Oil and Gas Bonds
Bonding Requirements and BLM Expenditures to Reclaim Orphaned Wells Gao ID: GAO-10-245 January 27, 2010The Federal Land Policy and Management Act of 1976 directs the Department of the Interior (Interior) to manage lands for multiple uses while also taking any action to prevent "unnecessary or undue degradation" of the land. To do this, Interior's Bureau of Land Management (BLM), among other things, requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so. Despite these requirements, not all operators perform reclamation. If the bond is not sufficient to cover well plugging and surface reclamation and there are no responsible or liable parties, the well is considered "orphaned," and BLM uses federal dollars to fund reclamation. The 12 western states where most oil and gas production occurs and other Interior agencies also require bonds to ensure reclamation. GAO was asked to (1) determine the number, value, and coverage of bonds held by BLM for oil and gas operations; (2) determine the amount that BLM has paid to reclaim orphaned wells over the past 20 years and the number of orphaned wells BLM has identified but has not yet reclaimed; and (3) compare BLM's bonding requirements for oil and gas operations with those the 12 western states use for oil and gas operations on state and private lands and other Interior agencies' bonding requirements for other resources. Among other things, GAO analyzed BLM data on wells and BLM-held bonds, and interviewed BLM officials.
According to GAO's analysis of BLM data, as of December 2008, oil and gas operators had provided 3,879 bonds, valued at $162 million, to ensure compliance with lease terms and conditions for 88,357 wells. BLM regulations establish minimum bond amounts: $10,000 for an individual lease, $25,000 to cover all leases of a single operator in a state, and $150,000 to cover all leases of a single operator nationwide. The bond amount for individual leases was set in 1960, while the statewide and nationwide bond amounts were set in 1951. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 orphaned wells in 10 states and has identified an additional 144 orphaned wells in 7 states that need to be reclaimed, according to BLM. The amount spent per reclamation project varied greatly, from a high of $582,829 for a single well in Wyoming in fiscal year 2008 to a low of $300 for 3 wells in Wyoming in fiscal year 1994. BLM reclamation cost estimates were not available for all of the wells it has yet to reclaim, but BLM field office officials have completed reclamation cost estimates of approximately $1.7 million for 102 of the 144 orphaned wells. The 12 western states (Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming) and other Interior agencies and offices have bonding approaches that differ from BLM's oil and gas bonding requirements. The states generally require higher bond amounts than the minimum amounts established by BLM regulations for individual and statewide oil and gas leases. Regulations governing the extraction or use of other federally owned resources generally require bond amounts based on the cost of reclamation or use minimum amounts that were established more recently than the bond amounts for oil and gas. GAO provided a draft of this report to the Department of Interior for review and comment. The Department provided technical comments, which were incorporated as appropriate.
GAO-10-245, Oil and Gas Bonds: Bonding Requirements and BLM Expenditures to Reclaim Orphaned Wells
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
January 2010:
Oil And Gas Bonds:
Bonding Requirements and BLM Expenditures to Reclaim Orphaned Wells:
GAO-10-245:
GAO Highlights:
Highlights of GAO-10-245, a report to congressional requesters.
Why GAO Did This Study:
The Federal Land Policy and Management Act of 1976 directs the
Department of the Interior (Interior) to manage lands for multiple
uses while also taking any action to prevent ’unnecessary or undue
degradation“ of the land. To do this, Interior‘s Bureau of Land
Management (BLM), among other things, requires oil and gas operators
to reclaim the land they disturb and post a bond to help ensure they
do so. Despite these requirements, not all operators perform
reclamation. If the bond is not sufficient to cover well plugging and
surface reclamation and there are no responsible or liable parties,
the well is considered ’orphaned,“ and BLM uses federal dollars to
fund reclamation. The 12 western states where most oil and gas
production occurs and other Interior agencies also require bonds to
ensure reclamation.
GAO was asked to (1) determine the number, value, and coverage of
bonds held by BLM for oil and gas operations; (2) determine the amount
that BLM has paid to reclaim orphaned wells over the past 20 years and
the number of orphaned wells BLM has identified but has not yet
reclaimed; and (3) compare BLM‘s bonding requirements for oil and gas
operations with those the 12 western states use for oil and gas
operations on state and private lands and other Interior agencies‘
bonding requirements for other resources. Among other things, GAO
analyzed BLM data on wells and BLM-held bonds, and interviewed BLM
officials.
What GAO Found:
According to GAO‘s analysis of BLM data, as of December 2008, oil and
gas operators had provided 3,879 bonds, valued at $162 million, to
ensure compliance with lease terms and conditions for 88,357 wells.
BLM regulations establish minimum bond amounts: $10,000 for an
individual lease, $25,000 to cover all leases of a single operator in
a state, and $150,000 to cover all leases of a single operator
nationwide. The bond amount for individual leases was set in 1960,
while the statewide and nationwide bond amounts were set in 1951.
For fiscal years 1988 through 2009, BLM spent about $3.8 million to
reclaim 295 orphaned wells in 10 states and has identified an
additional 144 orphaned wells in 7 states that need to be reclaimed,
according to BLM. The amount spent per reclamation project varied
greatly, from a high of $582,829 for a single well in Wyoming in
fiscal year 2008 to a low of $300 for 3 wells in Wyoming in fiscal
year 1994. BLM reclamation cost estimates were not available for all
of the wells it has yet to reclaim, but BLM field office officials
have completed reclamation cost estimates of approximately $1.7
million for 102 of the 144 orphaned wells.
The 12 western states (Alaska, Arizona, California, Colorado, Idaho,
Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming)
and other Interior agencies and offices have bonding approaches that
differ from BLM‘s oil and gas bonding requirements. The states
generally require higher bond amounts than the minimum amounts
established by BLM regulations for individual and statewide oil and
gas leases. Regulations governing the extraction or use of other
federally owned resources generally require bond amounts based on the
cost of reclamation or use minimum amounts that were established more
recently than the bond amounts for oil and gas.
GAO provided a draft of this report to the Department of Interior for
review and comment. The Department provided technical comments, which
were incorporated as appropriate.
Figure: Oil Wells on BLM Land Southwest of Ely, Nevada:
[Refer to PDF for image: photograph]
Source: Bureau of Land Management.
[End of figure]
View GAO-10-245 or key components. For more information, contact Anu
K. Mittal, (202) 512-3841 or mittala@gao.gov.
[End of section]
Contents:
Letter:
Background:
BLM Holds Nearly 4,000 Bonds, Valued at $162 Million, but Amounts Are
Based on Regulatory Minimums and Not on Full Reclamation Costs:
BLM Spent Nearly $4 Million to Reclaim 295 Orphaned Wells since Fiscal
Year 1988 and Has Identified Another 144 Orphaned Wells to Be
Reclaimed:
BLM Oil and Gas Bonding Requirements Differ from States' Requirements
and from Federal Bonding Requirements for Other Resources:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Information on BLM Held Oil and Gas Bonds:
Appendix III: Information on the Requirements the 12 Western States
Use for Oil and Gas Bonds:
Appendix IV: Bonding Requirements for the Extraction of Federally
Owned Resources, by Agency and Resource:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Number of Wells and Leases, by BLM State Office, as of
December 1, 2008:
Table 2: Number of Wells, BLM Expenditures to Reclaim Orphaned Wells,
and States Where Reclamation Occurred, Fiscal Years 1988-2009:
Table 3: Number of Wells and BLM Expenditures to Reclaim Orphaned
Wells, by State, Fiscal Years 1988-2009:
Table 4: Number of Orphaned Wells, Wells with a Reclamation Cost
Estimate, and Estimated Reclamation Costs, by State:
Table 5: Number of Orphaned Wells, Number of Wells with a Reclamation
Cost Estimate, the Estimated Reclamation Costs, and States where the
Wells Are Located, by Surface Management Agency:
Table 6: The 12 Western States' Bonding Requirements:
Table 7: Summary of Bonding Requirements for the Extraction of
Federally Owned Resources, by Agency:
Table 8: Number, Total Value, and Average Value of BLM Held Bonds, by
BLM State Office:
Table 9: Number of Surety and Personal Bonds, by BLM State Office:
Table 10: Value of Surety and Personal Bonds Administered by BLM State
Offices, by State:
Table 11: Number of Statewide, Nationwide, Individual, and Other Bonds
Administered by BLM State Offices, by State:
Table 12: Value of Statewide, Nationwide, Individual, and Other Bonds
Administered by BLM State Offices, by State:
Figures:
Figure 1: Boundaries of the 12 BLM State Offices:
Figure 2: Number of Wells and Value of Bonds, September 1988 to
September 2008:
Figure 3: Individual, Statewide, and Nationwide Current Bond Minimums
and Adjusted to 2009 Dollars:
Figure 4: Total Value of All Bond Categories, and Percentage of Total
Bond Value, as of December 1, 2008:
Abbreviations:
AFMSS: Automated Fluid Minerals Support System:
BLM: Bureau of Land Management:
FLPMA: Federal Land Policy and Management Act of 1976:
Interior: Department of the Interior:
MMS: Mineral Management Service:
NPR-A: National Petroleum Reserve, Alaska:
OSM: Office of Surface Mining Reclamation and Enforcement:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 27, 2010:
Congressional Requesters:
The Federal Land Policy and Management Act of 1976 (FLPMA), as
amended, directs the Secretary of the Interior to manage federal lands
for multiple uses, including recreation and mineral extraction, while
also taking any action required to prevent the "unnecessary or undue
degradation" of public land, including federal land that has been
leased for oil and gas operations. Over the past decade, the total
number of new wells drilled more than doubled, which has raised
concerns about the impact of these operations on federal land.
Operators are required to reclaim the leased land in the interest of
conservation of surface resources.[Footnote 1] Reclamation is intended
to return land disturbed by oil and gas operations to as close to its
original condition as is reasonably practical, including reshaping and
revegetating, removing structures, and plugging wells.
The Department of the Interior's (Interior) Bureau of Land Management
(BLM) is responsible for implementing FLPMA on BLM land. To carry out
this responsibility, BLM, among other things, requires oil and gas
operators to provide a bond to the agency before beginning certain
drilling operations under an oil and gas lease.[Footnote 2] These
bonds are intended to ensure that operators perform the required
reclamation, as well as the lease's other terms and conditions, such
as the payment of federal royalties. These bonds may be surety bonds,
a third-party guarantee that an operator purchases from a private
insurance company; or personal bonds accompanied by a financial
instrument, such as a cashier's check or negotiable Treasury security.
Having operators post bonds to help ensure reclamation after mineral
production has ceased is a common practice. The 12 western states
where most oil and gas production occurs also require bonds for oil
and gas wells on their lands.[Footnote 3] In addition, BLM and other
Interior agencies require bonds for the extraction of other resources,
such as gold and coal, which are located on federal land or owned by
the federal government.
Although all operators are required to complete reclamation, they do
not always do so. In these circumstances, BLM may use the bond to help
defray some of the cost of completing reclamation. If the bond is not
sufficient to cover well plugging and surface reclamation and there
are no responsible or liable parties, the well is considered
"orphaned." these cases, BLM uses appropriated funds to complete the
reclamation.
In this context, you asked us to study a range of issues concerning
BLM's bonding requirements and efforts to ensure that operators
reclaim their oil and gas operations. This report provides the results
of the first phase of our work.[Footnote 4] For this phase, we (1)
determined the number, value, and coverage of bonds held by BLM for
oil and gas operations;[Footnote 5] (2) determined the amount that BLM
has paid to reclaim orphaned wells over the past 20 years and the
number of orphaned wells BLM has identified but has not yet reclaimed;
and (3) compared BLM's bonding requirements for oil and gas operations
with the bonding requirements the 12 western states use for oil and
gas operations on state and private lands and other Interior agencies'
bonding requirements for other resources.
To address these objectives, we reviewed federal regulations and BLM
guidance on bonding for oil and gas leases. We discussed this guidance
and a broad range of issues related to how BLM oversees bonding for
oil and gas leases with bonding officials at BLM state offices and
field offices in Colorado and Wyoming, which have a large number of
oil and gas wells and administer bonds that account for a significant
amount of the value of BLM-held bonds. To determine the number of
bonds, their value, and coverage as of December 2008, we analyzed data
from BLM's Bonding and Surety System--an electronic system containing
bond information for oil and gas operations, as well as for other BLM
resource extraction programs. We also analyzed data from BLM's
Automated Fluid Minerals Support System (AFMSS)--a database that BLM
uses to track oil and gas information on public and Indian land. It
contains data on, among other things, lease ownership, and well
identification, location, and production. To assess the reliability of
the data we used from these systems, among other things, we
electronically tested all fields related to our analysis and met with
agency officials who administer the systems. We found that these data
were sufficiently reliable for the purpose of this report. For
orphaned wells, we obtained information from BLM for fiscal years 1998
through 2009 on the federal dollars paid to reclaim orphaned wells,
and the number of orphaned wells and estimated reclamation costs by
state. We also analyzed state oil and gas bonding regulations, as well
as federal bonding regulations for the extraction of other resources,
such as gold and coal, to compare these bonding regulations with BLM's
bonding regulations for onshore oil and gas operations. Appendix I
describes our scope and methodology in more detail.
