Risk Management and Financial Assurance for OCS Lease and Grant Obligations

DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

30 CFR Parts 550, 556, and 590

[Docket ID: BOEM-2023-0027]

RIN 1010-AE14

Risk Management and Financial Assurance for OCS Lease and Grant Obligations

AGENCY:

Bureau of Ocean Energy Management (BOEM), Interior.

ACTION:

Notice of proposed rulemaking and request for comment.

SUMMARY:

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

DATES:

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

ADDRESSES:

You may submit comments on the rulemaking by any of the following methods. In your comments, please reference “Risk Management and Financial Assurance for OCS Lease and Grant Obligations, RIN 1010-AE14.” Please include your name, and phone number or email address, so we can contact you if we have questions regarding your submission.

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Federal rulemaking portal: https://www.regulations.gov.

In the entry titled, “Enter Keyword or ID,” enter BOEM-2023-0027 then click search. Follow the instructions to submit public comments and view supporting and related materials available for this rulemaking.

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Mail or delivery service:

Send comments on the BOEM proposed rule to the Department of the Interior, Bureau of Ocean Energy Management, Office of Regulations, Attention: Kelley Spence, 45600 Woodland Road, Mailstop VAM-BOEM DIR, Sterling, VA 20166.

Submit comments on the IC in this proposed rule to

www.reginfo.gov/public/do/PRAMain.

From this main web page, you can find and submit comments on this particular information collection by proceeding to the boldface heading “Currently under Review,” selecting “Department of the Interior” in the “Select Agency” pull down menu, clicking “Submit,” then, checking the box “Only Show ICR for Public Comment” on the next web page, scrolling to this proposed rule, and clicking the “Comment” button at the right margin. Or, you may use the search function to locate the IC request related to the proposed rule on the main web page. Please provide a copy of your comments to the Information Collection Clearance Officer, Office of Regulations, Bureau of Ocean Energy Management, Attention: Anna Atkinson, 45600 Woodland Road, Sterling, Virginia 20166; or by email to

anna.atkinson@boem.gov.

Please reference OMB Control Number 1010-0006 in the subject line of your comments.

Instructions:

All submissions received must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking (1010-AE14). All comments received will be posted without change to

http://www.regulations.gov,

including any personal information provided. For detailed instructions on sending comments and additional information on the rulemaking process, see the “Public Availability of Comments:” heading of the

SUPPLEMENTARY INFORMATION

section of this document.

Docket:

For access to the docket to read background documents or comments received, go to

www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Kelley Spence, Office of Regulations, BOEM, at

kelley.spence@boem.gov

or at (984) 298-7345; or Karen Thundiyil, Chief, Office of Regulations, BOEM, at

Karen.Thundiyil@boem.gov

or at (202) 742-0970.

To obtain a copy of the information collection supporting statement, contact:

Information Collection Clearance Officer, Office of Regulations, Bureau of Ocean Energy Management, Attention: Anna Atkinson, at

anna.atkinson@boem.gov

or at (703) 787-1025.

SUPPLEMENTARY INFORMATION:

Public Availability of Comments:

BOEM may post all submitted comments to

regulations.gov.

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

Organization of this document.

The information in this preamble is organized as follows:

I. Table of Acronyms and Terms

II. Executive Summary

III. Background of BOEM Regulations

A. BOEM Statutory and Regulatory Authority and Responsibilities

B. History of Bonding Regulations and Guidance

C. 2020 Joint Notice of Proposed Rulemaking

D. Purpose of BOEM's Proposed Rulemaking

IV. Proposed Revisions to BOEM Supplemental Financial Assurance Requirements

A. Leases

B. Right-of-Use and Easement Grants

C. Pipeline Right-of-Way Grants

V. Proposed Revisions to Other Types of Supplemental Financial Assurance

A. Third-Party Guarantees

B. Decommissioning Accounts

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

VI. BOEM Evaluation Methodology

A. Credit Ratings

B. Valuing Proved Oil and Gas Reserves

VII. Phased Compliance With Supplemental Financial Assurance Orders

VIII. Appeals Bonds

IX. Proposed Revisions to BOEM Definitions

X. Section-by-Section Analysis

XI. Additional Comments Solicited by BOEM

XII. Procedural Matters

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

B. Regulatory Flexibility Act (RFA)

C. Small Business Regulatory Enforcement Fairness Act

D. Unfunded Mandates Reform Act (UMRA)

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

F. Executive Order 13132: Federalism

G. Executive Order 12988: Civil Justice Reform

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

I. Paperwork Reduction Act (PRA)

J. National Environmental Policy Act (NEPA)

K. Data Quality Act

L. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use

M. Clarity of This Regulation

I. Table of Acronyms and Terms

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

ANCSA Alaska Native Claims Settlement Act

ANPRM Advance Notice of Proposed Rulemaking

BOEM Bureau of Ocean Energy Management

BSEE Bureau of Safety and Environmental Enforcement

DOI Department of the Interior

E.O. Executive Order

FASB Financial Accounting Standards Board

FDIC Federal Deposit Insurance Corporation

FR Federal Register

GAAP Generally Accepted Accounting Principles

GAO Government Accountability Office

IC Information Collection

INC Incidents of Non-Compliance

IRFA Initial Regulatory Flexibility Analysis

IRIA Initial Regulatory Impact Assessment

MMS Minerals Management Service

NAICS North American Industry Classification System

NEPA National Environmental Policy Act

NRSRO Nationally Recognized Statistical Rating Organization

NTL Notice to Lessees

OIRA Office of Information and Regulatory Affairs (a component of OMB)

OMB Office of Management and Budget

OCS Outer Continental Shelf

OCSLA Outer Continental Shelf Lands Act

PRA Paperwork Reduction Act

RIA Regulatory Impact Analysis

RUE Right-of-Use and Easement

ROW Right-of-Way

SBA Small Business Administration

SEC Securities and Exchange Commission

S&P Standard and Poor's

U.S.C. United States Code

II. Executive Summary

This proposed rule would require that the holders of interests in Outer Continental Shelf (OCS) leases and grants provide financial assurance for their own contractual and regulatory obligations, including decommissioning obligations, to prevent the Federal Government from incurring costs to perform those obligations and to avoid the environmental or safety hazards associated with delayed compliance. This approach adheres to the general principle that the private parties enjoying the benefit of producing the mineral resources of the OCS should not shift the cost of satisfying their contractual and environmental obligations to the public. Based on the proposed framework, BOEM estimates that the aggregate amount of supplemental financial assurance required of lessees and grant holders under this proposed rulemaking available to the U.S. government for decommissioning activities would increase by an estimated $9.2 billion over current levels. This value represents less than one-quarter of all decommissioning liabilities, which is currently estimated at $42.8 billion.

This proposed rule is intended to update BOEM's criteria for determining whether oil, gas, and sulfur lessees, RUE grant holders, and ROW grant holders may be required to provide surety bonds or other financial assurance above the prescribed base financial assurance to ensure compliance with OCSLA. Provisions of this proposed rulemaking would change the existing criteria used to determine whether supplemental financial assurance should be required of OCS oil and gas lessees and grantees. Under the existing regulations, BOEM considers five criteria in making this determination for lessees: financial capacity; projected financial strength; business stability; record of compliance with existing rules and regulations; and reliability. This rulemaking proposes to eliminate those five criteria and replace them with two new criteria: credit rating and the ratio of the value of proved oil and gas reserves on the lease to the lease decommissioning liability associated with those reserves.

Using the credit rating of the lessee (to determine its financial strength) and the value of proved oil and gas reserves available to meet future financial obligations, BOEM would not require supplemental financial assurance in three cases. First, under this proposed rule, a lessee with an investment grade credit rating would not be required to post supplemental financial assurance beyond a base bond to cover its lease and regulatory obligations. These base bonds can range from $50,000 for a lease-specific bond with no approved operational activity to $3 million for an area-wide bond that includes a development production plan. Second, where there are multiple co-lessees on a lease, if any one co-lessee meets the credit rating threshold, none of the other co-lessees would be required to post supplemental financial assurance. Finally, for any lease on which all lessees are rated below investment grade, BOEM would next look to the value of the lease's proved oil and gas reserves relative to lease decommissioning obligations associated with the production of those reserves. For any such lease, if a lease has proved reserves with a value of at least three times that of the estimated decommissioning cost, no supplemental financial assurance would be required. In any case other than the three mentioned here, supplemental financial assurance would be mandatory.

Overall, this proposed rule would impose greater supplemental financial assurance requirements on lessees than the amounts currently required. This proposed rule also contains a provision that would allow phased-in compliance over a period of three years, which could ease burdens on individual lessees and operators in the short term.

This proposed rule would also make other less significant changes. This proposed rule would provide more specific bonding requirements for Federal RUEs and would remove restrictive provisions for third-party guarantees and decommissioning

accounts. Finally, it would add new criteria under which supplemental bonds and third-party guarantees may be cancelled.

On October 16, 2020, BOEM proposed a joint rulemaking with the Bureau of Safety and Environmental Enforcement (BSEE) to update BOEM's financial assurance criteria and other BSEE-administered regulations. On January 20, 2021, President Biden signed Executive Order (E.O.) 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” This Executive order, among other things, instructs agencies to review actions taken between January 20, 2017, and January 20, 2021, and consider publishing a notice of proposed rulemaking suspending, revising, or rescinding that action. Upon conducting such a review of the 2020 proposal and the record postdating the review, BOEM has decided, as an exercise of its judgment and expertise, not to move forward with the BOEM-administered portions of that 2020 proposed rulemaking. BOEM has instead decided to issue this new notice of proposed rulemaking to address its financial assurance policy concerns. BOEM is no longer considering any BOEM-related topics or proposals from that 2020 proposed joint rulemaking that are not discussed in this current proposed rule. BSEE finalized the BSEE-related provisions of the 2020 joint proposed rule on April 18, 2023 (88 FR 23569). This proposed rulemaking takes a new approach to update the financial assurance criteria to ensure that current lessees have sufficient resources to meet their lease and regulatory obligations, therefore providing more protection to the taxpayer. BSEE is expected to continue to exercise its regulatory authority to issue decommissioning orders to predecessor lessees, seek an appropriation, or intervene as necessary to address an environmental or safety risk, regardless of the outcome of this proposed rule. However, without this proposed rule (

i.e.,

without the financial assurance fully in place), it could take longer to arrange for decommissioning, which could result in additional environmental damage or increased obstacles to navigation. A reduction in decommissioning activity lead-time could reduce environmental damage, but BOEM cannot quantify this benefit in this rulemaking.

This proposed rulemaking would not apply to renewable energy activities.

III. Background of BOEM Regulations

A. BOEM Statutory and Regulatory Authority and Responsibilities

BOEM's authority to promulgate this rulemaking is granted by section 5 of OCSLA, 43 U.S.C. 1334. That section authorizes the Secretary of the Interior (Secretary) to issue regulations to administer OCS leasing for mineral development. Section 5(a) of OCSLA (43 U.S.C. 1334(a)) authorizes the Secretary to “prescribe such rules and regulations as may be necessary to carry out” the “provisions of [OCSLA] relating to the leasing of the” OCS. Section 5(b) of OCSLA (43 U.S.C. 1334(b)) provides that “compliance with regulations issued under” OCSLA must be a condition of “[t]he issuance and continuance in effect of any lease, or of any assignment or other transfer of any lease, under the provisions of” OCSLA.

43 U.S.C. 1338a reflects Congress' intent to authorize BOEM to collect financial assurance by specifically addressing the forfeiture of bonds and financial assurances by an OCS permittee, lessee, or right-of-way holder that does not fulfill the requirements of its permit, lease, or right-of-way or does not comply with the regulations of the Secretary, which includes defaulting on decommissioning activities.

The Secretary, in Secretary's Order 3299, as amended, delegated the authority to BOEM to carry out offshore conventional energy-related (

e.g.,

oil and gas) and renewable energy-related functions including, but not limited to, activities involving resource evaluation, planning, and leasing. Thus, BOEM is responsible for managing development of the Nation's offshore energy and mineral resources in an environmentally and economically responsible way. Secretary's Order 3299 also assigned authority to BSEE, including, but not limited to, enforcement of a lessee's obligation to perform decommissioning. BSEE provides estimates of decommissioning costs to BOEM so that the financial assurance required by BOEM will be sufficient to cover the estimated cost to perform decommissioning, thereby protecting the Federal Government from incurring financial loss. While BOEM also has program oversight for the financial assurance requirements set forth in 30 CFR parts 551, 581, 582, and 585, this proposed rule pertains only to the financial assurance requirements for oil and gas or sulfur leases under 30 CFR part 556, associated RUE grants and ROW grants under 30 CFR part 550, and appeals of supplemental financial assurance demands under 30 CFR part 590.

B. History of Bonding Regulations and Guidance

BOEM's existing financial assurance requirements for oil and gas leases (30 CFR 556.900 through 556.907) and pipeline ROW grants (30 CFR 550.1011), published by BOEM's predecessor, the Minerals Management Service (MMS), on May 22, 1997 (62 FR 27948),

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authorize the Regional Director to require bonding for oil and gas leases and pipeline ROW grants. Sections 556.900(a) and 556.901(a) and (b) require lease-specific or area-wide base bonds in prescribed amounts, depending on the level of activity on a lease or leases. Section 556.901(d) authorizes the Regional Director to require supplemental financial assurance for leases above the amounts for lease and area-wide base bonds prescribed in the regulations. Similarly, § 550.1011 authorizes the Regional Director to require an area-wide base surety bond in a prescribed amount and, when determined necessary, supplemental financial assurance above the prescribed amount, for ROW grants.

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The 1997 rule amended 30 CFR parts 250 and 256; 30 CFR parts 550 and 556 did not exist at that time. BOEM published the current regulations in 30 CFR parts 550 and 556 on October 18, 2011, 76 FR 64432. However, the 2011 rule did not make any substantive changes to the bonding and financial assurance requirements that were adopted in 1997; thus, the 1997 rule represents the last substantive update to the regulatory provisions for lessees.

BOEM's existing bonding regulations for RUE grants (§§ 550.160 and 550.166), published by MMS on December 28, 1999 (64 FR 72756),

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empower the Regional Director to require surety bonds or other financial assurance for RUE grants. Section 550.160(c) states that an applicant for a RUE serving an OCS lease “must meet bonding requirements.”

See

30 CFR 550.160(c). While no regulation prescribes a particular bond amount for a RUE that applies to an OCS lease, § 550.160 authorizes the Regional Director to require financial assurance if, and in the amount, the Regional Director determines necessary.

