FAQ

Abandoned Wells and Oil and Gas Bonding FAQ

Aug 1, 2023 | 15 min read | Print Article

TCS has long advocated for reforms to address the increasing taxpayer costs from orphaned wells and mines. Industry interests should be responsible for cleaning up their operations and properly restoring sites.

This FAQ primarily focuses on abandoned and orphaned oil and gas wells. Below are answers to some frequently asked questions (FAQs) on this topic to help you understand the orphaned well problem and how oil and gas bonding reform can address this issue.

To learn more about orphaned wells, read our issue brief here.
To learn more about oil and gas bonding on federal lands, read our fact sheet here.
Learn more about abandoned coal and hardrock mines.

FAQ About Abandoned Wells and Oil and Gas Bonding

1. What is an abandoned well?

Oil and gas wells become inactive when operators permanently cease production. Inactive wells must be maintained or plugged and reclaimed (cleaned up) in accordance with statutes and regulations. When they are not, these wells are considered abandoned.

2. What is an orphaned well?

Orphaned wells are a subset of abandoned wells where nobody is legally or financially responsible for cleanup, for example, when the company operating the wells goes bankrupt.

3. How do wells become orphaned?

Orphaned wells are wells that have been abandoned and have no legally or financially responsible party. This may happen when the company operating a well dissolves or goes bankrupt, as they do regularly throughout the oil and gas boom-and-bust cycle. It has been documented that larger companies sometimes shed their reclamation liability by selling assets like marginal wells at low costs to smaller companies that hope to squeeze out the last bit of oil at the end of the marginal wells’ economically useful life. Smaller companies are more likely to go bankrupt due to market fluctuations, causing wells to become orphaned.

4. What is well reclamation?

The Bureau of Land Management, the agency in charge of onshore federal oil and gas leasing, defines well reclamation as a process to restore lands to a condition “equal to or closely approximating” their original natural state, which involves plugging the well, removing structures and reshaping and revegetating the land around the wells.

5. Why do wells need to be reclaimed?

Abandoned and orphaned wells can damage the environment and pose significant risks to public health by leaking methane gas, contaminating surface water and groundwater, fragmenting habitats, eroding soil, and interfering with agricultural land use.

6. How many abandoned and orphaned wells are there right now?

The Environmental Protection Agency (EPA) estimated that there are about 2.1 million unplugged abandoned wells.

In 2019, the Bureau of Lange Management (BLM) provided a list of 296 orphaned wells on federal lands. However, we do not know how many wells become orphaned over specific time frames because the BLM does not systematically track this data. In 2020, the Interstate Oil and Gas Compact Commission (IOGCC) reported that there are 56,600 documented orphaned wells in 30 surveyed states, which include some but not all orphaned wells on federal and tribal lands. The IOGCC estimates the total number of undocumented orphaned well to be between 210,000 and 746,000 in those 30 states.

7. What happens when a well is orphaned?

When a well is orphaned on federal land, the Bureau of Land Management (BLM) uses the operating company’s bond to cover the costs of any remaining reclamation work. If the amount of the bond is insufficient, taxpayers are forced to cover the costs of reclaiming the orphaned wells.

8. What is oil and gas bonding?

The Bureau of Land Management is required by the Mineral Leasing Act of 1920 to obtain adequate bonds or other financial assurances from operators to cover the cost of well reclamation before they can start drilling a new well on federal lands. If an operator adequately reclaims their wells, the Bureau will return the bond to the operator. If not, the bureau uses the bonds to cover at least some of the costs of reclamation.

9. What are the different kinds of federal oil and gas bonds?

Operators can secure either a surety bond or a personal bond. A surety bond is when operators enter a legally binding contract with a third-party surety company who will assume the responsibility of the debt if the operator defaults or is unable to finance reclamation. A personal bond is either an upfront cash payment or guarantee of funds in the future, like a Letter of Credit or Certificate of Deposit.

There are also three different types of bond coverage available: an individual lease bond, a statewide bond, and nationwide bond.

10. How much do federal oil and gas bonds cost?

The cost of an oil or gas bond depends on the individual contract, but different types of coverage have different bond minimums. An individual lease bond has a $10,000 minimum, a statewide bond has a $25,000 minimum, and nationwide bond has a $150,000 minimum. According to the Government Accountability Office, 82 percent of bonds are accepted at this minimum rate.

The bond value per well depends on how many wells are covered in each bond. The Government Accountability Office reports that in 2019, on average, an individual lease bond covered about 10 wells, a statewide bond covered about 49 wells, and a nationwide bond covered 374 wells. The individual lease bonds had the highest average bond value per well at $2,691, and nationwide bonds had the lowest average bond per well value at $89. Overall, the Government Accountability Office found that the average value of bonds held by the Bureau of Land Management in 2019 was $2,122 per well.

11. How much does it cost to reclaim a well?

The Government Accountability Office (GAO) estimates that reclamation costs can range from $20,000 per well to $145,000 per well. However, the most extreme estimates are as low as $3,069 and as high as $603,000. In 2019, the Interstate Oil and Gas Compact Commission (IOGCC) reported that the national average for reclamation cost per well is $24,000.

12. What affects reclamation costs?

Reclamation costs can vary drastically depending on the depth and location of individual wells. Deeper wells are more costly to reclaim, with cost typically increasing proportionally with depth. And wells in locations that are difficult to reach, such as the middle of a river, also cost more to reclaim.

