Oil and Gas Bond Adequacy Reviews

United States Department of the Interior

BUREAU OF LAND MANAGEMENT

Washington, DC  20240

http://www.blm.gov

 

November 15, 2018

 

 

Supersedes IM 2013-151

In Reply Refer To:                                                                                         

3100 (310) P                                                                                                  

 

EMS TRANSMISSION 11/16/2018 

Instruction Memorandum No. 2019-014   

Expires:  09/30/2022

 

To:                   All Field Officials                                                                  

From:               Assistant Director, Energy, Minerals, and Realty Management

Subject:           Oil and Gas Bond Adequacy Reviews                                     

 

DD: 4/30/2019; 10/31/2019

Program Areas:  Federal Oil and Gas Operations and Lease Adjudication.

Purpose:  This Instruction Memorandum (IM) replaces the existing policy and guidance for conducting bond adequacy reviews for operations on Federal oil and gas leases (IM 2013-151, Oil and Gas Bond Adequacy Reviews) issued in 2013.  This updated policy requires the Bureau of Land Management (BLM) Field Offices (FO) to review oil and gas bonds to determine whether the bond amount appropriately reflects the level of potential risk (liability) posed by the operators and that offices place emphasis on securing that bond amount.  This IM does not address Indian oil and gas bonds; appropriate provisions at 25 CFR, Subchapter I, govern the Indian bonds.

Administrative or Mission Related: Mission Related.

Policy/Action:  Each BLM FO administering an oil and gas program will perform bond adequacy reviews on all bonds at least every five (5) years or earlier when warranted.  On a fiscal year (FY) basis, these bond reviews will target one-fifth (1/5^th) of the total active Statewide Bonds (SWB) and one-fifth (1/5^th) of the total active Nationwide Bonds (NWB) for adequacy each FY.  The criteria for selecting the SWBs and NWBs for each FY will include the date of last bond review, operator compliance, royalty payment history, and potential well liability as reflected by the number of associated active/inactive wells.  

As of September 30, 2017, the BLM has a total of 3,648 active bonds (FY 2017 Annual Report).  The BLM FOs reviewed a total of 2,992 bonds from October 1, 2013, to September 30, 2017 (FY 2014 to FY 2017).

According to the BLM’s records, the BLM offices secured about 16 percent of the proposed bond increases during the past two years.  Therefore, BLM offices will focus on securing the bond increases for those operators who show the higher risk factors.  When a FO determines that a bond increase is necessary, the BLM State Office (SO) is responsible for securing the increase.

I.          Bankruptcy

In recent years, the BLM saw an increase in bankruptcy cases where the bond amount was inadequate.  As of publication of this IM the BLM has adjudicated 102 bankruptcy cases involving Federal oil and gas lease interests.  To ensure that adequate financial assurance is in place, the BLM FOs and SOs need to assess and obtain an adequate bond increase prior to bankruptcy proceedings.  Therefore, when warranted, the BLM must take a proactive approach to secure bond increases so that the BLM does not incur the costs of well-plugging, abandonment, and reclamation.  However, the BLM will work with operators under financial duress on a case-by-case basis to ensure that lease operations can continue consistent with the applicable statutes and regulations.

II.        Bond Reviews

The BLM FOs will perform bond adequacy reviews on bonds using the Bond Adequacy Review Instructions (Attachment 1) and the Bond Adequacy Review Point System Worksheet (Attachment 3).  When determining bond amounts, the BLM will consider all appropriate factors, including positive factors such as operational history.  If the Authorized Officer (AO) determines that the bond amount (individual bond, SWB or NWB) is insufficient, the AO will take the necessary steps to increase the bond as described in Attachment 2. 

