New analysis: U.S. taxpayers could be on the hook for billions of dollars in oil and gas well cleanup costs

Feb 26, 2018

FOR IMMEDIATE RELEASE
Monday, February 26, 2018

 

DENVER—The Center for Western Priorities today released a new analysis estimating the costs of reclaiming oil and gas wells on U.S. public lands. The first-of-its-kind analysis finds that reclaiming—plugging and cleaning up—all producible wells on federal lands could cost a potential $6.1 billion, far exceeding the $162 million in reclamation bonds that the Government Accountability Office last estimated had been provided by oil and gas operators.

The analysis, conducted by the economic consulting firm ECONorthwest, comes as the Interior Department’s Royalty Policy Committee meets Wednesday to hear suggestions for modernizing the management of oil and gas production on public lands. Re-established by Secretary Ryan Zinke, the committee is heavily skewed towards oil and gas companies, without any organization or individual representing taxpayers and the public interest.

“If Secretary Zinke is committed to guaranteeing taxpayers receive a fair share from energy development, a good place to start would be to ensure all oil and gas wells on America’s public lands are adequately bonded. That’s certainly not the case today,” said Jennifer Rokala, Executive Director at the Center for Western Priorities. “The current system leaves taxpayers holding the bag while oil and gas companies can walk away from their reclamation responsibilities, paying pennies on the dollar. It’s beyond irresponsible.”

The analysis estimates the potential reclamation costs for the 94,096 producible wells on federal lands as of Fiscal Year 2016, accounting for differences in reclamation costs based on well depth.

Oil and gas companies are required to post bonds, effectively an insurance policy, when drilling on federal lands. The bonds ensure retired wells are cleaned up and do not pose an ongoing risk to lands and water should a company abandon them or go bankrupt. It is not uncommon for companies to shirk their reclamation responsibility.

Last month, the Interior Department Inspector General warned Interior Secretary Zinke that the Bureau of Land Management does not currently have an accurate inventory of idle wells on federal land, and that idle wells “pose notable financial risk” to taxpayers and the U.S. government. The report highlighted a single BLM field office that expected 97 idle wells to become orphaned in the near future. Oil and gas companies held just $150,000 in bonds on those wells, despite an estimated reclamation cost of $1.5 million — meaning taxpayers will likely be responsible for more than $1.3 million in cleanup costs from those 97 wells alone.

The Department of the Interior has not updated bonding requirements since they were originally set in the 1950s and 60s. These outdated requirements fail to account for decades of inflation and the increasing costs to clean up ever-deeper wells created by new drilling technologies. The bond for a single well, set in 1960, still sits at $10,000. Keeping pace with inflation, that bond would be roughly $64,000 today.

According to the analysis by ECONorthwest, the average well reclamation cost is an estimated $65,200, which would be nearly covered if the 1960 bond price had been indexed to inflation. However, reclamation costs have grown in recent years as the average well depth has increased to nearly 9,000 feet. Reclaiming a typical well at that depth costs more than $100,000.

Kristin Lee of ECONorthwest added, “It is clear that bonding requirements have not kept pace with inflation and new drilling technologies. These bonds are intended to ensure that oil and gas wells are reclaimed, while disincentivizing companies from walking away without carrying out their lease obligations. But the decades-old bonding levels risk leaving taxpayers on the hook for cleaning up thousands of oil and gas wells.”

A PDF of the analysis is available for download at westernpriorities.org/bondingreport. To speak with an expert on public lands, contact Aaron Weiss at 720-279-0019 or aaron@westernpriorities.org.

For more information, visit westernpriorities.org. To speak with an expert on public lands, contact Aaron Weiss at 720-279-0019 or aaron@westernpriorities.org.