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GAO report on BLM bonding urges changes
Government Accountability Office recommends Congress give BLM authority to obtain funds from operators to reclaim orphan wells Kristen Nelson Petroleum News
Congress should give the Bureau of Land Management the authority to obtain funds from operators to reclaim orphaned wells, the U.S. Government Accountability Office said in a September report on the risk to taxpayers of insufficient bonds to reclaim wells.
BLM has taken steps over the years to strengthen its management of the potential liability if oil and gas operators don’t fully reclaim wells they drill on leased federal lands, GAO said. BLM requires bonds, and has set requirements that bonds be reviewed every 5 years and amounts adjusted, but GAO said it found the average bond value was slightly lower in 2018 compared to 2008 and said “BLM has not obtained bond increases for the majority of instances in which its reviews identify that increases are required. Instead, most bonds are at their regulatory minimum values, which are not sufficient to cover reclamation costs incurred by BLM.”
Bond options Bonds are required to ensure compliance with terms and conditions of the lease, including such things are paying royalties and reclaiming wells, and BLM regulations generally require operators to have one of three types of bond coverage:
* Individual lease bonds - for all an operator’s wells on a single lease;
* Statewide bonds - for all an operator’s leases and operations in a single state; or
* Nationwide bonds - all of an operator’s leases and operations nationwide.
Bonds can be either surety bonds or personal bonds.
The Mineral Leasing Act of 1920, as amended, requires adequate bonds before operators begin drilling. BLM regulations set minimum bond values: $10,000 for individual lease bonds; $25,000 for all of an operator’s wells within a state; and $150,000 for all of an operator’s wells nationwide. (Bonds for the National Petroleum Reserve-Alaska are different, GAO said, with the minimum bond set in regulation - not less than $100,000 for a single lease and not less than $300,000 for a reserve-wide bond.)
For non-NPR-A bonds, the subject of the GAO report, the regulatory minimums have not been adjusted for inflation since the 1950s and 1960s. If the $10,000 bond were adjusted to 2018 dollars, the minimum would be $66,000; the statewide minimum, set at $25,000, would be about $198,000; and the $150,000 nationwide bond minimum would be about $1,187,000, GAO said.
Bond values “Based on our review of BLM data, the value of bonds held by BLM for oil and gas operations on a per-well basis were slightly lower in 2018 as compared to 2008,” GAO said. The total value of bonds in 2018 was higher, about $204 million, compared to about $188 million held in 2008, but there were more wells on federal leases in 2018 - 96,199 - compared to 85,330, an increase of 12.7%.
Calculated on a per-well basis, the value of the bonds was $2,207 in 2008 compared to $2,122 in 2018, a drop of 3.9%.
On average, individual lease bonds covered about 10 wells, statewide bonds covered about 49 wells and nationwide bonds covered 374 wells. As of 2018, individual lease bonds had the highest per well value at $2,691, statewide bonds had an average value per well of $1,592 and nationwide bonds had the lowest per well value at $890.
GAO said the bonds are insufficient to cover reclamation costs, which they identified as low cost and high cost, with an estimated $20,000 to reclaim a low-cost well and $145,000 to reclaim a high cost well. (GAO said the range of BLM’s well reclamation cost estimates was $3,096 for the lowest average estimate and $603,000 for the highest estimate.)
When bonds are less than reclamation costs, GAO said, they “may not create an incentive for operators to promptly reclaim wells after operations cease because it costs more to reclaim the wells than the operator could collect from its bond.” Less than 1% of bonds BLM currently holds would cover the cost of reclaiming the wells if those were $145,000 or more per well, while 16% of bonds would cover costs between $20,000 and $145,000 per well.
GAO said the problem was that 82% of bonds are at their regulatory minimum.
Wells at risk GAO distinguished between orphan wells, those actually abandoned, and at risk wells, those out of production which could become orphan wells.
BLM lacks a systematic way to track orphan wells over time, but GAO said in 2010 BLM identified 144 orphaned wells; in 2017 219 orphaned wells were identified; and this April, the list included 296 orphaned wells, of which 89 were not identified in the 2017 list.
In addition to orphaned wells identified by BLM over the last decade, GAO said it identified 2,294 wells that may be at increased risk of becoming orphan wells because they have not produced since June 2008 and have not been reclaimed - and the majority have bonds too low to cover typical reclamation costs.
GAO recommended that Congress consider giving BLM authority to obtain funds from operators to reclaim orphaned wells and recommended that the director of BLM take steps to adjust bond levels to more closely reflect expected reclamation costs.
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