American Oil and Gas Reporter - September 2016 - 119

Firm Questions BOEM Bonding Rules
CLEVELAND, OH.-The Bureau of
Ocean Energy Management's latest financial assurance and risk management
requirements violate federal regulations
and are unenforceable, an analysis by
Baker Hostetler's energy industry team
contends.
BOEM's Notice to Lessees No. 2016N01, "Requiring Additional Security,"
was to become effective Sept. 12. It regulates a lessee's obligations for decommissioning wells, platforms and pipelines
on oil and gas leases on the Outer Continental Shelf, Baker Hostetler describes.
The firm's analysis argues that while
the new NTL mirrors a proposed guidance
advertised by the agency in September
2015, the final guidelines fail to respond
to fundamental concerns submitted in response by affected companies and trade
groups. Baker Hostetler says the new
NTL is subject to three challenges:
* Its linked attachments conflict with
the regulations.
* By ignoring asset retirement obligations (AROs), which already are included in a company's audited financial
statements, BOEM effectively doublecounts the costs of removing a platform
by subtracting its own estimates of removal
liability from a tangible net worth already
reduced by AROs.
* The 10 percent cap on self-insurance
is a rule adopted outside of a proper rulemaking process.
Baker Hostetler says that if the new
NTL is found to be unlawful, the superseded supplemental bond procedures in
NTL No. 2008-N07 would not be resurrected automatically because, at a minimum, the earlier NTL also violated regulations in its treatment of AROs in
audited financial statements.

to discuss their financial capacity need
to be mindful of the agency's inconsistent
messaging. And lessees must be aware
that the second message is unlawful,"
Baker Hostetler says.
According to its analysis, the regulations applicable to leases require BOEM
to ask two questions:
* Does a lessee have the financial
ability to carry out its present and future
lease and regulatory obligations?
* If not, how much additional security

must be provided?
BOEM recognizes this two-step process
in its latest NTL, Baker Hostetler says,
which authorizes the regional director to
evaluate a lessee's financial ability and impose additional security requirements, if
needed. If a lessee is determined to have
the financial ability to meet its obligations,
that should end the scrutiny and call for
additional security, Baker Hostetler asserts.
Despite its apparent recognition of the
two-step process, the new NTL's incor-

Following Regulations
Baker Hostetler says BOEM's new
NTL appears to have been written by
two committees prohibited from speaking
to each other.
The one that drafted the NTL text, the
firm says, recognized that the agency,
before requiring a supplemental bond from
a lessee, had the burden of showing the
lessee lacked the financial capacity to perform its obligations under its OCS lease.
The other committee, which wrote the
linked attachments, Baker Hostetler adds,
takes for granted that no one has that required financial capacity, making the only
relevant question how big the supplemental
bond must be.
"Lessees now meeting with BOEM
SEPTEMBER 2016 119

American Oil and Gas Reporter - September 2016

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