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Oil, gas sector tells US lawmakers increased bond costs are unfair, may backfire

In addition to protesting plans to restrict leasing in Colorado and Alaska, the oil and natural gas industry is taking aim at the US Bureau of Land Management’s proposal to boost bond costs for leases, telling US lawmakers that it is unfair to impose new costs when there are so few abandoned wells.

The current bond rules work and that is why there are only 37 orphan wells on federal lands, Kathleen Sgamma, the president of the Western Energy Alliance, told the US House of Representatives’ Committee on Natural Resources Subcommittee on Energy and Mineral Resources on Sept. 19.

“The numbers show that it is an arbitrary and capricious rule to increase costs so much when the problem is such a relatively small number,” Sgamma said during a hearing.

The Department of Interior and the BLM on July 20 proposed to rule to raise minimum royalty rates, increase minimum bids and increase the minimum lease bond amount. Under the proposal, the minimum lease bond amount would be $150,000, up from the existing minimum of $10,000.

Bond concerns
Pete Stauber, the Minnesota Republican who chairs the subcommittee, asked whether the BLM’s proposal to increase bond costs and other fees would run the risk of creating more orphan wells by putting small oil and gas producers out of business.

“As written, if these rules go through, they would put more wells at risk of being orphaned,” Sgamma said. “The idea of a surety market and bonding is not to lock up all the capital in the bond, because if you do then you don’t have those resources available to actually do the plugging and abandoning work and the reclamation work,” she said.

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But Barbara Vasquez, an advocate for the Western Organization of Resource Councils, says the increased bonding requirements are necessary. The BLM has not increased minimum bonds amount for 60 years, she noted.

“Over 99% of federal wells carry bonds that are insufficient to cover the full cost of reclamation,” Vasquez said. “That means that oil and gas operators are often financially incentivized to skip out of their responsibilities at the end of the economically useful life of wells,” she said.

Federal wells often remain idled for years or decades before they are declared orphaned and then plugged and reclaimed, Vasquez said. There are more than 2,300 wells that have been idled for more than 25 years, she said. Until they are plugged, these wells have the potential to leak pollutants into the air and water, she said.

Pushback on leasing decisions
Republicans on the committee and some witnesses also decried the Biden administration’s recent plans to restrict leasing in Colorado and Alaska.
In August, BLM issued a proposal that would remove 1.6 million acres in Colorado from future oil and gas leasing. And In September, the Biden administration cancelled the last remaining oil and gas leases within the coastal plain of the Arctic National Wildlife Refuge and proposed new restrictions on oil and gas development in the National Petroleum Reserve-Alaska.

“I think the intention is to stop the development of the very promising Mancos shale,” Sgamma said regarding the Colorado proposal. BLM is closing nearly 1.6 million acres under the guise of closing areas that have no, low, or medium potential for oil and gas, she said.

“The problem with that is 15 years ago the Bakken was considered medium potential, 20 years ago the Permian Basin in New Mexico was considered basically low potential,” Sgamma said. “Now those are two of the most prolific basins in the world,” she said. “So by cutting off the Mancos shale to any new exploration, what was low that could become high potential, we would never know.”
Source: Platts

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