Drilling bonds are inadequate, group complains

A Colorado conservation group says federal and state bonding requirements for oil and gas development are far too low to ensure the public isn’t stuck with the costs of plugging and reclaiming wells.

While questioning the current requirements of Colorado and other states, Environment Colorado is particularly taking issue with current Bureau of Land Management rules applying to federal lands drilling, as the federal government considers approving new proposals in Colorado to drill in national forests and near national parks.

“Unfortunately, while the BLM is currently considering a package of rules to address the threat posed by (hydraulic fracturing) on federal land, that package includes no strengthening of federal financial assurance rules,” the report says.

The bonding is intended to cover cases such as when a company is financially unable to cover the costs of plugging and reclaiming a well following production. The BLM requires a bond of $10,000 per single lease, or $25,000 statewide for a company with multiple leases, or $150,000 for a company nationwide. The study says those levels are more than 50 years old and haven’t been updated for inflation.

Acknowledging that its bonding requirements were too low, the Colorado Oil and Gas Conservation Commission several years ago raised them from $5,000 per well to $10,000 to $20,000 per well, depending on its depth. It also increased the blanket bond companies can pay instead.

Environment Colorado opposes blanket bonds as insufficient. Its report also says fracked wells can cost $700,000 or more to plug. It is calling for companies to have to post financial assurance of at least $250,000 per well for plugging and reclamation, and at least $5 million per well for possible damage to property, health and the environment. It said Colorado requires energy companies to hold $1 million in general liability insurance.

BLM spokesman Steven Hall said bonds are for ensuring reclamation, and that federal environmental laws and agencies in combination with state ones make oil and gas development on public lands “the most environmentally sensitive development in Colorado.”

“To equate the size of the bond with the effectiveness of environmental protection demonstrates a lack of understanding of development of the public’s energy resources and how that development is regulated,” he said.

David Ludlam, executive director of the West Slope Colorado Oil and Gas Association, said the BLM also raises bond rates for companies with a history of violations.

“This approach to bonding increases indirectly rewards companies who follow the rules while punishing those who don’t,” he said.

Ludlam said universally raising bonds wouldn’t help make local drilling cost-competitive with operations elsewhere in the country.


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M. Todd Miskel glibly opines that enacting the regulations described above would make local natural gas infeasible to develop until the market price reaches that of Japan’s – $14.50 per million cubic feet (mcf).  Since the current market price is $3.67 per mcf, his unsupported assertion is that reasonable regulation of natural gas production and fracking would add over $10 per mcf to the cost of production.

While there is no question that increased regulation would indeed add to the industry’s “cost of doing business”, the magnitude suggested by Miskel – absent a more specific breakdown of those costs – is manifestly absurd. 

Miskel obviously favors a regulatory regime in which costs are “externalized” to the public rather than “internalized” to the industry.  Therefore, the real question is:  who should bear the public health, economic, and environmental costs of expanded natural gas production – the industry that expects to profit handsomely or we taxpayers (including future generations) who depend on effective governmental laws and regulations (not “voluntary compliance”) to protect the water we drink and the air we breathe. 

Thus, Miskel offers no justification (other than exaggerated “costs of compliance”) for continuing the “Halliburton Exceptions” to the Safe Drinking Water Act and the Clean Water Act, despite increasing evidence that “fracking” can contaminate water supplies.
More credible industry consultants previously estimated that compliance with the “FRAC Act” would add about $ .50 to the “breakeven price” for Western Slope natural gas.

Likewise, Miskel offers no justification for the continued use of toxic fracking fluids and diesel fuel, when marginally (20%) more expensive “green” fluids are already in use offshore.  Moreover, Miskel entirely ignores the public health benefits (and thus savings to taxpayers) of mandatory public disclosure – if not outright prohibition – of all toxins contained in proprietary fracking fluids and/or produced by chemical reactions between fracking fluids (and diesel fuel) and naturally occurring compounds in the well bore.

Finally, while the use of “best available technology” to capture escaping methane would indeed be expensive, that cost would be offset by both the market value of the methane being captured and sold, and by reducing the wasteful emission of “greenhouse gases”.

In other words, while exporting liquid natural gas will increase the domestic price of the product and thereby adversely impact American consumers, Miskel would continue both direct and indirect taxpayer subsidies to a profitable industry.  Instead, all such subsidies should be eliminated—and the savings invested in renewable energy sources and to offset the effects of higher domestic gas prices on U.S. businesses and residents.

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