Conventional Gas Well Bonding Rates Frozen at Current Level
A new state law will keep bonding rates for conventional oil and gas wells in Pennsylvania at the current low level for the next 10 years, which could increase the state’s liability if an operator walks away from its plugging responsibility.
House Bill 2644 recently became law, with Gov. Tom Wolf declining to sign it but also deciding against a veto. It will freeze bonds for conventional wells at the current $2,500 per well, which is just a fraction of the cost of plugging it at the end of production.
Under Act 13, passed by the state legislature in 2012, the bond amount for conventional wells was set at $2,500 per well, with the option for an operator to post a $25,000 blanket bond for multiple wells. While the state Environmental Quality Board could previously adjust bond amounts every two years to reflect the cost of well plugging, and had been considering raising bond amounts, the new legislation prevents any adjustment for 10 years. The new legislation does increase the maximum blanket bond for new wells to $100,000 or an additional $1,000 per new well if the operator already has a blanket bond.
Thousands of oil and gas wells have been drilled in Pennsylvania since the industry’s birth in 1859. Although owners and operators are legally responsible for plugging wells when oil and gas production ends, this does not always happen. Many of the 8,700 known abandoned wells in Pennsylvania’s database are so-called conventional “legacy wells” drilled before regulations on plugging existed and long since abandoned.
Research suggests there could be as many as 200,000 orphan wells in the state. At a conservative cost of $33,000 to plug an abandoned well, DEP’s liability ranges between $280 million to several billion, and plugging costs have been increasing in the past decade. While the state adds a modest surcharge on drilling permits to fund plugging activities and requires a bond, that amount is inadequate. Leaking wells are an environmental and health hazard, putting the potent greenhouse gas methane as well as chemicals including benzene, toluene, ethylbenzene, and xylenes, into the atmosphere and groundwater.
The recent Infrastructure Investment and Jobs Act passed by Congress will provide billions for plugging leaking and abandoned wells, and Pennsylvania is expected to receive about $400 million over the next decade to address the problem. The state Department of Environmental Protection has been ramping up its planning efforts and developing a database of plugging contractors and developing a plan for addressing leaking and abandoned wells. The grant formula documentation for the federal funding estimates that the current cost of plugging such a well is now about $68,000.
While conventional well operators have pushed to keep bond amounts low, arguing that higher bonds could cause financial hardship, environmental groups are concerned that the current bond rates provide no incentive for companies to properly plug them at the end of their production life and had been pushing for the EQB to require a bond that would cover the full cost of plugging.