Offshore Oil and Gas Resources: Actions Needed to Better Protect Against Billions of Dollars in Federal Exposure to Decommissioning Liabilities
Published: 2015-12-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Oil and gas produced on federal leases in the Gulf of Mexico are important to the U.S. energy supply. Historically, most offshore production was in shallow water, but more than two-thirds of the more than 5,000 active oil and gas leases in the Gulf are now located in deep water. When oil and gas infrastructure is no longer in use, Interior requires lessees to decommission it so that it does not pose safety and environmental hazards. Decommissioning can include plugging wells and removing platforms, which can cost millions of dollars. Interior requires lessees to provide bonds or other financial assurances to demonstrate that they can pay these costs; however, if lessees do not fulfill their decommissioning obligations, the federal government could be liable for these costs.
GAO was asked to review Interior's management of liabilities from offshore oil and gas production. This report examines Interior's (1) procedures for overseeing decommissioning and estimating its costs, (2) procedures for obtaining financial assurances for these liabilities, and (3) challenges managing these liabilities. GAO reviewed agency regulations and procedures and interviewed officials from Interior, credit rating agencies, academia, and trade associations.
section_title: What GAO Found
paragraphs: The Department of the Interior (Interior) has developed procedures to oversee the decommissioning of offshore oil and gas infrastructure and estimate costs associated with decommissioning liabilities but has not addressed limitations with its system for tracking cost estimates. According to officials, Interior's procedures include (1) identifying and tracking unused infrastructure, (2) reviewing lessee plans to decommission infrastructure, and (3) using different cost estimates for decommissioning in shallow and deep water. However, inconsistent with internal control standards, Interior officials must manually enter cost estimates into Interior's main data system to override inaccurate estimates automatically calculated by the system. Without a more accurate data system, Interior does not have reasonable assurance that it will consistently estimate the costs associated with decommissioning.
Interior's procedures for obtaining financial assurances for decommissioning liabilities pose financial risks to the federal government, and Interior is planning to revise its procedures to address these risks but has not finalized its approach. As of October 2015, for an estimated $38.2 billion in decommissioning liabilities in the Gulf, Interior officials identified about $2.3 billion in liabilities that may not be covered by financial assurances. However, these officials were unable to determine the extent to which these data were valid due to limitations with Interior's data system, among other things. Of the remaining $35.9 billion in decommissioning liabilities, Interior held or required about $2.9 billion in bonds and other financial assurances, and had foregone requiring about $33.0 billion in bonds for the remaining liabilities. Interior has procedures that allow it to waive its requirement for a lessee to provide a bond if the lessee passes a financial strength test. Prior GAO work has shown that the use of financial strength tests in lieu of bonds poses risks to the federal government. Interior recognizes the risks associated with its procedures, and Interior officials stated that they issued draft guidance to clarify their procedures in September 2015. Interior has not issued any final revisions to its procedures; therefore, it is too soon to evaluate the details of these proposed changes. Until Interior improves its ability to obtain valid data from its data system and revises and implements its financial assurance procedures, the federal government remains at increased risk of incurring costs should lessees fail to decommission oil and gas infrastructure.
Interior faces challenges managing potential decommissioning liability. For example, until December 2015, Interior did not have a requirement for lessees to report on costs associated with decommissioning activities in the Gulf. Instead, Interior contracted studies to obtain data on decommissioning costs, but some data were decades old. Federal internal control standards call for agencies to obtain information from external stakeholders that may significantly affect their ability to achieve agency goals. However, in December 2015, Interior issued final regulations (proposed in 2009) requiring lessees to report data on most, but not all, decommissioning costs to Interior. Unless and until Interior obtains accurate and complete data on decommissioning costs, Interior may not have reasonable assurance that its cost estimates of decommissioning liabilities in the Gulf are accurate, or that it is requiring sufficient amounts of financial assurance based on these estimates.
section_title: What GAO Recommends
paragraphs: GAO recommends that Interior take several steps to improve its data system, complete plans to revise its financial assurance procedures, and revise its cost reporting regulations, among other things. Interior concurred with GAO's recommendations.

section_title: Letter
paragraphs: Oil and gas resources located on federal leases on the outer continental  shelf are an important component of the nation’s energy supply. Wells on  federal leases on the outer continental shelf accounted for over 16  percent of the nation’s crude oil production in 2014 and about 5 percent of  natural gas production in 2013. The vast majority of this production  occurred on federal leases in the Gulf of Mexico (Gulf). Historically, most  offshore oil and gas activities have occurred in shallow water, but in  recent decades these activities have moved into deep water. More than  two-thirds of the more than 5,000 active oil and gas leases in the Gulf are  now located in deep water.
The Department of the Interior (Interior) manages oil and gas activities on  offshore federal leases, including activities associated with thousands of  wells, platforms, and miles of pipelines on the outer continental shelf.  When this infrastructure is no longer useful for operations or otherwise  becomes idle, or when a lease has been expired for more than 1 year,  Interior requires oil and gas lessees to decommission it so that it does not  pose potential safety hazards to marine vessels and environmental  hazards to sea life and humans. Decommissioning refers to the process  of plugging wells, removing platforms and other structures, removing or  cleaning out pipelines, and clearing sites of debris. According to Interior  estimates, in shallow water, decommissioning infrastructure can cost tens  of millions of dollars per lease, depending on the number of wells and  types of structures present. In deep water, decommissioning can cost  hundreds of millions of dollars per lease. In addition, infrastructure  damaged by hurricanes is significantly more expensive to decommission  than nondamaged infrastructure.
According to Interior’s regulations, all lessees are liable for  decommissioning costs that accrue during their ownership. Before  lessees drill wells or install platforms and other structures, Interior  requires them to provide financial assurance to ensure that they are  capable of meeting their decommissioning obligations. This financial  assurance may be in the form of a financial asset provided by the lessee,  such as a bond, or a determination that a lessee has the financial  strength and ability to fulfill decommissioning obligations. According to  Interior officials, the federal government has not incurred costs associated  with offshore decommissioning since 1989, when a lessee declared  bankruptcy. In response to this bankruptcy, Interior promulgated  regulations in 1993 requiring some lessees to provide bonds specifically  for offshore decommissioning. Nonetheless, Interior refers to oil and gas  infrastructure on offshore federal leases as potential liabilities because  the federal government may have to pay for decommissioning if lessees  do not.
