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U.S. Energy Drilling Boom could Mean $6 Billion in Federal Well Cleanups

February 26, 2018, by Valerie  Volcovici

WASHINGTON (Reuters) – Cleaning up the tens of thousands oil and gas wells on U.S. federal land after they stop producing could cost over $6 billion, and taxpayers may need to pitch in, according to an analysis of state and federal data commissioned by a conservation watchdog group.

The study released on Monday reflects one of the downsides to a years-long drilling boom that has made the United States a top world oil and gas producer.

The analysis by consultancy ECONorthwest on behalf of the Center for Western Priorities, estimates the potential reclamation costs for the 94,096 oil and gas wells now producing on federal lands at $6.1 billion.

The study pointed out the figure is likely several times higher than the amount the government has collected from oil and gas companies for the purposes of well reclamation – and taxpayers could be liable for some of the difference.

The Interior Department requires oil and gas companies to post reclamation bonds of $10,000 per well when they drill on federal land, to ensure that wells are cleaned up once they are retired or if a company goes bankrupt.

The report estimated, however, that the average cost of a well reclamation is now $65,200, with deeper wells that are becoming more common due to improved drilling technology costing around $100,000 to clean up.

Typically, if a company does not reclaim a well site, its bond is forfeited. If the bond is not enough to cover the cleanup, the government pays the difference.

“The current system leaves taxpayers holding the bag while oil and gas companies can walk away from their reclamation responsibilities,” said Jennifer Rokala, executive director at the Center for Western Priorities.

A spokeswoman for the Interior Department, Heather Swift, did not respond to requests for comment.

The Interior Department has not adjusted the price of reclamation bonds to keep up with inflation since the 1960s, exacerbating the disparity. If reclamation bonds had kept up with inflation, they would be roughly $64,000 in today’s dollars, according to ECONorthwest’s study.

The Interior Department has not released recent figures for the amount of money it has collected in reclamation bonds to cover existing wells. The Government Accountability Office, however, released a tally in 2010 showing reclamation bonds totaling $162 million.

The Inspector General of the Interior Department issued a report last month pointing out the financial risk to taxpayers from poor management of idle wells. It identified, among other things, a Bureau of Land Management field office that held $150,000 in bonds meant to cover 97 idle wells that together would cost $1.5 million to reclaim.

“Improperly managed idle wells can cost taxpayers millions of dollars,” according to the report.

Interior’s Royalty Policy Committee, which advises Secretary Ryan Zinke on management of the federal drilling program, will convene on Wednesday for its second meeting. Reclamation bonding is not on the agenda.

Reporting By Valerie Volcovici; Editing by Cynthia Osterman

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