[Federal Register Volume 79, Number 160 (Tuesday, August 19, 2014)]
[Proposed Rules]
[Pages 49027-49031]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-19380]


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DEPARTMENT OF THE INTERIOR

Bureau of Ocean Energy Management

30 CFR Parts 550, 551, 556, 581, 582 and 585

[Docket ID: BOEM-2013-0058; MMAA104000]
RIN 1010-AD83


Risk Management, Financial Assurance and Loss Prevention

AGENCY: Bureau of Ocean Energy Management (BOEM), Interior.

ACTION: Advance notice of proposed rulemaking (ANPR).

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SUMMARY: BOEM is seeking comments and information regarding its effort 
to update its regulations and program oversight for Outer Continental 
Shelf (OCS) financial assurance requirements. When BOEM's existing 
bonding regulations were originally drafted and first implemented, the 
principal risks associated with OCS leases were non-payment of rents 
and royalties, noncompliance with laws and regulations, and potential 
problems due to bankruptcy. While potentially significant, such risks 
were generally well-known and of limited complexity, size and scope.
    Due to increasingly complex business, functional, organizational 
and financial issues and vast differences in costs associated with 
expanded and varied offshore activities, BOEM has recognized the need 
to develop a comprehensive program to assist in identifying, 
prioritizing, and managing the risks associated with industry 
activities on the OCS. BOEM intends to design and implement a more 
robust and comprehensive risk management, financial assurance and loss 
prevention program to address these complex issues and cost differences 
associated with offshore operations. To do so, BOEM is seeking 
stakeholder comments regarding various risk management and monitoring 
activities pertaining to financial risks to taxpayers that may result 
from activities on the OCS. This notice specifically discusses the 
bonding and financial assurance program for BOEM's offshore oil and gas 
program. However, we also welcome the submission of comments on the 
analogous bonding and financial assurance program for BOEM's offshore 
renewable energy and hard minerals programs.
    BOEM currently requires lessees to provide performance bonds and/or 
one of various alternative forms of financial assurance to ensure 
compliance with the terms and conditions of leases, Rights-of-Use and 
Easements (RUEs) and Pipeline Rights-of-Way (ROWs). BOEM is seeking 
comments on who is best suited to mitigate risks and whether the 
correct parties are providing guarantees and other forms of financial 
assurance, as well as whether, or to what extent, the current forms of 
financial assurance are adequate and appropriate.
    Because costs and damages associated with oil spill financial 
responsibility (OSFR) are covered separately in the regulations, which 
is the subject of other proposed rulemakings on BOEM's regulatory 
agenda, BOEM is not soliciting comments on those regulations and their 
associated risk mitigation measures at this time.

DATES: BOEM will consider all comments received by midnight of October 
20, 2014. BOEM cannot commit to considering comments received after 
midnight on October 20, 2014.

ADDRESSES: You may submit comments on this ANPR using the Federal 
eRulemaking Portal: http://www.regulations.gov. Follow the instructions 
on the Web site for submitting comments. Please use Regulation 
Identifier Number (RIN) 1010-AD83 as an identifier in your message. See 
also the ``Public Comment Policy'' paragraph under the SUPPLEMENTARY 
INFORMATION section below.

FOR FURTHER INFORMATION CONTACT: For information regarding BOEM's 
comprehensive risk management, financial assurance, and loss prevention 
program or the major topics of this ANPR, contact Terry Scholten at 
[email protected] (504-810-2078) or Donna Dixon at 
[email protected] (504-731-1527), or by mail at 1201 Elmwood Park 
Blvd., GM364D, New Orleans, LA 70123. For issues related to the 
rulemaking process or timetable, contact Peter Meffert at 
[email protected] (703-787-1610), or by mail at 381 Elden St., 
Herndon, VA 20170.

