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A new bond proposal
AOGCC issues revised version of proposed new regulations for well bonding
Alan Bailey Petroleum News
Following a public hearing over proposed new regulations for the surety bonding of oil and gas wells in Alaska, the Alaska Oil and Gas Conservation Commission has published a revised version of its proposal. The bonding is designed to ensure that a well operator has the financial resources to plug and abandon a defunct well.
The new proposal sets a minimum bond level of $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 100 to 1,000 wells; and a $30 million bond for more than 1,000 wells.
At the request of the well operator, the commission can increase or decrease the bonding amount, if there is evidence that warrants an adjustment. And an operator with an existing bond will be allowed to increase the amount of this bond to the new required level in four installments over a period of three years.
The previous version proposed by AOGCC had set a minimum bond of $500,000 for one or two wells, $800,000 for three or four wells, $1.1 million for five or six wells, with the bonding amount steadily increasing through multiple steps to a maximum of $30 million for 3,500 to 3,999 wells.
Comments on the new proposal need to be filed with the commission by 4:30 pm on Nov. 27.
Statutory requirements State statutes require bonding of not less than $100,000 for a single well and not less than $200,000 for blanket coverage of all of an operator’s wells in the state. And traditionally the commission has only required bonding at these minimum levels, other than in situations where there have been regulatory violations.
But the commission has become concerned that these minimum bonding levels can fall far short of the realistic cost of plugging and abandoning a well. A well that has not been effectively plugged presents an environmental and safety hazard. And, if an operator does not have the financial wherewithal to conduct the plugging, or perhaps goes bankrupt, the plugging and abandonment liability falls on the landowner. In many cases the landowner is the state of Alaska.
Although, by statute, the commission can set bonding requirements at whatever level it deems appropriate, the commission has elected to set bonding levels by regulation, presumably to provide some clarity over bonding expectations.
A problem for small companies But obtaining a large bond may prove difficult for a company with relatively small financial resources. Thus, setting high bond rates may, in effect, preclude some small companies from developing Alaska oil and gas resources. During the recent hearing on the previous iteration of the bonding proposals, Amaroq Resources LLC, operator of six wells in the Nicolai Creek gas field on the west side of the Cook Inlet, told the commission that it is questionable whether the company would be able to obtain bonding at the required level. Without bonding, the company would go out of business and would not then be able continue to produce gas, or to plug and abandon its wells, the company said.
Questions raised During the hearing the Alaska Oil and Gas Association, representing a number of oil and gas producers in the state, expressed objection to the proposed major rise in bonding levels, saying that the increases were unprecedented and unreasonable. ConocoPhillips suggested reducing the number of bonding levels in the previous proposal: With the number of wells that a company operates liable to change continuously, the potential to frequently switch between one bond level and another would present a high burden in keeping the bonding up to date, the company suggested.
Other suggestions included the possibility of have a more unified state bonding procedure, combining the bonding requirements of different state agencies.
Environmental organizations and some Alaska citizens have expressed support for the AOGCC efforts to raise the bonding. Supporters argue that higher levels of bonding will reduce the risk of environmental damage from abandoned wells, as well as indemnifying the state against well abandonment costs. Opponents of the bond increases say that the result will be less development of Alaska’s oil and gas resources.
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