The main objective of this paper is to deepen the discussion regarding the application of financial assurance instruments, bonds, in the upstream oil sector. This paper will also attempt to explain the current choice of instruments within the sector. The concepts of environmental damages and internalization of environmental and regulatory costs will be briefly explored. Bonding mechanisms are presently being adopted by several governments with the objective of guaranteeing the availability of funds for end-of-leasing operations. Regulators are mainly concerned with the prospect of inheriting liabilities from lessees. Several forms of bonding instruments currently available were identified and a new instrument classification was proposed. Ten commonly used instruments were selected and analyzed under the perspective of both regulators and industry (surety, paid-in and periodic-payment collateral accounts, letters of credit, self-guaran tees, investment grade securities, real estate collaterals, insurance policies, pools, and special funds). A multiattribute value function model was then proposed to examine current instrument preferences. Preliminary simulations confirm the current scenario where regulators are likely to require surety bonds, letters of credit, and periodic payment collateral account tools. (C) 2003 Elsevier Science Ltd. All rights reserved.