Oil and Gas Bonds Adequacy Reviews

Each BLM SO administering an oil and gas program will oversee bond adequacy reviews on all bonds at least every five (5) years, or more frequently when warranted.  On a FY basis, these bond reviews will target 20 percent of the total active Individual Bonds (IBs), 20 percent of the total active Statewide Bonds (SWBs), and 20 percent of the total active NWBs for adequacy. 

The BLM SOs will focus on securing the bond increases for those operators that show higher risk factors as detailed in Section III of this IM. When a BLM SO or Field Office (FO) determines that a bond increase is necessary, the SO administering the bond is responsible for securing the bond increase within six (6) months unless the BLM office is pursuing enforcement actions under Section VI of this IM, “Recommended Protocol for Adjusting and Obtaining Bond Increases.”

I.          Bond Reviews

The BLM offices will perform bond adequacy reviews using the Bond Adequacy Review Instructions (Attachment 1) and document the reviews on the Bond Adequacy Review Worksheet (Attachment 2). When determining bond amounts, the BLM will consider all appropriate factors. If the Authorized Officer (AO) determines that the bond amount (IB, SWB, or NWB) is insufficient, the SO will take the necessary steps to increase the bond as described in Recommended Protocol for Adjusting and Obtaining Bond Increases (Attachment 3). Following a bond adequacy review, the AO should communicate any recommendations regarding bond adjustments (increase, decrease, or termination) with other SOs and FOs.

By October 31st of each year, the BLM SO will identify 20 percent of its IBs, SWBs, and NWBs that it intends to review during that fiscal year and provide it to the BLM Division of Fluid Minerals (HQ-310). Each administrative SO will coordinate the necessary FO reviews to ensure that all involved offices review their component of the appropriate SWBs or NWBs and consolidate multiple FO reviews (if needed) using Attachment 2.

NWB Reviews - Each BLM SO will conduct a review of at least 20 percent of NWBs annually. The SO will complete the bond adequacy review and use one Bond Adequacy Review Worksheet (Attachment 2) with all Federal wells and enforcement actions listed for each NWB.

SWB and IB Reviews - The administrative SO will decide the appropriate handling of the required bond reviews for its State. The FO or the SO may complete the bond review using Attachment 2. In all cases, the administrative SO must ensure it completes a comprehensive review and consolidates multiple FO reviews (if applicable) into one bond adequacy review using the Bond Adequacy Review Worksheet (Attachment 2) that includes all Federal wells and enforcement actions listed for each SWB or NWB.

If the SO requires the FOs to complete the bond adequacy reviews, it must notify the appropriate FOs by October 31st of each year of the IBs and SWBs that the FO will review during the fiscal year.

Empty Liability Bonds - The BLM defines empty liability bonds as bonds that have no apparent liabilities attached to the bond. As the BLM SO identifies bonds to review based on accepted and restricted bonds in the Mineral & Land Records System (MLRS), each SO will identify any empty liability bonds. The administrative SO maintaining the empty liability bond should send a letter using the Empty Liability Bonds Letter Template (Attachment 4) to the principal/obligor to determine if they are still interested in keeping the bond in-place or would like to start the bond termination process. When the BLM does not receive a response from the bonded principal/obligor or the letter is returned undeliverable because that principal/obligor is no longer in business, the BLM will take action to terminate the period of liability and close the bond based on the determination that BLM does not have any liabilities attached.

The SO should prioritize bond adequacy reviews for bonds with liability; therefore, the SO may opt to notate empty liability bonds in MLRS with a bond adequacy review that states the BLM identified the bond as an empty liability bond and will address the bond in the future.

AFMSS and MLRS Data Reports - To assist with completing reviews, HQ-310 developed Overview of Reports for Bond Adequacy Reviews (Attachment 5), which should be used for bond adequacy reviews. Please be advised, the Automated Fluid Minerals Support System (AFMSS) may have data issues until the system is stabilized. If your office is experiencing data issues, please contact HQ-310 with your specific challenges that need to be addressed.

Bond Review Triggers - In accordance with the BLM Handbook H-3106-1, Transfers by Assignments, Sublease or Otherwise; Release number: 3-295, the BLM may review a bond at any time per 43 CFR 3104.5(b). The BLM must review bonds in any of these situations:

• Prior to approval of a successor operator for units and communitization agreements;
• Whenever a change of operator occurs;
• If the BLM has not reviewed a bond within the last five (5) years; and
• When other surface management agencies request the BLM to increase a bond amount, the BLM will ensure that the bond adjustment is consistent with applicable statutes and regulations. This can be based upon the full cost of surface reclamation or by using this IM’s policy to calculate the bond amount.

Bond Riders - When reviewing the bond amounts, the office should keep in mind that bond riders may be specific to a certain office, location, or liability. When the bond rider is specific to an area, the office should ensure that it is excluding the bond rider when conducting the bond review for the total liability under this policy.

