Photo courtesy of Peter Bennett, www.citizenoftheplanet.com
Early on Saturday October 2, 2021, an undersea pipeline from an oil rig 4.5 miles from the Los Angeles shoreline ruptured, spilling an estimated 25,000 gallons of oil into the ocean, slathering marsh reserves, beaches, and wildlife. The rupture, potentially caused by an errant ship’s anchor, puts increasing stress on the rig’s owner, Amplify Energy, a company already in a tenuous financial position. It leads us to ask what a tiny company like Amplify is doing running a massive offshore operation. But going a step further, it points to a systemic and increasingly urgent problem: that the costs of safely disposing of these massive offshore facilities may not be covered by their owners.
While much of the coverage of the oil spill has focused on the damage caused by the spill to beaches and wildlife, underneath lurks a deeper problem: Amplify Energy is a barebones operator facing costs to close and clean up its aging infrastructure that could well exceed its ability to pay. And while the federal government should be protecting its interests by making sure it has enough cash on hand to close those offshore rigs, regulators only have financial assurances amounting to one tenth of the closure costs of all offshore rigs.
It turns out that closing offshore oil rigs is expensive business—in the tens to hundreds of millions per rig. But while oil and gas companies might want to imagine that obligation is decades away, it's increasingly looking like an issue we’ll have to deal with soon, and one that regulators aren’t prepared for.
Let’s start with Amplify.
Amplify runs three rigs in federal waters off Southern California, platforms called Ellen, Elly, and Eureka. Ellen and Eureka host 57 different oil wells, while Elly is a processing facility. Under federal law, Amplify is responsible for the full closure and decommissioning costs of these platforms, an enormous task. In 2020, the Bureau of Safety and Environmental Enforcement (“BSSE”) estimated that taking down these three platforms (which together weigh more than two hundred 747 airplanes) and closing up the sites would cost more than $215 million - and that cost keeps rising.
On Amplify’s books, $215 million is not small change. In 2020, Amplify only earned $10 million (net) on oil sales from its offshore platforms in 2020; it would take two decades for Amplify to earn enough to meet that obligation. And the company as a whole is struggling to keep its head above water. In 2020, all of Amplify’s assets amounted to $385 million, the vast majority of which is the value they estimate is locked up in oil still underground. The value of that oil fluctuates wildly year to year. In fact, when oil prices dropped last year, Amplify devalued themselves (called “taking an impairment”) by $477 million, more than half their value. And of course this is all before Amplify pays for the clean-up of Southern California’s coastline and settles the multitude of lawsuits coming down.
So will Amplify have enough cash to actually close its own wells? Even before this spill, the feds doubted it. The Bureau of Ocean Energy Management (BOEM) operates under the assumption that creditworthy oil and gas operators will have sufficient cash on hand to close their own offshore rigs (an assumption we’ll scratch in a moment). BOEM requires “financial assurances” from less creditworthy operators in the form of either cash, or a “surety bond,” a form of third-party insurance that guarantees the obligation will be paid if the operator goes out of business before completing its closure and clean up obligations. Amplify falls into that latter category, with a $161 million surety bond on file with BOEM. But that would still leave a gap of $54 million that BOEM would have to fund somehow to complete the clean up.
But that’s just Amplify, right?
No. The cost of decommissioning California’s huge offshore oil rigs is already threatening to hit taxpayers from a massively underreported boondoggle with a private oil company called Signal Hill. Signal Hill is a relatively small operator with around 800 active and idle wells in the Long Beach area—and until recently, two massive offshore platforms called Hogan and Houchin. Starting in 2015, Signal Hill stopped paying California the rent on its right-of-way for the pipeline connecting its offshore platforms to the shore. In June 2019, the California State Lands Commission terminated the lease on those pipelines, and ordered that Signal Hill close the lines, and consequently the platforms. Signal Hill complained that it had been unable to pay the nominal lease costs of $57,000 because it had been inhibited by low oil prices and damage at an onshore facility from a wildfire. But how is it that an oil company that can’t even make ends meet for a $57,000 lease was allowed to run a massive offshore rig?
