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**Billing Code: 4310**  **- MR**  **DEPARTMENT OF THE INTERIOR Bureau of Ocean Energy Management**  **30 CFR part s**  **550, 551, 556**  **, 581, 582 and 585 RIN 1010**  **- AD83**  **[Docket ID: BOEM -**  **2013 -**  **0058] Risk Management, Financial Assurance and Loss Prevention**  **MMAA104000 AGENCY:**  Bureau of Ocean Energy Management ( BOEM ), Interior. **ACTION:** Advance Notice of Proposed Rulemaking (ANPR) **SUMMARY:** BOEM is seeking comments and information regarding its effort to update its regulations and program oversight for Outer Continental Shelf (OCS) financial assurance requirements
. When BOEM’s existing bonding regulations were originall y drafted and first implemented, the principal risks associated with OCS leases were non
- payment of rents and royalties, noncompliance with laws and regulations, and potential problems due to bankruptcy
. While potentially

significant, such risks were generally well
- known and of limited complexity , size and scope. Due to increasingl y complex business , functional, organizational and financial issues and vast diff erences in costs associated with expanded and varied offshore activities, BOEM has recognized the need to develop a comprehensive program to assist in identifying, prioritizing, and managing the risks associated with industry activities on the OCS. BOEM i ntends to design and implement a more robust and comprehensive risk management , financial assurance and loss prevention program to address these complex issues and cost differences associated with2

offshore operations. To do so, BOEM is seeking stakeholder comments regarding various risk management and monitoring activities pertaining to financial risks to taxpayers that may result from activities on the OCS. This notice specifically discusses the bonding and financial assurance program for BOEM's offshore oil and gas program. However, we also welcome the submission of comments on the analogous bonding and financial assurance program for BOEM's offshore renewable energy and hard minerals program s . BOEM currentl y requires lessees to provide performance bon ds and/or one of various alternative forms of financial assurance to ensure compliance with the terms and conditions of leases, Rights
- of

- Use and Easements (RUEs) and Pipeline Rights
- of
- Way (ROWs). BOEM is seeking comments on who is best suited to mitigat e risks and whether the correct parties are providing guarantees and other forms of financial assurance, as well as whether, or to what extent, the current forms of financial assurance are adequate and appropriate. Because costs and damages associated with oil spill financial responsibility (OSFR) are covered separatel y under 30 CFR part 553, which is the subject of other proposed rulemakings on BOEM’s regulatory

agenda, BOEM is not soliciting comments on those regulations and their associated risk mitigati on measures at this time. **DATES:** BOEM will consider all comments received by midnight of [I NSERT DATE 60 DAYS FOLLOWING PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] . BOEM
cannot commit to considering comments received after midnight on [INSERT DATE 60 DAYS FOLLOWING PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]
. **ADDRESS ES**  **:** You may submit comments on th is ANPR using the Federal eRulemaking Portal: http://www.regulations.gov
. Follow the instruct ions on the w ebsite for submitting comments. Please use Regulation I dentifier Number (RIN) 1010
- AD83 as an identifier in your3

message. See also the “ Public Comment Policy” paragraph under the “ Supplementary In formation ” section below. **FOR FURTHER INFORMA TION:**  For information regarding BOEM’s comprehensive risk management, financial assurance, and loss prevention program or the major topics of this ANPR, contact Terry

Scholten at terry .scholten@boem.gov ( 504
- 81 0
- 2078 ) or Donna Dixon at Donna.Dixon@boem.gov ( 504
- 731
- 1527), or by mail at 1201 Elmwood Park Blvd., GM364D, New Orleans, LA 70123. For issues related to the rulemaking process or timetable, contact Peter Meffert at peter.meffert@boem.gov ( 703
- 787
- 16 10) , or b y mail at 381 Elden St., Herndon, VA 20170
. **SUPPLEMENTARY INFORMATION:** Public Availability

of Comments : Before including your address, phone number, email addres s, or other personal identifying information in your comments, you should be aware that your entire comment

– including yo ur personal identifying information

– may be made publicly

available at any time. While you may

ask us in your comment to withhold yo ur personal identifying information from public review, we cannot guarantee that we will be able to do so under Federal law
. Background: BOEM has program oversight for Outer Continental Shelf (OCS) fi nancial assurance requirements set forth in 30 CFR part s 550, 556 subpart I, 581 subpart C, 582 subpart D, 585 subpart E, and in § 551.7, all of which are promulgated pursuant to the Outer Continental Shelf Lands Act (OCSLA, 43 U.S.C. 1331 et seq.). Section 5(a) of OCSLA authorizes the Secretary of the Interi or to promulgate rules and regulations necessary to administer the OCS leasing program, including regulations concerning financial assurance. Section 8(p)(6) of4

