An oil and gas bond is an agreement between three entities: the principal (the business buying the bond), the obligee (the federal or state entity overseeing licensure), and the surety company that issues and backs the bond. In this case, the principal is any business that is involved in the process of extracting oil and gas, and the obligee is usually either the Department of Interior’s Bureau of Land Management (BLM), the Bureau of Ocean Energy Management, or another state entity in charge of regulating well activity. Unlike insurance, this bond protects the state and the public, rather than the principal, against unethical or illegal practices. For this reason, an oil and gas bond is federally required before being able to obtain a permit to operate. The total required bond amount starts at $10,000, and our starting bond premium is 1% of the total amount, so $100 for a $10,000 bond. However, the bond type and total amount vary depending on several factors.
The cost, or premium, is only a percentage of the total bond amount, and oil and gas bond premiums are typically between 1%-5% of the total bond amount. Surety agencies also base the price on the buyer’s credit score and history, business and personal finances, and professional experience within the industry. Because of the nature of the gas and oil industry, these bonds are considered high risk, so an excellent credit score and a few years of experience in the industry are extremely suggested before applying. Those with higher credit scores can expect to see rates between 1.5%-3% and buyers with notably low credit scores can still get bonded, but should expect premium rates closer to 10%-15%. Our premiums start at 1% of the total amount of the bond, as low as $100 for a $10,000 total, for example. In addition, these bonds remain in effect until the project ends, but buyers will have to pay the premium annually until that point.
We’re committed to offering our customers the best rates available on the market for their bonds. To do this, we have partnered with over 10 insurance partners, allowing us to find the best price available for each customer. Each surety company will rate each business differently, so even if a business has been declined or quoted a high premium, we can find a great, affordable quote from one of our 10 partners.
All businesses involved in drilling, redrilling, deepening, operation, maintenance, or repairing wells trying to obtain a license or permit are federally required to post an oil and gas bond. Additionally, contractors involved in the drilling, well plugging, maintenance, cleanup process and those leasing federal, state, or tribal land may also be required to post an oil and gas bond.
The bond type that may be required and the total of the bond that must be posted is determined by the obligee, and depends on many factors, including but not limited to:
Unlike typical insurance, an oil and gas bond protects the public and the government that the business deals with, not the principal itself. An oil and bond is a legal agreement between the government, business, and surety company. The bond guarantees that the business will abide by the law, follow industry standards, and maintain environmental safety precautions, and is primarily used to cover the financial or environmental damages involved in the cleanup process. If the business makes a mistake or is involved in unethical or illegal activity, a claim can be filed against the business to be compensated for the harm caused by the error. The bond then takes care of the financial burden for the business. It covers the immediate monetary repercussions (an amount not greater than the total of the bond) on its behalf. Then, the business will be required to back the surety company the debt that is owed. Additionally, because the cleanup process must take into account the safety of the public and the health of the environment, the closure of these bonds usually need to be signed off on by the obligee in order to ensure that the project has been completed without any short-term or long-term harm. This means that claims may be filed for a longer period of time, even after the official project itself has been completed.
It is important to note that various types of bonds may be required depending on the project's size, nature, and location. First, you will need to determine the type of basic bond you need that is federally required of all oil and gas companies. There are three general options to choose from, including:
Next, additional oil and gas bonds may be required depending on the state and activities of the business. These additional bonds and their purposes are shown below:
Finally, assess whether your business may need additional types of bonds that may be required to operate and obtain licensure in certain states, such as:
The federal government has laws regulating the general oil and gas bonds, but the following states have additional required bonds that must be posted before obtaining a permit: