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The Billion Dollar Problem Brewing In The Gulf

By: Elena Kobrinski Keen, Doctoral Candidate, Harte Research Institute for Gulf of Mexico Studies, Texas A&M University – Corpus Christi

Decommissioning of offshore oil and gas infrastructure has become a focal point of attention in the United States and globally due to an unforeseen moving target: financial responsibility and cost estimation. By law, all offshore oil and gas structural material must be removed, and this process is known as decommissioning. However, events that have unfolded in the past two years in U.S. regulation have highlighted that this legal requirement is not easy to implement. Faced with a $2.3 billion dollar current estimate in backdated decommissioning costs and an outward projected estimate of $30 to 40 billion and counting, the U. S. federal government is looking for answers. They are pressing for a quick response from an oil and gas industry whose financially lucrative interests on the Outer Continental Shelf (OCS) in the Gulf of Mexico are under the strongest governmental challenge in decades.

In an effort to address the slow response to timelines in decommissioning requirements, the U.S. government established a new policy known as “Idle Iron” in 2010. Idle Iron is a policy established in Notice to Lessees (NTL) No. 2010-G05, addressing timelines associated with the completion of platform removal requirements and well plug and abandonment. The federal government will issue an NTL (policy) as a formal document “that provide[s] clarification, description, or interpretation of a regulation or OCS standard” (www.bsee.gov/site-page/index-12) as a way to communicate with companies operating on the OCS. A platform removal list is generated by this Idle Iron policy. In the world of decommissioning, this policy sets forth a time-table for the removal of named structures and in the process has prompted a heightened interest in programs frequently called rigs-to-reefs.

The structural idle iron list is not small – it contained over 600 platforms at the onset of the policy’s effective date in 2010. It is constantly fluctuating higher and lower. As some platforms complete their removal requirements they fall off the list, while others meet the criteria to be added on. From a legal, environmental, navigational and safety standpoint, this policy has not been treated lightly – while removal requirements continue to mount in the Gulf where close to 3,000 platforms make up an intricate web of infrastructure (https://www.bsee.gov/faqs/howmany-platforms-are-in-the-gulf-of-mexico).

The support structure under oil and gas production platforms is often extensive. These hard surfaces provide places for organisms to attach and form artificial reefs. Photo credit: Schmahl/FGBNMS.

The support structure under oil and gas production platforms is often extensive. These hard surfaces provide places for organisms to attach and form artificial reefs. Photo credit: Schmahl/FGBNMS.

 

The reasoning behind the importance of the Idle Iron policy and delayed response times boils down to finances; and personal conversations with representatives from the federal Bureau of Safety and Environmental Enforcement (BSEE) in New Orleans, Louisiana pointed to a simple yet controversial message: there are not enough funds to cover decommissioning costs in the Gulf of Mexico. Therefore, many platforms (oil and gas structures used to extract oil from the ocean floor) are sitting “idle” in the Gulf, hence the name “Idle Iron.”

Moreover, a fairly new development in the constant pursuit of efficient management has led to the development and support of rigs-to-reefs programs. These programs encourage platforms to be left in place (or toppled or removed and moved to a predetermined reefing location) and placed in a state-driven and funded rigs-to-reefs program, as an alternative option to the requirement of removal. This option, through U.S. policy, has become acceptable as a legal alternative to full removal. This viable reefing opportunity became attractive to not only the federal government and the states, but also the oil and gas operators, as it turns out to often be less expensive to “reef” a structure instead of removing it. In addition, and on the side of rigs-to-reefs support, many of these platforms have become their own marine ecosystems, triggering an instant attraction by recreational fishers and divers, and gaining a unexpected nod from environmentalists as a prudent solution as opposed to abiding by the law and pulling the platform out, thus disturbing all marine life that has accumulated there.

Each platform has unique qualities that may or may not make reefing ideal.

Each platform has unique qualities that may or may not make reefing ideal.

 

As attractive as this option may seem, heavy controversy swirls around this topic, because the choice to reef is often not an easy or definitive solution. Each platform has unique qualities that may or may not make reefing ideal from a variety of perspectives, making careful evaluation critical to determine the best final outcome for decommissioning at the conclusion of lease operations. In addition, leaving offshore oil and gas structural material in place can often have negative effects on the environment, can interfere with navigation, and can also be problematic in light of frequent severe weather common to the Gulf region.

These problems are compounded by the fact that cost estimation disclosure requirements are not in place to accurately determine what the actual removal cost is, making the potential for distrust among parties rampant. Each state hosting a formal reefing program relies on a contributed donation from the operator in order to take over and maintain the life of the platform being reefed. If this donated cost amount turns out to be inaccurate—usually calculated as half of the total savings for removal vs. reefing—the future costs to the state for maintenance can be short-funded and detrimental to the program’s success.

