HOUSTON, June 17 (Reuters) -

Texas, Louisiana and Mississippi on Monday sued the U.S.

government to block the Biden administration's proposed rule

that would require the offshore oil and gas industry to provide

nearly $7 billion in financial assurances to cover costs of

dismantling old infrastructure.

The rule, which would take effect later this year, will

predominantly affect smaller companies that do not have

investment grade ratings or sufficient proven oil reserves. Oil

majors are more likely to meet the credit criteria or have large

reserves.

The lawsuit was filed against the U.S. Bureau of Ocean

Energy Management (BOEM), which has said the rule could affect

around three quarters of operators in the Gulf of Mexico.

The BOEM did not immediately respond for comment on the

suit. When the rule was announced in April, the Department of

the Interior said it was "to protect taxpayers from covering

costs that should be borne by the oil and gas industry when

offshore platforms require decommissioning."

Decommissioning old wells can cost billions of dollars

and that expense could fall to taxpayers if companies fail to

meet their obligations due to bankruptcies or the transfer of

assets from large to smaller companies with fewer resources.

Louisiana Attorney General Liz Murrill filed the lawsuit

in a Louisiana federal district court and was joined by attorney

generals of Texas and Mississippi.

"This is a really egregious direct assault on

intermediate level producers of oil and gas, and that affects a

lot of business in our state," Murrill told Reuters in an

interview.

"The new regulation is a solution in search of a

problem, imposing unnecessary financial burdens that will have

far-reaching impacts to many small to mid-size energy producers

and all Americans," said Kevin Bruce, executive director of the

Gulf Alliance, a coalition of leading independent offshore oil

and natural gas producers joining the legal challenge against

the BOEM.

Some 37 offshore oil and gas operators have filed for

bankruptcy since 2009, according to a U.S. government agency.

"This is a significant cost to our industry that would

really put a lot of people out of business," said Mike

Minarovic, CEO of Arena Offshore, which operates more than 100

platforms in the Gulf of Mexico that produce some 50,000 barrels

per day of oil equivalent

The new rule could cost Arena Offshore some $800-850

million in surety bonds, plus the costs of the bonds themselves,

Minarovic said, citing government estimates of decommissioning

cost.

Minarovic pointed to an outflow of money from surety

markets in the past five years and said securing the bonds

required to guarantee fiduciary and contractual obligations

"will just be a requirement the government has that cannot be

fulfilled."

As of June 2023, more than 2,700 wells and 500 platforms

were overdue for decommissioning in the Gulf of Mexico,

according to the U.S. Government Accountability Office, pushing

the government to require operators offer additional surety

bonds in a bid to protect taxpayers from footing the bill.

The BOEM held around $3.5 billion in supplemental bonds

to cover between $40 billion and $70 billion in total estimated

decommissioning costs.

Under the new rule, the BOEM will allow current lessees

and grant holders to request phased-in payments over three years

to meet the new supplemental financial assurance demands

required by the rule.

It was unclear yet whether the ruling would pressure

offshore production. Minarovic said there could be shut ins if

companies are unable to provide the bonds in time.

The U.S. Gulf of Mexico produces roughly 1.8 million

barrels per day of oil, according to the last government

figures, about 14% of total U.S. output.

"These (oil) companies should pay their fair share

and clean up the mess they leave behind, and that starts with

assurances like this one", Mike Scott, Sierra Club national oil

and gas campaign manager told Reuters.