13. How much do taxpayers spend reclaiming orphaned wells each year?

We do not know the exact amount of taxpayer dollars spent reclaiming orphan wells each year. The Government Accountability Office (GAO) estimates that in 2018 the reclamation costs for orphaned wells and for inactive wells at risk of becoming orphans was $46.2 million.

The Infrastructure, Investment, and Jobs Act (P.L.117-58) appropriated $4.7 billion in taxpayer funds to reclaim wells on federal, tribal, and state lands.

Without bonding reform, reclamation costs will only increase in the future. A 2018 report by Center for Western Priorities found that there were 94,100 existing producible wells on federal lands, which will cost $6.14 billion to reclaim in the future. In all of the U.S., including federal, state and private lands, there are 2.6 million documented unplugged wells, which is estimated to cost $280 billion to reclaim, according to the Carbon Tracker Initiative. This estimate excludes costs to reclaim an estimated additional 1.2 million undocumented wells in the U.S.

14. Why does oil and gas bonding need reform?

Bond rates were originally established in the 1950s and 1960s to ensure that oil and gas companies, not taxpayers, were responsible for reclaiming wells. However, these rates have not changed in over 60 years and are no longer sufficient.

Current bond rates have not been adjusted for inflation. Today’s $10,000 minimum bond was the equivalent of $98,870 in coverage when it was established a half century ago. Similarly, the original rate for statewide bonds translates to an equivalent of $271,984 and the nationwide bond minimum covered an equivalent of $1,631,905 in today’s dollars.

Additionally, technological improvements in oil and gas extraction have changed how operators use federal land and changed the cost to reclaim the land afterwards. Oil and gas companies today are drilling deeper than they did in the 1950s and 1960s, which means wells are more costly to clean up. These changes in reclamation costs should be factored into new bond minimums.

15. What reforms have been proposed to address orphaned wells?

The Administration and Congress have proposed several pieces of legislation that address orphaned wells but most have yet to be enacted into law. However, the Infrastructure, Investment, and Jobs Act (P.L. 117-58), passed in November 2021, appropriated $4.7 billion taxpayer dollars to reclaim orphaned wells—wells with no solvent owner or responsible party.

Orphaned wells are in need of urgent reclamation, but there must be efforts to shift the costs of reclamation to the oil and gas industry. With approximately 3.4 million abandoned wells still to be plugged in the United States, $4.7 billion will only be the beginning for taxpayers if we don’t hold the industry accountable for cleaning up after its own mess.

In August 2022, a draft of the Inflation Reduction Act included provisions that would raise the minimums for federal oil and gas bonds, but these provisions were excluded from the final bill because of a budget reconciliation rule that prohibits non-budgetary provisions in reconciliation bills.

In July 2023, the Department of the Interior released a proposed rule that would raise the minimums for individual leases bonds to $150,000; statewide bonds to $500,000; and eliminate nationwide and unit bonds. These reforms, if enacted, would protect taxpayers and finally hold oil and gas companies accountable for cleaning up after themselves.

Other reforms have also been introduced in the House and the Senate.

In the 117th Congress, two bills have been introduced in the Senate to address orphaned wells: S.2177 and S.1076.

2177, the Oil and Gas Bonding Reform and Orphaned Well Remediation Act, was introduced by Senator Michael Bennet on June 22, 2021. TCS supports S.2177 as an important step to protect taxpayers and hold industry actors accountable for cleaning up their messes. This legislation calls for updating bonding rates and implementing a system to track data on potential liabilities. More specifically, the bill would remove nationwide bonds and increase the bond minimum for an individual lease from $10,000 to $150,000 and for a statewide lease from $25,000 to $500,000. Additionally, the legislation would prohibit leasing to any entity that has failed to reclaim wells on any previous leases.

1076, the Revive Economic Growth and Reclaim Orphaned Wells Act of 2021, would provide funding to reclaim abandoned oil and gas wells. While S.1076 takes a positive step towards seeking to address orphan wells, TCS is concerned about the omission of oil and gas bonding reform measures.

In the House, three bills have been proposed to address orphaned wells: H.R. 1505, H.R. 2415, and H.R. 3585.

In March 2021, Representative Alan Lowenthal (D-CA) introduced H.R. 1505, the Bonding Reform and Taxpayer Protection Act, to increase the bond minimum for an individual lease from $10,000 to $150,000 and for a statewide lease from 25,000 to $500,000. Additionally, the legislation includes a section that would prohibit leasing to any entity that has failed to reclaim wells on any previous leases. TCS supports raising the bond minimum and reforming the bonding process.

The Orphaned Well Cleanup and Jobs Act of 2021 (H.R. 2415), introduced by Representative Teresa Leger Fernández, would authorize $7.25 billion in grants for orphaned well cleanup on state and private lands, $700 million in grants for cleanup on federal and tribal lands, and implement an annual idle well fee of between $500 and $7,500 per idle well on federal lands. The legislation would similarly increase the bond minimum to $150,000 and $500,000 for a bond covering wells on an individual lease or in an entire state, respectively. The Government Accountability Office calculated that an annual idle well fee of less than $350 per well could generate more than enough revenue to cover potential reclamation costs in a decade without using taxpayer dollars, in which case the generous authorization for reclamation on federal lands may not be necessary.

H. R. 3585 is the companion bill to S.1076 (Revive Economic Growth and Reclaim Orphaned Wells Act of 2021). We are similarly concerned about the lack of oil and gas bonding reform measures.