It is natural to return to the removal requirement when reefing is not the best option, but the current funds are often insufficient. The first problem is cost estimation, or estimating projected actual removal costs. This concept and number is difficult to determine and the disclosure dynamics on cost estimation requirements that currently affects rigs-to-reefs programs is carrying over into problems with the operator’s relationship with the federal government. What may be a reasonable decommissioning estimate at the onset of installation can increase exponentially over the course of time. Even the most conservative estimates can be completely inaccurate and underestimated when it comes time to decommission. Associated problems include an outdated regulatory system with little enforcement capability, and technology on the OCS consistently outpacing those same regulations. In late 2016, a new U.S. Presidential administration favoring the energy sector, coupled with a period of low oil prices, has exacerbated complications associated with financing decommissioning in the Gulf.

The structural idle iron list contained over 600 platforms at the onset of the policy’s effective date in 2010. As some platforms complete their removal requirements they fall off the list, while others meet the criteria to be added on. Removal requirements continue to mount in the Gulf where close to 3,000 platforms make up an intricate web of infrastructure. For online map, visit www.boem.gov/Visual-1-Active-Leases-and-Infrastructure/.

The structural idle iron list contained over 600 platforms at the onset of the policy’s effective date in 2010. As some platforms complete their removal requirements they fall off the list, while others meet the criteria to be added on. Removal requirements continue to mount in the Gulf where close to 3,000 platforms make up an intricate web of infrastructure. For online map, visit www.boem.gov/Visual-1-Active-Leases-and-Infrastructure/.

 

However, the U.S. federal government has been on a path to address this issue since 2015, launching various initiatives in 2016. In January of 2016, the U.S. Government Accountability Office (GAO) released a formal report acknowledging the financial difficulties in decommissioning. Shortly after in March of 2016, the Director of the Bureau of Ocean Energy Management (BOEM) at the time, Abigail Ross Hopper, made reference to an important caveat: the U.S. taxpayer is at risk for potentially absorbing outstanding decommissioning costs if the problems are not addressed in the near future. Citing the GAO report, she urged the House Committee on Natural Resources Subcommittee on Energy Mineral Resources in budget testimony to address the issue and asked for a modest “total investment of less than $6 million . . . Partially offset by industry fees” to develop a Risk Management Program that “has the potential to save the American taxpayers from billions in contingent liabilities that could result from industry bankruptcies and associated decommissioning costs. (Estimated total liabilities in the Gulf could be as high as $50 billion).”

In January of 2017, Ms. Hopper resigned, and the House Committee on Natural Resources did not respond to inquiries as to the outcome of her request.

In July of 2016, BOEM made another bold move in an affirmative direction to address climbing decommissioning cost estimates and increased potential liability with the release of a Notice to Lessees (NTL) 2016- N01, in an attempt to gain the attention of the oil and gas industry and pad their multi-billion dollar projected removal cost estimates in Gulf coast waters. The reasoning behind the NTL is that up to this point, the federal government financial bonding requirements that secured decommissioning costs up front from industry were either inadequate or non-existent. The NTL provided new guidelines addressing this, but the language and background provided in the NTL was unsatisfactory and insufficient to industry, resulting in an unprecedented backlash between the federal government and industry, weakening a relationship that has been strong since the onset of offshore oil and gas exploration in the 1950s.

The Gulf of Mexico is not only the nation’s primary offshore source of oil and gas, but also boasts some of the most productive fisheries globally, encompasses over five million acres of habitat, and supports a $20 billion dollar tourism industry.

The Gulf of Mexico is not only the nation’s primary offshore source of oil and gas, but also boasts some of the most productive fisheries globally, encompasses over five million acres of habitat, and supports a $20 billion dollar tourism industry.

 

To lessen the impact of the NTL, BOEM was forthcoming with a quick schedule of workshops hosted in Houston and New Orleans in late summer 2016 to address the immediate concerns, but the operators in the Gulf were quick to coalesce into groups such as the National Ocean Industries Association (NOIA) and the Gulf Energy Alliance (GEA) presumably to gain strength in numbers. Shortly after, and backed by signatures from over a dozen U.S. Senators and 31 U.S. House Members, letters went to the Department of the Interior in December of 2016 asking for immediate suspension of the NTL, and for more time to negotiate various options. The Department of the Interior responded via Notices to Stakeholders in January and February of 2017, and the outcome was to stay the NTL for at least six months, with the understanding that some issues still may be addressed within that timeframe on a case-bycase basis.