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The financial assurance regulations for RUE and ROW grants, then at §§ 250.160 and 250.166, were substantively modified in 1999. These provisions were renumbered in October 2011.

Section 550.166(a) requires an applicant for a RUE that serves a State lease to provide a base surety bond of $500,000. Section 550.166(b) provides that the Regional Director may require supplemental financial assurance above the prescribed $500,000 base surety bond from the holder of a such a RUE. MMS and now BOEM have employed the criteria used for determining whether supplemental financial assurance is required for leases to such

determinations for RUE and ROW grants because specific criteria for grants do not exist in the current regulations.

BOEM regulations at §§ 556.604(d) and 556.605(e) and BSEE regulations at § 250.1701 hold predecessors and current co-lessees responsible for decommissioning when a current lessee is unable to perform. The existing lease bonding regulations under § 556.901(d) provide five criteria

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that the Regional Director uses to determine whether a lessee's potential inability to carry out present and future financial obligations warrants a demand for supplemental financial assurance. However, the existing regulations do not specifically describe how the agency weighs those criteria. To provide guidance, MMS issued Notice to Lessees (NTL) No. 98-18N, effective December 28, 1998, which provided details on how it would apply the five criteria. This NTL was superseded by NTL No. 2003-N06, effective June 17, 2003, and that NTL was later superseded by NTL No. 2008-N07, which was effective August 28, 2008, but which was superseded on September 12, 2016. The September 12, 2016, NTL was subsequently rescinded.

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The following are the five criteria: (i) Financial capacity substantially in excess of existing and anticipated lease and other obligations; (ii) Projected financial strength significantly in excess of existing and future lease obligations; (iii) Business stability based on five years of continuous operation and production of oil and gas or sulfur in the OCS or in the onshore oil and gas industry; (iv) Reliability in meeting obligations based on: (A) Credit rating; or (B) Trade references; and (v) Record of compliance with laws, regulations, and lease terms.

Pursuant to BOEM's practice under NTL No. 2008-N07, a lessee or grant holder that did not pass established financial thresholds

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was required to provide supplemental financial assurance to cover its decommissioning liabilities. However, a lessee or grant holder that did pass such thresholds—including an analysis whether its cumulative potential decommissioning liability was less than or equal to 50 percent of its net worth

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—did not have to provide supplemental financial assurance and was considered “waived.” Additionally, if one lessee on a lease was waived, no other co-lessee (regardless of its own financial strength) would be required to provide supplemental financial assurance to cover the decommissioning liability for the lease. In a situation involving multiple lessees and two or more co-lessees that qualified for a waiver, none of the co-lessees was required to provide financial assurance, and the decommissioning liability on the lease was not attributable to any lessee. Because companies in this situation would not have the decommissioning liability associated with their lease(s) attributed to them (

i.e.,

the decommissioning liability would not be attributed to any company), that liability would not have been considered in determining whether that company met the net worth requirements to obtain a waiver.

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The 2008 NTL mandated a minimum net worth of $65 million and imposed a cap on the amount of waived liability at 50% of net worth. Liability covered by two qualified companies was not counted against the 50% cap.

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This is not a separate criterion but simply an elaboration of criterion one.

For a company in this situation, the financial capacity of the lessee would have appeared better than it actually was, because its total decommissioning liability appeared artificially low; the lessee could potentially qualify for a waiver to which it might not otherwise be entitled. Undergirding this rationale was an assumption that the chances of two waived lessees becoming financially distressed was unlikely. This proposed rule addresses that potential risk by allowing BOEM to obtain additional data to take contingent liabilities into consideration.

Since 2009, more than 30 corporate bankruptcies have occurred involving offshore oil and gas lessees with un-bonded decommissioning liabilities. The fact that bankruptcies and reorganizations have involved un-bonded decommissioning liabilities demonstrates that the waiver criteria in NTL No. 2008-N07 were inadequate to protect the public from potential responsibility for OCS decommissioning liabilities, especially during periods of low oil and gas prices. For example, ATP Oil & Gas was a mid-sized company with a supplemental financial assurance waiver when it filed for bankruptcy in 2012. Similarly, Bennu Oil & Gas, LLC, had a waiver at the time of its bankruptcy filing, and Energy XXI, Ltd., and Stone Energy Corporation obtained waivers within a year of filing for bankruptcy. While most OCS leases affected by the bankruptcies were ultimately sold or retained by the companies reorganized under chapter 11 of the U.S. Bankruptcy Code, these bankruptcies highlighted the weaknesses in BOEM's supplemental financial assurance program, including the waiver criteria in NTL No. 2008-N07, and BOEM's inability to forecast financial distress of these waived operators with sufficient time to require and receive financial assurance.

These bankruptcies involved a total offshore decommissioning liability of approximately $7.5 billion. This figure includes properties with co-lessees and predecessor lessees and properties held by companies that successfully emerged from a chapter 11 reorganization. However, the actual financial risk to the United States is significantly less than the total offshore decommissioning liability associated with offshore corporate bankruptcies. This is in part because other private parties may be responsible for decommissioning costs. Co-lessees and predecessors retain pre-existing obligations to fund or perform decommissioning. Also, a bankrupt company's assets were often sold to financially stronger buyers who assumed those liabilities.

Additionally, if BOEM has insufficient supplemental financial assurance at the time of an operator's bankruptcy, BOEM may pursue legal avenues for obtaining performance or funds in bankruptcy proceedings, such as provisions for decommissioning in the terms of the reorganization, the sale of the leases to financially responsible buyers, or limitations on debtor attempts to abandon environmental problems. However, in pursuing legal avenues, favorable outcomes are not assured, and additional funds may not be obtained to cover decommissioning obligations. It is possible that when there are multiple co-lessees on a lease, only one of them meets the credit rating threshold. It is also possible that co-lessees are not required to provide additional financial assurance and predecessors lack sufficient capital to fulfill unexpected decommissioning obligations. In these scenarios, bankrupt assets may prove less valuable than anticipated and fail to generate new buyers at auction. Components and wells for which the bankrupt party is the only liable party on the lease may further complicate decommissioning efforts. These challenges create a risk of unplugged wells and orphaned infrastructure. The American taxpayer may pay the cost of plugging those wells and reclaiming that abandoned infrastructure. BSEE has identified orphaned infrastructure without a predecessor and no financial assurance to cover the cost of decommissioning. BSEE's fiscal year 2023 budget request included $30 million in order to address this uncovered infrastructure.

On May 27, 2009, MMS issued a proposed rule, “Leasing of Sulphur or Oil and Gas and Bonding Requirements in the Outer Continental Shelf” (74 FR 25177), to rewrite the majority of 30 CFR part 256 (now redesignated as 30 CFR part 556).

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However, BOEM (post MMS restructuring) deferred revision of the bonding regulations to a separate rulemaking. The separate rulemaking

commenced August 19, 2014, with an advance notice of proposed rulemaking (ANPRM), “Risk Management, Financial Assurance and Loss Prevention” (79 FR 49027), to solicit ideas for improving the bonding regulations.

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76 FR 64432, Oct. 18. 2011.

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.”

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https://www.gao.gov/products/gao-16-40.

Following further analysis and a series of stakeholder meetings in 2015 and 2016 to solicit industry input, BOEM attempted to remedy the weaknesses in its supplemental financial assurance program with new NTL No. 2016-N01, “Requiring Additional Security,” which became effective September 12, 2016. NTL No. 2016-N01 sought to clarify the procedures and explain how BOEM would use the regulatory criteria to determine if and when supplemental financial assurance would be required for OCS leases and RUE and ROW grants. The NTL used net worth of a lessee as a measure of financial strength, detailed several changes in policy, and refined the criteria used to determine a lessee's or grant holder's financial ability to carry out its obligations. On August 29, 2016, BOEM requested GAO to close the above-stated recommendation in the GAO Report, stating that BOEM had implemented the recommendation by issuance of the NTL. The GAO found that the recommendation had been implemented and closed the audit recommendation later in Fiscal Year 2016.

In December 2016, BOEM began implementing the NTL and issued numerous orders to lessees and grant holders to provide supplemental financial assurance for “sole liability properties,”

i.e.,

leases and RUE and ROW grants for which the lessee or grant holder was the only party liable for meeting the lease or grant obligations.

On January 6, 2017, BOEM issued a note to stakeholders extending the implementation timeline for NTL No. 2016-N01 for six months. The extension applied to leases and RUE and ROW grants for which there were co-lessees, predecessors in interest, or both, except where BOEM determined there was a substantial risk of nonperformance of the interest holder's decommissioning obligations. The extension of the implementation timeline allowed BOEM to evaluate which leases and grants would be considered sole liability properties.

BOEM issued a second note to stakeholders on February 17, 2017, further extending the implementation timeline. BOEM also announced in the February note that it would withdraw the December 2016 orders issued on sole liability properties to allow time for the then new administration to review BOEM's supplemental financial assurance program.

In 2017, BOEM began to review its supplemental financial assurance program and NTL No. 2016-N01 to determine whether modifications were necessary and, if so, to what extent. BOEM's objective was ensuring operator compliance with lease terms while minimizing unnecessary burden on industry. As a result of this review, BOEM recognized the need to further develop a comprehensive program to assist in identifying, prioritizing, and managing the risks associated with industry activities on the OCS. This included options for revising or rescinding NTL No. 2016-N01 and revising the financial assurance program through rulemaking.

C. 2020 Joint Notice of Proposed Rulemaking

On October 16, 2020, BOEM and BSEE issued a joint notice of proposed rulemaking to revise certain BSEE policies concerning decommissioning orders and BOEM's financial assurance regulations. (See “Risk Management, Financial Assurance and Loss Prevention,” 85 FR 65904). As stated above, under existing regulations, BOEM requires lessees to provide a base bond as financial assurance to ensure that the cost of meeting OCS obligations is not passed to the taxpayer. The Regional Director may also order supplemental financial assurance if necessary to ensure performance of offshore decommissioning obligations.

In the joint proposed rule, BOEM proposed to adjust its supplemental financial assurance criteria to reflect the risk mitigation already provided by the joint and several liability of financially stable co-lessees and predecessor lessees. BSEE and BOEM regulations hold predecessors and current co-lessees responsible for decommissioning when a current lessee is unable to perform.

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In the joint proposed rule, BOEM would have taken into account the financial stability of predecessor lessees by waiving supplemental financial assurance requirements for a current lessee when there was a financially strong predecessor lessee.

8

See, for example, 30 CFR 556.604(d), 556.605(e), and 250.1701.

In the joint proposed rule, BOEM also sought to change its methodology for measuring financial strength to focus on a lessee's or its predecessor's credit rating and the value of proved oil and gas reserves. These proposed criteria would have relied on a company's nationally recognized statistical rating organization (NRSRO) credit rating or an equivalent BOEM proxy credit rating determined by evaluating a company's submitted audited financial statements through S&P Global's Credit Analytics credit model or a similar, widely accepted credit rating model. Under the joint proposed rule, a credit rating less than or equal to either BB− from S&P Global's Credit Analytics ratings (S&P), Ba3 from Moody's Investor Service (Moody's) or a proxy credit rating less than or equal to either BB− or Ba3, as determined by the Regional Director, could have constituted grounds for the Regional Director to require a lessee to provide supplemental financial assurance. If a company did not meet the minimum credit rating or proxy credit rating level, BOEM would have inquired into the credit or proxy credit ratings of co-lessees and predecessor lessees, which could be held liable under joint and several liability. If one of these co-lessees or predecessors met the credit rating criteria, BOEM could decide not to require supplemental financial assurance from the lessee. If there were no co-lessee or predecessor lessee that met the credit rating criteria, BOEM would then look to the value of the proved oil and gas reserves on the lease. If the value of those proved reserves was equal to or greater than three times the estimated cost of the decommissioning associated with the production of the reserves on any given lease, supplemental financial assurance would not have been required.

BOEM further proposed to use the same credit rating criteria to determine the financial assurance requirements for RUE grants described in § 550.160 and ROW grants in a revised § 550.1011. This would have included consideration of the credit and proxy credit ratings of co- and predecessor grant holders but would not have considered proved oil and gas reserves, given that neither RUE nor ROW grants entitle the holder to any interest in oil and gas reserves.

The joint proposed rule would have also applied the same credit rating criteria to its evaluation of potential guarantors. The joint proposed rule also would have removed the requirement for a third-party guarantee to ensure full compliance with the obligations of all lessees, operating rights owners, and operators on the lease and would have allowed a third-party guarantee to be used as supplemental financial assurance for a RUE or ROW grant. The former change would have allowed a guarantor to limit its guarantee to a subset of lease or grant obligations. Additional proposed changes would have applied to third-party guarantees the same terms and conditions that apply to cancellation of supplemental financial assurance surety bonds and return of pledged financial assurance, as well as a clarification to reiterate that “guarantee” and “indemnity agreement” both refer to the same guarantee agreement.

On January 20, 2021, President Biden signed Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” This Executive order, among other things, instructs agencies to review actions taken between January 20, 2017, and January 20, 2021, and consider publishing a notice of proposed rulemaking suspending, revising, or rescinding that action. Upon conducting such a review of the 2020 proposal and the record postdating the review, BOEM has decided, as an exercise of its judgement and expertise, not to move forward with the joint proposed rule and acknowledges that NTL No. 2016-N01 was never fully implemented and has since been rescinded. This NPRM parallels the approach in BOEM's portion of the 2020 proposal but, to increase protection of the taxpayer, it would require a higher threshold credit rating and would not allow a current lessee to avoid posting additional assurance based on a predecessor lessee's strength.

D. Purpose of BOEM's Proposed Rulemaking

This proposed rule is intended to update BOEM's criteria for determining whether oil, gas, and sulfur lessees, RUE grant holders, and ROW grant holders may be required to provide supplemental financial assurance to ensure compliance with their OCS obligations. In its continued efforts to address concerns with the financial assurance program, BOEM has opted to issue this new notice of proposed rulemaking to better protect the taxpayer from bearing the cost of facility decommissioning and other financial risks associated with OCS development, such as oil spill cleanup or other environmental remediation. Although the cases where taxpayers have actually paid costs for decommissioning are rare, some BOEM lessees have entered bankruptcy without the resources to cover decommissioning. In these cases, BOEM is required to negotiate with predecessors, co-lessees, and bankruptcy courts to obtain the funds needed for decommissioning. As mentioned earlier, this process is not always sufficient, as reflected in BSEE's request for additional appropriations to cover decommissioning of facilities for which there is no remaining liable party. BOEM has decided not to set a lower supplemental financial assurance requirement for lessees with financially strong predecessor lessees. Instead, BOEM proposes to require supplemental financial assurance for all leases owned by lessees that do not meet the proposed financial strength threshold or have sufficiently valuable proved oil and gas reserves on their leases that may attract a buyer if the current lessees are in financial distress. The omission of predecessor lessees from this calculus addresses several financial assurance issues. It ensures the current lessees have the financial capability to fulfill its decommissioning obligations, and discourages lessees from ignoring end-of-life decommissioning costs. It also simplifies potential administrative demands, since it obviates the need for parties to distinguish between wells with predecessor lessees and more recent sole-liability wells, side-track wells, and other sole-liability components. This proposed rule would retain the authority to pursue predecessor lessees for the performance of decommissioning; however, this proposed rule would not allow BOEM to rely upon the financial strength of predecessor lessees when determining whether, or how much, supplemental financial assurance should be provided by current OCS leaseholders.

