Oil and Gas: Bureau of Land Management Should Address Risks from Insufficient Bonds to Reclaim Wells

The oil and natural gas produced from wells on federal lands are important to the U.S. energy supply and bring in billions in federal revenue each year. However, when wells are not properly managed, the federal government may end up paying to clean up the wells when they stop producing. Specifically, wells on federal lands that an operator does not reclaim and for which there are no other liable parties fall to BLM to reclaim (restore lands to as close to their original natural states as possible). These wells become orphaned if the operator's bond held by BLM is not sufficient to cover reclamation costs. BLM regulations set minimum bond values at $10,000 for all of an operator's wells on an individual lease, $25,000 for all of an operator's wells in a state, and $150,000 for all of an operator's wells nationwide.

GAO was asked to review the status of oil and gas bonding for federal lands. This report (1) describes the value of bonds for oil and gas wells in 2018 compared to 2008, and (2) examines the extent to which BLM's bonds ensure complete and timely reclamation and thus prevent orphaned wells. GAO analyzed agency data on bonds and wells and interviewed BLM officials.

The average value of bonds held by the Bureau of Land Management (BLM) for oil and gas wells was slightly lower on a per-well basis in 2018 ($2,122) as compared to 2008 ($2,207), according to GAO's analysis of BLM data. The total value of bonds held by BLM for oil and gas operations increased between these years, as did the number of wells on federal land.

Bonds held by BLM have not provided sufficient financial assurance to prevent orphaned oil and gas wells (wells that are not reclaimed by their operators and, among other things, whose bonds were not sufficient to cover remaining reclamation costs, leaving BLM to pay for reclamation). Specifically, BLM identified 89 new orphaned wells between July 2017 and April 2019, and BLM offices identified to GAO about $46 million in estimated potential reclamation costs associated with orphaned wells and with inactive wells that officials deemed to be at risk of becoming orphaned in 2018. In part, bonds have not prevented orphaned wells because bond values may not be high enough to cover the potential reclamation costs for all wells under a bond, as may be needed if they become orphaned. GAO's analysis indicates that most bonds (84 percent) that are linked to wells in BLM data are likely too low to reclaim all the wells they cover. Bonds generally do not reflect reclamation costs because most bonds are set at their regulatory minimum values, and these minimums have not been adjusted since the 1950s and 1960s to account for inflation (see figure). Additionally, these minimums do not account for variables such as number of wells they cover or other characteristics that affect reclamation costs, such as well depth. Without taking steps to adjust bond levels to more closely reflect expected reclamation costs, BLM faces ongoing risks that not all wells will be completely and timely reclaimed, as required by law. It falls to BLM to reclaim orphaned wells, but the bureau does not assess user fees to cover reclamation costs, in part because it believes it does not have authority to do so. Providing such authority and developing a mechanism to obtain funds from operators for such costs could help ensure that BLM can completely and timely reclaim wells.

Congress should consider giving BLM the authority to obtain funds from operators to reclaim orphaned wells, and requiring BLM to implement a mechanism to do so. GAO also recommends that BLM take steps to adjust bond levels to more closely reflect expected reclamation costs. BLM concurred. BLM did not concur with a proposed recommendation to develop a mechanism to obtain funds, citing lack of authority. GAO changed it to a matter for Congressional consideration.

Oil and natural gas produced from wells on federal lands are important to  the U.S. energy supply and bring in billions in federal revenue each year.  However, when oil and gas wells are not properly managed, the federal  government may end up paying to clean up the wells when they stop  producing. According to the Department of the Interior’s Bureau of Land  Management (BLM), at the end of fiscal year 2018, BLM oversaw private  entities operating over 96,000 oil and gas wells on leased federal lands.  BLM is responsible for managing onshore federal oil and gas resources  and determining requirements for operators to reclaim leased lands,  which BLM defines as restoring lands to as close to their original natural  states as possible. The oil and gas industry’s boom-and-bust cycles can  lead operators to drill wells when prices for oil and gas are high but can  contribute to bankruptcies when prices are low. As a result, operators  may not always have the resources to reclaim lands around wells that  have been degraded by drilling and production. When wells are not fully  reclaimed, there may be risks of leaking methane or groundwater  contamination, among other things.

BLM uses bonds to reimburse at least some of the costs of well  reclamation in the event that operators or other liable parties do not  reclaim wells. The Mineral Leasing Act of 1920, as amended, requires  that federal regulations ensure that an adequate bond is established  before operators begin preparing land for drilling to ensure complete and  timely reclamation of the land, among other things. BLM regulations set  minimum bond values: $10,000 for all of an operator’s wells on an  individual lease (known as an individual lease bond), $25,000 for all of an  operator’s wells in a state (known as a statewide bond), and $150,000 for  all of an operator’s wells nationwide (known as a nationwide bond). In  January 2010, we reported on the number and value of bonds BLM held  for oil and gas operations for fiscal years 1988 through 2008 and the  value of individual lease, statewide, and nationwide bonds as of  December 2008. These bonds are designed to help prevent or reduce  taxpayer losses because the bond money may be used to reclaim wells  when operators or other liable parties do not. When the bonds covering  those wells are insufficient to cover reclamation expenses, and there are  no other responsible or liable parties to do so, wells are considered  “orphaned.”