Moving into March of 2017, industry and regulators reconvened in Houston for the annual Decommissioning and Abandonment Conference hosted by international conference organizers DecomWorld, where another showdown transpired pitting regulators against the operators in the Gulf. The BOEM Regional Director for the Gulf of Mexico opened with a presentation that Included the new NTL, making it clear that it was not going away. He reiterated the government’s request to work with industry on decommissioning costs for two years prior to the NTL release, and emphasized the need for communication and transparency among parties. He closed with highlights toward a path forward that included “holding interactive sessions with industry to discuss the current approach and address concerns, projected plan formulation[s] within two months, vetting and execution of the ‘path forward proposal’ within the [six] month pause, with a goal of resuming implementation”, among other strategic points.

The President of NOIA followed shortly after, stating the need to address issues immediately and emphasized how the incoming new U.S. Presidential administration and associated regulatory changes has put an unexpected spin on the issues at hand. What followed was a series of presentations and speakers that shifted into discussions about a joint industry project (JIP) and a panel emphasizing the rigs-to-reef program benefits and opportunities, with very little discussion of any drawbacks.

The six month stay on the NTL is a critical time for both regulators and industry to come to a common understanding on the options at stake. The Gulf of Mexico is at point where time is of the essence. It is not only the nation’s primary offshore source of oil and gas, but also boasts some of the most productive fisheries globally, encompasses over five million acres of habitat, and supports a $20 billion dollar tourism industry. The communities surrounding the Gulf depend on successful coastal management for their livelihoods, and a major component of this is how the management of offshore oil and gas infrastructure is addressed.

Studying the details of the Idle Iron policy and impacts to rigs-to-reefs programs was a part of a 2013 research project at the Harte Research Institute for Gulf of Mexico Studies at Texas A&M University in Corpus Christi, Texas, and what has transpired over the past four years has become the foundation of a larger dissertation research study currently being conducted by the author of this article. The initial study of idle iron and rigs-to-reefs became a strong foundation driving a final dissertation defense seminar this summer, which will include legal issues and potential international collaboration, also incorporating the difficulties with financing and the impact on rigs-to-reefs. It will also include a presentation of recommendations associated with these broad concepts. For more information, contact Elena Kobrinski Keen, Doctoral Candidate at the Harte Research Institute for Gulf of Mexico Studies at Texas A&M University Corpus Christi. This email address is being protected from spambots. You need JavaScript enabled to view it..

 

References

Bureau of Ocean Energy Management, Regulation and Enforcement. (2010). Notice to lessees and operators of federal oil and gas leases and pipeline right-of-way holders in the Outer Continental Shelf, Gulf of Mexico OCS region. NTL No. 2010- G05. www.bsee.gov/sites/bsee.gov/files/notices-to-lessees-ntl/notices-to-lessees/10g05.pdf

Bureau of Ocean Energy Management. (2016). Notice to lessees and operators of federal oil and gas, and sulfur leases, and holders of pipeline right-of-way and right-of-use and easement grants in the Outer Continental Shelf Requiring Additional Security. NTL No. 2016-N01. www.boem.gov/BOEM-NTL-2016-N01/

Bureau of Ocean Energy Management (2017). BOEM Prioritizes Implementation of Risk Management and Financial Assurance Program Provides Additional Time and Welcomes Stakeholder Engagement [Note to Stakeholders Press Release]. Retrieved from www.boem.gov/note01062017/

Bureau of Ocean Energy Management (2017). BOEM Withdraws Sole Liability Orders Further Review of Complex Financial Assurance Issues Warranted [Note to Stakeholders Press Release] Retrieved from www.boem.gov/note02172017/

Celata, M. (2017). An Update on Requiring Additional Security [PowerPoint slides]. Retrieved from www.boem.gov/2017-03-14-An-Update-Requiring-Additional-Information-DecomWorld-Celata/

Congress of the United States. (2016, December 14). BOEM New Policy [Letter to The Honorable Sally Jewell U.S. Department of the Interior]. Washington, DC.

Gulf Energy Alliance (GEA) http://gulfenergyalliance.org

Gulf Energy Alliance (2010). The Gulf Energy Alliance Commends House and Senate Letters Demanding Review and Suspension of BOEM NTL [Press Release]. Retrieved from http://gulfenergyalliance.org/update/u-s-senators-demandsuspension-of-ntl

National Ocean Industries Association (NOIA) America’s Offshore Energy Industry www.noia.org.

Statement of Abigail Ross Hopper Director, Bureau of Ocean Energy Management U.S. Department of the Interior, 7 (2016) (testimony of Abigail Ross Hopper). www.boem.gov/FY2017-Budget-Testimony-03-01-2016/

United States Government Accountability Office Report to Congressional Requesters (December 2015). Offshore Oil and Gas Resources Actions needed to better protect against billions of dollars in federal exposure to decommissioning liabilities (GAO-16-40). Washington, DC. www.gao.gov/assets/680/674353.pdf

United States Senate. (2016, December 12). BOEM New Policy [Letter to The Honorable Sally Jewell U.S. Department of the Interior]. Washington DC

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