Oil and Gas Bonds are a unique type of surety bond. They are typically considered a type of commercial surety risk but have unique expertise and underwriting requirements. Oil and gas bonds are a general term for several bonds that may be required in this industry.
What Types of Oil and Gas Bonds May Be Required?
• Plugging and abandonment bonds – These bonds protect the public by guaranteeing the proper duties are taken place when plugging and abandoning wells. The provide assurances for the cost of pollutions cleanup.
• Right of Way Bonds – These 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. Some of this land is leased for the purposes requires a bond for leasing land in connection with the drilling of oil, gas and geothermal wells. These bonds guarantee that the leasee will comply with all regulations. More information on BLM bond requirements can be found here.
• Performance Bond – Requires the oil and gas contractor complete contract according to the price and specifications. These can be for both drilling and service contracts.
Additionally, Oil and Gas contractors or producers may need other 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
Except for performance bonds, most of the 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 bond company cannot easily get off these obligations and maybe on them for a long time. Therefore, the bond company will take extra care to make sure the Principal is both financially strong and experienced. Many bond companies will not write these types of bonds as special industry expertise is required.
The cost of these bonds depends on many factors including the Company’s financial strength, experience, type of bond required, number of wells and length of the obligation. Expect to pay anywhere from 1% – 5%. Additionally, because many of these bonds renew every year, the premium will also be due annually.
Substitutions for Bonds
Most Federal and State Entities will allow for an Irrevocable Letter of Credit (ILOC) to be used in place of a 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.
What to Look for in a Bond Company
The contract documents, Federal and State statues or private owner will outline the requirements for the Surety company writing your bond. Many will require that your Surety 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 bond with a lesser rating. Most contracts will also require your Surety 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”.
Oil and gas bonds are types of surety bond and surety bonds are written on the principal of indemnity. This means that if the bond company suffers a loss, they will seek reimbursement from the indemnitors. Before getting a 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.
We are a company that supports our customers by providing them with the surety bonds they need to thrive. We are not just internet marketers or insurance agents. We are surety bond experts. Our team has over 100 years of combined experience and has access to all major bond companies.
Through creativity, experience and a commitment to the industry, we find a way to say YES and support our customers through bond placement, education and financial advice. MG Surety Bonds is affiliated with The Miller Group. The Miller Group is 60-year-old company that started with a focus on bonding contractors. Our people are dedicated to supporting our customers and giving back to the communities we serve. The Miller Group is committed to placing God, family and community first. We look forward to serving you.
Ben Williams is the President of MG Surety Bonds. He grew up working for a family owned business before eventually starting two of his own. He understands the risks and challenges that business owners face and the importance of surety credit in growing and maintaining a company’s revenue. Ben has held leadership positions, in surety, mergers and acquisitions and finance. He worked for one of the largest brokers in the country before joining The Miller Group and leading their surety practice. Ben holds a bachelor’s degree in Finance along with an Associate in Fidelity and Surety Bonding (AFSB). He also regularly speaks at construction industry associations on surety bonds and construction economics and has been published in multiple industry publications.
Ben leads a team of dedicated surety bond professionals who are the reason for the company’s great success. The team’s only role is to consult, support and serve our bond customers. We work large national accounts and accounts that need their first bond. We hope to have the opportunity to support you and your team. We want to be your surety partner for life!