States Sue U.S. to Block Rule Requiring Oil Companies to Ensure Payment for Dismantling Old Wells, By Reuters

By Georgina McCartney

HOUSTON (Reuters) – Texas, Louisiana, and Mississippi have filed a lawsuit against the U.S. government aiming to prevent the Biden administration’s proposed regulation, which would require the offshore oil and gas industry to provide nearly $7 billion in financial guarantees for dismantling outdated infrastructure.

This regulation is set to take effect later this year and will primarily impact smaller companies lacking investment-grade ratings or sufficient proven oil reserves. Larger oil companies are more likely to meet the financial criteria or possess substantial reserves.

The lawsuit targets the U.S. Bureau of Ocean Energy Management (BOEM), which has indicated that the rule could influence approximately three-quarters of operators in the Gulf of Mexico. The BOEM has not commented on the lawsuit, but when the rule was initially proposed in April, the Department of the Interior stated that it aims "to protect taxpayers from incurring costs that should be borne by the oil and gas industry when offshore platforms need decommissioning."

Dismantling old wells can entail costs running into billions of dollars, and taxpayers may face this burden if companies fail to comply due to bankruptcy or if assets are transferred from larger firms to smaller ones with fewer resources.

The lawsuit was initiated by Louisiana Attorney General Liz Murrill in a federal district court in Louisiana, with support from the attorneys general of Texas and Mississippi. "This is a severe direct assault on intermediate-level producers of oil and gas, impacting numerous businesses within our state," Murrill stated in an interview.

Kevin Bruce, executive director of the Gulf Alliance—a coalition of independent offshore oil and gas producers—described the regulation as "a solution in search of a problem," asserting that it imposes unnecessary financial burdens with wide-reaching effects for many small to mid-sized energy producers and the American public.

Since 2009, about 37 offshore oil and gas operators have filed for bankruptcy, according to a U.S. government agency. Mike Minarovic, CEO of Arena Energy, which operates over 100 platforms in the Gulf of Mexico producing around 50,000 barrels per day, emphasized that the new rule would impose significant costs and potentially drive many businesses to failure.

Minarovic noted that Arena Energy could incur costs of approximately $800-850 million in surety bonds, in addition to the associated costs, based on government decommissioning estimates. He highlighted a decline in funds available in surety markets over the past five years and expressed concern that securing the necessary bonds to fulfill fiduciary and contractual obligations may prove impossible under the new requirements.

As of June 2023, more than 2,700 wells and 500 platforms in the Gulf of Mexico had surpassed their decommissioning deadlines, prompting the government to enhance bond requirements to protect taxpayers from footing the bill. The BOEM currently holds around $3.5 billion in supplemental bonds, estimated to cover between $40 billion and $70 billion in total decommissioning expenses.

The new regulation allows current lessees to request phased payment plans over three years to comply with the increased financial assurance demands. It remains uncertain whether this ruling will impact offshore production levels. Minarovic warned that operations might have to be curtailed if companies cannot secure the required bonds in time.

The U.S. Gulf of Mexico contributes roughly 1.8 million barrels of oil daily, accounting for about 14% of total U.S. output. Mike Scott, the national oil and gas campaign manager for the Sierra Club, stated, "These companies should pay their fair share and clean up the mess they leave behind, starting with assurances like this one."