Regulators air draft plan to increase well bonding amounts

State regulators heard mixed reaction from oil industry representatives about proposed increases to bonding requirements for drilling new wells.

The Alaska Oil and Gas Conservation Commission held a public hearing Oct. 16 in Anchorage on the draft regulations, which would demand up to a $30 million bond be posted to drill and operate the largest oil fields.

The AOGCC oversees the technical down hole oil and gas drilling and resource issues for the state.

AOGCC Chair Hollis French said the added bonding expense would update state regulations to better reflect today’s costs to plug and abandon a well.

French referenced a 1991 Legislative Budget and Audit report that said the State of Alaska should update its minimum well bonding requirements. At the time the bonding requirements were $100,000 for one well and a minimum of $200,000 for multiple wells and a “statewide blanket bond,” he said, bonding levels that remain today. The 1991 report concluded that an operator with a $200,000 bond then likely wouldn’t be able to cover plugging and abandonment costs, according to French.

The three-member commission held a work session in June 2017 to discuss updating the requirements.

The resulting 23-tier bond schedule would require at least $500,000 for the first 2 permitted wellheads with the minimum amount increasing to $1.7 million for up to 10 wells.

A $15 million bond would be required for up to 999 wells and $30 million for more than 3,500 wells.

Alaska’s largest Prudhoe Bay and Kuparuk River fields have each contain more than 1,100 well bores.

Alaska Oil and Gas Association Regulatory and Legal Manager Peter Caltagirone said the bonding rate changes would be unprecedented; he noted they amount to a 150 percent increase for drilling two wells, a 50-fold increase for 100 wells and a 6,500 percent increase for 500 wells.

The proposed regulations also don’t consider other agreements operations might have with DNR, he said, and do not require the state to release the bond when a well is plugged and abandoned, as state regulations currently do.

“The proposed changes discourage new investment at a time when Alaska could use some new investment,” Caltagirone said, adding they would require new producers to comply immediately.

AOGA is open to updating the bonding requirements in some form, according to Caltagirone, but the industry group would like to see more communication amongst regulatory agencies.

Commissioner Cathy Foerster retorted that the commission is only interested in meaningful cost comparisons, such as how the proposed schedule compares to actual current plugging and abandonment costs.

ConocoPhillips Drilling Engineer Randall Kanady testified that the company, which operates the large Kuparuk and Alpine oil fields and is developing other large projects, believes the overall tiered approach is “sensible” but would like to see it simplified.

He suggested the minimum bonds but broken into three tiers to generally match the operators — explorers, small producers and major producers — with a $1.25 million bond covering up to 19 wells; $6 million for up to 200 wells; and $12 million for additional wells. Kanady noted the $12 million bond would be a 60-fold increase over current requirements.

The Audubon Society, The Wilderness Society and Cook Inletkeeper submitted joint testimony largely commending the commission for its plan. They cited a 2016 Bureau of Land Management report that stated the agency was spending $40 million to plug, abandon and clean up 18 wells in the National Petroleum Reserve-Alaska on the North Slope, or more than $2 million per well.

These so-called “legacy” wells were drilled and abandoned by the U.S. Navy and U.S. Geological Service between 1944 and 1974, with BLM inheriting responsibility for cleaning up the wells in 1982, according to its website.

The conservation groups praised the tiered bonding schedule instead of a “blanket” fee, noting the per well costs decrease as the number of wells grows.

“These changes greatly improve the likelihood that state government will not have to pay the high costs of problematic well operations or abandonment throughout Alaska, including in remote parts of the state where it is very expensive to conduct industrial activities such as plugging and abandoning wells,” they wrote to the AOGCC.

Several members of the public similarly approved of the plan.

However, Kenai Peninsula resident Jim White testified that such costly requirements prevent individual Alaskans from participating in the state’s oil and gas industry. White said he holds subsurface mineral rights to 4,600 acres on the Peninsula.

Elwood Brehmer can be reached at [email protected].

10/17/2018 - 10:34am