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Sunday, August 25, 2002 Senate bill balancing act for regulators By Kathi Stapp Texas Senate Bill 310 began innocently enough. Everyone agreed that it was important to protect Texas groundwater and to protect the environment of the state. From that point on, there has been little agreement between the Texas Railroad Commission and Texas independent oil and gas producers on the controversial legislation.
Railroad Commission Chairman Michael Williams sees it as a chance “to balance the need for healthy water and a healthy oil and gas industry.” In an effort to reduce the growth in the number of inactive wells without an active operator, the petroleum industry, landowner groups, and the Railroad Commission began discussions in the summer of 1999 to identify the cause of the problem and suggest solutions. The number of orphan wells that must ultimately be plugged by the state has grown to about 17,000. In addition, there are approximately 5,500 inactive wells owned by active operators that are not in compliance with plugging rules. “To reinterpret or relax our reading of SB 310 would place undue risk on Texas ground and surface water and unnecessary pressure on the Oilfield Cleanup Fund,” RRC Chairman Michael Williams said. According to the Texas Alliance of Oil and Gas Producers projections, 3,000 of 8,000 statewide oil and gas producers will be forced out of business over the next three years by the legislation. What led to the current number of non-compliant wells? n First, according to the RRC Web site, statute changes in 1991 inspired a class of un-bonded operators to perpetually avoid plugging inactive wells by paying a $100 per well annual fee. When these operators went out of business, they had often accumulated a number of inactive wells because it was cheaper to pay the $100 plugging extension fee than to plug the well. The average cost to plug a well is about $4,500. There was nothing for the commission to collect to recover the cost to plug these inactive wells. n Second, the industry-wide practice of transferring wells to operators with lower and lower operating costs as the well’s production declined also contributed to the problem. Often, succeeding operators tend to be less and less capitalized, resulting in the last operator often being an unbonded operator without the resources or revenue to plug the well. n Finally, there were instances of unprincipled operators who intentionally acquired large numbers of inactive wells for the sole purpose of stripping the wells of any salvageable equipment, selling the equipment, going out of business, and leaving the well bores to be plugged by the state. Roy Pitcock Jr. of Graham, chairman of the Texas Alliance of Energy Producers, said that there are a few bad operators who must be held accountable, but, for the most part, good operators should be allowed to explore and produce with as little interference as possible. Deliberations continued for more than a year, and in the summer of 2000, it was agreed that the best course of action to reduce the growth in orphan wells was to limit the transfer of inactive wells, limit the number of plugging extensions and begin a transition to universal bonding of all operators. It is the third step of the action plan, the transition to universal bonding of all operators that has industry members reeling. This step required statutory changes and was included in the Railroad Commission’s Sunset re-authorization bill, Senate Bill 310. The final version of the bill established universal bonding requirements to become effective Sept. 1, 2004. Until that date, the two existing unbonded financial assurance options remained, but both were made more difficult to achieve. "It's caused us a new expense in the cost of bonds or letters of credit. This is especially difficult for small operators with low producing wells,” said Allan Frizzell, vice president of Enrich Oil Corporation. “This incremental expense penalizes the small operator by driving up operating expense when there is little revenue being made." The first unbonded option has been called the “good guy” option. This option was first established in 1991 and specified that if an operator could demonstrate an acceptable record of compliance for the previous 48 consecutive months of operation, it could satisfy its financial assurance for the next 12 months by paying a $100 fee. SB 310 changed the annual fee to $1,000 and additionally required that the commission make a determination that bonds “are not obtainable at reasonable prices” for an operator to qualify for this option. The second unbonded option was to pay to the commission an annual fee equal to 3 percent of the face value of the otherwise required bond. No past performance standards were required of the operator. SB 310 left this option intact for the transition period, but raised the fee from 3 percent to 12.5 percent of the otherwise required bond amount. Martin V. Fleming, director of public affairs for Texas Independent Producers and Royalty Owners, feels that the RRC proposal unintentionally influenced the market. “Our research indicates underwriters are currently charging an annual rate from less than one percent to almost 10 percent for bonds. If the commission determines that 12 percent is reasonable, it will tend to drive the cost of bonds toward 12 percent.” he said. During the transition period, the annual plugging extension fee for wells of unbonded operators that were inactive over 12 months was increased from $100 to $300 by SB 310. The provisions enacted by the Nov. 1, 2000, rulemaking — which required plugging or bonding of wells that had been inactive for more than 36 months and owned by unbonded operators — were kept intact by SB 310.
The current controversy during the transition period to universal bonding involves some producers who previously were in the un-bonded class of operators and do not want to pay the 12.5 percent of the bond, claim that they can’t get a bond or letter of credit, and want the commission to grant them the “good guy” option with the $1,000 annual fee. Currently, the commission has a list of about 80 producers who have either applied for a hearing for “good guy” or have registered a complaint about not being able to get a bond or letter of credit. According to Pitcock, more than 200 hearings have been held, with only one operator being granted the “good guy” option. While there have been about 80 producers who have registered a complaint, there are about 3,586 producers that are currently bonded or have posted a letter of credit. This is an increase of about 1,500 bonded producers in the last 12 months. According to RRC chairman Michael Williams, 50 percent of active well operators are now bonded or have letters of credit, compared to only 9 percent one year ago. The ratio of letters of credit to bonds is about two letters of credit for each bond. The RRC cites this as evidence that bonds or letters of credit are generally available to operators. Those operators that have indicated problems in providing bonds or letters of credit generally show very low production per well, such that it would take many years of production revenue from the wells to cover the cost of plugging. Petroleum industry members have found few financial institutions are willing to provide the letters of credit without the producer moving all transactions to their business. “You cannot get a bond,” said Abilene operator Jerry Holden. “I had to deposit $50,000 with the bank so that they would give me a letter of credit. You cannot get reasonably priced bonds,” he added. And, according to Pitcock, “There are only a handful of underwriters who are even writing the bonds. If they don’t carry your other insurance, they don’t want to carry the bonds.” Those working as independents in the Texas oil industry claim bonding requirements will put thousands of operators out of business and reduce production. There has been a consistent reduction in the number of operators since the boom days of the late 1980s. The number of operators has declined from more than 16,000 in 1990 to about 7,800 today. Industry leaders fear Senate Bill 310 will be the final nail in the independent producer’s coffin. O’Neill predicts that Texas will lose five to 10 million barrels of stripper oil at a tax value of $125 million annually. “Our property taxes will soar to make up the tax difference. Rural unemployment will increase until area workers are forced to leave the area for other work,” he said. We feel that there should be legislation to help us, not hurt us,” said Pitcock. “There should be legislation that encourages the producer. The “Good Guy Option” goes out in 2004. We have to do something to ensure that this industry survives. Time is of the essence for some operators.” Kathryn Stapp is an Albany writer. Active Operators in Texas 1990: 16,
024
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Abilene
oil and gas producer Earl “Bill” O’Neil has called
the legislation “the most repugnant and evil-spirited bill
designed to effectively eliminate all small producers.”
The
Jan. 9, 2002, rule amendment defined the commission’s procedure
to determine if bonds “are not obtainable at reasonable prices”
for the “good guy” financial assurance option. The rule
specifies that an operator can request a hearing before the commission
to demonstrate that a bond is not obtainable at a reasonable price.
The operator is required to show that no fewer than three companies
which have issued a bond filed with the commission in the past
12 months will not issue a bond to the requesting operator for
an annual fee of less than 12 percent of the face amount of the
required bond.|
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E.W. Scripps Publications