GAO: BLM bonds insufficient for reclamation
September 26, 2019
BUFFALO — Bureau of Land Management regulations could leave some Johnson County landowners waiting decades for oil and gas operators to reclaim wells, while saddling American taxpayers with millions in costs nationwide, according to a new Government Accountability Office report titled “Bureau of Land Management Should Address Risks from Insufficient Bonds to Reclaim Wells.”
The report recommends that the BLM adjust its minimum bond rates to more accurately match the costs of reclamation and levy a new fee on all oil and gas operators to help fund that work on orphan well sites.
More than three-quarters of Johnson County's mineral estate are federally owned, and local landowner advocates have fought for stronger BLM bonding regulations for years.
“The majority of federal mineral estate is overlaid by private land, with private landowners suffering the harm of unplugged and unreclaimed orphan wells,” said Bob LaResche, vice chairman of the Powder River B asin Resource Council's board of directors. "It's not just a public lands problem."
BLM employees at the Buffalo Field Office say they have an established system that works.
“Our office has been very successful in pursuing record title owners and getting wells plugged,” said Casey Freise, BLM assistant field manager for minerals and lands.
Freise said the office has a list of roughly 13,000 more coalbed methane wells ripe for reclamation. About 1,700 of those are considered “idle” under BLM terminology, meaning they haven't produced in more than seven years.
“We kind of set the standard, just due to sheer numbers that we're dealing with," Freise said. "We put together a process that other offices within the state, or even within the BLM, are following.”
BLM bond rates haven't changed in more than 50 years, immune even to adjustments for inflation. The minimum $10,000 single-well bond, still the standard today, would have been worth more than $80,000 in 2019 dollars at the time it was instituted.
“Bonds are not sufficient to prevent orphaned wells in part because they do not reflect full reclamation costs for the wells they cover,” according to the GAO report, released last week.
GAO calculations revealed that 84% to 99% of current bonds are insufficient. “(That) 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.”
"An unplugged wellbore is a path for groundwater contamination," said the resource council’s executive director, Jill Morrison, highlighting a risk also mentioned in the GAO report.
For landowners, other impacts include "having all this old equipment, or the spread of noxious weeds. You were being paid on an annual basis before and now it's a liability on your property."
A well-leveraged bond helps insure mineral owners and landowners against boom-and-bust cycles that lead to operator bankruptcies, offering them a means to pay for reclamation if the companies responsible do not, according to the report.
“Wyoming had a lot of coalbed methane wells that were prematurely shut down as a result of low gas prices that made them uneconomical,” said Frank Rusco, one of the report’s authors, in an email.
He pointed to the findings of a previous GAO bonding report: “Our analysis of (BLM) data suggests that there were thousands of inactive coalbed methane wells as of October 2017. To the extent that market conditions remain unfavorable for coalbed methane production, BLM's potential future reclamation costs mayn increase if any operators of these wells go bankrupt."
An individual federal well carries a minimum bond of $10,000, roughly in line with the $10,000 to $15,000 cost of plugging and reclaiming a coal-bed methane well, but far less than deep horizontal wells, which can cost up to $150,000 apiece, according to BLM estimates.
Operators with multiple wells can instead choose an inclusive $25,000 statewide or $150,000 nationwide bond. Under those terms, a bond's per-well value decreases each time the company drills. As a result, the GAO calculated a nationwide per-well average bond value of $2,122.
BLM field offices have the authority to request higher bonds for specific wells when approving permits to drill, but it doesn't happen frequently.
According to Matt Warren, a supervisory petroleum engineer at the Buffalo Field Office, he requests bond increases for between one-quarter and one-third of permits issued more than the GAO-calculated national average of 18 percent.
“Our office will not discuss potential shortfalls or gaps," Freise wrote in an email response to questions about the costs the Buffalo Field Office has incurred under insufficient bonds.
“Everybody that seems to go down this process is successful, as long as they continue to do it," Warren said, explaining the BLM's chain-of-responsibility system that allows him to obtain reclamation funds even in the face of bankrupt operators.
Warren traveled to BLM state offices in Colorado and New Mexico last summer to speak and advise on effective execution of the process.
"It depends on priorities in the office, what you got going on. We've got our system here streamlined pretty well; all of us take it on and get after it,” Warren said.