NWB Reviews

The Washington Office Fluid Minerals Division (WO-310) will coordinate with SOs to identify the NWBs for review each FY.  Recently it was determined that one-half of the NWBs identified by WO-310 with potential for review had no associated wells; therefore, WO-310 will coordinate with SOs to update bond records.  The FOs that have wells associated with a NWB that is under review will provide their SOs with the proposed bond amount.  If it is determined that a NWB needs to be increased, the SOs will contact the SO holding the NWB (SOHN).  Upon receipt of all recommendations, the SOHN will review all submitted bond information and determine a bond amount up to the combined two highest submissions (proposed bond amounts).  The SOHN will require the principal to file a bond rider, as appropriate.  When there is a significant increase, above 200 percent of the existing bond amount, in the NWB amount, SOHNs may choose to phase in the bond increase, provided that the SOHN tracks the NWB until the BLM obtains the required bond amount within 6 months and does not issue new approval of any Applications for Permit to Drill (APD) for the operator until the new bond is in place.  However, if the operator is under bankruptcy this may not be applicable.  The SO will coordinate with the Department of the Interior (DOI) Office of the Solicitor relating to all adverse actions and bond increases during bankruptcy proceedings.

SWB Reviews

Each FY, SOs will select the SWBs and coordinate reviews of the selected SWBs with the appropriate FOs.  When the SO compiles all SWB recommendations from the FOs, a new SWB amount will be determined up to the combined amount from the two largest submissions (proposed bond amounts).  As with NWBs, the SO may choose to phase in the bond increase, provided that the SO tracks the SWB until the BLM obtains the required bond amount with a target to secure within 6 months and does not issue new approval of any APDs for the operator until the new bond is in place.  However if the operator is under bankruptcy this may not be applicable.  The SO will coordinate with the DOI Office of the Solicitor relating to all adverse actions and bond increases during bankruptcy proceedings.

Bond Review Triggers

In accordance with the BLM Handbook H-3106-1, Transfers by Assignments, Sublease or Otherwise, it is appropriate to review bonds in any of the following situations:

 

1. Prior to approval of a record title assignment or a transfer of operating rights if the subject property^[1] contains any wells that have been idle for 5 years or longer.  The FOs will consider the age of the field(s) or wellsite(s) and infrastructure, including the total number of reportable^[2] leaks (Major Undesirable Events) and equipment failures;
2. Prior to approval of a successor unit/communitization agreement operator;
3. Whenever a change in operator occurs and the property contains idle wells, i.e. any wells that have been shut in for 7 years or longer;
4. If the BLM has not reviewed a new operator’s bond within the last 5 years and there is a potential for increased risk due to this operator’s lack of a positive operations history.  The BLM can periodically review and make adjustments to the bond, i.e. reduce the bond amount, once the new operator establishes a satisfactory compliance history in the following years; 
5. If the operator of record transfers operations to another operator without the operator of record notifying the BLM;
6. When an operator submits an APD, and the BLM has not reviewed the adequacy of the bond specified for the operation within the last 5 years;
7. Whenever the operator(s) fails to promptly plug and abandon a well or adequately reclaim the land per 43 CFR 3162.3-4;
8. Following any incident pertaining to Drilling Without Approval;
9. If the operator has a prior history of non-payment of monies due, such as a failure to comply with a bond increase, payment demands from the Office of Natural Resources Revenue, or monetary demands from the AO;
10. If the operator has average production per oil well over the last 12 months that is greater than 10 barrels(bbls)/day or gas production per gas well over 60 thousand cubic feet (mcf)/day, the BLM may review the bond amounts to reflect the credit for highly producing wells; or,
11. When local conditions involving access to the well, subsidence in the well pad or nearby area, inundation of the wellhead or other such changes take place, the BLM may review the status of the well and make adjustments to the bond, if necessary.  

When the U.S. Forest Service or other surface management agency requests the BLM to increase a bond amount, the BLM will ensure that the bond adjustment is consistent with applicable statutes and regulations and will use the BLM Bond Adequacy Review policy to calculate the bond amount. 

III.       Authorized Officer’s Discretion

Based upon the operator’s performance, including but not limited to the factors below, the AO may consider reducing or increasing the bond amount. 

• If an operator conducts all operations in a prudent and timely manner, while maintaining a history of compliance, the AO may override the increase in the operator’s bond during the current bond adequacy review cycle.  This is especially true for operators demonstrating progress as they take over aging facilities from past operators and provide due diligence to the operations.
• If the operator reduces the liability covered by the bond by plugging and abandoning wells and adequately reclaiming all associated surface disturbance.
• If an operator poses an increased risk, the AO will require an increase for the bond beyond the increased amount derived from using the worksheet included as Attachment 3 of this IM.

