“Fracking” operations pose a staggering array of threats to our environment and health – contaminating drinking water, harming the health of nearby residents, marring forests and landscapes, and contributing to global warming. Many of these damages from drilling have significant “dollars and cents” costs.
To the extent that this dirty drilling is allowed to continue, policymakers must require, among other things, that the oil and gas industry provide up front financial assurance commensurate with the potential for damage. By holding operators fully accountable, strong financial assurance requirements deter some of the riskiest practices and ensure that the industry, rather than the public, bears the brunt of the costs. Requiring such assurance up front – i.e., before drilling occurs – helps ensure that the public is not left holding the bag when the boom is gone and drilling operators have left the scene.
Unfortunately, current state and federal requirements for bonding or other financial assurance are wholly inadequate to protect the public.
State and federal officials must adopt new financial assurance rules that ensure that the oil and gas industry – not taxpayers – is held fully accountable for the costs of fracking.
To protect the public, an adequate blueprint for bonding must adhere to the following principles:
Require broad accountability for fracking-related costs. Drillers should be required to provide financial assurance to cover well plugging and reclamation, restoration of damage to the environment and natural resources, compensation to victims for damage to property and health, provision of alternative sources of drinking water in case of water contamination, and full restoration of damage to public infrastructure, such as roads. Additional taxes and fees should be used to recover fracking-related costs that are relevant at a regional, national or international scale, such as costs resulting from emissions of smog-forming pollutants, emissions of global warming pollution, and impacts on local public services.
Require levels of financial assurance that are sufficient to protect the public. Drillers should be required to post financial assurance of at least $250,000 per well for the cost of plugging and reclamation and at least $5 million per well for damage to private property, health and natural resources, as well as environmental cleanup. Some measure of financial assurance should be required for at least 30 years to protect the public against problems that emerge only over time. Drillers should also be required to pay into industry-wide cleanup funds to act as a backstop source of funds for cleanup and victim compensation in the event that financial assurance rules are violated or fail to offer adequate protection.
Eliminate loopholes, exemptions and discounts. Federal officials should end the oil and gas industry’s exemptions from major environmental laws. “Blanket bonding” – which provides an unjustified bulk discount on financial assurance – should be eliminated. Provisions of state regulations that allow drillers to avoid posting financial assurance through financial tests, the payment of annual fees, or a history of compliance with state regulations should also be eliminated.
Require forms of financial assurance that truly protect the public. Surety bonds, collateral bonds backed by irrevocable letters of credit or cash equivalents, and fully-funded trust funds provide strong guarantees that funds will be available for cleanup when needed and these should form the foundation of any financial assurance system. Liability insurance can play an important role in protecting the public against the cost of damage to neighboring properties and natural resources, including damage that occurs long after plugging and reclamation are complete.
Integrate financial assurance rules into a comprehensive system of oil and gas regulation. State and federal governments must implement and enforce financial assurance requirements by ensuring that each well is covered by financial assurance and that financial assurance remains in place as long as the possibility of damage persists. In addition, regular inspection of wells and enforcement of environmental rules is essential to limit the potential for major mishaps that result in monetary damage that exceeds financial assurance requirements. Financial assurance rules can help hold drillers accountable for following the law if they contain provisions allowing bonds to be forfeited in cases where rules are broken or fines and penalties are not paid.
Time and again, resource extraction “booms” have given way to “busts” – leaving the companies that profited from mining or drilling unwilling or unable to clean up the damage they have caused. Absent swift action by policymakers to dramatically ramp up financial assurance for fracking, we could see a similar grim legacy from the new oil and gas rush.