|
House considers deferral of bonding law Statute requires an oil company to purchase surety bond to protect suppliers but DCCED says developing regulations is challenging
The Alaska House is considering a bill that would defer until Jan. 1, 2019, the implementation of new statutes requiring oil and gas companies operating in Alaska to obtain a surety bond or deposit an equivalent amount of cash when obtaining a state business license. The statutes were introduced in 2016 as part of House Bill 247, the bill that reformed the state’s system of oil and gas production tax credits. But the Alaska Department of Commerce, Community and Economic Development says that developing regulations to implement the statutes is proving more difficult than expected and that more time is needed, to ensure that workable regulations are in place when the statutes become law. Protect small companies The idea behind the bonding requirement is to protect small Alaska service companies from having to refund to secured creditors money received for services rendered to the oil company, if the company files for bankruptcy. Under federal bankruptcy law, a bankruptcy court can require refunds on any payments made by the oil company for up to 90 days before the company makes its bankruptcy filing. The bonding requirement is for $250,000. The particular concern is small oil companies that may have marginal financial resources for projects that they undertake.
The poster child for the problem being addressed is the bankruptcy of Buccaneer Energy Ltd., a small Australian company that was active in the Cook Inlet but went bankrupt in 2014. Although, prior to its bankruptcy, Buccaneer had paid some of its service companies and suppliers for services provided, after the bankruptcy filing the court ordered these companies to refund the some of the payments, to the benefit of Buccaneer’s secured creditors. This refund requirement caused considerable hardship for the small-scale service companies impacted.
On April 24 Rep. Paul Seaton, sponsor of the deferral bill, House Bill 229, commented to the House Labor and Commerce Committee that Buccaneer, in particular, had enjoyed significant state support through Alaska Industrial Development and Export Authority financing for the jack-up drilling rig that the company had used in Cook Inlet. Yet people who had supplied fuel, water, moorage and other services to Buccaneer were told to repay money they had received for services rendered, Seaton said.
Surety bonds The bonds would work in a similar manner to the surety bonds commonly associated with licenses for professional occupations, except that a bond would be associated with a business license rather than with an occupational license. Under the terms of the statutes, the bonds would only apply to oil and gas companies that are not currently producing oil and gas - a company’s bonding requirement would be released once the company starts producing oil or gas in commercially viable quantities. And a pecking order for recovering funds from a bankruptcy surety bond favors fund recovery for the types of services that small businesses typically supply.
Fred Parady, deputy commissioner of DCCED, told the committee that his department had spent the past six months trying to develop workable regulations for the new statutes.
“We did not foresee the complexities that are involved in implementing these bonding requirements.” Parady said, adding that his department remains fully committed to implementing the statutes.
The complexities of implementation require coordination between DCCED, the Department of Revenue and the Department of Natural Resources. DCCED had published a notice soliciting public comments and industry input on regulation development and had received two comments, Parady said.
Which businesses? One complication consists of coming up with a legal definition of which types of business would require the bonding. All Alaska business licenses are categorized using what is referred to as NAISC coding, a national system of codes for all the various types of business activity. It turned out that about 23 of these codes might apply to businesses that require the new bonding, but that it was possible to whittle down this list to about four codes, Parady explained.
Unfortunately, however, issues arose when evaluating the impact of applying the bonding requirement to businesses with licenses linked to these codes. For example, an obvious code to use would be the one for “crude petroleum and natural gas extraction.” But Usibelli Coal Mine has that code attached to its business license and no one expects that company to have to comply with the bonding requirement, Parady said.
Other complexities relate to companies that have subsidiaries, with questions arising over the level within a company to which the bonding would apply. And what about a company active in Cook Inlet but which only has production on the North Slope?
In addition to a simple means of identifying which companies require bonding, the regulations also require clear criteria for when a company can be released from the bonding, once the company’s production is underway, Parady said.
Moreover, because DCCED currently associates surety bonds with professional licenses, and not with business licenses, a new process imposing funding requirements for business licenses could cause delays in the licensing process for companies that would not, in fact, require the new bonding, Parady said.
Cost and benefit Asked by Rep. Gary Knopp whether the benefit to be gained from the modest scale of the new bonding actually justifies the effort involved in resolving the complexities of the required regulations, Parady commented that the security provided by the bonding is significant for a typical small company.
“The little guarantee that we offer to a small business … is a substantive contribution to their future viability,” Parady said.
Parady added that, on the other hand, increasing the size of the bonding would increase the cost of doing business for the oil and gas company. At a $250,000 level, a surety bond might cost somewhere in the range $6,500 to $7,500, depending on the rate charged for the bond, he suggested.
|
