CHAPTER 8 WHAT GOES UP MUST COME DOWN: DECOMMISSIONING FACILITIES ON THE FEDERAL OUTER CONTINENTAL SHELF

• Jurisdiction: United States

Federal Offshore Regulatory Enforcement
(Jan 2016)
CHAPTER 8
WHAT GOES UP MUST COME DOWN: DECOMMISSIONING FACILITIES ON THE FEDERAL OUTER CONTINENTAL SHELF

James M. Auslander
Principal
Beveridge & Diamond PC
Washington, DC

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JAMES M. AUSLANDER co-chairs Beveridge & Diamond's Energy practice team, and is based in Washington, D.C. Jamie focuses his practice on complex legal issues surrounding development of oil and gas, hardrock minerals, other natural resources, and renewable energy on public lands onshore and on the Outer Continental Shelf. He frequently works with the Bureau of Ocean Energy Management and prosecutes appeals before the Interior Board of Land Appeals regarding royalty, suspension, decommissioning, regulatory departures, and other issues. He also assists multinational corporations, domestic companies, and leading industry trade associations in protecting valuable lease rights and navigating the ever-changing environmental requirements to develop those leases.

I. INTRODUCTION

Talking about end-of-life matters is never easy. Though the end is inevitable, it is more appealing to defer the conversation and hope for the best when the time comes. Yet planning is of course crucial to avoid facing potentially significant complications at the last minute, perhaps without the luxury of resources or time to address them. Oil and gas facilities and wells on the Outer Continental Shelf ("OCS") are no exception.¹

The Department of the Interior ("DOI"), through the Bureau of Ocean Energy Management ("BOEM") and Bureau of Safety and Environmental Enforcement ("BSEE"), manages approximately 400 million acres in several OCS planning areas.² Companies may obtain from BOEM rights to explore or produce oil and gas, typically via a federal lease, right-of-way ("ROW," usually for pipelines between leases), or right of use and easement ("RUE," usually for limited activities on areas unleased or leased to another entity). The vast majority of OCS federal leases are located in the Gulf of Mexico, including approximately 4,500 active leases comprising nearly 25 million acres, and approximately another 23,000 leases that have since expired.³ Over 2,300 active platforms exist on the OCS, along with hundreds of others that are inactive,⁴ In addition, there are thousands of OCS wells and pipelines, many of which are active, that have not yet been permanently decommissioned. Most of these structures and wells

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are located in shallow water.⁵ Yet, advances in technology and promising oil and gas prospects are increasingly driving OCS exploration and production to fields farther from shore and in much deeper water. To date, according to BSEE, approximately 50 platforms and 300 wells have been installed in water depths greater than 1,000 feet.⁶

As a general rule, when oil and gas activities permanently cease, OCS lessees, operating rights owners, and operators (as well as ROW or RUE holders) must restore the covered area to approximate its natural condition.⁷ The basic rationale for the requirements to decommission idle infrastructure and clear the site is at least threefold. Doing so avoids potential environmental effects from equipment or components left on the seafloor, toppling of obsolete structures including via hurricanes, and risk of hydrocarbon releases. It also decreases safety and navigational risks from passing vessels, fishing, military activities, or other uses of the OCS. Finally, placing the decommissioning obligation on the entities installing or utilizing the infrastructure ensures that the financial burden does not ultimately fall on the public taxpayer. This last principle has especially fueled the government's renewed focus on decommissioning.

Yet, for many years, decommissioning was not a key topic of discussion or concern. Activities predominantly took place on the shallow water OCS, and the facility sizes and production volumes were relatively small. As the offshore oil and gas industry expanded in the latter part of the 20th century, the principal focus remained on identifying new reserves for exploration and production. In contrast to these revenue-generating functions, decommissioning appeared squarely on the cost side of the ledger and offered relatively less incentive for attention from lessees or the Minerals Management Service ("MMS," BOEM and BSEE's predecessor agency). Facilities were sometimes designed and placed with little regard for the logistics or timing of their ultimate decommissioning. Some facilities have fallen into a state of disrepair such that certain fixes may be required prior to decommissioning to ensure adequate safety during the process. Over time, facility and well installations continued to outpace removals, the number of inactive structures continued to grow, and MMS increasingly found itself policing lessees and operators to carry out decommissioning obligations.⁸

More recently, however, several factors have operated to assign a greater priority to addressing what has been termed "idle iron," and anticipating and defining responsibility for end-of-life lease activities on the OCS.

• Inventory: The sheer number and age of idle OCS facilities have increased to an extent that the demand for decommissioning is higher than it has ever been. According to BSEE, as of February 2015, 535 platforms are eligible for decommissioning, more than half of which

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are located on inactive leases, and nearly all of which are located in water depths shallower than 500 feet.⁹ Idle infrastructure is also somewhat concentrated in a number of companies; according to March 2015 data, ten OCS operators accounted for approximately 300 idle structures and 3000 idle wells.¹⁰ Meanwhile, much of the active existing infrastructure continues to age as it approaches the end of its useful life, with BSEE estimating approximately 40 percent of these facilities (and their underlying leases) as being over 25 years old.¹¹ The estimated total decommissioning exposure on the OCS may approach $37 billion.¹² The pace of decommissioning has quickened to resolve this sizeable inventory, backlog, and future demand. BSEE reports that over 2,000 structures were removed from the OCS between 2002 and 2013.¹³

• Economics. The plummeting price of oil in recent months has rendered certain operations less economic, particularly on aging or other prospects with marginal production. At the same time, regulatory requirements have continued to multiply and impose new costs on industry. In some instances, it can be more financially attractive to shut in and relinquish a lease (or ROW or RUE) rather than continue to operate in an adverse cost environment. The result is a need for decommissioning earlier than expected for certain leases, at a further cost of lost oil and gas production. At the same time, the incentive for new OCS facilities has diminished. In 2013, for example, BSEE reports installation of only 12 production facilities in the Gulf of Mexico compared to removal of 199 facilities, whereas ten or more years earlier the number of new installations approximated or surpassed removals.¹⁴ The temporarily decreased emphasis on new prospects frees up additional staff and resources to address decommissioning. Moreover, while the oil and gas industry currently is particularly sensitive to incurring new costs, the current economic environment also has afforded an opportunity to pursue decommissioning programs at cheaper overall rates by utilizing the larger number of available rigs that would otherwise be idle.

• Technology. An active industry has grown up around the development of more efficient and effective techniques and materials for plugging and abandoning wells, including drilling intervention wells, as well as the engineering of new methods and vessels for removing topsides and steel from the water. Some of these technologies were pioneered in other areas of the world such as the North Sea; while gaining acceptance among U.S. regulators can be a challenge, those efforts continue to progress. And though these new methods can fully decommission a site in fewer days, the overall effect on costs varies case-by-case.

• Deepwater Horizon Incident. The April 20, 2010 explosion and fire aboard the Deepwater Horizon drilling rig has now been well-chronicled. While that tragedy did not

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involve decommissioning, it did focus more widespread public attention on OCS operations and oversight. Following that incident, the former MMS was split into BOEM and BSEE (and the Office of Natural Resources Revenue), with BSEE specifically tasked with enforcement of operational regulations for OCS energy development, including decommissioning under the new 30 C.F.R. Part 250, Subpart Q. As described further below, BSEE has interpreted this mission to adopt novel legal positions expanding liability for offshore decommissioning.

• Weather Events. Hurricanes have always been a necessary evil for activities on the OCS, but recent severe storms have heightened attention on attendant risks to idle infrastructure. Historic weather events like Hurricane Ivan in 2004, Hurricanes Katrina and Rita in 2005, and Hurricane Ike in 2008 caused significant damage to OCS facilities. The 2004 and 2005 hurricane seasons in the Gulf of Mexico alone destroyed 120 structures.¹⁵ In addition, the current dialogue surrounding global climate change predicts a greater number and severity of hurricane events in coming years. These concerns have raised new challenges regarding how to perform decommissioning, e.g., for a toppled platform or severed wells largely covered by mud that cannot be reached by conventional means. They have also frontloaded decommissioning considerations to adequately plan for and avoid environmental and safety consequences of these unavoidable and damaging weather events.

• Bankruptcies. Like the weather, bankruptcy among oil and gas companies is not a new phenomenon. Recent...