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Bond regs questioned
DNR asks AOGCC to reconsider recent changes to well surety bonding levels
Alan Bailey Petroleum News
Sara Longan, deputy commissioner of the Alaska Department of Natural Resources, has written to the Alaska Oil and Gas Conservation Commission, asking the commission to reconsider new regulations that the commission recently issued for the surety bonding of Alaska oil and gas wells. DNR is worried that the very large increases in the bond levels will deter oil and gas investment in the state and that some small operators may be forced to discontinue operations.
“We note that many small and mid-size operators are responsible for a significant portion of the natural gas production in Cook Inlet,” Longan commented. She also said that, while production costs in Alaska are much higher than in other states, the new bonding levels “exceed those of other states by orders of magnitude.”
DNR has its own bonding requirements to assure adequate restoration of surface land around wells - the AOGCC bonding deals with the subsurface plugging of wells that are abandoned. DNR thinks that it and AOGCC could coordinate their financial assurance procedures, to avoid overlapping requirements. Apparently, DNR financial assurance agreements with producers often include assurance for the effective plugging and abandonment of wells.
Unrealistic bonding levels AOGCC’s new bonding regulations, which came into effect on April 18, reflect concerns that the commission has harbored for some time that previous bonding levels fell far short of the realistic cost of plugging and abandoning wells. If an operator fails to plug and abandon a well and has insufficient bonding to cover the plugging and abandonment costs, those costs fall on the landowner, in many cases the state.
In the past the commission has generally required bonding at the statutory minimum level of $100,000 for a single well and $200,000 for blanket coverage of all of an operator’s wells in the state. Under the new regulations 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. Under some circumstances the commission may increase or decrease the required bonding level.
DNR, on the other hand, requires a $500,000 statewide bond to cover an operator’s liability for the restoration of surface land. The DNR commissioner can, however, require additional financial assurances, if deemed necessary.
DNR suggests rework DNR suggests that AOGCC rework its bonding requirements, setting a more reasonable baseline level that can be adjusted up or down, depending on the circumstances. The commission should also consider potential overlaps with DNR financial assurance agreements, Longan wrote. Although AOGCC’s regulations do allow some flexibility in bonding levels, that flexibility starts at a very high bond level and can only be based on four specific factors - moreover, the regulations do not require AOGCC to collaborate with DNR, to identify any overlapping obligations and to determine whether DNR has already secured sufficient financial assurance, Longan wrote.
Significant hardship Longan told the commission that Alaska’s Division of Oil and Gas has analyzed the potential commercial impacts of the new bonding regulations on the state’s oil and gas leaseholders, particularly small operators, and has determining that compliance with the regulations will lead to significant hardship for existing oil and gas producers.
“The regulation’s new bonding levels run the risk of reversing the state’s efforts over the last decade to encourage smaller and mid-sized operators to invest in Alaska,” Longan wrote. “Many of these investments by such operators have led to the discovery of significant new oil and gas reserves.”
And, although the new regulations allow existing producers to ramp up their bonding levels in four annual installments, these installments are large enough to represent a significant increase in bonding obligations, Longan wrote. Longan also commented that the bonding requirements do not take into account the difference in potential plugging and abandonment costs between a well, say in a remote region of the North Slope, and on the Kenai Peninsula road system, for example.
Previous division comments The development of AOGCC’s new regulations was a lengthy process, involving public hearings and opportunities for public comment on various draft versions of the regulatory proposals. In a letter to the commission in October 2018, during a public comment period for one iteration of the draft regulatory changes, the division told the commission that, in cases where DNR is faced with having to deal with the plugging, abandonment and surface restoration of wells, the surety bonding levels have generally proven “grossly inadequate.” The funding shortfall has to be met through appropriations from the Alaska Legislature.
“In recent years the division has been addressing financial assurance of DR&R (dismantlement, removal and restoration) activities after negative experiences from bankruptcies of oil and gas companies operating in the state,” the division wrote.
Based on its experience, the division evaluates a company’s financial stability and determines whether some form of financial assurance is required in conjunction with a lease assignment, the division told the commission.
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