Under this proposed rule, instead of relying primarily on net worth to determine whether a lessee must provide supplemental financial assurance, BOEM's primary consideration would be a lessee's credit rating. Credit rating agencies account for many factors when evaluating a company, including cash flow, debt-to-earnings ratios, debt-to-funds-from-operations ratios, and other financial factors. A credit rating considers the past performance of a company, including, but not limited to, the income statement and cash flow statement, which provide a broad picture of how well a company may be able to meet its liabilities. The rating also considers forward-looking factors, such as the anticipated loss of assets and the anticipated highs and lows of the company's business cycle. Credit ratings provide a measure of the probability of a default on an obligation; studies have shown a very close correlation between the rating level and the probability of default.

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9

See for example, “Ratings vs Default Rates”, Moody's Annual Default Study—February 8, 2022, Douglas J. Lucas, “Default Correlation and Credit Analysis”, The Journal of Fixed Income Mar 1995, 4 (4) 76-87; DOI: 10.3905/jfi.1995.408124.

On the other hand, a net worth analysis (typically total assets minus total liabilities) uses figures that reflect the last day of the fiscal period. This “snapshot” is not adequate to predict a lessee's future financial position because a lessee's financial deterioration can occur quickly due to volatility in oil and gas prices, improper hedging of risks, and other business and economic reasons. Net worth is one financial data point that may not accurately reflect the overall financial risk posed by the company, as compared to the more comprehensive financial review undertaken by the rating agencies. A singular financial ratio analysis may unintentionally penalize some corporate structures where that particular ratio is not as important or relevant to that business, for example midstream master limited partnerships, which the tax code requires to distribute 90% of net income to partners. Relying on the more comprehensive and forward-looking credit rating analysis—both to determine whether supplemental financial assurance may be necessary and to determine whether a company can be a guarantor of the financial obligations of other companies operating on the OCS—would better allow BOEM to demand security before a company becomes financially distressed. For more discussion on credit ratings, see section VI.A (BOEM Evaluation Methodology—Credit Ratings) of this preamble.

After accruing an obligation to decommission certain infrastructure (

e.g.,

well, platform, pipeline), the predecessor lessee remains jointly and severally liable for decommissioning that infrastructure, even in cases where a predecessor lessee has divested its full interest in a lease by assignment to another company. This rulemaking would retain BOEM's existing right to pursue predecessor lessees for the performance of decommissioning; however, this rulemaking would not allow BOEM to rely upon the financial

strength of predecessor lessees when determining whether, or how much, supplemental financial assurance should be provided by current OCS leaseholders. This change strengthens the financial assurance program by ensuring current lessees have the financial strength or supplemental financial assurance in order to fulfill all their obligations.

In summary, BOEM is proposing this rulemaking to clarify and simplify its financial assurance requirements and to provide greater protection to taxpayers. These proposed regulatory changes provide additional clarity that current grant holders, lessees, and, when appropriate, operating rights holders (sublessees) bear the cost of ensuring compliance with lease obligations, rather than relying on prior owners.

IV. Proposed Revisions to BOEM Supplemental Financial Assurance Requirements

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

A. Leases

Lessees are jointly and severally liable for the lease decommissioning obligations that accrue during their ownership, as well as those that accrued prior to their ownership, which means that each current co-lessee is liable for the full obligation and BSEE may pursue performance from any individual current lessee.

See, e.g.,

30 CFR 556.604(d). In addition, a lessee that transfers its interest to another party continues to be liable for any unperformed decommissioning obligations that accrued prior to, or during, the time that lessee owned an interest in the lease.

See, e.g.,

30 CFR 556.710. This transferor liability applies, however, only to those obligations existing at the time of transfer; new facilities, or additions to existing facilities, that were not in existence at the time of any lease transfer are not obligations of a predecessor company and are considered obligations of the party that built such new facilities and its co- and successor lessees.

BOEM's existing supplemental financial assurance evaluation process, contained in § 556.901(d), is based only on the current lessee's ability to carry out present and future obligations. BOEM proposes to codify that this evaluation process includes an evaluation of the ability of a co-lessee to carry out present and future obligations. This codification recognizes that all of the current owners are benefiting from ongoing operations and are jointly and severally liable for compliance with DOI requirements. A current co-lessee is equally liable for present obligations and future obligations that exist while it is a co-lessee, including nonmonetary obligations.

Under BOEM's existing regulations, the Regional Director's evaluation of the need for supplemental financial assurance is based on the following five criteria: financial capacity; projected financial strength; business stability; reliability in meeting obligations based upon credit rating or trade references; and record of compliance with laws, regulations, and lease terms. BOEM is proposing to streamline its evaluation process by using only two criteria to determine whether supplemental financial assurance on a lease may be required: (1) A credit rating, either from an NRSRO, as identified by the United States Securities and Exchange Commission (SEC) pursuant to its grant of authority under the Credit Rating Agency Reform Act of 2006 and its implementing regulations at 17 CFR parts 240 and 249, or a proxy credit rating determined by BOEM based on a company's audited financial statements;

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or (2) The 3-to-1 ratio of the value of proved oil and gas reserves on a lease to the decommissioning liability associated with these reserves. These criteria better align BOEM's evaluation process with accepted financial risk evaluation methods used by the banking and finance industry. Corporate credit ratings are intended to evaluate the potential for a company to default on its financial obligations and are designed so that the higher the credit rating, the lower the risk of default. Credit ratings and proved oil reserves are good indicators of the likelihood that a company will be able to meet its financial obligations. Eliminating subjective or less precise criteria—such as the length of time in operation to determine business stability, or trade references to determine reliability in meeting obligations—will simplify the process and remove criteria that may not accurately or consistently predict financial distress. For more discussion on credit ratings, see section VI.A (BOEM Evaluation Methodology—Credit Ratings) of this preamble.

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In order for BOEM to establish a proxy credit rating, which can be used for the purpose of waiving any supplemental financial assurance requirements that would otherwise be required, BOEM is requiring that any company seeking a proxy credit rating provide audited financial statements. If such statements are not provided, BOEM will require supplemental financial assurance because it will have insufficient basis for concluding that the owners have sufficient capacity to reliably and timely meet their lease obligations.

BOEM proposes to eliminate the “business stability” criterion found in the current version of § 556.901(d)(1)(iii). The existing regulation bases business stability on 5 years of continuous operation and production of oil and gas, but BOEM has determined that there is little correlation between such history and a company's ability to carry out its present and future obligations. BOEM conducted an analysis of offshore bankruptcies, including an assessment of the number of years incorporated prior to bankruptcy, and determined that whether a company was in business for 5 or more years had no relationship to the likelihood of bankruptcy.

BOEM also proposes to eliminate the existing “record of compliance” criterion found in the current version of § 556.901(d)(1)(v). BOEM has determined that the number of INCs a company receives correlates with the

number of OCS properties it owns, not its financial stability, and therefore, BOEM has concluded that it is not an accurate predictor of its financial health. BOEM reviewed BSEE's Incidents of Non-Compliance (INCs) records and its Increased Oversight List, which represent BSEE's cumulative records of violations of performance standards on the part of OCS operators and lessees and determined that the number of incidents of non-compliance typically increases with the size and complexity of the operator's or lessee's operations, including the ratio of incidents to number of components. Because larger companies (regardless of credit score) tend to have more properties and components and therefore more INCs, BOEM determined that record of compliance criterion does not accurately predict financial default. BOEM's review of this information confirmed the feedback BOEM received in response to the 2016 NTL, namely that companies with a large number of properties and facilities tended to receive a large number of INCs and had more individual properties on the Increased Oversight List.

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BOEM specifically requests comments regarding the use of fines and violations as a criterion in the determination of a company's ability to fulfill decommissioning obligations, and any data or analysis addressing any correlation between the number of violations and the risk of financial default. BOEM also requests comments on whether the elimination of the INC's criteria would create a disincentive to comply with regulations. BOEM also requests comment on whether or not the cost of decommissioning is likely to increase based on the type, quantity, and magnitude of previous violations.

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The most recent data are available at

https://www.data.bsee.gov/Company/INCs/Default.aspx.

BOEM proposes to replace the existing “financial capacity” and “reliability” criteria in existing § 556.901(d)(1) with issuer credit rating or proxy credit rating. BOEM has found credit ratings, which are part of the existing “reliability” criterion, to be a more reliable indicator of financial ability to meet obligations than previous financial criteria issued by BOEM via NTLs (ex. NTL 2008-N07, NTL 2016-N01). Issuer credit ratings provided by a NRSRO incorporate a broad range of qualitative and quantitative factors, and a business entity's credit rating most accurately represents its overall ability to meet its financial commitments. An issuer credit rating is a forward-looking opinion about an obligor's overall creditworthiness. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due.

Under the proposal, if a lessee does not have a credit rating from a NRSRO, the lessee may instead submit audited financial statements, and BOEM will determine a proxy credit rating using a commercially available credit model determined by BOEM to fulfill its financial risk analysis requirements, such as the S&P Global's Credit Analytics credit model. Such audited financial information is currently the basis of one of the five criteria in BOEM's regulations, namely the “financial capacity” criterion. Under the proposed rule, this information will be the primary consideration used to evaluate lessees that do not have a NRSRO credit rating. BOEM has concluded that audited financial statements, prepared in accordance with Generally Accepted Accounting Principles (GAAP) and accompanied by an auditor's certificate, provide an accurate representation of the company's economic position and operational performance. Using this audited financial information to generate a proxy credit rating would allow BOEM to accurately determine if supplemental financial assurance is needed when a NRSRO rating is not available.

This proposed rule would provide the Regional Director with the authority to require a lessee to provide supplemental financial assurance if the lessee or its co-lessee does not have an investment grade credit rating,

i.e.,

a credit rating from a NRSRO that is greater than or equal to either BBB- from S&P or Baa3 from Moody's, or its equivalent, or a proxy credit rating greater than or equal to either BBB- or Baa3, as determined by the Regional Director, based on audited financial information with an accompanying auditor's certificate. BOEM has determined that having an investment grade credit rating is important to reliably ensure that a company not pose a substantial risk of default.

Under existing BOEM and BSEE regulations that would not change in this proposed rule, co-lessees are jointly and severally liable for accrued decommissioning obligations, and the risk that the government will be responsible for the decommissioning cost is therefore lower when co-lessees are financially viable. Hence, BOEM will not require supplemental financial assurance for properties where at least one co-lessee has an investment grade credit rating.

If BOEM determines that supplemental financial assurance is required, BOEM bases the amount of supplemental financial assurance required on the BSEE decommissioning cost estimate. Previously, BSEE provided a single algorithm-based deterministic estimate for OCS facilities. In 2020, BSEE updated certain decommissioning costs in the Technical Information Management System (

data.boem.gov

).

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The new estimates were based on industry-reported decommissioning costs pursuant to NTL 2016-N03—Reporting Requirements for Decommissioning Expenditures on the OCS, later superseded by NTL 2017-N02. Based on the reported data, BSEE has developed three probabilistic estimates of decommissioning costs for each OCS facility on any given lease. The lowest cost estimate would have a fifty percent likelihood of covering the full cost of decommissioning a facility and is thus referred to as “P50.” The second lowest cost estimate, P70, would have a seventy percent likelihood of covering the full cost of decommissioning a facility. The third and highest cost estimate, P90, would have a ninety percent likelihood of covering the full decommissioning cost of a facility. These BSEE-generated estimates are based on actual decommissioning expenditures reported by offshore companies.

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BSEE decommissioning cost estimates are available at the following URL:

https://www.data.bsee.gov/Leasing/DecomCostEst/Default.aspx.

BOEM proposes to use the P70 value to set the amount of any required supplemental financial assurance. In determining to use the P70 value, BOEM considered using either the P50, P70, or P90 decommissioning liability levels, which respectively represent an approximately 11 percent ($3.5 billion), 30 percent ($9.6 billion), and 55 percent ($17.9 billion) increase in total estimated financial assurances available to address offshore decommissioning liability relative to the previous algorithm-based estimate, based on an analysis of industry-reported decommissioning costs. BOEM weighed the risk of being underfunded (greatest at the P50 level) against the financial impact of requiring more financial assurance (greatest at the P90 level). As an example, a supplemental financial assurance set based on the P70 value means that, based on the uncertainty and risk applied by BSEE to its model, there is a 70% probability of covering the decommissioning cost of the facility (and therefore a 30% probability of exceeding it). The P70 value is not to be confused with the figure representing 70% of the cost of decommissioning a particular facility. Because it is a

statistical concept, it relies on the quality and size of the sample, as well as the uncertainty (variance) existing in these costs. There is also a real possibility that the P70 figure exceeds the actual decommissioning value of many facilities, in which case excess would cover some portion of insufficient assurance in those cases where the assurance is designed to address that entity's full range of liabilities.

BOEM's goal for its financial assurance program continues to be the protection of the American taxpayers from exposure to financial loss associated with OCS development, while ensuring that the financial assurance program does not detrimentally affect offshore investment or position American offshore exploration and production companies at a competitive disadvantage. BOEM's proposal to use P70 would reduce offshore decommissioning risk to taxpayers relative both to previous BSEE decommissioning estimates and to a methodology based on P50, while reducing burden on available capital for offshore investment, including both conventional and renewable energy activities, imposed by the use of P90. BOEM requests comments on potential unknown risks associated with the use of P70. BOEM has examined the impact that the different P values would have on the amount of financial assurance required but lacks the data to estimate the impact that selecting a P90 value might have on offshore capital expenses and investments, and therefore has selected P70 in this proposal. We are also specifically seeking information and data related to these impacts from commenters.

