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Rule2024-08309

Risk Management and Financial Assurance for OCS Lease and Grant Obligations

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Published

April 24, 2024

Effective

June 24, 2024

Issuing agencies

Interior DepartmentOcean Energy Management Bureau

Abstract

The Department of the Interior (the Department or DOI), acting through the Bureau of Ocean Energy Management (BOEM), is amending its risk management and financial assurance regulations. This final rule revises 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 are required to provide financial assurance above the current minimum bonding levels to ensure compliance with their Outer Continental Shelf Lands Act (OCSLA) obligations. This final rule streamlines the criteria for evaluating the financial health of lessees and grantees, codifies the use of the Bureau of Safety and Environmental Enforcement's (BSEE) probabilistic estimates of decommissioning costs in setting the level of demands for supplemental financial assurance, removes restrictive provisions for third-party guarantees and decommissioning accounts, adds new criteria for cancelling supplemental financial assurance, and clarifies bonding requirements for RUEs serving Federal leases. BOEM estimates that a total of $6.9 billion in new supplemental financial assurance will be required from lessees and grant holders under this final rule to cover potential costs of decommissioning activities. This final rule significantly increases the amount of financial assurance available to the U.S. Government in the case of a lessee default and meaningfully reduces the risk to the government and consequently to the U.S. taxpayer. This final rulemaking does not apply to renewable energy activities.

Full Text

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<title>Federal Register, Volume 89 Issue 80 (Wednesday, April 24, 2024)</title>
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[Federal Register Volume 89, Number 80 (Wednesday, April 24, 2024)]
[Rules and Regulations]
[Pages 31544-31599]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-08309]

[[Page 31543]]

Vol. 89

Wednesday,

No. 80

April 24, 2024

Part V

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; Final Rule

Federal Register / Vol. 89 , No. 80 / Wednesday, April 24, 2024 /
Rules and Regulations

[[Page 31544]]

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DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

30 CFR Parts 550, 556, and 590

[Docket No. BOEM-2023-0027]
RIN 1010-AE14

Risk Management and Financial Assurance for OCS Lease and Grant
Obligations

AGENCY: Bureau of Ocean Energy Management, Interior.

ACTION: Final rule.

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SUMMARY: The Department of the Interior (the Department or DOI), acting
through the Bureau of Ocean Energy Management (BOEM), is amending its
risk management and financial assurance regulations. This final rule
revises 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 are required to provide financial assurance
above the current minimum bonding levels to ensure compliance with
their Outer Continental Shelf Lands Act (OCSLA) obligations. This final
rule streamlines the criteria for evaluating the financial health of
lessees and grantees, codifies the use of the Bureau of Safety and
Environmental Enforcement's (BSEE) probabilistic estimates of
decommissioning costs in setting the level of demands for supplemental
financial assurance, removes restrictive provisions for third-party
guarantees and decommissioning accounts, adds new criteria for
cancelling supplemental financial assurance, and clarifies bonding
requirements for RUEs serving Federal leases. BOEM estimates that a
total of $6.9 billion in new supplemental financial assurance will be
required from lessees and grant holders under this final rule to cover
potential costs of decommissioning activities. This final rule
significantly increases the amount of financial assurance available to
the U.S. Government in the case of a lessee default and meaningfully
reduces the risk to the government and consequently to the U.S.
taxpayer. This final rulemaking does not apply to renewable energy
activities.

DATES: This final rule is effective on June 24, 2024. You may make
comments on the information collection (IC) burden in this rulemaking
and the Office of Management and Budget (OMB) and BOEM must receive
such comments on or before May 24, 2024. The IC burden comment
opportunity does not affect the final rule effective date.

ADDRESSES: BOEM has established a docket for this action under Docket
No. BOEM-2023-0027. All documents in the docket are listed on the
<a href="https://www.regulations.gov">https://www.regulations.gov</a> website and can be found by entering the
Docket No. in the ``Enter Keyword or ID'' search box and clicking
``search''.
You may submit comments on the IC to OMB's desk officer for the
Department of the Interior through <a href="https://www.reginfo.gov/public/do/PRAMain">https://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--Open for Public Comments,'' 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 final rule, and
clicking the ``Comment'' button at the right margin. Additionally, you
may use the search function to locate the IC request related to the
rule on the main web page. Please provide a copy of your comments to
the Information Collection Clearance Officer, Office of Regulations,
BOEM, Attention: Anna Atkinson, 45600 Woodland Road, Sterling, Virginia
20166; or by email to <a href="/cdn-cgi/l/email-protection#e3828d8d82cd8297888a8d908c8da3818c868ecd848c95">[email&#160;protected]</a>. Please reference OMB
Control Number 1010-0006 in the subject line of your comments.

FOR FURTHER INFORMATION CONTACT: Kelley Spence, Office of Regulations,
BOEM, 45600 Woodland Road, Sterling, Virginia 20166, at email address
<a href="/cdn-cgi/l/email-protection#b0fbd5dcdcd5c99ee3c0d5ded3d5f0d2dfd5dd9ed7dfc6">[email&#160;protected]</a> or at telephone number (984) 298-7345; and Karen
Thundiyil, Chief, Office of Regulations, BOEM, 1849 C Street NW,
Washington, DC 20240, at email address <a href="/cdn-cgi/l/email-protection#ca81abb8afa4e49ea2bfa4aea3b3a3a68aa8a5afa7e4ada5bc">[email&#160;protected]</a> or at
telephone number (202) 742-0970. Individuals in the United States who
are deaf, deafblind, hard of hearing, or have a speech disability may
dial 711 (TTY, TDD, or TeleBraille) to access telecommunications relay
services for contacting the contacts listed in this section. These
services are available 24 hours a day, 7 days a week, to leave a
message or question with the above individual. You will receive a reply
during normal business hours. Individuals outside the United States
should use the relay services offered within their country to make
international calls to the point-of-contact in the United States.

SUPPLEMENTARY INFORMATION: Preamble acronyms and abbreviations.
Multiple acronyms are included in this preamble. While this list may
not be exhaustive, to ease the reading of this preamble and for
reference purposes, BOEM explains the following acronyms here:

ANCSA Alaska Native Claims Settlement Act
BOEM Bureau of Ocean Energy Management
BSEE Bureau of Safety and Environmental Enforcement
CFR Code of Federal Regulations
CRA Congressional Review Act
DOI Department of the Interior (or Department)
E.O. Executive Order
FDIC Federal Deposit Insurance Corporation
FR Federal Register
FSLIC Federal Savings and Loan Insurance Corporation
GAO Government Accountability Office
GOMESA Gulf of Mexico Energy Security Act of 2006
IBLA Interior Board of Land Appeals
IC Information Collection
INC Incident of Non-Compliance
IRFA Initial Regulatory Flexibility Analysis
mmboe Million barrels of oil equivalents
MMS Minerals Management Service
NAICS North American Industry Classification System
NEPA National Environmental Policy Act
NPRM Notice of Proposed Rulemaking
NRSRO Nationally Recognized Statistical Rating Organization
NTL Notice to Lessees
OCS Outer Continental Shelf
OCSLA Outer Continental Shelf Lands Act
OIRA Office of Information and Regulatory Affairs (a component of
OMB)
OMB Office of Management and Budget
ONRR Office of Natural Resources Revenue
PRA Paperwork Reduction Act
RIA Regulatory Impact Analysis
RFA Regulatory Flexibility Act
RUE Right-of-Use and Easement
ROW Right-of-Way
SBA Small Business Administration
SBREFA Small Business Regulatory Enforcement Fairness Act
SEC Securities and Exchange Commission
S&P Standard and Poor's
UMRA Unfunded Mandates Reform Act
U.S.C. United States Code
U.S. EPA United States Environmental Protection Agency

Background information. On June 29, 2023, the Department proposed
revisions to the regulations for risk management and financial
assurance for Outer Continental Shelf (OCS) lease and grant
obligations. The comments received regarding the proposed rule, some of
which resulted in regulatory changes, and their corresponding responses
are summarized in this preamble. A detailed summary of all public
comments on the proposal and their corresponding responses are
available in the memorandum titled,

[[Page 31545]]

Risk Management and Financial Assurance for OCS Lease and Grant
Obligations: Response to Public Comments Received on the June 29, 2023,
Notice of Proposed Rulemaking in the docket for this rulemaking (Docket
No. BOEM-2023-0027). A ``track changes'' version of the regulatory
language that identifies the changes in this action compared to the
current regulations is also available in the docket.
Organization of this document. The information in this preamble is
organized as follows:

I. General Information

A. Executive Summary
1. Purpose of This Regulatory Action
2. Summary of Major Provisions
3. Costs and Benefits
B. Does this action apply to me?
C. Where can I get a copy of this document and other related
information?
II. Background
A. BOEM Statutory and Regulatory Authority and Responsibilities
B. History of Bonding Regulations and Guidance
C. Purpose of Rulemaking
D. Summary of the June 29, 2023, Proposed Rulemaking
III. Summary of the Final Rule and Public Comments
A. Revisions to BOEM Supplemental Financial Assurance
Requirements
1. Leases
a. Evaluation of Co-Lessees
b. Evaluation Criteria
2. Right-of-Use and Easement Grants
a. Base Financial Assurance
b. Area-Wide Financial Assurance
c. Supplemental Financial Assurance
3. Pipeline Right-of-Way Grants
B. Use of BSEE's Probabilistic Estimates for Determining
Decommissioning Costs
C. Revisions to Other Types of Supplemental Financial Assurance
1. Third-Party Guarantees
2. Decommissioning Accounts
3. Transfers of Lease Interests to Other Lessees or Operating
Rights Holders
D. Evaluation Methodology
1. Credit Ratings
a. Use of an ``Issuer Credit Rating''
b. Credit Rating Threshold
2. Proxy Credit Ratings
3. Valuing Proved Oil and Gas Reserves
E. Phased Compliance With Supplemental Financial Assurance
Orders
F. Appeal Bonds
G. Other Amendments
1. Revisions to Definitions
2. Changing of the Spelling of ``Sulphur'' to ``Sulfur''
IV. Summary of Cost, Economic Impacts, and Additional Analyses
Conducted
A. What are the affected entities?
B. What are the economic impacts?
C. What are the benefits?
D. What tribal outreach did BOEM conduct?
V. Section-by-Section Analysis
VI. Statutory and Executive Order Reviews
A. Executive Orders 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. Congressional Review Act (CRA)

I. General Information

A. Executive Summary

1. Purpose of This Regulatory Action
The purpose of this final regulatory action is to address concerns
regarding BOEM's financial assurance program. This rule finalizes
amendments to the existing provisions to better protect the taxpayer
from bearing the cost of facility decommissioning and other financial
risks associated with OCS development, such as environmental
remediation. Additionally, this final rule provides regulatory clarity
to OCS lessees regarding their financial obligations by codifying
requirements in the Code of Federal Regulations (CFR).
Since 2009, more than 30 corporate bankruptcies have occurred
involving offshore oil and gas lessees that did not have sufficient
financial assurance to cover their decommissioning liabilities. These
bankruptcies have highlighted a weakness in BOEM's current supplemental
financial assurance program. BOEM's existing program has, at times,
been unable to forecast financial distress of these lessees and
grantees that have not previously provided supplemental financial
assurance and, as a result, BOEM has not had sufficient time to require
and receive supplemental financial assurance prior to a declaration of
bankruptcy. Additionally, challenges arising from bankruptcy
proceedings, including the inability to sell less valuable assets that
fail to generate new buyers at auction, can result in unplugged wells
and orphaned infrastructure, potentially resulting in the American
taxpayer paying to plug those wells and decommission that abandoned
infrastructure. The amendments finalized in this rulemaking under
section 5 of OCSLA (43 United States Code (U.S.C.) 1334) and
Secretary's Order 3299 strengthen BOEM's financial assurance program to
better protect the taxpayer from bearing the cost of facility
decommissioning and other financial risks associated with OCS
development.
2. Summary of Major Provisions
The following major provisions are included in this final rule:
<bullet> streamlining the criteria used for evaluating the
financial health of lessees and grantees,
<bullet> codifying the use of the BSEE probabilistic estimates of
decommissioning cost for determining the amount of supplemental
financial assurance required,
<bullet> removing restrictive provisions for third-party guarantees
and decommissioning accounts,
<bullet> adding new criteria under which a bond or third-party
guarantee that was provided as financial assurance may be canceled, and
<bullet> clarifying financial assurance requirements for RUEs
serving Federal leases.
With this rulemaking, the Department is finalizing an amendment to
revise the criteria used to evaluate the need for supplemental
financial assurance from the existing five criteria--financial
capacity, projected financial strength, business stability, reliability
in meeting obligations based on credit rating or trade references, and
record of compliance with laws, regulations, and lease terms--to one of
two criteria: (1) credit rating and (2) the ratio of the value of
proved reserves to decommissioning liability associated with those
reserves. Specifically, the Department is finalizing the use of an
investment grade credit rating threshold (or proxy credit rating
equivalent) and a minimum 3-to-1 ratio of the value of proved reserves
to decommissioning liability associated with those reserves to
determine if a lessee is required to provide supplemental financial
assurance. If a current lessee meets one of these criteria, it will not
be required to provide supplemental financial assurance. These
amendments codify a forward-looking analysis for determining the need
for supplemental financial assurance and strengthen BOEM's financial
assurance program by providing a more accurate method for analyzing a
lessee's financial health.

[[Page 31546]]

The Department is also finalizing the use of the BSEE probabilistic
estimates of decommissioning cost for determining the amount of
supplemental financial assurance required. The new estimates are based
on industry-reported decommissioning costs pursuant to the notice-to-
lessees (NTL) requiring the submittal of such data. Previously, BSEE
provided a single algorithm-based deterministic estimate for OCS
facilities for determining decommissioning cost estimates. Based on the
reported data, BSEE has developed three probabilistic estimates (i.e.,
P-values) of decommissioning costs for each OCS facility on any given
lease. These values represent the likelihood of covering the full cost
of decommissioning a facility as a percentage; for example, P70
represents a 70 percent likelihood of covering the full cost of
decommissioning a facility. The Department is finalizing, as proposed,
the use of the P70 decommissioning estimate value to determine the
amount of supplemental financial assurance required from a current
lessee that does not meet the financial waiver criteria. If
probabilistic estimates are not available, then BOEM will use the
available deterministic values. BOEM also notes that the use of the
BSEE P70 value only reflects the amount of supplemental financial
assurance that may be required to meet decommissioning obligations and
does not reflect the total cost of corrective action that may be
required to bring a lease or grant into compliance.
The Department's goal for BOEM's 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 at
a competitive disadvantage. The Department acknowledges that the new
regulations could have a significant financial impact on affected
companies, and for that reason, the Department is finalizing the
amendment, as proposed, to phase in the new financial assurance
requirements over a 3-year period for existing leaseholders.
3. Costs and Benefits
The regulatory amendments in this rulemaking are expected to
increase the total amount of financial assurance required from OCS
lessees and grant holders. Those lessees that do not meet the updated
criteria to avoid providing financial assurance will realize an
increased compliance cost in the form of bonding premiums. BOEM has
drafted a Regulatory Impact Analysis (RIA) detailing the estimated
impacts of the respective provisions of this final rule and has
included it in the docket. The impacts reflect both monetized and non-
monetized impacts; the costs and benefits of the non-monetized impacts
are discussed qualitatively in the document. The table below summarizes
BOEM's monetized estimate of the cost of increased bonding premiums
paid by lessees over a 20-year period. Additional information on the
estimated transfers, costs, and benefits can be found in the RIA
available in the docket for this rulemaking (Docket No. BOEM-2023-
0027).

Net Total Estimated Compliance Cost of the Rule
[2024-2043, 2023, $ millions]
------------------------------------------------------------------------
Discounted Discounted
2024-2043 at 3% at 7%
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Net Total Compliance Cost....................... $8,525 $5,923
Annualized Compliance Cost...................... 573.0 559.0
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This final rule affects holders of oil, gas, and sulfur leases, ROW
grants, and RUE grants on the OCS. The analysis shows that this
includes roughly 391 companies with ownership interests in OCS leases
and grants. Entities that operate under this 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 Small
Business Administration (SBA) defines a small business as one with
fewer than 1,250 employees; for NAICS code 486110, it is a business
with fewer than 1,500 employees. Based on this criterion, approximately
271 (69 percent) of the businesses operating on the OCS subject to this
rule are considered small; the remaining businesses are considered
large entities. All the operating businesses meeting the SBA
classification are potentially impacted; therefore, BOEM expects that
the rule will affect a substantial number of small entities.
BOEM has estimated the annualized increase in compliance costs to
lessees and RUE and ROW grant holders and allocated those to small and
large entities based on their decommissioning liabilities. BOEM's
analysis estimates small companies could incur $421 million (7 percent
discounting) in annualized compliance costs from its changes. The
Bureau recognizes that there will be incremental cost burdens to most
affected small entities and has included a 3-year, phased compliance
approach to reduce burden associated with the transition to the
requirements of this rule. The changes are designed to balance the risk
of non-performance with the compliance burdens that are associated with
the requirement to provide supplemental financial assurance. Additional
information about these conclusions can be found in the RIA for this
rule.

B. Does this action apply to me?

Entities potentially affected by this final action are holders of
oil, gas, and sulfur leases, ROW grants, and RUE grants on the OCS.

C. Where can I get a copy of this document and other related
information?

In addition to being available in the docket, BOEM will post an
electronic copy of the documents related to this final action at:
<a href="https://www.boem.gov/regulations-and-guidance">https://www.boem.gov/regulations-and-guidance</a>.
BOEM's full response to comments on the June 29, 2023, notice of
proposed rulemaking (NPRM), including any comments not discussed in
this preamble, can be found in the memorandum titled, Risk Management
and Financial Assurance for OCS Lease and Grant Obligations: Response
to Public Comments Received on the June 29, 2023, Notice of Proposed
Rulemaking, available in the docket (Docket No. BOEM-2023-0027).

