As Fossil Fuel Companies Go Bust, Will Taxpayers Pay for Cleanup (Again)?

Frontier Group intern and University of Massachusetts-Amherst student Toby Armstrong contributed this blog post, the first in a series on the implications of the fracking bust and weak bonding requirements for taxpayers and the environment.

Fossil fuel extraction poses a significant risk to public health and the environment -- especially if the fossil fuel industry is not held accountable for cleaning up the mess that is inevitably left behind. Unfortunately, the boom and bust cycles that characterize energy markets are such that the money for cleanup often seems plentiful while companies are in the heat of expanding production, but is lacking when it’s time to close up shop and pay the tab.

With fossil fuel producers now in the midst of the “bust” part of the boom/bust cycle, it’s an important time to explore whether our current rules are strong enough to ensure that the fossil fuel industry will clean up its messes, or, as has been the case in previous busts, the industry will leave taxpayers and the environment to shoulder the cost.

Despite laws in every state mandating the reclamation of extraction sites, making sure that companies actually set money aside for these projects requires that states also mandate some form of financial assurance.

This assurance has primarily come in the form of bonds posted before production can begin at a site. If a company fulfills its duty to clean up a well or mine, it gets its bond back; if it walks away, it forfeits the bond, providing the state with the resources needed for cleanup.

The public is only protected, however, when the bonds are large enough to pay the full cost of cleanup. Unfortunately, in most states the bonding amount required is often far too low to cover the cost of the site’s reclamation. That can lead to big problems.

In the coal industry, for example, major names have recently filed for bankruptcy, including Alpha Natural Resources, Arch Coal, and most notably, Peabody Energy, the world’s largest private sector producer of coal.  In states like Wyoming and West Virginia, these large coal companies have traditionally been allowed to use “self-bonding” – or a mere demonstration that they have the assets necessary for cleanup. Peabody alone holds roughly $1.5 billion in cleanup liabilities that are self-bonded. If Peabody cannot find the money to make good on its promises, part of this cost could be added to the log of coal related cleanup projects for the taxpayers of the states to fund, already estimated at $3.6 billion.

Previous failures in the coal industry have demonstrated the importance of adequate bonding, and the lasting consequences of lax regulations. Between 2001 and 2008, 127 mines in West Virginia forfeited their reclamation bonds, with 227 forfeitures in Pennsylvania over a similar period.

As the oil and natural gas industry begins to slump, regulators are now facing similar issues in ensuring the proper plugging and restoration of wells. Since 2014, more than 60 oil producers have declared bankruptcy, leading to well abandonment. For example, Texas saw over 1,500 wells abandoned in 2015 alone, but only took in a fifth of the money required for plugging them, as the state hasn’t raised its bonding levels since 1991.

The situation is similar in Pennsylvania, which can only afford to plug around 130 wells a year (at about $5,000 to $200,000 per well). At that rate, it will be almost 70 years until the 8,747 abandoned wells the PA Department of Environmental Protection has logged – many of them drilled well before modern regulation began in the state – are plugged, and well over a thousand years until the remaining wells, many of which are yet to be documented, are found and plugged.

In total, more than 59,000 orphan oil and gas wells were on state waiting lists for plugging and remediation across the United States as of 2006, with potentially hundreds of thousands of additional wells whose status is unknown or undocumented.

To prevent the situation from getting any worse, states need to update their regulations to mandate bonding that covers the worst-case cost of cleanup, without loopholes or exemptions. Specifically, the allowance of blanket bonds, which cover all a company’s wells for a fixed cost, needs to be revoked, as it results in even less collateral per well (for a breakdown of state by state policy, see our 2013 report, Who Pays the Cost of Fracking?).

Clearly, states have enough on their plate dealing with the aftermath of past busts, and poor bonding laws are a big part of the problem. However, what’s at stake is far more than taxpayer dollars. Unplugged wells threaten to pollute drinking water and can leak the potent greenhouse gas methane, endangering communities both local and global. Now, as the fracking boom wanes in states across the country, there is the potential for thousands of new wells with unique dangers to be added to states’ cleanup logs.