Rent-seeking is a fact of life in politics, and you know something is fishy when companies team up with a governor or president to impose additional regulations on their own industries. Such is the case with a new rule issued by the Bureau of Ocean Energy Management (BOEM), which increases by $6.9 billion the amount of money offshore oil companies must hold to cover decommissioning costs. The regulation is a classic Biden administration move that uses a nonexistent problem to heap more unnecessary costs on American energy producers.
In offshore oil and gas exploration, the capital-intensive task of exploring and drilling a new well is usually done by publicly traded multinational companies, and their reward is the highest margin barrels that come out during the first several years of a well’s life. Then, after some time, the original owner will sell the well to a smaller operator who specializes in squeezing the remaining profits out of the well.
When a well is drilled, the operator is required to have financial assurances in place. If the company’s assets and/or track record is not sufficient (which is usually not a problem for large companies), it will be forced to purchase its financial assurance, often called a surety bond, to cover decommissioning of the well. The decommissioning liability is then shared with a new owner when it purchases the well. This is called joint and several liability.
The purpose of these assurances is to prevent a well from becoming “orphaned,” causing the responsibility of decommissioning to fall to taxpayers. After 75 years under this system, the taxpayer has only had to pay around $58 million for decommissioning, and those cases all involved sole liability leases, so joint and several liability was not in effect. Why impose billions of dollars in extra costs to solve a problem that so far has only cost in the tens of millions?
The new rule will require additional financial assurance from owners who lack an investment-grade credit rating, but it is silent on whether joint and several liability will continue. This effectively forces many independent owners to acquire new surety bonds, because, by virtue of their size their assets are not sufficient to cover the cost of decommissioning. This is where the $6.9 billion cost estimate comes from. With small businesses making up more than 76% of offshore operators, this impacts a majority of the business operating in the Gulf of Mexico.
Normally, these are the kinds of silly rules that the energy industry vigorously fights, but, as with the methane regulations recently promulgated by the EPA, multinational companies and the American Petroleum Institute not only capitulated but actually supported this change. The reason is that the credit rating barrier will exempt larger public companies that have investment-grade ratings, while imposing more costs on their smaller competitors that sometimes do not.
An additional barrier for riskier companies may seem to make sense in a vacuum, but, as history has shown, it has been extremely rare for decommissioning costs to fall upon the ratepayer. This is truly a rule searching for a problem to solve.
When extra costs are imposed on small energy producers, the loser, as always, is the American consumer. Energy demand is very inelastic, meaning that it takes steep price increases to substantially reduce consumption, because energy is so essential to our lives. Therefore, when American producers are hit with extra costs and reduce their output, the most likely scenario is that prices will rise a bit and less responsible producers in foreign countries will fill the gap. That’s exactly what this rule will encourage.
We cannot forget President Joe Biden’s pledge to eventually end offshore drilling, which he reiterated last year while blaming the courts for stopping him. This rule, in conjunction with restrictions on offshore lease sales and increases in royalty payments, are the first steps in his plan. To no one’s surprise, climate activists and environmental nonprofits have been pushing full stop for these changes, but now Big Oil is also encouraging the charade.
With this cartel of Big Oil and Big Green pushing for more regulations on offshore oil producers, it’s up to freedom-loving American energy producers and consumers to fight for their right to responsibly produce and consume energy as they see fit, rather than being subjected to the whims of bureaucrats and lobbyists in Washington, D.C.
