including your name, return
address, phone number, email address, or other personally identifiable
information in your comment, you should be aware that your entire
comment--including your personally identifiable information--may be
made publicly available. In order for BOEM to withhold from disclosure
your personally identifiable information, you must identify, in a cover
letter, any information contained in the submittal of your comments
that, if released, would constitute a clearly unwarranted invasion of
your personal privacy. You must also briefly describe in such cover
letter any possible harmful consequences of the disclosure of
information, such as embarrassment, injury, or other harm. While you
can ask us in your comment to withhold your personally identifiable
information from public review, we cannot guarantee that we will be
able to do so. Even if BOEM withholds your information in the context
of this rulemaking, your submission is subject to the Freedom of
Information Act (FOIA) and any relevant court orders, and if your
submission is requested under the FOIA or such court order, your
information will only be withheld if a determination is made that one
of the FOIA's exemptions to disclosure applies or if such court order
is challenged. Such a determination will be made in accordance with the
Department's FOIA regulations and applicable law.
Organization of this document. The information in this preamble is
organized as follows:
I. Table of Acronyms and Terms
II. Executive Summary
III. Background of BOEM Regulations
A. BOEM Statutory and Regulatory Authority and Responsibilities
B. History of Bonding Regulations and Guidance
[[Page 42137]]
C. 2020 Joint Notice of Proposed Rulemaking
D. Purpose of BOEM's Proposed Rulemaking
IV. Proposed Revisions to BOEM Supplemental Financial Assurance
Requirements
A. Leases
B. Right-of-Use and Easement Grants
C. Pipeline Right-of-Way Grants
V. Proposed Revisions to Other Types of Supplemental Financial
Assurance
A. Third-Party Guarantees
B. Decommissioning Accounts
C. Transfers of Lease Interests to Other Lessees or Operating
Rights Holders
VI. BOEM Evaluation Methodology
A. Credit Ratings
B. Valuing Proved Oil and Gas Reserves
VII. Phased Compliance With Supplemental Financial Assurance Orders
VIII. Appeals Bonds
IX. Proposed Revisions to BOEM Definitions
X. Section-by-Section Analysis
XI. Additional Comments Solicited by BOEM
XII. Procedural Matters
A. Executive Order 12866: Regulatory Planning and Review, as
Amended by Executive Order 14094--Modernizing Regulatory Review, and
Executive Order 13563: Improving Regulation and Regulatory Review
B. Regulatory Flexibility Act (RFA)
C. Small Business Regulatory Enforcement Fairness Act
D. Unfunded Mandates Reform Act (UMRA)
E. Executive Order 12630: Governmental Actions and Interference
With Constitutionally Protected Property Rights
F. Executive Order 13132: Federalism
G. Executive Order 12988: Civil Justice Reform
H. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
I. Paperwork Reduction Act (PRA)
J. National Environmental Policy Act (NEPA)
K. Data Quality Act
L. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
M. Clarity of This Regulation
I. Table of Acronyms and Terms
Several acronyms and terms are included in this preamble. To ease
the reading of this preamble and for reference purposes, we list the
following acronyms and their meanings here.
ANCSA Alaska Native Claims Settlement Act
ANPRM Advance Notice of Proposed Rulemaking
BOEM Bureau of Ocean Energy Management
BSEE Bureau of Safety and Environmental Enforcement
DOI Department of the Interior
E.O. Executive Order
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FR Federal Register
GAAP Generally Accepted Accounting Principles
GAO Government Accountability Office
IC Information Collection
INC Incidents of Non-Compliance
IRFA Initial Regulatory Flexibility Analysis
IRIA Initial Regulatory Impact Assessment
MMS Minerals Management Service
NAICS North American Industry Classification System
NEPA National Environmental Policy Act
NRSRO Nationally Recognized Statistical Rating Organization
NTL Notice to Lessees
OIRA Office of Information and Regulatory Affairs (a component of
OMB)
OMB Office of Management and Budget
OCS Outer Continental Shelf
OCSLA Outer Continental Shelf Lands Act
PRA Paperwork Reduction Act
RIA Regulatory Impact Analysis
RUE Right-of-Use and Easement
ROW Right-of-Way
SBA Small Business Administration
SEC Securities and Exchange Commission
S&P Standard and Poor's
U.S.C. United States Code
II. Executive Summary
This proposed rule would require that the holders of interests in
Outer Continental Shelf (OCS) leases and grants provide financial
assurance for their own contractual and regulatory obligations,
including decommissioning obligations, to prevent the Federal
Government from incurring costs to perform those obligations and to
avoid the environmental or safety hazards associated with delayed
compliance. This approach adheres to the general principle that the
private parties enjoying the benefit of producing the mineral resources
of the OCS should not shift the cost of satisfying their contractual
and environmental obligations to the public. Based on the proposed
framework, BOEM estimates that the aggregate amount of supplemental
financial assurance required of lessees and grant holders under this
proposed rulemaking available to the U.S. government for
decommissioning activities would increase by an estimated $9.2 billion
over current levels. This value represents less than one-quarter of all
decommissioning liabilities, which is currently estimated at $42.8
billion.
This proposed rule is intended to update BOEM's criteria for
determining whether oil, gas, and sulfur lessees, RUE grant holders,
and ROW grant holders may be required to provide surety bonds or other
financial assurance above the prescribed base financial assurance to
ensure compliance with OCSLA. Provisions of this proposed rulemaking
would change the existing criteria used to determine whether
supplemental financial assurance should be required of OCS oil and gas
lessees and grantees. Under the existing regulations, BOEM considers
five criteria in making this determination for lessees: financial
capacity; projected financial strength; business stability; record of
compliance with existing rules and regulations; and reliability. This
rulemaking proposes to eliminate those five criteria and replace them
with two new criteria: credit rating and the ratio of the value of
proved oil and gas reserves on the lease to the lease decommissioning
liability associated with those reserves.
Using the credit rating of the lessee (to determine its financial
strength) and the value of proved oil and gas reserves available to
meet future financial obligations, BOEM would not require supplemental
financial assurance in three cases. First, under this proposed rule, a
lessee with an investment grade credit rating would not be required to
post supplemental financial assurance beyond a base bond to cover its
lease and regulatory obligations. These base bonds can range from
$50,000 for a lease-specific bond with no approved operational activity
to $3 million for an area-wide bond that includes a development
production plan. Second, where there are multiple co-lessees on a
lease, if any one co-lessee meets the credit rating threshold, none of
the other co-lessees would be required to post supplemental financial
assurance. Finally, for any lease on which all lessees are rated below
investment grade, BOEM would next look to the value of the lease's
proved oil and gas reserves relative to lease decommissioning
obligations associated with the production of those reserves. For any
such lease, if a lease has proved reserves with a value of at least
three times that of the estimated decommissioning cost, no supplemental
financial assurance would be required. In any case other than the three
mentioned here, supplemental financial assurance would be mandatory.
Overall, this proposed rule would impose greater supplemental
financial assurance requirements on lessees than the amounts currently
required. This proposed rule also contains a provision that would allow
phased-in compliance over a period of three years, which could ease
burdens on individual lessees and operators in the short term.
This proposed rule would also make other less significant changes.
This proposed rule would provide more specific bonding requirements for
Federal RUEs and would remove restrictive provisions for third-party
guarantees and decommissioning
[[Page 42138]]
accounts. Finally, it would add new criteria under which supplemental
bonds and third-party guarantees may be cancelled.
On October 16, 2020, BOEM proposed a joint rulemaking with the
Bureau of Safety and Environmental Enforcement (BSEE) to update BOEM's
financial assurance criteria and other BSEE-administered regulations.
On January 20, 2021, President Biden signed Executive Order (E.O.)
13990, ``Protecting Public Health and the Environment and Restoring
Science to Tackle the Climate Crisis.'' This Executive order, among
other things, instructs agencies to review actions taken between
January 20, 2017, and January 20, 2021, and consider publishing a
notice of proposed rulemaking suspending, revising, or rescinding that
action. Upon conducting such a review of the 2020 proposal and the
record postdating the review, BOEM has decided, as an exercise of its
judgment and expertise, not to move forward with the BOEM-administered
portions of that 2020 proposed rulemaking. BOEM has instead decided to
issue this new notice of proposed rulemaking to address its financial
assurance policy concerns. BOEM is no longer considering any BOEM-
related topics or proposals from that 2020 proposed joint rulemaking
that are not discussed in this current proposed rule. BSEE finalized
the BSEE-related provisions of the 2020 joint proposed rule on April
18, 2023 (88 FR 23569). This proposed rulemaking takes a new approach
to update the financial assurance criteria to ensure that current
lessees have sufficient resources to meet their lease and regulatory
obligations, therefore providing more protection to the taxpayer. BSEE
is expected to continue to exercise its regulatory authority to issue
decommissioning orders to predecessor lessees, seek an appropriation,
or intervene as necessary to address an environmental or safety risk,
regardless of the outcome of this proposed rule. However, without this
proposed rule (i.e., without the financial assurance fully in place),
it could take longer to arrange for decommissioning, which could result
in additional environmental damage or increased obstacles to
navigation. A reduction in decommissioning activity lead-time could
reduce environmental damage, but BOEM cannot quantify this benefit in
this rulemaking.
This proposed rulemaking would not apply to renewable energy
activities.
III. Background of BOEM Regulations
A. BOEM Statutory and Regulatory Authority and Responsibilities
BOEM's authority to promulgate this rulemaking is granted by
section 5 of OCSLA, 43 U.S.C. 1334. That section authorizes the
Secretary of the Interior (Secretary) to issue regulations to
administer OCS leasing for mineral development. Section 5(a) of OCSLA
(43 U.S.C. 1334(a)) authorizes the Secretary to ``prescribe such rules
and regulations as may be necessary to carry out'' the ``provisions of
[OCSLA] relating to the leasing of the'' OCS. Section 5(b) of OCSLA (43
U.S.C. 1334(b)) provides that ``compliance with regulations issued
under'' OCSLA must be a condition of ``[t]he issuance and continuance
in effect of any lease, or of any assignment or other transfer of any
lease, under the provisions of'' OCSLA.
43 U.S.C. 1338a reflects Congress' intent to authorize BOEM to
collect financial assurance by specifically addressing the forfeiture
of bonds and financial assurances by an OCS permittee, lessee, or
right-of-way holder that does not fulfill the requirements of its
permit, lease, or right-of-way or does not comply with the regulations
of the Secretary, which includes defaulting on decommissioning
activities.
The Secretary, in Secretary's Order 3299, as amended, delegated the
authority to BOEM to carry out offshore conventional energy-related
(e.g., oil and gas) and renewable energy-related functions including,
but not limited to, activities involving resource evaluation, planning,
and leasing. Thus, BOEM is responsible for managing development of the
Nation's offshore energy and mineral resources in an environmentally
and economically responsible way. Secretary's Order 3299 also assigned
authority to BSEE, including, but not limited to, enforcement of a
lessee's obligation to perform decommissioning. BSEE provides estimates
of decommissioning costs to BOEM so that the financial assurance
required by BOEM will be sufficient to cover the estimated cost to
perform decommissioning, thereby protecting the Federal Government from
incurring financial loss. While BOEM also has program oversight for the
financial assurance requirements set forth in 30 CFR parts 551, 581,
582, and 585, this proposed rule pertains only to the financial
assurance requirements for oil and gas or sulfur leases under 30 CFR
part 556, associated RUE grants and ROW grants under 30 CFR part 550,
and appeals of supplemental financial assurance demands under 30 CFR
part 590.
B. History of Bonding Regulations and Guidance
BOEM's existing financial assurance requirements for oil and gas
leases (30 CFR 556.900 through 556.907) and pipeline ROW grants (30 CFR
550.1011), published by BOEM's predecessor, the Minerals Management
Service (MMS), on May 22, 1997 (62 FR 27948),\1\ authorize the Regional
Director to require bonding for oil and gas leases and pipeline ROW
grants. Sections 556.900(a) and 556.901(a) and (b) require lease-
specific or area-wide base bonds in prescribed amounts, depending on
the level of activity on a lease or leases. Section 556.901(d)
authorizes the Regional Director to require supplemental financial
assurance for leases above the amounts for lease and area-wide base
bonds prescribed in the regulations. Similarly, Sec. 550.1011
authorizes the Regional Director to require an area-wide base surety
bond in a prescribed amount and, when determined necessary,
supplemental financial assurance above the prescribed amount, for ROW
grants.
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\1\ The 1997 rule amended 30 CFR parts 250 and 256; 30 CFR parts
550 and 556 did not exist at that time. BOEM published the current
regulations in 30 CFR parts 550 and 556 on October 18, 2011, 76 FR
64432. However, the 2011 rule did not make any substantive changes
to the bonding and financial assurance requirements that were
adopted in 1997; thus, the 1997 rule represents the last substantive
update to the regulatory provisions for lessees.
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BOEM's existing bonding regulations for RUE grants (Sec. Sec.
550.160 and 550.166), published by MMS on December 28, 1999 (64 FR
72756),\2\ empower the Regional Director to require surety bonds or
other financial assurance for RUE grants. Section 550.160(c) states
that an applicant for a RUE serving an OCS lease ``must meet bonding
requirements.'' See 30 CFR 550.160(c). While no regulation prescribes a
particular bond amount for a RUE that applies to an OCS lease, Sec.
550.160 authorizes the Regional Director to require financial assurance
if, and in the amount, the Regional Director determines necessary.
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\2\ The financial assurance regulations for RUE and ROW grants,
then at Sec. Sec. 250.160 and 250.166, were substantively modified
in 1999. These provisions were renumbered in October 2011.
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Section 550.166(a) requires an applicant for a RUE that serves a
State lease to provide a base surety bond of $500,000. Section
550.166(b) provides that the Regional Director may require supplemental
financial assurance above the prescribed $500,000 base surety bond from
the holder of a such a RUE. MMS and now BOEM have employed the criteria
used for determining whether supplemental financial assurance is
required for leases to such
[[Page 42139]]
determinations for RUE and ROW grants because specific criteria for
grants do not exist in the current regulations.
BOEM regulations at Sec. Sec. 556.604(d) and 556.605(e) and BSEE
regulations at Sec. 250.1701 hold predecessors and current co-lessees
responsible for decommissioning when a current lessee is unable to
perform. The existing lease bonding regulations under Sec. 556.901(d)
provide five criteria \3\ that the Regional Director uses to determine
whether a lessee's potential inability to carry out present and future
financial obligations warrants a demand for supplemental financial
assurance. However, the existing regulations do not specifically
describe how the agency weighs those criteria. To provide guidance, MMS
issued Notice to Lessees (NTL) No. 98-18N, effective December 28, 1998,
which provided details on how it would apply the five criteria. This
NTL was superseded by NTL No. 2003-N06, effective June 17, 2003, and
that NTL was later superseded by NTL No. 2008-N07, which was effective
August 28, 2008, but which was superseded on September 12, 2016. The
September 12, 2016, NTL was subsequently rescinded.
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\3\ The following are the five criteria: (i) Financial capacity
substantially in excess of existing and anticipated lease and other
obligations; (ii) Projected financial strength significantly in
excess of existing and future lease obligations; (iii) Business
stability based on five years of continuous operation and production
of oil and gas or sulfur in the OCS or in the onshore oil and gas
industry; (iv) Reliability in meeting obligations based on: (A)
Credit rating; or (B) Trade references; and (v) Record of compliance
with laws, regulations, and lease terms.
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Pursuant to BOEM's practice under NTL No. 2008-N07, a lessee or
grant holder that did not pass established financial thresholds \4\ was
required to provide supplemental financial assurance to cover its
decommissioning liabilities. However, a lessee or grant holder that did
pass such thresholds--including an analysis whether its cumulative
potential decommissioning liability was less than or equal to 50
percent of its net worth \5\--did not have to provide supplemental
financial assurance and was considered ``waived.'' Additionally, if one
lessee on a lease was waived, no other co-lessee (regardless of its own
financial strength) would be required to provide supplemental financial
assurance to cover the decommissioning liability for the lease. In a
situation involving multiple lessees and two or more co-lessees that
qualified for a waiver, none of the co-lessees was required to provide
financial assurance, and the decommissioning liability on the lease was
not attributable to any lessee. Because companies in this situation
would not have the decommissioning liability associated with their
lease(s) attributed to them (i.e., the decommissioning liability would
not be attributed to any company), that liability would not have been
considered in determining whether that company met the net worth
requirements to obtain a waiver.
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\4\ The 2008 NTL mandated a minimum net worth of $65 million and
imposed a cap on the amount of waived liability at 50% of net worth.
Liability covered by two qualified companies was not counted against
the 50% cap.
\5\ This is not a separate criterion but simply an elaboration
of criterion one.
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For a company in this situation, the financial capacity of the
lessee would have appeared better than it actually was, because its
total decommissioning liability appeared artificially low; the lessee
could potentially qualify for a waiver to which it might not otherwise
be entitled. Undergirding this rationale was an assumption that the
chances of two waived lessees becoming financially distressed was
unlikely. This proposed rule addresses that potential risk by allowing
BOEM to obtain additional data to take contingent liabilities into
consideration.
Since 2009, more than 30 corporate bankruptcies have occurred
involving offshore oil and gas lessees with un-bonded decommissioning
liabilities. The fact that bankruptcies and reorganizations have
involved un-bonded decommissioning liabilities demonstrates that the
waiver criteria in NTL No. 2008-N07 were inadequate to protect the
public from potential responsibility for OCS decommissioning
liabilities, especially during periods of low oil and gas prices. For
example, ATP Oil & Gas was a mid-sized company with a supplemental
financial assurance waiver when it filed for bankruptcy in 2012.
Similarly, Bennu Oil & Gas, LLC, had a waiver at the time of its
bankruptcy filing, and Energy XXI, Ltd., and Stone Energy Corporation
obtained waivers within a year of filing for bankruptcy. While most OCS
leases affected by the bankruptcies were ultimately sold or retained by
the companies reorganized under chapter 11 of the U.S. Bankruptcy Code,
these bankruptcies highlighted the weaknesses in BOEM's supplemental
financial assurance program, including the waiver criteria in NTL No.
2008-N07, and BOEM's inability to forecast financial distress of these
waived operators with sufficient time to require and receive financial
assurance.
These bankruptcies involved a total offshore decommissioning
liability of approximately $7.5 billion. This figure includes
properties with co-lessees and predecessor lessees and properties held
by companies that successfully emerged from a chapter 11
reorganization. However, the actual financial risk to the United States
is significantly less than the total offshore decommissioning liability
associated with offshore corporate bankruptcies. This is in part
because other private parties may be responsible for decommissioning
costs. Co-lessees and predecessors retain pre-existing obligations to
fund or perform decommissioning. Also, a bankrupt company's assets were
often sold to financially stronger buyers who assumed those
liabilities.
Additionally, if BOEM has insufficient supplemental financial
assurance at the time of an operator's bankruptcy, BOEM may pursue
legal avenues for obtaining performance or funds in bankruptcy
proceedings, such as provisions for decommissioning in the terms of the
reorganization, the sale of the leases to financially responsible
buyers, or limitations on debtor attempts to abandon environmental
problems. However, in pursuing legal avenues, favorable outcomes are
not assured, and additional funds may not be obtained to cover
decommissioning obligations. It is possible that when there are
multiple co-lessees on a lease, only one of them meets the credit
rating threshold. It is also possible that co-lessees are not required
to provide additional financial assurance and predecessors lack
sufficient capital to fulfill unexpected decommissioning obligations.
In these scenarios, bankrupt assets may prove less valuable than
anticipated and fail to generate new buyers at auction. Components and
wells for which the bankrupt party is the only liable party on the
lease may further complicate decommissioning efforts. These challenges
create a risk of unplugged wells and orphaned infrastructure. The
American taxpayer may pay the cost of plugging those wells and
reclaiming that abandoned infrastructure. BSEE has identified orphaned
infrastructure without a predecessor and no financial assurance to
cover the cost of decommissioning. BSEE's fiscal year 2023 budget
request included $30 million in order to address this uncovered
infrastructure.
On May 27, 2009, MMS issued a proposed rule, ``Leasing of Sulphur
or Oil and Gas and Bonding Requirements in the Outer Continental
Shelf'' (74 FR 25177), to rewrite the majority of 30 CFR part 256 (now
redesignated as 30 CFR part 556).\6\ However, BOEM (post MMS
restructuring) deferred revision of the bonding regulations to a
separate rulemaking. The separate rulemaking
[[Page 42140]]
commenced August 19, 2014, with an advance notice of proposed
rulemaking (ANPRM), ``Risk Management, Financial Assurance and Loss
Prevention'' (79 FR 49027), to solicit ideas for improving the bonding
regulations.
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\6\ 76 FR 64432, Oct. 18. 2011.
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In December 2015, the Government Accountability Office (GAO)
reviewed BOEM's supplemental financial assurance procedures and issued
a report titled ``Offshore Oil and Gas Resources: Actions Needed to
Better Protect Against Billions of Dollars in Federal Exposure to
Decommissioning Liabilities.'' (GAO Report). While acknowledging BOEM's
ongoing efforts to update its policies, the GAO Report recommended,
inter alia, that ``BOEM complete its plan to revise its supplemental
financial assurance procedures, including the use of alternative
measures of financial strength.'' \7\
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\7\ https://www.gao.gov/products/gao-16-40.
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Following further analysis and a series of stakeholder meetings in
2015 and 2016 to solicit industry input, BOEM attempted to remedy the
weaknesses in its supplemental financial assurance program with new NTL
No. 2016-N01, ``Requiring Additional Security,'' which became effective
September 12, 2016. NTL No. 2016-N01 sought to clarify the procedures
and explain how BOEM would use the regulatory criteria to determine if
and when supplemental financial assurance would be required for OCS
leases and RUE and ROW grants. The NTL used net worth of a lessee as a
measure of financial strength, detailed several changes in policy, and
refined the criteria used to determine a lessee's or grant holder's
financial ability to carry out its obligations. On August 29, 2016,
BOEM requested GAO to close the above-stated recommendation in the GAO
Report, stating that BOEM had implemented the recommendation by
issuance of the NTL. The GAO found that the recommendation had been
implemented and closed the audit recommendation later in Fiscal Year
2016.
In December 2016, BOEM began implementing the NTL and issued
numerous orders to lessees and grant holders to provide supplemental
financial assurance for ``sole liability properties,'' i.e., leases and
RUE and ROW grants for which the lessee or grant holder was the only
party liable for meeting the lease or grant obligations.
On January 6, 2017, BOEM issued a note to stakeholders extending
the implementation timeline for NTL No. 2016-N01 for six months. The
extension applied to leases and RUE and ROW grants for which there were
co-lessees, predecessors in interest, or both, except where BOEM
determined there was a substantial risk of nonperformance of the
interest holder's decommissioning obligations. The extension of the
implementation timeline allowed BOEM to evaluate which leases and
grants would be considered sole liability properties.
BOEM issued a second note to stakeholders on February 17, 2017,
further extending the implementation timeline. BOEM also announced in
the February note that it would withdraw the December 2016 orders
issued on sole liability properties to allow time for the then new
administration to review BOEM's supplemental financial assurance
program.
In 2017, BOEM began to review its supplemental financial assurance
program and NTL No. 2016-N01 to determine whether modifications were
necessary and, if so, to what extent. BOEM's objective was ensuring
operator compliance with lease terms while minimizing unnecessary
burden on industry. As a result of this review, BOEM recognized the
need to further develop a comprehensive program to assist in
identifying, prioritizing, and managing the risks associated with
industry activities on the OCS. This included options for revising or
rescinding NTL No. 2016-N01 and revising the financial assurance
program through rulemaking.
C. 2020 Joint Notice of Proposed Rulemaking
On October 16, 2020, BOEM and BSEE issued a joint notice of
proposed rulemaking to revise certain BSEE policies concerning
decommissioning orders and BOEM's financial assurance regulations. (See
``Risk Management, Financial Assurance and Loss Prevention,'' 85 FR
65904). As stated above, under existing regulations, BOEM requires
lessees to provide a base bond as financial assurance to ensure that
the cost of meeting OCS obligations is not passed to the taxpayer. The
Regional Director may also order supplemental financial assurance if
necessary to ensure performance of offshore decommissioning
obligations.
In the joint proposed rule, BOEM proposed to adjust its
supplemental financial assurance criteria to reflect the risk
mitigation already provided by the joint and several liability of
financially stable co-lessees and predecessor lessees. BSEE and BOEM
regulations hold predecessors and current co-lessees responsible for
decommissioning when a current lessee is unable to perform.\8\ In the
joint proposed rule, BOEM would have taken into account the financial
stability of predecessor lessees by waiving supplemental financial
assurance requirements for a current lessee when there was a
financially strong predecessor lessee.
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\8\ See, for example, 30 CFR 556.604(d), 556.605(e), and
250.1701.
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In the joint proposed rule, BOEM also sought to change its
methodology for measuring financial strength to focus on a lessee's or
its predecessor's credit rating and the value of proved oil and gas
reserves. These proposed criteria would have relied on a company's
nationally recognized statistical rating organization (NRSRO) credit
rating or an equivalent BOEM proxy credit rating determined by
evaluating a company's submitted audited financial statements through
S&P Global's Credit Analytics credit model or a similar, widely
accepted credit rating model. Under the joint proposed rule, a credit
rating less than or equal to either BB- from S&P Global's Credit
Analytics ratings (S&P), Ba3 from Moody's Investor Service (Moody's) or
a proxy credit rating less than or equal to either BB- or Ba3, as
determined by the Regional Director, could have constituted grounds for
the Regional Director to require a lessee to provide supplemental
financial assurance. If a company did not meet the minimum credit
rating or proxy credit rating level, BOEM would have inquired into the
credit or proxy credit ratings of co-lessees and predecessor lessees,
which could be held liable under joint and several liability. If one of
these co-lessees or predecessors met the credit rating criteria, BOEM
could decide not to require supplemental financial assurance from the
lessee. If there were no co-lessee or predecessor lessee that met the
credit rating criteria, BOEM would then look to the value of the proved
oil and gas reserves on the lease. If the value of those proved
reserves was equal to or greater than three times the estimated cost of
the decommissioning associated with the production of the reserves on
any given lease, supplemental financial assurance would not have been
required.
BOEM further proposed to use the same credit rating criteria to
determine the financial assurance requirements for RUE grants described
in Sec. 550.160 and ROW grants in a revised Sec. 550.1011. This would
have included consideration of the credit and proxy credit ratings of
co- and predecessor grant holders but would not have considered proved
oil and gas reserves, given that neither RUE nor ROW grants entitle the
holder to any interest in oil and gas reserves.
[[Page 42141]]
The joint proposed rule would have also applied the same credit
rating criteria to its evaluation of potential guarantors. The joint
proposed rule also would have removed the requirement for a third-party
guarantee to ensure full compliance with the obligations of all
lessees, operating rights owners, and operators on the lease and would
have allowed a third-party guarantee to be used as supplemental
financial assurance for a RUE or ROW grant. The former change would
have allowed a guarantor to limit its guarantee to a subset of lease or
grant obligations. Additional proposed changes would have applied to
third-party guarantees the same terms and conditions that apply to
cancellation of supplemental financial assurance surety bonds and
return of pledged financial assurance, as well as a clarification to
reiterate that ``guarantee'' and ``indemnity agreement'' both refer to
the same guarantee agreement.