You asked us to review Interior’s management of potential federal  liabilities associated with the decommissioning of offshore oil and gas  infrastructure. This report examines (1) Interior’s procedures for  overseeing the decommissioning of offshore oil and gas infrastructure  and estimating costs associated with decommissioning liabilities; (2)  Interior’s procedures for obtaining financial assurances for  decommissioning liabilities; and (3) challenges, if any, Interior faces in  managing potential decommissioning liabilities. We focused our work on  the Gulf, where most oil and gas infrastructure is located.
To conduct this work, we reviewed Interior’s regulations regarding its  management of leases for offshore oil and gas production. To examine  Interior’s procedures for overseeing the decommissioning of offshore oil  and gas infrastructure and estimating decommissioning costs, we  interviewed officials from Interior’s Bureau of Safety and Environmental  Enforcement (BSEE) in their Washington, D.C., headquarters office and  Gulf regional office in New Orleans, Louisiana, and reviewed and  summarized relevant BSEE guidance, procedures, and related  documentation. We also compared BSEE’s actions to implement its  procedures to standards for internal control in the federal government. In  addition, to better understand the decommissioning process and the costs  involved, we spoke with a nongeneralizable sample of officials and  stakeholders from trade associations and academia. We identified these  officials and stakeholders from our prior work, published academic and  technical articles, our attendance at a decommissioning conference, and  interviews with BSEE officials, and we selected them based on their  knowledge in this area.
To examine Interior’s procedures for obtaining financial assurances for  decommissioning liabilities, we interviewed officials from Interior’s Bureau  of Ocean Energy Management (BOEM) in their Washington, D.C.,  headquarters office and Gulf regional office in New Orleans, Louisiana,  and reviewed and summarized relevant BOEM guidance, procedures,  and related documentation. We compared actions that BOEM took to  implement its procedures to standards for internal control in the federal  government. In addition, to better understand financial assurance and  bonding issues, we spoke with a nongeneralizable sample of analysts  from the three largest credit rating agencies, officials from bonding  companies, and stakeholders from trade associations. We identified these  organizations from our prior work and interviews with BOEM officials and  selected them based on their knowledge in this area.
To examine challenges Interior faces in managing potential  decommissioning liabilities, we used the information collected from our  first two objectives. We also spoke with a nongeneralizable sample of  stakeholders from trade associations about their views on challenges; we  identified these stakeholders from our prior work and selected them  based on their knowledge in this area.
We conducted this performance audit from October 2014 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: This section provides information on (1) the types of wells and structures  in the Gulf, (2) offshore leasing, (3) financial assurance requirements, (4)  decommissioning requirements, and (5) oil and gas infrastructure  installed and removed in the Gulf.
subsections: section_title: Types of Wells and Structures in the Gulf
paragraphs: Lessees drill wells to access and extract oil and gas from geologic  formations. According to an Interior publication, “exploratory” wells are  drilled in an area with potential oil and gas reserves, while “development”  wells are drilled to produce oil and gas from a known reserve. An  exploratory well may not actually produce any oil or gas, while a  successful development well produces oil or gas. Wellheads that are  located on a fixed platform (typically in shallow water) are referred to as  “dry tree” wells, and wellheads that are located on the seafloor (typically  in deep water) are referred to as “subsea” or “wet tree” wells.
Offshore oil and gas structures in the Gulf vary in size and complexity.  The simplest structures are found in shallow water and include caissons  and well protectors. A caisson is a cylindrical or tapered large diameter  steel pipe enclosing a well conductor and is the minimum structure for  offshore development. A well protector provides support to one or more  wells with no production equipment and facilities. A more complex  structure in shallow water is a fixed platform, which uses a jacket and  pilings to support the superstructure, or deck. The deck is the surface  where work is performed and provides space for crew quarters, a drilling  rig, and production facilities. Most of the large fixed platforms have living  quarters for the crew, a helicopter pad, and room for drilling and  production equipment. A typical platform is designed so that multiple  wells may be drilled from it. Wells from a single platform may have  bottom-hole locations many thousands of feet (laterally displaced) from  the surface location.
Structures in deep water rely on other methods to anchor to the ocean  floor. For example, a “compliant tower” structure supports the deck using  a narrow, flexible tower and a piled foundation. According to an industry  publication, the flexible nature of the compliant tower allows it to  withstand large wind and wave forces associated with hurricanes. Other  common deep-water structures include the tension leg platform, floating  production system, and spar platform. Illustrations of these structures  are shown in figure 1.
section_title: Offshore Leasing
paragraphs: Management of offshore oil and gas resources is primarily governed by  the Outer Continental Shelf Lands Act, which sets forth procedures for  leasing, exploration, and development and production of those  resources. The act calls for the preparation of an oil and gas leasing  program designed to meet the nation’s energy needs while also taking  into account a range of principles and considerations specified by the act.  Specifically, the act provides that “anagement of the outer Continental  Shelf shall be conducted in a manner which considers economic, social,  and environmental values of the renewable and nonrenewable resources  contained in the outer Continental Shelf, and the potential impact of oil  and gas exploration on other resource values of the outer Continental  Shelf and the marine, coastal, and human environments.”
The Outer Continental Shelf Lands Act also requires the Secretary of the  Interior to prepare a 5-year schedule of proposed lease sales, indicating  the size, timing, and location of leasing activity as precisely as possible.  Every 5 years, Interior selects the areas that it proposes to offer for  leasing and establishes a schedule for individual lease sales. These  leases may be offered for competitive bidding, and all eligible companies  are invited to submit written sealed bids for the lease and rights to  explore, develop, and produce oil and gas resources on these leases.  These rights last for a set period of time, referred to as the initial period of  the lease, and vary depending on the water depth.
