Types of Underground Injection Control Program Financial Assurance InstrumentsTypes and Requirements of Financial Instruments
The requirements of the financial instruments are designed to assure continued availability of plugging resources under a variety of circumstances that can occur during well life. These include: change in financial mechanism by an applicant; change in ownership of wells; proper plugging and abandonment of wells; and improper plugging and abandonment of wells. Financial mechanisms submitted by an applicant must meet specific requirements mentioned below. Sample forms of the instruments are available. Formats and language similar to these model forms and meeting the requirements stated below are also acceptable to EPA.
More legal details are available in Title 40 of the Code of Federal Regulations Part 144 Subpart F and Federal Financial Responsibility Demonstrations for Owners and Operators of Class II Oil- and Gas-Related Injection Wells (EPA 570/9-90-003) (PDF) (28 pp, 1.53 MB, About PDF). Subpart F is specifically applicable to Class I hazardous injection wells but the information is generally applicable to other classes of wells.
- Surety Bond
A surety bond is a guarantee by a surety company that obligations specified in the bond will be fulfilled. Two types of surety bonds are allowed. One kind, the Financial Guarantee Bond, guarantees that the surety company will fund a standby trust fund (described below) in the amount guaranteed by the bond. The other kind of bond, a Performance Bond, guarantees that if the owner or operator does not properly plug specified wells, the surety company will perform these duties or pay the amount of the bond into the standby trust fund.
When either kind of surety bond is used, a standby trust fund must also be established. The purpose of the standby trust fund is to receive any funds that may eventually be paid by the surety company. (Trust funds are explained in Section 3.) Both the bond and the standby trust agreement must be submitted as evidence of financial assurance.
A surety bond must meet the following requirements:
- It must be issued by a surety company on the Department of the Treasury's Listing of Approved Sureties (Department Circular 570) of acceptable sureties on Federal bonds.
- It must specify the wells it covers; hence, if new wells are started a new bond will be required by EPA.
- It must guarantee that if the owner or operator does not properly plug specified wells, the surety company will pay the amount of the bond into a standby trust fund. Hence, a standby trust fund where the beneficiary is the EPA must also be established. (See Section 4 for further information.)
- It must provide 120 days' notice of cancellation to the owner or operator and EPA.
- If the owner or operator does not provide substitute assurance to EPA within 90 days of such notice, the bond must provide for payment of its face value into the standby trust fund.
- The owner or operator may cancel the bond only after written consent by the EPA Regional Administrator. Such consent may be given after a substitute financial assurance is provided or the obligations guaranteed have been fulfilled.
- Letter of Credit
A letter of credit may be submitted as evidence of financial assurance. It must satisfy the following requirements:
- It must be issued by a bank or other institution whose operations are regulated and examined by a state or Federal agency.
- It must require that funds in it be deposited into the operator's standby trust fund if the owner or operator fails to fulfill plugging requirements. Hence, an operator using a letter of credit must also submit to EPA a standby trust agreement, of which EPA is the sole beneficiary. (See Section 4 for further information.
- It must identify the wells covered by the letter of credit.
- It must provide for a 120-day notice of nonrenewal from the issuing institution.
- If the owner or operator does not provide substitute assurance within 90 days, the Regional Administrator must be able to draw upon the letter of credit.
- The operator may cancel the letter of credit only with the EPA Regional Administrator's written consent.
Commercial banks and some savings and loan institutions and credit unions meet the qualifications in the regulations for issuing institutions.
- Trust Fund
Another financial assurance option is the trust fund. The trust fund mechanism requires the owner/operator to deposit funds equivalent to the required financial coverage into the trust fund initially. The trustee's responsibilities include: (1) investing the funds; (2) providing an annual valuation to the owner or operator and to EPA; and (3) accepting further deposits or releasing funds as wells are plugged or new wells drilled. In investing the funds the trustee will follow the general guidance of the owner or operator as long as it is in accordance with the trust provisions.
EPA will approve payments from the fund in reimbursement for costs of plugging as completed. If the cost of plugging appears to be significantly higher than the value of the trust fund at the time plugging begins, EPA can delay releasing funds until plugging is completed and certified. EPA will approve refunds if the value of the trust fund exceeds the estimated costs of plugging, or if other financial assurance is substituted for the trust fund, or if plugging is completed and funds still remain in the trust.
There are about 4,000 banks in the country, plus trust companies and some savings and loan institutions, which are qualified to manage trust funds. Financial institutions with which an owner or operator normally does business should be able to assist him in establishing a trust fund for plugging, either by serving as trustee or be referring him to trust institutions.
A trust fund must satisfy the following requirements:
- It must be established at a bank or other institution with authority to act as a trustee and whose trust activities are examined and regulated by state or Federal agency.
- It must contain funds equal to the required financial coverage.
- It must designate EPA as the beneficiary.
- It must specify the acceptable ways of investing money in the fund (by the Trustee).
- It must be accompanied by a "certificate of acknowledgment".
- It must specify the conditions under which EPA may disburse the money from the fund for the plugging of wells or for returning it to the operator.
- Standby Trust Fund
A standby trust fund is required when an applicant submits either a surety bond or letter of credit. The standby trust fund is simply a trust fund that is not fully funded. This instrument is used as a payment mechanism in case of forfeiture of the primary financial instrument, either the surety bond or letter of credit. It differs from a regular trust fund in that periodic payments are not required to be made into it and its cost is much lower. A sample form is available.