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Offshore Oil Rig

More egregious than the US Government cracking down on banks for being overly optimistic with their loans, has been the direct influence of regulators on the wider operations of energy firms. Especially with respect to their surety / bonding obligations. Nowhere has this crack down been more pronounced than the Gulf of Mexico.

The Bureau of Ocean Energy Management (BOEM) – the US federal regulator responsible for overseeing the offshore energy industry – has increasingly told independent Exploration & Production (E&P) companies their exemptions for bonding obligations for covering the firms’ estimated costs of plugging and abandoning wells, and decommissioning offshore facilities are no longer valid.

Without these exemptions, the E&P companies are being forced to try and secure supplemental bonding or somehow find other forms of financial assurance. With the leverage many of these firms already operate under, securing additional bonding or taking on more debt to satisfy the government could not happen at a worse time. BOEM has not grasped the concept that if they are concerned with oil companies continuing as a growing concern, forcing them to take on increasing debt levels at a time when their balance sheets can least afford it is not the answer.

“a handful of offshore operators are going to end up in bankruptcy”

However, the US Government does have an undeniable point in that a handful of offshore operators are going to end up in bankruptcy. In addition, those plugging & abandonment and/or decommissioning obligations are going to fall to prior operators. The wider question is what happens to the Gulf of Mexico given this dynamic. Does it force out the independent operators and make the Gulf purely for the super-majors? That’s a potential outcome and many in the industry feel the current US Administration may favor that outcome.

“ the consensus is the waters facing independent operators in the Gulf of Mexico will be choppy”

Yet, the industry is vociferously against that. Independent operators, in the eyes of the industry, are good for technical advancement, good for the US consumer, and ultimately good for the US government in the form of royalties and tax revenues. The battle over bonding regulations will continue to play out throughout 2016. However, absent a sizable rally in commodity prices that drastically improves balance sheets, the consensus is the waters facing independent operators in the Gulf of Mexico will be choppy indeed.

 

This is the second of a special three-part series on the Energy market. View the first post, “2 Events in Q2 that Could Create an Optimistic Energy Market.”