Oil and Gas Bond Adequacy Reviews

IM 2013-151
Instruction Memorandum

UNITED STATES DEPARTMENT OF THE INTERIORBUREAU OF LAND MANAGEMENTWASHINGTON, D.C. 20240http://www.blm.govJuly 3, 2013In Reply Refer To: 3100 (310) PInstruction Memorandum No. 2013-151Expires: 09/30/2014To: All Field OfficialsFrom: Assistant Director, Minerals and Realty ManagementSubject: Oil and Gas Bond Adequacy ReviewsDD: 04/30/2014Program Areas: Federal Oil and Gas Operations and Lease Adjudication. Purpose: This Instruction Memorandum (IM) supplements existing policy and guidance for conducting bond adequacy reviews for operations on Federal oil and gas leases. This updated policy requires that Bureau of Land Management (BLM) field offices regularly review oil and gas bonds to determine whether the bond amount appropriately reflects the level of potential risk (liability) posed by the operator. This IM does not address Indian oil and gas bonds; appropriate provisions at 25 CFR, Subchapter I, govern these bonds.Policy/Action: Each BLM field office administering an oil and gas program will perform bond adequacy reviews on all bonds at least once every 5 years or whenever a bond review is warranted. It is the responsibility of the state office to raise the bond amount above the minimum required by the regulations when there is an unacceptable degree of risk and potential liability to the Federal Government for the plugging and reclamation costs of non-plugged wells. The authorized officer (AO) may require an increase in the amount of any bond, in accordance with 43 CFR 3104.5 (b), whenever the operator poses an unacceptable risk due to factors including, but not limited to:(1) A history of previous violations;(2) A notice from the Office of Natural Resources Revenue (ONRR) that there are uncollected royalties due; or(3) The total cost of plugging existing wells and reclaiming lands exceeds the present bond amount (43 CFR 3104.5(b)).The operator compliance history becomes the largest factor for the measure of risk, including drilling without an approval (DWOA) as described in Attachment 1. To assist the field with their review of bonds, the instructions and worksheets attached to this IM and listed below are to be used during the review:

  • Bond Adequacy Review Instructions (attachment 1)
  • Procedures to Increase (or Decrease) Bond Amount (attachment 2)
  • Bond Adequacy Review Excel Worksheet (attachment 3)
  • Example of Bond Adequacy Review Excel Worksheet (attachment 4)
  • AFMSS Bond Adequacy Review Instructions (attachment 5)

Bond Reviews:The BLM field offices will perform adequacy reviews on all bonds using the Bond Adequacy Review Instructions (attachment 1) and the Bond Adequacy Review Point System Worksheet (attachment 3) to determine how much to adjust the bond (if necessary). If the bond being reviewed is a statewide or nationwide bond, the field office is only required to review the wells within their field office. It is also appropriate to review bonds:

  • Prior to approval of a record title assignment or a transfer of operating rights if the property being transferred contains any wells that have been idle for 7 years or longer; Property, as described in this IM refers to a lease, unit, or communitized area and associated liabilities;
  • Prior to approval of a successor unit/communization agreement operator; Whenever a change in operator occurs and the property contains any wells that have been idle for 7 years or longer; or if the BLM has not reviewed the new operator's bond within the last 5 years;
  • Whenever the operator submits an Application for Permit to Drill (APD), and the BLM has not reviewed the bond adequacy of the bond specified for the operation within the last 5 years;
  • Whenever the operator(s) fails to timely plug and abandon a well or adequately reclaim the land;
  • If the AO deems a bond review is necessary following repeated Incidents of Noncompliance by an operator; or
  • If the operator has a prior history of non-payment of monies due, such a failure to pay rent on nonproducing leases, or failure to pay other monetary demands from the authorized officer.