SUPPLEMENTARY INFORMATION: 
    Public Availability of Comments: Before including your address, 
phone number, email address, or other personal identifying information 
in your comments, you should be aware that your entire comment--
including your personal identifying information--may be made publicly 
available at any time. While you may ask us in your comment to withhold 
your personal identifying information from public review, we cannot 
guarantee that we will be able to do so under Federal law.
    Background: BOEM has program oversight for Outer Continental Shelf 
(OCS) financial assurance requirements set forth in 30 CFR parts 550, 
556 (subpart I), 581 (subpart C), 582 (subpart D), 585 (subpart E), and 
in Sec.  551.7, all of which are promulgated pursuant to the Outer 
Continental Shelf Lands Act (OCSLA, 43 U.S.C. 1331 et seq.). Section 
5(a) of OCSLA authorizes the Secretary of the Interior to promulgate 
rules and regulations necessary to administer the OCS leasing program, 
including regulations concerning financial assurance. Section 8(p)(6) 
of OCSLA requires the Secretary to obtain financial security for OCS 
leases, easements and rights-of-way issued for purposes other

[[Page 49028]]

than the development and production of oil and gas.
    Within DOI, BOEM is the bureau with primary authority to manage the 
financial risks to the government associated with the development of 
energy and mineral resources on the OCS. BOEM is in the process of 
updating regulations at 30 CFR part 556 to exercise this authority, as 
well as other regulations pertaining to financial assurance mentioned 
in the Summary above. BOEM is also reexamining the assumptions 
underlying its existing financial assurance and bonding program, as 
well as considering how to address risks and loss prevention more 
comprehensively. BOEM is enhancing its existing financial assurance and 
bonding program by incorporating a risk management approach to 
identifying, defining, quantifying, and treating all of the commercial, 
functional, organizational/business risks facing entities operating on 
the OCS in order to implement loss prevention measures. BOEM intends to 
apply this same approach to evaluating how OCS business entities can 
best meet their financial and contractual obligations. Such an approach 
would deal with all types of risk, such as mitigating financial risks 
resulting from fiscal, commercial and business risks, credit risk, 
functional and organizational risks, and hazard or event risks. Loss 
prevention procedures involve all of the efforts undertaken, including 
the regulations, processes, audits and financial controls, which are 
designed to minimize the government's exposure to financial risk.
    Program and Regulation Development: BOEM is developing a 
comprehensive risk management, financial assurance, and loss prevention 
program to address the financial, commercial, functional, 
organizational/business risks facing entities operating on the OCS in 
order to implement loss prevention measures. BOEM intends to reduce 
contingent liabilities, minimize governmental and taxpayer financial 
exposure to financial loss, and provide a fair, equitable and 
transparent approach to risk management that is understood by 
stakeholders and assists in the effective implementation of appropriate 
and cost-effective risk management and loss prevention techniques.
    BOEM is committed to engaging all interested stakeholders in this 
regulatory process. It will coordinate and consult with other Federal 
agencies, including the Bureau of Safety and Environmental Enforcement 
(BSEE) and the Office of Natural Resources Revenue (ONRR). To 
facilitate comment submission, BOEM has identified four major topics. 
Each topic includes questions designed to provide respondents with a 
general framework for commenting. Please note that these topics and 
questions are not intended to be all-inclusive; other comments, 
questions, or suggestions of topics, are encouraged. Note BSEE is also 
conducting a separate comprehensive risk assessment related to safety 
of operations on the OCS, which will include a development and analysis 
of decommissioning cost estimates.
    Major Topics:

I. Identification of Pertinent Risks/Liabilities
II. Risk Monitoring and Risk Management
III. Demonstrating Financial Assurance Over Project Lifecycles
IV. Financial Assurance, Bonding Levels and Requirements