OCSLA requires the Secretary to obtain financial securit y for OCS leases, easements and rights
of
- way issued for purposes other than the development and production of oil and gas. Within DOI , BOEM is the bureau with primary authority to manage the financial risks to the government associated with the development of energy and mineral resources on the OCS
. BOEM is in the process of updating regulations at 30 CFR part 556 to exercise this authority , as well as other regulations pertaining to financial assurance mentioned in the Summary above. BOEM is also reexamining the assumptions underlying its existing financial assurance and bonding program, as well as considering how to address risks and loss prevention more comprehensivel y. BOEM is enhancing its existing financial assurance and bonding program by incorporating a risk management approach to i dentifying, defining, quantifying, and treating all of the commercial, functional, organizational/business risks facing entities operating on the OCS in order to implement loss prevention measures . BOEM intends to apply this same approach to evaluating how OCS business entities can best meet their financial and contractual obligations
. Such an approach would deal with all ty pes of risk, such as mitigati ng financial risks resulting from fiscal, commercial and business risks, credit risk, functional and organizational risks, and hazard or event risks. Loss prevention procedures involve all of the efforts undertaken, including the regulations, processes, audits and financial controls, which are designed to minimize the government’s exposure to financial risk
. Program and Regulation Development : BOEM is developing a comprehensive risk management, financial assurance, and loss prevention program to address the financial , commercial, functional, organizational/business risks facing entities operating on the OCS in order to implement loss prevention measures
. BOEM intends to reduce contingent liabilities, minimize governmental and taxpayer financial exposure to financial loss, and provide a fair,5

equitable and transparent approach to risk management that is unde rstood by stakeholders and assists in the effective implementation of appropriate and cost
- effective risk management and loss prevention techniques. BOEM is committed to engaging all interested stakeholders in this regulatory process . It will coordinate and consult with other Federal agencies , including the Bureau of Safet y and Environmental Enforcement (BSEE) and the Office of Natural Resources Revenue (ONRR)
. To facilitate comment submission, BOEM ha s identified four major topics. E ach topic includes questions designed to provide respondents with a general framework for commenting. Please note that these topics and questions are not intended to be all
- inclusive ; other comments, questions, or suggestions of topics, are encouraged. Note BSEE is also c onducting a separate comprehensive risk assessment related to safety of operations on the OCS, which will include a development and anal ys is of decommissioning cost estimates. Major Topics: I. Id entification of Pertinent Risks/L iabilities II. Risk Monitoring and Risk Management III. Demonstrating Financial Assurance over Project Lifecycles IV
. Financial Assurance, Bonding Levels and Requirements Topic I : Identification of Pertinent Risks/Liabilities Description: BOEM recognize s the need to develop a comprehensive risk m anagement , financial assurance and loss prevention program that can assist in identifying, prioritizing, and managing the risks associated with OCS financial, commercial, functional, and business activities. Along with evaluating and assessing the risks a ssociated with ongoing activities , such a program would also include, but is not limited to, evaluating and assessing the business, fiscal6

and commercial risks associated with transfers of ownership of leases, operating rights, RUEs, ROWs, and facilities a s well as the transfer of ownership of all forms of interests in any OCS leases, RUEs, ROWs, and facilities . Such interests could include record title interests, operating rights interests, operating and/or working interests, economic interests or future participating or financial interests , among others
. BOEM is specificall y interested in comments regarding the financial risks and liabilities associated with aging offshore infrastructure, deepwater decommissioning, subsea decommissioning, pipeline aband onment, Arctic operations, and new technologies designed to address deepwater development or exploration and/or development of energy or mineral resources in locations with unusually adverse conditions. BOEM also needs to address business risks associated with the changing characteristics of entities operating on the OCS ( e.g. , smaller companies), underperformance, non - performance or default o n financial or legal obligations , and underpay ment or non - pay

ment of rentals and royalties. Finally , BOEM is seeki ng information regarding best practices in managing the financial, commercial, functional, organizational/business risks facing entities operating on the OCS in order to implement loss prevention measures associated with catastrophic damage caused b y natur al events ( e.g., hurricanes, ice floes, earthquakes), engineering failure, or other causes. Questions for respondents regarding identification of pertinent risks/liabilities : 1. Inaddition to the examples provided in this ANPR, are there other risks (m onetary and nonmonetary) that BOEM should consider in developing its comprehensive operational risk management, financial assurance, and loss prevention program ? What are they? Please describe an y other risks noted.7

