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New Bureau of Ocean Energy Management Notice Impacts Offshore Operations

New Bureau of Ocean Energy Management Notice Impacts Offshore Operations

A September 2016 notice issued by the Bureau of Ocean Energy Management (BOEM) could have serious implications for offshore energy operators and lessees. Specifically, companies may now be required to have financial statement audits to prove their net worth in order to self-insure their offshore operations.
Previous notices
Companies have been allowed to rely on co-lessees or co-owners for determination of financial strength when deciding whether a company needed to provide additional security (insurance or surety bond).
Current notice
With the enactment of the Notice to Lessees and Operators of Federal Oil and Gas, and Sulfur Leases, and Holders of Pipeline Right-of-Way and Right-of-Use and Easement Grants in the Outer Continental Shelf (NTL No. 2016-N01), this is no longer the case.
While companies may be able to self-insure their security obligations for their offshore leases, the BOEM will now consider certain factors to determine the self-insurance amount. This includes consideration of financial capacity and certain financial ratios as evidenced by a company’s most recent (less than 12 months old) audited financial statements.
Below is a summary overview of the NTL related to evaluating co-lessees’ or other affected companies’ financial security capacity (sections I and II of ten in the NTL).
Drilling down on the details related to requiring additional security *
NTL No. 2016-N01 clarifies the procedures and criteria that BOEM regional directors use to determine if and when additional security may be required for Outer Continental Shelf (OCS) leases, pipeline rights-of-way (ROW), and rights-of-use and easement (RUE). This NTL’s guidance and clarification of requirements apply to all BOEM regions.

  • If BOEM determined that one or more co-lessees or co-owners had sufficient financial strength and reliability, it was not necessary to provide additional security.
  • For the purpose of determining the requirement for additional security, BOEM would exclude from the company’s decommissioning liability calculation the full amount of the decommissioning liability on leases, ROWs, and RUEs on which there was a financially strong co-lessee or co-owner.


  • When determining the amount of additional security that may be required, the regional director will consider 100 percent of your decommissioning and other liability for every lease, ROW, and RUE of which your company holds an ownership interest or for which it provides a guarantee.
  • BOEM may determine, however, that you have the ability to self-insure some portion of, or all of, the additional security obligations for a lease, ROW, or RUE.
  • In order to meet all or a portion of the additional security required for any one lease, ROW, or RUE, you may be able to make arrangements to rely on financially strong co-lessees or co-owners who agree to allocate BOEM-determined self-insurance to such lease, ROW, or RUE.
  • Previously used formulas for determining financial strength and reliability have been determined to be outdated by BOEM and no longer provide sufficient protection for liabilities incurred during OCS operations. New criteria are now used to determine your financial ability to carry out your obligations.
  • The NTL addresses the possibility of individually tailoring a plan that could enable you to use one or more forms of additional security and/or to phase in compliance with your additional security requirement pursuant to such a plan.

Evaluating your financial ability to carry out OCS obligations and factors for consideration

BOEM regulations set forth a multi-tiered financial assurance system applicable to oil and gas and sulfur leases to ensure that OCS obligations will be met. There are three stages in the life of a lease when financial assurance is required by regulation: (1) lease issuance, (2) approval of an exploration plan, and (3) approval of a development and production plan or a development operations coordination document. At any time, however, the regional director may determine that additional security is necessary.


Evaluation of your financial ability to carry out obligations

In order to determine whether you must provide additional security, your BOEM regional director annually evaluates financial ability to carry out your present and future obligations. If it is determined that you must provide additional security, the regional director will determine how much additional security that will be. Prior to beginning this review, the regional director may request updated information from you.


Periodic reviews may also be done at any time at the discretion of the regional director but will likely be done when BOEM becomes aware of the following:

  • Any material or adverse change in your financial strength or OCS obligations
  • Any performance deficiencies, such as incidents of noncompliance; civil penalties; or failure to adhere to any term or condition of, or obligation imposed by, a lease, exploration, or development and production plan, development operations coordination document, or permit
  • Any change in operator or ownership
  • Any violation of Department of the Interior or other applicable regulations


Factors considered in the evaluation of financial ability to carry out obligations and the determination of self-insurance

You are responsible for ensuring that all obligations, including decommissioning and abandonment, are satisfied for every lease, ROW, or RUE in which you have an ownership interest. If the BOEM regional director determines that the financial ability of any lessee or grantee is not sufficient to assure performance of its obligations, he of she may require that lessees or ROW or RUE owners provide and maintain additional security. In making this determination, 100 percent of your decommissioning and other liability for every lease, ROW, and RUE in which you hold an ownership interest or for which you provide a guarantee will be considered


The regional director’s evaluation will be based on information you submit and other information in BOEM’s possession that demonstrate your financial capacity, financial strength, stability, reliability, and record of compliance. Providing relevant information such as your audited financial statements is encouraged. If it is not provided, BOEM will base its determinations on the information available to the Bureau. The first of the five criteria considered by the regional director in making a final determination is Financial Capability.


Financial capacity substantially in excess of existing and anticipated lease and other obligations, as evidenced by your most recent (not more than 12 months old) audited financial statements, is demonstrated in part by applicable financial criteria including, but not limited to, the nine listed below:

  • Cash flow from operations/total debt
  • Current ratio
  • Earnings before interest and taxes (EBIT)/interest expense
  • Quick ratio
  • Return on assets
  • Return on equity
  • Total debt/capital
  • Total debt/earnings before interest, taxes, depreciation, and amortization (EBITDA)
  • Total debt/equity

This information, as well as information concerning the manner in which BOEM will apply the other four criteria (projected financial strength, business stability, reliability, and record of compliance) is available on BOEM’s website.


How to proceed

NTL No. 2016-N01 covers many factors beyond our summary description above. We invite you to contact LaPorte for more information to help you understand and prepare for the new requirements and criteria established by this little-noticed BOEM NTL. LaPorte has qualified professionals in Texas and Louisiana who provide a full range of traditional and consulting services to our exploration and production and oilfield service clients.