Historically, Interior’s Minerals Management Service managed offshore  federal oil and gas activities and collected royalties for all producing  leases. In May 2010, in an effort to separate major functions of offshore  oil and gas management, Interior announced the reorganization of the  Minerals Management Service into the Bureau of Ocean Energy  Management, Regulation, and Enforcement, responsible for offshore oil  and gas management, and the Office of Natural Resources Revenue,  responsible for revenue collections. Subsequently, in October 2011, the  Bureau of Ocean Energy Management, Regulation, and Enforcement was  separated into BOEM and BSEE. BOEM oversees resource management  activities, including preparing the 5-year outer continental shelf oil and  gas leasing program; reviews oil and gas exploration and development  plans and environmental studies; and conducts National Environmental  Policy Act analyses. BSEE oversees operations and environmental  compliance, including reviewing drilling permits, inspecting offshore  drilling rigs and production platforms, assessing civil penalties, developing  regulations and standards for offshore drilling (including those related to  decommissioning), and ensuring the conservation of natural resources.
section_title: Financial Assurance Requirements
paragraphs: The Outer Continental Shelf Lands Act authorizes the Secretary of the  Interior to promulgate regulations necessary to administer the outer  continental shelf leasing program, including regulations concerning  financial assurance. Under this authority, Interior promulgated regulations  and developed financial assurance procedures to protect the government  from incurring costs if a lessee fails to meet its lease obligations, including  its obligation to decommission offshore infrastructure. Under these  regulations and procedures, BOEM regional directors may require a  lessee to provide a bond —referred to as a “supplemental bond”—that  covers the estimated costs of decommissioning for a lease. BSEE is  responsible for estimating costs associated with decommissioning  liabilities. If a lessee is unable to accomplish decommissioning obligations  as required, the federal government can use the bond to cover  decommissioning costs. However, if BOEM determines that at least one  lessee has sufficient financial strength to accomplish decommissioning  obligations on the lease, BOEM may waive the requirement for a  supplemental bond.
Under BOEM and BSEE regulations, lessee liability is “joint and  several”—that is, each lessee is liable for all decommissioning obligations  that accrue on the lease during its ownership, including those that  accrued prior to its ownership but had not been performed. In addition, a  lessee that transfers its ownership rights to another party will continue to  be liable for the decommissioning obligations it accrued. According to  BOEM officials, BOEM ensures that all decommissioning obligations on  offshore leases are required to be covered by either a supplemental bond  or a current lessee that has the financial ability to conduct  decommissioning.
section_title: Decommissioning Requirements
paragraphs: According to Interior regulations, lessees must permanently plug all wells,  remove all platforms and other structures, decommission all pipelines,  and clear the seafloor of all obstructions created by the lease and pipeline  operations when this infrastructure is no longer useful for operations.  Lessees must also permanently plug wells and remove platforms within 1  year after a lease terminates. BSEE refers to infrastructure that is no  longer useful for operations on active leases as idle infrastructure (or “idle  iron”) and infrastructure on expired leases as terminated lease  infrastructure. In general, BSEE’s guidance defines idle infrastructure as  follows:
A well is considered idle if it has not been used in the past 5 years for  operations associated with exploration or development and production  of oil or gas, and if the lessee has no plans for such operations.
A platform is considered idle if it has been toppled or otherwise  destroyed, or it has not been used in the past 5 years for operations  associated with exploration or development and production of oil or  gas.
Companies may postpone decommissioning idle wells and platforms to  defer the cost of removal, increase the opportunity for resale, or reduce  decommissioning costs through economies of scale and scheduling,  among other reasons. However, postponing decommissioning can be  costly because the longer a structure is present in the Gulf the greater the  likelihood it will be damaged by a hurricane. According to Interior  documentation, decommissioning a storm-damaged structure may cost  15 times or more the cost of decommissioning an undamaged structure.  In 2005, Hurricanes Katrina and Rita destroyed 116 structures and  significantly damaged another 163 structures and 542 pipelines in the  Gulf, according to Interior documentation. According to BSEE officials, as  of April 2015, the Gulf contained 13 destroyed structures with 16  associated wells.
Storm-damaged or toppled structures present a greater risk to safety and  require difficult and time-consuming salvage work. After preliminary  salvage work that can take weeks, divers cut and remove structural  components while crane assemblies remove the components and place  them on a barge for transport and disposal. Additionally, when working in  areas with strong currents and unconsolidated material, coffer dams are  often constructed on the seabed to prevent material from slumping back  in on the dive crews and equipment.
section_title: Oil and Gas Infrastructure Installed and Removed in the Gulf
paragraphs: Figure 2 shows the annual number of wells drilled and plugged in the Gulf  from 1947 through 2014. During this time period, lessees drilled a total of  52,223 wells in the Gulf (including 18,447 exploratory wells and 33,776  development wells) and plugged a total of 29,879 wells (including 4,017  temporarily abandoned wells and 25,862 permanently abandoned wells).
Figure 3 shows the annual number of structures installed and removed in  the Gulf from 1947 through 2014. During this time period, lessees  installed a total of 7,038 structures in the Gulf. In addition, starting in the  1970s, lessees began removing structures from the Gulf. Specifically,  lessees removed a total of 4,611 structures from 1973 through 2014.  Most of the structures installed and removed were fixed platforms and  caissons installed in shallow water.
Between the late 1940s and early 1960s, lessees only drilled wells in  shallow water. However, starting in the mid-1960s, lessees began drilling  wells in deep water. Figure 4 shows the annual number of wells drilled  and plugged in deep water in the Gulf from 1966 through 2014. During  this time period, lessees drilled a total of 6,468 wells (including  exploratory and development wells) and plugged a total of 2,489 wells  (including temporary and permanently abandoned wells) in deep water.  Lessees also installed 112 structures—mostly fixed platforms, spar,  tension leg platforms, and floating production systems—and removed 19  structures in deep water during this time period.