II.        Authorized Officer’s Discretion

The AO may consider reducing or increasing the bond amount based upon, but not limited to, the following factors:

• Where an operator conducts all operations in a prudent and timely manner, while maintaining a history of compliance, the AO may override the increase in the operator’s bond during the current bond adequacy review cycle. This is especially true for operators demonstrating progress as they take over aging facilities from past operators and provide due diligence to the operations.
• Where the operator reduces the liability covered by the bond by plugging and abandoning wells and adequately reclaiming all associated surface disturbance, the AO may consider reducing the bond amount.
• Where an operator poses an increased risk, the AO will require an increase for the bond beyond the increased amount derived from using Attachment 2.

Beyond the derived amount from Attachment 2, the AO will determine any increase based upon the history and the trend of bond increases for similar situations and the liability posed by the operator. However, the adjusted bond amount cannot be less than the minimum regulatory amount (see 43 CFR 3104). If the AO deviates from the points assigned in this worksheet or the recommended amount of bond increase or decrease, the AO must document the reason(s) and include the documentation in the well file and in MLRS.

When there is an increase of more than 200 percent of the existing NWB amount, the SO may choose to phase in the bond increase, provided that the operator provides a plan to plug and abandon current idled wells and the SO continues to track the NWB until the required bond amount is obtained (ideally within six (6) months) and does not approve any new applications for permit to drill (APDs) for the operator until the increased bond amount is in place.

III.       Bond Adequacy Calculation

The BLM will measure the potential risk by reviewing the operator’s overall operations history and risk factors, in particular the number of nonoperational wells, such as wells that have been in gas shut-in, oil shut-in, or temporarily abandoned status for more than four years (relative number of inactive wells), and the operator’s history of noncompliance.

The reviewing offices should assign points as shown in Attachment 2, which assigns points (at $500 per point) based upon the potential risk identified by the BLM office.

In instances where an operator has over 50 percent of its wells considered idled, per 42 USC 15907(a)(2), the BLM will require a full liability bond for all of the operator’s operations.

IV.       AFMSS and MLRS Data Entry Requirements

APD Processing - The FOs must timely and accurately enter all bond information into AFMSS as well as verify and identify all Federal wells (excluding State or fee wells) by their appropriate bond number. The FO must enter bond information into AFMSS as soon as the AO approves an APD.

Bond Adequacy Review - The SO or the FO must enter Bond Adequacy Review data into MLRS within five (5) business days of conducting the review (refer to Attachment 6, Directions to Document a Bond Review in MLRS) and document the bond review in the applicable hardcopy case file. The SO will update actions on the bond in MLRS. When the AO approves a final abandonment notice, the AO must ensure that the FO removes the well from the associated bond number in AFMSS.

V.        Annual Reports

The Bond Adequacy Review Reporting Format (Attachment 7) provides the layout for this annual report. The SO must run the MLRS Bonds Reviewed Report and submit a consolidated statewide report to HQ-310 using Attachment 7. The annual bond review report must include all reviews completed in that FY. The NWBs and SWBs selected for review must also be included in the consolidated annual report as outlined under “Bond Reviews” Section I of this IM. Please refer to Attachment 5 for details on running the MLRS report. This report lists the bonds that the FOs reviewed (bond number); whether the bond amount increased, decreased, or remained the same; and any necessary remarks. 

The BLM SOs will attach a short cover letter to the annual bond review report summarizing the number of bond reviews and the resulting number of bond adjustments conducted during the FY. The annual report, covering bond adequacy reviews from the beginning of the FY (October 1) to the end of the FY (September 30), is due to HQ-310 on October 31 of each following FY.

The reporting format in the annual bond reports must include the following:

• Bonds reviewed by bond number;
• The bond type: NWB, SWB, or IB;
• If the recommended bond amount is Increased (I), Decreased (D), or Unchanged (U);
• Current bond amount and new recommended bond amount (if applicable);
• Amount of bond increase or decrease with remarks;
• Number of bond increases from the previous FY bond reviews that were secured; and
• Summary data of bond reviews from all FOs in one spreadsheet tab.

VI.       Recommended Protocol for Adjusting and Obtaining Bond Increases

The SOs should secure any necessary bond increases as quickly as possible. The goal is to secure the full value of all deficient bonds within six (6) months of identifying an inadequate bond. All SOs must ensure the rider, which increases the total bond amount, covers all operations under the bond.

If the operator does not respond to the SO’s request to increase the bond amount, the SO should coordinate with a certified inspector to commence enforcement actions against the operator. The SOs should review Attachment 3 when dealing with nonresponsive operators.

However, if the operator is under bankruptcy, this may not be applicable. The SO will coordinate with the Department of the Interior’s (DOI’s) Office of the Solicitor (SOL) relating to all adverse actions and bond increases during bankruptcy proceedings