Providing coverage of Alaska and northern Canada's oil and gas industry
August 2019

Vol. 24, No.33 Week of August 18, 2019

New bonding reg criticized

Field operators say AOGCC retroactive bonding increase illegal, deters investment

Kay Cashman

Petroleum News

The comments “making it retroactive is illegal” and “will hurt oil and gas investment in Alaska” and “the new regulation favors big companies, hurts small companies, and overlaps with DNR, BLM bonding” best sum up the majority of remarks received in a survey about the increase in bonding levels for Alaska wells that was enacted in April by the Alaska Oil and Gas Conservation Commission, or AOGCC.

Petroleum News conducted the survey of oil and gas operators in Alaska on Aug. 13 and 14, including some with fields soon-to-be-online.

Two other comments often repeated using similar language were, “the state of Alaska already has a reputation of being untrustworthy; this new regulation confirms it in the eyes of the worldwide petroleum industry.”

That said, there was one operator who commended AOGCC’s new regulation and the work that went into it on the part of the agency, saying the commission appeared to have created a workable logical, tiered approach to bonding.

Two of the members involved in enacting the new regulation are no longer serving on the three-person independent commission, prompting queries as to whether AOGCC will rescind or revise its new bonding reg.

AOGCC’s geologist seat is held by Dan Seamount, appointed in 2000 by former Gov. Tony Knowles, reconfirmed in 2006 by former Gov. Frank Murkowski, and again in 2012 by former Gov. Sean Parnell, and yet once again in 2018 by former Gov. Bill Walker.

Also commissioners when the new bonding reg was approved were Hollis French in the public seat, who had been appointed by Walker, and Cathy Foerster in the petroleum engineer seat. She was appointed by Murkowski and reappointed by Parnell.

Current Alaska Gov. Mike Dunleavy dismissed French Feb. 26, alleging neglect of duty.

On March 7, Jessie Chmielowski was named to the commission to fill the petroleum engineer seat vacated by Foerster.

As reported in the Aug. 11 issue of Petroleum News, “AOGCC’s new bond levels still under fire; Longan dissatisfied,” the commission appears to have no intention of rescinding or revising its new bonding regulation.

And any question about whether the new bonding regulation was retroactive was put to rest when well owners began receiving certified notices that they owed upwards of $1 million in additional bonding for wells drilled in past years that had not been plugged and abandoned.

All survey respondents are anonymous (whether they wanted it or not), so no companies are named in this article. Also, specifics were removed from comments so that the company could not be identified.

Poor use of funds

“The changes in 20 AAC 25.025 is bad public policy for Alaska and its citizens. It creates an immediate and dramatic economic risk to an already sputtering economy,” one respondent said, calling additional bonding of several million dollars a poor use of “our hard-earned money - money that should be spent on exploration and development.”

“The owners of our company, which have an active field up here and is interested in doing more drilling, will probably vote to close shop.”

His firm’s counsel has advised “that imposition of an arbitrary and capricious new bonding requirement of this magnitude on a small Alaskan-owned company causing the operating company to close meets the legal parameters of an ‘administrative taking.’ … A 2,000% increase in bonding requirements for a small independent is not in the interest of the State of Alaska, its citizens, or the investors who have placed their capital at risk in operations on an oil and gas lease issued by the State of Alaska.”

Another respondent said,” Small companies will need to post cash, and this will be money that sits in an account versus being invested in development. … Fewer small companies will come to Alaska, more will go bankrupt, less money will be invested in oil and gas development resulting in less royalties and more headaches for the State.”

The AOGCC has created a “much larger and more immediate risk of reducing the commercial attractiveness of Alaska as a venue for oil and gas companies to operate. Some small existing operators will either stop drilling new wells or will be forced to close as consequent to this egregious bonding burden,” another respondent said.

Duplication between agencies

“The concerns that the AOGCC may be attempting to address with the bonding changes are already being addressed by the DNR (Alaska Department of Natural Resources) through the DR&R requirements associated with oil and gas leases. Duplicating these efforts with massive increases in the AOGCC bonding requirement is redundant and contrary to Alaska’s economic health. The State of Alaska may have different budgets for different departments and entities. But macroeconomically, State government is one large entity that exists for the benefit of the citizens of Alaska. Duplicating protections across various divisions of State government is not in the best interest of Alaska’s economy or its citizens,” one respondent pointed out.

Another operator wrote in an email, “Some of my answer depends upon how much accommodation the AOGCC provides for duplicative DNR (and in some cases EPA) bonding already in-place. I am supportive of the need for companies to demonstrate their financial wherewithal to address their expected abandonment costs, but the regulations definitely favor larger companies indiscriminately - i.e., without consideration for the respective company’s credit. It also bothers me that the State requires that I deal with two agencies on this issue (DNR and AOGCC).”

Another operator said he supported the Alaska Oil and Gas Association’s recommendation to AOGCC of “a holistic approach to modifications of current regulations in conjunction with other state agencies, private landowners, large and small producers and all other stakeholders.”