2. What measures should BOEM consider to reduce the risk and magnitude of identified outcomes ? 3. What infor

mation should BOEM consider in estimating the appropriate financial assurance to
cover each of the identified risks? 4. How should BOEM obtain the information needed to estimate the appropriate financial assurance to cover each of the identified risks ? 5
. What information should BOEM consider in establishing appropriate levels and ty pes of financial assurance? 6. How should BOEM obtain the information needed to establish appropriat e levels and t ypes of financial assurance associated with each of the identified risks? 7 . How should BOEM evaluate risk levels and priorities to responsibly manage current and future liabilities? 8
. What information should BOEM consider in addressing fi nancial assurance needed to cover catastrophic damage caused by natural events, engineering failure, or other causes? 9 . Should BOEM require proof of insurance/ financial assurance for catastrophic events? Topic II : Risk Monitoring and Risk Management Des cription: BOEM is interested in understanding and defining the necessary elements of a comprehensive operational risk management, financial assurance, and loss prevention program and believes that monitoring its business risk and recognizing necessary ris k transfer strategies are central to this effort. This effort includes risk management processes and evaluations that are sy stematic , are capable of being replicated, and that utilize best practices. In order to improve communication and better inform BO EM’s decision
- making processes, BOEM seeks information regarding its risk monitoring and risk management practices.8

Questions for respondents regarding risk monitoring and risk management: 10. What should BOEM’s risk management , financial assurance and loss pr evention program include? 11. What measures should BOEM consider in managing risk transference? 12. How should BOEM monitor an entity ’s financial health in order to assess the risk to taxpayers? H ow often should this be done? 13. How should BOEM monitor an entity ’s o rganizational strength and an y associated risk to taxpayers? 14. What measures could/should BOEM use to reduce taxpay er risk ( e.g., insurance, contractual indemnity

clauses, contractual risk transference strategies, bonding)? 15. What risk transfer mechanisms shou ld BOEM consider to mitigate risks associated with catastrophic events? 16. Given the complex business arrangements involved in OCS projects, which operational business partners should BOEM consider when assessing and monitoring overall financial risks ( e.g., lessees, operating rights owners, contractors, subcontractors)? 17. Should BOEM consider using individualized company
- specific or project
- specific risk management , financial assurance and loss prevention plans? I f so, what should they entail and should they

b e optional or required? 18. Should BOEM require prior approval of all ty pes of assignments between companies and/or lenders, including, but not limited to, assignments of overriding interests, royalty interests, net profits, production payments, or other ty pes of lease interests? 19. Should BOEM monitor and approve the total percentage of assignments of rights and obligations between companies and/or lenders?9

20. Even if BOEM does not approve all transfers of all ty pes of rights and obligations between companies and/or lenders, should BOEM require evidence of all such transfers to be filed with BOEM in order to maintain an accurate repository of records of all transfers? 21. To what extent should BOEM monitor debt obligations? 22. Should BOEM require the recording and/or approval of all transfers of purely “economic” interests? Topic III : Demonstrating Financial Assurance Over Project Lifecycles Description: The 40
- to 50
- ye ar (or more) life of some OCS projects injects further uncertainty in the attempt to define, manage, and reduce financial risks. Technological and financial challenges, which are not evident at the inception of a project, may arise as time goes b y, and consequentl y, the amount of financial assurance needed may vary over time. In order to deal with ongoin g commercial issues and difficult business challenges resulting in complex and far
reaching business impacts, BOEM plans to implement financial assurance and loss prevention practices designed to better define financial metrics, reduce data collection barriers, and help prepare and plan for business incidents that could compound risks to U.S. taxpayers. BOEM’s current regulations utilize bonding as the primary form of financial assurance. In addition, lessees may

submit the following alternative forms of security to fulfill financial assurance requirements: treasury securities and other ty

pes of securit y instruments approved b y the Regional Director, lease
- specific abandonment accounts, third
- party guarantees, demonstration of financial strength and relia bilit y, indemnity

obligations, treasury

notes, and trust agreements. BOEM is seeking information to assist in managing problems that are difficult to predict and in creating strategies that reduce response barriers and foster appropriate business planning measures.10