On January 20, 2021, President Biden signed Executive Order 13990,
``Protecting Public Health and the Environment and Restoring Science to
Tackle the Climate Crisis.'' This Executive order, among other things,
instructs agencies to review actions taken between January 20, 2017,
and January 20, 2021, and consider publishing a notice of proposed
rulemaking suspending, revising, or rescinding that action. Upon
conducting such a review of the 2020 proposal and the record postdating
the review, BOEM has decided, as an exercise of its judgement and
expertise, not to move forward with the joint proposed rule and
acknowledges that NTL No. 2016-N01 was never fully implemented and has
since been rescinded. This NPRM parallels the approach in BOEM's
portion of the 2020 proposal but, to increase protection of the
taxpayer, it would require a higher threshold credit rating and would
not allow a current lessee to avoid posting additional assurance based
on a predecessor lessee's strength.
D. Purpose of BOEM's Proposed Rulemaking
This proposed rule is intended to update BOEM's criteria for
determining whether oil, gas, and sulfur lessees, RUE grant holders,
and ROW grant holders may be required to provide supplemental financial
assurance to ensure compliance with their OCS obligations. In its
continued efforts to address concerns with the financial assurance
program, BOEM has opted to issue this new notice of proposed rulemaking
to better protect the taxpayer from bearing the cost of facility
decommissioning and other financial risks associated with OCS
development, such as oil spill cleanup or other environmental
remediation. Although the cases where taxpayers have actually paid
costs for decommissioning are rare, some BOEM lessees have entered
bankruptcy without the resources to cover decommissioning. In these
cases, BOEM is required to negotiate with predecessors, co-lessees, and
bankruptcy courts to obtain the funds needed for decommissioning. As
mentioned earlier, this process is not always sufficient, as reflected
in BSEE's request for additional appropriations to cover
decommissioning of facilities for which there is no remaining liable
party. BOEM has decided not to set a lower supplemental financial
assurance requirement for lessees with financially strong predecessor
lessees. Instead, BOEM proposes to require supplemental financial
assurance for all leases owned by lessees that do not meet the proposed
financial strength threshold or have sufficiently valuable proved oil
and gas reserves on their leases that may attract a buyer if the
current lessees are in financial distress. The omission of predecessor
lessees from this calculus addresses several financial assurance
issues. It ensures the current lessees have the financial capability to
fulfill its decommissioning obligations, and discourages lessees from
ignoring end-of-life decommissioning costs. It also simplifies
potential administrative demands, since it obviates the need for
parties to distinguish between wells with predecessor lessees and more
recent sole-liability wells, side-track wells, and other sole-liability
components. This proposed rule would retain the authority to pursue
predecessor lessees for the performance of decommissioning; however,
this proposed rule would not allow BOEM to rely upon the financial
strength of predecessor lessees when determining whether, or how much,
supplemental financial assurance should be provided by current OCS
leaseholders.
Under this proposed rule, instead of relying primarily on net worth
to determine whether a lessee must provide supplemental financial
assurance, BOEM's primary consideration would be a lessee's credit
rating. Credit rating agencies account for many factors when evaluating
a company, including cash flow, debt-to-earnings ratios, debt-to-funds-
from-operations ratios, and other financial factors. A credit rating
considers the past performance of a company, including, but not limited
to, the income statement and cash flow statement, which provide a broad
picture of how well a company may be able to meet its liabilities. The
rating also considers forward-looking factors, such as the anticipated
loss of assets and the anticipated highs and lows of the company's
business cycle. Credit ratings provide a measure of the probability of
a default on an obligation; studies have shown a very close correlation
between the rating level and the probability of default.\9\
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\9\ See for example, ``Ratings vs Default Rates'', Moody's
Annual Default Study--February 8, 2022, Douglas J. Lucas, ``Default
Correlation and Credit Analysis'', The Journal of Fixed Income Mar
1995, 4 (4) 76-87; DOI: 10.3905/jfi.1995.408124.
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On the other hand, a net worth analysis (typically total assets
minus total liabilities) uses figures that reflect the last day of the
fiscal period. This ``snapshot'' is not adequate to predict a lessee's
future financial position because a lessee's financial deterioration
can occur quickly due to volatility in oil and gas prices, improper
hedging of risks, and other business and economic reasons. Net worth is
one financial data point that may not accurately reflect the overall
financial risk posed by the company, as compared to the more
comprehensive financial review undertaken by the rating agencies. A
singular financial ratio analysis may unintentionally penalize some
corporate structures where that particular ratio is not as important or
relevant to that business, for example midstream master limited
partnerships, which the tax code requires to distribute 90% of net
income to partners. Relying on the more comprehensive and forward-
looking credit rating analysis--both to determine whether supplemental
financial assurance may be necessary and to determine whether a company
can be a guarantor of the financial obligations of other companies
operating on the OCS--would better allow BOEM to demand security before
a company becomes financially distressed. For more discussion on credit
ratings, see section VI.A (BOEM Evaluation Methodology--Credit Ratings)
of this preamble.
After accruing an obligation to decommission certain infrastructure
(e.g., well, platform, pipeline), the predecessor lessee remains
jointly and severally liable for decommissioning that infrastructure,
even in cases where a predecessor lessee has divested its full interest
in a lease by assignment to another company. This rulemaking would
retain BOEM's existing right to pursue predecessor lessees for the
performance of decommissioning; however, this rulemaking would not
allow BOEM to rely upon the financial
[[Page 42142]]
strength of predecessor lessees when determining whether, or how much,
supplemental financial assurance should be provided by current OCS
leaseholders. This change strengthens the financial assurance program
by ensuring current lessees have the financial strength or supplemental
financial assurance in order to fulfill all their obligations.
In summary, BOEM is proposing this rulemaking to clarify and
simplify its financial assurance requirements and to provide greater
protection to taxpayers. These proposed regulatory changes provide
additional clarity that current grant holders, lessees, and, when
appropriate, operating rights holders (sublessees) bear the cost of
ensuring compliance with lease obligations, rather than relying on
prior owners.
IV. Proposed Revisions to BOEM Supplemental Financial Assurance
Requirements
BOEM's existing financial assurance regulatory framework has two
main components: (1) Base bonds, generally required in amounts
prescribed by regulation, and (2) Supplemental financial assurance,
above the prescribed base bond amounts, that may be required upon the
Regional Director's determination that an increased amount is necessary
to ensure compliance with OCS obligations. BOEM's objective is to
ensure that taxpayers do not bear the cost of meeting the obligations
of lessees and grant holders on the OCS, particularly the costs of
decommissioning that must be met after the cash flow from production
ceases. At the same time, BOEM also recognizes the costs and
disincentives to additional exploration, development, and production
that are imposed on lessees and grant holders by increasing the
required amounts of bonds and/or other financial assurance. After
taking these considerations into account, BOEM is proposing to: (1)
Modify the evaluation process for requiring supplemental financial
assurance by clarifying and streamlining the evaluation criteria; and,
(2) Remove restrictive provisions for third-party guarantees and
decommissioning accounts. This proposed rule would allow the Regional
Director to require supplemental financial assurance when a lessee or
grant holder poses a substantial risk of becoming financially unable to
carry out its obligations under its lease or grant, or when the
property may not have sufficient value to be sold to another company
that could assume those obligations. In the former case, the risk that
the taxpayer might have to take on the financial obligations of a
lessee or grant holder is mitigated when there is a co-lessee or co-
grant holder that has sufficient financial capacity to carry out the
obligations.
A. Leases
Lessees are jointly and severally liable for the lease
decommissioning obligations that accrue during their ownership, as well
as those that accrued prior to their ownership, which means that each
current co-lessee is liable for the full obligation and BSEE may pursue
performance from any individual current lessee. See, e.g., 30 CFR
556.604(d). In addition, a lessee that transfers its interest to
another party continues to be liable for any unperformed
decommissioning obligations that accrued prior to, or during, the time
that lessee owned an interest in the lease. See, e.g., 30 CFR 556.710.
This transferor liability applies, however, only to those obligations
existing at the time of transfer; new facilities, or additions to
existing facilities, that were not in existence at the time of any
lease transfer are not obligations of a predecessor company and are
considered obligations of the party that built such new facilities and
its co- and successor lessees.
BOEM's existing supplemental financial assurance evaluation
process, contained in Sec. 556.901(d), is based only on the current
lessee's ability to carry out present and future obligations. BOEM
proposes to codify that this evaluation process includes an evaluation
of the ability of a co-lessee to carry out present and future
obligations. This codification recognizes that all of the current
owners are benefiting from ongoing operations and are jointly and
severally liable for compliance with DOI requirements. A current co-
lessee is equally liable for present obligations and future obligations
that exist while it is a co-lessee, including nonmonetary obligations.
Under BOEM's existing regulations, the Regional Director's
evaluation of the need for supplemental financial assurance is based on
the following five criteria: financial capacity; projected financial
strength; business stability; reliability in meeting obligations based
upon credit rating or trade references; and record of compliance with
laws, regulations, and lease terms. BOEM is proposing to streamline its
evaluation process by using only two criteria to determine whether
supplemental financial assurance on a lease may be required: (1) A
credit rating, either from an NRSRO, as identified by the United States
Securities and Exchange Commission (SEC) pursuant to its grant of
authority under the Credit Rating Agency Reform Act of 2006 and its
implementing regulations at 17 CFR parts 240 and 249, or a proxy credit
rating determined by BOEM based on a company's audited financial
statements; \10\ or (2) The 3-to-1 ratio of the value of proved oil and
gas reserves on a lease to the decommissioning liability associated
with these reserves. These criteria better align BOEM's evaluation
process with accepted financial risk evaluation methods used by the
banking and finance industry. Corporate credit ratings are intended to
evaluate the potential for a company to default on its financial
obligations and are designed so that the higher the credit rating, the
lower the risk of default. Credit ratings and proved oil reserves are
good indicators of the likelihood that a company will be able to meet
its financial obligations. Eliminating subjective or less precise
criteria--such as the length of time in operation to determine business
stability, or trade references to determine reliability in meeting
obligations--will simplify the process and remove criteria that may not
accurately or consistently predict financial distress. For more
discussion on credit ratings, see section VI.A (BOEM Evaluation
Methodology--Credit Ratings) of this preamble.
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\10\ In order for BOEM to establish a proxy credit rating, which
can be used for the purpose of waiving any supplemental financial
assurance requirements that would otherwise be required, BOEM is
requiring that any company seeking a proxy credit rating provide
audited financial statements. If such statements are not provided,
BOEM will require supplemental financial assurance because it will
have insufficient basis for concluding that the owners have
sufficient capacity to reliably and timely meet their lease
obligations.
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BOEM proposes to eliminate the ``business stability'' criterion
found in the current version of Sec. 556.901(d)(1)(iii). The existing
regulation bases business stability on 5 years of continuous operation
and production of oil and gas, but BOEM has determined that there is
little correlation between such history and a company's ability to
carry out its present and future obligations. BOEM conducted an
analysis of offshore bankruptcies, including an assessment of the
number of years incorporated prior to bankruptcy, and determined that
whether a company was in business for 5 or more years had no
relationship to the likelihood of bankruptcy.
BOEM also proposes to eliminate the existing ``record of
compliance'' criterion found in the current version of Sec.
556.901(d)(1)(v). BOEM has determined that the number of INCs a company
receives correlates with the
[[Page 42143]]
number of OCS properties it owns, not its financial stability, and
therefore, BOEM has concluded that it is not an accurate predictor of
its financial health. BOEM reviewed BSEE's Incidents of Non-Compliance
(INCs) records and its Increased Oversight List, which represent BSEE's
cumulative records of violations of performance standards on the part
of OCS operators and lessees and determined that the number of
incidents of non-compliance typically increases with the size and
complexity of the operator's or lessee's operations, including the
ratio of incidents to number of components. Because larger companies
(regardless of credit score) tend to have more properties and
components and therefore more INCs, BOEM determined that record of
compliance criterion does not accurately predict financial default.
BOEM's review of this information confirmed the feedback BOEM received
in response to the 2016 NTL, namely that companies with a large number
of properties and facilities tended to receive a large number of INCs
and had more individual properties on the Increased Oversight List.\11\
BOEM specifically requests comments regarding the use of fines and
violations as a criterion in the determination of a company's ability
to fulfill decommissioning obligations, and any data or analysis
addressing any correlation between the number of violations and the
risk of financial default. BOEM also requests comments on whether the
elimination of the INC's criteria would create a disincentive to comply
with regulations. BOEM also requests comment on whether or not the cost
of decommissioning is likely to increase based on the type, quantity,
and magnitude of previous violations.
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\11\ The most recent data are available at https://www.data.bsee.gov/Company/INCs/Default.aspx.
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BOEM proposes to replace the existing ``financial capacity'' and
``reliability'' criteria in existing Sec. 556.901(d)(1) with issuer
credit rating or proxy credit rating. BOEM has found credit ratings,
which are part of the existing ``reliability'' criterion, to be a more
reliable indicator of financial ability to meet obligations than
previous financial criteria issued by BOEM via NTLs (ex. NTL 2008-N07,
NTL 2016-N01). Issuer credit ratings provided by a NRSRO incorporate a
broad range of qualitative and quantitative factors, and a business
entity's credit rating most accurately represents its overall ability
to meet its financial commitments. An issuer credit rating is a
forward-looking opinion about an obligor's overall creditworthiness.
This opinion focuses on the obligor's capacity and willingness to meet
its financial commitments as they come due.
Under the proposal, if a lessee does not have a credit rating from
a NRSRO, the lessee may instead submit audited financial statements,
and BOEM will determine a proxy credit rating using a commercially
available credit model determined by BOEM to fulfill its financial risk
analysis requirements, such as the S&P Global's Credit Analytics credit
model. Such audited financial information is currently the basis of one
of the five criteria in BOEM's regulations, namely the ``financial
capacity'' criterion. Under the proposed rule, this information will be
the primary consideration used to evaluate lessees that do not have a
NRSRO credit rating. BOEM has concluded that audited financial
statements, prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and accompanied by an auditor's certificate, provide
an accurate representation of the company's economic position and
operational performance. Using this audited financial information to
generate a proxy credit rating would allow BOEM to accurately determine
if supplemental financial assurance is needed when a NRSRO rating is
not available.
This proposed rule would provide the Regional Director with the
authority to require a lessee to provide supplemental financial
assurance if the lessee or its co-lessee does not have an investment
grade credit rating, i.e., a credit rating from a NRSRO that is greater
than or equal to either BBB- from S&P or Baa3 from Moody's, or its
equivalent, or a proxy credit rating greater than or equal to either
BBB- or Baa3, as determined by the Regional Director, based on audited
financial information with an accompanying auditor's certificate. BOEM
has determined that having an investment grade credit rating is
important to reliably ensure that a company not pose a substantial risk
of default.
Under existing BOEM and BSEE regulations that would not change in
this proposed rule, co-lessees are jointly and severally liable for
accrued decommissioning obligations, and the risk that the government
will be responsible for the decommissioning cost is therefore lower
when co-lessees are financially viable. Hence, BOEM will not require
supplemental financial assurance for properties where at least one co-
lessee has an investment grade credit rating.
If BOEM determines that supplemental financial assurance is
required, BOEM bases the amount of supplemental financial assurance
required on the BSEE decommissioning cost estimate. Previously, BSEE
provided a single algorithm-based deterministic estimate for OCS
facilities. In 2020, BSEE updated certain decommissioning costs in the
Technical Information Management System (data.boem.gov).\12\ The new
estimates were based on industry-reported decommissioning costs
pursuant to NTL 2016-N03--Reporting Requirements for Decommissioning
Expenditures on the OCS, later superseded by NTL 2017-N02. Based on the
reported data, BSEE has developed three probabilistic estimates of
decommissioning costs for each OCS facility on any given lease. The
lowest cost estimate would have a fifty percent likelihood of covering
the full cost of decommissioning a facility and is thus referred to as
``P50.'' The second lowest cost estimate, P70, would have a seventy
percent likelihood of covering the full cost of decommissioning a
facility. The third and highest cost estimate, P90, would have a ninety
percent likelihood of covering the full decommissioning cost of a
facility. These BSEE-generated estimates are based on actual
decommissioning expenditures reported by offshore companies.
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\12\ BSEE decommissioning cost estimates are available at the
following URL: https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx.
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BOEM proposes to use the P70 value to set the amount of any
required supplemental financial assurance. In determining to use the
P70 value, BOEM considered using either the P50, P70, or P90
decommissioning liability levels, which respectively represent an
approximately 11 percent ($3.5 billion), 30 percent ($9.6 billion), and
55 percent ($17.9 billion) increase in total estimated financial
assurances available to address offshore decommissioning liability
relative to the previous algorithm-based estimate, based on an analysis
of industry-reported decommissioning costs. BOEM weighed the risk of
being underfunded (greatest at the P50 level) against the financial
impact of requiring more financial assurance (greatest at the P90
level). As an example, a supplemental financial assurance set based on
the P70 value means that, based on the uncertainty and risk applied by
BSEE to its model, there is a 70% probability of covering the
decommissioning cost of the facility (and therefore a 30% probability
of exceeding it). The P70 value is not to be confused with the figure
representing 70% of the cost of decommissioning a particular facility.
Because it is a
[[Page 42144]]
statistical concept, it relies on the quality and size of the sample,
as well as the uncertainty (variance) existing in these costs. There is
also a real possibility that the P70 figure exceeds the actual
decommissioning value of many facilities, in which case excess would
cover some portion of insufficient assurance in those cases where the
assurance is designed to address that entity's full range of
liabilities.
BOEM's goal for its financial assurance program continues to be the
protection of the American taxpayers from exposure to financial loss
associated with OCS development, while ensuring that the financial
assurance program does not detrimentally affect offshore investment or
position American offshore exploration and production companies at a
competitive disadvantage. BOEM's proposal to use P70 would reduce
offshore decommissioning risk to taxpayers relative both to previous
BSEE decommissioning estimates and to a methodology based on P50, while
reducing burden on available capital for offshore investment, including
both conventional and renewable energy activities, imposed by the use
of P90. BOEM requests comments on potential unknown risks associated
with the use of P70. BOEM has examined the impact that the different P
values would have on the amount of financial assurance required but
lacks the data to estimate the impact that selecting a P90 value might
have on offshore capital expenses and investments, and therefore has
selected P70 in this proposal. We are also specifically seeking
information and data related to these impacts from commenters.
For comparison, at BSEE's P90 levels, the total decommissioning
liability is approximately $51.2 billion, compared with $42.8 billion
at P70; of that total, the liability estimate associated with lessees
who have sub-investment grade credit ratings is approximately $24.7
billion at the P90 level and $20.2 billion at the P70 level. The total
liability estimates for properties expected to meet the three times
reserves threshold is approximately $9.0 billion at the P90 level and
$7.8 billion at P70 level. The difference between the full Tier 2
estimate and that of Tier 2 properties meeting the three times the
reserves threshold provides BOEM's total expected bond portfolio value
if the rule were to be finalized. For P90 this would be $15.7 billion,
reflecting an increase of $3.2 billion in bond demands (increased from
$12.5 billion at P70). The annual premium estimate for the forecasted
Tier 2 bond portfolio would increase from $380 million to $494 million,
an increase of approximately $114 million to bond lessees at the P90
level. This additional burden would be realized by the same population
of lessees as at the P70 level but would provide additional certainty
of sufficient bonding for that population in the event the facility
owners (1) defaulted on their obligations and (2) no viable predecessor
is available to fulfill their obligations.
BOEM requests comments and additional data on the costs and
benefits of setting the supplemental financial assurance requirements
based on each of the P50, P70, and P90 decommissioning liability
levels. In particular, BOEM would like information on impacts to
offshore capital expenses and investments of each liability level, as
well as impacts to potential taxpayer liability. BOEM also solicits
comment on whether setting assurance requirements based on different
liability levels might be appropriate for different circumstances. BOEM
also requests comments on costs and benefits of otherwise considering
predecessor lessees or grantees in determining the level of required
supplemental financial assurance.
Additionally, BOEM requests comments on the possibility of using a
higher BSEE decommissioning estimate (i.e., P90), including on how a
P90 estimate would affect small entities.
An offshore oil and gas lease that has a significant reserve-to-
liability value that is, a property that can generate a cash flow
significantly in excess of the costs associated with the
decommissioning of its assets--is likely to be purchased by another
company in the event of a default by the current lessee. The acquiring
company would then become liable for existing decommissioning
obligations, but due to the value of existing reserves, it would
acquire sufficient positive cash flow to reduce the risk that the costs
associated with the decommissioning of the assets would be borne by the
government. BOEM has determined that an adequate threshold for the
ratio of reserve value to the level of decommissioning liability should
be three to one. This threshold is discussed further in Section VI.B of
this preamble. Therefore, supplemental financial assurance will not be
required for properties with a value of proved oil and gas reserves
(using SEC methodology of reported value in the notes to the publicly
traded companies' Form 10-Ks) exceeding three times the decommissioning
costs (using the BSEE P70 estimated value) associated with the
production of those reserves, as these properties pose minimal risk
that the government will be required to bear the cost of
decommissioning.
BOEM is proposing to use and is requesting comments on this test as
the criterion to replace the existing generalized ``projected financial
strength'' criterion found currently at Sec. 556.901(d)(1)(ii), which
considers whether the estimated value of a lessee's existing lease
production and proved reserves is significantly in excess of the
lessee's existing and future lease obligations.
B. Right-of-Use and Easement Grants
BOEM's regulations concerning RUE grants serving a Federal OCS
lease or a State lease are found in Sec. Sec. 550.160 through 550.166.
Section 550.160 provides that an applicant for a RUE that serves an OCS
lease ``must meet bonding requirements,'' but the regulation does not
prescribe a base surety bond amount. The proposed rule would replace
this requirement with a cross-reference to the specific criteria
governing supplemental financial assurance demands in proposed Sec.
550.166.
BOEM is proposing to revise the bonding regulations to clarify that
any RUE grant holder must provide base financial assurance in a
specific amount, regardless of whether the RUE serves a State lease or
a Federal OCS lease. BOEM is proposing to establish a Federal RUE base
financial assurance requirement that matches the existing $500,000 base
financial assurance requirement for State RUEs. BOEM is also proposing
to establish a requirement for $500,000 area-wide RUE financial
assurance, which would satisfy the base financial assurance requirement
for any RUE holder that owns one or more RUEs within the same OCS area,
regardless of whether the RUE serves a State or Federal lease. BOEM is
also proposing to allow any lessee that has posted area-wide lease
financial assurance, pursuant to Sec. 556.900(a)(1), 556.901(a)(2), or
556.901(b)(2) for the areas specified in Sec. 556.900(a)(2), to modify
that lease surety bond to also cover any RUE(s) in the area owned by
the same lessee. The ability to use area-wide lease financial assurance
to cover the RUE base financial assurance obligation would be subject
to the requirement that the area-wide lease financial assurance would
be in an amount equal to or greater than the RUE base financial
assurance requirement (i.e., equal to or greater than $500,000). For
example, under the proposed regulations a lessee with a $3 million
area-wide lease surety bond could establish or acquire any number of
Federal or State RUEs in the area
[[Page 42145]]
without having to post any additional financial assurance, provided the
lessee agrees to modify the terms of its area-wide lease surety bond to
also cover any State or Federal RUEs that it owns or acquires. If the
existing area-wide bond is not modified, the lessee may satisfy the
requirement by providing new financial assurance to cover its RUE(s).
The rule proposes to consider the credit rating or proxy credit
rating of a RUE co-grant holder, mirroring the proposed methodology
used to determine if a lessee must provide supplemental financial
assurance. These credit rating standards provide the most effective and
proven method to evaluate a company's financial wherewithal and are
widely accepted as a significant demarcation of credit risk between
investment and non-investment grade rated companies. BOEM proposes to
include consideration of the credit rating or proxy credit rating of
co-owners of RUE grants because, like co-lessees, they are jointly and
severally liable for accrued decommissioning obligations for facilities
and pipelines on their RUE.
These changes to the RUE financial assurance requirements are
intended to: (1) Clarify the bonding requirement for Federal RUEs,
which is not explicitly defined in the existing regulations; (2) Align
the RUE bonding requirements for RUEs serving State and Federal leases;
and (3) Ensure that all RUEs are duly covered and that the risk of a
RUE holder defaulting on its decommissioning obligations is not
transferred to the American taxpayer.
BOEM is also proposing a new regulation to establish the conditions
under which the assignment of RUE interests may be disapproved. BOEM
may disapprove the assignment of a RUE when the assignee has not
satisfied all obligations under the regulations or under any BOEM or
BSEE order. BOEM may disapprove the assignment when the assignee has
not satisfied the financial assurance requirements.
BOEM is also proposing to revise the financial assurance
regulations to clarify that any RUE grant holder, whether the RUE
serves a State or Federal lease, may be required to provide
supplemental financial assurance for the RUE--above the $500,000 RUE
base financial assurance discussed above--if the grant holder does not
meet the credit rating or proxy credit rating criteria proposed to be
used for lessees. This change aligns the supplemental financial
assurance criteria for RUEs with those used in making the same
determination for leases. The value of proved oil and gas reserves will
not be considered because a RUE grant does not entitle the holder to
any interest in oil and gas reserves.
C. Pipeline Right-of-Way Grants
BOEM's bonding requirements for pipeline ROW grants, contained in
Sec. 550.1011, prescribe a $300,000 area-wide base surety bond that
guarantees compliance with all the terms and conditions of the pipeline
ROW grants held by a company in an OCS area. BOEM may require a
pipeline ROW grant holder to provide supplemental financial assurance
if the Regional Director determines that financial assurance in excess
of $300,000 is needed, but, unlike with leases, the regulation provides
no factors for the Regional Director's consideration when making this
determination. Therefore, BOEM is proposing to revise the financial
assurance regulations to provide that the Regional Director will demand
that a pipeline ROW grant holder provide supplemental financial
assurance when the grant holder does not meet the same credit rating or
proxy credit rating criteria proposed to be used for lessees. The value
of proved oil and gas reserves will not be considered because a ROW
grant does not entitle the holder to any interest in oil and gas
reserves.
The rule also proposes to consider the credit rating or proxy
credit rating of a co-grant holder. This change would better align
BOEM's evaluation process with accepted financial risk evaluation
methods used by the banking and finance industry and with the process
used to determine if a lessee must provide supplemental financial
assurance. BOEM proposes to include consideration of the credit rating
or proxy credit rating of co-owners of ROW grants because, like co-
lessees, they are jointly and severally liable for accrued
decommissioning obligations for facilities and pipelines on their ROW
(Sec. 250.1701(b)).
V. Proposed Revisions to Other Types of Supplemental Financial
Assurance
A. Third-Party Guarantees
BOEM is proposing to evaluate a potential guarantor using the same
credit rating or proxy credit rating criteria proposed for lessees. The
value of proved oil and gas reserves of an associated lease would not
be considered because that value is a characteristic of the lease
belonging to the guaranteed lessee and not an asset belonging to the
guarantor.