We performed our work from January 2009 to January 2010 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence
to meet our stated objectives and to discuss any limitations in our
work. We believe that the information and data obtained, and the
analysis conducted, provide a reasonable basis for our findings.
Background:
BLM is responsible for managing, as of July 2008, approximately 700
million acres of subsurface mineral resources: 655.5 million of these
acres are not affected by oil and gas production and 44.5 million
acres are leased for oil and gas operations. Of these 44.5 million
acres, 11.7 million acres are in oil and gas producing status and
472,000 acres have surface disturbance related to oil and gas
production. To manage BLM programs and land, the agency maintains a
network of state offices, which generally conforms to the boundary of
one or more states. The state offices are Alaska, Arizona, California,
Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Wyoming,
and Eastern States. BLM has little land in the eastern half of the
United States, consequently, the Eastern States state office, in
Springfield, Virginia, is responsible for managing land in 31 states.
Figure 1 shows the boundaries of the 12 BLM state offices.
Figure 1: Boundaries of the 12 BLM State Offices:
[Refer to PDF for image: illustration]
The illustration is a map of the United States depicting state office
boundaries and state offices.
Alaska: Anchorage;
Arizona: Phoenix;
California: Sacramento;
Colorado: Denver;
Eastern States: Springfield, VA;
Idaho: Boise;
Montana: Billings;
Nevada: Reno;
New Mexico: Santa Fe;
Oregon: Portland;
Utah: Salt Lake City;
Wyoming: Cheyenne.
Sources: GAO analysis of BLM data; Map Resources (map).
[End of figure]
When operators drill oil and gas wells, they typically remove topsoil
from the well site and lay a well pad, where the drilling rig is
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 operations, and roads and access ways are often built to move
equipment to and from the wells. Generally, these activities can
degrade the environment in three ways:
* Air quality. Newly graded roads can produce dust, impairing air
quality and visibility in the immediate area and downwind. Nitrogen
oxides from diesel engines and compressors used at drilling sites can
also degrade air quality.
* Water quality. Water draining off newly graded surfaces and roads or
oil or water accidentally discharged during oil and gas production can
increase the amount of sediment, salt, and pollutants discharged into
rivers and streams, thereby degrading them. In addition, shallow
aquifers can be polluted if required protective measures are not in
place, and the production of methane gas from coal beds can deplete
shallow aquifers that serve as domestic water sources.[Footnote 6]
* Habitat. A high density of drilling and production equipment can, in
extreme situations, change the appearance of the landscape from a
natural setting to an industrial zone. In addition, the noises,
smells, and lights from trucks, drilling and construction equipment,
and production facilities can disturb wildlife and people living
nearby.
Under FLPMA, BLM must manage federal lands for multiple uses,
including recreation and mineral extraction, as well as for sustained
yield. To that end, FLPMA requires BLM to develop resource management
plans, known as land use plans. In developing its land use plans, BLM
determines, among other things, which parcels of land will be
available for oil and gas development. According to BLM officials,
parties interested in leasing federal minerals submit an Expression of
Interest or pre-sale offer on those lands they are interested in
leasing. These are then reviewed and if the lands are eligible to be
leased, are placed up for competitive oil and gas lease sale. Leases
can vary in size reaching 2,560 acres for lands in the lower 48 states
and 5,760 acres for lands in Alaska.
Operators that have obtained a lease must submit an application for a
permit to drill to BLM before beginning to prepare land or drilling
any new oil or gas wells. The complete permit application package is a
lengthy and detailed set of forms and documents, which, among other
things, must include proof of bond coverage and a surface use plan of
operations; this surface use plan must include a reclamation plan that
details the steps operators propose to take to reclaim the site.
However, operators generally do not have to submit cost estimates for
completing the reclamation.
The Mineral Leasing Act of 1920, as amended, requires that federal
regulations ensure that an adequate bond or surety is established
before operators begin to prepare land for drilling. The bond is
intended to ensure complete and timely reclamation. Accordingly,
federal regulations require the operator to submit a surety or
personal bond to BLM, which is intended to ensure compliance with all
of the lease's terms and conditions, including reclamation
requirements. Surety bonds are a third-party guarantee that an
operator purchases from a private insurance company approved by the
Department of the Treasury, and personal bonds must be accompanied by
one of the following five financial instruments:
* certificates of deposit issued by a financial institution whose
deposits are federally insured;
* cashier's checks;
* certified checks;
* negotiable Treasury securities, including U.S. Treasury notes or
bonds, with conveyance to the Secretary of the Interior to sell the
security in case of default in the performance of the lease's terms
and conditions; and:
* irrevocable letters of credit that are issued for a specific term by
a financial institution whose deposits are federally insured, and meet
certain conditions.
In reviewing the application for a permit to drill, BLM (1) evaluates
the operator's proposal to ensure that the proposed drilling plan
conforms to the land use plan and applicable laws and regulations and
(2) inspects the proposed drilling site to determine if additional
site-specific conditions must be addressed before the operator can
begin drilling. After BLM approves a drilling permit, the operator can
drill the well and commence production.[Footnote 7]
After drilling the well, the operator may perform interim reclamation--
the practice of reclaiming surfaces that were disturbed to prepare a
well for drilling but that are no longer needed. For example,
operators may need a 10-acre drill pad to safely drill a series of
wells. However, once the wells are drilled, operators may only need 4
acres to safely service the wells over their lifetime. In this case,
the operator could reseed and regrade the 6 acres of the initial pad
that are no longer needed. While BLM does not generally require
interim reclamation in all permits it issues, it may decide to add
interim reclamation as a requirement in drilling permits for specific
oil and gas developments.
Final reclamation occurs when an operator determines, and BLM agrees,
that a well has no economic value. The terms of final reclamation are
included in the lease and the drilling permit.[Footnote 8] The
operator must follow the agreed-upon final reclamation plan, including
plugging the wells, removing all visual evidence of the well and drill
pad, recontouring the affected land, and revegetating the site with
native plant species. In general, the goal is to reclaim the well site
so that it matches the surrounding natural environment to the extent
possible. BLM then inspects the site to monitor the success of the
reclamation, a process that typically takes several years. Once BLM
determines that reclamation efforts have been successful, it approves
a Final Abandonment Notice.[Footnote 9]
However, in some circumstances, the operator may delay performing
reclamation and instead allow the well to remain idle for various
reasons. For example, expected higher oil and gas prices may once
again make the well economically viable to operate, or the operator
may decide to use the well for enhanced recovery operations, for
example using the well to inject water into the oil reservoir and push
any remaining oil to operating wells.
Under BLM policy, the agency must periodically review the status of
these idle wells to ensure that the operator has legitimate reasons
for allowing the wells to remain idle. According to BLM officials, the
primary purpose of idle-well reviews is to ensure that these wells do
not become orphaned--that is, they lack a bond sufficient to cover
reclamation costs and there are no responsible or liable parties to
perform reclamation.
States have adopted laws and regulations governing oil and gas
development on state and private lands, including bond and reclamation
requirements. In addition, other Interior programs and offices that
are responsible for managing the extraction of other federally owned
resources have bond and reclamation requirements. Specifically, those
programs and offices are:
* BLM Geothermal Resource Leasing. BLM issues leases for the
development of geothermal resources on federal lands; these resources
are used to develop electricity by capturing the geothermal heat
generated in the earth's core.
* BLM Hardrock Minerals Claims. BLM oversees the process for staking
claims and extracting hardrock minerals on the lands it manages. These
minerals are also referred to as locatable minerals and include gold,
silver, and copper, among others.
* BLM Mineral Materials Sales. BLM oversees the sale of these
minerals, such as sand and gravel, from federal lands. These minerals
are also sometimes referred to as salable minerals.
* BLM Solid Minerals Leasing. BLM issues leases for the extraction of
these minerals on federal lands; solid minerals are minerals other
than coal and oil shale, and include silicates, potash, and phosphate.
Solid minerals are also sometimes referred to as leasable minerals.
* Minerals Management Service (MMS) Offshore Oil and Gas Leasing. MMS
issues leases to develop offshore oil and gas resources in the Gulf of
Mexico, off the Atlantic coast, and off the Pacific coast states of
California, Oregon, Washington, and Hawaii.
* Office of Surface Mining Reclamation and Enforcement (OSM) Coal
Leasing. OSM regulates the surface mining of coal. States can choose
to develop their own programs to regulate surface mining if that
program is in accordance with federal law and approved by OSM. OSM is
charged with enforcing states' adherence to their approved programs or
implementing a federal program if the state fails to submit,
implement, or enforce its program.[Footnote 10]
BLM Holds Nearly 4,000 Bonds, Valued at $162 Million, but Amounts Are
Based on Regulatory Minimums and Not on Full Reclamation Costs:
As of December 2008, oil and gas operators had provided 3,879 surety
and personal bonds, valued at approximately $162 million, to ensure
compliance with all lease terms and conditions for 88,357 wells,
according to our analysis of BLM data. BLM officials told us that the
bond amounts are generally not based on the full reclamation costs for
a site that would be incurred by the government if an operator were to
fail to complete the required reclamation. Rather, the bond amounts
are based on regulatory minimums intended to ensure that the operator
complies with all the terms of the lease, including paying royalties
and conducting reclamation.
BLM Holds $162 Million in Surety and Personal Bonds for 88,357 Wells:
As of December 1, 2008, the 88,357 oil and gas wells were covered by
16,809 leases,[Footnote 11] with 70 percent of all wells located in
New Mexico and Wyoming. Cumulatively, Wyoming and New Mexico have more
than four times as many wells as the total number of wells in Utah and
California, which are the states with the third and fourth most wells
at 7,388 and 7,215, respectively. Table 1 shows the number of oil and
gas wells and leases located in the nine BLM state offices.
Table 1: Number of Wells and Leases, by BLM State Office, as of
December 1, 2008:
BLM State Office: New Mexico;
Number of wells: 31,184;
Number of leases: 5,664.
BLM State Office: Wyoming;
Number of wells: 30,451;
Number of leases: 6,005.
BLM State Office: Utah;
Number of wells: 7,388;
Number of leases: 1,274.
BLM State Office: California;
Number of wells: 7,215;
Number of leases: 308.
BLM State Office: Colorado;
Number of wells: 5,809;
Number of leases: 1,382.
BLM State Office: Montana;
Number of wells: 3,875;
Number of leases: 1,363.
BLM State Office: Eastern states;
Number of wells: 2,122;
Number of leases: 728.
BLM State Office: Alaska;
Number of wells: 176;
Number of leases: 33.
BLM State Office: Nevada;
Number of wells: 137;
Number of leases: 52.
BLM State Office: Total;
Number of wells: 88,357;
Number of leases: 16,809.
Source: GAO analysis of BLM data.
[End of table]
According to our analysis of BLM's data, as of December 1, 2008, oil
and gas operators had 3,879 bonds valued at approximately $162 million
to ensure compliance with lease terms and conditions for 88,357 wells
on federal land. Fifty-two percent of these bonds--2,086--were surety
bonds valued at approximately $84 million, and 48 percent--1,793--were
personal bonds valued at almost $78 million.
The number of wells and the value of bonds held by BLM have increased
over the past 20 years. The value of bonds increased from
approximately $69 million as of September 30, 1988, to approximately
$164 million as of September 30, 2008, as the number of wells
increased from almost 50,000 to more than 85,000.[Footnote 12] As
figure 2 shows, this increase in the number of wells occurred
primarily in the last decade.
Figure 2: Number of Wells and Value of Bonds, September 1988 to
September 2008:
[Refer to PDF for image: combination vertical bar and line graph]
Date: 9/30/1988;
Number of wells: 49,081;
Value of bonds: $20.0 million.
Date: 9/30/1993;
Number of wells: 53,647;
Value of bonds: $54.4 million.
Date: 9/30/1998;
Number of wells: 65,104;
Value of bonds: $69.8 million.
Date: 9/30/2003;
Number of wells: 65,389;
Value of bonds: $100.9 million.
Date: 9/30/2008;
Number of wells: 85,330;
Value of bonds: $161.0 million.
Source: GAO analysis of BLM data.
Notes:
Total bond values and the number of wells are provided as of the end
of the fiscal year.
Value of bonds are presented in current year dollars.
[End of figure]
Minimum Bond Amounts Were Last Set in the 1950s and 1960s to Ensure
Operators Meet Legal Requirements, including Reclamation:
The Mineral Leasing Act of 1920, as amended, requires that federal
regulations ensure that an adequate bond or surety is established that
ensures complete and timely reclamation. Under BLM regulations, bonds
are conditioned upon compliance with all of the terms and conditions
of the lease, including but not limited to, paying royalties, plugging
wells, reclaiming disturbed land, and cleaning up abandoned
operations. To ensure operators meet legal requirements, including
reclamation, BLM regulations require them to have one of the following
types of coverage:
* individual lease bonds, which are to cover all wells an operator
drills under one lease;[Footnote 13]
* statewide bonds, which are to cover all of an operator's leases in
one state;[Footnote 14]
* nationwide bonds, which are to cover all of an operator's leases in
the United States;[Footnote 15] and:
* other bonds, which include both unit operator bonds that cover all
operations conducted on leases within a specific unit agreement,
[Footnote 16] and bonds for leases in the National Petroleum Reserve
in Alaska (NPR-A).[Footnote 17]
BLM regulations establish a minimum bond amount in order to ensure
compliance with all legal requirements and also authorize or require
BLM to increase the bond amount in certain circumstances. These
minimum bond amounts were set in the 1950s and 1960s and have not been
updated. Specifically, the bond minimum of $10,000 for individual
bonds was last set in 1960, and the bond minimums for statewide bonds--
$25,000--and for nationwide bonds--$150,000--were last set in 1951. 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. Figure 3 shows the current amounts set in 1951 and
1960 and what these amounts would be if adjusted to 2009 dollars.
Figure 3: Individual, Statewide, and Nationwide Current Bond Minimums
and Adjusted to 2009 Dollars:
[Refer to PDF for image: vertical bar graph]
Bond: Individual bond;
Bond minimum: $10,000;
Bond minimum in 2009 dollars: $59,360.
Bond: Statewide bond;
Bond minimum: $25,000;
Bond minimum in 2009 dollars: $176,727.
Bond: Nationwide bond;
Bond minimum: $150,000;
Bond minimum in 2009 dollars: $1,060,364.
Source: GAO analysis of BLM data.
[End of figure]
Of the three primary bond categories--individual, statewide, and
nationwide--statewide bonds accounted for most of the bonds covering
oil and gas wells. Figure 4 shows the value and percentage
distribution of the bonds by type.
Figure 4: Total Value of All Bond Categories, and Percentage of Total
Bond Value, as of December 1, 2008:
[Refer to PDF for image: pie-chart]
Statewide: $130,219,752: 80%;
Individual: $12,457,838: 8%;
Nationwide: $10,231,650: 6%;
Other[A]: $9,406,169: 6%.
Source: GAO analysis of BLM data.
[A] Includes unit and NPR-A bonds.
[End of figure]
Appendix II provides more detailed information on the number and value
of BLM-held bonds by state.
While BLM regulations set minimum amounts for bonds, they also require
bonds in an increased amount in certain circumstances and authorize
BLM to require an increased bond amount when the operator poses a risk
due to certain factors. First, when an operator who has failed to plug
a well or reclaim lands in a timely manner that resulted in BLM making
a demand on a bond in the prior 5 years applies for a new permit to
drill, BLM must require a bond in an amount equal to the BLM cost
estimate for plugging the well and reclaiming the disturbed area if
the cost estimate is higher than the regulatory minimum.[Footnote 18]
Second, BLM officials may require an increase in the amount of any
bond when the operator poses a risk due to factors that include, but
are not limited to, a history of previous violations, a notice from
MMS that there are uncollected royalties due, or the fact that the
total cost of plugging existing wells and reclaiming lands exceeds the
present bond amount based on BLM estimates.[Footnote 19]
BLM Spent Nearly $4 Million to Reclaim 295 Orphaned Wells since Fiscal
Year 1988 and Has Identified Another 144 Orphaned Wells to Be
Reclaimed:
According to BLM data, the agency spent about $3.8 million to reclaim
295 orphaned wells in 10 states from fiscal years 1988 through 2009.
The 10 states where orphaned wells were reclaimed include California,
Colorado, Montana, New Mexico, North Dakota, Oklahoma, Ohio, Utah,
West Virginia, and Wyoming. Some of these states, such as Ohio and
West Virginia, do not currently produce high volumes of oil and gas
compared with other states in the West, although they did in the late
1800s and early 1900s. Although reclamation costs averaged $12,788 per
well, the amount spent to reclaim wells varied by reclamation project,
state, and fiscal year. For example:
* Cost per project. The amount spent per reclamation project varied
from a high of $582,829 for a single well in Wyoming in fiscal year
2008, to a low of $300 for three wells in Wyoming in fiscal year 1994.
These variations are due to differences in the amount of surface and
subsurface disturbance and the amount of effort required to reclaim
these wells.
* Number of wells and spending by state. The number of wells reclaimed
and the amount spent in each state also varied considerably.
California had the most orphaned wells reclaimed--140 of the 295 wells
reclaimed, or about 47 percent--while Colorado and West Virginia had
the fewest, each with 1 reclaimed well. However, over one-third of the
amount spent to reclaim orphaned wells--about $1.3 million--went
toward reclaiming 44 wells in Wyoming.
* Amount spent per year. In the fiscal years that BLM spent funds to
reclaim orphaned wells, the amount spent in each fiscal year varied
from a high of $632,829 to reclaim two wells in 2008, to a low of
$24,962 to reclaim a single well in Ohio in fiscal year 2001. BLM had
no expenditures to reclaim orphaned wells in fiscal years 1989 through
1991, 1996 through 1998, or in 2005. BLM officials explained that
orphaned wells were not reclaimed in those years because the decision
to do so is left to the discretion of BLM state office officials.
Further, there is no dedicated budget line item to fund orphaned well
reclamation; instead, it is dependent on whatever funds are available
from BLM state offices and the BLM Washington office.
Table 2 provides a summary of the number of wells reclaimed, the
expenditures per year, and the states where reclamation occurred by
year; table 3 shows the number of wells reclaimed and expenditures by
state.
Table 2: Number of Wells, BLM Expenditures to Reclaim Orphaned Wells,
and States Where Reclamation Occurred, Fiscal Years 1988-2009:
Fiscal year: 1988;
Wells: 1;
BLM expenditures: $475,279;
State where reclamation occurred: North Dakota.
Fiscal year: 1989;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1990;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1991;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1992;
Wells: 23;
BLM expenditures: $565,807;
State where reclamation occurred: California, Montana, New Mexico,
Utah, Wyoming.
Fiscal year: 1993;
Wells: 26;
BLM expenditures: $445,253;
State where reclamation occurred: California, Colorado, Montana, North
Dakota, Oklahoma, Wyoming.
Fiscal year: 1994;
Wells: 74;
BLM expenditures: $233,223;
State where reclamation occurred: California, New Mexico, Utah,
Wyoming.
Fiscal year: 1995;
Wells: 22;
BLM expenditures: $386,033;
State where reclamation occurred: California, Montana, Ohio.
Fiscal year: 1996;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1997;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1998;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 1999;
Wells: 15;
BLM expenditures: $110,516;
State where reclamation occurred: Ohio, Wyoming.
Fiscal year: 2000;
Wells: 1;
BLM expenditures: $80,987;
State where reclamation occurred: Utah.
Fiscal year: 2001;
Wells: 1;
BLM expenditures: $24,962;
State where reclamation occurred: Ohio.
Fiscal year: 2002;
Wells: 16;
BLM expenditures: $106,758;
State where reclamation occurred: California.
Fiscal year: 2003;
Wells: 104;
BLM expenditures: $250,080;
State where reclamation occurred: California, Ohio.
Fiscal year: 2004;
Wells: 3;
BLM expenditures: $48,000;
State where reclamation occurred: Ohio, Utah.
Fiscal year: 2005;
Wells: 0;
BLM expenditures: 0;
State where reclamation occurred: [Empty].
Fiscal year: 2006;
Wells: 2;
BLM expenditures: $259,378;
State where reclamation occurred: Ohio, West Virginia.
Fiscal year: 2007;
Wells: 2;
BLM expenditures: $27,000;
State where reclamation occurred: Wyoming.
Fiscal year: 2008;
Wells: 2;
BLM expenditures: $632,829;
State where reclamation occurred: Utah, Wyoming.
Fiscal year: 2009;
Wells: 3;
BLM expenditures: $126,583;
State where reclamation occurred: Wyoming.
Fiscal year: Total;
Wells: 295;
BLM expenditures: $3,772,688;
State where reclamation occurred: [Empty].
Source: GAO analysis of BLM data.
[End of table]
Table 3: Number of Wells and BLM Expenditures to Reclaim Orphaned
Wells, by State, Fiscal Years 1988-2009:
State: California;
Wells: 140;
BLM expenditures: $624,813.
State: Colorado;
Wells: 1;
BLM expenditures: $8,746.
State: Montana;
Wells: 15;
BLM expenditures: $451,994.
State: New Mexico;
Wells: 14;
BLM expenditures: $93,230.
State: North Dakota;
Wells: 2;
BLM expenditures: $497,852.
State: Ohio;
Wells: 19;
BLM expenditures: $225,168.
State: Oklahoma;
Wells: 3;
BLM expenditures: $18,660.
State: Utah;
Wells: 56;
BLM expenditures: $351,987.
State: West Virginia;
Wells: 1;
BLM expenditures: $211,218.
State: Wyoming;
Wells: 44;
BLM expenditures: $1,289,020.
State: Total;
Wells: 295;
BLM expenditures: $3,772,688.
Source: GAO analysis of BLM data.
[End of table]
BLM has identified an additional 144 orphaned wells on BLM and other
federal land that need to be reclaimed in seven states. Although BLM
reclamation estimates were not available for all of these wells,
officials in BLM field offices have completed reclamation cost
estimates for 102 of the 144 wells, for a total estimated cost of
$1,683,490. More than half of these wells for which BLM has estimated
costs are in Oklahoma--the state with the highest concentration of
orphaned wells. The estimated reclamation costs in each state differ
substantially--from an average cost per well in Wyoming of $93,641 to
a low of $9,100 in Arizona. These differences are due to such factors
as well age, well depth, the amount of surface disturbance, and costs
for materials and labor. Table 4 shows the orphaned wells and the
estimated reclamation costs by state; table 5 shows the wells by
surface management agency.
Table 4: Number of Orphaned Wells, Wells with a Reclamation Cost
Estimate, and Estimated Reclamation Costs, by State:
State: Arizona;
Wells: 4;
Number of wells with a reclamation cost estimate: 4;
Total estimated reclamation costs: $36,400.
State: California;
Wells: 25;
Number of wells with a reclamation cost estimate: 23;
Total estimated reclamation costs: $380,000.
State: New Mexico;
Wells: 34;
Number of wells with a reclamation cost estimate: 8;
Total estimated reclamation costs: $127,900.
State: Ohio;
Wells: 9;
Number of wells with a reclamation cost estimate: 8;
Total estimated reclamation costs: $154,530.
State: Oklahoma;
Wells: 54;
Number of wells with a reclamation cost estimate: 54;
Total estimated reclamation costs: $516,455.
State: Utah;
Wells: 13;
Number of wells with a reclamation cost estimate: 0;
Total estimated reclamation costs: Unknown.
State: Wyoming;
Wells: 5;
Number of wells with a reclamation cost estimate: 5;
Total estimated reclamation costs: $468,205.
State: Total;
Wells: 144;
Number of wells with a reclamation cost estimate: 102;
Total estimated reclamation costs: $1,683,490.
Source: GAO analysis of BLM data.
[End of table]
Table 5: Number of Orphaned Wells, Number of Wells with a Reclamation
Cost Estimate, the Estimated Reclamation Costs, and States where the
Wells Are Located, by Surface Management Agency:
Surface management agency: BLM[A];
Wells: 134;
Number of wells with a reclamation cost estimate: 93;
Total estimated reclamation costs: $1,468,960;
States: Arizona, California, New Mexico, Oklahoma, Utah, Wyoming.
Surface management agency: National Park Service;
Wells: 7;
Number of wells with a reclamation cost estimate: 7;
Total estimated reclamation costs: $147,030;
States: Ohio.
Surface management agency: Forest Service;
Wells: 3;
Number of wells with a reclamation cost estimate: 2;
Total estimated reclamation costs: $67,500;
States: California, Ohio.
Surface management agency: Total;
Wells: 144;
Number of wells with a reclamation cost estimate: 102;
Total estimated reclamation costs: $1,683,490.
Source: GAO analysis of BLM data.
[A] Includes split estate lands.
[End of table]
In addition, BLM is responsible for reclaiming 67 wells in Alaska that
are commonly referred to as legacy wells. Unlike orphaned wells, which
were drilled by private-sector operators, legacy wells were drilled by
the U.S. Navy and the U.S. Geological Survey from the early 1900s to
1981 on what was then the Naval Petroleum Reserve No. 4--a 23-million-
acre roadless area 200 miles north of the Arctic Circle. The wells
were drilled to evaluate the mineral potential of the area and to test
arctic oil and gas exploration and engineering practices. In 1976, the
reserve was renamed the National Petroleum Reserve-Alaska (NPR-A) and
its administration was transferred to BLM--including responsibility
for reclaiming those wells drilled prior to the transfer. Because of
the remote location and difficult weather conditions in the NPR-A,
mobilizing equipment and personnel to perform reclamation can be
unusually expensive. For example, BLM estimates that reclaiming one
well--known as Drew Point #1--will cost $23.6 million, owing in part
to the well's close proximity--less than 500 feet--to the Arctic
Ocean, which is eroding the shore nearby. Although estimates are not
available for reclaiming all 67 of these legacy wells, BLM estimated
in 2004 that reclaiming 37 high-priority legacy wells would exceed $40
million.[Footnote 20]
BLM Oil and Gas Bonding Requirements Differ from States' Requirements
and from Federal Bonding Requirements for Other Resources:
Like BLM, states have bonding requirements for oil and gas operations.
