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The state of Texas requires companies in the oil and gas industry to purchase a surety bond as a prerequisite for drilling and operating a new well. The purpose of this bonding requirement is to ensure that drilling projects are completed and that wells are operated in accordance with all environmental laws and regulations.
The bond protects the state from being held liable for having issued a drilling permit in the event that the oil and gas company defaults on a contract or fails to comply with applicable environmental requirements. It also provides a source of funds if it becomes necessary to hire another operator to complete a drilling project or remediate environmental damage, such as contamination of groundwater.
If you will be drilling or operating oil or gas wells in the state of Texas, you�ll need to purchase a Texas oils and gas bond. The required bond amount depends on the number of wells involved. Blanket performance bonds are required in the following increments:
A Texas oil and gas surety bond agreement is a legally binding contract involving three parties:
The terms of the surety bond agreement make the principal legally responsible for paying valid claims against the bond. Suppose that an oil and gas company begins a drilling project, but abandons it when the company becomes insolvent. Or perhaps the principal ceases operation of a well that isn�t producing a sufficient amount of oil, but fails to close the well properly and restore the land. Such violations of the surety bond agreement would result in the obligee having a valid claim that the principal is responsible for paying.
Although the principal is legally obligated to pay valid claims, the surety typically pays a claim in advance on behalf of the principal, and then is reimbursed by the principal. That�s because the surety establishes a line of credit for the principal in the required bond amount at the time the bond is issued. When the surety pays a claim, that payment is made against the principal�s line of credit, which creates a debt the principal owes to the surety�a debt that must be repaid. That is true whether the surety pays the obligee directly or pays for another company to come in and remediate the problem.
The surety�s main concern in determining how much a given principal will pay for a Texas oil and gas bond is the amount of risk the surety is assuming in extending credit to the principal. While the required bond amount is fixed, the premium rate can vary depending on the surety�s assessment of the risk involved in issuing the bond. The premium rate will depend largely on the principal�s personal credit score, the principal�s personal and business finances, and prior industry experience. A �low risk� principal with good credit will pay a premium as low as 1% of the required bond amount. A principal perceived as presenting a higher degree of risk will pay a higher premium.
Request a convenient online quote today, or call us to discuss the oil and gas bond you will need to drill and operate one or more wells in Texas.