For comparison, at BSEE's P90 levels, the total decommissioning liability is approximately $51.2 billion, compared with $42.8 billion at P70; of that total, the liability estimate associated with lessees who have sub-investment grade credit ratings is approximately $24.7 billion at the P90 level and $20.2 billion at the P70 level. The total liability estimates for properties expected to meet the three times reserves threshold is approximately $9.0 billion at the P90 level and $7.8 billion at P70 level. The difference between the full Tier 2 estimate and that of Tier 2 properties meeting the three times the reserves threshold provides BOEM's total expected bond portfolio value if the rule were to be finalized. For P90 this would be $15.7 billion, reflecting an increase of $3.2 billion in bond demands (increased from $12.5 billion at P70). The annual premium estimate for the forecasted Tier 2 bond portfolio would increase from $380 million to $494 million, an increase of approximately $114 million to bond lessees at the P90 level. This additional burden would be realized by the same population of lessees as at the P70 level but would provide additional certainty of sufficient bonding for that population in the event the facility owners (1) defaulted on their obligations and (2) no viable predecessor is available to fulfill their obligations.

BOEM requests comments and additional data on the costs and benefits of setting the supplemental financial assurance requirements based on each of the P50, P70, and P90 decommissioning liability levels. In particular, BOEM would like information on impacts to offshore capital expenses and investments of each liability level, as well as impacts to potential taxpayer liability. BOEM also solicits comment on whether setting assurance requirements based on different liability levels might be appropriate for different circumstances. BOEM also requests comments on costs and benefits of otherwise considering predecessor lessees or grantees in determining the level of required supplemental financial assurance.

Additionally, BOEM requests comments on the possibility of using a higher BSEE decommissioning estimate (

i.e.,

P90), including on how a P90 estimate would affect small entities.

An offshore oil and gas lease that has a significant reserve-to-liability value that is, a property that can generate a cash flow significantly in excess of the costs associated with the decommissioning of its assets—is likely to be purchased by another company in the event of a default by the current lessee. The acquiring company would then become liable for existing decommissioning obligations, but due to the value of existing reserves, it would acquire sufficient positive cash flow to reduce the risk that the costs associated with the decommissioning of the assets would be borne by the government. BOEM has determined that an adequate threshold for the ratio of reserve value to the level of decommissioning liability should be three to one. This threshold is discussed further in Section VI.B of this preamble. Therefore, supplemental financial assurance will not be required for properties with a value of proved oil and gas reserves (using SEC methodology of reported value in the notes to the publicly traded companies' Form 10-Ks) exceeding three times the decommissioning costs (using the BSEE P70 estimated value) associated with the production of those reserves, as these properties pose minimal risk that the government will be required to bear the cost of decommissioning.

BOEM is proposing to use and is requesting comments on this test as the criterion to replace the existing generalized “projected financial strength” criterion found currently at § 556.901(d)(1)(ii), which considers whether the estimated value of a lessee's existing lease production and proved reserves is significantly in excess of the lessee's existing and future lease obligations.

B. Right-of-Use and Easement Grants

BOEM's regulations concerning RUE grants serving a Federal OCS lease or a State lease are found in §§ 550.160 through 550.166. Section 550.160 provides that an applicant for a RUE that serves an OCS lease “must meet bonding requirements,” but the regulation does not prescribe a base surety bond amount. The proposed rule would replace this requirement with a cross-reference to the specific criteria governing supplemental financial assurance demands in proposed § 550.166.

BOEM is proposing to revise the bonding regulations to clarify that any RUE grant holder must provide base financial assurance in a specific amount, regardless of whether the RUE serves a State lease or a Federal OCS lease. BOEM is proposing to establish a Federal RUE base financial assurance requirement that matches the existing $500,000 base financial assurance requirement for State RUEs. BOEM is also proposing to establish a requirement for $500,000 area-wide RUE financial assurance, which would satisfy the base financial assurance requirement for any RUE holder that owns one or more RUEs within the same OCS area, regardless of whether the RUE serves a State or Federal lease. BOEM is also proposing to allow any lessee that has posted area-wide lease financial assurance, pursuant to § 556.900(a)(1), 556.901(a)(2), or 556.901(b)(2) for the areas specified in § 556.900(a)(2), to modify that lease surety bond to also cover any RUE(s) in the area owned by the same lessee. The ability to use area-wide lease financial assurance to cover the RUE base financial assurance obligation would be subject to the requirement that the area-wide lease financial assurance would be in an amount equal to or greater than the RUE base financial assurance requirement (

i.e.,

equal to or greater than $500,000). For example, under the proposed regulations a lessee with a $3 million area-wide lease surety bond could establish or acquire any number of Federal or State RUEs in the area

without having to post any additional financial assurance, provided the lessee agrees to modify the terms of its area-wide lease surety bond to also cover any State or Federal RUEs that it owns or acquires. If the existing area-wide bond is not modified, the lessee may satisfy the requirement by providing new financial assurance to cover its RUE(s).

The rule proposes to consider the credit rating or proxy credit rating of a RUE co-grant holder, mirroring the proposed methodology used to determine if a lessee must provide supplemental financial assurance. These credit rating standards provide the most effective and proven method to evaluate a company's financial wherewithal and are widely accepted as a significant demarcation of credit risk between investment and non-investment grade rated companies. BOEM proposes to include consideration of the credit rating or proxy credit rating of co-owners of RUE grants because, like co-lessees, they are jointly and severally liable for accrued decommissioning obligations for facilities and pipelines on their RUE.

These changes to the RUE financial assurance requirements are intended to: (1) Clarify the bonding requirement for Federal RUEs, which is not explicitly defined in the existing regulations; (2) Align the RUE bonding requirements for RUEs serving State and Federal leases; and (3) Ensure that all RUEs are duly covered and that the risk of a RUE holder defaulting on its decommissioning obligations is not transferred to the American taxpayer.

BOEM is also proposing a new regulation to establish the conditions under which the assignment of RUE interests may be disapproved. BOEM may disapprove the assignment of a RUE when the assignee has not satisfied all obligations under the regulations or under any BOEM or BSEE order. BOEM may disapprove the assignment when the assignee has not satisfied the financial assurance requirements.

BOEM is also proposing to revise the financial assurance regulations to clarify that any RUE grant holder, whether the RUE serves a State or Federal lease, may be required to provide supplemental financial assurance for the RUE—above the $500,000 RUE base financial assurance discussed above—if the grant holder does not meet the credit rating or proxy credit rating criteria proposed to be used for lessees. This change aligns the supplemental financial assurance criteria for RUEs with those used in making the same determination for leases. The value of proved oil and gas reserves will not be considered because a RUE grant does not entitle the holder to any interest in oil and gas reserves.

C. Pipeline Right-of-Way Grants

BOEM's bonding requirements for pipeline ROW grants, contained in § 550.1011, prescribe a $300,000 area-wide base surety bond that guarantees compliance with all the terms and conditions of the pipeline ROW grants held by a company in an OCS area. BOEM may require a pipeline ROW grant holder to provide supplemental financial assurance if the Regional Director determines that financial assurance in excess of $300,000 is needed, but, unlike with leases, the regulation provides no factors for the Regional Director's consideration when making this determination. Therefore, BOEM is proposing to revise the financial assurance regulations to provide that the Regional Director will demand that a pipeline ROW grant holder provide supplemental financial assurance when the grant holder does not meet the same credit rating or proxy credit rating criteria proposed to be used for lessees. The value of proved oil and gas reserves will not be considered because a ROW grant does not entitle the holder to any interest in oil and gas reserves.

The rule also proposes to consider the credit rating or proxy credit rating of a co-grant holder. This change would better align BOEM's evaluation process with accepted financial risk evaluation methods used by the banking and finance industry and with the process used to determine if a lessee must provide supplemental financial assurance. BOEM proposes to include consideration of the credit rating or proxy credit rating of co-owners of ROW grants because, like co-lessees, they are jointly and severally liable for accrued decommissioning obligations for facilities and pipelines on their ROW (§ 250.1701(b)).

V. Proposed Revisions to Other Types of Supplemental Financial Assurance

A. Third-Party Guarantees

BOEM is proposing to evaluate a potential guarantor using the same credit rating or proxy credit rating criteria proposed for lessees. The value of proved oil and gas reserves of an associated lease would not be considered because that value is a characteristic of the lease belonging to the guaranteed lessee and not an asset belonging to the guarantor.

The criteria to evaluate a guarantor provided in the existing regulations have proved difficult to apply. For example, § 556.905(a)(3) provides that the guarantor's total outstanding and proposed guarantees may not exceed 25 percent of its unencumbered net worth in the United States. Determining a company's total outstanding and proposed guarantees depends on accurate information provided by the guarantor, and BOEM has no way to confirm whether the 25 percent threshold has been exceeded at the time the guarantee is proffered or afterward. The same provision requires BOEM to consider the unencumbered net worth of the company in the United States, while another provision, § 556.905(c)(2)(iv), requires BOEM to consider the guarantor's unencumbered fixed assets in the United States. Both of these criteria are difficult to apply when the company under evaluation has domestic and international assets that must be separated. Using the same financial evaluation criterion,

i.e.,

issuer credit rating or proxy credit rating, to assess both guarantors and lessees as the most relevant measure of future capacity would provide consistency in evaluations and avoid overreliance on net worth.

To allow more flexibility in the use of third-party guarantees, the proposed rule would allow a third-party guarantee to be used as supplemental financial assurance for a RUE or ROW grant, as well as a lease. Most significantly, in proposed § 556.902(a)(3), this proposed rule would remove the requirement for a third-party guarantee to ensure compliance with the obligations of all lessees, operating rights owners, and operators on the lease, and would allow a guarantee limited to a specific amount, as agreed to by BOEM, or limited to the liabilities of specific parties. Potential guarantors are reluctant to provide a guarantee if they cannot limit the amount of their guarantee or choose the entity for which they are guaranteeing compliance. This change would allow a guarantor to limit its guarantee to a specific amount of the total financial assurance requirement. The remaining amount of required financial assurance must be covered by additional security from the guaranteed lessee/grant holder or its co-lessees or co-grant holders, so the amount of the requirement is fully satisfied. BOEM is proposing this change because the existing regulations do not clearly limit the liability of a guarantor to a fixed monetary amount stated in the guarantee. Therefore, few parties were willing to use third-party guarantees in the past.

By allowing a third-party guarantor to guarantee only the obligations it wishes to cover, BOEM would provide industry with the flexibility to use the guarantee to satisfy supplemental financial

assurance requirements without forcing the guarantor to cover the risks associated with all parties on the lease or grant or operations in which the party they wish to guarantee has no interest and over which the guarantor may have no control. Moreover, the proposal to allow BOEM to accept a third-party guarantee that is limited to specific obligations does not reduce BOEM's protection because the regulations would require that the financial assurance provided secures all lease and grant obligations.

The proposed rule would also allow BOEM to cancel a third-party guarantee under the same terms and conditions that apply to cancellation of other types of financial assurance, as provided in proposed § 556.906(d)(2).

Lastly, the existing regulation refers to both a “guarantee” and an “indemnity agreement” (which BOEM intended to mean the same thing), and the proposed rule clarifies that the regulations contemplate only one agreement: the guarantee agreement.

B. Decommissioning Accounts

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

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

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

VI. BOEM Evaluation Methodology

A. Credit Ratings

In this rulemaking, BOEM proposes to use an “Issuer credit rating” to evaluate the financial health of OCS lessees, grant holders, and guarantors. A review of S&P and Moody's rating methodologies showed that the analyses they perform to determine an issuer credit rating are wide-ranging and include factors beyond corporate financials (such as history, senior management, and commodity price outlook). An issuer credit rating provides the rating agencies' opinions of the entity's ability to honor senior unsecured debt and debt-like obligations. It is common for lessees to have both an issuer credit rating and a bond issuance rating. However, bond issuance ratings are opinions of the credit quality of a specific debt obligation only, which can vary based on the priority of a creditor's claim in bankruptcy or the extent to which assets are pledged as collateral. Due to the varying priority of claims associated with debt and the limited purpose of bond issuance ratings, BOEM proposes to accept only issuer credit ratings from a NRSRO, and references to credit rating in this rulemaking refer only to an issuer credit rating (or a “proxy rating” where so noted as appropriate). BOEM proposes to add “Issuer credit rating,” as defined by S&P, as a newly defined term in 30 CFR parts 550 and 556.

If an entity does not have an issuer credit rating, BOEM proposes to permit companies to request the Regional Director to determine a proxy credit rating based on audited financial information for the most recent fiscal year, including an income statement, a balance sheet, a statement of cash flows, and the auditor's certificate. By “most recent fiscal year” BOEM means a period that includes a 12-month period within the 24 months prior to the Regional Director's determination for which supplemental financial assurance is required. One benefit of this approach is to reduce the adverse effects of the rule on small businesses.

BOEM proposes to use S&P Global's Credit Analytics credit model to calculate proxy credit ratings.

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However, BOEM proposes to reserve the right to use a different model if it determines that a different model more accurately reflects those factors relevant to the financial evaluation of companies operating on the OCS. The purpose of using S&P Global's Credit Analytics credit models is to provide an accurate and objective method to assess any given company's probability of default on its financial obligations based on its audited financial statements. S&P Global's Credit Analytics credit models would allow BOEM to reliably score and efficiently model BOEM's potential risk exposure from a lessee that could potentially become unable to meet its decommissioning obligations. Credit modeling would allow BOEM to compare the company with similar public companies in the same industry segment. BOEM invites comments on the appropriateness of relying on S&P Global's Credit Analytics credit model, or other similar, widely accepted credit rating models to generate proxy credit ratings. Additionally, BOEM invites comments on the appropriateness of using a proxy credit rating when determining the need to provide financial assurance.

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https://www.spglobal.com/marketintelligence/en/documents/mi_risk_609827_credit-analytics_brochure_letter_fd.pdf.

BOEM's financial assurance program is intended to ensure that private companies have the capacity to meet their financial and non-financial (

i.e.,

performance) obligations. In order to both ensure that companies do not “cause [unmitigated] damage to the environment or to property, or endanger life or health,” 43 U.S.C. 1332(6), and to promote “expeditious and orderly development,” 43 U.S.C. 1332(3), BOEM seeks to balance the financial risk to the government and the taxpayer while minimizing regulatory burdens. See also 43 U.S.C. 1801(7), 1802(1) & (2).

BOEM has determined that establishing an issuer credit rating threshold of BBB- (S&P) or Baa3 (Moody's), an equivalent credit rating provided by another SEC-recognized NRSRO, or an equivalent proxy credit rating, is the best means for accomplishing these objectives. The Moody's Baa3 credit rating is equivalent to the S&P BBB- credit rating. If S&P and Moody's provide different ratings for the same company, BOEM will use the higher rating as the lessee's rating. As discussed in the IRIA, out of the 276 companies analyzed, none of the companies were rated at or above BBB-

at the time of bankruptcy nor within 10 years prior to bankruptcy, therefore, BOEM has selected BBB- as the credit rating threshold for providing additional financial assurance. Additionally, under the proposed rule, BOEM would have adequate time to secure needed financial assurance if a company were to drop below the proposed investment grade threshold as BOEM monitors company rating changes throughout the year.

