The Alaska Oil and Gas Conservation Commission held a workshop in early June on proposed changes to the bonding required in its regulations.
Commissioner Cathy Foerster, then commission chair, discussed the reasons for proposed changes with House Resources in February. She said with new and smaller companies coming to Alaska, the state no longer has the luxury of dealing with large publicly traded companies with large balance sheets and long track records - companies that have a hard time sneaking away in the dark of night.
In 2016 two operating companies in the state went bankrupt, Foerster said, which has the potential to leave the landowner holding the bag for plugging and abandonment liability.
She said the commission was considering changing its bonding requirements and would probably spend the summer, fall and winter letting all affected parties be heard through public meetings and hearings.
AOGCC subsequently proposed regulatory changes for bonding, and held a workshop on the proposed changes June 6.
Oil and gas company participants at the workshop included the Alaska Oil and Gas Association and ConocoPhillips Alaska, both of whom followed up their workshop participation with lengthy written comments to the commission. While other companies participated in the workshop, they did not submit comments, although AOGA members include most of the state’s operating oil and gas companies.
Proposed changes
The commission currently requires bonding “in the amount of not less than $100,000 to cover a single well or not less than $200,000 for a blanket bond covering all of the operator’s wells in the state,” unless the operator can demonstrate that for a single well “the cost of well abandonment and location clearance will be less than $100,000.”
Proposed regulatory changes require that bonds or security “must be in the amount that the operator demonstrates to the commission’s satisfaction is sufficient to ensure all wells can be properly plugged and abandoned in accordance” with commission regulatory requirements.
The proposed regulation says that within a year of the effective date of the regulations the operator must apply to the commission in writing and receive its concurrence on the bond amount - and would be required to apply and receive concurrence every five years thereafter or when significant changes are made to the operator’s existing development, when the designated operator for a well changes or upon the commission’s request.
For exploratory wells, the proposed regulations require that when an operator applies for a permit to drill it must submit “a written application with the estimated costs to properly plug and abandon the wells and properly clear the sites,” and provide a revised application of bonding amounts every year until “the wells are properly plugged and abandoned and the commission has approved the location clearance.”
Bonding would be based “on the estimated cost to abandon all existing and potential wells that could be drilled from the operator’s developments and the cost to clear all of the operator’s sites” along with “detailed supporting information so that the commission can determine if the amount is reasonable.”
AOGA concerns
In a July 25 seven-page letter to AOGCC Chair Hollis French, Joshua Kindred, environmental counsel to AOGA, cited both high level and specific concerns. He said that while “AOGA agrees that it is prudent to reevaluate” bonding requirements to ensure the state is adequately protected from risk, AOGA is concerned that the “draft bonding regulation represents a ‘solution’ that far exceeds the risk.”
Kindred said that commission staff acknowledged in the workshop that the vast majority of Alaska operators were financially responsible and that over three decades there were only a handful of incidents where the commission’s existing bonding regulations resulted in tangible harm to the state.
“AOGA believes that it would be worthwhile to consider those incidents and determine whether a more narrowly tailored approach would have provided sufficient protection without adversely impacting the industry as a whole,” he said.
The proposed regulation would “dramatically increase” bonding costs, he said, and “would invariably chill investment, thus decreasing recovery of Alaska’s oil and gas resources.”
AOGA also said the commission’s regulations already allow it to increase the amount of required bonds, because they specify amounts “not less than” $100,000 for single wells and $200,000 for multiple wells, an approach consistent with that taken by the federal Bureau of Land Management and by other states.
With risks to the state different for every operator, AOGA said it would be better to provide the commission with flexibility in bonding “to review risks and deal with operators who are financially distressed or whose past actions indicate a risk of non-compliance,” and said BLM uses that approach, allowing bonding to be tailored for wells or operators with indications of greater risk.
ConocoPhillips Alaska
ConocoPhillips Alaska is not a member of AOGA, and Shon Robinson, the company’s manager of drilling and wells, provided four pages of comments to the commission on the proposed bonding changes.
He said ConocoPhillips does not oppose updating bonding requirements, but does oppose the language proposed by AOGCC prior to the workshop.
“It is important the AOGCC 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,” Robinson said. “Instead, the AOGCC should continue to allow for an appropriate blanket bond, while also allowing for adjustments to be made, in particular circumstances on a case-by-case basis.”
He said AOGCC staff said at the workshop that inflation since bonding amounts were last amended in 1999 have diminished the value of the bonds, citing that as the key reason for changes. While ConocoPhillips does not dispute inflation, Robinson said, “we see a substantial disconnect between that stated reason and the changes that have been proposed,” and the company recommends that AOGCC use its existing discretion to update the bond amounts “without proceeding with a new rulemaking.”
Robinson said ConocoPhillips opposes requiring abandonment cost estimates for each well, which he said “would increase the work required by the agency staff and well operators, and would increase the costs and uncertainty associated with bonding.”
Standardized bonding amounts, “consistent with past practice and current regulations, best serves the balance between burden and benefit,” he said, adding that the commission could chose to group standardized amounts in categories, giving as examples treating onshore wells differently from offshore wells or remote exploration wells differently from “development wells accessible from gravel.”
ConocoPhillips also encouraged the commission to continue to allow blanket bonds, saying they play an important role in ensuring proper well plugging and abandonment “without posing an undue obstacle to drilling new wells.”
The company also encouraged AOGCC to limit bonding to wells, not including pads or other facilities, and noted that landowners and other regulators sometimes impose bonding or other security requirements, and said pad remediation governed by the Alaska Department of Natural Resources and well abandonment governed by BLM were examples of bonding requirements addressed by other agencies.
Future workshops requested
Both AOGA and ConocoPhillips requested that the commission hold additional workshops on the bonding issue.
AOGA encouraged a discussion of alternative approaches to bonding regulations in a future workshop.
ConocoPhillips said it “urges the AOGCC to re-consider its approach to the bonding updates in light of the comments received” at the June 6 workshop, propose new language and hold another workshop.
As this issue of Petroleum News went to press, no further workshops had been scheduled by the commission.