If the Forest Service requests the BLM to increase the bond amount, the BLM will conduct a review to determine if the bond should be adjusted. However, to be consistent with the BLM Bond Adequacy Review policy, as established in this IM, the AO will ensure that the bond amount meets the minimum, but does not exceed the maximum amount set by the prescribed point system as outlined in attachment 1.Prior to approval of an APD, the BLM will require a bond in an amount equal to the actual costs to plug and abandon the subject well and adequately reclaim the lands if the same operator has caused the BLM to make a demand for payment under a bond within the 5-year period prior to submission of the APD. The record title owner, operating rights owner, or operator may post a lease, statewide, or nationwide bond. The unit operator may post a unit bond. If the AO determines that the bond amount is insufficient, the AO will take the necessary steps to increase the bond as provided in attachment 2. If the AO determines that it is necessary to raise one of the operator's lease bonds, it is not appropriate to automatically raise any other lease bond the operator may hold without documenting the specific bond adequacy determination. A lease bond is lease (property) specific. To increase the amount of a statewide or nationwide bond, the AO will require the operator to file a bond rider to specify the designated liability on the bond so that any other demands on the bond cannot draw on that rider.If the operator reduces the liability covered by the bond by undertaking normal operating practices, such as plugging and abandoning a well(s) and adequately reclaiming all associated surface disturbance; upon request by the operator, the AO may consider reducing the bond amount in accordance with the attached Bond Adequacy Review Instructions. However, the remaining bond amount cannot be less than the minimum regulatory amount. Authorized Officer Discretion: To provide maximum flexibility across the range of scenarios likely to be encountered, the AO has the discretion to override a bond increase to the prescribed amount as outlined in attachment 1, primarily in the following situations:(1) If an operator conducts all operations in a prudent and timely manner and has a history of compliance, the AO may override the automatic 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 that may not have seen enough due diligence from past operators;(2) If an operator's average oil production per well per day over the past 12 months is greater than 5 barrels, as stated in attachment 3, but the gas production per well per day over the same period is less than 30 thousand cubic feet (MCF) per day from marginal wells; anda. The AO may subtract the number of points generated, as prescribed in the Bond Adequacy Review Excel Worksheet, for the marginal gas wells.(3) If an operator's average gas production per well per day over the past 12 months is greater than 30 MCF, as stated in attachment 3 but the oil production per well per day over the same period is less than 5 barrels per day from marginal wells.a. The AO may subtract the number of points generated, as prescribed in the Bond Adequacy Review Excel Worksheet, for the marginal oil wells.If the AO chooses to override the points assigned by the worksheet or the prescribed amount of bond increase, the AO must document and file the reason(s) and considerations that the points were overridden and why the bond was not increased by the prescribed amount in the case file. The AO responsibility is to monitor this situation to ensure adequate bonding for any unforeseen changes in the lease-specific operations and manage the overall risk to the public lands as appropriate.Bond Adequacy Calculation:The potential exposure of risk is measured by the degree of operation soundness. The BLM will measure this risk by three factors:(1) The status of wells covered by the bond (relative number of inactive wells, deep wells, and marginal production);(2) Operator-specific compliance history; and(3) Reclamation stewardship diligence. The point totals for each of these factors trigger an increase in bond calculated as $500 per point of risk as shown in attachment 3.Automated Fluid Minerals Support System (AFMSS) Data Entry Requirements:It is mandatory that the field office timely and accurately enters all bonds into the Automated Fluid Minerals Support System (AFMSS) and that the field office verifies and ties all Federal wells (not State or fee wells) to the appropriate bond number. The field office must enter bond information into AFMSS as soon as the AO approves an APD. However, the field office may enter the information at the time the field office receives an APD.The AO will verify that the field office has entered all active bonds into AFMSS and the field office made the appropriate association to all Federal wells. The field office must enter bond adequacy review data into the AFMSS bond review screen within 5 days of conducting the bond adequacy review (see attachment 5 for instructions). The field office must always document the bond review in the applicable case file. In addition, the Bond and Surety System is the BLM's official database for all oil and gas bonds. To preserve accurate recordation, the field office must update the Bond and Surety system as well. When the AO approves a Final Abandonment Notice, the field office must remove the well from the associated bond number in AFMSS and update the Bond and Surety System accordingly.Semi-annual Reports:For oversight, transparency, and to address questions from audits, the Legislative Branch, and other stakeholders, all state offices with an oil and gas program must submit a consolidated semi-annual bond adequacy review report to the Washington Office (WO) Division of Fluid Minerals (WO-310). A report covering the first and second quarters (October - March) of each fiscal year is due by April 30 of each year. A report covering the third and fourth quarters (April - September) is due by October 31 of each year. The state office will run the AFMSS "Bonds Reviewed Report" (GLB.102) for each of their field offices and submit a statewide, consolidated report to WO-310. Please refer to attachment 5, AFMSS Bond Adequacy Review Instructions, for directions to run this report in AFMSS. This report will list the bonds that the field offices reviewed (bond number), whether the field office increased/decreased the bond (if any), the amount of the increase/decrease (if any) for each bond, and a short cover letter narrative summarizing the activity. The first semi-annual report is due April 30, 2014.What Existing Policies Pertain to Bond Adequacy Processing?For reference, the following is a list of IMs that pertain to the Bond Adequacy process:

