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Proposed Rule2023-12916

Risk Management and Financial Assurance for OCS Lease and Grant Obligations

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Published

June 29, 2023

Issuing agencies

Interior DepartmentOcean Energy Management Bureau

Abstract

The Department of the Interior (the Department or DOI), acting through BOEM, proposes to modify its criteria for determining whether oil, gas, and sulfur lessees, right-of-use and easement (RUE) grant holders, and pipeline right-of-way (ROW) grant holders may be required to provide bonds or other financial assurance above the current regulatorily prescribed base bonds to ensure compliance with their Outer Continental Shelf Lands Act (OCSLA) obligations. This proposed rule would also remove existing restrictive provisions for third-party guarantees and decommissioning accounts and would add new criteria under which a bond or third-party guarantee that was provided as supplemental financial assurance may be canceled. Additionally, this proposed rule would clarify bonding requirements for RUEs serving Federal leases. Based on the proposed framework, BOEM estimates that the aggregate amount of supplemental financial assurance required of lessees and grant holders under this proposed rulemaking available to the U.S. government for decommissioning activities would increase by an estimated $9.2 billion over current levels. This value represents less than one-quarter of all offshore decommissioning liabilities, which is currently estimated at $42.8 billion. This proposed rulemaking would not apply to renewable energy activities.

Full Text

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[Federal Register Volume 88, Number 124 (Thursday, June 29, 2023)]
[Proposed Rules]
[Pages 42136-42176]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-12916]

[[Page 42135]]

Vol. 88

Thursday,

No. 124

June 29, 2023

Part II

Department of the Interior

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Bureau of Ocean Energy Management

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30 CFR Parts 550, 556, and 590

Risk Management and Financial Assurance for OCS Lease and Grant
Obligations; Proposed Rule

Federal Register / Vol. 88, No. 124 / Thursday, June 29, 2023 /
Proposed Rules

[[Page 42136]]

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DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

30 CFR Parts 550, 556, and 590

[Docket ID: BOEM-2023-0027]
RIN 1010-AE14

Risk Management and Financial Assurance for OCS Lease and Grant
Obligations

AGENCY: Bureau of Ocean Energy Management (BOEM), Interior.

ACTION: Notice of proposed rulemaking and request for comment.

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SUMMARY: The Department of the Interior (the Department or DOI), acting
through BOEM, proposes to modify its criteria for determining whether
oil, gas, and sulfur lessees, right-of-use and easement (RUE) grant
holders, and pipeline right-of-way (ROW) grant holders may be required
to provide bonds or other financial assurance above the current
regulatorily prescribed base bonds to ensure compliance with their
Outer Continental Shelf Lands Act (OCSLA) obligations. This proposed
rule would also remove existing restrictive provisions for third-party
guarantees and decommissioning accounts and would add new criteria
under which a bond or third-party guarantee that was provided as
supplemental financial assurance may be canceled. Additionally, this
proposed rule would clarify bonding requirements for RUEs serving
Federal leases. Based on the proposed framework, BOEM estimates that
the aggregate amount of supplemental financial assurance required of
lessees and grant holders under this proposed rulemaking available to
the U.S. government for decommissioning activities would increase by an
estimated $9.2 billion over current levels. This value represents less
than one-quarter of all offshore decommissioning liabilities, which is
currently estimated at $42.8 billion. This proposed rulemaking would
not apply to renewable energy activities.

DATES: BOEM must receive your comments on or before August 28, 2023.
BOEM has the discretion not to consider comments received after this
date. The Office of Management and Budget (OMB) and BOEM must receive
your comments on the information collection (IC) burden in this
rulemaking on or before July 31, 2023. The IC burden comment
opportunity does not affect the deadline for the public to comment to
BOEM on the proposed regulations.

ADDRESSES: You may submit comments on the rulemaking by any of the
following methods. In your comments, please reference ``Risk Management
and Financial Assurance for OCS Lease and Grant Obligations, RIN 1010-
AE14.'' Please include your name, and phone number or email address, so
we can contact you if we have questions regarding your submission.
<bullet> Federal rulemaking portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>. In
the entry titled, ``Enter Keyword or ID,'' enter BOEM-2023-0027 then
click search. Follow the instructions to submit public comments and
view supporting and related materials available for this rulemaking.
<bullet> Mail or delivery service: Send comments on the BOEM
proposed rule to the Department of the Interior, Bureau of Ocean Energy
Management, Office of Regulations, Attention: Kelley Spence, 45600
Woodland Road, Mailstop VAM-BOEM DIR, Sterling, VA 20166.
Submit comments on the IC in this proposed rule to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. From this main web page, you can find and submit
comments on this particular information collection by proceeding to the
boldface heading ``Currently under Review,'' selecting ``Department of
the Interior'' in the ``Select Agency'' pull down menu, clicking
``Submit,'' then, checking the box ``Only Show ICR for Public Comment''
on the next web page, scrolling to this proposed rule, and clicking the
``Comment'' button at the right margin. Or, you may use the search
function to locate the IC request related to the proposed rule on the
main web page. Please provide a copy of your comments to the
Information Collection Clearance Officer, Office of Regulations, Bureau
of Ocean Energy Management, Attention: Anna Atkinson, 45600 Woodland
Road, Sterling, Virginia 20166; or by email to <a href="/cdn-cgi/l/email-protection#88e9e6e6e9a6e9fce3e1e6fbe7e6c8eae7ede5a6efe7fe">[email&#160;protected]</a>.
Please reference OMB Control Number 1010-0006 in the subject line of
your comments.
Instructions: All submissions received must include the agency name
and docket number or Regulatory Information Number (RIN) for this
rulemaking (1010-AE14). All comments received will be posted without
change to <a href="http://www.regulations.gov">http://www.regulations.gov</a>, including any personal
information provided. For detailed instructions on sending comments and
additional information on the rulemaking process, see the ``Public
Availability of Comments:'' heading of the SUPPLEMENTARY INFORMATION
section of this document.
Docket: For access to the docket to read background documents or
comments received, go to <a href="http://www.regulations.gov">www.regulations.gov</a>.

FOR FURTHER INFORMATION CONTACT: Kelley Spence, Office of Regulations,
BOEM, at <a href="/cdn-cgi/l/email-protection#ddb6b8b1b1b8a4f3aeadb8b3beb89dbfb2b8b0f3bab2ab">[email&#160;protected]</a> or at (984) 298-7345; or Karen
Thundiyil, Chief, Office of Regulations, BOEM, at
<a href="/cdn-cgi/l/email-protection#216a4053444f0f7549544f454858484d61434e444c0f464e57">[email&#160;protected]</a> or at (202) 742-0970.
To obtain a copy of the information collection supporting
statement, contact: Information Collection Clearance Officer, Office of
Regulations, Bureau of Ocean Energy Management, Attention: Anna
Atkinson, at <a href="/cdn-cgi/l/email-protection#b7d6d9d9d699d6c3dcded9c4d8d9f7d5d8d2da99d0d8c1">[email&#160;protected]</a> or at (703) 787-1025.

SUPPLEMENTARY INFORMATION:
Public Availability of Comments: BOEM may post all submitted
comments to <a href="http://regulations.gov">regulations.gov</a>. Before including your name, return
address, phone number, email address, or other personally identifiable
information in your comment, you should be aware that your entire
comment--including your personally identifiable information--may be
made publicly available. In order for BOEM to withhold from disclosure
your personally identifiable information, you must identify, in a cover
letter, any information contained in the submittal of your comments
that, if released, would constitute a clearly unwarranted invasion of
your personal privacy. You must also briefly describe in such cover
letter any possible harmful consequences of the disclosure of
information, such as embarrassment, injury, or other harm. While you
can ask us in your comment to withhold your personally identifiable
information from public review, we cannot guarantee that we will be
able to do so. Even if BOEM withholds your information in the context
of this rulemaking, your submission is subject to the Freedom of
Information Act (FOIA) and any relevant court orders, and if your
submission is requested under the FOIA or such court order, your
information will only be withheld if a determination is made that one
of the FOIA's exemptions to disclosure applies or if such court order
is challenged. Such a determination will be made in accordance with the
Department's FOIA regulations and applicable law.
Organization of this document. The information in this preamble is
organized as follows:

I. Table of Acronyms and Terms
II. Executive Summary
III. Background of BOEM Regulations
A. BOEM Statutory and Regulatory Authority and Responsibilities
B. History of Bonding Regulations and Guidance

[[Page 42137]]

C. 2020 Joint Notice of Proposed Rulemaking
D. Purpose of BOEM's Proposed Rulemaking
IV. Proposed Revisions to BOEM Supplemental Financial Assurance
Requirements
A. Leases
B. Right-of-Use and Easement Grants
C. Pipeline Right-of-Way Grants
V. Proposed Revisions to Other Types of Supplemental Financial
Assurance
A. Third-Party Guarantees
B. Decommissioning Accounts
C. Transfers of Lease Interests to Other Lessees or Operating
Rights Holders
VI. BOEM Evaluation Methodology
A. Credit Ratings
B. Valuing Proved Oil and Gas Reserves
VII. Phased Compliance With Supplemental Financial Assurance Orders
VIII. Appeals Bonds
IX. Proposed Revisions to BOEM Definitions
X. Section-by-Section Analysis
XI. Additional Comments Solicited by BOEM
XII. Procedural Matters
A. Executive Order 12866: Regulatory Planning and Review, as
Amended by Executive Order 14094--Modernizing Regulatory Review, and
Executive Order 13563: Improving Regulation and Regulatory Review
B. Regulatory Flexibility Act (RFA)
C. Small Business Regulatory Enforcement Fairness Act
D. Unfunded Mandates Reform Act (UMRA)
E. Executive Order 12630: Governmental Actions and Interference
With Constitutionally Protected Property Rights
F. Executive Order 13132: Federalism
G. Executive Order 12988: Civil Justice Reform
H. Executive Order 13175: Consultation and Coordination With
Indian Tribal Governments
I. Paperwork Reduction Act (PRA)
J. National Environmental Policy Act (NEPA)
K. Data Quality Act
L. Executive Order 13211: Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use
M. Clarity of This Regulation

I. Table of Acronyms and Terms

Several acronyms and terms are included in this preamble. To ease
the reading of this preamble and for reference purposes, we list the
following acronyms and their meanings here.

ANCSA Alaska Native Claims Settlement Act
ANPRM Advance Notice of Proposed Rulemaking
BOEM Bureau of Ocean Energy Management
BSEE Bureau of Safety and Environmental Enforcement
DOI Department of the Interior
E.O. Executive Order
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FR Federal Register
GAAP Generally Accepted Accounting Principles
GAO Government Accountability Office
IC Information Collection
INC Incidents of Non-Compliance
IRFA Initial Regulatory Flexibility Analysis
IRIA Initial Regulatory Impact Assessment
MMS Minerals Management Service
NAICS North American Industry Classification System
NEPA National Environmental Policy Act
NRSRO Nationally Recognized Statistical Rating Organization
NTL Notice to Lessees
OIRA Office of Information and Regulatory Affairs (a component of
OMB)
OMB Office of Management and Budget
OCS Outer Continental Shelf
OCSLA Outer Continental Shelf Lands Act
PRA Paperwork Reduction Act
RIA Regulatory Impact Analysis
RUE Right-of-Use and Easement
ROW Right-of-Way
SBA Small Business Administration
SEC Securities and Exchange Commission
S&P Standard and Poor's
U.S.C. United States Code

II. Executive Summary

This proposed rule would require that the holders of interests in
Outer Continental Shelf (OCS) leases and grants provide financial
assurance for their own contractual and regulatory obligations,
including decommissioning obligations, to prevent the Federal
Government from incurring costs to perform those obligations and to
avoid the environmental or safety hazards associated with delayed
compliance. This approach adheres to the general principle that the
private parties enjoying the benefit of producing the mineral resources
of the OCS should not shift the cost of satisfying their contractual
and environmental obligations to the public. Based on the proposed
framework, BOEM estimates that the aggregate amount of supplemental
financial assurance required of lessees and grant holders under this
proposed rulemaking available to the U.S. government for
decommissioning activities would increase by an estimated $9.2 billion
over current levels. This value represents less than one-quarter of all
decommissioning liabilities, which is currently estimated at $42.8
billion.
This proposed rule is intended to update BOEM's criteria for
determining whether oil, gas, and sulfur lessees, RUE grant holders,
and ROW grant holders may be required to provide surety bonds or other
financial assurance above the prescribed base financial assurance to
ensure compliance with OCSLA. Provisions of this proposed rulemaking
would change the existing criteria used to determine whether
supplemental financial assurance should be required of OCS oil and gas
lessees and grantees. Under the existing regulations, BOEM considers
five criteria in making this determination for lessees: financial
capacity; projected financial strength; business stability; record of
compliance with existing rules and regulations; and reliability. This
rulemaking proposes to eliminate those five criteria and replace them
with two new criteria: credit rating and the ratio of the value of
proved oil and gas reserves on the lease to the lease decommissioning
liability associated with those reserves.
Using the credit rating of the lessee (to determine its financial
strength) and the value of proved oil and gas reserves available to
meet future financial obligations, BOEM would not require supplemental
financial assurance in three cases. First, under this proposed rule, a
lessee with an investment grade credit rating would not be required to
post supplemental financial assurance beyond a base bond to cover its
lease and regulatory obligations. These base bonds can range from
$50,000 for a lease-specific bond with no approved operational activity
to $3 million for an area-wide bond that includes a development
production plan. Second, where there are multiple co-lessees on a
lease, if any one co-lessee meets the credit rating threshold, none of
the other co-lessees would be required to post supplemental financial
assurance. Finally, for any lease on which all lessees are rated below
investment grade, BOEM would next look to the value of the lease's
proved oil and gas reserves relative to lease decommissioning
obligations associated with the production of those reserves. For any
such lease, if a lease has proved reserves with a value of at least
three times that of the estimated decommissioning cost, no supplemental
financial assurance would be required. In any case other than the three
mentioned here, supplemental financial assurance would be mandatory.
Overall, this proposed rule would impose greater supplemental
financial assurance requirements on lessees than the amounts currently
required. This proposed rule also contains a provision that would allow
phased-in compliance over a period of three years, which could ease
burdens on individual lessees and operators in the short term.
This proposed rule would also make other less significant changes.
This proposed rule would provide more specific bonding requirements for
Federal RUEs and would remove restrictive provisions for third-party
guarantees and decommissioning

[[Page 42138]]

accounts. Finally, it would add new criteria under which supplemental
bonds and third-party guarantees may be cancelled.
On October 16, 2020, BOEM proposed a joint rulemaking with the
Bureau of Safety and Environmental Enforcement (BSEE) to update BOEM's
financial assurance criteria and other BSEE-administered regulations.
On January 20, 2021, President Biden signed Executive Order (E.O.)
13990, ``Protecting Public Health and the Environment and Restoring
Science to Tackle the Climate Crisis.'' This Executive order, among
other things, instructs agencies to review actions taken between
January 20, 2017, and January 20, 2021, and consider publishing a
notice of proposed rulemaking suspending, revising, or rescinding that
action. Upon conducting such a review of the 2020 proposal and the
record postdating the review, BOEM has decided, as an exercise of its
judgment and expertise, not to move forward with the BOEM-administered
portions of that 2020 proposed rulemaking. BOEM has instead decided to
issue this new notice of proposed rulemaking to address its financial
assurance policy concerns. BOEM is no longer considering any BOEM-
related topics or proposals from that 2020 proposed joint rulemaking
that are not discussed in this current proposed rule. BSEE finalized
the BSEE-related provisions of the 2020 joint proposed rule on April
18, 2023 (88 FR 23569). This proposed rulemaking takes a new approach
to update the financial assurance criteria to ensure that current
lessees have sufficient resources to meet their lease and regulatory
obligations, therefore providing more protection to the taxpayer. BSEE
is expected to continue to exercise its regulatory authority to issue
decommissioning orders to predecessor lessees, seek an appropriation,
or intervene as necessary to address an environmental or safety risk,
regardless of the outcome of this proposed rule. However, without this
proposed rule (i.e., without the financial assurance fully in place),
it could take longer to arrange for decommissioning, which could result
in additional environmental damage or increased obstacles to
navigation. A reduction in decommissioning activity lead-time could
reduce environmental damage, but BOEM cannot quantify this benefit in
this rulemaking.
This proposed rulemaking would not apply to renewable energy
activities.

III. Background of BOEM Regulations

A. BOEM Statutory and Regulatory Authority and Responsibilities

BOEM's authority to promulgate this rulemaking is granted by
section 5 of OCSLA, 43 U.S.C. 1334. That section authorizes the
Secretary of the Interior (Secretary) to issue regulations to
administer OCS leasing for mineral development. Section 5(a) of OCSLA
(43 U.S.C. 1334(a)) authorizes the Secretary to ``prescribe such rules
and regulations as may be necessary to carry out'' the ``provisions of
[OCSLA] relating to the leasing of the'' OCS. Section 5(b) of OCSLA (43
U.S.C. 1334(b)) provides that ``compliance with regulations issued
under'' OCSLA must be a condition of ``[t]he issuance and continuance
in effect of any lease, or of any assignment or other transfer of any
lease, under the provisions of'' OCSLA.
43 U.S.C. 1338a reflects Congress' intent to authorize BOEM to
collect financial assurance by specifically addressing the forfeiture
of bonds and financial assurances by an OCS permittee, lessee, or
right-of-way holder that does not fulfill the requirements of its
permit, lease, or right-of-way or does not comply with the regulations
of the Secretary, which includes defaulting on decommissioning
activities.
The Secretary, in Secretary's Order 3299, as amended, delegated the
authority to BOEM to carry out offshore conventional energy-related
(e.g., oil and gas) and renewable energy-related functions including,
but not limited to, activities involving resource evaluation, planning,
and leasing. Thus, BOEM is responsible for managing development of the
Nation's offshore energy and mineral resources in an environmentally
and economically responsible way. Secretary's Order 3299 also assigned
authority to BSEE, including, but not limited to, enforcement of a
lessee's obligation to perform decommissioning. BSEE provides estimates
of decommissioning costs to BOEM so that the financial assurance
required by BOEM will be sufficient to cover the estimated cost to
perform decommissioning, thereby protecting the Federal Government from
incurring financial loss. While BOEM also has program oversight for the
financial assurance requirements set forth in 30 CFR parts 551, 581,
582, and 585, this proposed rule pertains only to the financial
assurance requirements for oil and gas or sulfur leases under 30 CFR
part 556, associated RUE grants and ROW grants under 30 CFR part 550,
and appeals of supplemental financial assurance demands under 30 CFR
part 590.

