Oil and Gas Bonds:

BLM Needs a Comprehensive Strategy to Better Manage Potential Oil and Gas Well Liability

GAO-11-292: Published: Feb 25, 2011. Publicly Released: Feb 25, 2011.

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The number of oil and gas wells on leased federal land has increased dramatically. To help manage the environmental impacts of these wells, the Department of the Interior's (Interior) Bureau of Land Management (BLM) requires oil and gas operators to reclaim disturbed land in a manner it prescribes. To help ensure operators reclaim leased land, BLM requires them to provide a bond before beginning drilling operations. BLM refers to oil and gas wells and leased land that will require reclamation as potential liabilities because BLM may have to pay for reclamation if the operators fail to do so. GAO was asked to determine (1) BLM's policies for managing potential federal oil and gas well liability, (2) the extent to which BLM has implemented these policies, and (3) the challenges, if any, BLM faces in managing potential oil and gas well liability. GAO analyzed agency data on bonding and wells and interviewed BLM officials. We surveyed all 48 BLM field offices with an oil and gas program, and received 33 responses covering these offices.

To manage potential liability on federal land, BLM has developed policies for reviewing bond adequacy and for managing idle wells (wells that have not produced for at least 7 years) and orphan wells (wells that generally have no responsible or liable parties). The bond adequacy policy is intended to ensure that bonds are regularly reviewed by BLM field offices when certain events occur, or periodically, and increased as necessary to ensure that they reflect the level of risk posed by the operator. BLM's idle and orphan well policy is intended to ensure that nonproducing wells are either plugged or returned to production; this policy directs BLM field offices to develop an inventory of such wells and rank and prioritize them for reclamation based on potential environmental harm, among other things. BLM has not consistently implemented its policies for managing potential liabilities. Specifically, for fiscal years 2005 through 2009, GAO found that 13 of the 33 field office survey respondents reported that they either did not conduct any reviews or did not know the number of reviews conducted. Most field office officials told GAO that a lack of resources and higher priorities were the primary reasons for not conducting these reviews. In addition, BLM state offices also did not consistently interpret BLM policy on when to increase bond amounts. For example, officials in three state offices told GAO that they generally require evidence of operator noncompliance before raising a bond amount, while another state office increased bond amounts for most operators because it viewed them as a potential risk to the government. With regard to reviews of idle or orphan wells, 11 of the 33 field office survey respondents reported that they had not conducted any reviews in one or more fiscal years during the 5-year period GAO examined. The shortage of resources was identified by officials as the primary reason that these reviews were not conducted. In addition, 2 BLM state offices and 22 field offices have not created action plans for reviewing bond adequacy and idle and orphan wells, as BLM policies call for. BLM faces two challenges in managing potential liability, according to field office officials. First, its bonding system impairs BLM's ability to manage potential liability. Specifically, the minimum bond amounts--not updated in more than 50 years--may not be sufficient to encourage all operators to comply with reclamation requirements. These officials also stated that criteria in the policy for deciding when to increase a bond is vague, creating ambiguity about whether a request for an increase should be submitted and whether it will be approved. Second, limitations with the data system BLM uses to track oil and gas information on public land restrict the agency's ability to evaluate potential liability and monitor agency performance. For example, the BLM field offices GAO surveyed reported a total of about 2,300 idle wells that had been inactive for 7 years or more as of fiscal year 2009. However, other Interior data indicate that the number of idle wells on federal land is nearly double the amount reported by the BLM field offices. GAO recommends that BLM develop a comprehensive strategy to, among other things, increase minimum bond amounts over time and improve its data system to better evaluate potential liability and agency performance. In commenting on a draft of this report BLM agreed with GAO's recommendations and noted that it has already taken steps to improve the completeness and accuracy of its oil and gas data.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: BLM has issued two new instructional memoranda. The first of these, regarding idle well reviews, was issued in September 2012, and the second regarding bond adequacy reviews was issued in July 2013. Both instructional memoranda include new data entry requirements that specify when and how BLM field office employees are to track and record reviews in AFMSS.

    Recommendation: To better manage potential liability on federal land, the Secretary of the Interior should direct the Director of BLM to develop a comprehensive strategy to include implementing an approach for ensuring complete and consistent well records in AFMSS so that BLM field and state offices can better evaluate potential liability and improve decisionmaking.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: In July 2013, BLM issued instructional memorandum 2013-151 entitled Federal Oil and Gas Operations and Lease Adjudication, that creates a new process for conducting bond adequacy reviews. This process involves a system of assessing well liability against clearly defined terms and criteria and evaluating the conditions that increase well liability. In addition, the instructional memorandum creates a new process for having these bond increases processed at the BLM state office level.

    Recommendation: To better manage potential liability on federal land, the Secretary of the Interior should direct the Director of BLM to develop a comprehensive strategy to include revising the bond adequacy review policy to more clearly define terms and the conditions that warrant a bond increase.

    Agency Affected: Department of the Interior

  3. Status: Open

    Comments: In July 2013, BLM issued instructional memorandum 2013-151 entitled Federal Oil and Gas Operations and Lease Adjudication. This new policy clarifies procedures for reviewing the adequacy of oil and gas bonds and increasing or decreasing the bond amount accordingly. According to BLM officials, this new policy creates an administrative framework that will lead to potentially significant bond increases within the current regulatory framework. Therefore, BLM no longer intends to increase minimum bond amounts through a rulemaking process as it had previously planned.

    Recommendation: To better manage potential liability on federal land, the Secretary of the Interior should direct the Director of BLM to develop a comprehensive strategy to include increasing regulatory minimum bonding amounts over time to strengthen bonding as a tool for ensuring operators' compliance.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: BLM has issued two new instructional memoranda. The first of these, regarding idle well reviews, was issued in September 2012, and the second regarding bond adequacy reviews was issued in July 2013. Thse instructional memoranda include reporting requirements whereby BLM state offices are to submit an annual idle well report and semi-annual bond adequacy reports to BLM's Washington Office. These reports summarize the number of reviews conducted by the field offices in that state and the actions taken to reduce well liability.

    Recommendation: To better manage potential liability on federal land, the Secretary of the Interior should direct the Director of BLM to develop a comprehensive strategy to include implementing an approach for better monitoring agency performance in conducting reviews for bond adequacy and idle wells.

    Agency Affected: Department of the Interior

 

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