This page addresses Frequently Asked Questions regarding the New Oil and Gas Bonding Legislation.
On April 5, 2006, Governor Fletcher signed into law SB 237. This bill creates new blanket bonding rates for the oil and gas industry and will become effective on July 15th, 2006.
In anticipation of many questions about this legislation, this information was prepared to assist and answer as many questions as possible. If you have additional questions concerning SB 237, please feel free to contact the Division of Oil and Gas Conservation using the contact information below.
1) Does the bill change the individual bond rates?
No, the individual bond rates will remain the same. The bill does re-structure the paragraph for the individual rates and simply puts the rates in a table as compared to the long paragraph in the previous wording of the statute.
2) Does the bill change the bonding for deep wells?
No, the bonding rates for deep wells can still be set by the Kentucky Oil and Gas Conservation Commission as previously written under the statutes. The bill does move this language which authorizes the commission to set bond amounts for deep wells to another section but there are no changes in this process for bonding a deep well.
3) What are the new bond rates for blanket bonds?
The bill establishes a tiered bonding structure for blanket bonds as follows:
a) 1 – 25 wells require a $10,000 bond.
b) 25 -100 wells require a $25,000 bond.
c) 101-500 wells require a $50,000 bond.
d) 501 wells or more require a $100,000 bond.
4) Is the new bonding structure retroactive on existing blanket bonds?
No, the new rates are only effective for new wells to be permitted after the effective date of July 15th, 2006. Any operator that is currently operating under a current blanket bond can continue to operate at their current amount for the wells covered under their bond. If they wish to add new wells or drill new permits (issued after July 15th), then they must upgrade their bond to the new tiered structure. But otherwise, a current blanket bond operator that adds no new wells can continue to operate those wells and the new bond structure will have no effect.
5) Do I have to post the additional amount of necessary bonding all at once if I am going to add new wells to my bond?
No, the bill allows for any operator to individually bond new wells and thereby incrementally increase their bond until such time as they have posted the necessary amount under the tiered structure. The division will combine the individual bonds into a blanket bond when an operator has posted sufficient individual bonds in the amount that would be required under the bonding structure.
6) Does the new tiered blanket bonding structure apply to new operators?
No, the bill establishes a “qualified” operator and a “non-qualified” operator. A “qualified” operator is any operator which has an existing blanket bond in place prior to the effective date of July 15th. A “non-qualified” operator is an operator that does not have an existing blanket bond in place prior to July 15th, 2006.
7) What are the blanket bond amounts for a new or “non-qualified” operator?
The blanket bond rates for a new or “non-qualified” operator are as follows:
a) 1 – 100 wells require a $50,000 bond.
b) 101 wells or more require a $100,000 bond.
8) Can a “non-qualified” operator become a “qualified” operator and be authorized to operate under the “qualified” bond structure?
Yes, a “non-qualified” operator can request to become “qualified” under the following conditions:
a) Demonstrate for a period of 36 months prior to the request for a “qualified” blanket bond a record of compliance with the statutes and administrative regulations of the division; or
b) Provide proof of financial ability to plug and abandon wells covered by the blanket bond and file a corporate guarantee if the operator is a corporate subsidiary. Proof of financial ability shall be in the form of an audited financial statement which meets certain criteria under the statute. Please refer to the statute for the specifics on this requirement.
9) Do current “qualified” operators have to file an audited financial statement?
No, this requirement applies only to any new or “non-qualified” operators that desire to become a “qualified” operator under the “qualified” blanket bonding tiered structure. If you currently operate under a blanket bond, you simply continue to operate as in the past, but must upgrade your bond in accordance with the tiered structure if you add new wells after July 15th, 2006.
10) When is an operator not eligible for a blanket bond?
The new law does provide criteria under which an operator cannot be granted a blanket bond either as a “qualified” or “non-qualified” operator. These conditions are:
a) If an operator has more than 10 violations of the statutes or administrative regulations within a 36 month period;
b) If an operator has any outstanding, unabated violations of the statutes or administrative regulations which have not been appealed;
c) If an operator has forfeited a bond, either individual or blanket, on any permit where the operator has not entered into an agreed order for the plugging of the well or wells under the forfeited bond; or
d) If a bond has been forfeited and the proceeds used to plug the well, unless the operator has made restitution to the department for all costs associated with the forfeiture and plugging of the well or wells.
11) What types of bond are accepted by the Division?
Bond types have not changed under the new law. The acceptable forms of bonding include cash, surety, letters of credit, or certificate of deposits.
12) Are there any provisions when an operator chooses to post a certificate of deposit as a blanket bond?
The new law does require that if an operator chooses to post a certificate of deposit as its blanket bond, the first $5,000 of the bond shall be in the form of cash. Under the tiered structure, operators will be posting $10,000, $25,000, $50,000 or $100,000 in some form of bond. If the operator chooses to use certificates of deposit (CD), whereby the operator draws the interest, then the operator must post the first $5,000 in cash with the department, whereby the department draws the interest into the abandoned well plugging fund. Therefore, under the first tier of $10,000, the bond would be $5,000 in cash and $5,000 in a CD, the second tier would be $5,000 in cash and $20,000 in a CD and so on so forth.
13) Are there conditions which would not allow an operator to receive any additional permits?
Yes, the new law provides that an operator is not eligible for additional permits if:
a) the operator has any outstanding, unabated violations of the statutes or administrative regulations, which have not been appealed:
b) the operator has had a forfeiture of a bond, either individual or blanket, and has not entered into an agreed order to plug the well or wells under the forfeited bond; or
c) the well under which the bond has been forfeited has been plugged by the department, unless the operator has made restitution for all costs associated with the forfeiture and plugging.
SENATE BILL 237 CAN BE VIEWED IN ITS ENTIRETY AT:
http://www.lrc.ky.gov/record/06RS/SB237.htm
