The Application of Bonding Mechanisms for Environmental Compliance and Its Economic Impacts on Oil Projects

The present paper describes the financial assurance system (bonding system), an incentive approach being adopted by several countries to guarantee or fund environmental obligations and ensure environmental performance. Environmental compliance involves meeting all end-of-leasing obligations, including closure and decommissioning operations. This paper also identifies the main forms of potential environmental damages resulting from upstream activities and their potential financial impact on the regulatory agency. It will be demonstrated how bonding instruments may help reduce such risks by: (1) providing financial incentive for environmental compliance; (2) safeguarding government and taxpayers by attaining reasonable protection from default at a minimum increase in project costs; and (3) protecting the environment from potential harm resulting from failure to carryout proper closure operations in a timely fashion. A model is proposed for a hypothetical scenario and an analysis is performed in order to identify potential financial impacts on oil projects.