B. History of Bonding Regulations and Guidance

BOEM's existing financial assurance requirements for oil and gas
leases (30 CFR 556.900 through 556.907) and pipeline ROW grants (30 CFR
550.1011), published by BOEM's predecessor, the Minerals Management
Service (MMS), on May 22, 1997 (62 FR 27948),\1\ authorize the Regional
Director to require bonding for oil and gas leases and pipeline ROW
grants. Sections 556.900(a) and 556.901(a) and (b) require lease-
specific or area-wide base bonds in prescribed amounts, depending on
the level of activity on a lease or leases. Section 556.901(d)
authorizes the Regional Director to require supplemental financial
assurance for leases above the amounts for lease and area-wide base
bonds prescribed in the regulations. Similarly, Sec. 550.1011
authorizes the Regional Director to require an area-wide base surety
bond in a prescribed amount and, when determined necessary,
supplemental financial assurance above the prescribed amount, for ROW
grants.
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\1\ The 1997 rule amended 30 CFR parts 250 and 256; 30 CFR parts
550 and 556 did not exist at that time. BOEM published the current
regulations in 30 CFR parts 550 and 556 on October 18, 2011, 76 FR
64432. However, the 2011 rule did not make any substantive changes
to the bonding and financial assurance requirements that were
adopted in 1997; thus, the 1997 rule represents the last substantive
update to the regulatory provisions for lessees.
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BOEM's existing bonding regulations for RUE grants (Sec. Sec.
550.160 and 550.166), published by MMS on December 28, 1999 (64 FR
72756),\2\ empower the Regional Director to require surety bonds or
other financial assurance for RUE grants. Section 550.160(c) states
that an applicant for a RUE serving an OCS lease ``must meet bonding
requirements.'' See 30 CFR 550.160(c). While no regulation prescribes a
particular bond amount for a RUE that applies to an OCS lease, Sec.
550.160 authorizes the Regional Director to require financial assurance
if, and in the amount, the Regional Director determines necessary.
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\2\ The financial assurance regulations for RUE and ROW grants,
then at Sec. Sec. 250.160 and 250.166, were substantively modified
in 1999. These provisions were renumbered in October 2011.
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Section 550.166(a) requires an applicant for a RUE that serves a
State lease to provide a base surety bond of $500,000. Section
550.166(b) provides that the Regional Director may require supplemental
financial assurance above the prescribed $500,000 base surety bond from
the holder of a such a RUE. MMS and now BOEM have employed the criteria
used for determining whether supplemental financial assurance is
required for leases to such

[[Page 42139]]

determinations for RUE and ROW grants because specific criteria for
grants do not exist in the current regulations.
BOEM regulations at Sec. Sec. 556.604(d) and 556.605(e) and BSEE
regulations at Sec. 250.1701 hold predecessors and current co-lessees
responsible for decommissioning when a current lessee is unable to
perform. The existing lease bonding regulations under Sec. 556.901(d)
provide five criteria \3\ that the Regional Director uses to determine
whether a lessee's potential inability to carry out present and future
financial obligations warrants a demand for supplemental financial
assurance. However, the existing regulations do not specifically
describe how the agency weighs those criteria. To provide guidance, MMS
issued Notice to Lessees (NTL) No. 98-18N, effective December 28, 1998,
which provided details on how it would apply the five criteria. This
NTL was superseded by NTL No. 2003-N06, effective June 17, 2003, and
that NTL was later superseded by NTL No. 2008-N07, which was effective
August 28, 2008, but which was superseded on September 12, 2016. The
September 12, 2016, NTL was subsequently rescinded.
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\3\ The following are the five criteria: (i) Financial capacity
substantially in excess of existing and anticipated lease and other
obligations; (ii) Projected financial strength significantly in
excess of existing and future lease obligations; (iii) Business
stability based on five years of continuous operation and production
of oil and gas or sulfur in the OCS or in the onshore oil and gas
industry; (iv) Reliability in meeting obligations based on: (A)
Credit rating; or (B) Trade references; and (v) Record of compliance
with laws, regulations, and lease terms.
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Pursuant to BOEM's practice under NTL No. 2008-N07, a lessee or
grant holder that did not pass established financial thresholds \4\ was
required to provide supplemental financial assurance to cover its
decommissioning liabilities. However, a lessee or grant holder that did
pass such thresholds--including an analysis whether its cumulative
potential decommissioning liability was less than or equal to 50
percent of its net worth \5\--did not have to provide supplemental
financial assurance and was considered ``waived.'' Additionally, if one
lessee on a lease was waived, no other co-lessee (regardless of its own
financial strength) would be required to provide supplemental financial
assurance to cover the decommissioning liability for the lease. In a
situation involving multiple lessees and two or more co-lessees that
qualified for a waiver, none of the co-lessees was required to provide
financial assurance, and the decommissioning liability on the lease was
not attributable to any lessee. Because companies in this situation
would not have the decommissioning liability associated with their
lease(s) attributed to them (i.e., the decommissioning liability would
not be attributed to any company), that liability would not have been
considered in determining whether that company met the net worth
requirements to obtain a waiver.
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\4\ The 2008 NTL mandated a minimum net worth of $65 million and
imposed a cap on the amount of waived liability at 50% of net worth.
Liability covered by two qualified companies was not counted against
the 50% cap.
\5\ This is not a separate criterion but simply an elaboration
of criterion one.
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For a company in this situation, the financial capacity of the
lessee would have appeared better than it actually was, because its
total decommissioning liability appeared artificially low; the lessee
could potentially qualify for a waiver to which it might not otherwise
be entitled. Undergirding this rationale was an assumption that the
chances of two waived lessees becoming financially distressed was
unlikely. This proposed rule addresses that potential risk by allowing
BOEM to obtain additional data to take contingent liabilities into
consideration.
Since 2009, more than 30 corporate bankruptcies have occurred
involving offshore oil and gas lessees with un-bonded decommissioning
liabilities. The fact that bankruptcies and reorganizations have
involved un-bonded decommissioning liabilities demonstrates that the
waiver criteria in NTL No. 2008-N07 were inadequate to protect the
public from potential responsibility for OCS decommissioning
liabilities, especially during periods of low oil and gas prices. For
example, ATP Oil & Gas was a mid-sized company with a supplemental
financial assurance waiver when it filed for bankruptcy in 2012.
Similarly, Bennu Oil & Gas, LLC, had a waiver at the time of its
bankruptcy filing, and Energy XXI, Ltd., and Stone Energy Corporation
obtained waivers within a year of filing for bankruptcy. While most OCS
leases affected by the bankruptcies were ultimately sold or retained by
the companies reorganized under chapter 11 of the U.S. Bankruptcy Code,
these bankruptcies highlighted the weaknesses in BOEM's supplemental
financial assurance program, including the waiver criteria in NTL No.
2008-N07, and BOEM's inability to forecast financial distress of these
waived operators with sufficient time to require and receive financial
assurance.
These bankruptcies involved a total offshore decommissioning
liability of approximately $7.5 billion. This figure includes
properties with co-lessees and predecessor lessees and properties held
by companies that successfully emerged from a chapter 11
reorganization. However, the actual financial risk to the United States
is significantly less than the total offshore decommissioning liability
associated with offshore corporate bankruptcies. This is in part
because other private parties may be responsible for decommissioning
costs. Co-lessees and predecessors retain pre-existing obligations to
fund or perform decommissioning. Also, a bankrupt company's assets were
often sold to financially stronger buyers who assumed those
liabilities.
Additionally, if BOEM has insufficient supplemental financial
assurance at the time of an operator's bankruptcy, BOEM may pursue
legal avenues for obtaining performance or funds in bankruptcy
proceedings, such as provisions for decommissioning in the terms of the
reorganization, the sale of the leases to financially responsible
buyers, or limitations on debtor attempts to abandon environmental
problems. However, in pursuing legal avenues, favorable outcomes are
not assured, and additional funds may not be obtained to cover
decommissioning obligations. It is possible that when there are
multiple co-lessees on a lease, only one of them meets the credit
rating threshold. It is also possible that co-lessees are not required
to provide additional financial assurance and predecessors lack
sufficient capital to fulfill unexpected decommissioning obligations.
In these scenarios, bankrupt assets may prove less valuable than
anticipated and fail to generate new buyers at auction. Components and
wells for which the bankrupt party is the only liable party on the
lease may further complicate decommissioning efforts. These challenges
create a risk of unplugged wells and orphaned infrastructure. The
American taxpayer may pay the cost of plugging those wells and
reclaiming that abandoned infrastructure. BSEE has identified orphaned
infrastructure without a predecessor and no financial assurance to
cover the cost of decommissioning. BSEE's fiscal year 2023 budget
request included $30 million in order to address this uncovered
infrastructure.
On May 27, 2009, MMS issued a proposed rule, ``Leasing of Sulphur
or Oil and Gas and Bonding Requirements in the Outer Continental
Shelf'' (74 FR 25177), to rewrite the majority of 30 CFR part 256 (now
redesignated as 30 CFR part 556).\6\ However, BOEM (post MMS
restructuring) deferred revision of the bonding regulations to a
separate rulemaking. The separate rulemaking

[[Page 42140]]

commenced August 19, 2014, with an advance notice of proposed
rulemaking (ANPRM), ``Risk Management, Financial Assurance and Loss
Prevention'' (79 FR 49027), to solicit ideas for improving the bonding
regulations.
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\6\ 76 FR 64432, Oct. 18. 2011.
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In December 2015, the Government Accountability Office (GAO)
reviewed BOEM's supplemental financial assurance procedures and issued
a report titled ``Offshore Oil and Gas Resources: Actions Needed to
Better Protect Against Billions of Dollars in Federal Exposure to
Decommissioning Liabilities.'' (GAO Report). While acknowledging BOEM's
ongoing efforts to update its policies, the GAO Report recommended,
inter alia, that ``BOEM complete its plan to revise its supplemental
financial assurance procedures, including the use of alternative
measures of financial strength.'' \7\
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\7\ <a href="https://www.gao.gov/products/gao-16-40">https://www.gao.gov/products/gao-16-40</a>.
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Following further analysis and a series of stakeholder meetings in
2015 and 2016 to solicit industry input, BOEM attempted to remedy the
weaknesses in its supplemental financial assurance program with new NTL
No. 2016-N01, ``Requiring Additional Security,'' which became effective
September 12, 2016. NTL No. 2016-N01 sought to clarify the procedures
and explain how BOEM would use the regulatory criteria to determine if
and when supplemental financial assurance would be required for OCS
leases and RUE and ROW grants. The NTL used net worth of a lessee as a
measure of financial strength, detailed several changes in policy, and
refined the criteria used to determine a lessee's or grant holder's
financial ability to carry out its obligations. On August 29, 2016,
BOEM requested GAO to close the above-stated recommendation in the GAO
Report, stating that BOEM had implemented the recommendation by
issuance of the NTL. The GAO found that the recommendation had been
implemented and closed the audit recommendation later in Fiscal Year
2016.
In December 2016, BOEM began implementing the NTL and issued
numerous orders to lessees and grant holders to provide supplemental
financial assurance for ``sole liability properties,'' i.e., leases and
RUE and ROW grants for which the lessee or grant holder was the only
party liable for meeting the lease or grant obligations.
On January 6, 2017, BOEM issued a note to stakeholders extending
the implementation timeline for NTL No. 2016-N01 for six months. The
extension applied to leases and RUE and ROW grants for which there were
co-lessees, predecessors in interest, or both, except where BOEM
determined there was a substantial risk of nonperformance of the
interest holder's decommissioning obligations. The extension of the
implementation timeline allowed BOEM to evaluate which leases and
grants would be considered sole liability properties.
BOEM issued a second note to stakeholders on February 17, 2017,
further extending the implementation timeline. BOEM also announced in
the February note that it would withdraw the December 2016 orders
issued on sole liability properties to allow time for the then new
administration to review BOEM's supplemental financial assurance
program.
In 2017, BOEM began to review its supplemental financial assurance
program and NTL No. 2016-N01 to determine whether modifications were
necessary and, if so, to what extent. BOEM's objective was ensuring
operator compliance with lease terms while minimizing unnecessary
burden on industry. As a result of this review, BOEM recognized the
need to further develop a comprehensive program to assist in
identifying, prioritizing, and managing the risks associated with
industry activities on the OCS. This included options for revising or
rescinding NTL No. 2016-N01 and revising the financial assurance
program through rulemaking.

C. 2020 Joint Notice of Proposed Rulemaking

On October 16, 2020, BOEM and BSEE issued a joint notice of
proposed rulemaking to revise certain BSEE policies concerning
decommissioning orders and BOEM's financial assurance regulations. (See
``Risk Management, Financial Assurance and Loss Prevention,'' 85 FR
65904). As stated above, under existing regulations, BOEM requires
lessees to provide a base bond as financial assurance to ensure that
the cost of meeting OCS obligations is not passed to the taxpayer. The
Regional Director may also order supplemental financial assurance if
necessary to ensure performance of offshore decommissioning
obligations.
In the joint proposed rule, BOEM proposed to adjust its
supplemental financial assurance criteria to reflect the risk
mitigation already provided by the joint and several liability of
financially stable co-lessees and predecessor lessees. BSEE and BOEM
regulations hold predecessors and current co-lessees responsible for
decommissioning when a current lessee is unable to perform.\8\ In the
joint proposed rule, BOEM would have taken into account the financial
stability of predecessor lessees by waiving supplemental financial
assurance requirements for a current lessee when there was a
financially strong predecessor lessee.
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\8\ See, for example, 30 CFR 556.604(d), 556.605(e), and
250.1701.
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In the joint proposed rule, BOEM also sought to change its
methodology for measuring financial strength to focus on a lessee's or
its predecessor's credit rating and the value of proved oil and gas
reserves. These proposed criteria would have relied on a company's
nationally recognized statistical rating organization (NRSRO) credit
rating or an equivalent BOEM proxy credit rating determined by
evaluating a company's submitted audited financial statements through
S&P Global's Credit Analytics credit model or a similar, widely
accepted credit rating model. Under the joint proposed rule, a credit
rating less than or equal to either BB- from S&P Global's Credit
Analytics ratings (S&P), Ba3 from Moody's Investor Service (Moody's) or
a proxy credit rating less than or equal to either BB- or Ba3, as
determined by the Regional Director, could have constituted grounds for
the Regional Director to require a lessee to provide supplemental
financial assurance. If a company did not meet the minimum credit
rating or proxy credit rating level, BOEM would have inquired into the
credit or proxy credit ratings of co-lessees and predecessor lessees,
which could be held liable under joint and several liability. If one of
these co-lessees or predecessors met the credit rating criteria, BOEM
could decide not to require supplemental financial assurance from the
lessee. If there were no co-lessee or predecessor lessee that met the
credit rating criteria, BOEM would then look to the value of the proved
oil and gas reserves on the lease. If the value of those proved
reserves was equal to or greater than three times the estimated cost of
the decommissioning associated with the production of the reserves on
any given lease, supplemental financial assurance would not have been
required.
BOEM further proposed to use the same credit rating criteria to
determine the financial assurance requirements for RUE grants described
in Sec. 550.160 and ROW grants in a revised Sec. 550.1011. This would
have included consideration of the credit and proxy credit ratings of
co- and predecessor grant holders but would not have considered proved
oil and gas reserves, given that neither RUE nor ROW grants entitle the
holder to any interest in oil and gas reserves.

[[Page 42141]]

The joint proposed rule would have also applied the same credit
rating criteria to its evaluation of potential guarantors. The joint
proposed rule also would have removed the requirement for a third-party
guarantee to ensure full compliance with the obligations of all
lessees, operating rights owners, and operators on the lease and would
have allowed a third-party guarantee to be used as supplemental
financial assurance for a RUE or ROW grant. The former change would
have allowed a guarantor to limit its guarantee to a subset of lease or
grant obligations. Additional proposed changes would have applied to
third-party guarantees the same terms and conditions that apply to
cancellation of supplemental financial assurance surety bonds and
return of pledged financial assurance, as well as a clarification to
reiterate that ``guarantee'' and ``indemnity agreement'' both refer to
the same guarantee agreement.
On January 20, 2021, President Biden signed Executive Order 13990,
``Protecting Public Health and the Environment and Restoring Science to
Tackle the Climate Crisis.'' This Executive order, among other things,
instructs agencies to review actions taken between January 20, 2017,
and January 20, 2021, and consider publishing a notice of proposed
rulemaking suspending, revising, or rescinding that action. Upon
conducting such a review of the 2020 proposal and the record postdating
the review, BOEM has decided, as an exercise of its judgement and
expertise, not to move forward with the joint proposed rule and
acknowledges that NTL No. 2016-N01 was never fully implemented and has
since been rescinded. This NPRM parallels the approach in BOEM's
portion of the 2020 proposal but, to increase protection of the
taxpayer, it would require a higher threshold credit rating and would
not allow a current lessee to avoid posting additional assurance based
on a predecessor lessee's strength.

D. Purpose of BOEM's Proposed Rulemaking

This proposed rule is intended to update BOEM's criteria for
determining whether oil, gas, and sulfur lessees, RUE grant holders,
and ROW grant holders may be required to provide supplemental financial
assurance to ensure compliance with their OCS obligations. In its
continued efforts to address concerns with the financial assurance
program, BOEM has opted to issue this new notice of proposed rulemaking
to better protect the taxpayer from bearing the cost of facility
decommissioning and other financial risks associated with OCS
development, such as oil spill cleanup or other environmental
remediation. Although the cases where taxpayers have actually paid
costs for decommissioning are rare, some BOEM lessees have entered
bankruptcy without the resources to cover decommissioning. In these
cases, BOEM is required to negotiate with predecessors, co-lessees, and
bankruptcy courts to obtain the funds needed for decommissioning. As
mentioned earlier, this process is not always sufficient, as reflected
in BSEE's request for additional appropriations to cover
decommissioning of facilities for which there is no remaining liable
party. BOEM has decided not to set a lower supplemental financial
assurance requirement for lessees with financially strong predecessor
lessees. Instead, BOEM proposes to require supplemental financial
assurance for all leases owned by lessees that do not meet the proposed
financial strength threshold or have sufficiently valuable proved oil
and gas reserves on their leases that may attract a buyer if the
current lessees are in financial distress. The omission of predecessor
lessees from this calculus addresses several financial assurance
issues. It ensures the current lessees have the financial capability to
fulfill its decommissioning obligations, and discourages lessees from
ignoring end-of-life decommissioning costs. It also simplifies
potential administrative demands, since it obviates the need for
parties to distinguish between wells with predecessor lessees and more
recent sole-liability wells, side-track wells, and other sole-liability
components. This proposed rule would retain the authority to pursue
predecessor lessees for the performance of decommissioning; however,
this proposed rule would not allow BOEM to rely upon the financial
strength of predecessor lessees when determining whether, or how much,
supplemental financial assurance should be provided by current OCS
leaseholders.
Under this proposed rule, instead of relying primarily on net worth
to determine whether a lessee must provide supplemental financial
assurance, BOEM's primary consideration would be a lessee's credit
rating. Credit rating agencies account for many factors when evaluating
a company, including cash flow, debt-to-earnings ratios, debt-to-funds-
from-operations ratios, and other financial factors. A credit rating
considers the past performance of a company, including, but not limited
to, the income statement and cash flow statement, which provide a broad
picture of how well a company may be able to meet its liabilities. The
rating also considers forward-looking factors, such as the anticipated
loss of assets and the anticipated highs and lows of the company's
business cycle. Credit ratings provide a measure of the probability of
a default on an obligation; studies have shown a very close correlation
between the rating level and the probability of default.\9\
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\9\ See for example, ``Ratings vs Default Rates'', Moody's
Annual Default Study--February 8, 2022, Douglas J. Lucas, ``Default
Correlation and Credit Analysis'', The Journal of Fixed Income Mar
1995, 4 (4) 76-87; DOI: 10.3905/jfi.1995.408124.
---------------------------------------------------------------------------

On the other hand, a net worth analysis (typically total assets
minus total liabilities) uses figures that reflect the last day of the
fiscal period. This ``snapshot'' is not adequate to predict a lessee's
future financial position because a lessee's financial deterioration
can occur quickly due to volatility in oil and gas prices, improper
hedging of risks, and other business and economic reasons. Net worth is
one financial data point that may not accurately reflect the overall
financial risk posed by the company, as compared to the more
comprehensive financial review undertaken by the rating agencies. A
singular financial ratio analysis may unintentionally penalize some
corporate structures where that particular ratio is not as important or
relevant to that business, for example midstream master limited
partnerships, which the tax code requires to distribute 90% of net
income to partners. Relying on the more comprehensive and forward-
looking credit rating analysis--both to determine whether supplemental
financial assurance may be necessary and to determine whether a company
can be a guarantor of the financial obligations of other companies
operating on the OCS--would better allow BOEM to demand security before
a company becomes financially distressed. For more discussion on credit
ratings, see section VI.A (BOEM Evaluation Methodology--Credit Ratings)
of this preamble.
After accruing an obligation to decommission certain infrastructure
(e.g., well, platform, pipeline), the predecessor lessee remains
jointly and severally liable for decommissioning that infrastructure,
even in cases where a predecessor lessee has divested its full interest
in a lease by assignment to another company. This rulemaking would
retain BOEM's existing right to pursue predecessor lessees for the
performance of decommissioning; however, this rulemaking would not
allow BOEM to rely upon the financial

[[Page 42142]]

strength of predecessor lessees when determining whether, or how much,
supplemental financial assurance should be provided by current OCS
leaseholders. This change strengthens the financial assurance program
by ensuring current lessees have the financial strength or supplemental
financial assurance in order to fulfill all their obligations.
In summary, BOEM is proposing this rulemaking to clarify and
simplify its financial assurance requirements and to provide greater
protection to taxpayers. These proposed regulatory changes provide
additional clarity that current grant holders, lessees, and, when
appropriate, operating rights holders (sublessees) bear the cost of
ensuring compliance with lease obligations, rather than relying on
prior owners.