Another respondent said, “The existing regulations have been in place for many years and worked well. In our view, the DR&R requirements used by DNR cover the concerns that the AOGCC may be trying to address with this increase in bonding. Changes to the existing regulations and implementation of the proposed bonding requirements will have a direct impact on our forward operations in Alaska and our capital requirements. We urge the AOGCC to reconsider implementation of these new bonding requirements and leave the existing bonding regulations in place. Alternatively, implement a coordinated and collaborative review, with industry and other State bodies prior to considering changes to the existing regulations.”

Another operator said, “There needs to be a more common-sense approach to these bonding requirements if the people of Alaska are going realize the long-term benefits of being a major oil producing state.”

Alaska untrustworthy

“Alaska has a way of moving the goal posts that is, inevitably, to the detriment of smaller operators. Whether that be via broken promises at the government level, in relation to paying down the tax credits, or by changing the tax system itself or through introduction of new regulations or legislation. … It is the little guys that get stepped on. And what happens when the little guys get edged out? The big guys have the sandbox all to themselves again,” said an operator.

Another said “The AOGCC regs will have the same effect as recent changes in the production tax system. They will increase costs for smaller and new operators, while not affecting the big producers. By increasing the bonding by $400K for each well up to 10, it will, by its very structure, increase the cost of each new well. The State should establish a bonding pool that can spread the risk of an unfunded P&A across the entire industry.”

More on unfairness to smaller companies

One operator said AOGCC’s new bonding regulation “creates economic hardship” and will “possibly force some out of business … resulting in orphaned wells.”

Further hardship is “created by the unreasonably short implementation timeframe of 90 days,” noting that his company’s insurance company said it would be “highly unlikely” his company could secure the additional bonding given the 90-day limit.

Posting a new $___-multi-million bond instead of his current AOGCC $200,000 bond currently in place is an “unwise use of exploration and development funds” for his firm and would be better invested in states such as “California, Colorado, North Dakota, Louisiana and Texas” where “bonding rates are much lower.”

Another respondent said, “The State of Alaska Constitution has one of the clearest and most unambiguous equal protection clauses found in any jurisdiction worldwide. On a per well basis, the changes in 20 AAC 25.025 are clearly biased against small Independents. The drilling of one shallow gas well requires a $400,000 bond. A company operating 2,000 deep oil wells is required to post a bond in the amount of $15,000 per well.”

AOGCC “could argue that there is a greater risk of a small independent going bankrupt than a major. Therefore, differential bonding requirements are appropriate and necessary. I would like to remind the AOGCC that BP entered very dire financial circumstances during and after the Macondo blowout debacle in the Gulf of Mexico. Bankruptcy was a serious possibility at that time. Beyond BP, Texaco’s 1987 bankruptcy is proof positive that big oil and gas companies can become bankrupt. Conversely, there are many examples of small Independents that have grown into larger successful oil and gas companies (e.g., Hilcorp).”

Another respondent said, “It is our view that these proposed regulations would create risk to the State by way of impeding new business development. Specifically, smaller companies will be disproportionately disadvantaged. These smaller companies are the ones that have predominantly led the charge in changing legacy views in relation to the exploration potential of the State.

Another operator said, “This bonding is punitive. It is not only punitive to a normal operator like me but it clearly violates the terms that the United State government made with Alaska homesteaders prior to statehood. They said, if the homesteader proved up on their acreage in two years, they would own the surface and all the oil and gas below the surface. But as a practical matter they don’t because oil cannot convert to an asset until reaches the surface - it must be drilled and then it converts to the homesteader’s ownership. Obviously, AOGCC’s new bonding clearly prohibits him from ever doing that. The average homesteader can’t put his hands on $400,000 just to get permission from one agency to drill his own well, above and beyond what he must put out for other bonding and the actual cost of drilling the well. He is tragically prohibited from developing his homestead and all the assets it has.”

Exceeds levels in other states

Several respondents mentioned the new AOGCC bonding levels “far exceed” those in other states, often citing what they knew of bonding in other locations, as well as DNR Deputy Commissioner Sara Longan’s statement published in the Aug. 11 issue of Petroleum News.

One even mentioned a 1996 survey that he had conducted, and which clearly illustrated the difference between Alaska and other states.

Independent Amaroq had given AOGCC in its comments prior to enacting the new regulation a chart that showed the difference in costs between states (see pdf of this issue in which chart appears).

As for Longan, she had said, “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.”

Lawsuits in the making

Quoting two different state statutes, three operators said they were in the early stages of preparing lawsuits against AOGCC and its members.

“I am financially capable and willing to take this all the way to the U.S. Supreme Court if necessary. … My counsel assures me I have a 99 percent chance of winning,” one operator said. “In court damages could be collected from each and every commissioner jointly and severally.”

Another said, “I’ve had enough of this sh___. I’m not giving up just because they think they can push us around. Someone has to stand up to them. I can pay the legal bills, so I am going to do it.”

Another respondent said, “it’s time for a class action lawsuit,” although he intends to sue with or without others.

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