The COVID-19 disaster and a catastrophic fall in oil prices could leave the state on the hook for billions in environmental cleanup costs if oil and gas companies go bankrupt during the health crisis, the state’s top land official says.
The crash in the oil and gas market is fueling long-standing concern from State Land Commissioner Stephanie Garcia Richard and environmental groups that bonding requirements for oil and gas companies are nowhere near enough.
“We never dreamed that we would be in this position,” she said. “It’s a double whammy, right? We rely on them for our day-to-day operation funding. … In addition, we could be left holding the financial bag for cleanup.”
Before drilling an oil or gas well companies must set aside a bond meant to cover the cost of cleanup if they go under.
It costs about $29,000 to plug and remediate the average well, according to the state Energy, Minerals and Natural Resources Department. Yet the current State Land Office bonding requirement for companies to pump oil is $25,000 per operator, regardless of how many wells that company is operating.
Additional funding known as “blanket bonding” required by the state ranges from $50,000 for up to 10 wells to $250,000 for more than 100 wells. The state is authorized this year to spend $4.92 million of a total $8.75 million oil and gas cleanup fund.
But that’s just money for wells on state land. Bonding amounts for companies on federal land have not changed in decades, and critics have argued they are nowhere near high enough to cover an industry collapse.
When oil prices plummeted into negative territory in April, concerns were raised about bonding requirements. But even before that crash, an oil price war between Saudi Arabia and Russia resulted in layoffs, wells being shut in and dismal projections for the fossil fuel market created uncertainty that was unimaginable in the industry just a few months ago.
Adrienne Sandoval, who oversees the oil division within the Energy, Minerals and Natural Resources Department, acknowledged state officials do not know whether bonding requirements and money from the oil reclamation fund are enough to cover what may unfold in the next several months.
In the past it has been enough, she said. And in the past, large hydraulic fracturing, or fracking, operations usually have not gone bankrupt, and if they have they’ve typically been purchased by other oil and gas companies.
But these are not typical times.
“I can’t speculate on how many wells we may see in the future that are abandoned,” Sandoval said. “That’s all going to depend on price and how the companies leverage themselves overtime. I don’t want to speculate if we have enough going forward because I don’t know how many wells are going to be shut in.”
Dozens of smaller operators in New Mexico don’t have the financial reserves available to energy giants like Chevron or ExxonMobil. In the event of a flood of bankruptcies, wells would be plugged, machinery disassembled and millions of gallons of toxic hydraulic fracturing water left untended, Garcia Richard said.
The land commissioner has argued in the past the bonds oil and gas companies must issue are insufficient to deal with the actual cost of cleanup.
But the gap between the real cleanup cost and the amount available to the state could widen dramatically if an unprecedented number of companies go bankrupt.
Garcia Richard said state lawmakers could be forced to clean up toxic oil and gas contamination with money from the State Land Office that could otherwise go to schools or health.
In New Mexico, 46,566 oil and gas wells are currently producing oil, according to the state Energy, Minerals and Natural Resources Department. As of April 24, 207 wells had been shut in, with an unknown number anticipated to turn the valves off in the weeks to come.
Of New Mexico’s active wells, 14,060 are on state trust land, according to the State Land Office — the remainder are on private or federal land. There are another 60,000 inactive wells statewide.
“Nationally we’ve already seen one bankruptcy related to the downturn, so our concern even before this crisis is how exposed the state is to massive fallout in the oil and gas industry,” said Camilla Feibelman, director of the Sierra Club’s Rio Grande Chapter.
Tom Singer, a senior policy adviser with the Western Environmental Law Center, agreed. He said the public interest law firm also is concerned companies that decide to shut in wells may never open again amid the glut in global oil supply and low prices.
Robert McEntyre, a spokesman for the New Mexico Oil and Gas Association, downplayed the risk of a catastrophic industry failure and argued bonding requirements are high enough.
McEntyre also pointed to the $4.9 million state fund available this year for environmental cleanup.
“At this point the fund … has been refilled and is back to a healthy level, and we should give the fund an opportunity to work and perform its intended purpose before looking at other policy remedies,” he said.
The State Land Office pushed lawmakers during the 2020 legislative session to fund a study pinpointing how far short bonding requirements are. But lawmakers did not approve the measure.
Gov. Michelle Lujan Grisham’s office, however, gave Garcia Richard the green light and the money to go ahead with the study anyway. A spokeswoman for the State Land Office said officials hope to have it completed and available to the public by the end of the year.
“We’re going around the Legislature because they were given the opportunity to do the right thing and they blinked,” Garcia Richard said.