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 No. BOEM-2023-0027]

RIN 1010-AE14

Risk Management and Financial Assurance for OCS Lease and Grant Obligations

AGENCY:

Bureau of Ocean Energy Management, Interior.

ACTION:

Final rule.

SUMMARY:

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

DATES:

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

ADDRESSES:

BOEM has established a docket for this action under Docket No. BOEM-2023-0027. All documents in the docket are listed on the

https://www.regulations.gov

website and can be found by entering the Docket No. in the “Enter Keyword or ID” search box and clicking “search”.

You may submit comments on the IC to OMB's desk officer for the Department of the Interior through

https://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—Open for Public Comments,” selecting “Department of the Interior” in the “Select Agency” pull down menu, clicking “Submit,” then, checking the box “Only Show ICR for Public Comment” on the next web page, scrolling to this final rule, and clicking the “Comment” button at the right margin. Additionally, you may use the search function to locate the IC request related to the rule on the main web page. Please provide a copy of your comments to the Information Collection Clearance Officer, Office of Regulations, BOEM, Attention: Anna Atkinson, 45600 Woodland Road, Sterling, Virginia 20166; or by email to

anna.atkinson@boem.gov.

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

FOR FURTHER INFORMATION CONTACT:

Kelley Spence, Office of Regulations, BOEM, 45600 Woodland Road, Sterling, Virginia 20166, at email address

Kelley.Spence@boem.gov

or at telephone number (984) 298-7345; and Karen Thundiyil, Chief, Office of Regulations, BOEM, 1849 C Street NW, Washington, DC 20240, at email address

Karen.Thundiyil@boem.gov

or at telephone number (202) 742-0970. Individuals in the United States who are deaf, deafblind, hard of hearing, or have a speech disability may dial 711 (TTY, TDD, or TeleBraille) to access telecommunications relay services for contacting the contacts listed in this section. These services are available 24 hours a day, 7 days a week, to leave a message or question with the above individual. You will receive a reply during normal business hours. Individuals outside the United States should use the relay services offered within their country to make international calls to the point-of-contact in the United States.

SUPPLEMENTARY INFORMATION:

Preamble acronyms and abbreviations.

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

ANCSA Alaska Native Claims Settlement Act

BOEM Bureau of Ocean Energy Management

BSEE Bureau of Safety and Environmental Enforcement

CFR Code of Federal Regulations

CRA Congressional Review Act

DOI Department of the Interior (or Department)

E.O. Executive Order

FDIC Federal Deposit Insurance Corporation

FR Federal Register

FSLIC Federal Savings and Loan Insurance Corporation

GAO Government Accountability Office

GOMESA Gulf of Mexico Energy Security Act of 2006

IBLA Interior Board of Land Appeals

IC Information Collection

INC Incident of Non-Compliance

IRFA Initial Regulatory Flexibility Analysis

mmboe Million barrels of oil equivalents

MMS Minerals Management Service

NAICS North American Industry Classification System

NEPA National Environmental Policy Act

NPRM Notice of Proposed Rulemaking

NRSRO Nationally Recognized Statistical Rating Organization

NTL Notice to Lessees

OCS Outer Continental Shelf

OCSLA Outer Continental Shelf Lands Act

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

OMB Office of Management and Budget

ONRR Office of Natural Resources Revenue

PRA Paperwork Reduction Act

RIA Regulatory Impact Analysis

RFA Regulatory Flexibility Act

RUE Right-of-Use and Easement

ROW Right-of-Way

SBA Small Business Administration

SBREFA Small Business Regulatory Enforcement Fairness Act

SEC Securities and Exchange Commission

S&P Standard and Poor's

UMRA Unfunded Mandates Reform Act

U.S.C. United States Code

U.S. EPA United States Environmental Protection Agency

Background information.

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

Risk Management and Financial Assurance for OCS Lease and Grant Obligations: Response to Public Comments Received on the June 29, 2023, Notice of Proposed Rulemaking

in the docket for this rulemaking (Docket No. BOEM-2023-0027). A “track changes” version of the regulatory language that identifies the changes in this action compared to the current regulations is also available in the docket.

Organization of this document.

The information in this preamble is organized as follows:

I. General Information

A. Executive Summary

1. Purpose of This Regulatory Action

2. Summary of Major Provisions

3. Costs and Benefits

B. Does this action apply to me?

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

II. Background

A. BOEM Statutory and Regulatory Authority and Responsibilities

B. History of Bonding Regulations and Guidance

C. Purpose of Rulemaking

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

III. Summary of the Final Rule and Public Comments

A. Revisions to BOEM Supplemental Financial Assurance Requirements

1. Leases

a. Evaluation of Co-Lessees

b. Evaluation Criteria

2. Right-of-Use and Easement Grants

a. Base Financial Assurance

b. Area-Wide Financial Assurance

c. Supplemental Financial Assurance

3. Pipeline Right-of-Way Grants

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

C. Revisions to Other Types of Supplemental Financial Assurance

1. Third-Party Guarantees

2. Decommissioning Accounts

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

D. Evaluation Methodology

1. Credit Ratings

a. Use of an “Issuer Credit Rating”

b. Credit Rating Threshold

2. Proxy Credit Ratings

3. Valuing Proved Oil and Gas Reserves

E. Phased Compliance With Supplemental Financial Assurance Orders

F. Appeal Bonds

G. Other Amendments

1. Revisions to Definitions

2. Changing of the Spelling of “Sulphur” to “Sulfur”

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

A. What are the affected entities?

B. What are the economic impacts?

C. What are the benefits?

D. What tribal outreach did BOEM conduct?

V. Section-by-Section Analysis

VI. Statutory and Executive Order Reviews

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

B. Regulatory Flexibility Act (RFA)

C. Small Business Regulatory Enforcement Fairness Act

D. Unfunded Mandates Reform Act (UMRA)

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

F. Executive Order 13132: Federalism

G. Executive Order 12988: Civil Justice Reform

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

I. Paperwork Reduction Act (PRA)

J. National Environmental Policy Act (NEPA)

K. Data Quality Act

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

M. Congressional Review Act (CRA)

I. General Information

A. Executive Summary

1. Purpose of This Regulatory Action

The purpose of this final regulatory action is to address concerns regarding BOEM's financial assurance program. This rule finalizes amendments to the existing provisions to better protect the taxpayer from bearing the cost of facility decommissioning and other financial risks associated with OCS development, such as environmental remediation. Additionally, this final rule provides regulatory clarity to OCS lessees regarding their financial obligations by codifying requirements in the Code of Federal Regulations (CFR).

Since 2009, more than 30 corporate bankruptcies have occurred involving offshore oil and gas lessees that did not have sufficient financial assurance to cover their decommissioning liabilities. These bankruptcies have highlighted a weakness in BOEM's current supplemental financial assurance program. BOEM's existing program has, at times, been unable to forecast financial distress of these lessees and grantees that have not previously provided supplemental financial assurance and, as a result, BOEM has not had sufficient time to require and receive supplemental financial assurance prior to a declaration of bankruptcy. Additionally, challenges arising from bankruptcy proceedings, including the inability to sell less valuable assets that fail to generate new buyers at auction, can result in unplugged wells and orphaned infrastructure, potentially resulting in the American taxpayer paying to plug those wells and decommission that abandoned infrastructure. The amendments finalized in this rulemaking under section 5 of OCSLA (43 United States Code (U.S.C.) 1334) and Secretary's Order 3299 strengthen BOEM's financial assurance program to better protect the taxpayer from bearing the cost of facility decommissioning and other financial risks associated with OCS development.

2. Summary of Major Provisions

The following major provisions are included in this final rule:

• streamlining the criteria used for evaluating the financial health of lessees and grantees,

• codifying the use of the BSEE probabilistic estimates of decommissioning cost for determining the amount of supplemental financial assurance required,

• removing restrictive provisions for third-party guarantees and decommissioning accounts,

• adding new criteria under which a bond or third-party guarantee that was provided as financial assurance may be canceled, and

• clarifying financial assurance requirements for RUEs serving Federal leases.

With this rulemaking, the Department is finalizing an amendment to revise the criteria used to evaluate the need for supplemental financial assurance from the existing five criteria—financial capacity, projected financial strength, business stability, reliability in meeting obligations based on credit rating or trade references, and record of compliance with laws, regulations, and lease terms—to one of two criteria: (1) credit rating and (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. Specifically, the Department is finalizing the use of an investment grade credit rating threshold (or proxy credit rating equivalent) and a minimum 3-to-1 ratio of the value of proved reserves to decommissioning liability associated with those reserves to determine if a lessee is required to provide supplemental financial assurance. If a current lessee meets one of these criteria, it will not be required to provide supplemental financial assurance. These amendments codify a forward-looking analysis for determining the need for supplemental financial assurance and strengthen BOEM's financial assurance program by providing a more accurate method for analyzing a lessee's financial health.

The Department is also finalizing the use of the BSEE probabilistic estimates of decommissioning cost for determining the amount of supplemental financial assurance required. The new estimates are based on industry-reported decommissioning costs pursuant to the notice-to-lessees (NTL) requiring the submittal of such data. Previously, BSEE provided a single algorithm-based deterministic estimate for OCS facilities for determining decommissioning cost estimates. Based on the reported data, BSEE has developed three probabilistic estimates (

i.e.,

P-values) of decommissioning costs for each OCS facility on any given lease. These values represent the likelihood of covering the full cost of decommissioning a facility as a percentage; for example, P70 represents a 70 percent likelihood of covering the full cost of decommissioning a facility. The Department is finalizing, as proposed, the use of the P70 decommissioning estimate value to determine the amount of supplemental financial assurance required from a current lessee that does not meet the financial waiver criteria. If probabilistic estimates are not available, then BOEM will use the available deterministic values. BOEM also notes that the use of the BSEE P70 value only reflects the amount of supplemental financial assurance that may be required to meet decommissioning obligations and does not reflect the total cost of corrective action that may be required to bring a lease or grant into compliance.

The Department's goal for BOEM's financial assurance program continues to be the protection of the American taxpayers from exposure to financial loss associated with OCS development, while ensuring that the financial assurance program does not detrimentally affect offshore investment or position American offshore exploration and production at a competitive disadvantage. The Department acknowledges that the new regulations could have a significant financial impact on affected companies, and for that reason, the Department is finalizing the amendment, as proposed, to phase in the new financial assurance requirements over a 3-year period for existing leaseholders.

3. Costs and Benefits

The regulatory amendments in this rulemaking are expected to increase the total amount of financial assurance required from OCS lessees and grant holders. Those lessees that do not meet the updated criteria to avoid providing financial assurance will realize an increased compliance cost in the form of bonding premiums. BOEM has drafted a Regulatory Impact Analysis (RIA) detailing the estimated impacts of the respective provisions of this final rule and has included it in the docket. The impacts reflect both monetized and non-monetized impacts; the costs and benefits of the non-monetized impacts are discussed qualitatively in the document. The table below summarizes BOEM's monetized estimate of the cost of increased bonding premiums paid by lessees over a 20-year period. Additional information on the estimated transfers, costs, and benefits can be found in the RIA available in the docket for this rulemaking (Docket No. BOEM-2023-0027).

Net Total Estimated Compliance Cost of the Rule

[2024-2043, 2023, $ millions]

2024-2043

Discounted

at 3%

Discounted

at 7%

Net Total Compliance Cost

$8,525

$5,923

Annualized Compliance Cost

573.0

559.0

This final rule affects holders of oil, gas, and sulfur leases, ROW grants, and RUE grants on the OCS. The analysis shows that this includes roughly 391 companies with ownership interests in OCS leases and grants. Entities that operate under this rule are classified primarily under North American Industry Classification System (NAICS) codes 211120 (Crude Petroleum Extraction), 211130 (Natural Gas Extraction), and 486110 (Pipeline Transportation of Crude Oil and Natural Gas). For NAICS classifications 211120 and 211130, the Small Business Administration (SBA) defines a small business as one with fewer than 1,250 employees; for NAICS code 486110, it is a business with fewer than 1,500 employees. Based on this criterion, approximately 271 (69 percent) of the businesses operating on the OCS subject to this rule are considered small; the remaining businesses are considered large entities. All the operating businesses meeting the SBA classification are potentially impacted; therefore, BOEM expects that the rule will affect a substantial number of small entities.

BOEM has estimated the annualized increase in compliance costs to lessees and RUE and ROW grant holders and allocated those to small and large entities based on their decommissioning liabilities. BOEM's analysis estimates small companies could incur $421 million (7 percent discounting) in annualized compliance costs from its changes. The Bureau recognizes that there will be incremental cost burdens to most affected small entities and has included a 3-year, phased compliance approach to reduce burden associated with the transition to the requirements of this rule. The changes are designed to balance the risk of non-performance with the compliance burdens that are associated with the requirement to provide supplemental financial assurance. Additional information about these conclusions can be found in the RIA for this rule.

B. Does this action apply to me?

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

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

In addition to being available in the docket, BOEM will post an electronic copy of the documents related to this final action at:

https://www.boem.gov/regulations-and-guidance.

BOEM's full response to comments on the June 29, 2023, notice of proposed rulemaking (NPRM), including any comments not discussed in this preamble, can be found in the memorandum titled,

Risk Management and Financial Assurance for OCS Lease and Grant Obligations: Response to Public Comments Received on the June 29, 2023, Notice of Proposed Rulemaking,

available in the docket (Docket No. BOEM-2023-0027).

II. Background

A. BOEM Statutory and Regulatory Authority and Responsibilities

Section 5 of OCSLA (43 U.S.C. 1334), authorizes the Secretary of the Interior (Secretary) to issue regulations to administer OCS leasing for mineral development. Section 5(a) of OCSLA (43 U.S.C. 1334(a)) authorizes the Secretary to “prescribe such rules and regulations as may be necessary to carry out [provisions of OCSLA]” related to leasing on the OCS. Section 5(b) of OCSLA (43 U.S.C. 1334(b)) provides that “compliance with regulations issued under” OCSLA must be a condition of “[t]he issuance and continuance in effect of any lease, or of any assignment or other transfer of any lease, under the provisions of” OCSLA. Section 18 of OCSLA (43 U.S.C. 1344) states that, “Management of the [OCS] shall be conducted in a manner which considers economic, social, and environmental values of the renewable

and nonrenewable resources contained in the [OCS]. . .”.

