Microsoft Word - Bond Instruction Sheet Dec 2005 Revision.doc

RAILROAD COMMISSION OF TEXAS

P-5 Financial Assurance Unit

Oil & Gas Division

P.O. Box 12967

Austin, Texas 78711-2967

rev. 12/2005

INSTRUCTIONS

INDIVIDUAL & BLANKET PERFORMANCE BONDS

LETTERS OF CREDIT OR CASH DEPOSITS

For Wells and Other Oil and Gas Operations

Pursuant to Sections 91.103, 91.104, 91.1041, 91.1042 & 91.109 Tex. Nat. Res. Code (TNRC)

A. FINANCIAL SECURITY. Except as noted below, a person required to file a P-5 Organization Report (P-5), under § 91.142, TNRC and

Commission rules, must also execute and file a bond, letter of credit or cash deposit. There are two options available under w hich a person would

be considered a “Bonded Operator” under Commission rules: Option 1 – an individual performance bond, letter of credit or cash deposit covering

only wells; or Option 2 – a blanket performance bond, letter of credit or cash deposit covering wells and/or other oil and gas operations. A person

filing a P-5 who is engaged in non-well activities that require the filing of financial security cannot use Option 1. Bonds and Letters of Credit must

be filed on forms approved by the Commission; these forms are available from the Commission or on our website at

www.rrc.texas.gov

. Bonds

must be issued by a surety company registered in the State of Texas with the Texas Department of Insurance.

EXEMPTION FROM FINANCIAL SECURITY REQUIREMENT: if an operator's only

activity is as a first purchaser, survey company, salt

water hauler, gas nominator, gas purchaser or well plugger is not

required to file financial security in connection with their P-5 filing.

WELL SPECIFIC PLUGGING INSURANCE: a wellbore for which the operator has filed a well-specific plugging insurance policy will be

excluded from the calculation of an operator’s financial security requirement. An insurance policy filed for this purpose must meet the

requirements of Statewide Rule 78.

B. INDIVIDUAL PERFOMANCE BOND (Option 1). An individual performance bond may be submitted by any person who operates one or more

wells and who has no other C ommission-regulated activities that requi re financial security at the time of filing. A n individual bond will cover all

permitted wells and all current w ells carried on the C ommission’s Oil and Gas Proration Schedules, including but not limited to active, inactive,

injection or disposal, 14(b)(2) extension, or hydrocarbon storage. Additional wells that are obtained during the current year and prior to the filing

of next year’s P-5 may require that the bond amount be increased to cover the additional wells. Only one individual bond cover ing all w ells is

required.

C. BLANKET PERFORMANCE BOND (Option 2). A blanket performance bond may be submitted to cover all Commission-regulated operations

performed by a person, including all current wells. Additional wells that are obtained prior to the filing of next year’s P-5 and carried on the Oil

and Gas Proration Schedules will be automatically covered by th e bond provided that the total number of wells remains within th e range specified

for the bond amount (see I(1) below). Only one blanket performance bond is required for a person performing multiple operations.

D. LETTER OF CREDIT. A letter of credit may be submitted to fulfill financial secur ity requirements, subject generally to the same requirements

for bonds. If you are submitting a letter of credit in lieu of an individual performance bond under Option 1, you need not fill in Box #4 on the letter

of credit.

E. CASH DEPOSIT. A cash deposit may be submitted in lieu of either bond. Cash deposits must be submitted by certified cashiers check and will

be held in an account within the Oil Field Clean Up Fund. Any interest accruing on cash deposits will be deposited into the Oi l Field Clean Up

Fund pursuant to Texas statute and will not accrue to the operator’s account.

F. OIL & GAS OPERATIONS. Statewide Rule 1 lists some of the oil and gas operati ons regulated by the Commission. These and others are also

listed below. These operations and associated activities must be covered by a bond or alternate form of financial security. If you are submitting a

blanket bond, in Box #4 on the bond (letter of credit), identify all Commission-regulated operations that you perform, by checking each appropriate

operation and providing a sufficient description of any other Commission-regulated operations not listed below.

Commission-Regulated Operations

(A) permitting, drilling, operating, or producing any oil, gas, geothe rmal resource, brine mining inj ection, fluid inj ection, or oil & gas w aste

disposal well;

(B) transporting, reclaiming, treating, processing, or refining crude oil, gas & products, or geothermal resources & associated minerals;

(C) discharging, storing, handling, transpor ting, reclaiming, or disposing of oil & gas waste, including hauling salt water for hi re by any method

other than pipeline

;

(D) operating gasoline plants, natural gas or natural gas liquids pr ocessing plants, pressure maintenance or repressurizing plants , or recycling

plants;

(E) recovering skim oil from a salt water disposal site; (I) operating a pipeline;

(F) nominating crude oil or natural gas

; (J) operating as a cementer approved for plugging wells

;

(G) operating a direction survey company

; (K) operating an underground hydrocarbon or natural gas storage facility; or

(H) cleaning a reserve pit (L) gas purchaser

If an operator's only activity is as a first purchaser, survey company, salt water hauler, gas nominator, gas purchaser or well plugger is not required

to file financial security in connection with their P-5 filing.