Federal laws and BLM regulations and policies contain requirements  aimed at managing BLM’s potential oil and gas well liabilities and  preventing orphaned wells, including through ongoing oversight of wells  and bonds provided by operators. For example, BLM’s well review policy  calls for field offices to, among other things, periodically review all inactive  wells to determine whether they are capable of producing oil or gas or  have a future beneficial use and, if not, have operators submit plans to  reclaim the wells. In May 2018, we reported on BLM’s challenges in  implementing these reviews, including differing understandings among  field offices of the specific actions that constitute a well review. In that  report, we recommended that BLM develop and communicate specific  instructions on what actions constitute a well review for annual reporting  purposes. BLM concurred with this recommendation, and officials told us  they are developing new reporting requirements.

Similar to its well review policy, BLM has a bond adequacy review policy  that calls for BLM to regularly review bonds when certain events occur or  periodically. Based on these reviews, BLM is to seek to increase bonds  as necessary to ensure they reflect risks posed by the operator. In our  May 2018 report, we also reported on BLM’s challenges in implementing  bond adequacy reviews and made recommendations to improve their  implementation. In that report, we recommended that BLM strengthen  its approach to monitoring field offices’ implementation of the bond  adequacy review policy, such as by collecting and analyzing data on  performance indicators and ensuring the quality of those data. BLM  concurred with this recommendation, and officials told us they are  working on revising their guidance on data validation and are  implementing quality reviews of their data.

You asked us to review issues related to bonds for oil and gas wells on  federal lands. This report (1) describes the value of bonds for oil and gas  wells in 2018 compared to 2008, and (2) examines the extent to which  BLM’s bonds ensure complete and timely reclamation and thus prevent  orphaned wells.

To describe the value of bonds for oil and gas wells in 2018 compared to  2008, we analyzed oil and gas well data from BLM’s Automated Fluid  Minerals Support System (AFMSS) as of May 2018 and data on bonds  from BLM’s Legacy Rehost 2000 (LR2000) system as of May 2018. We  compared these data to the 2008 data from these systems that we  reported in 2010. We matched the May 2018 data from the two systems  based on the bond number—a variable in both systems—to identify how  many wells were covered by each bond and to determine the average  bond value per well for each bond category. To assess the reliability of  these AFMSS and LR2000 data elements, we reviewed agency  documents, met with relevant agency officials, and performed electronic  testing. We found these data to be sufficiently reliable for our purposes.

To examine the extent to which BLM’s bonds ensure complete and timely  reclamation and thus prevent orphaned wells, we analyzed several  sources of data, including AFMSS well data, LR2000 bond data, Office of  Natural Resources Revenue’s Oil and Gas Operations Report (OGOR)  well production data, and well reclamation cost estimates from proofs of  claim that BLM files with the Department of Justice when an operator files  for bankruptcy. First, we examined whether bonds are sufficient to cover  potential reclamation costs for the wells they cover. To do this, we  analyzed cost estimates on proofs of claim and identified typical high- and  low-cost well reclamation scenarios. We then compared the cost  scenarios to the average bond value available per well, for each bond,  calculated using bond values in LR2000 and the number of wells covered  by each bond in AFMSS. Next, we examined a subset of wells that are at  increased risk of becoming orphaned and whether bonds are sufficient to  cover their potential reclamation costs. To do this, we used OGOR  production data to identify wells that had not produced since at least June  2008 and that met several other criteria. For those at-risk wells, we  compared reclamation cost scenarios to the average bond value available  for each—calculated by dividing bond value by the number of at-risk wells  covered by the bond—using well data from AFMSS and bond value data  from LR2000. To assess the reliability of the AFMSS, LR2000, and  OGOR data elements we used, we reviewed agency documents, met with  relevant agency officials, and performed electronic testing. We found  these data to be sufficiently reliable for our purposes.

In addition, we examined the number of orphaned wells, comparing the  number of orphaned wells identified by BLM as of April 2019 to those  identified by BLM as of July 2017 and 2009, the two previous times we  reported on orphaned wells. To assess the reliability of the 2019  orphaned well list, we reviewed agency documents and met with relevant  agency officials. Though we identified shortcomings with these data,  which we discuss in the report where appropriate, we nevertheless found  these data to be sufficiently reliable for the purpose of describing the  orphaned wells BLM has identified.

To understand how BLM manages bonds, we reviewed BLM’s policies  and interviewed officials from four BLM state offices and four BLM field  offices. We selected these state and field offices because they were  responsible for managing the largest numbers of wells on federal land.  We also interviewed officials from BLM’s headquarters office in  Washington, D.C. Findings from the selected BLM offices cannot be  generalized to offices we did not interview, but they provide a range of  views. Appendix I provides additional information on our scope and  methodology.

We conducted this performance audit from January 2018 to September  2019 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Oil and gas exploration and production involves disturbing lands in  several ways. For example, when operators drill oil and gas wells, they  typically remove topsoil and construct a well pad, where the drilling rig will  be located. Other equipment on-site can include generators and fuel  tanks. In addition, reserve pits are often constructed to store or dispose of  water, mud, and other materials that are generated during drilling and  production, and roads and access ways are often built to move equipment  to and from the wells.

Once wells cease production, which may occur many decades after they  are drilled, they can become inactive. Inactive wells have the potential to  create physical and environmental hazards if operators do not properly  reclaim them, a process that may involve plugging the well, removing  structures, and reshaping and revegetating the land around the wells. For  example, inactive wells that are not properly plugged can leak methane  into the air or contaminate surface water and groundwater. Well sites that  are not properly reclaimed can contribute to habitat fragmentation and soil  erosion, and equipment left on-site can interfere with agricultural land use  and diminish wildlife habitat.