Since 1985, oil production from deepwater wells has increased  significantly, as shown in figure 5. While the number of wells drilled has  decreased in recent years, offshore production has increased as lessees  have drilled wells in deep water that are more productive than wells in  shallower water. In 2014, over 80 percent of Gulf oil production occurred  in deep water, up from 6 percent in 1985. According to BSEE officials,  activities in deep water, including drilling and decommissioning, are  significantly more expensive than those in shallow water because of the  technology required and challenges associated with deep water, such as  very high pressures at significant water and well depths.
section_title: Interior Has Procedures to Oversee Decommissioning and Estimate Related Costs but Faces Data System Limitations and Has Not Documented Some Procedures
paragraphs: Interior’s BSEE has developed procedures to oversee the  decommissioning of offshore oil and gas infrastructure and estimate costs  associated with decommissioning liabilities, but limitations in its data  system may affect the accuracy and completeness of some cost  estimates. In addition, BSEE has not documented some of its procedures  for identifying and tracking infrastructure that needs to be  decommissioned and for estimating the related costs.
subsections: section_title: BSEE Has Procedures to Oversee Decommissioning and Estimate Costs, but Data System Limitations May Affect the Accuracy and Completeness of Some Cost Estimates
paragraphs: Officials in BSEE’s Gulf regional office have developed procedures for  overseeing the activities of lessees in decommissioning oil and gas  infrastructure in the Gulf and estimating the costs of doing so, but  limitations in its data system for estimating costs may affect the accuracy  and completeness of some cost estimates.
subsections: section_title: Procedures for Overseeing Decommissioning
paragraphs: Under BSEE’s regulations, lessees must apply for approval before  plugging wells, removing platforms and clearing sites, and  decommissioning pipelines. According to BSEE regional officials, they  review applications to ensure that they contain the required information  (see table 1 below). Once this process is complete, BSEE officials  approve a lessee’s application, which authorizes the lessee to begin  decommissioning activities.
After lessees complete all planned decommissioning, they are required to  report to BSEE on the outcome of these activities so that BSEE may  verify that all their decommissioning obligations have been met, including  clearing the seafloor around wells, platforms, and other facilities.
According to BSEE regional officials, they review lessee reports on  decommissioning activities to ensure that the results are consistent with  the information presented as part of the application process. Table 2  summarizes BSEE’s reporting requirements related to the results of  decommissioning activities.
According to BSEE regional officials, during the process of reviewing  lessee reports, BSEE may issue a notice of an “incident of  noncompliance” in cases where lessees have not provided all of the  required information or when lessee activities are not consistent with  BSEE regulations. If BSEE officials determine that the violation is not  severe or threatening, they will issue a “warning” notice that requires the  lessee to correct the violation within a specified period of time. If BSEE  officials determine that the violation is more serious, they will issue a  “shut-in” notice that requires the lessee to correct the violation before  resuming activities. In addition, BSEE officials can assess a civil penalty  of up to $40,000 per violation per day if the lessee fails to correct the  violation in the period of time specified in the notice, or if the violation  resulted in a threat of serious harm to human life or damage to the  environment.
In addition to reviewing lessee applications and reports, the BSEE Gulf  region identifies and tracks idle and terminated lease infrastructure.  According to BSEE regional officials, the BSEE Gulf region began  identifying and tracking idle lease infrastructure in 2010 and currently  updates a list of this infrastructure on an annual basis. BSEE began  identifying and tracking terminated lease infrastructure prior to 2010,  according to BSEE regional officials. At the beginning of each calendar  year, BSEE regional officials obtain data from Interior’s main data  system—the Technical Information Management System (TIMS)—on  wells and structures on leases that meet the criteria for idle and  terminated lease infrastructure. Based on these data, BSEE sends a list  of idle and terminated lease infrastructure to each lessee, requesting a  decommissioning plan and schedule for decommissioning the lessee’s  inventory. According to BSEE regional officials, BSEE works with lessees  to verify the accuracy of their inventory of idle and terminated lease  infrastructure, and BSEE tracks lessees’ progress in meeting their  schedules.
section_title: Procedures for Estimating Costs
paragraphs: According to BSEE regional officials, BSEE estimates the costs  associated with decommissioning liabilities by counting the number and  types of wells, pipeline segments, and structures on a lease and using  data on the water depth associated with this infrastructure. Using these  data, BSEE then calculates the costs associated with (1) plugging and  abandoning wells, (2) removing platforms and other structures, (3)  decommissioning pipelines, and (4) clearing debris from the site.
In general, the cost to plug wells and remove structures increases as the  water depth increases. For example, according to BSEE’s current  methodology, its estimate of the cost to plug a dry tree well attached to a  fixed structure in shallow water is $150,000, while its estimate of the cost  to plug a subsea well in deep water is a minimum of about $21 million.  Likewise, BSEE’s estimates of the costs to remove fixed platforms in  shallow water range from approximately $85,000 to $4.6 million, while its  estimate of the cost to remove a floating structure (and associated  equipment) in deep water is a minimum of $30 million.
According to BSEE regional officials, a number of events can trigger  BSEE’s review of the costs associated with decommissioning liabilities on  a lease. Examples of these events include the following:
BSEE determines that a lessee is planning a potential sale or  acquisition of leases.
BOEM or BSEE detect indications of financial stress for a lessee.
BOEM requests a review of a pending request for lease assignment  and bond cancellations.
A lessee requests a review from BSEE when some but not all  infrastructure is decommissioned on a lease.
BSEE enters and stores its cost estimates of decommissioning liabilities  in TIMS. However, according to BSEE regional officials, TIMS is limited in  its ability to accurately and completely record cost estimates of  decommissioning liabilities, as follows:
TIMS contains three data fields to record cost estimates for each  offshore lease—one for estimates of the cost of removing existing  structures, one for estimates of the cost of plugging existing wells, and  one for estimates of the cost of clearing debris from sites. TIMS uses  algorithms developed in the 1990s to calculate cost estimates for  each of these data fields. However, BSEE officials said that the cost  estimates are too low compared to BSEE’s current estimates. For  example, TIMS calculates the cost to plug a well is $100,000,  regardless of water depth or the type of well, while BSEE estimates  the cost to plug a subsea well in deep water is approximately $21  million.
TIMS does not contain separate data fields for recording the  estimated cost to plug a planned well (as opposed to an existing well)  or to decommission pipelines. BSEE officials said that both of these  costs are important to consider and to estimate a lessee’s potential  decommissioning liability.