The Secretary, in Secretary's Order 3299 (as amended), established BOEM and delegated to it the authority to carry out conventional energy- (

e.g.,

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

For more information on the statutory authority for this rule, see the preamble to the proposed rule at 88 FR 42138, June 29, 2023.

B. History of Bonding Regulations and Guidance

The Minerals Management Service (MMS), BOEM's predecessor, published the existing financial assurance requirements for oil, gas, and sulfur leases and pipeline ROW grants on May 22, 1997 (62 FR 27948). These regulations required lease-specific or area-wide base bonds in prescribed amounts, depending on the level of activity on a lease, and provided the authority to require additional supplemental financial assurance for leases above the base bonds depending on the financial health of the lessee. Additionally, MMS published the existing financial assurance requirements for RUE grants on December 28, 1999 (64 FR 72756). These regulations did not dictate a specific bond amount for a RUE but did provide the authority to require bonding if necessary. BOEM employs the same criteria for RUE and ROW grants as it does for leases to determine whether supplemental financial assurance is required, because specific criteria pertaining to supplemental financial assurance for grants do not exist in the current regulations.

The current bonding regulations at 30 CFR 556.901(d) provide five criteria that the Regional Director uses to determine whether a lessee's potential inability to carry out present and future decommissioning obligations warrants a demand for supplemental financial assurance; however, the current bonding regulations do not specifically describe how the criteria are weighted. To provide guidance, MMS issued a Notice to Lessees (NTL) effective December 28, 1998, which provided details on how it would apply the five criteria (NTL No. 98-18N). This NTL was superseded by NTL No. 2003-N06, effective June 17, 2003, and that NTL was later superseded by NTL No. 2008-N07, which was effective August 28, 2008. Most recently, NTL No. 2008-N07 was superseded on September 12, 2016, with NTL No. 2016-N01, which was later rescinded in February of 2020.

In December 2015, the Government Accountability Office (GAO) reviewed BOEM's supplemental financial assurance procedures and issued a report titled “Offshore Oil and Gas Resources: Actions Needed to Better Protect Against Billions of Dollars in Federal Exposure to Decommissioning Liabilities.” (GAO Report). While acknowledging BOEM's ongoing efforts to update its policies, the GAO Report recommended, inter alia, that “BOEM complete its plan to revise its supplemental financial assurance procedures, including the use of alternative measures of financial strength.”

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

On October 16, 2020, DOI issued a notice of proposed rulemaking (85 FR 65904) to revise certain BSEE policies concerning decommissioning orders and the Department's financial assurance regulations that are administered by BOEM. In the joint proposed rule, the Department proposed to adjust the supplemental financial assurance criteria to reflect the risk mitigation already provided by the joint and several liability of financially stable co-lessees and predecessor lessees. The Department's regulations hold predecessors responsible for some or all of the decommissioning when a current lessee is unable to perform its obligations. In the 2020 proposed rule, the Department proposed to consider the financial stability of predecessor lessees by waiving supplemental financial assurance requirements for a current lessee when there is a financially strong predecessor lessee. The Department also proposed to change the methodology for measuring financial strength to focus on credit rating and the value of proved oil and gas reserves and to apply the credit rating methodology to RUE grants and ROW grants as well.

On April 18, 2023, DOI finalized the BSEE-administered provisions of the 2020 proposal (88 FR 23569). The Department's 2023 final rule implements provisions of the 2020 proposed rule to clarify decommissioning responsibilities of RUE grant holders and to formalize BSEE's policies regarding performance by predecessors ordered to decommission OCS facilities.

On June 29, 2023, the Department proposed a new rule in lieu of finalizing the BOEM provisions of the 2020 joint proposal. The new proposed rule provided recommended revisions to the regulations concerning risk management and financial assurance for OCS lease and grant obligations. This final action addresses the public comments received on the June 29, 2023, proposal and finalizes amendments to those regulations. For more details on the history of the bonding regulations, see the preamble to the proposed rule at 88 FR 42138.

C. Purpose of Rulemaking

The purpose of this rulemaking is to finalize amendments to address concerns regarding BOEM's financial assurance program. This rule finalizes amendments to the existing provisions to better protect the taxpayer from bearing the cost of facility decommissioning and other financial risks associated with OCS development, such as environmental remediation. This rule also provides regulatory clarity to OCS lessees regarding their financial obligations by codifying requirements in the CFR.

As discussed in the preamble to the proposed rule (88 FR 42140), the GAO identified three main shortcomings in the Department's prior approach to financial assurance: (1) the Department faced challenges in determining actual decommissioning liabilities due to data system limitations and inaccurate data; (2) the Department did not require sufficient financial assurance to cover liabilities, primarily due to the practice

of waiving supplemental bonding requirements, resulting in financial assurance coverage (such as bonds) for less than 8% of an estimated $38.2 billion in decommissioning liabilities; and (3) the Department's criteria for assessing lessees' financial strength did not provide accurate and timely information about their ability to cover future decommissioning costs. As the GAO report indicated, the existing regulatory structure is inadequate, introduces needless financial risk, and is unsustainable.

Importantly, relatively few major facilities have been decommissioned (relative to the number installed) because the vast majority of facilities are or were recently actively producing. As more facilities reach the end of their useful life, however, decommissioning will be required on a larger scale. Accordingly, previously low losses to the government are not a reliable indicator for future losses. The GAO has in fact asserted the opposite and has notified Congress that the current program must be revised to avoid putting the government in an untenable situation.

On February 20, 2024, the GAO issued a new report titled

Offshore Oil and Gas: Interior Needs to Improve Decommissioning Enforcement and Mitigate Related Risks

(GAO-24-106229) that provided four recommendations to DOI to strengthen BSEE's and BOEM's decommissioning oversight and enforcement. Recommendation 3 specifically stated the “Secretary of the Interior should ensure the BOEM Director completes planned actions to further develop, finalize, and fully implement changes to financial assurance regulations and procedures that reduce financial risks, including by (1) requiring higher levels of supplemental bonding, and (2) addressing other known weaknesses.” The measures BOEM described in the proposed rule and finalized here will, as a practical matter, address this GAO recommendation.

Since 2009, more than 30 corporate bankruptcies have occurred involving offshore oil and gas lessees with decommissioning liabilities that were not covered by financial assurance. The fact that bankruptcies have involved decommissioning liabilities without sufficient supplemental financial assurance demonstrates that the waiver criteria in NTL No. 2008-N07 were inadequate to protect the public from potential responsibility for OCS decommissioning liabilities, especially during periods of low oil and gas prices. For example, ATP Oil & Gas was a mid-sized company with a supplemental financial assurance waiver when it filed for bankruptcy in 2012. Similarly, Bennu Oil & Gas LLC, had a waiver at the time of its bankruptcy filing, and Energy XXI, Ltd. and Stone Energy Corporation obtained waivers less than a year before filing for bankruptcy. While most OCS leases affected by the bankruptcies were ultimately sold or retained by the companies reorganized under chapter 11 of the U.S. Bankruptcy Code, these bankruptcies highlighted the weakness in BOEM's supplemental financial assurance program. BOEM's existing program has, at times, been unable to forecast financial distress of these lessees and grantees that have not previously provided supplemental financial assurance and, as a result, BOEM has not had sufficient time to require and receive supplemental financial assurance prior to a declaration of bankruptcy.

Additionally, challenges arising in bankruptcy proceedings, including the inability to sell less valuable assets that fail to generate new buyers at auction, can result in unplugged wells and orphaned infrastructure. This could result in the American taxpayer paying the cost to plug those wells and decommission that abandoned infrastructure. The amendments finalized in this rulemaking strengthen BOEM's financial assurance regulations to better protect the taxpayer from bearing the cost of facility decommissioning and other financial risks associated with OCS development.

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

On June 29, 2023, DOI published an NPRM in the

Federal Register

at 88 FR 42136, which proposed amendments to 30 CFR parts 550, 556, and 590. This NPRM proposed to streamline the criteria used for evaluating the financial health of lessees, codify the use of the BSEE probabilistic estimates of decommissioning cost for determining the amount of supplemental financial assurance required, remove restrictive provisions for third-party guarantees and decommissioning accounts, add criteria for which a bond or third-party guarantee that was provided as supplemental financial assurance may be canceled, and clarify bonding requirements for RUEs serving Federal leases. Specifically, the Department proposed to revise the criteria used to evaluate the need for supplemental financial assurance from lessees from the existing five criteria—financial capacity, projected financial strength, business stability, reliability in meeting obligations based on credit rating or trade references, and record of compliance with laws, regulations, and lease terms—to one of two criteria: (1) credit rating and (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. The Department proposed the use of an investment grade credit rating threshold (or proxy credit rating equivalent) and a minimum 3-to-1 ratio of the value of proved reserves to decommissioning liability associated with those reserves to determine if a lessee is required to provide supplemental financial assurance.

After examining the financial assurance costs in conjunction with risk coverages derived from using different P-values for decommissioning costs over different time periods for the full implementation of this rule, BOEM proposed that an adequate balance between OCS development and financial risk level on the OCS is achieved by the combination of a P70 value and a phase-in period of 3 years. The proposed phased-in approach allows the lessee, grant holder, or operator to submit the amount due over 3 fiscal years, which is specifically designed to mitigate the disruptive impact of large, immediate financial assurance demands. BOEM notes that poorly-capitalized companies with end-of-life assets may declare bankruptcy at the P70 level, but that bankruptcy would also be a risk under a P90 or a P50 level threshold. It was BOEM's conclusion that a P70 threshold with a 3-year phase-in achieves an adequate balance between the level of protection against the risks that the proposed rule intends to manage with a reasonable period of time to fully implement the costs derived from these policy changes. Details regarding each of the specific proposal provisions are discussed in section III of this preamble.

III. Summary of the Final Rule and Public Comments

For each topic, this section provides a description of what the Department proposed, what the Department is finalizing, and a summary of key comments and responses for each proposal provision. BOEM's full response to comments on the June 29, 2023, NPRM, including any comments not discussed in this preamble, can be found in the memorandum titled,

Risk Management and Financial Assurance for OCS Lease and Grant Obligations: Response to Public Comments Received on the June 29, 2023, Notice of Proposed Rulemaking

available in the docket (Docket No. BOEM-2023-0027) (hereinafter

Response to Public Comments

).

A. Revisions to BOEM Supplemental Financial Assurance Requirements

The Department proposed and is finalizing revisions to the supplemental financial assurance requirements for oil, gas, and sulfur leases, RUE grants, and pipeline ROW grants, as discussed in the subsections below.

1. Leases

In the June 29, 2023, NPRM, the Department proposed changes to the lease financial assurance requirements to (1) modify the evaluation process for requiring supplemental financial assurance by clarifying and streamlining the evaluation criteria, and (2) remove restrictive provisions for third-party guarantees and decommissioning accounts. The proposed rule would allow the Regional Director to require supplemental financial assurance when a lessee or grant holder poses a substantial risk of becoming financially unable to carry out its obligations under its lease or grant, or when the property may not have sufficient value to be sold to another company that could assume those obligations. In the former case, the risk that the taxpayer might have to take on the financial obligations of a lessee or grant holder is mitigated when there is a co-lessee or co-grant holder that has sufficient financial capacity to carry out the obligations. These proposed provisions, the key public comments received on the provisions, and the Department's final amendments are discussed in the following subsections. A summary of all comments received regarding revisions to lease financial assurance provisions and BOEM's corresponding responses can be found in section 3 of the

Response to Public Comments.

Additionally, DOI also proposed to use the costs of decommissioning resulting from BSEE's new methodology, which provides probabilistic costs using a database of reported decommissioning costs on the OCS, to determine the amount of supplemental financial assurance required, as discussed in section III.B of this preamble.

a. Evaluation of Co-Lessees

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

e.g.,

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

e.g.,

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

BOEM's existing supplemental financial assurance evaluation process, contained in 30 CFR 556.901(d), is not clear to what extent co-lessee financial capacity is to be considered. The Department proposed to codify in 30 CFR 556.901(d)(3) that this process includes an evaluation of the ability of a co-lessee to carry out present and future obligations. This proposed amendment recognizes that all current owners are benefiting from ongoing operations and are jointly and severally liable for compliance with DOI requirements. All current co-lessees are equally liable for present nonmonetary obligations and such future obligations that accrue while they are co-lessees. As proposed, BOEM would not require supplemental financial assurance for properties where at least one co-lessee meets the credit rating threshold. A summary of the comments received is provided here.

Comment:

Several commenters expressed support for DOI's proposal to not require supplemental financial assurance on leases where at least one co-lessee meets the credit rating threshold.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed in 30 CFR 556.901(d), that the evaluation for determining whether supplemental financial assurance is required includes an evaluation of the ability of a co-lessee to carry out present and future obligations. This amendment recognizes that all current owners are benefiting from ongoing operations and are jointly and severally liable for compliance with DOI requirements. As proposed, the Department is finalizing the provision that it will not require supplemental financial assurance from properties where at least one co-lessee meets the credit rating threshold.

Comment:

Several commenters expressed opposition to DOI's proposal, asserting that any co-lessee that does not maintain an investment grade credit rating (or equivalent proxy credit rating) should be required to provide supplemental financial assurance. Commenters recommended that the Department require supplemental financial assurance for their respective working interest shares from all co-lessees that do not maintain an investment grade credit rating for leases that are not exempt based on the reserve analysis. An additional commenter recommended the financial assurance evaluation be extended to sublessees when a company can provide evidence that the sublessee was one of the original installers/owners of the lease facilities.

Response:

BOEM acknowledges the commenters' recommendations that the Department should require financial assurance from all co-lessees that do not maintain an investment grade credit rating for their respective working interests but concludes that it is impractical to evaluate co-lessees and operating rights owners since each co-lessee is liable for the total obligation and not their proportional share. DOI is finalizing, as proposed in 30 CFR 556.901(d), to not require supplemental financial assurance for leases where at least one co-lessee meets the credit rating threshold. This amendment recognizes that all current owners are benefiting from ongoing operations and are jointly and severally liable for compliance with DOI requirements. All current co-lessees are equally liable for present nonmonetary obligations and such future obligations that accrue while they are co-lessees.

b. Evaluation Criteria

The Department proposed to revise the criteria in 30 CFR 556.901(d) used to evaluate the need for supplemental financial assurance from lessees from the five criteria—financial capacity, projected financial strength, business stability, reliability in meeting obligations based on credit rating or trade references, and record of compliance with laws, regulations, and lease terms—to a simpler analysis of one of two criteria: (1) credit rating or (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. As discussed in the preamble to the proposed rule at 88 FR 42142-42144, the Department proposed to eliminate the “business stability” and the “record of compliance” criteria, to replace the “financial capacity” and “reliability” criteria with issuer credit rating or proxy credit rating, and to replace the “projected financial strength” criterion with a ratio of the value of proved oil and gas reserves on a lease to the decommissioning liability associated with those reserves.

