Offshore Oil and Gas Resources: Interior Can Improve Its Management of
Lease Abandonment (Chapter Report, 05/11/94, GAO/RCED-94-82).
When oil and gas production from a federal lease on the Outer
Continental Shelf ends, the Interior Department's Minerals Management
Service (MMS) is responsible for ensuring that the parties to the lease
bear the costs of abandoning the leased area. Lease abandonment includes
plugging any abandoned wells, removing structuring, and clearing lease
sites, all of which must be done in a way that minimizes harm to marine
life and the environment. This report discusses (1) MMS' actions to
lessen the environmental impact of lease abandonment and (2) the
estimated costs of lease abandonment and MMS' approach for ensuring that
the government is not burdened with these costs. GAO focuses on MMS'
actions in the Gulf of Mexico because almost all Outer Continental Shelf
oil and gas structures are located there.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-94-82
TITLE: Offshore Oil and Gas Resources: Interior Can Improve Its
Management of Lease Abandonment
DATE: 05/11/94
SUBJECT: Gas leases
Oil leases
Surety bonds
Financial management
Wildlife conservation
Marine mineral resources development
Environmental impact statements
Environmental monitoring
Water pollution control
IDENTIFIER: Gulf of Mexico
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Cover
================================================================ COVER
Report to the Chairman, Committee on Governmental Affairs, U.S.
Senate
May 1994
OFFSHORE OIL AND GAS RESOURCES -
INTERIOR CAN IMPROVE ITS
MANAGEMENT OF LEASE ABANDONMENT
GAO/RCED-94-82
Offshore Lease Abandonment
Abbreviations
=============================================================== ABBREV
GAO - General Accounting Office
MMS - Minerals Management Service
NEPA - National Environmental Policy Act
NMFS - National Marine Fisheries Service
OCS - Outer Continental Shelf
OCSLA - Outer Continental Shelf Lands Act
SBA - Small Business Administration
Letter
=============================================================== LETTER
B-255788
May 11, 1994
The Honorable John Glenn
Chairman, Committee on Governmental Affairs
United States Senate
Dear Mr. Chairman:
In response to your request, this report discusses (1) actions taken
by the Department of the Interior's Minerals Management Service to
minimize the environmental impact of the abandonment of federal oil
and gas leases on the Outer Continental Shelf and (2) the estimated
costs of lease abandonment and the Minerals Management Service's
approach for ensuring that the government is not burdened with these
costs. We focused our review on the Gulf of Mexico because almost
all offshore oil and gas structures on federal leases are located
there.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter. At that time, we will send copies to
the Secretary of the Interior and other interested parties. We will
make copies available to others on request.
This work was performed under the direction of James Duffus III,
Director, Natural Resources Management Issues, who can be reached at
(202) 512-7756 if you or your staff have any questions. Major
contributors to this report are listed in appendix III.
Sincerely yours,
Keith O. Fultz
Assistant Comptroller General
EXECUTIVE SUMMARY
============================================================ Chapter 0
PURPOSE
---------------------------------------------------------- Chapter 0:1
When oil and gas production from a federal lease on the Outer
Continental Shelf (OCS) ends, the Department of the Interior's
Minerals Management Service (MMS) is responsible for ensuring that
the parties responsible for the lease bear the costs of abandoning
the leased area. Lease abandonment includes plugging and abandoning
wells, removing structures, and clearing lease sites, all of which
must be done in a manner that prevents unreasonable harm to marine
life and the environment. In response to a request from the
Chairman, Senate Committee on Governmental Affairs, this report
discusses (1) MMS' actions to minimize the environmental impact of
lease abandonment and (2) the estimated costs of lease abandonment
and MMS' approach for ensuring that the government is not burdened
with these costs. The report focuses on MMS' actions in the Gulf of
Mexico because almost all OCS oil and gas structures are located
there.
BACKGROUND
---------------------------------------------------------- Chapter 0:2
As of December 1993, there were about 3,800 OCS oil and gas
structures, virtually all of which were located in the Gulf of
Mexico. These structures vary in size and complexity, and costs for
lease abandonment range from about $50,000 to $100 million per
structure, depending on the size of the structure and the depth of
the water in which the structure is located. If the responsible
parties do not properly abandon leases, the federal government may
have to incur these costs. For many years, more structures were
installed each year than removed. However, in 1992 and 1993, a total
of 343 structures were removed and 195 installed, all in the Gulf of
Mexico.
OCS oil and gas structures are removed most often by using underwater
explosives to shear the portions of the structures that extend to the
ocean's floor. Explosives kill nearby fish and can kill marine
mammals and endangered sea turtles if they are in the vicinity of the
structure being removed.
Among the purposes of the Outer Continental Shelf Lands Act are (1)
balancing resource development with protection of the environment and
(2) encouraging the development of new and improved technology that
will eliminate or minimize the risk of damage to the environment.
Under other laws, including the Endangered Species Act, the
Department of the Interior and the Department of Commerce's National
Marine Fisheries Service are responsible for protecting the
environment and marine life.
As part of MMS' approach for protecting the environment and ensuring
that the government is not burdened with lease abandonment costs, it
is important that the agency ensure that wells are properly plugged
and abandoned and lease sites cleared. If these tasks are done
properly in the first place, it is less likely that future problems
will occur that may damage the environment and cause the government
to incur costs.
RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3
MMS has acted to protect the environment by (1) limiting the use of
explosives in order to protect endangered sea turtles and (2)
requiring that wells be plugged and lease sites cleared. However,
MMS has not encouraged the development of nonexplosive structure
removal technologies that would eliminate or minimize environmental
damage. In addition, MMS does not have an overall inspection
strategy that targets its limited resources to adequately ensure that
wells are properly plugged and abandoned and that lease sites are
properly cleared.
At the time of GAO's review, MMS was not required to pay any lease
abandonment costs if responsible parties had failed to do so. MMS
has a workable approach for protecting the government from incurring
lease abandonment costs, consisting of requiring a general bond for
all leases and supplemental bonds in the amount of the total
estimated costs of lease abandonment for leases without at least one
party deemed financially capable. However, prior to November 1993,
the criteria that MMS had been using to assess the financial
capability of the parties responsible for OCS leases may not have
adequately measured a company's ability to pay for the potentially
significant costs of lease abandonment. As of March 1993, Gulf of
Mexico leases having $4.4 billion worth of estimated lease
abandonment costs were covered by only $68 million in bonds. In
August 1993, MMS promulgated new regulations that changed those
criteria and increased the amounts of the general bonds that the
parties responsible for OCS leases are required to provide.\1
However, both of these changes are to be phased in without a deadline
for completion. For example, the new general bond amounts will only
be required when a change occurs in lease activity or ownership.
Therefore, implementing the new coverage may take some time, and some
leases may never have the new coverage. In the meantime, the federal
government may be at risk for lease abandonment costs that exceed
bond coverage.
--------------------
\1 These regulations became effective November 26, 1993.
PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4
MMS COULD DO MORE TO PROTECT
THE ENVIRONMENT FROM THE
EFFECTS OF OCS OIL AND GAS
LEASE ABANDONMENT
-------------------------------------------------------- Chapter 0:4.1
To protect the environment, MMS and the National Marine Fisheries
Service, which is responsible for protecting marine endangered
species, formally agreed on measures for protecting endangered sea
turtles when underwater explosives are used to remove OCS structures.
These measures limit the amount of explosives that may be used
without specific approval. Furthermore, MMS requires that lease
sites be verified as having been cleared.
However, MMS has not adequately studied the costs and benefits of
using nonexplosive technology that would eliminate or minimize the
risk of environmental damage from removing OCS structures. Certain
actions by MMS may actually encourage the use of explosives. For
example, in 1993, MMS proposed relaxing the limits on the use of
explosives without having adequately documented the need for larger
explosive charges or the probability of harmful effects on marine
life. Several oil and gas company representatives told us that if
MMS encouraged or required the use of nonexplosive removal methods,
companies would further develop this technology.
