The Biden administration, in line with its goal of significantly reducing oil production, has quietly implemented regulations that are likely to result in a significant loss of jobs in the oil industry across the Gulf Coast states, including Mississippi and Louisiana.
For any offshore producer of energy, part of the company’s financial calculus has to be the ability to comply with all imposed industry regulations that require companies to be able to disassemble the facility and restore the site after the end of production (“decommissioning”).
This can be expensive, so often, this process requires companies to demonstrate their capacity to pay for the decommissioning. This can be done by demonstrating financial strength and reliability or by purchasing surety bonds if that financial strength and reliability is not demonstrated.
The offshore oil industry has operated under a financial assurance model that has worked extraordinarily well for years and the oil industry has thrived under a successful financial assurance model. The typical journey of an offshore oil rig involves a major oil company erecting the oil rig and using it during its most productive phase. Eventually, the major companies may sell off the leasing rights to smaller, independent, oil companies who continue to extract oil until the oil rig reaches the end of its productive life.
Major oil companies have no trouble with financial assurance. They have a deep reserve of assets to draw upon, which usually prevents them from having to purchase surety bonds. However, the assets are not always sufficient for smaller companies.
This reality has historically not been a problem. The system has included joint and several liability between the oil producers, and it has relied on the market to act as a safety net. When the existing owner cannot pay for all of the decommissioning, predecessor owners have stepped up. This risk has usually been built into the transactions between the two companies, with the major oil companies doing their due diligence before assuming the risk. Importantly, with this system in place, as long as any company that has ever controlled the lease has the necessary financial strength, no surety bonds must be purchased.
The end result of this joint and several liability system is that the taxpayer almost never has to pay for decommissioning. Historically, only $58 million has been paid for by the taxpayer. This is a tiny amount considering the size of the industry. All of that amount came from sole liability leaseholders, where there was no predecessor owner to assume the gap in liability. Bottom line: The existing system has worked, and the taxpayer has been protected for decades.
Recently, the Bureau of Ocean Energy Management passed regulations that try to fix what wasn’t broken. They noticeably fail to affirm that this joint and several liability framework will remain moving forward — so much so that the Surety and Fidelity Association of America noted that “BOEM is silent as to how and when the required financial assurance will be called upon.”
As a result, small and independent oil companies are likely to be required to purchase surety bonds to meet their financial assurance requirements. However, the surety market has stated that it may not even be able to underwrite the amount of necessary surety bonds. Even if it could, this would add $6 billion in new costs for these small oil companies over the next 20 years.
Small oil companies make up over 75% of the oil companies currently operating in the outer continental shelf in the Gulf of Mexico. The average cost increase for those companies to purchase the newly required surety bonds is projected to be $379 million per year at best, but likely closer to $800 million per year. Assuming these small oil companies can even get the necessary surety bonds, the costs of the surety bonds are likely to damage them severely.
The new regulations are likely to put many small oil companies out of business, and the people who work for them are also likely to find themselves without jobs. Opportune LLP wrote that the new regulations will eliminate 36,000 jobs. Additionally, Opportune projects the regulations will shrink the nation’s gross domestic product by $9.9 billion and will cost the federal government $573 million in oil royalties.
The new regulations frivolously act as the tip of the spear for the environmental activists who seem to hold tremendous sway over key leadership in the Biden administration. The significant impact on Gulf States’ workers is unnecessary. The damage to the economy is unnecessary. It is time that our federal government stops appeasing the few at the cost of so many.
Hebert is the former chairman of the Federal Energy Regulatory Commission, a former chairman of the Mississippi Public Service Commission and a former chairman of the Oil and Gas Committee in the Mississippi House of Representatives. He is currently a partner with the Brunini Law Firm and is an expert on the complex power and energy industry as well as the regulation of the industry by government at all levels.
Schube is the executive director for the Council to Modernize Governance, a think tank committed to making the administration of government more efficient, representative and restrained. He is formerly a constitutional and administrative law attorney.