Oil & Gas and Geothermal Bonds

Oil and gas leasing regulations (43 CFR 3104) require, prior to commencement of surface disturbing activities related to drilling operations on a federal oil and gas lease, the operator on the ground shall be covered by a bond. A surety or personal bond may be posted by the lessee, sublessee (owner of operating rights) or operator. The following information has been compiled to provide assistance to the applicant in obtaining the appropriate bonding coverage.

Use of the June 1988 edition of Bond Form 3000-4, Oil and Gas or Geothermal Lease Bond is mandatory.   Bond Form 3000-4 can be completed and applied, as shown below, to provide coverage for the operator on the ground. Any operator may conduct operations under its own bond by furnishing a statement that it is responsible under the terms and conditions of the lease for the operations conducted on the lease or portion of the lease and providing the bond number.  Bonds filed for operations in California or nationwide bonds being filed in California should be sent to:

Bureau of Land Management - California State Office
2800 Cottage Way Suite W1834
Sacramento, CA 95825

1. Individual Bond: This shall be in an amount of not less than $10,000 ($20,000 in California) and provides coverage for one lease. An individual lease bond maintained by the lessee/sublessee may be conditioned by rider to cover operations conducted by an operator.

2. State, Nationwide or National Petroleum Reserve in Alaska Oil and Gas Bond : This may be filed in lieu of an individual lease bond. A statewide or nationwide bond can be used in the capacity of lessee, sublessee or operator. State and nationwide bonds accepted on bond forms in use prior to Form 3000-4 must be conditioned by rider to cover an operator where he holds no record title or operating rights interest in a lease.

A statewide bond shall be in an amount of not less than $25,000 ($75,000 in California) and covers all leases and operations in one State. It must be filed in the BLM state office having jurisdiction over the affected lands.

A nationwide bond shall be in an amount of not less than $150,000 and covers all leases or operations nationwide. It may be filed in any BLM state office.

3. Bond of Oil and Gas Unit Operator: This may be filed in lieu of individual lease bonds. The amount will be set by the authorized officer who approves Unit plans of development and supervises Unit Operations, such amount not to be less than that for a statewide bond.

Bonds may be provided in the form of surety or personal bonds. All coverages are available through the use of the June 1988 edition of Form 3000-4, Oil and Gas or Geothermal Lease Bond. They must be filed in the proper BLM State Office.

Surety Bonds

The surety for any Federal bond must be approved by the Department of Treasury as an acceptable surety. A list of acceptable sureties, Circular 570, can be obtained from:

Surety Bond Branch Financial Management Service
Department of the Treasury
401 14th Street, SW
Washington, D.C. 20227
http://www.fms.treas.gov/c570/index.html

The original copy of the surety bond must be filed in the proper BLM State Office on a form approved by the BLM along with a Power of Attorney for the person signing on the behalf of the surety.

Personal Bonds

The power of attorney to authorize use of the funds, in case of default, is incorporated within the terms of Form 3000-4. Form 3000-4 should be filed in the proper BLM office along with the amount required for the bond.

Personal bonds may be backed by:

1. Cashier's check

2. Certified check

The monies will be deposited in a suspense account and will be refunded to the principal at the time the bond is no longer required. The cash bond can be accepted very quickly, but provides no interest to the bonded principal.

3. Certificate of Deposit (original must be filed in proper BLM office)

a. The CD should be made payable to The Department of the Interior - BLM.

b. Issued by a financial institution whose deposits are Federally insured through Federal Deposit Insurance Corporation (FDIC) or Federal Savings and Loan Insurance Corporation (FSLIC).

Offices and Branches of FDIC insured institutions or verification that a specific bank is FDIC insured can be obtained by accessing the Find an Institution, FDIC Institution Directory at http://www3.fdic.gov .

c. Indicate on the face of the CD the following: "The Secretary of the Department of the Interior or his duly authorized representative is granted full authority to demand immediate payment in case of default. Approval by the Secretary of the Department of the Interior or his duly authorized representative is required prior to redemption of the Certificate of Deposit by any party."

d. There should be no expiration of time in which the CD may be collected by the Bureau.

4. Irrevocable letter of credit (original must be filed in proper BLM office)

a. Issued for a specific term by a financial institution whose deposits are Federally insured through FDIC or FSLIC.

b. Identify Secretary as sole payee with full authority to demand payment in case of default.

c. Irrevocable during its term.

d. Initial expiration date shall be at least 1 year following the date it is filed in the proper BLM office.

e. Shall contain a provision for automatic renewal of not less than 1 year.

A sample acceptable letter of credit is available upon request from the California State Office by contacting Laurie Moore (916) 978-4377.

5. Negotiable Treasury Securities - Acceptable negotiable securities are U.S. Treasury Notes or Bonds. Guaranteed lines of credit and notes or bonds issued by state or local governments are not acceptable forms of security. Personal bonds backed by negotiable securities allow principals to collect interest from the U.S. Treasury as long as there is no default in the lease obligations.