II. Background

A. BOEM Statutory and Regulatory Authority and Responsibilities

Section 5 of OCSLA (43 U.S.C. 1334), 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 [provisions of OCSLA]'' related to
leasing on 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. Section 18 of OCSLA (43 U.S.C. 1344) states
that, ``Management of the [OCS] shall be conducted in a manner which
considers economic, social, and environmental values of the renewable

[[Page 31547]]

and nonrenewable resources contained in the [OCS]. . .''.
The Secretary, in Secretary's Order 3299 (as amended), established
BOEM and delegated to it the authority to carry out conventional
energy- (e.g., oil and gas) and renewable energy-related functions on
the OCS, including, but not limited to, activities involving resource
evaluation, planning, and leasing under the provisions of OCSLA. As
such, 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 established
BSEE and delegated to it the authority to, among other things, enforce
an oil and gas lessee's obligation to perform decommissioning. BSEE
provides estimates to BOEM to inform the financial assurance needed to
cover the cost to perform decommissioning, thereby protecting the
American taxpayer from incurring financial loss. When a current lessee
is unable to perform its obligations, the Department's regulations at
30 CFR 556.604(d) and 556.605(e) hold current co-lessees responsible
for all decommissioning obligations and predecessor lessees responsible
for those decommissioning obligations that had accrued before they
assigned their interests to others. See Section III.B for more detail
on joint and several liability requirements. While BOEM also has
program oversight for the financial assurance requirements set forth in
30 CFR parts 551, 581, 582, and 585, this final rule pertains only to
the financial assurance requirements for oil and gas or sulfur leases
under part 556, RUE grants and ROW grants under part 550, and appeals
of supplemental financial assurance demands under part 590.
For more information on the statutory authority for this rule, see
the preamble to the proposed rule at 88 FR 42138, June 29, 2023.

B. History of Bonding Regulations and Guidance

The Minerals Management Service (MMS), BOEM's predecessor,
published the existing financial assurance requirements for oil, gas,
and sulfur leases and pipeline ROW grants on May 22, 1997 (62 FR
27948). These regulations required lease-specific or area-wide base
bonds in prescribed amounts, depending on the level of activity on a
lease, and provided the authority to require additional supplemental
financial assurance for leases above the base bonds depending on the
financial health of the lessee. Additionally, MMS published the
existing financial assurance requirements for RUE grants on December
28, 1999 (64 FR 72756). These regulations did not dictate a specific
bond amount for a RUE but did provide the authority to require bonding
if necessary. BOEM employs the same criteria for RUE and ROW grants as
it does for leases to determine whether supplemental financial
assurance is required, because specific criteria pertaining to
supplemental financial assurance for grants do not exist in the current
regulations.
The current bonding regulations at 30 CFR 556.901(d) provide five
criteria that the Regional Director uses to determine whether a
lessee's potential inability to carry out present and future
decommissioning obligations warrants a demand for supplemental
financial assurance; however, the current bonding regulations do not
specifically describe how the criteria are weighted. To provide
guidance, MMS issued a Notice to Lessees (NTL) effective December 28,
1998, which provided details on how it would apply the five criteria
(NTL No. 98-18N). 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. Most recently, NTL No.
2008-N07 was superseded on September 12, 2016, with NTL No. 2016-N01,
which was later rescinded in February of 2020.
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.'' See <a href="https://www.gao.gov/products/gao-16-40">https://www.gao.gov/products/gao-16-40</a>.
On October 16, 2020, DOI issued a notice of proposed rulemaking (85
FR 65904) to revise certain BSEE policies concerning decommissioning
orders and the Department's financial assurance regulations that are
administered by BOEM. In the joint proposed rule, the Department
proposed to adjust the 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. The
Department's regulations hold predecessors responsible for some or all
of the decommissioning when a current lessee is unable to perform its
obligations. In the 2020 proposed rule, the Department proposed to
consider the financial stability of predecessor lessees by waiving
supplemental financial assurance requirements for a current lessee when
there is a financially strong predecessor lessee. The Department also
proposed to change the methodology for measuring financial strength to
focus on credit rating and the value of proved oil and gas reserves and
to apply the credit rating methodology to RUE grants and ROW grants as
well.
On April 18, 2023, DOI finalized the BSEE-administered provisions
of the 2020 proposal (88 FR 23569). The Department's 2023 final rule
implements provisions of the 2020 proposed rule to clarify
decommissioning responsibilities of RUE grant holders and to formalize
BSEE's policies regarding performance by predecessors ordered to
decommission OCS facilities.
On June 29, 2023, the Department proposed a new rule in lieu of
finalizing the BOEM provisions of the 2020 joint proposal. The new
proposed rule provided recommended revisions to the regulations
concerning risk management and financial assurance for OCS lease and
grant obligations. This final action addresses the public comments
received on the June 29, 2023, proposal and finalizes amendments to
those regulations. For more details on the history of the bonding
regulations, see the preamble to the proposed rule at 88 FR 42138.

C. Purpose of Rulemaking

The purpose of this rulemaking is to finalize amendments to address
concerns regarding BOEM's financial assurance program. This rule
finalizes amendments to the existing provisions to better protect the
taxpayer from bearing the cost of facility decommissioning and other
financial risks associated with OCS development, such as environmental
remediation. This rule also provides regulatory clarity to OCS lessees
regarding their financial obligations by codifying requirements in the
CFR.
As discussed in the preamble to the proposed rule (88 FR 42140),
the GAO identified three main shortcomings in the Department's prior
approach to financial assurance: (1) the Department faced challenges in
determining actual decommissioning liabilities due to data system
limitations and inaccurate data; (2) the Department did not require
sufficient financial assurance to cover liabilities, primarily due to
the practice

[[Page 31548]]

of waiving supplemental bonding requirements, resulting in financial
assurance coverage (such as bonds) for less than 8% of an estimated
$38.2 billion in decommissioning liabilities; and (3) the Department's
criteria for assessing lessees' financial strength did not provide
accurate and timely information about their ability to cover future
decommissioning costs. As the GAO report indicated, the existing
regulatory structure is inadequate, introduces needless financial risk,
and is unsustainable.
Importantly, relatively few major facilities have been
decommissioned (relative to the number installed) because the vast
majority of facilities are or were recently actively producing. As more
facilities reach the end of their useful life, however, decommissioning
will be required on a larger scale. Accordingly, previously low losses
to the government are not a reliable indicator for future losses. The
GAO has in fact asserted the opposite and has notified Congress that
the current program must be revised to avoid putting the government in
an untenable situation.
On February 20, 2024, the GAO issued a new report titled Offshore
Oil and Gas: Interior Needs to Improve Decommissioning Enforcement and
Mitigate Related Risks (GAO-24-106229) that provided four
recommendations to DOI to strengthen BSEE's and BOEM's decommissioning
oversight and enforcement. Recommendation 3 specifically stated the
``Secretary of the Interior should ensure the BOEM Director completes
planned actions to further develop, finalize, and fully implement
changes to financial assurance regulations and procedures that reduce
financial risks, including by (1) requiring higher levels of
supplemental bonding, and (2) addressing other known weaknesses.'' The
measures BOEM described in the proposed rule and finalized here will,
as a practical matter, address this GAO recommendation.
Since 2009, more than 30 corporate bankruptcies have occurred
involving offshore oil and gas lessees with decommissioning liabilities
that were not covered by financial assurance. The fact that
bankruptcies have involved decommissioning liabilities without
sufficient supplemental financial assurance 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 less than a year before 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 weakness in BOEM's
supplemental financial assurance program. BOEM's existing program has,
at times, been unable to forecast financial distress of these lessees
and grantees that have not previously provided supplemental financial
assurance and, as a result, BOEM has not had sufficient time to require
and receive supplemental financial assurance prior to a declaration of
bankruptcy.
Additionally, challenges arising in bankruptcy proceedings,
including the inability to sell less valuable assets that fail to
generate new buyers at auction, can result in unplugged wells and
orphaned infrastructure. This could result in the American taxpayer
paying the cost to plug those wells and decommission that abandoned
infrastructure. The amendments finalized in this rulemaking strengthen
BOEM's financial assurance regulations to better protect the taxpayer
from bearing the cost of facility decommissioning and other financial
risks associated with OCS development.

D. Summary of the June 29, 2023, Proposed Rulemaking

On June 29, 2023, DOI published an NPRM in the Federal Register at
88 FR 42136, which proposed amendments to 30 CFR parts 550, 556, and
590. This NPRM proposed to streamline the criteria used for evaluating
the financial health of lessees, codify the use of the BSEE
probabilistic estimates of decommissioning cost for determining the
amount of supplemental financial assurance required, remove restrictive
provisions for third-party guarantees and decommissioning accounts, add
criteria for which a bond or third-party guarantee that was provided as
supplemental financial assurance may be canceled, and clarify bonding
requirements for RUEs serving Federal leases. Specifically, the
Department proposed to revise the criteria used to evaluate the need
for supplemental financial assurance from lessees from the existing
five criteria--financial capacity, projected financial strength,
business stability, reliability in meeting obligations based on credit
rating or trade references, and record of compliance with laws,
regulations, and lease terms--to one of two criteria: (1) credit rating
and (2) the ratio of the value of proved reserves to decommissioning
liability associated with those reserves. The Department proposed the
use of an investment grade credit rating threshold (or proxy credit
rating equivalent) and a minimum 3-to-1 ratio of the value of proved
reserves to decommissioning liability associated with those reserves to
determine if a lessee is required to provide supplemental financial
assurance.
After examining the financial assurance costs in conjunction with
risk coverages derived from using different P-values for
decommissioning costs over different time periods for the full
implementation of this rule, BOEM proposed that an adequate balance
between OCS development and financial risk level on the OCS is achieved
by the combination of a P70 value and a phase-in period of 3 years. The
proposed phased-in approach allows the lessee, grant holder, or
operator to submit the amount due over 3 fiscal years, which is
specifically designed to mitigate the disruptive impact of large,
immediate financial assurance demands. BOEM notes that poorly-
capitalized companies with end-of-life assets may declare bankruptcy at
the P70 level, but that bankruptcy would also be a risk under a P90 or
a P50 level threshold. It was BOEM's conclusion that a P70 threshold
with a 3-year phase-in achieves an adequate balance between the level
of protection against the risks that the proposed rule intends to
manage with a reasonable period of time to fully implement the costs
derived from these policy changes. Details regarding each of the
specific proposal provisions are discussed in section III of this
preamble.

III. Summary of the Final Rule and Public Comments

For each topic, this section provides a description of what the
Department proposed, what the Department is finalizing, and a summary
of key comments and responses for each proposal provision. BOEM's full
response to comments on the June 29, 2023, NPRM, including any comments
not discussed in this preamble, can be found in the memorandum titled,
Risk Management and Financial Assurance for OCS Lease and Grant
Obligations: Response to Public Comments Received on the June 29, 2023,
Notice of Proposed Rulemaking available in the docket (Docket No. BOEM-
2023-0027) (hereinafter Response to Public Comments).

[[Page 31549]]

A. Revisions to BOEM Supplemental Financial Assurance Requirements

The Department proposed and is finalizing revisions to the
supplemental financial assurance requirements for oil, gas, and sulfur
leases, RUE grants, and pipeline ROW grants, as discussed in the
subsections below.
1. Leases
In the June 29, 2023, NPRM, the Department proposed changes to the
lease financial assurance requirements 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. The
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. These proposed provisions, the
key public comments received on the provisions, and the Department's
final amendments are discussed in the following subsections. A summary
of all comments received regarding revisions to lease financial
assurance provisions and BOEM's corresponding responses can be found in
section 3 of the Response to Public Comments.
Additionally, DOI also proposed to use the costs of decommissioning
resulting from BSEE's new methodology, which provides probabilistic
costs using a database of reported decommissioning costs on the OCS, to
determine the amount of supplemental financial assurance required, as
discussed in section III.B of this preamble.
a. Evaluation of Co-Lessees
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
full 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 but are
only 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 30 CFR 556.901(d), is not clear to what extent
co-lessee financial capacity is to be considered. The Department
proposed to codify in 30 CFR 556.901(d)(3) that this process includes
an evaluation of the ability of a co-lessee to carry out present and
future obligations. This proposed amendment recognizes that all current
owners are benefiting from ongoing operations and are jointly and
severally liable for compliance with DOI requirements. All current co-
lessees are equally liable for present nonmonetary obligations and such
future obligations that accrue while they are co-lessees. As proposed,
BOEM would not require supplemental financial assurance for properties
where at least one co-lessee meets the credit rating threshold. A
summary of the comments received is provided here.
Comment: Several commenters expressed support for DOI's proposal to
not require supplemental financial assurance on leases where at least
one co-lessee meets the credit rating threshold.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed in 30 CFR 556.901(d), that the
evaluation for determining whether supplemental financial assurance is
required includes an evaluation of the ability of a co-lessee to carry
out present and future obligations. This amendment recognizes that all
current owners are benefiting from ongoing operations and are jointly
and severally liable for compliance with DOI requirements. As proposed,
the Department is finalizing the provision that it will not require
supplemental financial assurance from properties where at least one co-
lessee meets the credit rating threshold.
Comment: Several commenters expressed opposition to DOI's proposal,
asserting that any co-lessee that does not maintain an investment grade
credit rating (or equivalent proxy credit rating) should be required to
provide supplemental financial assurance. Commenters recommended that
the Department require supplemental financial assurance for their
respective working interest shares from all co-lessees that do not
maintain an investment grade credit rating for leases that are not
exempt based on the reserve analysis. An additional commenter
recommended the financial assurance evaluation be extended to
sublessees when a company can provide evidence that the sublessee was
one of the original installers/owners of the lease facilities.
Response: BOEM acknowledges the commenters' recommendations that
the Department should require financial assurance from all co-lessees
that do not maintain an investment grade credit rating for their
respective working interests but concludes that it is impractical to
evaluate co-lessees and operating rights owners since each co-lessee is
liable for the total obligation and not their proportional share. DOI
is finalizing, as proposed in 30 CFR 556.901(d), to not require
supplemental financial assurance for leases where at least one co-
lessee meets the credit rating threshold. This amendment recognizes
that all current owners are benefiting from ongoing operations and are
jointly and severally liable for compliance with DOI requirements. All
current co-lessees are equally liable for present nonmonetary
obligations and such future obligations that accrue while they are co-
lessees.
b. Evaluation Criteria
The Department proposed to revise the criteria in 30 CFR 556.901(d)
used to evaluate the need for supplemental financial assurance from
lessees from the five criteria--financial capacity, projected financial
strength, business stability, reliability in meeting obligations based
on credit rating or trade references, and record of compliance with
laws, regulations, and lease terms--to a simpler analysis of one of two
criteria: (1) credit rating or (2) the ratio of the value of proved
reserves to decommissioning liability associated with those reserves.
As discussed in the preamble to the proposed rule at 88 FR 42142-42144,
the Department proposed to eliminate the ``business stability'' and the
``record of compliance'' criteria, to replace the ``financial
capacity'' and ``reliability'' criteria with issuer credit rating or
proxy credit rating, and to replace the ``projected financial
strength'' criterion with a ratio of the value of proved oil and gas
reserves on a lease to the decommissioning liability associated with
those reserves.