In addition, MMS does not have an overall inspection strategy for
targeting its limited resources to ensuring that wells are properly
plugged and abandoned. If wells are not properly plugged and
abandoned, leaks can occur after a lease site has been abandoned,
causing serious damage to the environment and marine life. MMS has
only about 50 technicians in the Gulf of Mexico Region to inspect
about 3,800 OCS facilities, and they generally inspect well plugging
only when it happens to coincide with other inspections.
Furthermore, MMS' inspection strategy does not adequately ensure that
OCS oil and gas lease sites are cleared. For leases in water less
than 300 feet deep, MMS requires the responsible parties to hire
trawlers to verify that the sites have been properly cleared.
However, MMS does not control the hiring of trawlers or independently
verify that sites have been properly cleared.
MMS IS IMPROVING HOW IT
PROTECTS THE GOVERNMENT FROM
INCURRING OCS OIL AND GAS
LEASE ABANDONMENT COSTS, BUT
MORE COULD BE DONE
-------------------------------------------------------- Chapter 0:4.2
To guarantee that parties responsible for lease abandonment costs
bear those costs, MMS requires that OCS leases be covered by surety
bonds.\2
At a minimum, every lease must be covered by a general bond in a
fixed amount. Since May 1992, MMS has required that any lease that
does not have at least one party that is financially capable of
fulfilling lease abandonment obligations be covered by a supplemental
bond in the full amount of the estimated lease abandonment costs.
Lease abandonment costs range from about $50,000 to $100 million for
a structure. For the 1,811 active OCS leases in the Gulf of Mexico
with structures or wells, GAO estimated the total cost of lease
abandonment, as of March 1993, at about $4.4 billion in current
dollars. However, these leases were covered by only $68 million in
bonds. MMS determined that of these leases, 1,702, with estimated
lease abandonment costs of about $4.2 billion, were held by at least
one financially capable party. These leases were covered by a total
of $45 million in general bonds.
MMS' August 1993 regulations increased the required amounts of
general bonds, which should eventually increase the total amount of
bond coverage on OCS leases. However, the increases are to be phased
in over time, only when a change occurs in lease activity or
ownership, with no deadline for completion. Also, at the same time,
MMS changed the evidence required for evaluating the financial
capability of parties responsible for OCS leases. Before, MMS used
criteria that were developed for purposes unrelated to assessing a
party's ability to pay for lease abandonment costs. The revised
criteria, if properly implemented, could provide greater assurance
that the leases have either at least one financially capable party or
supplemental bonds in the full amount of the estimated lease
abandonment costs. However, there is no specified time frame for
implementing the new criteria, and they could be phased in over time.
Thus, it may be some time until a significant number of leases have
the new general and supplemental bonds, and some leases may never
have them before the leases are abandoned. In commenting on a draft
of this report, MMS said that it plans to initiate a rulemaking to
set deadlines for completing new bond requirements.
--------------------
\2 A surety bond is a guarantee that the bond writer will pay a
stipulated amount if the purchaser of the bond defaults on paying for
obligations covered by the bond.
RECOMMENDATIONS TO THE
SECRETARY OF THE INTERIOR
---------------------------------------------------------- Chapter 0:5
GAO recommends that the Secretary of the Interior direct the Director
of MMS to
encourage the use of nonexplosive technologies for removing
offshore structures, whenever possible, that will eliminate or
minimize the risk of harm to the environment and marine life;
study the feasibility, benefits, and costs of mandating the use of
nonexplosive methods of removing offshore structures, whenever
possible, because of the harm that explosives do to marine life;
require MMS to develop an inspection strategy for targeting its
limited resources to ensure the proper plugging and abandonment
of OCS wells and the clearance of lease sites; and
complete a rulemaking to place time limits on the phase-in of both
the increased general bond amounts and supplemental bonding
under the new criteria.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6
In written comments on a draft of this report, the Departments of the
Interior and Commerce generally agreed with GAO's recommendations.
Interior agreed that OCS lease abandonment technology needs further
review, taking into account factors including safety, cost, and
environmental effects. Interior stated that it was reevaluating its
inspection strategy and considering various options for witnessing
more abandonment activities. In addition, Interior stated that it
recognized the need for a deadline for all lessees to have increased
bond coverage and is developing regulations to accomplish this.
Commerce noted that the report is well written and will be understood
by an audience with a broad range of expertise on the impacts that
removing structures has on marine environments. The departments'
comments have been incorporated in the report where appropriate.
INTRODUCTION
============================================================ Chapter 1
Since 1953, the Department of the Interior has managed the
development of oil and gas resources of the Outer Continental Shelf
(OCS).\1 Interior's Minerals Management Service (MMS) issues and
manages OCS oil and gas leases; among other things, MMS is
responsible for ensuring that when production ends, the leases are
abandoned in a manner that prevents unreasonable harm to marine life
and the environment. MMS is also responsible for ensuring that the
parties responsible for the OCS leases bear the costs of the lease
abandonment activities. These activities include plugging and
abandoning wells to prevent leaks, removing structures, and clearing
lease sites of obstructions to prevent hazards to commercial fishing
and shrimping as well as navigation.
OCS oil and gas structures vary in size and complexity. Simple
structures include such things as single pipes and single well
protectors. Modern structures are made of steel, or sometimes, steel
and concrete. Most of the large platforms have living quarters for
the crew, a helicopter pad, and room for drilling and production
equipment. A typical platform is designed so that 12 to 48 or more
wells may be drilled from it by directional drilling. Wells from a
single platform may extend over an area of several thousand acres (as
measured at the bottom of the holes).
Platforms consist of three main components--the superstructure, or
deck; the jacket; and the pilings. The deck is the surface where
work is performed. The jacket rests on the ocean's floor and has
columns, or legs, that extend above the water's surface. Pilings to
hold the structures in place are driven through the legs into the
ocean's floor. The jacket guides the installation of pilings and is
a structural unit to support the deck. Furthermore, it resists
waves, currents, wind, and earthquakes. Figure 1.1 shows a
steel-jacket offshore platform.
Figure 1.1: Offshore Platform
(See figure in printed
edition.)
Oil and gas structures are removed most often by using underwater
explosives to shear the portions that extend to the ocean's floor.
This kills nearby fish and can kill marine mammals and endangered sea
turtles if they are near the structure being removed. To fulfill its
responsibility for protecting the environment, MMS regulates OCS
lease abandonment; this includes limiting the use of underwater
explosives to remove structures in the Gulf of Mexico.
MMS is also responsible for ensuring that parties responsible for OCS
lease abandonment costs pay those costs. These costs range from
about $50,000 to $100 million per structure, depending on the
structure's size and the water's depth in which it is located. The
federal government may have to incur these costs if the responsible
parties fail to pay them.
As of December 1993, there were about 3,800 OCS oil and gas
structures, virtually all of which were located in the Gulf of
Mexico.\2 For many years, more structures were installed each year
than removed. However, in 1992 and 1993, a total of 343 structures
were removed and 195 installed, all in the Gulf of Mexico.
--------------------
\1 The OCS is the area approximately from 3 to 200 miles off the
coast of the United States that is under federal jurisdiction. It
may extend even further off the coast if oil or gas can be
economically developed. The first 3 miles offshore (9 miles offshore
in the cases of Texas and the Gulf coast of Florida) are under the
jurisdiction of the adjacent states.
\2 MMS has four OCS regions: Alaska, Atlantic, Gulf of Mexico, and
Pacific. Because most OCS leases are in the Gulf of Mexico, this
report only addresses MMS' management of lease abandonment in its
Gulf of Mexico Region.
LAWS PERTAINING TO THE
ABANDONMENT OF OCS LEASES
---------------------------------------------------------- Chapter 1:1
The Outer Continental Shelf Lands Act (OCSLA), as amended (43 U.S.C.
