BLM Bonds: Drilling vs Plugging


Aug 15, 2023

Bonds: Current Rules & Proposed Changes

One of the big challenges in sealing abandoned or orphan wells is determining who should pay for it. In many instances the company that drilled the well is no longer in business or the well has been passed to organizations that simply can’t afford to plug it. In those cases, the burden falls to taxpayers. But a newly proposed rule change by the Bureau of Land Management (BLM) aims to reduce the burden on taxpayers by increasing the amount oil and gas companies must pay in bonds before drilling on federal land. However, industry officials state that such a policy change lacks nuance and could hinder oil and gas development.

Under existing BLM bond rules (set in the 1960s) oil and gas companies pay $10,000 to drill on a single lease, $25,000 to drill throughout a single state, or shell out $150,000 for leases across the nation. The proposed BLM rules increase the bond for an individual lease to $150,000, raises the statewide bond to $500,000, and gets rid of nationwide bonds. Additionally, under the new rules an operator would get the bond amount they paid back after plugging a well and reclaiming the land on the lease.

Planning Ahead: Aligning Costs

The costs of plugging an orphan well vary but can run upwards of $200,000/well. Existing bond rates are not enough to cover these costs, leaving the federal government to pick up the tab to seal orphan wells. Each year in Wyoming alone, costs to plug and reclaim orphaned and improperly sealed wells amount to $2.7 million. In 2018, the Government Accountability Office (GAO) published a report showing that the taxpayer costs of plugging orphan wells could be more than $330 million.

Promoting P&A: Preventing Orphan Wells

The increased bond prices would help cover the costs of plugging orphan wells, putting more of the cost burden on oil and gas companies and less on taxpayers. Similar changes to state-level bond rules, other mechanisms like conservation taxes levied on producers and money set aside by the Bipartisan Infrastructure Deal add to the pool of resources for dealing with orphan wells.

Another effect of increasing bond prices is that oil and gas companies would have more incentive to plug wells rather than selling the lease to another company. In the past, companies would sell less productive leases off to smaller operators that lacked the resources to plug unproductive wells and would sometimes go bankrupt, leaving orphaned wells. The new rules require new lessees to pay the higher bond prices when buying from another company. This could have an added effect of filtering out companies that lack the resources to properly manage wells that are no longer productive.

The Flip Side: Punishing Producers

However, some in the oil and gas industry caution against the proposed bond increase as it could harm smaller companies. Higher startup costs imposed by the new bond rules would more easily be absorbed by larger operators and could disproportionately affect smaller oil and gas companies. As an alternative, oil and gas industry officials propose that BLM introduce a bond on idle wells and a conservation tax like the one Wyoming implemented that taxes wells idle for more than three years at $10/ft.

Once BLM has finalized the language in their proposed changes, the new rules will be posted to the Federal Register after which there will be a 60-day period for public comments.

Ensuring Abandonment: Funding & Cost-Effective Remediation

Whether it be through bonds, an idle well tax, or a combination of the two its clear a solution is needed to prevent wells from going unplugged after all available hydrocarbons are extracted. With $4.7B in federal funds already allocated to plug orphaned wells across the nation, its imperative a system is put in place to prevent further expenses on behalf of taxpayers.

While time will tell what the government decides is the most effective way to ensure wells are properly abandoned, controlling costs to maximize the impact of available funds can be done today by implementing best practices and utilizing new technologies. While many wells are straightforward to plug, approximately 1/3 of wells suffer from annular gas leaks that can make plugging a nightmare and lead to considerably higher expenses. BioSqueeze uses the natural process of biomineralization to permanently seal annular gas leaks more effectively than any other technology, allowing for routine abandonment of event the most difficult wells.

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