[[Page 31550]]

Specifically, DOI proposed the following in 30 CFR 556.901(d) to
determine whether supplemental financial assurance on a lease may be
required: (1) a credit rating, either from an Nationally Recognized
Statistical Rating Organization (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; or (2) a minimum ratio of the value of proved oil and gas
reserves on a lease to the decommissioning liability associated with
those reserves. For discussion of the justification of the credit
rating selected and the minimum reserves to decommissioning liabilities
ratio selected, see section III.D of this preamble.
These proposed criteria better align BOEM's evaluation process with
accepted financial risk evaluation methods used by the banking and
finance industry. As discussed in the preamble to the proposed rule (88
FR 42142), 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 often do not accurately
or consistently predict financial distress. Additionally, the
Department solicited comments on any other appropriate criteria for use
in evaluating the need for supplemental financial assurance from OCS
lessees.
Comment: Multiple commenters generally supported the streamlining
of the evaluation criteria, particularly the use of credit ratings as a
more appropriate criterion than financial capacity, projected financial
strength, and business stability.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed in 30 CFR 556.901(d), the
replacement of the prior five criteria with the two criteria: (1)
credit rating and (2) the ratio of the value of proved reserves to
decommissioning liability associated with those reserves. This
amendment codifies a forward-looking analysis for determining the need
for supplemental financial assurance, which is simpler to evaluate for
both the Department and lessees, in lieu of a backward-looking
analysis.
Comment: Several commenters recommended that the Department
completely remove the evaluation to determine if supplemental financial
assurance is required. One commenter specifically asked the Department
to eliminate this step entirely and to simply require all OCS
leaseholders, regardless of financial strength, to provide supplemental
financial assurance. An additional commenter urged the Department to
require every lessee to post supplemental financial assurance to ensure
decommissioning costs are covered and eliminate consideration of proxy
credit ratings and the value of proved oil reserves associated with a
given lease.
Response: BOEM is the agency within DOI responsible for managing
development of the nation's offshore resources in an environmentally
and economically responsible way. BOEM must balance OCS development
with protection of both the taxpayer and the environment and concludes
that this rule achieves an acceptable balance of objectives. BOEM does
not believe requiring all entities to provide supplemental financial
assurance can be justified by the potential risk to the taxpayer,
because financially strong entities are highly unlikely to file for
bankruptcy and are highly likely to be able to cover their
decommissioning obligations. Additionally, requiring those entities
with little likelihood of default to provide supplemental financial
assurance would reduce funds available for other capital expenditures.
Accordingly, the Department is finalizing, as proposed in 30 CFR
556.901(d), the two evaluation criteria for lessees: (1) credit rating
and (2) the ratio of the value of proved reserves to decommissioning
liability associated with those reserves. The purpose of financial
assurance is not to prevent problems; it is to ensure there is money to
fix them. As such, criteria that do not relate to financial capacity do
not target the companies for which the financial assurance is needed.
Using the revised criteria simplifies the evaluation process,
streamlining the Department's evaluation without compromising the risk
to taxpayers. Indeed, the two new criteria are more protective than the
existing criteria, as evidenced by the significant increase in the
amount of financial assurance that will be required using the updated
criteria.
Comment: Commenters who objected to the removal of the record of
compliance criterion urged BOEM to be more attentive to past safety
performance, deny waivers to any company with idle iron, stipulate that
owners with decommissioning obligations for abandoned or idle wells
would not be eligible for new leases, and develop a scoring system to
grade companies on various safety and environmental metrics to
incorporate into the financial assurance analysis.
Response: While commenters offered a conceptual argument to retain
the record of compliance criterion, they provided no new data to
suggest a correlation between financial strength of a company and its
record of compliance. As discussed in the preamble to the proposed rule
at 88 FR 42142, BOEM examined the number of incidents of non-compliance
(INCs) issued by BSEE, their severity, and the relationship between
INCs and financial health/strength of companies and found that the data
was not a reliable indicator of financial strength. The data show that
the number of incidents is correlated with the number of structures a
lessee has on the OCS, and not necessarily to the financial health of
the lessee. Additionally, BOEM's financial assurance program is not in
and of itself designed to promote safety or compliance (there are other
Department regulations addressing these matters), but to assure that a
lessee can financially bring a noncompliant lease into compliance. The
Department's forward-looking approach, which is being finalized here,
allows time for BOEM to demand financial assurance, rather than waiting
for inspections and corresponding incidents to occur and then
determining that supplemental financial assurance is needed because of
the number of INCs.
The Department is finalizing the replacement of the five criteria
in 30 CFR 556.901(d) with two criteria for lessees: (1) credit rating
and (2) the ratio of the value of proved reserves to decommissioning
liability associated with those reserves. This amendment codifies a
forward-looking analysis for determining the need for supplemental
financial assurance in lieu of the backward-looking analysis that
resulted from the use of the five criteria or that would result from
using INCs as an indicator. For a summary of all comments received
regarding the streamlining of the evaluation criteria, including the
removal of the record of compliance criterion, and BOEM's corresponding
responses, see sections 3.1 through 3.6 of the Response to Public
Comments.
2. Right-of-Use and Easement Grants
In the June 29, 2023, NPRM, the Department proposed changes to the
RUE financial assurance requirements to clarify the financial assurance
requirement for RUEs serving Federal leases, which is not explicitly
addressed in the existing regulations. These proposed provisions, the
public

[[Page 31551]]

comments received on the provisions, and DOI's final amendments are
discussed in the following subsections.
a. Base Financial Assurance
The Department proposed to revise 30 CFR 550.166 to provide 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 and proposed a Federal RUE base financial assurance
requirement matching the existing $500,000 base financial assurance
requirement for State RUEs. For a summary of all comments received
regarding revisions to base financial assurance provisions for RUEs and
BOEM's corresponding responses, see section 4 of the Response to Public
Comments.
Comment: Commenters supported the proposal to require a RUE grant
holder to provide financial assurance in a specific amount, regardless
of whether the RUE serves a State lease or Federal OCS lease, but
asserted that BOEM should update the base financial assurance value
because it was determined in 1993, was based on costs in relatively
shallow waters, and significant inflation has occurred since the last
revision.
Response: BOEM agrees with the commenters' assertion that the
initial base bond amount was determined many years ago and acknowledges
that this value should be reevaluated. Because BOEM did not propose a
new value in the NPRM and, therefore, cannot revise it in the final
rule, BOEM plans to evaluate the specific values of the base
supplemental financial assurance for RUEs, ROWs, and leases in a future
rulemaking.
With this rulemaking, the Department is finalizing 30 CFR 550.166,
as proposed, that provides that any RUE grant holder must provide base
financial assurance of $500,000, regardless of whether the RUE serves a
State lease or a Federal OCS lease, to match the existing base
financial assurance requirements for State RUEs.
b. Area-Wide Financial Assurance
The Department proposed in 30 CFR 550.166(a) a $500,000 area-wide
base financial assurance for RUE grant holders, 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. Additionally, the Department proposed
in 30 CFR 550.166(a)(1) to allow any lessee that has previously posted
area-wide lease financial assurance (pursuant to 30 CFR 556.900(a)(1)
or 556.901(a)(2) or (b)(2) for the areas specified in 30 CFR
556.900(a)(2)) to modify that lease financial assurance to also cover
any RUE(s) in the area owned by that 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 be in an amount equal to or greater than
the RUE base financial assurance requirement (i.e., equal to or greater
than $500,000).
Comment: A commenter asserted that there was no need for a new
requirement for area-wide financial assurance for RUEs, as it would
solely cover RUE rentals. They suggested that this aspect should
already be sufficiently covered under the existing area-wide financial
assurance for leases provided by lessees. The commenter also noted
that, presently, ``BSEE does not permit transfers of RUEs.'' To address
this, the commenter recommended that both BOEM and BSEE should mandate
complete ownership filings for all co-owners of the respective ROW and
RUE for the Department's approval. They asserted that this approach
would appropriately distribute the risk among all co-owners.
Response: BOEM disagrees with the commenter's assertion that there
``is no need for'' area-wide financial assurance requirements for RUEs.
RUE holders have decommissioning responsibility and not just that of
paying rentals. Area-wide coverage is not being required but being
offered as an alternative to separately bonding each RUE. In response
to the suggestion that BOEM and BSEE should mandate complete ownership
filings for ROW and RUEs, we note that is outside the scope of this
rulemaking.
As discussed in the preamble to the proposed rule at 88 FR 42144,
the proposed rule at 30 CFR 550.166(a)(1) would allow any lessee that
has already posted area-wide lease financial assurance to modify that
lease surety bond to also cover any RUE(s) in the area owned by the
same lessee. The ability to use the area-wide lease financial assurance
to cover the RUE base financial assurance 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. For example, under the proposal, 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 without having to post any
additional financial assurance (other than, potentially, supplemental
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 financial assurance
is not modified, the lessee may satisfy the requirement by providing
new financial assurance to cover its RUE(s). In the example, BOEM
believes the $3 million area-wide lease surety bond is sufficient to
cover the RUE $500,000 requirement. The Department is finalizing this
provision as proposed, in addition to new supplemental financial
assurance requirements for RUE grant-holders that do not maintain an
investment grade credit rating. As discussed earlier in this preamble,
BOEM plans to evaluate the specific values of the base supplemental
financial assurance for RUEs, ROWs, and leases in a future rulemaking.
The Department is finalizing, as proposed in 30 CFR 550.166(a), the
option to provide $500,000 area-wide RUE financial assurance, which
will 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. Lessees that have
previously posted area-wide lease financial assurance will be able 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 will be
subject to the requirement that, in addition to covering the lease
financial assurance requirement, the area-wide lease financial
assurance must include an amount equal to or greater than the RUE base
financial assurance requirement (i.e., equal to or greater than
$500,000) in order to cover the financial assurance requirements for
both the leases and RUEs.
c. Supplemental Financial Assurance
The Department proposed to replace the general statement in 30 CFR
550.160(c) that RUE grant holders ``must meet bonding requirements''
with the specific criteria governing financial assurance requirements
found in proposed 30 CFR 556.900 through 556.902, and the applicable
financial assurance requirements in 30 CFR 550.166 and 30 CFR part 556,
subpart I. Similar to the proposed changes to the evaluation criteria
for lease holders, DOI proposed in 30 CFR 550.166(b) to consider the
credit rating or proxy credit rating of RUE co-grant holders to
determine if a grantee must provide supplemental financial assurance.
The

[[Page 31552]]

value of proved oil and gas reserves was not included in this
evaluation because a RUE grant does not entitle the holder to any
interest in oil and gas reserves. For a summary of all comments
received regarding revisions to supplemental financial assurance
provisions for RUEs and BOEM's corresponding responses, see section 4
of the Response to Public Comments.
Comment: Commenters supported the proposal to evaluate the
financial health of RUE grant holders using the same criterion as was
proposed for oil and gas lessees (i.e., investment grade credit rating
of grant holders or co-holders).
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing 30 CFR 550.160(c), as proposed, to replace the
general statement that RUE grant holders ``must meet bonding
requirements'' with the evaluation of a grant holder's financial health
using a credit rating or a proxy credit rating to determine
supplemental financial assurance demands.
Comment: A commenter suggested that the Department should not
require supplemental bonding for RUEs that are servicing and associated
with high value leases because some companies own interest in the
reserves associated with a RUE granted to maintain a platform
operational on an expired lease for servicing production on another
lease.
Response: BOEM disagrees with the commenter's assertion that the
Department should not require supplemental bonding for RUEs that are
servicing and associated with high value leases. RUEs do not grant a
holder an interest in reserves. While the same company may own reserves
as a lessee, DOI would not be able to compel the grantee to sell the
lease to cover the costs of grant decommissioning.
The Department is finalizing, as proposed, 30 CFR 550.160(c), which
provides that a RUE grant-holder may be required to provide
supplemental financial assurance if they do not maintain an investment
grade issuer credit rating or proxy credit rating equivalent. This
change is consistent with the evaluation of oil and gas lessees found
in finalized 30 CFR 556.901(d). The Department is also finalizing, as
proposed, that the value of proved oil and gas reserves will not be
considered in this evaluation because a RUE grant does not entitle the
holder to any interest in the associated oil and gas reserves.
3. Pipeline Right-of-Way Grants
Existing bonding requirements for pipeline ROW grants, contained in
30 CFR 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. Additionally, existing 30
CFR 550.1011(a)(2) states that 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.
Similar to the proposed changes to the evaluation criteria for lease
holders, DOI proposed in 30 CFR 550.1011(c) to consider the credit
rating or proxy credit rating of ROW co-grant holders to determine if
the grantee must provide supplemental financial assurance. The value of
proved oil and gas reserves was not included in this evaluation because
a ROW grant does not entitle the holder to any interest in the
associated oil and gas reserves. For a summary of all comments received
regarding revisions to ROWs and BOEM's corresponding responses, see
section 5 of the Response to Public Comments.
Comment: Commenters supported the proposal to evaluate the
financial health of pipeline ROW grant holders using the same criterion
as was proposed for oil and gas lessees (i.e., investment grade credit
rating or proxy credit rating of grant holders or co-holders).
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed in 30 CFR 550.1011(c), to
evaluate pipeline ROW grant-holders using the criterion proposed for
lessees (i.e., investment grade credit rating or proxy credit rating of
grant holders or co-holders).
Comment: A commenter suggested that the Department should not
require supplemental bonding for ROW pipelines that are servicing and
associated with high value leases because some companies own an
interest in the reserves that their ROW pipeline services.
Response: BOEM disagrees with the commenter's assertion that the
Department should not require supplemental bonding for ROW pipelines
that are servicing and associated with high value leases. ROWs do not
grant a holder an interest in reserves. While the same company may own
reserves as a lessee, DOI would not be able to compel the grantee to
sell the lease to cover the costs of grant decommissioning.
Comment: A commenter requested that the Department rethink allowing
oil and gas operators to decommission pipelines in place and should
ensure that BSEE's decommissioning costs sufficiently meet the cost of
removing all pipeline from the seafloor.
Response: Changes to the regulations allowing oil and gas operators
to decommission pipelines in place is outside the scope of this
rulemaking.
DOI is finalizing, as proposed, 30 CFR 550.1011, which provides for
an evaluation of pipeline ROW grant-holders using the criterion
proposed for lessees (i.e., issuer credit rating or proxy credit
rating). This will ensure that pipeline ROW grant-holders can
demonstrate that they have the financial ability to meet their
obligations of the ROW.
The Department is finalizing the use of an investment grade credit
rating or proxy credit rating for pipeline ROW co-grant holders to
determine if a grant holder must provide supplemental financial
assurance, consistent with the evaluation of oil and gas lessees in 30
CFR 550.1011(a)(2). The value of proved oil and gas reserves will not
be considered in this evaluation because a ROW grant does not entitle
the holder to any interest in oil and gas reserves.

B. Use of BSEE's Probabilistic Estimates for Determining
Decommissioning Costs

When determining the necessary amount of supplemental financial
assurance, BSEE previously provided to BOEM a single, algorithm-based
deterministic estimate for decommissioning costs of OCS facilities. In
30 CFR 556.901, the Department proposed to replace BSEE's former
single, algorithm-based deterministic estimates for OCS facility
decommissioning costs with the new BSEE methodology that provides
probabilistic estimates (i.e., P-values) based on decommissioning costs
reported by industry pursuant to NTL 2016-N03--Reporting Requirements
for Decommissioning Expenditures on the OCS, later superseded by NTL
2017-N02. These values represent the likelihood of covering the full
cost of decommissioning a facility as a percentage; for example, P70
represents a 70 percent likelihood of covering the full cost of
decommissioning a facility. Specifically, the Department proposed to
use the P70 value to determine the amount of any required supplemental
financial assurance and solicited comments on the use of other values
(i.e., P50 and P90) and the associated impacts. Additionally, if
probabilistic estimates are not available, BOEM will use the available
deterministic value.
BOEM received a wide range of comments on the use of the P70 value
that are discussed generally below. A

[[Page 31553]]

summary of all comments received regarding the use of BSEE's
decommissioning estimates and BOEM's corresponding responses can be
found in section 3.7 of the Response to Public Comments.
Comment: Multiple commenters supported the use of the P70 value and
recommended that BOEM adopt the P70 value in the final rule for
consistency with the stated purpose of the proposed rule: to ensure
that current lessees are financially able to perform their
decommissioning obligations.
Response: BOEM acknowledges the commenters' support for the
proposal of P70. The Department is finalizing in 30 CFR 556.901, as
proposed, the use of P70 to determine the financial assurance required
for properties where the current lessee does not have an investment
grade credit rating or the ratio of the value of the proved reserves to
decommissioning liabilities associated with those reserves is not
greater than or equal to 3-to-1. This approach holds all current
lessees that do not meet the credit rating or reserve criteria
responsible for providing supplemental financial assurance unless there
is an investment grade co-lessee associated with the same
decommissioning obligations.
Comment: Conversely, several commenters asserted that the P70 value
was not sufficiently conservative to protect other parties and the
public in the event of default. They asserted that BOEM should use the
P90 value to increase the probability of ensuring that all
decommissioning obligations are covered by those operating on the OCS.
Response: BOEM disagrees with the commenters' assertion that the
P70 estimate is not sufficiently conservative to protect other parties
and the public in the event of a default. The P70 value should not be
confused with a figure representing 70 percent of the cost of
decommissioning of a particular facility. The statistical P-value
relies on the quality and size of the data inputs, as well as the
uncertainty existing in these costs.
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 at a competitive
disadvantage. A P70 financial assurance level will reduce offshore
decommissioning risk to taxpayers relative to previous BSEE
deterministic decommissioning estimates, while attempting to reduce the
burden on available capital for continued OCS investment that would be
imposed by using P90. BOEM's use of the P70 decommissioning value
balances the risk of being underfunded at lower financial assurance
levels against the risk of setting a financial assurance level at
higher P-values that would overstate the costs in a significant number
of cases.
BOEM considered bonding at P90, which would result in the lowest
risk of the proposed options to the taxpayer from underfunded offshore
decommissioning liabilities. However, P90 would result in an
approximately 40 percent chance of being over bonded. In addition, BOEM
considered the cost of financing, which would generally (particularly
in high interest rate environments) increase the risks of burdensome
over bonding. BOEM's analysis concluded that the increased cost to
lessees resulting from adopting P90 rather than P70 would be too high
when compared to the additional risk reduction. As a result, BOEM
concluded that P70 reflects a risk tolerance that is neither too
aggressive nor too conservative, striking an appropriate balance
between the risk of default to the taxpayer and the burden to the
regulated community.
Comment: Other commenters asserted that the proposed rule did not
include sufficient information and transparency about how the
probabilistic estimates are derived.
Response: In response to commenters asserting that BOEM did not
explain the development of the P-values, BOEM notes that the
development of BSEE's probabilistic estimates was discussed in the
preamble to the proposed rule at 88 FR 42143. The decommissioning cost
estimates are developed as a distribution (i.e., P50, P70, and P90)
based on actual decommissioning expenditure data received from OCS
operators since mid-2016. The data is available based on a lease, ROW,
or RUE basis and also contains details on a well, platform, pipeline,
and site clearance level. It does not consider which companies are
jointly and severally liable for meeting decommissioning obligations.
The new probabilistic estimates were developed using 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 this reported data, BSEE developed three
probabilistic estimates of decommissioning costs for each OCS facility
on a given lease. The lowest cost estimate would have a 50 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 70 percent likelihood of covering the full cost of
decommissioning a facility. The third and highest cost estimate
considered, P90, would have a 90 percent likelihood of covering the
full cost of decommissioning a facility. These estimates are based on
what the government would expect to pay if an operator failed to
perform decommissioning. The current estimates can be found here:
<a href="https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx">https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx</a>.
Comment: Some commenters asserted that the P70 values, and
sometimes even the P50 values, exceed their internal estimates for
their decommissioning costs and that BOEM should allow the use of
company-provided estimates. These commenters noted that these internal
estimates were based on contractor bids and experience.
Response: BOEM acknowledges the commenters' concerns that the P70
estimates may be higher than the actual cost of decommissioning for
specific platforms. In general, it can be more expensive for the
government to decommission a facility than it is for an OCS operator to
do so. Therefore, even if the P70 value is higher than company-derived
values, it may be more aligned with the costs that the government would
incur to perform the decommissioning, which is the relevant
consideration when determining the cost to decommission a facility if
the company fails to do so. The final rule establishes a procedure for
submitting these issues for the consideration of the Regional Director
for a reduction in the supplemental financial assurance demand.
Comment: Multiple commenters asserted that BOEM should focus on
sole liability properties (i.e., properties with no predecessors or co-
lessees), claiming that those properties pose the most risk to the U.S.
taxpayer.
Response: BOEM disagrees with the commenters' assertion that it
should focus only on sole liability properties, an approach that would
not sufficiently protect the taxpayer. As discussed in the RIA, there
are approximately $14.6 billion in decommissioning liabilities
associated with leases without an investment grade predecessor in the
chain of title, of which only $460 million is associated with sole
liability properties. Thus, the Department is finalizing an approach
that holds all current lessees responsible for providing supplemental
financial assurance unless they meet the waiver criteria or are