Specifically, DOI proposed the following in 30 CFR 556.901(d) to determine whether supplemental financial assurance on a lease may be required: (1) a credit rating, either from an Nationally Recognized Statistical Rating Organization (NRSRO), as identified by the United States Securities and Exchange Commission (SEC) pursuant to its grant of authority under the Credit Rating Agency Reform Act of 2006 and its implementing regulations at 17 CFR parts 240 and 249, or a proxy credit rating determined by BOEM based on a company's audited financial statements; or (2) a minimum ratio of the value of proved oil and gas reserves on a lease to the decommissioning liability associated with those reserves. For discussion of the justification of the credit rating selected and the minimum reserves to decommissioning liabilities ratio selected, see section III.D of this preamble.

These proposed criteria better align BOEM's evaluation process with accepted financial risk evaluation methods used by the banking and finance industry. As discussed in the preamble to the proposed rule (88 FR 42142), eliminating subjective or less precise criteria—such as the length of time in operation to determine business stability or trade references to determine reliability in meeting obligations—will simplify the process and remove criteria that often do not accurately or consistently predict financial distress. Additionally, the Department solicited comments on any other appropriate criteria for use in evaluating the need for supplemental financial assurance from OCS lessees.

Comment:

Multiple commenters generally supported the streamlining of the evaluation criteria, particularly the use of credit ratings as a more appropriate criterion than financial capacity, projected financial strength, and business stability.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed in 30 CFR 556.901(d), the replacement of the prior five criteria with the two criteria: (1) credit rating and (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. This amendment codifies a forward-looking analysis for determining the need for supplemental financial assurance, which is simpler to evaluate for both the Department and lessees, in lieu of a backward-looking analysis.

Comment:

Several commenters recommended that the Department completely remove the evaluation to determine if supplemental financial assurance is required. One commenter specifically asked the Department to eliminate this step entirely and to simply require all OCS leaseholders, regardless of financial strength, to provide supplemental financial assurance. An additional commenter urged the Department to require every lessee to post supplemental financial assurance to ensure decommissioning costs are covered and eliminate consideration of proxy credit ratings and the value of proved oil reserves associated with a given lease.

Response:

BOEM is the agency within DOI responsible for managing development of the nation's offshore resources in an environmentally and economically responsible way. BOEM must balance OCS development with protection of both the taxpayer and the environment and concludes that this rule achieves an acceptable balance of objectives. BOEM does not believe requiring all entities to provide supplemental financial assurance can be justified by the potential risk to the taxpayer, because financially strong entities are highly unlikely to file for bankruptcy and are highly likely to be able to cover their decommissioning obligations. Additionally, requiring those entities with little likelihood of default to provide supplemental financial assurance would reduce funds available for other capital expenditures. Accordingly, the Department is finalizing, as proposed in 30 CFR 556.901(d), the two evaluation criteria for lessees: (1) credit rating and (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. The purpose of financial assurance is not to prevent problems; it is to ensure there is money to fix them. As such, criteria that do not relate to financial capacity do not target the companies for which the financial assurance is needed. Using the revised criteria simplifies the evaluation process, streamlining the Department's evaluation without compromising the risk to taxpayers. Indeed, the two new criteria are more protective than the existing criteria, as evidenced by the significant increase in the amount of financial assurance that will be required using the updated criteria.

Comment:

Commenters who objected to the removal of the record of compliance criterion urged BOEM to be more attentive to past safety performance, deny waivers to any company with idle iron, stipulate that owners with decommissioning obligations for abandoned or idle wells would not be eligible for new leases, and develop a scoring system to grade companies on various safety and environmental metrics to incorporate into the financial assurance analysis.

Response:

While commenters offered a conceptual argument to retain the record of compliance criterion, they provided no new data to suggest a correlation between financial strength of a company and its record of compliance. As discussed in the preamble to the proposed rule at 88 FR 42142, BOEM examined the number of incidents of non-compliance (INCs) issued by BSEE, their severity, and the relationship between INCs and financial health/strength of companies and found that the data was not a reliable indicator of financial strength. The data show that the number of incidents is correlated with the number of structures a lessee has on the OCS, and not necessarily to the financial health of the lessee. Additionally, BOEM's financial assurance program is not in and of itself designed to promote safety or compliance (there are other Department regulations addressing these matters), but to assure that a lessee can financially bring a noncompliant lease into compliance. The Department's forward-looking approach, which is being finalized here, allows time for BOEM to demand financial assurance, rather than waiting for inspections and corresponding incidents to occur and then determining that supplemental financial assurance is needed because of the number of INCs.

The Department is finalizing the replacement of the five criteria in 30 CFR 556.901(d) with two criteria for lessees: (1) credit rating and (2) the ratio of the value of proved reserves to decommissioning liability associated with those reserves. This amendment codifies a forward-looking analysis for determining the need for supplemental financial assurance in lieu of the backward-looking analysis that resulted from the use of the five criteria or that would result from using INCs as an indicator. For a summary of all comments received regarding the streamlining of the evaluation criteria, including the removal of the record of compliance criterion, and BOEM's corresponding responses, see sections 3.1 through 3.6 of the

Response to Public Comments.

2. Right-of-Use and Easement Grants

In the June 29, 2023, NPRM, the Department proposed changes to the RUE financial assurance requirements to clarify the financial assurance requirement for RUEs serving Federal leases, which is not explicitly addressed in the existing regulations. These proposed provisions, the public

comments received on the provisions, and DOI's final amendments are discussed in the following subsections.

a. Base Financial Assurance

The Department proposed to revise 30 CFR 550.166 to provide that any RUE grant holder must provide base financial assurance in a specific amount, regardless of whether the RUE serves a State lease or a Federal OCS lease and proposed a Federal RUE base financial assurance requirement matching the existing $500,000 base financial assurance requirement for State RUEs. For a summary of all comments received regarding revisions to base financial assurance provisions for RUEs and BOEM's corresponding responses, see section 4 of the

Response to Public Comments.

Comment:

Commenters supported the proposal to require a RUE grant holder to provide financial assurance in a specific amount, regardless of whether the RUE serves a State lease or Federal OCS lease, but asserted that BOEM should update the base financial assurance value because it was determined in 1993, was based on costs in relatively shallow waters, and significant inflation has occurred since the last revision.

Response:

BOEM agrees with the commenters' assertion that the initial base bond amount was determined many years ago and acknowledges that this value should be reevaluated. Because BOEM did not propose a new value in the NPRM and, therefore, cannot revise it in the final rule, BOEM plans to evaluate the specific values of the base supplemental financial assurance for RUEs, ROWs, and leases in a future rulemaking.

With this rulemaking, the Department is finalizing 30 CFR 550.166, as proposed, that provides that any RUE grant holder must provide base financial assurance of $500,000, regardless of whether the RUE serves a State lease or a Federal OCS lease, to match the existing base financial assurance requirements for State RUEs.

b. Area-Wide Financial Assurance

The Department proposed in 30 CFR 550.166(a) a $500,000 area-wide base financial assurance for RUE grant holders, which would satisfy the base financial assurance requirement for any RUE holder that owns one or more RUEs within the same OCS area, regardless of whether the RUE serves a State or Federal lease. Additionally, the Department proposed in 30 CFR 550.166(a)(1) to allow any lessee that has previously posted area-wide lease financial assurance (pursuant to 30 CFR 556.900(a)(1) or 556.901(a)(2) or (b)(2) for the areas specified in 30 CFR 556.900(a)(2)) to modify that lease financial assurance to also cover any RUE(s) in the area owned by that lessee. The ability to use area-wide lease financial assurance to cover the RUE base financial assurance obligation would be subject to the requirement that the area-wide lease financial assurance be in an amount equal to or greater than the RUE base financial assurance requirement (

i.e.,

equal to or greater than $500,000).

Comment:

A commenter asserted that there was no need for a new requirement for area-wide financial assurance for RUEs, as it would solely cover RUE rentals. They suggested that this aspect should already be sufficiently covered under the existing area-wide financial assurance for leases provided by lessees. The commenter also noted that, presently, “BSEE does not permit transfers of RUEs.” To address this, the commenter recommended that both BOEM and BSEE should mandate complete ownership filings for all co-owners of the respective ROW and RUE for the Department's approval. They asserted that this approach would appropriately distribute the risk among all co-owners.

Response:

BOEM disagrees with the commenter's assertion that there “is no need for” area-wide financial assurance requirements for RUEs. RUE holders have decommissioning responsibility and not just that of paying rentals. Area-wide coverage is not being required but being offered as an alternative to separately bonding each RUE. In response to the suggestion that BOEM and BSEE should mandate complete ownership filings for ROW and RUEs, we note that is outside the scope of this rulemaking.

As discussed in the preamble to the proposed rule at 88 FR 42144, the proposed rule at 30 CFR 550.166(a)(1) would allow any lessee that has already posted area-wide lease financial assurance to modify that lease surety bond to also cover any RUE(s) in the area owned by the same lessee. The ability to use the area-wide lease financial assurance to cover the RUE base financial assurance would be subject to the requirement that the area-wide lease financial assurance would be in an amount equal to or greater than the RUE base financial assurance requirement. For example, under the proposal, a lessee with a $3 million area-wide lease surety bond could establish or acquire any number of Federal or State RUEs in the area without having to post any additional financial assurance (other than, potentially, supplemental financial assurance), provided the lessee agrees to modify the terms of its area-wide lease surety bond to also cover any State or Federal RUEs that it owns or acquires. If the existing area-wide financial assurance is not modified, the lessee may satisfy the requirement by providing new financial assurance to cover its RUE(s). In the example, BOEM believes the $3 million area-wide lease surety bond is sufficient to cover the RUE $500,000 requirement. The Department is finalizing this provision as proposed, in addition to new supplemental financial assurance requirements for RUE grant-holders that do not maintain an investment grade credit rating. As discussed earlier in this preamble, BOEM plans to evaluate the specific values of the base supplemental financial assurance for RUEs, ROWs, and leases in a future rulemaking.

The Department is finalizing, as proposed in 30 CFR 550.166(a), the option to provide $500,000 area-wide RUE financial assurance, which will satisfy the base financial assurance requirement for any RUE holder that owns one or more RUEs within the same OCS area, regardless of whether the RUE serves a State or Federal lease. Lessees that have previously posted area-wide lease financial assurance will be able to modify that lease surety bond to also cover any RUE(s) in the area owned by the same lessee. The ability to use area-wide lease financial assurance to cover the RUE base financial assurance obligation will be subject to the requirement that, in addition to covering the lease financial assurance requirement, the area-wide lease financial assurance must include an amount equal to or greater than the RUE base financial assurance requirement (

i.e.,

equal to or greater than $500,000) in order to cover the financial assurance requirements for both the leases and RUEs.

c. Supplemental Financial Assurance

The Department proposed to replace the general statement in 30 CFR 550.160(c) that RUE grant holders “must meet bonding requirements” with the specific criteria governing financial assurance requirements found in proposed 30 CFR 556.900 through 556.902, and the applicable financial assurance requirements in 30 CFR 550.166 and 30 CFR part 556, subpart I. Similar to the proposed changes to the evaluation criteria for lease holders, DOI proposed in 30 CFR 550.166(b) to consider the credit rating or proxy credit rating of RUE co-grant holders to determine if a grantee must provide supplemental financial assurance. The

value of proved oil and gas reserves was not included in this evaluation because a RUE grant does not entitle the holder to any interest in oil and gas reserves. For a summary of all comments received regarding revisions to supplemental financial assurance provisions for RUEs and BOEM's corresponding responses, see section 4 of the

Response to Public Comments.

Comment:

Commenters supported the proposal to evaluate the financial health of RUE grant holders using the same criterion as was proposed for oil and gas lessees (

i.e.,

investment grade credit rating of grant holders or co-holders).

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing 30 CFR 550.160(c), as proposed, to replace the general statement that RUE grant holders “must meet bonding requirements” with the evaluation of a grant holder's financial health using a credit rating or a proxy credit rating to determine supplemental financial assurance demands.

Comment:

A commenter suggested that the Department should not require supplemental bonding for RUEs that are servicing and associated with high value leases because some companies own interest in the reserves associated with a RUE granted to maintain a platform operational on an expired lease for servicing production on another lease.

Response:

BOEM disagrees with the commenter's assertion that the Department should not require supplemental bonding for RUEs that are servicing and associated with high value leases. RUEs do not grant a holder an interest in reserves. While the same company may own reserves as a lessee, DOI would not be able to compel the grantee to sell the lease to cover the costs of grant decommissioning.

The Department is finalizing, as proposed, 30 CFR 550.160(c), which provides that a RUE grant-holder may be required to provide supplemental financial assurance if they do not maintain an investment grade issuer credit rating or proxy credit rating equivalent. This change is consistent with the evaluation of oil and gas lessees found in finalized 30 CFR 556.901(d). The Department is also finalizing, as proposed, that the value of proved oil and gas reserves will not be considered in this evaluation because a RUE grant does not entitle the holder to any interest in the associated oil and gas reserves.

3. Pipeline Right-of-Way Grants

Existing bonding requirements for pipeline ROW grants, contained in 30 CFR 550.1011, prescribe a $300,000 area-wide base surety bond that guarantees compliance with all the terms and conditions of the pipeline ROW grants held by a company in an OCS area. Additionally, existing 30 CFR 550.1011(a)(2) states that BOEM may require a pipeline ROW grant holder to provide supplemental financial assurance if the Regional Director determines that financial assurance in excess of $300,000 is needed but, unlike with leases, the regulation provides no factors for the Regional Director's consideration when making this determination. Similar to the proposed changes to the evaluation criteria for lease holders, DOI proposed in 30 CFR 550.1011(c) to consider the credit rating or proxy credit rating of ROW co-grant holders to determine if the grantee must provide supplemental financial assurance. The value of proved oil and gas reserves was not included in this evaluation because a ROW grant does not entitle the holder to any interest in the associated oil and gas reserves. For a summary of all comments received regarding revisions to ROWs and BOEM's corresponding responses, see section 5 of the

Response to Public Comments.

