Oil and Gas Bond Adequacy Reviews
UNITED STATES DEPARTMENT OF THE INTERIOR
BUREAU OF LAND MANAGEMENT
WASHINGTON, D.C. 20240
August 3, 2006
In Reply Refer To:
3100 (310) P
EMS TRANSMISSION 08/08/2006
Instruction Memorandum No. 2006-206
Expires: 09/30/2007
To: All State Directors
From: Assistant Director, Minerals, Realty and Resource Protection
Subject: Oil and Gas Bond Adequacy Reviews
Program Area: Federal Oil and Gas Lease Operations and Bonding
Purpose: To reiterate regulatory and policy bonding requirements for oil and gas operations on Federal lands, including split estate lands, and on private lands.
Policy/Action: Each State Office (SO) administering an oil and gas program shall establish an action plan with a goal that operators on Federal oil and gas leases are reviewed for risk assessment and bond adequacy. The goal of the action plan is to develop a process to ensure review of operations on Federal oil and gas leases and include steps to increase bond amounts when it is determined necessary. When a review determines that an operator has an increase in activities, or when record title or operating rights are transferred and the transferor is the bonded party and is transferring all of its lease interests, or we are notified of a change of operator, the authorized officer (AO) will determine whether existing bonding is adequate.
The bond may be increased to any level specified by the AO, although the bond amount should not be increased solely on the number of wells on the lease. In no circumstance shall the bond amount exceed the total of the estimated cost of plugging and reclamation, the amount of uncollected royalties due, plus the amount of monies owed to the lessor due to previous violations remaining outstanding. If an operator’s bond coverage is determined inadequate, the bonded party will be contacted and requested to increase its bonding or negotiate a plan to reduce plugging obligations and/or conduct reclamation work.
Additionally, the bond may be decreased if the Federal liability on the bond is reduced. This may occur when plugging and reclamation activities are performed on a lease or leases while some operational liabilities still remain under the bond. In other instances, State or other local jurisdictions may require new or increased bonding for liabilities already covered by the Federal bond. If these other jurisdictional bonds may be used to pay for Federal liabilities covered by our bond in case of operator default, then these bonds may be considered in reducing the Federal bond amount (but not below the regulatory minimum). The AO should take into account all liabilities secured by such bonds held by other governments in determining whether it is reasonable to reduce the Federal bond coverage in reliance on these bonds.
It is important that idle and inactive wells be reviewed and that continuous reclamation monitoring be conducted to identify potential problems and liabilities and to assess adequacy of existing bond amounts. Attachment 1 contains standard business process descriptions for bond adequacy reviews.
This memorandum is not intended to force across-the-board increases for all bonds. Upon your analysis, however, there are likely situations where a bond increase should be pursued. The judgment and field experience of your staff is paramount in making these determinations. We are mindful of the need to maintain an acceptable risk level, yet not to place an undue burden on industry.
Implementation of this policy and its progress will initially be evaluated during FY 2007.
Policy Clarification: The AO has the authority to require an increase to an existing statewide or nationwide bond, as well as an individual lease bond, to cover a specific liability on one or several Federal leases. Liabilities may include produced water impoundment structures, wells with significant liabilities, surface production facilities, or other surface uses with significant reclamation liabilities. This type of bond increase can be accomplished via a bond rider that is reserved solely for the liability specified, so that other demands on the statewide or nationwide bond could not draw on that increased amount of the bond.
The AO also has the authority to require bonding for reclamation of off-lease lands or surface waters that may be adversely affected by operations necessary on the leasehold. Examples of off-lease liability could include disposal pits, on-channel reservoirs or produced water impoundments constructed on private lands for use by one or more Federal leases. Bonding for these types of off-lease liabilities can be covered by a bond rider attached to a lease, a statewide or a nationwide oil and gas bond and should specify the specific off-lease liability to be covered. The AO must take into account the existence of any other bond covering these off-lease liabilities required by BLM for example, a 2805 right-of-way bond, the State or other jurisdiction, in order to prevent duplication of bond coverage.
Timeframe: The guidance contained in this Instruction Memorandum is effective immediately.
Background: Task 7 of the National Energy Policy Implementation Plan requires the Bureau of Land Management (BLM) to explore improvements related to liability and reclamation of Federal oil and gas leases. The regulations under 43 CFR 3104-Bonds, require that the lessee, operating rights owner, or operator provide bond coverage prior to surface disturbing activities and to maintain adequate bond coverage during the operational period of a lease.
The AO may require an increase in the amount of any bond whenever it is determined that the operator poses a risk. Risk factors include, but are not limited to, a history of previous violations, a notice from the Minerals Management Service that uncollected royalties are due, or when the total cost of plugging existing wells and reclaiming lands exceeds the present bond amount based on the estimates determined by the AO and the lessees’ economic condition warrant concern about their ability to meet the cost of plugging and reclamation.
Budget Impact: Some additional resources to perform an increased level of operator, lease operations and bond reviews may be required.
Regulation/Manual/Handbook Sections Affected: Regulations at 43 CFR 3104, 3106.6 and 3163.3-1, and Handbooks 3104-1 and 3106-1.
Coordination: BLM Washington, State and Field Office Staff, and the Solicitor’s Office.
Contact: If you have any questions about this guidance, please contact Tim Spisak at (202) 452-5061.
Signed by: Authenticated by:
Thomas P. Lonnie Robert M. Williams
Assistant Director Division of IRM Governance,WO-560
Minerals, Realty and Resource Protection
1 Attachment
Bond Adequacy Review Process Description (2 pp)