[[Page 31554]]

associated with an investment grade co-lessee. The Department is
finalizing, as proposed, the use of P70 to determine the amount of
supplemental financial assurance required for properties where the
current lessee or co-lessee does not have an investment grade credit
rating or the ratio of the value of the proved reserves to
decommissioning liabilities associated with those reserves is not
greater than or equal to 3-to-1.
Comment: Commenters also asserted that the proposed rule ignored
joint and several liability, and that by creating a system that does
not account for the financial strength of liable predecessors, the
proposed rule insulates predecessor lessees from their liabilities and
relieves them of the need to perform due diligence when selling their
lease(s) to a subsequent lessee.
Response: Omitting the existence of predecessor lessees from the
analysis of whether to waive the requirement of supplemental financial
assurance for a current lessee--the approach being finalized here--
addresses several associated issues. It ensures that the current
lessees have the financial capability to fulfill their decommissioning
obligations. It also eliminates the incentive to use joint and several
liability as an excuse to delay setting aside funds to pay for
predictable decommissioning costs. This approach does not change or
undermine joint and several liability; it retains BOEM's and BSEE's
authority to pursue predecessor lessees for the performance of
decommissioning.
Comment: Other commenters asserted that BOEM must consider the
obligations of the predecessors in the chain-of-title before seeking
additional financial assurance from current lessees, otherwise the
result is requiring ``double bonding.''
Response: Commenters appear to be claiming that private
arrangements between assignors (predecessors) and assignees
(successors) are sufficient to protect the government without a
requirement for providing supplemental bonds to the government. That is
only partially the case. In most cases, the government cannot call the
bonds in question. Any duplication can be avoided by the private
parties cancelling any private arrangements that are not needed in
light of government requirements. It is DOI's obligation to set bottom
line, public, and uniform thresholds to protect the U.S. and its
taxpayers; private agreements are unrelated to the Department's
obligations under OCSLA.
Comment: One commenter provided an updated analysis of burden,
including a comparison of the three proposed decommissioning estimate
values, which was referenced by multiple commenters in their comment
submissions. The commenter's analysis asserted that the results across
the liability levels ``are largely dependent on each company's
`portfolio' of decommissioning liabilities'' and stated that in any
portfolio of uncertain results, some cost estimates will exceed their
expected value, while some cost estimates will be less. Accordingly,
the commenter asserted, percentile values are not additive, as actual
variances from estimates would offset each other so that the P70 of the
combined outcomes of the portfolio would approach the sum of the mean.
The commenter stated that a better approach would be to sum the mean
values or to conduct a portfolio analysis for each operator. According
to the commenter, P50 is more representative of a log-normal
distribution's statistical average. Additionally, the commenter
provided a cost comparison for P70 to P90 that included the following
estimates: decrease in capital expenditures over 10 years ($4.7 billion
vs $5.565 billion), decrease in OCS production (55 million barrels of
oil equivalents (mmboe) vs 64 mmboe), and decrease in industry jobs
across the Gulf coast region (36,200 vs 43,300).
Response: BSEE is responsible for providing BOEM (and the public)
estimated costs to perform decommissioning. Since BOEM conducts the
company financial risk evaluation to determine the appropriate
financial assurance amount required, BSEE provides BOEM a range of
estimates associated with analyses of data collected under the
authority found at 30 CFR 250.1704 (subpart Q) and guidance under NTL
No. 2017-N02. These costs are considered a proxy for ``fair value'',
i.e., how much it would cost BSEE to cause near immediate
decommissioning by contracting with a third-party services provider.
Actual expenditure data has been collected by regulation since
April 2016 for wells and facilities, and since May 2017 for pipelines.
To date, BSEE has collected about 2,050 data points for wells, 1,235
for facilities (including removal and site clearance and verification),
and 1,020 for pipelines. This actual expenditure data collected shows a
wide range of costs for similarly situated infrastructure, making a
probabilistic approach preferred over a single deterministic estimate.
When sufficient data exists for a particular subset of the sample
(e.g., dry trees on fixed structures in 400 feet of water), BSEE
performs multivariate regression analyses to create distributions of
cost outcomes.
Based on these distributions, BSEE posts P50, P70, and P90
estimates for each well, platform, or pipeline, and aggregated for each
lease, ROW, or RUE.\1\ When sufficient data does not exist (e.g., dry
trees on floating structures) a single deterministic (or point)
estimate is provided. Note that the point estimate contains no
information about its potential variability. Contrast this with
probabilistic estimates where a P50 estimate implies that half of the
reported values should be less than and half should be more than the
P50 estimate. Likewise, the P70 and P90 estimates imply that that there
is 30 percent and 10 percent chance, respectively, that the
decommissioning cost will be higher than the estimate. Said another
way, P70 and P90 values imply there is a 70 percent and a 90 percent
chance, respectively, that the estimated cost will not be exceeded. The
data does not take into consideration which companies are jointly and
severally liable for meeting decommissioning obligations.
---------------------------------------------------------------------------

\1\ There is not a technical support document in support of
these calculations; the data used for these estimates is available
at <a href="https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx">https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx</a>.
---------------------------------------------------------------------------

It would be inappropriate for BOEM to consider the liability
distribution across a company's entire portfolio, as financial
assurance for one lease cannot be used to cover an unassociated lease.
Financial assurance provided to BOEM is generally structured to provide
coverage at the lease level; even for companies with multiple leases,
policy coverage is typically limited to only those associated
facilities on the specified lease. For example, financial assurance at
BSEE's P70 level provides risk mitigation in the event of a default of
that lessee where any excess financial assurance resulting from
facilities on the same lease whose decommissioning costs were below the
P70-estimate would be available to cover associated lease facilities
whose decommissioning costs exceed the P70 value. For lessees or grant-
holders that can demonstrate decommissioning costs below BSEE's
estimates, the Department has included in the final rule a provision in
30 CFR 556.901(g) allowing for the submission of decommissioning cost
data for consideration by the Regional Director in potentially reducing
the supplemental financial assurance demand. Such information could
include, for example, an existing contract for decommissioning
activities. BOEM will consult with BSEE on the

[[Page 31555]]

information received prior to deciding to reduce the required amount of
supplemental financial assurance. BOEM did not select the P90 level
because of the expected burdens it would place on the industry, such as
the examples highlighted by the commenter.
BOEM's goal for its financial assurance program continues to be the
protection of the American taxpayer 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.

C. Revisions to Other Types of Supplemental Financial Assurance

The Department proposed and is finalizing revisions to the
supplemental financial assurance requirements for third-party
guarantees and decommissioning accounts, and prerequisites for
transfers, as discussed in the subsections below.
1. Third-Party Guarantees
The Department proposed in 30 CFR 556.905(a) to evaluate a
potential guarantor using the same credit rating or proxy credit rating
criterion as was 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, and because liquid
assets are needed to finance compliance or decommissioning. As
discussed in the preamble to the proposed rule (88 FR 42145), the
criteria to evaluate a guarantor provided in the existing regulations
have proved difficult to apply. 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. Using the same criterion also simplifies the
evaluation process, making it more efficient without compromising the
risk to taxpayers.
Additionally, to allow more flexibility in the use of third-party
guarantees, the final rule allows a third-party guarantee to be used as
supplemental financial assurance for a RUE or ROW grant as well as a
lease. Most significantly, the amendment proposed in Sec.
556.902(a)(3) 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, as agreed to by BOEM,
would allow a guarantee limited to a specific amount or limited one or
more specific lease obligations.
A summary of all comments received regarding third-party guarantees
and BOEM's corresponding responses regarding the provisions to evaluate
third-party guarantors can be found in section 6.1 of the Response to
Public Comments.
Comment: Commenters generally supported the proposal to evaluate a
potential guarantor using the same credit rating or proxy credit rating
criterion as proposed for lessees.
Response: BOEM acknowledges the commenters' support for the
proposal to evaluate a potential guarantor using the same credit rating
or proxy credit rating criterion as proposed for lessees, and the
Department is finalizing this provision in 30 CFR 556.905(a) as
proposed.
Comment: Multiple commenters generally supported the proposal to
allow limiting third-party guarantees to a specific amount.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing the ability to limit third-party guarantees to
a specific amount or one or more specific lease obligations in 30 CFR
556.902(a)(3).
Comment: One commenter suggested that DOI modify its regulations to
allow guarantors to limit their guarantees to specific obligations.
They asserted this modification is consistent with the proposed rule
and would ease pressure on the security market by removing any
additional and unstated obligations from guarantees that are not
included in a financial assurance demand order.
Response: The Department is finalizing the proposed amendment to
Sec. 556.902(a)(3), which will 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 will
allow, as agreed to by BOEM, a guarantee limited to a specific amount
or to one or more specific lease obligations. This change, to replace a
requirement to cover all costs, parties, and obligations with
permission to limit any of them, part of which BOEM is adding in
response to public comments, allows a guarantor to limit its guarantee
to a specific amount of the total financial assurance requirement. By
allowing a third-party guarantor to guarantee only the obligations it
wishes to cover, BOEM provides industry with the flexibility to use the
guarantee to satisfy supplemental financial 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
limited influence. Moreover, BOEM's capacity to accept a third-party
guarantee that is limited to the obligations of a specific party does
not reduce BOEM's protection because if a limited guarantee is
approved, the guaranteed party will be required to provide other
supplemental financial assurance with respect to any of its liabilities
left uncovered by the limited guarantee.
Comment: Other commenters opposed the proposal and asserted that
third-party guarantors should not be excused from the requirement that
guarantees cover all obligations of lessees, operating rights owners,
and operators on the lease, but did not provide supporting reasoning
for their assertions.
Response: BOEM believes that allowing third-party guarantors to
limit their guaranteed obligations will ease the burden for entities
required to provide additional supplemental financial assurance, while
continuing to reduce the risk to taxpayers. DOI has added regulatory
language in the final rule in 30 CFR 556.905(b) specifically allowing a
third-party to limit its cumulative obligations to a fixed dollar
amount or to covering the costs to perform one or more specific lease
obligations (with no fixed dollar amount). In both scenarios, the value
or the obligations to be covered must be agreed to by BOEM at the time
the third-party guarantee is provided.
Additionally, to allow more flexibility in the use of third-party
guarantees, the final rule will allow a third-party guarantee to be
used as supplemental financial assurance for a RUE or ROW grant, as
well as a lease.
BOEM acknowledges the commenters' opposition to allowing third-
party guarantors to limit their guarantee and BOEM assumes the concern
flows from a belief that the third-party guarantee may be insufficient.
Contrary to this understanding, however, the lessee must still provide
the total amount of the supplemental financial assurance demand through
other financial assurance methods, even if a third-party guarantor
limits the guarantee.
The proposed rule included amendments to 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). No comments were received on this
provision. Therefore, the Department is finalizing, as

[[Page 31556]]

proposed, amendments to 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).
Finally, the existing regulation refers to both a ``guarantee'' and
an ``indemnity agreement'' (which BOEM intended to mean the same
thing), and the proposed rule clarified that the regulations
contemplate only one agreement: the guarantee agreement. No comments
were received on this proposed amendment; therefore, the Department is
also finalizing the clarification that both a ``guarantee'' and an
``indemnity agreement'' contemplate the same guarantee agreement by
removing all references to ``indemnity agreement'' in the regulatory
text. This terminology is changed to clarify that the government is not
required to incur the expenses of decommissioning before demanding
compensation from the guarantor.
2. Decommissioning Accounts
The Department proposed to rename the lease-specific abandonment
accounts in 30 CFR 556.904 as ``Decommissioning Accounts,'' the
terminology used by the industry. This name change is intended to
remove any perceived limitation that this type of account can apply to
only 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, the Department also
proposed to remove the requirement in 30 CFR 556.904(d) to pledge
Treasury securities to fund the account once the funds equal the
maximum amount insurable by the Federal Deposit Insurance Corporation
(FDIC)/Federal Savings and Loan Insurance Corporation (FSLIC), for
which insurance is currently capped at $250,000.
No comments were received specifically on the proposed amendment to
rename the lease-specific abandonment accounts in 30 CFR 556.904 as
``Decommissioning Accounts'' or the proposed amendment to remove the
requirement to pledge Treasury securities to fund the account before
the funds equal the maximum amount insurable by the FDIC/FSLIC.
Therefore, the Department is finalizing 30 CFR 556.904, as proposed, to
rename the lease-specific abandonment accounts as ``Decommissioning
Accounts.'' The Department is also finalizing the removal of the
requirement to pledge Treasury securities to fund the account before
the funds equal the maximum amount insurable by the FDIC/FSLIC.
3. Transfers of Lease Interests to Other Lessees or Operating Rights
Holders
The Department proposed amendments to update subparts G (30 CFR
556.704) and H (30 CFR 556.802) 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 financial assurance requirements. As discussed in
the preamble to the proposed rule (88 FR 42146), 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 DOI. To address this problem, the Department proposed to
clarify that it may withhold approval of any transfer or assignment of
any lease interest unless and until the financial assurance
requirements have been satisfied.
A summary of all comments received regarding transfers and BOEM's
corresponding responses regarding revisions to transfers can be found
in section 6.2 of the Response to Public Comments.
Comment: Commenters generally supported the proposal to allow BOEM
to withhold approval of any new transfer or assignment of any lease
interest until financial assurance obligations are satisfied.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed, amendments to update subparts G
(30 CFR 556.704) and H (30 CFR 556.802) of the Department's existing
part 556 regulations to clarify that BOEM may withhold approval of 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 financial assurance
requirements. As a result of these final amendments, BOEM may withhold
approval of any new transfer or assignment of any lease interest unless
and until financial assurance demands have been satisfied.

D. Evaluation Methodology

The Department proposed and is finalizing revisions to the
financial evaluation criteria that will be used for determining
supplemental financial assurance requirements for oil, gas, and sulfur
leases, RUE grants, and pipeline ROW grants. The proposed evaluation
methodology for the revised criteria, the public comments received, and
DOI's final amendments are discussed in the subsections below.
Summaries of all comments received regarding credit ratings, proxy
credit ratings, and valuing proved oil and gas reserves and BOEM's
corresponding responses can be found in section 7 of the Response to
Public Comments.
1. Credit Ratings
a. Use of an ``Issuer Credit Rating''
The Department proposed to use an ``issuer credit rating'' to
evaluate the financial health of OCS lessees, grant holders, and
guarantors, and proposed to include the new term and corresponding
definition in 30 CFR 550.105 and 556.105. As discussed in the preamble
to the proposed rule (88 FR 42146), an issuer credit rating provides
the rating agencies' opinions of the entity's ability to honor senior
unsecured debt and debt-like obligations. The Department proposed to
accept only issuer credit ratings from a Nationally Recognized
Statistical Rating Organization (NRSRO), such as Standard and Poor's
(S&P) Rating Services and Moody's Investors Service Incorporated (or
any of their subsidiaries). General comments on issuer credit ratings
are as follows:
Comment: Commenters generally supported the use of an issuer credit
rating. Several commenters recommended that BOEM include Fitch Ratings
in the definition as it is an NRSRO equivalent to S&P's and Moody's.
Response: BOEM acknowledges the commenters' support and agrees with
the commenters' assertion that the intent of the proposed rule was to
allow credit ratings from Fitch Ratings. The Department has included
Fitch Ratings and its subsidiaries in the final rule in 30 CFR 556.105.
Comment: An additional commenter noted that BOEM should remove the
term and definition of issuer credit rating from part 550 because it is
not used in the part.
Response: The commenters' assertion is correct, and the Department
is not finalizing the proposed addition of ``Issuer credit rating'' to
30 CFR part 550. In part 550, the existing regulatory text references
30 CFR part 556 to discuss the use of the issuer credit rating.
b. Credit Rating Threshold
As discussed in the proposed RIA, BOEM reviewed historical default
rates

[[Page 31557]]

