Journal Article

Risk-adjusted supplemental bonding in the Gulf of Mexico

Mark J. Kaiser and Bernard J. Kruse

in The Journal of World Energy Law & Business

Volume 4, issue 2, pages 136-156
Published in print June 2011 | ISSN: 1754-9957
Published online May 2011 | e-ISSN: 1754-9965 | DOI:
Risk-adjusted supplemental bonding in the Gulf of Mexico

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Leases in the Outer Continental Shelf that do not satisfy a minimum threshold financial capacity are required to post a supplemental bond to ensure that the US government is protected from incurring costs associated with lease abandonment. A bonding formula based upon the estimated cost to perform decommissioning was developed in 1991 by the federal government to implement the supplemental bond programme. The purpose of this article is to update and extend the legacy formula using a risk-adjusted mechanism. We review the objectives of the supplemental bond programme and provide a historical perspective of its development. The objectives of a bonding formula are described along with the trade-offs that occur in development. Factors that impact US government decommissioning exposure are highlighted and we present a risk-adjusted mechanism across the three main stages of decommissioning. We advocate the selection of bonding levels that balance the need of the government to minimize its decommissioning exposure at an acceptable level of risk without incurring an excessive financial burden on owners.

Journal Article.  7908 words.  Illustrated.

Subjects: Environment and Energy Law

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