By Timothy Terrell
“BLM is proposing to shift the state bonding minimums back to what they were prior to 2024, consistent with the White House’s intent to reduce regulatory barriers to energy production…. The large majority of oil and gas well operators are responsible, and it makes no sense to treat them all as though they were reckless and financially unstable.”
The Biden Administration enacted hundreds of punitive actions against the domestic oil and gas industry. The Trump Administration has worked to reverse this overreach. The latest reversal concerns a Bureau of Land Management’s proposal to lower statewide bonding on oil and gas leases from $500,000 to $25,000.
In protest, the Evangelical Environmental Network (EEN) and other left-of-center environmental organizations claim that companies will be incited to abandon wells and stick taxpayers with the cleanup bill. EEN misleadingly argues that “asking companies to cover their own cleanup costs is not a regulatory burden….”
To clarify, the BLM is proposing to shift the state bonding minimums back to what they were prior to 2024, consistent with the White House’s intent to reduce regulatory barriers to energy production. The higher minimums imposed in 2024 have not taken effect yet, as the BLM had extended the phase-in date to June of 2027.
Analysis
While it is appropriate that taxpayers not be on the hook for any company’s liabilities, the EEN’s complaint here is misleading. Companies will still be liable for their own cleanup costs if the bonding requirements revert to the pre-2024 level. The oil or gas well operator remains responsible for plugging wells and restoring the surface under the Mineral Leasing Act. If the operator does not comply with reclamation requirements, the lease can be cancelled, and other punitive actions can be taken.
Additionally, as the BLM explained, the lower bond minimums do not mean that the operator is not being required to provide adequate protection for the taxpayers. The bureau can increase the bond amount on a case-by-case basis, as when companies are “at-risk.” It can also “impose more stringent interim and final reclamation requirements, implement additional bond reviews, and develop other measures to limit the risk to the U.S. taxpayer from a lessee failing to meet its reclamation obligations.”
Will the BLM actually take these actions? A 2019 Government Accountability Office (GAO) report stated that the BLM had not been properly using its discretion to secure larger bonds where the risks justified doing so—a point which opponents of the lower bond minimums have emphasized. But in 2024, the BLM addressed this problem with Instruction Memorandum IM2024-014, which strengthened the review process for setting bonds to help ensure that higher-risk operators pay accordingly. The BLM also indicated in its proposal this year that it is “contemplating re-instating nationwide bonds,” which the 2024 bond increase rule had eliminated.
Taking all of this into consideration, the fact that the proposed statewide minimum bonding requirements “fall far below the BLM’s own estimated cost of $35,000 to $200,000 to decommission wells” is not particularly relevant, though a superficial comparison with the lower bond minimum might cause alarm among those who do not investigate further. The BLM can raise bonding requirements where necessary—especially since its IM2024-14 revisions—and has other means by which to induce compliance and protect Americans from the costs of unplugged and abandoned wells. The large majority of oil and gas well operators are responsible, and it makes no sense to treat them all as though they were reckless and financially unstable. Matching the bond requirement to the risk is better stewardship than a policy that ignores differences across firms and well characteristics.
Imposing high bonding requirements across the board does little to protect taxpayers or the environment and ties up capital in unproductive ways. In fact, as some states have ratcheted up financial assurance regulations, and as capital market trends have increased costs, some operators have been unable to cope. Ironically, this can make the well abandonment problem worse—a foretaste of what could come if higher federal minimums come into force.
A group of western oil and gas producers pointed out the unintended consequences: “Financial assurance pressures increase bankruptcy and/or premature well abandonment, orphaning legacy assets without adequate plugging and reclamation funding. Increased financial assurance requirements are intended to prevent orphaned wells, but the reverse is occurring; such requirements are increasing the number of wells being orphaned.” Lower bonding requirements should avoid these problems, and would particularly help smaller independent operators, who face even higher burdens if the 2024 rule phases in next year.
For consumers, the effect of higher bond minimums is to increase the expense of producing energy at a time when international conflict has already driven up prices significantly. Since lower-income Americans face comparatively higher budget strains from higher energy prices, and any increased burden on taxpayers (which should be minimal) would fall disproportionately on higher-income Americans who pay the vast majority of federal income taxes, it is even more difficult to understand objections from those who profess to care for the poor.
Politics or Market Process
An underlying problem here is common to any government ownership and management—the problem of determining the best use of a resource through political means. How does a bureaucracy such as the Bureau of Land Management determine the best use of land and its mineral resources amid the pressures of interest groups and the noise of public comments?
Without a market process through which energy users, farmers and ranchers, wildlife lovers, industries, and home buyers reveal the strength of their preferences for different uses of land, governments will have no way to find that “best use,” or to discover the appropriate financial terms to impose on users of the land. Instead, disputes over bonding requirements, oil and gas leasing revenues, environmental conservation, and the like will be settled through fractious interest group politics and alarmist rhetoric. A better way is to privatize the mineral rights to public lands and the surface land as well, a subject for another day.
Timothy D. Terrell (terrelltd@wofford.edu) is T.B. Stackhouse Professor of economics at Wofford College in Spartanburg, SC, and is a senior fellow at the Cornwall Alliance for the Stewardship of Creation and at the Mises Institute.
