Another Fracking Time Bomb Lurks Beneath U.S.

You've heard about the earthquakes, the controversial claims of flammable tap water, the potential contamination of streams, lakes and drinking water aquifers, but the system that's supposed to pay for these calamities may itself be a pending disaster.
Most states protect taxpayers from cleanup costs by requiring oil and gas producers to buy a surety bond that will pay in the event of a disaster. But those bond amounts, nearly everywhere in the U.S., are woefully inadequate to pay likely cleanup costs, said Ryan Kellogg, a professor of public policy at the University of Chicago.
"In just about any state the bond amounts are absolutely laughable," Kellogg said Friday, calling the system a sham. "The bond amounts are minuscule compared to what reclamation costs often turn out to be."
And reclamation projects are likely to multiply in coming decades as the more than 1.7 million fracked wells in the United States age.
The Mineral Leasing Act requires a bond of $10,000 for a single lease on federal land. With an average of five wells per lease, that comes to $2,000 per well. That number was set in 1960 and has never been increased, according to economists, even to adjust for inflation. Yet a well blowout can cost tens of millions of dollars to clean up, according to various studies of this issue. A well that's merely orphaned—abandoned without being properly sealed—costs about $13,000 to reclamate.
Sometimes, the responsible party disappears by the time cleanup costs become evident.
"Sometimes you’re able to go back and find the firms and actually make them liable for doing the cleanup," said Kellogg, an associate with the Energy Policy Institute at Chicago. "A lot of the time… the taxpayers have to clean it up because the firms that caused the problem are long gone and you can’t find them or they’ve gone bankrupt."
States have bond requirements of their own, but most of those are also inadequate, economists say.
Kellogg studies the impact of lease terms on well development. He cited studies by economists Lucas Davis of the University of California Berkeley, who argues in a 2015 paper that natural gas producers are more likely to take risks because they don't face the full cost of potential cleanups, and Judson Boomhower, soon of UC San Diego, who argues in a 2015 paper that bond amounts should be increased.
"The Texas requirements examined in this paper are some of the highest among major oil- and gas-producing states," Boomhower writes, "and they are still small compared to maximum potential damages. The results of this study support arguments to increase bonds in other jurisdictions at least to the amounts required in Texas. While it is impossible to extrapolate beyond the observed bond levels, it also seems likely that somewhat higher bond requirements would yield further benefits given that Texas’ requirements are still well below potential damages."
Texas requires bonds equivalent to $2 per foot for an individual well—horizontal wells designed for fracking can be over a mile deep and another mile long—or up to $250,000 for a blanket bond covering a producer for all wells drilled in the state. At the low end of the spectrum, Louisiana requires as little as $500 for an individual well.
Davis and Boomhower contend the bond system has advantages over other methods—such as direct regulation, insurance and lawsuits—if the bonds are properly funded. Because there are more than a million wells across the nation, and more being drilled all the time, direct regulation is difficult to enforce, Davis writes. Insurers face the same difficulty policing producers, and insurance tends to enable risky behavior because producers believe they are covered. Producers tend not to worry about lawsuits either, because it's difficult and expensive for injured parties to bring suits, and because it's likely the producer will have sold the well by the time a lawsuit arises.
Bonds have the advantage of addressing the "moral hazard" that rewards producers for taking risks:
"If drilling results in no significant environmental damage and the producer adequately reclaims the drilling site, then the producer receives the bond back in its entirety along with accrued interest," Davis writes.
But if the bond amount is dwarfed by cleanup costs, producers are likely to forfeit a bond rather than pay for a cleanup.
"The oil and gas boom has had economy-wide benefits," Boomhower writes. "At the same time, it presents environmental challenges on a massive scale. The large number of projects being developed creates more risk of accidents, and the deployment of new chemicals and techniques creates novel risks."
The problem may come home to roost in the United States in the next 20 to 30 years, when the horizontal wells drilled in this decade for hydraulic fracturing have aged.
"We shall see in 20 or 30 years," Kellogg said. Most fracking wells are drilled by large companies like Chesapeake Energy or EOG, but after peak production tapers off, they may be sold to smaller, less affluent companies.
"Part of the problem with the low bond amounts is these big firms have an incentive to sell off. Once you don’t need all the fancy technology anymore, and you just have a wellhead with gas coming out of it, they sell it to somebody else, who can go bankrupt."
Then who pays for reclamation?