Because of these limitations, BSEE regional officials said that, in 2009,  they began investing more time and resources into manually updating  cost estimates of decommissioning liabilities in TIMS. Currently, BSEE  officials use separate spreadsheets—containing updated methodologies  for estimating costs in shallow and deep water—to estimate costs to  decommission leases. They then manually enter the cost estimates into  TIMS using separate data fields entitled “adjusted decommissioning  liability” for each type of cost estimate; for example, plugging wells,  removing structures, and site clearance. In addition, they add estimated  costs for (1) plugging planned wells into the “adjusted decommissioning  liability” data field for existing wells and (2) decommissioning pipelines  into the “adjusted decommissioning liability” data field for site clearance.  Once they enter these data, TIMS automatically populates the date of that  entry into an “updated” data field.
According to BSEE regional officials, they have manually entered updated  cost estimates for most leases in the Gulf. Specifically, as of July 8, 2015,  BSEE officials said that they had entered updated cost estimates for  3,460 (86 percent) of the 4,021 leases in the Gulf with decommissioning  liabilities. BSEE officials characterized their efforts to update cost  estimates as an “ongoing process” and said that their activities related to  cost estimating have increased dramatically over the past decade.  Officials said that while there was no set time frame by which they plan to  update cost estimates for all the leases in the Gulf, the number of leases  changes over time, and BSEE prioritizes its efforts on those leases that  BOEM and BSEE determine pose higher financial risk.
BSEE regional officials told us that Interior is transitioning to a new data  system (the National Consolidated Information System) to manage  offshore oil and gas activities and that BSEE plans to use the new data  system to improve how decommissioning liabilities are calculated and  recorded. However, officials were unable to provide details on how the  new data system will address the existing data limitations in TIMS or  when they expect to implement these improvements in the new data  system. Internal control standards in the federal government call for  agencies to ensure that all transactions and events are completely and  accurately recorded. Without the ability to completely and accurately  record data on decommissioning costs, some of BSEE’s estimates of  decommissioning liabilities may not be complete or accurate, and BOEM  may not have reasonable assurance that it is requiring sufficient amounts  of financial assurance based on BSEE’s estimates.
section_title: BSEE Does Not Have Finalized, Documented Procedures for Identifying and Tracking Infrastructure That Needs to Be Decommissioned or for Estimating Costs
paragraphs: BSEE officials in the Gulf regional office told us BSEE does not have  documented procedures for identifying and tracking idle and terminated  lease infrastructure or finalized documented procedures for estimating  costs associated with decommissioning liabilities. Specifically, BSEE  regional officials told us the bureau did not have documentation, such as  standard operating procedures or operating manuals that described their  process for identifying and tracking infrastructure. BSEE regional officials  provided draft documentation outlining their approach to estimating costs  associated with plugging wells, removing structures, and  decommissioning pipelines; however, they told us that these documents  had not been finalized and were a “work in progress.” According to these  officials, these documents replace an older policy manual and were  developed in 2014 after BSEE established the Decommissioning Support  Section within the Gulf regional office.
In addition, BSEE’s draft documents outlining its approach to estimating  the costs of decommissioning liabilities do not address how BSEE  regional officials plan to periodically assess the methodology for  estimating costs, as recommended by an internal Interior review.  Specifically, in fiscal year 2009, Interior conducted an internal review of its  procedures related to its financial accountability and risk management  program. In an internal report, Interior stated that program officials  estimated costs using data that had not been updated in over 14 years.  The report recommended that the program develop and implement a  formal policy to review and revise all assessments at least once every 5  years for all regions. It also recommended that program officials  consider adjusting assessments to reflect the cost of inflation during the  period between the 5-year updates. To date, BSEE regional officials have  not developed and implemented formal procedures addressing these  recommendations.
Internal control standards in the federal government call for agencies to  clearly document internal controls, and the documentation should appear  in management directives, administrative policies, or operating manuals.  According to BSEE regional officials, they plan to establish documented  procedures to identify and track idle and terminated lease infrastructure  and estimate costs, but have not done so due to competing priorities,  among other reasons. Without finalized, documented procedures, BSEE  does not have reasonable assurance that it will consistently conduct such  activities in the future, which could limit the effectiveness of Interior’s  oversight of the decommissioning process and its ability to obtain  sufficient financial assurances to cover decommissioning liability.
section_title: Interior’s Procedures for Obtaining Financial Assurances for Decommissioning Liabilities Pose Risks to the Federal Government, and Interior Plans to Revise Them
paragraphs: Interior’s procedures for obtaining financial assurances for offshore  decommissioning liabilities pose financial risks to the federal government.  Officials from Interior’s BOEM told us that the bureau plans to revise its  procedures that determine how much financial assurance a lessee must  provide, and that they expect these procedures to reduce the risk that the  government could incur costs associated with decommissioning.
subsections: section_title: BOEM’s Procedures for Obtaining Financial Assurances for Decommissioning Liabilities Pose Risks to the Federal Government
paragraphs: BOEM’s procedures for obtaining financial assurances for offshore  decommissioning liabilities pose financial risks to the federal government  in three ways. First, as of October 2015, according to BOEM officials,  BOEM had identified approximately $2.3 billion in decommissioning  liabilities in the Gulf that may not be covered by financial assurances but  was unable to determine in a timely manner the extent to which these  liabilities were valid. Specifically, after identifying data on potentially  uncovered decommissioning liabilities in TIMS, BOEM officials analyzed  these data over several months to determine their validity. That is, BOEM  officials tried to determine the extent to which these liabilities were  accurate and the extent to which valid liabilities were covered by financial  assurances. BOEM officials told us that, based on their analyses, some of  the $2.3 billion in decommissioning liabilities may be valid and uncovered  by financial assurances.
However, according to BOEM officials, they were unable to quantify how  much of the $2.3 billion in decommissioning liabilities were valid and  uncovered by financial assurances due to limitations with the TIMS data  system and inaccurate data, among other things. For example, BOEM  officials stated that existing reports generated by the TIMS data system  did not provide all the necessary information for determining the validity of  data on decommissioning liabilities and financial assurances. As a result,  officials said that they had to create new reports to access additional data  stored in TIMS, and that these efforts were time consuming. In addition,  BOEM officials said that they identified leases that did not have wells or  platforms but for which TIMS contained estimates of decommissioning  liabilities. BOEM officials said that data associated with these  decommissioning liabilities may not be valid but that they would need to  consult with BSEE officials to determine their validity, which would take  additional time.
BOEM officials stated that, in order to determine the validity of the data in  TIMS, they plan to consult with BSEE officials and continue to analyze  relevant data. Once they have determined the validity of the data, they  said that they will take steps to obtain financial assurances for any  uncovered decommissioning liabilities. However, officials were unable to  provide details on how or when they planned to address existing  limitations with the TIMS data system or determine the accuracy of data  on decommissioning liabilities. Internal control standards in the federal  government call for agencies to ensure that pertinent information is  identified, captured, and distributed in a form and time frame that permits  people to perform their duties efficiently. Without timely access to valid  data on decommissioning liabilities in the Gulf and associated financial  assurances, BOEM does not have reasonable assurance that it has  sufficient financial assurances in place, putting the federal government at  risk.
For the purposes of ensuring that there is at least one responsible party with the  financial ability to fulfill lease decommissioning obligations, BOEM attributes all lease  decommissioning liabilities to any waived lessee on a lease (even if other responsible  parties are present on the lease). The waived lessee is, with all other lessees, jointly and  severally liable for decommissioning and relies on its financial strength to secure the costs  of this decommissioning, on behalf of all the jointly and severally liable parties.
Under Interior regulations, regional directors may determine that a supplemental bond is  necessary to ensure compliance with a lessee’s obligations. According to Interior officials,  supplemental bonding becomes a requirement once the regional director determines that  it is necessary.
Adjusted net worth includes a percentage of a lessee’s proven oil and gas reserves  added to a lessee’s audited net worth. BOEM varies the total liability ratio it will accept  based on adjusted net worth—for example, a lessee with between $65 million and $100  million in adjusted net worth can possess total lessee liabilities of no more than 2 or 2.5  times its adjusted net worth, depending on the size of the company’s potential  decommissioning liability.
Alternatively, BOEM allows a lessee to use a substitute criterion—the lessee must  demonstrate that it produces in excess of an average of 20,000 barrels of oil equivalent  per day on its leases. However, according to BOEM officials, of the 51 waived lessees  only 1 or 2 chose to use this alternative criterion. demonstrate reliability, as shown by a record of compliance with laws,  regulations and lease terms, among other factors.
If a lessee passes the financial strength test by demonstrating its financial  ability to pay for decommissioning on its leases, BOEM waives its  requirement for the lessee to provide supplemental bonds. Other  responsible parties on the lease will also be waived from the requirement  to provide supplemental bonds. According to BOEM officials, BOEM  waives these parties as well because the waived lessee could be held  responsible if another party on a lease does not fulfill its decommissioning  obligations. In addition, a waived lessee may provide financial assurance  in the form of a corporate guarantee of the lease obligations of a lessee  on another lease.
After BOEM waives a lessee from the requirement to provide  supplemental bonding, it monitors the financial strength of the lessee to  ensure it continues to pass BOEM’s financial strength test. BOEM  conducts quarterly financial reviews for the first 2 years after a lessee  receives a waiver and then an annual review thereafter. In addition, on a  weekly basis, BOEM compares the decommissioning obligations (as  determined by BSEE) of all waived lessees with the financial information  provided by lessee audited financial statements. If BOEM finds that a  lessee no longer passes its financial strength test, BOEM will conduct a  more in-depth review of a lessee’s financial status by reviewing financial  statements, credit ratings, and other financial information. BOEM may  also conduct an unscheduled financial review if: (1) BSEE revises its  estimate of a lessee’s decommissioning liability, (2) a lessee’s financial  status changes as reported by credit rating agencies, or (3) a lessee does  not pay the required royalties to the federal government. According to  BOEM officials, these reviews could cause BOEM to revoke a lessee’s  waiver from the requirement to provide supplemental bonding. For  example, in May 2015, BOEM revoked the waiver of one lessee and,  according to BOEM officials, the waived lessee and related parties could  be required to provide as much as $1 billion in supplemental bonds.
Our prior reports have found that the use of financial strength tests and  corporate guarantees in lieu of bonds poses financial risks to the federal  government. Specifically, we found, in August 2005, that the financial  assurance mechanisms that impose the lowest costs on the companies  using them— such as financial strength tests and corporate guarantees— also typically pose the highest financial risks to the government entity  accepting them. In that report, we found that, if a company passes a  financial strength test but subsequently files for bankruptcy or becomes  insolvent, the company in essence is no longer providing financial  assurance because it may no longer have the financial capacity to meet  its obligations. Such financial deterioration can occur quickly. While  companies no longer meeting the financial test are to obtain other  financial assurance, they may not be able to obtain or afford to purchase  it. In addition, in May 2012, we found that, according to the Bureau of  Land Management and the Environmental Protection Agency, corporate  guarantees are potentially risky because they are not covered by a  specific financial asset such as a bond. BOEM’s use of the financial  strength test and corporate guarantees in lieu of bonds raises the risk that  the federal government may have to pay for offshore decommissioning if  lessees do not.
The third way BOEM’s procedures pose financial risks to the federal  government is that BOEM’s financial strength test relies on measures that  may not provide an accurate indication of a lessee’s ability to pay for  decommissioning. As described above, BOEM uses net worth (from a  lessee’s audited financial statements) as a key measure in its financial  strength test. However, according to representatives from credit rating  agencies we spoke to, net worth provides limited value to assess a  company’s financial strength and ability to pay future liabilities.  Specifically, these representatives said that net worth is “backward  looking” and can be skewed by the volatile nature of commodity prices,  among other factors. Credit rating agencies use financial measures that  emphasize the evaluation of cash flow, such as debt-to-earnings and  debt-to-funds from operations to evaluate whether a company will be able  to pay its liabilities. Without the use of similar measures in its financial  assessments, BOEM may not have reasonable assurance that the  lessees it waives from the requirement to provide supplemental bonds  have the financial abilities to fulfill decommissioning obligations, which  may increase the financial risk to the government.
section_title: BOEM Plans to Revise Its Procedures to Reduce Financial Risks
paragraphs: According to BOEM officials, BOEM recognizes the financial risks  associated with its current financial assurance procedures and plans to  revise its procedures to reduce risk. Specifically, BOEM officials told us  that BOEM’s planned revisions would eliminate the use of financial  strength tests to completely waive lessees from the requirement to  provide supplemental bonding. Instead, BOEM plans to conduct financial  reviews of lessees’ financial status and, based on those reviews, assign  lessees an amount of credit that may be used to reduce required bonding  associated with decommissioning liabilities on leases. Lessees would be  able to apportion this credit to leases, in coordination with other  responsible parties on those leases, to ensure that lease  decommissioning liabilities are fully covered by apportioned credit or  supplemental bonds. As part of BOEM’s financial review of lessees, these  officials told us that BOEM plans to use criteria that emphasize the use of  measures such as cash flow and company liquidity while deemphasizing  the use of net worth. In addition to these planned revisions, in August  2014, BOEM announced its intent to update its regulations and program  oversight for offshore financial assurance requirements. BOEM solicited  stakeholder comments in response to this proposal and has held industry  forums to discuss potential changes to its financial assurance regulations  and procedures.
According to BOEM officials, if BOEM were to use these criteria as part of  its financial strength test, some of the lessees currently waived from the  requirement to provide supplemental bonds could lose their waivers.  BOEM officials also stated that, if the revised procedures are  implemented as planned, lessees could be required to provide several  billion dollars in additional supplemental bonds. BOEM officials told us  they plan to update the bureau’s financial assurance procedures in late  2015 or early 2016. In commenting on a draft of this report, Interior  officials stated that on September 22, 2015, BOEM issued proposed  guidance to clarify its financial assurance procedures. However, it is too  soon to evaluate the specific details of BOEM’s proposed changes to its  financial assurance procedures because BOEM has not issued any final  revisions to its procedures. Until BOEM revises and implements new  procedures, the federal government remains at greater risk of incurring  costs should lessees fail to decommission offshore oil and gas  infrastructure as required.
section_title: Interior Faces Two Key Challenges Managing Potential Decommissioning Liabilities
paragraphs: Interior faces two key challenges managing potential decommissioning  liabilities. First, BSEE does not have access to all relevant data from  lessees on costs associated with decommissioning activities in the Gulf.  Second, BOEM’s requirements for reporting the transfers of lease rights  may impair its ability to manage decommissioning liabilities.
subsections: section_title: BSEE Does Not Have Access to All Relevant Data on Decommissioning Costs
paragraphs: BSEE does not have access to all relevant current data on costs  associated with decommissioning activities in the Gulf. Internal control  standards in the federal government call for agencies to obtain  information from external stakeholders that may significantly affect their  abilities to achieve agency goals. Obtaining accurate and complete  information on the decommissioning costs is critical to Interior being able  to achieve its goals. Specifically, BSEE needs accurate and complete  information on decommissioning costs to estimate decommissioning  liabilities in the Gulf, and BOEM relies on BSEE’s estimates to ensure  that it is requiring sufficient amounts of financial assurance to cover  decommissioning liabilities.
However, BSEE generally has not had access to current data on  decommissioning costs. Prior to December 2015, under BSEE’s  regulations, lessees were not required to report costs associated with  decommissioning activities to BSEE. According to BSEE regional officials,  data on decommissioning costs were considered proprietary, and  companies generally did not share this information with BSEE. Instead,  BSEE regional officials relied on other sources of data—some of which  are decades old and, as a result, likely inaccurate—to estimate costs  associated with decommissioning liabilities. According to BSEE regional  officials, their estimates for decommissioning liabilities in shallow water  were based on data provided by the oil and gas industry in 1995. For  decommissioning liabilities in water depths of 400 to 1,400 feet, their  estimates were based on information in a 2009 report that Interior  contracted. For decommissioning liabilities for subsea wells, BSEE  officials said that they had developed their own models for estimating  costs based on an analysis of a variety of factors, such as the daily cost  of hiring a vessel in the Gulf to plug wells.
During the course of our audit, BSEE regional officials told us that they  planned to improve this process and the resulting data by issuing a  regulation requiring such data to be submitted. Specifically, Interior issued  a proposed rule in May 2009 to establish new requirements for lessees to  submit expense information on costs associated with plugging and  abandonment, platform removal, and site clearance. In December 2015,  BSEE issued a final rule establishing these requirements. However,  according to BSEE regional officials, the rule does not require lessees to  submit expense information on costs associated with decommissioning  pipelines, and officials were unable to provide details as to when or  whether BSEE would issue a new rule to require the reporting of such  costs. Unless and until BSEE obtains all relevant cost data, BSEE may  continue to use outdated information to assess decommissioning  liabilities. Without access to accurate and complete information on  decommissioning costs, BSEE may not have reasonable assurance that  its estimates of decommissioning liabilities in the Gulf are accurate, and  BOEM may not have reasonable assurance that it is requiring sufficient  amounts of financial assurance based on BSEE’s estimates.
section_title: Absence of a Clear Reporting Deadline for Transfers of Revenue Rights May Impair BOEM’s Ability to Manage Decommissioning Liabilities
paragraphs: The absence of a clear deadline for reporting transfers of rights to lease  production revenue may impair BOEM’s ability to manage  decommissioning liabilities. Under BOEM’s financial assurance  procedures, BOEM must obtain accurate information on a lessee’s  financial status to determine whether the lessee has sufficient financial  strength to meet its decommissioning obligations, and BOEM may waive  its requirement for the lessee to provide supplemental bonds based on  this information. However, the transfer of rights to a lease may affect a  lessee’s financial status. For example, lessees may transfer lease  ownership and the right to operate on a lease, which also obligates the  new owner to decommission infrastructure on the lease. Under Interior  regulations, these transfers must be approved by BOEM.
Lessees can also transfer rights to lease production revenue. Transfers  of these revenue rights generally allow the receiving party to obtain a  portion of the revenue from oil and gas production over a period of time  and the lessee, in turn, is paid in advance of production. The more  revenue rights a lessee transfers to other parties, the less revenue the  lessee has to cover its other obligations, including decommissioning.  However, unlike transfers of lease ownership and operating rights,  transfers of revenue rights do not obligate the new owner to  decommission, and lessees are not required to obtain BOEM’s approval  for these transfers. BOEM requires lessees to report these transfers, but  its regulations do not establish a clear deadline for the reporting. As a  result, BOEM is not always aware of such transfers in a timely manner.