[Footnote 21] However, in most states, bond amounts reflect some of
the well's characteristics and are generally higher than BLM's minimum
amounts. The states with regulatory minimum bond amounts not based on
well characteristics generally have minimum amounts higher than BLM's
minimum amounts. In addition, federal regulations for other resources
generally require the bonds to reflect the cost of reclamation or have
minimum bond amounts that have been more recently established.
States Have Different Approaches for Determining Bonding Amounts and
Generally Require Bond Amounts Equal to or Higher Than Those of BLM:
The 12 western states have bonding requirements for oil and gas
operations that differ in their approach from BLM's onshore oil and
gas bonding requirements. The states use bonds that cover either all
wells in the state (similar to BLM's statewide bond but referred to as
statewide blanket bonds), multiple wells in the states (referred to as
blanket bonds), or an individual well. Regarding the amount of bond
required, the 12 western states generally either use a minimum bond
amount established by regulation regardless of the well's
characteristics or determine bond amounts based either on the depth of
the well(s) or on the total number of wells covered by the bond. The
latter approach is often more complex than the regulatory minimum
requirements and triggers increases in bond amounts when certain
additional factors come into play. For example:
* For individual wells, Wyoming determines bond amounts based on well
depth. If the well is less than 2,000 feet deep, the state requires a
bond of at least $10,000, and if the well is 2,000 feet or deeper, the
state requires a bond of at least $20,000. For statewide bonds, the
minimum bond amount is $75,000. However, Wyoming may require an
additional bond, currently in the amount of $10 per foot of well
depth, when a well is not producing, injecting, or disposing after an
operator's total footage of idle wells reaches a certain
threshold.[Footnote 22] Finally, the amount of this additional bond
will increase every 3 years in accordance with the percentage change
in Wyoming consumer price index.
* For statewide bonds, California uses an approach that considers the
number of wells and imposes an additional requirement on operators
with idle wells. If an operator has 50 or fewer wells, then the bond
amount is set at $100,000; if an operator has more than 50 wells
exclusive of properly abandoned wells, the bond amount is set at
$250,000. In addition to these bond amounts, operators must either (1)
pay an annual fee for each idle well, (2) establish an escrow account
of $5,000 for each idle well, (3) provide a $5,000 bond per idle well,
or (4) have filed a management and elimination plan for all long-term
idle wells. In lieu of complying with this requirement for idle wells,
operators can post a $1 million statewide bond.
In contrast, BLM's method for deciding when and how much to increase
the minimum bond amount is not automatic, unless the operator has
previously failed to plug a well or reclaim lands; rather, it is based
on the judgment of field and state office officials.
Table 6 shows the 12 western states' bonding requirements.
Table 6: The 12 Western States' Bonding Requirements:
State: Alaska: Individual well bond;
Approach for determining the bond amount: Minimum amount[A].
State: Alaska: Statewide bond;
Approach for determining the bond amount: Minimum amount.
State: Arizona: Individual well bond;
Approach for determining the bond amount: Based on well depth.
State: Arizona: Blanket bond;
Approach for determining the bond amount: Based on number of wells.
State: California: Individual well bond;
Approach for determining the bond amount: Based on well depth.
State: California: Statewide bond;
Approach for determining the bond amount: Based on number of wells[B].
State: Colorado: Individual well bond;
Approach for determining the bond amount: Based on well depth[C].
State: Colorado: Statewide bond;
Approach for determining the bond amount: Based on number of wells:
[C].
State: Idaho: Individual well bond;
Approach for determining the bond amount: Minimum amount.
State: State: Idaho: Statewide bond;
Approach for determining the bond amount: Minimum amount.
State: Montana: Individual well bond;
Approach for determining the bond amount: Based on well depth[C].
State: Montana: Blanket bond;
Approach for determining the bond amount: Minimum amount[D].
State: Nevada: Individual well bond;
Approach for determining the bond amount: Minimum amount.
State: Nevada: Statewide bond;
Approach for determining the bond amount: Minimum amount.
State: New Mexico: Individual well bond;
Approach for determining the bond amount: Based on well depth.
State: New Mexico: Statewide bond;
Approach for determining the bond amount: Minimum amount[E].
State: Oregon: Individual well bond;
Approach for determining the bond amount: Based on well depth.
State: Oregon: Blanket bond;
Approach for determining the bond amount: Based on well depth.
State: Utah: Individual well bond;
Approach for determining the bond amount: Based on well depth[F].
State: Utah: Statewide bond;
Approach for determining the bond amount: Based on well depth[F].
State: Washington: Individual well bond;
Approach for determining the bond amount: Minimum amount.
State: Washington: Statewide bond;
Approach for determining the bond amount: Minimum amount.
State: Wyoming: Individual well bond;
Approach for determining the bond amount: Based on well depth.
State: Wyoming: Statewide bond;
Approach for determining the bond amount: Minimum amount.
Total: Individual well bond;
Approach for determining the bond amount: Minimum amount: 4;
Approach for determining the bond amount: Based on well depth: 8;
Approach for determining the bond amount: Based on number of wells: 0.
Total: Blanket or statewide bond;
Approach for determining the bond amount: Minimum amount: 7;
Approach for determining the bond amount: Based on well depth: 2;
Approach for determining the bond amount: Based on number of wells: 3.
Source: GAO analysis of state laws and regulations.
[A] State regulators are authorized to allow bond coverage in a lesser
amount for a specific well under certain circumstances.
[B] Bond amounts are based in part on the number of wells covered by
the bond.
[C] State regulations establish bond amounts but authorize regulators
to increase that amount under certain circumstances.
[D] State regulations set the bond amount at $50,000 but authorize an
increase to $100,000 when the factual situation warrants it. In
addition, the state Board of Oil and Gas Conservation can limit the
number of wells covered by a blanket bond.
[E] Under state law, statewide bonds cannot exceed $50,000, which is
the amount specified in the regulation.
[F] State regulations establish minimum bond amount based on well
depth but authorize regulators to allow bond coverage in a lesser
amount for a specific well under certain circumstances and greater
amounts when the regulatory minimum amount will be insufficient to
cover the costs of plugging the well and restoring the well site.
[End of table]
The 12 western states generally require bond amounts that are at least
equal to or higher than the minimum amount BLM requires for its
individual lease and statewide bonds, or determine the bond amount
based on well depth or number of wells covered by the bond. For
example:
* The 4 states that require minimum bond amounts for individual wells
regardless of well depth--Alaska, Idaho, Nevada, and Washington--set
minimum bond amounts at $100,000, $10,000, $10,000, and $50,000 per
well, respectively. Because these bond amounts are required for each
well, in most circumstances they are generally higher than BLM's
minimum amount of $10,000 for individual lease bonds since most BLM
leases have more than one well.
* The 7 states whose regulations establish a bond amount or minimum
bond amount for statewide or blanket bonds regardless of a well's
characteristics--Alaska, Idaho, Montana, Nevada, New Mexico,
Washington, and Wyoming--have amounts that range from a high of
$250,000 in Washington to low of $25,000 in Idaho.
* All states except Alaska, Idaho, Nevada, and Washington determine
the amount of individual well bonds based, at least in part, on well
depth. Three of the 9 states whose regulations provide for statewide
bonds--California, Colorado, Utah--also determine the amount based on
well depth or the number of wells covered by the bond.[Footnote 23]
Because of the nature of these approaches, it is difficult to compare
them with BLM's bonding requirements to determine which would result
in the higher bond amount. However, these approaches are generally
more sophisticated than minimum requirements in that they associate
the bond amount with the amount of drilling, which may reduce the
potential liability to the states in cases where the operator fails to
perform the necessary reclamation.
See appendix III for detailed information on the bonding requirements
in each of the 12 western states.
Federal Regulations for Other Resources Generally Require Bond Amounts
That Cover Reclamation Costs or the Minimum Bond Amounts Have Been
More Recently Set:
Regulations governing the extraction of other resources owned by the
federal government generally require (1) bond amounts that consider
the cost of reclamation, which reduces the government's potential
liability for reclamation costs; or (2) use minimum amounts that were
established more recently than the amounts for BLM oil and gas bonds.
First, bonding requirements for the extraction of coal and hardrock
minerals--such as gold, silver, and copper--require operators to post
bonds that cover the full estimated cost of reclamation. These
requirements reduce the potential reclamation liability to the federal
government should the operations fail to perform the necessary
reclamation.
Second, for the remaining types of federally owned resources, minimum
bond amounts are established by regulation. These regulations are
similar to BLM's regulations; however, these regulatory minimum
amounts generally have all been established or updated since BLM
established its current regulatory minimums for oil and gas leases in
1951 for statewide and nationwide bonds, and in 1960 for individual
lease bonds. Table 7 provides a summary of the type and amount of
bonds required for the extraction or use of federally owned resources.
Additional detail on the structure, amount, and types of bonds
permitted is contained in appendix IV.
Table 7: Summary of Bonding Requirements for the Extraction of
Federally Owned Resources, by Agency:
Agency and program: BLM Geothermal Resource Leasing;
Type and amount: Minimum amounts established by regulation:[A];
Drilling Operations (established in 1973):
* Single lease: $10,000;
* Statewide: $50,000;
* Nationwide: $150,000;
Utilization Operations (such as electricity generation):
* Electrical Generation Facility: $100,000 (established in 1979);
Direct Use Facility: BLM will specify amount.
Agency and program: BLM Hardrock Minerals (also known as locatable
minerals--includes minerals such as gold, silver, and copper);
Type and amount: Regulations promulgated in 2000 established that the
bond amount will be based on the estimated costs as if BLM were to
contract with a third party to reclaim the operations according to the
reclamation plan.
Agency and program: BLM Mineral Materials (also known as salable
minerals--includes materials such as sand and gravel);
Type and amount: Bond amount based on sales contract amount:
* No bond is required if contract utilizes a community pit or common
use area and party pays a reclamation fee. (Established in 1983);
* For contracts of $2,000 or more, BLM will establish bond amount to
ensure it is sufficient to meet the contract's reclamation standards.
However, the amount must be at least $500. (Established in 2001);
* For contracts of less than $2,000, BLM may require a bond. If BLM
requires a bond it cannot exceed an amount greater than 20 percent of
the total contract value. (Established in 1983)[B].
Agency and program: BLM Solid Minerals (other than coal and oil shale,
also known as leasable minerals--includes minerals such as silicates,
potash, and sulfur);
Type and amount: Minimum amounts established by regulation:
* Individual lease: $5,000 (established in 1949 for phosphate, in 1954
for potassium and sodium, 1956 for sulfur, and in 1984 for all other
solid minerals other than coal and oil shale, such as vein type solid
hydrocarbons);
* Statewide (for a specific mineral): $25,000 (established in 1967 for
most solid minerals other than coal and oil shale and extended to all
solid minerals other than coal and oil shale in 1984);
* Nationwide (for a specific mineral): $75,000 (established in 1984).
Agency and program: MMS Offshore Oil and Gas Leasing;
Type and amount: Minimum amounts, determined by the stage of
development/activity, established by regulation:
General Lease Bond (established in 1969)[C]:
* Individual lease: $50,000;
* Areawide:[D] $300,000;
Lease Exploration Bond (established in 1993):
* Individual lease: $200,000;
* Areawide:[D] $1 million;
Development and Production Activities Bond (established in 1993):
* Individual lease: $500,000;
* Areawide:[D] $3 million.
Agency and program: OSM Coal Leasing[E];
Type and amount: Bond amount based on, but not limited to, the
estimated reclamation costs submitted by the operator or owner and
reflects the probable difficulty of reclamation. The amount of the
bond must be sufficient to assure the completion of the reclamation
plan if the work has to be performed by the regulatory authority. The
regulatory authority must adjust the bond amount from time to time as
the area requiring bond coverage is increased or decreased or where
the cost of future reclamation changes;
OSM regulations were promulgated in 1983.
Source: GAO analysis of federal regulations.
[A] BLM is authorized to increase the bond amount under certain
circumstances, including when the amount will not cover the estimated
reclamation cost.
[B] Prior to 1983, BLM regulations authorized a bond amount for
contracts less than $2,000 but did not impose a maximum bond amount.
[C] A general lease bond does not have to be posted if a lease
exploration or development and production activities bond is posted.
The latter categories of bonds were established in 1993 because the
level of the general lease bond coverage could no longer provide
assurance of safety and effective protection to the environment.
[D] Areawide bonds cover an operator's or owner's leases in one of
three areas: (1) the Gulf of Mexico and the area off the Atlantic
coast; (2) the area offshore the Pacific Coast states of California,
Oregon, Washington, and Hawaii; and (3) the area off the shore of
Alaska.
[E] Under the Surface Mining Control and Reclamation Act of 1977, OSM
regulates surface coal mining, however, the act also allows states to
develop their own regulatory program if those programs are in
accordance with the act's requirements and approved by OSM. States
with an approved state program and that meet other qualifications can
enter into a cooperative agreement with the Secretary of the Interior
to enforce the state's program on federal lands within the state. In
these cooperative agreements, OSM delegates responsibility for the
establishment and release of bonds required for surface coal mining
and reclamation operations on federal lands to the state regulatory
authority, although OSM must concur in the release. In addition to
this bond required by OSM or the approved state regulatory authority,
BLM will not issue a coal lease until the prospective lessee has
posted a bond. However, these lease bonds do not cover reclamation
unless the state in which the mining will occur does not have a
cooperative agreement with the Secretary.
[End of table]
Agency Comments and Our Evaluation:
GAO provided Interior with a draft of this report for its review and
comment. Interior provided technical comments, which we incorporated
as appropriate.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies to interested
congressional committees; the Secretary of the Interior; and the
Director of the Bureau of Land Management. The report also is
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-3841 or mittala@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 major
contributions to this report are listed in appendix V.
Signed by:
Anu K. Mittal:
Director, Natural Resources and Environment:
List of Requesters:
The Honorable Jeff Bingaman:
Chairman:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Nick Rahall:
Chairman:
Committee on Natural Resources:
House of Representatives:
The Honorable Jim Costa:
Chairman:
Subcommittee on Energy and Mineral Resources:
Committee on Natural Resources:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This appendix details the methods we used to examine three aspects of
the Department of the Interior's (Interior) Bureau of Land Management
(BLM) bonding requirements for BLM oil and gas leases and reclamation
of oil and gas wells. Specifically, we were asked to (1) determine the
types, value, and coverage of bonds held by BLM for oil and gas
operations; (2) determine the amount that BLM has paid to reclaim
orphaned wells over the past 20 years, and the number of orphaned
wells BLM has identified but has not yet reclaimed; and (3) compare
BLM's bonding requirements for oil and gas operations with the bonding
requirements the 12 western states use for oil and gas operations on
state and private lands and other Interior agencies' bonding
requirements for other resources.
Overall, we reviewed federal regulations and BLM guidance on bonding
for oil and gas leases, and discussed this guidance and a broad range
of issues related to how BLM oversees bonding for oil and gas leases
during interviews with bonding officials at BLM state offices and
field offices in Colorado and Wyoming--two states that have a large
number of oil and gas wells and administer bonds that account for a
significant amount of the value of BLM-held bonds.
For objective one--to determine the number, value, and coverage of
bonds, as of December 2008--we analyzed data from BLM's bond and
surety system, and Automated Fluid Minerals Support System (AFMSS),
and met with agency officials who administer the systems. From the
bond and surety system, we received 13 tables from BLM containing
747,926 records on bonds from June 19, 1925, to December 17, 2008. We
also received 9 tables containing 106,705 records on wells from
January 7, 1930, to August 20, 2009 from BLM's AFMSS. Because the bond
and surety system contains records on bonds that have been terminated
and do not have any well liability attached, we first determined which
records contained active bonds. Because bond data were limited to
records before December 17, 2008, we selected the first day of the
final month for which we had data, December 1, 2008. We corroborated
the number of active bonds using a range of different methodologies
that uses other data in the bond and surety system and confirmed that
the list of active bonds was sufficiently complete for the purposes of
our analysis.
To determine the number of bonds, we selected all active bonds as of
December 1, 2008, in the bond and surety system and grouped them by
bond type into surety or personal bonds. BLM's data further identified
personal bonds as letter of credit, time deposit, Treasury security,
and guaranteed remittance. We analyzed 43 C.F.R. § 3104.1, which
addresses bond types, and spoke to BLM officials, before deciding to
group the various types of personal bonds into a single personal bond
category.
To determine the value of bonds, we selected all active bonds as of
December 1, 2008, in the bond and surety system and grouped them by
unique bond file number. To calculate the total value of all active
bonds, we summed the bond amount for all unique bonds. We also grouped
bonds by bond type and bond coverage type to calculate the value for
each group. Finally, we grouped all bonds by BLM state office using
the administrative state field in the bond and surety system and
summed the amount of all bonds for each BLM state office, as well as
categorizing bonds by bond type and bond coverage type.
For bond coverage, we selected active bonds as of December 1, 2008,
from the bond and surety system and grouped them by the following
categories: individual, statewide, nationwide, and other. The other
category included collective (unit), blanket bonds, and bonds for the
National Petroleum Reserve in Alaska. We analyzed 43 C.F.R. §§ 3104.2-
3104.4 and spoke with BLM officials to determine the appropriate bond
coverage type categories, creating the other category for the 6
percent of bonds not typically used for current wells.
To determine the number of wells, we received and analyzed data BLM
generated from the AFMSS database that included records current as of
August 20, 2009. The set of data received from BLM excluded all wells
that had been reclaimed prior to this date and whose bonds had been
released, helping to ensure that our data only included wells that
required a bond. To have the well data match the bonding data, we
selected all well records in AFMSS that were drilled before December
1, 2008. We identified wells using the well's unique American
Petroleum Institute number, which is assigned when the well is
drilled. In addition to information on producing wells, the data also
included information on wells that were shut in (i.e., could return to
production) and temporarily abandoned (i.e., could be used for a
purpose other than producing oil or gas). We also grouped these wells
by their BLM state office using a location field in AFMSS. To
determine the number of leases, we grouped the number of wells listed
before December 1, 2008, by unique lease number, and analyzed these
leases by state using the location field of the lease within AFMSS.
Because the AFMSS system can generate current data only, our analysis
excludes those wells that were reclaimed between December 1, 2008, and
August 20, 2009. Although these wells were not included in our totals,
we concluded the data were sufficiently reliable for the purpose of
our analysis, as data published in BLM's Public Land Statistics show
that only 231 wells were plugged and abandoned in all of fiscal year
2008.[Footnote 24] We also compared our total number of wells with the
total number of wells in the fiscal year 2008 BLM Public Land
Statistics. We determined that the difference between our total for
December 1, 2008, and BLM's total for September 30, 2008--a difference
of about 3 percent--did not significantly affect our analysis.
For figure 2 in the report--the number of wells and value of bonds,
from September 30, 1988, to September 30, 2008 (the most current date
for which BLM data were available)--we selected five dates at 5-year
intervals for the past 20 years, and calculated the total value of all
bonds using data in the bond and surety system and the number of wells
from BLM Public Land Statistics. We used the following dates to assess
coverage: September 30, 2008; September 30, 2003; September 30, 1998;
September 30, 1993; and September 30, 1988. For each of these dates,
we selected all active bonds, providing us with those bonds that were
accepted, but not terminated, before each of the five dates. To
calculate the total value of these bonds, we grouped unique bonds for
each of the five dates, and summed the bond amount field in the bond
and surety system. To calculate well totals, we were limited by the
dynamic nature of AFMSS, which restricted us from calculating the
number of active wells for specific dates in the past. Due to this
limitation, we relied on BLM's Public Land Statistics for the well
totals for our specified dates.
For figure 3 in the report--individual, statewide, and nationwide
current bond minimums adjusted to 2009 dollars--we used the bond
minimums established in 43 C.F.R. §§ 3104.2, 3104.3 and searched the
Federal Register to determine the dates the bond minimums were
established. We then calculated the amount of each bond minimum in
2009 dollars.
We reviewed the reliability of the data we used from the bond and
surety system and AFMSS and found these data sufficiently reliable for
the purpose of our review, including: total number of bonds, total
number of wells, number and value of bonds by bond type, number and
value of bonds by coverage type, number of wells by state, number of
leases by state, number and value of bonds by state, average value of
bonds by state office, number and value of bond types by state office,
and number and value of coverage types by state office. To test the
sufficiency of the bond and surety system and AFMSS data used to
calculate the number, types, values, and coverage of bonds, we
electronically tested the database and conducted interviews with BLM
staff responsible for the integrity of the data. We also
electronically tested all fields related to our analysis, including
tests for null values, duplicate records, accurate relationships
between code and text fields, and outliers. We also conducted 20
interviews with BLM staff between December 12, 2008, and November 13,
2009, on the following topics: data entry, use of data, completeness
of data, accuracy of data, edit checks, supervisory oversight,
internal reviews, different data fields, and data limitations. We
determined that there were no significant issues with the bond and
surety system and AFMSS data we used to calculate the number, types,
value, and coverage of bonds.
To address our second objective--determine how much BLM has paid to
reclaim orphaned wells over the past 20 years, and how many wells BLM
has yet to reclaim--we obtained data collected by BLM officials from
BLM field and state offices. To determine the expenditures for
reclaiming orphaned wells, we obtained data for fiscal years 1988
through November 30, 1994, from a 1995 BLM report.[Footnote 25] We
obtained data through fiscal year 2009 from BLM officials. These data
included federal dollars paid to reclaim orphaned wells, the number of
wells reclaimed, and their location. To determine the number of
orphaned wells yet to be reclaimed, we reviewed BLM's Instructional
Memorandum No. 2007-192, which directs BLM field office staff to
report data on orphaned wells to BLM's Washington Office. The
Instructional Memorandum directs field office staff to complete an
"Orphaned Well Scoring Checklist" for each orphaned well identified.
This checklist asks for such information as the well's location; well
name; and other factors relating to reclamation, such as the well
depth or estimated reclamation cost. We reviewed these checklists and
analyzed all available estimated reclamation amounts. We then
calculated and summarized estimated reclamation cost data by state and
surface management agency.
To address our third objective--compare BLM's bonding methods with
those used by the 12 western states and other Interior agencies--we
analyzed state oil and gas bonding laws and regulations, as well as
federal bonding regulations for the extraction or use of other
federally owned resources. These federal agencies and resources
included BLM Geothermal Energy, BLM Hardrock Minerals, BLM Mineral
Materials, BLM Solid Minerals, Mineral Management Service Offshore Oil
and Gas Leasing, and Office of Surface Mining Reclamation and
Enforcement Coal Leasing. We summarized the bonding requirements,
including scope, structure, amount, and method for determining bond
amounts.
We conducted our work from January 2009 to January 2010 in accordance
with all sections of GAO's Quality Assurance Framework that are
relevant to our objectives. The framework requires that we plan and
perform the engagement to obtain sufficient and appropriate evidence
to meet our stated objectives and to discuss any limitations in our
work. We believe that the information and data obtained, and the
analysis conducted, provide a reasonable basis for any findings and
conclusions.
[End of section]
Appendix II: Information on BLM Held Oil and Gas Bonds:
This appendix provides information on BLM held oil and gas bonds from
BLM's AFMSS and bond and surety systems, including the number, value,
and average value of all BLM held bonds (table 8); the number and
value of surety and personal bonds (tables 9 and 10); and the number
and value of individual, statewide, nationwide, and other bonds
(tables 11 and 12).
Table 8: Number, Total Value, and Average Value of BLM Held Bonds, by
BLM State Office:
BLM state office: Alaska;
Number of bonds: 17;
Total value: $2,625,000;
Average value: $154,412.
BLM state office: Arizona;
Number of bonds: 8;
Total value: $576,000;
Average value: $72,000.
BLM state office: California;
Number of bonds: 158;
Total value: $7,773,000;
Average value: $49,196.
BLM state office: Colorado;
Number of bonds: 312;
Total value: $12,633,419;
Average value: $40,492.
BLM state office: Eastern states;
Number of bonds: 413;
Total value: $16,759,630;
Average value: $40,580.
BLM state office: Montana;
Number of bonds: 277;
Total value: $12,592,605;
Average value: $45,461.
BLM state office: Nevada;
Number of bonds: 55;
Total value: $1,365,000;
Average value: $24,818.
BLM state office: New Mexico;
Number of bonds: 1,297;
Total value: $40,145,825;
Average value: $30,953.
BLM state office: Oregon;
Number of bonds: 4;
Total value: $350,000;
Average value: $87,500.
BLM state office: Utah;
Number of bonds: 253;
Total value: $9,011,653;
Average value: $35,619.
BLM state office: Wyoming;
Number of bonds: 1,085;
Total value: $58,483,277;
Average value: $53,902.
BLM state office: Total;
Number of bonds: 3,879;
Total value: $162,315,409;
Average value: $41,845.
Source: GAO analysis of BLM data.
[End of table]
Table 9: Number of Surety and Personal Bonds, by BLM State Office:
BLM state office: Alaska;
Surety bonds: 6;
Personal bonds: 11.
BLM state office: Arizona;
Surety bonds: 1;
Personal bonds: 7.
BLM state office: California;
Surety bonds: 63;
Personal bonds: 95.
BLM state office: Colorado;
Surety bonds: 170;
Personal bonds: 142.
BLM state office: Eastern states;
Surety bonds: 164;
Personal bonds: 249.
BLM state office: Montana;
Surety bonds: 162;
Personal bonds: 115.
BLM state office: Nevada;
Surety bonds: 35;
Personal bonds: 20.
BLM state office: New Mexico;
Surety bonds: 700;
Personal bonds: 597.
BLM state office: Oregon;
Surety bonds: 2;
Personal bonds: 2.
BLM state office: Utah;
Surety bonds: 171;
Personal bonds: 82.
BLM state office: Wyoming;
Surety bonds: 612;
Personal bonds: 473.
BLM state office: Total;
Surety bonds: 2,086;
Personal bonds: 1,793.
Source: GAO analysis of BLM data.