Costs for well reclamation vary widely and are affected by factors such as  the depth of the well. Although BLM does not estimate reclamation costs  for all wells, it has estimated reclamation costs for thousands of wells  whose operators have filed for bankruptcy. Based on our analysis of  these estimates, we identified two cost scenarios: low-cost wells typically  cost about $20,000 to reclaim, and high-cost wells typically cost about  $145,000 to reclaim.

As shown in figure 1, BLM regulations or policies outline how BLM is to  initially collect bonds from operators, review bonds, and ultimately return  the bond to the operator or use it to cover costs of reclamation.

Bonds collected from operator. BLM regulations require operators to  submit a bond to ensure compliance with all of the terms and conditions  of the lease, including, but not limited to, paying royalties and reclaiming  wells. BLM regulations generally require operators to have one of the  following types of bond coverage:  individual lease bonds, which cover all of an operator’s wells under  one lease;  statewide bonds, which cover all of an operator’s leases and  operations in one state; or nationwide bonds, which cover all of an operator’s leases and  operations nationwide. (See figure 2.)

BLM can accept two types of bonds: surety bonds and personal bonds. A  surety bond is a third-party guarantee that an operator purchases from a  private insurance company approved by the Department of the Treasury.  The operator pays a premium to the surety company that can vary  depending on various factors, including the amount of the bond and the  assets and financial resources of the operator. If operators fail to reclaim  their wells, the surety company is responsible for paying BLM up to the  amount of the bond to help offset reclamation costs.

A personal bond must be accompanied by one of the following financial  instruments:  certificates of deposit issued by a financial institution whose deposits  are federally insured, granting the Secretary of the Interior full  authority to redeem it in case of default in the performance of the  terms and conditions of the lease;  cashier’s checks; negotiable Treasury securities, including U.S. Treasury notes or  bonds, with conveyance to the Secretary of the Interior of full authority  to sell the security in case of default in the performance of the lease’s  terms and conditions; or  irrevocable letters of credit that are issued for a specific term by a  financial institution whose deposits are federally insured and meet  certain conditions and that identify the Secretary of the Interior as sole  payee with full authority to demand immediate payment in case of  default in the performance of the lease’s terms and conditions.

BLM bond reviews. BLM regulations provide flexibility to increase bonds  above minimums and require increases above minimum amounts if  operators meet certain criteria. Specifically, BLM regulations require BLM  to increase the bond amount when an operator who applies for a new  drilling permit had previously failed to reclaim a well in a timely manner.  For such an operator, BLM must require a bond in an amount equal to its  cost estimate for reclaiming the new well if BLM’s cost estimate is higher  than the regulatory minimum amount. BLM regulations also authorize  increases in the bond amount—not to exceed the estimated cost of  reclamation and any royalties or penalties owed—whenever the  authorized officer determines that the operator poses a risk due to factors  such as that the expected reclamation costs exceed the present bond.

In response to our previous recommendation in 2011 that BLM develop a  comprehensive strategy to revise its bond adequacy review policy to  more clearly define terms and conditions that warrant a bond increase,  BLM issued a bond adequacy review policy in July 2013, Instruction  Memorandum 2013-151. The policy contained directives for conducting  reviews when bonds meet certain criteria. Specifically, the 2013 bond  adequacy review policy called for field offices to, among other things,  review each bond at least every 5 years to determine whether the bond  value appropriately reflected the level of potential risk posed by the  operator. If it did not, authorized officers were to propose an increase (or  decrease) in the bond value.

In November 2018, BLM issued a revised bond adequacy review policy,  Instruction Memorandum 2019-014, which supersedes the 2013 policy.  The 2018 policy continues to call for field offices to review each bond at  least every 5 years, but it revised the point system worksheet that field  offices are to use when determining whether a bond increase (or  decrease) is warranted. Also, in response to our 2018 recommendation  that BLM ensure that the reviews of nationwide and statewide bonds  reflect the overall risk presented by operators, the 2018 policy calls for  additional coordination between BLM headquarters, state offices, and  field offices when reviewing nationwide and statewide bonds.

BLM returns or uses bond. If operators reclaim their wells, BLM returns  the bond to the operator. Many decades may pass between when BLM  collects a bond and when it is returned. If operators do not reclaim their  wells, BLM may redeem the certificate of deposit, cash the check, sell the  security, or make a demand on the letter of credit to pay the reclamation  costs. Liability for reclaiming a well on onshore federal lands can fall to  either the lease holder or the operator, and BLM may also hold past  owners or operators liable. The liability for past owners or operators  extends only to reclamation obligations that accrued before BLM  approved the transfer of their lease to a subsequent lessee. They are not  liable for reclamation and lease obligations incurred after that transfer is  approved.

Average Bond Values Per Well Were Slightly Lower in 2018 as Compared to 2008

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. Although the total value of bonds held by BLM for oil  and gas operations was higher in 2018 than in 2008 (about $204 million  compared to about $188 million, in 2018 dollars), the average bond value  per well was slightly lower because the number of wells on federal land  was also higher in 2018 than in 2008 (96,199 wells compared to 85,330).  Specifically, in 2008, BLM held bonds worth an average of $2,207 per  well in 2018 dollars.23,  BLM held bonds worth an average of $2,122 per  well in 2018, a decrease of 3.9 percent as compared to 2008 (see table  1).