1331 et seq.), requires the Secretary of the Interior to administer
mineral leasing, exploration, and development on the OCS. Among
OCSLA's purposes are balancing resource development with protection
of the environment and encouraging the development of new and
improved technology for the production of resources that will
eliminate or minimize the risk of damage to the environment. OCSLA
also mandates that the Secretary require the use of the best
available and safest technologies feasible. To enforce the
requirements, including those affecting the environment, OCSLA
requires the Secretary to inspect every OCS facility at least once
annually as well as to conduct periodic on-site inspections without
advance notice.
In addition, under the National Environmental Policy Act of 1969
(NEPA), as amended (42 U.S.C. 4321 et seq.), it is national policy
that all federal agencies, including MMS, promote efforts that will
prevent or eliminate damage to the environment. Under NEPA, agencies
must study alternative courses of action concerning uses of available
resources when a recommended action might significantly affect the
quality of the environment.
Two other acts are also relevant to protecting marine life from the
effects of OCS oil and gas lease abandonment. One, the Endangered
Species Act of 1973, as amended (16 U.S.C. 1531 et seq.), requires,
among other things, that federal agencies consult with the Secretary
of Commerce in order to ensure that any action will not likely
jeopardize the continued existence of any marine endangered or
threatened species. Endangered sea turtles and other marine life
were found dead on the Texas and Louisiana coasts in 1986. Evidence
suggested that this was caused by explosives used to remove OCS oil
platforms in adjacent waters. As a result, the National Marine
Fisheries Service (NMFS), within the Department of Commerce, and MMS
formally agreed on measures for protecting endangered sea turtles in
the Gulf of Mexico when oil and gas structures are removed using
explosives.
The second act is the Marine Mammal Protection Act of 1972, as
amended (16 U.S.C. 1371 et seq.), which places a moratorium on the
"taking" of marine mammals, including a complete cessation of
harassing, hunting, capturing, or killing, except as approved under
the act. This act does not require federal agencies to consult with
the Secretary of Commerce to ensure that actions will not jeopardize
marine mammals. However, approval must be obtained from the
Secretary for exceptions to the moratorium on taking. MMS also
addresses the effects of OCS lease abandonment on marine mammals in
its environmental impact statements and environmental studies.
OBJECTIVES, SCOPE, AND
METHODOLOGY
---------------------------------------------------------- Chapter 1:2
The Chairman, Senate Committee on Governmental Affairs, asked us to
evaluate the Department of the Interior's management of OCS oil and
gas lease abandonment. We were asked to evaluate (1) MMS' actions to
minimize the environmental impact of lease abandonment and (2) the
estimated costs of lease abandonment and MMS' approach for ensuring
that the government is not burdened with these costs.
To evaluate Interior's actions to minimize the environmental effects
of lease abandonment, we reviewed applicable federal laws and
regulations. We interviewed MMS officials at the Gulf of Mexico OCS
Region regarding the removal of structures and site clearance
requirements. We interviewed academicians in the scientific
community. We interviewed NMFS officials at the Southeast Regional
Office and the Galveston Laboratory about the use of explosives for
the removal of OCS structures. We interviewed representatives from
oil and gas companies working offshore, OCS oil and gas service
contractors, and the Offshore Operators Committee (an industry
association of oil and gas operators in the Gulf of Mexico) about
methods for removing offshore structures. We interviewed
representatives from the Gulf of Mexico Fishery Management Council to
obtain information on the effect of explosives on fish.\3 We
interviewed officials and reviewed documents of the U.S. Army Corps
of Engineers' New Orleans District Office regarding methods of
removing offshore structures in Louisiana state waters. Finally, we
contacted several environmental groups to obtain their views on the
environmental effects of removing structures in the Gulf of Mexico.
The groups we contacted included the World Wildlife Fund, the
National Wildlife Federation, the Natural Resources Defense Council,
the National Fish and Wildlife Foundation, the National Coalition for
Marine Conservation, the Sierra Club, Greenpeace, the Environmental
Defense Fund, the National Audubon Society, Friends of the Earth, and
the Center for Marine Conservation.
In order to determine if MMS' procedures ensure that oil and gas
companies adequately clear the ocean's floor after removing their
structures, we interviewed several members of MMS' site clearance
committee. This committee included (1) MMS and state and local
officials and (2) representatives from the oil and gas and commercial
fishing and shrimping industries. We also interviewed five
commercial fishermen/shrimpers to obtain their views on the adequacy
of MMS' site clearance procedures. Two of the commercial
fishermen/shrimpers were members of the site clearance committee,
another was president of the Louisiana Shrimp Association, and one
was a member of the Organization of Louisiana Fishermen. In
addition, we interviewed the executive director of the Texas Shrimp
Association.
To determine estimated total OCS lease abandonment costs to remove
structures, plug wells, and clear sites in the Gulf of Mexico, we
obtained and analyzed an MMS database containing estimated lease
abandonment costs for active leases with structures or wells. We
verified that formulas used by MMS to calculate lease abandonment
costs were accurately derived from actual cost data developed by MMS
for 37 structures. We verified that MMS' estimated lease abandonment
costs were accurately calculated using the formulas. Finally, we
calculated lease abandonment costs for all active leases with
structures and/or wells using MMS' formulas.
To evaluate Interior's approach to ensure that the government is not
burdened with lease abandonment costs, we reviewed MMS' OCS bonding
requirements as they relate to lease abandonment. We also reviewed
federal laws and regulations. Furthermore, we interviewed MMS
officials at headquarters in Washington, D.C., and at the Gulf of
Mexico OCS Region. And we interviewed industry representatives from
four major oil and gas trade associations--the American Petroleum
Institute, the Independent Petroleum Association of America, the
Offshore Operators Committee, and the National Ocean Industries
Association. In addition, we interviewed officials of the Surety
Association of America and the Department of the Treasury regarding
the evaluation of financial risk as well as the reliability of surety
companies providing OCS bonds. Finally, we gathered information on
state laws and regulations concerning lease abandonment and bonding
requirements from state regulatory officials with the Louisiana
Department of Natural Resources, the California State Lands
Commission, and the Texas General Land Office.
The Departments of the Interior and Commerce provided written
comments on a draft of this report. These comments are presented in
appendixes I and II, are evaluated in chapter 4, and have been
incorporated in the report where appropriate. We conducted our
review from October 1992 through November 1993 in accordance with
generally accepted government auditing standards.
--------------------
\3 The Gulf of Mexico Fishery Management Council is one of eight
regional Fishery Management Councils established by the Fishery
Conservation and Management Act of 1976, as amended (16 U.S.C.
1852). The Council manages fishery resources in the Gulf of Mexico.
MMS COULD DO MORE TO PROTECT THE
ENVIRONMENT FROM THE EFFECTS OF
OCS OIL AND GAS LEASE ABANDONMENT
============================================================ Chapter 2
Although MMS has acted to ensure that OCS oil and gas lease
abandonment does not adversely affect the environment in the Gulf of
Mexico, it could do more. Specifically, MMS has not done all it can
to encourage the development of nonexplosive structure- removal
technologies that would eliminate or minimize damage to the
environment. In addition, MMS does not have an inspection strategy
for ensuring that wells are properly plugged and abandoned and lease
sites cleared to protect the environment.
MMS HAS TAKEN ACTIONS TO LIMIT
LEASE ABANDONMENT EFFECTS ON
MARINE LIFE AND THE ENVIRONMENT
---------------------------------------------------------- Chapter 2:1
MMS requires lessees to remove all oil and gas structures from the
OCS within 1 year after a lease is terminated. In addition, lessees
must plug and abandon wells and clear the site. MMS regulates these
lease abandonment activities to protect the environment; this
includes providing for the suspension or prohibition of any activity
that poses a threat to aquatic life or to the marine, coastal, or
human environment.