[End of table]
Table 10: Value of Surety and Personal Bonds Administered by BLM State
Offices, by State:
BLM state office: Alaska;
Surety bonds: $425,000;
Personal bonds: $2,200,000.
BLM state office: Arizona;
Surety bonds: $25,000;
Personal bonds: $551,000.
BLM state office: California;
Surety bonds: $4,150,000;
Personal bonds: $3,623,000.
BLM state office: Colorado;
Surety bonds: $4,379,000;
Personal bonds: $8,254,419.
BLM state office: Eastern states;
Surety bonds: $6,586,000;
Personal bonds: $10,173,630.
BLM state office: Montana;
Surety bonds: $4,679,000;
Personal bonds: $7,913,605.
BLM state office: Nevada;
Surety bonds: $1,030,000;
Personal bonds: $335,000.
BLM state office: New Mexico;
Surety bonds: $19,598,205;
Personal bonds: $20,547,620.
BLM state office: Oregon;
Surety bonds: $50,000;
Personal bonds: $300,000.
BLM state office: Utah;
Surety bonds: $4,364,968;
Personal bonds: $4,646,685.
BLM state office: Wyoming;
Surety bonds: $39,049,056;
Personal bonds: $19,434,221.
BLM state office: Total;
Surety bonds: $84,336,229;
Personal bonds: $77,979,180.
Source: GAO Analysis of BLM data.
[End of table]
Table 11: Number of Statewide, Nationwide, Individual, and Other Bonds
Administered by BLM State Offices, by State:
BLM state office: Alaska;
Statewide: 13;
Nationwide: 1;
Individual: 0;
Other[A]: 3.
BLM state office: Arizona;
Statewide: 7;
Nationwide: 0;
Individual: 0;
Other[A]: 1.
BLM state office: California;
Statewide: 89;
Nationwide: 8;
Individual: 10;
Other[A]: 51.
BLM state office: Colorado;
Statewide: 230;
Nationwide: 26;
Individual: 13;
Other[A]: 43.
BLM state office: Eastern states;
Statewide: 215;
Nationwide: 57;
Individual: 119;
Other[A]: 22.
BLM state office: Montana;
Statewide: 189;
Nationwide: 23;
Individual: 16;
Other[A]: 49.
BLM state office: Nevada;
Statewide: 26;
Nationwide: 7;
Individual: 3;
Other[A]: 19.
BLM state office: New Mexico;
Statewide: 911;
Nationwide: 210;
Individual: 96;
Other[A]: 80.
BLM state office: Oregon;
Statewide: 4;
Nationwide: 9;
Individual: 9;
Other[A]: 0.
BLM state office: Utah;
Statewide: 150;
Nationwide: 30;
Individual: 10;
Other[A]: 63.
BLM state office: Wyoming;
Statewide: 718;
Nationwide: 31;
Individual: 260;
Other[A]: 76.
BLM state office: Total;
Statewide: 2,552;
Nationwide: 393;
Individual: 527;
Other[A]: 407.
Source: GAO Analysis of BLM data.
[A] Other includes the following bond coverage types: blanket bond,
collective (Unit), and NPR-A (National Petroleum Reserve, Alaska).
[End of table]
Table 12: Value of Statewide, Nationwide, Individual, and Other Bonds
Administered by BLM State Offices, by State:
BLM state office: Alaska;
Statewide: $2,100,000;
Nationwide: $300,000;
Individual: 0;
Other[A]: $225,000.
BLM state office: Arizona;
Statewide: $575,000;
Nationwide: 0;
Individual: 0;
Other[A]: $1,000.
BLM state office: California;
Statewide: $5,725,000;
Nationwide: $395,000;
Individual: $283,000;
Other[A]: $1,370,000.
BLM state office: Colorado;
Statewide: $10,687,056;
Nationwide: $560,000;
Individual: $516,363;
Other[A]: $870,000.
BLM state office: Eastern states;
Statewide: $12,615,630;
Nationwide: $1,105,000;
Individual: $2,765,000;
Other[A]: $274,000.
BLM state office: Montana;
Statewide: $10,502,605;
Nationwide: $745,000;
Individual: $355,000;
Other[A]: $990,000.
BLM state office: Nevada;
Statewide: $720,000;
Nationwide: $220,000;
Individual: $100,000;
Other[A]: $325,000.
BLM state office: New Mexico;
Statewide: $31,060,354;
Nationwide: $5,374,300;
Individual: $2,124,171;
Other[A]: $1,587,000.
BLM state office: Oregon;
Statewide: $350,000;
Nationwide: 0;
Individual: 0;
Other[A]: 0.
BLM state office: Utah;
Statewide: $6,675,218;
Nationwide: $753,350;
Individual: $175,000;
Other[A]: $1,408,085.
BLM state office: Wyoming;
Statewide: $49,208,889;
Nationwide: $779,000;
Individual: $6,139,304;
Other[A]: $2,356,084.
BLM state office: Total;
Statewide: $130,219,752;
Nationwide: $10,231,650;
Individual: $12,457,838;
Other[A]: $9,406,169.
Source: GAO Analysis of BLM data.
[A] Other includes the following bond coverage types: blanket bond,
collective (Unit), and NPR-A (National Petroleum Reserve, Alaska).
[End of table]
[End of section]
Appendix III: Information on the Requirements the 12 Western States
Use for Oil and Gas Bonds:
State: Alaska;
Scope of bond: To ensure that each well is drilled, operated,
maintained, repaired, and abandoned (plugged) and each location is
cleared in accordance with state laws and regulations[A];
Approach:
* Single well bond;
* Blanket bond covering all of the operator's wells in the state;
Amount: Single well bond:
* Not less than $100,000, unless the applicant demonstrates that the
cost of well abandonment (plugging) and location clearance will be
less than $100,000;
Blanket bond:
* Not less than $200,000;
Types permitted:
* Surety bond by an authorized insurer who is in good standing;
* Personal bond and security in the form of (1) a certificate of
deposit, (2) irrevocable letter of credit, or (3) an otherwise
adequate security.
State: Arizona;
Scope of bond: Conditioned on drilling, plugging dry or abandoned
wells, repairing wells causing waste or pollution, maintaining and
restoring well sites, and acting in accordance with the applicable
laws and regulations;
Although the state Oil and Gas Conservation Commission is authorized
to issue a rule requiring an additional bond if the surface landowner
is not in a contractual relationship with drilling permittee, no such
rule has been issued;
Approach:
* Individual well bond;
* Blanket bond to cover multiple wells;
Amount: Individual well bond:
* $10,000 for wells 10,000 feet or less deep;
* $20,000 for wells deeper than 10,000 feet;
Blanket bond:
* $25,000 for 10 or fewer wells;
* $50,000 for more than 10 but fewer than 50 wells;
* $250,000 for 50 or more wells;
Types permitted:
* Surety bond by a corporate surety authorized to do business in
Arizona;
* Certified check;
* Certificate of deposit from a bank whose deposits are federally
insured.
State: California;
Scope of bond: Conditioned on compliance with all statutory
requirements for drilling, redrilling, deepening, or permanently
altering the casing of the well[B];
Approach:
* Individual indemnity bond;
* Blanket indemnity bond covering all wells in the state;
* Idle well indemnity bond;
Amount:
Individual indemnity bond:
* $15,000 for wells less than 5,000 feet deep;
* $20,000 for wells at least 5,000 feet deep but less than 10,000 feet
deep;
* $30,000 for each well 10,000 or more feet deep;
Blanket indemnity bond:
* $250,000 plus the idle well bond. If a bond was provided prior to
Jan. 1, 1999, its amount must be increased by a minimum of $30,000 per
year beginning on Jan. 1, 2000, until the bond reaches $250,000;
* $100,000 plus the idle well bond for operators having 50 or fewer
wells, exclusive of properly abandoned wells;
* $1 million dollars;
Idle well indemnity bond:
* $5,000 per well, if the operator chooses to post a bond rather than
pay an annual fee, open an escrow account, or have filed a management
plan by July 1, 1999;
Types permitted:
* Indemnity bond;
* Certificate of deposit that (1) does not exceed the federally
insured amount, (2) is insured, and (3) is issued by a bank or savings
association authorized to do business in California;
* Savings accounts and evidence of the deposit in the account. The
account cannot exceed the federally insured amount, must be federally
insured and with a bank authorized to do business in California;
* Investment certificates or share accounts issued by savings
associations authorized to do business in California. The account's
balance cannot exceed the federally insured amount and must be insured;
* Certificates for funds or share accounts issued by credit unions
whose share deposits are guaranteed. The account's balance cannot
exceed the guaranteed amount.
State: Colorado;
Scope of bond: Every operator must provide assurance that it is
financially capable of fulfilling applicable requirements (1) to
protect the health, safety, and welfare of the general public in the
conduct of the oil and gas operations; (2) to ensure proper
reclamation of the land and soil affected by oil and gas operations
and to ensure the protection of the topsoil of said land during such
operations; and (3) associated with terminating operations and
permanent closure;
Approach: (1) Surface Owner Protection Financial Assurance: individual
well or statewide blanket bond; To protect surface owners who are not
parties to a lease or other agreement with the operator from
unreasonable crop loss or land damage; (2) Soil Protection, Plugging,
Abandonment and Site Reclamation Financial Assurance: individual or
statewide blanket bond;
Amount: The Oil and Gas Conservation Commission has the authority to
increase any of these amounts for an operator under certain
circumstances[C];
(1) Surface Owner Protection:
Individual well:
* $2,000 per well for non-irrigated land;
* $5,000 per well for irrigated land.
Statewide:
* $25,000;
(2) Soil Protection, Plugging, Abandonment and Site Reclamation[D]:
Individual well bond:
* $10,000 per well for wells less than 3,000 feet deep;
* $20,000 per well for wells greater than or equal to 3,000 feet deep;
Statewide bond:
* $60,000 for less than 100 wells;
* $100,000 for 100 or more wells;
If the operator has excess inactive wells[E], the financial assurance
amount increases by:
* $10,000 for each excess inactive well less than 3,000 feet deep;
* $20,000 for each excess inactive well greater than or equal to 3,000
feet deep;
The Commission can modify or waive this increase if the operator
submits a plan for (1) returning the wells to production in a timely
manner or (2) plugging and abandoning the wells on an acceptable
schedule;
Additional finance assurances required for off-site, centralized
exploration and production waste management facility and seismic
operations:
Types permitted:
* Demonstration that operator has sufficient net worth to guarantee
performance, which the Commission must review annually;
* Certificate of general liability insurance;
* Bond or other surety instrument;
* Letter of credit;
* Certificate of deposit;
* Other financial instrument;
* Escrow account or sinking fund;
* Lien or other security interest in real or personal property of the
operator that is acceptable to the Commission and reviewed annually.
State: Idaho;
Scope of bond: Conditioned upon compliance with the legal and
regulatory requirements for drilling, maintaining, operating, and
plugging of each oil and gas well;
Approach:
* Individual well bond;
* Statewide blanket bond;
Amount: Individual bond of not less than $10,000 per well;
Blanket bond of not less than $25,000 for all wells in the state;
Separate bond requirements govern wells on state and school lands;
Types permitted:
* Surety bond by a corporate surety authorized to do business in Idaho;
* Cash.
State: Montana;
Scope of bond: Conditioned on properly plugging each dry or abandoned
well and restoring the surface of the location;
Approach:
* Single well bond;
* Multiple well bond;
Amount:
Single well bond:
* $1,500 if the well's depth is 2,000 feet or less. The Board of Oil
and Gas Conservation can increase the bond requirement to $3,000 under
certain circumstances[F];
* $5,000 if the well's depth is greater than 2,000 feet and less than
3,501 feet. The Board can increase this amount to $10,000 under
certain circumstances[G];
* $10,000 where the well's depth is 3,501 feet or more. The Board can
increase this amount to $20,000 under certain circumstances[H];
Multiple well bonds:
* $50,000. The Board can increase this amount to $100,000 under
certain circumstances and/or limit the number of multiple wells that
can be covered by a multiple bond.[I] If existing wells are covered by
a bond with an amount less than $25,000, the owner or operator must
increase coverage to $25,000;
Types permitted:
* Surety bond issued from a company licensed to do business in Montana;
* Federally insured certificate of deposit held by a Montana bank;
* Letter of credit issued by a Montana commercial bank whose deposits
are FDIC insured.
State: Nevada;
Scope of bond: Conditioned on (1) dry or abandoned well being plugged
in accordance with state regulations and (2) operation and repair of
well in a manner that does not cause waste;
Approach:
* Individual well bond;
* Blanket statewide bond;
Amount:
Individual well bond of not less than $10,000;
Blanket statewide bond of not less than $50,000;
Types permitted:
* Bond issued by a corporate surety authorized to do business in
Nevada and approved by the state regulatory agency;
* Cash deposit;
* Savings certificate or time certificate of deposit issued by a bank
or savings or loan association in Nevada.