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 1-year default rates increase
significantly with lower ratings. The average S&P 1-year default rate
for BBB- rated companies from 1981 to 2020 was 0.24 percent.
Comparatively, the average 1-year default rate for BB- rated companies
was 1.21 percent, for B- rated companies, 8.73 percent, and for C rated
companies, 24.92 percent. In the proposal, BOEM asserted that 1-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, typically 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. The amended regulation, as proposed,
would not preclude a demand for supplemental financial assurance
through the Regional Director's regulatory authority at any time.
The Department proposed to use an investment grade credit rating
threshold for determining if supplemental financial assurance may be
required by a lessee. The Department proposed the term and associated
definition of ``Investment grade credit rating'' in 30 CFR 550.105 and
556.105. BOEM explained in the preamble to the proposed rule (88 FR
42159) that the use of an investment grade credit rating standard for
waiving supplemental financial assurance was an appropriate threshold
because it minimizes credit default risk to the taxpayer without
overburdening offshore companies with the cost of providing financial
assurance in low credit risk scenarios. BOEM received a wide range of
comments on the proposal to use an investment grade credit rating
threshold for determining supplemental financial assurance
requirements, as summarized below.
Comment: Multiple commenters asserted that the proposal would
result in significant hardship to small businesses that did not meet
this criterion and hence would have to provide supplemental financial
assurance. Commenters argued that a requirement to provide supplemental
financial assurance would increase the risks of defaulting, not
investing in maintenance of existing operations, laying off employees,
delaying performance of current decommissioning obligations, and
diverting capital funds needed for future OCS energy development.
Response: BOEM acknowledges the commenters' concern and considered
the effects on small entities; however, BOEM is not targeting the size
of companies. BOEM is evaluating the financial strength of all
companies in order to ensure that the development of energy in the OCS
is safe and protects both the taxpayer and the environment. The
Department has included numerous provisions in this rulemaking to
reduce the burden on small entities. BOEM acknowledged in the proposed
rule (88 FR 42146) that small businesses may not have issuer credit
ratings and, to address this issue, proposed to allow entities without
a rating to request that the BOEM Regional Director assess a proxy
credit rating. Additionally, these small businesses can be evaluated on
the proved reserves of their lease to determine whether they may be
waived from the requirement to provide additional supplemental
financial assurance, also potentially reducing their financial burden.
Furthermore, on a lease where the lessee has an investment grade credit
rating, BOEM will waive co-lessees from having to provide supplemental
financial assurance. The Department also included phased-in
implementation, and increased the flexibility of decommissioning
accounts and third party guarantees to reduce the financial burden on
all lessees, including small businesses.
Comment: Multiple commenters supported the use of an investment
grade threshold.
Response: BOEM acknowledges the commenters' support and agrees that
using a credit rating threshold of investment grade strikes the
appropriate balance between both DOI's and the conventional energy
sector's goal to protect the American taxpayers from exposure to
financial loss associated with OCS development and the burden of
providing financial assurance because of the low default risk
associated with companies that maintain an investment grade credit
rating. The Department is finalizing, as proposed in 30 CFR 556.105,
the use of an investment grade credit rating threshold.
Comment: Other commenters supported an even higher credit rating
threshold.
Response: BOEM acknowledges the commenters' support for the change
in the proposed rule that changed the credit rating threshold for
waiver of supplemental financial assurance from BB- to BBB- but
disagrees with the commenters' assertion that BOEM should further raise
the threshold to a higher rating. As discussed in the preamble to the
proposed rule, BOEM believes that 1-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 corresponds with the release of
audited annual financial statements). As would be expected, the average
S&P historical 1-year default rates increase significantly with lower
ratings. The average S&P 1-year default rate for BBB- rated companies
from 1981 to 2020 was 0.24 percent. Comparatively, the average 1-year
default rate for BB- rated companies was 1.21 percent, for B- rated
companies, 8.73 percent, and for C rated companies, 24.92 percent.
Raising the threshold criteria would only reduce the rate to 0.12
percent for a credit rating of BBB+ or to 0.07 percent for a credit
rating of A-. BOEM believes that the 1-year default rate for BBB- rated
companies of 0.24 percent balances the need for ensuring lessee
obligations in the OCS are met while ensuring that the development of
the nation's offshore resources is not unreasonably hindered. Raising
the threshold to a higher value would reduce capital available to
companies for investment, with little additional protection from the
effects of bankruptcy. Additionally, financial assurance can only be
used for the obligations of the specific lease for which it is
provided. Having more financial assurance from low-risk companies will
not provide meaningful protection against the default of high-risk
companies and thus would have an insignificant effect on aggregate
risk.
Comment: One commenter asserted that the proposal is a ``form of
adverse selection against financial assurance providers because only
entities with an elevated risk of default will remain in the market for
financial assurance instruments such as surety bonds.''
Response: BOEM disagrees with the commenter's assertion that the
proposal is a ``form of adverse selection.'' ``Adverse selection''
describes the phenomenon whereby one party to a transaction has better
information than the other and therefore prices are adjusted to
accommodate this discrepancy in information. The commenters do not
explain how that concept applies to the rulemaking. They assert that it
amounts to ``adverse selection'' against financial assurance providers
because ``only entities with an elevated risk of default will remain in
the market for financial assurance

[[Page 31558]]

instruments such as surety bonds.'' There is no assertion of any
discrepancy in the information available to lessees vs. assurance
providers or any effect on the price of that transaction and BOEM does
not see any. To the extent the commenters are asserting that the risk
pool is too small to make underwriting feasible, their comment
conflicts with other comments received claiming that the rule requires
supplemental assurance from relatively low risk lessees. The Department
continues, as proposed, to allow other types of financial assurance
instruments in addition to bonds in the final rule. Under BOEM's past
practice, many companies were waived from providing supplemental
financial assurance, and it is likely that only companies with an
elevated risk of default sought to obtain bonds to comply with the
existing regulations. Additionally, the number of companies requesting
bonds for use as supplemental financial assurance and their
corresponding risk profile does not preclude a viable bond market as
the market can set the fees and collateral required to obtain the
bonds.
Comment: Several commenters expressed concerns that the preamble to
the proposed rule alluded to monitoring of credit ratings, but the
regulatory text did not mention the monitoring. They asserted that, to
ensure these commitments are kept, the Department must include specific
requirements for reviewing credit ratings regularly, with a requirement
for BOEM to reassess credit ratings at least once per year.
Response: With respect to monitoring credit ratings, BOEM stated in
the preamble to the proposed rule at 88 FR 42147 (and has repeated in
this final rulemaking) that BOEM's general practice is to review ``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 financial statements).'' BOEM's financial assurance program is
intended to ensure that private companies have the capacity to meet
their financial and non-financial obligations. BOEM seeks to balance
the financial risk to the government and the taxpayer with the
regulatory burden on lessees and grantees. BOEM did not add additional
regulatory text in this final rule to address this comment because it
is unnecessary; BOEM maintains the general practice of evaluating
lessees, RUE grant-holders, and pipeline ROW grant-holders for
financial risk on at least an annual basis. The amended regulation
would not preclude a demand for supplemental financial assurance
through the Regional Director's regulatory authority at any time.
As discussed in the proposed RIA, of the 276 companies analyzed,
none were rated at or above BBB- at the time of bankruptcy or within 10
years prior to bankruptcy. As such, BOEM has selected BBB- as the
credit rating threshold for providing additional financial assurance.
The Department is finalizing, as proposed in 30 CFR 556.901(d), an
issuer credit rating threshold of BBB- (S&P and Fitch) or Baa3
(Moody's), an equivalent credit rating provided by another SEC-
recognized NRSRO, or an equivalent proxy credit rating, to ensure that
lessees and grant holders have the capacity to meet their financial and
non-financial 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 unreasonable regulatory burdens. If different NRSROs provide
different ratings for the same lessee, BOEM will use the higher of the
lessee's ratings. Additionally, as BOEM monitors company rating changes
throughout the year, use of this threshold will ensure that BOEM has
adequate time to demand needed financial assurance before a company
drops further below the investment grade rating.
2. Proxy Credit Ratings
The Department proposed in 30 CFR 556.901(d) to allow entities that
do not have a NRSRO-issued credit rating to request that the Regional
Director 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. As proposed, DOI intended the ``most recent
fiscal year'' to mean a continuous 12-month period within the 24-months
prior to the Regional Director's determination that supplemental
financial assurance is required. General comments on proxy credit
ratings are as follows:
Comment: Commenters expressed concerns regarding BOEM's proposal to
use a proxy credit rating for entities without an issuer credit rating.
Commenters asserted that BOEM is not a financial rating agency and does
not have the capacity or expertise to institute a program to develop
proxy credit ratings.
Response: BOEM is not developing the credit rating; it is using S&P
Global Inc.'s Credit Analytics credit model, in conjunction with
company-provided financial information for the most recent fiscal year
to obtain a proxy rating. As discussed in the preamble to the proposed
rule at 88 FR 42146, the Regional Director would use the model and
company-provided 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. The use of S&P
Global Inc.'s Credit Analytics credit model provides an accurate and
objective method to assess any given company's probability of default
on its financial obligations based on its audited financial statements.
The vast majority of companies operating on the OCS are private
companies that do not have an issuer credit rating; therefore, without
an option for a proxy credit rating, these companies would be required
to provide supplemental financial assurance unless they met the
reserves criterion. The Department proposed, and is finalizing in 30
CFR 556.901(d), the use of a proxy credit rating to benefit those
companies without an issuer credit rating, particularly small
businesses, and to therefore reduce their burden by allowing them the
opportunity to demonstrate that they should not be required to provide
supplemental financial assurance.
Comment: Commenters asserted that companies would need to establish
a proxy credit rating using the ``intricate financial models of S&P and
Moody's'', which would be time consuming, and that providing the
information that BOEM proposed to require in order to perform a proxy
rating would represent a burden for small companies.
Response: BOEM disagrees with the commenter's assertion that the
companies would need to establish a proxy credit rating using the
``intricate financial models of S&P and Moody's'' and that the
development would be time-consuming. Companies without a credit rating
can provide BOEM with audited financials and BOEM will perform the
modeling to determine the proxy credit rating. BOEM does not believe
this option creates an undue burden on small businesses, as those small
businesses would be required to provide supplemental financial
assurance if they could not obtain an issuer credit rating; the proxy
credit rating provides an alternative for these businesses to qualify
for the financial waiver. Additionally, if a company finds this
alternative more burdensome than the benefit of avoiding posting

[[Page 31559]]

supplemental financial assurance, nothing in the regulations requires
them to select this alternative. Providing audited financials in
exchange for possible supplemental financial assurance avoidance is
consistent with practice under the current regulations and thus not an
additional burden.
The Department proposed to use S&P Global Inc.'s Credit Analytics
credit model to calculate proxy credit ratings, but retained 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. BOEM specifically solicited comment
on the use of S&P Global Inc.'s Credit Analytics credit model for
developing proxy credit ratings. General comments on the use of the S&P
model are as follows:
Comment: Commenters were generally supportive of the use of S&P
Global Inc.'s Credit Analytics credit model.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed in 30 CFR 556.901(d), the option
for companies without issuer credit ratings to request the Regional
Director to determine a proxy credit rating based on audited financial
information for the most recent fiscal year and the S&P credit model.
3. Valuing Proved Oil and Gas Reserves
The Department proposed in 30 CFR 556.901(d) to consider the proved
reserves on a particular lease when determining whether supplemental
financial assurance is required. As discussed in the preamble to the
proposed rule (88 FR 42147), 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.
DOI proposed that companies should report the value of their reserves
using the methodology pursuant to the SEC's regulations on reserve
reporting, and the presentation should be by the lease, or leases, for
which the exemption is being requested. These regulations are commonly
used and understood by offshore oil and gas companies and such reserve
reports 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 proved reserves,
rather than attempting to recreate these regulations. BOEM would use
the value of proved oil and gas reserves per-lease when determining
whether the discounted value of the reserves on any given lease exceeds
three times the cost of the proposed P70 decommissioning estimate
associated with the production of those reserves.
Additionally, the Department proposed the use of a ratio of the
value of proved reserves to decommissioning liability associated with
those reserves that meets or exceeds a value of 3-to-1. As discussed in
the preamble to the proposed rule (88 FR 42148), 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 for that property would be borne by the
government, and consequently reducing the need for supplemental
financial assurance. In BOEM's judgment, a ratio of 3-to-1 provides
sufficient risk reduction to justify a Regional Director determination
that the lessee is not required to provide supplemental financial
assurance for that lease. Bankruptcy data show that the most valuable
properties of the bankrupt company (with at least a 3-to-1 ratio of the
value of reserves to decommissioning costs) are acquired by another
entity. That result accords with BOEM's experience and with common
sense because the value of these properties is economically viable even
after including the decommissioning cost. Additionally, no commenters
provided a different value than 3-to-1 in response to BOEM's
solicitation for comment on other appropriate values.
Comment: Multiple commenters generally supported the use of a
minimum 3-to-1 ratio of the value of proved reserves to decommissioning
liability associated with those reserves.
Response: BOEM acknowledges the commenters' support, and the
Department is finalizing, as proposed in 30 CFR 556.901(d), the use of
a minimum 3-to-1 ratio.
Comment: Several commenters opposed the use of the ratio, asserting
that normal fluctuations in the demand and price of oil and gas,
coupled with the imminent global shift away from fossil fuels to
renewable energy, make it likely that the value of proved oil reserves
in all leases will decline over time. As a result, lessees may earn
less over the life of the lease and in turn, have less capital to cover
decommissioning costs.
Response: There are many external factors that can impact the value
of reserves. BOEM's use of this metric is only to determine the
likelihood that a lease would be acquired, due to the value of the
reserves left on the lease, by a financially healthy company that would
then be liable for lease obligations.
Comment: Several commenters asserted that the value of
decommissioning liability should be added back to the reserve value to
avoid double counting. Additional commenters asserted that comparing
undiscounted decommissioning liability to the present value of
underlying reserves was an incorrect analysis.
Response: BOEM agrees with the commenters that the decommissioning
liability should not be double counted; it is not the Bureau's intent
to double count the decommissioning liability. The regulations are
clear that BOEM is asking for the discounted value of the reserves
(e.g., realized sale price minus uplift costs) without factoring in
decommissioning. BOEM requires lessees to provide supplemental
financial assurance against undiscounted BSEE decommissioning estimates
to protect from financial default events that may occur before
scheduled end of life and the full accounting recognition of the asset
retirement obligation, therefore BOEM concludes that using a discounted
asset retirement obligation insufficiently protects the taxpayer. BOEM
believes the regulations are sufficiently defined to ensure the reserve
analysis is based on the ratio on the discounted value of proved
reserves (excluding decommissioning costs) to the undiscounted BSEE
decommissioning estimate. The Department is finalizing, as proposed in
30 CFR 556.901(d)(4), the use of a ratio of the value of proved
reserves to decommissioning liability associated with those reserves
that meets or exceeds 3-to-1.

E. Phased Compliance With Supplemental Financial Assurance Orders

In the preamble to the proposed rule, BOEM acknowledged that the
proposed regulations could have a significant financial impact on
affected companies (88 FR 42148). For that reason, BOEM proposed to
phase in the new supplemental financial assurance requirements over a
3-year period for existing leaseholders in 30 CFR 556.901(h). As
proposed, BOEM would require that any company receiving a supplemental
financial assurance demand (within 3 years of the rule becoming
effective) post one-third of the total amount by the deadline listed on
the demand letter. A second one-third would be required 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. BOEM
specifically

[[Page 31560]]

solicited comments regarding this approach from potentially affected
parties, and requested comment on how the new supplemental financial
assurance demands could be most effectively implemented to minimize any
unnecessarily adverse effects.
A summary of all comments received regarding the phased compliance
approach and BOEM's corresponding responses can be found in section 8
of the Response to Public Comments.
Comment: In general, industry commenters supported the phased
approach and several commenters recommended that it be extended to 5
years to ``mitigate potential significant risk to companies and to
provide adequate time for the bonding market to adjust.''
Response: BOEM disagrees with the commenters' recommendation that
the phased approach should be extended to 5 years. BOEM has concluded
that the period of 3 years reduces exposure to risk of non-performance
and hence addresses the need at issue in this rulemaking, requiring
supplemental financial assurance where appropriate to protect the
taxpayer while simultaneously providing adequate time for the bonding
market to adjust to the new requirements. The bond market adjustment is
basically a price adjustment and not so much a volume adjustment, and
hence a 3-year period is sufficient to make these adjustments. On the
other hand, lessees have a sufficient period of time to finance the
cost of the required financial assurance. If the bond market does not
provide bonding to a lessee, it is not due to market conditions, but
rather to the high levels of risk, and hence the implication in this
case is that the lessee is such a high risk that no bonding company
wants to add this risk to its portfolio. The Department is finalizing
in 30 CFR 556.901(h) a 3-year phased compliance period.
Comment: Additional commenters requested that BOEM include a phased
provision for parties that were exempt but then later could not meet
the exemption criteria because of changed circumstances and that BOEM
include such provisions for parties that obtain OCS lease or grant
interests in the first 3 years after implementation of the final rule.
Response: In response to commenters' suggestions that BOEM add
clarification that this option is available for changed circumstances
or for obtaining new lease interests, BOEM believes that the proposed
text in 30 CFR 556.901(h) was broad enough to encompass these
circumstances. If a party is exempt but then later cannot meet the
exemption criteria because of changed circumstances (e.g., change in
credit rating), or if a party obtains an OCS lease or grant interest
within the phased compliance time frame after implementation of the
final rule, they would be allowed to use the phased compliance
approach. BOEM has retained the language to establish a 3-year
compliance window broad enough to encompass these circumstances. BOEM
intends for any party who, within the 3-year compliance window, incurs
new decommissioning liability or experiences changed circumstances
resulting in a financial assurance demand from BOEM, to be allowed, at
the Regional Director's discretion, to use the 3-year phased in
approach to providing supplemental financial assurance. This compliance
window will end on the date 3 years after the effective date of this
final rule and any party receiving a supplemental financial assurance
demand after that date will be required to provide the supplemental
financial assurance in full as required by the demand, with no phase-
in.