The criteria to evaluate a guarantor provided in the existing
regulations have proved difficult to apply. For example, Sec.
556.905(a)(3) provides that the guarantor's total outstanding and
proposed guarantees may not exceed 25 percent of its unencumbered net
worth in the United States. Determining a company's total outstanding
and proposed guarantees depends on accurate information provided by the
guarantor, and BOEM has no way to confirm whether the 25 percent
threshold has been exceeded at the time the guarantee is proffered or
afterward. The same provision requires BOEM to consider the
unencumbered net worth of the company in the United States, while
another provision, Sec. 556.905(c)(2)(iv), requires BOEM to consider
the guarantor's unencumbered fixed assets in the United States. Both of
these criteria are difficult to apply when the company under evaluation
has domestic and international assets that must be separated. Using the
same financial evaluation criterion, i.e., issuer credit rating or
proxy credit rating, to assess both guarantors and lessees as the most
relevant measure of future capacity would provide consistency in
evaluations and avoid overreliance on net worth.
To allow more flexibility in the use of third-party guarantees, the
proposed rule would allow a third-party guarantee to be used as
supplemental financial assurance for a RUE or ROW grant, as well as a
lease. Most significantly, in proposed Sec. 556.902(a)(3), this
proposed rule would remove the requirement for a third-party guarantee
to ensure compliance with the obligations of all lessees, operating
rights owners, and operators on the lease, and would allow a guarantee
limited to a specific amount, as agreed to by BOEM, or limited to the
liabilities of specific parties. Potential guarantors are reluctant to
provide a guarantee if they cannot limit the amount of their guarantee
or choose the entity for which they are guaranteeing compliance. This
change would allow a guarantor to limit its guarantee to a specific
amount of the total financial assurance requirement. The remaining
amount of required financial assurance must be covered by additional
security from the guaranteed lessee/grant holder or its co-lessees or
co-grant holders, so the amount of the requirement is fully satisfied.
BOEM is proposing this change because the existing regulations do not
clearly limit the liability of a guarantor to a fixed monetary amount
stated in the guarantee. Therefore, few parties were willing to use
third-party guarantees in the past.
By allowing a third-party guarantor to guarantee only the
obligations it wishes to cover, BOEM would provide industry with the
flexibility to use the guarantee to satisfy supplemental financial
[[Page 42146]]
assurance requirements without forcing the guarantor to cover the risks
associated with all parties on the lease or grant or operations in
which the party they wish to guarantee has no interest and over which
the guarantor may have no control. Moreover, the proposal to allow BOEM
to accept a third-party guarantee that is limited to specific
obligations does not reduce BOEM's protection because the regulations
would require that the financial assurance provided secures all lease
and grant obligations.
The proposed rule would also allow BOEM to cancel a third-party
guarantee under the same terms and conditions that apply to
cancellation of other types of financial assurance, as provided in
proposed Sec. 556.906(d)(2).
Lastly, the existing regulation refers to both a ``guarantee'' and
an ``indemnity agreement'' (which BOEM intended to mean the same
thing), and the proposed rule clarifies that the regulations
contemplate only one agreement: the guarantee agreement.
B. Decommissioning Accounts
Section 556.904 currently allows lessees to establish a lease-
specific abandonment account to satisfy any supplemental financial
assurance required by Sec. 556.901(d). BOEM proposes to rename these
accounts ``Decommissioning Accounts,'' the terminology used by the
industry, to remove any perceived limitation of this type of account to
a single lease, and to signify that these accounts may be used to
ensure compliance with supplemental financial assurance requirements
for a RUE and ROW grant, as well as a lease. To make these accounts
more attractive to parties who may desire to use this method of
providing supplemental financial assurance, BOEM also proposes to
remove the requirement to pledge Treasury securities to fund the
account before the funds equal the maximum amount insurable by the
Federal Deposit Insurance Corporation (FDIC) (currently capped at
$250,000). BOEM notes that, due to this current requirement, lessees
may have been unwilling to use decommissioning accounts.
C. Transfers of Lease Interests to Other Lessees or Operating Rights
Holders
The proposed rule would update subparts G and H of the Department's
existing part 556 regulations to clarify that BOEM will not approve the
transfer of a lease interest, whether a record title interest or an
operating rights interest, until the transferee complies with all
applicable regulations and orders, including the financial assurance
requirements. As discussed above, many of the facilities currently on
the OCS have decommissioning obligations where the cost of performance
greatly exceeds the amount of financial assurance currently available
to the Department of the Interior. To address this problem, BOEM is
proposing that it may prohibit approval of any new transfer or
assignment of any lease interest unless and until the financial
assurance demands have been satisfied.
VI. BOEM Evaluation Methodology
A. Credit Ratings
In this rulemaking, BOEM proposes to use an ``Issuer credit
rating'' to evaluate the financial health of OCS lessees, grant
holders, and guarantors. A review of S&P and Moody's rating
methodologies showed that the analyses they perform to determine an
issuer credit rating are wide-ranging and include factors beyond
corporate financials (such as history, senior management, and commodity
price outlook). An issuer credit rating provides the rating agencies'
opinions of the entity's ability to honor senior unsecured debt and
debt-like obligations. It is common for lessees to have both an issuer
credit rating and a bond issuance rating. However, bond issuance
ratings are opinions of the credit quality of a specific debt
obligation only, which can vary based on the priority of a creditor's
claim in bankruptcy or the extent to which assets are pledged as
collateral. Due to the varying priority of claims associated with debt
and the limited purpose of bond issuance ratings, BOEM proposes to
accept only issuer credit ratings from a NRSRO, and references to
credit rating in this rulemaking refer only to an issuer credit rating
(or a ``proxy rating'' where so noted as appropriate). BOEM proposes to
add ``Issuer credit rating,'' as defined by S&P, as a newly defined
term in 30 CFR parts 550 and 556.
If an entity does not have an issuer credit rating, BOEM proposes
to permit companies to request the Regional Director to determine a
proxy credit rating based on audited financial information for the most
recent fiscal year, including an income statement, a balance sheet, a
statement of cash flows, and the auditor's certificate. By ``most
recent fiscal year'' BOEM means a period that includes a 12-month
period within the 24 months prior to the Regional Director's
determination for which supplemental financial assurance is required.
One benefit of this approach is to reduce the adverse effects of the
rule on small businesses.
BOEM proposes to use S&P Global's Credit Analytics credit model to
calculate proxy credit ratings.\13\ However, BOEM proposes to reserve
the right to use a different model if it determines that a different
model more accurately reflects those factors relevant to the financial
evaluation of companies operating on the OCS. The purpose of using S&P
Global's Credit Analytics credit models is to provide an accurate and
objective method to assess any given company's probability of default
on its financial obligations based on its audited financial statements.
S&P Global's Credit Analytics credit models would allow BOEM to
reliably score and efficiently model BOEM's potential risk exposure
from a lessee that could potentially become unable to meet its
decommissioning obligations. Credit modeling would allow BOEM to
compare the company with similar public companies in the same industry
segment. BOEM invites comments on the appropriateness of relying on S&P
Global's Credit Analytics credit model, or other similar, widely
accepted credit rating models to generate proxy credit ratings.
Additionally, BOEM invites comments on the appropriateness of using a
proxy credit rating when determining the need to provide financial
assurance.
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\13\ https://www.spglobal.com/marketintelligence/en/documents/mi_risk_609827_credit-analytics_brochure_letter_fd.pdf.
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BOEM's financial assurance program is intended to ensure that
private companies have the capacity to meet their financial and non-
financial (i.e., performance) obligations. In order to both ensure that
companies do not ``cause [unmitigated] damage to the environment or to
property, or endanger life or health,'' 43 U.S.C. 1332(6), and to
promote ``expeditious and orderly development,'' 43 U.S.C. 1332(3),
BOEM seeks to balance the financial risk to the government and the
taxpayer while minimizing regulatory burdens. See also 43 U.S.C.
1801(7), 1802(1) & (2).
BOEM has determined that establishing an issuer credit rating
threshold of BBB- (S&P) or Baa3 (Moody's), an equivalent credit rating
provided by another SEC-recognized NRSRO, or an equivalent proxy credit
rating, is the best means for accomplishing these objectives. The
Moody's Baa3 credit rating is equivalent to the S&P BBB- credit rating.
If S&P and Moody's provide different ratings for the same company, BOEM
will use the higher rating as the lessee's rating. As discussed in the
IRIA, out of the 276 companies analyzed, none of the companies were
rated at or above BBB-
[[Page 42147]]
at the time of bankruptcy nor within 10 years prior to bankruptcy,
therefore, BOEM has selected BBB- as the credit rating threshold for
providing additional financial assurance. Additionally, under the
proposed rule, BOEM would have adequate time to secure needed financial
assurance if a company were to drop below the proposed investment grade
threshold as BOEM monitors company rating changes throughout the year.
BOEM reviewed historical default rates across the entire credit
rating spectrum, as well as the credit profile of oil and gas sector
bankruptcies arising from the commodity price downturn in 2014, to
determine an appropriate level of risk. As would be expected, the
average S&P historical one-year default rates increase significantly
with lower ratings. The average S&P one-year default rate \14\ for BBB-
rated companies from 1981 to 2020 was 0.24 percent. Comparatively, the
average one-year default rate for BB- rated companies was 1.21 percent,
for B- rated companies was 8.73 percent, and for C rated companies was
24.92 percent. BOEM believes that one-year default rates are an
appropriate measure of risk, given BOEM's policy of reviewing the
financial status of lessees, ROW holders, and RUE holders at least on
an annual basis (the review typically corresponding with the release of
audited annual financial statements). In addition, throughout the year,
BOEM monitors company credit rating changes, market reports, trade
press, articles in major news media and quarterly financial reports to
review the financial status of lessees, ROW holders, and RUE holders,
and the regulation would not preclude a demand for supplemental
financial assurance through the Regional Director's regulatory
authority at any time.
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\14\ The one-year default rate represents the percentage of
companies having any given credit rating that have failed to meet
their financial obligations during any given twelve-month period.
For example, for companies having had BBB- rating in 2020, 0.24
percent defaulted on their financial obligations in the subsequent
twelve-month period (i.e., approximately one out of every 400
companies having a BBB- credit rating).
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BOEM has identified a circumstance in which the use of a proxy
credit rating may not adequately account for the potential risk of
default. This circumstance would occur in a situation where a company
has a substantial contingent liability for decommissioning OCS
facilities (i.e., decommissioning exposure by virtue of being a co-
lessee) associated with its minority ownership of such facilities if
the majority owners are unable or unwilling to meet their obligations.
This is particularly the case in the OCS context because existing
Department regulations stipulate that all co-owners of any OCS lease,
regardless of their ownership share, are jointly and severally liable
for all the obligations associated with the lease. Contingent
liabilities that are deemed unlikely to financially materialize are not
required to be booked as a liability on a balance sheet under Financial
Accounting Standards Board (FASB) accounting rules for Asset Retirement
Obligations, so would not be included in audited financial statements,
and therefore may not be taken into consideration in the generation of
proxy credit ratings.
For offshore lessees with a NRSRO issuer credit rating, the current
average net worth of investment grade lessees is $115 billion dollars,
with average book assets of $155 billion dollars. This implies that the
financial risk of non-performance on co-lessee liability exposure from
these companies is very low. Given that total U.S. offshore liability
is lower than half the average net worth of offshore investment grade
companies, such lessees are likely to have the financial capacity to
cover the contingent liabilities of co-lessees that have not themselves
provided financial assurance.
However, where a non-publicly traded company (i.e., a company
without an issuer credit rating) has substantial minority co-ownership
interests in OCS leases, the proxy credit rating derived for the
minority owner may not adequately represent the risk exposure in
circumstances where (1) The ownership interests of the other co-owners
are disproportionately large compared to the ownership interest of the
minority owner, and; (2) The credit ratings of the majority co-owners
are not investment grade. This possibility is relatively likely due to
BOEM's historical practice of declining to require supplemental
financial assurance from any co-lessees who share ownership of a lease
with any company with an investment grade proxy credit rating,
regardless of the financial circumstance of the co-owner or the
relative ownership share of any co-owner.
In these circumstances, a company may have contingent
decommissioning liabilities that are not adequately captured in the
company's financial statements. It may be that such decommissioning
liabilities amount to a disproportionate share compared to the total
assets of the company, such that the company may not have the financial
capacity to satisfy these contingent liabilities. If, for example, a
small company with a high proxy credit rating were a one percent co-
lessee of a lease with financially weak co-lessees, the small company
may not have sufficient assets to meet its decommissioning obligations
for the remaining ninety-nine percent of the decommissioning costs
(which it may be required to satisfy under the joint-and-several
liability provisions of the regulations) in the event that its co-
lessees were to default on their financial obligations.
For this reason, BOEM is proposing to add a new provision to the
regulations that would authorize BOEM to require a company requesting a
proxy credit rating to provide information on its ownership of other
OCS facilities and leases. This new provision authorizes BOEM to take
the contingent liabilities associated with the company's co-ownership
of these assets into consideration in determining the appropriate proxy
credit rating.
BOEM invites comments on the appropriateness of this approach of
relying on lessee and grant holder credit ratings, including whether
BOEM has proposed an appropriate credit rating threshold of BBB-, and
if not, what threshold or set of thresholds would best protect taxpayer
interests while not imposing undue burdens on industry. Also, BOEM
invites comments on alternative options for determining the need for
financial assurance other than credit ratings. Additionally, BOEM
invites comments on whether financial assurance should be required of
all companies, regardless of credit rating, and the impacts such a
requirement might have on OCS investment and on potential taxpayer
liabilities.
B. Valuing Proved Oil and Gas Reserves
Under this proposed rule, if BOEM considers the proved reserves on
a particular lease when determining whether supplemental financial
assurance is required, BOEM would require the lessee to submit a
reserve report for the proved oil and gas reserves (as defined by the
SEC regulations at 17 CFR 210.4-10(a)(22)) located on a given lease.
The reserve report provided to BOEM would contain the projected future
production quantities of proved oil and gas reserves on a per lease
basis, the production cost for those reserves also on a per lease
basis, and the discounted future cash flows from production. The
reserve report would also provide the value of the proved oil and gas
reserves per lease, determined under the accounting and reporting
standards set forth in SEC Regulation S-X at 17 CFR 210.4-10 and SEC
Regulation S-K at 17 CFR, subpart
[[Page 42148]]
229.1200.\15\ BOEM proposes to use SEC regulations on reserve reporting
because they are commonly accepted and understood by offshore oil and
gas companies and are already produced by publicly traded companies.
This also allows BOEM to rely on the established SEC regulations on the
definitions, qualifications, and requirements for proven reserves,
rather than attempting to recreate these regulations. BOEM would use
this proved oil and gas reserves per-lease value when determining
whether the value of the reserves on any given lease exceeds three
times the cost of the P70 decommissioning estimate associated with the
production of those reserves.
---------------------------------------------------------------------------
\15\ Unlike this proposed regulation, the SEC regulations at 17
CFR 229.1202(a)(2) say: ``Disclose, in the aggregate and by
geographic area and for each country containing 15 percent or more
of the registrant's proved reserves, expressed on an oil-equivalent-
barrels basis, reserves estimated . . . .'' Although BOEM would
require that lessees apply the methodology of the SEC, it would
require the analysis on a lease-specific basis.
---------------------------------------------------------------------------
BOEM believes that a property with a sufficient ``reserves-to-
decommissioning cost'' ratio would likely be purchased by another
company if a current lessee defaults on its obligations, thereby
reducing the risk that decommissioning costs would be borne by the
government, and consequently reducing the need for supplemental
financial assurance.
A reserves-to-decommissioning cost ratio of one-to-one would mean
that the estimated value of remaining oil and gas reserves on a lease
is equal to the cost of decommissioning. BOEM does not expect any other
company to purchase a lease interest with a ratio of one-to-one, as the
new lessee would not receive any return on its investment once it bears
the cost of decommissioning. A reserves-to-decommissioning cost ratio
below three-to-one might be considered adequate to encourage a new
lessee to take on the cost of purchasing the lease and assuming
liability for all of the existing decommissioning obligations, however
there may be other factors that would reduce the lease's commercial
appeal (e.g., macro-economic conditions, maintenance conditions, or
higher than typical operating costs).
In BOEM's judgment, a reserves-to-decommissioning cost ratio that
meets or exceeds three-to-one provides enough risk reduction to justify
a Regional Director determination that the lessee is not required to
provide supplemental financial assurance for that lease. Establishing
an appropriate reserves-to-decommissioning cost ratio protects the
taxpayer during periods of commodity price volatility. If commodity
prices decline in a manner similar to late 2014 through early 2016, for
example, BOEM believes a ratio of at least three-to-one assures the
property would most likely retain its economic viability and financial
attractiveness to potential buyers. BOEM requests comment on whether
this is an appropriate threshold, or if there are better approaches
and/or data sets available for analysis that would provide BOEM with
better certainty that taxpayer interests will ultimately be protected.
VII. Phased Compliance With Supplemental Financial Assurance Orders
BOEM recognizes that the proposed regulations may have a
significant financial impact on affected companies. For that reason,
BOEM is proposing to phase in the new bonding requirements over a
three-year period for existing leaseholders. As part of this proposal,
BOEM would require that any company receiving a supplemental financial
assurance demand post one-third of the total amount by the deadline
listed on the demand letter. A second one-third would be required by
the end of the second year (i.e., within 24 months of the receipt of
the demand letter). The final one-third payment would be due within 36
months of the receipt of the demand letter. If a lessee's credit rating
improves to investment grade during the three-year period, BOEM will
discontinue collection of the remaining financial assurance and return
any supplemental financial assurance previously provided.
BOEM is requesting comments from potentially affected parties about
this phased approach and how it could most effectively be implemented
to minimize any unnecessarily adverse effects from an increased
supplemental financial assurance requirement.
VIII. Appeals Bonds
When BOEM issues a supplemental financial assurance demand, the
affected party has the option to appeal the demand to the Department of
the Interior's Board of Land Appeals (IBLA). In many cases in which an
appeal is filed, it is accompanied by a request to stay BOEM's
supplemental financial assurance order pending the outcome of the
appeal. Currently, if the stay is granted, BOEM has no ability to
ensure that a facility is covered by adequate financial assurance until
the appeal is decided. It is important that BOEM ensure that the
government's interests are protected immediately because IBLA appeals
may continue for several years. If the company appealing the
supplemental financial assurance demand declares bankruptcy before its
appeal is resolved, BOEM has no financial assurance to cover the costs
of corrective action. For this reason, BOEM is proposing a new
requirement whereby any company seeking to stay a supplemental
financial assurance demand pending appeal must, as a condition of
obtaining a stay of the order, post an appeals bond in the amount of
supplemental financial assurance required. If the appeal is successful,
the amount of the appeals bond in excess of the amount of supplemental
financial assurance determined to be required would be released. If the
appeal is unsuccessful, the appeals bond could be replaced or converted
into bonds to cover the supplemental financial assurance demand.
IX. Proposed Revisions to BOEM Definitions
To implement the changes proposed above, BOEM proposes to add or
revise several definitions in 30 CFR parts 550 and 556. For proposed 30
CFR part 550, BOEM proposes to add new terms and definitions for
``Issuer credit rating,'' ``Investment grade credit rating,'' and
``Financial assurance,'' and to revise the definition of ``You.'' BOEM
proposes to add a new term and definition for ``Right-of-Use and
Easement (RUE)'' and remove the separate definitions of ``Right-of-
use'' and ``Easement'' in 30 CFR part 550 because those terms are not
used separately in the existing or proposed regulatory text. Similarly,
for 30 CFR part 556, BOEM proposes to add definitions for the new term
``Issuer credit rating'' and ``Investment grade credit rating,'' remove
the existing term and definition of ``Security or securities,'' add a
new term and definition for ``Financial assurance,'' and revise the
definitions of ``Right-of-Use and Easement (RUE)'' and ``You,'' all of
which will match those in proposed 30 CFR part 550.
Additionally, BOEM is replacing the word ``sulphur'' with the more
contemporary spelling of ``sulfur'' throughout the regulatory text
where it has not been previously changed. This edit is a technical
correction and does not change any meaning or intent of the regulatory
provisions. BOEM proposes updating the word ``sulfur'' in Sec. Sec.
550.101, 550.102, and 550.105.
X. Section-by-Section Analysis
BOEM is proposing to revise the following regulations:
[[Page 42149]]
Part 550--Oil and Gas and Sulfur Operations in the Outer Continental
Shelf
The terms ``bond,'' ``bonding,'' ``surety bond,'' ``security,'' and
``securities'' would be replaced throughout this part with the new term
``financial assurance.''
Subpart A--General
Section 550.105 Definitions
The proposed rule would add a definition of ``Issuer credit
rating,'' which is a newly defined term in 30 CFR part 550, for the
reasons set forth above.
BOEM would remove the terms ``Easement,'' and ``Right-of-use,''
neither of which is used separately. In lieu of these two terms, and to
define the term actually used in 30 CFR part 550, BOEM would add a
definition for ``Right-of-Use and Easement (RUE).''
This proposed rule would also add a new term and definition for
``Financial assurance'' to list the various methods that may be used to
ensure compliance with OCS obligations.
The proposed rule would add new definitions for the terms
``Transfer'' and ``Assign'' to clarify that these terms are used
interchangeably throughout 30 CFR part 550. This change would also
serve to clarify that the related terms ``transferee'' and
``transferor'' are interchangeable with ``assignee'' and ``assignor''
respectively.
The proposed rule would add a new definition for the term
``Investment grade credit rating,'' meaning ``an issuer credit rating
of BBB- or higher, or its equivalent, assigned to an issuer of
corporate debt by a nationally recognized statistical rating
organization as that term defined by the United States Securities and
Exchange Commission.'' This definition would become the threshold
determination according to which BOEM would define whether financial
assurance typically would or would not be required.
BOEM would also revise the definition of the term ``You'' to now
include, depending on the context of the regulations, a bidder, a
lessee (record title owner), a sublessee (operating rights owner), a
Federal or State right-of-use and easement grant holder, a pipeline
right-of-way grant holder, an assignor or transferor, a designated
operator or agent of the lessee or grant holder, or an applicant
seeking to become one of the above. This change to the definition of
``You'' would, in concert with changes proposed in Sec. 550.166, make
explicit that any financial assurance provisions applicable to either a
State or Federal RUE would apply to the other.
Section 550.160 When will BOEM grant me a right-of-use and easement
(RUE), and what requirements must I meet?
The proposed rule would revise the introductory text of this
section to clarify that a RUE grant need not cover both leased and
unleased lands. Instead, BOEM may grant a RUE on leased lands (i.e.,
leased to another party), or unleased lands, or both. The paragraph (a)
introductory text would be expanded to include additional activities
associated with a RUE, such as using or modifying existing devices. The
paragraph (a) introductory text would also be expanded to include the
words ``seafloor production equipment'' and ``facilities.'' By
expanding the RUE requirement to additional activities and devices,
BOEM would ensure that all associated activities that may have an
impact on the environment of the OCS are included.
BOEM also proposes to revise paragraph (b) to provide that a RUE
grant holder must exercise the grant according to the terms of the
grant and the applicable regulations of 30 CFR part 550, as well as the
requirements of 30 CFR part 250, subpart Q.
BOEM also proposes to revise paragraph (c) to update the cross-
reference to BOEM's lessee qualification requirements, Sec. Sec.
556.400 through 556.402, and to replace the language in this paragraph
referencing ``bonding requirements'' with a cross reference to Sec.
550.166, which BOEM also proposes to revise to add specific criteria
for financial assurance demands, as provided below.
Section 550.166 If BOEM grants me a RUE, what financial assurance must
I provide?
The proposed rule would revise the section heading by removing the
reference to ``a State lease'' and replacing ``surety bond'' with
``financial assurance.'' This reflects the change in the text of
paragraph (b) of this section that provides that the financial
assurance requirements of this section would apply to both a RUE
granted to serve a State lease and one serving an OCS lease. The term
``surety bond'' would also be replaced with ``financial assurance''
throughout the section.
BOEM proposes to revise paragraph (a) to require $500,000 in
financial assurance that guarantees compliance with the terms and
conditions of any OCS RUEs you hold. Previously, paragraph (a) only
required $500,000 in financial assurance for RUEs associated with State
leases.
BOEM proposes to add paragraph (a)(1) to allow area-wide lease
financial assurance to satisfy the requirements of paragraph (a),
provided it is in excess of the $500,000 base RUE financial assurance
requirement and is amended to guarantee compliance with all the terms
and conditions of the RUE(s) it covers.
BOEM proposes to add paragraph (a)(2) to allow the Regional
Director to lower the required financial assurance amount for research
and other similar types of RUEs, which reflects BOEM's past experience
that the total liability exposure can be well below $500,000 for such
RUEs.
BOEM proposes to add paragraph (a)(3) to ensure that the financial
assurance requirements of Sec. 556.900(d) through (g) and Sec.
556.902 would apply to the requirements stated in paragraph (a).
BOEM would also add to paragraph (b) in this section to provide
that, if BOEM grants a RUE that serves either an OCS lease or a State
lease, the Regional Director may require the grant holder to provide
supplemental financial assurance to ensure compliance with the
obligations under the RUE grant. BOEM would use the same issuer credit
rating or proxy credit rating criteria found in proposed Sec.
556.901(d)(1) and (2) to evaluate a RUE grant holder as BOEM proposes
to apply to lessees, i.e., the Regional Director may require
supplemental financial assurance if the grant holder does not have an
issuer credit rating or a proxy credit rating that meets the criteria
set forth in proposed Sec. 556.901(d)(1). Like lessees, most RUE
holders are oil and gas companies, and BOEM would, therefore, use the
same financial criteria to determine the need for additional financial
assurance from RUE holders to provide consistency.
BOEM proposes to revise paragraph (b)(1) to update the regulatory
citation in existing Sec. 550.166(b)(1) to provide that the
supplemental financial assurance must meet the requirements for lease
surety bonds or other financial assurance provided in Sec. 556.900(d)
through (g) and Sec. 556.902.
The proposed rule would also revise Sec. 550.166(b)(2) to include
``BOEM and BSEE orders'' in the list of costs and liabilities, and
clarify that RUE holders should also comply with the decommissioning
regulations at 30 CFR part 250, subpart Q.
The proposed rule would also add new paragraph (c) to provide that
if a RUE grant holder fails to replace any deficient financial
assurance upon demand, or fails to provide
[[Page 42150]]
supplemental financial assurance upon demand, BOEM may assess
penalties, request BSEE to suspend operations on the RUE, and/or
initiate action for cancellation of the RUE grant. Proposed paragraph
(c) provides for actions similar to those available to BOEM pursuant to
proposed Sec. 556.900(h) if a lessee fails to provide sufficient
financial assurance.
Section 550.167 How may I obtain or assign my interest in a RUE?
The proposed rule would add Sec. 550.167 to establish the ability
to assign a RUE interest. Previously, RUE interests were not assigned,
because assignment of RUE interests was not addressed in the existing
regulations. This change is being proposed to allow RUE assignments.
This new section would also require a RUE assignee to provide the
information outlined in existing Sec. 550.161, which currently must be
provided only by applicants for a new RUE. Paragraph (a) of Sec.