Questions for respondents regarding demonstration of financial assurance over project lifecycles: 23. What criteria demonstrate a company’ s ability to remain financiall y viable ( i.e. , solvent) over the long term ? 24. What criteria demonstrate a company’ s ability to pay specific costs associated with lease obligations on the OCS ( e.g. , decommissioning) ? 25. In assessing financial assurance, how should BOEM consider the value of proved producing
reserves ( i.e. , metrics and methodologies) in determining the amo unt of financial assurance necessary to protect taxpayer interests ? 26. What factors should BOEM consider in assessing corporate structure and offshore business performance and history

to help ensure that taxpayers are protected from liability risks for costs accrued b y offshore operations? 27. How should BOEM consider the financial and technical qualifications of a company before the compan y is allowed to conduct business on the OCS? 28. To protect U.S. taxpayers, should BOEM treat significant financial or legal chang es as events that would require offshore companies or operators to provide notice of such events and that would trigger BOEM’s reassessment of the companies’ or operators’ existing financial assurances? If so, what significant financial or legal changes s hould be used? 29. Should BOEM tailor the amounts/levels and ty pes of financial assurance requirements for OCS operations on a case
- by
- case basis ( e.g. , by individual project, individual lease, unit , and/or compan y)? 30. Should BOEM consider allowing companies t o set up a decommissioning trust that is funded from a percentage of production? I f so, would such a trust appl y to a single well or man y11

wells, a single lease or more than one lease, a unit, one company, or some combination of these, or some other formul ation? 31. There are multiple levels of business entity risk, including: 1) risk by t ype of entity (whether a corporation, LL C, trust, partnership, etc.), particularly as new t ypes of entities are being created whose control may be exercised from outside the organization; 2) risk by level of entity (where one company

or entity owns another that may

own a third entity , etc.); 3) risk created b y shared ownership (particularl y of a lease or facility, or where there are man y entities involved in the ownership of the same interest); 4) risk created b y subdivided interests in a lease such that different companies own distinct, severed interests in the same lease (whether divided by depth or aliquot or b y function or by operating/non
- operating ownership rights); 5) ri sks created by asset transfers from one entity to another or from one organization’s domestic accounts or affiliates to some offshore accounts, operations or affiliates; or 6) other risks associated with unique or complex business entities or combinations thereof. H ow should BOEM deal with the complexity of multiple business entities in assessing financial assurance and managing taxpayer risk ? 32. S hould the levels /amounts of financial assurance and the ty pes of allowable securit y demonstrat ing that financia l assurance ( e.g . , insurance, bonds) vary by the ty pe of risk and

/or the project lifecycle ? And, if so, how ? 33. Termination or cancellation of leases and/or RUEs may be necessitated by

a lessee’s or operator’s failure to meet its financial obligations relate d to bonding or financial assurance. What factors do you believe BOEM should consider before making the determination that a lessee’s or operator’s failures with regard to meeting its financial assurance obligations are so significant that BOEM should term inate or cancel a lease or RUE on that basis?12

34. What financial assurance and/or bonding provisions should be established and maintained to deal with the outstanding liabilities that remain after a lease, RUE or ROW has been terminated or cancelled? How can the se be administered and enforced if the affected part y has no remaining active operations on the OCS? 35. BOEM is considering assessing the financial strength of individual companies with active operations on the OCS more than once per ye ar. How often shoul d BOEM make a determination of financial strength ( e.g . , monthly , quarterl y, semi
- annuall y , etc.)? 36. Overall, how should BOEM use standard financial metrics, such as net worth, debt to equity ratio, cash flow, loss, capitalization, liquidity , etc., to deter mine financial assurance (i.e., the amount/level and/or ty

pes of financial assurance needed) ? 37. Besides the Bureau of Safety and Environmental Enforcement’s ( BSEE’s ) decommissioning cost estimates, and amounts identified by ONRR for potential non
- pay ment of financial obligations, and potential non
- compliance with legal obligations, what other factors should BOEM consider when determining the appropriate amount of supplemental financial assurance? Topic IV : Financial Assurance, Bonding Levels and Requirements Description: BOEM currently relies primaril y upon surety bonds to provide basic protection against risks associated with a lessee’s or operator’s failure to meet regulatory and lease requirements
. Initial ( i.e. , general) lease bonds , required for all le ases, are determined b y the level of activit y on the lease. This may take the form of a l ease - specific bond or an area
- wide bond: Lease Activity Lease
- specific Bond Amount Area
- wide Bond

Amount No approved operational $50,000 $300,00013

activity Expl oration Plan $200,000 $1,000,000 Development Production Plan $500,000 $3,000,000 ROW N/A $300,000 ( See 30 CFR 556.52

