Oil & Gas Bonds

Oil and Gas Bonds are a unique type of surety bond. They are typically considered a type of commercial surety bond but have unique expertise and underwriting requirements. Oil and gas bonds are a general term for several surety bonds that may be required in this industry.

What Types of Oil and Gas Bonds May Be Required?

• Plugging and abandonment bonds – These surety bonds protect the public by guaranteeing that wells will be properly plugged and sealed at the end of their use. They provide assurances for the cost of cleaning up abandoned wells if not plugged by the bond Principal.

• Right of Way Bonds – These surety bonds are typically required before a permit can be issued on a public “Right of Way”.

• Lease Bonds – The Bureau of Land Management (BLM) manages the United States’ onshore mineral estate. The land leased for this purpose requires a surety bond for leasing land in connection with the drilling of oil, gas and geothermal wells. These surety bonds guarantee that the leasee will comply with all regulations. More information on BLM surety bond requirements can be found here.

• Performance Bond – Requires the oil and gas contractor to complete the contract according to the price and specifications. These can be for both drilling and service contracts. More can be read about performance bonds here.

Additionally, Oil and Gas contractors or producers may need other surety bonds such as:

• Fuel Tax Bonds

• International Bonds

• Self-Insured Workers Compensation Bonds

• License and Permit Bonds

• Excise Tax Bonds

• Miscellaneous Energy Bonds

Who May Need Bonds?

• Contractors involved in drilling

• Oil and Gas producers

• Those leasing Federal, State and Tribal land

• Anyone involved in the ever-changing industry

Underwriting Considerations

Except for performance bonds, most of the surety bonds listed above will renew every year. They are only cancellable by the Obligee (Government or Municipality) once the obligation is complete or a replacement is granted. The surety bond company cannot easily get off these obligations and maybe on them for a long time. Therefore, the surety bond company will take extra care to make sure the Principal is both financially strong and experienced. Many surety bond companies will not write these types of surety bonds as special industry expertise is required.

Bond Cost

The cost of these oil and gas bonds depends on many factors including the Company’s financial strength, experience, type of surety bond required, number of wells and length of the obligation. Expect to pay anywhere from 1% – 5%. Additionally, because many of these surety  bonds renew every year, the premium will also be due annually.

Substitutions for Surety Bonds

Most Federal and State Entities will allow for an Irrevocable Letter of Credit (ILOC) to be used in place of a surety bond. There are several potential disadvantages to this including:

• It ties up liquidity and borrowing capabilities

• It can be more expensive, especially in an increasing interest rate environment.

• They can be called on demand with little defense.

More can be read about the differences between surety bonds and letters of credit here. 

What to Look for in a Surety Bond Company

The contract documents, Federal and State statues or private owner will outline the requirements for the surety bond company writing your Oil and gas bonds. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. You can check that here (registration required). Contractors should be very suspicious about using a surety bond company with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.

Indemnity Required

Oil and gas bonds are types of surety bonds and surety bonds are written on the principal of indemnity. This means that if the surety bond company suffers a loss, they will seek reimbursement from the indemnitors. Before getting an Oil and Gas bond, the company and often the owners will be asked to sign a General Indemnity Agreement. You should read this agreement carefully before signing it as it spells out the terms and conditions of all indemnitors. This is one major difference between surety bonds and insurance. Read more about indemnity here.

Frequently Asked Questions

Companies can view our Surety Bond Frequently Asked Questions Page here.