F. Appeal Bonds

As discussed in the preamble to the proposed rule (88 FR 42148),
the Department proposed a new requirement in 30 CFR 556.902(h) 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 appeal bond in the amount of supplemental financial assurance
required. If the appeal is successful, the amount of the appeal bond in
excess of the amount of any supplemental financial assurance determined
to be required would be returned to the appropriate party. If the
appeal is unsuccessful, the appeal bond could be replaced with, or
converted into, bonds or other forms of financial assurance to cover
the supplemental financial assurance demand.
Comments received regarding appeals and BOEM's corresponding
responses can be found in section 9 of the Response to Public Comments.
Comment: Multiple commenters expressed opposition to BOEM's
proposal, asserting that it raises due process concerns, specifically
because the proposal inhibits the recipient's first opportunity to have
an adjudication of BOEM's determination. They noted that the current
process provides an opportunity for each party to express concerns at
an early stage, while, under the proposal, a lessee could be forced
into posting a bond that could be held for years, which is
disproportionate to the perceived risk to the U.S. taxpayer. An
additional commenter equated the appeal bond requirement to ``an
automatic denial of stays,'' which, they claimed, could render most
supplemental financial assurance demands subject to immediate judicial
review, citing 5 U.S.C. 704 and 43 CFR 4.21(c). The same commenter also
suggested that the appeal bond provision would contradict existing
Sec. 590.107 (sic) (should be ``Sec. 590.7'').
Response: BOEM disagrees that the appeal bond provision raises due
process concerns. It does not prevent the recipient of a BOEM order
from appealing, or from requesting a stay of that order. An appeal bond
no more deprives an appellant of due process here than it does in the
case of a judicial appeal. No court has held that due process requires
that agencies assure the availability of stays without appeal bond
requirements, nor is it the case that the Interior Board of Land
Appeals' (IBLA's) decision on a stay request constitutes an
adjudication of the decision appealed. Further, the appeal bond
provision does not prevent the parties from being able to express
concerns at an early stage. The recipient of a financial assurance
demand has 60 days within which to file a notice of appeal with the
IBLA, during which time it is free to meet with BOEM and attempt to
resolve any issues with respect to the demand. See 30 CFR 590.3. In
fact, the regulations specifically provide for early, informal
resolution of issues. See 30 CFR 590.6. Moreover, whether an appeal
bond is required has no effect on the IBLA's adjudication of the merits
of an appeal. The requirement to post an appeal bond would, however,
add a procedural step before a stay of a BOEM demand could be put in
place. This step is necessary to ensure that financial assurance is
available to cover an appellant's obligations if, during the pendency
of the appeal, the appellant undergoes financial distress.
As noted above, if an appellant wins its appeal, and no financial
assurance is required, the appeal bond will be cancelled, or the amount
of the appeal bond in excess of the amount of financial security
determined to be required will be returned to the appropriate party.
Thus, an appellant is not ``forced'' to post an appeal bond that may be
held for years, as claimed by the commenter. This is different from not
appealing and posting a bond for lease compliance that will be held
until decommissioning is performed. Nor did the proposed rule prescribe
that an appeal bond must ``convert'' to a different type of bond to
cover a required financial assurance obligation.

[[Page 31561]]

BOEM also disagrees that the appeal bond provision will result in
``automatic denials of stays,'' leading to more judicial litigation.
The statutory and regulatory provisions cited by the commenter stand
for the proposition that the unavailability of a stay excuses parties
from the requirement to exhaust administrative remedies before seeking
judicial review. But this outcome will occur only if the IBLA denies a
stay request, and such a denial would be made independent of the appeal
bond requirement. The IBLA must grant or deny a stay based on the
factors set forth at 43 CFR 4.21(b)(1), and not on whether an appeal
bond has been, or must be, posted. See 43 CFR 4.21(b)(4). Therefore,
the requirement that an appeal bond be posted should not result in the
IBLA granting fewer stay requests. Nor does the appeal bond provision
contradict Sec. 590.7. The latter provision, at paragraph (c), states
that the IBLA may grant a stay of a BOEM decision, but that the
decision remains in effect until the stay is granted. That is true
regardless of the new appeal bond provision. Under the new provision,
the IBLA may still grant a stay of a decision, and until a stay is
granted, the decision remains in effect, but in order for the stay to
take effect, the appellant must post the required appeal bond.
Comment: One commenter expressed concern that the proposed rule
specifies that an appeal bond will ``automatically'' convert to a
financial assurance obligation should the lease operator lose its
appeal and noted that bonds do not operate in this manner. If
finalized, the commenter asserted that the appeal bond should provide a
certain number of days for the lease operator to post its financial
assurance obligation to allow the surety to underwrite the operator at
the time the bond is determined to be justified. Additionally, the
commenter stated that BOEM did not offer support for this proposed
requirement and requested data on the number of financial assurance
appeals, the number of stays granted in those appeals, and the total
historical decommissioning liability that has gone uncovered due to
appellate stays.
Response: The proposed rule did not require that an appeal bond
``convert'' to a financial assurance obligation and BOEM is not
finalizing the rule to require conversion. If an appellant lost its
appeal, the appeal bond could be ``converted'' to financial assurance
if that is a viable approach, or the lessee who lost the appeal would
have to provide some other acceptable form of financial assurance.
Neither the proposed nor final rule specify a timeline for this
provision of financial assurance.
In response to the request for data, of the 1,449 appeals the IBLA
received during the last 5 fiscal years, only 5 were from BOEM
decisions concerning financial assurance. The appellant(s) filed a
petition for a stay in 4 of those 5 appeals, and the IBLA granted one
of them. Additional data regarding the current number of appeals is
available at the following website: <a href="https://www.doi.gov/oha/organization/ibla/IBLA-Pending-Appeals">https://www.doi.gov/oha/organization/ibla/IBLA-Pending-Appeals</a>.
Comment: A commenter also highlighted that BSEE, in its recent
final rule arising from the Department's 2020 proposed rule, declined
to retain an appeal bond provision that would have required the posting
of an appeal bond to obtain a stay of a BSEE decommissioning order.
This commenter suggested that it would be unreasonable for BOEM and
BSEE to take two different approaches.
Response: There is no inconsistency with BSEE deciding not to
require appeal bonds at the stage of an order to decommission and BOEM
deciding to require them at the stage of financial assurance demands.
The BSEE decision is based in large part on the assumption that
financial assurance is already in place by the time it issues
decommissioning orders and thus it does not face the risks that BOEM
does at the time of demanding financial assurance. See 88 FR 23569,
23579 (April 18, 2023) (noting BSEE's reliance on the financial
assurance regulations for determining an appeal bond is not necessary
for the BSEE program).
BOEM's retention of the appeal bond provision means that, in the
event of a stay of a financial assurance order, there will be an appeal
bond, ensuring that, even if the appellant becomes insolvent during the
appeal, there will be sufficient funds to perform decommissioning when
it is ordered by BSEE. This fact supports, rather than contradicts,
BSEE's decision not to retain its own appeal bond provision in the BSEE
rule, as duplicative and unnecessary.
Additionally, after the publication of the NPRM, which included
BOEM's proposed provision to require the appeal bond, on December 13,
2023, BSEE published a proposed rule titled Bonding Requirements When
Filing an Appeal of a Bureau of Safety and Environmental Enforcement
Civil Penalty (88 FR 86285), which would amend the bonding requirements
when filing an appeal of a BSEE civil penalty. The proposed regulations
would require that entities appealing a BSEE civil penalty decision to
the IBLA must have a bond covering the civil penalty assessment amount
for the IBLA to have jurisdiction over the appeal.
Further, an appeal bond requirement already applies to appeals of
civil penalties assessed by BOEM and orders of the Office of Natural
Resources Revenue (ONRR). Such a requirement is equally appropriate
when the effect of a change in circumstances of the appellant, such as
bankruptcy or insolvency, could leave DOI without the means of
performing decommissioning. Companies can, and have, filed for
bankruptcy while waiting for a decision from the IBLA on an appeal,
leaving the government with no financial assurance to address
decommissioning obligations. As such, the Department is finalizing, as
proposed, the inclusion of the 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 appeal bond in
the amount of supplemental financial assurance required.

G. Other Amendments

1. Revisions to Definitions
The Department proposed to revise definitions, remove terms and
associated definitions, and add new definitions in 30 CFR 550.105
(Definitions) and 30 CFR 556.105 (Acronyms and definitions) as
discussed in the following subsections. A summary of all comments
received regarding revisions to definitions and BOEM's corresponding
responses can be found in section 10 of the Response to Public
Comments.
a. New Terms: ``Assign'' and ``Transfer''
The Department proposed to add new definitions for the terms
``Assign'' and ``Transfer'' to clarify that these terms are used
interchangeably throughout 30 CFR parts 550 and 556. This change would
also serve to clarify that the related terms ``transferee'' and
``transferor'' are interchangeable with ``assignee'' and ``assignor''
respectively. The definition of the new term ``Assign'' was proposed to
mean conveying an ownership interest in an oil, gas, or sulfur lease,
ROW grant or RUE grant. For purposes of this part, ``assign'' is
synonymous with ``transfer'' and the two terms are used
interchangeably. The definition of the new term ``Transfer'' was
proposed to mean ``conveying an ownership interest in an oil, gas, or
sulfur lease, ROW grant or RUE grant. For the purposes of this part,
``transfer'' is synonymous with ``assign'' and the two terms are used
interchangeably.

[[Page 31562]]

General comments received are as follows:
Comment: Commenters suggested that BOEM clarify for the purposes of
part 550 that ``transfer'' in both the new term and in the definition
of ``Assign'' should be defined to exclude informal transfers. Examples
of informal transfers were corporate name changes that are not
technically a conveyance of an interest to a new entity. They provided
suggested regulatory text edits as follows: ``Transfer means to convey
an ownership interest in an oil, gas, or sulfur lease, ROW grant or RUE
grant. For the purposes of this part, ``transfer'' is synonymous with
``assign'' and the two terms are used interchangeably, [Underline:
except that a transfer excludes transactions subject to 30 CFR 556.715
or changes only in the corporate name of an interest owner that do not
require BOEM approval]'' where the underline represents the commenter's
proposed additional language.
Response: BOEM disagrees with the commenters' assertion that BOEM
should clarify that ``Transfer'' excludes transactions subject to 30
CFR 556.715 or changes only in the corporate name of an interest owner
that do not require BOEM approval. The referenced section, 30 CFR
556.715, addresses transactions of economic interests that should and
will be included in the definition of transfer, although that section
makes clear such transfers do not require BOEM approval. Additionally,
BOEM does not consider a corporate name change to be an ``assignment''
and therefore, the suggested edit is unnecessary.
The Department is finalizing, as proposed, the new terms ``Assign''
and ``Transfer'' and their corresponding definitions.
b. Replacement: ``Right-of-Use'' and ``Easement'' With ``Right-of-Use
and Easement''
The Department proposed to remove the terms ``Easement'' and
``Right-of-use'' from 30 CFR part 550 because neither are used
separately in the regulations. In lieu of these two terms, and to
define the term used in part 550, DOI proposed the addition of the new
term ``Right-of-Use and Easement'' and its associated definition as ``a
right to use a portion of the seabed, at an OCS site other than on a
lease you own, to construct, secure to the seafloor, use, modify, or
maintain platforms, seafloor production equipment, artificial islands,
facilities, installations, or other devices to support the exploration,
development, or production of oil, gas, or sulfur resources from an OCS
lease or a lease on State submerged lands.'' Additionally, the
Department proposed to amend the definition of ``Right-of-Use and
Easement'' in 30 CFR 556.105 to match the proposed definition in 30 CFR
550.105.
No public comments were received on the proposal to delete
``Easement'' and ``Right-of-use'' and replace with the new term
``Right-of-use and Easement'' in 30 CFR 550.105 or on the amendments to
the existing definition in 30 CFR 556.105. As such, the Department is
finalizing, as proposed, BOEM's amendments to remove the terms
``Easement'' and ``Right-of-use'' from 30 CFR part 550 because neither
are used separately in the regulations. In lieu of these two terms, and
to define the term used in part 550, the Department is finalizing the
addition of the new term ``Right-of-Use and Easement'' and its
associated definition. In the final rule, BOEM has removed ``adjacent
to or accessible from the OCS'' from the proposed RUE definition, as it
is not helpful. This is a technical correction and does not change any
meaning or intent of the definition. Additionally, the Department is
finalizing the edits to the same definition, in 30 CFR 556.105.
c. New Term: ``Financial Assurance''
The Department proposed to add a new term and definition for
``Financial assurance'' in 30 CFR 550.105 and 556.105(b) to list the
various methods that may be used to ensure compliance with OCS
obligations in 30 CFR parts 550 and 556. DOI proposed to define the
term as ``a surety bond, a pledge of Treasury securities, a
decommissioning account, a third-party guarantee, or another form of
security acceptable to the BOEM Regional Director, that is used to
ensure compliance with obligations under the regulations in this part
and under the terms of a lease, a RUE grant, or a pipeline ROW grant.''
General comments received are as follows:
Comment: One commenter expressed support for the new ``Financial
assurance'' term and noted that it supported ``the breadth and
optionality in the proposed'' definition.
Response: BOEM acknowledges the commenter's support, and the
Department is finalizing the new term as proposed.
Comment: Commenters recommended that BOEM should be consistent and
intentional in its use of ``financial assurance,'' ``security,'' and
``bond'' within the final rule. Specifically, they asked BOEM to
consider using the global term ``security'' as in the 2020 Proposed
Rule in lieu of ``financial assurance,'' which instead can refer to the
process of furnishing security rather than the security itself.
Response: BOEM does not believe the term ``financial assurance'' is
ever used as a ``process for furnishing security'' in this rulemaking
and, instead, is used to describe any of a number of different types of
securities that BOEM will accept to guarantee performance of
obligations. As such, BOEM believes the term and associated definition
is appropriate. BOEM has elected to simplify the rule by consistently
using the term financial assurance instead of referring to the various
types of financial securities. The Department is finalizing, as
proposed, the removal of the term and definition of ``Security or
securities'' in part 556, as these terms have been replaced with
``financial assurance'' throughout part 556 and 550 for regulatory
consistency.
The Department is finalizing, as proposed, the new term and
definition for ``Financial assurance'' in 30 CFR 550.105 and 556.105(b)
to list the various methods that may be used to ensure compliance with
the relevant OCS obligations in 30 CFR parts 550 and 556.
d. New Term: ``Investment Grade Credit Rating''
The Department proposed to add the new term and associated
definition for ``Investment grade credit rating'' in 30 CFR 550.105 and
556.105(b). The associated definition was proposed as ``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 (NRSRO) as that term is defined by the United States
Securities and Exchange Commission (SEC).'' This definition was
proposed as the threshold above which BOEM would typically not require
supplemental financial assurance. General comments received are as
follows:
Comment: As discussed in section III.D of this preamble, commenters
both supported and opposed the addition of the ``Investment grade
credit rating'' definition. Several commenters suggested that BOEM not
add the term to 30 CFR 550.105 because the term is not used in part
550.
Response: As discussed in section III.D of this preamble, the
Department is not finalizing the proposed addition of ``Investment
grade credit rating'' to 30 CFR part 550, as the commenters' assertion
that the term is not used in part 550 is correct. In part 550, the
regulatory text references 30 CFR part 556 to discuss the use of the
issuer credit rating.