BOEM estimates that Signal Hill’s two offshore facilities, Hogan and Houchin, will cost $85.6 million to close and remediate, far and away more than Signal Hill has on hand. In mid-2020, Signal Hill filed for bankruptcy, stating that it didn’t have the means to close its offshore oil rigs. According to a recent SEC filing, the federal Bureau of Safety and Environmental Enforcement (BSEE), the agency charged with ensuring that remediation happens, is going after the former owners of the oil rig, including Occidental Petroleum, to pay down the remediation costs.
So how did we end up in a spot where at least five giant offshore oil platforms are at risk of being left with no solvent entity to close them out? In part, it’s a story of another regulator that took the line from the oil and gas industry: that closure obligations are so far in the future that they just don’t matter.
The federal government is woefully unprotected against the cost of closing offshore rigs
BOEM identified twenty-three oil platforms in the federal waters off the California coast, and a closure cost of more than $1.6 billion to close all of those rigs. And yet BOEM holds only $267 million in financial assurances or bonds to guarantee those closures don’t happen on taxpayer’s backs. That’s an incredible discrepancy, but it doesn’t stop there.
Including the Gulf Coast, the federal government estimates that closure liability for all offshore oil and gas platforms is an astronomical $32.7 billion, and yet BOEM only holds $3.3 billion in bonds; the agency simply assumes that most oil companies will be able to clean up their own messes and meet their obligations. Even for the companies that BOEM thinks are most likely to fail—those with credit ratings of ‘speculative’ or worse—BOEM still only holds 20 percent of the closure costs in secured bonds. Ironically, the agency readily admits that “since 2009, there have been 30 corporate bankruptcies of offshore oil and gas lessees, involving an approximately $7.5 billion in total decommissioning liability.” The agency goes on to say that their program fails when “the unsecured decommissioning liabilities exceed the value of the leases to potential purchasers or investors.” In other words, nobody’s going to buy a rig that’s going to cost more to clean up then it will ever generate in profits.
Insufficient financial assurances and bonding requirements don’t just put taxpayers at risk, they can also lead to lax enforcement and perverse incentives for producers. When a facility is insufficiently bonded, regulators may equivocate in enforcing environmental or safety laws, in fear that the owner of the facility—and in particular, owners on the verge of financial failure—will simply abandon the facility. The same perverse assessment holds true for the producers themselves. Once the cost of decommissioning exceeds the future value of operations, a producer’s best option is to go out of business, leaving the decommissioning costs to somebody else. Appropriate financial assurances circumvent this unappetizing math.
As the cost of producing from offshore facilities keeps creeping up and the value of offshore production drops, we’ll face more bankruptcies in the future, and more cases where the owners of these massive facilities simply can’t cover their own obligations. The federal agency charged with managing offshore oil is so concerned with burdens on oil companies that it's willing to put taxpayers at risk for the overwhelming costs of closing these oil rigs.
So where does that leave us with Amplify?
Today’s attention is focused on Amplify’s oil spill, the damage it's done, and who will bear the costs of cleanup. But Amplify’s accident brings to light a much more pernicious problem. After years of just barely scraping by, Amplify’s ability to pay down its likely offshore closure costs is truly Sisyphean. Like its onshore counterpart, California Resources Corporation, Amplify is facing a cost it cannot bear—and yet it must. Like California’s regulators, BOEM has ceded the floor to oil and gas companies, ensuring that the protection of corporate profits comes before the protection of the environment and taxpayers. Federal lawmakers are already considering allocating billions of dollars to clean up hundreds of thousands of wells abandoned by insolvent or unscrupulous oil and gas producers. It is incomprehensible that we would allow ourselves to bail out yet more fossil interests who failed to clean up their own mess.