Oil and gas producers, particularly independents, are paying a heavy price in a bonding market that has grown increasingly tight in the wake of the Sept. 11 terrorist attacks and the bankruptcies of Enron Corp. and K-Mart, six major producer groups told the Interior Department Monday. They called on the agency to ease up on some of its bonding requirements for producers in light of market conditions.

“External events beyond the control of industry have severely limited the availability of bonds and led to a relatively tight market that is now hampering exploration and development efforts on federal lands to the extent that hydrocarbons are not being recovered due to the inability of industry to obtain the bonds necessary to satisfy regulators,” said the National Ocean Industries Association (NOIA), American Petroleum Institute, Domestic Petroleum Council, Independent Petroleum Association of America, Natural Gas Supply Association and the U.S. Oil & Gas Association.

“The tight bonding markets [are impacting] virtually every oil and gas company that conducts business on federal lands and waters,” the groups said in a letter to Tom Fulton, deputy assistant secretary of Interior’s Land and Minerals Management. Those most affected are independent producers, who depend on insurers to meet their bonding requirements, said NOIA spokesman Tom Michels. But larger producers that can self-bond — such as ExxonMobil — also are feeling the pinch as they try to sell lease properties to smaller third parties who face bonding uncertainty.

“If a lessee [producer] is unable to sell a property that previously would have been marketable absent current bonding market conditions, it may be forced to prematurely abandon the property resulting in the loss of domestic natural gas and oil resources and lost revenues for state and federal governments and the private sector,” the oil and gas groups said.

Interior’s Minerals Management Service (MMS) and Bureau of Land Management (BLM) require producers on federal offshore and onshore lands, respectively, to post bonds to ensure that producers plug and abandon wells, remove platforms and other facilities, essentially restoring sites to their pre-drilling conditions as much as possible, they noted.

Currently, the MMS has three tiers of bonds for the offshore: 1) when there are no operations, it requires a $50,000 bond per lease, or a $300,000 area-wide bond; 2) it requires a $200,000 bond per lease or a $1 million area-wide bond for leases with a proposed exploration plan or a significant revision to an approved exploration plan; and 3) it requires a $500,000 lease bond or $3 million area-wide bond for leases with a proposed development and production plan. The agency often considers these bonding figures as “floors.” A regional director has the authority to raise the levels on a case-by-case basis, requiring producers to provide additional security in the form of “supplemental” bonds.

On federal onshore lands, producers have three options to satisfy BLM bonding requirements: they can obtain a $150,000 nationwide bond, a $25,000 statewide bond, or individual lease bonds of $10,000, the producer groups said. “As with offshore bonds, these bonding rates are minimum, and may be raised by the BLM authorized officer on a case-by-case basis.”

The six groups called on Interior to review the “amount of discretion” to be given to regional directors/officers to adjust bonding levels, arguing that too much discretion would be tantamount to an increase in bonding rates by the agency.

“Bonding [still] is an effective tool for both industry and the regulators,” they said, but “the increasingly tight bonding market has caused the bonding requirements to become an impediment to industry’s ability to conduct its operations.” Certain surety companies are demanding that producers deposit cash to obtain their bonds. “In some cases, cash for 100% of the required bonding amount may have to be posted for plugging and abandonment obligations…[This] takes cash directly out of the pool of money otherwise available for exploration and development,” the producer groups noted.

“The diversion of capital away from exploration and production due to the surety industry’s inability to meet the bonding demand, ultimately leads to less development of the resource base, weakening our nation’s efforts to establish its energy independence. Tax and royalty collections to both federal and state governments are negatively impacted, affecting the nation’s overall economic well-being. The tight bonding market, combined with the high bonding amounts often imposed [by Interior], is creating a situation where offshore and onshore operations are unreasonably costly, and sometimes prohibitively expensive to pursue.”

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