State: New Mexico;
Scope of bond: Conditioned on the well being plugged and abandoned and
the location restored and remediated in compliance with applicable
rules. The financial assurance is not to secure payment for damages to
livestock, range, crops or tangible improvements or any other purpose;
Approach:
* One-well financial assurance[J];
* Blanket financial assurance for all wells statewide[K];
Amount: One-well financial assurance:
* $5,000 plus $1 per foot of well depth in certain counties;
* $10,000 plus $1 per foot of well depth in all other counties;
Blanket financial assurance:
* $50,000;
Wells that have been in temporary abandonment for more than 2 years
must be covered by a one-well financial assurance, unless the well is
shut-in because of the lack of a pipeline connection;
Types permitted:
* Irrevocable letter of credit that meets certain conditions;
* Cash deposited into a federally insured account in New Mexico;
* Surety bond that meets certain conditions;
* Insurance policy that meets certain requirements.
State: Oregon;
Scope of bond: Bond will not be released unless well has been properly
abandoned, including site reclamation;
Approach:
* Single well bond;
* Blanket bond for multi-well operations;
Amount:
Single well bond:
* $10,000 for wells less than 2,000 feet deep;
* $15,000 for wells between 2,000 and 5,000 feet deep;
* $25,000 for wells greater than 5,000 feet deep;
Blanket bond:
* Amount equals the sum of individual bonds required for the wells,
although some wells might be excluded from this calculation[L];
* Minimum amount of $100,000;
Types permitted:
* Surety bond;
* The Department of Geology and Mineral Industries has the discretion
to accept an irrevocable letter of credit or other form of financial
security.
State: Utah;
Scope of bond: Conditioned upon the operator plugging each dry or
abandoned well, repairing each well causing waste or pollution, and
maintaining and restoring the well site;
Approach:
* Individual well bond;
* Statewide blanket bond;
Amount:
Individual well bond:
* At least $1,500 for a well less than 1,000 feet deep;
* At least $15,000 for a well more than 1,000 feet deep but less than
3,000 feet deep;
* $30,000 for a well more than 3,000 feet deep but less than 10,000
feet deep;
* At least $60,000, for wells more than 10,000 feet deep;
Blanket Bond:
* At least $15,000 for wells less than 1,000 feet deep;
* At least $120,000 for wells more than 1,000 feet deep;
If the Division determines that these amounts will be insufficient to
cover the costs of well plugging and site restoration, a change in the
form or amount of bond coverage may be required;
The Board has the discretion to allow bond coverage in a lesser amount
for a specific well;
If the Division finds that a well is violating regulatory requirements
for shut-in and temporarily abandoned wells, the required bond amount
increases to the cost of actual plugging and site restoration costs;
Types permitted:
* Surety bond with performance guarantee of a corporation that meets
certain requirements;
* Collateral bond supported by one or more of the following: (1) a
cash account at a federally insured bank authorized to do business in
Utah or with the Division that does not exceed the FDIC insurance
limits; (2) negotiable bonds of the United States, a state, or
municipality; (3) negotiable certificates of deposit issued by a
federally insured bank authorized to do business in Utah that do not
exceed FDIC insurance limits; (4) irrevocable letter of credit that
meets certain requirements. Since July 1, 2003, operators who want to
establish a new blanket bond that consists either fully or partially
of a collateral bond must be qualified by the Division first[M];
* A combination of a surety and collateral bond.
State: Washington;
Scope of bond: Conditioned on plugging each dry or abandoned well,
reclaiming and cleaning up the well drilling site, repairing wells
that cause waste, and complying with all applicable laws, regulations,
orders, and permit conditions, including regulations and guidelines
for reclamation of land impacted by oil and gas drilling and
production activities;
Approach:
* Individual well bond;
* Statewide blanket bond;
Amount:
Individual well bond:
* Not less than $50,000 for most wells;
* $20,000 for wells less than 2,000 feet deep drilled solely to obtain
subsurface geological data;
Statewide blanket bond:
* Not less than $250,000;
Types permitted:
* Surety bond that meets certain requirements;
* Cash deposit;
* Savings account assigned to the state;
* Certificate of deposit in a Washington bank and guarantee of payment
of the principal in the event penalties are assessed for early
redemption;
* Letter of credit from bank acceptable to the State Oil and Gas
Supervisor.
State: Wyoming;
Scope of bond: Conditioned on (1) the well being operated and
maintained so as not to cause waste or damage to the environment;
(2) plugging each permanently abandoned well in accordance with
regulations; (3) reclamation of area affected by the oil or gas
operations; and (4) compliance with all applicable laws, regulations,
and orders[N];
Approach:
* Individual well bond;
* Statewide blanket bond;
* Split estate bonds;
To secure payment of damages to the surface owner. Instead of posting
a bond, the operator can execute an agreement with a surface owner (1)
addressing compensation for damages to land and improvements;
or (2) waiving the surface owner's right to seek damages;
Amount:
The state Oil and Gas Conservation Commission can increase the amounts
listed below after notice and a hearing if good cause can be shown;
Individual well:
* Minimum amount of $10,000 for wells less than 2,000 feet deep;
* Minimum amount of $20,000 for wells 2,000 feet or more deep;
Blanket bond:
* Minimum amount of $75,000[O];
Idle well bond increase:
An increased bond level up to $10 per foot may be required for each
idle well once the operator's total footage of idle wells exceeds a
certain threshold; The level of additional bonding will increase every
3 years in accordance with the percentage change in the Wyoming
consumer price index; The operator can request a different bonding
level based on evaluation of specific well conditions and
circumstances; In lieu of additional bonding, the supervisor may
accept a detailed plan of operation which includes a time schedule to
permanently plug and abandon idle wells;
Split estate bonds;
* Individual well bond of not less than $2,000 per well on the land;
* Blanket bond amount is determined by the oil and gas supervisor;
The state's oil and gas supervisor has discretion in establishing the
amount of these bonds;
Types permitted:
* Surety bond;
* Cashier's check and binding, first-priority pledge agreement;
* Certificate of deposit for an initial term of not less than 1 year
that renews automatically and a binding, first-priority pledge
agreement;
* Letter of credit issued by an FDIC-insured bank with an initial
expiration date of not less than 1 year from date of issuance and that
is automatically renewed.
Source: GAO analysis of state laws and regulations.
[A] The bond or bond and security remain in effect until the
abandonment of all the wells covered by them and the Alaska Oil and
Gas Conservation Commission approves final clearance of the locations.
[B] The bond should secure the state against all losses, charges, and
expenses incurred by it to obtain such compliance.
[C] When the Oil and Gas Conservation Commission‘s Director has
reasonable cause to believe that the Commission may become burdened
with the costs of fulfilling an operator‘s statutory requirements
because (1) the operator has demonstrated a pattern of noncompliance
with oil and gas regulations in Colorado or other states; (2) special
geologic, environmental, or operational circumstances exist which make
the plugging and abandonment of particular wells more costly; or (3)
other special and unique circumstances exist, he may petition the
Commission for an increased financial assurance.
[D] All wells whose financial assurances were posted prior to April 1,
2009, must have had financial assurances that meet these requirements
by July 1, 2009.
[E] An operator has excess inactive wells if its inactive well count
exceeds the operator‘s financial assurance amount divided by (1)
$10,000 for inactive wells less than 3,000 feet deep or (2) $20,000
for inactive wells greater than or equal to 3,000 feet deep.
[F] The bond amount can be increased when the Board finds that the
factual situation warrants such an increase in order for the owner or
operator to comply with the Board‘s rules.
[G] The bond amount can be increased when the Board finds that the
factual situation warrants such an increase in order for the owner or
operator to comply with the Board‘s rules.
[H] The bond amount can be increased when the Board finds that the
factual situation warrants such an increase in order for the owner or
operator to comply with the Board‘s rules.
[I] The bond amount can be increased when the Board finds that the
factual situation warrants such an increase in order for the owner or
operator to comply with the Board‘s rules.
[J] The Oil Conservation Commission was required to establish this
financial assurance in amounts determined sufficient to reasonably pay
the cost of plugging the well, considering the depth of the well,
among other things.
[K] The counties are: Chaves, Eddy, Lea, McKinley, Rio Arriba,
Roosevelt, Sandoval, and San Juan.
[L] The following wells may be excluded from this computation: (1)
wells that have a gross annual wellhead production during the past 12
months that is greater than the amount of the required individual well
bond and (2) wells that have been used as disposal or service wells in
the past 12 months.
[M] Qualification consists of the Division finding, as evidenced by
audited financial statements for the previous 2 years and the most
current quarterly financial report, that the operator‘s ratio of (1)
current assets to current liabilities is 1.20 or greater; and (2)
total liabilities to stockholder‘s equity is 2.50 or less.
[N] Site reclamation must be initiated within 1 year of permanent
abandonment of the well or last use of a pit. Reclamation must be
completed in accordance with the landowner‘s reasonable requests
and/or resemble the original vegetation and contour of adjoining
lands. All disturbed state lands must be recontoured and reseeded in
accordance with Commission regulations unless the Office of State
Lands and Investments approves otherwise.
[O] Operators with blanket bonds of $25,000 in place prior to July 1,
2000, do not need to increase their bond coverage or post additional
coverage.
[P] The total footage of idle wells threshold is 2,500 feet or 7,500
feet depending on the level of blanket bond in place. An idle well is
one which is not producing, injecting, or disposing.
[End of table]
[End of section]
Appendix IV: Bonding Requirements for the Extraction of Federally
Owned Resources, by Agency and Resource:
Agency and resource being extracted: Office of Surface Mining
Reclamation and Enforcement (OSM) Coal Leasing;
Scope of bond: Conditioned upon compliance with all applicable laws,
regulations, the permit, and regulatory program, including the
reclamation plan;
Approach:
* Performance bond for the entire permit area;
* Cumulative bond schedule and the performance bond required for full
reclamation of the initial area to be disturbed;
* Incremental bond schedule and the performance bond required for the
first increment in the schedule;
* Alternative bonding system if it achieves certain objectives and
purposes;
Amount:
* The amount of the bond required for each bonded area shall (1) be
determined by the regulatory authority; (2) depend upon the
requirements of the approval permit and reclamation plan; (3) reflect
the probable difficulty of reclamation, given consideration to such
factors as topography, geology, hydrology, and revegetation potential;
and (4) be based on, but not limited to, the estimated cost submitted
by the permit applicant;
* The amount of the bond shall be sufficient to assure the completion
of the reclamation plan if the work has to be performed by the
regulatory authority in the event of forfeiture;
* In no case shall the total bond initially posted for the entire area
under one permit be less than $10,000;
* The regulatory authority must adjust the bond amount from time to
time as the area requiring bond coverage is increased or decreased or
where the cost of future reclamation changes;
Types permitted:
* Surety bond that meets certain requirements;
* Collateral bond (including cash; cash accounts that do not exceed
FDIC insurable limits; certificates of deposit that do not exceed FDIC
insurable limits and meet other requirements; a first mortgage, first
deed of trust, or perfected first-lien security interest in real
property; and irrevocable letters of credit that meet certain
requirements);
* Self-bond (indemnity agreement executed by the applicant or the
applicant and a corporate guarantor that meets certain requirements);
* A combination of any of these types.
Agency and resource being extracted: Minerals Management Service (MMS)
Offshore Oil and Gas Leasing;
Scope of bond: To guarantee compliance with all terms and conditions
of the lease, including structure removal and site clearance;
Approach:
* Lease specific bond;
* Areawide bond[A];
Amount: Amount of bond is determined by stage of development/activity.
Posting a lease exploration bond exempts owner/operator from posting a
general lease bond. Posting a development and activities bond exempts
the owner/operator from posting a general lease bond and lease
exploration bond;
General lease bond:
* $50,000 lease specific bond;
* $300,000 areawide bond;
Lease exploration bond:
* $200,000 lease specific bond;
* $1 million areawide bond;
Development and production activities bond:
* $500,000 lease specific bond[B];
* $3 million areawide bond;
Additional security: MMS can require an additional security if it
determines that it is necessary to ensure compliance. Such a
determination is based on an evaluation of the lessee's ability to
carry out present and future financial obligations[C]; In lieu of an
additional bond, MMS may authorize the lessee to establish a lease-
specific abandonment account or third-party guarantee;
Types permitted:
* Surety bond issued by a surety company approved by the Department of
the Treasury (Treasury);
* Treasury securities[D];
* Alternative types of securities provided the MMS Regional Director
determines that the alternative protects the interest of the United
States to the same extent as the required bond[E];
* A combination of these types.
Agency and resource being extracted: BLM Onshore Oil and Gas;
Scope of bond: To ensure compliance with the Mineral Leasing Act of
1920 as amended, including complete and timely plugging of the
well(s), reclamation of the lease area(s), and the restoration of any
lands or surface waters adversely affected by lease operations;
Approach:
* Individual lease bond;
* Statewide bond;
* Nationwide bond;
Amount:
* Individual lease: not less than $10,000;
* Statewide: not less than $25,000;
* Nationwide: not less than $150,000;
If an operator has forfeited a financial assurance in the previous 5
years because of failure to plug a well or reclaim lands in a timely
manner, BLM must require a bond in an amount equal to the estimated
costs of plugging the well and reclaiming the disturbed area before
approving an application for a permit to drill; BLM has the authority
to require an increase in the bond amount whenever it determines that
the operator poses a risk due to factors including, but not limited
to, a history of previous violations, a notice from MMS that there are
uncollected royalties due, or that total cost of plugging existing
wells and reclaiming lands exceeds the present bond amount[F];
Types permitted:
* Surety bond issued by a qualified surety company approved by
Treasury;
* Personal bonds accompanied by (1) certificate of deposit issued by
an institution whose deposits are federally insured; (2) cashier's
check; (3) certified check; (4) negotiable Treasury securities; or (5)
irrevocable letter of credit that meets certain conditions.