[[Page 31563]]

The Department has revised the definition of ``Investment grade
credit rating'' in 30 CFR 556.105(b) with this final rule to clarify
which rating agency corresponded with the proposed BBB- rating. The
final definition is ``an issuer credit rating of BBB- or higher (S&P
Global Ratings and Fitch Ratings, Inc.), Baa3 or higher (Moody's
Investors Service Inc.), or its equivalent, assigned to an issuer of
corporate debt by a nationally recognized statistical rating
organization as that term is defined in section 3(a)(62) of the
Securities Exchange Act of 1934.''
e. New Term: ``Issuer Credit Rating''
The Department proposed to add the new term and associated
definition for ``Issuer credit rating'' in 30 CFR 550.105 and
556.105(b). The associated definition was proposed as ``a credit rating
assigned to an issuer of corporate debt by Standard and Poor's (S&P)
Rating Services (or any of its subsidiaries), by Moody's Investors
Service Incorporated (or any of its subsidiaries), or by another NRSRO
as that term is defined by the United States SEC.'' General comments
received are as follows:
Comment: Multiple commenters suggested that BOEM not add the term
``Issuer credit rating'' and associated definition to 30 CFR 550.105
because the term is not used in part 550. Other commenters recommended
that BOEM include Fitch Ratings as one of the listed NRSROs in the new
definition in 30 CFR 556.105.
Response: The Department is not finalizing the proposed addition of
``Issuer credit rating'' to 30 CFR part 550, as the commenters'
assertion that it is not used in part 550 is correct. In part 550, the
existing regulatory text references 30 CFR part 556 to discuss the use
of the issuer credit rating. BOEM agrees with the commenters' assertion
that Fitch Ratings is also an appropriate NRSRO and is adding it to the
definition in 30 CFR 556.105.
f. Removal: ``Security or Securities''
The Department proposed to delete the term and associated
definition of ``Security or securities'' in 30 CFR 556.105(b) since the
term ``security'' was proposed to be replaced with ``financial
assurance'' throughout the subpart. This term, i.e., ``security,'' did
not exist in 30 CFR part 550 and therefore was not proposed to be
removed therefrom. General comments received are as follows:
Comment: Commenters recommended that BOEM be consistent and
intentional in its use of ``financial assurance,'' ``security,'' and
``bond'' within the final rule. Specifically, they asked BOEM to
consider utilizing the global term ``security'' as in the 2020 Proposed
Rule in lieu of ``financial assurance,'' which instead can refer to the
process of furnishing security rather than the security itself.
Response: BOEM does not believe the term ``financial assurance'' is
ever used as a ``process for furnishing security'' in this rulemaking
and, instead, is used to describe any of a number of different types of
securities which BOEM accepts to guarantee performance of obligations.
As such, BOEM believes the term and associated definition is
appropriate. BOEM has elected to simplify the rule by consistently
using the term financial assurance instead of the various types of
financial securities. The Department is finalizing, as proposed, the
removal of the term and definition of ``Security or securities'' from
part 556, as these terms have been replaced with ``financial
assurance'' throughout parts 556 and 550 for regulatory consistency.
g. Revision: ``You''
The Department proposed to revise the definition for ``You'' in 30
CFR parts 550 and 556 as, depending on the context of the part: ``a
bidder, a lessee (record title owner), a sublessee (operating rights
owner), a Federal or State RUE grant holder, a pipeline ROW 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 individuals listed in this definition.'' 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.
General comments received are as follows:
Comment: Commenters expressed concerns with BOEM's proposed
definition of ``You'' and asserted that BOEM was imposing on the
regulated community the duty to ascertain which persons covered by the
definition are subject to the specific regulatory requirements of each
section. For example, a commenter asserted that the inclusion of ``an
assignor or transferor'' in the definition is problematic in the
context of part 556 because the scope ``is financial assurance that is
solely the responsibility of current interest holders.''
Response: The Department did not revise the proposed definition of
``you'' in the final rule. BOEM retained ``assignor or transferor'' in
the definition as it is appropriate in the context of some subsections
across the broad scope of parts 550 and 556. The intent of the
definition of ``you'' was always to be totally encompassing and to rely
on context for its meaning in any particular situation.
The Department is finalizing, as proposed, the revisions to the
definition of ``You.'' The definition of the term has traditionally
been all-encompassing in both parts 550 and 556 and BOEM believes the
context provided by the individual subsections is sufficient for
determining which entity covered by the term is the appropriate entity
to which a particular subsection applies.
2. Changing of the Spelling of ``Sulphur'' to ``Sulfur''
The Department proposed to replace the word ``sulphur'' with the
more contemporary spelling of ``sulfur'' throughout the regulatory text
where it has not been previously changed. BOEM noted that this edit was
a technical correction and did not change any meaning or intent of the
regulatory provisions. The Department proposed to update the word
``sulphur'' in the heading of part 550 and in Sec. Sec. 550.101,
550.102, 550.105, and 550.199.
No comments were received on changing the spelling of ``sulphur''
to ``sulfur.'' Therefore, the Department is finalizing, as proposed,
its plans to replace the word ``sulphur'' with the more contemporary
spelling of ``sulfur'' in Sec. Sec. 550.101, 550.102, and 550.105 in
this final action.

IV. Summary of Cost, Economic Impacts, and Additional Analyses
Conducted

A. What are the affected entities?

This final rule will affect current and future lessees, sublessees,
RUE grant holders, and pipeline ROW grant holders. BOEM's analysis
shows that this includes roughly 391 companies with record title
ownership or operating rights in leases, and with interests in RUE
grants and pipeline ROW grants. These lessees and grant holders are
responsible for complying with the regulations and therefore would bear
the compliance costs and realize the cost savings associated with the
provisions in this final rule.

B. What are the economic impacts?

The amendments in this final rule are expected to increase the
total amount of financial assurance required from OCS lessees and grant
holders. Those lessees that do not meet the updated criteria to avoid
providing supplemental financial assurance will have an increased
compliance cost in the form of bond premiums. BOEM has drafted an RIA
detailing the estimated impacts of the

[[Page 31564]]

respective provisions of this final rule. These impacts reflect both
monetized and non-monetized impacts; the costs and benefits of the non-
monetized impacts are discussed qualitatively in the RIA and in the
following paragraphs. The table below summarizes BOEM's monetized
estimate of the cost of increased bonding premiums paid by lessees over
a 20-year period. This timeframe is expected to adequately capture the
aging shallow-water OCS infrastructure removal while providing BOEM
with time to monitor the efficacy of its new program. Due to
technological advances and the changing nature of the OCS's role in the
energy transition, estimates beyond 20-years are too speculative to be
reliable at this stage. Regulatory certainty for OCS lessees is
valuable, however; as the Statement of Energy Effects notes, higher
compliance costs could make the U.S. OCS less competitive in a global
oil market. Additional information on the estimated transfers, costs,
and benefits can be found in the RIA posted in the public docket for
this rule.

The rule affects holders of oil, gas, and sulfur leases, ROW
grants, and RUE grants on the OCS. The analysis shows that this
includes roughly 391 companies with ownership interests in OCS leases
and grants. Entities that operate under this rule are classified
primarily under 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, it is a business with fewer than 1,500
employees. Based on this criterion, approximately 271 (69 percent) of
the businesses operating on the OCS subject to this rule are considered
small; the remaining businesses are considered large entities. All the
operating businesses meeting the SBA classification are potentially
impacted; therefore, BOEM expects that the rule will affect a
substantial number of small entities.
BOEM has estimated the annualized increase in compliance costs to
lessees and allocated those to small and large entities based on their
decommissioning liabilities. In the table below, BOEM's analysis
estimates small companies could incur $421 million (7 percent
discounting) in annualized compliance costs from changes in the final
rule. The Bureau recognizes that there will be incremental cost burdens
to most affected small entities and has included a 3-year phased
compliance approach to provide flexibility for entities required to
provide financial assurance under the new requirements. The changes are
designed to balance the risk of non-performance with the compliance
burdens that are associated with the requirement to provide
supplemental financial assurance. Additional information about these
conclusions can be found in the regulatory flexibility analysis for
this rule.

Estimated Compliance Costs for Non-Investment Grade Small Entities
[2024-2043, 2023, $ millions]
------------------------------------------------------------------------
Discounted Discounted
2024-2043 at 3% at 7%
------------------------------------------------------------------------
Total Compliance Cost........................... $6,362 $4,455
Annualized Compliance Cost...................... 428 421
------------------------------------------------------------------------

C. What are the benefits?

OCSLA regulations and lease provisions require lessees to
decommission facilities, including plugging and abandoning OCS wells
and removing facilities when their useful life has concluded. If the
current lessee fails to perform decommissioning of its OCS facilities,
the burden to decommission OCS facilities may fall to other obligated
parties, such as co-lessees or predecessor lessees, and failing that,
the Federal Government and U.S. taxpayers. Some of the corporate
bankruptcies involving offshore oil and gas lessees since 2009 have
involved decommissioning liabilities not covered by bonds or other
forms of financial assurance. As such, these bankruptcies demonstrate
that BOEM's regulations have been inadequate to protect the public from
potential responsibility for OCS decommissioning, especially during
periods of low hydrocarbon prices. The final rule is intended to
correct these shortcomings with an approach that promotes
internalization of costs of decommissioning by lessees and grant
holders by adhering to the general principle that each current owner
should bear the costs for its own obligations. This final rule is
expected to significantly increase the amount of financial assurance
coverage that protects the Federal Government and taxpayer by requiring
that every lessee, ROW grant holder, and RUE grant holder assume full
responsibility for providing assurance for performance of its own
obligations unless there is a financially strong co-lessee (i.e., one
that meets the credit rating threshold). Finally, the final rule is
expected to reduce the decommissioning activity lead-time that can
result in environmental harms arising out of orphaned, unmaintained, or
minimally maintained facilities, which could result in additional
environmental damage or increased obstacles to navigation, while
awaiting the uncertain outcomes of bankruptcy proceedings or
Congressional appropriations. A reduction in decommissioning activity
lead-time could reduce environmental damage, but BOEM cannot quantify
this benefit in this rulemaking.
Bonding of OCS liabilities by a surety company greatly reduces the
risk that those liabilities will revert to a predecessor lessee or
grant holder because DOI could, but is not required to, turn to the
surety for performance before turning to a predecessor. Further,
because this final rule is designed to secure the taxpayer against the
riskiest subset of liability--i.e., OCS obligations that belong to
speculatively rated companies without marketable reserves--it will
require more supplemental financial assurance than the Department
currently holds from such companies and will decrease the likelihood
that these liabilities become the responsibility of the government.
These reductions in risk are dependent on the initial level of risk
specific to each OCS lease and lessee, and as such, BOEM is not able to
quantify them in aggregate, as discussed in the RIA. This rule will not
affect the Department's regulatory authority to issue decommissioning
orders to predecessor lessees or to intervene as necessary to address
an imminent environmental or safety risk. However, without this final
rule (i.e., without the new supplemental financial assurance procedures
fully in place), it could take longer to arrange for decommissioning.
Orphaned, unmaintained, or minimally maintained facilities, which
currently exist on the OCS, could result in additional environmental
damage or increased obstacles to navigation, while awaiting the
uncertain outcomes of bankruptcy proceedings or Congressional
appropriations.
Additionally, this final rule provides lessees and grant holders
with clarity and regulatory certainty regarding the

[[Page 31565]]

way in which BOEM will conduct its financial assurance program. The
financial assurance it requires will provide accountability to the
taxpayer that a current lessee's or grant holder's obligations to
decommission will not go unfulfilled, or that an associated cost of
business is not transferred to another party at the culmination of the
life of the facility when the productive value is gone and only
liabilities remain.

D. What tribal outreach did BOEM conduct?

On March 31, 2023, BOEM sent letters to all federally recognized
Tribal Nations and Alaska Native Claims Settlement Act (ANCSA)
Corporations to ensure they are aware of the proposed rulemaking, to
answer any immediate questions they may have had, and to invite formal
consultation if desired. Only one Tribe requested consultation, which
was held on June 28, 2023; meeting notes for this consultation are
available in the docket (Docket No. BOEM-2023-0027).

V. Section-by-Section Analysis

Severability

BOEM proposed in the preamble to the proposed rule at 88 FR 42156
that the provisions of the rule be severable. No public comments were
received on severability. Should any court hold unlawful and/or set
aside portions of this rule, the remaining portions are severable and
therefore should not be remanded to the Department. The final rule
contains three main components: (1) streamlining criteria warranting a
demand for supplemental financial assurance; (2) establishing the
amount of any supplemental financial assurance; and (3) making several,
less significant changes to, among other things, transferring interests
in RUE grants and requiring appeals bonds for a stay of an IBLA appeal.
See section III of this preamble.
It is impracticable, if not impossible, for BOEM to anticipate and
address every conceivable adverse court remedy order. For purposes of
this rule, it suffices to substantiate BOEM's intent that the rule's
three components operate largely independently 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 level of financial assurance
required 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 utility does not depend on the
specifics of this final rule. For example, if a court were to vacate
BOEM's selection of the level of supplemental financial assurance
required (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
included in this rule. In this scenario, BOEM could still collect
supplemental financial assurance using the previously accepted BSEE
deterministic estimate for decommissioning costs.
BOEM is amending the following regulations as follows:

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

The terms ``bond,'' ``bonding,'' ``surety bond,'' ``security,'' and
``securities'' are replaced throughout this part with the new term
``financial assurance'', as proposed.
The term ``sulphur'' is replaced throughout this part with
``sulfur'', as proposed. This edit is a technical correction and does
not change any meaning or intent of the regulatory provisions.
Subpart A--General
Section 550.101 Authority and Applicability
The Department is finalizing the revision of ``sulphur'' to
``sulfur'' in the introductory text and is clarifying that the BOEM
Director is the one granted authority by the Secretary to regulate oil,
gas, and sulfur exploration, development, and production operations on
the OCS.
Section 550.102 What does this part do?
The Department is finalizing the revision of ``sulphur'' to
``sulfur'' in the paragraphs (a) and (b).
Section 550.103 Where can I find more information about the
requirements in this part?
The Department is removing the term ``supplement'' from this
section as a technical correction. The existing regulatory text needs
improvement because NTLs do not supplement regulatory requirements, but
instead clarify, provide voluntary recommendations, or provide
additional information concerning how to comply with requirements in
the regulations (e.g., addresses for submissions).
Section 550.105 Definitions
The Department is finalizing as proposed, and as discussed in
section III.G of this preamble, new definitions for the terms
``Assign'' and ``Transfer'' to clarify that these terms are used
interchangeably throughout the part. This change also serves to clarify
that the related terms ``assignee'' and ``assignor'' are
interchangeable with ``transferee'' and ``transferor,'' respectively.
The Department is finalizing, as proposed, revisions to the
definition of ``Criteria air pollutant'' and ``Nonattainment area'' to
explain the acronyms U.S. EPA and NAAQS. This is a technical correction
and does not change any meaning or intent of the definitions.
The Department is finalizing as proposed, and as discussed in
section III.G of this preamble, removal of the terms ``Easement'' and
``Right-of-use'' because neither are used separately in the
regulations. In lieu of these two terms, and to define the term used in
part 550, The Department is finalizing the addition of the new term
``Right-of-Use and Easement'' and its associated definition. Since
proposal, BOEM has removed ``adjacent to or accessible from the OCS''
from the RUE definition, as it is not helpful. This is a technical
correction and does not change any meaning or intent of the definition.
This definition is consistent with the final amendments to the
definition of RUE in 30 CFR 556.105.
The Department is finalizing as proposed, and as discussed in
section III.G of this preamble, the addition of the new term and
definition for ``Financial assurance'' to list the various methods that
may be used to ensure compliance with OCS obligations. Additionally,
the Department is finalizing, as proposed, and discussed in section
III.G of this preamble, revisions to the definition of ``You.''
Section 550.160 When will BOEM grant me a right-of-use and easement
(RUE), and what requirements must I meet?
The paragraph (a) introductory text is expanded, as in the proposed
rule, to include additional functions and devices associated with a RUE
by adding ``secure to the seafloor, use, modify'' after ``construct;''
by substituting ``or'' for ``and'' before the word ``maintain;'' and by
adding references to ``seafloor production equipment'' and
``facilities.'' These edits create consistency between this section and
the definition of RUE in Sec. 550.105. A commenter suggested edits to

[[Page 31566]]

paragraph (a) because the commenter found the paragraph difficult to
read. In response to this comment, DOI has replaced the proposed clause
``You must require the RUE'' with ``A RUE is required'' in this final
rule. That change, in turn, could be confusing when read in conjunction
with the existing introductory text of Sec. 550.160. Accordingly, DOI
is deleting the introductory text in this final rule. This deletion
does not change any meaning or intent of any part of Sec. 550.160.
The Department is finalizing, as proposed, revisions to 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
part 550.
The Department is finalizing, as proposed, revisions to 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 has amended to add
specific criteria for financial assurance demands, as discussed in
section III.A of this preamble. The Department is also revising
paragraph (d) to replace ``right-of-use and easement'' with ``RUE.''
The Department is revising paragraphs (e) and (f)(2) to update the
list therein to be consistent with the finalized revisions in paragraph
(a). BOEM identified the need for these revisions after publication of
the proposed rule and is making them in the final rule for consistency
with the new definition of RUE.
Section 550.166 If BOEM grants me a RUE, what financial assurance must
I provide?
As proposed, the Department is finalizing amendments to 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 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, as discussed in section
III.A of this preamble. The term ``surety bond'' is replaced with
``financial assurance'' throughout the section.
The Department is finalizing revisions to paragraph (a) to require
$500,000 in financial assurance that guarantees compliance with the
terms and conditions of any OCS RUEs an entity holds, as discussed in
section III.A of this preamble. Previously, paragraph (a) required
$500,000 in financial assurance only for RUEs associated with State
leases. Additionally, the Department is finalizing the addition of
paragraph (a)(1), as proposed, to allow area-wide lease financial
assurance to satisfy the requirements of paragraph (a) provided that
assurance is in excess of the $500,000 base RUE financial assurance
requirement and also guarantees compliance with all the terms and
conditions of the RUE(s) it covers. The Department is also finalizing
the addition of paragraph (a)(2) as proposed to allow the Regional
Director to lower the required financial assurance amount for research
and other similar types of RUEs, which reflects BOEM's experience that
the total liability exposure for such RUEs can be well below $500,000.
Lastly, the Department is finalizing the addition of paragraph (a)(3)
as proposed to provide that the financial assurance requirements of
section 556.900(d) through (g) and Sec. 556.902 apply to the financial
assurance required in paragraph (a).
The Department is finalizing, as proposed, the revision of
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 will use the issuer credit rating or proxy credit rating
criterion found in Sec. 556.901(d)(1) and (2) to evaluate a RUE grant
holder, as discussed in section III.A of this preamble; 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 criterion set forth in amended Sec.
556.901(d)(1). Like lessees, most RUE holders are oil and gas
companies, and BOEM will therefore, as discussed in section III.A of
this preamble, use the same financial criterion to determine the need
for additional financial assurance from RUE holders and lessees to
provide consistency.
The Department is finalizing the revision to paragraph (b)(1) as
proposed 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. Sec. 556.900 (d) through (g) and 556.902.
This rule also finalizes the revision to Sec. 550.166(b)(2) to include
``applicable BOEM and BSEE orders'' in the list of what RUE
supplemental financial assurance must cover. The Department is not
finalizing the proposed language that clarified that RUE holders must
also comply with the decommissioning regulations at part 250, subpart Q
of this title as it is no longer needed. BSEE adopted changes to their
regulations in subpart Q to expressly state that RUE holders must
comply with the BSEE decommissioning regulations. 88 FR 23569 (Apr. 18,
2023). As such, BOEM is not finalizing this reference to the BSEE
regulations, as it is now redundant. The Department is finalizing the
addition of new paragraph (c), as proposed, to provide that if a RUE
grant holder fails to replace any deficient financial assurance upon
demand, or fails to provide 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.
Section 550.167 How may I assign my interest in a RUE?
The Department is finalizing the addition of a new Sec. 550.167 to
establish the ability to assign a RUE interest. Paragraph (a)
establishes that those who want to obtain a RUE or are requesting
assignment of an interest in a RUE must provide the information
contained Sec. 550.161 and must obtain BOEM's approval. In response to
comment, the Department is finalizing the addition of a new paragraph
(b) that parallels the provisions for ROW assignments in BSEE's
regulations at 30 CFR 250.1018. New paragraphs (c)(1) through (4)
establish, as proposed, the circumstances in which BOEM may disapprove
an assignment. These circumstances are intended to prevent the
assignment of a RUE when, for example, the assignment would result in
inadequate financial assurance.
Section 550.199 Paperwork Reduction Act Statements--Information
Collection
The Department is finalizing the revision of ``sulphur'' to
``sulfur'' in paragraph (b) and clarification that ``parts 551, 552''
refer to 30 CFR parts 551 and 552.
Subpart J--Pipelines and Pipeline Rights-of-Way
Section 550.1011 Financial Assurance Requirements for Pipeline Right-
of-Way (ROW) Grant Holders
The Department is finalizing the revision of this section in its
entirety. The section heading is 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.
The Department is finalizing, as proposed, revisions to paragraph
(a) to

