A Risk-Adjusted Method for Determining OCS Lease Abandonment Liability in the Gulf of Mexico for BOEMRE Supplemental Bonding

Abstract

Summary In recent years, because of widespread hurricane destruction in the Gulf of Mexico (GOM) and unprecedented losses to the offshore industry, concern has been raised by the federal government that small operators may have difficulty in completing their decommissioning requirements. Hurricane-destroyed infrastructure is significantly more expensive to decommission than normal operations, and small operators are at risk to financial liability and potential bankruptcy. If a company goes bankrupt and there are no capable working-interest owners or previous leaseholders, the financial liability may fall upon the US government. To ensure that the government is adequately protected from incurring costs associated with offshore-lease abandonment, Minerals Management Service (MMS), recently renamed the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), requires operators to post a supplemental bond if at least one working-interest owner on a lease does not satisfy a minimum financial capacity. A supplemental-bonding formula was developed by MMS in the early 1990s that is based upon the estimated cost of decommissioning. In recognition of the long period of time since the supplemental-bonding formula was developed, an updated risk-adjusted bonding mechanism is presented in this paper. Our purpose is to update the 1990-legacy formula and present risk-adjusted alternatives to incorporate the uncertainty inherent in the implementation of formula mechanisms. The philosophy of making rational tradeoffs between cost and risks is common throughout the offshore industry, and this paper describes the selection of bonding levels that balance the need of the government to minimize its decommissioning exposure at an acceptable level of risk.