BLM bonds do not typically cover an individual well; however, we calculated the average  bond value on a per-well basis (bond amount divided by the number of wells covered by  the bond) to compare the value over time adjusted for the increased number of wells.  When reporting on all wells, we calculated the average bond value per well as the  aggregate value of all BLM bonds divided by the total number of producible well bores.  Appendix I provides additional information on our scope and methodology. category for bonds that were linked to wells in the data. We found that,  on average, as of 2018 an individual lease bond covered about 10 wells,  a statewide bond covered about 49 wells, and a nationwide bond covered  374 wells. However, some bonds cover more than the typical number of  wells and some fewer. As of 2018, individual lease bonds had the highest  average bond value per well at $2,691, and nationwide bonds had the  lowest average bond per well value at $890. Statewide bonds had an  average bond value per well of $1,592.

The share of the total value of bonds held by BLM that are individual  lease, statewide, or nationwide bonds differed in 2018 from 2008 (see  Figure 3). The share of individual lease bonds was slightly higher in 2018  as compared to 2008 (about 8 percent in 2008 and about 9 percent in  2018). In 2008, statewide bonds represented about 80 percent  (approximately $130 million) of the total value of bonds. In 2018,  statewide bonds represented about 59 percent of total bond value  (approximately $120 million), but this category still represented the largest  share of total bond value. In contrast, nationwide bonds were a lower  share of total bond value in 2008 (about 6 percent, approximately $10.2  million) than in 2018 (30 percent, approximately $61.8 million).

BLM officials told us that changes in the composition of the oil and gas  industry may have contributed to these changes in the composition of  bonds. In particular, officials said some larger companies may have  expanded their operations in recent years, sometimes acquiring smaller  companies. Large companies with expansive operations are more likely  than small companies to have nationwide bonds because such bonds can  cover operations in multiple states, which statewide and individual lease  bonds do not. Therefore, an industry shift to larger companies would tend  to increase the share of nationwide bonds.

Bonds Held by BLM Are Insufficient to Prevent Orphaned Wells

Bonds Do Not Provide Sufficient Financial Assurance to Prevent Orphaned Wells

Bonds do not provide sufficient financial assurance to prevent orphaned  wells for several reasons. First, BLM has identified new orphaned wells— wells whose bonds were not sufficient to pay for needed reclamation  when operators or other parties failed to reclaim them. As we reported in  May 2018, BLM does not track the number of orphaned wells over time  and so cannot identify how many wells became orphaned over specific  time frames. However, our analyses of BLM’s orphaned well lists from  different years have shown that BLM has continued to identify new  orphaned wells since 2009. We reported in January 2010 that BLM  identified 144 orphaned wells in 2009. Then, in May 2018, we reported  that BLM identified 219 orphaned wells in July 2017—an increase of 75  orphaned wells. In April 2019, BLM provided a list of 296 orphaned  wells that included 89 new wells that were not identified on the July 2017  list.

Bonds are not sufficient to prevent orphaned wells in part because they  do not reflect full reclamation costs for the wells they cover. Bonds that  are high enough to cover all reclamation costs provide complete financial  assurance to prevent orphaned wells because, in the event that an  operator does not reclaim its wells, BLM can use the bond to pay for  reclamation. On the other hand, bonds that are less than reclamation  costs 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. We analyzed bonds that are linked to  wells in BLM’s data, and found that most of these bonds would not cover  reclamation costs for their wells. Specifically, we compared the average  bond coverage available for these wells to the two cost scenarios we  described above. About 84 percent of these bonds—covering 99.5  percent of these wells—would not fully cover reclamation costs under a  low-cost scenario (these bonds have an average value per well of less  than $20,000). Less than 1 percent of bonds—covering less than 0.01  percent of these wells—would be sufficient to reclaim all the wells they  cover if they were high cost (these bonds have an average value per well  of $145,000 or more). The remaining bonds—about 16 percent—have  average bond values per well of between $20,000 and less than  $145,000.

The majority of bond values do not reflect reclamation costs in large part  because most bonds—82 percent—remain at their regulatory minimum  values. These regulatory minimums are not reflective of reclamation  costs for a number of reasons:

Regulatory bond minimums have not been adjusted since the 1950s  and 1960s to account for inflation. As shown in figure 4, when  adjusted to 2018 dollars, the $10,000 individual lease bond minimum  would be about $66,000, the $25,000 statewide bond minimum would  be about $198,000, and the $150,000 nationwide bond minimum  would be about $1,187,000.

Bond minimums are based on the bond category and do not adjust  with the number of wells they cover, which can vary greatly. According  to BLM’s data, in 2018 the number of wells covered by a single bond  ranged from one well to 6,654 wells. On average, a single bond  covered about 68 wells. As wells are added to a bond, the total  associated reclamation cost increases even if the bond value does  not. A bond that increases with each additional well it covers and then  decreases as wells are reclaimed could increase the financial  incentive for operators to reclaim their wells in a timely manner. This  is because operators would have to contribute additional bond value  or would recover some bond value when they add or reclaim a well,  respectively. Currently, bond minimums do not automatically adjust in  this manner and therefore provide limited financial incentives for an  operator to reclaim wells in a timely manner.

Bond minimums do not reflect characteristics of individual wells such  as depth or location, but such characteristics can affect reclamation  costs, according to BLM officials. Wells are being drilled deeper than  in the past; in 1950, well depth averaged about 3,700 feet, and in  2008, it averaged about 6,000 feet. Newer wells may be drilled 10,000  feet vertically. Officials from one BLM field office told us they assume  a cost of $10 per foot of well depth to plug a well, so as wells are  drilled deeper, plugging costs typically increase proportionally.  Additionally, the location of some wells makes them more expensive  to reclaim. For example, BLM officials told us about several wells that  may cost three times more to reclaim than other nearby wells because  they are located in the middle of a river, making them hard to reach.