MMS REQUIRES WELL PLUGGING
AND ABANDONMENT
-------------------------------------------------------- Chapter 2:1.1
MMS regulations require that OCS oil and gas wells that are no longer
useful be plugged and abandoned in accordance with specified
technical provisions. A producing well is no longer useful when it
lacks the capacity for further profitable oil and gas production.
Wells can be abandoned throughout the life of a lease. Operators
must submit a notice of intent to abandon a well, which must show the
reason for abandonment, supporting data, and a description of the
proposed work. According to MMS, its engineers review this
documentation for compliance with regulations.
Well plugging and abandonment generally involves setting a series of
cement plugs inside a well. The operator must test the plugs under
pressure to protect against the possibility of a leak. Lessees are
required to submit a well abandonment report to MMS describing the
manner in which the work was accomplished.
STRUCTURE REMOVAL IS DONE IN
STAGES
-------------------------------------------------------- Chapter 2:1.2
Generally, portions of structures above the water are removed first.
Then the portions of structures that extend to the ocean's floor are
removed. It is this underwater aspect of structure removal that
poses the greatest risk to the environment. These portions are
removed by using either explosives or nonexplosive means such as
cutters.\1 To prevent obstructions from oil and gas activities from
remaining after removal, MMS regulations require that all OCS oil and
gas platforms and other structures be removed to a depth of at least
15 feet below the ocean's floor unless an exception is approved by
MMS.
In accordance with the agreement reached between NMFS and MMS to
protect endangered sea turtles in the Gulf of Mexico, companies
cannot use more than 50 pounds of explosives per detonation unless an
exception is granted for each use of more than 50 pounds. Companies
must also (1) have observers, approved by NMFS, to look for turtles
around the removal site prior to, during, and after the detonation;
(2) conduct an aerial survey before and after each detonation; (3)
delay a detonation to allow observed turtles to be removed to at
least 1,000 yards away from the blast site; (4) detonate only during
daylight hours; (5) look for turtles and marine mammals before and
after detonations and remove dead or injured ones; (6) stagger
detonations to minimize the cumulative effects of the blasts; (7) not
use explosive charges to scare turtles away; and (8) report the
results to MMS and NMFS. If a company seeks an exception to the
restriction on using more than 50 pounds of explosives per detonation
or to remove a structure less than 15 feet below the ocean's floor,
MMS and NMFS consult to determine if additional measures--for
example, a larger area observed or increased time of
observations--should be required.
Besides protecting turtles, the above actions help protect marine
mammals. For example, no exception has been granted to the OCS oil
and gas industry under the Marine Mammal Protection Act for the
incidental killing of marine mammals through the removal of
structures. However, in 1990, the American Petroleum Institute
requested that NMFS provide such an exception. In June 1993, NMFS
published a proposed rule providing for such an exception.
--------------------
\1 Examples of cutters include arc cutters, which use a torch to cut,
and mechanical cutters, which use rotating blades or a high- pressure
jet of sand to cut.
MMS REQUIRES SITE CLEARANCE
-------------------------------------------------------- Chapter 2:1.3
MMS regulations require that every OCS lease site be cleared so that
structures, equipment, and other obstructions do not conflict with
other uses of the OCS. In addition, MMS regulations and a related
notice require a lessee to verify and certify that the ocean's floor
at a lease site has been cleared. Since 1990 MMS has required that,
in the Gulf of Mexico, parties responsible for OCS leases must
contract with trawlers to verify that sites are clear for all sites
located in water less than 300 feet deep. These sites must be
trawled entirely in two directions by a trawling boat outfitted with
nets that are representative of the accepted shrimping industry
standard. All oil- and gas-related debris encountered during the
trawl must be removed from the ocean's floor. In addition, a
verification letter from the trawler, including details and results
of the trawl, must be submitted by the lessee or operator to MMS.
MMS began requiring trawlers to verify site clearance in the Gulf of
Mexico after receiving complaints from the commercial shrimping
industry that some sites were not being properly cleared of debris
and obstructions. To respond to those complaints, MMS formed a
committee to study the site clearance problem and make
recommendations on how MMS could best revise its regulatory
requirements. The site clearance committee, comprising shrimping
industry and oil and gas industry representatives as well as state
and local government and MMS officials, recommended MMS' current
requirements.
For structures located in water over 300 feet deep, lessees must
verify a site's clearance by means that are approved by MMS. MMS
requires that operators verify that these sites are cleared by using
sonar.
MMS CONDUCTS OTHER
ACTIVITIES TO PROTECT THE
OCS ENVIRONMENT
-------------------------------------------------------- Chapter 2:1.4
To comply with NEPA, MMS prepares environmental impact statements and
environmental assessments. These documents are prepared every 5
years for the oil- and gas-leasing program, for each lease sale, and
for specific activities under the leasing program. The program and
sale documents address lease abandonment activities.
MMS also has an Environmental Studies Program that develops
information needed for an assessment of the impacts that the oil- and
gas-leasing program has on the OCS. This program has produced
several studies on specific aspects of the OCS environment, including
the use of explosives to remove oil and gas structures. In addition,
its staff members are generally cognizant of other environmental
studies.
MMS also has Environmental Operations staff members who are
responsible for ensuring that lease activities are environmentally
acceptable. For example, they evaluate environmental studies in
order to make recommendations on how lease activities should be
conducted, and they conduct endangered species consultations with
NMFS.
MMS IS NOT ENCOURAGING
NONEXPLOSIVE OCS STRUCTURE
REMOVAL TECHNOLOGY
---------------------------------------------------------- Chapter 2:2
Although one of the purposes of OCSLA is to encourage technology that
will eliminate or minimize the risk of environmental damage, MMS has
not adequately studied the costs and benefits of using nonexplosive
technologies nor taken actions to encourage their use. The majority
of OCS oil and gas structures have been removed using explosives,
which kill fish and can harm any other nearby marine life. However,
technologies for the removal of structures exist that do not use
explosives and do not adversely affect the environment by killing
fish and threatening endangered sea turtles and protected marine
mammals.
EXPLOSIVES KILL MARINE LIFE
-------------------------------------------------------- Chapter 2:2.1
The fact that the explosives used to remove OCS oil and gas
structures kill nearby marine life has been well documented.
Following the kills of endangered turtles, protected dolphins, and
fish that evidence suggested resulted from the use of explosives to
remove platforms in the Gulf of Mexico in 1986, MMS began formal
consultation with NMFS under the Endangered Species Act to limit the
use of explosives in order to protect endangered turtles. In
addition, a 1987 MMS environmental assessment of potential impacts
associated with the removal of OCS structures noted that, unlike
explosives, nonexplosive removal methods minimize or eliminate harm
to marine life. The potential for explosive removal methods to harm
marine life was also pointed out in MMS' 5-year oil and gas
Environmental Impact Statement for 1992-97, which states that
"platform removal could result in harm to sea turtles and marine
mammals when explosive structure-removal operations are conducted."
In May 1991, the Gulf of Mexico Fishery Management Council, which
represents recreational fishing, commercial fishing, seafood
processing, and environmental, scientific, consumer, and state
conservation interests expressed concern to MMS that the use of
explosives to remove OCS oil and gas structures was killing large
numbers of fish. The Council urged MMS to suspend the use of
explosives to remove large offshore structures until MMS determined
the effects on fish. MMS responded that the available evidence on
the effects on fish of using explosives to remove OCS structures did
not justify a moratorium on the use of explosives. Nevertheless, in
1991, MMS initiated a study to be done by NMFS to determine the
extent of fish kill caused by explosive removals of OCS oil and gas
structures. This study is now scheduled to be completed around the
end of 1994.
