Will the Public End up Paying to Clean up the Fracking Boom?

Analysis
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Increasingly,ย U.S. shale firms appear unable toย pay back investorsย for the money borrowed toย fuel the last decade of the fracking boom. In a similar vein, those companies also seem poised to stiff the public on cleanup costs for abandoned oil and gas wells once the producers have movedย on.

โ€œItโ€™s starting to become out of control, and we want to rein this in,โ€ Bruce Hicks, Assistant Director of the North Dakota Oil and Gas Division,ย said in Augustย aboutย companies abandoning oil and gas wells. If North Dakotaโ€™s regulators,ย some of the most industry-friendlyย in the country, are sounding the alarm, then thatย doesnโ€™t bode well for the rest of theย nation.

In fact, officials in North Dakota are using Pennsylvania as an example of what they want to avoid when it comes to abandoned wells, and withย goodย reason.

The first oil well drilled in America was in Pennsylvania in 1859, and the oil and gas industry has been drilling โ€” and abandoning โ€” wells there ever since. Pennsylvaniaโ€™s Department of Environmental Protection (DEP)ย says that while it only has documentation of 8,000 orphaned and abandoned wells, it estimates the state actually hasย over a halfย million.

โ€œWe anticipate as many as 560,000 are in existence that we just donโ€™t know of yet,โ€ DEPย spokesperson Laura Fraley told StateImpact Pennsylvania. โ€œThereโ€™s no responsible party and so itโ€™s on state government to pay to have those potential environmental and public health hazardsย remediated.โ€

According to StateImpact, โ€œThe state considers any well that doesnโ€™t produce oil and gas for a calendar year to be an abandonedย well.โ€

That first oil well drilled in Pennsylvania was 70 feet deep. Modern fracked wells, however, can be well over 10,000 feet in total length (most new fracked wells are drilled vertically to a depth where they turn horizontal to fracture the shale that contains the oil and gas).ย Because the longer the total length ofย the well, the more it costs to clean up, the funding required to properly clean up and cap wells has grown as drillers have continued to use new technologies to greatly extend well lengths.ย ย Evidence from the federal government points to the potential for theseย costs beingย shifted to the tax-payingย public.

The Government Accountability Office (GAO)ย released a report this September about the risks from insufficient bonds to reclaim wells on public lands. It said, โ€œthe bonds operators provide as insurance are often not enough to cover the costs of this cleanup.โ€ย The reportย cited a Bureau of Land Management (BLM) officialโ€™s estimate of $10 a foot for well cleanupย costs.

StateImpact Pennsylvania noted that costs to reclaim a well could add up to $20,000, and DEP spokesperson Fraley said they could be โ€œmuch, much higher.โ€ The GAO report noted that โ€œlow-cost wells typically cost about $20,000 to reclaim, and high-cost wells typically cost about $145,000 toย reclaim.โ€

In North Dakota, where state regulators have raised concerns about this growing problem, one of theย top industry regulators,ย State Mineral Resources Director Lynn Helms, estimatedย that wells thereย cost $150,000 to plug andย reclaim.

And this problem isn’t just in the U.S. Canada is facing a similar cleanupย crisis.ย 

Financial Bonding Requirements for Wellย Cleanupย 

Legally, oil and gas companies are required to set aside money to pay for well cleanup costs,ย a process known as bonding. These requirements vary by state and for public lands, but in all cases, the amounts required are so small as to be practicallyย irrelevant.

The GAO report reviewed the bonds held by the Bureau of Land Management for wells on public lands and found that the average bond per well in 2018 was worthย $2,122.

The Western Organization of Resource Councils summarized bonding requirements by state, and none of them came even close to being adequate to cover estimated costs to deal with old wells. In North Dakota, a $50,000 bond is required for a well. But a $100,000 bond can cover up to 6 wells, which comes out to $16,667 per well โ€” or approximately one tenth of the estimatedย cost to reclaim a well in thatย state.