– 556.59, subpart I, Bonding). If these amounts are deemed insufficient to cover decommissioning liability and other lease ob ligations, BOEM may

r equire additional assurance in the form of additional ( i.e. , supplemental) bonding or other additional security
. BOEM now may determine that an additional bond or supplemental financial assurance is not necessary for a lease if at lea st one record title owner meets the financial strength and reliability criteria detailed in the Notice to Lessees and Operators No. 2008
- N07, “Supplemental Bond Procedures,” available at http://www.boem.gov/Regulations/Notices
- To
- Lessees/Notices
- to - Lessees
- and
- Operators.aspx
. Currently , approximately 90 percent of leases do not require an addition al bond or supplemental financial assurance because at leas t one record title owner has been determined to meet these criteria ( i.e. , the financial assurance instrument is self
- insurance). Additional bonding and supplemental financial assurance practices utilize decommissioning cost estimates and anal ys es provide d by

the BSEE and also consider potential underpay ment of rentals and royalties. Questions for respondents regarding bonding or supplemental financial assurance levels, amounts, and requirements: 38. Is BOEM’s two
- tiered bonding structure ( i.e ., initial bond followed b y additional bond) the best means of protecting the taxpayers’ interests? 39. If BOEM continue s to use bonds, should BOEM do away with the two - tier bonding approach , and just require one bond? Or, should additional bonds be required in certain circ umstances, and if so, what key criteria should be used to determine when additional bonding would, or would not, be necessary?14

40. Should BOEM continue to allow self
- insurance for those companies who demonstrate the requisite financial strength, or should BOEM eliminate self
- insurance ? And, either way , why? 41. What are the benefits and drawbacks to utilizing lease
- specific abandonment accounts, surety bonds, treasury

notes, third part y guarantees, indemnity agreements, escrow accounts, certificates of deposit, in surance , and trust agreements? Are there any other financial assurance arrangements BOEM should consider? If so, what are they and how do they work? 42. What are the benefits and drawbacks to utilizing combinations of the instruments discussed in the previou s question? 43. In addition to inflation, what other factors should be considered in establishing and revising bond and/or supplemental financial assurance amounts ? 44. What bond and/or supplemental financial assurance amounts would provide realistic coverage in t oday ’s business environment? 45. The current regulations (30 CFR 556.52) allow business entities to use area
- wide bonds in lieu of posting individual bonds withi n an OCS area. The areas are: 1) the Gulf of Mexico and the area offshore the Atlantic Coast; 2) the area offshore the Pacific Coast States of California, Oregon, Washington, and Hawaii; and 3) the area offshore the Coast of Alaska. Should BOEM continue to allow area - wide bonds? If so, under what circumstances should they

be allowed? 46. Do you have an y other suggestions regarding h ow BOEM’s financial assurance program can be made more viable and robust? 47. Should BOEM address (or vary) additional bonding and/or supplemental financial assurance requirements over the phases of a project lifecycle ( e.g ., sho uld bonding and/or supplemental15

financial assurance be required today in order to decommission a structure in 20 years)? I f so, how? S hould such variations in requirements be automatic, or determined on a case
- by
case basis? 48. How should BOEM best address the individual risks identified or associated with a specific project or lease? 49. Given the high costs associated with offshore decommissioning, and if BOEM continues to allow self
- insurance, how should the financial strength and reliability criteria in NTL No. 2008
- N07 be updated? What are the most important factors to consider and/or evaluate? 50. In the case of trust agreements, how and when in the project lifecycle should the accounts be funded? What are the benefits and drawbacks of different trust funding methods? 51. Should BOEM consider a fee
- per - barrel produced approach as a means of funding an insufficient lease
- specific decommissioning account? What would be the benefits and drawbacks of this approach? 52. In addition to bonding, should acceptable insuranc e coverage (including tail insurance or a project
- specific insurance policy) be utilized to fund or guarantee lease, operating, or regulatory

responsibilities? 53. Under what circumstances should bonds or other forms of financial assurance be released? 54. What are ty

pical cost s for current forms of financial assurance (e.g
. , performance bond s , pay ment bond s , captives, trusts, treasury notes, third part y indemnity agreements, insurance) available on the market and identify whether these are for an individual site or overall costs ? What variables are associated with these costs? If collateral is required, how much must be posted?16

BOEM seeks responses to the above questions, and seeks other relevant input regarding the development of a comprehensive risk management, financial assurance, and loss prevention program . BOEM encourages all interested parties to respond to these questions and to provide comments and information relevant to the development of such a program. BOEM will determine how to proceed a fter anal yz ing the comments received as a result of this ANPR
.

_______________

________________

________ ___________________ Janice M. Schneider Date Assistant Secretary

– Land and Minerals Manage ment