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Risky Business: Getting a Surety Bond in Fluctuating Commodity Markets

A decade ago, almost no one in the general public had ever heard of fracking. If anything, they thought it was the way that people on Battlestar Galactica swore (ok, very few people thought that). It was a term in the commodity industry that was beginning to be used more and more as it became an increasingly viable method of extracting oil and natural gas from shale. Over the last 10 years, fracking has become an industry standard and has been used in nearly every state.

Like with every new technological development, fracking started with major players, the traditional oil companies, dominating the market. As it shakes out, there is increasingly more room for wildcat outfits and other independent companies. The problem, of course, is that fracking is controversial, and not just for environmental reasons (though it got good news yesterday when the EPA announced that a finding showed it posed no “widespread” threat to drinking water). More and more, states are beginning to change bond requirements in order to get drilling permits, due to the nature of both the work and the commodity market. Understanding your obligations, and even getting out ahead of them, is a great way for your small business to get the work it needs.

Fracking surety bond

A hydraulic fracking operation brings a lot of wear and tear to the local infrastructure, which is why many states are now requiring bonds.
Image from Wikimedia Commons

Why States Want Bonds for Fracking: Wear and Tear

In 2012, North Carolina joined a growing number of states starting to demand bonds for companies engaged in fracking. They were concerned about wear and tear on roads and bridges, and asked for a $100,000 bond per every mile of roadway used, as well as $360 per square foot on bridges. This seemed like a lot, but the state claimed it cost them nearly $300,000 per mile of road to have fracking companies use them. By 2014, North Carolina had established a strong system of rules.

This makes sense and gets to the very nature of why bonds are required. As the North Carolina government stated when making its case, the bridges they were concerned about could see hundreds of large trucks cross over them in a  single month, where before they only had maybe a half-dozen in the same timespan. This is because fracking generally takes place in rural environments, locations extraction companies had previously ignored. Before, the layers of shale rock seemed infertile ground for extraction, but the new techniques revealed them to be conducive. So these rural areas which had seen hardly any industry suddenly were being utilized for major operations.

These operations also utilized roads and bridges that were simply not built for the kind of use taking place. Indeed, the entire surrounding infrastructure wasn’t built for such operations. Even the most careful companies can’t help but impact the area they work in, which is why states like New York want a very strict bonding process.

The counterargument here is that companies could just pay for damages, without the need of bonding. The reason why that argument no longer flies goes to the very heart of why it is important for independent companies in the commodity market to always make sure they are bonded if they wish to get work.

The Need for Bonds in a Fluctuating Commodity Market

You probably don’t need reminding that if you are involved this industry, you can be buffeted by forces far out of your control, and not just where dinosaurs happened to die. At the end of last year, OPEC was sufficiently worried about fracking and other alternative extraction forms that they lowered their prices, causing the cost of oil to plummet. While many Americans rejoiced at dramatically cheaper gas, it sent huge reverberations throughout the fracking industry. At the beginning of this year, nearly 97% of fracking companies were operating at a loss.

This makes states nervous about the ability of companies to fulfill their obligations, especially when it comes to payment and performance, depending on the nature of the contract. We all know that the market can jump back and forth very quickly. That’s the nature of the commodity market. It’s hard to predict. The entire petrochemical industry is in an uncertain state of flux. Some people think that shale gas will change everything, while others think it is a bubble on the verge of popping. Surety bonds give states a sense of certainty when awarding licenses to drill.

As with other industries, it is important to stay ahead of trends and regulations. Right now not every state requires bonds but most do, and there is legislation going through other states to mandate it. It’s important to be fully bonded by a trusted bonding company with a great reputation. The market may go up and down, and a bust one day can be a boom the next, but one thing that never changes is the need for protection. The right surety bond can give you that and help get you drilling.

Getting a surety for your commodity market business requires the backing of a strong Surety company with a reputation you can depend on. Contact Surety1 today for a quick and fair bonding process that’ll get you to work.

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