Oil regulators consider relief for new bond requirements

State regulators in charge of subsurface oversight of the oil and gas industry are giving a series of mostly small operators the opportunity to make their case for special treatment under recently strengthened financial assurance requirements.

The Alaska Oil and Gas Conservation Commission on Jan. 16 heard Malamute Energy Inc.’s appeal to updated bonding requirements for entities holding active or unplugged wells in the state.

The hearing for Malamute Energy was the fourth of nine reconsideration requests the three-member commission is scheduled to hear through Feb. 18.

Last May, the commission, or AOGCC, approved regulations that greatly increased the bond amounts companies with wells are required to post. Former AOGCC chair Hollis French said the new bonding requirements were approved after nearly two years of work and it was one issue the commissioners all agreed needed to be addressed.

When the minimum bonds were being considered, French and the other commissioners noted the amount the state requires well holders to hold for well plugging and abandonment costs hadn’t been updated for decades. They cited a 1991 Legislative Budget and Audit report that said the State of Alaska should update its minimum well bonding requirements then.

At that time, the bonding requirements were $100,000 for one well and a minimum of $200,000 for multiple wells and a “statewide blanket bond,” which were the required amounts until the May 2019 change. The 1991 report concluded that an operator with a $200,000 bond then likely wouldn’t be able to cover plugging and abandonment costs.

The new five-tier bond schedule requires those holding up to 10 wells to post $400,000 per well. Operators with between 11 and 40 wells must post a cumulative $6 million bond and the amounts gradually increase to $30 million for operators with more than 1,000 wells.

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

A handful of small operators, the Alaska Oil and Gas Association and individual leaseholders objected to a 23-tier bond schedule that was proposed during the revision process for being overly complex and excessive increases compared to what was long required.

While the tiered bond schedule was simplified, the amounts required for operators with more than 10 or more wells were ultimately increased from the proposal vetted during public hearings in 2018.

French said the effort to update the bond amounts was aimed particularly at small oil and gas companies after bankruptcies in the industry following the collapse of oil prices in 2014-15.

“The small companies are exactly where the problem is,” he said, adding that he would be very skeptical of any attempt to reduce the bonds from the levels the commission settled on last year.

Commissioner Dan Seamount, the lone commissioner left on the panel from when much of the bond revision work was done, said in an interview that the current hearings are not part of a plan to overhaul the new bond levels, but rather they are specific, one-off requests for exemptions from the regulations that he otherwise sees as a prudent step towards protecting the state from potentially expensive liabilities.

“It has nothing to do with changing the regulations,” Seamount said, noting that the commission also has the authority to reduce or increase the requirements for operators on a case-by-case basis.

“The operators that produce 99 percent of the production (in Alaska) are in compliance and we’ve gotten nine requests for reconsideration,” Seamount said.

He added that two requests were for holders of geothermal wells, which the AOGCC regulates but are usually much cheaper to plug and abandon than oil and gas wells.

Current AOGCC chair Jeremy Price said in a brief interview that state law says the financial requirements should be “reasonable” and he simply wants to give the companies a chance to make their case.

Gov. Mike Dunleavy’s administration has sought to relax or repeal business and environmental regulations in many realms the state oversees, including the oil and gas industry. Price was Dunleavy’s deputy chief of staff before being appointed to the AOGCC by the governor last October.

Malamute’s situation is rather unique in Alaska; company President Leonard Sojka said in his testimony to the commission that the company holds two wells in the federal Umiat Unit just inside the National Petroleum Reserve-Alaska and the Bureau of Land Management recently increased its bond requirement for the unit from $200,000 to $1.25 million. Malamute is to post the first $525,000 of that by early March, according to Sojka.

The AOGCC bonding regulations required operators to post the first $500,000, or at least 25 percent of the difference between the old and new amounts, by mid-August 2019. A second, similar installment is due in August 2020. The regulations mandate that operators post the full amount by August 16, 2022.

Sojka noted that the BLM bonds exceed the $800,000 Malamute is eventually required to hold for the state and said neither of the Umiat wells pose an environmental risk.

He said he doesn’t object to the state bonds in concept, but called them “redundant.”

According to Sojka, Malamute Energy was formed by a group of creditors to Linc Energy who took over the Australian company’s Alaska holdings after Linc went bankrupt in 2016. Linc drilled the two oil exploration wells in 2013 and 2014, but neither produced viable quantities of crude.

An analysis found plugging and abandoning the wells would cost nearly $3 million, but Sojka said roughly two-thirds of that cost would be for ice roads and other costs to access the wells, as they were drilled during the winter and there is no gravel infrastructure available to access them year-round.

He suggested the work could be done for much less than $3 million by utilizing new modular equipment flown in to a nearby airstrip if need be.

However, Sojka said Malamute doesn’t expect to plug the wells at this point because it plans to continue exploring the area.

BLM Alaska Oil and Gas Section Chief Rob Brumbaugh said the agency would only use the federal bonds if it were saddled with plugging and abandoning the suspended wells.

“I honestly don’t know of any mechanism that makes it possible for the feds to go after the state money,” Brumbaugh said, adding that Hilcorp and ConocoPhillips are the only two other companies with duplicative bonds and they are large companies with the financial wherewithal to deal with them.

Seamount said the AOGCC had not made a decision on Malamute’s situation as of Jan. 21 but stressed that “orphaned” wells are a serious problem in the Lower 48 and Canada that the commission wants to prevent in Alaska.

“A lot of states have over 10,000 orphaned wells that have nobody to plug them,” Seamount said.

He added that he’s considering sending a questionnaire to officials in other states and provinces inquiring about their bonding levels and if they feel their requirements are adequate.

According to a 2019 report from the Interstate Oil and Gas Compact Commission, there are more than 56,000 documented orphan wells across the country — Alaska has 15 — and hundreds of thousands more undocumented wells are estimated to exist.

The Alberta Liabilities Disclosure Project, a coalition of conservation groups, financiers and current and former oil and gas industry players contends provincial government data shows that the cost of cleaning up Alberta’s more than 300,000 problem wells is between $40 billion and $70 billion, while the government has published an $18.5 billion total cleanup cost.

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Elwood Brehmer can be reached at [email protected].

Updated: 
01/22/2020 - 9:35am