NONEXPLOSIVE METHODS OF OCS
STRUCTURE REMOVAL ARE USED
TO SOME EXTENT
-------------------------------------------------------- Chapter 2:2.2
Nonexplosive methods of removing OCS oil and gas structures are
available and would minimize or eliminate adverse effects on the
environment. From 1987 through 1992, 570 OCS oil and gas structures
were removed in the Gulf of Mexico. Of these, 378 (66 percent) were
removed using explosives, and the remaining 192 (34 percent) were
removed using nonexplosive methods.
A 1987 environmental assessment by MMS on the removal of OCS
structures stated that both arc cutters and mechanical cutters are
feasible, and that with both methods, "damage to marine life is
minimal or non-existent."\2 The assessment also stated that several
nonexplosive technologies, such as cutters that use abrasive sand,
were emerging. A 1987 U.S. Army Corps of Engineers paper on the
removal of structures in Louisiana state waters commented on
alternative methods of removing structures.\3
It stated that the industry most often uses explosives because it
believes them to be cheaper and simpler. However, the paper also
stated that nonexplosive techniques can be equally effective. The
paper noted that the Corps had received 15 requests to remove
structures using explosives, but further noted that when the Corps
sent back a standard request for information, including a request for
information on why explosives were needed, 11 of the requests were
withdrawn and nonexplosive means used instead.
Officials of some oil and gas companies that use nonexplosive methods
such as cutters told us that these methods have already proved to be
cost-effective in successfully removing structures. However, even
some of these officials told us that it is cheaper and/or more
efficient to use explosives for some removals. And representatives
from some other companies believe that explosives are generally
cheaper and/or more efficient for removing structures.
Officials of two companies that manufacture cutters for the removal
of offshore structures told us that although they have successfully
demonstrated their technologies to OCS oil and gas operators, some
operators resist using these technologies. One official cited
companies' long-term use of explosives as one reason for this
resistance. The other official cited companies' bad experiences with
previous nonexplosive methods as another reason. The latter official
said that oil and gas companies have not taken into consideration the
improvements in mechanical cutter technology that have made it as
cost-effective as explosives.
We were unable, however, to determine for ourselves which method was
more efficient and/or economical. Neither MMS nor the oil companies
that we contacted had documented the relative costs and benefits of
the different technologies. Such cost-benefit studies of using
alternative technologies should, among other things, consider the
effects of water depth, structure size and configuration,
environmental effects, and human safety. Anecdotal evidence provided
by oil companies and MMS and the results of our analysis of how
structures have been removed were both inconclusive and
contradictory.
--------------------
\2 Gulf of Mexico OCS Region, Proceedings: Eighth Annual Gulf of
Mexico Information Transfer Meeting, OCS Study MMS 88-0035 (Dec.
1987), pp. 304-306.
\3 Robert Bosenberg,"Perspective on Oil and Gas Production Structure
Removals and the Permit Process," U.S. Army Corps of Engineers, New
Orleans District.
MMS ACTIONS ENCOURAGE USE OF
EXPLOSIVES
-------------------------------------------------------- Chapter 2:2.3
Although one of OCSLA's purposes is to encourage the development of
new and improved technology to eliminate or minimize the risk of
damage to the environment, MMS has not weighed the costs and benefits
of nonexplosive removal methods nor encouraged their use. In fact,
certain MMS actions may actually encourage the use of explosives.
For example, in 1993, MMS' Gulf of Mexico Region proposed to NMFS
relaxing the limits on the use of explosives. The proposal would
allow companies, without getting a specific exception from NMFS, to
increase the maximum amount of explosives used from 50 to 150 pounds
per detonation, and the proposal would eliminate the use of observers
in certain areas of the Gulf that are designated as unlikely to have
turtles present. The MMS Gulf of Mexico Regional Supervisor for
Field Operations told us that MMS proposed the change because
companies sometimes had to use repeated explosive charges to
accomplish the removal of a structure, which was inefficient.
However, another MMS regional official told us that oil and gas
companies have rarely requested exceptions to use larger explosive
charges. In fact, since the NMFS limit of 50 pounds per detonation
was imposed in 1988, only 9 of 335 removals of structures, through
1992, used more than 50 pounds of explosives per detonation, by
approval from NMFS.
MMS initiated the proposal to relax the limits on the use of
explosives without adequate study. For example, MMS did not analyze
the extent to which larger explosive charges have been required to
remove certain structures. In addition, MMS' justification for
designating certain areas of the Gulf, where endangered sea turtles
need less protection from explosives, is not relevant. MMS cited an
NMFS study that concluded that one area of the Gulf needed additional
protective measures but the remainder of the Gulf would be adequately
protected under existing requirements. The study did not address
increasing the allowed amount of explosive charges from 50 to 150
pounds per detonation. Furthermore, MMS' study, being conducted by
NMFS, of the effects of explosives on fish is not yet complete.
Some oil and gas company representatives told us that if MMS
encouraged or required the use of nonexplosive removal methods,
companies would have an incentive to develop this technology and that
this technology should be given an opportunity to prove and improve
itself. This reflects a 1985 National Research Council report that
stated that as the number of removals of OCS structures increases,
technical removal proficiency will improve. And one company official
told us that MMS' proposal to allow the increased amount of
explosives without having to seek an exception from NMFS actually
encourages the use of explosives and serves as a disincentive to
using nonexplosive methods.
While OCSLA requires that MMS encourage the use of technologies that
eliminate or minimize the risk of damage to the environment, MMS Gulf
of Mexico regional officials told us at the time of our review that
MMS is not, and does not have plans for, doing anything to encourage
nonexplosive removal methods. One official said that such action is
not MMS' responsibility and that MMS is not concerned with what
method is used, even though relaxing the limit on the use of
explosives might encourage the use of explosives. However, in
commenting on a draft of our report, MMS noted that it was
reevaluating the potential safety and environmental impacts of
various structure-removal technologies.
MMS DOES NOT HAVE AN INSPECTION
STRATEGY FOR ENSURING THAT
WELLS ARE PROPERLY PLUGGED
---------------------------------------------------------- Chapter 2:3
MMS does not have an overall inspection strategy for ensuring that
wells are properly plugged and abandoned to protect against future
leaks. If oil leaks from an improperly plugged well, there is a risk
that the environment and marine life will be adversely affected.
Mammals, birds, fish, shellfish, and plants can be killed by oil. An
MMS official told us that although no abandoned OCS oil leases are
known to have had leaking plugged wells, leaks have been known to
occur from plugged wells on leases that have not yet been abandoned.
However, if a well were found to be leaking after the lease was
abandoned and its structures removed, correcting the problem would be
more difficult. Boats, equipment, and personnel would have to be
mobilized to replug the well. During this period of time, oil would
continue to escape from the well.
The OCSLA requires that MMS inspect all OCS facilities subject to
environmental regulation at least once a year and that MMS conduct
periodic unannounced inspections. MMS' approximately 50 technicians
in the Gulf of Mexico Region are responsible for inspecting about
3,800 OCS facilities. According to MMS, in 1992, 516 wells were
plugged and abandoned in the Gulf of Mexico, and MMS technicians
inspected 46, or about 9 percent of them. However, technicians
inspect well plugging and abandonment only when that coincides with
either a scheduled annual inspection or an unannounced inspection.
MMS does not have an overall strategy that targets its limited
inspection resources to ensure that wells are properly plugged and
abandoned. For example, MMS does not target leases near the end of
their productive lives for inspection to ensure that wells have been
properly plugged and abandoned and may never inspect the plugging and
abandonment of wells on some leases. As a result, we believe MMS has
little assurance that wells will not leak after a lease site has been
abandoned.
MMS LACKS ADEQUATE ASSURANCE
THAT LEASE SITES ARE PROPERLY
CLEARED
---------------------------------------------------------- Chapter 2:4
MMS lacks adequate assurance that OCS oil and gas lease sites are
properly cleared. MMS relies on lessees and operators to conduct and
verify site clearance but does not independently verify that it is
done properly.