[[Page 31567]]

add ``, attempt to assign,'' after ``apply for'' so that it is clear
the financial assurance requirements of this section apply to an
assignment of a right-of-way grant. The revisions subsume paragraph
(a)(1) into paragraph (a) and revise it to remove the reference to 30
CFR part 256, which has no bonding requirements for pipelines, and to
add the word ``pipeline'' before ``right-of-way.'' The revisions add
``grant'' after ``right-of-way (ROW)'' for clarification, and to
clarify that the purpose of the area-wide financial assurance, which is
required in paragraph (a), is to guarantee compliance with the terms
and conditions of all the pipeline ROW grants held in an OCS area, as
defined in Sec. 556.900(b). These amendments clarify that the
requirement to provide area-wide financial assurance for a pipeline ROW
grant is separate and distinct from the financial assurance coverage
provided for leases and RUEs. Existing paragraph (a)(2) is removed
because supplemental financial assurance requirements would be covered
by new paragraph (d).
The Department is finalizing, as proposed, the removal of 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). The Department is finalizing, as proposed, the
replacement of 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.
The Department is finalizing the replacement of paragraph (c), as
proposed, with a provision stating that the requirements for lease
financial assurance in Sec. Sec. 556.900(d) through (g) and 556.902
apply to the area-wide financial assurance required in paragraph (a) of
this section. The Department is finalizing the removal of existing
paragraph (d), which is now made redundant by new paragraph (f).
The Department is finalizing, as proposed, the addition of a new
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. As discussed in section III.A of this preamble,
the Department is finalizing the use of the same issuer credit rating
or proxy credit rating criterion to evaluate a pipeline ROW grant
holder, or co-grant holder, as the Department is finalizing to apply to
lessees in Sec. 556.901(d)(1). BOEM, as discussed in section III.A of
this preamble, has found that reliance on credit ratings better
evaluates financial stability than net worth, and is thus applying the
same financial criterion in evaluating the financial stability of grant
holders.
The Department is finalizing, as proposed in new paragraph (e)(1),
a provision that the supplemental financial assurance must meet the
general requirements for lease surety bonds or other financial
assurance, as provided in Sec. Sec. 556.900(d) through (g) and
556.902. The Department is not finalizing the proposed language in new
paragraph (e)(2) that stated that any supplemental financial assurance
for a pipeline ROW is required to cover costs and liabilities for
regulatory compliance and compliance with applicable 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, because it is no longer needed and redundant. BSEE
adopted changes to their regulations in subpart Q to expressly state
that all ROW holders must comply with the BSEE decommissioning
regulations. 88 FR 23569 (Apr. 18, 2023). As such, BOEM is not
finalizing this reference to the BSEE regulations, as it is now
redundant. New paragraph (e)(2) now states that any supplemental
financial assurance for a pipeline ROW is required to cover the costs
and liabilities for compliance with obligations of your ROW grants and
with applicable BOEM and BSEE orders.
The Department is also finalizing the addition of 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 30 CFR 250.1013.

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

The Department is finalizing, as proposed, 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 contain
authority allowing BOEM to issue or amend regulations.
The final rule also removes, as proposed, the citation to 43 U.S.C.
1331 note which is where the Gulf of Mexico Energy Security Act of 2006
(GOMESA) 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 that statute and has removed all regulations on
this topic from part 556, except section 556.1000, which provides that
lessees may no longer apply for such credits.
Additionally, the terms ``bond,'' ``bonding,'' and ``surety bond''
are replaced throughout this part with the new term ``financial
assurance.'' The Department is finalizing, as proposed, the revision to
the part 556 heading to update the spelling of sulfur and to replace
``bonding'' with ``financial assurance.''
Subpart A--General Provisions
Section 556.104 Information Collection and Proprietary Information
The Department is finalizing the removal of an incorrect phone
number and email address in paragraph (a)(4). This is a technical
correction, consistent with the content of other subparts, that was
discovered after publication of the proposed rule and does not change
the intent of the paragraph.
Section 556.105 Acronyms and Definitions
The Department is finalizing, as proposed, and as discussed in
section III.G of this preamble, the new terms ``Assign'' and
``Transfer'' and associated definitions to clarify that these terms are
used interchangeably throughout the part. This change also serves to
clarify that the related terms ``assignee'' and ``assignor'' are
interchangeable with ``transferee'' and ``transferor'' respectively.
The Department is finalizing the removal of ``GOMESA'' from the
acronym list in paragraph (a) as discussed above. The final rule
removes the citation to 43 U.S.C. 1331 note which is the only reference
to GOMESA in part 556.
The Department is finalizing, as proposed, and as discussed in
section III.G of this preamble, amendments to the definition of
``Right-of-Use and Easement (RUE)'' to include the words

[[Page 31568]]

``to construct, secure to the seafloor, use, modify, or maintain
platforms, seafloor production equipment.'' This amended definition is
the same as the definition of ``Right-of-Use and Easement'' finalized
in Sec. 550.105.
The Department is finalizing revisions to the definition of
``Eastern Planning Area'' as proposed to remove the acronym ``EPA''
which can be confused with the United States Environmental Protection
Agency (U.S. EPA). The Department is not finalizing the proposed
removal of the rest of the first sentence in the existing definition to
retain consistency with the definitions for ``Central Planning Area''
and ``Western Planning Area,'' which were not changed in the proposed
rulemaking.
The Department is finalizing, as proposed, and as discussed in
section III.G of this preamble, the addition of a new term and
definition for ``Financial assurance'' to clarify that various methods
can be used to ensure compliance with OCS obligations. This definition
is the same as the definition of ``Financial assurance'' finalized in
Sec. 550.105.
The Department is finalizing, as proposed, and as discussed in
sections III.D and III.G of this preamble, the addition of a new term
and definition for ``Investment grade credit rating'' to 30 CFR part
556.
The Department is finalizing, as discussed in section III.G of this
preamble, the addition of the new term ``Issuer credit rating'' and its
corresponding definition, as revised based on public comment as: ``a
credit rating assigned to an issuer of corporate debt by S&P Global
Ratings, by Moody's Investors Service Inc., by Fitch Ratings, Inc., or
by another nationally recognized statistical rating organization, as
that term is defined in section 3(a)(62) of the Securities Exchange Act
of 1934.''
The Department is adding the definition of ``Predecessor,'' as
proposed in the 2020 proposed rule and as discussed in section III.B of
this preamble, to describe the prior owners who share liability with
the current owners.
The Department is finalizing, as proposed, the removal of the term
and definition of ``Security or securities,'' as these terms have been
replaced with ``financial assurance'' throughout parts 556 and 550 for
regulatory consistency. Additionally, the Department is finalizing, as
proposed, and discussed in section III.G of this preamble, the
revisions to the definition of ``You.'' This definition is the same as
the definition of ``You'' finalized in Sec. 550.105.
Subpart G--Transferring All or Part of the Record Title Interest in a
Lease
Section 556.703 What is the effect of the approval of the assignment of
100 percent of the record title in a particular aliquot(s) of my lease
and of the resulting lease segregation?
The Department is removing ``bonding'' from paragraph (a) as a non-
substantive change identified after proposal to be consistent with its
replacement by the term ``financial assurance'' throughout the subpart.
Section 556.704 When may BOEM disapprove an assignment or sublease of
an interest in my lease?
The Department is finalizing, as proposed, revisions to paragraph
(a)(1) to clearly state that BOEM may disapprove an assignment or
sublease when the transferor, transferee, or sublessee is not in
compliance with all applicable regulations and orders, including
financial assurance requirements. Similarly, this rule replaces the
word ``would'' in the section heading with ``may'' to better reflect
this discretion. Additionally, BOEM is non-substantively revising
paragraph (a)(2) to remove the ``etc.'' in the parenthetical as it is
not necessary since the parenthetical is a list of examples.
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 final rule revises paragraph (a) to clearly state that BOEM may
disapprove a transfer of operating rights in a lease if the transferee
is not in compliance with all applicable regulations and orders,
including financial assurance requirements. This final rule also
replaces the word ``would'' in the section heading with ``may'' to
better reflect this discretion. Additionally, BOEM is non-substantively
revising paragraph (b) to remove the ``etc.'' in the parenthetical as
it is not necessary since the parenthetical is a list of examples.
Subpart I--Financial Assurance
Section 556.900 Financial Assurance Requirements for an Oil and Gas or
Sulfur Lease
The Department is finalizing, as proposed, revisions to the section
heading to read, ``Financial assurance requirements for an oil and gas
or sulfur lease'' 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, not just
surety bonds. The Department is also finalizing the heading of subpart
I to remove ``Bonding or Other'' consistent with the replacement of
``bonding'' with ``financial assurance.''
The Department is finalizing the addition of what was proposed as
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. However,
to avoid confusion in how to apply existing paragraphs (a)(1) through
(3), BOEM has moved this language to the introduction of paragraph (a)
to note that it is required in addition to any one of paragraphs (a)(1)
through (3). BOEM's modified language in paragraph (a) also addresses a
concern by a commenter that asserted ``the proposed provision makes no
sense at the lease issuance stage because supplemental financial
assurance can only be required after approved lease exploration or
production activities commence.''
The Department is finalizing, as proposed, revisions to the
introductory text in 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 Department is finalizing, as proposed, revisions to the
introductory text in paragraph (h) to replace the words ``additional
bond coverage'' with ``supplemental financial assurance'' to clarify
that surety bonds are not the only means of meeting the requirement.
The final rule also revises paragraph (h)(2) in recognition that BSEE,
rather than BOEM, is the agency with authority to suspend production or
other operations on a lease.
Finally, the Department is finalizing, as proposed, the addition of
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 under Sec.
550.166 may be called for performance of obligations arising from a RUE
on which the holder of a RUE defaults.
Section 556.901 Base and Supplemental Financial Assurance
The Department is finalizing, as proposed, revisions to the section
heading to read, ``Base and Supplemental Financial Assurance,'' because
this section covers both base financial assurance and supplemental
financial assurance requirements.

[[Page 31569]]

The Department is finalizing, as proposed, revisions to the
introductory text of paragraph (a) to replace the word ``bonds'' with
``financial assurance'' for consistency with the terminology amendments
in this subpart. The Department is also revising paragraph (a)(1)(i)
introductory text to replace the word ``bond'' with ``lease exploration
financial assurance'' for consistency with the terminology used in
existing paragraph (a)(1)(ii) (lease exploration bond).
The Department is finalizing, as proposed, the elimination of the
parenthetical ``(the lessee)'' from the paragraph (b) introductory text
as it is made redundant by the definition of ``You.'' The Department is
also finalizing, as proposed, revisions to the 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 is not being changed.
The Department is finalizing, as proposed, revisions to paragraph
(c) to remove the words ``authorized officer'' and replace them with
``Regional Director,'' and to 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
prescribed in paragraph (a)(1) or (b)(1), but not less than the amount
of the cost for decommissioning.
The Department in the final rule is, as proposed, combining the
provisions of the existing paragraph (d) introductory text and the
existing paragraph (d)(1) to provide that the Regional Director may
determine that supplemental financial assurance is required to ensure
compliance with the obligations, including decommissioning obligations,
under a lease and the applicable regulations if the lessee does not
meet at least one of the criteria provided in new paragraphs (d)(1)
through (4).
The Department is finalizing, as proposed, the addition of a new
paragraph (d)(1) to set forth the criterion BOEM would use to evaluate
the ability of a lessee to carry out present and future obligations.
Under this paragraph, BOEM will use an investment grade issuer credit
rating from a NRSRO, as defined by the SEC, greater than or equal to
either BBB- from S&P Global Ratings or Fitch Ratings Inc., or Baa3 from
Moody's Investor Service Inc., or the equivalent rating from another
NRSRO. If different SEC-recognized NRSROs provide different ratings for
the same company, BOEM will apply the highest rating.
As discussed in section III of this preamble, the Department is
finalizing the addition of a new paragraph (d)(2) that states that BOEM
can 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
Global Ratings or Fitch Ratings Inc., or Baa3 from Moody's Investor
Service Inc., or their equivalent from another NRSRO. The proxy credit
ratings that BOEM will calculate on behalf of lessees will 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 uses to determine the proxy credit rating must be from a
continuous 12-month period within the 24-month period 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 all
liabilities that may encumber a lessee's ability to carry out future
obligations. Under the final rule in Sec. 556.901(d)(2)(ii), the
lessee is 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.
The Department is finalizing revisions to paragraph (d)(3) to
address the situation where the lessee does not meet the criterion in
paragraph (d)(1) or (2), but one or more co-lessees or co-grant holders
meet the criterion. The Regional Director may require a lessee to
provide supplemental financial assurance for decommissioning
obligations if no co-lessee or co-grant holder has an issuer credit
rating or proxy credit rating that meets the threshold set forth in
paragraph (d)(1) or (2). In response to comments, BOEM has revised new
paragraph (d)(3) to make clear that the presence of such co-lessee or
co-grant holder will allow the Regional Director to not require
financial assurance from a current lessee only to the extent that the
current lessee and that co-lessee or co-grant holder shares accrued
liabilities.
The Department is finalizing the addition of a new paragraph (d)(4)
to set forth the methodology the Regional Director would use to
determine proved reserves if the lessee does not meet the criteria in
paragraph (d)(1), (2), or (3). In this instance, the Regional Director
will assess each lease, unit, or field to determine whether the value
of the discounted proved oil and gas reserves on the lease exceeds
three times the undiscounted estimated cost of the decommissioning
associated with the production of those reserves. Under paragraph
(d)(4), the Regional Director's assessment will 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 received multiple comments requesting BOEM
allow the proved oil and gas reserve analysis to be based on a unit or
field basis, and to clarify when values are discounted and when they
are undiscounted in the calculation; BOEM has added clarifications in
paragraph (d)(4) to address these comments (e.g., including the field
or unit basis, and stating that undiscounted cost estimates will be
used).
The Department is also finalizing the addition of new paragraphs
(d)(4)(i) and (ii), which state that, when implementing this reserves
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.
The Department is finalizing, as proposed, redesignation of
existing paragraph (d)(2) as paragraph (e) and revisions 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.
The Department is finalizing redesignation of existing paragraph
(e) as paragraph (f) and revisions 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. As
discussed in section III.B of this preamble, the Department is
finalizing the use of the BSEE P70 decommissioning probabilistic
estimate to determine the amount of supplemental financial assurance
required to guarantee compliance when there are insufficient reserves
or no current lessee or co-lessee that meets the criterion in Sec.
556.901(d)(1) or (2). The Department is finalizing, as proposed, the
inclusion of the language from existing paragraph (e) in new paragraph
(f) to establish that, in determining the

[[Page 31570]]

amount of supplemental financial assurance, the Regional Director will
consider the lessee's potential underpayment of royalty and cumulative
decommissioning obligations.
The Department is finalizing, as proposed, redesignation of
existing paragraph (f) as paragraph (g) and revisions to replace the
words ``bond'' and ``surety'' with ``financial assurance'' throughout.
Existing regulation 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.'' The Department is finalizing, as proposed, the
replacement of this less prescriptive regulatory text with new
paragraph (g)(2) that states an entity must submit evidence to the
Regional Director that demonstrates that the projected amount of
royalties due to the United States Government and the estimated costs
of decommissioning are less than the required financial assurance
amount. Additionally, through the same process, BOEM will allow an
entity to request a reduction if it opposes the amount of a proposed
increase in the amount of financial assurance required.
The Department is finalizing the addition of new paragraph (h) to
describe the limited opportunity lessees will have to provide the
required supplemental financial assurance in phased installments during
the first 3 years after the effective date of this regulation, subject
to the conditions of paragraphs (h)(1) and (2). The Department proposed
and is finalizing a 3-year approach, as discussed in section III.E of
this preamble, which is appropriate to mitigate potentially significant
risk to companies and to provide adequate time for the bonding market
to adjust. Additionally, this approach reduces the immediate regulatory
burden on lessees and grant holders that are required to provide
financial assurance as a result of this rule, which are likely to
mainly be small businesses.
The Department is finalizing the addition of new paragraphs
(h)(1)(i) through (iii) to establish the timing and amounts of phased
supplemental financial assurance that would need to be provided.
Submissions would be required in three installments of one-third of the
demand each, 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 installment would be due within
36 months from the date of the receipt of the original demand letter.
Additionally, the Department is finalizing, as proposed, the
addition of 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
phased compliance deadline under pa

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