On June 29, the Biden administration proposed a new rule that would injure small, independent oil and gas producers while providing little benefit.
Interior Department’s latest attack on domestic energyOn June 29, the Biden administration, at the behest of the Bureau of Ocean Energy Management, or BOEM — which is part of the Department of the Interior — proposed a new rule that would injure small, independent oil and gas producers while providing little benefit. The new rule says that small oil companies would have to provide further financial assurances to cover the cost of decommissioning offshore wells and platforms.
Oil companies that are and were parties to federal leases have always been collectively responsible for the decommissioning cost, which has protected taxpayers. But in 1989, a lessee declared bankruptcy, causing the government to pay for decommissioning. In response, the federal government promulgated rules requiring some lessees to provide bonds to cover the cost of decommissioning if the company is unable to establish it can pay.
This comes at a cost, typically reducing the purchase price that a seller receives from a buyer. Sellers have sophisticated treasury teams that weigh the risks before executing a transaction. The most significant problem is that this new insurance does not exist and the surety industry says creating such a product under BOEM’s proposed scheme is impossible. The surety industry is unwilling to underwrite the risk given recent energy losses, the ambiguity of the risk being transferred, and the limited number of remaining surety companies underwriting energy risk.
But is the risk of crippling these small businesses worth it? Perhaps not. What has been billed as a $42 billion taxpayer liability in remaining decommission costs carries only $750 million in liability from sole operators. Historically, only these operators have caused taxpayer liabilities, and the government has already received bonds for these potential costs.
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