Oil and Gas Companies may need many surety bond and credit solutions. These products can open up new opportunities, maximize liquidity and reduce risks. Common Oil and Gas surety solutions include Bid Bonds, Oil Lease Bonds, Plugging and Abandonment Bonds, Surety Backed Letters of Credit, On Demand Payment Bonds and Trade Credit. Learn more about these solutions and others below.
Landowners, operators of oil or gas wells, drilling contractors, pipeline owners, along with trucking and shipping companies that work in oil and gas may all need surety bonds and credit solutions for their businesses. Some of these bonds are required by states and governments, while some are required by private parties to protect their interest in land, products and trade.
There are many different types of bonds that may be needed by oil and gas companies. Oil and Gas is heavily regulated, and bonds are often used to guarantee performance and compliance of the company’s obligations.
Plugging and Abandonment Bonds are used to guarantee that an oil or gas well will be properly plugged at the end of its useful life. The process usually involves removing or cutting all pipe and sealing the well so that it cannot leak in the future. These bonds are often required by governments before drilling of a well can begin.
Oil and Gas Lease Bonds are required on U.S. Government owned property, offshore drilling, and many state owned lands. The Bureau of Land Management (BLM) regulates these lands. These bonds guarantee that the lessee will operate according to the laws and lease agreements and also guarantee that lease payments are made. They also guarantee plugging wells and other reclamation once the lease is complete. Oil and Gas companies also need to bid bonds in certain cases to bid on the rights to these lands.
On Demand Payment Bonds work like a letter of credit. They are callable and payable on demand. These bonds can be used to guarantee a variety of obligations for oil and gas companies. Their main purpose is to replace financial guarantees that a company may be required to post for trading purposes. On demand payment bonds can reduce a company’s collateral obligations and free up borrowing ability. They are generally easier to get than Surety Backed Letters of Credit while serving a similar purpose.
Surety Backed Letters of Credit are a tool to free up borrowing and liquidity when an oil or gas company must post a letter of credit to guarantee an obligation. Surety backed letters of credit are more difficult to obtain than On Demand Payment Bonds. Therefore, they should be considered when a party will only accept a letter of credit.
While not a bond, energy trade credit can provide oil and gas suppliers with protection from non-payment of customers. This product allows wholesalers to grow their businesses by selling more commodities on credit, while minimizing the downside of the non-payment risk.
Some states require special licensing to haul oil, gas or other hazardous materials. These special transportation licenses often require a license bond. The bonds generally guarantee that the transporter will follow rules and laws, and provide the government some financial relief if an accident, or spill occurs. Still, these bonds are not a substitution for proper professional liability insurance.
The Oil and Gas company applying for the bond is the principal. This could be a driller, lessee, pipeline owner, shipper or other party. The government entity, property owner or trade partner requiring the guarantee is referred to as the Obligee. The bond company providing a financial guarantee for the principal’s obligation is the Surety.
The principal pays bond premium to the surety and provides the surety with indemnity. In exchange, the surety provides a financial guarantee to the obligee on behalf of the principal. Should the principal default on the obligation, the obligee can make a claim on the bond with the surety.
Should a claim occur, the surety will investigate and pay the claim. Surety provides a major benefit to the obligee. Instead of trying to collect from the principal through legal means, they can simply file a claim on the bond. If the surety does pay a valid claim, they have the right to seek reimbursement from the principal under the indemnity agreement.
Some types of Oil and Gas bonds are considered hazardous by the surety industry. These include Lease Bonds and Plugging Bonds. That is because the length of time that these bonds must remain in place. Others such as transportation bonds or on demand payment bonds are much more straightforward. In all cases, the surety will want to understand the obligation being guaranteed, including how long the bond will be needed. They will want to underwrite the oil or gas company’s financial strength, equipment, manpower and experience.
Not all surety bond companies are comfortable writing oil and gas surety bonds. Similarly, not all brokers have the experience or expertise to handle these obligations. Oil and gas companies will find it easier if they work with a partner who understands their business.
Oil and Gas can be priced from less than 1% of the bond amount to more than 5% of the bond amount depending on both the strength of the company, and the obligation being guaranteed. Companies with strong balance sheets will qualify for significantly better pricing and terms.
Surety bonds and energy trade credit provide significant benefits to oil and gas companies over other solutions. Bonds free up cash, collateral and borrowing when compared to other options such as letters of credit or cash deposits. These assets are better used for operations and expansion. Surety bonds and energy trade credit may also open up international opportunities by providing the necessary financial guarantees required by new trade partners.
Oil and Gas Bonds are a great way to secure obligations, and guarantee contracts. Axcess Surety has the markets and expertise to help those in the industry meet these challenges. Contact our oil and gas bond experts today.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