In addition to BLM having identified orphaned wells over the last decade,  we identified inactive wells at increased risk of becoming orphaned and  found their bonds are often not sufficient to reclaim the wells. Our  analysis of BLM bond value data and Office of Natural Resources  Revenue production data showed a significant number of inactive wells  remain unplugged and could be at increased risk of becoming orphaned.  Specifically, we identified 2,294 wells that may be at increased risk of  becoming orphaned because they have not produced since June 2008  and have not been reclaimed. Further, for a majority of these at-risk  wells, their bonds are too low to cover typical reclamation costs for just  these at-risk wells. Our analysis of oil and gas production data showed these wells have not produced oil or gas or been used in other ways,  such as serving as injection wells, since at least June 2008, when oil and  gas prices were at or near record highs. Given that the Energy  Information Administration projects oil and natural gas prices will remain  at levels significantly below the 2008 highs through 2050, it is unlikely  price will motivate operators to reopen these wells. Some of these wells  have been inactive for far longer. Since these at-risk wells are unlikely  to produce again, an operator bankruptcy could lead to orphaned wells  unless bonds are adequate to reclaim them. If the number of at-risk wells  is multiplied by our low-cost reclamation scenario of $20,000, it implies a  cost of about $46 million to reclaim these wells. If the number of these  wells is multiplied by our high-cost reclamation scenario of $145,000, it  implies a cost of about $333 million. When we further analyzed the  available bonds for these at-risk wells, we found that most of these wells  (about 77 percent) had bonds that would be too low to fully reclaim the at- risk wells under our low-cost scenario. More than 97 percent of these at- risk wells have bonds that would not fully reclaim the wells under our  high-cost scenario.

BLM has a policy for reviewing the adequacy of bonds but has not been  able to consistently secure bond increases when needed, and this policy  has not resulted in bonds that would be adequate to reclaim most wells.  BLM’s bond adequacy review policy calls for field office staff to review oil  and gas bonds at least every 5 years to determine whether the bond  amount appropriately reflects the level of potential risk posed by the  operator. However, according to BLM documentation, its offices did not  secure about 84 percent of the proposed bond increases in fiscal years  2016 and 2017. BLM officials at one field office and one state office noted  it is difficult to secure increases from bond reviews when firms are already  in difficult financial situations. In November 2018, BLM updated its bond  adequacy review policy and called for the agency to focus on securing  bond increases from operators that show the highest risk factors. BLM’s  updated policy more explicitly lays out steps to secure bond increases,  including that BLM should not approve new applications to drill from an  operator while waiting for a bond increase. The new policy also gives  BLM officials discretion to not pursue a bond increase after considering  other priorities demanding staff time and workload. It is unclear whether  the update will improve BLM’s ability to secure bond increases, as it may  not address the underlying challenge of attempting to increase bonds  from operators who are already in a difficult financial position.

While BLM’s federal oil and gas bond minimums do not sufficiently reflect  the costs of well reclamation, requirements for bond amounts for other  federal mining and energy development activities account for potential  reclamation costs to some extent. For example, for bonds for surface coal  mining and hardrock mining on federal lands, the Department of the  Interior requires bond amounts based on the full estimated cost of  reclamation. For grants of federal rights-of-way for wind and solar  energy development in designated leasing areas, BLM requires bonds  based on a minimum amount per wind turbine or per acre of solar. For  such grants in all other areas, the bonds are based on the estimated cost  of reclamation but cannot be less than the per-turbine or per-acre  amounts previously mentioned.

Additionally, some states have minimum bond requirements for oil and  gas wells on lands in the state that, unlike federal bond minimums, adjust  with the number of wells they cover or the characteristics of the wells, or  both. For example, Texas and Louisiana offer operators with wells on  lands in those states the choice of a bond based on total well depth or  based on the number of wells. Specifically, the Texas Railroad  Commission lets operators choose bonds based on either the total depth  of all wells on lands in the state multiplied by $2 per foot, or minimums  based on the number of wells covered. If operators choose the latter, the  bond for 0 to 10 wells is $25,000; the bond for 11 to 99 wells is $50,000;  and the bond for 100 or more wells is $250,000. In Louisiana, the Office  of Conservation offers operators with wells on lands in the state the  choice of a bond based on total well depth or based on the number of  wells. Louisiana further specifies a multiplier that varies depending on the  total depth of the well. For example, the bond calculation is $2 per foot for  wells less than 3,000 feet deep, $5 per foot for wells from 3,001 to 10,000  feet deep, and $4 per foot for wells 10,001 feet deep or deeper.  Operators in Louisiana can alternatively choose to follow a system based  on number of wells, with a minimum bond for 10 or fewer wells set at  $50,000, a minimum bond for 11 to 99 wells set at $250,000, and a  minimum bond for 100 or more wells set at $500,000. Pennsylvania’s  Department of Environmental Protection requires bonds for  unconventional wells that vary based on the number of wells and well  bore length.

