M&K Oil Co. is a family-owned Wyoming operator with hundreds of aging wells speckled across Weston County, and it’s seen the industry change a lot since drilling its first well in 1974.
It’s weathered dramatic price collapses, increased regulations, growing competition from horizontal drillers and a shale revolution that’s largely passed them by.
Today, the biggest challenge is much more basic — bonding, or the required insurance that guarantees operators plug and reclaim wells at their end of life.
For reasons unknown to M&K, the marketplace has soured on insuring oil and gas developments in Wyoming.
“I really don’t know why they aren't doing it and what's happened from the time our business started until now, but we've tried several times to go out and try and purchase a surety bond, and we just haven't been able to do it,” said Nathan McLeland, CEO of Gillette-based M&K Oil, which was founded by his father and grandfather.
The company in recent years has therefore had to self-bond by posting the full cash equivalent upfront.
But this can threaten production by sapping cash that may be needed for daily operations. Making things worse for small local oil and gas companies in Wyoming is that the cost of those bonds are about to skyrocket.
Bonds Balloon
The Biden administration last year instituted new bonding requirements for oil and gas development on federal land.
They’re the first federal bond adjustments in more than 60, and the administration argued they're needed to protect ratepayers from picking up the reclamation tab on abandoned and orphaned wells.
The cost of a single lease bond will rise from $10,000 to $150,000, and the cost of a statewide blanket bond for operators with four or more leases will rise from $25,000 to $500,000.
For small and midsize operators like M&K whose bread-and-butter is the steady trickle from old wells producing as few as five barrels per day, those astronomical bond rate hikes seem existential.
“These rates are really going to affect our business because we'll have less cash to conduct operations, less cash to undertake plugging and reclamation operations,” McLeland said. “If our cash gets tied up with this bonding, it'll make it very hard to operate.”
Which many in the industry have said was the true reason behind the Biden administration’s hiking bond rates by 1,400% and more. Not to level the field, but to price oil and gas producers out of business.
M&K isn’t the only company feeling the pressure.
The new bond requirements, set to take effect next year, will supersede the annual gross revenue of more than 25% of the state’s operators, making them effectively uninsurable, Tom Kropatch, director of the Wyoming Oil and Gas Conservation Commission (WOGCC) , told the Cowboy State Daily.
Nathan McLeland assesses a small field in Weston County. (Courtesy M&K Oil Co.) 
An M&K Oil Co. pumpjack works an aging vertical well in Weston County. (Courtesy M&K Oil Co.)
Help Is On The Way For Small Operators
But help is on the way.
Wyoming legislators crafted an innovative solution to help keep small operators in play, and it was signed into law by Gov. Mark Gordon last week.
Senate File 20 creates a new bonding pool system designed to aggregate risk and give small operators access to financial assurance needed to continue tapping wells on federal land.
The WOGCC under the law will partner with private market insurers to create a special-purpose bond pool that aims to give small developers access to insurance with having to post cost-prohibitive cash collateral.
The state-managed system will extend bonding credit to marginal operators based on projected future earnings, with the bond to be paid off through a new mill levy accumulated across the expected lifespan of a well.
In addition to bonding arrangements with private insurers, the new law also directs WOGCC to create its own financial assurance pool.
Out the gate, the commission has at its disposal $45 million to seed the state-backed pool, drawing on an existing stockpile of unspent assessment fees along with grant money available from federal programs designed to plug orphan wells.
It will be a vital resource for small developers that make up around 80% of the registered operators in the state, and for close to one-third of the state’s oil and gas production, according to figures from the Petroleum Association of Wyoming (PAW).
Currently, around 65% of the state's oil production and more than 75% of its natural gas production happens on federal estates, according to data from WOGCC.
Why Are Bonds So Much?
The federal government says the new bond rates reflect basic math. According to data from the Bureau of Land Management, the average cost to reclaim a well on federal land is around $75,000, and the average number of wells per lease is two; hence, the single lease minimum bond is now $150,000.
However, industry leaders in Wyoming have shown that the actual costs can vary widely, and in many cases come in with a significantly lower price tag.
“The bonds are often substantially higher than what the true cost of plugging and abandonment would actually be,” state Sen. Chris Rothfuss, D-Laramie, said during a committee hearing.
He explained how in the event of abandonment the state could still perform the reclamation for “pennies on the dollar” of the full bond amount while bypassing the tedium of bond forfeiture.
The state of Wyoming often uses a baseline cost estimate of $10 per foot for the expense of plugging an oil well, according to WOGCC. Where accurate, this means many operators could afford to plug their wells for far below the $75,000 minimum.
One such operator is Tom Van Kleef, owner of Oil Mountain Energy, which has eight wells on two leases in Natrona County.
"I have one lease that has one well on it and it’s 2,500 feet deep,” he told the House Minerals, Business and Economic Development Committee as it debated SF 20. “At 10 dollars a foot, that’s $25,000, not $150,000.”
In a statement later, Van Kleef says the new regulations make this “the first system like this anywhere in the nation, anywhere in the world.”
Pete Obermueller, president of PAW, in a statement cheered the law's passage.
“By creating a bonding pool funded by industry-paid fees and taxes, we’re ensuring that Wyoming’s small producers can meet their bonding requirements without being forced to shut down,” he said. “This keeps wells operating, revenues flowing and jobs in our communities — all while maintaining our strong commitment to environmental responsibility.”