IV. Proposed Revisions to BOEM Supplemental Financial Assurance
Requirements

BOEM's existing financial assurance regulatory framework has two
main components: (1) Base bonds, generally required in amounts
prescribed by regulation, and (2) Supplemental financial assurance,
above the prescribed base bond amounts, that may be required upon the
Regional Director's determination that an increased amount is necessary
to ensure compliance with OCS obligations. BOEM's objective is to
ensure that taxpayers do not bear the cost of meeting the obligations
of lessees and grant holders on the OCS, particularly the costs of
decommissioning that must be met after the cash flow from production
ceases. At the same time, BOEM also recognizes the costs and
disincentives to additional exploration, development, and production
that are imposed on lessees and grant holders by increasing the
required amounts of bonds and/or other financial assurance. After
taking these considerations into account, BOEM is proposing to: (1)
Modify the evaluation process for requiring supplemental financial
assurance by clarifying and streamlining the evaluation criteria; and,
(2) Remove restrictive provisions for third-party guarantees and
decommissioning accounts. This proposed rule would allow the Regional
Director to require supplemental financial assurance when a lessee or
grant holder poses a substantial risk of becoming financially unable to
carry out its obligations under its lease or grant, or when the
property may not have sufficient value to be sold to another company
that could assume those obligations. In the former case, the risk that
the taxpayer might have to take on the financial obligations of a
lessee or grant holder is mitigated when there is a co-lessee or co-
grant holder that has sufficient financial capacity to carry out the
obligations.

A. Leases

Lessees are jointly and severally liable for the lease
decommissioning obligations that accrue during their ownership, as well
as those that accrued prior to their ownership, which means that each
current co-lessee is liable for the full obligation and BSEE may pursue
performance from any individual current lessee. See, e.g., 30 CFR
556.604(d). In addition, a lessee that transfers its interest to
another party continues to be liable for any unperformed
decommissioning obligations that accrued prior to, or during, the time
that lessee owned an interest in the lease. See, e.g., 30 CFR 556.710.
This transferor liability applies, however, only to those obligations
existing at the time of transfer; new facilities, or additions to
existing facilities, that were not in existence at the time of any
lease transfer are not obligations of a predecessor company and are
considered obligations of the party that built such new facilities and
its co- and successor lessees.
BOEM's existing supplemental financial assurance evaluation
process, contained in Sec. 556.901(d), is based only on the current
lessee's ability to carry out present and future obligations. BOEM
proposes to codify that this evaluation process includes an evaluation
of the ability of a co-lessee to carry out present and future
obligations. This codification recognizes that all of the current
owners are benefiting from ongoing operations and are jointly and
severally liable for compliance with DOI requirements. A current co-
lessee is equally liable for present obligations and future obligations
that exist while it is a co-lessee, including nonmonetary obligations.
Under BOEM's existing regulations, the Regional Director's
evaluation of the need for supplemental financial assurance is based on
the following five criteria: financial capacity; projected financial
strength; business stability; reliability in meeting obligations based
upon credit rating or trade references; and record of compliance with
laws, regulations, and lease terms. BOEM is proposing to streamline its
evaluation process by using only two criteria to determine whether
supplemental financial assurance on a lease may be required: (1) A
credit rating, either from an NRSRO, as identified by the United States
Securities and Exchange Commission (SEC) pursuant to its grant of
authority under the Credit Rating Agency Reform Act of 2006 and its
implementing regulations at 17 CFR parts 240 and 249, or a proxy credit
rating determined by BOEM based on a company's audited financial
statements; \10\ or (2) The 3-to-1 ratio of the value of proved oil and
gas reserves on a lease to the decommissioning liability associated
with these reserves. These criteria better align BOEM's evaluation
process with accepted financial risk evaluation methods used by the
banking and finance industry. Corporate credit ratings are intended to
evaluate the potential for a company to default on its financial
obligations and are designed so that the higher the credit rating, the
lower the risk of default. Credit ratings and proved oil reserves are
good indicators of the likelihood that a company will be able to meet
its financial obligations. Eliminating subjective or less precise
criteria--such as the length of time in operation to determine business
stability, or trade references to determine reliability in meeting
obligations--will simplify the process and remove criteria that may not
accurately or consistently predict financial distress. For more
discussion on credit ratings, see section VI.A (BOEM Evaluation
Methodology--Credit Ratings) of this preamble.
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\10\ In order for BOEM to establish a proxy credit rating, which
can be used for the purpose of waiving any supplemental financial
assurance requirements that would otherwise be required, BOEM is
requiring that any company seeking a proxy credit rating provide
audited financial statements. If such statements are not provided,
BOEM will require supplemental financial assurance because it will
have insufficient basis for concluding that the owners have
sufficient capacity to reliably and timely meet their lease
obligations.
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BOEM proposes to eliminate the ``business stability'' criterion
found in the current version of Sec. 556.901(d)(1)(iii). The existing
regulation bases business stability on 5 years of continuous operation
and production of oil and gas, but BOEM has determined that there is
little correlation between such history and a company's ability to
carry out its present and future obligations. BOEM conducted an
analysis of offshore bankruptcies, including an assessment of the
number of years incorporated prior to bankruptcy, and determined that
whether a company was in business for 5 or more years had no
relationship to the likelihood of bankruptcy.
BOEM also proposes to eliminate the existing ``record of
compliance'' criterion found in the current version of Sec.
556.901(d)(1)(v). BOEM has determined that the number of INCs a company
receives correlates with the

[[Page 42143]]

number of OCS properties it owns, not its financial stability, and
therefore, BOEM has concluded that it is not an accurate predictor of
its financial health. BOEM reviewed BSEE's Incidents of Non-Compliance
(INCs) records and its Increased Oversight List, which represent BSEE's
cumulative records of violations of performance standards on the part
of OCS operators and lessees and determined that the number of
incidents of non-compliance typically increases with the size and
complexity of the operator's or lessee's operations, including the
ratio of incidents to number of components. Because larger companies
(regardless of credit score) tend to have more properties and
components and therefore more INCs, BOEM determined that record of
compliance criterion does not accurately predict financial default.
BOEM's review of this information confirmed the feedback BOEM received
in response to the 2016 NTL, namely that companies with a large number
of properties and facilities tended to receive a large number of INCs
and had more individual properties on the Increased Oversight List.\11\
BOEM specifically requests comments regarding the use of fines and
violations as a criterion in the determination of a company's ability
to fulfill decommissioning obligations, and any data or analysis
addressing any correlation between the number of violations and the
risk of financial default. BOEM also requests comments on whether the
elimination of the INC's criteria would create a disincentive to comply
with regulations. BOEM also requests comment on whether or not the cost
of decommissioning is likely to increase based on the type, quantity,
and magnitude of previous violations.
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\11\ The most recent data are available at <a href="https://www.data.bsee.gov/Company/INCs/Default.aspx">https://www.data.bsee.gov/Company/INCs/Default.aspx</a>.
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BOEM proposes to replace the existing ``financial capacity'' and
``reliability'' criteria in existing Sec. 556.901(d)(1) with issuer
credit rating or proxy credit rating. BOEM has found credit ratings,
which are part of the existing ``reliability'' criterion, to be a more
reliable indicator of financial ability to meet obligations than
previous financial criteria issued by BOEM via NTLs (ex. NTL 2008-N07,
NTL 2016-N01). Issuer credit ratings provided by a NRSRO incorporate a
broad range of qualitative and quantitative factors, and a business
entity's credit rating most accurately represents its overall ability
to meet its financial commitments. An issuer credit rating is a
forward-looking opinion about an obligor's overall creditworthiness.
This opinion focuses on the obligor's capacity and willingness to meet
its financial commitments as they come due.
Under the proposal, if a lessee does not have a credit rating from
a NRSRO, the lessee may instead submit audited financial statements,
and BOEM will determine a proxy credit rating using a commercially
available credit model determined by BOEM to fulfill its financial risk
analysis requirements, such as the S&P Global's Credit Analytics credit
model. Such audited financial information is currently the basis of one
of the five criteria in BOEM's regulations, namely the ``financial
capacity'' criterion. Under the proposed rule, this information will be
the primary consideration used to evaluate lessees that do not have a
NRSRO credit rating. BOEM has concluded that audited financial
statements, prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and accompanied by an auditor's certificate, provide
an accurate representation of the company's economic position and
operational performance. Using this audited financial information to
generate a proxy credit rating would allow BOEM to accurately determine
if supplemental financial assurance is needed when a NRSRO rating is
not available.
This proposed rule would provide the Regional Director with the
authority to require a lessee to provide supplemental financial
assurance if the lessee or its co-lessee does not have an investment
grade credit rating, i.e., a credit rating from a NRSRO that is greater
than or equal to either BBB- from S&P or Baa3 from Moody's, or its
equivalent, or a proxy credit rating greater than or equal to either
BBB- or Baa3, as determined by the Regional Director, based on audited
financial information with an accompanying auditor's certificate. BOEM
has determined that having an investment grade credit rating is
important to reliably ensure that a company not pose a substantial risk
of default.
Under existing BOEM and BSEE regulations that would not change in
this proposed rule, co-lessees are jointly and severally liable for
accrued decommissioning obligations, and the risk that the government
will be responsible for the decommissioning cost is therefore lower
when co-lessees are financially viable. Hence, BOEM will not require
supplemental financial assurance for properties where at least one co-
lessee has an investment grade credit rating.
If BOEM determines that supplemental financial assurance is
required, BOEM bases the amount of supplemental financial assurance
required on the BSEE decommissioning cost estimate. Previously, BSEE
provided a single algorithm-based deterministic estimate for OCS
facilities. In 2020, BSEE updated certain decommissioning costs in the
Technical Information Management System (<a href="http://data.boem.gov">data.boem.gov</a>).\12\ The new
estimates were based on industry-reported decommissioning costs
pursuant to NTL 2016-N03--Reporting Requirements for Decommissioning
Expenditures on the OCS, later superseded by NTL 2017-N02. Based on the
reported data, BSEE has developed three probabilistic estimates of
decommissioning costs for each OCS facility on any given lease. The
lowest cost estimate would have a fifty percent likelihood of covering
the full cost of decommissioning a facility and is thus referred to as
``P50.'' The second lowest cost estimate, P70, would have a seventy
percent likelihood of covering the full cost of decommissioning a
facility. The third and highest cost estimate, P90, would have a ninety
percent likelihood of covering the full decommissioning cost of a
facility. These BSEE-generated estimates are based on actual
decommissioning expenditures reported by offshore companies.
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\12\ BSEE decommissioning cost estimates are available at the
following URL: <a href="https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx">https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx</a>.
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BOEM proposes to use the P70 value to set the amount of any
required supplemental financial assurance. In determining to use the
P70 value, BOEM considered using either the P50, P70, or P90
decommissioning liability levels, which respectively represent an
approximately 11 percent ($3.5 billion), 30 percent ($9.6 billion), and
55 percent ($17.9 billion) increase in total estimated financial
assurances available to address offshore decommissioning liability
relative to the previous algorithm-based estimate, based on an analysis
of industry-reported decommissioning costs. BOEM weighed the risk of
being underfunded (greatest at the P50 level) against the financial
impact of requiring more financial assurance (greatest at the P90
level). As an example, a supplemental financial assurance set based on
the P70 value means that, based on the uncertainty and risk applied by
BSEE to its model, there is a 70% probability of covering the
decommissioning cost of the facility (and therefore a 30% probability
of exceeding it). The P70 value is not to be confused with the figure
representing 70% of the cost of decommissioning a particular facility.
Because it is a

[[Page 42144]]

statistical concept, it relies on the quality and size of the sample,
as well as the uncertainty (variance) existing in these costs. There is
also a real possibility that the P70 figure exceeds the actual
decommissioning value of many facilities, in which case excess would
cover some portion of insufficient assurance in those cases where the
assurance is designed to address that entity's full range of
liabilities.
BOEM's goal for its financial assurance program continues to be the
protection of the American taxpayers from exposure to financial loss
associated with OCS development, while ensuring that the financial
assurance program does not detrimentally affect offshore investment or
position American offshore exploration and production companies at a
competitive disadvantage. BOEM's proposal to use P70 would reduce
offshore decommissioning risk to taxpayers relative both to previous
BSEE decommissioning estimates and to a methodology based on P50, while
reducing burden on available capital for offshore investment, including
both conventional and renewable energy activities, imposed by the use
of P90. BOEM requests comments on potential unknown risks associated
with the use of P70. BOEM has examined the impact that the different P
values would have on the amount of financial assurance required but
lacks the data to estimate the impact that selecting a P90 value might
have on offshore capital expenses and investments, and therefore has
selected P70 in this proposal. We are also specifically seeking
information and data related to these impacts from commenters.
For comparison, at BSEE's P90 levels, the total decommissioning
liability is approximately $51.2 billion, compared with $42.8 billion
at P70; of that total, the liability estimate associated with lessees
who have sub-investment grade credit ratings is approximately $24.7
billion at the P90 level and $20.2 billion at the P70 level. The total
liability estimates for properties expected to meet the three times
reserves threshold is approximately $9.0 billion at the P90 level and
$7.8 billion at P70 level. The difference between the full Tier 2
estimate and that of Tier 2 properties meeting the three times the
reserves threshold provides BOEM's total expected bond portfolio value
if the rule were to be finalized. For P90 this would be $15.7 billion,
reflecting an increase of $3.2 billion in bond demands (increased from
$12.5 billion at P70). The annual premium estimate for the forecasted
Tier 2 bond portfolio would increase from $380 million to $494 million,
an increase of approximately $114 million to bond lessees at the P90
level. This additional burden would be realized by the same population
of lessees as at the P70 level but would provide additional certainty
of sufficient bonding for that population in the event the facility
owners (1) defaulted on their obligations and (2) no viable predecessor
is available to fulfill their obligations.
BOEM requests comments and additional data on the costs and
benefits of setting the supplemental financial assurance requirements
based on each of the P50, P70, and P90 decommissioning liability
levels. In particular, BOEM would like information on impacts to
offshore capital expenses and investments of each liability level, as
well as impacts to potential taxpayer liability. BOEM also solicits
comment on whether setting assurance requirements based on different
liability levels might be appropriate for different circumstances. BOEM
also requests comments on costs and benefits of otherwise considering
predecessor lessees or grantees in determining the level of required
supplemental financial assurance.
Additionally, BOEM requests comments on the possibility of using a
higher BSEE decommissioning estimate (i.e., P90), including on how a
P90 estimate would affect small entities.
An offshore oil and gas lease that has a significant reserve-to-
liability value that is, a property that can generate a cash flow
significantly in excess of the costs associated with the
decommissioning of its assets--is likely to be purchased by another
company in the event of a default by the current lessee. The acquiring
company would then become liable for existing decommissioning
obligations, but due to the value of existing reserves, it would
acquire sufficient positive cash flow to reduce the risk that the costs
associated with the decommissioning of the assets would be borne by the
government. BOEM has determined that an adequate threshold for the
ratio of reserve value to the level of decommissioning liability should
be three to one. This threshold is discussed further in Section VI.B of
this preamble. Therefore, supplemental financial assurance will not be
required for properties with a value of proved oil and gas reserves
(using SEC methodology of reported value in the notes to the publicly
traded companies' Form 10-Ks) exceeding three times the decommissioning
costs (using the BSEE P70 estimated value) associated with the
production of those reserves, as these properties pose minimal risk
that the government will be required to bear the cost of
decommissioning.
BOEM is proposing to use and is requesting comments on this test as
the criterion to replace the existing generalized ``projected financial
strength'' criterion found currently at Sec. 556.901(d)(1)(ii), which
considers whether the estimated value of a lessee's existing lease
production and proved reserves is significantly in excess of the
lessee's existing and future lease obligations.

B. Right-of-Use and Easement Grants

BOEM's regulations concerning RUE grants serving a Federal OCS
lease or a State lease are found in Sec. Sec. 550.160 through 550.166.
Section 550.160 provides that an applicant for a RUE that serves an OCS
lease ``must meet bonding requirements,'' but the regulation does not
prescribe a base surety bond amount. The proposed rule would replace
this requirement with a cross-reference to the specific criteria
governing supplemental financial assurance demands in proposed Sec.
550.166.
BOEM is proposing to revise the bonding regulations to clarify that
any RUE grant holder must provide base financial assurance in a
specific amount, regardless of whether the RUE serves a State lease or
a Federal OCS lease. BOEM is proposing to establish a Federal RUE base
financial assurance requirement that matches the existing $500,000 base
financial assurance requirement for State RUEs. BOEM is also proposing
to establish a requirement for $500,000 area-wide RUE financial
assurance, which would satisfy the base financial assurance requirement
for any RUE holder that owns one or more RUEs within the same OCS area,
regardless of whether the RUE serves a State or Federal lease. BOEM is
also proposing to allow any lessee that has posted area-wide lease
financial assurance, pursuant to Sec. 556.900(a)(1), 556.901(a)(2), or
556.901(b)(2) for the areas specified in Sec. 556.900(a)(2), to modify
that lease surety bond to also cover any RUE(s) in the area owned by
the same lessee. The ability to use area-wide lease financial assurance
to cover the RUE base financial assurance obligation would be subject
to the requirement that the area-wide lease financial assurance would
be in an amount equal to or greater than the RUE base financial
assurance requirement (i.e., equal to or greater than $500,000). For
example, under the proposed regulations a lessee with a $3 million
area-wide lease surety bond could establish or acquire any number of
Federal or State RUEs in the area

[[Page 42145]]

without having to post any additional financial assurance, provided the
lessee agrees to modify the terms of its area-wide lease surety bond to
also cover any State or Federal RUEs that it owns or acquires. If the
existing area-wide bond is not modified, the lessee may satisfy the
requirement by providing new financial assurance to cover its RUE(s).
The rule proposes to consider the credit rating or proxy credit
rating of a RUE co-grant holder, mirroring the proposed methodology
used to determine if a lessee must provide supplemental financial
assurance. These credit rating standards provide the most effective and
proven method to evaluate a company's financial wherewithal and are
widely accepted as a significant demarcation of credit risk between
investment and non-investment grade rated companies. BOEM proposes to
include consideration of the credit rating or proxy credit rating of
co-owners of RUE grants because, like co-lessees, they are jointly and
severally liable for accrued decommissioning obligations for facilities
and pipelines on their RUE.
These changes to the RUE financial assurance requirements are
intended to: (1) Clarify the bonding requirement for Federal RUEs,
which is not explicitly defined in the existing regulations; (2) Align
the RUE bonding requirements for RUEs serving State and Federal leases;
and (3) Ensure that all RUEs are duly covered and that the risk of a
RUE holder defaulting on its decommissioning obligations is not
transferred to the American taxpayer.
BOEM is also proposing a new regulation to establish the conditions
under which the assignment of RUE interests may be disapproved. BOEM
may disapprove the assignment of a RUE when the assignee has not
satisfied all obligations under the regulations or under any BOEM or
BSEE order. BOEM may disapprove the assignment when the assignee has
not satisfied the financial assurance requirements.
BOEM is also proposing to revise the financial assurance
regulations to clarify that any RUE grant holder, whether the RUE
serves a State or Federal lease, may be required to provide
supplemental financial assurance for the RUE--above the $500,000 RUE
base financial assurance discussed above--if the grant holder does not
meet the credit rating or proxy credit rating criteria proposed to be
used for lessees. This change aligns the supplemental financial
assurance criteria for RUEs with those used in making the same
determination for leases. The value of proved oil and gas reserves will
not be considered because a RUE grant does not entitle the holder to
any interest in oil and gas reserves.