Any increase beyond the amount derived from using the worksheet will be determined by the AO based upon the history and the trend of bond increases for similar situations and the liability posed by the operator. However, the adjusted bond amount cannot be less than the required minimum regulatory (43 CFR 3104) amount.

If the AO deviates from the points assigned by the worksheet or the recommended amount of bond increase/decrease, the AO must document the reason(s) and include the documentation in the well file and in the Automated Fluid Minerals Support System (AFMSS). 

IV.       Bond Adequacy Calculation

The BLM will measure the potential risk by reviewing the operator’s overall operations history and the following risk factors: 

1. The number of wells shut-in status, such as Gas well Shut-in (GSI), Oil well Shut-in (OSI) or temporarily abandoned (TA) status for more than seven years (relative number of inactive wells);
2. Active/Inactive wells that are 10,000 feet deep or greater;
3. Wells with marginal production (less than 5 bbls/day for oil wells and less than 30 mcf per/day for gas wells);
4. History of Incidences of Noncompliance (INC); and
5. Number of wells plugged with final surface reclamation not completed. 

The offices assign points (at $500 per point) to these risks as shown in Attachment 4.

V.        AFMSS Data Entry Requirements

1. APD Processing.  The FOs must timely and accurately enter all bond information into the AFMSS as well as verify and identify all Federal wells (excluding State or fee wells) by their appropriate bond number^[3].  The FO must enter bond information into AFMSS as soon as the AO approves an APD.

2. Bond Adequacy Review.  The AO will verify that the FO has entered all active bonds into the AFMSS and that the FO made the appropriate bond reference to Federal wells.  The FO must enter Bond Adequacy Review data into the AFMSS^[4] bond review screen within five business days of conducting the review (see Attachment 6), and document the bond review in the applicable hardcopy case file.  The SO will update actions on the bond in the Bond and Surety System (Legacy Rehost 2000 (LR200), Alaska Land Information System, or updated version).  When the AO approves a Final Abandonment Notice (FAN), the AO must ensure that the FO removes the well from the associated bond number in the AFMSS which will also disassociate the well from the bond in the Bond and Surety System (LR2000) through inter-system syncing.

VI.       Midyear and Annual Reports

The U.S. Government Accountability Office (GAO) report on BLM Oil and Gas Liabilities (GAO-11-292) calls for all SOs with an oil and gas program to submit a consistent and consolidated semi-annual (midyear and annual) Bond Adequacy Review report to the WO-310.  The annual bond review report must include all reviews completed in the FY.  Attachment 5 provides the format for this report.  The SO will run the AFMSS “Bonds Reviewed Report” (GLB.102) for each of their FOs and submit a statewide, consolidated report to WO-310 in a consistent format per attachment 5.  Effective FY 2019, NWBs selected for review will also be included in the consolidated annual report.  The SWBs selected for review by each SO must also be included in the report as outlined under “Bond Reviews” section II of this IM.  Please refer to Attachment 6, AFMSS Bond Adequacy Review Instructions, for details on running this AFMSS report.  This report lists the bonds that the FOs reviewed (bond number), whether the bond amount increased, decreased or remained the same, and any necessary remarks.  As recommended by the GAO for consistency and accuracy of reporting, SOs will attach a short cover letter with the Annual Report summarizing the number of bond reviews and the resulting number of bond adjustments conducted during the FY.  The midyear report (October 1 to March 31) is due to WO-310 on April 30 of each year.  The annual report, covering bond adequacy reviews from the beginning of the FY (October 1) to the end of the FY (September 30) is due to WO-310 on October 31 of each FY. 

The new reporting format will be required in the midyear and annual bond reports, which must include the following^[5]:

1. Bonds reviewed by bond number;
2. Indicate the Bond type: NWB, SWB, Individual (I), etc.;
3. Number of wells associated with the bond;
4. If the recommended bond amount is increased (I), decreased (D), or unchanged (U);
5. Current bond amount and new recommended bond amount (if any);
6. Amount of bond increase/decrease with remarks;
7. Number of bond increases from the previous FY bond reviews that were secured; and
8. Summary data of bond reviews from all FOs in one spreadsheet tab.