550.167 would establish that BOEM must approve all assignments of all
or part of a RUE interest. Paragraphs (b)(1) through (4) would
establish the circumstances in which BOEM may disapprove an assignment
of a RUE, mirroring the circumstances under which BOEM may disapprove
the assignment of a lease or sublease pursuant to Sec. 556.704. These
circumstances are intended to prevent the assignment of a RUE when, for
example, the assignment would result in inadequate financial assurance.
Subpart J--Pipelines and Pipeline Rights-of-Way
Section 550.1011 Financial Assurance Requirements for Pipeline Right-
of-Way (ROW) Grant Holders
The proposed rule would revise this section in its entirety. The
section heading would be revised to read, ``Financial assurance
requirements for pipeline right-of-way (ROW) grant holders,'' to
clarify that a pipeline ROW grant holder may meet the requirements of
this section by providing bonds or other types of financial assurance,
in order to expand the language to include forms of financial assurance
in addition to bonds.
Currently, Sec. 550.1011(a) requires that an applicant or a holder
of a ROW must provide and maintain a $300,000 bond (in addition to bond
coverage required in 30 CFR parts 256 and 556), and potentially
additional security, if the Regional Director determines the latter is
needed. The proposed rule would revise this paragraph to require that
assignees, as well as applicants and holders, are required to provide
and maintain the $300,000 financial assurance to make clear that
financial assurance requirements would apply to an assignment of a ROW
grant. The proposed rule would remove the reference to 30 CFR part 256
currently in paragraph (a)(1) because 30 CFR part 256 does not contain
pipeline bonding requirements. The proposed rule would clarify that the
requirement to provide area-wide financial assurance for a pipeline ROW
grant is separate and distinct from the financial assurance coverage
required for leases in 30 CFR part 556 and that required for RUEs in 30
CFR part 550. Existing paragraph (a)(2) would be removed because
supplemental financial assurance requirements would be covered by
proposed paragraph (d).
BOEM would also remove existing paragraph (b), which defines the
three recognized OCS areas, because it is made redundant by the
reference to Sec. 556.900(b) in revised paragraph (a). BOEM proposes
to replace the removed paragraph (b) with a new paragraph (b) to
provide that the requirement under paragraph (a) to furnish and
maintain area-wide financial assurance may be satisfied if the operator
or a co-grant holder provides area-wide pipeline right-of-way financial
assurance in the required amount that guarantees compliance with the
regulations and the terms and conditions of the grant, as discussed in
Section IV.C of this preamble.
BOEM also proposes to revise paragraph (c) with a provision stating
that the requirements for lease financial assurance in Sec. 556.900(d)
through (g) and Sec. 556.902 would apply to the area-wide financial
assurance required in paragraph (a) of this section. This cross-
reference incorporates the financial assurance provisions from 30 CFR
part 556 that specify the required content, form, and administrative
handling of financial assurance. BOEM would remove existing paragraphs
(c) and (d), which would be made redundant by proposed new paragraph
(f).
BOEM would add paragraph (d) to provide that the Regional Director
may determine that supplemental financial assurance is necessary to
ensure compliance with the obligations under a pipeline ROW grant based
on an evaluation of the grant holder's ability to carry out present and
future obligations on the pipeline ROW. BOEM proposes to use the same
issuer credit rating or proxy credit rating criteria to evaluate a
pipeline ROW grant holder, or co-grant holder, as BOEM proposes to
apply to lessees in Sec. 556.901(d)(1). BOEM, as noted earlier in this
preamble, has found that reliance on credit ratings better evaluates
financial stability, and is thus applying the same financial criteria
in evaluating financial stability of grant holders.
BOEM also proposes to add additional supplemental financial
assurance requirements in new paragraph (e)(1) stating that the
supplemental financial assurance must meet the general requirements for
lease surety bonds or other financial assurance, as provided in Sec.
556.900(d) through (f) and the proposed revisions to paragraph (g) and
Sec. 556.902. This cross-reference incorporates the financial
assurance provisions from 30 CFR part 556 that specify the required
content, form, and administrative handling of financial assurance. New
paragraph (e)(2) proposes that any supplemental financial assurance for
a pipeline ROW would be required to cover liabilities for regulatory
compliance and compliance with BOEM and BSEE orders, decommissioning of
all pipelines or other facilities, and clearance from the seafloor of
all obstructions created by the pipeline ROW operations, in accordance
with the regulations set forth in 30 CFR part 250, subpart Q. See
Section IV.C of this preamble for further discussion.
The proposed rule would also add new paragraph (f) to provide that
if a pipeline ROW grant holder fails to replace any deficient financial
assurance upon demand or fails to provide supplemental financial
assurance upon demand, the Regional Director may assess penalties,
request BSEE to suspend operations on the pipeline ROW, and/or initiate
action for forfeiture of the pipeline ROW grant in accordance with
Sec. 250.1013.
Part 556--Leasing of Sulfur or Oil and Gas and Bonding Requirements in
the Outer Continental Shelf
The proposed rule would make a technical correction to the
authority citation for part 556 by removing the citation to 43 U.S.C.
1801-1802, because neither of these two sections contains authority
allowing BOEM to issue or amend regulations.
The proposed rule would also remove the citation to 43 U.S.C. 1331
note, which is where the Gulf of Mexico Energy Security Act of 2006 is
set forth. While this statute required BOEM to issue regulations
concerning the availability of bonus or royalty credits for exchanging
eligible leases, the deadline for applying for such a bonus or royalty
credit was October 14, 2010; therefore, lessees may no longer apply for
such credits. BOEM no longer needs the authority to issue regulations
under
[[Page 42151]]
that statute and has removed all regulations on this topic from 30 CFR
part 556, except for Sec. 556.1000, which provides that lessees may no
longer apply for such credits.
The terms ``bond,'' ``bonding,'' and ``surety bond'' would be
replaced throughout this part with the new term ``financial
assurance,'' as discussed earlier in this preamble. This change
includes changing the Title of Part 556 from ``Leasing of Sulphur or
Oil and Gas and Bonding Requirements in the Outer Continental Shelf''
to ``Leasing of Sulfur or Oil and Gas and Financial Assurance
Requirements in the Outer Continental Shelf.''
Subpart A--General Provisions
Section 556.105 Acronyms and Definitions
The proposed rule would add a definition of ``Issuer credit
rating'' and ``Investment grade credit rating,'' which are identical to
the proposed additions in Sec. 550.105.
The proposed rule would also revise the definition of ``Right-of-
Use and Easement (RUE)'' to include the words ``to construct, secure to
the seafloor, use, modify, or maintain platforms, seafloor production
equipment.'' This definition would be the same as the definition of
``Right-of-Use and Easement (RUE)'' proposed for Sec. 550.105.
The proposed rule would also add a definition for ``Financial
assurance'' to clarify that various methods can be used to ensure
compliance with OCS obligations. This definition would be the same as
the definition of ``Financial assurance'' proposed for Sec. 550.105.
The proposed rule would add definitions for the new terms
``Transfer'' and ``Assign'' to clarify that that these terms are used
interchangeably throughout 30 CFR part 556. This change would also
serve to clarify that the related terms ``transferee'' and
``transferor'' are interchangeable with ``assignee'' and ``assignor,''
respectively.
The proposed rule would also revise the definition of the term
``You'' to include, depending on the context of the regulations, a
bidder, a lessee (record title owner), a sublessee (operating rights
owner), a Federal or State right-of-use and easement grant holder, a
pipeline right-of-way grant holder, assignor or transferor, a
designated operator or agent of the lessee or grant holder, or an
applicant seeking to become one of the above. This change to the
definition of ``You,'' in concert with changes proposed in Sec.
550.166, would make explicit that any provisions applicable to either a
State or Federal RUE would apply to the other, and that any
distinctions between the two with respect to financial assurance are
being removed. This change is in concert with changes proposed in Sec.
550.105.
Subpart G--Transferring All or Part of the Record Title Interest in a
Lease
Section 556.704 When may BOEM disapprove an assignment or sublease of
an interest in my lease?
The proposed rule would revise paragraph (a) to clearly state that
all parties involved in the assignment of a record title interest in a
lease must be in compliance with all applicable regulations and orders,
including financial assurance requirements, or BOEM may disapprove an
assignment or sublease, consistent with changes to 30 CFR part 550
proposed in this rulemaking. The proposed rule would replace the word
``would'' in the section title with ``may'' to better reflect this
discretion.
Subpart H--Transferring All or Part of the Operating Rights in a Lease
Section 556.802 When may BOEM disapprove the transfer of all or part of
my operating rights interest?
The proposed rule would revise the existing section heading to
replace ``assignment'' with ``transfer'' consistent with the new
definitions proposed for both terms. The proposed rule would revise
paragraph (a) to clearly state that for the transferee to receive
approval for the transfer of operating rights in a lease, the
transferee must be in compliance with all applicable regulations and
orders to provide financial assurance requirements before BOEM may
approve an assignment, consistent with changes to 30 CFR part 550
proposed in this rulemaking. The proposed rule would replace the word
``would'' in the section title with ``may'' to better reflect this
discretion.
Subpart I--Bonding or Other Financial Assurance
Section 556.900 Financial Assurance Requirements for an Oil and Gas or
Sulfur Lease
The proposed rule would revise the section heading to read,
``Financial assurance requirements for an oil and gas or sulfur lease''
in order to ensure that the term ``bonding'' has been consistently
replaced with ``financial assurance'' and to clarify that a number of
forms of financial assurance can be provided, and not just surety
bonds, consistent with changes to 30 CFR part 550 proposed in this
rulemaking.
BOEM proposes to add paragraph (a)(4) to make clear that any
supplemental financial assurance required by the Regional Director must
be provided before a new lease will be issued or an assignment of a
lease approved.
The proposed rule would also revise the introductory text of
paragraph (g) to replace the word ``security'' with ``financial
assurance,'' and to add the word ``surety'' before ``bond'' in two
places to clarify that in those cases the regulation is referring to a
``surety bond.''
The proposed rule would revise the introductory text of paragraph
(h) to replace the words ``bond coverage'' with ``financial assurance''
to clarify that surety bonds are not the only means of meeting the
requirement. The proposed rule would also revise paragraph (h)(2) in
recognition that BSEE, rather than BOEM, is the agency with authority
to suspend production or other operations on a lease.
The proposed rule would add paragraph (i) to ensure consistency
with the RUE financial assurance requirements by providing that area-
wide lease surety bonds pledged to satisfy the financial assurance
requirements for RUEs may be called in for performance of obligations
on which the holder of a RUE defaults.
Section 556.901 Base Financial Assurance and Supplemental Financial
Assurance
The proposed rule would revise the section heading to read, ``Base
financial assurance and supplemental financial assurance,'' because
this section covers both base financial assurance and supplemental
financial assurance requirements.
Section 556.901(a)
The proposed rule would also revise paragraph (a)(1)(i)
introductory text to replace the word ``bond'' with ``lease exploration
financial assurance'' to be consistent with the terminology used in
existing paragraph (a)(1)(ii), which BOEM does not propose to change.
Section 556.901(b)
The proposed rule would eliminate the parenthetical ``(the
lessee)'' from the introductory text as it is made redundant by the
proposed revised definition of ``You.'' The proposed rule would also
revise paragraph (b)(1)(i) introductory text to replace the word
``bond'' with ``lease development financial assurance'' for consistency
with the terminology used in existing paragraph (b)(1)(ii), which BOEM
does not propose to change.
[[Page 42152]]
Section 556.901(c)
The proposed rule would also revise paragraph (c) to remove the
words ``authorized officer'' and replace them with ``Regional
Director,'' and remove the words ``lease bond coverage'' and ``a lease
surety bond'' and replace them in each instance with ``financial
assurance'' to clarify that the Regional Director can review whether
BOEM would be adequately secured by a surety bond, or another type of
financial assurance, for an amount less than the amount proposed in
paragraph (b)(1), but not less than the estimated cost for
decommissioning.
Section 556.901(d)
BOEM proposes to combine the provisions of the existing paragraph
(d) introductory text and the existing introductory paragraph (d)(1) to
provide that the Regional Director may determine that supplemental
financial assurance is required to ensure compliance with the
obligations under a lease if the lessee does not meet at least one of
the criteria provided in proposed paragraphs (d)(1) through (4) below.
For further discussion, see Section V of this preamble.
Section 556.901(d)(1)
BOEM proposes to revise paragraph (d)(1) to set forth the criteria
BOEM would use to evaluate the ability of a lessee to carry out present
and future obligations. Under this paragraph, BOEM would use an issuer
credit rating from a NRSRO, as defined by the SEC, greater than or
equal to either BBB- from Standard & Poor's (S&P) Ratings Service or
Baa3 from Moody's Investor Service, or the equivalent from another
NRSRO. If different NRSROs provide different ratings for the same
company, BOEM would apply the higher rating, as discussed in section
IV.A of this preamble.
Section 556.901(d)(2)
BOEM proposes to revise paragraph (d)(2) stating that BOEM could
also use a proxy credit rating calculated by BOEM based on audited
financial information from the most recent fiscal year (including an
income statement, balance sheet, statement of cash flows, and the
auditor's certificate) greater than or equal to either BBB- from S&Ps
Ratings Service or Ba3 from Moody's Investor Service, or their
equivalent from another NRSRO. The proxy credit ratings that BOEM would
calculate on behalf of lessees would be structured in the same scale as
the standard ratings (i.e., AAA to D). The audited financial
information from the most recent fiscal year that BOEM used to
determine the proxy credit rating must include a twelve-month period
within the twenty-four months prior to the lessee's receipt of the
Regional Director's determination that the lessee must provide
supplemental financial assurance. When determining a proxy credit
rating, the Regional Director will consider any additional liabilities
that may encumber a lessee's ability to carry out future obligations.
Under the proposed rule, the lessee would be obligated to provide the
Regional Director with information regarding its joint-ownership
interests and other liabilities associated with OCS leases, which might
not otherwise be accounted for in the audited financial information
provided to BOEM.
Section 556.901(d)(3)
BOEM proposes to add new paragraph (d)(3) to address the situation
where the lessee does not meet the criteria in proposed paragraphs
(d)(1) or (2), but one or more co-lessee(s) does meet those criteria.
The Regional Director may require a lessee to provide supplemental
financial assurance on a lease-by-lease basis if no co-lessee has an
issuer credit rating or proxy credit rating that meets the threshold
set forth in paragraphs (d)(1) or (2), as discussed in Section IV.A of
this preamble.
Section 556.901(d)(4)
BOEM proposes to add new paragraph (d)(4) to set forth the
criterion the Regional Director would use if the lessee does not meet
the criteria in proposed paragraphs (d)(1), (2), or (3). In this
instance, the Regional Director would assess each lease to determine
whether the value of the proved oil and gas reserves on the lease
exceed three times the estimated cost of the decommissioning associated
with the production of those reserves. Under paragraph (d)(4), the
Regional Director's assessment would be based on the evaluation of
proved oil and gas reserves following the methodology set forth in SEC
Regulation S-X at 17 CFR 210.4-10 and SEC Regulation S-K at 17 CFR
229.1200. BOEM also proposes new paragraphs (d)(4)(i) and (ii), which
state that, when implementing this criterion, BOEM will use
decommissioning cost estimates, including a BSEE-generated
probabilistic estimate at the P70 level, when available, or, if such
estimate is not available, BOEM will use the BSEE-generated
deterministic estimate.
Section 556.901(e)
BOEM proposes to redesignate existing paragraph (d)(2) as paragraph
(e) and revise it to provide that a lessee may satisfy the Regional
Director's demand for supplemental financial assurance either by
increasing the amount of its existing financial assurance or by
providing additional surety bonds or other types of acceptable
financial assurance.
Section 556.901(f)
BOEM proposes to redesignate existing paragraph (e) as paragraph
(f) and revise to remove the word ``bond'' and replace it with
``supplemental financial assurance,'' a term that includes a surety
bond or another type of financial assurance. BOEM also proposes to
modify the language of new paragraph (f) to establish that, in
determining the amount of supplemental financial assurance, the
Regional Director will consider the lessee's potential underpayment of
royalty and the cumulative decommissioning obligations as established
in the manner described in proposed paragraph (d)(3) of this section,
i.e., the use of the appropriate BSEE estimate.
Section 556.901(g)
BOEM proposes to redesignate existing paragraph (f) as new
paragraph (g) and revise it to replace the word ``security'' with
``financial assurance'' throughout.
Existing 30 CFR 556.901(f)(2) includes a statement to the effect
that, if a company requests a reduction of the amount of the original
bond required, the Regional Director may agree to such a reduction
provided that he or she finds that ``the evidence you submit is
convincing.'' BOEM proposes to replace the current regulatory text with
the following statement in new paragraph (g)(2): ``Upon review of your
submission, the Regional Director may reduce the amount of financial
assurance required,'' as discussed in Section IV of this preamble.
Section 556.901(h)
BOEM proposes to add a new paragraph (h) to describe the limited
opportunity lessees will have to provide the required supplemental
financial assurance in three phased installments during the first three
years after the effective date of this regulation, subject to the
conditions of proposed paragraphs (h)(1) and (2). A three-year approach
would allow companies to raise the relevant capital through operations
over a longer period of time, as discussed in section VII of this
preamble. Accordingly, it would reduce bankruptcy risk and ensure a
greater level of financial protection for the government and taxpayers.
BOEM proposes to add new paragraphs (h)(1)(i) through (iii) to
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establish the timing and amounts of phased supplemental financial
assurance that would need to be provided. Payments would be required in
three installments of one-third that of the demand, the first of which
would be required within the timeframe specified in the demand letter,
or within 60 calendar days of receiving the demand letter if no
timeframe is specified. The second one-third would be required within
24 months from the date of receipt of the original demand letter, and
the final payment would be due within 36 months from the date of the
receipt of the original demand letter.
BOEM proposes to add a new paragraph (h)(2) to establish a
procedure in case a demand that has been approved for phased compliance
is not met within the timeframes established by paragraphs (h)(1)(i)
through (iii). If a payment is missed, the Regional Director will
notify the party of the failure to meet the timeframe and that it will
no longer be eligible to meet the supplemental financial assurance
demand by using the phased compliance option set forth in proposed
paragraph (h). Moreover, the remaining balance of the demand would
become due ten calendar days after the Regional Director's notification
is received.
Section 556.902 General Requirements for Bonds or Other Financial
Assurance
The proposed rule would revise the section heading to read,
``General requirements for bonds or other financial assurance,'' to
recognize that other types of financial assurance, such as a dual-
obligee bond or a pledge of Treasury securities, may be provided under
30 CFR part 556.
These revisions propose that the same general requirements for
surety bonds provided by lessees, operating rights owners, or operators
of leases, also apply to surety bonds provided by RUE grant and
pipeline ROW grant holders. The proposed rule would therefore also
revise paragraph (a) to include ``grant holder'' and to cover surety
bonds provided under 30 CFR part 550. The requirements of this section
are those that apply broadly to all companies having to provide
financial assurance to BOEM for an OCS oil and gas or sulfur lease.
Additional requirements appliable specifically to RUEs and ROWs are
described in proposed Sec. Sec. 550.166 and 550.1011, respectively.
The proposed rule would add ``or grant'' after ``lease'' to clarify
the change to include grant holders in paragraph (a)(2). The rulemaking
would also add compliance with ``all BOEM and BSEE orders'' as a
requirement to ensure that providers of financial assurance are aware
that such financial assurance guarantees compliance with BOEM and BSEE
orders as well as with the regulations and the terms of a lease, ROW,
or RUE. This addition is necessary because a requirement to provide
supplemental financial assurance arises from a BOEM order. ``BOEM and
BSEE orders'' would mean any order issued by the relevant bureau, such
as a BSEE order to decommission, or a BOEM order to provide
supplemental bond.
The proposed rule would revise paragraph (a)(3) to include the
obligations of all record title owners, operating rights owners, and
operators on the lease.
The proposed rule would also revise paragraph (e)(2) to clarify
that the use of Treasury securities as financial assurance requires a
pledge of Treasury securities, as provided in Sec. 556.900(f).
The proposed rule would add a new paragraph (g) to recognize the
option to seek an informal resolution of a surety bond demand pursuant
to 30 CFR 590.6, which contains information regarding informal
resolutions. This paragraph would further provide that a request for an
informal resolution of a dispute concerning the Regional Director's
decision to require supplemental financial assurance will not affect
the applicant's ability to request a phased payment of its supplemental
financial assurance demand under proposed Sec. 556.901(h).
The proposed rule would add a new paragraph (h) to address risks
arising in connection with the lessee's and grant holder's ability to
appeal a demand for supplemental financial assurance to the Interior
Board of Land Appeals (IBLA) pursuant to the regulations in 30 CFR part
590. The proposed rule would add an additional requirement to the IBLA
appeals process whereby, if an appellant requests that the IBLA stay
the supplemental financial assurance demand, the appellant would be
required to post an appeals surety bond equal to the amount of
supplemental financial assurance that the appellant seeks to stay
before any stay could go into effect. Because IBLA appeals may continue
for several years, it is important that BOEM ensure that the
government's interests are protected. The appeals surety bond
requirement would prevent the government from being left with no
security if the appellant filed bankruptcy before the appeal process
ended.
Section 556.903 Lapse of Financial Assurance
The proposed rule would replace the word ``bond'' in the section
title with ``financial assurance'' for consistency with the terminology
change made throughout the rulemaking. The proposed rule would revise
paragraph (a) to add after the word ``surety'', ``guarantor, or the
financial institution holding or providing your financial assurance''
and to include references to the financial assurance requirements for
RUE grants (Sec. 550.166) and pipeline ROW grants (Sec. 550.1011).
The proposed rule would also revise paragraph (a) by removing the words
``terminates immediately'' and substituting ``must be replaced.'' The
proposed rule would replace the word ``promptly'' with a specific
timeline of within seven calendar days of learning of a negative event
for the financial assurance provider and would also add a 30-calendar
day timeframe in which the party must provide other financial assurance
from a different financial assurance provider.
BOEM also proposes to revise the first sentence of paragraph (b) by
inserting ``or financial institution'' after ``guarantor,'' to make the
provision apply to all types of financial assurance providers,
including those offering decommissioning accounts. BOEM also proposes
to revise the second sentence of paragraph (b) for consistency in
terminology by inserting the words ``or other financial assurance''
after the word ``bonds'' and inserting the words ``guarantor, or
financial institution'' after the word ``surety'', so that all surety
bonds or other financial assurance instruments must require all
financial assurance providers to notify the Regional Director within 72
hours of learning of an action filed alleging that the lessee or grant
holder, or their financial assurance provider, is insolvent or
bankrupt.
Section 556.904 Decommissioning Accounts
The proposed rule would revise the section heading and the term
``abandonment accounts'' throughout the section to read
``decommissioning accounts,'' in accordance with BOEM policy and
accepted terminology used in the industry. The words ``lease-specific''
would be removed throughout this section to remove the implication that
such an account could only pertain to one lease, thereby clarifying
that a decommissioning account could be used for one lease or several
leases, a RUE grant, or a pipeline ROW grant, or a combination thereof,
as discussed in section V.B of this preamble.
BOEM proposes to revise paragraph (a) to remove the term ``lease-
specific'' and replace it with ``decommissioning,'' and to add
references to the base and
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supplemental financial assurance regulation (proposed Sec.
556.901(d)), as well as the financial assurance regulations for RUE
grants (proposed Sec. 550.166(b)) and pipeline ROW grants (proposed
Sec. 550.1011(d)), consistent with the changes mentioned in the
preceding paragraph. Although the paragraph (a) introductory text would
continue to allow a lessee or grant holder to establish a
decommissioning account at a federally insured financial institution,
this proposed rule would eliminate the existing restriction in
paragraph (d) that such deposits not exceed the FDIC/FSLIC insurance
limits and the reference to paragraph (a)(3), which is being revised
and is no longer relevant to withdrawal of funds from a decommissioning
account.
The proposed rule would re-arrange the existing sentence
constituting Sec. 556.904(a)(1). The proposed rule would also revise
paragraph (a)(2) to remove the words ``as estimated by BOEM'' to
clarify that BOEM does not estimate decommissioning costs, but rather
uses the estimates of decommissioning costs determined by BSEE. The
proposed rule would also revise paragraph (a)(2) to require funding of
a decommissioning account ``pursuant to a schedule that the Regional
Director prescribes,'' as opposed to ``within the timeframe the
Regional Director prescribes'' as existing Sec. 556.904(a)(2) now
states.
The proposed rule would revise paragraph (a)(3) to remove the
requirement to provide binding instructions to purchase Treasury
securities for a decommissioning account under certain circumstances.
The proposed rule would replace the existing language with a new
provision providing that if you fail to make the initial payment or any
scheduled payment into the decommissioning account, you must
immediately submit, and subsequently maintain, a surety bond or other
financial assurance in an amount equal to the remaining unsecured
portion of your estimated decommissioning liability. This change
reflects BOEM's current policy to order a surety bond or other
financial assurance in the event the payments into the decommissioning
account are not timely made.
The proposed rule would revise paragraph (b) by removing ``lease-
specific'' and substituting ``decommissioning.''
The proposed rule would also remove existing paragraphs (c) and
(d), which concern the use of pledged Treasury securities to fund a
decommissioning account, as discussed in section V.B of this preamble.
Removing the requirement in existing paragraph (d) that the account
holder must purchase Treasury securities when the amount in the account
equals the maximum amount insurable by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation will
make these accounts more attractive to parties who may desire to use
this method of providing supplemental financial assurance. The removal
of existing paragraphs (c) and (d) would not preclude the use of
Treasury securities to fund a decommissioning account. Existing
paragraph (e) would be redesignated as paragraph (c) except that the
word ``pledged'' would be removed, and ``other revenue stream'' would
be added to the list of financial assurance options.
The proposed rule would add a revised paragraph (d), which would
describe the Regional Director's discretion to authorize BOEM to
provide funds from a decommissioning account to a liable party that
performs the decommissioning.
Section 556.905 Third-Party Guarantees
The proposed rule would revise the section heading to read,
``Third-party guarantees.'' The proposed rule would also revise the
section throughout to remove the introductory titles of each paragraph
to ensure consistency in the proposed rule's format.
Section 556.905(a)
BOEM proposes to revise paragraph (a) to include a cross-reference
to proposed Sec. 550.166(b) (related to RUEs) and proposed Sec.
550.1011(d)) (related to pipeline ROWs) in addition to the existing
reference to proposed Sec. 556.901(d) (related to base financial
assurance for leases), to clarify that a third-party guarantee may be
used as a type of supplemental financial assurance for not only leases,
but for RUE grants and pipeline ROW grants as well. This is further
discussed in Section V.A of this preamble.