BOEM reviewed historical default rates across the entire credit rating spectrum, as well as the credit profile of oil and gas sector bankruptcies arising from the commodity price downturn in 2014, to determine an appropriate level of risk. As would be expected, the average S&P historical one-year default rates increase significantly with lower ratings. The average S&P one-year default rate

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for BBB- rated companies from 1981 to 2020 was 0.24 percent. Comparatively, the average one-year default rate for BB- rated companies was 1.21 percent, for B− rated companies was 8.73 percent, and for C rated companies was 24.92 percent. BOEM believes that one-year default rates are an appropriate measure of risk, given BOEM's policy of reviewing the financial status of lessees, ROW holders, and RUE holders at least on an annual basis (the review typically corresponding with the release of audited annual financial statements). In addition, throughout the year, BOEM monitors company credit rating changes, market reports, trade press, articles in major news media and quarterly financial reports to review the financial status of lessees, ROW holders, and RUE holders, and the regulation would not preclude a demand for supplemental financial assurance through the Regional Director's regulatory authority at any time.

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The one-year default rate represents the percentage of companies having any given credit rating that have failed to meet their financial obligations during any given twelve-month period. For example, for companies having had BBB− rating in 2020, 0.24 percent defaulted on their financial obligations in the subsequent twelve-month period (

i.e.,

approximately one out of every 400 companies having a BBB− credit rating).

BOEM has identified a circumstance in which the use of a proxy credit rating may not adequately account for the potential risk of default. This circumstance would occur in a situation where a company has a substantial contingent liability for decommissioning OCS facilities (

i.e.,

decommissioning exposure by virtue of being a co-lessee) associated with its minority ownership of such facilities if the majority owners are unable or unwilling to meet their obligations. This is particularly the case in the OCS context because existing Department regulations stipulate that all co-owners of any OCS lease, regardless of their ownership share, are jointly and severally liable for all the obligations associated with the lease. Contingent liabilities that are deemed unlikely to financially materialize are not required to be booked as a liability on a balance sheet under Financial Accounting Standards Board (FASB) accounting rules for Asset Retirement Obligations, so would not be included in audited financial statements, and therefore may not be taken into consideration in the generation of proxy credit ratings.

For offshore lessees with a NRSRO issuer credit rating, the current average net worth of investment grade lessees is $115 billion dollars, with average book assets of $155 billion dollars. This implies that the financial risk of non-performance on co-lessee liability exposure from these companies is very low. Given that total U.S. offshore liability is lower than half the average net worth of offshore investment grade companies, such lessees are likely to have the financial capacity to cover the contingent liabilities of co-lessees that have not themselves provided financial assurance.

However, where a non-publicly traded company (

i.e.,

a company without an issuer credit rating) has substantial minority co-ownership interests in OCS leases, the proxy credit rating derived for the minority owner may not adequately represent the risk exposure in circumstances where (1) The ownership interests of the other co-owners are disproportionately large compared to the ownership interest of the minority owner, and; (2) The credit ratings of the majority co-owners are not investment grade. This possibility is relatively likely due to BOEM's historical practice of declining to require supplemental financial assurance from any co-lessees who share ownership of a lease with any company with an investment grade proxy credit rating, regardless of the financial circumstance of the co-owner or the relative ownership share of any co-owner.

In these circumstances, a company may have contingent decommissioning liabilities that are not adequately captured in the company's financial statements. It may be that such decommissioning liabilities amount to a disproportionate share compared to the total assets of the company, such that the company may not have the financial capacity to satisfy these contingent liabilities. If, for example, a small company with a high proxy credit rating were a one percent co-lessee of a lease with financially weak co-lessees, the small company may not have sufficient assets to meet its decommissioning obligations for the remaining ninety-nine percent of the decommissioning costs (which it may be required to satisfy under the joint-and-several liability provisions of the regulations) in the event that its co-lessees were to default on their financial obligations.

For this reason, BOEM is proposing to add a new provision to the regulations that would authorize BOEM to require a company requesting a proxy credit rating to provide information on its ownership of other OCS facilities and leases. This new provision authorizes BOEM to take the contingent liabilities associated with the company's co-ownership of these assets into consideration in determining the appropriate proxy credit rating.

BOEM invites comments on the appropriateness of this approach of relying on lessee and grant holder credit ratings, including whether BOEM has proposed an appropriate credit rating threshold of BBB-, and if not, what threshold or set of thresholds would best protect taxpayer interests while not imposing undue burdens on industry. Also, BOEM invites comments on alternative options for determining the need for financial assurance other than credit ratings. Additionally, BOEM invites comments on whether financial assurance should be required of all companies, regardless of credit rating, and the impacts such a requirement might have on OCS investment and on potential taxpayer liabilities.

B. Valuing Proved Oil and Gas Reserves

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

229.1200.

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

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

BOEM believes that a property with a sufficient “reserves-to-decommissioning cost” ratio would likely be purchased by another company if a current lessee defaults on its obligations, thereby reducing the risk that decommissioning costs would be borne by the government, and consequently reducing the need for supplemental financial assurance.

A reserves-to-decommissioning cost ratio of one-to-one would mean that the estimated value of remaining oil and gas reserves on a lease is equal to the cost of decommissioning. BOEM does not expect any other company to purchase a lease interest with a ratio of one-to-one, as the new lessee would not receive any return on its investment once it bears the cost of decommissioning. A reserves-to-decommissioning cost ratio below three-to-one might be considered adequate to encourage a new lessee to take on the cost of purchasing the lease and assuming liability for all of the existing decommissioning obligations, however there may be other factors that would reduce the lease's commercial appeal (

e.g.,

macro-economic conditions, maintenance conditions, or higher than typical operating costs).

In BOEM's judgment, a reserves-to-decommissioning cost ratio that meets or exceeds three-to-one provides enough risk reduction to justify a Regional Director determination that the lessee is not required to provide supplemental financial assurance for that lease. Establishing an appropriate reserves-to-decommissioning cost ratio protects the taxpayer during periods of commodity price volatility. If commodity prices decline in a manner similar to late 2014 through early 2016, for example, BOEM believes a ratio of at least three-to-one assures the property would most likely retain its economic viability and financial attractiveness to potential buyers. BOEM requests comment on whether this is an appropriate threshold, or if there are better approaches and/or data sets available for analysis that would provide BOEM with better certainty that taxpayer interests will ultimately be protected.

VII. Phased Compliance With Supplemental Financial Assurance Orders

BOEM recognizes that the proposed regulations may have a significant financial impact on affected companies. For that reason, BOEM is proposing to phase in the new bonding requirements over a three-year period for existing leaseholders. As part of this proposal, BOEM would require that any company receiving a supplemental financial assurance demand post one-third of the total amount by the deadline listed on the demand letter. A second one-third would be required by the end of the second year (

i.e.,

within 24 months of the receipt of the demand letter). The final one-third payment would be due within 36 months of the receipt of the demand letter. If a lessee's credit rating improves to investment grade during the three-year period, BOEM will discontinue collection of the remaining financial assurance and return any supplemental financial assurance previously provided.

BOEM is requesting comments from potentially affected parties about this phased approach and how it could most effectively be implemented to minimize any unnecessarily adverse effects from an increased supplemental financial assurance requirement.

VIII. Appeals Bonds

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

IX. Proposed Revisions to BOEM Definitions

To implement the changes proposed above, BOEM proposes to add or revise several definitions in 30 CFR parts 550 and 556. For proposed 30 CFR part 550, BOEM proposes to add new terms and definitions for “Issuer credit rating,” “Investment grade credit rating,” and “Financial assurance,” and to revise the definition of “You.” BOEM proposes to add a new term and definition for “Right-of-Use and Easement (RUE)” and remove the separate definitions of “Right-of-use” and “Easement” in 30 CFR part 550 because those terms are not used separately in the existing or proposed regulatory text. Similarly, for 30 CFR part 556, BOEM proposes to add definitions for the new term “Issuer credit rating” and “Investment grade credit rating,” remove the existing term and definition of “Security or securities,” add a new term and definition for “Financial assurance,” and revise the definitions of “Right-of-Use and Easement (RUE)” and “You,” all of which will match those in proposed 30 CFR part 550.

Additionally, BOEM is replacing the word “sulphur” with the more contemporary spelling of “sulfur” throughout the regulatory text where it has not been previously changed. This edit is a technical correction and does not change any meaning or intent of the regulatory provisions. BOEM proposes updating the word “sulfur” in §§ 550.101, 550.102, and 550.105.

X. Section-by-Section Analysis

BOEM is proposing to revise the following regulations:

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

The terms “bond,” “bonding,” “surety bond,” “security,” and “securities” would be replaced throughout this part with the new term “financial assurance.”

Subpart A—General

Section 550.105 Definitions

The proposed rule would add a definition of “Issuer credit rating,” which is a newly defined term in 30 CFR part 550, for the reasons set forth above.

BOEM would remove the terms “Easement,” and “Right-of-use,” neither of which is used separately. In lieu of these two terms, and to define the term actually used in 30 CFR part 550, BOEM would add a definition for “Right-of-Use and Easement (RUE).”

This proposed rule would also add a new term and definition for “Financial assurance” to list the various methods that may be used to ensure compliance with OCS obligations.

The proposed rule would add new definitions for the terms “Transfer” and “Assign” to clarify that these terms are used interchangeably throughout 30 CFR part 550. This change would also serve to clarify that the related terms “transferee” and “transferor” are interchangeable with “assignee” and “assignor” respectively.

The proposed rule would add a new definition for the term “Investment grade credit rating,” meaning “an issuer credit rating of BBB- or higher, or its equivalent, assigned to an issuer of corporate debt by a nationally recognized statistical rating organization as that term defined by the United States Securities and Exchange Commission.” This definition would become the threshold determination according to which BOEM would define whether financial assurance typically would or would not be required.

BOEM would also revise the definition of the term “You” to now include, depending on the context of the regulations, a bidder, a lessee (record title owner), a sublessee (operating rights owner), a Federal or State right-of-use and easement grant holder, a pipeline right-of-way grant holder, an assignor or transferor, a designated operator or agent of the lessee or grant holder, or an applicant seeking to become one of the above. This change to the definition of “You” would, in concert with changes proposed in § 550.166, make explicit that any financial assurance provisions applicable to either a State or Federal RUE would apply to the other.

Section 550.160 When will BOEM grant me a right-of-use and easement (RUE), and what requirements must I meet?

The proposed rule would revise the introductory text of this section to clarify that a RUE grant need not cover both leased and unleased lands. Instead, BOEM may grant a RUE on leased lands (

i.e.,

leased to another party), or unleased lands, or both. The paragraph (a) introductory text would be expanded to include additional activities associated with a RUE, such as using or modifying existing devices. The paragraph (a) introductory text would also be expanded to include the words “seafloor production equipment” and “facilities.” By expanding the RUE requirement to additional activities and devices, BOEM would ensure that all associated activities that may have an impact on the environment of the OCS are included.

BOEM also proposes to revise paragraph (b) to provide that a RUE grant holder must exercise the grant according to the terms of the grant and the applicable regulations of 30 CFR part 550, as well as the requirements of 30 CFR part 250, subpart Q.

BOEM also proposes to revise paragraph (c) to update the cross-reference to BOEM's lessee qualification requirements, §§ 556.400 through 556.402, and to replace the language in this paragraph referencing “bonding requirements” with a cross reference to § 550.166, which BOEM also proposes to revise to add specific criteria for financial assurance demands, as provided below.

Section 550.166 If BOEM grants me a RUE, what financial assurance must I provide?

The proposed rule would revise the section heading by removing the reference to “a State lease” and replacing “surety bond” with “financial assurance.” This reflects the change in the text of paragraph (b) of this section that provides that the financial assurance requirements of this section would apply to both a RUE granted to serve a State lease and one serving an OCS lease. The term “surety bond” would also be replaced with “financial assurance” throughout the section.

BOEM proposes to revise paragraph (a) to require $500,000 in financial assurance that guarantees compliance with the terms and conditions of any OCS RUEs you hold. Previously, paragraph (a) only required $500,000 in financial assurance for RUEs associated with State leases.

BOEM proposes to add paragraph (a)(1) to allow area-wide lease financial assurance to satisfy the requirements of paragraph (a), provided it is in excess of the $500,000 base RUE financial assurance requirement and is amended to guarantee compliance with all the terms and conditions of the RUE(s) it covers.

BOEM proposes to add paragraph (a)(2) to allow the Regional Director to lower the required financial assurance amount for research and other similar types of RUEs, which reflects BOEM's past experience that the total liability exposure can be well below $500,000 for such RUEs.

BOEM proposes to add paragraph (a)(3) to ensure that the financial assurance requirements of § 556.900(d) through (g) and § 556.902 would apply to the requirements stated in paragraph (a).

BOEM would also add to paragraph (b) in this section to provide that, if BOEM grants a RUE that serves either an OCS lease or a State lease, the Regional Director may require the grant holder to provide supplemental financial assurance to ensure compliance with the obligations under the RUE grant. BOEM would use the same issuer credit rating or proxy credit rating criteria found in proposed § 556.901(d)(1) and (2) to evaluate a RUE grant holder as BOEM proposes to apply to lessees,

i.e.,

the Regional Director may require supplemental financial assurance if the grant holder does not have an issuer credit rating or a proxy credit rating that meets the criteria set forth in proposed § 556.901(d)(1). Like lessees, most RUE holders are oil and gas companies, and BOEM would, therefore, use the same financial criteria to determine the need for additional financial assurance from RUE holders to provide consistency.

BOEM proposes to revise paragraph (b)(1) to update the regulatory citation in existing § 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 § 556.900(d) through (g) and § 556.902.

The proposed rule would also revise § 550.166(b)(2) to include “BOEM and BSEE orders” in the list of costs and liabilities, and clarify that RUE holders should also comply with the decommissioning regulations at 30 CFR part 250, subpart Q.

The proposed rule would also add new paragraph (c) to provide that if a RUE grant holder fails to replace any deficient financial assurance upon demand, or fails to provide

supplemental financial assurance upon demand, BOEM may assess penalties, request BSEE to suspend operations on the RUE, and/or initiate action for cancellation of the RUE grant. Proposed paragraph (c) provides for actions similar to those available to BOEM pursuant to proposed § 556.900(h) if a lessee fails to provide sufficient financial assurance.

