Subchapter G. BONDING REQUIREMENTS

§ 78.301. Scope.

 In addition to the requirements of section 215 of the act (58 P. S. §  601.215), this subchapter specifies certain requirements for surety bonds, collateral bonds, replacement of existing bonds, maintaining adequate bond and bond forfeiture.

 For a well that has not been plugged, the owner or operator shall file a bond or otherwise comply with the bonding requirements of section 215 of the act (58 P. S. §  601.215) and this chapter. A bond or bond substitute is not required for a well drilled before April 18, 1985.

 (a)  The following types of security are approvable:

   (1)  A surety bond as provided in §  78.304 (relating to terms and conditions for surety bonds).

   (2)  A collateral bond as provided in § §  78.305—78.308. For individuals who meet the requirements of section 215(d.1) of the act, a phased deposit of collateral bond as provided in §  78.309(b) (relating to phased deposit of collateral).

 (b)  A person submitting a bond shall comply with the Department guidelines establishing minimum criteria for execution and completion of the bond forms and related documents.

 (c)  A bond shall be conditioned upon compliance with the drilling, water supply replacement, restoration and plugging requirements in the act, this chapter and permit conditions relating thereto. The bonds are penal in nature and are designed to ensure compliance by the operator to protect the environment, public health and safety affected by the oil and gas well.

 (d)  The person named in the bond or other security shall be the same as the person named in the permit.

 (e)  The bond amounts required under section 215 of the act are as follows:

   (1)  Two thousand five hundred dollars for a single well.

   (2)  Twenty-five thousand dollars for a blanket bond.

 (a)  The bond of a surety company that has failed, refused or unduly delayed to pay, in full, on a forfeited surety bond is not approvable.

 (b)  Only the bond of a surety authorized to do business in this Commonwealth is approvable. If the principal place of business of the surety is outside of this Commonwealth, or if the surety is not a Pennsylvania corporation, the surety bond shall also be signed by an authorized resident agency of the surety that maintains an office in this Commonwealth.

 (c)  The surety may cancel the bond by filing written notice of cancellation with the Department, the operator and the principal on the bond, only under the following conditions:

   (1)  The notice of cancellation shall be sent by certified mail, return receipt requested. Cancellation may not take effect until 120 days after receipt of the notice of cancellation by the Department, the operator and the principal on the bond as evidenced by return receipts.

   (2)  Within 30 days after receipt of a notice of cancellation, the operator shall provide the Department with a replacement bond under §  78.310 (relating to replacement of existing bond).

 (d)  The Department will not accept surety bonds from a surety company when the total bond liability to the Department on the bonds filed by the operator, the principal and related parties exceeds the surety company’s single risk limit as provided by The Insurance Company Law of 1921 (40 P. S. § §  341—991).

 (e)  The bond shall provide that the surety and the principal shall be jointly and severally liable for payment of the bond amount.

 (f)  The bond shall provide that the amount shall be confessed to judgment and execution upon forfeiture.

 (g)  The Department will retain, during the term of the bond, and upon forfeiture of the bond, a property interest in the surety’s guarantee of payment under the bond which is not affected by the bankruptcy, insolvency or other financial incapacity of the operator or principal on the bond.

 (h)  The surety shall give written notice to the Department, if permissible under law, to the principal and the Department within 10 days of a notice received or action filed by or with a regulatory agency or court having jurisdiction over the surety alleging one of the following:

   (1)  The insolvency or bankruptcy of the surety.

   (2)  A violation of regulatory requirements applicable to the surety, when as a result of the violation, suspension or revocation of the surety’s license to do business in this Commonwealth or another state is under consideration by a regulatory agency.

   The provisions of this §  78.304 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229.

 (a)  Collateral documents shall be executed by the owner or operator.

 (b)  The market value of collateral deposited shall be at least equal to the required bond amount with the exception of United States Treasury Zero Coupon Bonds which shall have a maturity date of not more than 10 years after the date of purchase and at maturity a value of at least $25,000.

 (c)  Collateral shall be pledged and assigned to the Department free from claims or rights. The pledge or assignment shall vest in the Department a property interest in the collateral which shall remain until release as provided by law and is not affected by the bankruptcy, insolvency or other financial incapacity of the operator.

 (d)  The Department’s ownership rights to deposited collateral shall be such that the collateral is readily available to the Department upon forfeiture. The Department may require proof of ownership, and other means, such as secondary agreements, as it deems necessary to meet the requirements of this subchapter. If the Department determines that deposited collateral does not meet the requirements of this subchapter, it may take action under the law to protect its interest in the collateral.

   The provisions of this §  78.305 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284. Immediately preceding text appears at serial page (138865).

 (a)  Letters of credit submitted as collateral for collateral bonds shall be subject to the following conditions:

   (1)  The letter of credit shall be a standby or guarantee letter of credit issued by a Federally insured or equivalently protected financial institution, regulated and examined by the Commonwealth or a Federal agency and authorized to do business in this Commonwealth.