BOEM would also revise paragraph (a)(1) to require that the
guarantor, not the guarantee, as provided in the existing regulation,
must meet the criteria in proposed Sec. 556.901(d)(1), as the factors
in proposed Sec. 556.901(d) more properly apply to an entity, such as
a guarantor, than to a document, such as a guarantee. See section V.A
of this preamble for further discussion. BOEM would retain existing
paragraph (a)(2), but would revise it to include a requirement, which
is found in existing paragraph (a)(4), that the guarantor or guaranteed
party must submit a third-party guarantee ``containing each of the
provisions in proposed paragraph (d) of this section.'' As discussed
below, paragraph (d) is being revised to no longer use the term
``indemnity agreement'' and to provide instead that the provisions that
BOEM previously required a lessee or grant holder to include in
indemnity agreements must be included in a third-party guarantee
agreement. This terminology is changed to clarify that the government
is not required to incur the expenses of decommissioning before
demanding compensation from the guarantor. The proposed rule would also
remove existing paragraphs (a)(3) and (a)(4), which would be superseded
by other revisions to this section.
Section 556.905(b)
The proposed rule would redesignate existing paragraph (b) as
paragraph (c) and revise the introductory text to remove the reference
to existing paragraph (c)(3) of this section because the requirements
in that paragraph would be superseded in this proposed rule. The
proposed rule would replace this reference with a reference to
paragraph (a)(1) of this section in paragraph (c) as it is proposed to
be revised. The proposed rule would add new paragraph (b) to allow
guarantors to limit their guarantees to a fixed dollar amount as agreed
to by BOEM. BOEM is proposing this change because the existing
regulations do not clearly limit the liability of a guarantor to a
fixed monetary amount stated in the guarantee. Therefore, few parties
were willing to use third-party guarantees in the past. Because the
cessation of production is neither desirable nor easily accomplished by
an operator, the proposed rule would also revise existing paragraph
(b)(2) to remove the requirement that, when a guarantor becomes
unqualified, you must ``cease production until you comply with the
surety bond coverage requirements of this subpart.'' Instead, the
language in revised redesignated paragraph (c) would be revised to
provide that you must, within 72 hours, ``[s]ubmit and subsequently
maintain a surety bond or other financial assurance covering those
obligations previously secured by the third-party guarantee.''
The proposed rule would remove existing paragraph (c) as the
language would be superseded by the new language in Sec. 556.905(a).
Section 556.905(d)
The proposed rule would revise paragraph (d)(1) introductory text
to read ``If you fail to comply with the terms of any lease or grant
covered by the guarantee, or any applicable
[[Page 42155]]
regulation, your guarantor must either:'' to be consistent with the
revision of paragraph (a) to allow the use of a third-party guarantee
for a RUE grant or a pipeline ROW grant.
The proposed rule would revise paragraph (d)(1)(i) to clarify that
the corrective action required is to bring the lease or grant into
compliance with its terms, or any applicable regulation, to the extent
covered by the guarantee.
The proposed rule would revise paragraph (d)(1)(ii) to clarify that
the liability only extends to that covered by the guarantee and that
payment does not result in the cancelation of the guarantee, but only a
reduction in the remaining value equal to the amount provided.
The proposed rule would remove existing subparagraph (d)(2) to be
consistent with the revision to remove existing paragraph (c). As a
result, existing paragraph (d)(3) would be redesignated as paragraph
(d)(2) and existing paragraph (d)(4) would be redesignated as paragraph
(d)(3).
The proposed rule would revise the redesignated paragraphs
(d)(2)(ii) and (iii) to remove the words ``your guarantor's'' and
replace them with the word ``the'' to clarify that redesignated
paragraph (d)(2) would apply to the guarantee itself.
The proposed rule would revise proposed paragraph (d)(3) to replace
the term ``a suitable replacement security instrument'' with
``acceptable replacement financial assurance'' for clarity and would
include the requirement that appears in existing Sec. 556.905(d)(4)
that any replacement financial assurance must be provided before the
termination of the period of liability of the third-party guarantee.
Section 556.905(e)
The proposed rule would also revise paragraph (e) to provide that
BOEM will cancel a third-party guarantee under the same terms and
conditions as those proposed in Sec. Sec. 556.906(b) and (d)(3).
Section 556.905(f) Through (k)
BOEM also proposes to add new paragraphs (f) through (k) to replace
the provisions of existing paragraph (e). The new paragraphs mirror the
provisions of existing paragraph (e) while making minor adjustments to
accommodate the new format and add clarification. The term ``indemnity
agreement'' would be replaced with ``third-party guarantee agreement''
throughout.
Section 556.906 Termination of the Period of Liability and Cancellation
of Financial Assurance
The proposed rule would replace the words ``security'' and ``surety
bond'' with ``financial assurance'' and ``surety'' with ``financial
assurance provider'' for consistency with the changes throughout the
proposed rule. The section title would also be revised so that ``a
bond'' is replaced with ``financial assurance.''
The proposed rule would revise existing paragraph (b)(1) to remove
the word ``terminated'' in two instances and replace it with
``cancelled'' to be consistent with the existing paragraph (b)
introductory text, which provides that the Regional Director will
cancel your previous financial assurance when you provide a
replacement, subject to the conditions provided in existing paragraphs
(b)(1) through (3). BOEM would also remove the word ``for'' before ``by
the bond'' in paragraph (b)(1) for grammatical reasons.
The proposed rule would revise existing paragraph (b)(2) to also
add cross-references to Sec. 550.166, which is the financial assurance
regulation for RUE grants, and Sec. 550.1011, which is the financial
assurance regulation for pipeline ROW grants, and would revise existing
paragraph (b)(3) to also reference supplemental financial assurance
regulations for RUE grants (proposed Sec. 550.166(b) and pipeline ROW
grants (proposed Sec. 550.1011(d)). BOEM proposes to delete the word
``base'' in front of financial assurance in existing paragraph (b)(2)
to propose that the new financial assurance would replace whatever
financial assurance that previously existed, whether that financial
assurance consisted of a base bond and/or any prior supplemental
financial assurance.
The proposed rule would revise the paragraph (d) introductory text
to cover financial assurance cancellations and return of pledged
financial assurance and, in the table, would remove the middle column
entitled, ``The period of liability will end,'' because it is redundant
with the provisions in proposed paragraphs (a) through (c).
In existing paragraph (d), in the column in the table entitled
``For the following type of bond,'' BOEM proposes to remove the words
``type of bond'' and replace those words with a colon at the top of the
table so that this paragraph would apply to surety bonds or other
financial assurance, as applicable. Paragraph (d)(1) would also be
revised to include a cross-reference to base financial assurance
submitted under proposed Sec. 550.166(a) (for RUE grants) and proposed
Sec. 550.1011(a) (for pipeline ROW grants). BOEM would also revise
paragraph (d)(2) in the same column to include a reference to
supplemental financial assurance submitted under proposed Sec.
550.166(b) and proposed Sec. 550.1011(d).
The proposed rule would revise paragraph (d) to amend the heading
of the column entitled, ``Your bond will be cancelled,'' to read,
``Your financial assurance will be reduced or cancelled, or your
pledged financial assurance will be returned,'' to clarify that
financial assurance may be reduced or cancelled and pledged financial
assurance, or a portion thereof, may be returned, and to specify other
circumstances under which the Regional Director may cancel supplemental
financial assurance or return pledged financial assurance. While the
existing criteria identify most instances when cancellation of
financial assurance is appropriate, occasionally there are other
circumstances where cancellation would be warranted. The proposed rule
would allow cancellation when BOEM determines, using the criteria set
forth in proposed Sec. 556.901(d), 550.166(b), or 550.1011(d), as
applicable, that a lessee or grant holder no longer needs to provide
supplemental financial assurance for its lease, RUE grant, or pipeline
ROW grant when the operations for which the supplemental financial
assurance was provided ceased prior to accrual of any decommissioning
obligation; or when cancellation of the financial assurance is
appropriate because BOEM determines such financial assurance never
should have been required under the regulations.
The proposed rule would add a new paragraph (d)(3) in the table in
paragraph (d) to address the cancellation of a third-party guarantee.
In the past, parties have expressed concern to BOEM that the
regulations, although they expressly allow for the termination of the
period of liability, do not clearly allow for the cancellation of the
guarantee. This addition would allow BOEM to cancel a third-party
guarantee under the same terms and conditions that apply to
cancellation of other types of financial assurance, as provided in
proposed Sec. 556.906(d)(2).
The proposed rule would revise the introductory text in paragraph
(e) to remove the words ``or release'' because the term ``release'' is
undefined and not used in practice. Likewise, the proposed rule would
remove the words ``or released'' from paragraph (e)(2). No substantive
change is intended; rather BOEM seeks to clarify the meaning of the
existing provision.
[[Page 42156]]
The proposed rule would also revise paragraph (e) to reference RUE
grants and pipeline ROW grants to provide that the Regional Director
may reinstate the financial assurance on the same grounds as currently
provided for reinstatement of lease financial assurance.
Section 556.907 Forfeiture of Bonds or Other Financial Assurance
The proposed rule would replace the words ``security,'' ``surety
bond,'' or ``third-party guarantee'' with ``financial assurance'' and
``surety'' with ``financial assurance provider'' for consistency with
the changes throughout the proposed rule.
The proposed rule would revise the section heading to read,
``Forfeiture of bonds or other financial assurance'' because the use of
``or'' is sufficient in this instance. The proposed rule would revise
paragraph (a)(1) to include surety bonds or other financial assurance
for RUE grants and pipeline ROW grants, in addition to leases, in the
forfeiture provisions of this section. BOEM also proposes to clarify
that the Regional Director may call for forfeiture of all or part of a
surety bond or other form of financial assurance, or demand performance
from a guarantor, if the lessee or grantee covered by the financial
assurance refuses or is unable to comply with any term or condition of
a lease, a RUE grant, or a pipeline ROW grant, as well as any
regulation. Throughout this section, BOEM proposes to add references to
a grant, a grant holder, and grant obligations to implement the
revisions in proposed paragraph (a)(1). BOEM proposes to revise (a)(2)
to replace ``other form of security'' with ``other form of financial
assurance'' for consistent terminology.
BOEM proposes to revise paragraph (b) to include surety bonds ``or
other financial assurance'' so that BOEM may pursue forfeiture of a
surety bond or other financial assurance. The word ``lessee'' would
also be replaced with ``record title holder'' to ensure that co-lessees
are included.
BOEM proposes to revise paragraph (c)(1) to include ``financial
institution holding or providing your financial assurance'' as one of
the parties the Regional Director would notify of a determination to
call for forfeiture because a bank or other financial institution may
hold funds subject to forfeiture.
The proposed rule would revise paragraph (c)(1)(ii) to acknowledge
limitations authorized by Sec. 556.902(a)(3) by more precisely stating
that the Regional Director will use an estimate of the cost of the
corrective action needed to bring a lease into compliance when
determining the amount to be forfeited, subject, in the case of a
guarantee, to any limitation authorized by proposed Sec.
556.902(a)(3).
BOEM proposes to replace existing paragraphs (c)(2)(ii) and (iii)
with a new paragraph (c)(2)(ii) that would specify that to avoid
forfeiture by promising to take corrective action, any financial
assurance provider would have to agree to, and demonstrate that it will
complete the required corrective action to bring the relevant lease
into compliance within the timeframe specified by the Regional
Director, even if the cost of such compliance exceeds the limit of the
financial assurance. The proposed changes make clear that existing
paragraphs (c)(2)(ii) and (iii) apply to all forms of financial
assurance, including the caveat that corrective action must be
completed even if the cost of compliance exceeds the limit of the
financial assurance.
BOEM proposes to revise existing paragraphs (d) and (e)(2) by
replacing ``leases'' with ``lease or grant'' to extend the
applicability of these provisions to include holders of RUE and ROW
grants.
BOEM proposes to revise paragraph (f)(1) to include ``grant'' as
well as lease. BOEM also proposes to revise paragraph (f)(2) to clarify
that BOEM may recover additional costs from a third-party guarantor
only to the extent covered by the guarantee. This would be consistent
with the change made at Sec. 556.902(a)(3) to allow the use of limited
third-party guarantees.
This rulemaking would also reword paragraph (g) for clarity.
In some circumstances, predecessor lessees that have been notified
about the failure of their successor organizations to fulfill their
decommissioning obligations will initiate the requisite decommissioning
activities. In these cases, predecessor lessees or grantees are likely
to incur costs that could be funded from financial assurance posted
with BOEM on behalf of the current lessee. Some of this financial
assurance may be forfeited by the current lessee or by other successor
lessees. BOEM proposes to add a paragraph (h) to make clear that BOEM
may provide funding collected from forfeited financial assurance to
predecessor lessees or grant holders or to third parties taking
corrective actions on the lease or grant.
Part 590--Appeal Procedures
Subpart A--Offshore Minerals Management Appeal Procedures
Section 590.4 How do I file an appeal?
BOEM proposes to add paragraph (c) to specify that, while a demand
for supplemental financial assurance may be appealed to the IBLA, a
stay can only be granted if an appeal surety bond for an amount equal
to the demand is posted. This is intended to mitigate the risk to the
government that, after the appeal is decided, a company will be unable
to perform its obligations because of its financial deterioration
during pendency of the appeal.
Severability
BOEM proposes to include in the final rule that, should any court
hold unlawful and/or set aside portions of this rulemaking, the
remaining portions are severable and therefore should not be remanded
to the agency. The proposed rule contains three main components: (1)
Streamlining requirements for supplemental financial assurance; (2)
Establishing ``P70'' as the relevant estimate for the amount of any
supplemental financial assurance, and (3) Making several, less
significant changes to, among other things. right-of-use and easement
and right-of-way grants and decommissioning accounts. See preamble
sections IV.B through V.C.
These three components operate largely independent of each other:
the first component considers whether a lessee is at risk of default
based on the lessee's credit rating or the proved reserves on the
lease; the second component considers the appropriate requirements in
light of that risk; and the third component addresses several
longstanding and technical matters that do not bear directly on the
first two components. Indeed, these three components are sufficiently
distinct that their severability does not depend on the specifics of
this proposed rule. For example, if, in the final rule, BOEM sets the
appropriate level of supplemental financial assurance at a different P-
value, that decision would remain severable from the threshold
determination regarding whether to collect supplemental financial
assurance and from the other separate technical changes proposed by
this rule.
XI. Additional Comments Solicited by BOEM
In addition to those comment requests stated above, BOEM also
requests comments on the topics below:
BOEM is considering the inclusion of offshore joint and
several decommissioning liabilities (of the co-lessees that would
otherwise have exempted the lessee from providing supplemental
financial assurance) in the determination of a proxy credit rating when
these liabilities are ``disproportionately high'' and may encumber that
co-lessee's ability to
[[Page 42157]]
carry out future obligations. BOEM is requesting comments on the
appropriate criteria to determine what constitutes ``disproportionately
high'' offshore liabilities, for example, a ratio of decommissioning
liabilities to the net worth of the co-lessee above X times, or other
financially significant and reasonable criteria on how these
liabilities should best be incorporated into the proxy credit rating
that BOEM will derive.
The use of End-of-Life (Years) in the evaluation of asset
value as an alternative to using the decommissioning costs ratio. BOEM
requests comments on the use of a minimum number of years of production
remaining criterion to qualify for an exemption from supplemental
financial assurance. Possibly, End-of-Life criteria could be an
alternative to the 3:1 ratio of value of reserves to decommissioning
costs.
The consideration of bond issuance ratings, in addition to
issuer credit ratings, in determining the financial risk posed by
lessees and grant holders. BOEM also invites comments on determining an
appropriate threshold for bond issuance ratings, such as general
unsecured debt ratings.
Should BOEM exclude third-party guarantors from the
requirement of Sec. 556.902(a)(3) that guarantees must ``guarantee
compliance with all obligations of all lessees, operating rights,
owners and operators on the lease'' in addition to allowing a third-
party guarantee to be limited in amount?
XII. Procedural Matters
A. Executive Order 12866: Regulatory Planning and Review, as Amended by
Executive Order 14094--Modernizing Regulatory Review, and Executive
Order 13563: Improving Regulation and Regulatory Review
Executive Order 12866, as amend by Executive Order 14094 provides
that the Office of Information and Regulatory Affairs (OIRA) in OMB
will review all significant rules. OIRA has reviewed this proposed rule
and determined that it is a significant action under Executive Order
12866, as amend by Executive Order 14094 Sec 3 (f)(1). This rulemaking
will result in an annual effect on the economy of $200 million or more
(adjusted every 3 years by the Administrator of OIRA for changes in
gross domestic product); or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, territorial, or
tribal governments or communities.
Executive Order 13563 reaffirms the principles of Executive Order
12866, as amend by Executive Order 14094, while calling for
improvements in the Nation's regulatory system to promote
predictability and reduce uncertainty, and to use the best, most
innovative, and least burdensome tools for achieving regulatory ends.
Executive Order 13563 directs agencies to consider regulatory
approaches that reduce burdens and maintain flexibility and freedom of
choice for the public where these approaches are relevant, feasible,
and consistent with regulatory objectives. BOEM has developed this
proposed rule in a manner consistent with these requirements.
BOEM's proposed changes are estimated to increase the private cost
to lessees in the form of bonding or other financial assurance
premiums. BOEM has drafted an initial regulatory impact analysis (IRIA)
detailing the estimated impacts of this proposed rule. The IRIA
reflects both monetized and non-monetized impacts; the costs and
benefits of the non-monetized impacts are discussed qualitatively in
the document. BOEM's IRIA is available in the public docket for this
rulemaking.
BOEM expects this proposed rule may increase the total amount of
financial assurance, increasing the aggregate private cost to lessees
of financial assurance premiums. The table below summarizes BOEM's
estimate of the cost in financial assurance premiums paid by lessees
over a 20-year time horizon if this proposed rule is finalized less the
premiums associated with BOEM's existing current financial assurance
portfolio. Additional information on the estimated transfers, costs,
and benefits can be found in the IRIA posted in the public docket for
this proposed rule.
Total Estimated Increase in Bonding Financial Assurance Premiums
Associated With BOEM's Proposed Amendments
[2022-2041, 2021$ millions]
------------------------------------------------------------------------
Discounted at Discounted at
2022-2041 3% 7%
------------------------------------------------------------------------
Total Compliance Cost................... $4,867 $3,379
Annualized Compliance Cost.............. 327.1 318.9
------------------------------------------------------------------------
B. Regulatory Flexibility Act (RFA)
The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires agencies
to analyze the economic impact of regulations when a significant
economic impact on a substantial number of small entities is likely and
to consider regulatory alternatives that will achieve the agency's
goals while minimizing the burden on small entities. BOEM has provided
an initial regulatory flexibility analysis (IRFA), which assesses the
impact of this proposed rule on small entities. The IRFA is available
in the public docket for this rulemaking.
As defined by the Small Business Administration (SBA), a small
entity is one that is ``independently owned and operated and which is
not dominant in its field of operation.'' What characterizes a small
business varies from industry to industry. The proposed rule would
affect OCS lessees and RUE grant holders and pipeline ROW grant holders
on the OCS. The analysis shows that this includes roughly 536 companies
with ownership interests in OCS leases and grants. Entities that would
operate under this proposed rule are classified primarily under North
American Industry Classification System (NAICS) codes 211120 (Crude
Petroleum Extraction), 211130 (Natural Gas Extraction), and 486110
(Pipeline Transportation of Crude Oil and Natural Gas). For NAICS
classifications 211120 and 211130, the SBA defines a small business as
one with fewer than 1,250 employees; for NAICS code 486110, a business
with fewer than 1,500 employees.
Based on these criteria, approximately 407 (76 percent) of the
businesses operating on the OCS subject to this proposed rule are
considered small; the remaining businesses are considered large
entities. All of the operating businesses meeting the SBA ``small
business'' classification are potentially impacted; therefore, BOEM
expects that the proposed rule would affect a substantial number of
small entities. Small and large oil and gas companies have different
business models. Large
[[Page 42158]]
oil and gas companies tend to focus their business efforts on new
exploration and development projects. Such projects tend to be large in
scale, low in frequency, and focused on deep water operations; as a
result, the rate of their oil and gas reserve depletion is low. In
contrast, most small oil and gas companies tend to focus on late-stage
oil and gas production intended to maximize the residual output from
established facilities; as a result, the rate of their oil and gas
reserve depletion is high. For this reason, smaller companies tend to
operate large numbers of old facilities, which are likely to require
decommissioning sooner than newer facilities. Accordingly, the
prospective decommissioning costs of small oil companies are likely to
be high relative to their net tangible assets, making these companies
disproportionately susceptible to any change in decommissioning costs
and the associated costs of providing supplemental financial assurance.
Because BOEM's financial assurance program is intended to ensure that
all current lessees meet their obligations, and thereby avoid the need
for the taxpayer to assume these obligations in the event of default,
any action taken by BOEM to ensure financial responsibility of lessees
would necessarily significantly impact smaller companies.
BOEM estimated the annualized increase in private costs to lessees
and allocated those costs to small and large entities based on their
decommissioning liabilities. BOEM's analysis concludes that the
proposed regulatory changes could cause small companies to incur $252.6
million (at a 7 percent discount rate) in annualized compliance costs.
BOEM recognizes that there will be incremental cost burdens to most
affected small entities. BOEM seeks specific comment and feedback from
affected small entities on the costs associated with this rulemaking.
Additional information about these conclusions can be found in the IRFA
for this proposed rule.
Estimated Impact in Private Cost for Small Lessees
[2021, $millions]
------------------------------------------------------------------------
Discounted at Discounted at
2021-2041 3% 7%
------------------------------------------------------------------------
Total Compliance Cost................... $3,820 $2,676
Annualized Compliance Cost.............. 256.8 252.6
------------------------------------------------------------------------
The proposed changes are designed to balance the risk of non-
performance with the costs and disincentives to production that are
associated with the requirement to provide supplemental financial
assurance. The IRIA and the IRFA include three regulatory alternatives
which were considered and not selected by BOEM. This section walks
through the alternatives (which are discussed in more detail in the
IRIA) and discusses how these alternatives impact small businesses and
why they were not selected.
Regulatory Alternatives
There are three regulatory alternatives to the proposed action
analyzed in the IRIA:
1. No Action Alternative: Continue the policies of partial
implementation of NTL No. 2016-N01.
2. More Stringent Regulatory Alternative: Full implementation of
NTL No. 2016-N01.
3. Less Stringent Regulatory Alternative: Lower Tier 1 \16\ cutoff
to BB- and include a waiver for lessees with Tier 1 predecessor
lessees.
---------------------------------------------------------------------------
\16\ The IRIA alternatives describe lessees as Tier 1 or Tier 2
depending on whether BOEM would require the lessee to provide
supplemental financial assurance. Tier 1 lessees are considered low
risk and would not be required to provide supplemental financial
assurance, while Tier 2 lessees are considered high risk and would
be required to do so.
---------------------------------------------------------------------------
Under the no action alternative, BOEM would continue to partially
implement NTL No. 2016-N01, which only requires high-risk, Tier 2
lessees (lessees with a credit rating below BB-) to provide bonds or
other financial assurance and only for their sole liability
properties.\17\ Only Tier 2 lessees that do not have another lessee in
the chain of title would be required to provide supplemental financial
assurance. This alternative differs from the proposed rule in that the
proposed rule would change the Tier 2 demarcation to those lessees with
ratings below BBB-. The proposed rule also would require supplemental
financial assurance for Tier 2 lessees who do not have a Tier 1 (low
risk) co-lessee, grant holder, or co-grant-holder regardless of the
presence of any predecessor lessee or grantee, even a Tier 1
predecessor. This alternative is more fully described in the IRIA as
the baseline.
---------------------------------------------------------------------------
\17\ This does not fully reflect the current policy, and
therefore is not literally a ``no action'' alternative: BOEM
broadened the scope of its financial assurance requirement relative
to a partial implementation of NTL No. 2016-N01 last year. See BOEM
Expands Financial Assurance Efforts [verbar] Bureau of Ocean Energy
Management, https://www.boem.gov/newsroom/notes-stakeholders/boem-expands-financial-assurance-efforts. However, there have been
relatively few companies affected by the new policy to date, and it
is too recent for this policy change to have had a discernible
impact on financial assurance demands; therefore, the alternative
used in the IRIA best estimates the baseline.
---------------------------------------------------------------------------
Under the more stringent alternative, BOEM would fully implement
NTL No. 2016-N01. The NTL included guidance on how BOEM would evaluate
the five criteria for determining a company's ability to meet its OCS
obligations for self-insurance, which are described in more detail in
the IRIA. The result of NTL No. 2016-N01, as written, was that not even
the subsidiaries of highly rated companies could provide sufficient
financial assurance for the full amount of their OCS liabilities. More
information on the more stringent alternative is included in the IRIA.
Under the less stringent alternative, BOEM analyzed an alternative
that would maintain the baseline threshold demarcation between Tier 1
and Tier 2 companies at BB-. The less stringent option also would
include the baseline's consideration of predecessor lessees but would
require that at least one predecessor lessee be a Tier 1 company in
order for the current lessee to avoid having to provide supplemental
financial assurance. This alternative would require Tier 2 lessees who
have Tier 2 predecessor lessees to provide supplemental financial
assurance; they would not be required to do so under the baseline. As
opposed to the proposed rule, lessees with a BB-, BB, or BB+ rating
would not be required to provide supplemental financial assurance under
this alternative. Further, under this alternative, any Tier 2 lessee
with a Tier 1 lessee in the chain of title would not be required to
provide supplemental financial assurance, unlike under the proposed
rule. BOEM fully outlines this alternative in the IRIA.
[[Page 42159]]
Discussion of Regulatory Alternatives
Under the no action alternative, the current level of financial
risk would remain the same. However, BOEM reviewed NTL No. 2016-N01
after several recent bankruptcies and determined that changes were
necessary to comprehensively identify, prioritize, and manage the
health, safety, and environmental risks associated with industry
activities on the OCS.
In its IRIA analysis, BOEM estimates that implementation of the
more stringent alternative would significantly increase the compliance
cost over the baseline and over the proposed rule. BOEM acknowledges
that there could be some additional risk reduction by bonding a greater
number of liabilities, but, given joint and several liability with
multiple co-lessees and predecessor lessees, the relative risk
reduction from this alternative would be very small. Although the more
stringent option would reduce the risk that the U.S. Government might
have to assume performance of the lessee's obligations, the $647
million annualized compliance cost of this alternative could be a
significant cost burden on the U.S. offshore oil and gas industry.
The less stringent alternative would differ in two problematic ways
from the proposed action. First, the less stringent option would
maintain the baseline demarcation between Tier 1 and Tier 2, which is
lower than that of the proposed rule. This would not meaningfully help
to mitigate default risk to the taxpayer on decommissioning
liabilities. Second, the less stringent alternative would not require
financial assurance should a Tier 1 predecessor lessee be in the chain
of title. Although the less stringent alternative would result in lower
bonding costs for industry and small businesses than the proposed rule,
consideration of predecessor lessees and grantees encourages moral
hazard by incentivizing current lessees to pass risk to predecessors
rather than proactively prepare for decommissioning and related
obligations. Therefore, BOEM did not select this alternative. See the
IRIA for more detailed information about the alternative bonding and
risk profiles.
BOEM decided against the less stringent alternative. Instead, BOEM
will require supplemental financial assurance from all financially weak
lessees that lack either financially strong co-lessees or sufficiently
valuable proved oil and gas reserves to attract a buyer if needed.
