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AOGCC’s new bond levels still under fire; Longan dissatisfied
Kay Cashman Petroleum News
As reported in the May 26 issue of Petroleum News, Sara Longan, deputy commissioner of the Alaska Department of Natural Resources, wrote to the Alaska Oil and Gas Conservation Commission earlier that month, asking AOGCC to reconsider and revise their new regulation for the surety bonding of Alaska oil and gas wells.
Two of the commissioners involved in enacting the new reg, which had gone into effect April 18, were no longer serving on the three-person commission by that time.
DNR, she indicated, 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.
Longan also raised other issues, including potential overlap with DNR financial assurance agreements and the new bonding levels exceeding those of other states.
In October, 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 issues, and instead supported AOGCC’s actions.
It should be noted that Walker was decidedly less supportive of the oil industry in Alaska 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.)
New bonding levels Prior to enacting its new bonding reg, the quasi-judicial 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 an operator’s wells in Alaska.
Under the new scenario 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.
In reviewing testimony and comments prior to AOGCC’s new bonding regulation being adopted, some reflect concerns that previous bonding levels fell 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, supporters of the new reg said.
AOGCC’s response In early August, Petroleum News asked Longan whether AOGCC had responded to DNR’s concerns as outlined in her May letter.
On Aug. 6, she replied in an email.
“DNR met with AOGCC to share DNR’s Dismantlement, Removal, and Restoration (DR&R) bonding requirements, how there may be duplication among agencies, and we reiterated the concerns we raised in our comment letter. AOGCC reported they were unable to rescind or modify their regulations,” Longan said.
AOGCC Commissioner Dan Seamount told Petroleum News, on Aug. 6, “The regulation will not be rescinded or rewritten to go back to former levels. However, under the new regulation the amount of bond could change under 20 AAC 25.025 (3) which says ‘upon request of an operator, or on its own motion, the commission may increase or decrease the amounts set out in (1) of this subsection based on evidence that engineering, geotechnical, environmental, or location conditions warrant an adjustment of those amounts.’”
When asked, if there was a limit on how much they can be reduced, he responded, “The bond can only be reduced to how much is estimated to P and A the well. As you can see in the regulation there is a four-year time span to submit the total bonding amount. The AOGCC can approve requests for reconsideration if we feel that there are grounds for adjusting the bond amount. If we approve reconsideration, we will hold a hearing to evaluate the technical support for reductions (or increases) of the bonds.”
On the issue of duplication of bonding between agencies, Seamount told PN that the commission is required by statute to have a bonding program.
Duplication between agencies Petroleum News asked Longan whether the cost of plugging and abandonment was covered under DNR’s bonding.
“DNR requires a producer to have a statewide bond of $500,000 for surface operations (11 AAC 83.160(c)),” Longan replied. “The (DNR) Commissioner has discretion to require additional financial assurances from companies, which typically includes assurances to effectively cover proper plugging and abandonment (P&A).”
DNR, she said, currently has multiple financial assurance agreements with its lessees that require them to post a bond in excess of the $500,000 statewide bond.
“The bonds held for the plugging and abandoning of wells will only be released after the work has been performed,” Longan said.
“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.”
DNR’s comments in October did not mention any concerns about duplication.
Comparison with other states When queried about DNR’s concern that AOGCC’s new bonding levels exceeded those of other states, Longan replied as follows: “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.”
Big Nanushuk finds, BlueCrest success In Longan’s letter to AOGCC, she said their 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. Many of these investments by such operators have led to the discovery of significant new oil and gas reserves.”
When asked to give one or two examples of this, she said that cases include, “(1) work done by Repsol, Armstrong Energy and Oil Search Alaska at the Pikka project and Nanushuk formation on the North Slope” and “(2) BlueCrest Energy producing Cosmopolitan in the Cook Inlet.”
- KAY CASHMAN
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