Legacy Thread

[basserdan]

Dangers In The Deep: A $40B Time Bomb Threatening Gulf Of Mexico Oil Companies


An oil platform stands in the Gulf of Mexico off the coast of Port Fourchon, Louisiana. (Derick E. Hingle/Bloomberg)

By Alex Plough and Marion Halftermeyer, with additional reporting by Alexander Gladstone
Sep 13, 2016 @ 01:33 PM

Hundreds of stakeholders in the Gulf of Mexico oil and gas sector huddled in a Louisiana movie theater on a late August morning to hear about a $40 billion problem, according to a Debtwire Investigations report.

This problem had been slow to develop over the last two decades, but a new set of regulations that takes effect this week threatens to accelerate its impact across the entire offshore energy industry, from Big Oil to the wildcatters who issued billions of new debt to fund rapid expansion plans.

The purpose of the meeting, organized by the Bureau of Ocean Energy Management (BOEM), was to outline the overhaul of the rules governing who has to pay for plugging and abandonment (P&A) – the expensive process of shutting down oil wells and dismantling the massive steel platforms associated with oil production on the U.S. Gulf coast.

During the boom years, the cost to eventually tear down multiplying offshore structures was hardly top of mind. Light-touch regulation meant that most companies didn’t have to set any money aside to fund P&A, and the regulatory agencies had vastly underestimated how expensive deep-water drilling had become.

But now, after feverish planning that began in 2013, regulators are poised to ensure that the true cost of decommissioning is balanced against a company’s ability to pay. However, this change is set to take effect at a time when of unprecedented financial strain for the sector.

Earlier this year, government officials estimated that the cost to dismantle all the platforms in the Gulf had reached at least $40 billion. Putting the figure in context, officials also noted that operators have just $3 billion of collateral to pay for it.

“What the government is asking companies to do they should have done 15 years ago,” said Robert Byrd, a recently retired 35-year veteran of the industry whose experience includes planning and executing offshore platform decommissioning projects and cost estimating for those projects.

A LIT FUSE

Corporate strategies for how to fund the gap between the old and new regulatory regimes are few. Now, only the most financially secure companies with the best credit ratings can waive a portion of their bonding requirements up to 10% of their tangible net worth, known as self-insurance. The rest will have to issue surety bonds or pledge proceeds from US Treasury bills to the regulators.

The clock starts on Nov. 14 when BOEM begins mailing out order letters with the agency’s additional bonding requirements.

Meanwhile, as distress in the energy space continues to claim victims in bankruptcy court at a frenetic pace, investors and advisors are closely watching for clues on how increased bonding requirements will be dealt with. More than 150 oil and gas companies have filed for bankruptcy over the last 18 months, according to Debtwire data.

One thing is for sure: energy companies looking to restructure their debt will now have to clear a space at the table for Department of Justice lawyers, who are actively involved in several cases where P&A obligations have become a sticking point for the reorganization.

“This may be the most critical issue for these companies to resolve,” said Omer F. “Rick” Kuebel III, a New Orleans-based lawyer in the energy practice of Locke Lord LLP. “The industry knows it and is dealing with it. But the financial markets may not understand it yet.”

http://www.forbes.com/sites/debtwire/2016/09/13/dangers-in-the-deep-a-40-billion-time-bomb-threatening-the-gulf/#303846614abc