The Mineral Leasing Act of 1920, as amended, requires federal  regulations to ensure that an adequate bond is established before  operators begin surface-disturbing activities on any lease, to ensure  complete and timely reclamation of the lease tract as well as land and  surface waters adversely affected by lease operations. The Mineral  Leasing Act of 1920 does not require that BLM set bonds at full  reclamation costs. However, the gap between expected reclamation costs  and minimum bond amounts has grown over time because the minimums  have not been adjusted since they were established in the 1950s and  1960s, whereas reclamation costs have increased due to inflation and the  changing characteristics of wells being drilled. In the absence of bond  levels that more closely reflect expected reclamation costs, such as by  increasing regulatory minimums and incorporating consideration of the  number of wells on each bond and their characteristics, BLM will continue  to face risks that its bonds will not provide sufficient financial assurance to  prevent orphaned wells. In particular, adjusting bond minimums so that  bonds more closely reflect expected reclamation costs up front could help  decrease the need for bond increases later when companies are  potentially in financial distress.

BLM Does Not Currently Assess User Fees to Fund Orphaned Well Reclamation

In addition to fulfilling its responsibility to prevent new orphaned wells, it  falls to BLM to reclaim wells that are currently orphaned, and BLM has  encountered challenges in doing so. We reported in May 2018 that 13  BLM field offices identified about $46.2 million in estimated potential  reclamation costs associated with orphaned wells and with inactive wells  that officials deemed to be at risk of becoming orphaned. There is also a  risk more wells will become orphaned in coming years, as we described  above. Based on the most recent orphaned well lists we received from  BLM, 51 wells that BLM identified in 2009 as orphaned had not been  reclaimed as of April 2019.

The Energy Policy Act of 2005 (EPAct 2005) directs Interior to establish a  program that, among other things, provides for the identification and  recovery of reclamation costs from persons or other entities currently  providing a bond or other financial assurance for an oil or gas well that is  orphaned, abandoned, or idled. One way in which BLM may be able to  accomplish this is through the imposition of user fees. In 2008, we found  that well-designed user fees can reduce the burden on taxpayers to  finance those portions of activities that provide benefits to identifiable  users. Further, according to Office of Management and Budget  guidance, it may be appropriate for an agency to request authority to  retain the fee revenue if the user fees offset the expenses of a service  that is intended to be self-sustaining.

The volume of drilling applications and inactive wells provide an  opportunity to fund reclamation costs. According to BLM data, the agency  processes more than 3,500 applications to drill each year, on average,  and has over 14,000 inactive wells. Based on our calculations, a separate  fee of about $1,300 charged at the time a drilling application is submitted  (in addition to the current drilling application filing fee, which is $10,050),  or an annual fee of less than $350 for inactive wells could generate  enough revenue to cover, in a little over a decade, the entire $46 million  potential reclamation costs field offices identified to us. In commenting  on a draft of this report, BLM stated that it does not have the authority to  seek or collect fees from lease operators to reclaim orphaned wells.   Developing a mechanism to obtain funds from operators to cover the  costs of reclamation, consistent with EPAct 2005, could help ensure that  BLM can completely and timely reclaim wells without using taxpayer  dollars.

Other federal programs, including other BLM programs, collect fees from  users to fund reclamation activities. For example, the federal government  collects fees from mining companies to reclaim abandoned mines.  Specifically, the federal abandoned mine reclamation program is funded  in part by fees on coal production. We reported in March 2018 that the  program had spent about $3.9 billion to reclaim abandoned mine lands  since the program’s creation in 1977.

Additionally, some states with oil and gas development have dedicated  funds for reclaiming orphaned wells. In Wyoming, the state’s Oil and Gas  Conservation Commission’s Orphan Well Program reclaims orphaned  wells on state or private lands for which bonds and operator liability are  unavailable or insufficient to fund reclamation. The program is funded  through a conservation tax assessed on the sale of oil and natural gas  produced in Wyoming. Through this program, the Wyoming Oil and Gas  Conservation Commission has reclaimed approximately 2,215 wells since  2014, according to a Commission official. Similarly, in Arkansas,  operators make annual payments to its abandoned well plugging fund  based on the number of wells and permits they have, on a sliding scale.  For example, at the low end, operators with one to five wells or permits  pay $100 per well, and at the high end, operators with over 300 wells or  permits pay $4,000 per operator. The Arkansas fund was used to  reclaim 136 wells in fiscal years 2016 through 2018, according to an  official with the state’s Oil and Gas Commission. Virginia’s Orphaned Well  Fund is funded through a $200 surcharge on each permit application. The  fund is administered by the Virginia Division of Gas and Oil, which  prioritizes wells to reclaim according to their condition and potential threat  to public safety and the environment.

BLM oversees private entities operating thousands of oil and gas wells on  leased federal lands and has taken steps over the years to strengthen its  management of the potential liability that oil and gas operations represent  should operators not fully reclaim wells and return lands to their original  condition when production ceases. For example, the agency’s 2013 bond  adequacy review policy outlined how bonds were to be reviewed every 5  years and bond amounts adjusted depending on risks presented by  operators. However, we found average bond values were slightly lower in  2018 as compared to 2008 and BLM has not obtained bond increases for  the majority of instances in which its reviews identify that increases are  needed. Instead, most bonds are at their regulatory minimum values,  which are not sufficient to cover reclamation costs incurred by BLM.  Without adjusting bond levels to more closely reflect expected  reclamation costs—such as by considering the effects of inflation, the  number of wells covered by a single bond, and the characteristics of  those wells—BLM faces ongoing risks that not all wells will be completely  and timely reclaimed, resulting in additional orphaned wells.

