Elena Kobrinski, Doctoral CandidateHarte Research Institute for Gulf of Mexico Studies

Texas A&M University - Corpus Christi, TexasJoint Artificial Reef Subcommittee Meeting

San Antonio, TexasMarch 15, 2016

OVERVIEW OF OFFSHORE OIL & GAS DECOMMISSIONING

COST ESTIMATION

TOPICS OF DISCUSSION:1. OIL AND GAS LEASES IN THE GULF OF MEXICO

2. PROBLEMS WITH LEASES LEADING TO PROBLEMS IN ESTIMATING COSTS TO DECOMMISSION

3. GOVERNMENT ACCOUNTABILITY OFFICE (GAO) REPORT RELEASED IN JANUARY 2016:

• ACTIONS NEEDED TO BETTER PROTECT AGAINST BILLIONS OF DOLLARS IN FEDERAL EXPOSURE TO DECOMMISSIONING LIABILITIES

How does a lease work in the Gulf of Mexico?

• Five Year Program Leasing Cycles

• The leasing contract with the federal government requires removal!• The mystery of financial assurance:

• Area-wide bonds, supplemental bonds and “financial strength”

• Code of Federal Regulations (30 CFR 556 – Subpart I – Bonding)

•

Source: BOEM 2014

COST ESTIMATION: HOW DO LEASES LEAD TO PROBLEMS?

• Personal Communication with BOEM and BSEE, 2015:• “Technological advances are outpacing regulations, policies and programs”• “Contingent liability on the U.S. Outer Continental Shelf are large and increasing…

routing decommissioning estimates at $50 Billion“• “The problem is they are not required to submit financial assurance…”• “The money for decommissioning can’t come from the treasury… there needs to be

a central fund…” • The issue of “relinquished” leases• The issue of SUBLEASING• The issue of IDLE IRON… currently 227 structures and 1020 wells are overdue

• 227 structures with an $8 Million estimate = $1.8 BILLION• FOIA to BSEE and the Departent of the Interior: 2015 – 2016• Government Accountability Office (GAO) Report Released in January 2016

REPORT OVERVIEW:• As of October 2015, for an estimated $38.2 billion in decommissioning liabilities in

the Gulf, Interior officials identified about $2.3 billion in liabilities that may not be covered by financial assurances.

• Of the remaining $35.9 billion in decommissioning liabilities, Interior held or required about $2.9 billion in bonds and other financial assurances, and had foregone requiring about $33.0 billion in bonds for the remaining liabilities.

• Until Interior improves its ability to obtain valid data from its data system and revises and implements its financial assurance procedures, the federal government remains at increased risk of incurring costs should lessees fail to decommission oil and gas infrastructure.

THE INTERIOR FACES TWO KEY CHALLENGES MANAGING POTENTIAL DECOMMISSIONING LIABILITIES:

1. BSEE (Bureau of Safety and Environmental Enforcement) does not have access to all relevant data from lessees on costs associated with decommissioning activities in the Gulf.

2. BOEM’s requirements for reporting the transfers of lease rights may impair its ability to manage decommissioning liabilities.

• Unless and until Interior obtains accurate and complete data on decommissioning costs, Interior may not have reasonable assurance that its cost estimates of decommissioning liabilities in the Gulf are accurate, or that it is requiring sufficient amounts of financial assurance based on these estimates.

• If the recommendations in the report and the final regulations requiring the reporting of data are successful, it could mean more transparency with actual decommissioning costs, instead of a constant moving target.

• Ultimately, it could mean more financial assurance for the artificial reef programs… and rigs-to-reefs programs specifically.

WHAT DOES THIS MEAN FOR ARTIFICIAL REEF PROGRAMS?

ACKNOWLEDGMENTS• James R. Ballard, Gulf States Marine Fisheries Commission• Committee Chair, Dr. Richard McLaughlin, Endowed Chair for Marine Policy and Law, Harte Research

Institute• Committee Members:

• Dr. Alexey Sadovski, Professor of Mathematics, Department of Science and Engineering, Texas A&M University

• Dr. Brooke Shipley, Artificial Reef Chief Scientist and GIS Specialist, Texas Parks and Wildlife Department

• Dr. Anita Reed, Associate Professor, College of Business, Texas A&M University• Mr. John Embesi, Research Specialist, Flower Garden Banks National Marine Sanctuary• Graduate Faculty Representative: Dr. Gary Jeffress, Director, Conrad Blucher Institute

• Harte Research Institute for Gulf of Mexico Studies• Texas A&M University – Corpus Christi• NOAA Environmental Cooperative Science Center• Beveridge & Diamond, P.C., Washington, D.C.• Bureau of Safety and Environmental Enforcement (BSEE) Gulf of Mexico Outer Continental Shelf

Region, New Orleans

This material is based upon work supported by the National Oceanic and Atmospheric Administration, Educational Partnership Program, U.S. Department of Commerce, under Agreement No. NA11SEC4810001. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Commerce, National Oceanic and Atmospheric Administration.

THANK YOU!

The Gulf of Mexico is the most extensively developed hydrocarbon producing area in the world.

Source: W. Griffin, Marine Policy and Economics 2010 (Wilson and Heath)

THE BIG PICTURE:

• “The oil and gas industry worldwide is looking at the decommissioning of 6500 offshore rigs by 2025 . . . policy is still not set. Policy based on science is badly needed in this area.”

• ~Dr. David Booth, University of Technology, Sydney, Australia, April, 2011

RECOMMENDATIONS:• Ensure that BSEE collects all relevant data associated with decommissioning from

lessees. • Direct BSEE to establish documented procedures for estimating decommissioning liability. • Develop a plan and set a time frame to ensure that Interior’s data system for managing

offshore oil and gas activities includes processes to accurately and completely record estimated decommissioning liabilities.

• Develop a plan and set a time frame to ensure that Interior’s data system for managing offshore oil and gas activities will be able to identify, capture, and distribute data on decommissioning liabilities and financial assurances in a timely manner.

• Ensure that BOEM completes its plan to revise its financial assurance procedures, including the use of alternative measures of financial strength.

• Revise BOEM’s regulations to establish a clear deadline for the reporting of transfers to require that lessees report the transfer of rights to lease production revenue.

HOW DOES THIS FIT IN WITH MY RESEARCH?• Dissertation Chapters:

• Chapter One: • Current Decommissioning Status in the U.S. and Global Overview, with an Emphasis

on Rigs-to-Reefs Programs

• Chapter Two: • The United States Outer Continental Shelf Oil and Gas Leasing Process, Cost

Estimation and Financial Assurance in Gulf of Mexico Decommissioning, and How the Current Status Could Affect the Future Offshore Sales Market

• Chapter Three:• Current Decommissioning Issues and Strategies in the Gulf of Mexico: A Website,

Survey and Predictive Model, A Discussion on Education and Transparency, and Recommendations and Ideas for Future Research

Discussing two parts of Chapter Two…