R649-13-1. Performance Bonds Required for Oil and Gas Activities

(1) Before approval of a permit to drill a new well or engaging in any permitted oil and gas activity in Utah, an operator shall provide a performance bond to the division as set forth in Rule R649-13. (a) Oil and gas activities include: (i) drilling, completion or recompletion of an oil or gas well; (ii) production of oil or gas; (iii) re-entering an abandoned well; (iv) activities commenced by a transferee upon a transfer of ownership of existing wells; (v) Underground Injection Control (UIC) disposal and Enhanced Oil Recovery (EOR) Operations; (vi) operation of E&P product recycling facilities; and (vii) seismic exploration. (b) Except as set forth in Subsection R649-13-1(c), the division will not require a separate bond when an operator furnishes evidence to the division that a bond to cover plugging and restoration and in a form and amount acceptable to the division is held by other governmental or tribal entities in accordance with state, federal or tribal regulatory requirements and has been approved by the agency having jurisdictional primacy over oil and gas operations for each permitted oil and gas activity. (c) If a federally permitted well with private or state surface does not penetrate the targeted federal or Tribal minerals and the federal bonding agency releases or excludes the well from their bonding, the well will be regulated by the division and bonded according to Section R649-13-2 or R649-13-3. (d) Except as set forth in Section R649-13-6, performance bonds shall remain in full force and effect until liability thereunder is released by the division. (e) Should the division determine that an operator is not appropriately bonded, the division shall provide written notice to the operator of the bonding deficiencies. Except as provided in Subsection R649-13-6(b), if the operator fails to obtain appropriate bonding within 120 days, the division may require an operator to immediately cease all oil and gas activities until the operator complies with the bonding requirements. (f) A performance bond furnished to the division shall be payable to the division and conditioned upon the faithful performance by the operator of the duty to plug each dry or abandoned well, repair each well causing waste or pollution, maintain and restore the well site and complete reclamation of other permitted oil and gas activity. (g) The form and amount of the performance bond must be approved by the division. Subject to the requirements of Subsection (2), acceptable forms may include a surety bond, a collateral bond, cash, certificates of deposit, letters of credit or a combination of these bonding methods. (h) Performance bond liability shall be for the duration of the drilling, operating, plugging, restoration of the well and well site, and reclamation of other permitted oil and gas activity. (i) To ensure continuous coverage, a performance bond shall be automatically renewable or the operator shall ensure continuous bond coverage by replacing a bond, if necessary, at least 30 days before the expiration date with another acceptable bond. (2) General Terms & Conditions of Performance Bonds. (a) Each performance bond shall provide a mechanism for the surety, or other guarantor of the performance bond, to provide prompt notice to the division and the operator of any action filed alleging the insolvency or bankruptcy of the surety or guarantor, or alleging violations that would result in suspension or revocation of the surety's or guarantor's charter or license to do business. (i) Upon the incapacity of the surety or guarantor to guarantee payment of the performance bond by reason of bankruptcy, insolvency, or suspension or revocation of a charter or license, the operator shall be deemed to be without bond coverage. (ii) Upon notification of insolvency or bankruptcy, the division shall notify the operator in writing of the lack of bond coverage and shall specify a reasonable period, not to exceed 90 days, to provide substitute bond coverage. The 90-day period may be extended upon written request and a showing of good cause to the division or the board. (b) Surety Bonds. (i) A surety bond shall be executed by the operator and a surety company licensed to do business in Utah that is listed in "A.M. Best's Key Rating Guide" at a rating of A- or better. All surety companies will also be listed in the current issue of the U.S. Department of the Treasury Circular 570. (ii) When the division notifies an operator that a surety company guaranteeing its performance does not meet the standard of Subsection (2)(b)(i), the operator shall have 120 days after notice from the division to obtain bond coverage which complies with this rule. (iii) A surety bond will be forfeited and collected by the division if not replaced by an acceptable bond at least 30 days before its expiration date. (c) Collateral Bonds. (i) The division may not accept an individual account or certificate of deposit in excess of the maximum insurable amount as determined by the Federal Deposit Insurance Corporation; (ii) The division shall require that certificates of deposit be made payable to or assigned to the division both in writing and upon the records of the bank issuing the certificates. If assigned to the division, the division shall require the bank issuing the certificate to waive all rights of setoff or liens against that certificate. (iii) Any interest paid on a cash account or certificate of deposit shall be retained in the account and applied to the bond value of the account unless the division has provided written approval for the payment of interest to the operator. (iv) Letters of credit will be subject to the following conditions: (A) Letters of credit shall be payable to the division upon demand. (B) Letters of credit shall be irrevocable during their terms. (C) Letters of credit shall be issued by a federally insured bank authorized to do business in the United States. (D) A letter of credit will be forfeited and collected by the division if not replaced by an acceptable bond at least 30 days before its expiration date. (v) Persons with an interest in collateral posted as a bond, and who desire notification of actions pursuant to the bond, shall request the notification in writing from the division when the collateral is offered. (d) Transfer of wells. (i) If the transfer, sale, or exchange of wells between parties results in a change in well performance bond amounts the division may allow the parties to agree to maintain the bonding amount before the transfer, sale, or exchange for a period of up to 12 months to facilitate operational changes. An extension may be requested before the board. (3) Bonding Schedules. (a) The board shall adjust the bonding schedules outlined in Section R649-13-4 on a not to exceed five-year cycle to account for inflation based on current data from the Producer Price Index for oil and gas extraction operations. The adjusted schedules shall follow Rulemaking Procedure pursuant to Section 63G-3-301. (b) Then, upon written notice and a showing of good cause, may require operators to provide performance bonds in amounts greater than set out in this rules. Good cause includes violation of Section R649-3-36, Shut-in and Temporarily Abandoned Wells, a violation of which shall result in the division requiring a bond amount for the applicable well in the amount of actual plugging and site restoration costs. (c) An operator may appeal a performance bond determination by the division by filing a request for agency action with the division pursuant to Rule R649-10.