C. Pipeline Right-of-Way Grants

BOEM's bonding requirements for pipeline ROW grants, contained in
Sec. 550.1011, prescribe a $300,000 area-wide base surety bond that
guarantees compliance with all the terms and conditions of the pipeline
ROW grants held by a company in an OCS area. BOEM may require a
pipeline ROW grant holder to provide supplemental financial assurance
if the Regional Director determines that financial assurance in excess
of $300,000 is needed, but, unlike with leases, the regulation provides
no factors for the Regional Director's consideration when making this
determination. Therefore, BOEM is proposing to revise the financial
assurance regulations to provide that the Regional Director will demand
that a pipeline ROW grant holder provide supplemental financial
assurance when the grant holder does not meet the same credit rating or
proxy credit rating criteria proposed to be used for lessees. The value
of proved oil and gas reserves will not be considered because a ROW
grant does not entitle the holder to any interest in oil and gas
reserves.
The rule also proposes to consider the credit rating or proxy
credit rating of a co-grant holder. This change would better align
BOEM's evaluation process with accepted financial risk evaluation
methods used by the banking and finance industry and with the process
used to determine if a lessee must provide supplemental financial
assurance. BOEM proposes to include consideration of the credit rating
or proxy credit rating of co-owners of ROW grants because, like co-
lessees, they are jointly and severally liable for accrued
decommissioning obligations for facilities and pipelines on their ROW
(Sec. 250.1701(b)).

V. Proposed Revisions to Other Types of Supplemental Financial
Assurance

A. Third-Party Guarantees

BOEM is proposing to evaluate a potential guarantor using the same
credit rating or proxy credit rating criteria proposed for lessees. The
value of proved oil and gas reserves of an associated lease would not
be considered because that value is a characteristic of the lease
belonging to the guaranteed lessee and not an asset belonging to the
guarantor.
The criteria to evaluate a guarantor provided in the existing
regulations have proved difficult to apply. For example, Sec.
556.905(a)(3) provides that the guarantor's total outstanding and
proposed guarantees may not exceed 25 percent of its unencumbered net
worth in the United States. Determining a company's total outstanding
and proposed guarantees depends on accurate information provided by the
guarantor, and BOEM has no way to confirm whether the 25 percent
threshold has been exceeded at the time the guarantee is proffered or
afterward. The same provision requires BOEM to consider the
unencumbered net worth of the company in the United States, while
another provision, Sec. 556.905(c)(2)(iv), requires BOEM to consider
the guarantor's unencumbered fixed assets in the United States. Both of
these criteria are difficult to apply when the company under evaluation
has domestic and international assets that must be separated. Using the
same financial evaluation criterion, i.e., issuer credit rating or
proxy credit rating, to assess both guarantors and lessees as the most
relevant measure of future capacity would provide consistency in
evaluations and avoid overreliance on net worth.
To allow more flexibility in the use of third-party guarantees, the
proposed rule would allow a third-party guarantee to be used as
supplemental financial assurance for a RUE or ROW grant, as well as a
lease. Most significantly, in proposed Sec. 556.902(a)(3), this
proposed rule would remove the requirement for a third-party guarantee
to ensure compliance with the obligations of all lessees, operating
rights owners, and operators on the lease, and would allow a guarantee
limited to a specific amount, as agreed to by BOEM, or limited to the
liabilities of specific parties. Potential guarantors are reluctant to
provide a guarantee if they cannot limit the amount of their guarantee
or choose the entity for which they are guaranteeing compliance. This
change would allow a guarantor to limit its guarantee to a specific
amount of the total financial assurance requirement. The remaining
amount of required financial assurance must be covered by additional
security from the guaranteed lessee/grant holder or its co-lessees or
co-grant holders, so the amount of the requirement is fully satisfied.
BOEM is proposing this change because the existing regulations do not
clearly limit the liability of a guarantor to a fixed monetary amount
stated in the guarantee. Therefore, few parties were willing to use
third-party guarantees in the past.
By allowing a third-party guarantor to guarantee only the
obligations it wishes to cover, BOEM would provide industry with the
flexibility to use the guarantee to satisfy supplemental financial

[[Page 42146]]

assurance requirements without forcing the guarantor to cover the risks
associated with all parties on the lease or grant or operations in
which the party they wish to guarantee has no interest and over which
the guarantor may have no control. Moreover, the proposal to allow BOEM
to accept a third-party guarantee that is limited to specific
obligations does not reduce BOEM's protection because the regulations
would require that the financial assurance provided secures all lease
and grant obligations.
The proposed rule would also allow BOEM to cancel a third-party
guarantee under the same terms and conditions that apply to
cancellation of other types of financial assurance, as provided in
proposed Sec. 556.906(d)(2).
Lastly, the existing regulation refers to both a ``guarantee'' and
an ``indemnity agreement'' (which BOEM intended to mean the same
thing), and the proposed rule clarifies that the regulations
contemplate only one agreement: the guarantee agreement.

B. Decommissioning Accounts

Section 556.904 currently allows lessees to establish a lease-
specific abandonment account to satisfy any supplemental financial
assurance required by Sec. 556.901(d). BOEM proposes to rename these
accounts ``Decommissioning Accounts,'' the terminology used by the
industry, to remove any perceived limitation of this type of account to
a single lease, and to signify that these accounts may be used to
ensure compliance with supplemental financial assurance requirements
for a RUE and ROW grant, as well as a lease. To make these accounts
more attractive to parties who may desire to use this method of
providing supplemental financial assurance, BOEM also proposes to
remove the requirement to pledge Treasury securities to fund the
account before the funds equal the maximum amount insurable by the
Federal Deposit Insurance Corporation (FDIC) (currently capped at
$250,000). BOEM notes that, due to this current requirement, lessees
may have been unwilling to use decommissioning accounts.

C. Transfers of Lease Interests to Other Lessees or Operating Rights
Holders

The proposed rule would update subparts G and H of the Department's
existing part 556 regulations to clarify that BOEM will not approve the
transfer of a lease interest, whether a record title interest or an
operating rights interest, until the transferee complies with all
applicable regulations and orders, including the financial assurance
requirements. As discussed above, many of the facilities currently on
the OCS have decommissioning obligations where the cost of performance
greatly exceeds the amount of financial assurance currently available
to the Department of the Interior. To address this problem, BOEM is
proposing that it may prohibit approval of any new transfer or
assignment of any lease interest unless and until the financial
assurance demands have been satisfied.

VI. BOEM Evaluation Methodology

A. Credit Ratings

In this rulemaking, BOEM proposes to use an ``Issuer credit
rating'' to evaluate the financial health of OCS lessees, grant
holders, and guarantors. A review of S&P and Moody's rating
methodologies showed that the analyses they perform to determine an
issuer credit rating are wide-ranging and include factors beyond
corporate financials (such as history, senior management, and commodity
price outlook). An issuer credit rating provides the rating agencies'
opinions of the entity's ability to honor senior unsecured debt and
debt-like obligations. It is common for lessees to have both an issuer
credit rating and a bond issuance rating. However, bond issuance
ratings are opinions of the credit quality of a specific debt
obligation only, which can vary based on the priority of a creditor's
claim in bankruptcy or the extent to which assets are pledged as
collateral. Due to the varying priority of claims associated with debt
and the limited purpose of bond issuance ratings, BOEM proposes to
accept only issuer credit ratings from a NRSRO, and references to
credit rating in this rulemaking refer only to an issuer credit rating
(or a ``proxy rating'' where so noted as appropriate). BOEM proposes to
add ``Issuer credit rating,'' as defined by S&P, as a newly defined
term in 30 CFR parts 550 and 556.
If an entity does not have an issuer credit rating, BOEM proposes
to permit companies to request the Regional Director to determine a
proxy credit rating based on audited financial information for the most
recent fiscal year, including an income statement, a balance sheet, a
statement of cash flows, and the auditor's certificate. By ``most
recent fiscal year'' BOEM means a period that includes a 12-month
period within the 24 months prior to the Regional Director's
determination for which supplemental financial assurance is required.
One benefit of this approach is to reduce the adverse effects of the
rule on small businesses.
BOEM proposes to use S&P Global's Credit Analytics credit model to
calculate proxy credit ratings.\13\ However, BOEM proposes to reserve
the right to use a different model if it determines that a different
model more accurately reflects those factors relevant to the financial
evaluation of companies operating on the OCS. The purpose of using S&P
Global's Credit Analytics credit models is to provide an accurate and
objective method to assess any given company's probability of default
on its financial obligations based on its audited financial statements.
S&P Global's Credit Analytics credit models would allow BOEM to
reliably score and efficiently model BOEM's potential risk exposure
from a lessee that could potentially become unable to meet its
decommissioning obligations. Credit modeling would allow BOEM to
compare the company with similar public companies in the same industry
segment. BOEM invites comments on the appropriateness of relying on S&P
Global's Credit Analytics credit model, or other similar, widely
accepted credit rating models to generate proxy credit ratings.
Additionally, BOEM invites comments on the appropriateness of using a
proxy credit rating when determining the need to provide financial
assurance.
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\13\ <a href="https://www.spglobal.com/marketintelligence/en/documents/mi_risk_609827_credit-analytics_brochure_letter_fd.pdf">https://www.spglobal.com/marketintelligence/en/documents/mi_risk_609827_credit-analytics_brochure_letter_fd.pdf</a>.
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BOEM's financial assurance program is intended to ensure that
private companies have the capacity to meet their financial and non-
financial (i.e., performance) obligations. In order to both ensure that
companies do not ``cause [unmitigated] damage to the environment or to
property, or endanger life or health,'' 43 U.S.C. 1332(6), and to
promote ``expeditious and orderly development,'' 43 U.S.C. 1332(3),
BOEM seeks to balance the financial risk to the government and the
taxpayer while minimizing regulatory burdens. See also 43 U.S.C.
1801(7), 1802(1) & (2).
BOEM has determined that establishing an issuer credit rating
threshold of BBB- (S&P) or Baa3 (Moody's), an equivalent credit rating
provided by another SEC-recognized NRSRO, or an equivalent proxy credit
rating, is the best means for accomplishing these objectives. The
Moody's Baa3 credit rating is equivalent to the S&P BBB- credit rating.
If S&P and Moody's provide different ratings for the same company, BOEM
will use the higher rating as the lessee's rating. As discussed in the
IRIA, out of the 276 companies analyzed, none of the companies were
rated at or above BBB-

[[Page 42147]]

at the time of bankruptcy nor within 10 years prior to bankruptcy,
therefore, BOEM has selected BBB- as the credit rating threshold for
providing additional financial assurance. Additionally, under the
proposed rule, BOEM would have adequate time to secure needed financial
assurance if a company were to drop below the proposed investment grade
threshold as BOEM monitors company rating changes throughout the year.
BOEM reviewed historical default rates across the entire credit
rating spectrum, as well as the credit profile of oil and gas sector
bankruptcies arising from the commodity price downturn in 2014, to
determine an appropriate level of risk. As would be expected, the
average S&P historical one-year default rates increase significantly
with lower ratings. The average S&P one-year default rate \14\ for BBB-
rated companies from 1981 to 2020 was 0.24 percent. Comparatively, the
average one-year default rate for BB- rated companies was 1.21 percent,
for B- rated companies was 8.73 percent, and for C rated companies was
24.92 percent. BOEM believes that one-year default rates are an
appropriate measure of risk, given BOEM's policy of reviewing the
financial status of lessees, ROW holders, and RUE holders at least on
an annual basis (the review typically corresponding with the release of
audited annual financial statements). In addition, throughout the year,
BOEM monitors company credit rating changes, market reports, trade
press, articles in major news media and quarterly financial reports to
review the financial status of lessees, ROW holders, and RUE holders,
and the regulation would not preclude a demand for supplemental
financial assurance through the Regional Director's regulatory
authority at any time.
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\14\ The one-year default rate represents the percentage of
companies having any given credit rating that have failed to meet
their financial obligations during any given twelve-month period.
For example, for companies having had BBB- rating in 2020, 0.24
percent defaulted on their financial obligations in the subsequent
twelve-month period (i.e., approximately one out of every 400
companies having a BBB- credit rating).
---------------------------------------------------------------------------

BOEM has identified a circumstance in which the use of a proxy
credit rating may not adequately account for the potential risk of
default. This circumstance would occur in a situation where a company
has a substantial contingent liability for decommissioning OCS
facilities (i.e., decommissioning exposure by virtue of being a co-
lessee) associated with its minority ownership of such facilities if
the majority owners are unable or unwilling to meet their obligations.
This is particularly the case in the OCS context because existing
Department regulations stipulate that all co-owners of any OCS lease,
regardless of their ownership share, are jointly and severally liable
for all the obligations associated with the lease. Contingent
liabilities that are deemed unlikely to financially materialize are not
required to be booked as a liability on a balance sheet under Financial
Accounting Standards Board (FASB) accounting rules for Asset Retirement
Obligations, so would not be included in audited financial statements,
and therefore may not be taken into consideration in the generation of
proxy credit ratings.
For offshore lessees with a NRSRO issuer credit rating, the current
average net worth of investment grade lessees is $115 billion dollars,
with average book assets of $155 billion dollars. This implies that the
financial risk of non-performance on co-lessee liability exposure from
these companies is very low. Given that total U.S. offshore liability
is lower than half the average net worth of offshore investment grade
companies, such lessees are likely to have the financial capacity to
cover the contingent liabilities of co-lessees that have not themselves
provided financial assurance.
However, where a non-publicly traded company (i.e., a company
without an issuer credit rating) has substantial minority co-ownership
interests in OCS leases, the proxy credit rating derived for the
minority owner may not adequately represent the risk exposure in
circumstances where (1) The ownership interests of the other co-owners
are disproportionately large compared to the ownership interest of the
minority owner, and; (2) The credit ratings of the majority co-owners
are not investment grade. This possibility is relatively likely due to
BOEM's historical practice of declining to require supplemental
financial assurance from any co-lessees who share ownership of a lease
with any company with an investment grade proxy credit rating,
regardless of the financial circumstance of the co-owner or the
relative ownership share of any co-owner.
In these circumstances, a company may have contingent
decommissioning liabilities that are not adequately captured in the
company's financial statements. It may be that such decommissioning
liabilities amount to a disproportionate share compared to the total
assets of the company, such that the company may not have the financial
capacity to satisfy these contingent liabilities. If, for example, a
small company with a high proxy credit rating were a one percent co-
lessee of a lease with financially weak co-lessees, the small company
may not have sufficient assets to meet its decommissioning obligations
for the remaining ninety-nine percent of the decommissioning costs
(which it may be required to satisfy under the joint-and-several
liability provisions of the regulations) in the event that its co-
lessees were to default on their financial obligations.
For this reason, BOEM is proposing to add a new provision to the
regulations that would authorize BOEM to require a company requesting a
proxy credit rating to provide information on its ownership of other
OCS facilities and leases. This new provision authorizes BOEM to take
the contingent liabilities associated with the company's co-ownership
of these assets into consideration in determining the appropriate proxy
credit rating.
BOEM invites comments on the appropriateness of this approach of
relying on lessee and grant holder credit ratings, including whether
BOEM has proposed an appropriate credit rating threshold of BBB-, and
if not, what threshold or set of thresholds would best protect taxpayer
interests while not imposing undue burdens on industry. Also, BOEM
invites comments on alternative options for determining the need for
financial assurance other than credit ratings. Additionally, BOEM
invites comments on whether financial assurance should be required of
all companies, regardless of credit rating, and the impacts such a
requirement might have on OCS investment and on potential taxpayer
liabilities.

B. Valuing Proved Oil and Gas Reserves

Under this proposed rule, if BOEM considers the proved reserves on
a particular lease when determining whether supplemental financial
assurance is required, BOEM would require the lessee to submit a
reserve report for the proved oil and gas reserves (as defined by the
SEC regulations at 17 CFR 210.4-10(a)(22)) located on a given lease.
The reserve report provided to BOEM would contain the projected future
production quantities of proved oil and gas reserves on a per lease
basis, the production cost for those reserves also on a per lease
basis, and the discounted future cash flows from production. The
reserve report would also provide the value of the proved oil and gas
reserves per lease, determined under the accounting and reporting
standards set forth in SEC Regulation S-X at 17 CFR 210.4-10 and SEC
Regulation S-K at 17 CFR, subpart

[[Page 42148]]

229.1200.\15\ BOEM proposes to use SEC regulations on reserve reporting
because they are commonly accepted and understood by offshore oil and
gas companies and are already produced by publicly traded companies.
This also allows BOEM to rely on the established SEC regulations on the
definitions, qualifications, and requirements for proven reserves,
rather than attempting to recreate these regulations. BOEM would use
this proved oil and gas reserves per-lease value when determining
whether the value of the reserves on any given lease exceeds three
times the cost of the P70 decommissioning estimate associated with the
production of those reserves.
---------------------------------------------------------------------------

\15\ Unlike this proposed regulation, the SEC regulations at 17
CFR 229.1202(a)(2) say: ``Disclose, in the aggregate and by
geographic area and for each country containing 15 percent or more
of the registrant's proved reserves, expressed on an oil-equivalent-
barrels basis, reserves estimated . . . .'' Although BOEM would
require that lessees apply the methodology of the SEC, it would
require the analysis on a lease-specific basis.
---------------------------------------------------------------------------

BOEM believes that a property with a sufficient ``reserves-to-
decommissioning cost'' ratio would likely be purchased by another
company if a current lessee defaults on its obligations, thereby
reducing the risk that decommissioning costs would be borne by the
government, and consequently reducing the need for supplemental
financial assurance.
A reserves-to-decommissioning cost ratio of one-to-one would mean
that the estimated value of remaining oil and gas reserves on a lease
is equal to the cost of decommissioning. BOEM does not expect any other
company to purchase a lease interest with a ratio of one-to-one, as the
new lessee would not receive any return on its investment once it bears
the cost of decommissioning. A reserves-to-decommissioning cost ratio
below three-to-one might be considered adequate to encourage a new
lessee to take on the cost of purchasing the lease and assuming
liability for all of the existing decommissioning obligations, however
there may be other factors that would reduce the lease's commercial
appeal (e.g., macro-economic conditions, maintenance conditions, or
higher than typical operating costs).
In BOEM's judgment, a reserves-to-decommissioning cost ratio that
meets or exceeds three-to-one provides enough risk reduction to justify
a Regional Director determination that the lessee is not required to
provide supplemental financial assurance for that lease. Establishing
an appropriate reserves-to-decommissioning cost ratio protects the
taxpayer during periods of commodity price volatility. If commodity
prices decline in a manner similar to late 2014 through early 2016, for
example, BOEM believes a ratio of at least three-to-one assures the
property would most likely retain its economic viability and financial
attractiveness to potential buyers. BOEM requests comment on whether
this is an appropriate threshold, or if there are better approaches
and/or data sets available for analysis that would provide BOEM with
better certainty that taxpayer interests will ultimately be protected.

VII. Phased Compliance With Supplemental Financial Assurance Orders

BOEM recognizes that the proposed regulations may have a
significant financial impact on affected companies. For that reason,
BOEM is proposing to phase in the new bonding requirements over a
three-year period for existing leaseholders. As part of this proposal,
BOEM would require that any company receiving a supplemental financial
assurance demand post one-third of the total amount by the deadline
listed on the demand letter. A second one-third would be required by
the end of the second year (i.e., within 24 months of the receipt of
the demand letter). The final one-third payment would be due within 36
months of the receipt of the demand letter. If a lessee's credit rating
improves to investment grade during the three-year period, BOEM will
discontinue collection of the remaining financial assurance and return
any supplemental financial assurance previously provided.
BOEM is requesting comments from potentially affected parties about
this phased approach and how it could most effectively be implemented
to minimize any unnecessarily adverse effects from an increased
supplemental financial assurance requirement.

