Plugged & Abandoned…

As if low prices for crude oil and natural gas were not causing enough stress on many US upstream E&P businesses (as evidenced by the burgeoning number of restructurings and Chapter 11 bankruptcy filings), their executives are now faced with the potential need to provide significantly increased levels of “Plug & Abandonment” (P&A) collateral to satisfy enhanced regulatory requirements being imposed by the Bureau of Ocean Energy Management (BOEM) on companies operating (or which have interests in) offshore leases and fields in the Gulf of Mexico (GoM) and elsewhere in US territorial waters, also referred to as the Offshore Continental Shelf (OCS).

A P&A obligation is simply an example of an Asset Retirement Obligation (ARO), whereby any operator, or prospective operator, of an O&G field in the GoM has to provide assurance to the BOEM that, as and when any well or field comes to the end of its useful life and has to be de-commissioned, there will be sufficient resources available to carry out the necessary work to the required standard; with the collateral providing assurance that, should the operator default, the costs of de-commissioning will not fall upon the public purse. Providing P&A collateral is, thus, an essential component in managing any US “offshore” E&P business.

The issue is that providing such P&A assurance has traditionally been done with bank letters of credit (LoCs) or surety bonds. In addition, many companies were able to obtain a significant level of exemption from the BOEM (called “waivers”) allowing them to self-insure such obligations because of their financial capacity. However, to provide bank LoCs and surety bonds most companies have had to eat into their banking facilities and/or post collateral against the provision of a bond, which is both a constraint on their financial resources and economically inefficient.

Now the world has changed, and, for some, drastically.

The new regime, which came into effect on September 12th, means that the BOEM will no longer grant waivers; nor will it allow self-insurance of P&A obligations beyond 10% of any company’s Net Tangible Worth (NTW). In addition, it is going to use more rigorous financial formulae and qualitative assessments to determine a company’s ability to self-insure, and will no longer take into account the joint and several (J&S) nature of obligations in respect of offshore leases, but in many cases look at an operator’s capacity on a stand-alone basis. And, just to make its point, it is imposing a tight timeframe for compliance- with staged requirements over the next year.

All of this, not surprisingly, is causing some consternation amongst the companies affected, as they receive letters from the BOEM setting out the extent (if any) to which they will be permitted to self-insure. We anticipate that many company executives will suffer “sticker shock.”

However, the BOEM has also publicly stated that it will now, at a Regional Director’s discretion, accept a much broader range of collateral to provide the required “financial assurance”, including policies of insurance. Through its insurance companies, Awbury specializes in providing its clients with solutions to complex credit, financial and economic issues, such as the ones many now face in the P&A realm. Not only that, but, because we undertake a comprehensive analysis of all the risks involved, including an Obligor’s credit capacity, we are able to provide those solutions in ways which do not unnecessarily tie up its bank lines or working capital; allowing management to focus on more productive uses of a company’s resources. We are, therefore, able to help those facing new or increased P&A requirements to manage them effectively and promptly.

So, if the letter you receive from the BOEM causes a sharp intake of breath, you should give us a call!

The Awbury Team

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