North Dakota has a history of bending toย oil and gas industry pressure when it comes to regulations. While North Dakotaโ€™s bonding rulesย fallย far short of what’s needed to actually cover full cleanup costs, the reality on the ground is much worse. Regulators allow companies to โ€œtemporarily abandonโ€ wells, whichย requires no action from companies for at least seven years. Wells can hold this โ€œtemporaryย statusโ€ for decades. And another practice in the stateย allows a companyย to sell old, under-performing wells to another company, passing alongย the liability but notย the bondingย funds.

By any measure, the amount of private money currently allocated in the U.S. to plug and reclaim oil and gas wells is a small fraction of the real costs. Thatย means oil and gas wells โ€” and the U.S. had one million active wells in 2017, and even more abandoned โ€” will either be left to fail and potentially contaminate the surrounding water, air, and soil, or the public will have to pick up the tab. This representsย just one of the many ways the public subsidizes the oil and gasย industry.

A South Dakota Caseย Study

South Dakota allows companies to post a $30,000 bond for as many wells as the company chooses to drill. Spyglass Cedar Creek is a Texas-based company that was operating in South Dakota and recently abandoned 40 wells,ย which the state has estimated will have a cleanup cost of $1.2ย million.

However, there is aย twist to this story. That $30,000 bond doesnโ€™t really exist. The owners of the company had put $20,000 of it into a Certificate of Deposit. But when the state went looking for that money, the owners said they had cashed it in 2015 because, as reported by the Rapid City Journal, โ€œcompany officials did not remember what the money wasย for.โ€

Spyglass Cedar Creekย doesย not have the money set aside that wasย required to clean up these wells, the state does not have recourse to get thatย money, and some of the wells are reportedly leaking. So, what can beย done?

According to Doyle Karpen, member of the South Dakota Board of Minerals and Environment, the answer is forย the taxpayers of that state to cover theย cost.

โ€œI think the only way we can correct this is go to the Legislature and ask for money,โ€ Karpen said earlier thisย year.

Following the Coal Industry Businessย Model

What is starting to unfold with the oil and gas industry is very similar to what hasย already been playing out with the U.S. coalย industry.

According to a Center for Public Integrityย investigation, more than 150 coal mines (and dozens of uranium mines)ย have been allowed to idle indefinitely, enablingย their owners to avoid paying for the costs ofย cleanup.

In April, the Stanford Law Review published the paper, โ€œBankruptcy as Bailout: Coal Company Insolvency and the Erosion of Federal Law,โ€ which notes that almost half the coal mined in the U.S. is done so by companies that have recently declaredย bankruptcy.

The paper notes how the bankruptcy process is used by coal companies to rid themselves of environmental cleanup liabilities and pension costs โ€œin a manner that has eviscerated the regulatory schemes that gave rise to thoseย obligations.โ€

Yet coal company executives often receiveย healthy bonuses, even as theyย are driving companies into bankruptcy.

This summer, Blackjewel famously failed to pay its coal miners, and even pulled funds out of their bank accounts, after the company suddenly declared bankruptcy in July. That promptedย workers to sit on train tracks in Kentucky, blocking a $1 million shipment of coal, in a two-month protest. And Blackjewel is poised to leave behind thousands of acres of mined land in Appalachia without adequateย reclamation.

Privatize the Profits, Socialize theย Losses

The mineral extraction business model in the U.S. is set up to maximize profits for executives, even as they lose investor money and bankrupt their companies. That is true of the coal industry and that is true of the shale oil and gas industry.

At the same time, the regulatory capture by these industries at both state and federal levels allows private companiesย to pass on environmental cleanup costs to the public, and theย inadequate bonding system for oil and gas well reclamation represents just one moreย example.

The so-called fracking revolution in America has resulted in many new records: record amounts of U.S. oil and gas exportedย (to the detriment of a livable climate), new levels of human health impacts on surrounding communities,ย record numbers of industry-inducedย earthquakes,ย record amounts of flaring natural gasย in oil and gas fields, and record-breaking depths and lengths ofย wells.

And the cleanup costs for the fracking boom are also poised to beย staggering.ย 

Main image: Oil in the hills. Credit:ย Alfonso E. Perez-Gonzalez,ย CC BYย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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