VIII. Appeals Bonds

When BOEM issues a supplemental financial assurance demand, the
affected party has the option to appeal the demand to the Department of
the Interior's Board of Land Appeals (IBLA). In many cases in which an
appeal is filed, it is accompanied by a request to stay BOEM's
supplemental financial assurance order pending the outcome of the
appeal. Currently, if the stay is granted, BOEM has no ability to
ensure that a facility is covered by adequate financial assurance until
the appeal is decided. It is important that BOEM ensure that the
government's interests are protected immediately because IBLA appeals
may continue for several years. If the company appealing the
supplemental financial assurance demand declares bankruptcy before its
appeal is resolved, BOEM has no financial assurance to cover the costs
of corrective action. For this reason, BOEM is proposing a new
requirement whereby any company seeking to stay a supplemental
financial assurance demand pending appeal must, as a condition of
obtaining a stay of the order, post an appeals bond in the amount of
supplemental financial assurance required. If the appeal is successful,
the amount of the appeals bond in excess of the amount of supplemental
financial assurance determined to be required would be released. If the
appeal is unsuccessful, the appeals bond could be replaced or converted
into bonds to cover the supplemental financial assurance demand.

IX. Proposed Revisions to BOEM Definitions

To implement the changes proposed above, BOEM proposes to add or
revise several definitions in 30 CFR parts 550 and 556. For proposed 30
CFR part 550, BOEM proposes to add new terms and definitions for
``Issuer credit rating,'' ``Investment grade credit rating,'' and
``Financial assurance,'' and to revise the definition of ``You.'' BOEM
proposes to add a new term and definition for ``Right-of-Use and
Easement (RUE)'' and remove the separate definitions of ``Right-of-
use'' and ``Easement'' in 30 CFR part 550 because those terms are not
used separately in the existing or proposed regulatory text. Similarly,
for 30 CFR part 556, BOEM proposes to add definitions for the new term
``Issuer credit rating'' and ``Investment grade credit rating,'' remove
the existing term and definition of ``Security or securities,'' add a
new term and definition for ``Financial assurance,'' and revise the
definitions of ``Right-of-Use and Easement (RUE)'' and ``You,'' all of
which will match those in proposed 30 CFR part 550.
Additionally, BOEM is replacing the word ``sulphur'' with the more
contemporary spelling of ``sulfur'' throughout the regulatory text
where it has not been previously changed. This edit is a technical
correction and does not change any meaning or intent of the regulatory
provisions. BOEM proposes updating the word ``sulfur'' in Sec. Sec.
550.101, 550.102, and 550.105.

X. Section-by-Section Analysis

BOEM is proposing to revise the following regulations:

[[Page 42149]]

Part 550--Oil and Gas and Sulfur Operations in the Outer Continental
Shelf

The terms ``bond,'' ``bonding,'' ``surety bond,'' ``security,'' and
``securities'' would be replaced throughout this part with the new term
``financial assurance.''
Subpart A--General
Section 550.105 Definitions
The proposed rule would add a definition of ``Issuer credit
rating,'' which is a newly defined term in 30 CFR part 550, for the
reasons set forth above.
BOEM would remove the terms ``Easement,'' and ``Right-of-use,''
neither of which is used separately. In lieu of these two terms, and to
define the term actually used in 30 CFR part 550, BOEM would add a
definition for ``Right-of-Use and Easement (RUE).''
This proposed rule would also add a new term and definition for
``Financial assurance'' to list the various methods that may be used to
ensure compliance with OCS obligations.
The proposed rule would add new definitions for the terms
``Transfer'' and ``Assign'' to clarify that these terms are used
interchangeably throughout 30 CFR part 550. This change would also
serve to clarify that the related terms ``transferee'' and
``transferor'' are interchangeable with ``assignee'' and ``assignor''
respectively.
The proposed rule would add a new definition for the term
``Investment grade credit rating,'' meaning ``an issuer credit rating
of BBB- or higher, or its equivalent, assigned to an issuer of
corporate debt by a nationally recognized statistical rating
organization as that term defined by the United States Securities and
Exchange Commission.'' This definition would become the threshold
determination according to which BOEM would define whether financial
assurance typically would or would not be required.
BOEM would also revise the definition of the term ``You'' to now
include, depending on the context of the regulations, a bidder, a
lessee (record title owner), a sublessee (operating rights owner), a
Federal or State right-of-use and easement grant holder, a pipeline
right-of-way grant holder, an assignor or transferor, a designated
operator or agent of the lessee or grant holder, or an applicant
seeking to become one of the above. This change to the definition of
``You'' would, in concert with changes proposed in Sec. 550.166, make
explicit that any financial assurance provisions applicable to either a
State or Federal RUE would apply to the other.
Section 550.160 When will BOEM grant me a right-of-use and easement
(RUE), and what requirements must I meet?
The proposed rule would revise the introductory text of this
section to clarify that a RUE grant need not cover both leased and
unleased lands. Instead, BOEM may grant a RUE on leased lands (i.e.,
leased to another party), or unleased lands, or both. The paragraph (a)
introductory text would be expanded to include additional activities
associated with a RUE, such as using or modifying existing devices. The
paragraph (a) introductory text would also be expanded to include the
words ``seafloor production equipment'' and ``facilities.'' By
expanding the RUE requirement to additional activities and devices,
BOEM would ensure that all associated activities that may have an
impact on the environment of the OCS are included.
BOEM also proposes to revise paragraph (b) to provide that a RUE
grant holder must exercise the grant according to the terms of the
grant and the applicable regulations of 30 CFR part 550, as well as the
requirements of 30 CFR part 250, subpart Q.
BOEM also proposes to revise paragraph (c) to update the cross-
reference to BOEM's lessee qualification requirements, Sec. Sec.
556.400 through 556.402, and to replace the language in this paragraph
referencing ``bonding requirements'' with a cross reference to Sec.
550.166, which BOEM also proposes to revise to add specific criteria
for financial assurance demands, as provided below.
Section 550.166 If BOEM grants me a RUE, what financial assurance must
I provide?
The proposed rule would revise the section heading by removing the
reference to ``a State lease'' and replacing ``surety bond'' with
``financial assurance.'' This reflects the change in the text of
paragraph (b) of this section that provides that the financial
assurance requirements of this section would apply to both a RUE
granted to serve a State lease and one serving an OCS lease. The term
``surety bond'' would also be replaced with ``financial assurance''
throughout the section.
BOEM proposes to revise paragraph (a) to require $500,000 in
financial assurance that guarantees compliance with the terms and
conditions of any OCS RUEs you hold. Previously, paragraph (a) only
required $500,000 in financial assurance for RUEs associated with State
leases.
BOEM proposes to add paragraph (a)(1) to allow area-wide lease
financial assurance to satisfy the requirements of paragraph (a),
provided it is in excess of the $500,000 base RUE financial assurance
requirement and is amended to guarantee compliance with all the terms
and conditions of the RUE(s) it covers.
BOEM proposes to add paragraph (a)(2) to allow the Regional
Director to lower the required financial assurance amount for research
and other similar types of RUEs, which reflects BOEM's past experience
that the total liability exposure can be well below $500,000 for such
RUEs.
BOEM proposes to add paragraph (a)(3) to ensure that the financial
assurance requirements of Sec. 556.900(d) through (g) and Sec.
556.902 would apply to the requirements stated in paragraph (a).
BOEM would also add to paragraph (b) in this section to provide
that, if BOEM grants a RUE that serves either an OCS lease or a State
lease, the Regional Director may require the grant holder to provide
supplemental financial assurance to ensure compliance with the
obligations under the RUE grant. BOEM would use the same issuer credit
rating or proxy credit rating criteria found in proposed Sec.
556.901(d)(1) and (2) to evaluate a RUE grant holder as BOEM proposes
to apply to lessees, i.e., the Regional Director may require
supplemental financial assurance if the grant holder does not have an
issuer credit rating or a proxy credit rating that meets the criteria
set forth in proposed Sec. 556.901(d)(1). Like lessees, most RUE
holders are oil and gas companies, and BOEM would, therefore, use the
same financial criteria to determine the need for additional financial
assurance from RUE holders to provide consistency.
BOEM proposes to revise paragraph (b)(1) to update the regulatory
citation in existing Sec. 550.166(b)(1) to provide that the
supplemental financial assurance must meet the requirements for lease
surety bonds or other financial assurance provided in Sec. 556.900(d)
through (g) and Sec. 556.902.
The proposed rule would also revise Sec. 550.166(b)(2) to include
``BOEM and BSEE orders'' in the list of costs and liabilities, and
clarify that RUE holders should also comply with the decommissioning
regulations at 30 CFR part 250, subpart Q.
The proposed rule would also add new paragraph (c) to provide that
if a RUE grant holder fails to replace any deficient financial
assurance upon demand, or fails to provide

[[Page 42150]]

supplemental financial assurance upon demand, BOEM may assess
penalties, request BSEE to suspend operations on the RUE, and/or
initiate action for cancellation of the RUE grant. Proposed paragraph
(c) provides for actions similar to those available to BOEM pursuant to
proposed Sec. 556.900(h) if a lessee fails to provide sufficient
financial assurance.
Section 550.167 How may I obtain or assign my interest in a RUE?
The proposed rule would add Sec. 550.167 to establish the ability
to assign a RUE interest. Previously, RUE interests were not assigned,
because assignment of RUE interests was not addressed in the existing
regulations. This change is being proposed to allow RUE assignments.
This new section would also require a RUE assignee to provide the
information outlined in existing Sec. 550.161, which currently must be
provided only by applicants for a new RUE. Paragraph (a) of Sec.
550.167 would establish that BOEM must approve all assignments of all
or part of a RUE interest. Paragraphs (b)(1) through (4) would
establish the circumstances in which BOEM may disapprove an assignment
of a RUE, mirroring the circumstances under which BOEM may disapprove
the assignment of a lease or sublease pursuant to Sec. 556.704. These
circumstances are intended to prevent the assignment of a RUE when, for
example, the assignment would result in inadequate financial assurance.
Subpart J--Pipelines and Pipeline Rights-of-Way
Section 550.1011 Financial Assurance Requirements for Pipeline Right-
of-Way (ROW) Grant Holders
The proposed rule would revise this section in its entirety. The
section heading would be revised to read, ``Financial assurance
requirements for pipeline right-of-way (ROW) grant holders,'' to
clarify that a pipeline ROW grant holder may meet the requirements of
this section by providing bonds or other types of financial assurance,
in order to expand the language to include forms of financial assurance
in addition to bonds.
Currently, Sec. 550.1011(a) requires that an applicant or a holder
of a ROW must provide and maintain a $300,000 bond (in addition to bond
coverage required in 30 CFR parts 256 and 556), and potentially
additional security, if the Regional Director determines the latter is
needed. The proposed rule would revise this paragraph to require that
assignees, as well as applicants and holders, are required to provide
and maintain the $300,000 financial assurance to make clear that
financial assurance requirements would apply to an assignment of a ROW
grant. The proposed rule would remove the reference to 30 CFR part 256
currently in paragraph (a)(1) because 30 CFR part 256 does not contain
pipeline bonding requirements. The proposed rule would clarify that the
requirement to provide area-wide financial assurance for a pipeline ROW
grant is separate and distinct from the financial assurance coverage
required for leases in 30 CFR part 556 and that required for RUEs in 30
CFR part 550. Existing paragraph (a)(2) would be removed because
supplemental financial assurance requirements would be covered by
proposed paragraph (d).
BOEM would also remove existing paragraph (b), which defines the
three recognized OCS areas, because it is made redundant by the
reference to Sec. 556.900(b) in revised paragraph (a). BOEM proposes
to replace the removed paragraph (b) with a new paragraph (b) to
provide that the requirement under paragraph (a) to furnish and
maintain area-wide financial assurance may be satisfied if the operator
or a co-grant holder provides area-wide pipeline right-of-way financial
assurance in the required amount that guarantees compliance with the
regulations and the terms and conditions of the grant, as discussed in
Section IV.C of this preamble.
BOEM also proposes to revise paragraph (c) with a provision stating
that the requirements for lease financial assurance in Sec. 556.900(d)
through (g) and Sec. 556.902 would apply to the area-wide financial
assurance required in paragraph (a) of this section. This cross-
reference incorporates the financial assurance provisions from 30 CFR
part 556 that specify the required content, form, and administrative
handling of financial assurance. BOEM would remove existing paragraphs
(c) and (d), which would be made redundant by proposed new paragraph
(f).
BOEM would add paragraph (d) to provide that the Regional Director
may determine that supplemental financial assurance is necessary to
ensure compliance with the obligations under a pipeline ROW grant based
on an evaluation of the grant holder's ability to carry out present and
future obligations on the pipeline ROW. BOEM proposes to use the same
issuer credit rating or proxy credit rating criteria to evaluate a
pipeline ROW grant holder, or co-grant holder, as BOEM proposes to
apply to lessees in Sec. 556.901(d)(1). BOEM, as noted earlier in this
preamble, has found that reliance on credit ratings better evaluates
financial stability, and is thus applying the same financial criteria
in evaluating financial stability of grant holders.
BOEM also proposes to add additional supplemental financial
assurance requirements in new paragraph (e)(1) stating that the
supplemental financial assurance must meet the general requirements for
lease surety bonds or other financial assurance, as provided in Sec.
556.900(d) through (f) and the proposed revisions to paragraph (g) and
Sec. 556.902. This cross-reference incorporates the financial
assurance provisions from 30 CFR part 556 that specify the required
content, form, and administrative handling of financial assurance. New
paragraph (e)(2) proposes that any supplemental financial assurance for
a pipeline ROW would be required to cover liabilities for regulatory
compliance and compliance with BOEM and BSEE orders, decommissioning of
all pipelines or other facilities, and clearance from the seafloor of
all obstructions created by the pipeline ROW operations, in accordance
with the regulations set forth in 30 CFR part 250, subpart Q. See
Section IV.C of this preamble for further discussion.
The proposed rule would also add new paragraph (f) to provide that
if a pipeline ROW grant holder fails to replace any deficient financial
assurance upon demand or fails to provide supplemental financial
assurance upon demand, the Regional Director may assess penalties,
request BSEE to suspend operations on the pipeline ROW, and/or initiate
action for forfeiture of the pipeline ROW grant in accordance with
Sec. 250.1013.

Part 556--Leasing of Sulfur or Oil and Gas and Bonding Requirements in
the Outer Continental Shelf

The proposed rule would make a technical correction to the
authority citation for part 556 by removing the citation to 43 U.S.C.
1801-1802, because neither of these two sections contains authority
allowing BOEM to issue or amend regulations.
The proposed rule would also remove the citation to 43 U.S.C. 1331
note, which is where the Gulf of Mexico Energy Security Act of 2006 is
set forth. While this statute required BOEM to issue regulations
concerning the availability of bonus or royalty credits for exchanging
eligible leases, the deadline for applying for such a bonus or royalty
credit was October 14, 2010; therefore, lessees may no longer apply for
such credits. BOEM no longer needs the authority to issue regulations
under

[[Page 42151]]

that statute and has removed all regulations on this topic from 30 CFR
part 556, except for Sec. 556.1000, which provides that lessees may no
longer apply for such credits.
The terms ``bond,'' ``bonding,'' and ``surety bond'' would be
replaced throughout this part with the new term ``financial
assurance,'' as discussed earlier in this preamble. This change
includes changing the Title of Part 556 from ``Leasing of Sulphur or
Oil and Gas and Bonding Requirements in the Outer Continental Shelf''
to ``Leasing of Sulfur or Oil and Gas and Financial Assurance
Requirements in the Outer Continental Shelf.''
Subpart A--General Provisions
Section 556.105 Acronyms and Definitions
The proposed rule would add a definition of ``Issuer credit
rating'' and ``Investment grade credit rating,'' which are identical to
the proposed additions in Sec. 550.105.
The proposed rule would also revise the definition of ``Right-of-
Use and Easement (RUE)'' to include the words ``to construct, secure to
the seafloor, use, modify, or maintain platforms, seafloor production
equipment.'' This definition would be the same as the definition of
``Right-of-Use and Easement (RUE)'' proposed for Sec. 550.105.
The proposed rule would also add a definition for ``Financial
assurance'' to clarify that various methods can be used to ensure
compliance with OCS obligations. This definition would be the same as
the definition of ``Financial assurance'' proposed for Sec. 550.105.
The proposed rule would add definitions for the new terms
``Transfer'' and ``Assign'' to clarify that that these terms are used
interchangeably throughout 30 CFR part 556. This change would also
serve to clarify that the related terms ``transferee'' and
``transferor'' are interchangeable with ``assignee'' and ``assignor,''
respectively.
The proposed rule would also revise the definition of the term
``You'' to include, depending on the context of the regulations, a
bidder, a lessee (record title owner), a sublessee (operating rights
owner), a Federal or State right-of-use and easement grant holder, a
pipeline right-of-way grant holder, assignor or transferor, a
designated operator or agent of the lessee or grant holder, or an
applicant seeking to become one of the above. This change to the
definition of ``You,'' in concert with changes proposed in Sec.
550.166, would make explicit that any provisions applicable to either a
State or Federal RUE would apply to the other, and that any
distinctions between the two with respect to financial assurance are
being removed. This change is in concert with changes proposed in Sec.
550.105.
Subpart G--Transferring All or Part of the Record Title Interest in a
Lease
Section 556.704 When may BOEM disapprove an assignment or sublease of
an interest in my lease?
The proposed rule would revise paragraph (a) to clearly state that
all parties involved in the assignment of a record title interest in a
lease must be in compliance with all applicable regulations and orders,
including financial assurance requirements, or BOEM may disapprove an
assignment or sublease, consistent with changes to 30 CFR part 550
proposed in this rulemaking. The proposed rule would replace the word
``would'' in the section title with ``may'' to better reflect this
discretion.
Subpart H--Transferring All or Part of the Operating Rights in a Lease
Section 556.802 When may BOEM disapprove the transfer of all or part of
my operating rights interest?
The proposed rule would revise the existing section heading to
replace ``assignment'' with ``transfer'' consistent with the new
definitions proposed for both terms. The proposed rule would revise
paragraph (a) to clearly state that for the transferee to receive
approval for the transfer of operating rights in a lease, the
transferee must be in compliance with all applicable regulations and
orders to provide financial assurance requirements before BOEM may
approve an assignment, consistent with changes to 30 CFR part 550
proposed in this rulemaking. The proposed rule would replace the word
``would'' in the section title with ``may'' to better reflect this
discretion.
Subpart I--Bonding or Other Financial Assurance
Section 556.900 Financial Assurance Requirements for an Oil and Gas or
Sulfur Lease
The proposed rule would revise the section heading to read,
``Financial assurance requirements for an oil and gas or sulfur lease''
in order to ensure that the term ``bonding'' has been consistently
replaced with ``financial assurance'' and to clarify that a number of
forms of financial assurance can be provided, and not just surety
bonds, consistent with changes to 30 CFR part 550 proposed in this
rulemaking.
BOEM proposes to add paragraph (a)(4) to make clear that any
supplemental financial assurance required by the Regional Director must
be provided before a new lease will be issued or an assignment of a
lease approved.
The proposed rule would also revise the introductory text of
paragraph (g) to replace the word ``security'' with ``financial
assurance,'' and to add the word ``surety'' before ``bond'' in two
places to clarify that in those cases the regulation is referring to a
``surety bond.''
The proposed rule would revise the introductory text of paragraph
(h) to replace the words ``bond coverage'' with ``financial assurance''
to clarify that surety bonds are not the only means of meeting the
requirement. The proposed rule would also revise paragraph (h)(2) in
recognition that BSEE, rather than BOEM, is the agency with authority
to suspend production or other operations on a lease.
The proposed rule would add paragraph (i) to ensure consistency
with the RUE financial assurance requirements by providing that area-
wide lease surety bonds pledged to satisfy the financial assurance
requirements for RUEs may be called in for performance of obligations
on which the holder of a RUE defaults.
Section 556.901 Base Financial Assurance and Supplemental Financial
Assurance
The proposed rule would revise the section heading to read, ``Base
financial assurance and supplemental financial assurance,'' because
this section covers both base financial assurance and supplemental
financial assurance requirements.
Section 556.901(a)
The proposed rule would also revise paragraph (a)(1)(i)
introductory text to replace the word ``bond'' with ``lease exploration
financial assurance'' to be consistent with the terminology used in
existing paragraph (a)(1)(ii), which BOEM does not propose to change.
Section 556.901(b)
The proposed rule would eliminate the parenthetical ``(the
lessee)'' from the introductory text as it is made redundant by the
proposed revised definition of ``You.'' The proposed rule would also
revise paragraph (b)(1)(i) introductory text to replace the word
``bond'' with ``lease development financial assurance'' for consistency
with the terminology used in existing paragraph (b)(1)(ii), which BOEM
does not propose to change.

