The North Dakota Emergency Commission recently approved the use of $33.1 million in federal coronavirus aid to plug abandoned oil wells. State and oil industry officials portrayed the decision as an energy sector jobs program and an attempt to solve the growing problem of abandoned oil wells. Both are worthy goals.
But the decision also shows the negligence of state officials. If the North Dakota Industrial Commission required sufficient reclamation bonds, it wouldn’t be necessary to use federal taxpayer money to plug abandoned oil wells.
The NDIC’s bond requirements are insufficient to deal with the 549 abandoned wells that the state has identified as candidates for plugging, not to mention the tens of thousands that eventually will need to be plugged.
State Mineral Resources Director Lynn Helms recently claimed that oil companies are required to post a $100,000 bond for a producing well. That’s actually not true, and even if it were, that amount is not high enough to cover plugging and reclamation costs.
The $100,000 bond Helms referred to is what’s known as a “blanket bond.” The NDIC allows an oil company that operates more than one well (i.e. almost all oil companies) to post a single bond of $100,000.
A blanket bond is limited to six wells, but that doesn’t mean for every six wells an oil company operates it must post a $100,000 bond. The regulation is worded so that the limit seems to apply to how many of an oil company’s wells need to be plugged at a given time, not to every six wells it actually owns.
Regardless of how the six-well limit is applied, it’s obvious the NDIC’s bond requirements are completely inadequate. The cost of plugging a well averages about $150,000, not including site reclamation costs. Even if an oil company is required to post a $100,000 bond for every six wells, that works out to only $16,666.67 per well, a small fraction of the total cost of plugging and reclamation. If the six-well limit is applied to wells that need to be plugged instead of all wells owned (as one suspects), the amount per well is even lower.
According to Helms, oil companies can’t afford to plug and reclaim wells and are unable to obtain bonds, given the state of the oil industry. But that’s precisely why adequate bonds are needed. At the time of drilling, oil companies are flush with cash and can easily obtain bonds. Since the oil industry’s business model is essentially boom and bust, requiring adequate bonds up front ensures money will be available when the oil stops flowing. Without sufficient bonds, taxpayers are stuck with a bill that eventually will run into the billions.
The Legislature can protect taxpayers by increasing bond requirements. The minimum bond should be $150,000 for each well drilled or operated and should increase over time to track inflation. Each bond should be dedicated to the plugging and reclamation of a specific well. Blanket bonds should only be allowed if the aggregate amount equals at least $150,000 per well.
The state is using federal taxpayer dollars to provide a band-aid solution to a problem it created. Unless bond requirements are increased, the use of coronavirus aid will be merely a small down payment from taxpayers on billions of eventual costs.
If the NDIC really cared about the problem of abandoned oil wells, it would increase bond requirements and hold oil companies accountable for cleaning up their own mess. Instead, the NDIC is giving its friends in the oil industry a taxpayer-funded bailout.
It’s obvious whose side state officials are on, and it’s certainly not the side of North Dakota taxpayers.
Tory Jackson is an attorney and writer. His legal practice involves real estate and business matters, with a particular focus on historic rehabilitation projects. He holds degrees from Bismarck State College, the University of Virginia and Harvard Law School. He lives in Bismarck, where he was born and raised.
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