Further, BLM faces a backlog of orphaned wells to reclaim—with 51  dating back at least 10 years. Unlike some other federal and state  programs that obtain funds from industry through fees or dedicated funds,  BLM does not do so for reclaiming orphaned wells. According to BLM, it  does not have the authority to seek or collect fees from lease operators to  reclaim orphaned wells. Authorizing and requiring the implementation of a  mechanism to obtain funds from oil and gas operators to cover the costs  of reclamation could help ensure BLM can completely and timely reclaim  wells.

Congress should consider giving BLM the authority to obtain funds from  operators to reclaim orphaned wells, and requiring BLM to implement a  mechanism to obtain sufficient funds from operators for reclaiming  orphaned wells. (Matter for Consideration 1)

The Director of BLM should take steps to adjust bond levels to more  closely reflect expected reclamation costs, such as by increasing  regulatory minimums to reflect inflation and incorporating consideration of  the number of wells on each bond and their characteristics.   (Recommendation 1)

We provided a draft of this product to BLM for comment. In its written  comments, reproduced in appendix II, BLM concurred with the  recommendation. BLM stated that it is committed to ensuring that its field  offices continue to review oil and gas bonds at least every 5 years, or  earlier when warranted, and noted its November 2018 Instruction  Memorandum 2019-014 updated its bond review policy. BLM further  stated that, while the adjustment of bond values may not reflect the  inflation index, the policy is intended to increase bond amounts while  fostering an environment conducive to BLM’s leasing operations. As we  point out in this report, BLM has historically had difficulties securing bond  increases through bond reviews, and so additional steps may be needed  to adjust bond levels to more closely reflect expected reclamation costs.

In the draft we provided to BLM for comment, we included a  recommendation that the Director of BLM should take steps to obtain  funds from operators for reclaiming orphaned wells. BLM did not concur  with this recommendation, saying it does not have the authority to seek or  collect fees from lease operators to reclaim orphaned wells. We continue  to believe a mechanism for BLM to obtain funds from oil and gas  operators to cover the costs of reclamation for orphaned wells could help  ensure BLM can completely and timely reclaim these wells, some of  which have been orphaned for at least 10 years. We have therefore  instead made a matter for Congressional consideration.

BLM also provided technical comments, which we incorporated as  appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Interior, and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report (1) describes the value of bonds for oil and gas wells in 2018  compared to 2008, and (2) examines the extent to which the Bureau of  Land Management’s (BLM) bonds ensure complete and timely  reclamation and thus prevent orphaned wells.

To describe the value of bonds for oil and gas wells in 2018 compared to  2008, we analyzed oil and gas well data from BLM’s Automated Fluid  Minerals Support System (AFMSS) as of May 2018 and data from BLM’s  Legacy Rehost 2000 (LR2000) system on bonds as of May 2018. Bond  data we reviewed included the bond category (e.g., individual lease or  nationwide) and bond value. We compared these data to data obtained  from the same systems for 2008 and reported by GAO in 2010. We  matched the May 2018 data from the two systems based on the bond  number—a variable in both systems—to identify how many wells were  covered by each bond and to determine the average bond value per well  for each bond category. To assess the reliability of AFMSS and LR2000  data elements, we reviewed agency documents, met with relevant agency  officials, and performed electronic testing. We found these data to be  sufficiently reliable for our purposes. We also interviewed BLM  headquarters officials to understand why bond composition may have  changed over time. To report on the number of bonded wells held by  BLM, we used a published BLM value for producible well bores—wells  capable of production—which should represent a lower bound on the  number of bonded wells in September 2018 because some wells may be  plugged or temporarily incapable of production but would still require a  bond if the surrounding site had not been fully reclaimed. To determine  the average value of bonds per well in 2018, we divided the total value of  all bonds held by BLM by the total number of producible well bores.

To examine the extent to which BLM’s bonds ensure complete and timely  reclamation and prevent orphaned wells, we conducted the following  analyses:

Reclamation cost scenarios: To determine whether bonds are  sufficient to cover potential reclamation costs for the wells they cover,  we identified typical high- and low-cost scenarios for well reclamation  (including plugging the well and reclaiming the surrounding well site)  and compared those scenarios to the average bond value available  per well. To determine high- and low-cost reclamation scenarios, we  analyzed BLM’s well reclamation cost estimates on proofs of claim  submitted to the Department of Justice from calendar year 2016  through May 2018. These 59 proofs of claim listed estimated  reclamation costs for 8,664 well sites. We calculated the average  reclamation cost per well for each individual proof of claim by dividing  the total dollar value claimed for reclamation liability (actual liability  plus potential liability) by the total number of wells listed in each proof  of claim document. We found the average reclamation cost estimates  for each proof of claim have a bimodal distribution, meaning that data  are clustered around two distinct cost levels, rather than clustered  around a single average cost. As a result, we determined that using  two separate measures that indicate typical values for separate  groups of low-cost and high-cost wells would provide more meaningful  statistics about cost. We therefore selected reclamation costs of  $20,000 for the low-cost reclamation scenario and $145,000 for the  high-cost scenario based on the 25th and 75th percentiles of the  distribution of average estimated reclamation cost per proof of claim,  weighted by the number of wells on each proof of claim.

Bond value per well: To determine the average bond value available  per well, we analyzed bonds listed in LR2000 that were tied to wells  listed in AFMSS using the bond number—a variable in both systems.  We found that 1,547 out of the 3,357 unique bond numbers in LR2000  had wells tied to them in AFMSS. These 1,547 bonds covered about  80 percent of the wells in AFMSS. The other 20 percent of wells in  AFMSS either did not list a bond number, or the bond number listed  was not in LR2000. For each bond in LR2000 covering wells in  AFMSS, we calculated the bond available per well as the bond value  divided by the number of wells it covers. We then compared the bond  values per well against both high ($145,000 per well) and low  ($20,000 per well) reclamation cost scenarios to identify which bonds  would be adequate to reclaim all the wells they covered under  different cost scenarios. If AFMSS bond information was incomplete, it  is possible that there are more wells covered by bonds than we were  able to identify—and therefore the bond value per well would be lower  than we found.

