In most states, oil and gas well operators that are involved in exploring, drilling and plugging of wells are required to secure a surety bond to guarantee the compliance of statutes and regulations set forth by each state for the issuance of a license or permit. An oil and gas well surety bond ensures that proper permitting has been obtained and conditions will be met in the exploring, drilling and plugging process. This also includes faithful performance of duties and responsibilities and protects the environment, State and citizens from harm.
Even with new technology, not all states need a form of financial security since the land and terrain is not likely to produce oil or gas. These states are mostly found on the eastern seaboard such as Delaware, New Hampshire, Vermont, Maine and Massachusetts. States such as Vermont have chosen not participate in exploration and drilling even though there may be a potential for gas and oil offshore.
Surety Bonds to Meet Financial Security Requirements:
Each state requiring a form of financial security will often accept a surety bond instead of a cash deposit, letter of credit or other form of security. The bond may be in the form of a single or individual well bond or a blanket bond that covers multiple well sites. Some states have a limit to the number of wells under a blanket bond, while others have no limit. Bond terminology may include wording such as: performance, indemnity, surety, conformance, domestic, inactive, deepened, converted, surface, plugging, drilling, abandoned, leased, re-opened, onshore, offshore, irrigated, non-irrigated, seismic, crude oil, natural gas, financial security instrument, and may reference the depth of a well and name or number of the well.
The bond amount may be determined by the depth of a well, type of well, the number of wells owned or leased and other well method information. Most states require a bond at all times and are considered non-cancellable until the well is plugged and the land restored. When a well is plugged and meets the states closure conditions, the state (the obligee) will no longer require a bond and will release it back to the surety that issued it. Bond amounts required by a state range anywhere from $1,000 and up to over a million dollars depending on the location of the wells (offshore wells generally require higher bond amounts) and the number of wells.
Operators may transfer a well to a new owner and a new bond will be required at that time to meet the state requirements. Failure to maintain a bond or pay for the annual continuation can result in a claim by the obligee (the state requiring the bond) and the operator will be required to repay the claimed amount. Operators can opt to replace a bond and in certain instances to find a better rate than was originally quoted if their personal credit has improved since the original bond was issued. A new bond may cost less and can be purchased to replace the existing bond. Sureties (the insurance company underwriting the bond) may also require financial records of the business during the purchasing of a new bond and may request financial reports annually or periodically thereafter.
Permit or License Requirements:
Each state has its own procedures for issuing a license or permit. The process generally includes providing details of the well location(s): including a plat(s) with land details, well construction and type of well casing and cementing, lease information (for leased land), drilling and operation information, and geologic information. The process may also include a site inspection, completion of the application, and payment of the permit or license fee.
Applying for an Oil and Gas Well Bond in Your State? The first step in applying for a surety bond is understanding the licensing or permit requirements of the state in which your well(s) will be located. The list below provides basic information for each state’s bond name and the state agency requiring the bond.