Vol. 25, No.32 Week of August 09, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Bonding limbo

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AOGCC’s proposed surety well bond revisions don’t fix duplication, overlap

Kay Cashman

Petroleum News

More than a year after first being asked by the Alaska Department of Natural Resources, a landowner, to reconsider their new surety well bonding regulation that contains much higher bonding costs and duplicates the coverage required by landowners, the Alaska Oil and Gas Conservation Commission is proposing revisions that do not resolve the problem of overlap with DNR financial assurance agreements.

Typically, the agreements that DNR requires of operators cover the proper plugging and abandonment of wells; the most common exception being large oil and gas companies such as BP, ConocoPhillips and ExxonMobil which are self-insured.

Rather, the quasi-judicial commission is proposing language that appears to clarify what was already understood - that it will only allow a reduction in the bond amount if an operator demonstrates it has coverage in place with the landowner that is “dedicated exclusively to the plugging and abandonment of a well or wells.”

Similar to the coverage required by AOGCC under its new bonding regulation that went into effect April 18, 2019, DNR’s “bonds held for the plugging and abandoning of wells will only be released after the work has been performed,” DNR Deputy Commissioner Sara Longan said in an early May 2019 letter to AOGCC that asked for reconsideration.

Three extra years

The primary change proposed in AOGCC’s Aug. 4 public notice increases the number of annual installments an operator can make from 4 years to 7 years. These payments are for what AOGCC billed operators for retroactive bonding increases.

AOGCC’s new bonding regulation reflects concerns that previous bonding levels fell short of the realistic cost of plugging and abandoning wells. If an operator fails to P&A a well and has insufficient bonding to cover the costs, those costs fall on the landowner; on state land that is DNR.

Prior to the new bonding regulation enactment in April 2019, the commission generally required bonding at the statutory minimum level of $100,000 for a single well and $200,000 for blanket coverage of all an operator’s wells in the state. Under the new regulation the required bonding is $400,000 per well for one to 10 wells; a $6 million bond for 11 to 40 wells; a $10 million bond for 41 to 100 wells; a $20 million bond for 101 to 1,000 wells; and a $30 million bond for more than 1,000 wells.

Six small companies protest

Under some circumstances the commission may increase or decrease the required bonding level, but of the filings for reconsideration filed by six small oil and gas companies - AIX Energy, Alaskan Crude, Amaroq Resources, Cook Inlet Energy, Malamute Energy and Savant Alaska - only one company’s bonding has been reduced.

In late March of this year, AOGCC reduced the bond required for four AIX Energy wells at the Kenai Loop field from $1.6 million to the $200,000 bond AIX already had in place with the commission, based on the company having a $950,000 certificate of deposit in place for plugging and abandoning with the landowner, Mental Health Trust Land Office.

On the issue of duplication of bonding between agencies, AOGCC Commissioner Dan Seamount told Petroleum News in August 2019 that the commission is required by statute to have a bonding program.

Deter O&G investment

Longan said DNR was worried that the increases in the bonding levels would deter oil and gas investment in the state, and especially hurt small to mid-size oil and gas explorers and producers.

She also noted that the new bonding levels exceed those of other states.

“Current Alaska bonding requirements already parallel or exceed other states. For example, New Mexico’s counterpart to AOGCC has a law similar to Alaska’s which allows producers to provide a ‘blanket plugging financial assurance’ not to exceed $250,000. Texas is also similar to Alaska. It has a three-tiered bonding schedule which is capped at $250,000 for producers with more than 100 wells. North Dakota requires a blanket bond for all wells of $100,000,” Longan told Petroleum News in an Aug. 6, 2019 email.

In October 2018, under former Gov. Bill Walker’s administration, DNR had provided comments during the public comment period for the new regulation that did not raise these concerns or the issue of duplication, and instead supported AOGCC’s actions.

It should be noted that Walker was decidedly less supportive of Alaska’s oil industry than the current governor, Mike Dunleavy, and that the AOGCC bonding amount hasn’t changed in at least 40 years. (The current equivalent of the minimum 1980 bond amount of $100,000 would be $350,000.)

Separate authorities

Longan also said Aug. 6, 2019, “Agencies often have shared goals and separate authorities to help protect the state’s interest during the operational life of a field including the proper DR&R. We have suggested AOGCC collaborate with DNR to fully understand the comprehensive state bonding requirements. Without agency collaboration, there will be duplication and overlap.”

And collaboration seemed to finally be happening - see story in June 20 issue of Petroleum News titled, “Duplicate bonding solved? AOGCC appears to be working with landowners that do initial surety bonding.”

“Since AOGCC implemented its new oil and gas surety bonding standards, DNR and AOGCC have successfully been working to increase our coordination, with a goal of ensuring all parties fully understand existing statewide bond coverage,” Longan told Petroleum News in a June 1, 2020, email.

Neither Longan nor AOGCC Chair Jeremy Price was able to comment on the proposed changes on Aug. 5.

AOGCC has scheduled a hearing on the changes for Sept. 1. Written comments can be submitted until 4:30 p.m. on Sept. 10.

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