[[Page 42152]]

Section 556.901(c)
The proposed rule would also revise paragraph (c) to remove the
words ``authorized officer'' and replace them with ``Regional
Director,'' and remove the words ``lease bond coverage'' and ``a lease
surety bond'' and replace them in each instance with ``financial
assurance'' to clarify that the Regional Director can review whether
BOEM would be adequately secured by a surety bond, or another type of
financial assurance, for an amount less than the amount proposed in
paragraph (b)(1), but not less than the estimated cost for
decommissioning.
Section 556.901(d)
BOEM proposes to combine the provisions of the existing paragraph
(d) introductory text and the existing introductory paragraph (d)(1) to
provide that the Regional Director may determine that supplemental
financial assurance is required to ensure compliance with the
obligations under a lease if the lessee does not meet at least one of
the criteria provided in proposed paragraphs (d)(1) through (4) below.
For further discussion, see Section V of this preamble.
Section 556.901(d)(1)
BOEM proposes to revise paragraph (d)(1) to set forth the criteria
BOEM would use to evaluate the ability of a lessee to carry out present
and future obligations. Under this paragraph, BOEM would use an issuer
credit rating from a NRSRO, as defined by the SEC, greater than or
equal to either BBB- from Standard & Poor's (S&P) Ratings Service or
Baa3 from Moody's Investor Service, or the equivalent from another
NRSRO. If different NRSROs provide different ratings for the same
company, BOEM would apply the higher rating, as discussed in section
IV.A of this preamble.
Section 556.901(d)(2)
BOEM proposes to revise paragraph (d)(2) stating that BOEM could
also use a proxy credit rating calculated by BOEM based on audited
financial information from the most recent fiscal year (including an
income statement, balance sheet, statement of cash flows, and the
auditor's certificate) greater than or equal to either BBB- from S&Ps
Ratings Service or Ba3 from Moody's Investor Service, or their
equivalent from another NRSRO. The proxy credit ratings that BOEM would
calculate on behalf of lessees would be structured in the same scale as
the standard ratings (i.e., AAA to D). The audited financial
information from the most recent fiscal year that BOEM used to
determine the proxy credit rating must include a twelve-month period
within the twenty-four months prior to the lessee's receipt of the
Regional Director's determination that the lessee must provide
supplemental financial assurance. When determining a proxy credit
rating, the Regional Director will consider any additional liabilities
that may encumber a lessee's ability to carry out future obligations.
Under the proposed rule, the lessee would be obligated to provide the
Regional Director with information regarding its joint-ownership
interests and other liabilities associated with OCS leases, which might
not otherwise be accounted for in the audited financial information
provided to BOEM.
Section 556.901(d)(3)
BOEM proposes to add new paragraph (d)(3) to address the situation
where the lessee does not meet the criteria in proposed paragraphs
(d)(1) or (2), but one or more co-lessee(s) does meet those criteria.
The Regional Director may require a lessee to provide supplemental
financial assurance on a lease-by-lease basis if no co-lessee has an
issuer credit rating or proxy credit rating that meets the threshold
set forth in paragraphs (d)(1) or (2), as discussed in Section IV.A of
this preamble.
Section 556.901(d)(4)
BOEM proposes to add new paragraph (d)(4) to set forth the
criterion the Regional Director would use if the lessee does not meet
the criteria in proposed paragraphs (d)(1), (2), or (3). In this
instance, the Regional Director would assess each lease to determine
whether the value of the proved oil and gas reserves on the lease
exceed three times the estimated cost of the decommissioning associated
with the production of those reserves. Under paragraph (d)(4), the
Regional Director's assessment would be based on the evaluation of
proved oil and gas reserves following the methodology set forth in SEC
Regulation S-X at 17 CFR 210.4-10 and SEC Regulation S-K at 17 CFR
229.1200. BOEM also proposes new paragraphs (d)(4)(i) and (ii), which
state that, when implementing this criterion, BOEM will use
decommissioning cost estimates, including a BSEE-generated
probabilistic estimate at the P70 level, when available, or, if such
estimate is not available, BOEM will use the BSEE-generated
deterministic estimate.
Section 556.901(e)
BOEM proposes to redesignate existing paragraph (d)(2) as paragraph
(e) and revise it to provide that a lessee may satisfy the Regional
Director's demand for supplemental financial assurance either by
increasing the amount of its existing financial assurance or by
providing additional surety bonds or other types of acceptable
financial assurance.
Section 556.901(f)
BOEM proposes to redesignate existing paragraph (e) as paragraph
(f) and revise to remove the word ``bond'' and replace it with
``supplemental financial assurance,'' a term that includes a surety
bond or another type of financial assurance. BOEM also proposes to
modify the language of new paragraph (f) to establish that, in
determining the amount of supplemental financial assurance, the
Regional Director will consider the lessee's potential underpayment of
royalty and the cumulative decommissioning obligations as established
in the manner described in proposed paragraph (d)(3) of this section,
i.e., the use of the appropriate BSEE estimate.
Section 556.901(g)
BOEM proposes to redesignate existing paragraph (f) as new
paragraph (g) and revise it to replace the word ``security'' with
``financial assurance'' throughout.
Existing 30 CFR 556.901(f)(2) includes a statement to the effect
that, if a company requests a reduction of the amount of the original
bond required, the Regional Director may agree to such a reduction
provided that he or she finds that ``the evidence you submit is
convincing.'' BOEM proposes to replace the current regulatory text with
the following statement in new paragraph (g)(2): ``Upon review of your
submission, the Regional Director may reduce the amount of financial
assurance required,'' as discussed in Section IV of this preamble.
Section 556.901(h)
BOEM proposes to add a new paragraph (h) to describe the limited
opportunity lessees will have to provide the required supplemental
financial assurance in three phased installments during the first three
years after the effective date of this regulation, subject to the
conditions of proposed paragraphs (h)(1) and (2). A three-year approach
would allow companies to raise the relevant capital through operations
over a longer period of time, as discussed in section VII of this
preamble. Accordingly, it would reduce bankruptcy risk and ensure a
greater level of financial protection for the government and taxpayers.
BOEM proposes to add new paragraphs (h)(1)(i) through (iii) to

[[Page 42153]]

establish the timing and amounts of phased supplemental financial
assurance that would need to be provided. Payments would be required in
three installments of one-third that of the demand, the first of which
would be required within the timeframe specified in the demand letter,
or within 60 calendar days of receiving the demand letter if no
timeframe is specified. The second one-third would be required within
24 months from the date of receipt of the original demand letter, and
the final payment would be due within 36 months from the date of the
receipt of the original demand letter.
BOEM proposes to add a new paragraph (h)(2) to establish a
procedure in case a demand that has been approved for phased compliance
is not met within the timeframes established by paragraphs (h)(1)(i)
through (iii). If a payment is missed, the Regional Director will
notify the party of the failure to meet the timeframe and that it will
no longer be eligible to meet the supplemental financial assurance
demand by using the phased compliance option set forth in proposed
paragraph (h). Moreover, the remaining balance of the demand would
become due ten calendar days after the Regional Director's notification
is received.
Section 556.902 General Requirements for Bonds or Other Financial
Assurance
The proposed rule would revise the section heading to read,
``General requirements for bonds or other financial assurance,'' to
recognize that other types of financial assurance, such as a dual-
obligee bond or a pledge of Treasury securities, may be provided under
30 CFR part 556.
These revisions propose that the same general requirements for
surety bonds provided by lessees, operating rights owners, or operators
of leases, also apply to surety bonds provided by RUE grant and
pipeline ROW grant holders. The proposed rule would therefore also
revise paragraph (a) to include ``grant holder'' and to cover surety
bonds provided under 30 CFR part 550. The requirements of this section
are those that apply broadly to all companies having to provide
financial assurance to BOEM for an OCS oil and gas or sulfur lease.
Additional requirements appliable specifically to RUEs and ROWs are
described in proposed Sec. Sec. 550.166 and 550.1011, respectively.
The proposed rule would add ``or grant'' after ``lease'' to clarify
the change to include grant holders in paragraph (a)(2). The rulemaking
would also add compliance with ``all BOEM and BSEE orders'' as a
requirement to ensure that providers of financial assurance are aware
that such financial assurance guarantees compliance with BOEM and BSEE
orders as well as with the regulations and the terms of a lease, ROW,
or RUE. This addition is necessary because a requirement to provide
supplemental financial assurance arises from a BOEM order. ``BOEM and
BSEE orders'' would mean any order issued by the relevant bureau, such
as a BSEE order to decommission, or a BOEM order to provide
supplemental bond.
The proposed rule would revise paragraph (a)(3) to include the
obligations of all record title owners, operating rights owners, and
operators on the lease.
The proposed rule would also revise paragraph (e)(2) to clarify
that the use of Treasury securities as financial assurance requires a
pledge of Treasury securities, as provided in Sec. 556.900(f).
The proposed rule would add a new paragraph (g) to recognize the
option to seek an informal resolution of a surety bond demand pursuant
to 30 CFR 590.6, which contains information regarding informal
resolutions. This paragraph would further provide that a request for an
informal resolution of a dispute concerning the Regional Director's
decision to require supplemental financial assurance will not affect
the applicant's ability to request a phased payment of its supplemental
financial assurance demand under proposed Sec. 556.901(h).
The proposed rule would add a new paragraph (h) to address risks
arising in connection with the lessee's and grant holder's ability to
appeal a demand for supplemental financial assurance to the Interior
Board of Land Appeals (IBLA) pursuant to the regulations in 30 CFR part
590. The proposed rule would add an additional requirement to the IBLA
appeals process whereby, if an appellant requests that the IBLA stay
the supplemental financial assurance demand, the appellant would be
required to post an appeals surety bond equal to the amount of
supplemental financial assurance that the appellant seeks to stay
before any stay could go into effect. Because IBLA appeals may continue
for several years, it is important that BOEM ensure that the
government's interests are protected. The appeals surety bond
requirement would prevent the government from being left with no
security if the appellant filed bankruptcy before the appeal process
ended.
Section 556.903 Lapse of Financial Assurance
The proposed rule would replace the word ``bond'' in the section
title with ``financial assurance'' for consistency with the terminology
change made throughout the rulemaking. The proposed rule would revise
paragraph (a) to add after the word ``surety'', ``guarantor, or the
financial institution holding or providing your financial assurance''
and to include references to the financial assurance requirements for
RUE grants (Sec. 550.166) and pipeline ROW grants (Sec. 550.1011).
The proposed rule would also revise paragraph (a) by removing the words
``terminates immediately'' and substituting ``must be replaced.'' The
proposed rule would replace the word ``promptly'' with a specific
timeline of within seven calendar days of learning of a negative event
for the financial assurance provider and would also add a 30-calendar
day timeframe in which the party must provide other financial assurance
from a different financial assurance provider.
BOEM also proposes to revise the first sentence of paragraph (b) by
inserting ``or financial institution'' after ``guarantor,'' to make the
provision apply to all types of financial assurance providers,
including those offering decommissioning accounts. BOEM also proposes
to revise the second sentence of paragraph (b) for consistency in
terminology by inserting the words ``or other financial assurance''
after the word ``bonds'' and inserting the words ``guarantor, or
financial institution'' after the word ``surety'', so that all surety
bonds or other financial assurance instruments must require all
financial assurance providers to notify the Regional Director within 72
hours of learning of an action filed alleging that the lessee or grant
holder, or their financial assurance provider, is insolvent or
bankrupt.
Section 556.904 Decommissioning Accounts
The proposed rule would revise the section heading and the term
``abandonment accounts'' throughout the section to read
``decommissioning accounts,'' in accordance with BOEM policy and
accepted terminology used in the industry. The words ``lease-specific''
would be removed throughout this section to remove the implication that
such an account could only pertain to one lease, thereby clarifying
that a decommissioning account could be used for one lease or several
leases, a RUE grant, or a pipeline ROW grant, or a combination thereof,
as discussed in section V.B of this preamble.
BOEM proposes to revise paragraph (a) to remove the term ``lease-
specific'' and replace it with ``decommissioning,'' and to add
references to the base and

[[Page 42154]]

supplemental financial assurance regulation (proposed Sec.
556.901(d)), as well as the financial assurance regulations for RUE
grants (proposed Sec. 550.166(b)) and pipeline ROW grants (proposed
Sec. 550.1011(d)), consistent with the changes mentioned in the
preceding paragraph. Although the paragraph (a) introductory text would
continue to allow a lessee or grant holder to establish a
decommissioning account at a federally insured financial institution,
this proposed rule would eliminate the existing restriction in
paragraph (d) that such deposits not exceed the FDIC/FSLIC insurance
limits and the reference to paragraph (a)(3), which is being revised
and is no longer relevant to withdrawal of funds from a decommissioning
account.
The proposed rule would re-arrange the existing sentence
constituting Sec. 556.904(a)(1). The proposed rule would also revise
paragraph (a)(2) to remove the words ``as estimated by BOEM'' to
clarify that BOEM does not estimate decommissioning costs, but rather
uses the estimates of decommissioning costs determined by BSEE. The
proposed rule would also revise paragraph (a)(2) to require funding of
a decommissioning account ``pursuant to a schedule that the Regional
Director prescribes,'' as opposed to ``within the timeframe the
Regional Director prescribes'' as existing Sec. 556.904(a)(2) now
states.
The proposed rule would revise paragraph (a)(3) to remove the
requirement to provide binding instructions to purchase Treasury
securities for a decommissioning account under certain circumstances.
The proposed rule would replace the existing language with a new
provision providing that if you fail to make the initial payment or any
scheduled payment into the decommissioning account, you must
immediately submit, and subsequently maintain, a surety bond or other
financial assurance in an amount equal to the remaining unsecured
portion of your estimated decommissioning liability. This change
reflects BOEM's current policy to order a surety bond or other
financial assurance in the event the payments into the decommissioning
account are not timely made.
The proposed rule would revise paragraph (b) by removing ``lease-
specific'' and substituting ``decommissioning.''
The proposed rule would also remove existing paragraphs (c) and
(d), which concern the use of pledged Treasury securities to fund a
decommissioning account, as discussed in section V.B of this preamble.
Removing the requirement in existing paragraph (d) that the account
holder must purchase Treasury securities when the amount in the account
equals the maximum amount insurable by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation will
make these accounts more attractive to parties who may desire to use
this method of providing supplemental financial assurance. The removal
of existing paragraphs (c) and (d) would not preclude the use of
Treasury securities to fund a decommissioning account. Existing
paragraph (e) would be redesignated as paragraph (c) except that the
word ``pledged'' would be removed, and ``other revenue stream'' would
be added to the list of financial assurance options.
The proposed rule would add a revised paragraph (d), which would
describe the Regional Director's discretion to authorize BOEM to
provide funds from a decommissioning account to a liable party that
performs the decommissioning.
Section 556.905 Third-Party Guarantees
The proposed rule would revise the section heading to read,
``Third-party guarantees.'' The proposed rule would also revise the
section throughout to remove the introductory titles of each paragraph
to ensure consistency in the proposed rule's format.
Section 556.905(a)
BOEM proposes to revise paragraph (a) to include a cross-reference
to proposed Sec. 550.166(b) (related to RUEs) and proposed Sec.
550.1011(d)) (related to pipeline ROWs) in addition to the existing
reference to proposed Sec. 556.901(d) (related to base financial
assurance for leases), to clarify that a third-party guarantee may be
used as a type of supplemental financial assurance for not only leases,
but for RUE grants and pipeline ROW grants as well. This is further
discussed in Section V.A of this preamble.
BOEM would also revise paragraph (a)(1) to require that the
guarantor, not the guarantee, as provided in the existing regulation,
must meet the criteria in proposed Sec. 556.901(d)(1), as the factors
in proposed Sec. 556.901(d) more properly apply to an entity, such as
a guarantor, than to a document, such as a guarantee. See section V.A
of this preamble for further discussion. BOEM would retain existing
paragraph (a)(2), but would revise it to include a requirement, which
is found in existing paragraph (a)(4), that the guarantor or guaranteed
party must submit a third-party guarantee ``containing each of the
provisions in proposed paragraph (d) of this section.'' As discussed
below, paragraph (d) is being revised to no longer use the term
``indemnity agreement'' and to provide instead that the provisions that
BOEM previously required a lessee or grant holder to include in
indemnity agreements must be included in a third-party guarantee
agreement. This terminology is changed to clarify that the government
is not required to incur the expenses of decommissioning before
demanding compensation from the guarantor. The proposed rule would also
remove existing paragraphs (a)(3) and (a)(4), which would be superseded
by other revisions to this section.
Section 556.905(b)
The proposed rule would redesignate existing paragraph (b) as
paragraph (c) and revise the introductory text to remove the reference
to existing paragraph (c)(3) of this section because the requirements
in that paragraph would be superseded in this proposed rule. The
proposed rule would replace this reference with a reference to
paragraph (a)(1) of this section in paragraph (c) as it is proposed to
be revised. The proposed rule would add new paragraph (b) to allow
guarantors to limit their guarantees to a fixed dollar amount as agreed
to by BOEM. BOEM is proposing this change because the existing
regulations do not clearly limit the liability of a guarantor to a
fixed monetary amount stated in the guarantee. Therefore, few parties
were willing to use third-party guarantees in the past. Because the
cessation of production is neither desirable nor easily accomplished by
an operator, the proposed rule would also revise existing paragraph
(b)(2) to remove the requirement that, when a guarantor becomes
unqualified, you must ``cease production until you comply with the
surety bond coverage requirements of this subpart.'' Instead, the
language in revised redesignated paragraph (c) would be revised to
provide that you must, within 72 hours, ``[s]ubmit and subsequently
maintain a surety bond or other financial assurance covering those
obligations previously secured by the third-party guarantee.''
The proposed rule would remove existing paragraph (c) as the
language would be superseded by the new language in Sec. 556.905(a).
Section 556.905(d)
The proposed rule would revise paragraph (d)(1) introductory text
to read ``If you fail to comply with the terms of any lease or grant
covered by the guarantee, or any applicable