Comment:

Commenters supported the proposal to evaluate the financial health of pipeline ROW grant holders using the same criterion as was proposed for oil and gas lessees (

i.e.,

investment grade credit rating or proxy credit rating of grant holders or co-holders).

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed in 30 CFR 550.1011(c), to evaluate pipeline ROW grant-holders using the criterion proposed for lessees (

i.e.,

investment grade credit rating or proxy credit rating of grant holders or co-holders).

Comment:

A commenter suggested that the Department should not require supplemental bonding for ROW pipelines that are servicing and associated with high value leases because some companies own an interest in the reserves that their ROW pipeline services.

Response:

BOEM disagrees with the commenter's assertion that the Department should not require supplemental bonding for ROW pipelines that are servicing and associated with high value leases. ROWs do not grant a holder an interest in reserves. While the same company may own reserves as a lessee, DOI would not be able to compel the grantee to sell the lease to cover the costs of grant decommissioning.

Comment:

A commenter requested that the Department rethink allowing oil and gas operators to decommission pipelines in place and should ensure that BSEE's decommissioning costs sufficiently meet the cost of removing all pipeline from the seafloor.

Response:

Changes to the regulations allowing oil and gas operators to decommission pipelines in place is outside the scope of this rulemaking.

DOI is finalizing, as proposed, 30 CFR 550.1011, which provides for an evaluation of pipeline ROW grant-holders using the criterion proposed for lessees (

i.e.,

issuer credit rating or proxy credit rating). This will ensure that pipeline ROW grant-holders can demonstrate that they have the financial ability to meet their obligations of the ROW.

The Department is finalizing the use of an investment grade credit rating or proxy credit rating for pipeline ROW co-grant holders to determine if a grant holder must provide supplemental financial assurance, consistent with the evaluation of oil and gas lessees in 30 CFR 550.1011(a)(2). The value of proved oil and gas reserves will not be considered in this evaluation because a ROW grant does not entitle the holder to any interest in oil and gas reserves.

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

When determining the necessary amount of supplemental financial assurance, BSEE previously provided to BOEM a single, algorithm-based deterministic estimate for decommissioning costs of OCS facilities. In 30 CFR 556.901, the Department proposed to replace BSEE's former single, algorithm-based deterministic estimates for OCS facility decommissioning costs with the new BSEE methodology that provides probabilistic estimates (

i.e.,

P-values) based on decommissioning costs reported by industry pursuant to NTL 2016-N03—

Reporting Requirements for Decommissioning Expenditures on the OCS,

later superseded by NTL 2017-N02. These values represent the likelihood of covering the full cost of decommissioning a facility as a percentage; for example, P70 represents a 70 percent likelihood of covering the full cost of decommissioning a facility. Specifically, the Department proposed to use the P70 value to determine the amount of any required supplemental financial assurance and solicited comments on the use of other values (

i.e.,

P50 and P90) and the associated impacts. Additionally, if probabilistic estimates are not available, BOEM will use the available deterministic value.

BOEM received a wide range of comments on the use of the P70 value that are discussed generally below. A

summary of all comments received regarding the use of BSEE's decommissioning estimates and BOEM's corresponding responses can be found in section 3.7 of the

Response to Public Comments.

Comment:

Multiple commenters supported the use of the P70 value and recommended that BOEM adopt the P70 value in the final rule for consistency with the stated purpose of the proposed rule: to ensure that current lessees are financially able to perform their decommissioning obligations.

Response:

BOEM acknowledges the commenters' support for the proposal of P70. The Department is finalizing in 30 CFR 556.901, as proposed, the use of P70 to determine the financial assurance required for properties where the current lessee does not have an investment grade credit rating or the ratio of the value of the proved reserves to decommissioning liabilities associated with those reserves is not greater than or equal to 3-to-1. This approach holds all current lessees that do not meet the credit rating or reserve criteria responsible for providing supplemental financial assurance unless there is an investment grade co-lessee associated with the same decommissioning obligations.

Comment:

Conversely, several commenters asserted that the P70 value was not sufficiently conservative to protect other parties and the public in the event of default. They asserted that BOEM should use the P90 value to increase the probability of ensuring that all decommissioning obligations are covered by those operating on the OCS.

Response:

BOEM disagrees with the commenters' assertion that the P70 estimate is not sufficiently conservative to protect other parties and the public in the event of a default. The P70 value should not be confused with a figure representing 70 percent of the cost of decommissioning of a particular facility. The statistical P-value relies on the quality and size of the data inputs, as well as the uncertainty existing in these costs.

BOEM's goal for its financial assurance program continues to be the protection of the American taxpayers from exposure to financial loss associated with OCS development, while ensuring that the financial assurance program does not detrimentally affect offshore investment or position American offshore exploration and production at a competitive disadvantage. A P70 financial assurance level will reduce offshore decommissioning risk to taxpayers relative to previous BSEE deterministic decommissioning estimates, while attempting to reduce the burden on available capital for continued OCS investment that would be imposed by using P90. BOEM's use of the P70 decommissioning value balances the risk of being underfunded at lower financial assurance levels against the risk of setting a financial assurance level at higher P-values that would overstate the costs in a significant number of cases.

BOEM considered bonding at P90, which would result in the lowest risk of the proposed options to the taxpayer from underfunded offshore decommissioning liabilities. However, P90 would result in an approximately 40 percent chance of being over bonded. In addition, BOEM considered the cost of financing, which would generally (particularly in high interest rate environments) increase the risks of burdensome over bonding. BOEM's analysis concluded that the increased cost to lessees resulting from adopting P90 rather than P70 would be too high when compared to the additional risk reduction. As a result, BOEM concluded that P70 reflects a risk tolerance that is neither too aggressive nor too conservative, striking an appropriate balance between the risk of default to the taxpayer and the burden to the regulated community.

Comment:

Other commenters asserted that the proposed rule did not include sufficient information and transparency about how the probabilistic estimates are derived.

Response:

In response to commenters asserting that BOEM did not explain the development of the P-values, BOEM notes that the development of BSEE's probabilistic estimates was discussed in the preamble to the proposed rule at 88 FR 42143. The decommissioning cost estimates are developed as a distribution (

i.e.,

P50, P70, and P90) based on actual decommissioning expenditure data received from OCS operators since mid-2016. The data is available based on a lease, ROW, or RUE basis and also contains details on a well, platform, pipeline, and site clearance level. It does not consider which companies are jointly and severally liable for meeting decommissioning obligations. The new probabilistic estimates were developed using industry-reported decommissioning costs pursuant to NTL-2016-N03,

Reporting Requirements for Decommissioning Expenditures on the OCS,

later superseded by NTL-2017-N02. Based on this reported data, BSEE developed three probabilistic estimates of decommissioning costs for each OCS facility on a given lease. The lowest cost estimate would have a 50 percent likelihood of covering the full cost of decommissioning a facility and is thus referred to as “P50.” The second lowest cost estimate, P70, would have a 70 percent likelihood of covering the full cost of decommissioning a facility. The third and highest cost estimate considered, P90, would have a 90 percent likelihood of covering the full cost of decommissioning a facility. These estimates are based on what the government would expect to pay if an operator failed to perform decommissioning. The current estimates can be found here:

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

Comment:

Some commenters asserted that the P70 values, and sometimes even the P50 values, exceed their internal estimates for their decommissioning costs and that BOEM should allow the use of company-provided estimates. These commenters noted that these internal estimates were based on contractor bids and experience.

Response:

BOEM acknowledges the commenters' concerns that the P70 estimates may be higher than the actual cost of decommissioning for specific platforms. In general, it can be more expensive for the government to decommission a facility than it is for an OCS operator to do so. Therefore, even if the P70 value is higher than company-derived values, it may be more aligned with the costs that the government would incur to perform the decommissioning, which is the relevant consideration when determining the cost to decommission a facility if the company fails to do so. The final rule establishes a procedure for submitting these issues for the consideration of the Regional Director for a reduction in the supplemental financial assurance demand.

Comment:

Multiple commenters asserted that BOEM should focus on sole liability properties (

i.e.,

properties with no predecessors or co-lessees), claiming that those properties pose the most risk to the U.S. taxpayer.

Response:

BOEM disagrees with the commenters' assertion that it should focus only on sole liability properties, an approach that would not sufficiently protect the taxpayer. As discussed in the RIA, there are approximately $14.6 billion in decommissioning liabilities associated with leases without an investment grade predecessor in the chain of title, of which only $460 million is associated with sole liability properties. Thus, the Department is finalizing an approach that holds all current lessees responsible for providing supplemental financial assurance unless they meet the waiver criteria or are

associated with an investment grade co-lessee. The Department is finalizing, as proposed, the use of P70 to determine the amount of supplemental financial assurance required for properties where the current lessee or co-lessee does not have an investment grade credit rating or the ratio of the value of the proved reserves to decommissioning liabilities associated with those reserves is not greater than or equal to 3-to-1.

Comment:

Commenters also asserted that the proposed rule ignored joint and several liability, and that by creating a system that does not account for the financial strength of liable predecessors, the proposed rule insulates predecessor lessees from their liabilities and relieves them of the need to perform due diligence when selling their lease(s) to a subsequent lessee.

Response:

Omitting the existence of predecessor lessees from the analysis of whether to waive the requirement of supplemental financial assurance for a current lessee—the approach being finalized here—addresses several associated issues. It ensures that the current lessees have the financial capability to fulfill their decommissioning obligations. It also eliminates the incentive to use joint and several liability as an excuse to delay setting aside funds to pay for predictable decommissioning costs. This approach does not change or undermine joint and several liability; it retains BOEM's and BSEE's authority to pursue predecessor lessees for the performance of decommissioning.

Comment:

Other commenters asserted that BOEM must consider the obligations of the predecessors in the chain-of-title before seeking additional financial assurance from current lessees, otherwise the result is requiring “double bonding.”

Response:

Commenters appear to be claiming that private arrangements between assignors (predecessors) and assignees (successors) are sufficient to protect the government without a requirement for providing supplemental bonds to the government. That is only partially the case. In most cases, the government cannot call the bonds in question. Any duplication can be avoided by the private parties cancelling any private arrangements that are not needed in light of government requirements. It is DOI's obligation to set bottom line, public, and uniform thresholds to protect the U.S. and its taxpayers; private agreements are unrelated to the Department's obligations under OCSLA.

Comment:

One commenter provided an updated analysis of burden, including a comparison of the three proposed decommissioning estimate values, which was referenced by multiple commenters in their comment submissions. The commenter's analysis asserted that the results across the liability levels “are largely dependent on each company's `portfolio' of decommissioning liabilities” and stated that in any portfolio of uncertain results, some cost estimates will exceed their expected value, while some cost estimates will be less. Accordingly, the commenter asserted, percentile values are not additive, as actual variances from estimates would offset each other so that the P70 of the combined outcomes of the portfolio would approach the sum of the mean. The commenter stated that a better approach would be to sum the mean values or to conduct a portfolio analysis for each operator. According to the commenter, P50 is more representative of a log-normal distribution's statistical average. Additionally, the commenter provided a cost comparison for P70 to P90 that included the following estimates: decrease in capital expenditures over 10 years ($4.7 billion vs $5.565 billion), decrease in OCS production (55 million barrels of oil equivalents (mmboe) vs 64 mmboe), and decrease in industry jobs across the Gulf coast region (36,200 vs 43,300).

Response:

BSEE is responsible for providing BOEM (and the public) estimated costs to perform decommissioning. Since BOEM conducts the company financial risk evaluation to determine the appropriate financial assurance amount required, BSEE provides BOEM a range of estimates associated with analyses of data collected under the authority found at 30 CFR 250.1704 (subpart Q) and guidance under NTL No. 2017-N02. These costs are considered a proxy for “fair value”,

i.e.,

how much it would cost BSEE to cause near immediate decommissioning by contracting with a third-party services provider.

Actual expenditure data has been collected by regulation since April 2016 for wells and facilities, and since May 2017 for pipelines. To date, BSEE has collected about 2,050 data points for wells, 1,235 for facilities (including removal and site clearance and verification), and 1,020 for pipelines. This actual expenditure data collected shows a wide range of costs for similarly situated infrastructure, making a probabilistic approach preferred over a single deterministic estimate. When sufficient data exists for a particular subset of the sample (

e.g.,

dry trees on fixed structures in 400 feet of water), BSEE performs multivariate regression analyses to create distributions of cost outcomes.

Based on these distributions, BSEE posts P50, P70, and P90 estimates for each well, platform, or pipeline, and aggregated for each lease, ROW, or RUE.

1

When sufficient data does not exist (

e.g.,

dry trees on floating structures) a single deterministic (or point) estimate is provided. Note that the point estimate contains no information about its potential variability. Contrast this with probabilistic estimates where a P50 estimate implies that half of the reported values should be less than and half should be more than the P50 estimate. Likewise, the P70 and P90 estimates imply that that there is 30 percent and 10 percent chance, respectively, that the decommissioning cost will be higher than the estimate. Said another way, P70 and P90 values imply there is a 70 percent and a 90 percent chance, respectively, that the estimated cost will not be exceeded. The data does not take into consideration which companies are jointly and severally liable for meeting decommissioning obligations.

1

There is not a technical support document in support of these calculations; the data used for these estimates is available at

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

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

information received prior to deciding to reduce the required amount of supplemental financial assurance. BOEM did not select the P90 level because of the expected burdens it would place on the industry, such as the examples highlighted by the commenter.

BOEM's goal for its financial assurance program continues to be the protection of the American taxpayer from exposure to financial loss associated with OCS development, while ensuring that the financial assurance program does not detrimentally affect offshore investment or position American offshore exploration and production companies at a competitive disadvantage.

C. Revisions to Other Types of Supplemental Financial Assurance

The Department proposed and is finalizing revisions to the supplemental financial assurance requirements for third-party guarantees and decommissioning accounts, and prerequisites for transfers, as discussed in the subsections below.

1. Third-Party Guarantees

The Department proposed in 30 CFR 556.905(a) to evaluate a potential guarantor using the same credit rating or proxy credit rating criterion as was proposed for lessees. The value of proved oil and gas reserves of an associated lease would not be considered because that value is a characteristic of the lease belonging to the guaranteed lessee and not an asset belonging to the guarantor, and because liquid assets are needed to finance compliance or decommissioning. As discussed in the preamble to the proposed rule (88 FR 42145), the criteria to evaluate a guarantor provided in the existing regulations have proved difficult to apply. Using the same financial evaluation criterion,

i.e.,

issuer credit rating or proxy credit rating, to assess both guarantors and lessees as the most relevant measure of future capacity would provide consistency in evaluations and avoid overreliance on net worth. Using the same criterion also simplifies the evaluation process, making it more efficient without compromising the risk to taxpayers.

