The Bureau of Land Management (BLM) recently proposed raising the minimum bonding requirements by a factor of 15 for individual federal leases, raising the minimum amount from $10,000 to $150,000, and by a factor of 20 for statewide bonds, raising the minimum amount from $25,000 to $500,000. The proposal, which would require the updated bonding amounts in place one year after the final rule’s effective date for individual lease bonds and two years after enactment for statewide bonds, also removes the option for unit and nationwide bonds.
Minimum Bond Requirement, Calculated
While not providing an exact formula for how it will determine each operator’s bond requirements, the proposed rule explains that BLM estimates an average of $71,000 per well to plug and abandon a well and reclaim the well site. BLM estimates a statewide minimum bond based on an oil and gas operator having seven wells within a state, for a total estimated liability of $497,000, rounded to the nearest $50,000. Thus, a $500,000 minimum bond requirement for a statewide bond for an operator with seven wells. In its proposed rulemaking, BLM clearly states that it “will increase the statewide bond amount for operators with more than seven wells tied to the bond.” 88 Fed. Reg. 47562, 47581 (July 24, 2023).
Thus, an operator with 50 wells would likely have a minimum statewide bond requirement of $3,550,000; an operator with 10 wells would be required to have a minimum bond of $710,000. BLM provides no further insight into how it will calculate the required bond amount at this time; BLM may provide further clarification in the final rule.
For those holding nationwide bonds, the BLM proposes allowing three years to convert the nationwide bond into separate state bonds. Those with unit bonds must update to statewide bonds within two years of the effective date of the final rule.
Bonding Further Constrained
Adding insult to injury, BLM’s proposed rulemaking eliminates the ability for operators to use certificates of deposit (CDs) and letters of credit (LOCs) to secure a personal bond. BLM’s reasoning is that these options do not include specific language requiring Secretarial approval before the surety holder releases the CD or LOC. BLM is offering that operators can update their surety instruments when they update their bonds according to the proposed regulations.
Proposed Rulemaking in a Nutshell
The bonding and surety proposals are part of a larger rulemaking by BLM to update and “enhance the administration of the Federal onshore oil and gas program” to be in line with recent legislation. However, as seen with the bonding proposals, the rulemaking goes beyond recent legislation by adding and raising routine fees as well as providing additional hurdles to obtaining federal leases and diligently developing those leases.
Additional key topics addressed in the BLM rulemaking include:
- Codifying expression of interest fees, and increasing required bonus bids, royalty, and rental rates.
- Instituting preference criteria to reduce the number of leases offered with alternative resource options for the lands.
- Penalizing operators for not developing leases within the first five years of a federal lease’s primary term by raising rental rates by $1 each subsequent year of non-development.
- Restricting extensions for applications for permit to drill.
- Restricting availability of lease extensions and suspensions.
BLM published its proposed rule, titled “Fluid Mineral Leases and Leasing Process,” 88 Fed. Reg. 47562 (July 24, 2023), on July 24, 2023, and is taking comments on it until September 22, 2023. The proposed rule is available here. BLM also provided a fact sheet on the proposed rule, available here, and a fact sheet on the bonding proposal, available here.
For more information about BLM’s proposed rule and potential implications, please contact Theresa Sauer or Bret Sumner.