Topic I: Identification of Pertinent Risks/Liabilities

    Description: BOEM recognizes the need to develop a comprehensive 
risk management, financial assurance and loss prevention program that 
can assist in identifying, prioritizing, and managing the risks 
associated with OCS financial, commercial, functional, and business 
activities. Along with evaluating and assessing the risks associated 
with ongoing activities, such a program would also include, but is not 
limited to, evaluating and assessing the business, fiscal and 
commercial risks associated with transfers of ownership of leases, 
operating rights, RUEs, ROWs, and facilities as well as the transfer of 
ownership of all forms of interests in any OCS leases, RUEs, ROWs, and 
facilities. Such interests could include record title interests, 
operating rights interests, operating and/or working interests, 
economic interests or future participating or financial interests, 
among others.
    BOEM is specifically interested in comments regarding the financial 
risks and liabilities associated with aging offshore infrastructure, 
deepwater decommissioning, subsea decommissioning, pipeline 
abandonment, Arctic operations, and new technologies designed to 
address deepwater development or exploration and/or development of 
energy or mineral resources in locations with unusually adverse 
conditions. BOEM also needs to address business risks associated with 
the changing characteristics of entities operating on the OCS (e.g., 
smaller companies), underperformance, non-performance or default on 
financial or legal obligations, and underpayment or non-payment of 
rentals and royalties. Finally, BOEM is seeking information regarding 
best practices in managing the financial, commercial, functional, 
organizational/business risks facing entities operating on the OCS in 
order to implement loss prevention measures associated with 
catastrophic damage caused by natural events (e.g., hurricanes, ice 
floes, earthquakes), engineering failure, or other causes. Questions 
for respondents regarding identification of pertinent risks/
liabilities:
    1. In addition to the examples provided in this ANPR, are there 
other risks (monetary and nonmonetary) that BOEM should consider in 
developing its comprehensive operational risk management, financial 
assurance, and loss prevention program? What are they? Please describe 
any other risks noted.
    2. What measures should BOEM consider to reduce the risk and 
magnitude of identified outcomes?
    3. What information should BOEM consider in estimating the 
appropriate financial assurance to cover each of the identified risks?
    4. How should BOEM obtain the information needed to estimate the 
appropriate financial assurance to cover each of the identified risks?
    5. What information should BOEM consider in establishing 
appropriate levels and types of financial assurance?
    6. How should BOEM obtain the information needed to establish 
appropriate levels and types of financial assurance associated with 
each of the identified risks?
    7. How should BOEM evaluate risk levels and priorities to 
responsibly manage current and future liabilities?
    8. What information should BOEM consider in addressing financial 
assurance needed to cover catastrophic damage caused by natural events, 
engineering failure, or other causes?
    9. Should BOEM require proof of insurance/financial assurance for 
catastrophic events?

Topic II: Risk Monitoring and Risk Management

    Description: BOEM is interested in understanding and defining the 
necessary elements of a comprehensive operational risk management, 
financial assurance, and loss prevention program and believes that 
monitoring its business risk and recognizing necessary risk transfer 
strategies are central to this effort. This effort includes risk 
management processes and evaluations that are systematic, are capable 
of being replicated, and that utilize best practices. In order to 
improve communication and better inform BOEM's decision-making 
processes, BOEM seeks information regarding its

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risk monitoring and risk management practices. Questions for 
respondents regarding risk monitoring and risk management:
    10. What should BOEM's risk management, financial assurance and 
loss prevention program include?
    11. What measures should BOEM consider in managing risk 
transference?
    12. How should BOEM monitor an entity's financial health in order 
to assess the risk to taxpayers? How often should this be done?
    13. How should BOEM monitor an entity's organizational strength and 
any associated risk to taxpayers?
    14. What measures could/should BOEM use to reduce taxpayer risk 
(e.g., insurance, contractual indemnity clauses, contractual risk 
transference strategies, bonding)?
    15. What risk transfer mechanisms should BOEM consider to mitigate 
risks associated with catastrophic events?
    16. Given the complex business arrangements involved in OCS 
projects, which operational business partners should BOEM consider when 
assessing and monitoring overall financial risks (e.g., lessees, 
operating rights owners, contractors, subcontractors)?
    17. Should BOEM consider using individualized company-specific or 
project-specific risk management, financial assurance and loss 
prevention plans? If so, what should they entail and should they be 
optional or required?
    18. Should BOEM require prior approval of all types of assignments 
between companies and/or lenders, including, but not limited to, 
assignments of overriding interests, royalty interests, net profits, 
production payments, or other types of lease interests?
    19. Should BOEM monitor and approve the total percentage of 
assignments of rights and obligations between companies and/or lenders?
    20. Even if BOEM does not approve all transfers of all types of 
rights and obligations between companies and/or lenders, should BOEM 
require evidence of all such transfers to be filed with BOEM in order 
to maintain an accurate repository of records of all transfers?
    21. To what extent should BOEM monitor debt obligations?
    22. Should BOEM require the recording and/or approval of all 
transfers of purely ``economic'' interests?