Additionally, to allow more flexibility in the use of third-party guarantees, the final rule allows a third-party guarantee to be used as supplemental financial assurance for a RUE or ROW grant as well as a lease. Most significantly, the amendment proposed in § 556.902(a)(3) would remove the requirement for a third-party guarantee to ensure compliance with the obligations of all lessees, operating rights owners, and operators on the lease, and, as agreed to by BOEM, would allow a guarantee limited to a specific amount or limited one or more specific lease obligations.

A summary of all comments received regarding third-party guarantees and BOEM's corresponding responses regarding the provisions to evaluate third-party guarantors can be found in section 6.1 of the

Response to Public Comments.

Comment:

Commenters generally supported the proposal to evaluate a potential guarantor using the same credit rating or proxy credit rating criterion as proposed for lessees.

Response:

BOEM acknowledges the commenters' support for the proposal to evaluate a potential guarantor using the same credit rating or proxy credit rating criterion as proposed for lessees, and the Department is finalizing this provision in 30 CFR 556.905(a) as proposed.

Comment:

Multiple commenters generally supported the proposal to allow limiting third-party guarantees to a specific amount.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing the ability to limit third-party guarantees to a specific amount or one or more specific lease obligations in 30 CFR 556.902(a)(3).

Comment:

One commenter suggested that DOI modify its regulations to allow guarantors to limit their guarantees to specific obligations. They asserted this modification is consistent with the proposed rule and would ease pressure on the security market by removing any additional and unstated obligations from guarantees that are not included in a financial assurance demand order.

Response:

The Department is finalizing the proposed amendment to § 556.902(a)(3), which will remove the requirement for a third-party guarantee to ensure compliance with the obligations of all lessees, operating rights owners, and operators on the lease, and will allow, as agreed to by BOEM, a guarantee limited to a specific amount or to one or more specific lease obligations. This change, to replace a requirement to cover all costs, parties, and obligations with permission to limit any of them, part of which BOEM is adding in response to public comments, allows a guarantor to limit its guarantee to a specific amount of the total financial assurance requirement. By allowing a third-party guarantor to guarantee only the obligations it wishes to cover, BOEM provides industry with the flexibility to use the guarantee to satisfy supplemental financial assurance requirements without forcing the guarantor to cover the risks associated with all parties on the lease or grant or operations in which the party they wish to guarantee has no interest and over which the guarantor may have limited influence. Moreover, BOEM's capacity to accept a third-party guarantee that is limited to the obligations of a specific party does not reduce BOEM's protection because if a limited guarantee is approved, the guaranteed party will be required to provide other supplemental financial assurance with respect to any of its liabilities left uncovered by the limited guarantee.

Comment:

Other commenters opposed the proposal and asserted that third-party guarantors should not be excused from the requirement that guarantees cover all obligations of lessees, operating rights owners, and operators on the lease, but did not provide supporting reasoning for their assertions.

Response:

BOEM believes that allowing third-party guarantors to limit their guaranteed obligations will ease the burden for entities required to provide additional supplemental financial assurance, while continuing to reduce the risk to taxpayers. DOI has added regulatory language in the final rule in 30 CFR 556.905(b) specifically allowing a third-party to limit its cumulative obligations to a fixed dollar amount or to covering the costs to perform one or more specific lease obligations (with no fixed dollar amount). In both scenarios, the value or the obligations to be covered must be agreed to by BOEM at the time the third-party guarantee is provided.

Additionally, to allow more flexibility in the use of third-party guarantees, the final rule will allow a third-party guarantee to be used as supplemental financial assurance for a RUE or ROW grant, as well as a lease.

BOEM acknowledges the commenters' opposition to allowing third-party guarantors to limit their guarantee and BOEM assumes the concern flows from a belief that the third-party guarantee may be insufficient. Contrary to this understanding, however, the lessee must still provide the total amount of the supplemental financial assurance demand through other financial assurance methods, even if a third-party guarantor limits the guarantee.

The proposed rule included amendments to allow BOEM to cancel a third-party guarantee under the same terms and conditions that apply to cancellation of other types of financial assurance, as provided in proposed § 556.906(d)(2). No comments were received on this provision. Therefore, the Department is finalizing, as

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

Finally, the existing regulation refers to both a “guarantee” and an “indemnity agreement” (which BOEM intended to mean the same thing), and the proposed rule clarified that the regulations contemplate only one agreement: the guarantee agreement. No comments were received on this proposed amendment; therefore, the Department is also finalizing the clarification that both a “guarantee” and an “indemnity agreement” contemplate the same guarantee agreement by removing all references to “indemnity agreement” in the regulatory text. This terminology is changed to clarify that the government is not required to incur the expenses of decommissioning before demanding compensation from the guarantor.

2. Decommissioning Accounts

The Department proposed to rename the lease-specific abandonment accounts in 30 CFR 556.904 as “Decommissioning Accounts,” the terminology used by the industry. This name change is intended to remove any perceived limitation that this type of account can apply to only a single lease, and to signify that these accounts may be used to ensure compliance with supplemental financial assurance requirements for a RUE and ROW grant, as well as a lease. To make these accounts more attractive to parties who may desire to use this method of providing supplemental financial assurance, the Department also proposed to remove the requirement in 30 CFR 556.904(d) to pledge Treasury securities to fund the account once the funds equal the maximum amount insurable by the Federal Deposit Insurance Corporation (FDIC)/Federal Savings and Loan Insurance Corporation (FSLIC), for which insurance is currently capped at $250,000.

No comments were received specifically on the proposed amendment to rename the lease-specific abandonment accounts in 30 CFR 556.904 as “Decommissioning Accounts” or the proposed amendment to remove the requirement to pledge Treasury securities to fund the account before the funds equal the maximum amount insurable by the FDIC/FSLIC. Therefore, the Department is finalizing 30 CFR 556.904, as proposed, to rename the lease-specific abandonment accounts as “Decommissioning Accounts.” The Department is also finalizing the removal of the requirement to pledge Treasury securities to fund the account before the funds equal the maximum amount insurable by the FDIC/FSLIC.

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

The Department proposed amendments to update subparts G (30 CFR 556.704) and H (30 CFR 556.802) of the Department's existing part 556 regulations to clarify that BOEM will not approve the transfer of a lease interest, whether a record title interest or an operating rights interest, until the transferee complies with all applicable regulations and orders, including financial assurance requirements. As discussed in the preamble to the proposed rule (88 FR 42146), many of the facilities currently on the OCS have decommissioning obligations where the cost of performance greatly exceeds the amount of financial assurance currently available to DOI. To address this problem, the Department proposed to clarify that it may withhold approval of any transfer or assignment of any lease interest unless and until the financial assurance requirements have been satisfied.

A summary of all comments received regarding transfers and BOEM's corresponding responses regarding revisions to transfers can be found in section 6.2 of the

Response to Public Comments.

Comment:

Commenters generally supported the proposal to allow BOEM to withhold approval of any new transfer or assignment of any lease interest until financial assurance obligations are satisfied.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed, amendments to update subparts G (30 CFR 556.704) and H (30 CFR 556.802) of the Department's existing part 556 regulations to clarify that BOEM may withhold approval of the transfer of a lease interest, whether a record title interest or an operating rights interest, until the transferee complies with all applicable regulations and orders, including financial assurance requirements. As a result of these final amendments, BOEM may withhold approval of any new transfer or assignment of any lease interest unless and until financial assurance demands have been satisfied.

D. Evaluation Methodology

The Department proposed and is finalizing revisions to the financial evaluation criteria that will be used for determining supplemental financial assurance requirements for oil, gas, and sulfur leases, RUE grants, and pipeline ROW grants. The proposed evaluation methodology for the revised criteria, the public comments received, and DOI's final amendments are discussed in the subsections below. Summaries of all comments received regarding credit ratings, proxy credit ratings, and valuing proved oil and gas reserves and BOEM's corresponding responses can be found in section 7 of the

Response to Public Comments.

1. Credit Ratings

a. Use of an “Issuer Credit Rating”

The Department proposed to use an “issuer credit rating” to evaluate the financial health of OCS lessees, grant holders, and guarantors, and proposed to include the new term and corresponding definition in 30 CFR 550.105 and 556.105. As discussed in the preamble to the proposed rule (88 FR 42146), an issuer credit rating provides the rating agencies' opinions of the entity's ability to honor senior unsecured debt and debt-like obligations. The Department proposed to accept only issuer credit ratings from a Nationally Recognized Statistical Rating Organization (NRSRO), such as Standard and Poor's (S&P) Rating Services and Moody's Investors Service Incorporated (or any of their subsidiaries). General comments on issuer credit ratings are as follows:

Comment:

Commenters generally supported the use of an issuer credit rating. Several commenters recommended that BOEM include Fitch Ratings in the definition as it is an NRSRO equivalent to S&P's and Moody's.

Response:

BOEM acknowledges the commenters' support and agrees with the commenters' assertion that the intent of the proposed rule was to allow credit ratings from Fitch Ratings. The Department has included Fitch Ratings and its subsidiaries in the final rule in 30 CFR 556.105.

Comment:

An additional commenter noted that BOEM should remove the term and definition of issuer credit rating from part 550 because it is not used in the part.

Response:

The commenters' assertion is correct, and the Department is not finalizing the proposed addition of “Issuer credit rating” to 30 CFR part 550. In part 550, the existing regulatory text references 30 CFR part 556 to discuss the use of the issuer credit rating.

b. Credit Rating Threshold

As discussed in the proposed RIA, BOEM reviewed historical default rates

across the entire credit rating spectrum, as well as the credit profile of oil and gas sector bankruptcies arising from the commodity price downturn in 2014, to determine an appropriate level of risk. As would be expected, the average S&P historical 1-year default rates increase significantly with lower ratings. The average S&P 1-year default rate for BBB- rated companies from 1981 to 2020 was 0.24 percent. Comparatively, the average 1-year default rate for BB- rated companies was 1.21 percent, for B- rated companies, 8.73 percent, and for C rated companies, 24.92 percent. In the proposal, BOEM asserted that 1-year default rates are an appropriate measure of risk, given BOEM's policy of reviewing the financial status of lessees, ROW holders, and RUE holders, typically on an annual basis (the review typically corresponding with the release of audited annual financial statements). In addition, throughout the year, BOEM monitors company credit rating changes, market reports, trade press, articles in major news media, and quarterly financial reports to review the financial status of lessees, ROW holders, and RUE holders. The amended regulation, as proposed, would not preclude a demand for supplemental financial assurance through the Regional Director's regulatory authority at any time.

The Department proposed to use an investment grade credit rating threshold for determining if supplemental financial assurance may be required by a lessee. The Department proposed the term and associated definition of “Investment grade credit rating” in 30 CFR 550.105 and 556.105. BOEM explained in the preamble to the proposed rule (88 FR 42159) that the use of an investment grade credit rating standard for waiving supplemental financial assurance was an appropriate threshold because it minimizes credit default risk to the taxpayer without overburdening offshore companies with the cost of providing financial assurance in low credit risk scenarios. BOEM received a wide range of comments on the proposal to use an investment grade credit rating threshold for determining supplemental financial assurance requirements, as summarized below.

Comment:

Multiple commenters asserted that the proposal would result in significant hardship to small businesses that did not meet this criterion and hence would have to provide supplemental financial assurance. Commenters argued that a requirement to provide supplemental financial assurance would increase the risks of defaulting, not investing in maintenance of existing operations, laying off employees, delaying performance of current decommissioning obligations, and diverting capital funds needed for future OCS energy development.

Response:

BOEM acknowledges the commenters' concern and considered the effects on small entities; however, BOEM is not targeting the size of companies. BOEM is evaluating the financial strength of all companies in order to ensure that the development of energy in the OCS is safe and protects both the taxpayer and the environment. The Department has included numerous provisions in this rulemaking to reduce the burden on small entities. BOEM acknowledged in the proposed rule (88 FR 42146) that small businesses may not have issuer credit ratings and, to address this issue, proposed to allow entities without a rating to request that the BOEM Regional Director assess a proxy credit rating. Additionally, these small businesses can be evaluated on the proved reserves of their lease to determine whether they may be waived from the requirement to provide additional supplemental financial assurance, also potentially reducing their financial burden. Furthermore, on a lease where the lessee has an investment grade credit rating, BOEM will waive co-lessees from having to provide supplemental financial assurance. The Department also included phased-in implementation, and increased the flexibility of decommissioning accounts and third party guarantees to reduce the financial burden on all lessees, including small businesses.

Comment:

Multiple commenters supported the use of an investment grade threshold.

Response:

BOEM acknowledges the commenters' support and agrees that using a credit rating threshold of investment grade strikes the appropriate balance between both DOI's and the conventional energy sector's goal to protect the American taxpayers from exposure to financial loss associated with OCS development and the burden of providing financial assurance because of the low default risk associated with companies that maintain an investment grade credit rating. The Department is finalizing, as proposed in 30 CFR 556.105, the use of an investment grade credit rating threshold.

Comment:

Other commenters supported an even higher credit rating threshold.

Response:

BOEM acknowledges the commenters' support for the change in the proposed rule that changed the credit rating threshold for waiver of supplemental financial assurance from BB- to BBB- but disagrees with the commenters' assertion that BOEM should further raise the threshold to a higher rating. As discussed in the preamble to the proposed rule, BOEM believes that 1-year default rates are an appropriate measure of risk, given BOEM's policy of reviewing the financial status of lessees, ROW holders, and RUE holders at least on an annual basis (the review typically corresponds with the release of audited annual financial statements). As would be expected, the average S&P historical 1-year default rates increase significantly with lower ratings. The average S&P 1-year default rate for BBB- rated companies from 1981 to 2020 was 0.24 percent. Comparatively, the average 1-year default rate for BB- rated companies was 1.21 percent, for B- rated companies, 8.73 percent, and for C rated companies, 24.92 percent. Raising the threshold criteria would only reduce the rate to 0.12 percent for a credit rating of BBB+ or to 0.07 percent for a credit rating of A-. BOEM believes that the 1-year default rate for BBB- rated companies of 0.24 percent balances the need for ensuring lessee obligations in the OCS are met while ensuring that the development of the nation's offshore resources is not unreasonably hindered. Raising the threshold to a higher value would reduce capital available to companies for investment, with little additional protection from the effects of bankruptcy. Additionally, financial assurance can only be used for the obligations of the specific lease for which it is provided. Having more financial assurance from low-risk companies will not provide meaningful protection against the default of high-risk companies and thus would have an insignificant effect on aggregate risk.