Section 550.167 How may I obtain or assign my interest in a RUE?

The proposed rule would add § 550.167 to establish the ability to assign a RUE interest. Previously, RUE interests were not assigned, because assignment of RUE interests was not addressed in the existing regulations. This change is being proposed to allow RUE assignments. This new section would also require a RUE assignee to provide the information outlined in existing § 550.161, which currently must be provided only by applicants for a new RUE. Paragraph (a) of § 550.167 would establish that BOEM must approve all assignments of all or part of a RUE interest. Paragraphs (b)(1) through (4) would establish the circumstances in which BOEM may disapprove an assignment of a RUE, mirroring the circumstances under which BOEM may disapprove the assignment of a lease or sublease pursuant to § 556.704. These circumstances are intended to prevent the assignment of a RUE when, for example, the assignment would result in inadequate financial assurance.

Subpart J—Pipelines and Pipeline Rights-of-Way

Section 550.1011 Financial Assurance Requirements for Pipeline Right-of-Way (ROW) Grant Holders

The proposed rule would revise this section in its entirety. The section heading would be revised to read, “Financial assurance requirements for pipeline right-of-way (ROW) grant holders,” to clarify that a pipeline ROW grant holder may meet the requirements of this section by providing bonds or other types of financial assurance, in order to expand the language to include forms of financial assurance in addition to bonds.

Currently, § 550.1011(a) requires that an applicant or a holder of a ROW must provide and maintain a $300,000 bond (in addition to bond coverage required in 30 CFR parts 256 and 556), and potentially additional security, if the Regional Director determines the latter is needed. The proposed rule would revise this paragraph to require that assignees, as well as applicants and holders, are required to provide and maintain the $300,000 financial assurance to make clear that financial assurance requirements would apply to an assignment of a ROW grant. The proposed rule would remove the reference to 30 CFR part 256 currently in paragraph (a)(1) because 30 CFR part 256 does not contain pipeline bonding requirements. The proposed rule would clarify that the requirement to provide area-wide financial assurance for a pipeline ROW grant is separate and distinct from the financial assurance coverage required for leases in 30 CFR part 556 and that required for RUEs in 30 CFR part 550. Existing paragraph (a)(2) would be removed because supplemental financial assurance requirements would be covered by proposed paragraph (d).

BOEM would also remove existing paragraph (b), which defines the three recognized OCS areas, because it is made redundant by the reference to § 556.900(b) in revised paragraph (a). BOEM proposes to replace the removed paragraph (b) with a new paragraph (b) to provide that the requirement under paragraph (a) to furnish and maintain area-wide financial assurance may be satisfied if the operator or a co-grant holder provides area-wide pipeline right-of-way financial assurance in the required amount that guarantees compliance with the regulations and the terms and conditions of the grant, as discussed in Section IV.C of this preamble.

BOEM also proposes to revise paragraph (c) with a provision stating that the requirements for lease financial assurance in § 556.900(d) through (g) and § 556.902 would apply to the area-wide financial assurance required in paragraph (a) of this section. This cross-reference incorporates the financial assurance provisions from 30 CFR part 556 that specify the required content, form, and administrative handling of financial assurance. BOEM would remove existing paragraphs (c) and (d), which would be made redundant by proposed new paragraph (f).

BOEM would add paragraph (d) to provide that the Regional Director may determine that supplemental financial assurance is necessary to ensure compliance with the obligations under a pipeline ROW grant based on an evaluation of the grant holder's ability to carry out present and future obligations on the pipeline ROW. BOEM proposes to use the same issuer credit rating or proxy credit rating criteria to evaluate a pipeline ROW grant holder, or co-grant holder, as BOEM proposes to apply to lessees in § 556.901(d)(1). BOEM, as noted earlier in this preamble, has found that reliance on credit ratings better evaluates financial stability, and is thus applying the same financial criteria in evaluating financial stability of grant holders.

BOEM also proposes to add additional supplemental financial assurance requirements in new paragraph (e)(1) stating that the supplemental financial assurance must meet the general requirements for lease surety bonds or other financial assurance, as provided in § 556.900(d) through (f) and the proposed revisions to paragraph (g) and § 556.902. This cross-reference incorporates the financial assurance provisions from 30 CFR part 556 that specify the required content, form, and administrative handling of financial assurance. New paragraph (e)(2) proposes that any supplemental financial assurance for a pipeline ROW would be required to cover liabilities for regulatory compliance and compliance with BOEM and BSEE orders, decommissioning of all pipelines or other facilities, and clearance from the seafloor of all obstructions created by the pipeline ROW operations, in accordance with the regulations set forth in 30 CFR part 250, subpart Q. See Section IV.C of this preamble for further discussion.

The proposed rule would also add new paragraph (f) to provide that if a pipeline ROW grant holder fails to replace any deficient financial assurance upon demand or fails to provide supplemental financial assurance upon demand, the Regional Director may assess penalties, request BSEE to suspend operations on the pipeline ROW, and/or initiate action for forfeiture of the pipeline ROW grant in accordance with § 250.1013.

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

The proposed rule would make a technical correction to the authority citation for part 556 by removing the citation to 43 U.S.C. 1801-1802, because neither of these two sections contains authority allowing BOEM to issue or amend regulations.

The proposed rule would also remove the citation to 43 U.S.C. 1331 note, which is where the Gulf of Mexico Energy Security Act of 2006 is set forth. While this statute required BOEM to issue regulations concerning the availability of bonus or royalty credits for exchanging eligible leases, the deadline for applying for such a bonus or royalty credit was October 14, 2010; therefore, lessees may no longer apply for such credits. BOEM no longer needs the authority to issue regulations under

that statute and has removed all regulations on this topic from 30 CFR part 556, except for § 556.1000, which provides that lessees may no longer apply for such credits.

The terms “bond,” “bonding,” and “surety bond” would be replaced throughout this part with the new term “financial assurance,” as discussed earlier in this preamble. This change includes changing the Title of Part 556 from “Leasing of Sulphur or Oil and Gas and Bonding Requirements in the Outer Continental Shelf” to “Leasing of Sulfur or Oil and Gas and Financial Assurance Requirements in the Outer Continental Shelf.”

Subpart A—General Provisions

Section 556.105 Acronyms and Definitions

The proposed rule would add a definition of “Issuer credit rating” and “Investment grade credit rating,” which are identical to the proposed additions in § 550.105.

The proposed rule would also revise the definition of “Right-of-Use and Easement (RUE)” to include the words “to construct, secure to the seafloor, use, modify, or maintain platforms, seafloor production equipment.” This definition would be the same as the definition of “Right-of-Use and Easement (RUE)” proposed for § 550.105.

The proposed rule would also add a definition for “Financial assurance” to clarify that various methods can be used to ensure compliance with OCS obligations. This definition would be the same as the definition of “Financial assurance” proposed for § 550.105.

The proposed rule would add definitions for the new terms “Transfer” and “Assign” to clarify that that these terms are used interchangeably throughout 30 CFR part 556. This change would also serve to clarify that the related terms “transferee” and “transferor” are interchangeable with “assignee” and “assignor,” respectively.

The proposed rule would also revise the definition of the term “You” to include, depending on the context of the regulations, a bidder, a lessee (record title owner), a sublessee (operating rights owner), a Federal or State right-of-use and easement grant holder, a pipeline right-of-way grant holder, assignor or transferor, a designated operator or agent of the lessee or grant holder, or an applicant seeking to become one of the above. This change to the definition of “You,” in concert with changes proposed in § 550.166, would make explicit that any provisions applicable to either a State or Federal RUE would apply to the other, and that any distinctions between the two with respect to financial assurance are being removed. This change is in concert with changes proposed in § 550.105.

Subpart G—Transferring All or Part of the Record Title Interest in a Lease

Section 556.704 When may BOEM disapprove an assignment or sublease of an interest in my lease?

The proposed rule would revise paragraph (a) to clearly state that all parties involved in the assignment of a record title interest in a lease must be in compliance with all applicable regulations and orders, including financial assurance requirements, or BOEM may disapprove an assignment or sublease, consistent with changes to 30 CFR part 550 proposed in this rulemaking. The proposed rule would replace the word “would” in the section title with “may” to better reflect this discretion.

Subpart H—Transferring All or Part of the Operating Rights in a Lease

Section 556.802 When may BOEM disapprove the transfer of all or part of my operating rights interest?

The proposed rule would revise the existing section heading to replace “assignment” with “transfer” consistent with the new definitions proposed for both terms. The proposed rule would revise paragraph (a) to clearly state that for the transferee to receive approval for the transfer of operating rights in a lease, the transferee must be in compliance with all applicable regulations and orders to provide financial assurance requirements before BOEM may approve an assignment, consistent with changes to 30 CFR part 550 proposed in this rulemaking. The proposed rule would replace the word “would” in the section title with “may” to better reflect this discretion.

Subpart I—Bonding or Other Financial Assurance

Section 556.900 Financial Assurance Requirements for an Oil and Gas or Sulfur Lease

The proposed rule would revise the section heading to read, “Financial assurance requirements for an oil and gas or sulfur lease” in order to ensure that the term “bonding” has been consistently replaced with “financial assurance” and to clarify that a number of forms of financial assurance can be provided, and not just surety bonds, consistent with changes to 30 CFR part 550 proposed in this rulemaking.

BOEM proposes to add paragraph (a)(4) to make clear that any supplemental financial assurance required by the Regional Director must be provided before a new lease will be issued or an assignment of a lease approved.

The proposed rule would also revise the introductory text of paragraph (g) to replace the word “security” with “financial assurance,” and to add the word “surety” before “bond” in two places to clarify that in those cases the regulation is referring to a “surety bond.”

The proposed rule would revise the introductory text of paragraph (h) to replace the words “bond coverage” with “financial assurance” to clarify that surety bonds are not the only means of meeting the requirement. The proposed rule would also revise paragraph (h)(2) in recognition that BSEE, rather than BOEM, is the agency with authority to suspend production or other operations on a lease.

The proposed rule would add paragraph (i) to ensure consistency with the RUE financial assurance requirements by providing that area-wide lease surety bonds pledged to satisfy the financial assurance requirements for RUEs may be called in for performance of obligations on which the holder of a RUE defaults.

Section 556.901 Base Financial Assurance and Supplemental Financial Assurance

The proposed rule would revise the section heading to read, “Base financial assurance and supplemental financial assurance,” because this section covers both base financial assurance and supplemental financial assurance requirements.

Section 556.901(a)

The proposed rule would also revise paragraph (a)(1)(i) introductory text to replace the word “bond” with “lease exploration financial assurance” to be consistent with the terminology used in existing paragraph (a)(1)(ii), which BOEM does not propose to change.

Section 556.901(b)

The proposed rule would eliminate the parenthetical “(the lessee)” from the introductory text as it is made redundant by the proposed revised definition of “You.” The proposed rule would also revise paragraph (b)(1)(i) introductory text to replace the word “bond” with “lease development financial assurance” for consistency with the terminology used in existing paragraph (b)(1)(ii), which BOEM does not propose to change.

Section 556.901(c)

The proposed rule would also revise paragraph (c) to remove the words “authorized officer” and replace them with “Regional Director,” and remove the words “lease bond coverage” and “a lease surety bond” and replace them in each instance with “financial assurance” to clarify that the Regional Director can review whether BOEM would be adequately secured by a surety bond, or another type of financial assurance, for an amount less than the amount proposed in paragraph (b)(1), but not less than the estimated cost for decommissioning.

Section 556.901(d)

BOEM proposes to combine the provisions of the existing paragraph (d) introductory text and the existing introductory paragraph (d)(1) to provide that the Regional Director may determine that supplemental financial assurance is required to ensure compliance with the obligations under a lease if the lessee does not meet at least one of the criteria provided in proposed paragraphs (d)(1) through (4) below. For further discussion, see Section V of this preamble.

Section 556.901(d)(1)

BOEM proposes to revise paragraph (d)(1) to set forth the criteria BOEM would use to evaluate the ability of a lessee to carry out present and future obligations. Under this paragraph, BOEM would use an issuer credit rating from a NRSRO, as defined by the SEC, greater than or equal to either BBB− from Standard & Poor's (S&P) Ratings Service or Baa3 from Moody's Investor Service, or the equivalent from another NRSRO. If different NRSROs provide different ratings for the same company, BOEM would apply the higher rating, as discussed in section IV.A of this preamble.

Section 556.901(d)(2)

BOEM proposes to revise paragraph (d)(2) stating that BOEM could also use a proxy credit rating calculated by BOEM based on audited financial information from the most recent fiscal year (including an income statement, balance sheet, statement of cash flows, and the auditor's certificate) greater than or equal to either BBB− from S&Ps Ratings Service or Ba3 from Moody's Investor Service, or their equivalent from another NRSRO. The proxy credit ratings that BOEM would calculate on behalf of lessees would be structured in the same scale as the standard ratings (

i.e.,

AAA to D). The audited financial information from the most recent fiscal year that BOEM used to determine the proxy credit rating must include a twelve-month period within the twenty-four months prior to the lessee's receipt of the Regional Director's determination that the lessee must provide supplemental financial assurance. When determining a proxy credit rating, the Regional Director will consider any additional liabilities that may encumber a lessee's ability to carry out future obligations. Under the proposed rule, the lessee would be obligated to provide the Regional Director with information regarding its joint-ownership interests and other liabilities associated with OCS leases, which might not otherwise be accounted for in the audited financial information provided to BOEM.

Section 556.901(d)(3)

BOEM proposes to add new paragraph (d)(3) to address the situation where the lessee does not meet the criteria in proposed paragraphs (d)(1) or (2), but one or more co-lessee(s) does meet those criteria. The Regional Director may require a lessee to provide supplemental financial assurance on a lease-by-lease basis if no co-lessee has an issuer credit rating or proxy credit rating that meets the threshold set forth in paragraphs (d)(1) or (2), as discussed in Section IV.A of this preamble.

Section 556.901(d)(4)

BOEM proposes to add new paragraph (d)(4) to set forth the criterion the Regional Director would use if the lessee does not meet the criteria in proposed paragraphs (d)(1), (2), or (3). In this instance, the Regional Director would assess each lease to determine whether the value of the proved oil and gas reserves on the lease exceed three times the estimated cost of the decommissioning associated with the production of those reserves. Under paragraph (d)(4), the Regional Director's assessment would be based on the evaluation of proved oil and gas reserves following the methodology set forth in SEC Regulation S-X at 17 CFR 210.4-10 and SEC Regulation S-K at 17 CFR 229.1200. BOEM also proposes new paragraphs (d)(4)(i) and (ii), which state that, when implementing this criterion, BOEM will use decommissioning cost estimates, including a BSEE-generated probabilistic estimate at the P70 level, when available, or, if such estimate is not available, BOEM will use the BSEE-generated deterministic estimate.