For leases in water less than 300 feet deep, MMS requires lessees and
operators to hire trawlers to conduct site clearance, then to submit
to MMS a letter from the trawlers verifying that sites were cleared
plus a letter from the lessees and operators that the verification
was witnessed by them. MMS allows lessees and operators to hire the
trawlers, as long as the trawlers have a valid commercial trawling
license and prior experience in trawling operations. When this
procedure began in 1990, MMS and the fishing and shrimping industry
believed the trawlers would have a vested interest in ensuring that
lease sites were properly cleared. However, MMS does not require
that trawlers hired for site clearance verification derive their
livelihood from fishing or shrimping. MMS approves the trawlers that
lessees and operators plan to hire on the basis of their satisfying
MMS' equipment and experience requirements. However, MMS does not
verify that site clearance verification has been properly performed.
For example, MMS does not observe trawlers, hire trawlers to
spot-check sites, or use alternate means to verify site clearance
when possible. An MMS Gulf of Mexico regional official told us that
such additional measures could be considered but that they have not
been used to date because existing procedures are thought to be
adequate.
Several commercial fishermen and shrimpers told us they were pleased
with MMS' current use of trawlers for site clearance, and they
believed the Gulf of Mexico is cleaner now than it used to be.
Nevertheless, the president of the Louisiana Shrimp Association,
representing commercial shrimpers in that state, expressed concern to
us about the need for better independent site clearance verification.
Specifically, he told us about an instance when he was hired by a
salvage company to clear a site but was dismissed before verifying
that the site was cleared because his nets continued to snag on an
obstruction. The salvage company nevertheless submitted a site
clearance verification letter to MMS. Subsequently, he informed MMS
that the site was not clear, and MMS required the responsible company
to send divers to determine if the snag was caused by debris from the
lease site. The divers retrieved an object, but it was not
determined whether the object was due to oil and gas activities.
MMS IS IMPROVING HOW IT PROTECTS
THE GOVERNMENT FROM INCURRING OCS
OIL AND GAS LEASE ABANDONMENT
COSTS, BUT MORE COULD BE DONE
============================================================ Chapter 3
MMS has developed a workable approach for protecting the government
from incurring OCS oil and gas lease abandonment costs in the Gulf of
Mexico. However, prior to an August 1993 change in MMS' bonding
requirements, MMS' implementation of this approach had been putting
the government at financial risk. As of March 1993, Gulf of Mexico
leases with $4.4 billion in estimated lease abandonment costs were
covered by only $68 million in bonds.
MMS' approach consists of two parts: (1) requiring a general bond
for all leases and (2) requiring supplemental bonds in the amount of
the total estimated costs of lease abandonment for leases without at
least one party deemed financially capable. However, the criteria
that MMS had been using to assess financial capability may not have
adequately measured a company's ability to pay for the potentially
significant costs of lease abandonment.
In August 1993, MMS promulgated new regulations that changed the
criteria for financial capability and increased the general bond
amounts.\1 However, both of these changes are to be phased in over an
open-ended period of time. This could result in a lengthy period
before the new coverage is in place, and some leases may never have
the new coverage. In commenting on a draft of this report, MMS said
that it recognizes the need for a deadline for all leases to comply
with the increased levels of bond coverage and is developing a
rulemaking to accomplish that result.
In addition, proper well plugging and abandonment and structure
removal are needed to minimize the opportunity for problems to
surface after a lease has been abandoned. If such problems were to
occur and MMS were unable to locate responsible parties to correct
the problems and/or to obtain sufficient remuneration from bonds, the
government would have to incur the costs.
--------------------
\1 These regulations became effective November 26, 1993.
MMS HAS TAKEN ACTIONS TO HOLD
PARTIES RESPONSIBLE FOR LEASE
ABANDONMENT COSTS
---------------------------------------------------------- Chapter 3:1
MMS regulations require OCS leases to be covered by surety bonds to
guarantee compliance with all lease terms, including lease
abandonment.\2 If a lease has more than one lessee, MMS requires
co-lessees to designate a single operator to fulfill the lessees'
obligations, including posting the bond. However, the co-lessees
remain liable if the operator defaults on obligations.
Ownership of a lease, in whole or part, may be assigned from one
party to another, with MMS' approval. An assignee obtains the
benefits and liabilities of its lease that occur from the assignment
date forward. The assignor remains responsible for obligations that
accrued prior to assignment, including lease abandonment.
--------------------
\2 MMS also accepts U.S. Treasury securities in lieu of surety bonds
and, as of November 1993, accepts other means of financial
security--for example, a nonrevocable letter of credit.
GENERAL BONDS
-------------------------------------------------------- Chapter 3:1.1
MMS regulations specify that, at a minimum, every OCS oil and gas
lease must be covered by a general bond. Previously, this bond was
in the amount of $50,000 for a bond covering a single lease or
$300,000 for an areawide bond covering all leases bonded by one party
in one OCS area.\3 However, MMS, concerned that those general bond
amounts might be inadequate because of the high costs of lease
abandonment, changed its regulations in August 1993 to increase
general bond amounts to as much as $3 million for an areawide bond.
In order not to overwhelm the oil and surety industries by requiring
simultaneous conversion to the higher amounts, MMS regulations
provide that the new amounts will be phased in when there is a change
in lease activity or ownership.
--------------------
\3 An OCS area is the same as one of MMS' four regions.
SUPPLEMENTAL BONDS
-------------------------------------------------------- Chapter 3:1.2
In May 1992, MMS decided to require a supplemental bond for any lease
that does not have at least one responsible party that is financially
capable of fulfilling lease abandonment obligations. A supplemental
bond is required for the full amount of estimated lease abandonment
costs, less the amount of general bond coverage. If MMS determines
that estimated lease revenues and oil and gas reserves are sufficient
to enable the responsible parties to pay for lease abandonment costs,
the supplemental bond amount may be phased in over time.
PROTECTING AGAINST THE HIGH
COSTS OF OCS OIL AND GAS LEASE
ABANDONMENT
---------------------------------------------------------- Chapter 3:2
OCS oil and gas lease abandonment costs can range from $50,000 to
$100 million dollars for a structure. Lease abandonment costs vary
depending on water depth as well as the size and complexity of
structures. For the 1,811 active leases with structures or wells in
the Gulf of Mexico, we estimated the total cost of lease abandonment
at about $4.4 billion as of March 1993.\4 These leases were covered
by $68 million in bonds. Prior to the mid-1980s, most OCS oil and
gas leases were obtained by large oil and gas companies. MMS
considered the financial resources of these companies sufficient to
ensure performance of lease obligations, including payment of lease
abandonment costs, and only required general bonds to protect the
government from incurring these costs. However, according to MMS,
leases are increasingly being held by smaller oil and gas companies.
This is happening for two reasons. First, as production declines
from older leases, large companies no longer regard them as
economical to operate. Smaller companies, with less expenses,
believe they can operate some of those leases profitably, so the
large companies assign those leases to the smaller ones. Second,
smaller companies are increasingly bidding on and obtaining new
leases. Because smaller companies generally have less financial
resources, the risk that a company might not be able to pay its lease
abandonment costs could increase.
MMS' August 1993 regulations, which increased general bond amounts,
should eventually increase the total amount of bond coverage on OCS
leases in the Gulf of Mexico. However, increased bond amounts are to
be phased in over time, with no deadline for when the phase-in shall
be completed. That is, new general bond amounts will only be
required when a lease comes up for review because of certain actions
that may occur during the life of a lease, such as the filing of an
exploration plan or a development and production plan. Thus, it may
be some time before many leases have the new bond amounts.
Furthermore, leases that are in production in the Gulf of Mexico may
not experience an action that would trigger an increase in the
general bond amount.