[[Page 42155]]

regulation, your guarantor must either:'' to be consistent with the
revision of paragraph (a) to allow the use of a third-party guarantee
for a RUE grant or a pipeline ROW grant.
The proposed rule would revise paragraph (d)(1)(i) to clarify that
the corrective action required is to bring the lease or grant into
compliance with its terms, or any applicable regulation, to the extent
covered by the guarantee.
The proposed rule would revise paragraph (d)(1)(ii) to clarify that
the liability only extends to that covered by the guarantee and that
payment does not result in the cancelation of the guarantee, but only a
reduction in the remaining value equal to the amount provided.
The proposed rule would remove existing subparagraph (d)(2) to be
consistent with the revision to remove existing paragraph (c). As a
result, existing paragraph (d)(3) would be redesignated as paragraph
(d)(2) and existing paragraph (d)(4) would be redesignated as paragraph
(d)(3).
The proposed rule would revise the redesignated paragraphs
(d)(2)(ii) and (iii) to remove the words ``your guarantor's'' and
replace them with the word ``the'' to clarify that redesignated
paragraph (d)(2) would apply to the guarantee itself.
The proposed rule would revise proposed paragraph (d)(3) to replace
the term ``a suitable replacement security instrument'' with
``acceptable replacement financial assurance'' for clarity and would
include the requirement that appears in existing Sec. 556.905(d)(4)
that any replacement financial assurance must be provided before the
termination of the period of liability of the third-party guarantee.
Section 556.905(e)
The proposed rule would also revise paragraph (e) to provide that
BOEM will cancel a third-party guarantee under the same terms and
conditions as those proposed in Sec. Sec. 556.906(b) and (d)(3).
Section 556.905(f) Through (k)
BOEM also proposes to add new paragraphs (f) through (k) to replace
the provisions of existing paragraph (e). The new paragraphs mirror the
provisions of existing paragraph (e) while making minor adjustments to
accommodate the new format and add clarification. The term ``indemnity
agreement'' would be replaced with ``third-party guarantee agreement''
throughout.
Section 556.906 Termination of the Period of Liability and Cancellation
of Financial Assurance
The proposed rule would replace the words ``security'' and ``surety
bond'' with ``financial assurance'' and ``surety'' with ``financial
assurance provider'' for consistency with the changes throughout the
proposed rule. The section title would also be revised so that ``a
bond'' is replaced with ``financial assurance.''
The proposed rule would revise existing paragraph (b)(1) to remove
the word ``terminated'' in two instances and replace it with
``cancelled'' to be consistent with the existing paragraph (b)
introductory text, which provides that the Regional Director will
cancel your previous financial assurance when you provide a
replacement, subject to the conditions provided in existing paragraphs
(b)(1) through (3). BOEM would also remove the word ``for'' before ``by
the bond'' in paragraph (b)(1) for grammatical reasons.
The proposed rule would revise existing paragraph (b)(2) to also
add cross-references to Sec. 550.166, which is the financial assurance
regulation for RUE grants, and Sec. 550.1011, which is the financial
assurance regulation for pipeline ROW grants, and would revise existing
paragraph (b)(3) to also reference supplemental financial assurance
regulations for RUE grants (proposed Sec. 550.166(b) and pipeline ROW
grants (proposed Sec. 550.1011(d)). BOEM proposes to delete the word
``base'' in front of financial assurance in existing paragraph (b)(2)
to propose that the new financial assurance would replace whatever
financial assurance that previously existed, whether that financial
assurance consisted of a base bond and/or any prior supplemental
financial assurance.
The proposed rule would revise the paragraph (d) introductory text
to cover financial assurance cancellations and return of pledged
financial assurance and, in the table, would remove the middle column
entitled, ``The period of liability will end,'' because it is redundant
with the provisions in proposed paragraphs (a) through (c).
In existing paragraph (d), in the column in the table entitled
``For the following type of bond,'' BOEM proposes to remove the words
``type of bond'' and replace those words with a colon at the top of the
table so that this paragraph would apply to surety bonds or other
financial assurance, as applicable. Paragraph (d)(1) would also be
revised to include a cross-reference to base financial assurance
submitted under proposed Sec. 550.166(a) (for RUE grants) and proposed
Sec. 550.1011(a) (for pipeline ROW grants). BOEM would also revise
paragraph (d)(2) in the same column to include a reference to
supplemental financial assurance submitted under proposed Sec.
550.166(b) and proposed Sec. 550.1011(d).
The proposed rule would revise paragraph (d) to amend the heading
of the column entitled, ``Your bond will be cancelled,'' to read,
``Your financial assurance will be reduced or cancelled, or your
pledged financial assurance will be returned,'' to clarify that
financial assurance may be reduced or cancelled and pledged financial
assurance, or a portion thereof, may be returned, and to specify other
circumstances under which the Regional Director may cancel supplemental
financial assurance or return pledged financial assurance. While the
existing criteria identify most instances when cancellation of
financial assurance is appropriate, occasionally there are other
circumstances where cancellation would be warranted. The proposed rule
would allow cancellation when BOEM determines, using the criteria set
forth in proposed Sec. 556.901(d), 550.166(b), or 550.1011(d), as
applicable, that a lessee or grant holder no longer needs to provide
supplemental financial assurance for its lease, RUE grant, or pipeline
ROW grant when the operations for which the supplemental financial
assurance was provided ceased prior to accrual of any decommissioning
obligation; or when cancellation of the financial assurance is
appropriate because BOEM determines such financial assurance never
should have been required under the regulations.
The proposed rule would add a new paragraph (d)(3) in the table in
paragraph (d) to address the cancellation of a third-party guarantee.
In the past, parties have expressed concern to BOEM that the
regulations, although they expressly allow for the termination of the
period of liability, do not clearly allow for the cancellation of the
guarantee. This addition would allow BOEM to cancel a third-party
guarantee under the same terms and conditions that apply to
cancellation of other types of financial assurance, as provided in
proposed Sec. 556.906(d)(2).
The proposed rule would revise the introductory text in paragraph
(e) to remove the words ``or release'' because the term ``release'' is
undefined and not used in practice. Likewise, the proposed rule would
remove the words ``or released'' from paragraph (e)(2). No substantive
change is intended; rather BOEM seeks to clarify the meaning of the
existing provision.

[[Page 42156]]

The proposed rule would also revise paragraph (e) to reference RUE
grants and pipeline ROW grants to provide that the Regional Director
may reinstate the financial assurance on the same grounds as currently
provided for reinstatement of lease financial assurance.
Section 556.907 Forfeiture of Bonds or Other Financial Assurance
The proposed rule would replace the words ``security,'' ``surety
bond,'' or ``third-party guarantee'' with ``financial assurance'' and
``surety'' with ``financial assurance provider'' for consistency with
the changes throughout the proposed rule.
The proposed rule would revise the section heading to read,
``Forfeiture of bonds or other financial assurance'' because the use of
``or'' is sufficient in this instance. The proposed rule would revise
paragraph (a)(1) to include surety bonds or other financial assurance
for RUE grants and pipeline ROW grants, in addition to leases, in the
forfeiture provisions of this section. BOEM also proposes to clarify
that the Regional Director may call for forfeiture of all or part of a
surety bond or other form of financial assurance, or demand performance
from a guarantor, if the lessee or grantee covered by the financial
assurance refuses or is unable to comply with any term or condition of
a lease, a RUE grant, or a pipeline ROW grant, as well as any
regulation. Throughout this section, BOEM proposes to add references to
a grant, a grant holder, and grant obligations to implement the
revisions in proposed paragraph (a)(1). BOEM proposes to revise (a)(2)
to replace ``other form of security'' with ``other form of financial
assurance'' for consistent terminology.
BOEM proposes to revise paragraph (b) to include surety bonds ``or
other financial assurance'' so that BOEM may pursue forfeiture of a
surety bond or other financial assurance. The word ``lessee'' would
also be replaced with ``record title holder'' to ensure that co-lessees
are included.
BOEM proposes to revise paragraph (c)(1) to include ``financial
institution holding or providing your financial assurance'' as one of
the parties the Regional Director would notify of a determination to
call for forfeiture because a bank or other financial institution may
hold funds subject to forfeiture.
The proposed rule would revise paragraph (c)(1)(ii) to acknowledge
limitations authorized by Sec. 556.902(a)(3) by more precisely stating
that the Regional Director will use an estimate of the cost of the
corrective action needed to bring a lease into compliance when
determining the amount to be forfeited, subject, in the case of a
guarantee, to any limitation authorized by proposed Sec.
556.902(a)(3).
BOEM proposes to replace existing paragraphs (c)(2)(ii) and (iii)
with a new paragraph (c)(2)(ii) that would specify that to avoid
forfeiture by promising to take corrective action, any financial
assurance provider would have to agree to, and demonstrate that it will
complete the required corrective action to bring the relevant lease
into compliance within the timeframe specified by the Regional
Director, even if the cost of such compliance exceeds the limit of the
financial assurance. The proposed changes make clear that existing
paragraphs (c)(2)(ii) and (iii) apply to all forms of financial
assurance, including the caveat that corrective action must be
completed even if the cost of compliance exceeds the limit of the
financial assurance.
BOEM proposes to revise existing paragraphs (d) and (e)(2) by
replacing ``leases'' with ``lease or grant'' to extend the
applicability of these provisions to include holders of RUE and ROW
grants.
BOEM proposes to revise paragraph (f)(1) to include ``grant'' as
well as lease. BOEM also proposes to revise paragraph (f)(2) to clarify
that BOEM may recover additional costs from a third-party guarantor
only to the extent covered by the guarantee. This would be consistent
with the change made at Sec. 556.902(a)(3) to allow the use of limited
third-party guarantees.
This rulemaking would also reword paragraph (g) for clarity.
In some circumstances, predecessor lessees that have been notified
about the failure of their successor organizations to fulfill their
decommissioning obligations will initiate the requisite decommissioning
activities. In these cases, predecessor lessees or grantees are likely
to incur costs that could be funded from financial assurance posted
with BOEM on behalf of the current lessee. Some of this financial
assurance may be forfeited by the current lessee or by other successor
lessees. BOEM proposes to add a paragraph (h) to make clear that BOEM
may provide funding collected from forfeited financial assurance to
predecessor lessees or grant holders or to third parties taking
corrective actions on the lease or grant.

Part 590--Appeal Procedures

Subpart A--Offshore Minerals Management Appeal Procedures
Section 590.4 How do I file an appeal?
BOEM proposes to add paragraph (c) to specify that, while a demand
for supplemental financial assurance may be appealed to the IBLA, a
stay can only be granted if an appeal surety bond for an amount equal
to the demand is posted. This is intended to mitigate the risk to the
government that, after the appeal is decided, a company will be unable
to perform its obligations because of its financial deterioration
during pendency of the appeal.
Severability
BOEM proposes to include in the final rule that, should any court
hold unlawful and/or set aside portions of this rulemaking, the
remaining portions are severable and therefore should not be remanded
to the agency. The proposed rule contains three main components: (1)
Streamlining requirements for supplemental financial assurance; (2)
Establishing ``P70'' as the relevant estimate for the amount of any
supplemental financial assurance, and (3) Making several, less
significant changes to, among other things. right-of-use and easement
and right-of-way grants and decommissioning accounts. See preamble
sections IV.B through V.C.
These three components operate largely independent of each other:
the first component considers whether a lessee is at risk of default
based on the lessee's credit rating or the proved reserves on the
lease; the second component considers the appropriate requirements in
light of that risk; and the third component addresses several
longstanding and technical matters that do not bear directly on the
first two components. Indeed, these three components are sufficiently
distinct that their severability does not depend on the specifics of
this proposed rule. For example, if, in the final rule, BOEM sets the
appropriate level of supplemental financial assurance at a different P-
value, that decision would remain severable from the threshold
determination regarding whether to collect supplemental financial
assurance and from the other separate technical changes proposed by
this rule.

XI. Additional Comments Solicited by BOEM

In addition to those comment requests stated above, BOEM also
requests comments on the topics below:
<bullet> BOEM is considering the inclusion of offshore joint and
several decommissioning liabilities (of the co-lessees that would
otherwise have exempted the lessee from providing supplemental
financial assurance) in the determination of a proxy credit rating when
these liabilities are ``disproportionately high'' and may encumber that
co-lessee's ability to

[[Page 42157]]

carry out future obligations. BOEM is requesting comments on the
appropriate criteria to determine what constitutes ``disproportionately
high'' offshore liabilities, for example, a ratio of decommissioning
liabilities to the net worth of the co-lessee above X times, or other
financially significant and reasonable criteria on how these
liabilities should best be incorporated into the proxy credit rating
that BOEM will derive.
<bullet> The use of End-of-Life (Years) in the evaluation of asset
value as an alternative to using the decommissioning costs ratio. BOEM
requests comments on the use of a minimum number of years of production
remaining criterion to qualify for an exemption from supplemental
financial assurance. Possibly, End-of-Life criteria could be an
alternative to the 3:1 ratio of value of reserves to decommissioning
costs.
<bullet> The consideration of bond issuance ratings, in addition to
issuer credit ratings, in determining the financial risk posed by
lessees and grant holders. BOEM also invites comments on determining an
appropriate threshold for bond issuance ratings, such as general
unsecured debt ratings.
<bullet> Should BOEM exclude third-party guarantors from the
requirement of Sec. 556.902(a)(3) that guarantees must ``guarantee
compliance with all obligations of all lessees, operating rights,
owners and operators on the lease'' in addition to allowing a third-
party guarantee to be limited in amount?

XII. Procedural Matters

A. Executive Order 12866: Regulatory Planning and Review, as Amended by
Executive Order 14094--Modernizing Regulatory Review, and Executive
Order 13563: Improving Regulation and Regulatory Review

Executive Order 12866, as amend by Executive Order 14094 provides
that the Office of Information and Regulatory Affairs (OIRA) in OMB
will review all significant rules. OIRA has reviewed this proposed rule
and determined that it is a significant action under Executive Order
12866, as amend by Executive Order 14094 Sec 3 (f)(1). This rulemaking
will result in an annual effect on the economy of $200 million or more
(adjusted every 3 years by the Administrator of OIRA for changes in
gross domestic product); or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, territorial, or
tribal governments or communities.
Executive Order 13563 reaffirms the principles of Executive Order
12866, as amend by Executive Order 14094, while calling for
improvements in the Nation's regulatory system to promote
predictability and reduce uncertainty, and to use the best, most
innovative, and least burdensome tools for achieving regulatory ends.
Executive Order 13563 directs agencies to consider regulatory
approaches that reduce burdens and maintain flexibility and freedom of
choice for the public where these approaches are relevant, feasible,
and consistent with regulatory objectives. BOEM has developed this
proposed rule in a manner consistent with these requirements.
BOEM's proposed changes are estimated to increase the private cost
to lessees in the form of bonding or other financial assurance
premiums. BOEM has drafted an initial regulatory impact analysis (IRIA)
detailing the estimated impacts of this proposed rule. The IRIA
reflects both monetized and non-monetized impacts; the costs and
benefits of the non-monetized impacts are discussed qualitatively in
the document. BOEM's IRIA is available in the public docket for this
rulemaking.
BOEM expects this proposed rule may increase the total amount of
financial assurance, increasing the aggregate private cost to lessees
of financial assurance premiums. The table below summarizes BOEM's
estimate of the cost in financial assurance premiums paid by lessees
over a 20-year time horizon if this proposed rule is finalized less the
premiums associated with BOEM's existing current financial assurance
portfolio. Additional information on the estimated transfers, costs,
and benefits can be found in the IRIA posted in the public docket for
this proposed rule.

Total Estimated Increase in Bonding Financial Assurance Premiums
Associated With BOEM's Proposed Amendments
[2022-2041, 2021$ millions]
------------------------------------------------------------------------
Discounted at Discounted at
2022-2041 3% 7%
------------------------------------------------------------------------
Total Compliance Cost................... $4,867 $3,379
Annualized Compliance Cost.............. 327.1 318.9
------------------------------------------------------------------------

B. Regulatory Flexibility Act (RFA)

The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires agencies
to analyze the economic impact of regulations when a significant
economic impact on a substantial number of small entities is likely and
to consider regulatory alternatives that will achieve the agency's
goals while minimizing the burden on small entities. BOEM has provided
an initial regulatory flexibility analysis (IRFA), which assesses the
impact of this proposed rule on small entities. The IRFA is available
in the public docket for this rulemaking.
As defined by the Small Business Administration (SBA), a small
entity is one that is ``independently owned and operated and which is
not dominant in its field of operation.'' What characterizes a small
business varies from industry to industry. The proposed rule would
affect OCS lessees and RUE grant holders and pipeline ROW grant holders
on the OCS. The analysis shows that this includes roughly 536 companies
with ownership interests in OCS leases and grants. Entities that would
operate under this proposed rule are classified primarily under North
American Industry Classification System (NAICS) codes 211120 (Crude
Petroleum Extraction), 211130 (Natural Gas Extraction), and 486110
(Pipeline Transportation of Crude Oil and Natural Gas). For NAICS
classifications 211120 and 211130, the SBA defines a small business as
one with fewer than 1,250 employees; for NAICS code 486110, a business
with fewer than 1,500 employees.
Based on these criteria, approximately 407 (76 percent) of the
businesses operating on the OCS subject to this proposed rule are
considered small; the remaining businesses are considered large
entities. All of the operating businesses meeting the SBA ``small
business'' classification are potentially impacted; therefore, BOEM
expects that the proposed rule would affect a substantial number of
small entities. Small and large oil and gas companies have different
business models. Large

[[Page 42158]]

oil and gas companies tend to focus their business efforts on new
exploration and development projects. Such projects tend to be large in
scale, low in frequency, and focused on deep water operations; as a
result, the rate of their oil and gas reserve depletion is low. In
contrast, most small oil and gas companies tend to focus on late-stage
oil and gas production intended to maximize the residual output from
established facilities; as a result, the rate of their oil and gas
reserve depletion is high. For this reason, smaller companies tend to
operate large numbers of old facilities, which are likely to require
decommissioning sooner than newer facilities. Accordingly, the
prospective decommissioning costs of small oil companies are likely to
be high relative to their net tangible assets, making these companies
disproportionately susceptible to any change in decommissioning costs
and the associated costs of providing supplemental financial assurance.
Because BOEM's financial assurance program is intended to ensure that
all current lessees meet their obligations, and thereby avoid the need
for the taxpayer to assume these obligations in the event of default,
any action taken by BOEM to ensure financial responsibility of lessees
would necessarily significantly impact smaller companies.
BOEM estimated the annualized increase in private costs to lessees
and allocated those costs to small and large entities based on their
decommissioning liabilities. BOEM's analysis concludes that the
proposed regulatory changes could cause small companies to incur $252.6
million (at a 7 percent discount rate) in annualized compliance costs.
BOEM recognizes that there will be incremental cost burdens to most
affected small entities. BOEM seeks specific comment and feedback from
affected small entities on the costs associated with this rulemaking.
Additional information about these conclusions can be found in the IRFA
for this proposed rule.

Estimated Impact in Private Cost for Small Lessees
[2021, $millions]
------------------------------------------------------------------------
Discounted at Discounted at
2021-2041 3% 7%
------------------------------------------------------------------------
Total Compliance Cost................... $3,820 $2,676
Annualized Compliance Cost.............. 256.8 252.6
------------------------------------------------------------------------

The proposed changes are designed to balance the risk of non-
performance with the costs and disincentives to production that are
associated with the requirement to provide supplemental financial
assurance. The IRIA and the IRFA include three regulatory alternatives
which were considered and not selected by BOEM. This section walks
through the alternatives (which are discussed in more detail in the
IRIA) and discusses how these alternatives impact small businesses and
why they were not selected.
Regulatory Alternatives
There are three regulatory alternatives to the proposed action
analyzed in the IRIA:
1. No Action Alternative: Continue the policies of partial
implementation of NTL No. 2016-N01.
2. More Stringent Regulatory Alternative: Full implementation of
NTL No. 2016-N01.
3. Less Stringent Regulatory Alternative: Lower Tier 1 \16\ cutoff
to BB- and include a waiver for lessees with Tier 1 predecessor
lessees.
---------------------------------------------------------------------------

\16\ The IRIA alternatives describe lessees as Tier 1 or Tier 2
depending on whether BOEM would require the lessee to provide
supplemental financial assurance. Tier 1 lessees are considered low
risk and would not be required to provide supplemental financial
assurance, while Tier 2 lessees are considered high risk and would
be required to do so.
---------------------------------------------------------------------------

Under the no action alternative, BOEM would continue to partially
implement NTL No. 2016-N01, which only requires high-risk, Tier 2
lessees (lessees with a credit rating below BB-) to provide bonds or
other financial assurance and only for their sole liability
properties.\17\ Only Tier 2 lessees that do not have another lessee in
the chain of title would be required to provide supplemental financial
assurance. This alternative differs from the proposed rule in that the
proposed rule would change the Tier 2 demarcation to those lessees with
ratings below BBB-. The proposed rule also would require supplemental
financial assurance for Tier 2 lessees who do not have a Tier 1 (low
risk) co-lessee, grant holder, or co-grant-holder regardless of the
presence of any predecessor lessee or grantee, even a Tier 1
predecessor. This alternative is more fully described in the IRIA as
the baseline.
---------------------------------------------------------------------------

\17\ This does not fully reflect the current policy, and
therefore is not literally a ``no action'' alternative: BOEM
broadened the scope of its financial assurance requirement relative
to a partial implementation of NTL No. 2016-N01 last year. See BOEM
Expands Financial Assurance Efforts [verbar] Bureau of Ocean Energy
Management, <a href="https://www.boem.gov/newsroom/notes-stakeholders/boem-expands-financial-assurance-efforts">https://www.boem.gov/newsroom/notes-stakeholders/boem-expands-financial-assurance-efforts</a>. However, there have been
relatively few companies affected by the new policy to date, and it
is too recent for this policy change to have had a discernible
impact on financial assurance demands; therefore, the alternative
used in the IRIA best estimates the baseline.
---------------------------------------------------------------------------

Under the more stringent alternative, BOEM would fully implement
NTL No. 2016-N01. The NTL included guidance on how BOEM would evaluate
the five criteria for determining a company's ability to meet its OCS
obligations for self-insurance, which are described in more detail in
the IRIA. The result of NTL No. 2016-N01, as written, was that not even
the subsidiaries of highly rated companies could provide sufficient
financial assurance for the full amount of their OCS liabilities. More
information on the more stringent alternative is included in the IRIA.
Under the less stringent alternative, BOEM analyzed an alternative
that would maintain the baseline threshold demarcation between Tier 1
and Tier 2 companies at BB-. The less stringent option also would
include the baseline's consideration of predecessor lessees but would
require that at least one predecessor lessee be a Tier 1 company in
order for the current lessee to avoid having to provide supplemental
financial assurance. This alternative would require Tier 2 lessees who
have Tier 2 predecessor lessees to provide supplemental financial
assurance; they would not be required to do so under the baseline. As
opposed to the proposed rule, lessees with a BB-, BB, or BB+ rating
would not be required to provide supplemental financial assurance under
this alternative. Further, under this alternative, any Tier 2 lessee
with a Tier 1 lessee in the chain of title would not be required to
provide supplemental financial assurance, unlike under the proposed
rule. BOEM fully outlines this alternative in the IRIA.

[[Page 42159]]

Discussion of Regulatory Alternatives
Under the no action alternative, the current level of financial
risk would remain the same. However, BOEM reviewed NTL No. 2016-N01
after several recent bankruptcies and determined that changes were
necessary to comprehensively identify, prioritize, and manage the
health, safety, and environmental risks associated with industry
activities on the OCS.
In its IRIA analysis, BOEM estimates that implementation of the
more stringent alternative would significantly increase the compliance
cost over the baseline and over the proposed rule. BOEM acknowledges
that there could be some additional risk reduction by bonding a greater
number of liabilities, but, given joint and several liability with
multiple co-lessees and predecessor lessees, the relative risk
reduction from this alternative would be very small. Although the more
stringent option would reduce the risk that the U.S. Government might
have to assume performance of the lessee's obligations, the $647
million annualized compliance cost of this alternative could be a
significant cost burden on the U.S. offshore oil and gas industry.
The less stringent alternative would differ in two problematic ways
from the proposed action. First, the less stringent option would
maintain the baseline demarcation between Tier 1 and Tier 2, which is
lower than that of the proposed rule. This would not meaningfully help
to mitigate default risk to the taxpayer on decommissioning
liabilities. Second, the less stringent alternative would not require
financial assurance should a Tier 1 predecessor lessee be in the chain
of title. Although the less stringent alternative would result in lower
bonding costs for industry and small businesses than the proposed rule,
consideration of predecessor lessees and grantees encourages moral
hazard by incentivizing current lessees to pass risk to predecessors
rather than proactively prepare for decommissioning and related
obligations. Therefore, BOEM did not select this alternative. See the
IRIA for more detailed information about the alternative bonding and
risk profiles.
BOEM decided against the less stringent alternative. Instead, BOEM
will require supplemental financial assurance from all financially weak
lessees that lack either financially strong co-lessees or sufficiently
valuable proved oil and gas reserves to attract a buyer if needed.
Eschewing reliance on predecessor lessees ensures that financial
responsibility for decommissioning rests with current lessees and
encourages those lessees to financially prepare for decommissioning
costs, rather than pass those expenses to predecessor lessees and
possibly the taxpayer. BOEM finds the less stringent alternative would
not adequately reduce default risk and would not require all lessees to
fully internalize the cost of decommissioning. This alternative is also
discussed in more detail below and in the IRIA.
As part of this less stringent alternative, potential adverse
impacts to small businesses could be reduced if BOEM kept the Tier 2
threshold at BB- relative to the proposed rule, which increases such
threshold to BBB- to match the investment grade standard. BOEM has
determined that the use of an investment grade standard for waiving
supplemental financial assurance is the most appropriate threshold
because this approach minimizes credit default risk to the taxpayer
without overburdening offshore companies with the cost of providing
financial assurance in low credit risk scenarios.
BOEM finds that the less stringent alternative would slightly
increase the likelihood that decommissioning costs would be borne by
the taxpayer as lowering the floor of Tier 1 would expand the number of
companies not subject to financial assurance to include those with
higher 1-year default rates.
Although credit ratings are objective criteria that are intended to
accurately reflect the risk of default and the potential that the
Federal Government could be forced to undertake performance obligations
of OCS lessees, BOEM recognizes that the proportion of small companies
adversely affected by the proposed rule would be higher than that of
large companies. However, this disproportionate effect on small
companies is not attributable to the proposed rule, but results from
the need to ensure that decommissioning obligations are fulfilled.
This less stringent alternative also relies on predecessor lessees
and grantees when determining if and how much supplemental financial
assurance will be required, which BOEM's proposed rule does not. By not
allowing reliance on predecessors to excuse supplemental financial
assurance, BOEM requires that all lessees take into account the full
cost of decommissioning as they will have provided financial assurance
that prevents the need to turn to predecessor lessees. Any entity that
owned a lease at any point in time is jointly and severally liable for
the costs of decommissioning facilities on that lease during their
tenure, along with the current and prior owners, until such time as the
facility has been permanently decommissioned. Therefore, if the current
lessee is unable or unwilling to decommission it at the end of its
useful life, BSEE can order the prior lessee to complete the
decommissioning obligations for facilities that existed on the lease at
the time of ownership. If BOEM were to take into account the financial
capacity of predecessor lessees in determining the amount of
supplemental financial assurance required of a current owner, the
financial burden on small companies would be substantially reduced
compared to that resulting from the proposed rule, because a much
smaller number of them would be required to post supplemental financial
assurance. Given that the required amount of supplemental financial
assurance relative to the net assets of such companies is often
substantial, and considering that the premiums on the underlying bonds
can be significant relative to the net income of such companies, taking
into account predecessor lessee strength could substantially reduce the
potential adverse impacts of requiring financial assurance from small
business.
Though allowing the presence of a predecessor lessee or grantee to
change financial assurance requirements would reduce the potential
adverse impacts to small businesses, BOEM does not recommend waiving
supplemental financial assurance from current lessees based only on the
existence of financially viable predecessor lessees. Financial
consideration for the decommissioning liability has already been
discounted from the asset purchase price paid by the current lessee. As
a corollary, a lessee knows that BOEM may demand supplemental financial
assurance from it to cover its obligations, including decommissioning
obligations for which it shares liability with a predecessor lessee.
Armed with this knowledge, all lessees can plan ahead and include the
possible need to provide supplemental financial assurance in their
business plans. Therefore, there is no need to insulate current lessees
from supplemental financial assurance demands by relying on the
financial ability of strong predecessor lessees. Along the same lines,
allowing current lessees not to provide supplemental financial
assurance based on a predecessor lessee's strength may incentivize
current lessees to not consider decommissioning costs in their business
decisions or to take risks they would not have otherwise taken if they
had financial resources at risk in the event

[[Page 42160]]

of non-performance. This ``moral hazard'' could distort the market for
lease transfers by allowing a buyer and seller to conduct a transaction
without calculating in end-of-life decommissioning cash outflows, the
buyer relying on end-of-life bankruptcy instead of decommissioning, and
may ultimately result in predecessor lessees and grantees having to
perform decommissioning for which they had not planned.
While waiving supplemental financial assurance for companies having
financially viable predecessor lessees and grantees would mitigate the
impact the proposed rule on small businesses, BOEM has determined that
this benefit would not be acceptable given that, under these
circumstances, lessees may not always fully internalize the cost of
their decommissioning obligations into their operations as they can
rely on the predecessor lessee if needed and avoid having to pay
financial assurance premiums. Additional moral hazard implications of
implementing such a retroactive policy are described in more detail in
the IRIA. Reliance on predecessor lessees would likely also cause them
to require the buyer provide them financial assurance prior to selling
their leases to new owners (which would also result in a cost for small
businesses). For these reasons, BOEM has determined that any waiver of
financial responsibility based on business relationships should be
limited to situations where the liable party voluntarily becomes a
current co-lessee or co-grantee and therefore, knowingly assumes its
liabilities.

C. Small Business Regulatory Enforcement Fairness Act

This proposed rule would revise the financial assurance
requirements for OCS lessees and grant holders and would require
supplemental financial assurance where the risk is highest. BOEM's
proposed changes would: (1) Modify the evaluation process for requiring
additional security, (2) Simplify and strengthen the evaluation
criteria, and (3) Remove restrictive provisions for third-party
guarantees and decommissioning accounts. These proposed changes reflect
an interest in relying on current lessees and grant holders to provide
required financial assurance, aligning the evaluation criteria with
banking and finance industry practices, providing greater flexibility
for industry, and protecting taxpayers from exposure to the
consequences of noncompliance with DOI regulations and OCS lease
obligations, particularly the nonperformance of decommissioning
obligations.
This proposed rule is a major rule under 5 U.S.C. 804(2), the Small
Business Regulatory Enforcement Fairness Act, because implementation of
this rulemaking will have an annual effect on the economy of $100
million or more.
For more information on the small business impacts, see the IRFA
analysis and the discussion in section XII.B of this preamble. Small
businesses may send comments on the actions of Federal employees who
enforce or otherwise determine compliance with Federal regulations to
the Small Business and Agriculture Regulatory Enforcement Ombudsman,
and to the Regional Small Business Regulatory Fairness Board. The
Ombudsman evaluates these actions annually and rates each agency's
responsiveness to small business. If you wish to comment on actions by
employees of BSEE or BOEM, call 1-888-REG-FAIR (1-888-734-3247).

D. Unfunded Mandates Reform Act (UMRA)

This proposed rule does not impose an unfunded mandate on State,
local, or tribal governments of $85 million per year.\18\ This proposed
rule does not have a significant or unique effect on State, local, or
tribal governments. Moreover, the proposed rule would not have
disproportionate budgetary effects on these governments.
---------------------------------------------------------------------------

\18\ 2021 values are available here: <a href="https://crsreports.congress.gov/product/pdf/R/R40957">https://crsreports.congress.gov/product/pdf/R/R40957</a>.
---------------------------------------------------------------------------

BOEM has determined that this proposed rule would impose costs on
the private sector of more than $182 million in a single year. The IRIA
includes information on the costs of the proposed rule and its
alternatives. The UMRA (2 U.S.C. 1531 et seq.) requires BOEM to perform
a cost-benefit assessment and to provide the legal authority for the
rulemaking, a description of the macro-economic effects, and a summary
of the State, local, or tribal government concerns. These items are
described in more detail in the IRIA.
Because all of the anticipated private sector expenditures that may
result from the proposed rule are analyzed in the IRIA and IRFA (i.e.,
expenditures of the offshore oil and gas industry), these documents
satisfy the UMRA requirement to estimate any disproportionate budgetary
effects of the proposed rule on a particular segment of the private
sector. As explained in the IRIA, the rulemaking is anticipated to have
annualized net estimated compliance costs of $319 million annually (7
percent discounting) but provides strengthened financial assurance to
protect taxpayers from the costs of decommissioning offshore
infrastructure. Under the proposed action, BOEM will evaluate the
financial strength of OCS lessees and grant holders that could affect
their ability to meet OCS obligations. The IRIA outlines both a less
stringent and more stringent regulatory alternative. The more stringent
option was not selected as the added benefits did not justify the
increased compliance burden. BOEM's less stringent option includes a
lower credit rating of BB- to be classified as low risk and allows
predecessor lessee or grantee strength to be included in the financial
assurance evaluation. This alternative was not selected as BB rated
companies are considered speculative and below investment grade and
relying on predecessor lessees and grantees introduces a moral hazard
and does not require each current lessee to internalize its
decommissioning obligations.

E. Executive Order 12630: Governmental Actions and Interference With
Constitutionally Protected Property Rights

This proposed rule does not affect a taking of private property or
otherwise have takings implications under Executive Order 12630.
Therefore, a takings implication assessment is not required.

F. Executive Order 13132: Federalism

Under the criteria in section 1 of Executive Order 13132, this
proposed rule does not have sufficient federalism implications to
warrant the preparation of a federalism summary impact statement.
Therefore, a federalism summary impact statement is not required.

G. Executive Order 12988: Civil Justice Reform

This proposed rule complies with the requirements of Executive
Order 12988. Specifically, this proposed rule:
(1) Meets the criteria of section 3(a) requiring that all
regulations be reviewed to eliminate errors and ambiguity and be
written to minimize litigation; and
(2) Meets the criteria of section 3(b)(2) requiring that all
regulations be written in clear language and contain clear legal
standards.

H. Executive Order 13175: Consultation and Coordination With Indian
Tribal Governments

Executive Order 13175 defines policies that have tribal
implications as

[[Page 42161]]

regulations, legislative comments or proposed legislation, and other
policy statements or actions that will or may have a substantial direct
effect on one or more Indian Tribes, or on the relationship between the
Federal Government and one or more Indian Tribes.
BOEM strives to strengthen its government-to-government
relationships with American Indian and Alaska Native Tribes through a
commitment to consultation with those tribes and recognition of their
right to self-governance and tribal sovereignty. The DOI's consultation
policy for Tribal Nations, as described in Departmental Manual part 512
chapter 4, expands on the above definition from E.O. 13175, and defines
a Departmental Action with Tribal Implications as--
``[a]ny regulation, rulemaking, policy, guidance, legislative
proposal, plan, programmatic or operational activity, or grant or
funding formula change that may have a substantial direct effect on a
Tribe in matters including but not limited to: (1) Tribal cultural
practices; lands; treaty rights; resources; ancestral lands; sacred
sites, including sites that are submerged; and lands Tribes were
removed from, or access to traditional areas of cultural or religious
importance on Federally managed lands and waters; (2) the ability of a
Tribe to govern or provide services to its members; (3) a Tribe's
formal relationship with the Department, be it nation-to-nation or
beneficiary-to-trustee; or, (4) any action planned by a non-federal
entity that involves funding, approval, or other final agency action
provided by the Department, unless the Tribe is a party to the action.
Substantial direct effects on Tribes may include, but are not limited
to, effects as shown in the Consensus-Seeking Model (Figure 1).'' 512
DM 4.3.B. (November 30, 2022). DOI's procedures for consultation with
Tribal Nations also provide that:
``Bureaus/Offices must invite Indian Tribes early in the planning
process to consult whenever a Departmental plan or action with Tribal
Implications arises. Bureaus/Offices should operate under the
assumption that all actions with land or resource use or resource
impacts may have Tribal implications and should extend consultation
invitations accordingly.'' 512 DM 5.4. (November 30, 2022).
Additionally, we are also respectful of our responsibilities for
consultation with Alaska Native Claims Settlement Act (ANCSA)
Corporations. The DOI's consultation policy defines a Departmental
Action with ANCSA Corporation Implications as--

``[a]ny regulation, rulemaking, policy, guidance, legislative
proposal, grant funding formula changes, or operational activity
that may have a substantial direct effect on an ANCSA Corporation,
including but not limited to: (1) any activity that may
substantially affect land, water, areas, or resources owned or
selected by ANCSA Corporation; (2) any activity that may impact the
ability of an ANCSA Corporation to participate in Departmental
programs for which it qualifies; (3) any activity that may impact
the ability of ANCSA shareholders to access and use ANCSA lands,
water areas, or resources; (4) any activity that may impact the
ability of Alaska Native people to maintain their traditional way of
life and subsistence practices on ANCSA Corporation lands, waters,
or adjacent federal lands; or, (5) any activity that may have a
direct effect on the ability of an ANCSA Corporation to fulfil the
purposes for which it was established under ANCSA.'' 512 DM 6.3.C.
(November 30, 2022).

DOI consultation procedures for ANSCA corporations also provides:
``Bureaus and Offices should operate under the assumption that all
actions with land or resource use or resource impacts may have ANCSA
Corporation implications and should extend consultation invitations
accordingly. When ANCSA Corporations indicate that there is substantial
and direct effect of the Departmental Action with ANCSA Corporation
Implications, the Department must engage in consultation.'' 512 DM
7.4.A. (November 30, 2022).
This rulemaking proposes to modify the criteria for determining
whether oil, gas, and/or sulfur lessees, RUE grant holders, and
pipeline ROW grant holders may be required to provide bonds or other
financial assurance, above the current regulatorily prescribed base
bond amounts, to ensure compliance with their OCSLA obligations. It
also proposes to remove certain restrictive provisions for third-party
guarantees and decommissioning accounts and would add new criteria
under which a bond, or third-party guarantee, that was provided as
supplemental financial assurance, may be cancelled. Additionally, this
proposed rule would clarify bonding requirements for RUEs serving
Federal leases.
We have evaluated this proposed rule under the DOI's consultation
policy and under the criteria in Executive Order 13175, and have
determined that, while this rulemaking will likely not cause any
substantial direct effects on environmental or cultural resources,
there may be resource or economic impacts to one or more federally
recognized Indian tribes or ANCSA Corporations as a result of this
proposed rule.
In developing the 2020 Joint Notice of Proposed Rulemaking (85 FR
65924), BOEM determined that the rulemaking would have no substantial
direct effects on environmental or cultural resources. However, BOEM
determined there was the potential for economic impacts to one Tribal
Nation and one ANCSA Corporation. In August 2018, BOEM invited
consultation with this Tribal Nation and the ANCSA Corporation. BOEM
consulted with the Tribal Nation in September 2018. The ANCSA
Corporation did not request to consult. At that time, BOEM discussed
the possible impacts from the 2020 proposal, as documented in the
memorandum to the docket titled ``2018 Outreach on the Financial
Assurance Proposal.''
On March 31, 2023, BOEM sent letters to all Tribes and ANCSA
Corporations to ensure they are aware of this preparation for a new
proposed rulemaking, to answer any immediate questions they may have,
and to invite formal consultation if they would like to consult. To
date, only one Tribe has requested consultation, however we will
formally consult with any Tribes or ANCSA corporations at any stage in
this rulemaking as it advances if consultation is requested.

I. Paperwork Reduction Act (PRA)

This proposed rule references existing information collections
(ICs) previously approved by OMB and adds new IC requirements for BOEM
regulations that require OMB review and approval under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.). Therefore, an
information collection request for BOEM is being submitted to OMB for
review and approval. The ICs related to this rulemaking concern the
requirements under 30 CFR parts 550 and 556. BOEM may not conduct or
sponsor, and you are not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
OMB has reviewed and approved the information collection
requirements associated with risk management and financial assurance
for OCS lease and grant obligations and assigned the following OMB
control numbers:
<bullet> 1010-0006 (BOEM), ``Leasing of Sulfur or Oil and Gas in
the Outer Continental Shelf (30 CFR parts 550, Subpart J; 556, Subparts
A through I, and K; and 560, Subparts B and E) (expires 03/31/2026),
and
<bullet> 1010-0114 (BOEM), ``30 CFR 550, Subpart A, General, and
Subpart K, Oil and Gas Production Requirements (expires 05/31/2026).

[[Page 42162]]

This proposed rule would modify collections of information under 30
CFR part 550, subparts A and J, and 30 CFR part 556, subpart I,
concerning financial assurance requirements (such as bonding) for
leases, pipeline ROW grants, and RUE grants. OMB has reviewed and
approved the information collection requirements associated with
financial assurance regulations for leases (30 CFR 556.900 through
907), pipeline ROW grants (30 CFR 550.1011), and RUE grants (30 CFR
550.160 and 550.166).
BOEM estimates that the number of information collection burden
hours for the proposed rule overall are close to the same as for the
existing regulatory framework. If this proposed rule becomes final and
effective, the new and changed provisions

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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.