GAO report: Outdated federal rules spawn orphan wells

Federal requirements that oil and gas companies post security deposits before drilling on public land are 50 years out of date and may be too low to deter the firms from abandoning the facilities, a government report concluded today.

The study by the Government Accountability Office, Congress’ investigative arm, also found that federal regulators were wrong in believing 2,300 oil and natural gas wells on public lands had been idle for at least seven years. In fact, the number may be twice that.

The report hones in on problems managing data and enforcing bond requirements at the Interior Department’s Bureau of Land Management, the agency that oversees 250 million acres of federal land. At the request of Sen. Jeff Bingaman, D-N.M., the GAO studied the agency’s muscle when it comes to enforcing requirements that oil and gas companies reclaim leased land after operations have ceased, by plugging wells, removing structures and re-vegetating the area so it comes close to its pre-drilling condition.

Oil and gas companies are required to post bonds of at least $10,000 before drilling on a federal lease — an amount that was set in 1960 and hasn’t been updated since. Adjusted to 2009 dollars, the GAO said, the requirement would be at least $59,360. Bonds that cover all of an operator’s leases in a single state must be at least $25,000 ($176,727 in 2009 dollars), and companies must put up bonds of at least $150,000 (or $1.1 million adjusted for inflation) to guarantee all of their leases nationwide.

Because “the cost to plug and reclaim a well site may far outweigh the value of the bond,” the GAO said, “these minimum amounts may not be sufficient to serve as an incentive to encourage operators to comply with plugging and reclamation requirements.”

Drawing inspiration from TV’s The Honeymooners, Rep. Ed Markey, D-Mass., likened the bond process to a security deposit paid before someone can rent an apartment.

“Since the bond amounts haven’t been increased in 50 years, this is like oil companies renting an apartment in 2011 and paying the same security deposit as did Ralph and Alice Kramden,” Markey said in a statement. “Oil companies should have the bucks to help these ‘orphan’ wells, but the policies in place give them virtually no incentive to act responsibly, raising concerns as to whether these companies will live up to their end of the bargain to drill on public land.”

The Interior Department will launch a review of the minimum bond amounts, Assistant Secretary Wilma Lewis said in a response provided to the GAO.

But Lewis stressed that bonds aren’t the only incentive for oil and gas companies to comply with reclamation requirements — and that the requirements can already be hiked for companies who have failed to tidy up after drilling. Bond holders who default and fail to reimburse the bureau for the full cost of site reclamation may have all of their leases under the bond canceled — a big deterrent for operators who have extensive operations on federal lands.

According to federal officials interviewed by the GAO, the cost of plugging a well can run to $20 per foot depth — for projects that may be thousands of feet below the surface. Reclamation costs can range from $200 to $15,000 per acre.

BLM officials at field offices in Western states told the GAO that the discrepancy between minimum bond requirements and the actual reclamation costs means that some small independent operators “may be inclined to declare bankruptcy and default on the bond rather than pay to properly plug and reclaim the well site.” To avoid the default, BLM officials told the GAO “they must devote significant time and resources to supervising these small operators and persuading them to properly plug and reclaim their wells, which places a drain on staff resources.”

When wells are orphaned — abandoned without any responsible or liable company — the cost for reclaiming the land falls to taxpayers. According to the GAO, the land management bureau has spent $3.8 million over the last 20 years to reclaim 295 orphaned wells, and there are another 144 orphaned wells that haven’t yet been reclaimed.