At the time of our review, MMS had not paid any lease abandonment
costs because responsible parties had failed to do so. However,
there have been a few cases in which bonded parties defaulted on
lease abandonment obligations. For the cases that have been
resolved, MMS has been able to get co-lessees or new parties taking
over those leases to accept responsibility for paying the costs.
Because MMS holds assignors responsible for lease abandonment costs,
large oil and gas companies that assign leases to smaller companies
continue to provide assurance that lease abandonment costs will be
covered for those leases. However, because assignors could also
default, supplemental bonds serve a valuable purpose for protecting
the government's financial interest.
Furthermore, to protect the government from incurring lease
abandonment costs if responsible parties cannot be found and/or lease
bonds are insufficient to cover the costs, it is important that MMS
have measures in place to ensure that wells are properly plugged and
abandoned and lease sites are properly cleared. Properly abandoning
leases in the first place would reduce the opportunity for problems
to arise later that may result in the incurring of costs by the
government.
--------------------
\4 MMS has not attempted to estimate when each lease would be
abandoned. Therefore, this estimate, in current dollars, is based on
the assumption that all structures were removed, wells plugged and
abandoned, and sites cleared at the time this estimate was made.
MMS IS IMPROVING ITS CRITERIA
FOR DETERMINING FINANCIAL
CAPACITY
---------------------------------------------------------- Chapter 3:3
The criteria that MMS had been using to determine the financial
capacity of parties responsible for OCS leases may not have
adequately measured their ability to pay for the potentially
significant costs of lease abandonment. As a result, MMS may not
have been obtaining sufficient bond coverage through supplemental
bonds. As of March 1993, Gulf of Mexico leases with $4.4 billion in
estimated lease abandonment costs were covered by only $68 million in
bonds. However, MMS' August 1993 regulations that change the
criteria could improve this situation.
From May 1992 until November 1993, MMS allowed a company to submit
various evidence to demonstrate its financial capacity. However, in
lieu of other evidence, MMS adopted certain criteria for deeming a
company financially capable of meeting its lease abandonment
responsibilities. These criteria included (1) a Small Business
Administration (SBA) criterion for distinguishing between large and
small oil and gas companies, (2) two financial criteria developed by
MMS on the basis of SBA's criterion, and (3) MMS' criterion for
determining large oil and gas companies for the purpose of regulating
bidding on OCS leases. Thus, to be deemed financially capable of
fulfilling lease abandonment obligations without a supplemental bond,
a company must have met one of the following criteria:
Total employment of 500 or more.
Minimum net worth of $35 million.
Minimum gross annual sales of $45 million.
Worldwide production of oil, gas, and petroleum products that
exceeds 1.6 million barrels in 6 months.
The criteria used by MMS between May 1992, when it began requiring
supplemental bonds, and November 1993 were developed for purposes
unrelated to assessing a company's ability to pay lease abandonment
costs. For example, a company with 500 employees but with less than
$35 million in net worth would have been considered financially
capable, without regard to the estimated abandonment costs of its
leases.
As of May 4, 1993, MMS' financial capacity criteria resulted in the
exemption of 153 parties from the requirement for supplemental
bonding. These 153 parties were responsible for 1,702 (94 percent)
of the 1,811 leases with structures and/or wells in the Gulf of
Mexico. Because MMS determined that these 1,702 leases were held by
at least one financially capable party, only general bonds were
required. The estimated lease abandonment costs for these leases was
about $4.2 billion and was covered by $45 million in general bonds.
Being determined financially capable may have little to do with a
company's financial capability, according to the criteria used by MMS
until November 1993. For example, as of January 29, 1993, MMS had
identified four bankrupt companies responsible for OCS oil and gas
leases that were on the exempt list. That is, they met one of MMS'
criteria--for example, number of employees--but were in bankruptcy.
In August 1993, MMS revised its regulations for supplemental bonds to
change the evidence required for evaluating financial capability. As
a result of the revised regulations, MMS will use audited financial
statements, projected production, longevity of OCS operations, credit
ratings, and past compliance with legal requirements. However, the
regulations do not specify what criteria will be used to determine
that a company is financially capable. At the time of our review,
MMS was developing these criteria. An MMS Gulf of Mexico Region
official told us that MMS is attempting to develop criteria that
relate to a company's total liability for offshore operations. The
revised regulations, if properly implemented, could provide greater
assurance that leases have either at least one financially capable
party or supplemental bonds in the full amount of estimated lease
abandonment costs.
However, MMS' May 1992 supplemental bond criteria specified that such
bond coverage would be phased in over time. That is, leases would
only be subject to supplemental bonds when certain activities
occurred, such as the filing of exploration plans. MMS' August 1993
regulations do not specify a time frame for implementation. If the
new requirements for supplemental bonds are phased in over time, it
may take some time until a significant number of leases that should
have supplemental bonds have them. Furthermore, some leases may
never have an activity that triggers review of the need for
supplemental bonds. In commenting on a draft of this report, MMS
said that it recognizes the need for a deadline for all leases to
comply with the increased levels of bond coverage and is developing a
rulemaking to accomplish that result.
MMS HAS NOT OBTAINED
SUPPLEMENTAL BONDS FOR ALL OCS
LEASES THAT NEED SUCH BONDS
---------------------------------------------------------- Chapter 3:4
As of March 1993, 109 of the 1,811 leases in the Gulf of Mexico with
structures and/or wells did not have at least one responsible party
that met MMS' pre-November 1993 criteria for financial capacity.
Although MMS' procedures required supplemental bonds in the full
amount of estimated lease abandonment costs for these leases, 68
leases did not have supplemental bonds. The estimated lease
abandonment costs for these 68 leases are about $114 million, but
they are covered by only about $4 million in bonds.
Although MMS requires supplemental bonds on all leases without at
least one financially capable responsible party, since supplemental
bonding began in 1992, MMS has been obtaining supplemental bonds only
on leases as they were assigned. A Gulf of Mexico Region official
told us that MMS is planning to obtain supplemental bonds on other
leases where needed, in accordance with the supplemental bonding
criteria that became effective November 1993.
We found that 61 of the 68 leases that should be but are not covered
by supplemental bonds were leased by or assigned to current lessees
before MMS implemented its supplemental bond procedures and may not
have had changes in lease activity that would trigger the requirement
of supplemental bonds. These leases have estimated abandonment costs
of $108 million but are covered by only about $3 million in total
bonds. The remaining seven leases that should have supplemental
bonds but do not were leased by or assigned to current lessees after
MMS implemented its supplemental bond procedures. Specifically, we
found the following:
Four leases have new structures or wells since their most recent
assignments. When MMS reviewed the assignments, supplemental
bonds were not required because there were no structures or
wells on the leases. MMS should have obtained supplemental
bonds to cover the new estimated abandonment costs for these
leases of $1.4 million. However, these leases are covered by
only about $100,000 in bonds.
Two leases are covered by one areawide bond. However, their total
estimated lease abandonment costs exceed the amount of the
areawide bond, so the leases are inadequately covered and should
have supplemental bonds. These leases have estimated
abandonment costs of $700,000 but are covered by $300,000 in
bonds.
One lease was transferred as part of a bankruptcy resolution to a
company that is not exempt. MMS is working on obtaining a
supplemental bond on this lease. This lease has estimated
abandonment costs of $3.4 million.
Because these leases do not have appropriate bond coverage, the
government is at risk for their costs of lease abandonment.
CONCLUSIONS AND RECOMMENDATIONS
============================================================ Chapter 4
To protect the environment from the effects of OCS oil and gas lease
abandonment and to protect the federal government from incurring
costs, it is important that OCS oil and gas lease abandonment be done
properly. For example, if wells are not properly plugged and
abandoned, the environment could be damaged before personnel, boats,
and equipment could be mobilized to replug the well. Furthermore, if
MMS were unable to locate responsible parties to correct problems
caused by improper site clearance and/or to obtain sufficient
remuneration from bonds, the government would have to incur the
costs.