VII.     Recommended Protocol for Obtaining Bond Increases

Attachment 2 provides detailed information for increasing a bond amount and securing the bond increase.  The BLM offices will use their authority to issue an INC to the operator or the operating rights holders that do not comply with the BLM’s demand for a bond increase.  If further action is required, the BLM will issue a second INC and pursue civil penalties.  The BLM will work with the DOI Office of the Solicitor, as appropriate, to identify additional enforcement actions if the operator or operating rights holder does not comply with BLM’s civil penalties assessment(s).

Timeframe:  This policy is effective upon issuance.

Budget Impact:  This policy will increase the time needed to perform the bond adequacy reviews, documentation, reports, and secure bond increases from the operator; but focuses on efforts to pursue the most important bond increases.  The intent is to avoid more bankruptcies with inadequate bonds and save the BLM overall costs. 

Background:  Since the issuance of IM 2013-151, a number of operators have filed for bankruptcy and failed to meet their Federal lease obligations.  If these cases reach Chapter 7 bankruptcy, they often result in the BLM incurring the cost of plugging and abandoning of wells and reclamation of associated lands.  It is the BLM’s responsibility to take proactive measures to deter and minimize the liability associated with high-risk operators.

The recent GAO audit report (GAO-18-250) calls for the BLM to update its bond adequacy review policy to ensure that NWBs and SWBs reflect their associated risks.  This IM meets the Secretary of Interior's administration priorities in encouraging environmentally responsible development of energy and minerals on public lands.    

Since the BLM secured an average of 16 percent of pending bond increases during the past year, the AO will weigh existing bond increase proposals still pending, what workload remains reasonable considering other priorities demanding staff time, and will have the discretion not to pursue a bond increase, unless the new increase is reasonably justified based upon consideration of the staff time and workload involved in pursuing the increase.

The GAO released Report 11-292, entitled, “Oil and Gas Bonds:  BLM Needs a Comprehensive Strategy to Better Manage Potential Oil and Gas Well Liability,”[6] where the GAO found that the current BLM policy for bond increases to be vague and ambiguous.  The GAO recommended “revising the bond adequacy review policy to more clearly define terms and the conditions that warrant a bond increase.”  In June 2018 GAO release Report 18-250 entitled “Oil and Gas Wells: Bureau of Land Management Needs to Improve Its Data and Oversight of Its Potential Liabilities”[7] underscored the need for adequate SWBs and NWBs.

Manual/Handbook Sections Affected:  This IM incorporates this guidance into the BLM Handbooks H-3104-1, Bonds, and H-3106-1, Assignments and Other Transfers, (Oil and Gas Adjudication Handbooks).

Coordination:  This policy was coordinated with the BLM via a Bond team of SO and FO specialists, and the BLM Washington Office of Energy, Minerals, and Realty Management Directorate (WO-300), in consultation with the DOI Office of the Solicitor.

Contact:  If there are any questions concerning the content of this IM, please contact me at 202-208-4201 or your staff may contact Jamie Sellar-Baker, Acting Division Chief of Fluid Minerals, at 202‑912-7143 or jsellarb@blm.gov, or Subijoy Dutta, Senior Petroleum Engineer, WO-310, at 202-912-7152 or sdutta@blm.gov.

 

Signed By:                                                                  Authenticated By:

                       

Michael D. Nedd                                                        Ambyr Fowler

Assistant Director                                                       Division of Business Resources (WO-850)

Energy, Minerals, and Realty Management

 

 

6 Attachments:

1 - Bond Adequacy Review Instructions (3 pp)

2 - Recommended Protocol for Adjustment and Securing Bond Increases (2 pp)

3 - Bond Adequacy Review Excel Worksheet (Excel Spreadsheet) (1 p)

4 - Sample of Bond Adequacy Review Excel Worksheet (1 p)

5 – Bond Adequacy Reporting Format (Sample) (2 pp)

6 - AFMSS Bond Adequacy Review Instructions (To be updated after AFMSS2 gets developed and deployed) (5 pp)