Three states and trade groups have filed a lawsuit contesting a federal regulation that they claim would limit the ability of small, independent operators to explore for and produce oil and gas on the outer continental shelf.
The plaintiffs claim that the operators could end up spending billions of dollars only to comply with the requirement.
The government will lose over $500 million in oil and gas royalties over the next decade, 36,000 jobs would be lost, and the GDP will fall by $10 billion, according to the lawsuit. Another allegation in the lawsuit is that the goal of the Biden administration “throttled the production (of oil and gas) on multiple fronts since day one.”
The rule was issued by the Department of Interior through the Bureau of Energy Management. It requires oil and gas companies operating on the outer continental shelf to get additional funding to cover anticipated decommissioning costs for aged wells, even if they do not have an investment-grade credit rating. On June 29th, the regulation became official.
On June 17, the plaintiffs—consisting of various oil and gas trade associations, the states of Texas, Louisiana, and Mississippi—filed a lawsuit in the U.S. District Court for the Western District of Louisiana, seeking a stay on the rule’s effectiveness or an injunction to prevent its implementation.
The government claims the measure is necessary to shield taxpayers from the possibility of paying for these operators’ deactivation.
The plaintiffs argue in their lawsuit that the government has incurred decommissioning liabilities of $58 million over the course of 75 years of offshore leasing. This amounts to less than 0.03% of the $208 billion in royalties and related revenue that the government has earned over the last 40 years.
The smaller businesses would need an extra $6.9 billion in funding, according to the plaintiffs’ case.
“But BOEM knows — or should know — that nobody will be able to provide those bonds, so the lessees will be unable to meet the Rule’s requirement,” according to the lawsuit. “So what? Lessees of smaller and medium-sized enterprises (SMEs) will confront perhaps catastrophic outcomes; they are responsible for producing more than one-third of the natural gas and oil extracted from the Outer Continental Shelf.
“When they cannot meet the government’s demand for additional bonds, they can be subjected to civil penalties, forced to stop oil and gas production, and banned from operating in the Gulf.”
The complaint states that surety bond providers informed BOEM that they were unable to supply the requested bonds.
An expert on commercial transactions and a partner in Jones Walker’s Corporate Practice Group, Mallory Wynne told The Center Square that supplemental bonds being required by the BOEM and oil and gas corporations posting bonds to secure liabilities are not new occurrences.
According to Wynne, smaller lessees and operators may find it more expensive to do business in the Gulf of Mexico as a result of the new regulation.
The Industrial, Petrochemical, and Advanced Manufacturing Industry Team is co-chaired by Seth Levine, who is also a partner in Jones Walker’s Corporate Practice Group.
“The rule may result in increased costs of compliance for many lessees,” Levine informed the Center Square. “The rule might cause oil and gas companies to reassess and restructure the allocation of risk in transactions involving acquisitions and divestitures of lease interests.”
In addition to the organizations that have submitted amicus briefs—the Ocean Conservancy, the Center for Biological Diversity, Healthy Gulf, the American Petroleum Institute, and the Louisiana Mid-Continent Oil and Gas Association—the American Petroleum Institute has asked to be a part of the litigation. Wynne mentioned the possibility of further intervention.
Source: The Center Square