Eschewing reliance on predecessor lessees ensures that financial
responsibility for decommissioning rests with current lessees and
encourages those lessees to financially prepare for decommissioning
costs, rather than pass those expenses to predecessor lessees and
possibly the taxpayer. BOEM finds the less stringent alternative would
not adequately reduce default risk and would not require all lessees to
fully internalize the cost of decommissioning. This alternative is also
discussed in more detail below and in the IRIA.
As part of this less stringent alternative, potential adverse
impacts to small businesses could be reduced if BOEM kept the Tier 2
threshold at BB- relative to the proposed rule, which increases such
threshold to BBB- to match the investment grade standard. BOEM has
determined that the use of an investment grade standard for waiving
supplemental financial assurance is the most appropriate threshold
because this approach minimizes credit default risk to the taxpayer
without overburdening offshore companies with the cost of providing
financial assurance in low credit risk scenarios.
BOEM finds that the less stringent alternative would slightly
increase the likelihood that decommissioning costs would be borne by
the taxpayer as lowering the floor of Tier 1 would expand the number of
companies not subject to financial assurance to include those with
higher 1-year default rates.
Although credit ratings are objective criteria that are intended to
accurately reflect the risk of default and the potential that the
Federal Government could be forced to undertake performance obligations
of OCS lessees, BOEM recognizes that the proportion of small companies
adversely affected by the proposed rule would be higher than that of
large companies. However, this disproportionate effect on small
companies is not attributable to the proposed rule, but results from
the need to ensure that decommissioning obligations are fulfilled.
This less stringent alternative also relies on predecessor lessees
and grantees when determining if and how much supplemental financial
assurance will be required, which BOEM's proposed rule does not. By not
allowing reliance on predecessors to excuse supplemental financial
assurance, BOEM requires that all lessees take into account the full
cost of decommissioning as they will have provided financial assurance
that prevents the need to turn to predecessor lessees. Any entity that
owned a lease at any point in time is jointly and severally liable for
the costs of decommissioning facilities on that lease during their
tenure, along with the current and prior owners, until such time as the
facility has been permanently decommissioned. Therefore, if the current
lessee is unable or unwilling to decommission it at the end of its
useful life, BSEE can order the prior lessee to complete the
decommissioning obligations for facilities that existed on the lease at
the time of ownership. If BOEM were to take into account the financial
capacity of predecessor lessees in determining the amount of
supplemental financial assurance required of a current owner, the
financial burden on small companies would be substantially reduced
compared to that resulting from the proposed rule, because a much
smaller number of them would be required to post supplemental financial
assurance. Given that the required amount of supplemental financial
assurance relative to the net assets of such companies is often
substantial, and considering that the premiums on the underlying bonds
can be significant relative to the net income of such companies, taking
into account predecessor lessee strength could substantially reduce the
potential adverse impacts of requiring financial assurance from small
business.
Though allowing the presence of a predecessor lessee or grantee to
change financial assurance requirements would reduce the potential
adverse impacts to small businesses, BOEM does not recommend waiving
supplemental financial assurance from current lessees based only on the
existence of financially viable predecessor lessees. Financial
consideration for the decommissioning liability has already been
discounted from the asset purchase price paid by the current lessee. As
a corollary, a lessee knows that BOEM may demand supplemental financial
assurance from it to cover its obligations, including decommissioning
obligations for which it shares liability with a predecessor lessee.
Armed with this knowledge, all lessees can plan ahead and include the
possible need to provide supplemental financial assurance in their
business plans. Therefore, there is no need to insulate current lessees
from supplemental financial assurance demands by relying on the
financial ability of strong predecessor lessees. Along the same lines,
allowing current lessees not to provide supplemental financial
assurance based on a predecessor lessee's strength may incentivize
current lessees to not consider decommissioning costs in their business
decisions or to take risks they would not have otherwise taken if they
had financial resources at risk in the event
[[Page 42160]]
of non-performance. This ``moral hazard'' could distort the market for
lease transfers by allowing a buyer and seller to conduct a transaction
without calculating in end-of-life decommissioning cash outflows, the
buyer relying on end-of-life bankruptcy instead of decommissioning, and
may ultimately result in predecessor lessees and grantees having to
perform decommissioning for which they had not planned.
While waiving supplemental financial assurance for companies having
financially viable predecessor lessees and grantees would mitigate the
impact the proposed rule on small businesses, BOEM has determined that
this benefit would not be acceptable given that, under these
circumstances, lessees may not always fully internalize the cost of
their decommissioning obligations into their operations as they can
rely on the predecessor lessee if needed and avoid having to pay
financial assurance premiums. Additional moral hazard implications of
implementing such a retroactive policy are described in more detail in
the IRIA. Reliance on predecessor lessees would likely also cause them
to require the buyer provide them financial assurance prior to selling
their leases to new owners (which would also result in a cost for small
businesses). For these reasons, BOEM has determined that any waiver of
financial responsibility based on business relationships should be
limited to situations where the liable party voluntarily becomes a
current co-lessee or co-grantee and therefore, knowingly assumes its
liabilities.
C. Small Business Regulatory Enforcement Fairness Act
This proposed rule would revise the financial assurance
requirements for OCS lessees and grant holders and would require
supplemental financial assurance where the risk is highest. BOEM's
proposed changes would: (1) Modify the evaluation process for requiring
additional security, (2) Simplify and strengthen the evaluation
criteria, and (3) Remove restrictive provisions for third-party
guarantees and decommissioning accounts. These proposed changes reflect
an interest in relying on current lessees and grant holders to provide
required financial assurance, aligning the evaluation criteria with
banking and finance industry practices, providing greater flexibility
for industry, and protecting taxpayers from exposure to the
consequences of noncompliance with DOI regulations and OCS lease
obligations, particularly the nonperformance of decommissioning
obligations.
This proposed rule is a major rule under 5 U.S.C. 804(2), the Small
Business Regulatory Enforcement Fairness Act, because implementation of
this rulemaking will have an annual effect on the economy of $100
million or more.
For more information on the small business impacts, see the IRFA
analysis and the discussion in section XII.B of this preamble. Small
businesses may send comments on the actions of Federal employees who
enforce or otherwise determine compliance with Federal regulations to
the Small Business and Agriculture Regulatory Enforcement Ombudsman,
and to the Regional Small Business Regulatory Fairness Board. The
Ombudsman evaluates these actions annually and rates each agency's
responsiveness to small business. If you wish to comment on actions by
employees of BSEE or BOEM, call 1-888-REG-FAIR (1-888-734-3247).
D. Unfunded Mandates Reform Act (UMRA)
This proposed rule does not impose an unfunded mandate on State,
local, or tribal governments of $85 million per year.\18\ This proposed
rule does not have a significant or unique effect on State, local, or
tribal governments. Moreover, the proposed rule would not have
disproportionate budgetary effects on these governments.
---------------------------------------------------------------------------
\18\ 2021 values are available here: https://crsreports.congress.gov/product/pdf/R/R40957.
---------------------------------------------------------------------------
BOEM has determined that this proposed rule would impose costs on
the private sector of more than $182 million in a single year. The IRIA
includes information on the costs of the proposed rule and its
alternatives. The UMRA (2 U.S.C. 1531 et seq.) requires BOEM to perform
a cost-benefit assessment and to provide the legal authority for the
rulemaking, a description of the macro-economic effects, and a summary
of the State, local, or tribal government concerns. These items are
described in more detail in the IRIA.
Because all of the anticipated private sector expenditures that may
result from the proposed rule are analyzed in the IRIA and IRFA (i.e.,
expenditures of the offshore oil and gas industry), these documents
satisfy the UMRA requirement to estimate any disproportionate budgetary
effects of the proposed rule on a particular segment of the private
sector. As explained in the IRIA, the rulemaking is anticipated to have
annualized net estimated compliance costs of $319 million annually (7
percent discounting) but provides strengthened financial assurance to
protect taxpayers from the costs of decommissioning offshore
infrastructure. Under the proposed action, BOEM will evaluate the
financial strength of OCS lessees and grant holders that could affect
their ability to meet OCS obligations. The IRIA outlines both a less
stringent and more stringent regulatory alternative. The more stringent
option was not selected as the added benefits did not justify the
increased compliance burden. BOEM's less stringent option includes a
lower credit rating of BB- to be classified as low risk and allows
predecessor lessee or grantee strength to be included in the financial
assurance evaluation. This alternative was not selected as BB rated
companies are considered speculative and below investment grade and
relying on predecessor lessees and grantees introduces a moral hazard
and does not require each current lessee to internalize its
decommissioning obligations.
E. Executive Order 12630: Governmental Actions and Interference With
Constitutionally Protected Property Rights
This proposed rule does not affect a taking of private property or
otherwise have takings implications under Executive Order 12630.
Therefore, a takings implication assessment is not required.
F. Executive Order 13132: Federalism
Under the criteria in section 1 of Executive Order 13132, this
proposed rule does not have sufficient federalism implications to
warrant the preparation of a federalism summary impact statement.
Therefore, a federalism summary impact statement is not required.
G. Executive Order 12988: Civil Justice Reform
This proposed rule complies with the requirements of Executive
Order 12988. Specifically, this proposed rule:
(1) Meets the criteria of section 3(a) requiring that all
regulations be reviewed to eliminate errors and ambiguity and be
written to minimize litigation; and
(2) Meets the criteria of section 3(b)(2) requiring that all
regulations be written in clear language and contain clear legal
standards.
H. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments
Executive Order 13175 defines policies that have tribal
implications as
[[Page 42161]]
regulations, legislative comments or proposed legislation, and other
policy statements or actions that will or may have a substantial direct
effect on one or more Indian Tribes, or on the relationship between the
Federal Government and one or more Indian Tribes.
BOEM strives to strengthen its government-to-government
relationships with American Indian and Alaska Native Tribes through a
commitment to consultation with those tribes and recognition of their
right to self-governance and tribal sovereignty. The DOI's consultation
policy for Tribal Nations, as described in Departmental Manual part 512
chapter 4, expands on the above definition from E.O. 13175, and defines
a Departmental Action with Tribal Implications as--
``[a]ny regulation, rulemaking, policy, guidance, legislative
proposal, plan, programmatic or operational activity, or grant or
funding formula change that may have a substantial direct effect on a
Tribe in matters including but not limited to: (1) Tribal cultural
practices; lands; treaty rights; resources; ancestral lands; sacred
sites, including sites that are submerged; and lands Tribes were
removed from, or access to traditional areas of cultural or religious
importance on Federally managed lands and waters; (2) the ability of a
Tribe to govern or provide services to its members; (3) a Tribe's
formal relationship with the Department, be it nation-to-nation or
beneficiary-to-trustee; or, (4) any action planned by a non-federal
entity that involves funding, approval, or other final agency action
provided by the Department, unless the Tribe is a party to the action.
Substantial direct effects on Tribes may include, but are not limited
to, effects as shown in the Consensus-Seeking Model (Figure 1).'' 512
DM 4.3.B. (November 30, 2022). DOI's procedures for consultation with
Tribal Nations also provide that:
``Bureaus/Offices must invite Indian Tribes early in the planning
process to consult whenever a Departmental plan or action with Tribal
Implications arises. Bureaus/Offices should operate under the
assumption that all actions with land or resource use or resource
impacts may have Tribal implications and should extend consultation
invitations accordingly.'' 512 DM 5.4. (November 30, 2022).
Additionally, we are also respectful of our responsibilities for
consultation with Alaska Native Claims Settlement Act (ANCSA)
Corporations. The DOI's consultation policy defines a Departmental
Action with ANCSA Corporation Implications as--
``[a]ny regulation, rulemaking, policy, guidance, legislative
proposal, grant funding formula changes, or operational activity
that may have a substantial direct effect on an ANCSA Corporation,
including but not limited to: (1) any activity that may
substantially affect land, water, areas, or resources owned or
selected by ANCSA Corporation; (2) any activity that may impact the
ability of an ANCSA Corporation to participate in Departmental
programs for which it qualifies; (3) any activity that may impact
the ability of ANCSA shareholders to access and use ANCSA lands,
water areas, or resources; (4) any activity that may impact the
ability of Alaska Native people to maintain their traditional way of
life and subsistence practices on ANCSA Corporation lands, waters,
or adjacent federal lands; or, (5) any activity that may have a
direct effect on the ability of an ANCSA Corporation to fulfil the
purposes for which it was established under ANCSA.'' 512 DM 6.3.C.
(November 30, 2022).
DOI consultation procedures for ANSCA corporations also provides:
``Bureaus and Offices should operate under the assumption that all
actions with land or resource use or resource impacts may have ANCSA
Corporation implications and should extend consultation invitations
accordingly. When ANCSA Corporations indicate that there is substantial
and direct effect of the Departmental Action with ANCSA Corporation
Implications, the Department must engage in consultation.'' 512 DM
7.4.A. (November 30, 2022).
This rulemaking proposes to modify the criteria for determining
whether oil, gas, and/or sulfur lessees, RUE grant holders, and
pipeline ROW grant holders may be required to provide bonds or other
financial assurance, above the current regulatorily prescribed base
bond amounts, to ensure compliance with their OCSLA obligations. It
also proposes to remove certain restrictive provisions for third-party
guarantees and decommissioning accounts and would add new criteria
under which a bond, or third-party guarantee, that was provided as
supplemental financial assurance, may be cancelled. Additionally, this
proposed rule would clarify bonding requirements for RUEs serving
Federal leases.
We have evaluated this proposed rule under the DOI's consultation
policy and under the criteria in Executive Order 13175, and have
determined that, while this rulemaking will likely not cause any
substantial direct effects on environmental or cultural resources,
there may be resource or economic impacts to one or more federally
recognized Indian tribes or ANCSA Corporations as a result of this
proposed rule.
In developing the 2020 Joint Notice of Proposed Rulemaking (85 FR
65924), BOEM determined that the rulemaking would have no substantial
direct effects on environmental or cultural resources. However, BOEM
determined there was the potential for economic impacts to one Tribal
Nation and one ANCSA Corporation. In August 2018, BOEM invited
consultation with this Tribal Nation and the ANCSA Corporation. BOEM
consulted with the Tribal Nation in September 2018. The ANCSA
Corporation did not request to consult. At that time, BOEM discussed
the possible impacts from the 2020 proposal, as documented in the
memorandum to the docket titled ``2018 Outreach on the Financial
Assurance Proposal.''
On March 31, 2023, BOEM sent letters to all Tribes and ANCSA
Corporations to ensure they are aware of this preparation for a new
proposed rulemaking, to answer any immediate questions they may have,
and to invite formal consultation if they would like to consult. To
date, only one Tribe has requested consultation, however we will
formally consult with any Tribes or ANCSA corporations at any stage in
this rulemaking as it advances if consultation is requested.
I. Paperwork Reduction Act (PRA)
This proposed rule references existing information collections
(ICs) previously approved by OMB and adds new IC requirements for BOEM
regulations that require OMB review and approval under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Therefore, an
information collection request for BOEM is being submitted to OMB for
review and approval. The ICs related to this rulemaking concern the
requirements under 30 CFR parts 550 and 556. BOEM may not conduct or
sponsor, and you are not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
OMB has reviewed and approved the information collection
requirements associated with risk management and financial assurance
for OCS lease and grant obligations and assigned the following OMB
control numbers:
1010-0006 (BOEM), ``Leasing of Sulfur or Oil and Gas in
the Outer Continental Shelf (30 CFR parts 550, Subpart J; 556, Subparts
A through I, and K; and 560, Subparts B and E) (expires 03/31/2026),
and
1010-0114 (BOEM), ``30 CFR 550, Subpart A, General, and
Subpart K, Oil and Gas Production Requirements (expires 05/31/2026).
[[Page 42162]]
This proposed rule would modify collections of information under 30
CFR part 550, subparts A and J, and 30 CFR part 556, subpart I,
concerning financial assurance requirements (such as bonding) for
leases, pipeline ROW grants, and RUE grants. OMB has reviewed and
approved the information collection requirements associated with
financial assurance regulations for leases (30 CFR 556.900 through
907), pipeline ROW grants (30 CFR 550.1011), and RUE grants (30 CFR
550.160 and 550.166).
BOEM estimates that the number of information collection burden
hours for the proposed rule overall are close to the same as for the
existing regulatory framework. If this proposed rule becomes final and
effective, the new and changed provisions would increase the overall
annual burden hours for OMB Control Number 1010-0006 by 77 hours
(totaling 19,131 annual burden hours) and 268 responses (totaling
10,575 responses) as justified below. The changed provisions for OMB
Control Number 1010-0114 would add new and revise requirements in 30
CFR part 550, subpart A, but would not impact the overall burden hours
for this control number because the burdens for these provisions are
counted under OMB Control Number 1010-0006. However, the regulatory
descriptions of new and modified requirements would be extensive enough
to require an update of the OMB control number.
When needed, BOEM would submit future burden changes (either
increases or decreases) of the OMB control numbers with reasoning to
OMB for review and approval. Every 3 years, BOEM would also review the
burden numbers for changes, seek public comment, and submit any request
for changes to OMB for approval.
Title of Collection: 30 CFR part 550, ``Oil and Gas and Sulfur
Operations in the Outer Continental Shelf,'' and 30 CFR part 556,
``Leasing of Sulfur or Oil and Gas and Bonding Requirements in the
Outer Continental Shelf.''
OMB Control Number: 1010-0006 and 1010-0114.
Form Number: None.
Type of Review: Revision of currently approved collections.
Respondents/Affected Public: Federal OCS oil, gas, and sulfur
operators and lessees, and RUE grant and pipeline ROW grant holders.
Total Estimated Number of Annual Responses: 10,575 responses for
1010-0006, and 5,302 responses for 1010-0114.
Total Estimated Number of Annual Burden Hours: 19,131 hours for
1010-0006, and 18,323 hours for 1010-0114.
Respondent's Obligation: Responses to these collections of
information are mandatory or are required to obtain or retain a
benefit.
Frequency of Collection: The frequency of response varies but is
primarily on the occasion or as per the requirement.
Total Estimated Annual Non-hour Burden Cost: No additional non-hour
costs.
The following is a brief explanation of how the proposed regulatory
changes would affect the various subparts' hour and non-hour cost
burdens for OMB Control Number 1010-0114.
Right-of-Use and Easement
BOEM's existing regulations concerning RUE grants for an OCS lessee
and a State lessee are found in 30 CFR 550.160 through 550.166. The
burdens related to 30 CFR 550.160 and 550.166 are identified in OMB
Control Number 1010-0114 but accounted for in OMB Control Number 1010-
0006.
Section 550.160 provides that an applicant for a RUE that serves an
OCS lease must meet bonding requirements, but the regulation does not
prescribe a base surety bond amount. The proposed rule would replace
this requirement with a cross-reference to the specific criteria
governing financial assurance demands in proposed Sec. 550.166.
Therefore, BOEM is proposing to establish a Federal RUE base financial
assurance requirement matching the existing base surety bond
requirement for State RUEs. The annual burden hour likely would not
change since RUEs that serve OCS leases are currently already meeting
bonding requirements under BOEM's agreement-specific conditions of
approval. The proposed regulations will be more specific and clarify
the meaning of ``meeting bonding requirements.''
BOEM is proposing to establish a $500,000 area-wide RUE financial
assurance requirement for any RUE-holder that owns one or more RUEs,
regardless of whether they serve a State or Federal lease. BOEM is also
proposing to allow any lessee that has posted an area-wide lease surety
bond to modify that lease surety bond to also cover any RUE(s) held by
the same entity.
BOEM is also proposing to revise the RUE regulations to clarify
that any RUE grant holder, whether the RUE serves a State or Federal
lease, may be required to provide supplemental financial assurance for
the RUE if the grant holders do not meet the credit rating or proxy
credit rating criteria. The existing regulations authorized demands for
supplemental financial assurance but specified no criteria. The annual
burden hour would not change based on these clarifications.
The following is the revised burden table and a brief explanation
of how the proposed regulatory changes would affect the various
subparts' hour and non-hour cost burdens for OMB Control Number 1010-
0006:
BILLING CODE P
[GRAPHIC] [TIFF OMITTED] TP29JN23.000
[[Page 42163]]
[GRAPHIC] [TIFF OMITTED] TP29JN23.001
[[Page 42164]]
[GRAPHIC] [TIFF OMITTED] TP29JN23.002
[[Page 42165]]
[GRAPHIC] [TIFF OMITTED] TP29JN23.003
BILLING CODE C
Pipelines and Pipeline Right-of-Way Grants
Proposed Sec. 550.1011(d) relates to BOEM's determination of
whether supplemental financial assurance is necessary to ensure
compliance with the obligations under a pipeline ROW grant. This
determination would be based on whether pipeline ROW grant holders have
the ability to carry out present and future obligations. The criteria
proposed for the financial determination include an issuer credit
rating or a proxy credit rating. The issuer credit rating and the
audited financial information on which BOEM determines a proxy credit
rating already exist. The burden of determining a proxy credit rating
falls on BOEM. The annual burdens placed on the grant holder would be
minimal (providing to BOEM information the grant holder already has)
and would be included in the burden estimates for 30 CFR 556.901(d).
Proposed Sec. 550.1011(d)(2) provides that BOEM would consider the
issuer credit rating or proxy credit rating of a co-grant holder,
because they are liable
[[Page 42166]]
for accrued decommissioning obligations for facilities and pipelines on
their ROW. The burden for determining credit rating falls mostly on
BOEM. The annual burdens placed on the grant holder would be minimal
(providing to BOEM information the grant holder already has) and would
be included in the burden estimates for 30 CFR 556.901(d).
Bond or Other Financial Assurance Requirements for Leases
Proposed Sec. 556.900(a)(4) proposes to add that supplemental
financial assurance required by the Regional Director must be provided
before a new lease is issued or an assignment of a lease is approved.
The burden increase for this requirement would be included in OMB
Control Number 1010-0006. Supplemental financial assurance required by
this provision would likely not significantly impact the burdens due to
low occurrence, but BOEM would account for the change in the burden
table.
Base Financial Assurance and Supplemental Financial Assurance
Proposed Sec. 556.901(d) relates to BOEM's determination of
whether supplemental financial assurance is necessary to ensure
compliance with the obligations under a lease. New proposed Sec.
556.901(d)(1) would base this determination on an issuer credit rating
or a proxy credit rating determined by BOEM based on audited financial
information.
New Sec. 556.901(d)(2) provides that BOEM would consider the
issuer credit rating or proxy credit rating of a co-lessee, and new
Sec. 556.901(d)(3) provides that BOEM would consider the net present
value of proved oil and gas reserves on the lease. Lessees' submission
of information on proved reserves would account for additional annual
burden hours. The lessee would not need to submit proved reserve
information if supplemental financial assurance is not required based
on its issuer credit rating or proxy credit rating, or those of its co-
lessees.
The existing OMB-approved hour burden for each respondent to
prepare and submit the information for the existing evaluation criteria
requirements is 3.5 hours. In this proposed rule, the revision of the
evaluation criteria would likely result in requiring less time for the
respondents to prepare and submit the information, particularly for
issuer credit rating. If companies choose to demonstrate that the net
present value of proved oil and gas reserves on the lease exceeds three
times the decommissioning cost associated with production of those
reserves, then the time necessary for companies to prepare and submit
information on the proved oil and gas reserves would likely be greater
than 3.5 hours. Therefore, BOEM proposes to retain the average 3.5-hour
burden to reflect the decrease in time required to prepare and submit
issuer credit ratings and audited financials and the increase in time
required for preparing and submitting information on proved reserves.
When the final rule becomes effective, the related burden hours for all
respondents (lessee, co-lessee, grant holder, and co-grant holder)
would be included in OMB Control Number 1010-0006.
The OMB-approved number of respondents who currently submit
financial information under the existing provision is 166 respondents.
Recently, BOEM has seen the number of leases decrease in the Gulf of
Mexico. BOEM estimates the new number of respondents would be between
150 and 160 respondents. For this request, BOEM will use the higher
number of 160 respondents (-6 respondents). This number will be
reviewed during the next IC renewal process. When the final rule
becomes effective, BOEM will include the new number of respondents in
OMB Control Number 1010-0006.
The existing OMB-approved annual burden hours for Sec. 556.901
related to demonstrating financial worth/ability to carry out present
and future financial obligations is 581 hours (166 respondents x 3.5
hours). With the changes provided in the proposed rule and described
above, BOEM estimates that the annual hour burden would decrease by
approximately 21 annual burden hours, and total annual burden hours
would be 560 hours (160 respondents x 3.5 hours). This decrease in
annual burden hours would be reflected in OMB Control Number 1010-0006
when the final rule becomes effective.
BOEM proposes to add paragraph (h) to Sec. 556.901 to establish
the limited opportunity to provide the required supplemental financial
assurance demanded in three installments during the first 3 years after
the effective date of this regulation. This provision would establish
the timing and proportions of phased supplemental financial assurance
that would be required in each installment. The lessee would have the
option to submit the supplemental financial assurance once or in
installments. If the lessee chooses to provide supplemental financial
assurance in installments, the number of submissions of supplemental
financial assurance would likely increase, but only for the first 3
years after the effective date of this regulation. OMB has currently
approved 45 annual burden hours for supplemental financial assurance
submissions (135 submissions which take 20 minutes each to submit).
BOEM estimates the burden hours for the proposed installment
submissions provision to be 135 annual burden hours (405 submissions x
20 minutes), which is an increase of 90 hours over existing OMB
approval.
General Requirements for Bonds and Other Financial Assurance
The scope of proposed Sec. 556.902(a) would include ``grant
holder'' and financial assurance posted under the requirements of 30
CFR part 550. This change would clarify that the same general
requirements for financial assurance provided by lessees, operating
rights owners, or operators also apply to financial assurance provided
by RUE and pipeline ROW grant holders. BOEM proposes to keep the
burdens the same as the existing OMB burdens.
Decommissioning Accounts
Proposed revisions to Sec. 556.904 would allow the Regional
Director to authorize a RUE grant holder and a pipeline ROW grant
holder, as well as a lessee, to establish a decommissioning account as
supplemental financial assurance required under Sec. 556.901(d), or
550.166(b) or 550.1011(d). Because this change represents a new
opportunity for grant holders, there are no existing burdens related to
this provision under the current OMB approval. BOEM is capturing the
requirement to establish decommissioning accounts in the burden table.
BOEM estimates 24 annual burden hours for grant holders and/or lessees
to establish their decommissioning account.
A new provision is proposed under Sec. 556.904(a)(3), which would
require immediate submission of a surety bond or other financial
assurance in the amount equal to the remaining unsecured portion of the
supplemental financial assurance demand if the initial payment or any
scheduled payment into the decommissioning account is not timely made.
In the context of paperwork-burden, this provision replaces the
existing provision that requires submission of binding instructions.
The annual burden hours will remain the same but will shift to the
proposed requirement and would be reflected in OMB Control Number 1010-
0006.
Third-Party Guarantees
Proposed Sec. 556.905(a) relates to the guarantor's ability to
carry out present
[[Page 42167]]
and future obligations. Proposed Sec. 556.905(a)(2) would require the
guarantor to submit a third-party guarantee agreement. Paragraph (d)
would provide that the terms which the existing regulation requires for
indemnity agreements must be included in a third-party guarantee
agreement. This change is to avoid any inference that the government
must incur the expenses of decommissioning before being indemnified by
the guarantor. It is a change of the name of the agreement and does not
change the associated burden.
