Why Interior could get stuck with the tab for cleaning up oil platforms

By Heather Richards | 04/12/2024 06:59 AM EDT

Oil majors are refusing to remove two offshore platforms in California, sparking a dispute that could stymie nationwide decommissioning efforts.

A sign at California’s Summerland Beach — where the state’s first offshore oil wells were drilled at the turn of the century — warns of crude oil in the water. Natural seeps and old oil wells can leak oil into the ocean.

A sign at California’s Summerland Beach — where the state’s first offshore oil wells were drilled at the turn of the century — warns of crude oil in the water. Natural seeps and old oil wells can leak oil into the ocean. Heather Richards/POLITICO's E&E News

CARPINTERIA, California — Two hulking platforms have sucked oil out of the ocean floor off this sunny local beach for nearly five decades.

The Hogan and Houchin platforms are now rusting monuments to California’s once-powerful fossil fuel industry. Abandoned by their last owner, they should have been torn down years ago.

But a series of companies tied to the platforms say it’s not their job — and now, they want the federal government to take on the multimillion-dollar responsibility.


The saga echoes the unfolding fight to clean up the nation’s deteriorating fossil fuel infrastructure. More than 2,700 offshore oil and gas wells and 500 platforms are overdue for decommissioning in the Gulf of Mexico alone, according to a recent report from the Government Accountability Office.

The Interior Department has long struggled to ensure oil companies pay up and clean up once they’ve stopped pumping oil, a challenge that could only increase as decades-old infrastructure off the nation’s coastlines faces retirement. If not maintained, old platforms and their wells can leak toxins and degrade ecosystems, becoming serious environmental hazards.

“The agency has recognized these problems for years,” said John Smith, who worked on decommissioning at Interior’s former Minerals Management Service (MMS). “When it comes to doing something about it, they’re weak-kneed.”

Interior could soon find itself on the hook for the millions of dollars required to safely remove the two California platforms. That’s because the companies that once owned a stake in Hogan and Houchin — ConocoPhillips, Occidental Petroleum and Devon Energy — are appealing an order to take the platforms down, testing a federal regulation that requires former owners to ensure cleanup.

The stakes are high for Interior. Experts say its rule may not withstand opposition if oil majors take it to court, with uncertain consequences for a potentially enormous backlog of oil and gas wells, platforms and pipelines that are past their prime and owned by midsize companies more likely to go into financial distress.

In a statement, the Bureau of Ocean Energy Management said those beefed-up requirements would “ensure the taxpayer is protected from financial loss from offshore decommissioning liability.”

Environmental groups are already on board with President Joe Biden’s proposed rules. They look at Hogan and Houchin as a preamble to the kind of costs that could emerge during the gradual retirement of the nation’s oil program due to its climate impacts.

“Without proper decommissioning, we can’t really move away from our dependency on fossil fuels,” said Ava Ibanez Amador, an attorney with Earthjustice. “We are just advocating for the government to actually enforce what it’s supposed to enforce and to create stronger regulations so that we can protect our oceans.”

But Elmer Danenberger, former chief of the engineering and operations division at MMS, said the Biden administration could miss a key lesson in Hogan and Houchin: that federal officials shouldn’t greenlight offshore energy projects from companies that show signs they can’t pay for the eventual cleanup.

That applies not just to oil infrastructure, he said, but to the emerging offshore wind industry.

“The taxpayer should not pay a dime, ever, for decommissioning,” he said.

How Hogan and Houchin were abandoned

In 1990, the Hogan and Houchin platforms were in decline. But a new company called Signal Hill Services wanted to buy the platforms from its then-owners — which included Phillips Petroleum Co. and Occidental Petroleum — and promised to revive production with horizontal drilling and by pumping water into the old reservoirs to increase pressure.

Career MMS employees were skeptical. They saw an inexperienced operator with weak financial backing.

The company had just been created by petroleum engineer Richard Carone and his brother Robert. Both had experience in the oil drilling sector, before going into finance at Chase Manhattan Bank’s global petroleum business.

They launched an oil and gas consulting business in 1984, before creating Signal Hill, their first foray into offshore drilling.

“Field people [in California] were opposed to the deal, and so were career people in headquarters,” recalled Danenberger.

Smith, who also worked at the agency during the Signal Hill takeover, echoed Danenberger’s recollection of widespread opposition to Signal Hill, as did one former BOEM employee familiar with the history who was granted anonymity due to the sensitive nature of the conflict. BOEM and the Bureau of Safety and Environmental Enforcement (BSEE) replaced MMS in 2011.

But political leadership believed an escrow account that would be filled to $17 million would cover future issues, former officials said.

“They just thought this was something to get some additional production. You know: ‘Give this company a chance. We're gonna have an escrow account. We’ll be protected, and we can fall back on Phillips,'” Danenberger said, referring to the firm that preceded ConocoPhillips.

Who ordered the green light for Signal Hill isn’t clear. But the George H.W. Bush administration — and its political appointees — were friendly toward oil and gas development.

Bush, a Republican, had built his fortune first in the West Texas oil fields and then in the Gulf of Mexico with the oil firm Zapata Offshore.

The director of MMS at the time was Barry Williamson, who would later lead the Texas Railroad Commission, which has at times been criticized for its oversight of the oil and gas industry. Bush’s Interior secretary, former New Mexico politician Manuel Lujan Jr., was jostling for more offshore development in the early 1990s, even as he juggled the fallout of the Exxon Valdez tanker oil spill off the coast of Alaska.

Lujan, who died in 2019, faced criticism from environmentalists during his tenure for his drilling stance. He framed the Exxon spill in Alaska as a problem with oil transportation and warned against blaming the nation’s offshore drillers.

"While tankers continue to spill oil into our waters, and offshore drilling continues to provide a record of environmentally sound production, why are we attacking offshore drilling?" Lujan said at the time.

The complicated question of who pays

Federal agencies did not always have strict rules to force oil and gas companies to decommission old wells and platforms. Many companies only held general bonds that covered just a portion of the ultimate cost, said Danenberger, who now runs a blog exploring offshore regulatory issues and news.

Former owners of oil and gas assets were also not expected to pay if a later owner folded. In a 1988 letter obtained by Danenberger's blog, then-MMS Director William Bettenberg told the Amoco Production Co. flatly that the Interior Department "will not proceed against" prior owners if a company is "unable to fulfill its obligations to plug and abandon wells and remove facilities."

Interior reversed that position in the 1990s.

BOEM confirmed in a statement that it can hold prior holders of a federal lease liable for decommissioning.

That’s more complicated than it sounds for the thousands of platforms off the U.S. coasts, many changing hands from company to company over decades, said Frank Rusco, director of the Government Accountability Office's natural resources and environment team.

GAO’s investigation into offshore decommissioning found that BSEE — the agency tasked with forcing decommissioning — has been hesitant to “test its strength,” not knowing what would happen if a legacy oil company took the bureau to court. Each decommissioning conflict so far has been solved through a mix of negotiation and light force, Rusco said.

“The way that regulations are, if you've ever held a lease, then you're responsible for decommissioning all the stuff that was on that lease at the time that you sold it, but it's not clear how far back you can go,” Rusco said. “BSEE has gotten some folks to pitch in and take over previous lease owners, … but if they tried to enforce that, broadly, it would end up in the courts no doubt, and they're not sure what the outcome would be.”

The question of who pays is becoming more pressing as older oil and gas operations in the Gulf of Mexico edge toward retirement, and following several high-profile bankruptcies.

In 2021, for example, the Fieldwood Energy bankruptcy resulted in roughly $7 billion worth of cleanup costs meted out in part to former owners.

The more recent Cox bankruptcy threatened to revive the issue — the company had roughly $4.5 billion in total estimated cleanup costs for Cox and Cox-affiliated offshore assets. The company avoided a crisis by selling much of its older platforms and wells.

Rahul Vashi, a partner in the Houston office of the Gibson, Dunn & Crutcher law firm, said the current assumption for most legacy oil operators is that they could be forced to cover the decommissioning of older assets.

“For assets that have been off the books for years and may have been sold at a time when producers and regulators were less focused on end-of-life decommissioning, operators have to prepare for the possibility, or perhaps likelihood, that they could be left responsible for a massive liability,” he said.

The Hogan and Houchin case is challenging those assumptions.

