Oil well decommissioning is a hot button issue in the world of energy production. The idea is quite simple: when an oil well is erected, the company who controls that operation must have the resources to take down the facility at the end of its life. This federal law requiring “financial assurance” is to be maintained throughout the life of the project to prevent the taxpayer from bearing that cost.
For decades, oil wells in the Outer Continental Shelf (“OCS”) have changed hands from large oil companies, who typically use the facility while it is in highly productive use, to smaller oil companies, who will continue to use the facility until the end of its productive use. These changing of hands may, and often, occur a few times over that lifespan.
Federal regulations have followed this pattern. They have imposed joint and several liability, meaning that any company who has ever owned or controlled the lease can be held liable for the decommissioning costs. Because anyone who has owned a lease can be liable, the government has only required that any one of these facilities have the financial capability to cover decommissioning.
The beauty of this simple rule is that the free market has done its job. When one company sells the rights to an oil rig to another, often, the selling company will do its due diligence and ensure that the buying company has the financial resources to pay for decommissioning. This means that the buying company, upon purchase, will already have bonds purchased when they purchase the facility. Or the larger company will risk the financial obligation and require the buyer to pay more. Either way, the government should not need to separately require these assurances from the new company.
This system has worked. The Bureau of Ocean Energy Management (BOEM) has acknowledged that instances in which the taxpayer would have to pay for decommissioning are rare. Historically, only $58 million have fallen to the taxpayer, (to demonstrate scale, a rough estimate by industry insiders of decommissioning costs borne by private parties in that time is $25 billion), and all of these taxpayer losses stemmed from operators with no predecessor, meaning there was no other private party to share responsibility for decommissioning liabilities.
Yet, last year, the federal government put forth a proposed rule that upends the already functional system by assuming that all $42.8 billion in potential future decommissioning liability is at risk of being borne by the taxpayers. For important context, only 2 percent of this large $42.8 billion estimate ($391 million) can be traced to sole owner platforms (i.e., no predecessors) where BOEM does not possess bonds in hand. If the rule is finalized, the law would have the effect of requiring new surety obligations to be incurred by entities, almost wholly consisting of small businesses and representing 98 percent of all potential future liability, that have demonstrated virtually no risk to the taxpayers. The industry responsible for creating the new insurance product has also expressed skepticism that a viable market could exist.
So why is BOEM moving forward with the proposal? Typically, the answer lies in who is set to benefit from such a dramatic change in government regulations. In this instance, two distinct and rather strange bedfellows stand out.
First, consider the environmental NGO industry, which has populated the leadership ranks of the Biden administration. With over 76 percent of the offshore oil and gas operators being small businesses, who are tasked with bearing over $9 billion in new supplemental bonding, the projected impact on energy production and development is dire. But while the public, consumers, and American energy security would suffer, this appears to be exactly what the climate change lobby wants.
Second, consider Big Oil. Not only would this rule reduce their decommissioning liabilities, it would also decimate their competitors in the offshore oil and gas industry. This may be bad for energy consumers, but could be a great development for Big Oil. Public records reported on by the Daily Caller show senior Biden administration officials being courted by Big Oil representatives early on in their tenure lobbying for precisely this change in the regulations. While it may seem short-sighted to think you can leverage government power to torpedo your own industry competitors without feeling the consequences too, this may be exactly what is envisioned by Big Oil.
For decades, the system of financial assurances has worked remarkably well in protecting taxpayers and responsibly decommissioning offshore rigs. Yet BOEM now proposes a $9 billion solution to fix a $391 million problem that also reduces energy security for the American people. As usual in Washington, the reason is not hard to understand. But this time the marriage of Big Oil and the environmental lobby could be tough to overcome.
Curtis Schube is the executive director for Council to Modernize Governance, a think tank committed to making the administration of government more efficient, representative, and restrained. He is formerly a constitutional and administrative law attorney.