Comment:

One commenter asserted that the proposal is a “form of adverse selection against financial assurance providers because only entities with an elevated risk of default will remain in the market for financial assurance instruments such as surety bonds.”

Response:

BOEM disagrees with the commenter's assertion that the proposal is a “form of adverse selection.” “Adverse selection” describes the phenomenon whereby one party to a transaction has better information than the other and therefore prices are adjusted to accommodate this discrepancy in information. The commenters do not explain how that concept applies to the rulemaking. They assert that it amounts to “adverse selection” against financial assurance providers because “only entities with an elevated risk of default will remain in the market for financial assurance

instruments such as surety bonds.” There is no assertion of any discrepancy in the information available to lessees vs. assurance providers or any effect on the price of that transaction and BOEM does not see any. To the extent the commenters are asserting that the risk pool is too small to make underwriting feasible, their comment conflicts with other comments received claiming that the rule requires supplemental assurance from relatively low risk lessees. The Department continues, as proposed, to allow other types of financial assurance instruments in addition to bonds in the final rule. Under BOEM's past practice, many companies were waived from providing supplemental financial assurance, and it is likely that only companies with an elevated risk of default sought to obtain bonds to comply with the existing regulations. Additionally, the number of companies requesting bonds for use as supplemental financial assurance and their corresponding risk profile does not preclude a viable bond market as the market can set the fees and collateral required to obtain the bonds.

Comment:

Several commenters expressed concerns that the preamble to the proposed rule alluded to monitoring of credit ratings, but the regulatory text did not mention the monitoring. They asserted that, to ensure these commitments are kept, the Department must include specific requirements for reviewing credit ratings regularly, with a requirement for BOEM to reassess credit ratings at least once per year.

Response:

With respect to monitoring credit ratings, BOEM stated in the preamble to the proposed rule at 88 FR 42147 (and has repeated in this final rulemaking) that BOEM's general practice is to review “the financial status of lessees, ROW holders, and RUE holders at least on an annual basis (the review typically corresponding with the release of audited financial statements).” BOEM's financial assurance program is intended to ensure that private companies have the capacity to meet their financial and non-financial obligations. BOEM seeks to balance the financial risk to the government and the taxpayer with the regulatory burden on lessees and grantees. BOEM did not add additional regulatory text in this final rule to address this comment because it is unnecessary; BOEM maintains the general practice of evaluating lessees, RUE grant-holders, and pipeline ROW grant-holders for financial risk on at least an annual basis. The amended regulation would not preclude a demand for supplemental financial assurance through the Regional Director's regulatory authority at any time.

As discussed in the proposed RIA, of the 276 companies analyzed, none were rated at or above BBB- at the time of bankruptcy or within 10 years prior to bankruptcy. As such, BOEM has selected BBB- as the credit rating threshold for providing additional financial assurance. The Department is finalizing, as proposed in 30 CFR 556.901(d), an issuer credit rating threshold of BBB- (S&P and Fitch) or Baa3 (Moody's), an equivalent credit rating provided by another SEC-recognized NRSRO, or an equivalent proxy credit rating, to ensure that lessees and grant holders have the capacity to meet their financial and non-financial obligations. In order to both ensure that companies do not “cause [unmitigated] damage to the environment or to property, or endanger life or health,” 43 U.S.C. 1332(6), and to promote “expeditious and orderly development,” 43 U.S.C. 1332(3), BOEM seeks to balance the financial risk to the government and the taxpayer while minimizing unreasonable regulatory burdens. If different NRSROs provide different ratings for the same lessee, BOEM will use the higher of the lessee's ratings. Additionally, as BOEM monitors company rating changes throughout the year, use of this threshold will ensure that BOEM has adequate time to demand needed financial assurance before a company drops further below the investment grade rating.

2. Proxy Credit Ratings

The Department proposed in 30 CFR 556.901(d) to allow entities that do not have a NRSRO-issued credit rating to request that the Regional Director determine a proxy credit rating based on audited financial information for the most recent fiscal year, including an income statement, a balance sheet, a statement of cash flows, and the auditor's certificate. As proposed, DOI intended the “most recent fiscal year” to mean a continuous 12-month period within the 24-months prior to the Regional Director's determination that supplemental financial assurance is required. General comments on proxy credit ratings are as follows:

Comment:

Commenters expressed concerns regarding BOEM's proposal to use a proxy credit rating for entities without an issuer credit rating. Commenters asserted that BOEM is not a financial rating agency and does not have the capacity or expertise to institute a program to develop proxy credit ratings.

Response:

BOEM is not developing the credit rating; it is using S&P Global Inc.'s Credit Analytics credit model, in conjunction with company-provided financial information for the most recent fiscal year to obtain a proxy rating. As discussed in the preamble to the proposed rule at 88 FR 42146, the Regional Director would use the model and company-provided audited financial information for the most recent fiscal year, including an income statement, a balance sheet, a statement of cash flows, and the auditor's certificate. The use of S&P Global Inc.'s Credit Analytics credit model provides an accurate and objective method to assess any given company's probability of default on its financial obligations based on its audited financial statements. The vast majority of companies operating on the OCS are private companies that do not have an issuer credit rating; therefore, without an option for a proxy credit rating, these companies would be required to provide supplemental financial assurance unless they met the reserves criterion. The Department proposed, and is finalizing in 30 CFR 556.901(d), the use of a proxy credit rating to benefit those companies without an issuer credit rating, particularly small businesses, and to therefore reduce their burden by allowing them the opportunity to demonstrate that they should not be required to provide supplemental financial assurance.

Comment:

Commenters asserted that companies would need to establish a proxy credit rating using the “intricate financial models of S&P and Moody's”, which would be time consuming, and that providing the information that BOEM proposed to require in order to perform a proxy rating would represent a burden for small companies.

Response:

BOEM disagrees with the commenter's assertion that the companies would need to establish a proxy credit rating using the “intricate financial models of S&P and Moody's” and that the development would be time-consuming. Companies without a credit rating can provide BOEM with audited financials and BOEM will perform the modeling to determine the proxy credit rating. BOEM does not believe this option creates an undue burden on small businesses, as those small businesses would be required to provide supplemental financial assurance if they could not obtain an issuer credit rating; the proxy credit rating provides an alternative for these businesses to qualify for the financial waiver. Additionally, if a company finds this alternative more burdensome than the benefit of avoiding posting

supplemental financial assurance, nothing in the regulations requires them to select this alternative. Providing audited financials in exchange for possible supplemental financial assurance avoidance is consistent with practice under the current regulations and thus not an additional burden.

The Department proposed to use S&P Global Inc.'s Credit Analytics credit model to calculate proxy credit ratings, but retained the right to use a different model if it determines that a different model more accurately reflects those factors relevant to the financial evaluation of companies operating on the OCS. BOEM specifically solicited comment on the use of S&P Global Inc.'s Credit Analytics credit model for developing proxy credit ratings. General comments on the use of the S&P model are as follows:

Comment:

Commenters were generally supportive of the use of S&P Global Inc.'s Credit Analytics credit model.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed in 30 CFR 556.901(d), the option for companies without issuer credit ratings to request the Regional Director to determine a proxy credit rating based on audited financial information for the most recent fiscal year and the S&P credit model.

3. Valuing Proved Oil and Gas Reserves

The Department proposed in 30 CFR 556.901(d) to consider the proved reserves on a particular lease when determining whether supplemental financial assurance is required. As discussed in the preamble to the proposed rule (88 FR 42147), BOEM would require the lessee to submit a reserve report for the proved oil and gas reserves (as defined by the SEC regulations at 17 CFR 210.4-10(a)(22)) located on a given lease. DOI proposed that companies should report the value of their reserves using the methodology pursuant to the SEC's regulations on reserve reporting, and the presentation should be by the lease, or leases, for which the exemption is being requested. These regulations are commonly used and understood by offshore oil and gas companies and such reserve reports are already produced by publicly traded companies. This also allows BOEM to rely on the established SEC regulations on the definitions, qualifications, and requirements for proved reserves, rather than attempting to recreate these regulations. BOEM would use the value of proved oil and gas reserves per-lease when determining whether the discounted value of the reserves on any given lease exceeds three times the cost of the proposed P70 decommissioning estimate associated with the production of those reserves.

Additionally, the Department proposed the use of a ratio of the value of proved reserves to decommissioning liability associated with those reserves that meets or exceeds a value of 3-to-1. As discussed in the preamble to the proposed rule (88 FR 42148), BOEM believes that a property with a sufficient “reserves-to-decommissioning cost” ratio would likely be purchased by another company if a current lessee defaults on its obligations, thereby reducing the risk that decommissioning costs for that property would be borne by the government, and consequently reducing the need for supplemental financial assurance. In BOEM's judgment, a ratio of 3-to-1 provides sufficient risk reduction to justify a Regional Director determination that the lessee is not required to provide supplemental financial assurance for that lease. Bankruptcy data show that the most valuable properties of the bankrupt company (with at least a 3-to-1 ratio of the value of reserves to decommissioning costs) are acquired by another entity. That result accords with BOEM's experience and with common sense because the value of these properties is economically viable even after including the decommissioning cost. Additionally, no commenters provided a different value than 3-to-1 in response to BOEM's solicitation for comment on other appropriate values.

Comment:

Multiple commenters generally supported the use of a minimum 3-to-1 ratio of the value of proved reserves to decommissioning liability associated with those reserves.

Response:

BOEM acknowledges the commenters' support, and the Department is finalizing, as proposed in 30 CFR 556.901(d), the use of a minimum 3-to-1 ratio.

Comment:

Several commenters opposed the use of the ratio, asserting that normal fluctuations in the demand and price of oil and gas, coupled with the imminent global shift away from fossil fuels to renewable energy, make it likely that the value of proved oil reserves in all leases will decline over time. As a result, lessees may earn less over the life of the lease and in turn, have less capital to cover decommissioning costs.

Response:

There are many external factors that can impact the value of reserves. BOEM's use of this metric is only to determine the likelihood that a lease would be acquired, due to the value of the reserves left on the lease, by a financially healthy company that would then be liable for lease obligations.

Comment:

Several commenters asserted that the value of decommissioning liability should be added back to the reserve value to avoid double counting. Additional commenters asserted that comparing undiscounted decommissioning liability to the present value of underlying reserves was an incorrect analysis.

Response:

BOEM agrees with the commenters that the decommissioning liability should not be double counted; it is not the Bureau's intent to double count the decommissioning liability. The regulations are clear that BOEM is asking for the discounted value of the reserves (

e.g.,

realized sale price minus uplift costs) without factoring in decommissioning. BOEM requires lessees to provide supplemental financial assurance against undiscounted BSEE decommissioning estimates to protect from financial default events that may occur before scheduled end of life and the full accounting recognition of the asset retirement obligation, therefore BOEM concludes that using a discounted asset retirement obligation insufficiently protects the taxpayer. BOEM believes the regulations are sufficiently defined to ensure the reserve analysis is based on the ratio on the discounted value of proved reserves (excluding decommissioning costs) to the undiscounted BSEE decommissioning estimate. The Department is finalizing, as proposed in 30 CFR 556.901(d)(4), the use of a ratio of the value of proved reserves to decommissioning liability associated with those reserves that meets or exceeds 3-to-1.

E. Phased Compliance With Supplemental Financial Assurance Orders

In the preamble to the proposed rule, BOEM acknowledged that the proposed regulations could have a significant financial impact on affected companies (88 FR 42148). For that reason, BOEM proposed to phase in the new supplemental financial assurance requirements over a 3-year period for existing leaseholders in 30 CFR 556.901(h). As proposed, BOEM would require that any company receiving a supplemental financial assurance demand (within 3 years of the rule becoming effective) post one-third of the total amount by the deadline listed on the demand letter. A second one-third would be required within 24 months of the receipt of the demand letter. The final one-third payment would be due within 36 months of the receipt of the demand letter. BOEM specifically

solicited comments regarding this approach from potentially affected parties, and requested comment on how the new supplemental financial assurance demands could be most effectively implemented to minimize any unnecessarily adverse effects.

A summary of all comments received regarding the phased compliance approach and BOEM's corresponding responses can be found in section 8 of the

Response to Public Comments.

Comment:

In general, industry commenters supported the phased approach and several commenters recommended that it be extended to 5 years to “mitigate potential significant risk to companies and to provide adequate time for the bonding market to adjust.”

Response:

BOEM disagrees with the commenters' recommendation that the phased approach should be extended to 5 years. BOEM has concluded that the period of 3 years reduces exposure to risk of non-performance and hence addresses the need at issue in this rulemaking, requiring supplemental financial assurance where appropriate to protect the taxpayer while simultaneously providing adequate time for the bonding market to adjust to the new requirements. The bond market adjustment is basically a price adjustment and not so much a volume adjustment, and hence a 3-year period is sufficient to make these adjustments. On the other hand, lessees have a sufficient period of time to finance the cost of the required financial assurance. If the bond market does not provide bonding to a lessee, it is not due to market conditions, but rather to the high levels of risk, and hence the implication in this case is that the lessee is such a high risk that no bonding company wants to add this risk to its portfolio. The Department is finalizing in 30 CFR 556.901(h) a 3-year phased compliance period.

Comment:

Additional commenters requested that BOEM include a phased provision for parties that were exempt but then later could not meet the exemption criteria because of changed circumstances and that BOEM include such provisions for parties that obtain OCS lease or grant interests in the first 3 years after implementation of the final rule.

Response:

In response to commenters' suggestions that BOEM add clarification that this option is available for changed circumstances or for obtaining new lease interests, BOEM believes that the proposed text in 30 CFR 556.901(h) was broad enough to encompass these circumstances. If a party is exempt but then later cannot meet the exemption criteria because of changed circumstances (

e.g.,

change in credit rating), or if a party obtains an OCS lease or grant interest within the phased compliance time frame after implementation of the final rule, they would be allowed to use the phased compliance approach. BOEM has retained the language to establish a 3-year compliance window broad enough to encompass these circumstances. BOEM intends for any party who, within the 3-year compliance window, incurs new decommissioning liability or experiences changed circumstances resulting in a financial assurance demand from BOEM, to be allowed, at the Regional Director's discretion, to use the 3-year phased in approach to providing supplemental financial assurance. This compliance window will end on the date 3 years after the effective date of this final rule and any party receiving a supplemental financial assurance demand after that date will be required to provide the supplemental financial assurance in full as required by the demand, with no phase-in.

