James Kuipers, a mining engineer and author of the study by the Western Organization of Resource Councils, said the financial assurances in place fall well short of what is needed.
“The overall industrywide liability is estimated in the billions of dollars, and just a few bad actor companies could saddle taxpayers and landowners with millions of dollars of clean-up liability,” he said.
The report by the Western Organization of Resource Councils calls on states to require oil and gas operations to put money aside up front to cover the full cost of reclaiming a drilling operation.
That is a position that could do more harm than good, according to Frank Yates, vice president of Yates Petroleum, based in Artesia, N.M., which holds more than 4,000 oil and gas leases on federal lands, more than any other company.
“It's like environmentalists destroying the environment because the cure is worse than the disease,” Yates said.
“The fact is if you did that it would force a lot of small mom and pop operators out of business and dramatically increase the burden on the agencies to plug wells," he said. It would also force companies to put their money into bonds instead of their programs in place for dealing with inactive wells, Yates said.
The WORC report is especially critical of “blanket bonds,” where a set amount covers all a company's wells. If divided among enough wells, the money for each well would be so small that it would be meaningless.
In Utah, companies are required to put up a bond ranging from $1,500 for a shallow well to $60,000 for the deepest wells. But the company can also put up a blanket bond of $120,000 covering all the operation's wells in the state.
Utah recently began requiring companies to show their financial ability to cover reclamation costs in order to qualify for a blanket bond. The state also has an "orphaned well" program, which uses money collected from oil and gas companies to plug abandoned wells, said Dustin Doucet, a petroleum engineer with the Utah Division of Oil, Gas and Mining.
Interior Department spokesman John Wright said "the bonding system is working." He said the department has $125 million in bonds associated with federal leases and has had just 17 demands for cleanups totaling $2.7 million over the last five years.
Interior Department bonds have a minimum of $10,000 on a single lease, but the agency also has blanket bonds, allowing a producer to post $25,000 in assurances for all the company's wells in a state, or $150,000 for all the wells in the country.
Kuipers said several hardrock mining companies went bankrupt in the 1990s and taxpayers had to pay tens of millions of dollars in reclamation. Hardrock operations are now required to post bonds for the full amount of the cleanup.
A similar scenario could play out in the West over the next 20 years. If oil and gas resources are tapped out or prices fall and companies leave the area, the bonds available will be important, Kuipers said.
“It's significant, but then again the liability is significant as well,” said Kuipers. “It is something the oil and gas industry can come up with. They just have to get used to it as part of their cost of operations in the West.”
