Biden’s Rule on Offshore Drilling Could Cripple Small Oil Companies
The Biden administration’s latest move, pushed by the Bureau of Ocean Energy Management (BOEM) within the Department of the Interior, represents yet another attack on domestic energy production. This new rule, which requires small oil companies to provide additional financial assurances in the form of surety bonds to cover the cost of decommissioning offshore wells and platforms, is a clear hindrance to small, independent oil and gas producers without providing any significant benefit.
While the goal of protecting taxpayers is commendable, the proposed changes appear to be a solution in search of a problem. Moreover, the practicality of the rule is in doubt, as no financial market is willing to underwrite these surety bonds. This raises a fundamental question: Why impose a requirement that cannot be fulfilled, effectively jeopardizing the livelihoods of small businesses and the energy sector?
To fully grasp the implications of this rule, we must understand the context. Offshore drilling in the Gulf of Mexico has a long history dating back to 1947, resulting in over 7,000 structures and more than 55,000 wells. Over the years, the industry has decommissioned the majority of these structures, with more than 85% of all wells and platforms removed, incurring a substantial cost of over $25 billion (in today’s dollars).
Oil companies have always been collectively responsible for the decommissioning cost as parties to federal leases, thereby protecting taxpayers. However, an unfortunate bankruptcy case in 1989 led to the government covering the decommissioning cost. In response, the federal government implemented rules that require some lessees to provide bonds to cover decommissioning costs if they cannot demonstrate their ability to pay.
This continuing obligation ensures that all current and former lessees remain collectively responsible for decommissioning liabilities, even when leases change hands. This forces sellers to perform financial due diligence on buyers and demand their own financial security, often in the form of surety bonds, letters of credit, or other security. While this comes at a cost to the seller, it has historically protected taxpayers.
Remarkably, the new proposal by BOEM seems to remove this protection by letting major oil companies off the hook, while forcing small operators to buy over $9 billion worth of new insurance. The problem is that this new insurance does not exist, and the surety industry deems it impossible to create such a product under BOEM’s proposed scheme.
Even if such bonds were available, the cost of this insurance would be prohibitively expensive for small businesses, who would bear the full financial burden. About 76% of the companies operating in the Outer Continental Shelf fall under this rule, and the cost of this insurance, as estimated by BOEM, exceeds $6 billion over the next 20 years. Consequently, this requirement, even if met, would significantly reduce the number of companies capable of operating in the Outer Continental Shelf.
But the key question remains: Is it worth risking the survival of these small businesses? A $42 billion taxpayer liability in remaining decommissioning costs carries only $750 million in liability from sole operators, historically the source of taxpayer liabilities, for which the government has already received bonds. This excessive caution seems unfounded, particularly given that the government has collected over $121 billion in lease royalties since 2004, making the energy sector a consistent source of revenue.
One can’t help but wonder about the true motivation behind the Interior Department’s latest move. BOEM’s press release mentions advancing the Biden-Harris administration’s federal oil and gas reform agenda, which aligns with President Biden’s promise to halt all new drilling on public lands. This move might just be another piece of that agenda, and it’s workers, small businesses, and the energy industry that stand to lose.