TIPRO, Texas Railroad Commission differ on bonding requirements

Texas Independent Producers and Royalty Owners is pushing the Texas Railroad Commission to allow independent exploration and production companies the 3-year phase-in designated by state legislators.

By OGJ editors

HOUSTON, Sept. 17 -- The Texas Independent Producers and Royalty Owners Association (TIPRO) is pushing the Texas Railroad Commission to allow independent exploration and production companies the 3-year phase-in period originally designated by state legislators in which to secure bonding or other financial guarantees against environmental damage during drilling operations.

"Instead of following the legislative intent, the commission has structured its rules so that, for practical purposes, almost all independents must provide financial security in 1 year," said Scott Anderson, TIPRO's executive vice-president.

However, Texas Railroad Commissioner Tony Garza claimed 116 operators asked in July "to be granted a 'good guy exception'" to the financial assurance program.

"Since changes to the financial assurance requirements took effect in March, a number of groups, including regional oil and gas associations and a group of Texas legislators, are pressing hard to roll back this long-overdue program," he said. "Although critics have been vocal, suggesting that we grant 'good guy' waivers to some operators regardless of their financial standing or history, the bonding and financial assurance program is working. We're seeing a significant number of operators able to secure the bonds or letters of credit necessary to stay in business."

TIPRO, legislators' view
TIPRO President Joe Abel of Midland, Tex., denied that his group is trying to undo the bonding requirement. "TIPRO strongly supported, and continues to support, the legislature's determination in 2001 that all oil producers should put up financial assurance to cover damages that might be caused by their operations," he said. "We also supported the legislature's determination that bonding needed to be phased-in over a 3-year period. It was obvious that the bonding industry would not be able to cope with the flood of new business if changes were implemented too rapidly."

In late July, more than 20 Texas legislators requested that State Comptroller Carole Keeton Rylander analyze as quickly as possible the economic impact on the state and its school districts of the program, as imposed by the TRC.

Those legislators stated in a letter dated July 30, "The result of this onerous interpretation by the commission . . . does not bode well for many small oil and gas operators and the state of Texas. Independent businessmen and women may be forced out of the business; all will see their operating capital reduced; marginal wells will be prematurely plugged or abandoned. These events will inevitably lead to undue strain on those individuals. In addition, when the Texas oil and gas industry suffers, there is a reduction in employment in rural Texas. This, in turn, lowers the tax base for school, counties, and small municipalities and erodes the base of severance and sales tax receipts."

Abel said, "Since the bonding industry has not been able to cope with so much new business, industry has had to tie up hundreds of millions of dollars of capital by obtaining letters of credit and so-called bonds that require collateral. This money could be used for drilling wells if the legislature's intent were being followed. Some operators are in fact on the verge of being put out of business even though they have good environmental track records."

"Of the 7,161 registered, active (Texas) operators, some 50% have financial assurance, a 40% increase from just a year ago," Garza said. "In fact, currently, 95% of the oil and 96.2% of gas produced in Texas was produced by operators with bonds, cash, or letters of credit."

The 116 operators seeking exception, he said, "accounted for 0.14% of the oil produced in Texas and 0.03% of the natural gas produced. The unfortunate reality is that many of the low-producing operators cited here will never generate sufficient revenue from their wells to pay for the cost of plugging when it becomes necessary to do so."

However, Garza claimed, "Based on past experience, approximately 75% of these applications for exception to the bonding requirements will be withdrawn or dismissed, most frequently because the operator eventually secures the wells with either a bond or letter of credit."

The program is critical, Garza said, because "the state's Oil Field Cleanup Fund faces a potential liability of $540 million for abandoned oil field sites and wells and is already stretched too thin for current demands on the fund. A burden of this magnitude cannot and should not be picked up by the taxpayers of Texas."

Garza said there are "17,000 abandoned, non-producing oil and gas wells in the state," including many that "may very well pose a potential threat to Texas's most precious natural resource—water."

TIPRO has 2,000 members, including both independent producers and royalty owners.

More in General Interest