We believe that MMS could do more to ensure that OCS oil and gas
lease abandonment does not adversely affect the environment in the
Gulf of Mexico. MMS has not encouraged the nonexplosive removal of
OCS structures. In addition, MMS does not have an overall inspection
strategy for ensuring that wells are properly plugged and abandoned
nor does it independently verify that lease sites are properly
cleared. As a result, MMS has little assurance that wells will not
leak after a lease has been abandoned and that sites are properly
cleared.
While we believe that MMS has developed a workable approach for
reducing the likelihood that the government will be burdened with
lease abandonment costs, it could do more. Its implementation of
this approach has not ensured that all parties have been adequately
bonded, and it may be some time before a significant number of leases
have the coverage required.
MMS COULD DO MORE TO PROTECT
THE ENVIRONMENT FROM THE
EFFECTS OF OCS OIL AND GAS
LEASE ABANDONMENT
---------------------------------------------------------- Chapter 4:1
MMS has taken actions to protect the environment in the Gulf of
Mexico from adverse effects of lease abandonment. However, MMS could
do more to protect the environment. Specifically, MMS has not done
all it can to meet OCSLA's purpose of encouraging the development of
technologies that minimize or eliminate harm to the environment.
Using explosives to remove OCS structures kills marine life, and
alternative technologies that do not adversely affect the environment
are available and can be further developed. While MMS has not
studied the costs and benefits of using such technologies nor
encouraged their use, in commenting on this report, MMS noted that it
is reevaluating the potential safety and environmental impacts of
various structure removal technologies.
In addition, MMS does not have an overall strategy that targets its
limited inspection resources to ensuring that wells are properly
plugged and abandoned and lease sites cleared. As a result, MMS has
little assurance that wells will not leak after a lease site has been
abandoned and that sites are properly cleared. MMS' inspection
strategy for ensuring that wells are properly plugged and abandoned
could include targeting some of its inspections to a sample of
plugging and abandonment operations. MMS could take any number of
actions to assure that lease sites are properly cleared, such as
having
on-board MMS observers during selected trawling operations;
independent verification, using trawlers hired by MMS or other
means, to sample sites that have been verified as clear by
lessees and operators;
MMS certification of trawlers that may be hired for site clearance
verification; and/or
direct contracting of trawlers by MMS, to be reimbursed by the oil
and gas companies.
MMS IS IMPROVING HOW IT
PROTECTS THE GOVERNMENT FROM
INCURRING OCS OIL AND GAS LEASE
ABANDONMENT COSTS, BUT MORE
COULD BE DONE
---------------------------------------------------------- Chapter 4:2
MMS' approach, which requires (1) general bonds for OCS oil and gas
leases with responsible parties that are financially capable and (2)
supplemental bonds in the full amount of estimated lease abandonment
costs for leases without at least one financially capable party, is
workable for providing reasonable assurance that the taxpayer is not
burdened with lease abandonment costs. However, until recently, MMS'
implementation of this approach put the government at risk because
MMS' criteria for determining parties' financial capacity may not
have been appropriate to ensure sufficient financial coverage.
In addition, under pre-August 1993 criteria, MMS did not obtain
supplemental bonds for 68 leases that should have had them. Instead
of financial coverage in the full amount of estimated lease
abandonment costs, these leases have bonds that would cover only
about 4 percent of their estimated abandonment costs.
MMS' August 1993 regulations established new financial capability
criteria for determining the need for supplemental bonds and
increased general bond amounts. If properly implemented, the new
criteria could help ensure that the government is adequately
protected from incurring lease abandonment costs. However, because
the time frames for implementation of these requirements are
open-ended, it is possible that it will be some time before a
significant number of leases have the new coverage required under the
regulations. And leases that do not have the necessary
administrative change to trigger a review of the need for
supplemental bonds may never have supplemental bond coverage. In
commenting on a draft of this report, MMS recognized the need for a
deadline for all leases to comply with the increased levels of bond
coverage and said that it is developing a rulemaking to impose such a
deadline.
RECOMMENDATIONS TO THE
SECRETARY OF THE INTERIOR
---------------------------------------------------------- Chapter 4:3
In order to better protect the environment from the effects of OCS
oil and gas lease abandonment and the federal government from
incurring the costs of such abandonment, we recommend that the
Secretary of the Interior direct the Director of MMS to do the
following:
Encourage the use of nonexplosive technologies for removing
offshore structures, whenever possible, that will eliminate or
minimize the risk of harm to the environment, in accordance with
OCSLA's purpose.
Study the feasibility, benefits, and costs (including the potential
effects on the environment and the safety of humans) of
mandating the use of nonexplosive methods of removing offshore
structures, whenever possible, because of the harm that
explosives do to marine life.
Require MMS to develop an inspection strategy for targeting its
limited resources to ensure the proper plugging and abandonment
of OCS wells and the clearance of lease sites.
Complete a rulemaking to place time limits on the phase-in of both
the increased general bond amounts and supplemental bonding
under the new criteria. Establishing such limits would help
ensure that the government is adequately protected from
incurring costs associated with OCS lease abandonment that
should be paid by the companies responsible for the leases.
AGENCY COMMENTS
---------------------------------------------------------- Chapter 4:4
In commenting on a draft of this report, the Department of the
Interior generally agreed with our recommendations. Specifically,
Interior agreed that OCS lease abandonment technology needs further
review, taking into account factors including safety, cost, and
environmental effects. Interior noted that it considered safety a
prime concern when evaluating the technologies proposed for the
removal of OCS structures. Interior also indicated that while it has
had few problems with improper lease abandonments, it was
reevaluating its inspection strategy and considering options for
witnessing more abandonment activities. In addition, Interior stated
that it recognized the need for a deadline for all lessees to comply
with the increased levels of bond coverage and is developing a
rulemaking to accomplish this.
The Department of Commerce concurred with our recommendations to
Interior and noted that the report is well written and will be
understood by an audience with a broad range of expertise on the
impacts of the removals of OCS structures on marine environments.
Commerce suggested that it would be helpful if the report explained
the characteristics of structures that can be more cheaply or
efficiently removed with the use of explosives. We cannot provide
the characteristics of structures that can be more cheaply or
efficiently removed with the use of explosives because neither MMS
nor the oil companies that we contacted had documented the relative
costs and benefits of using such technologies. Accordingly, we have
recommended that MMS study the feasibility, benefits, and costs of
mandating the use of nonexplosive methods of removing offshore
structures. Such a study should consider, among other things, the
effect of water depth, structure size and configuration,
environmental effects, and human safety. Commerce also noted that it
would be useful if the report provided specific guidance on how MMS
should encourage alternative removal technologies for removing
offshore structures and suggested that MMS might use incentives or
penalties. We believe that until a cost-benefit study of alternative
methods of removing OCS structures is completed, it would be
premature to use incentives or penalties. Rather, MMS should issue a
directive encouraging the use of nonexplosive technologies, whenever
possible, that will eliminate or minimize the risk of harm to the
environment.
Both departments' comments have been incorporated in the report where
appropriate.
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
GAO RESPONSE TO INTERIOR'S
COMMENTS
---------------------------------------------------------- Chapter 4:5
See the end of chapter 4 for a discussion of these comments.
(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
COMMERCE
============================================================ Chapter 4
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
GAO RESPONSE TO COMMERCE'S
COMMENTS
---------------------------------------------------------- Chapter 4:6
See the end of chapter 4 for a discussion of these comments.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION,
WASHINGTON, D.C.
------------------------------------------------------- Appendix III:1
Robert W. Wilson, Assistant Director
Leonard W. Ellis, Assignment Manager
DALLAS REGIONAL OFFICE
------------------------------------------------------- Appendix III:2
Thomas F. Ward, Evaluator-in-Charge
Sally Moino, Site Senior
Charles Lin, Evaluator