Section 556.901(e)

BOEM proposes to redesignate existing paragraph (d)(2) as paragraph (e) and revise it to provide that a lessee may satisfy the Regional Director's demand for supplemental financial assurance either by increasing the amount of its existing financial assurance or by providing additional surety bonds or other types of acceptable financial assurance.

Section 556.901(f)

BOEM proposes to redesignate existing paragraph (e) as paragraph (f) and revise to remove the word “bond” and replace it with “supplemental financial assurance,” a term that includes a surety bond or another type of financial assurance. BOEM also proposes to modify the language of new paragraph (f) to establish that, in determining the amount of supplemental financial assurance, the Regional Director will consider the lessee's potential underpayment of royalty and the cumulative decommissioning obligations as established in the manner described in proposed paragraph (d)(3) of this section,

i.e.,

the use of the appropriate BSEE estimate.

Section 556.901(g)

BOEM proposes to redesignate existing paragraph (f) as new paragraph (g) and revise it to replace the word “security” with “financial assurance” throughout.

Existing 30 CFR 556.901(f)(2) includes a statement to the effect that, if a company requests a reduction of the amount of the original bond required, the Regional Director may agree to such a reduction provided that he or she finds that “the evidence you submit is convincing.” BOEM proposes to replace the current regulatory text with the following statement in new paragraph (g)(2): “Upon review of your submission, the Regional Director may reduce the amount of financial assurance required,” as discussed in Section IV of this preamble.

Section 556.901(h)

BOEM proposes to add a new paragraph (h) to describe the limited opportunity lessees will have to provide the required supplemental financial assurance in three phased installments during the first three years after the effective date of this regulation, subject to the conditions of proposed paragraphs (h)(1) and (2). A three-year approach would allow companies to raise the relevant capital through operations over a longer period of time, as discussed in section VII of this preamble. Accordingly, it would reduce bankruptcy risk and ensure a greater level of financial protection for the government and taxpayers.

BOEM proposes to add new paragraphs (h)(1)(i) through (iii) to

establish the timing and amounts of phased supplemental financial assurance that would need to be provided. Payments would be required in three installments of one-third that of the demand, the first of which would be required within the timeframe specified in the demand letter, or within 60 calendar days of receiving the demand letter if no timeframe is specified. The second one-third would be required within 24 months from the date of receipt of the original demand letter, and the final payment would be due within 36 months from the date of the receipt of the original demand letter.

BOEM proposes to add a new paragraph (h)(2) to establish a procedure in case a demand that has been approved for phased compliance is not met within the timeframes established by paragraphs (h)(1)(i) through (iii). If a payment is missed, the Regional Director will notify the party of the failure to meet the timeframe and that it will no longer be eligible to meet the supplemental financial assurance demand by using the phased compliance option set forth in proposed paragraph (h). Moreover, the remaining balance of the demand would become due ten calendar days after the Regional Director's notification is received.

Section 556.902 General Requirements for Bonds or Other Financial Assurance

The proposed rule would revise the section heading to read, “General requirements for bonds or other financial assurance,” to recognize that other types of financial assurance, such as a dual-obligee bond or a pledge of Treasury securities, may be provided under 30 CFR part 556.

These revisions propose that the same general requirements for surety bonds provided by lessees, operating rights owners, or operators of leases, also apply to surety bonds provided by RUE grant and pipeline ROW grant holders. The proposed rule would therefore also revise paragraph (a) to include “grant holder” and to cover surety bonds provided under 30 CFR part 550. The requirements of this section are those that apply broadly to all companies having to provide financial assurance to BOEM for an OCS oil and gas or sulfur lease. Additional requirements appliable specifically to RUEs and ROWs are described in proposed §§ 550.166 and 550.1011, respectively.

The proposed rule would add “or grant” after “lease” to clarify the change to include grant holders in paragraph (a)(2). The rulemaking would also add compliance with “all BOEM and BSEE orders” as a requirement to ensure that providers of financial assurance are aware that such financial assurance guarantees compliance with BOEM and BSEE orders as well as with the regulations and the terms of a lease, ROW, or RUE. This addition is necessary because a requirement to provide supplemental financial assurance arises from a BOEM order. “BOEM and BSEE orders” would mean any order issued by the relevant bureau, such as a BSEE order to decommission, or a BOEM order to provide supplemental bond.

The proposed rule would revise paragraph (a)(3) to include the obligations of all record title owners, operating rights owners, and operators on the lease.

The proposed rule would also revise paragraph (e)(2) to clarify that the use of Treasury securities as financial assurance requires a pledge of Treasury securities, as provided in § 556.900(f).

The proposed rule would add a new paragraph (g) to recognize the option to seek an informal resolution of a surety bond demand pursuant to 30 CFR 590.6, which contains information regarding informal resolutions. This paragraph would further provide that a request for an informal resolution of a dispute concerning the Regional Director's decision to require supplemental financial assurance will not affect the applicant's ability to request a phased payment of its supplemental financial assurance demand under proposed § 556.901(h).

The proposed rule would add a new paragraph (h) to address risks arising in connection with the lessee's and grant holder's ability to appeal a demand for supplemental financial assurance to the Interior Board of Land Appeals (IBLA) pursuant to the regulations in 30 CFR part 590. The proposed rule would add an additional requirement to the IBLA appeals process whereby, if an appellant requests that the IBLA stay the supplemental financial assurance demand, the appellant would be required to post an appeals surety bond equal to the amount of supplemental financial assurance that the appellant seeks to stay before any stay could go into effect. Because IBLA appeals may continue for several years, it is important that BOEM ensure that the government's interests are protected. The appeals surety bond requirement would prevent the government from being left with no security if the appellant filed bankruptcy before the appeal process ended.

Section 556.903 Lapse of Financial Assurance

The proposed rule would replace the word “bond” in the section title with “financial assurance” for consistency with the terminology change made throughout the rulemaking. The proposed rule would revise paragraph (a) to add after the word “surety”, “guarantor, or the financial institution holding or providing your financial assurance” and to include references to the financial assurance requirements for RUE grants (§ 550.166) and pipeline ROW grants (§ 550.1011). The proposed rule would also revise paragraph (a) by removing the words “terminates immediately” and substituting “must be replaced.” The proposed rule would replace the word “promptly” with a specific timeline of within seven calendar days of learning of a negative event for the financial assurance provider and would also add a 30-calendar day timeframe in which the party must provide other financial assurance from a different financial assurance provider.

BOEM also proposes to revise the first sentence of paragraph (b) by inserting “or financial institution” after “guarantor,” to make the provision apply to all types of financial assurance providers, including those offering decommissioning accounts. BOEM also proposes to revise the second sentence of paragraph (b) for consistency in terminology by inserting the words “or other financial assurance” after the word “bonds” and inserting the words “guarantor, or financial institution” after the word “surety”, so that all surety bonds or other financial assurance instruments must require all financial assurance providers to notify the Regional Director within 72 hours of learning of an action filed alleging that the lessee or grant holder, or their financial assurance provider, is insolvent or bankrupt.

Section 556.904 Decommissioning Accounts

The proposed rule would revise the section heading and the term “abandonment accounts” throughout the section to read “decommissioning accounts,” in accordance with BOEM policy and accepted terminology used in the industry. The words “lease-specific” would be removed throughout this section to remove the implication that such an account could only pertain to one lease, thereby clarifying that a decommissioning account could be used for one lease or several leases, a RUE grant, or a pipeline ROW grant, or a combination thereof, as discussed in section V.B of this preamble.

BOEM proposes to revise paragraph (a) to remove the term “lease-specific” and replace it with “decommissioning,” and to add references to the base and

supplemental financial assurance regulation (proposed § 556.901(d)), as well as the financial assurance regulations for RUE grants (proposed § 550.166(b)) and pipeline ROW grants (proposed § 550.1011(d)), consistent with the changes mentioned in the preceding paragraph. Although the paragraph (a) introductory text would continue to allow a lessee or grant holder to establish a decommissioning account at a federally insured financial institution, this proposed rule would eliminate the existing restriction in paragraph (d) that such deposits not exceed the FDIC/FSLIC insurance limits and the reference to paragraph (a)(3), which is being revised and is no longer relevant to withdrawal of funds from a decommissioning account.

The proposed rule would re-arrange the existing sentence constituting § 556.904(a)(1). The proposed rule would also revise paragraph (a)(2) to remove the words “as estimated by BOEM” to clarify that BOEM does not estimate decommissioning costs, but rather uses the estimates of decommissioning costs determined by BSEE. The proposed rule would also revise paragraph (a)(2) to require funding of a decommissioning account “pursuant to a schedule that the Regional Director prescribes,” as opposed to “within the timeframe the Regional Director prescribes” as existing § 556.904(a)(2) now states.

The proposed rule would revise paragraph (a)(3) to remove the requirement to provide binding instructions to purchase Treasury securities for a decommissioning account under certain circumstances. The proposed rule would replace the existing language with a new provision providing that if you fail to make the initial payment or any scheduled payment into the decommissioning account, you must immediately submit, and subsequently maintain, a surety bond or other financial assurance in an amount equal to the remaining unsecured portion of your estimated decommissioning liability. This change reflects BOEM's current policy to order a surety bond or other financial assurance in the event the payments into the decommissioning account are not timely made.

The proposed rule would revise paragraph (b) by removing “lease-specific” and substituting “decommissioning.”

The proposed rule would also remove existing paragraphs (c) and (d), which concern the use of pledged Treasury securities to fund a decommissioning account, as discussed in section V.B of this preamble. Removing the requirement in existing paragraph (d) that the account holder must purchase Treasury securities when the amount in the account equals the maximum amount insurable by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation will make these accounts more attractive to parties who may desire to use this method of providing supplemental financial assurance. The removal of existing paragraphs (c) and (d) would not preclude the use of Treasury securities to fund a decommissioning account. Existing paragraph (e) would be redesignated as paragraph (c) except that the word “pledged” would be removed, and “other revenue stream” would be added to the list of financial assurance options.

The proposed rule would add a revised paragraph (d), which would describe the Regional Director's discretion to authorize BOEM to provide funds from a decommissioning account to a liable party that performs the decommissioning.

Section 556.905 Third-Party Guarantees

The proposed rule would revise the section heading to read, “Third-party guarantees.” The proposed rule would also revise the section throughout to remove the introductory titles of each paragraph to ensure consistency in the proposed rule's format.

Section 556.905(a)

BOEM proposes to revise paragraph (a) to include a cross-reference to proposed § 550.166(b) (related to RUEs) and proposed § 550.1011(d)) (related to pipeline ROWs) in addition to the existing reference to proposed § 556.901(d) (related to base financial assurance for leases), to clarify that a third-party guarantee may be used as a type of supplemental financial assurance for not only leases, but for RUE grants and pipeline ROW grants as well. This is further discussed in Section V.A of this preamble.

BOEM would also revise paragraph (a)(1) to require that the guarantor, not the guarantee, as provided in the existing regulation, must meet the criteria in proposed § 556.901(d)(1), as the factors in proposed § 556.901(d) more properly apply to an entity, such as a guarantor, than to a document, such as a guarantee. See section V.A of this preamble for further discussion. BOEM would retain existing paragraph (a)(2), but would revise it to include a requirement, which is found in existing paragraph (a)(4), that the guarantor or guaranteed party must submit a third-party guarantee “containing each of the provisions in proposed paragraph (d) of this section.” As discussed below, paragraph (d) is being revised to no longer use the term “indemnity agreement” and to provide instead that the provisions that BOEM previously required a lessee or grant holder to include in indemnity agreements must be included in a third-party guarantee agreement. This terminology is changed to clarify that the government is not required to incur the expenses of decommissioning before demanding compensation from the guarantor. The proposed rule would also remove existing paragraphs (a)(3) and (a)(4), which would be superseded by other revisions to this section.

Section 556.905(b)

The proposed rule would redesignate existing paragraph (b) as paragraph (c) and revise the introductory text to remove the reference to existing paragraph (c)(3) of this section because the requirements in that paragraph would be superseded in this proposed rule. The proposed rule would replace this reference with a reference to paragraph (a)(1) of this section in paragraph (c) as it is proposed to be revised. The proposed rule would add new paragraph (b) to allow guarantors to limit their guarantees to a fixed dollar amount as agreed to by BOEM. BOEM is proposing this change because the existing regulations do not clearly limit the liability of a guarantor to a fixed monetary amount stated in the guarantee. Therefore, few parties were willing to use third-party guarantees in the past. Because the cessation of production is neither desirable nor easily accomplished by an operator, the proposed rule would also revise existing paragraph (b)(2) to remove the requirement that, when a guarantor becomes unqualified, you must “cease production until you comply with the surety bond coverage requirements of this subpart.” Instead, the language in revised redesignated paragraph (c) would be revised to provide that you must, within 72 hours, “[s]ubmit and subsequently maintain a surety bond or other financial assurance covering those obligations previously secured by the third-party guarantee.”

The proposed rule would remove existing paragraph (c) as the language would be superseded by the new language in § 556.905(a).

Section 556.905(d)

The proposed rule would revise paragraph (d)(1) introductory text to read “If you fail to comply with the terms of any lease or grant covered by the guarantee, or any applicable

regulation, your guarantor must either:” to be consistent with the revision of paragraph (a) to allow the use of a third-party guarantee for a RUE grant or a pipeline ROW grant.

The proposed rule would revise paragraph (d)(1)(i) to clarify that the corrective action required is to bring the lease or grant into compliance with its terms, or any applicable regulation, to the extent covered by the guarantee.

The proposed rule would revise paragraph (d)(1)(ii) to clarify that the liability only extends to that covered by the guarantee and that payment does not result in the cancelation of the guarantee, but only a reduction in the remaining value equal to the amount provided.

The proposed rule would remove existing subparagraph (d)(2) to be consistent with the revision to remove existing paragraph (c). As a result, existing paragraph (d)(3) would be redesignated as paragraph (d)(2) and existing paragraph (d)(4) would be redesignated as paragraph (d)(3).

The proposed rule would revise the redesignated paragraphs (d)(2)(ii) and (iii) to remove the words “your guarantor's” and replace them with the word “the” to clarify that redesignated paragraph (d)(2) would apply to the guarantee itself.