   (2)  The letter of credit shall be irrevocable and shall be so designated. However, the Department may accept a letter of credit for which a limited time period is stated if the following conditions are met and are stated in the letter:

     (i)   The letter of credit is automatically renewable for additional time periods unless the financial institution gives at least 90 days prior written notice to both the Department and the operator of its intent to terminate the credit at the end of the current time period.

     (ii)   The Department has the right to draw upon the credit before the end of its time period, if the operator fails to replace the letter of credit with other acceptable means of compliance with section 215 of the act (58 P. S. §  601.215) within 30 days of the financial institution’s notice to terminate the credit.

   (3)  Letters of credit shall name the Department as the beneficiary and be payable to the Department, upon demand, in part or in full, upon presentation of the Department’s drafts, at sight. The Department’s right to draw upon the letter of credit does not require documentary or other proof by the Department that the customer has violated the conditions of the bond, the permit or other requirements.

   (4)  A letter of credit shall be subject to 13 Pa.C.S. (relating to the Uniform Commercial Code) and the latest revision of Uniform Customs and Practices for Documentary Credits as published in the International Chamber of Commerce Publication No. 400.

   (5)  The Department will not accept a letter of credit from a financial institution which has failed, refused or unduly delayed to pay, in full, on a letter of credit or a certificate of deposit previously submitted as collateral to the Department.

   (6)  The issuing financial institution shall waive rights of set-off or liens which it has or might have against the letter of credit.

 (b)  If the Department collects any amount under the letter of credit due to failure of the operator to replace the letter of credit after demand by the Department, the Department will hold the proceeds as cash collateral as provided by this subchapter. The operator may obtain the cash collateral after he has submitted and the Department has approved a bond or other means of compliance with section 215 of the act.

   The provisions of this §  78.306 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284. Immediately preceding text appears at serial pages (138865) to (138866).

 A certificate of deposit submitted as collateral for collateral bonds is subject to the following conditions:

   (1)  The certificate of deposit shall be made payable to the operator and shall be assigned to the Department by the operator, in writing, as required by the Department and on forms provided by the Department. The assignment shall be recorded upon the books of the financial institution issuing the certificate.

   (2)  The certificate of deposit shall be issued by a Federally-insured or equivalently protected financial institution which is authorized to do business in this Commonwealth.

   (3)  The certificate of deposit shall state that the financial institution issuing it waives rights of setoff or liens which it has or might have against the certificate.

   (4)  The certificate of deposit shall be automatically renewable and fully assignable to the Department. Certificates of deposit shall state on their face that they are automatically renewable.

   (5)  The operator shall submit certificates of deposit in amounts which will allow the Department to liquidate those certificates prior to maturity, upon forfeiture, for the full amount of the bond without penalty to the Department.

   (6)  The Department will not accept certificates of deposit from financial institutions which have failed, refused or unduly delayed to pay, in full, on certificates of deposit or letters of credit which have previously been submitted as collateral to the Department.

   (7)  The operator is not entitled to interest accruing after forfeiture is declared by the Department, until the forfeiture declaration is ruled invalid by a court having jurisdiction over the Department, and the ruling is final.

   The provisions of this §  78.307 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284. Immediately preceding text appears at serial pages (138866) to (138867).

 Negotiable bonds submitted and pledged as collateral for collateral bonds under section 215(a)(3) of the act (58 P. S. §  601.215(a)(3)) are subject to the following conditions:

   (1)  The Department will use the current market value of governmental securities, other than United States Treasury Zero Coupon Bonds, for the purpose of establishing the value of the securities for bond deposit.

   (2)  The current market value shall be at least equal to the amount of the required bond.

   (3)  The Department may periodically evaluate the securities and may require additional amounts if the current market value is insufficient to satisfy the bond amount requirements for the oil or gas well operations.

   (4)  The operator may request and receive the interest accruing on governmental securities filed with the Department as the interest becomes due and payable. An operator will not receive interest accruing on governmental securities until the full amount of the bond has been accumulated. No interest may be paid for postforfeiture interest accruing during appeals and after resolution of the appeals, when the forfeiture is adjudicated, decided or settled in favor of the Commonwealth.

   The provisions of this §  78.308 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284. Immediately preceding text appears at serial pages (138867) to (138868).

 (a)  Operators.

   (1)  Eligibility. An operator who had a phased deposit of collateral in effect as of November 26, 1997, may maintain that bond for wells requiring bonding, for new well permits and for wells acquired by transfer.

     (i)   An operator may not have more than 200 wells.

     (ii)   Under the following schedule, an operator shall make a deposit with the Department of approved collateral prior to the issuance of a permit for a well or the transfer of a permit for a well, and shall make subsequent annual deposits and additional well payments. For the purpose of calculating the required deposit, all of the operator’s wells are included in the number of wells.

     (iii)   An operator shall make the phased deposits of collateral as required by the bond.

   (2)  Termination of eligibility. An operator is no longer eligible to make phased deposits of collateral when one or more of the following occur:

     (i)   The operator shall fully bond the wells immediately, if an operator has more than 200 wells.