Topic III: Demonstrating Financial Assurance Over Project Lifecycles

    Description: The 40- to 50-year (or more) life of some OCS projects 
injects further uncertainty in the attempt to define, manage, and 
reduce financial risks. Technological and financial challenges, which 
are not evident at the inception of a project, may arise as time goes 
by, and consequently, the amount of financial assurance needed may vary 
over time. In order to deal with ongoing commercial issues and 
difficult business challenges resulting in complex and far-reaching 
business impacts, BOEM plans to implement financial assurance and loss 
prevention practices designed to better define financial metrics, 
reduce data collection barriers, and help prepare and plan for business 
incidents that could compound risks to U.S. taxpayers.
    BOEM's current regulations utilize bonding as the primary form of 
financial assurance. In addition, lessees may submit the following 
alternative forms of security to fulfill financial assurance 
requirements: treasury securities and other types of security 
instruments approved by the Regional Director, lease-specific 
abandonment accounts, third-party guarantees, demonstration of 
financial strength and reliability, indemnity obligations, treasury 
notes, and trust agreements. BOEM is seeking information to assist in 
managing problems that are difficult to predict and in creating 
strategies that reduce response barriers and foster appropriate 
business planning measures.
    Questions for respondents regarding demonstration of financial 
assurance over project lifecycles:
    23. What criteria demonstrate a company's ability to remain 
financially viable (i.e., solvent) over the long term?
    24. What criteria demonstrate a company's ability to pay specific 
costs associated with lease obligations on the OCS (e.g., 
decommissioning)?
    25. In assessing financial assurance, how should BOEM consider the 
value of proved producing reserves (i.e., metrics and methodologies) in 
determining the amount of financial assurance necessary to protect 
taxpayer interests?
    26. What factors should BOEM consider in assessing corporate 
structure and offshore business performance and history to help ensure 
that taxpayers are protected from liability risks for costs accrued by 
offshore operations?
    27. How should BOEM consider the financial and technical 
qualifications of a company before the company is allowed to conduct 
business on the OCS?
    28. To protect U.S. taxpayers, should BOEM treat significant 
financial or legal changes as events that would require offshore 
companies or operators to provide notice of such events and that would 
trigger BOEM's reassessment of the companies' or operators' existing 
financial assurances? If so, what significant financial or legal 
changes should be used?
    29. Should BOEM tailor the amounts/levels and types of financial 
assurance requirements for OCS operations on a case-by-case basis 
(e.g., by individual project, individual lease, unit, and/or company)?
    30. Should BOEM consider allowing companies to set up a 
decommissioning trust that is funded from a percentage of production? 
If so, would such a trust apply to a single well or many wells, a 
single lease or more than one lease, a unit, one company, or some 
combination of these, or some other formulation?
    31. There are multiple levels of business entity risk, including: 
(1) Risk by type of entity (whether a corporation, LLC, trust, 
partnership, etc.), particularly as new types of entities are being 
created whose control may be exercised from outside the organization; 
(2) risk by level of entity (where one company or entity owns another 
that may own a third entity, etc.); (3) risk created by shared 
ownership (particularly of a lease or facility, or where there are many 
entities involved in the ownership of the same interest); (4) risk 
created by subdivided interests in a lease such that different 
companies own distinct, severed interests in the same lease (whether 
divided by depth or aliquot or by function or by operating/non-
operating ownership rights); (5) risks created by asset transfers from 
one entity to another or from one organization's domestic accounts or 
affiliates to some offshore accounts, operations or affiliates; or (6) 
other risks associated with unique or complex business entities or 
combinations thereof. How should BOEM deal with the complexity of 
multiple business entities in assessing financial assurance and 
managing taxpayer risk?
    32. Should the levels/amounts of financial assurance and the types 
of allowable security demonstrating that financial assurance (e.g., 
insurance, bonds) vary by the type of risk and/or the project 
lifecycle? And, if so, how?
    33. Termination or cancellation of leases and/or RUEs may be 
necessitated by a lessee's or operator's failure to meet its financial 
obligations related to bonding or financial assurance. What factors do 
you believe BOEM should consider before making the determination that a 
lessee's or operator's failures with regard to meeting its financial 
assurance obligations are so significant that BOEM should terminate or 
cancel a lease or RUE on that basis?
    34. What financial assurance and/or bonding provisions should be

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established and maintained to deal with the outstanding liabilities 
that remain after a lease, RUE or ROW has been terminated or cancelled? 
How can these be administered and enforced if the affected party has no 
remaining active operations on the OCS?
    35. BOEM is considering assessing the financial strength of 
individual companies with active operations on the OCS more than once 
per year. How often should BOEM make a determination of financial 
strength (e.g., monthly, quarterly, semi-annually, etc.)?
    36. Overall, how should BOEM use standard financial metrics, such 
as net worth, debt to equity ratio, cash flow, loss, capitalization, 
liquidity, etc., to determine financial assurance (i.e., the amount/
level and/or types of financial assurance needed)?
    37. Besides the Bureau of Safety and Environmental Enforcement's 
(BSEE's) decommissioning cost estimates, and amounts identified by ONRR 
for potential non-payment of financial obligations, and potential non-
compliance with legal obligations, what other factors should BOEM 
consider when determining the appropriate amount of supplemental 
financial assurance?

Topic IV: Financial Assurance, Bonding Levels and Requirements

    Description: BOEM currently relies primarily upon surety bonds to 
provide basic protection against risks associated with a lessee's or 
operator's failure to meet regulatory and lease requirements. Initial 
(i.e., general) lease bonds, required for all leases, are determined by 
the level of activity on the lease. This may take the form of a lease-
specific bond or an area-wide bond:

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                                                                  Lease-specific bond
                        Lease activity                                   amount           Area-wide bond amount
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No approved operational activity..............................                  $50,000                 $300,000
Exploration Plan..............................................                  200,000                1,000,000
Development Production Plan...................................                  500,000                3,000,000
ROW...........................................................                      N/A                  300,000
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(See 30 CFR 556.52-556.59, subpart I, Bonding.)