F. Appeal Bonds

As discussed in the preamble to the proposed rule (88 FR 42148), the Department proposed a new requirement in 30 CFR 556.902(h) whereby any company seeking to stay a supplemental financial assurance demand pending appeal must, as a condition of obtaining a stay of the order, post an appeal bond in the amount of supplemental financial assurance required. If the appeal is successful, the amount of the appeal bond in excess of the amount of any supplemental financial assurance determined to be required would be returned to the appropriate party. If the appeal is unsuccessful, the appeal bond could be replaced with, or converted into, bonds or other forms of financial assurance to cover the supplemental financial assurance demand.

Comments received regarding appeals and BOEM's corresponding responses can be found in section 9 of the

Response to Public Comments.

Comment:

Multiple commenters expressed opposition to BOEM's proposal, asserting that it raises due process concerns, specifically because the proposal inhibits the recipient's first opportunity to have an adjudication of BOEM's determination. They noted that the current process provides an opportunity for each party to express concerns at an early stage, while, under the proposal, a lessee could be forced into posting a bond that could be held for years, which is disproportionate to the perceived risk to the U.S. taxpayer. An additional commenter equated the appeal bond requirement to “an automatic denial of stays,” which, they claimed, could render most supplemental financial assurance demands subject to immediate judicial review, citing 5 U.S.C. 704 and 43 CFR 4.21(c). The same commenter also suggested that the appeal bond provision would contradict existing § 590.107 (sic) (should be “§ 590.7”).

Response:

BOEM disagrees that the appeal bond provision raises due process concerns. It does not prevent the recipient of a BOEM order from appealing, or from requesting a stay of that order. An appeal bond no more deprives an appellant of due process here than it does in the case of a judicial appeal. No court has held that due process requires that agencies assure the availability of stays without appeal bond requirements, nor is it the case that the Interior Board of Land Appeals' (IBLA's) decision on a stay request constitutes an adjudication of the decision appealed. Further, the appeal bond provision does not prevent the parties from being able to express concerns at an early stage. The recipient of a financial assurance demand has 60 days within which to file a notice of appeal with the IBLA, during which time it is free to meet with BOEM and attempt to resolve any issues with respect to the demand. See 30 CFR 590.3. In fact, the regulations specifically provide for early, informal resolution of issues. See 30 CFR 590.6. Moreover, whether an appeal bond is required has no effect on the IBLA's adjudication of the merits of an appeal. The requirement to post an appeal bond would, however, add a procedural step before a stay of a BOEM demand could be put in place. This step is necessary to ensure that financial assurance is available to cover an appellant's obligations if, during the pendency of the appeal, the appellant undergoes financial distress.

As noted above, if an appellant wins its appeal, and no financial assurance is required, the appeal bond will be cancelled, or the amount of the appeal bond in excess of the amount of financial security determined to be required will be returned to the appropriate party. Thus, an appellant is not “forced” to post an appeal bond that may be held for years, as claimed by the commenter. This is different from not appealing and posting a bond for lease compliance that will be held until decommissioning is performed. Nor did the proposed rule prescribe that an appeal bond must “convert” to a different type of bond to cover a required financial assurance obligation.

BOEM also disagrees that the appeal bond provision will result in “automatic denials of stays,” leading to more judicial litigation. The statutory and regulatory provisions cited by the commenter stand for the proposition that the unavailability of a stay excuses parties from the requirement to exhaust administrative remedies before seeking judicial review. But this outcome will occur only if the IBLA denies a stay request, and such a denial would be made independent of the appeal bond requirement. The IBLA must grant or deny a stay based on the factors set forth at 43 CFR 4.21(b)(1), and not on whether an appeal bond has been, or must be, posted. See 43 CFR 4.21(b)(4). Therefore, the requirement that an appeal bond be posted should not result in the IBLA granting fewer stay requests. Nor does the appeal bond provision contradict § 590.7. The latter provision, at paragraph (c), states that the IBLA may grant a stay of a BOEM decision, but that the decision remains in effect until the stay is granted. That is true regardless of the new appeal bond provision. Under the new provision, the IBLA may still grant a stay of a decision, and until a stay is granted, the decision remains in effect, but in order for the stay to take effect, the appellant must post the required appeal bond.

Comment:

One commenter expressed concern that the proposed rule specifies that an appeal bond will “automatically” convert to a financial assurance obligation should the lease operator lose its appeal and noted that bonds do not operate in this manner. If finalized, the commenter asserted that the appeal bond should provide a certain number of days for the lease operator to post its financial assurance obligation to allow the surety to underwrite the operator at the time the bond is determined to be justified. Additionally, the commenter stated that BOEM did not offer support for this proposed requirement and requested data on the number of financial assurance appeals, the number of stays granted in those appeals, and the total historical decommissioning liability that has gone uncovered due to appellate stays.

Response:

The proposed rule did not require that an appeal bond “convert” to a financial assurance obligation and BOEM is not finalizing the rule to require conversion. If an appellant lost its appeal, the appeal bond could be “converted” to financial assurance if that is a viable approach, or the lessee who lost the appeal would have to provide some other acceptable form of financial assurance. Neither the proposed nor final rule specify a timeline for this provision of financial assurance.

In response to the request for data, of the 1,449 appeals the IBLA received during the last 5 fiscal years, only 5 were from BOEM decisions concerning financial assurance. The appellant(s) filed a petition for a stay in 4 of those 5 appeals, and the IBLA granted one of them. Additional data regarding the current number of appeals is available at the following website:

https://www.doi.gov/oha/organization/ibla/IBLA-Pending-Appeals.

Comment:

A commenter also highlighted that BSEE, in its recent final rule arising from the Department's 2020 proposed rule, declined to retain an appeal bond provision that would have required the posting of an appeal bond to obtain a stay of a BSEE decommissioning order. This commenter suggested that it would be unreasonable for BOEM and BSEE to take two different approaches.

Response:

There is no inconsistency with BSEE deciding not to require appeal bonds at the stage of an order to decommission and BOEM deciding to require them at the stage of financial assurance demands. The BSEE decision is based in large part on the assumption that financial assurance is already in place by the time it issues decommissioning orders and thus it does not face the risks that BOEM does at the time of demanding financial assurance. See 88 FR 23569, 23579 (April 18, 2023) (noting BSEE's reliance on the financial assurance regulations for determining an appeal bond is not necessary for the BSEE program).

BOEM's retention of the appeal bond provision means that, in the event of a stay of a financial assurance order, there will be an appeal bond, ensuring that, even if the appellant becomes insolvent during the appeal, there will be sufficient funds to perform decommissioning when it is ordered by BSEE. This fact supports, rather than contradicts, BSEE's decision not to retain its own appeal bond provision in the BSEE rule, as duplicative and unnecessary.

Additionally, after the publication of the NPRM, which included BOEM's proposed provision to require the appeal bond, on December 13, 2023, BSEE published a proposed rule titled

Bonding Requirements When Filing an Appeal of a Bureau of Safety and Environmental Enforcement Civil Penalty

(88 FR 86285), which would amend the bonding requirements when filing an appeal of a BSEE civil penalty. The proposed regulations would require that entities appealing a BSEE civil penalty decision to the IBLA must have a bond covering the civil penalty assessment amount for the IBLA to have jurisdiction over the appeal.

Further, an appeal bond requirement already applies to appeals of civil penalties assessed by BOEM and orders of the Office of Natural Resources Revenue (ONRR). Such a requirement is equally appropriate when the effect of a change in circumstances of the appellant, such as bankruptcy or insolvency, could leave DOI without the means of performing decommissioning. Companies can, and have, filed for bankruptcy while waiting for a decision from the IBLA on an appeal, leaving the government with no financial assurance to address decommissioning obligations. As such, the Department is finalizing, as proposed, the inclusion of the requirement whereby any company seeking to stay a supplemental financial assurance demand pending appeal must, as a condition of obtaining a stay of the order, post an appeal bond in the amount of supplemental financial assurance required.

G. Other Amendments

1. Revisions to Definitions

The Department proposed to revise definitions, remove terms and associated definitions, and add new definitions in 30 CFR 550.105 (

Definitions

) and 30 CFR 556.105 (

Acronyms and definitions

) as discussed in the following subsections. A summary of all comments received regarding revisions to definitions and BOEM's corresponding responses can be found in section 10 of the

Response to Public Comments.

a. New Terms: “Assign” and “Transfer”

The Department proposed to add new definitions for the terms “Assign” and “Transfer” to clarify that these terms are used interchangeably throughout 30 CFR parts 550 and 556. This change would also serve to clarify that the related terms “transferee” and “transferor” are interchangeable with “assignee” and “assignor” respectively. The definition of the new term “Assign” was proposed to mean conveying an ownership interest in an oil, gas, or sulfur lease, ROW grant or RUE grant. For purposes of this part, “assign” is synonymous with “transfer” and the two terms are used interchangeably. The definition of the new term “Transfer” was proposed to mean “conveying an ownership interest in an oil, gas, or sulfur lease, ROW grant or RUE grant. For the purposes of this part, “transfer” is synonymous with “assign” and the two terms are used interchangeably.

General comments received are as follows:

Comment:

Commenters suggested that BOEM clarify for the purposes of part 550 that “transfer” in both the new term and in the definition of “Assign” should be defined to exclude informal transfers. Examples of informal transfers were corporate name changes that are not technically a conveyance of an interest to a new entity. They provided suggested regulatory text edits as follows: “Transfer means to convey an ownership interest in an oil, gas, or sulfur lease, ROW grant or RUE grant. For the purposes of this part, “transfer” is synonymous with “assign” and the two terms are used interchangeably, [Underline: except that a transfer excludes transactions subject to 30 CFR 556.715 or changes only in the corporate name of an interest owner that do not require BOEM approval]” where the underline represents the commenter's proposed additional language.

Response:

BOEM disagrees with the commenters' assertion that BOEM should clarify that “Transfer” excludes transactions subject to 30 CFR 556.715 or changes only in the corporate name of an interest owner that do not require BOEM approval. The referenced section, 30 CFR 556.715, addresses transactions of economic interests that should and will be included in the definition of transfer, although that section makes clear such transfers do not require BOEM approval. Additionally, BOEM does not consider a corporate name change to be an “assignment” and therefore, the suggested edit is unnecessary.

The Department is finalizing, as proposed, the new terms “Assign” and “Transfer” and their corresponding definitions.

b. Replacement: “Right-of-Use” and “Easement” With “Right-of-Use and Easement”

The Department proposed to remove the terms “Easement” and “Right-of-use” from 30 CFR part 550 because neither are used separately in the regulations. In lieu of these two terms, and to define the term used in part 550, DOI proposed the addition of the new term “Right-of-Use and Easement” and its associated definition as “a right to use a portion of the seabed, at an OCS site other than on a lease you own, to construct, secure to the seafloor, use, modify, or maintain platforms, seafloor production equipment, artificial islands, facilities, installations, or other devices to support the exploration, development, or production of oil, gas, or sulfur resources from an OCS lease or a lease on State submerged lands.” Additionally, the Department proposed to amend the definition of “Right-of-Use and Easement” in 30 CFR 556.105 to match the proposed definition in 30 CFR 550.105.

No public comments were received on the proposal to delete “Easement” and “Right-of-use” and replace with the new term “Right-of-use and Easement” in 30 CFR 550.105 or on the amendments to the existing definition in 30 CFR 556.105. As such, the Department is finalizing, as proposed, BOEM's amendments to remove the terms “Easement” and “Right-of-use” from 30 CFR part 550 because neither are used separately in the regulations. In lieu of these two terms, and to define the term used in part 550, the Department is finalizing the addition of the new term “Right-of-Use and Easement” and its associated definition. In the final rule, BOEM has removed “adjacent to or accessible from the OCS” from the proposed RUE definition, as it is not helpful. This is a technical correction and does not change any meaning or intent of the definition. Additionally, the Department is finalizing the edits to the same definition, in 30 CFR 556.105.

c. New Term: “Financial Assurance”

The Department proposed to add a new term and definition for “Financial assurance” in 30 CFR 550.105 and 556.105(b) to list the various methods that may be used to ensure compliance with OCS obligations in 30 CFR parts 550 and 556. DOI proposed to define the term as “a surety bond, a pledge of Treasury securities, a decommissioning account, a third-party guarantee, or another form of security acceptable to the BOEM Regional Director, that is used to ensure compliance with obligations under the regulations in this part and under the terms of a lease, a RUE grant, or a pipeline ROW grant.” General comments received are as follows:

Comment:

One commenter expressed support for the new “Financial assurance” term and noted that it supported “the breadth and optionality in the proposed” definition.

Response:

BOEM acknowledges the commenter's support, and the Department is finalizing the new term as proposed.

Comment:

Commenters recommended that BOEM should be consistent and intentional in its use of “financial assurance,” “security,” and “bond” within the final rule. Specifically, they asked BOEM to consider using the global term “security” as in the 2020 Proposed Rule in lieu of “financial assurance,” which instead can refer to the process of furnishing security rather than the security itself.

Response:

BOEM does not believe the term “financial assurance” is ever used as a “process for furnishing security” in this rulemaking and, instead, is used to describe any of a number of different types of securities that BOEM will accept to guarantee performance of obligations. As such, BOEM believes the term and associated definition is appropriate. BOEM has elected to simplify the rule by consistently using the term financial assurance instead of referring to the various types of financial securities. The Department is finalizing, as proposed, the removal of the term and definition of “Security or securities” in part 556, as these terms have been replaced with “financial assurance” throughout part 556 and 550 for regulatory consistency.

The Department is finalizing, as proposed, the new term and definition for “Financial assurance” in 30 CFR 550.105 and 556.105(b) to list the various methods that may be used to ensure compliance with the relevant OCS obligations in 30 CFR parts 550 and 556.

d. New Term: “Investment Grade Credit Rating”

The Department proposed to add the new term and associated definition for “Investment grade credit rating” in 30 CFR 550.105 and 556.105(b). The associated definition was proposed as “an issuer credit rating of BBB− or higher, or its equivalent, assigned to an issuer of corporate debt by a nationally recognized statistical rating organization (NRSRO) as that term is defined by the United States Securities and Exchange Commission (SEC).” This definition was proposed as the threshold above which BOEM would typically not require supplemental financial assurance. General comments received are as follows:

Comment:

As discussed in section III.D of this preamble, commenters both supported and opposed the addition of the “Investment grade credit rating” definition. Several commenters suggested that BOEM not add the term to 30 CFR 550.105 because the term is not used in part 550.

