The key piece still missing from federal oil and gas leasing reform

Sep 28, 2022

By Kate Groetzinger

The Inflation Reduction Act brought long overdue reforms to the majority of the federal oil and gas leasing program. But bonding was dropped at the last minute, leaving taxpayers holding the bag for abandoned oil and gas wells.

A cup of coffee cost 34 cents in 1960, when current federal bonding rates for oil and gas development on federal lands were set. Today, you’re lucky to find a cup of coffee for under $3. It’s clear the cost of cleaning up abandoned oil and gas wells on federal lands has also risen, yet efforts to reflect that increase in law have largely failed over the last five decades.

When President Joe Biden signed the Inflation Reduction Act into law this August, he reformed an oil and gas leasing system that had been largely untouched since the 1920s. Companies now have to pay to nominate acres for lease, and the minimum bid per acre to lease public lands was raised from $2 to $10Yet the parliamentarian pulled federal bonding reform from the IRA under the pretense that it was not tied closely enough to the federal budget — a requirement for bills passed through the reconciliation process.

Right now, the minimum bonding requirements are $10,000 for an individual lease, $25,000 for all leases in a state, and $150,000 for a company nationwide. The provision to align bonding requirements with actual cleanup costs would have raised them to at least $150,000 for an individual lease, $500,000 for all leases in a state, or $2,000,000 for all leases by a company nationwide.

Failure to update these rates leaves taxpayers holding the bag, in many cases, when oil and gas companies go bankrupt and can’t afford to clean up their operations. For example, last year’s Bipartisan Infrastructure Law allocated $4.7 billion in taxpayer dollars to a five-year program to clean up orphaned wells on state, private, tribal, and federal lands. States set their own bonding rates for wells on state and private land and can levy taxes on oil and gas producers to pay for orphan well cleanup, while federal bonding rates are set by Congress or the Interior Department. 2019 report by the Government Accountability Office found that only between 1 and 16 percent of federal bonds are sufficient to cover the cleanup of their wells, depending on the cost estimates used. And, unlike states, the Bureau of Land Management is unable to levy a tax or fee on the oil and gas industry to pay for orphan well cleanup.

Orphan wells not only pose a financial risk to taxpayers, they pose an acute environmental threat to Westerners as well. Unplugged wells can leak oil, gas, or saltwater that can damage freshwater resources, soils, and other underground and surface resources. Additionally, unplugged wellbores can collapse and create a hazard to humans and animals.

Volatile oil and gas prices as well as changing industry regulations have been shown to speed the rate at which wells become abandoned, and that will surely be the case as federal investment in renewable energy supercharges the energy transition and fossil fuels become less profitable. It’s important that Congress or the Interior Department update these rates, to avoid giving oil and gas companies a free pass to pollute public lands now at the expense of taxpayers in the future.

Congress could increase bonding rates by passing standalone legislation, like the Oil and Gas Bonding Reform and Orphaned Well Remediation Act, or by attaching similar language to a larger legislative package. Alternatively, the Interior Department could act now to raise bonding rates administratively through a rulemaking process. A formal rulemaking would be a long-term fix that brings bonding rates up to date, but the department would need to begin that process immediately if it hopes to finalize a rule by the end of President Biden’s first term.

As Americans, we deserve 21st century laws and regulations to ensure we get a fair return for extractive activities on our public lands. And as Westerners, we deserve common-sense rules that protect our air, water, and wildlife for future generations. It’s time for politicians and public servants in D.C. to fix the last vestige of a system that was designed to benefit the oil and gas industry at the expense of everyone else.

(Photo: Pumpjacks on Lost Hills Oil Field in California on Route 46 at sunset, Arne Hückelheim/Wikimedia Commons)