Proposed Sec. 556.905(c)(2) would eliminate the requirement that a
lessee must cease production until supplemental financial assurance
coverage requirements are met when a guarantor becomes unqualified. The
regulatory provision would be replaced with a requirement to
immediately submit and maintain a substitute surety bond or other
financial assurance. Both the existing and proposed provisions require
the lessee to provide replacement surety bond coverage; however, BOEM's
current OMB Control Number 1010-0006 does not quantify the burdens.
Therefore, BOEM would add approximately 8 annual burden hours to OMB
Control Number 1010-0006 for any lessee whose guarantor became
unqualified.
Proposed Sec. 556.905(b) would remove the requirement that a
guarantee ensure compliance with all lessees' or grant holders'
obligations and the obligations of all operators on the lease or grant.
This revision would allow a third-party guarantor to limit the
obligations covered by the third-party guarantee. In some situations,
this change could result in additional paperwork burden due to
additional surety bonds or other financial assurance that must be
provided to BOEM to cover obligations previously covered by a third-
party guarantee. BOEM estimates the number of additional financial
assurance demands resulting from this revision to be low and the annual
burdens would be included in the existing burden estimates for OMB
Control Number 1010-0006, and revised in future IC requests, if needed.
Proposed Sec. 556.905 would replace the indemnity agreement with a
third-party guarantee agreement with comparable provisions. This change
would not impact annual burden hours. Proposed Sec. 556.905(e) would
provide that a lessee or grant holder and the guarantor under a third-
party guarantee may request BOEM to cancel a third-party guarantee.
BOEM would cancel a third-party guarantee under the same terms and
conditions provided for cancellation of additional surety bonds in
proposed Sec. 556.906(d)(2). The current OMB-approved burden under
Sec. Sec. 556.905(d) and 556.906 is 189 annual burden hours. BOEM
proposes to keep the burdens the same as the current OMB approved
burdens at 189 annual burden hours.
Termination of the Period of Liability and Cancellation of Financial
Assurance
Proposed Sec. 556.906(d)(2) would be revised to add additional
circumstances when BOEM may cancel supplemental financial assurance.
Proposed Sec. 556.906(d)(2) would require a cancellation request from
the lessee or grant holder, or the surety, based on assertions that one
of the stated circumstances is present. BOEM already receives these
types of requests and has approved the requests, where warranted, as a
departure from the regulations. These burdens are already counted in
the existing OMB burden estimate for OMB Control Number 1010-0006.
If this proposed rule becomes effective and OMB approves the
information, BOEM would revise the existing OMB control numbers to
reflect the changes. The IC does not include questions of a sensitive
nature. BOEM will protect proprietary information according to the
Freedom of Information Act (5 U.S.C. 552) and DOI implementing
regulations (43 CFR part 2), 30 CFR 556.104, Information collection and
proprietary information, and 30 CFR 550.197, Data and information to be
made available to the public or for limited inspection.
The PRA requires agencies to estimate the total annual reporting
and recordkeeping non-hour cost burden resulting from the collection of
information, and we solicit your comments on this item. For reporting
and recordkeeping only, your response should split the cost estimate
into two components: (1) total capital and startup cost component; and
(2) annual operation, maintenance, and purchase of service component.
Your estimates should consider the cost to generate, maintain, and
disclose or provide the information. You should describe the methods
you use to estimate major cost factors, including system and technology
acquisition, expected useful life of capital equipment, discount
rate(s), and the period over which you incur costs. Generally, your
estimates should not include equipment or services purchased: (1)
before October 1, 1995; (2) to comply with requirements not associated
with the information collection; (3) for reasons other than to provide
information or keep records for the Government; or (4) as part of
customary and usual business or private practices.
As part of our continuing effort to reduce paperwork and respondent
burdens, we invite the public and other Federal agencies to comment on
any aspect of this information collection, including:
(1) Is the proposed information collection necessary or useful for
BOEM to properly perform its functions?
(2) Are the estimated annual burden hour increases and decreases
resulting from the proposed rule reasonable?
(3) Is the estimated annual non-hour cost burden resulting from
this information collection reasonable?
(4) Do you have any suggestions that would enhance the quality,
clarity, or usefulness of the information to be collected?
(5) Is there a way to minimize the information collection burden on
those who must respond, such as by using appropriate automated digital,
electronic, mechanical, or other forms of information technology?
Send your comments and suggestions on this information collection
by the date indicated in the DATES section to the Desk Officer for the
Department of the Interior at OMB-OIRA at (202) 395-5806 (fax) or via
the www.reginfo.gov portal (online). You may view the information
collection request(s) at https://www.reginfo.gov/public/do/PRAMain.
Please provide a copy of your comments to the BOEM Information
Collection Clearance Officer (see the ADDRESSES section). You may
contact Anna Atkinson, BOEM Information Collection Clearance Officer at
(703) 787-1025 with any questions. Please reference Risk Management,
Financial Assurance and Loss Prevention (OMB Control No. 1010-0006), in
your comments.
J. National Environmental Policy Act (NEPA)
A detailed environmental analysis under NEPA is not required
because the proposed rule is covered by a categorical exclusion (see 43
CFR 46.205). This proposed rule meets the criteria set forth at 43 CFR
46.210(i) for a Departmental categorical exclusion in that this
proposed rule is ``of an administrative, financial, legal, technical,
or procedural nature.'' We have also determined that the proposed rule
does not involve any of the extraordinary circumstances listed in 43
CFR 46.215 that would require further analysis under NEPA.
[[Page 42168]]
K. Data Quality Act
In developing this proposed rule, we did not conduct or use a
study, experiment, or survey requiring peer review under the Data
Quality Act (Pub. L. 106-554, app. C, sec. 515, 114 Stat. 2763, 2763A-
153-154).
L. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
Under Executive Order 13211, agencies are required to prepare and
submit to OMB a Statement of Energy Effects for ``significant energy
actions.'' This should include a detailed statement of any adverse
effects on energy supply, distribution, or use (including a shortfall
in supply, price increases, and increased use of foreign supplies)
expected to result from the action and a discussion of reasonable
alternatives and their effects.
This action, which is a significant regulatory action under
Executive Order 12866,\19\ is likely to have a significant effect on
the supply, distribution, or use of energy. BOEM has prepared a
Statement of Energy Effects for this action. BOEM estimates that
stronger supplemental financial assurance requirements will increase
compliance costs for non-investment grade companies operating on the
OCS by approximately $319 million annually (7 percent discounting).
Pursuant to OMB's memorandum M-01-27,\20\ BOEM recognizes that this
action may ``adversely affect[ ] in a material way the productivity,
competition, or prices in the energy sector.'' By increasing industry
compliance costs, the regulation could adversely make the U.S. offshore
oil and gas sector less attractive than regions with lower operating
costs. Additionally, increased costs may depress the value of offshore
assets or cause continuing production to become uneconomic sooner,
leading to shorter-than-otherwise useful life and potentially a loss of
production. For additional discussion on the energy effects and
regulatory alternatives, please refer to the IRIA for this proposal.
---------------------------------------------------------------------------
\19\ According to E.O. 31211, ``For purposes of this order: (a)
``Regulation'' and ``rule'' have the same meaning as they do in
Executive Order 12866 or any successor order. (b) ``Significant
energy action'' means any action by an agency (normally published in
the Federal Register) that promulgates or is expected to lead to the
promulgation of a final rule or regulation, including notices of
inquiry, advance notices of proposed rulemaking, and notices of
proposed rulemaking: (1)(i) that is a significant regulatory action
under Executive Order 12866 or any successor order,''.
\20\ https://www.whitehouse.gov/wp-content/uploads/2017/11/2001-M-01-27-Guidance-for-Implementing-E.O.-13211.pdf.
---------------------------------------------------------------------------
M. Clarity of This Regulation
BOEM is required by Executive Order 12866, Executive Order 12988,
and by the Presidential memorandum of June 1, 1998, to write all rules
in plain language. This means that each rule BOEM publishes must:
(1) Be logically organized;
(2) Use the active voice to address readers directly;
(3) Use clear language rather than jargon;
(4) Be divided into short sections and sentences; and
(5) Use lists and tables wherever possible.
If you feel that BOEM has not met these requirements, send comments
by one of the methods listed in the ADDRESSES section. To better help
BOEM revise the proposed rule, your comments should be as specific as
possible. For example, you should specify the numbers of the sections
or paragraphs that you find unclear, which sections or sentences are
too long, and the sections where you feel lists or tables would be
useful.
List of Subjects
30 CFR Part 550
Administrative practice and procedure, Continental shelf,
Government contracts, Investigations, Mineral resources, Oil and gas
exploration, Oil pollution, Outer continental shelf, Penalties,
Pipelines, Public lands--rights-of-way, Reporting and recordkeeping
requirements, Rights-of-way, Sulfur.
30 CFR Part 556
Administrative practice and procedure, Continental shelf,
Environmental protection, Government contracts, Intergovernmental
relations, Mineral resources, Oil and gas exploration, Outer
continental shelf, Public lands, Reporting and recordkeeping
requirements, Rights-of-way.
30 CFR Part 590
Administrative practice and procedure.
Laura Daniel-Davis,
Principal Deputy Assistant Secretary, Land and Minerals Management.
For the reasons stated in the preamble, the Bureau of Ocean Energy
Management (BOEM) proposes to amend 30 CFR chapter V as follows:
PART 550--OIL AND GAS AND SULFUR OPERATIONS IN THE OUTER
CONTINENTAL SHELF
0
1. The authority citation for part 550 continues to read as follows:
Authority: 30 U.S.C. 1751; 31 U.S.C. 9701; 43 U.S.C. 1334
0
2. Revise the heading to part 550 to read as set forth above.
Subpart A--General
0
3. Amend Sec. 550.101 by revising the introductory paragraph to read
as follows:
Sec. 550.101 Authority and applicability.
The Secretary of the Interior (Secretary) authorized the Bureau of
Ocean Energy Management (BOEM) to regulate oil, gas, and sulfur
exploration, development, and production operations on the Outer
Continental Shelf (OCS). Under the Secretary's authority, the Director
requires that all operations:
* * * * *
0
4. Amend Sec. 550.102 by revising paragraphs (a) and (b)(16) to read
as follows:
Sec. 550.102 What does this part do?
(a) This part contains the regulations of the BOEM Offshore program
that govern oil, gas, and sulfur exploration, development, and
production operations on the OCS. When you conduct operations on the
OCS, you must submit requests, applications, and notices, or provide
supplemental information for BOEM approval.
(b) * * *
Table--Where To Find Information for Conducting Operations
------------------------------------------------------------------------
For information about Refer to
------------------------------------------------------------------------
* * * * *
(16) Sulfur operations.................... 30 CFR part 250, subpart P.
* * * * *
------------------------------------------------------------------------
0
5. Amend Sec. 550.105 by:
0
a. Adding the definition ``Assign'' in alphabetical order;
0
b. Revising the definitions ``Criteria air pollutant'' and
``Development geological and geophysical (G&G) activities'';
0
c. Removing the definition ``Easement'';
0
d. Revising the definitions ``Exploration'' and ``Facility'';
0
e. Adding the definition ``Financial assurance'' in alphabetical order;
[[Page 42169]]
0
d. Revising the definition ``Geological and geophysical (G&G)
exploration'';
0
e. Adding the definitions ``Investment grade credit rating'' and
``Issuer credit rating'' in alphabetical order;
0
f. Revising the definitions ``Minerals'', ``Nonattainment area'',
``Pipelines'', and ``Production areas'';
0
g. Removing the definition ``Right-of-use'';
0
h. Adding the definition ``Right-of-Use and Easement (RUE)'' in
alphabetical order;
0
i. Removing the definition ``Right-of-way pipelines'';
0
j. Adding the definition ``Right-of-way (ROW) pipelines'';
0
k. Adding the definition ``Transfer'' in alphabetical order;
0
l. Revising the definition ``You'';
0
m. Adding the definition ``Waste of oil, gas, or sulfur'' in
alphabetical order; and
0
n. Removing the definition ``Waste of oil, gas, or sulphur.
The revisions and additions read as follows:
Sec. 550.105 Definitions.
* * * * *
Assign means to convey an ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant. For the purposes of this part,
``assign'' is synonymous with ``transfer'' and the two terms are used
interchangeably.
* * * * *
Criteria air pollutant means any air pollutant for which the United
States Environmental Protection Agency (USEPA) has established a
primary or secondary National Ambient Air Quality Standard (NAAQS)
pursuant to section 109 of the Clean Air Act.
* * * * *
Development geological and geophysical (G&G) activities means those
G&G and related data-gathering activities on your lease or unit that
you conduct following discovery of oil, gas, or sulfur in paying
quantities to detect or imply the presence of oil, gas, or sulfur in
commercial quantities.
* * * * *
Exploration means the commercial search for oil, gas, or sulfur.
Activities classified as exploration include but are not limited to:
(1) Geophysical and geological (G&G) surveys using magnetic,
gravity, seismic reflection, seismic refraction, gas sniffers, coring,
or other systems to detect or imply the presence of oil, gas, or
sulfur; and
(2) Any drilling conducted for the purpose of searching for
commercial quantities of oil, gas, and sulfur, including the drilling
of any additional well needed to delineate any reservoir to enable the
lessee to decide whether to proceed with development and production.
Facility, as used in Sec. 550.303, means all installations or
devices permanently or temporarily attached to the seabed. They include
mobile offshore drilling units (MODUs), even while operating in the
``tender assist'' mode (i.e., with skid-off drilling units) or other
vessels engaged in drilling or downhole operations. They are used for
exploration, development, and production activities for oil, gas, or
sulfur and emit or have the potential to emit any air pollutant from
one or more sources. They include all floating production systems
(FPSs), including column-stabilized-units (CSUs); floating production,
storage and offloading facilities (FPSOs); tension-leg platforms
(TLPs); spars, etc. During production, multiple installations or
devices are a single facility if the installations or devices are at a
single site. Any vessel used to transfer production from an offshore
facility is part of the facility while it is physically attached to the
facility.
Financial assurance means a surety bond, a pledge of Treasury
securities, a decommissioning account, a third-party guarantee, or
another form of security acceptable to the BOEM Regional Director, that
is used to ensure compliance with obligations under the regulations and
under the terms of a lease, a RUE grant, or a pipeline ROW grant.
* * * * *
Geological and geophysical (G&G) explorations means those G&G
surveys on your lease or unit that use seismic reflection, seismic
refraction, magnetic, gravity, gas sniffers, coring, or other systems
to detect or imply the presence of oil, gas, or sulfur in commercial
quantities.
* * * * *
Investment grade credit rating means an issuer credit rating of
BBB- or higher, or its equivalent, assigned to an issuer of corporate
debt by a nationally recognized statistical rating organization (NRSRO)
as that term defined by the United States Securities and Exchange
Commission (SEC).
Issuer credit rating means a credit rating assigned to an issuer of
corporate debt by Standard and Poor's (S&P) Ratings Services (or any of
its subsidiaries), by Moody's Investors Service Incorporated (or any of
its subsidiaries) or by another NRSRO, as that term is defined by the
United States SEC.
* * * * *
Minerals include oil, gas, sulfur, geopressured-geothermal and
associated resources, and all other minerals that are authorized by an
Act of Congress to be produced.
* * * * *
Nonattainment area means, for any criteria air pollutant, an area
which is show by monitored data or which is calculated by air quality
modeling (or other methods determined by the Administrator of the USEPA
to be reliable) to exceed any primary or secondary NAAQS established by
the USEPA.
* * * * *
Pipelines are the piping, risers, and appurtenances installed for
transporting oil, gas, sulfur, and produced waters.
* * * * *
Production areas are those areas where flammable petroleum gas,
volatile liquids or sulfur are produced, processed (e.g., compressed),
stored, transferred (e.g., pumped), or otherwise handled before
entering the transportation process.
* * * * *
Right-of-Use and Easement (RUE) means a right to use a portion of
the seabed, at an OCS site other than on a lease you own, to construct,
secure to the seafloor, use, modify, or maintain platforms, seafloor
production equipment, artificial islands, facilities, installations, or
other devices to support the exploration, development, or production of
oil, gas, or sulfur resources from an OCS lease or a lease on State
submerged lands adjacent to or accessible from the OCS.
Right-of-way (ROW) pipelines are those pipelines that are contained
within:
(1) The boundaries of a single lease or unit, but are not owned and
operated by a lessee or operator of that lease or unit;
(2) The boundaries of contiguous (not cornering) leases that do not
have a common lessee or operator;
(3) The boundaries of contiguous (not cornering) leases that have a
common lessee or operator but are not owned and operated by that common
lessee or operator; or
(4) An unleased block(s).
* * * * *
Transfer means to convey an ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant. For the purposes of this part,
``transfer'' is synonymous with ``assign'' and the two terms are used
interchangeably.
* * * * *
You, depending on the context of the regulations, means a bidder, a
lessee (record title owner), a sublessee
[[Page 42170]]
(operating rights owner), a Federal or State RUE grant holder, a
pipeline ROW grant holder, an assignor or transferor, a designated
operator or agent of the lessee or grant holder, or an applicant
seeking to become one of the above.
Waste of oil, gas, or sulfur means:
(1) The physical waste of oil, gas, or sulfur;
(2) The inefficient, excessive, or improper use, or the unnecessary
dissipation of reservoir energy;
(3) The locating, spacing, drilling, equipping, operating, or
producing of any oil, gas, or sulfur well(s) in a manner that causes or
tends to cause a reduction in the quantity of oil, gas, or sulfur
ultimately recoverable under prudent and proper operations or that
causes or tends to cause unnecessary or excessive surface loss or
destruction of oil or gas; or
(4) The inefficient storage of oil.
* * * * *
0
6. Amend Sec. 550.160 by
0
a. Revising the section heading;
0
b. Revising the introductory text; and
0
c. Revising paragraphs (a) introductory text, (b), and (c).
The revisions read as follows:
Sec. 550.160 When will BOEM grant me a right-of-use and easement
(RUE), and what requirements must I meet?
BOEM may grant you a RUE on leased or unleased lands on the OCS, if
you meet these requirements:
(a) You must require the RUE to construct, secure to the seafloor,
use, modify, or maintain platforms, seafloor production equipment,
artificial islands, facilities, installations, or other devices at an
OCS site other than an OCS lease you own, that are:
* * * * *
(b) You must exercise the RUE according to the terms of the grant
and the regulations of this part, as well as the regulations in 30 CFR
part 250, subpart Q.
(c) You must meet the qualification requirements at 30 CFR 556.400
through 556.402 and the financial assurance requirements in Sec.
550.166 and 30 CFR part 556, subpart I.
* * * * *
0
7. Revise Sec. 550.166 to read as follows:
Sec. 550.166 If BOEM grants me a RUE, what financial assurance must I
provide?
(a) Before BOEM grants you a RUE on the OCS, you must maintain
financial assurance of $500,000 that guarantees compliance with the
regulations and the terms and conditions of the RUEs you hold.
(1) You are not required to submit and maintain the financial
assurance of $500,000 pursuant to this paragraph (a) if you furnish and
maintain area-wide lease financial assurance in excess of $500,000
pursuant to 30 CFR 556.901(a), provided that the area-wide lease
financial assurance also guarantees compliance with all the terms and
conditions of the RUEs you hold.
(2) The Regional Director may reduce the amount required in this
paragraph (a) upon a determination that the reduced amount is
sufficient to guarantee compliance with the regulations and the terms
and conditions of the RUE grant.
(3) The requirements for financial assurance in 30 CFR 556.900(d)
through (g) and 30 CFR 556.902 apply to the financial assurance
required under this paragraph (a).
(b) If BOEM grants you a RUE that serves either an OCS lease or a
State lease, the Regional Director may require supplemental financial
assurance, above the amount required by paragraph (a) of this section,
to ensure compliance with the obligations under your RUE grant based on
an evaluation of your ability to carry out present and future
obligations on the RUE using the criteria set forth in 30 CFR
556.901(d)(1) and (2). This supplemental financial assurance must:
(1) Meet the requirements of 30 CFR 556.900(d) through (g) and 30
CFR 556.902; and
(2) Cover costs and liabilities for compliance with regulations,
compliance with BOEM and the Bureau of Safety and Environmental
Enforcement (BSEE) orders, and well abandonment, platform and structure
removal, and site clearance of the seafloor of the RUE, in accordance
with the regulations at 30 CFR part 250, subpart Q.
(c) If you fail to replace any deficient financial assurance upon
demand or fail to provide supplemental financial assurance upon demand,
the Regional Director may:
(1) Assess penalties under subpart N of this part;
(2) Request BSEE to suspend operations on your RUE; and/or
(3) Initiate action for cancellation of your RUE grant.
0
8. Add Sec. 550.167 under the undesignated center heading ``Right-of-
Use and Easement'' to read as follows:
Sec. 550.167 How may I obtain or assign my interest in a RUE?
(a) To obtain or assign a RUE, you must file an application and
provide the information contained in Sec. 550.161 and you must obtain
BOEM's approval.
(b) BOEM may disapprove an assignment in the following
circumstances:
(1) When the assignee has unsatisfied obligations under the
regulations in this chapter or in 30 CFR chapters II or XII, or under
any BOEM or BSEE order;
(2) When an assignment is not acceptable as to form or content
(e.g., containing incorrect legal description, not executed by a person
authorized to bind the corporation, assignee does not meet the
requirements of 30 CFR 556.401 through 556.405);
(3) When the assignment does not comply with or would conflict with
these regulations, or any other applicable laws or regulations (e.g.,
Departmental debarment rules);
(4) When the assignee does not meet the applicable financial
assurance requirements in Sec. 550.166 and 30 CFR 556.900 through
556.907, or an order issued thereunder, with respect to the interest
being assigned.
0
9. Amend Sec. 550.199 by revising paragraph (b) to read as follows:
Sec. 550.199 Paperwork Reduction Act statements--information
collection.
* * * * *
(b) Respondents are OCS oil, gas, and sulfur lessees and operators.
The requirement to respond to the information collections in this part
is mandated under the Act (43 U.S.C. 1331 et seq.) and the Act's
Amendments of 1978 (43 U.S.C. 1801 et seq.). Some responses are also
required to obtain or retain a benefit or may be voluntary. Proprietary
information will be protected under Sec. 550.197, Data and information
to be made available to the public or for limited inspection; 30 CFR
parts 551 and 552; and the Freedom of Information Act (5 U.S.C. 552)
and its implementing regulations at 43 CFR part 2.
* * * * *
Subpart J--Pipelines and Pipeline Rights-of-Way
0
10. Revise Sec. 550.1011 to read as follows:
Sec. 550.1011 Financial assurance requirements for pipeline right-of-
way (ROW) grant holders.
(a) When you apply for, attempt to assign, or are the holder of a
pipeline right-of-way (ROW) grant, you must furnish and maintain
$300,000 of area-wide financial assurance that guarantees compliance
with the regulations and the terms and conditions of all the pipeline
ROW grants you hold in an OCS area as defined in 30 CFR 556.900(b). The
requirement to furnish and maintain area-wide financial assurance for a
pipeline ROW grant is separate and distinct from the requirement to
provide financial assurance for a lease or right-of-use and easement
(RUE).
[[Page 42171]]
(b) The requirement to furnish and maintain area-wide pipeline ROW
financial assurance under paragraph (a) of this section may be
satisfied if your operator or a co-grant holder provides such financial
assurance in the required amount that guarantees compliance with the
regulations and the terms and conditions of the grant.
(c) The requirements for lease financial assurance in 30 CFR
556.900(d) through (g) and 30 CFR 556.902 apply to the area-wide
financial assurance required in paragraph (a) of this section.
(d) The Regional Director, using the criteria set forth in 30 CFR
556.901(d)(1) and (2), may require supplemental financial assurance
(i.e., above the amount required by paragraph (a) of this section) to
ensure compliance with the obligations under your pipeline right-of-way
grant based on an evaluation of your ability to carry out present and
future obligations on the pipeline ROW.
(e) The supplemental financial assurance required under paragraph
(d) of this section must:
(1) Meet the requirements of 30 CFR 556.900(d) through (g) and 30
CFR 556.902, and
(2) Cover costs and liabilities for regulatory compliance and
compliance with BOEM and BSEE orders, decommissioning of all pipelines
or other facilities, and clearance from the seafloor of all
obstructions created by your pipeline ROW operations in accordance with
the regulations at 30 CFR part 250, subpart Q.
(f) If you fail to replace any deficient financial assurance upon
demand or fail to provide supplemental financial assurance upon demand,
the Regional Director may:
(1) Assess penalties under subpart N of this part;
(2) Request BSEE to suspend operations on your pipeline ROW; and/or
(3) Initiate action for forfeiture of your pipeline ROW grant in
accordance with 30 CFR 250.1013.
PART 556--LEASING OF SULFUR OR OIL AND GAS AND FINANCIAL ASSURANCE
REQUIREMENTS IN THE OUTER CONTINENTAL SHELF
0
11. The authority citation for part 556 is revised to read as follows:
Authority: 31 U.S.C. 9701; 42 U.S.C. 6213; 43 U.S.C. 1334.
0
12. Revise the heading to part 556 to read as set forth above.
Subpart A--General Provisions
0
13. Amend Sec. 556.105 by:
0
a. In paragraph (a), removing the acronym ``EPA''; and
0
b. In paragraph (b):
0
i. Adding the definition ``Assign'' in alphabetical order;
0
ii. Revising the definition ``Eastern Planning Area'';
0
iii. Adding the definitions ``Financial assurance'', ``Investment grade
credit rating'', and ``Issuer credit rating'' in alphabetical order;
0
iv. Revising the definition ``Right-of-Use and Easement (RUE)'';
0
v. Removing the definition ``Security or securities'';
0
vi. Adding the definition ``Transfer''; and
0
vii. Revising the definition ``You''.
The revisions and additions read as follows:
Sec. 556.105 Acronyms and definitions.
* * * * *
(b) * * *
Assign means to convey an ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant. For the purposes of this part,
``assign'' is synonymous with ``transfer'' and the two terms are used
interchangeably.
* * * * *
Eastern Planning Area means that portion of the Gulf of Mexico that
lies southerly and westerly of Florida.
* * * * *
Financial assurance means a surety bond, a pledge of Treasury
securities, a decommissioning account, a third-party guarantee, or
another form of security acceptable to the BOEM Regional Director, that
is used to ensure compliance with obligations under the regulations and
under the terms of a lease, a RUE grant, or a pipeline ROW grant.
* * * * *
Investment grade credit rating means an issuer credit rating of
BBB- or higher, or its equivalent, assigned to an issuer of corporate
debt by a nationally recognized statistical rating organization (NRSRO)
as that term defined by the United States Securities and Exchange
Commission (SEC).
* * * * *
Issuer credit rating means a credit rating assigned to an issuer of
corporate debt by Standard and Poor's (S&P) Rating Services (or any of
its subsidiaries), by Moody's Investors Service Incorporated (or any of
its subsidiaries), or by another NRSRO as that term is defined by the
United States SEC.
