HOUSTON – Mississippi, Texas and Louisiana sued the US government on Monday to block the Biden administration’s proposed rule that would require the offshore oil and gas industry to provide nearly $7 billion in financial guarantees to cover costs. to dismantle old infrastructure.
The rule, which would take effect later this year, will predominantly affect smaller companies that do not have investment grade ratings or sufficient proven oil reserves. Oil majors are more likely to meet credit criteria or have large reserves.
The lawsuit was filed against the US Bureau of Ocean Energy Management (BOEM), which has said the rule could affect about three-quarters of operators in the Gulf of Mexico.
The BOEM did not immediately respond to a request for comment on the lawsuit. When the rule was announced in April, the Interior Department said it was “to protect taxpayers from covering the costs the oil and gas industry would have to bear when offshore platforms require decommissioning.”
Decommissioning old wells can cost billions of dollars, and that expense could fall to taxpayers if companies default on their obligations due to bankruptcies or the transfer of assets from large companies to smaller, less resourceful companies.
Louisiana Attorney General Liz Murrill filed the lawsuit in federal district court in Louisiana and was joined by the attorneys general of Texas and Mississippi.
“This is a really egregious direct attack on mid-tier oil and gas producers, and that affects a lot of businesses in our state,” Murrill told KeynoteUSA in an interview.
“The new regulation is a solution in search of a problem, imposing unnecessary financial burdens that will have far-reaching impacts for many small and medium-sized energy producers and all Americans,” said Kevin Bruce, executive director of the Gulf Alliance. , a coalition of major independent offshore oil and natural gas producers joining the legal challenge against BOEM.
Some 37 offshore oil and gas operators have filed for bankruptcy since 2009, according to a US government agency.
“This is a significant cost to our industry that would really put a lot of people out of business,” said Mike Minarovic, chief executive of Arena Offshore, which operates more than 100 platforms in the Gulf of Mexico that produce about 50,000 barrels per day of oil equivalent. Petroleum
The new rule could cost Arena Offshore between $800 million and $850 million in surety bonds, plus the costs of the bonds themselves, Minarovic said, citing government estimates of the cost of decommissioning.
Minarovic pointed to an outflow of money from collateral markets over the past five years and said securing the bonds needed to secure fiduciary and contractual obligations “will simply be a government requirement that cannot be met.”
As of June 2023, more than 2,700 wells and 500 platforms were behind in decommissioning in the Gulf of Mexico, according to the U.S. Government Accountability Office, forcing the government to require operators to offer bonuses. of additional guarantees in an attempt to protect taxpayers from footing the bill. .
BOEM had about $3.5 billion in supplemental bonds to cover between $40 billion and $70 billion in total estimated decommissioning costs.
Under the new rule, BOEM will allow current lessees and grant holders to apply for graduated payments over three years to meet the new supplemental financial assurance demands required by the rule.
It was not yet clear whether the ruling would put pressure on production abroad. Minarovic said there could be problems if companies cannot deliver the bonuses on time.
The U.S. Gulf of Mexico produces about 1.8 million barrels per day of oil, according to the latest government figures, about 14% of total U.S. production.
“These (oil) companies should pay their fair share and clean up the mess they leave behind, and that starts with guarantees like this,” Mike Scott, director of the Sierra Club’s national oil and gas campaign, told KeynoteUSA.
(Reporting by Georgina McCartney in Houston; Editing by Liz Hampton and David Gregorio)
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