Effective January 1, 1991, the BLM closed its account with the Federal Reserve Board (FRB) and instituted new procedures for U.S. Treasury Securities to be used as security for bond coverage. Instead of being transferred to BLM's bookðentry account through the FRB as in the past, securities will be held in a Circular 154, U.S. Government Account Number 11, under the obligor's depository financial institution's (bank's) American Bankers Association (ABA) number with the FRB. Once the security is transferred into the Circular 154 Account Number 11, neither the obligor nor the bank will be able to access the security without BLM providing authorization to the FRB to do so.

The lessee or operator requiring a bond must contact a commercial bank and tell them that they want to purchase a specific negotiable security to satisfy BLM bonding requirements. Please note that if you are providing a negotiable security, you must purchase that security with a current market value or purchase price equal to or exceeding the required bond amount. It cannot be issued for a discounted price which matures to full par value in the future. This means that you may have to purchase more U.S. Treasury Notes or Bonds in order to have the full amount placed in the Circular 154 U.S. Government Account. (For example, if you wish to provide a $10,000 bond, you may have to purchase $12,000 worth of U.S. Treasury Notes or Bonds in order to have the full $10,000 in the Circular 154 account).

Therefore, when you as the obligor contact your bank to purchase a negotiable Treasury security, you should send the following to the BLM office responsible for administering the lease(s) for which the bond is being provided as soon as possible:

a. Your name and address.

b. The serial number of the oil and gas lease (or a statement that the bond is for statewide, nationwide or unit coverage).

c. The type of security purchased (Bill, Bond or Note).

d. The par amount of the security, the interest rate and maturity date of the security.

e. The Committee on Uniform Securities Identification Procedures (CUSIP) number of the security.

f. The name and mailing address of your bank, along with the name and telephone number of a contact person, if possible.

g. The depository bank's nine digit ABA number.

h. The name of the FRB or branch servicing the depository financial institution.

Upon receipt of the information in Items a-h above, the BLM office will telefax a copy of that information to the Negotiable Securities Custodian at the Denver Service Center's Branch of General Accounting. The Negotiable Securities Custodian will then contact both the servicing FRB or branch and the obligor's bank to authorize the transfer of the security to the Circular 154 Account Number 11.

THE OBLIGOR'S FINANCIAL INSTITUTION MUST NOT TRANSFER THE SECURITY TO THE CIRCULAR 154 ACCOUNT NUMBER 11 UNTIL AUTHORIZATION IS GIVEN BY THE NEGOTIABLE SECURITIES CUSTODIAN.

When the security is transferred to the Circular 154 Account Number 11, the financial institution must include the following information in the electronic transfer message: "Security pledged to DOI-BLM, (name of office) by (name of obligor) for (lease serial number, etc.)." The following is an example of an acceptable transfer message: "Security pledged to DOI Bureau of Land Management, California State Office by Omega, Inc., for Oil and Gas Lease CACA12345."

Upon transfer of the negotiable security, the obligor should provide the following information to the BLM office:

a. A fully-completed bond Form 3000-4. A Power of attorney which authorizes the Secretary of the Interior to collect the funds in case of default in the lease terms is part of Form 3000-4.

b. A copy of the "Acknowledgement of Book-Entry Deposit, Release of Account Transfer," which the FRB will send to your bank. This will constitute proof that the security is in the Circular 154 Account 11. This document also provides BLM with the date of the transfer.

c. A transaction document from your bank to verify that the amount you paid for the security, excluding any commission fee and accrued interest, must equal or exceed the bonding requirement amount.

BLM will notify the obligor by written decision 1) that the personal bond has been accepted, 2) the BLM Bond Number assigned to the bond, and 3) the date bond coverage is effective. The BLM office will also furnish a copy of its bond acceptance decision, along with a copy of "Acknowledgement of Book-Entry Deposit, Release of Account Transfer," to the Negotiable Securities Custodian (SC-615).

Semi-annual interest on Treasury Notes and Bonds will be transferred by the FRB to the obligor's bank, which will transfer the interest to the obligor in accordance with an agreement between the obligor and the financial institution (e.g., deposit the interest to a checking account or savings account, etc.). Beginning in 1992, the obligor's financial institution will be responsible for sending a 1099-INT form to the obligor for interest paid the previous calendar year.

The Negotiable Securities Custodian will notify the BLM office about a maturing security approximately 90 days before the maturity date, and the BLM office will, in turn, notify the obligor by letter that the security is maturing.

If bond coverage is no longer required, or if replacement bond coverage is provided, prior to the maturity date of the security or after the maturity date of the security, the BLM office will send a memo requesting that the Negotiable Securities Custodian direct the FRB to transfer the security from the Circular 154 Account Number 11 to the obligor's bank.

If collection under the bond is necessary due to a default under the terms of a lease or leases covered by the bond, BLM will send a memo requesting that the Negotiable Securities Custodian direct the FRB to transfer the proceeds to BLM. The proceeds of the security will then be deposited into the BLM office's suspense account.

When a replacement security is being filed, it is not necessary to file a new personal bond form and power of attorney. The information requested in Items a-h previously listed still needs to be furnished to the appropriate BLM office.

If the bank has any questions about any of the information provided, it may contact the servicing FRB or branch. Any questions regarding BLM's procedures may be directed to Esther Velasquez, Negotiable Securities Custodian, at (303) 236-6321.