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RESEARCH AND BRIEFINGS

Using Surety Bonds to Secure Pipeline Abandonment Obligations

 


When the National Energy Board (NEB) released “Hearing Order RH-2-2008 — Land Matters Consultation Initiative Stream 3, Pipeline Abandonment — Financial Issues Board Decision” on May 26, 2009, the Board highlighted that its key concern was ensuring that funds would be available to cover rehabilitation and environmental costs upon pipeline abandonment. Every pipeline company regulated by the NEB was directed to comply with the steps set out in the action plan.

In early 2014, Marsh Canada, a global leader in the use of Surety Bonds as alternatives to letters of credit, was the only insurance broker invited to testify at the NEB hearings to determine whether surety bonds should be allowed to secure future abandonment obligations. On May 29, 2014, the NEB agreed with Marsh’s position that surety bonds should be allowed, announcing:

“By January 1, 2015, NEB regulated pipeline companies must have a set-aside mechanism in place to begin accumulating funds to pay for pipeline abandonment, either by the establishment of a trust, a Letter of Credit or a Surety Bond.“ -National Energy Board, Press Release, May 29, 2014

Surety bonds are a widely accepted form of financial assurance — a viable alternative to bank guarantees and letters of credit — and, as Marsh recommended to the NEB, an ideal solution for pipeline abandonment obligations.

FIVE REASONS TO CHOOSE A SURETY BOND:

  1. Off balance sheet: Since surety bonds are not reportable, they do not encumber balance sheets.
  2. Unrestricted funds: Unlike letters of credit, bonds will free up funds and reduce debt and tender without being restricted by security requirements. They do not contribute to the legal limit a bank may lend to your business.
  3. Cost effective: Bonds allows for greater financial flexibility by leveraging the capital base and utilizing assets more cost-effectively. Bonds do not present a significant drain on cash reserves and do not require upfront fees.
  4. Unsecured: Surety bonds do not require any tangible security or collateral.
  5. Easy to administer: Surety bonds are quick, flexible, and operate alongside traditional banking facilities.

WHY MARSH SURETY?

Marsh Canada’s Surety team specialists will work with you to devise a surety bond facility that fits your needs. We offer:

  • Consulting: We advise on your construction and commercial surety issues such as financial analysis, co-surety/multiple surety, balance sheet strategies, proposal analysis, increases in surety capacity, and indemnity alternatives.
  • Placement: To establish and maintain your relationship with a surety, our specialists gather and present data to underwriters, facilitate underwriting meetings, respond to surety questions, review surety rate schedules, and more.
  • Transactions: Our specialists provide daily service items such as bond issuance, bond reports, bond premium computations, accounting and invoicing, and responses to your inquiries and requests.