For example, in one recent case, a waived lessee that had previously  transferred most of its revenue rights to other parties subsequently  declared bankruptcy. BOEM was unaware of these transfers until  bankruptcy court proceedings. Had BOEM been aware of these transfers  during its weekly review of the waived lessee, it could have revoked the  lessee’s waiver if it determined the lessee no longer passed the financial  strength test. Consequently, BOEM then could have required the lessee  or its co-lessees to provide supplemental bonds to cover its  decommissioning obligations. In this case, the transfer of revenue rights  left the lessee with insufficient assets to pay all of its liabilities during  bankruptcy, including decommissioning. Though other lessees were held  liable for decommissioning costs under joint and several liability, the  government was at increased risk of incurring costs if the other lessees  had been unwilling or unable to perform decommissioning.
BOEM officials told us that they created an internal group to help improve  BOEM’s knowledge of revenue rights transfers and the effect of transfers  on a lessee’s financial status. In commenting on a draft of this report,  BOEM officials stated that they believe that current regulations could be  interpreted as imposing a reporting deadline but recognize the need to  clarify the regulations. Without a clear reporting deadline, lessees have  little incentive to report revenue rights transfers to BOEM in a timely  manner, and this could limit BOEM’s ability to effectively evaluate a  lessee’s financial strength.
section_title: Conclusions
paragraphs: Decommissioning offshore oil and gas infrastructure is expensive and  poses potential financial liabilities to the federal government. BSEE  officials in the Gulf region have developed procedures for reviewing idle  and terminated lease infrastructure to ensure that this infrastructure is  decommissioned. In addition, in December 2015, BSEE issued final  regulations (proposed in 2009) requiring lessees to report  decommissioning costs directly to BSEE. However, several problems  remain. First, BSEE’s recent regulations do not require lessees to report  costs associated with decommissioning pipelines. Unless and until BSEE  obtains all relevant cost data, it may continue to use outdated data to  assess decommissioning liabilities. Second, limitations of Interior’s  current data system restrict BSEE’s ability to record estimates of  decommissioning costs, and it is unclear how BSEE’s new data system  will address these limitations or when it will be available. Without access  to complete data on decommissioning costs, and without the ability to  accurately and completely record data in Interior’s main data system,  BSEE does not have reasonable assurance that its estimates of  decommissioning liabilities in the Gulf are accurate, and BOEM may not  have reasonable assurance that it is requiring sufficient amounts of  financial assurance based on BSEE’s estimates. Third, BSEE does not  have finalized, documented procedures for identifying and tracking idle  and terminated lease infrastructure and estimating decommissioning  liabilities. Without such documented procedures, BSEE does not have  reasonable assurance that it will consistently conduct such activities in  the future, which could limit the effectiveness of BSEE’s oversight of the  decommissioning process.
Moreover, while BOEM is taking important steps to ensure that the  financial assurance procedures used by the federal government are  reducing the government’s exposure to decommissioning costs by  updating its procedures to assess the financial strength of lessees, we  continue to have three concerns. First, BOEM identified roughly $2.3  billion in decommissioning liabilities in the Gulf that may not be covered  by financial assurances but was unable to determine the extent to which  these liabilities were valid after several months of analysis due to  limitations with the TIMS data system and inaccurate data. As a result, it  is unclear whether BOEM has obtained sufficient financial assurances to  cover decommissioning liabilities in the Gulf. Without timely access to  valid data on decommissioning liabilities and associated financial  assurances, BOEM cannot ensure that it has sufficient financial  assurances in place, putting the federal government at financial risk.  Second, to date BOEM has not taken concrete steps to revise its current  procedures. As a result, it is unclear whether BOEM’s planned revisions  will improve its procedures and the extent to which these revisions will  increase the amount of bonding that lessees provide. Until BOEM revises  its financial assurance procedures, the federal government remains at  increased risk of incurring costs should lessees fail to decommission oil  and gas infrastructure. Third, BOEM is not always aware when lessees  transfer rights to lease production revenue. While BOEM’s current  regulations require lessees to report such transfers, these regulations do  not clearly establish a deadline for reporting. Without a clear reporting  deadline, lessees have little incentive to report revenue rights transfers to  BOEM in a timely manner, and this could limit BOEM’s ability to  effectively evaluate a lessee’s financial strength.
section_title: Recommendations for Executive Action
paragraphs: To improve the effectiveness of Interior’s oversight of the  decommissioning process, we recommend that the Secretary of the  Interior direct BSEE to establish documented procedures for identifying  and tracking idle and terminated lease infrastructure.
To better ensure that the government obtains sufficient financial  assurances to cover decommissioning liabilities in the event of lessee  default, we recommend that the Secretary of the Interior take the  following six actions:
Ensure that BSEE collects all relevant data associated with  decommissioning from lessees.
Direct BSEE to establish documented procedures for estimating  decommissioning liability.
Develop a plan and set a time frame to ensure that Interior’s data  system for managing offshore oil and gas activities includes  processes to accurately and completely record estimated  decommissioning liabilities.
Develop a plan and set a time frame to ensure that Interior’s data  system for managing offshore oil and gas activities will be able to  identify, capture, and distribute data on decommissioning liabilities  and financial assurances in a timely manner.
Ensure that BOEM completes its plan to revise its financial assurance  procedures, including the use of alternative measures of financial  strength.
Revise BOEM’s regulations to establish a clear deadline for the  reporting of transfers to require that lessees report the transfer of  rights to lease production revenue.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Interior for review and comment.  Interior provided written comments, which are reproduced in appendix I,  and generally agreed with our findings and concurred with our  recommendations.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of the Interior, and  other interested parties. In addition, this report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff members who made major  contributions to this report are listed in appendix II.
section_title: Appendix I: Comments from the Department of the Interior
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Christine Kehr (Assistant  Director), Jason Holliday, and David Messman made key contributions to  this report. Also contributing to this report were Philip Farah, Cindy  Gilbert, Paul Kinney, Risto Laboski, Alison O’Neill, and Barbara  Timmerman.