New Mexico

A AssuredPartners FN | Eec— - To Whom it May Concern, My name s Trevor Gilstrap, an employee of AssuredPartnrs. In my current capacity, serve as Senior Vice President, and lead the national Energy vertical within AssuredPartners. | have extensive experience in the insurance industry, and began my journey in 2011 when | joined Sisk & Co. local insurance brokerage in Denver. Sisk & Co. specialized in providing insurance and surety programs for upstream and midstream oil and gas service contractors ‘and operators. During my time there, | worked as an insurance producer, focusing on the oil and gas industry. In 2015, AssuredPartners acquired Sisk & Co., and | continued in my role for two more years before taking on the responsibility of developing and leading the Energy vertical within AssuredPartners. | have been asked to relay some of my concerns with regard to potential changes to the existing bonding structure for Operators’ wells in New Mexico. Throughout my more than a decade in the insurance industry, with a strong focus on placing insurance and bond programs for oil and gas companies, I have never encountered a more challenging surety market. The days of minimal collateral requirements seem like 2 distant memory. Unlike insurance policies, bonds don't transfer risk; instead, they serve as a payment guarantee. When a bond is invoked, the surety immediately seeks reimbursement from the Principal E&P). To ensure minimal losses, sureties often require collateral tied to the bond amount. Although there isn't a formal guideline, my experience over the past three years suggests that sureties ‘are looking for financial statements from the Principal showing working capital equivalent to at least. 25% (or more) of the bond's penal sum to consider terms with limited collateral. In general, the lower the working capital, the higher the collateral required. In many cases, sureties are demanding collateral ranging from 50% to 100% of the bond's penal sum. If significant increases in surety requirements for New Mexico are implemented, | fear it may lead to an undesirable outcome ~ much as Colorado has experienced since incepting their changes. Stable operators may find themselves unable to afford the associated costs of doing business in the state, potentially resulting in more orphaned wells, contrary to what OCD aims to prevent. In my current role, | predominately work with oil and gas companies. In most cases, we've observed sureties demanding 50% to 100% collateral for oil and gas bonds. Additionally, sureties charge an annual bond premium. For these specific bonds, annual premiums typically range from 2.5% to 3.5% of the penal sum. To put this into perspective, an operator facing a bond with a penal sum of $5,000,000 ‘should anticipate providing at least $2,500,000 in either cash or irrevocable letter of credit as collateral, as well as paying an annual premium for the bond itself of somewhere between $125,000 and $175,000. According to an article by The Colorado Sun in September of 2023, in the 90 days prior to the articles release Colorado had experienced a massive “surge” in oil and gas well and site abandonments. The ‘timing of this surge coincides with the implementation of COGCC's (now ECMC) of the overhauled plugging and abandonment requirements in the state. The structure of the new bonding requirements has made compliance nearly impossible for large swaths of smaller, independent operators. In the. current state of the surety environment, they are simply unable to secure the bonds required of them,  A | CC Moreover, in the early stages of the rulemaking process, operators were: compelled to adhere to the. new regulations to obtain approval for a sale of their assets from the COGCC/ECMC. The | phrasing of ‘these rules led to an ongoing state of uncertainty, as operators were unable to meet the financial ‘obligations required to raise their penal sums. ‘Simultaneously, they couldn't transfer their assets to a suitable buyer due to non-compliance, ultimately leaving them with one viable option: abandonment. Lastly, a precipitous increase in bonding requirements will necessitate much larger collateral (working capital) from operators to satisfy the bond provider. This reduction in working capital is likely to decrease the operator's funds available for the actual plugging and abandonment of their wells, thus continuing to compound the issue and drive previously competent and compliant operators to positions. where they are forced to abandon their assets to the state. = fr “Trevor Gilstrap, 3 el ‘SVP & National Energy Practice Leader io AssuredPartners. AEE Yor sey Qa dn 4 ’ at OSL MOR me Sy I de re iat se A a sii ie an iad | Cadi ae i WLR oe Ee is Ch rn Ea oR os