What New Mexico’s Plugging and Abandonment Bonding Proposal Could Mean for Operators

In New Mexico, proposed changes to the plugging and abandonment (“P&A”) bonding requirements are a hot topic across the oil and gas industry. While these changes may be intended to reduce the number of orphaned wells, they could unintentionally make it harder for operators to stay in compliance and may even increase the number of orphan wells over time.

As insurance and risk management advisors who work closely with energy clients across the country, we have been closely following this rulemaking process. Here are some considerations for operators as the rulemaking process and discussions continue.

New thresholds for marginal wells may significantly increase bonding obligations.

The New Mexico Oil Conservation Division (“OCD”) has historically required either:

• Single-well Financial Assurance (“FA”) of $25,000 per well, or
• A blanket bond of $250,000 to cover all wells.

Under the proposal, those figures would increase significantly:

• The single-well FA would rise to $150,000 per well.
• Marginal wells, defined as producing less than 1,000 BOE per year and operating fewer than 180 days annually, would require single-well bonding at $150,000 each.
• If more than 15% of an operator’s wells are marginal, the operator would be required to bond all wells at that same $150,000 level.

While the final rule is still under review, it is clear that current bonding requirements are expected to increase. 

Bonds guarantee payment, but they don’t transfer risk

At first glance, higher bonding requirements may sound like a reasonable safeguard with limited to no impact on operators. In practice, however, the proposed increases could place significant strain on many small and mid-sized operators.

A surety bond is not insurance. It is a financial guarantee, not a transfer of risk. When a bond is issued, the operator remains financially responsible. If a claim occurs, the surety pays the obligee, in this case, the state, and then seeks reimbursement from the operator.

Most sureties require collateral, typically between 50% and 100% of the bond amount, and charge annual premiums averaging 2.5% to 3.5% of the total bond value.

When costs rise, compliance can fall out of reach for smaller operators

While the intention of these proposed changes is to prevent orphaned wells, higher bonding requirements may may have the opposite effect. Some industry players argue that when operators cannot afford to post higher bonds, they may shut in or abandon operations entirely, orphaning those wells.

Within two years after similar changes were implemented in another state, the total bonding on hand decreased while the number of orphaned wells quadrupled, and smaller operators were forced out of the market. This is a cautionary tale of how aggressive bonding requirements can have unintended consequences.

Practical steps to strengthen compliance and protect operations

Review Current Financial Assurance Strategy

Understand what mechanisms you have in place, whether surety bonds, letters of credit, or cash bonds, and how an increase to $150,000 per well could affect your liquidity and access to capital.

Explore Alternatives

Options that use asset retirement agreements backed by insurance policies can meet regulatory obligations while easing capital constraints for operators. These structures function as true risk transfer mechanisms rather than pure financial guarantees.

Engage Early with Advisors

The proposed rule is still under discussion; however, proactive planning is crucial. An experienced insurance broker can help quantify the impact of different bonding scenarios and evaluate alternative financial assurance products that may be accepted by regulators.

Monitor Developments Closely

While the final rule may differ from what is currently being proposed, operators should expect tighter financial assurance requirements in the future. Having a plan in place now can help ensure flexibility once new rules are adopted.

Partner with trusted advisors to manage risk and meet compliance with confidence

Operators understand the importance of proper well plugging and environmental stewardship.

As brokers and risk advisors to the energy sector, we are here to help operators evaluate options, maintain compliance, and protect business continuity in an increasingly complex regulatory environment.

If you would like to discuss how these proposed changes may affect your operations or explore alternatives, such as insurance-backed financial assurance solutions, please contact AssuredPartners Energy.

Disclaimer:
The information contained herein is offered as insurance industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer financial, tax, legal or client-specific insurance or risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis.