Oil and Gas Plugging and Abandonment Bonds are a surety bond that guarantees that the oil or gas well will be plugged or capped at the end of its useful life. The bond serves as a financial guarantee that either the principal will plug the well, or the surety will pay to have it plugged. 

The oil or gas well owner or lessee is the principal on the bond. The principal guarantees that at the end of the well’s use, the principal will cap or plug the well. This normally involves removing any underground pipe and filling the hole with cement or other permanent material. The obligee is usually the Federal or State government. The obligee is the party receiving the benefit of the plugging bond on behalf of the public. The surety is a third-party bond company that is guaranteeing the principal’s obligation. 

Should the principal default on the obligation, the obligee can make a claim against the surety bond. When a claim is made, the surety will investigate the claim and either pay for another party to complete the plugging, or pay the state the bond’s penalty.

The required amount of an Oil or Gas Plugging and Abandonment Bond depends on the state or government requirement. These bond requirements can be as little as $2,500 per well to more than $100,000 per well. Check your state’s requirements.

Obtaining Oil and Gas Plugging and Abandonment Bonds can be challenging. This is because the life of a well may extend many years in the future. By one indication, an oil well may be expected to last 20 - 40 years. This creates a challenge because a lot of conditions could change during that period. A company’s financial condition could significantly deteriorate. Changes to other forms of energy could result in less of a demand. Further, legislation could impact the demand or profitability. 

Surety bond companies will want to make sure the company has strong financial strength compared to the obligation. Surety bond companies are normally not allowed to get off of these obligations, unless they are replaced by another bond company. Therefore, the surety bond company will want to make sure the company is overqualified. In some cases, the bond company may even ask for collateral. 

Oil and Gas Plugging and Abandonment Bonds can be written as either a single well or a blanket bond. Blanket bonds allow for an oil and gas company to cover multiple wells under the same bond. The advantages to blanket bonds are less paperwork and cost. Because the bond company is writing a blanket limit, there is less administrative work and less cost involved. However, not all states will accept blanket bonds as they often provide the state with less coverage.

The cost of plugging bonds depends on the financial strength of the company applying for the bond as well as the length of time the well is expected to be open. Most companies will pay between 1% - 5% of the bond amount. Companies with stronger financial statements will qualify for better rates. The premium for these bonds will be due annually until the well is closed and plugged. 

Plugging and Abandonment Bonds are similar to Oil and Gas Leasing Bonds. Usually, leasing bonds also guarantee that the well will be plugged at the end of the life. However, different states have different names and requirements. Leasing Bonds also generally guarantee compliance with the lease terms, including payments.

Oil and Gas Plugging and Abandonment Bonds are important to the environment and a key financial responsibility of companies drilling for natural resources. Contact the energy experts at Axcess Surety today for all your Oil and Gas bonding needs.