February 28, 2017 Articles

Decommissioning Oil and Gas Facilities: Challenges in (and out of) Bankruptcy

The convergence of the financial challenges presented by lower oil prices and an increase in decommissioning obligations has forced some companies into bankruptcy.

By Andrew J. Gallo and Duke K. McCall III – February 28, 2017

Aging facilities and lower oil prices have led to a substantial increase in the number of oil and gas facilities being decommissioned in the United States. More than 40 percent of the active oil and gas facilities located on the U.S. Outer Continental Shelf (OCS) are projected to be nearing the end of their designed service life. Economic pressures also have forced less productive facilities to be taken out of service. The U.S. Bureau of Ocean Energy Management (BOEM) recently calculated the cost of “routine” decommissioning obligations to be $40 billion—and that’s just in the Gulf of Mexico. Michael Celata, Bureau of Ocean Energy Mgmt., Regulatory Considerations for Ensuring Decommissioning and Other Lease Obligations 7 (Feb. 4, 2016).

The convergence of the financial challenges presented by lower oil prices and an increase in decommissioning obligations has forced some companies into bankruptcy, where decommissioning obligations may be reallocated from the bankrupt record title owner to prior or subsequent lessees. Even outside of bankruptcy, regulatory changes intended to ensure that taxpayers do not bear decommissioning costs have increased the complexity and cost of providing financial assurance for decommissioning obligations; industry representatives have warned that this could force some producers out of the OCS, increasing the likelihood that others in the record chain of title will have to bear decommissioning costs. 

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