Taxpayers Could Foot Bill for Oil Wells

Bonds posted by companies with federal oil and gas leases cover only a small fraction of the projected costs of plugging wells and restoring land once the fuel is extracted, leaving taxpayers with the potential for huge cleanup bills, an Associated Press analysis of federal records shows.

The Bureau of Land Management has (search) collected just $132 million in bonds from oil and gas companies responsible for more than 100,000 wells on federal lands. The government estimates it costs between $2,500 and $75,000 to cap each well and restore the surface area.

In the past five years, the BLM has spent $2.2 million to clean up 187 wells where operators defaulted on their bonds.

At that average rate of $13,066 per well, the shortfall between the bonds and the actual cleanup costs could leave taxpayers with as much as a $1 billion potential liability if companies reneged on their cleanup responsibilities, the AP analysis found.

The Bush administration this fall quietly shelved an eight-year effort to increase the minimum bond requirements for oil and gas drilling (search) on federal lands.

The current rates were set in 1960, and gas and oil companies are the only federal mineral lease holders that aren't required to post full reclamation bonds. Coal and hard rock mineral companies must post bonds equivalent to the estimated cleanup costs.

Bush administration officials say they don't want high bonds to discourage oil and gas exploration on federal lands in the midst of an energy crunch and believe the risks are minimal given that relatively few companies have reneged on cleanup obligations in recent years.

In the past five years, 17 companies defaulted on their cleanup, causing their bonds to be revoked.

"There is a small risk here," said Bob Anderson, the BLM's deputy assistant director for minerals. "And it's a risk that we think is an equitable one."

But others, including landowners struggling to get legacy wells plugged, believe it is unfair.

Eric Barlow, a Wyoming rancher who's been trying for years to get two nonproducing oil wells on his 18,000-acre spread plugged and abandoned, said the BLM's current bonding requirements are little more than "window dressing." Barlow owns the land but the government owns the rights to the minerals underneath and leases them.

"If you're accused of a felony crime and you go in front of a judge and you have a bond hearing, they're going to set a bond that will reasonably assure that you stick around to face the charges," he said.

"What we have in this situation is these guys are released from custody immediately, or never even taken into custody, because the amount of the bonding is such a minimal amount. They have no incentive to take care of things that need to be cleaned up."

The Bush administration concluded this fall that rather than raise the minimum bonds for all oil and gas leases, they would use existing authority to selectively impose higher bond requirements on those companies they deem risky.

"The BLM has reviewed its policies and procedures and believes that the existing regulations... already provide the needed authority to increase bonds when the BLM determines that operators pose a risk on federal oil and gas leases," BLM Director Kathleen Clark and Assistant Secretary of the Interior Rebecca Watson wrote Sept. 30.

In the past five years, Anderson said the agency has increased 35 bonds, requiring operators to post an extra $3.6 million. The increases account for less than 3 percent of total oil and gas bonds.

The September decision amounted to an about-face. A year earlier, Watson told a Denver newspaper that increases in a proposed new bond rule would take effect "sooner rather than later."

Interior Secretary Gale Norton, Watson said at the time, "has a firm view that companies are responsible for land reclamation, not individual taxpayers."

The 1960 regulations require that an operator post a minimum bond of $10,000 per lease, regardless of how many wells will be drilled on that lease. Alternatively, a company can choose to post a minimum $25,000 bond for statewide drilling, or a $150,000 nationwide bond.

The bonds are intended to ensure that oil and gas wells are plugged and the surface area restored once production has ceased. Without such reclamation, abandoned wells can pose a pollution threat to groundwater if well casings fail.

Following a critical 1996 inspector general's report, the BLM in 1998 proposed a rule change that would have increased the minimum lease bond to $20,000 and the minimum statewide bond to $75,000. At the time, the agency said increases just to cover inflation since 1960 would require a lease bond of $50,000 and a statewide bond of $135,000.

The rule change was ready for final publication when Bush took office in 2001 and ordered a government-wide halt to all pending rule changes. The bond rule appeared to be back on track when the BLM's implementation plan for the recommendations of Vice President Cheney's energy task force in 2002 called for its completion.

But none of the four bond-related tasks in that implementation plan have been completed, while eight tasks related to speeding up drilling permit approvals and opening more federal lands to oil and gas development have been finished. BLM issued 5,824 drilling permits in five Rocky Mountain states during fiscal 2004, a 63 percent increase over 2003.

Environmentalists and ranchers critical of the agency say the risk to taxpayers is growing as larger, more established oil and gas companies sell their lease holdings to smaller, less financially viable firms.

The explosive growth of coal-bed methane exploration in Wyoming and Montana also poses increased risks, they argue, because it requires far more wells and surface disturbances than traditional oil and gas activities.

Drilling for coal-bed methane (search) involves releasing groundwater to relieve pressure holding gas in coal seams. Some farmers and conservationists contend that the water released is often salty or of poor quality, and can hurt crops or other vegetation.

In one coal-bed methane field in southeastern Montana, an engineering consultant retained by the Northern Plains Resource Council (search) testified in a civil case against BLM that it would cost $2 million to $213 million to reclaim the 1,564-acre field. Fidelity Exploration and Production Co., the operator, has posted a $150,000 nationwide bond with BLM and a $200,000 state bond with Montana.

The number of idle wells on federal lands also is growing. BLM data obtained with a Freedom of Information request show that more than 1,500 oil and gas wells are no longer producing, and in some case haven't been for decades.

That's 25 percent more than the 1,200 "temporarily abandoned" or "shut-in" wells the BLM told Congress existed on federal lands four years ago.