BOEM estimated in 2020 that the platforms and infrastructure for Hogan and Houchin would cost $85.6 million to remove. But legacy owner ConocoPhillips — alongside Devon Energy and Occidental Petroleum — is fighting orders to pay it, and none of the cost is covered by supplemental bonds, according to BOEM’s records.

Smith, the former MMS official, said the oil and gas industry’s perspective could be that the Interior Department is the one that failed with Hogan and Houchin.

“ConocoPhillips is saying, ‘No, we're not responsible for the full cost. … As an agency, you were responsible for ensuring that bond money was there, and you're negligent. So why should we cover your negligence?’” Smith said.

'Worst operators on the OCS'

When Signal Hill took over Hogan and Houchin, it was the first independent oil company to venture into those waters. All former players in the Pacific's offshore oil industry had been oil majors.

But the Carone brothers — and their engineering manager Steven Coombs — never succeeded in bringing Hogan and Houchin back to booming. Their company also fell behind financially, missing regular payments to the original decommissioning escrow account, recalled Smith.

Signal Hill also built a reputation for safety violations and poor upkeep of their facilities, validating the initial warnings from MMS officials, according to former federal officials and California state records.

“They were the worst operators on the OCS,” Smith said, referring to the outer continental shelf.

By around 2010, MMS was demanding that Signal Hill fill the decommissioning account to about $67 million, its estimate of current cleanup costs, which was far more that Signal currently had in the account.

Federal officials went back and forth with Signal Hill, trying to get the company to fill the account. They were fearful, however, that demanding too much money could push the company into bankruptcy.

“We knew they were financially not that stable. So, we wanted to ensure the bond kept increasing without putting them out of business,” Smith said.

The fight lasted for years, with Signal Hill filing multiple appeals to the Interior Board of Land Appeals. Finally, Interior’s lawyers threatened to sue, leading to an out of court settlement that required Signal Hill to gradually contribute to the escrow account while allowing the company to use the money for decommissioning work, recalled Smith.

But Signal Hill dipped into the account for operational expenses too, draining available funds, according to a 2020 investigation from the Interior Office of Inspector General.

The OIG referred the potential fraud case to the U.S. Department of Justice, which declined to prosecute.

By this time, Signal Hill was unraveling.

Signal Hill’s final days

Signal Hill’s former executives could not be reached for this story, but their representative Bruce Cowen defended the company during a hearing in 2019 before the California State Lands Commission in San Diego.

“We've gone through a very difficult period the last five years,” he told regulators, who were weighing whether to yank the company’s right of ways for back rent. “We acknowledge we haven't paid. We want to make it right.”

Offshore oil platforms dot the horizon as a couple looks on at California’s Summerland Beach.
Offshore oil platforms dot the horizon as a couple looks on at California’s Summerland Beach. | Heather Richards/POLITICO's E&E News

Cowen cited the company’s struggle with declining oil prices, mudslides that knocked out coastal roads to its facilities and a 2017 fire that cost the firm millions in uninsured costs.

Bucking the company’s plea, the commissioners voted to terminate the company’s leases for pipelines in state waters and slammed Signal Hill’s record of noncompliance with the state and with federal agencies.

“The fundamental issue is that [Signal Hill] had an obligation to comply with the lease terms, and they failed to do so year, after year, after year,” said State Lands Commission Executive Officer Jennifer Lucchesi at the San Diego hearing, according to a transcript of the meeting.

Without the right to pass through state waters, Hogan and Houchin could no longer produce, effectively cutting off the cash-strapped company’s source of revenue.

In October of 2020, Signal Hill relinquished its offshore lease to BOEM and dissolved. A month later, BSEE ordered legacy owners ConocoPhillips, Devon Energy and Occidental Petroleum to decommission the platforms.

Those firms — none of which would speak to E&E News for this article — have appealed that order, and the Hogan and Houchin story has disappeared into the Interior Board of Land Appeals. The board, which settles regulatory disputes for Interior’s bureaus, only makes final decisions public.

BOEM does not have any money to cover decommissioning of the two platforms if the federal government were forced to take that liability.

BOEM said in an email to E&E News that it had secured an agreement with ConocoPhillips to use what financial assurance was available — a general bond for the Hogan and Houchin lease — to pay for upkeep of the platforms until decommissioning begins. The bureau did not provide details when asked for specific dollar amounts that it may require from the legacy owners.

But even if the Interior Board of Land Appeals rules against industry, the companies can still take the cleanup fight to district court.

If that happens, Interior’s requirement that former companies pay to decommission abandoned oil and gas infrastructure will be put to a legal test for the first time, said Danenberger.

Companies often don’t want their reputations bruised by fights over cleanup liabilities, but they could feel like it’s worth the public attention given the high cost of the old Signal Hill assets.

“If you're talking $100 million plus to take down Hogan and Houchin, [they] may not be worrying so much about what the public thinks,” he said.

Since 2020, ConocoPhillips has employed the Beacon West Energy Group to maintain the platforms, which were in a state of disrepair, according to state records.

Conoco declined to comment for this story given the ongoing dispute. But the company mentioned the Hogan and Houchin saga in its recent financial filings, saying it “continues to evaluate its exposure in this matter.”

Escalating costs

The conflict over Hogan and Houchin is arising now partly because California decommissioning is so expensive that companies are balking.

Smith, now an offshore energy consultant, said the cost to take down offshore oil platforms in the Pacific could be many factors greater than Interior has estimated — the result of age, water depth and lack of decommissioning resources on the West Coast.

All of California’s remaining oil platforms are older than the 30-year lifespan they were designed for, according to a recent decommissioning report by Smith and the consultancy firm TSB Offshore.

Hogan and Houchin weigh more than 10 million pounds each and sit in waters more than 150 feet deep. The TSB report estimates that the decommissioning cost for each platform could be two to three times higher than the $85 million estimated by Interior bureaus.

But they aren’t even the most challenging of California’s older infrastructure.

Heritage and Harmony, owned by Exxon Mobil, weigh between 138 million to 174 million pounds. Seven of the last California platforms are in water depths exceeding 500 feet, which is close to the world depth record for totally removing a conventional steel jacket platform from the ocean, according to TSB.

The cost for decommissioning is also high because California doesn’t have ships to take down oil platforms.

U.S. heavy lift vessels of the right size are in the Gulf of Mexico, the heart of the nation’s offshore oil and gas development. Ships could be brought from Asia and the North Sea at a high cost — ranging from $16 million to $66 million — but the Jones Act, a federal law to protect U.S. maritime jobs, also hampers efficient use of ships that are foreign flagged, the TSB report notes.

More light will be shed on California’s decommissioning outlook as the state begins to take down the Holly platform, which was abandoned in state waters by owner Venoco in 2017.

Lucchesi said Holly’s decommissioning has proved more costly than anticipated. But she noted that the high cost was partly because the state had to take over as an operator after Venoco walked away.

“That's a significant lesson that we have learned over the years,” she said. “We're not just taking operators’ numbers [on decommissioning costs], because that might be true for the operators. But it's not true in the worst-case scenario — where the state has to step in and take over.”

New rules

The Biden administration is only the latest to try and update bonding and decommissioning rules to protect the U.S. government from picking up cleanup costs. The Trump administration began reforms but didn’t finish them.

BOEM’s draft rules, released last year, would bring in an additional $9.2 billion in financial assurances by forcing some companies to provide supplemental bonds. The agency has said its approach will target the companies it views as most likely to go into distress.

Danenberger, the former MMS engineering chief, was critical of BOEM’s draft for nixing an earlier provision to require extra financial assurances from companies amassing violations. Missing payments and cutting safety corners is often a harbinger of financial troubles, as it was for Hogan and Houchin, he said.

BOEM said operators with more leases often have a higher number of violations, so that record is “not an accurate predictor of its financial ability to meet decommissioning obligations.”

Large operators are largely supportive of the supplemental bonds idea, which could cushion them from liabilities when properties are abandoned. But midsize oil companies have balked at the Biden administration rules, warning that pressuring companies to secure new bonds could lead to more bankruptcies.

Ibanez Amador, with Earthjustice, pushed back on those concerns.

The group was one of several that issued a letter to Interior following the GAO report demanding tougher enforcement of decommissioning offshore. She said if a company faces insolvency due to complying with cleanup rules or paying penalties, it’s a fair cost of doing business.

“They know from the very beginning of their operations what the penalties, what the liabilities, what the decommissioning costs, may be,” she said. “None of this is a surprise.”