AOGCC considering revisions to well bonding requirements

State regulators under the Dunleavy administration are continuing to tweak bonding requirements for oil and gas wells overhauled just more than a year ago.

The Alaska Oil and Gas Conservation Commission held a brief public hearing Sept. 1 to take testimony on proposed changes to the bonding requirements that would increase the amount of time an operator has to post a given bond amount.

The amended regulations would also allow the three-member commission to reduce the state’s minimum bond requirement on a case-by-case basis if a landowner requires a bond be posted to cover plugging and abandonment costs.

The commission, which oversees technical drilling and other subsurface oil and gas industry matters and is chaired by Gov. Mike Dunleavy’s former deputy chief of staff Jeremy Price, published the prospective changes following numerous appeals heard last winter from operators to the new requirements.

Examining and repealing business regulations deemed burdensome or unnecessary has been a focal point of the Dunleavy administration.

After nearly two years of hearings and deliberation, in May 2019 the AOGCC approved regulations that greatly increased the bond amounts companies with wells are required to post. When those bonding minimums were being considered, 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 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,” which were the required amounts until the 2019 revision. 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.

Former AOGCC chair Hollis French — appointed by former Gov. Bill Walker and fired by Dunleavy for alleged poor work habits — 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.

Leaders of Malamute Energy, a small North Slope operator that holds two wells just inside the federal National Petroleum Reserve-Alaska, testified in a January hearing that the company is in a rather unique situation that justified an exemption from the new requirements.

Malamute’s minimum bond for the Umiat Unit that contains the wells had recently been increased by the Bureau of Land Management from $200,000 to $1.25 million, much greater than the $800,000 the company must eventually hold for the state, company President Leonard Sojka said at the time.

While the vast majority of oil and gas development has historically been on state acreage on the North Slope and across the Cook Inlet basin, the industry — led by ConocoPhillips — is increasing activity in the NPR-A and the prospect of exploration in the Arctic National Wildlife Refuge could lead to similar situations.

Alaska Native corporations have also sought more exploration on their lands in recent years; some of that work — as with Doyon and Ahtna — has been done by the companies themselves but traditional oil operators have also signed agreements to explore on Native lands.

The commissioners did not comment during the meeting and Price did not respond to follow-up questions in time for this story.

Kenai Peninsula resident Jim White testified Sept. 1 that the state’s costly bond requirements prevent individual Alaskans from participating in the state’s oil and gas industry. White said in prior testimony objecting to the bonds that he holds subsurface mineral rights to 4,600 acres on the peninsula.

“(A homesteader) can’t own that oil and gas until he gets the oil to the surface so when the bonding requirement gets so high, he’s being deprived of what he paid for,” White said in describing his situation. “The homesteader feels like he got a raw deal; he didn’t get what he paid for.”

The proposed regulations would also take the number of installments operators can use to reach the required bond amount from four annual payments to seven. The second through sixth installments would be due each Aug. 16 “of the first five years following the first installment and must be a minimum of one-sixth of the difference between the operator’s level of bonding and, if required, security after payment of the first installment and the level required under (other regulations),” the proposed regulations state.

John Hendrix, who purchased the Cook Inlet gas producer Furie Operating Alaska out of bankruptcy earlier this summer, submitted written testimony supporting the changes as long as they also account for a bond or other financial security an operator has with another state agency.

Furie has set up a “sinking fund” with the Department of Natural Resources for dismantlement, removal and reclamation of the company’s offshore Cook Inlet platform.

“Ensuring continued investment and production from Cook Inlet will allow the Railbelt utilities and the Interior to provide reliable energy for a sustainable economy,” Hendrix wrote. “We appreciate the Commission’s efforts to eliminate redundant financial responsibility requirements that are currently required by multiple State agencies.”

The commission is accepting public comments on the proposed regulations through Sept. 10.

Elwood Brehmer can be reached at [email protected].

09/02/2020 - 9:19am