Response:

As discussed in section III.D of this preamble, the Department is not finalizing the proposed addition of “Investment grade credit rating” to 30 CFR part 550, as the commenters' assertion that the term is not used in part 550 is correct. In part 550, the regulatory text references 30 CFR part 556 to discuss the use of the issuer credit rating.

The Department has revised the definition of “Investment grade credit rating” in 30 CFR 556.105(b) with this final rule to clarify which rating agency corresponded with the proposed BBB− rating. The final definition is “an issuer credit rating of BBB− or higher (S&P Global Ratings and Fitch Ratings, Inc.), Baa3 or higher (Moody's Investors Service Inc.), or its equivalent, assigned to an issuer of corporate debt by a nationally recognized statistical rating organization as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934.”

e. New Term: “Issuer Credit Rating”

The Department proposed to add the new term and associated definition for “Issuer credit rating” in 30 CFR 550.105 and 556.105(b). The associated definition was proposed as “a credit rating assigned to an issuer of corporate debt by Standard and Poor's (S&P) Rating Services (or any of its subsidiaries), by Moody's Investors Service Incorporated (or any of its subsidiaries), or by another NRSRO as that term is defined by the United States SEC.” General comments received are as follows:

Comment:

Multiple commenters suggested that BOEM not add the term “Issuer credit rating” and associated definition to 30 CFR 550.105 because the term is not used in part 550. Other commenters recommended that BOEM include Fitch Ratings as one of the listed NRSROs in the new definition in 30 CFR 556.105.

Response:

The Department is not finalizing the proposed addition of “Issuer credit rating” to 30 CFR part 550, as the commenters' assertion that it is not used in part 550 is correct. In part 550, the existing regulatory text references 30 CFR part 556 to discuss the use of the issuer credit rating. BOEM agrees with the commenters' assertion that Fitch Ratings is also an appropriate NRSRO and is adding it to the definition in 30 CFR 556.105.

f. Removal: “Security or Securities”

The Department proposed to delete the term and associated definition of “Security or securities” in 30 CFR 556.105(b) since the term “security” was proposed to be replaced with “financial assurance” throughout the subpart. This term,

i.e.,

“security,” did not exist in 30 CFR part 550 and therefore was not proposed to be removed therefrom. General comments received are as follows:

Comment:

Commenters recommended that BOEM be consistent and intentional in its use of “financial assurance,” “security,” and “bond” within the final rule. Specifically, they asked BOEM to consider utilizing the global term “security” as in the 2020 Proposed Rule in lieu of “financial assurance,” which instead can refer to the process of furnishing security rather than the security itself.

Response:

BOEM does not believe the term “financial assurance” is ever used as a “process for furnishing security” in this rulemaking and, instead, is used to describe any of a number of different types of securities which BOEM accepts to guarantee performance of obligations. As such, BOEM believes the term and associated definition is appropriate. BOEM has elected to simplify the rule by consistently using the term financial assurance instead of the various types of financial securities. The Department is finalizing, as proposed, the removal of the term and definition of “Security or securities” from part 556, as these terms have been replaced with “financial assurance” throughout parts 556 and 550 for regulatory consistency.

g. Revision: “You”

The Department proposed to revise the definition for “You” in 30 CFR parts 550 and 556 as, depending on the context of the part: “a bidder, a lessee (record title owner), a sublessee (operating rights owner), a Federal or State RUE grant holder, a pipeline ROW grant holder, an assignor or transferor, a designated operator or agent of the lessee or grant holder, or an applicant seeking to become one of the individuals listed in this definition.” This change to the definition of “You” would, in concert with changes proposed in § 550.166, make explicit that any financial assurance provisions applicable to either a State or Federal RUE would apply to the other. General comments received are as follows:

Comment:

Commenters expressed concerns with BOEM's proposed definition of “You” and asserted that BOEM was imposing on the regulated community the duty to ascertain which persons covered by the definition are subject to the specific regulatory requirements of each section. For example, a commenter asserted that the inclusion of “an assignor or transferor” in the definition is problematic in the context of part 556 because the scope “is financial assurance that is solely the responsibility of current interest holders.”

Response:

The Department did not revise the proposed definition of “you” in the final rule. BOEM retained “assignor or transferor” in the definition as it is appropriate in the context of some subsections across the broad scope of parts 550 and 556. The intent of the definition of “you” was always to be totally encompassing and to rely on context for its meaning in any particular situation.

The Department is finalizing, as proposed, the revisions to the definition of “You.” The definition of the term has traditionally been all-encompassing in both parts 550 and 556 and BOEM believes the context provided by the individual subsections is sufficient for determining which entity covered by the term is the appropriate entity to which a particular subsection applies.

2. Changing of the Spelling of “Sulphur” to “Sulfur”

The Department proposed to replace the word “sulphur” with the more contemporary spelling of “sulfur” throughout the regulatory text where it has not been previously changed. BOEM noted that this edit was a technical correction and did not change any meaning or intent of the regulatory provisions. The Department proposed to update the word “sulphur” in the heading of part 550 and in §§ 550.101, 550.102, 550.105, and 550.199.

No comments were received on changing the spelling of “sulphur” to “sulfur.” Therefore, the Department is finalizing, as proposed, its plans to replace the word “sulphur” with the more contemporary spelling of “sulfur” in §§ 550.101, 550.102, and 550.105 in this final action.

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

A. What are the affected entities?

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

B. What are the economic impacts?

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

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

Net Total Estimated Compliance Cost of the Rule

[2024-2043, 2023, $ millions]

2024-2043

Discounted

at 3%

Discounted

at 7%

Net Total Compliance Cost

$8,525

$5,923

Annualized Compliance Cost

573.0

559.0

The rule affects holders of oil, gas, and sulfur leases, ROW grants, and RUE grants on the OCS. The analysis shows that this includes roughly 391 companies with ownership interests in OCS leases and grants. Entities that operate under this rule are classified primarily under NAICS codes 211120 (Crude Petroleum Extraction), 211130 (Natural Gas Extraction), and 486110 (Pipeline Transportation of Crude Oil and Natural Gas). For NAICS classifications 211120 and 211130, the SBA defines a small business as one with fewer than 1,250 employees; for NAICS code 486110, it is a business with fewer than 1,500 employees. Based on this criterion, approximately 271 (69 percent) of the businesses operating on the OCS subject to this rule are considered small; the remaining businesses are considered large entities. All the operating businesses meeting the SBA classification are potentially impacted; therefore, BOEM expects that the rule will affect a substantial number of small entities.

BOEM has estimated the annualized increase in compliance costs to lessees and allocated those to small and large entities based on their decommissioning liabilities. In the table below, BOEM's analysis estimates small companies could incur $421 million (7 percent discounting) in annualized compliance costs from changes in the final rule. The Bureau recognizes that there will be incremental cost burdens to most affected small entities and has included a 3-year phased compliance approach to provide flexibility for entities required to provide financial assurance under the new requirements. The changes are designed to balance the risk of non-performance with the compliance burdens that are associated with the requirement to provide supplemental financial assurance. Additional information about these conclusions can be found in the regulatory flexibility analysis for this rule.

Estimated Compliance Costs for Non-Investment Grade Small Entities

[2024-2043, 2023, $ millions]

2024-2043

Discounted

at 3%

Discounted

at 7%

Total Compliance Cost

$6,362

$4,455

Annualized Compliance Cost

428

421

C. What are the benefits?

OCSLA regulations and lease provisions require lessees to decommission facilities, including plugging and abandoning OCS wells and removing facilities when their useful life has concluded. If the current lessee fails to perform decommissioning of its OCS facilities, the burden to decommission OCS facilities may fall to other obligated parties, such as co-lessees or predecessor lessees, and failing that, the Federal Government and U.S. taxpayers. Some of the corporate bankruptcies involving offshore oil and gas lessees since 2009 have involved decommissioning liabilities not covered by bonds or other forms of financial assurance. As such, these bankruptcies demonstrate that BOEM's regulations have been inadequate to protect the public from potential responsibility for OCS decommissioning, especially during periods of low hydrocarbon prices. The final rule is intended to correct these shortcomings with an approach that promotes internalization of costs of decommissioning by lessees and grant holders by adhering to the general principle that each current owner should bear the costs for its own obligations. This final rule is expected to significantly increase the amount of financial assurance coverage that protects the Federal Government and taxpayer by requiring that every lessee, ROW grant holder, and RUE grant holder assume full responsibility for providing assurance for performance of its own obligations unless there is a financially strong co-lessee (

i.e.,

one that meets the credit rating threshold). Finally, the final rule is expected to reduce the decommissioning activity lead-time that can result in environmental harms arising out of orphaned, unmaintained, or minimally maintained facilities, which could result in additional environmental damage or increased obstacles to navigation, while awaiting the uncertain outcomes of bankruptcy proceedings or Congressional appropriations. A reduction in decommissioning activity lead-time could reduce environmental damage, but BOEM cannot quantify this benefit in this rulemaking.

Bonding of OCS liabilities by a surety company greatly reduces the risk that those liabilities will revert to a predecessor lessee or grant holder because DOI could, but is not required to, turn to the surety for performance before turning to a predecessor. Further, because this final rule is designed to secure the taxpayer against the riskiest subset of liability—

i.e.,

OCS obligations that belong to speculatively rated companies without marketable reserves—it will require more supplemental financial assurance than the Department currently holds from such companies and will decrease the likelihood that these liabilities become the responsibility of the government. These reductions in risk are dependent on the initial level of risk specific to each OCS lease and lessee, and as such, BOEM is not able to quantify them in aggregate, as discussed in the RIA. This rule will not affect the Department's regulatory authority to issue decommissioning orders to predecessor lessees or to intervene as necessary to address an imminent environmental or safety risk. However, without this final rule (

i.e.,

without the new supplemental financial assurance procedures fully in place), it could take longer to arrange for decommissioning. Orphaned, unmaintained, or minimally maintained facilities, which currently exist on the OCS, could result in additional environmental damage or increased obstacles to navigation, while awaiting the uncertain outcomes of bankruptcy proceedings or Congressional appropriations.

Additionally, this final rule provides lessees and grant holders with clarity and regulatory certainty regarding the

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

D. What tribal outreach did BOEM conduct?

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

V. Section-by-Section Analysis

Severability

BOEM proposed in the preamble to the proposed rule at 88 FR 42156 that the provisions of the rule be severable. No public comments were received on severability. Should any court hold unlawful and/or set aside portions of this rule, the remaining portions are severable and therefore should not be remanded to the Department. The final rule contains three main components: (1) streamlining criteria warranting a demand for supplemental financial assurance; (2) establishing the amount of any supplemental financial assurance; and (3) making several, less significant changes to, among other things, transferring interests in RUE grants and requiring appeals bonds for a stay of an IBLA appeal. See section III of this preamble.

It is impracticable, if not impossible, for BOEM to anticipate and address every conceivable adverse court remedy order. For purposes of this rule, it suffices to substantiate BOEM's intent that the rule's three components operate largely independently of each other: the first component considers whether a lessee is at risk of default based on the lessee's credit rating or the proved reserves on the lease; the second component considers the appropriate level of financial assurance required in light of that risk; and the third component addresses several longstanding and technical matters that do not bear directly on the first two components. Indeed, these three components are sufficiently distinct that their utility does not depend on the specifics of this final rule. For example, if a court were to vacate BOEM's selection of the level of supplemental financial assurance required (P-value), that decision would remain severable from the threshold determination regarding

whether

to collect supplemental financial assurance and from the other separate technical changes included in this rule. In this scenario, BOEM could still collect supplemental financial assurance using the previously accepted BSEE deterministic estimate for decommissioning costs.

BOEM is amending the following regulations as follows:

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

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

The term “sulphur” is replaced throughout this part with “sulfur”, as proposed. This edit is a technical correction and does not change any meaning or intent of the regulatory provisions.

Subpart A—General

Section 550.101 Authority and Applicability

The Department is finalizing the revision of “sulphur” to “sulfur” in the introductory text and is clarifying that the BOEM Director is the one granted authority by the Secretary to regulate oil, gas, and sulfur exploration, development, and production operations on the OCS.

Section 550.102 What does this part do?

The Department is finalizing the revision of “sulphur” to “sulfur” in the paragraphs (a) and (b).

Section 550.103 Where can I find more information about the requirements in this part?

The Department is removing the term “supplement” from this section as a technical correction. The existing regulatory text needs improvement because NTLs do not supplement regulatory requirements, but instead clarify, provide voluntary recommendations, or provide additional information concerning how to comply with requirements in the regulations (

e.g.,

addresses for submissions).

Section 550.105 Definitions

The Department is finalizing as proposed, and as discussed in section III.G of this preamble, new definitions for the terms “Assign” and “Transfer” to clarify that these terms are used interchangeably throughout the part. This change also serves to clarify that the related terms “assignee” and “assignor” are interchangeable with “transferee” and “transferor,” respectively.

The Department is finalizing, as proposed, revisions to the definition of “Criteria air pollutant” and “Nonattainment area” to explain the acronyms U.S. EPA and NAAQS. This is a technical correction and does not change any meaning or intent of the definitions.

The Department is finalizing as proposed, and as discussed in section III.G of this preamble, removal of the terms “Easement” and “Right-of-use” because neither are used separately in the regulations. In lieu of these two terms, and to define the term used in part 550, The Department is finalizing the addition of the new term “Right-of-Use and Easement” and its associated definition. Since proposal, BOEM has removed “adjacent to or accessible from the OCS” from the RUE definition, as it is not helpful. This is a technical correction and does not change any meaning or intent of the definition. This definition is consistent with the final amendments to the definition of RUE in 30 CFR 556.105.

The Department is finalizing as proposed, and as discussed in section III.G of this preamble, the addition of the new term and definition for “Financial assurance” to list the various methods that may be used to ensure compliance with OCS obligations. Additionally, the Department is finalizing, as proposed, and discussed in section III.G of this preamble, revisions to the definition of “You.”

Section 550.160 When will BOEM grant me a right-of-use

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