Agency and resource being extracted: BLM National Petroleum Reserve,
Alaska (NPR-A);
Scope of bond: To ensure compliance with the all the lease terms,
including rentals and royalties, conditions, and stipulations;
Approach:
* Individual lease bond;
* Reserve-wide bond;
Amount:
* Individual lease: $100,000;
* Reserve-wide $300,000 (either as a rider to existing nationwide bond
or a separate bond);
Types permitted:
* Surety bond issued by a qualified surety company approved by
Treasury;
* Personal bonds secured by (1) certificate of deposit issued by an
institution whose deposits are federally insured; (2) cashier's check;
(3) certified check; (4) negotiable Treasury securities; or (5)
irrevocable letter of credit that meets certain conditions.
Agency and resource being extracted: BLM Geothermal Energy;
Scope of bond: To cover (1) any activities related to exploration,
drilling, utilization, or associated operations on a federal lease;
(2) reclamation of the surface and other resources; (3) rental and
royalty payments; (4) compliance with applicable laws, regulations,
notices, orders, and lease terms;
Approach:
* Individual lease bond;
* Statewide activity bond;
* Nationwide activity bond;
Amount:
BLM has the authority to increase the following bond amounts when (1)
the operator has a history of noncompliance; (2) BLM previously made a
claim against a surety company because someone covered by the current
bond failed to plug and abandon a well and reclaim the surface in a
timely manner; (3) a person covered by the bond owes uncollected
royalties; or (4) the bond amount will not cover the estimated
reclamation cost;
Drilling operations:
* Individual: $10,000;
* Statewide: $50,000;
* Nationwide: $150,000;
Utilization operations:
* Electrical Generation Facility: at least $100,000;
* Direct Use Facility: BLM will specify amount;
Types permitted:
* Corporate surety bond issued by a surety company approved by
Treasury;
* Personal bonds secured by (1) certificate of deposit issued by a
federally insured financial institution authorized to do business in
the United States; (2) cashier's check; (3) certified check; (4)
negotiable securities, such as Treasury notes; and (5) irrevocable
letter of credit that meet certain conditions.
Agency and resource being extracted: BLM Solid Minerals (other than
coal and oil shale, also known as leasable minerals);
Scope of bond: Released when (1) all royalties, rentals, penalties,
and assessments are paid; (2) all permit or lease obligations are
satisfied; (3) site reclaimed; and (4) effective measures are taken to
ensure that the mineral prospecting or development activities will not
adversely affect surface or subsurface resources;
Approach:
* Individual lease bond;
* Statewide bond (to cover all leases of the same mineral);
* Nationwide bond (to cover all leases of the same mineral);
Amount:
BLM determines bond amounts considering the cost of complying with all
permit and lease terms, including royalty and reclamation requirements;
* Individual lease: minimum $5,000 (minimum $1,000 for prospecting
permits);
* Statewide: minimum $25,000;
* Nationwide: minimum $75,000;
Types permitted:
* Surety bond issued by a qualified company approved by Treasury;
* Personal bonds in the form of a (1) cashier's check; (2) certified
check; (3) or negotiable Treasury bond.
Agency and resource being extracted: BLM Mineral Materials (also known
as salable minerals);
Scope of bond: To meet the reclamation standards specified in the
mineral materials sales contract;
Approach:
* Performance bond for contract;
* No performance bond required if sales contract from a community
pit[G] or common use area and party pays a reclamation fee;
Amount:
Sales contract:
* For contracts of $2,000 or more, BLM will establish bond amount to
ensure it is sufficient to meet the contract's reclamation standards.
However, the amount must be at least $500;
* For contracts of less than $2,000, BLM may require a bond. If BLM
requires a bond, it cannot exceed an amount greater than 20 percent of
the total contract amount;
Community pit and common use area contracts:
* If party pays reclamation fee, no performance bond is required;
Types permitted:
* Corporate surety bond issued by a company approved by Treasury;
* Certificate of deposit that is issued by an institution whose
deposits are insured and does not exceed the maximum FDIC insurable
amount;
* Cash bond;
* Irrevocable letter of credit from a bank or financial institution
organized or authorized to do business in the United States;
* Negotiable Treasury bond of the United States.
Agency and resource being extracted: BLM Hardrock Minerals (also known
as locatable minerals);
Scope of bond: To cover the estimated cost, as if BLM were to contract
with a third party, to reclaim the operations according to the
reclamation plan, including construction and maintenance costs for any
treatment facilities necessary to meet federal and state environmental
standards. The financial guarantee must also cover any interim
stabilization and infrastructure maintenance costs needed to maintain
the area of operations in compliance with applicable environmental
requirements while third-party contracts are developed and executed;
Approach:
* Individual financial guarantee covering a single notice or plan of
operations[H];
* Blanket financial guarantee covering a statewide or nationwide
operations;
Amount:
* Amount is based on the estimated cost as if BLM were to contract
with a third party to reclaim the operations according to the
reclamation plan, including construction and maintenance costs for any
treatment facilities necessary to meet federal and state environmental
standards;
* BLM may determine that a bond is not required where mining
operations would cause nominal environmental damage or the operator
has an excellent past record for reclamation;
* In addition to the financial guarantee, BLM may require the
establishment of a trust fund or other funding mechanism to ensure the
continuation of long-term treatment to achieve water quality standards
and for other long-term, post-mining maintenance requirements. The
funding must be adequate to provide for construction, long-term
operation, maintenance, or replacement of any treatment facilities and
infrastructure, for as long as the treatment and facilities are needed
after mine closure;
Types permitted: If accepted by the BLM state director:
* Surety bonds that meet certain requirements;
* Cash maintained in a federal depository account of the U.S. Treasury;
* Irrevocable letters of credit from a financial institution organized
or authorized to do business in the United States;
* Certificates of deposit or savings accounts not in excess of the
FDIC insurable amount;
* Negotiable U.S. government, state, and municipal securities or bonds
maintained in a Securities Investors Protection Corporation-insured
trust account by a licensed securities brokerage firm;
* Investment grade securities having a Standard and Poor's rating of
AAA or AA or an equivalent rating from a nationally recognized
securities rating service that are maintained in a Securities
Investors Protection Corporation-insured trust account by a licensed
securities brokerage firm;
* Certain forms of insurance that meet regulatory requirements;
* Certain existing financial assurances under state law or regulation;
* Trust funds or other funding mechanisms.
Source: GAO analysis of federal regulations.
[A] Areawide bonds cover all leases in one of three areas: (1) the
Gulf of Mexico and the area off the Atlantic Coast; (2) the area
offshore the Pacific Coast states of California, Oregon, Washington,
and Hawaii; and (3) the area off the shore of Alaska.
[B] MMS may accept a bond in a lesser amount when the lessee can
demonstrate that the wells and platforms can be abandoned and removed
and the drilling and platform sites cleared of obstructions for less
than the amount of the bond.
[C] MMS will evaluate a lessee‘s (1) financial capacity substantially
in excess of existing and anticipated lease and other obligations; (2)
projected financial strength significantly in excess of existing and
future lease obligations; (3) business stability based on 5 years of
continuous operation and production; (4) reliability in meeting
obligations based on credit ratings or trade references; and (5)
record of compliance with laws, regulations, and lease terms.
[D] If the market amount of the security falls below the level of bond
coverage required, the lessee must pledge an additional security.
[E] If the market amount of the security falls below the level of bond
coverage required, the lessee must pledge an additional security.
[F] The increased bond amount cannot exceed the total of the estimated
costs of plugging and reclamation, the amount of uncollected royalties
due to MMS, plus the amount of monies owed to the lessor due to
previous violations remaining outstanding.
[G] A community pit supplies mineral materials to small contractors
and to the general public for private use.
[H] A notice of operations is required for exploration activities that
disturb 5 acres or less. Although BLM must receive notice prior to any
surface disturbance, BLM does not need to grant approval for notice-
level operations. A plan of operations is required for any operation
greater than casual use, except for notice-level operations, and
operations causing surface disturbance greater than casual use in
special status areas, such as designated wilderness areas and national
monuments.
[End of table]
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Anu K. Mittal (202) 512-3841 or mittala@gao.gov:
Acknowledgments:
In addition to the contact named above, Andrea Wamstad Brown
(Assistant Director), Jeffrey B. Barron, Casey L. Brown, Jerome
Sandau, Jeanette Soares, Anne Stevens, Carol Herrnstadt Shulman, and
Walter Vance made key contributions to this report.
[End of section]
Footnotes:
[1] For the purposes of this report, the term operator refers to
lessees, owners of operating rights, and operators of an oil or gas
operation, unless indicated otherwise.
[2] BLM is responsible for managing 261 million acres of surface
federal lands, as well as approximately 700 million acres of
subsurface lands. Approximately 58 million acres of these federal
subsurface lands are located beneath privately owned lands--a
situation commonly known as a split estate.
[3] The 12 western states include Alaska, Arizona, California,
Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah,
Washington, and Wyoming.
[4] During the next phase of our work, we will address the remaining
aspects of your request, which primarily concern whether BLM is
adequately managing the potential estimated liability for reclaiming
nonproducing wells.
[5] For the purposes of this report, coverage refers to the total
number of wells covered by bonds held by BLM.
[6] To produce methane gas from a coal bed, operators have to pump
water from underground deposits in order to release the methane gas
contained in the subsurface coal.
[7] In some circumstances, approval from state officials may also be
required before operators can commence drilling and production.
[8] For the purposes of this report, use of the term reclamation
refers to the final reclamation process.
[9] In circumstances where the surface land is managed by another
surface management agency, that agency inspects the site to monitor
reclamation. In addition, prior to approving the Final Abandonment
Notice, BLM gets the approval of the surface management agency or in
cases involving split estates, the private surface owner.
[10] States with an approved state program that meet other
qualifications can enter into a cooperative agreement with the
Secretary of the Interior to enforce the state's program on federal
lands within the state. In these cooperative agreements, OSM delegates
responsibility for the establishment and release of bonds required for
surface coal mining and reclamation operations on federal lands to the
state regulatory authority, although OSM must concur in the release.
In addition to this bond required by OSM or the approved state
regulatory authority, BLM will not issue a coal lease until the
prospective lessee has posted a bond. However, these lease bonds do
not cover reclamation unless the state in which the mining will occur
does not have a cooperative agreement with the Secretary.
[11] For the purposes of this report, unless stated otherwise, leases
refer to producing leases--leases that have a well. We are not
including leases that do not have a well in our total.
[12] We calculated BLM bond values by fiscal year to correspond to the
available BLM data on the total number of wells, which is only
available by fiscal year.
[13] With the consent of the surety provider, an individual lease bond
posted by a lessee may cover all operators on a lease. Otherwise, each
operator on a lease must provide a separate bond covering just the
wells they operate. According to BLM officials, most leases have only
one operator.
[14] A statewide bond posted by a lessee can cover all well operators
with the consent of the surety provider.
[15] A nationwide bond posted by a lessee can cover all well operators
with the consent of the surety provider.
[16] Unit agreements refer to multiple lessees who unite to adopt and
operate under a unit plan for the development of any oil or gas pool,
field, or like area.
[17] The amount of a unit operator bond is determined on a case-by-
case basis by BLM officials, and the minimum amount of a NPR-A bond is
set in regulation--not less than $100,000 for a single lease or not
less than $300,000 for a reservewide bond (submitted separately or as
a rider to an already existing nationwide bond).
[18] This requirement applies only to operators, and not lessees or
owners of operating rights.
[19] This requirement applies only to operators, and not lessees or
owners of operating rights.
[20] Rob Brumbaugh and Stan Porhola, Alaska Legacy Wells Summary
Report: National Petroleum Reserve-Alaska, BLM/AK/ST-05004+2360+941,
Department of the Interior, Bureau of Land Management, Alaska State
Office, November 2004.
[21] In addition to a bond for well plugging, abandonment, and site
reclamation, some states, like Colorado, require additional bonds to
protect the surface land owner in certain split estate situations.
[22] In lieu of this additional bond, the Wyoming Oil and Gas
Conservation Commission may accept a detailed plan of operation which
includes a time schedule to permanently plug and abandon idle wells or
otherwise remove the well from idle status. In addition, an operator
can request a different bond amount based on an evaluation of the
specific well conditions and circumstances.
[23] Arizona, Montana, and Oregon do not have bonds that cover all of
an operator's wells within a state; rather they have blanket bonds
that cover multiple wells.
[24] Public Land Statistics 2008, Vol. 193, BLM/OC/ST-09/001-1165,
Department of the Interior, Bureau of Land Management, May 2009.
[25] BLM Oil and Gas Program: Bonding/Unfunded Liability Review,
Bureau of Land Management, Department of the Interior, March 1995.
[End of section]
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441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
