What are Oil & Gas Bonds and What Makes Them Unique?

oil gas bonds unique

Do you own a business in the oil and gas industry? If so, you may know about oil and gas surety bonds. Regardless of if you have past experience acquiring these types of bonds, or if this is your first time, the information here may prove beneficial along the way.

Oil and Gas Bonds Explained

A surety bond in the oil and gas industry can cover many things. You can read more about the difference type of bonds here. Often, when people refer to oil and gas surety bonds, they are referring to well plugging bonds. These surety bonds are required by public and private land owners before a company is allowed to drill wells on their property. These surety bonds guarantee that the Principal (Usually the well driller) will plug and seal the well when they are finished. If the Principal does not or cannot, the surety bond company will step in. Because surety bonds are written on the Principle of Indemnity, they will seek reimbursement from the Principal and any indemnitors, however.

Who is Required to Have an Oil and Gas Bond?

If you have business operations that involve well plugging, maintenance, repair, operation, drilling, or managing the pollution to the environment that the industry cause, or if you work with oil or gas drilling in any other way, it is likely that you will need oil and gas surety bonds.

How are They Used?

Oil and Gas bonds have different purposes depending on what they are for. In general, the protect against the two following items.

  1. It ensures the business operating in this industry follows all of the federal and state regulations regarding the operation and the clean up of gas and oil drilling actions, which helps protect the environment from any contamination that is caused by the industry.
  2. It protects the Owner (Obligee) from a financial loss. The surety bond will pay out compensation up to the amount of the bond if the business does not follow the required regulations or pay the needed taxes.

However, some contractors need performance bonds for this industry. These guarantee the completion of a contract. You can read more about performance bonds here.

What is the Cost?

The costs associated with these surety bonds are based on the actual amount of the bond, along with the financial strength of the Principal that has requested the bond. The surety bond amount that is required will vary from one state to state and on a Federal level. Some states allow the Principal to post a blanket bond to cover a number of open wells. Keep in mind that many of these oil and gas surety bonds renew every year until the obligation is closed out. That means the bond premium will also be due every year.

Underwriting Oil and Gas Surety Bonds

Oil and Gas surety bonds are getting more challenging to obtain. That is because there have been a number of significant bankruptcies over the years. Most surety bond companies will want to see Principals that have strong balance sheets and the ability. These oil and gas surety bonds can often stay open for years, so surety bond companies want to make sure the Principal is strong enough to withstand ups and downs in the market place.

Getting an Oil and Gas Bond if You Have Bad Credit

What about companies without significant net worth or credit challenges? Usually, in these situations, your premium to receive the surety bonds is going to be higher but there are usually options.

Working with a surety bond expert can often help you get through this complicated process and get the oil and gas surety bonds you need. If you’d like to speak with an expert on Oil & Gas Bonds, contact MG Surety Bonds today.