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August 2018

Vol. 23, No.33 Week of August 19, 2018

AOGCC ups bonding

Minimum from $100,000 to $500,000, bonds would top out at $30 million

Kristen Nelson

Petroleum News

The Alaska Oil and Gas Conservation Commission has been reviewing its bonding requirements for drilling in the state - currently a minimum of $100,000 for one well and a minimum of $200,000 for multiple wells - and has settled on a multitiered proposal beginning at $500,000 and rising to as much as $30 million.

The bonding covers plugging and abandonment requirements.

Last year the commission considered a change requiring companies to provide estimates of costs to plug and abandon all of their wells, receive the commission’s concurrence on the amount and bond to cover that amount, with an update every five years - or whenever the operator made significant changes - and requiring commission concurrence.

For exploration wells, the commission proposed that when an operator applied for a permit to drill it must submit an estimate of costs to properly plug and abandon the wells, with a revision every year until the wells are properly plugged and abandoned.

The commission has dropped that approach and in proposed regulations published Aug. 14, the commission adopted a multitiered bonding approach, based on its current system, but with the required bonding amount increasing as the number of wells increases. The new minimum would be $500,000 for one to two wells, $800,000 for three to four wells, $1.1 million for five to six wells and steadily increasing, capping out at $30 million for 3,500 to 3,999 wells.

The commission said the proposed bonding changes would increase “the minimum bonding amount to more accurately reflect the costs of abandoning wells by establishing a multi-tiered bonding schedule based on the number of wells an operator has.”

Concern

The commission has been concerned about existing bonding amounts.

Commissioner Cathy Foerster told legislators in February of 2017 that as oil fields mature, the state will no longer have the luxury of dealing with large publicly traded companies with large balance sheets and long tract records - companies which she said would have a hard time sneaking away in the dark of night. As new and smaller companies come to the state, it increases the threat of orphan wells - wells which haven’t been properly plugged and abandoned.

Forester told legislators that in 2016 two companies operating in the state went bankrupt, with the potential of leaving the landowner holding the bag for plugging and abandonment liability. When Aurora Gas went bankrupt it had 19 west side Cook Inlet wells and only six were purchased out of bankruptcy, leaving 10 on Cook Inlet Region Inc. land and three on state land, making those the Department of Natural Resources’ responsibility. Eventually, Foerster told legislators, DNR will be coming to you for money to plug and abandon those three wells.

The real problem, Foerster and Commissioner Hollis French - now the chair of the commission - told legislators last year is not those three wells, but that more than 5,000 wells have been drilled in the state and as large companies tend to sell out of mature provinces to smaller companies, the state faces the problem of that P&A requirement falling on the shoulders of companies which don’t have the deep pockets of the major North Slope producers.

Foerster told legislators that while the commission can increase the required bonding amount - it’s regulations list minimums - bonding isn’t free. While more financially secure companies can get a bond for pennies on the dollar, for an independent the cost would be high and might be prohibitive, she said.

Objection to last year’s plan

Last year the commission proposed requiring bonding to cover the estimated cost of plugging and abandoning wells.

It drew industry criticism.

The Alaska Oil and Gas Association said in written comments on the 2017 proposal that it was concerned the “draft bonding regulation represents a ‘solution’ that far exceeds the risk.” AOGA recommended that the commission adopt a more tailored approach, looking at the risk and dealing “with operators who are financially distressed or whose past actions indicate a risk of noncompliance,” and noted that the federal Bureau of Land Management uses that approach, tailoring bonding for wells or operators with indications of greater risk.

ConocoPhillips Alaska said in written comments on last year’s proposal that it was important the commission “not adopt a program that unduly increases the administrative burdens borne by both the AOGCC and well operators in connection with bonding, such as the proposed requirement to estimate the abandonment cost for each particular well.” The company said the requirement for providing abandonment cost estimates “would increase the work required by the agency staff and well operators, and would increase the costs and uncertainty associated with bonding.”

Hearing scheduled

The commission has scheduled a hearing on its current proposed bonding changes for Oct. 16 at its Anchorage offices from 10 a.m. to 2 p.m. and said it will accept written comments through 4:30 p.m. Oct. 16 as well as through the end of the hearing.

The proposed regulations are available on the AOGCC website at http://doa.alaska.gov/ogc/.






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