* * * * *
Right-of-Use and Easement (RUE) means a right to use a portion of
the seabed at an OCS site other than on a lease you own, to construct,
secure to the seafloor, use, modify, or maintain platforms, seafloor
production equipment, artificial islands, facilities, installations, or
other devices to support the exploration, development, or production of
oil, gas, or sulfur resources from an OCS lease or a lease on State
submerged lands adjacent to or accessible from the OCS.
* * * * *
Transfer means to convey an ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant. For the purposes of this part,
``transfer'' is synonymous with ``assign'' and the two terms are used
interchangeably.
* * * * *
You, depending on the context of the regulations, means a bidder, a
lessee (record title owner), a sublessee (operating rights owner), a
Federal or State RUE grant holder, a pipeline ROW grant holder, an
assignor or transferor, a designated operator or agent of the lessee or
grant holder, or an applicant seeking to become one of the above.
Subpart G--Transferring All or Part of the Record Title Interest in
a Lease
0
14. Amend Sec. 556.704 by revising the section heading, and paragraphs
(a) introductory text and (a)(1) to read as follows:
Sec. 556.704 When may BOEM disapprove an assignment or sublease of an
interest in my lease?
(a) BOEM may disapprove an assignment or sublease of all or part of
your lease interest(s):
(1) When the transferor, transferee, or sublessee is not in
compliance with all applicable regulations and orders, including
financial assurance requirements;
* * * * *
Subpart H--Transferring All or Part of the Operating Rights in a
Lease
0
15. Amend Sec. 556.802 by revising the section heading, introductory
text, and paragraph (a) to read as follows:
Sec. 556.802 When may BOEM disapprove the transfer of all or part of
my operating rights interest?
BOEM may disapprove a transfer of all or part of your operating
rights interest:
(a) When the transferee is not in compliance with all applicable
regulations and orders, including financial assurance requirements;
* * * * *
[[Page 42172]]
Subpart I--Bonding or Other Financial Assurance
0
16. Amend Sec. 556.900 by:
0
a. Revising the section heading and introductory text;
0
b. Revising paragraph (a)(3), and adding paragraph (a)(4);
0
c. Revising paragraphs (g) introductory text and (h); and
0
d. Adding paragraph (i).
The revisions and additions read as follows:
Sec. 556.900 Financial assurance requirements for an oil and gas or
sulfur lease.
This section establishes financial assurance requirements for the
lessee of an OCS oil and gas or sulfur lease.
(a) * * *
(3) Maintain a lease or area-wide bond in the amount required in
Sec. 556.901(a) or (b); and
(4) Provide any supplemental financial assurance required by the
Regional Director.
* * * * *
(g) You may provide alternative types of financial assurance
instead of providing a surety bond if the Regional Director determines
that the alternative financial assurance protects the interests of the
United States to the same extent as a surety bond.
* * * * *
(h) If you fail to replace deficient financial assurance or to
provide supplemental financial assurance upon demand, the Regional
Director may:
(1) Assess penalties under part 550, subpart N of this subchapter;
(2) Request BSEE to suspend production and other operations on your
lease in accordance with 30 CFR 250.173; and/or
(3) Initiate action to cancel your lease.
(i) In the event you amend your area-wide surety bond covering
lease obligations, or obtain a new area-wide lease surety bond, to
cover the financial assurance requirements for any RUE(s), your area-
wide lease surety bond may be called in whole or in part to cover any
or all the obligations on which you default that are associated with
your RUE(s) located in the area covered by such area-wide lease surety
bond.
0
17. Amend Sec. 556.901 by:
0
a. Revising the section heading;
0
b. Revising paragraphs (a) introductory text and (a)(1)(i);
0
c. Revising paragraphs (b) introductory text and (b)(1)(i);
0
d. Revising paragraphs (c) through (f); and
0
e. Adding paragraphs (g) and (h).
The revisions and additions read as follows:
Sec. 556.901 Base financial assurance and supplemental financial
assurance.
(a) This paragraph (a) explains what financial assurance you must
provide before lease exploration activities commence.
(1) * * *
(i) You must furnish the Regional Director $200,000 in lease
exploration financial assurance that guarantees compliance with all the
terms and conditions of the lease by the earliest of:
* * * * *
(b) This paragraph (b) explains what financial assurance you must
provide before lease development and production activities commence.
(1) * * *
(i) You must furnish the Regional Director $500,000 in lease
development financial assurance that guarantees compliance with all the
terms and conditions of the lease by the earliest of:
* * * * *
(c) If you can demonstrate to the satisfaction of the Regional
Director that you can satisfy your decommissioning and other lease
obligations for less than the amount of financial assurance required
under paragraphs (a)(1) or (b)(1) of this section, the Regional
Director may accept financial assurance in an amount less than the
prescribed amount but not less than the amount of the cost for
decommissioning.
(d) The Regional Director may determine that supplemental financial
assurance (i.e., financial assurance above the amounts prescribed in 30
CFR 550.166(a), 30 CFR 550.1011(a), Sec. 556.900(a) or paragraphs (a)
and (b) of this section) is required to ensure compliance with your
lease obligations, including decommissioning obligations; the
regulations in this chapter; and the regulations in 30 CFR chapters II
and XII. The Regional Director may require you to provide supplemental
financial assurance if you do not meet at least one of the following
criteria:
(1) You have an Investment grade issuer credit rating. If any SEC-
recognized NRSRO provides a credit rating that differs from any other
SEC-recognized NRSRO credit rating, BOEM will apply the highest rating
for the purposes of determining your financial assurance requirements.
(2) You have a proxy credit rating determined by the Regional
Director, which must be based on audited financial information for the
most recent fiscal year (which must include an income statement,
balance sheet, statement of cash flows, and the auditor's certificate).
(i) The audited financial information for your most recent fiscal
year must cover a continuous twelve-month period within the twenty-
four-month period prior to the lessee's receipt of the Regional
Director's determination that you must provide supplemental financial
assurance.
(ii) In determining your proxy credit rating, the Regional Director
may include the value of the contingent liabilities associated with any
lease(s) or grants in which you have an ownership interest. Upon the
request of the Regional Director, you must provide the information that
the Regional Director determines is necessary to properly evaluate your
contingent liabilities, including joint ownership interests and
liabilities associated with your OCS leases and grants.
(3) Your co-lessee or co-grant-holder has an issuer credit rating
or a proxy credit rating that meets the criteria set forth in paragraph
(d)(1) of this section; however, the Regional Director may require you
to provide supplemental financial assurance for decommissioning
obligations for which such co-lessee or co-grant-holder is not liable.
(4) There are proved oil and gas reserves on the lease, as defined
by the SEC Regulation S-X at 17 CFR 210.4-10 and SEC Regulation S-K at
17 CFR 229.1200, the value of which exceeds three times the estimated
cost of the decommissioning associated with the production of those
reserves, and that value must be based on reserve reports submitted to
the Regional Director and reported on a per-lease basis. BOEM will
determine the decommissioning costs associated with the production of
your reserves on a per-lease basis, and will use the following
decommissioning cost estimates:
(i) Where BSEE-generated probabilistic estimates are available,
BOEM will use the estimate at the level at which there is a 70 percent
probability that the actual cost of decommissioning will be less than
the estimate (P70).
(ii) If there is no BSEE probabilistic estimate available, BOEM
will use the BSEE-generated deterministic estimate.
(e) You may satisfy the Regional Director's demand for supplemental
financial assurance by increasing the amount of your existing financial
assurance or providing additional surety bonds or other types of
acceptable financial assurance.
(f) The Regional Director will determine the amount of supplemental
financial assurance required to guarantee compliance. In making this
determination, the Regional Director will consider potential
underpayment of royalty and cumulative
[[Page 42173]]
decommissioning obligations using the methodology set forth in
paragraph (d)(3) of this section.
(g) If your cumulative potential obligations and liabilities either
increase or decrease, the Regional Director may adjust the amount of
supplemental financial assurance required.
(1) If the Regional Director proposes an adjustment, the Regional
Director will:
(i) Notify you and your financial assurance provider of any
proposed adjustment to the amount of financial assurance required; and
(ii) Give you an opportunity to submit written or oral comment on
the adjustment.
(2) If you request a reduction of the amount of supplemental
financial assurance required, or oppose the amount of a proposed
adjustment, you must submit evidence to the Regional Director
demonstrating that the projected amount of royalties due to the United
States Government and the estimated costs of decommissioning are less
than the required financial assurance amount. Upon review of your
submission, the Regional Director may reduce the amount of financial
assurance required.
(h) At any time during the first three years from the effective
date of this regulation, you may request that the Regional Director
allow you to provide, in three equal installments payable according to
the schedule provided under this paragraph (h), the full amount of
supplemental financial assurance required.
(1) If the Regional Director allows you to provide the amount
required on such a phased basis, you must comply with the following:
(i) You must provide the initial one-third of the total
supplemental financial assurance required within the timeframe
specified in the demand letter or, if no timeframe is specified, within
60 calendar days of the date of receipt of the demand letter.
(ii) You must provide the second one-third of the required
supplemental financial assurance to BOEM within 24 months of the date
of receipt of the demand letter.
(iii) You must provide the final one-third of the required
supplemental financial assurance to BOEM within 36 months of the date
of receipt of the demand letter.
(2) If the Regional Director allows you to meet your supplemental
financial assurance requirement in a phased manner, as set forth in
this section, and you fail to timely provide the required supplemental
financial assurance to BOEM, the Regional Director will notify you of
such failure. You will no longer be eligible to meet your supplemental
financial assurance requirement in the manner prescribed in this
paragraph (h), and the remaining amount due will become due 10-calendar
days after such notification is received.
0
18. Amend Sec. 556.902 by revising the section heading, paragraphs (a)
and (e)(2), and adding paragraphs (g) and (h) to read as follows:
Sec. 556.902 General requirements for bonds or other financial
assurance.
(a) Any surety bond or other financial assurance that you, as
record title owner, operating rights owner, grant holder, or operator,
provide under this part, or under 30 CFR part 550, must:
(1) Be payable upon demand to the Regional Director;
(2) Guarantee compliance with all your obligations under the lease
or grant, the regulations under 30 CFR chapters II and XII, and all
BOEM and BSEE orders; and
(3) Guarantee compliance with the obligations of all record title
owners, operating rights owners, and operators on the lease, and all
grant-holders on a grant.
* * * * *
(e) * * *
(2) A pledge of Treasury securities as provided in Sec.
556.900(f).
* * * * *
(g) If you believe that BOEM's supplemental financial assurance
demand is unjustified, you may request an informal resolution of your
dispute in accordance with the requirements of 30 CFR 590.6. Your
request for an informal resolution will not affect your right to
request to meet your supplemental financial assurance requirement in a
phased manner under Sec. 556.901(h).
(h) You may file an appeal of a supplemental financial assurance
demand with the Interior Board of Land Appeals (IBLA) pursuant to the
regulations in 30 CFR part 590. However, if you request that the IBLA
stay the demand pending a final ruling on your appeal, you must post an
appeal surety bond equal to the amount of the demand that you seek to
stay before any such stay is effective.
0
19. Revise Sec. 556.903 to read as follows:
Sec. 556.903 Lapse of financial assurance.
(a) If your surety, guarantor, or the financial institution holding
or providing your financial assurance becomes bankrupt or insolvent, or
has its charter or license suspended or revoked, any financial
assurance coverage from such surety, guarantor, or financial
institution must be replaced. You must notify the Regional Director
within 7 calendar days of learning of such event, and, within 30
calendar days of learning of such event, you must provide other
financial assurance from a different financial assurance provider in
the amount required under Sec. Sec. 556.900, 556.901, 30 CFR 550.166,
or 30 CFR 550.1011.
(b) You must notify the Regional Director within 72 hours of
learning of any action filed alleging that you are insolvent or
bankrupt or that your surety, guarantor, or financial institution is
insolvent or bankrupt or has had its charter or license suspended or
revoked. All surety bonds or other financial assurance must require the
surety, guarantor, or financial institution to timely provide this
required notification both to you and directly to BOEM.
0
20. Revise Sec. 556.904 to read as follows:
Sec. 556.904 Decommissioning accounts.
(a) The Regional Director may authorize you to establish a
decommissioning account(s) in a federally insured financial institution
to satisfy a supplemental financial assurance demand made pursuant to
Sec. 556.901(d), 30 CFR 550.166(b) or 30 CFR 550.1011(d). The
decommissioning account must be set up in such a manner that funds may
not be withdrawn without the written approval of the Regional Director.
(1) Funds in the account must be pledged to meet your
decommissioning obligations and payable upon demand to BOEM.
(2) You must fully fund the account, pursuant to a schedule that
the Regional Director prescribes, to cover all decommissioning costs
estimated by BSEE.
(3) If you fail to make the initial payment or any scheduled
payment into the decommissioning account, you must immediately submit,
and subsequently maintain, a surety bond or other financial assurance
in an amount equal to the remaining unfulfilled portion of the
supplemental financial assurance demand.
(b) Any interest paid on funds in a decommissioning account will
become part of the principal funds in the account unless the Regional
Director authorizes in writing the payment of the interest to the party
who deposits the funds.
(c) The Regional Director may require you to create an overriding
royalty, production payment obligation, or other revenue stream for the
benefit of an account established as financial
[[Page 42174]]
assurance for the decommissioning of your lease(s) or RUE or pipeline
right-of-way grant(s). The required obligation may be associated with
oil and gas or sulfur production from a lease other than a lease or
grant secured through the decommissioning account.
(d) BOEM may provide funds from the decommissioning account to the
liable party that performs the decommissioning to cover the costs
thereof.
0
21. Revise Sec. 556.905 to read as follows:
Sec. 556.905 Third-party guarantees.
(a) The Regional Director may accept a third-party guarantee to
satisfy a supplemental financial assurance demand made pursuant to
Sec. 556.901(d), 30 CFR 550.166(b), or 30 CFR 550.1011(d), if:
(1) The guarantor meets the credit rating or proxy credit rating
criterion set forth in Sec. 556.901(d)(1); and
(2) The guarantor or guaranteed party submits a third-party
guarantee agreement containing each of the provisions in paragraph (d)
of this section.
(b) A third-party guarantor may limit its cumulative obligations to
a fixed dollar amount as agreed to by BOEM at the time the third-party
guarantee is provided.
(c) If, during the life of your third-party guarantee, your
guarantor no longer meets the criterion referred to in paragraph (a)(1)
of this section, you must, within 72 hours of so learning:
(1) Notify the Regional Director; and
(2) Submit, and subsequently maintain a surety bond or other
financial assurance covering those obligations previously secured by
the third-party guarantee.
(d) Your third-party guarantee must contain each of the following
provisions:
(1) If you fail to comply with the terms of any lease or grant
covered by the guarantee, or any applicable regulation, your guarantor
must either:
(i) Take corrective action to bring the lease or grant into
compliance with its terms or any applicable regulation, to the extent
covered by the guarantee; or
(ii) Be liable under the third-party guarantee agreement to
provide, within seven calendar days, sufficient funds for the Regional
Director to complete such corrective action to the extent covered by
the guarantee. Such payment does not result in the cancellation of the
guarantee, and instead reduces the remaining value of the guarantee in
an amount equal to the payment.
(2) If your guarantor wishes to terminate the period of liability
under its guarantee, it must:
(i) Notify you and the Regional Director at least 90-calendar days
before the proposed termination date;
(ii) Obtain the Regional Director's approval for the termination of
the period of liability for all or a specified portion of the
guarantee; and
(iii) Remain liable for all liabilities that accrued prior to the
termination and responsible for all work and workmanship performed
during the period of liability.
(3) Before the termination of the period of liability of the third-
party guarantee, you must provide acceptable replacement financial
assurance.
(e) If you or your guarantor request BOEM to cancel your third-
party guarantee, BOEM will cancel the guarantee under the same terms
and conditions provided for cancellation of supplemental financial
assurance and return of pledged financial assurance in Sec. 556.906,
paragraphs (b) and/or (d)(3).
(f) The guarantor or guaranteed party must submit a third-party
guarantee agreement that meets the following criteria:
(1) The third-party guarantee agreement must be executed by your
guarantor and all persons and parties bound by the agreement.
(2) The third-party guarantee agreement must bind, jointly and
severally, each person and party executing the agreement.
(3) When your guarantor is a corporate entity, two corporate
officers who are authorized to bind the corporation must sign the
third-party guarantee agreement.
(g) Your corporate guarantor and any other corporate entities bound
by the third-party guarantee agreement must provide the Regional
Director copies of:
(1) The authorization of the signatory corporate officials to bind
their respective corporations;
(2) An affidavit certifying that the agreement is valid under all
applicable laws; and
(3) Each corporation's corporate authorization to execute the
third-party guarantee agreement.
(h) If your third-party guarantor or another party bound by the
third-party guarantee agreement is a partnership, joint venture, or
syndicate, the third-party guarantee agreement must:
(1) Bind each partner or party who has a beneficial interest in
your guarantor; and
(2) Provide that each member of the partnership, joint venture, or
syndicate is jointly and severally liable for those obligations secured
by the guarantee.
(i) When forfeiture is called for under Sec. 556.907, the third-
party guarantee agreement must provide that your guarantor will either:
(1) Take corrective action to bring your lease or grant into
compliance with its terms, and the regulations, to the extent covered
by the guarantee; or
(2) Provide sufficient funds within seven calendar days to permit
the Regional Director to complete such corrective action to the extent
covered by the guarantee.
(j) The third-party guarantee agreement must contain a confession
of judgment. It must provide that, if the Regional Director determines
that you are in default of the lease or grant covered by the guarantee
or not in compliance with any regulation applicable to such lease or
grant, the guarantor:
(1) Will not challenge the determination; and
(2) Will remedy the default to the extent covered by the guarantee.
(k) Each third-party guarantee agreement is deemed to contain all
terms and conditions contained in paragraphs (d), (f), and (j) of this
section, even if the guarantor has omitted these terms from the third-
party guarantee agreement.
0
22. Revise Sec. 556.906 to read as follows:
Sec. 556.906 Termination of the period of liability and cancellation
of financial assurance.
This section defines the terms and conditions under which BOEM will
terminate the period of liability of financial assurance. Terminating
the period of liability ends the period during which obligations
continue to accrue, but does not relieve the financial assurance
provider of the responsibility for obligations that accrued during the
period of liability. Canceling a financial assurance instrument
relieves the financial assurance provider of all liability. The
liabilities that accrue during a period of liability include
obligations that started to accrue prior to the beginning of the period
of liability and had not been met, and obligations that begin accruing
during the period of liability.
(a) When you or your financial assurance provider request
termination:
(1) The Regional Director will terminate the period of liability
under your financial assurance within 90 calendar days after BOEM
receives the request; and
(2) If you intend to continue operations, or have not met all
decommissioning obligations, you must provide replacement financial
assurance of an equivalent amount.
(b) If you provide replacement financial assurance, the Regional
Director will cancel your previous
[[Page 42175]]
financial assurance and the previous financial assurance provider will
not retain any liability, provided that:
(1) The amount of the new financial assurance is equal to or
greater than that of the financial assurance that was cancelled, or you
provide an alternative form of financial assurance, and the Regional
Director determines that the alternative form of financial assurance
provides a level of security equal to or greater than that provided by
the financial assurance that was cancelled;
(2) For financial assurance submitted under Sec. 556.900(a), Sec.
556.901(a) or (b), 30 CFR 550.166(a), or 30 CFR 550.1011(a) the new
financial assurance provider agrees to assume all outstanding
obligations that accrued during the period of liability that was
terminated; and
(3) For supplemental financial assurance submitted under Sec.
556.901(d), 30 CFR 550.166(b), or 30 CFR 550.1011(d), the issuer of
such financial assurance agrees to assume that portion of the
outstanding obligations that accrued during the period of liability
that was terminated and that the Regional Director determines may
exceed the coverage of the base financial assurance. The Regional
Director will notify the provider of the new financial assurance of the
amount required.
(c) This paragraph (c) applies if the period of liability is
terminated, but the financial assurance is not replaced with an
equivalent amount. The financial assurance provider will continue to be
responsible for accrued obligations:
(1) Until the obligations are satisfied; and
(2) For additional periods of time in accordance with paragraph (d)
of this section.
(d) BOEM will cancel the financial assurance for your lease or
grant, and the Regional Director will return any pledged financial
assurance, as shown in the following:
Table 1 to Paragraph (d)
------------------------------------------------------------------------
Your financial assurance will be
reduced or cancelled, or your
For the following: pledged financial assurance will be
returned:
------------------------------------------------------------------------
(1) Financial assurance submitted 7 years after the lease or grant
under Sec. 556.900(a), Sec. expires or is terminated, 6 years
556.901(a) or (b), 30 CFR after the Regional Director
550.166(a), or 30 CFR 550.1011(a). determines that you have completed
all covered obligations, or at the
conclusion of any appeals or
litigation related to your covered
obligations, whichever is the
latest. The Regional Director will
reduce the amount of your financial
assurance or return a portion of
your pledged financial assurance if
the Regional Director determines
that you need less than the full
amount of the financial assurance
or pledged financial assurance to
cover any potential obligations.
(2) Financial assurance submitted (i) When the lease or grant expires
under Sec. 556.901(d), 30 CFR or is terminated and the Regional
550.166(a), or 30 CFR 550.1011(d). Director determines you have met
your covered obligations, unless
the Regional Director: (A)
Determines that the future
potential liability resulting from
any undetected problem is greater
than the amount of the financial
assurance submitted under Sec.
556.900(a), Sec. 556.901(a) or
(b), 30 CFR 550.166(a), or 30 CFR
550.1011(a); and
(B) Notifies the provider of
financial assurance submitted under
Sec. 556.901(d), 30 CFR
550.166(b), or 30 CFR 550.1011(d)
that the Regional Director will
wait 7 years before canceling all
or a part of such financial
assurance (or longer period as
necessary to complete any appeals
or judicial litigation related to
your secured obligations).
(ii) At any time when:
(A) BOEM has determined, using the
criteria set forth in Sec.
556.901(d)(1) of this part, as
applicable, that you no longer need
to provide the supplemental
financial assurance for your lease,
RUE grant, or pipeline ROW grant.
(B) The operations for which the
supplemental financial assurance
was provided ceased prior to
accrual of any decommissioning
obligation; or,
(C) Cancellation of the financial
assurance is appropriate because,
under the regulations, BOEM
determines such financial assurance
never should have been required.
(3) Third-party Guarantee under When the Regional Director
Sec. 556.901(d), 30 CFR determines you have met your
550.166(b), or 30 CFR 550.1011(d). obligations secured by the
guarantee (or longer period as
necessary to complete any appeals
or judicial litigation related to
your obligations secured by the
guarantee).
------------------------------------------------------------------------
(e) For all financial assurance, the Regional Director may
reinstate your financial assurance as if no cancellation had occurred
if:
(1) A person makes a payment under the lease, RUE grant, or
pipeline ROW grant, and the payment is rescinded or must be returned by
the recipient because the person making the payment is insolvent,
bankrupt, subject to reorganization, or placed in receivership; or,
(2) The responsible party represents to BOEM that it has discharged
its obligations under the lease, RUE grant, or pipeline ROW grant and
the representation was materially false when the financial assurance
was cancelled.
0
23. Revise Sec. 556.907 to read as follows:
Sec. 556.907 Forfeiture of bonds or other financial assurance.
This section explains how a bond or other financial assurance may
be forfeited.
(a) The Regional Director will call for forfeiture of all or part
of the bond, or other form of financial assurance, including a
guarantee you provide under this part, if:
(1) You, or any party with the obligation to comply refuse to
comply with any term or condition of your lease, RUE grant, pipeline
ROW grant, or any applicable regulation, or the Regional Director
determines that you are unable to so comply; or
(2) You default on one of the conditions under which the Regional
Director accepts your bond, third-party guarantee, and/or other form of
financial assurance.
(b) The Regional Director may pursue forfeiture of your surety bond
or other financial assurance without first making demands for
performance against any other record title owner, operating rights
owner, grant holder, or other person
[[Page 42176]]
authorized to perform lease or grant obligations.
(c) The Regional Director will:
(1) Notify you, your surety, guarantor, or the financial
institution holding or providing your financial assurance, of a
determination to call for forfeiture of your financial assurance,
whether it takes the form of a surety bond, guarantee, funds, or other
type of financial assurance.
(i) This notice will be in writing and will provide the reason for
the forfeiture and the amount to be forfeited.
(ii) The Regional Director will determine the amount to be
forfeited based upon an estimate of the total cost of corrective action
to bring your lease or grant into compliance, subject in the case of a
guarantee to any limitation in the guarantee authorized by Sec.
556.902(a)(3).
(2) Advise you and your financial assurance provider that
forfeiture may be avoided if, within five business days:
(i) You agree to and demonstrate that you will bring your lease or
grant into compliance within the timeframe the Regional Director
prescribes; or
(ii) The provider of your financial assurance agrees to and
demonstrates that it will complete the corrective action to bring your
lease or grant into compliance within the timeframe the Regional
Director prescribes, even if the cost of compliance exceeds the amount
of that financial assurance.
(d) If the Regional Director finds you are in default, the Regional
Director may cause the forfeiture of any financial assurance provided
to ensure your compliance with the terms and conditions of your lease
or grant and the regulations in this chapter and 30 CFR chapters II and
XII.
(e) If the Regional Director determines that your financial
assurance is forfeited, the Regional Director will:
(1) Collect the forfeited amount; and
(2) Use the funds collected to bring your lease or grant into
compliance and to correct any default.
(f) If the amount the Regional Director collects under your
financial assurance is insufficient to pay the full cost of corrective
actions, the Regional Director may:
(1) Take or direct action to obtain full compliance with your lease
or grant and the regulations in this chapter; and
(2) Recover from you, any co-lessee, operating rights owner, grant
holder or, to the extent covered by the guarantee, any third-party
guarantor responsible under this subpart, all costs in excess of the
amount the Regional Director collects under your forfeited financial
assurance.
(g) If the amount that the Regional Director collects under your
forfeited financial assurance exceeds the cost of taking the corrective
action required to bring your lease or grant into compliance with its
terms and the regulations in this chapter and 30 CFR chapters II and
XII, the Regional Director will return the excess funds to the party
from whom they were collected.
(h) The Regional Director may pay the funds from the forfeited
financial assurance to a co- or predecessor lessee or third party who
is taking the corrective action required to obtain partial or full
compliance with the regulations and the terms of your lease or grant.
Subchapter C--Appeals
PART 590--APPEAL PROCEDURES
0
24. The authority citation for part 590 continues to read as follows:
Authority: 5 U.S.C. 301 et seq.; 31 U.S.C. 9701; 43 U.S.C.
1334.
Subpart A--Offshore Minerals Management Appeal Procedures
0
25. Amend Sec. 590.4 by adding paragraph (c) to read as follows:
Sec. 590.4 How do I file an appeal?
* * * * *
(c) You may file an appeal of a BOEM supplemental financial
assurance demand with the IBLA. However, if you request that the IBLA
stay the demand pending a final ruling on your appeal, you must post an
appeal surety bond equal to the amount of the demand that you seek to
stay before any such stay is effective.
[FR Doc. 2023-12916 Filed 6-28-23; 8:45 am]
BILLING CODE P