Oil and gas operators’ required bond insurance in New Mexico would cover only a fraction of the potential cost of cleaning up wells and pipelines they might leave behind, which could stick the state’s taxpayers with a colossal bill, according to an independent study released Thursday.
Drillers have $200 million in bonds — only a fraction of the money required for cleanup that could cost as much as $8.3 billion in a worst-case scenario, said the study, compiled for the state by the Center for Applied Research, an economic consulting firm.
New Mexico has 700 abandoned wells on record, as well as thousands of idle and low-producing wells that could become “orphaned” — the term for wells scrapped by operators who go bankrupt or out of business.
The state becomes responsible for orphaned wells on state and private lands, plugging them and restoring contaminated sites. The $8.3 billion price tag is the estimated cost of cleaning up not only those abandoned wells but all of the active and idle wells on state and private lands — about 48,500 — along with pipelines and infrastructure not covered by bonds.
“This is the very first study that fully assesses the inadequacies of New Mexico’s oil and gas bonding requirements,” State Land Commissioner Stephanie Garcia Richard said in a statement. “And while I’m proud to have sparked the development of the study, the results are staggering.”
Companies must be stewards of the land, plugging wells to prevent methane leaks, removing old equipment, cleaning up oil spills and restoring the site, Garcia Richard said.
“No one can afford these obligations if they have gone bankrupt,” she added. “That is why we need companies to be adequately bonded on the front end.”
A state regulator and an industry representative see the study’s worst-case cost as inflated.
In an email, Adrienne Sandoval, director of the state Oil Conservation Division, wrote the report’s estimate of typical plugging costs exceed what her agency’s inspectors have seen in the field.
“Our experience suggests it is about half,” Sandoval wrote. “That said, even using a lower cost estimate, OCD recognizes that there is still a gap, just not as large as estimated in this report.”
Robert McEntyre, a spokesman for the New Mexico Oil and Gas Association, insisted his group supports “pragmatic approaches” to ensure public lands where drilling occurs are protected and restored.
But he disagreed with those who would use the study to push for broad bonding reform. Orphaned wells make up a tiny portion of wells within the state, he said, calling them “outlier cases.”
“It’s simply impossible and illogical that all oil and gas wells and infrastructure would require plugging and remediation at the same time, as the report suggests,” McEntyre wrote in an email.
Both McEntyre and Sandoval noted the state Legislature increased bond requirements for drillers in 2018.
With the new bond rules only in place for two years, McEntyre argued, it would be premature to question how well they are working.
U.S. Rep. Teresa Leger Fernandez believes the current bonding system is inadequate.
She has introduced a House bill that would increase the bonding companies must pay to drill wells and would charge a yearly fee for idled wells on public lands. It also would earmark $8 billion in grants to clean up the wells across the country, including $25 million for New Mexico
“Findings in this study are alarming and provide yet another example for why we need federal funding and bonding reform to clean up orphaned wells,” Leger Fernandez wrote in an email. “It would finally hold oil and gas companies responsible from the beginning. There is no excuse for companies to litter our precious lands and abandon our communities.”
Leger Fernández proposes a minimum bond of $150,000 on any oil or gas lease and $500,000 for a “blanket bond” that covers all wells in a lease or within a state. Larger companies operate hundreds of wells at a time.
In New Mexico, operators pay $25,000 for one well plus $2 per foot of depth. Blanket bonds vary in cost depending on the number — from $50,000 for 10 or fewer to $250,000 for 100 or more.
The state also has a reclamation fund that oil and gas companies pay into through fees. That fund is tapped when a company’s bond doesn’t cover cleanup costs at an abandoned site.
That fund’s size ranges from $5 million to $8 million in a given year, depending on the health of the industry, Sandoval said.
Although Sandoval didn’t express support for bonding reform, she said she does back increased federal funding to close the gap between available bond money and cleanup costs.
“This gap is why OCD supports efforts on the federal level to put more funding into plugging efforts,” Sandoval said.
An environmental advocate said the study uses simple math to show how big the problem could become and why increased bonding is needed.
As the world shifts toward renewable energy in the coming years, many of the smaller oil and gas operators in the state will fold in the tighter market, leaving behind orphaned wells, said Tom Singer, senior policy adviser at the Western Environmental Law Center.
About 8,500 wells have produced nothing in the past 15 months, Singer said, adding idle wells often become abandoned ones.
Singer agreed it’s unlikely all of the state’s wells would fail at once, but he contends $200 million in total bonding is “nonsensically low,” especially with all the marginal wells still in place.
“The more idle and nonproducing wells that a company owns, the more that they need to be assuring the taxpayers that they’ve got the resources to clean up their mess,” Singer said.