  • Bond Adequacy- Related IMs:
  • IM 2010-161, July 2010,
  • Federal Oil and Gas Bonds
  • IM 2008-122, May 2008,
  • Oil and Gas Bond Adequacy Reviews; DD: 05/30/2008; 10/31/2008
  • IM 2006-206, August 2006,
  • Oil and Gas Bond Adequacy Reviews

Timeframe: This policy is effective upon issuance. Implementation Plan: All state offices with an oil and gas program must submit a consolidated semi-annual bond adequacy review report to the Washington Office (WO) Division of Fluid Minerals (WO-310). A report covering the first and second quarters (October - March) of each fiscal year is due by April 30 of each year. A report covering the third and fourth quarters (April - September) is due by October 31 of each year. The first report is due to WO-310 by April 30, 2014.The report should include the following:1. Bonds reviewed by bond number;2. Determination if bond was increased, decrease or unchanged;3. Amount of bond adjustment; and4. Summary remarks regarding the review.Sample Report:

  • Bond Reviewed (by bond number)
  • Bond Increased/ Decreased/Unchanged
  • Amount of Bond Adjustment
  • Summary of review XYZ000000
  • Increased $182,500

Worksheet indicated an increase was required. Notable: 12 wells were idle for 7 years or more and the operator had 4 MUEs over the last 3 years.Budget Impact: This policy will increase the time needed to perform the bond adequacy reviews, documentation, and reporting, and result in a moderate impact to oil and gas budgets with less time available for oversight and permitting.Background: The Government Accountability Office (GAO) released Report 11-292, entitled, "Oil and Gas Bonds: BLM Needs a Comprehensive Strategy to Better Manage Potential Oil and Gas Well Liability," in February 2011 (http://www.gao.gov/new.items/d11292.pdf). The GAO found that current BLM policy for deciding when to increase a bond is vague and creates ambiguity about whether a field office should request a bond increase and whether the AO should approve the request. The GAO recommended “revising the bond adequacy review policy to more clearly define terms and the conditions that warrant a bond increase."In our response to the GAO Report, the Department of the Interior, Assistant Secretary for Land and Minerals Management (ASLM), accepted all of the GAO's findings and recommendations. Specifically, the ASLM agreed to update the BLM current bond adequacy review policy to ensure that BLM state and field offices require the appropriate bond amount, including any warranted increase. The regulations at 43 CFR 3104.5 (b) authorize the AO to increase the amount of any bond whenever it is determined that the operator poses a risk due to factors including, but not limited to:- A history of previous violations;- A notice from ONRR that there are uncollected royalties due; or- The total cost of plugging existing wells and reclaiming lands exceeds the present bond amount.The record title owner, the operating rights owner, or the operator can request a State Director Review whenever the AO issues a decision to increase any bond (43 CFR 3165.3). The AO will attach appropriate appeals language to all bond increase decisions.Manual/Handbook Sections Affected: The BLM Handbooks H-3104-1, Bonds, and H-3106-1, Assignments and Other Transfers, will incorporate this interim policy during their next revision.Coordination: Representatives from WO-310, all state offices, and the Office of the Solicitor coordinated in the development of this IM.Contact: If there are any questions concerning this IM, please contact me at 202-208-4201. Your staff may contact Steven Wells, Division Chief, WO-310, at 202-912-7143 or s1wells@blm.gov, or John Ajak, Petroleum Engineer, WO-310, at 202-912-7147 or jajak@blm.gov. For questions related to AFMSS, you may contact Carol Larson, BLM AFMSS Technician, 406-233-3655 or clarson@blm.gov.Signed by: Michael Nedd,  Assistant Director, Minerals and Realty ManagementAuthenticated by: Catherine Emmett Division of IRM Governance5 Attachments1 - Bond Adequacy Review Instructions (3 pp)2 - Procedures to Increase (or Decrease) Bond Amount (1 p)3 - Bond Adequacy Review Excel Worksheet (Excel Spreadsheet) (1 p)4 - Sample of Bond Adequacy Review Excel Worksheet (1 p)5 - AFMSS Bond Adequacy Review Instructions (7 pp)

Office

National Office

Attachments

Fiscal Year

2013