(over)

G. WHEN & WHERE TO FILE. When required, file the original of the bond or letter of credit (or notice of renewal, where appropriate), or tender

the Cash Deposit, in the C ommission’s A ustin office. Financial security may be required at the time of filing an initial or re newal P-5, upon

acquisition of wells by P-4 transfer, or upon filing of an app lication for drilling permit. If a bond or letter of credit is d eclared forfeited, payment

shall also be made to the Austin office. Financial security may be filed or modified at other times during the P-5 year subject to certain restrictions.

H. AMOUNT OF INDIVIDUAL PERFORMANCE BOND, LETTER OF CREDIT OR CASH DEPOSIT. Persons who elect Option 1 (if

available) shall file an individual performance bond, letter of credit or cash deposit, in an amount equal to $2.00 per foot mu ltiplied by the total

aggregate depth of all wells on the Oil and Gas Proration Schedules for the operator, or the total depth of any permitted w ells if the operator has no

wells on schedule. The total aggregate depth will be determin ed from Commission records and is provided on your Options Fact Sheet. Increases

in the total aggregate depth due to an increase in the number of wells operated by a person may require that the amount of the bond, letter of credit

or cash deposit, be increased. Bay and offshore well operators have additional financial security requirements as described in J below.

I. AMOUNT OF BLANKET PERFORMANCE BOND, LETTER OF CREDIT OR CASH DEPOSIT.

1. Wells Only. Number of Wells

Bond Amount

1 to 10 $ 25,000

11 to 99 50,000

100 or more 250,000

2. Commission-Regulated Operations Other Than Wells. Except where excluded under Paragraph A above, persons performing other

operations within the jurisdiction of the Commission, including, but not limited to those operations listed in Paragraph F, but who have

no wells, shall file a bond in the amount of $25,000.

3. Wells & Other Commission-Regulated Operations. Persons operating wells and performing other operations within the jurisdiction

of the Commission for which financial security is required shall file financial security in an amount determined by the greater of that

required by the wells operated or by the non-well activities. Note: Additional bonding for commercia l facilities may be separately

required by the Commission pursuant to Statewide Rule 78.

4. New Operations. Persons filing a P-5 Organization Report for the first time in order to perform Commission-regulated activities are not

required to file financial security at the time of filing. However, the Commission may require financial security in an appropriate amount

prior to granting authority for certain operations by that operator (including approval of P-4 transfers or the issuance of drilling permits).

5. Additional Wells. Additional wells acquired by a person will automatically be covered by the blanket bond, letter of credit or cash

deposit, provided that the total number of wells does not exceed the range permitted by the amount submitted. If the total number of

wells increases beyond the range permitted, the Commission will requi re additional coverage before further acquisitions will be

approved.

6. Bay & Offshore Wells. Bay and offshore well operators have additional financial security requirements as described in J below.

J. BAY AND OFFSHORE WELL BONDING. In addition to the bonding required under H and I above, an operator of bay and/or offshore wells

must provide additional entry level bonding of $60,000 for bay wells or $100,000 for offshore wells. Operators of such wells ar e required to file

additional financial security equal to the presumed plugging cost of $60,000 for each non-producing bay well or the presumed pl ugging cost of

$100,000 for each non-producing offshore well beyond the first non-producing well.

K. WELLS. All wells of a person carried on the current Commission Oil and Gas Proration Schedules must be counted in determining the bo nd

amount for a blanket bond. In Box #3 on the bond (letter of cred it), list your total number of wells. This includes active, inactive, injection or

disposal, 14(b)(2) extension, hydrocarbon stor age wells or other wells carried on the Schedules. For an individual performance bond or letter of

credit, also state, in Box #3, the total aggregate depth of all of your wells. Well count and depth is to be given as of the d ate you file the bond. If

you have no wells on schedule, then any uncompleted wells for wh ich you hold drilling permits (if any) will be used to calculat e your financial

security requirement. Refer to your Options Fact Sheet for well information.

L. WELL TRANSFER. A transfer, by any means, of any well covered under a bond is not complete unless the operator acquiring the well has on

file with the Commission an individual performance bond, letter of credit or cash deposit under Option 1, or a blanket performa nce bond, letter of

credit or cash deposit under Option 2, in an amount sufficient to cover both its current operations and the wells being transfe rred. Any existing

bond, letter of credit or cash deposit remains in effect and the prior operator of the well remains responsible for compliance with all law s and

Commission rules covering the transferred w ell until the C ommission de termines that the w ell is covered by proper financial sec urity and the

acquiring person has assumed full responsibility for the well in accordance with all state laws, including §91.107, TNRC and Commission rules.

M. TERM & EXPIRATION.

A person must have a valid and current bond, letter of credit or cash deposit on file while performing Commission-

regulated operations. The annual expiration date of a bond must be 150 days after your P-5 expiration date; the expiration date of a letter of

credit must be 90 days after your P-5 expiration date. When filing a bond or letter of credit for the first time, you will be required to file a bond

with an extended term, in order to provide continuous coverage between your P-5 effective date and the appropriate period beyon d the P-5

expiration date as stated above. Written notice of renewal of an existing bond or letter of credit must be given by the Surety or financial institution

to the Commission, or a new bond or letter of credit (or other author ized form of financial security) must be filed on or befor e your P-5 filing date.

Obligations under bonds or letters of credit may be released by written agreement between the Commission, Principal (Operator) and the surety or

financial institution.