While the Bureau of Ocean Energy Management once frequently granted waivers to prosperous offshore operators allowing them to avoid posting bond for future decommissioning, it is now tightening its review process, further straining operator finances as they confront looming P&A work. Our analysts look at the recent example of Stone Energy, and what lies ahead in the upstream offshore sector as companies continue to adapt to the market slowdown.
As operators on the Gulf of Mexico Shelf continue to adapt to the low oil price environment, more and more of them are in a position of looking toward the financial stress of future P&A work. With the Bureau of Ocean Energy Management (BOEM) indicating it will no longer issue waivers to financially healthy operators to avoid posting bonds to cover future decommissioning costs in the Gulf of Mexico, some of these operators are facing significant financial strain.
In a notable decision last week, the BOEM rescinded a waiver for Stone Energy, citing a $565 million bonding obligation. Although not a surprise decision, it highlights how the agency's increasing hesitance to grant waivers and revised calculation methods for decommissioning costs seem to be putting the most strain on operators who are least able to absorb the financial obligations. Stone's share price has fallen 95% from a year ago, and little relief is in sight as operators are just beginning to absorb the effects of the oil price collapse.
Energy XXI has successfully renegotiated what was initially a $1 billion bond notice to more manageable levels, while operators like W&T are taking a proactive approach, jumpstarting P&A work now to keep rigs busy and avoid future decommissioning liabilities. We expect these trends to continue as companies disclose revised bonding requirements over the coming months.
You can purchase our full US Upstream Week In Brief on demand to read this week's top stories in the North America Upstream sector, including a look at why equity markets remain confident in oil-price recovery; what it means for operators now that USGS has included human-induced earthquakes in its official hazards forecast; and how the coal share in US power generation is now matched by gas.
Denver breakfast briefing
Our experts in upstream oil and gas will be holding a breakfast briefing on April 6, 2016, in Denver, Colorado, to discuss 'Looking for the silver lining in $30 oil.' Please register here to reserve a spot.