At-risk wells: To identify wells that may be at greater risk of becoming  orphaned and determine whether their bonds are sufficient to cover  potential reclamation costs, we used well production data from the  Office of Natural Resources Revenue’s Oil and Gas Operations  Report (OGOR) as of June 2017 and bond values from LR2000. First,  we defined wells as “at risk of becoming orphaned” if they met several  criteria. Specifically, we identified wells that (1) had recent OGOR  reports (on or after March 2017); (2) had not been used productively  from at least June 2008 through the most recent record (meaning the  well did not report producing any volume of oil or gas during this  timeframe, nor were any volume of water or materials injected into the  well during this timeframe); (3) were not being used as a monitoring  well in the most recent record, which we considered a productive use;  and (4) had not been plugged and abandoned. We selected June  2008 as the cutoff date for productivity because in June and July of  2008, oil and gas prices hit peaks that have not since been reached  again, and which the Energy Information Administration does not  expect prices to reach again through at least 2050. We believe our  analysis is a conservative estimate of wells at greater risk, in part  because we did not include wells that produced when prices were at  their peaks and stopped producing soon afterward and may be  unlikely to produce in the future unless prices reach the same peaks  again. In addition, our lower-bound estimate does not include some  coalbed methane wells that have been inactive for less than 9 years  but are unlikely to produce at current prices because of the relatively  higher cost of coalbed methane production. We also excluded wells  that reported any volume of oil or gas production or water injection  since June 2008, although some very low-producing wells may also  be at risk of becoming orphaned.

Bond value for at-risk wells: To calculate the average bond value per  at-risk well, we identified bonds listed in LR2000 that were tied to at- risk wells in AFMSS to determine the value of bonds available to  reclaim these at-risk wells if needed. We identified 2,041 of the 2,294  at-risk wells were linked to bonds. For each bond, we divided the  bond value by the number of at-risk wells it covered to determine the  bond amount per at-risk well. In cases in which an at-risk well was  linked to more than one bond, we additionally calculated the average  of the bond value per at-risk well for each bond linked to the well. To  determine the sufficiency of bonds for at-risk wells, we identified the  number of wells with an average bond value per at-risk well equal to  or greater than $20,000 (low cost reclamation scenario) or $145,000  (high cost reclamation scenario).

Orphaned wells: We compared three lists of orphaned wells based on  data provided by BLM in 2009, July 2017, and April 2019. The 2009  data are from our January 2010 report, which used Orphaned Well  Scoring Checklists that list information such as the well’s name and  location. The July 2017 data are from our May 2018 report, which  used an orphaned well list generated through a query of AFMSS by  BLM. The April 2019 list was generated through a query of an  updated version of AFMSS known as AFMSS 2. We compared the  lists to identify how many wells that were on the 2009 list remained on  the 2019 list, and how many wells that were on the 2017 list were on  the 2019 list.

To assess the reliability of the AFMSS, LR2000, and OGOR data  elements we used, we reviewed agency documents, met with relevant  agency officials, and performed electronic testing. We found these data  elements to be sufficiently reliable for our purposes. Similarly, to assess  the reliability of the 2019 orphaned well list, we reviewed agency  documents and met with relevant agency officials. Though we identified  shortcomings with data on orphaned wells, we nevertheless found these  data to be sufficiently reliable for the purpose of describing the orphaned  wells BLM has identified. To assess the reasonableness of proofs of  claim data, we interviewed relevant agency officials and reviewed agency  documents.

To understand how BLM manages bonds, we reviewed BLM’s policies  and interviewed officials from four BLM state offices and four BLM field  offices. We selected these state and field offices because, according to  AFMSS data, they were responsible for managing the largest numbers of  wells on federal land. These BLM state offices were California, New  Mexico, Utah, and Wyoming. These BLM field offices were Bakersfield,  Buffalo, Carlsbad, and Farmington. We also interviewed officials from  BLM’s headquarters office in Washington, D.C. Findings from the  selected BLM offices cannot be generalized to officials we did not  interview but provide a range of views. To understand how some states  with oil and gas development on state lands set minimum bonds and fund  orphaned well reclamation, we contacted officials from oil and gas  oversight agencies in Arkansas, Louisiana, Pennsylvania, Texas, Virginia,  and Wyoming.

Appendix II: Comments from the Department of the Interior

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Quindi Franco (Assistant  Director), Marietta Mayfield Revesz (Analyst-in-Charge), Marie Bancroft,  William Gerard, Cindy Gilbert, Gwen Kirby, Joe Maher, Shaundra  Patterson, Dan Royer, and Jerry Sandau made key contributions to this  report.

Oil and natural gas wells on federal land bring in billions in federal revenue. However, if their operators don’t properly manage these wells, the government may end up paying to clean them up when they stop producing. And the bonds operators provide as insurance are often not enough to cover the costs of this cleanup.

We found that the Bureau of Land Management identified 89 new wells between July 2017 and April 2019 that it would be responsible for cleaning up because operators’ bonds were too small to cover cleanup costs. We recommended that the Bureau adjust bond amounts to better reflect the costs of cleanup.