Operators may shut in wells temporarily in response to low market prices. Warren said the BLM typically waits two years before issuing enforcement actions, asking operators to produce or plug.
Still, the BLM doesn't consider a well "idle" or start pursuing its bond until it has been out of production a full seven years.
"A lot of times gas prices are higher in the winter than the summer,” Warren said. “A year and a half to two years, you get a couple of those highs and lows."
If the current operator can't pay for reclamation, the BLM collects the bond. If it's not enough to complete reclamation, the BLM will then pursue the company that holds the federal lease, known as the record title holder. If they are unable to pay, the BLM will go after all operators and record title owners, said Warren, “back until the day the well was drilled.”
Pete Obermueller, president of the Wyoming Petroleum Association, noted that some companies have established specific practices for their federal holdings in response to the BLM process.
"There are operators who will, if they sell a well or a field or whatever, take out an insurance policy against who they just sold it to in order to protect themselves.”
"Our leases are set up differently (than wells on state or private land, managed by the Oil and Gas Conservation Commission)” Warren said. "From the day the well is drilled until it's plugged, that entire chain of custody, they're all liable for that. We can't call it an orphan well until we've pursued everybody and not gotten anybody.”
Warren said that during his 11 years with the Buffalo Field Office, he has seen 109 orphan wells. Seventy-eight of those are scheduled to be part of a new well-plugging project that started this week.
"From my standpoint, if you're looking at if you're looking at 100 orphan wells," Obermueller said, “that means is that the vast majority of (responsible parties) are meeting their obligations with regard to reclamation.”
BLM protocol requires officials to allow 120 days for each party to respond to a notice so for a well with a long history of operators and owners, it can take awhile to get from idle to orphan. Still, Warren stresses that it is important to follow each step exactly to ensure that companies can't escape paying due to a protocol error.
"Sometimes you do run into a situation where the record title owner is also the operator," Freise said. "That's where you can have a problem." Warren and Freise say that over the past few years, the field office has plugged and reclaimed an average of 600 to 700 wells annually.
Still, critics like the PRBRC’s Morrison contend that even when the BLM gets wells plugged, it takes too long.
"It's usually takes much longer than seven (years),” Morrison said. "They don’t even look at it (until then.) They don't even start the process.”
Over her decades of tracking orphan well impacts on land owners, she has witnessed little regulatory reform.
“At the federal level, virtually none,” Morrison said. “At the state level, there's a recognition of the problem."
“In Wyoming, we have regular consultations with BLM field offices, and our discussions of orphan wells and finding had been frustrating and nonproductive," LaResche said.
The Wyoming Oil and Gas Conservation Commission, which manages state and private wells, uses a different system than the BLM's to manage wells one that mirrors the recommendations provided to the BLM in the latest GAO report.
Initial minimum bonds are significantly higher: An individual well is bonded at a rate of $10 per foot of drilled depth. Operators who wish to pay a statewide bond must put up $100,000. The WOGCC levies an additional bond of $10 per foot on idle wells. For a shallow, 1,000-foot coalbed methane well, that would raise an additional $10,000, while an idle 10,000-foot horizontal well would carry a $100,000 bond.
In 2013, then-Gov. Matt Mead budgeted an extra $3 million dollars for the WOGCC budget to target orphan wells, funded by a mill levy conservation tax assessed on all oil and gas extracted in the state. Currently, by its definition, the WOGCC has reclaimed 2,215 wells under the orphan well pro gram, with 3,173 more slated for action.
The GAO issued two primary recommendations for the BLM in its report. The first was to adjust minimum bond levels to more closely reflect anticipated reclamation costs, and the second was to develop a mechanism to obtain additional funds to reclaim wells, similar to Wyoming's conservation tax, an example cited in the report.
In a response, Joseph Balash, assistant secretary of land and minerals management at the Interior Department, agreed with the first recommendation, but asserted that the BLM did not have the authority to collect additional fees, although that power could be given to the agency by Congress.
For now, employees at the Buffalo office will continue to follow the process they have practiced thousands of times already.
“It may not look like anything's going on, but we're working feverishly to get it all done,” Warren said. “The stuff
that's in production, we want it to stay in production, be cause it is a resource for everybody. But the stuff that doesn't need to be used and doesn't have any future, let's plug it and reclaim it and get it done.”