    If these amounts are deemed insufficient to cover decommissioning 
liability and other lease obligations, BOEM may require additional 
assurance in the form of additional (i.e., supplemental) bonding or 
other additional security. BOEM now may determine that an additional 
bond or supplemental financial assurance is not necessary for a lease 
if at least one record title owner meets the financial strength and 
reliability criteria detailed in the Notice to Lessees and Operators 
No. 2008-N07, ``Supplemental Bond Procedures,'' available at http://www.boem.gov/Regulations/Notices-To-Lessees/Notices-to-Lessees-and-Operators.aspx. Currently, approximately 90 percent of leases do not 
require an additional bond or supplemental financial assurance because 
at least one record title owner has been determined to meet these 
criteria (i.e., the financial assurance instrument is self-insurance). 
Additional bonding and supplemental financial assurance practices 
utilize decommissioning cost estimates and analyses provided by the 
BSEE and also consider potential underpayment of rentals and royalties. 
Questions for respondents regarding bonding or supplemental financial 
assurance levels, amounts, and requirements:
    38. Is BOEM's two-tiered bonding structure (i.e., initial bond 
followed by additional bond) the best means of protecting the 
taxpayers' interests?
    39. If BOEM continues to use bonds, should BOEM do away with the 
two-tier bonding approach, and just require one bond? Or, should 
additional bonds be required in certain circumstances, and if so, what 
key criteria should be used to determine when additional bonding would, 
or would not, be necessary?
    40. Should BOEM continue to allow self-insurance for those 
companies who demonstrate the requisite financial strength, or should 
BOEM eliminate self-insurance? And, either way, why?
    41. What are the benefits and drawbacks to utilizing lease-specific 
abandonment accounts, surety bonds, treasury notes, third party 
guarantees, indemnity agreements, escrow accounts, certificates of 
deposit, insurance, and trust agreements? Are there any other financial 
assurance arrangements BOEM should consider? If so, what are they and 
how do they work?
    42. What are the benefits and drawbacks to utilizing combinations 
of the instruments discussed in the previous question?
    43. In addition to inflation, what other factors should be 
considered in establishing and revising bond and/or supplemental 
financial assurance amounts?
    44. What bond and/or supplemental financial assurance amounts would 
provide realistic coverage in today's business environment?
    45. The current regulations (30 CFR 556.52) allow business entities 
to use area-wide bonds in lieu of posting individual bonds within an 
OCS area. The areas are: 1) the Gulf of Mexico and the area offshore 
the Atlantic Coast; 2) the area offshore the Pacific Coast States of 
California, Oregon, Washington, and Hawaii; and 3) the area offshore 
the Coast of Alaska. Should BOEM continue to allow area-wide bonds? If 
so, under what circumstances should they be allowed?
    46. Do you have any other suggestions regarding how BOEM's 
financial assurance program can be made more viable and robust?
    47. Should BOEM address (or vary) additional bonding and/or 
supplemental financial assurance requirements over the phases of a 
project lifecycle (e.g., should bonding and/or supplemental financial 
assurance be required today in order to decommission a structure in 20 
years)? If so, how? Should such variations in requirements be 
automatic, or determined on a case-by-case basis?
    48. How should BOEM best address the individual risks identified or 
associated with a specific project or lease?
    49. Given the high costs associated with offshore decommissioning, 
and if BOEM continues to allow self-insurance, how should the financial 
strength and reliability criteria in NTL No. 2008-N07 be updated? What 
are the most important factors to consider and/or evaluate?
    50. In the case of trust agreements, how and when in the project 
lifecycle should the accounts be funded? What are the benefits and 
drawbacks of different trust funding methods?
    51. Should BOEM consider a fee-per-barrel produced approach as a 
means of funding an insufficient lease-specific decommissioning 
account? What would be the benefits and drawbacks of this approach?
    52. In addition to bonding, should acceptable insurance coverage 
(including tail insurance or a project-

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specific insurance policy) be utilized to fund or guarantee lease, 
operating, or regulatory responsibilities?
    53. Under what circumstances should bonds or other forms of 
financial assurance be released?
    54. What are typical costs for current forms of financial assurance 
(e.g., performance bonds, payment bonds, captives, trusts, treasury 
notes, third party indemnity agreements, insurance) available on the 
market and identify whether these are for an individual site or overall 
costs? What variables are associated with these costs? If collateral is 
required, how much must be posted?
    BOEM seeks responses to the above questions, and seeks other 
relevant input regarding the development of a comprehensive risk 
management, financial assurance, and loss prevention program. BOEM 
encourages all interested parties to respond to these questions and to 
provide comments and information relevant to the development of such a 
program. BOEM will determine how to proceed after analyzing the 
comments received as a result of this ANPR.

    Dated: July 21, 2014.
Janice M. Schneider,
Assistant Secretary--Land and Minerals Management.
[FR Doc. 2014-19380 Filed 8-18-14; 8:45 am]
BILLING CODE 4310-MR-P