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Vol. 18, No. 35 Week of September 01, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry
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Bonding for DR&R for platforms? DNR considering changes to regs

It appears to be a case of almost burned — twice shy.

The State of Alaska could have gotten stuck with abandonment costs for Cook Inlet’s Osprey platform when a previous owner went bankrupt. Now it wants to make it harder for operators to walk away, leaving the state to pick up the costs.

The Department of Natural Resources, Division of Oil and Gas, is holding a public workshop to hear comments on proposed changes to regulations covering rehabilitation and dismantlement, removal and restoration, DR&R, for Cook Inlet oil and gas platforms.

Subjects for the workshop, at 9 a.m. Sept. 9 in the Kahtnu Room at the Dena’ina Civic and Convention Center in Anchorage, include potential regulations for rehabilitation plans for platforms and DR&R assurances.

16 Cook Inlet platforms

There are 16 offshore oil and gas platforms in Cook Inlet, division Director Bill Barron said in an Aug. 23 public notice, 14 installed between 1964 and 1968 and the remaining two installed in 1986 and in 2000, when the Osprey platform became the newest and most southerly platform in the inlet.

Twelve of the platforms are producing oil and gas; at the other four there are “varying degrees of inactivity,” Barron said.

He said DNR is examining the adequacy of its current regulations “to determine if further regulatory clarification is necessary to mitigate risk to the state of financial loss, environmental damage, and safety-related incidents.”

The state is looking at whether it should require and review more specific rehabilitation plans and “create appropriate financial assurance arrangements for DR&R.”

DNR and the Alaska Oil and Gas Conservation Commission have primary authority for regulating DR&R, with AOGCC regulating plugging and abandonment of wells and DNR responsible, under unit and other agreements and authorizations, for DR&R on state lands.

Financial assurance issue

DNR addresses the financial assurance issue in a discussion paper available at

In the paper the division said the risk for DR&R is not merely academic, citing the Osprey platform as an example. In 2009, Pacific Energy Resources, then the owner of the Osprey platform, filed for bankruptcy. While a new operator did resume operations on Osprey, the division said that had that not occurred, the state could have been forced to spend “tens of millions” of its own funds for DR&R of the platform.

The division also cited an example from federal waters, where an offshore platform operator filed for bankruptcy in 2012 and walked away from its Gulf of Mexico platform. The federal government negotiated making the estimated $153 million for DR&R of the platform a top priority expense in the bankruptcy, but the state said it is unclear whether funds will be available to cover the expense.

To deal with this eventuality, the division is proposing a financial test it compared to that used by the U.S. Department of the Interior’s Bureau of Ocean Energy Management as well as to past work done by the division. “BOEM’s supplemental bonding scheme requires full bonding (or indemnity) for companies that do not pass a financial strength test,” the division said. The BOEM evaluation looks at net worth, debt-to-equity and the percentage of net worth represented by estimated DR&R costs.

The division said it is considering “a more graduated approach” and is studying the expected loss to the state when lessees fail to satisfy DR&R obligations for Cook Inlet platforms. “For a given platform, this expected loss is simply the product of the expected loss given default multiplied by the probability of default,” given that if the lessee fails to complete its DR&R obligations the state may need to complete the work.

Financial strength test

The probability of default would be addressed through a financial strength test using metrics including the value of equity and third-party credit ratings, supplemented by a score (Altman’s Z-score). The division said Altman’s Z-score has been successful in predicting default within two years, is a widely reported financial metric which “can be calculated from financial statements and market capitalization, is commonly used in finance and balances the tension between forecasting precision and complexity.”

The division is considering requiring bonding against the full expected cost of DR&R for lessees with less than $100 million in equity, with larger companies eligible for incremental bonding.

It also said regularly updated financial assessments would benefit both the lessee and the state, as a lessee’s financial health varies through time. If it improves, less bonding may be necessary to protect the state; if that financial strength declines, then the state may need more financial assurances to protect its position.

In addition to a bond required under the proposed system, should the DNR commissioner conclude the lessee poses a greater risk to the state than reflected in the risk assessment, the commissioner may find that it is in the best interest of the state to increase the required bond, require a third-party guarantee or develop an alternative form of additional assurance.

—Kristen Nelson

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