The proposed rule would revise proposed paragraph (d)(3) to replace the term “a suitable replacement security instrument” with “acceptable replacement financial assurance” for clarity and would include the requirement that appears in existing § 556.905(d)(4) that any replacement financial assurance must be provided before the termination of the period of liability of the third-party guarantee.

Section 556.905(e)

The proposed rule would also revise paragraph (e) to provide that BOEM will cancel a third-party guarantee under the same terms and conditions as those proposed in §§ 556.906(b) and (d)(3).

Section 556.905(f) Through (k)

BOEM also proposes to add new paragraphs (f) through (k) to replace the provisions of existing paragraph (e). The new paragraphs mirror the provisions of existing paragraph (e) while making minor adjustments to accommodate the new format and add clarification. The term “indemnity agreement” would be replaced with “third-party guarantee agreement” throughout.

Section 556.906 Termination of the Period of Liability and Cancellation of Financial Assurance

The proposed rule would replace the words “security” and “surety bond” with “financial assurance” and “surety” with “financial assurance provider” for consistency with the changes throughout the proposed rule. The section title would also be revised so that “a bond” is replaced with “financial assurance.”

The proposed rule would revise existing paragraph (b)(1) to remove the word “terminated” in two instances and replace it with “cancelled” to be consistent with the existing paragraph (b) introductory text, which provides that the Regional Director will cancel your previous financial assurance when you provide a replacement, subject to the conditions provided in existing paragraphs (b)(1) through (3). BOEM would also remove the word “for” before “by the bond” in paragraph (b)(1) for grammatical reasons.

The proposed rule would revise existing paragraph (b)(2) to also add cross-references to § 550.166, which is the financial assurance regulation for RUE grants, and § 550.1011, which is the financial assurance regulation for pipeline ROW grants, and would revise existing paragraph (b)(3) to also reference supplemental financial assurance regulations for RUE grants (proposed § 550.166(b) and pipeline ROW grants (proposed § 550.1011(d)). BOEM proposes to delete the word “base” in front of financial assurance in existing paragraph (b)(2) to propose that the new financial assurance would replace whatever financial assurance that previously existed, whether that financial assurance consisted of a base bond and/or any prior supplemental financial assurance.

The proposed rule would revise the paragraph (d) introductory text to cover financial assurance cancellations and return of pledged financial assurance and, in the table, would remove the middle column entitled, “The period of liability will end,” because it is redundant with the provisions in proposed paragraphs (a) through (c).

In existing paragraph (d), in the column in the table entitled “For the following type of bond,” BOEM proposes to remove the words “type of bond” and replace those words with a colon at the top of the table so that this paragraph would apply to surety bonds or other financial assurance, as applicable. Paragraph (d)(1) would also be revised to include a cross-reference to base financial assurance submitted under proposed § 550.166(a) (for RUE grants) and proposed § 550.1011(a) (for pipeline ROW grants). BOEM would also revise paragraph (d)(2) in the same column to include a reference to supplemental financial assurance submitted under proposed § 550.166(b) and proposed § 550.1011(d).

The proposed rule would revise paragraph (d) to amend the heading of the column entitled, “Your bond will be cancelled,” to read, “Your financial assurance will be reduced or cancelled, or your pledged financial assurance will be returned,” to clarify that financial assurance may be reduced or cancelled and pledged financial assurance, or a portion thereof, may be returned, and to specify other circumstances under which the Regional Director may cancel supplemental financial assurance or return pledged financial assurance. While the existing criteria identify most instances when cancellation of financial assurance is appropriate, occasionally there are other circumstances where cancellation would be warranted. The proposed rule would allow cancellation when BOEM determines, using the criteria set forth in proposed § 556.901(d), 550.166(b), or 550.1011(d), as applicable, that a lessee or grant holder no longer needs to provide supplemental financial assurance for its lease, RUE grant, or pipeline ROW grant when the operations for which the supplemental financial assurance was provided ceased prior to accrual of any decommissioning obligation; or when cancellation of the financial assurance is appropriate because BOEM determines such financial assurance never should have been required under the regulations.

The proposed rule would add a new paragraph (d)(3) in the table in paragraph (d) to address the cancellation of a third-party guarantee. In the past, parties have expressed concern to BOEM that the regulations, although they expressly allow for the termination of the period of liability, do not clearly allow for the cancellation of the guarantee. This addition would allow BOEM to cancel a third-party guarantee under the same terms and conditions that apply to cancellation of other types of financial assurance, as provided in proposed § 556.906(d)(2).

The proposed rule would revise the introductory text in paragraph (e) to remove the words “or release” because the term “release” is undefined and not used in practice. Likewise, the proposed rule would remove the words “or released” from paragraph (e)(2). No substantive change is intended; rather BOEM seeks to clarify the meaning of the existing provision.

The proposed rule would also revise paragraph (e) to reference RUE grants and pipeline ROW grants to provide that the Regional Director may reinstate the financial assurance on the same grounds as currently provided for reinstatement of lease financial assurance.

Section 556.907 Forfeiture of Bonds or Other Financial Assurance

The proposed rule would replace the words “security,” “surety bond,” or “third-party guarantee” with “financial assurance” and “surety” with “financial assurance provider” for consistency with the changes throughout the proposed rule.

The proposed rule would revise the section heading to read, “Forfeiture of bonds or other financial assurance” because the use of “or” is sufficient in this instance. The proposed rule would revise paragraph (a)(1) to include surety bonds or other financial assurance for RUE grants and pipeline ROW grants, in addition to leases, in the forfeiture provisions of this section. BOEM also proposes to clarify that the Regional Director may call for forfeiture of all or part of a surety bond or other form of financial assurance, or demand performance from a guarantor, if the lessee or grantee covered by the financial assurance refuses or is unable to comply with any term or condition of a lease, a RUE grant, or a pipeline ROW grant, as well as any regulation. Throughout this section, BOEM proposes to add references to a grant, a grant holder, and grant obligations to implement the revisions in proposed paragraph (a)(1). BOEM proposes to revise (a)(2) to replace “other form of security” with “other form of financial assurance” for consistent terminology.

BOEM proposes to revise paragraph (b) to include surety bonds “or other financial assurance” so that BOEM may pursue forfeiture of a surety bond or other financial assurance. The word “lessee” would also be replaced with “record title holder” to ensure that co-lessees are included.

BOEM proposes to revise paragraph (c)(1) to include “financial institution holding or providing your financial assurance” as one of the parties the Regional Director would notify of a determination to call for forfeiture because a bank or other financial institution may hold funds subject to forfeiture.

The proposed rule would revise paragraph (c)(1)(ii) to acknowledge limitations authorized by § 556.902(a)(3) by more precisely stating that the Regional Director will use an estimate of the cost of the corrective action needed to bring a lease into compliance when determining the amount to be forfeited, subject, in the case of a guarantee, to any limitation authorized by proposed § 556.902(a)(3).

BOEM proposes to replace existing paragraphs (c)(2)(ii) and (iii) with a new paragraph (c)(2)(ii) that would specify that to avoid forfeiture by promising to take corrective action, any financial assurance provider would have to agree to, and demonstrate that it will complete the required corrective action to bring the relevant lease into compliance within the timeframe specified by the Regional Director, even if the cost of such compliance exceeds the limit of the financial assurance. The proposed changes make clear that existing paragraphs (c)(2)(ii) and (iii) apply to all forms of financial assurance, including the caveat that corrective action must be completed even if the cost of compliance exceeds the limit of the financial assurance.

BOEM proposes to revise existing paragraphs (d) and (e)(2) by replacing “leases” with “lease or grant” to extend the applicability of these provisions to include holders of RUE and ROW grants.

BOEM proposes to revise paragraph (f)(1) to include “grant” as well as lease. BOEM also proposes to revise paragraph (f)(2) to clarify that BOEM may recover additional costs from a third-party guarantor only to the extent covered by the guarantee. This would be consistent with the change made at § 556.902(a)(3) to allow the use of limited third-party guarantees.

This rulemaking would also reword paragraph (g) for clarity.

In some circumstances, predecessor lessees that have been notified about the failure of their successor organizations to fulfill their decommissioning obligations will initiate the requisite decommissioning activities. In these cases, predecessor lessees or grantees are likely to incur costs that could be funded from financial assurance posted with BOEM on behalf of the current lessee. Some of this financial assurance may be forfeited by the current lessee or by other successor lessees. BOEM proposes to add a paragraph (h) to make clear that BOEM may provide funding collected from forfeited financial assurance to predecessor lessees or grant holders or to third parties taking corrective actions on the lease or grant.

Part 590—Appeal Procedures

Subpart A—Offshore Minerals Management Appeal Procedures

Section 590.4 How do I file an appeal?

BOEM proposes to add paragraph (c) to specify that, while a demand for supplemental financial assurance may be appealed to the IBLA, a stay can only be granted if an appeal surety bond for an amount equal to the demand is posted. This is intended to mitigate the risk to the government that, after the appeal is decided, a company will be unable to perform its obligations because of its financial deterioration during pendency of the appeal.

Severability

BOEM proposes to include in the final rule that, should any court hold unlawful and/or set aside portions of this rulemaking, the remaining portions are severable and therefore should not be remanded to the agency. The proposed rule contains three main components: (1) Streamlining requirements for supplemental financial assurance; (2) Establishing “P70” as the relevant estimate for the amount of any supplemental financial assurance, and (3) Making several, less significant changes to, among other things. right-of-use and easement and right-of-way grants and decommissioning accounts. See preamble sections IV.B through V.C.

These three components operate largely independent of each other: the first component considers whether a lessee is at risk of default based on the lessee's credit rating or the proved reserves on the lease; the second component considers the appropriate requirements in light of that risk; and the third component addresses several longstanding and technical matters that do not bear directly on the first two components. Indeed, these three components are sufficiently distinct that their severability does not depend on the specifics of this proposed rule. For example, if, in the final rule, BOEM sets the appropriate level of supplemental financial assurance at a different P-value, that decision would remain severable from the threshold determination regarding

whether

to collect supplemental financial assurance and from the other separate technical changes proposed by this rule.

XI. Additional Comments Solicited by BOEM

In addition to those comment requests stated above, BOEM also requests comments on the topics below:

• BOEM is considering the inclusion of offshore joint and several decommissioning liabilities (of the co-lessees that would otherwise have exempted the lessee from providing supplemental financial assurance) in the determination of a proxy credit rating when these liabilities are “disproportionately high” and may encumber that co-lessee's ability to

carry out future obligations. BOEM is requesting comments on the appropriate criteria to determine what constitutes “disproportionately high” offshore liabilities, for example, a ratio of decommissioning liabilities to the net worth of the co-lessee above X times, or other financially significant and reasonable criteria on how these liabilities should best be incorporated into the proxy credit rating that BOEM will derive.

• The use of End-of-Life (Years) in the evaluation of asset value as an alternative to using the decommissioning costs ratio. BOEM requests comments on the use of a minimum number of years of production remaining criterion to qualify for an exemption from supplemental financial assurance. Possibly, End-of-Life criteria could be an alternative to the 3:1 ratio of value of reserves to decommissioning costs.

• The consideration of bond issuance ratings, in addition to issuer credit ratings, in determining the financial risk posed by lessees and grant holders. BOEM also invites comments on determining an appropriate threshold for bond issuance ratings, such as general unsecured debt ratings.

• Should BOEM exclude third-party guarantors from the requirement of § 556.902(a)(3) that guarantees must “guarantee compliance with all obligations of all lessees, operating rights, owners and operators on the lease” in addition to allowing a third-party guarantee to be limited in amount?

XII. Procedural Matters

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

Executive Order 12866, as amend by Executive Order 14094 provides that the Office of Information and Regulatory Affairs (OIRA) in OMB will review all significant rules. OIRA has reviewed this proposed rule and determined that it is a significant action under Executive Order 12866, as amend by Executive Order 14094 Sec 3 (f)(1). This rulemaking will result in an annual effect on the economy of $200 million or more (adjusted every 3 years by the Administrator of OIRA for changes in gross domestic product); or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, territorial, or tribal governments or communities.

Executive Order 13563 reaffirms the principles of Executive Order 12866, as amend by Executive Order 14094, while calling for improvements in the Nation's regulatory system to promote predictability and reduce uncertainty, and to use the best, most innovative, and least burdensome tools for achieving regulatory ends. Executive Order 13563 directs agencies to consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public where these approaches are relevant, feasible, and consistent with regulatory objectives. BOEM has developed this proposed rule in a manner consistent with these requirements.

BOEM's proposed changes are estimated to increase the private cost to lessees in the form of bonding or other financial assurance premiums. BOEM has drafted an initial regulatory impact analysis (IRIA) detailing the estimated impacts of this proposed rule. The IRIA reflects both monetized and non-monetized impacts; the costs and benefits of the non-monetized impacts are discussed qualitatively in the document. BOEM's IRIA is available in the public docket for this rulemaking.

BOEM expects this proposed rule may increase the total amount of financial assurance, increasing the aggregate private cost to lessees of financial assurance premiums. The table below summarizes BOEM's estimate of the cost in financial assurance premiums paid by lessees over a 20-year time horizon if this proposed rule is finalized less the premiums associated with BOEM's existing current financial assurance portfolio. Additional information on the estimated transfers, costs, and benefits can be found in the IRIA posted in the public docket for this proposed rule.

Total Estimated Increase in Bonding Financial Assurance Premiums Associated With BOEM's Proposed Amendments

[2022-2041, 2021$ millions]

2022-2041

Discounted at 3%

Discounted at 7%

Total Compliance Cost

$4,867

$3,379

Annualized Compliance Cost

327.1

318.9

B. Regulatory Flexibility Act (RFA)

The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires agencies to analyze the economic impact of regulations when a significant economic impact on a substantial number of small entities is likely and to consider regulatory alternatives that will achieve the agency's goals while minimizing the burden on small entities. BOEM has provided an initial regulatory flexibility analysis (IRFA), which assesses the impact of this proposed rule on small entities. The IRFA is available in the public docket for this rulemaking.

As defined by the Small Business Administration (SBA), a small entity is one that is “independently owned and operated and which is not dominant in its field of operation.” What characterizes a small business varies from industry to industry. The proposed rule would affect OCS lessees and RUE grant holders and pipeline ROW grant holders on the OCS. The analysis shows that this includes roughly 536 companies with ownership interests in OCS leases and grants. Entities that would operate under this proposed rule are classified primarily under North American Industry Classification System (NAICS) codes 211120 (Crude Petroleum Extraction), 211130 (Natural Gas Extraction), and 486110 (Pipeline Transportation of Crude Oil and Natural Gas). For NAICS classifications 211120 an

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