     (ii)   If the operator misses a phased deposit of collateral payment, the operator shall do one of the following:

       (A)   Immediately submit the appropriate bond amount in full.

       (B)   Cease all operations and plug the wells covered by the bond in accordance with the plugging requirements of section 210 of the act (58 P. S. §  601.210).

 (b)  Individuals.

   (1)  Eligibility.

     (i)   An individual who seeks to satisfy the collateral bond requirements of the act by submitting phased deposit of collateral under section 215(d.1) of the act (58 P. S. §  601.215(d.1)), may not drill more than ten new wells per calendar year. A well in which the individual has a financial interest is to be considered one of the wells permitted under this section. A partnership, association or corporation is not eligible for phased deposit of collateral under this subsection.

     (ii)   The individual shall deposit with the Department $500 per well in approved collateral prior to issuance of a new permit.

     (iii)   The individual shall deposit 10% of the remaining amount of bond in approved collateral in each of the next 10 years. Annual payments shall become due on the anniversary date of the issuance of the permit, unless otherwise established by the Department. Payments shall be accompanied by appropriate bond documents required by the Department.

     (iv)   The individual shall make the phased collateral payments as required by the bond.

   (2)  Termination of eligibility. If the individual misses a phased deposit of collateral payment, the individual will no longer be eligible to make phased deposits of collateral and shall do one of the following:

     (i)   Immediately submit the appropriate bond amount in full.

     (ii)   Cease operations and plug the wells covered by the bond in accordance with the plugging requirements of section 210 of the act.

 (c)  Interest earned. Interest earned by collateral on deposit by operators and individuals under this section shall be accumulated and become part of the bond amount until the operator completes deposit of the requisite bond amount in accordance with the schedule of deposit. Interest earned by the collateral shall be retruned to the operator or the individual upon release of the bond. Interest may not be paid for postforfeiture interest accruing during appeals and after resolution of the appeals, when the forfeiture is adjudicated, decided or settled in favor of the Commonwealth.

   The provisions of this §  78.309 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284; amended March 30, 2001, effective March 31, 2001, 31 Pa.B. 1736. Immediately preceding text appears at serial pages (241951) to (241953).

 (a)  An owner or operator may replace an existing surety or collateral bond with another surety or collateral bond that satisfies the requirements of this chapter, if the liability which has accrued against the bond, the owner or operator who filed the first bond and the well operation is transferred to the replacement bond. An owner or operator may not substitute a phased deposit of collateral bond under section 215(d) and (d.1) of the act (58 P. S. §  601.215(d) and (d.1)) for a valid surety bond or collateral that has been filed and approved by the Department.

 (b)  The Department will not release existing bonds until the operator has submitted and the Department has approved acceptable replacement bonds.

   The provisions of this §  78.310 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229; amended December 16, 1994, effective December 17, 1994, 24 Pa.B. 6284; amended March 30, 2001, effective March 31, 2001, 31 Pa.B. 1736. Immediately preceding text appears at serial page (241953).

 The permittee shall maintain a bond in an amount and with sufficient guarantee as provided by this chapter. If a surety company that had provided surety bonds, or a financial institution that had provided certificates of deposit or letters of credit for an operator enters into bankruptcy or liquidation, has its license suspended or revoked or for another reason indicates an inability or unwillingness to provide an adequate financial guarantee of the obligations under the bond, the operator shall submit a bond within 45 days of notice from the Department.

 (a)  A collateral or surety bond may be forfeited when the Department determines that the operator fails or refuses to comply with the act, this title, an order of the Department, or the terms or conditions of the permit relating to drilling, water supply replacement, plugging and site restoration.

 (b)  If forfeiture of the bond is required, the Department will:

   (1)  Send written notification by mail to the permittee, and the surety, if any, of the Department’s intent to forfeit the bond and describe the grounds for forfeiture. The notification will also provide an opportunity to take remedial action or submit a schedule for taking remedial actions acceptable to the Department within 30 days of the notice of intent to forfeit, in lieu of collecting the bond.

   (2)  If the permittee and surety, if any, fail either to take remedial action or to submit a plan acceptable to the Department within 30 days of the notice of the intent to forfeit, the bond will be subject to forfeiture and collection up to the face amount thereof. The Department will issue a declaration to forfeit the bond.

   (3)  The declaration to forfeit is an action which may be appealable to the Environmental Hearing Board under section 4 of the Environmental Hearing Board Act (35 P. S. §  7514).

 An owner or operator shall notify the Department by certified mail within 10 calendar days after commencement of a voluntary or involuntary proceeding under 11 U.S.C.A. § §  101—1330, known as the Federal Bankruptcy Act, naming the owner or operator as debtor.

 Remedies provided or authorized by law for violation of statutes, including the act, the applicable environmental protection acts, this title, the terms and conditions of permits and orders of the Department, are expressly preserved. Nothing in this subchapter is an exclusive penalty or remedy for the violations. No action under this subchapter waives or impairs another remedy or penalty provided in law or equity.

   The provisions of this §  78.314 adopted July 28, 1989, effective July 29, 1989, 19 Pa.B. 3229.