GAO: BLM bonds don't reflect reclamation costs

Producers’ federal leasing expenses could climb if the US Bureau of Land Management decides to increase reclamation bond minimums that were established in the 1950s and 1960s.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Mar. 2 -- Producers’ federal leasing expenses could climb if the US Bureau of Land Management decides to increase reclamation bond minimums that were established in the 1950s and 1960s. The 3,879 bonds valued at $169 million that covered 88,357 onshore oil and gas wells at the end of 2008 do not reflect current estimated reclamation costs, the federal Government Accountability Office said in a new report.

“Specifically, the bond minimum of $10,000 for individual bonds was last set in 1960, and the bond minimum for statewide bonds—$25,000—and for nationwide bonds—$150,000—were last set in 1951,” it noted. “If adjusted to 2009 dollars, these amounts would be $59,360 for an individual bond, $176,727 for a statewide bond, and $1,060,364 for a nationwide bond.”

Most of the bonds for the wells on land under BLM’s jurisdiction are statewide, according to the Jan. 27 report that GAO released on Feb. 26 following a 30-day comment period.

It said while regulations set minimum amounts, those amounts can increase in certain circumstances and BLM is authorized to collect more when an operator poses a risk due to factors including a history of previous violations, a notice from the US Minerals Management Service that there are royalties due, or total plugging and reclamation costs for existing wells exceeding the present bond amount based on BLM estimates.

The 12 western states where most BLM oil and gas leasing occurs also have bonding requirements, but in most cases the amounts reflect some of the well’s characteristics and are generally higher than BLM’s minimums, the report said. States’ minimums not based on well characteristics also are generally higher than BLM’s, it continued, adding that “federal regulations for other resources generally require the bonds to reflect the cost of reclamation or have minimum amounts that have been more recently established.”

Reviewing findings
Contacted for a reaction, a spokesman for the US Senate Energy and Natural Resources Committee said on Mar. 1 that Chairman Jeff Bingaman (D-NM), who requested the report along with House Natural Resources Committee Chairman Nick J. Rahall (D-W.Va.), was still reviewing the information. US Interior Secretary Ken Salazar is scheduled to appear before the Senate committee on Mar. 3 to discuss the Department of the Interior’s fiscal 2011 budget request and could be asked about the matter, the spokesman told OGJ by e-mail.

The great majority of the more than 63,000 onshore oil and gas wells presently under BLM’s jurisdiction are properly abandoned and adequately reclaimed. Those which are not become the responsibility of the leasing entity which, in this case, is the federal government.

The bonds are intended to ensure that producers perform the required reclamation and meet other terms and conditions such as paying royalties, GAO said in its report. They may be surety bonds, which it described as a third-party guarantee that an operator buys from a private insurance company, or personal bonds accompanied by a cashier’s check, negotiable US Treasury security, or other financial instrument. Operators also may be required to post bonds to ensure reclamation after production has ceased, GAO said.

If the bond is not sufficient to cover plugging the well and reclaiming the surface and there are no responsible or liable parties, the well is considered “orphaned” and BLM uses appropriated funds to complete the reformation, it added. The report said that as of Dec. 1, 2008, 70% of the 88,357 oil and gas wells covered by 16,809 BLM leases were in New Mexico and Wyoming. The two states cumulatively had more than four times as many wells as the total in Utah and California, the states with the third and fourth most wells at 7,388 and 7,215, respectively, it indicated.

“The number of wells and the value of bonds held by BLM have increased over the past 20 years,” GAO said. The bonds’ total value grew from $69 million as of Sept. 30, 1988, to $164 million as of Sept. 30, 2008, as the number of wells climbed from almost 50,000 to more than 85,000, with most of the increase coming in the last decade, it said.

Contact Nick Snow at nicks@pennwell.com.

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