October 24, 2014

Who Pays the Cost of Fracking?

The report posted below should be of interest to the general public, which will bear the cost of the failures on the part of companies engaged in horizontal hydrofracking (fracking) to properly insure their projects against the possibility–ever present given the high-pressure environment and toxic chemicals, radioactive drill cuttings and fracking fluids that shale gas fracking produces–that there will be a high-cost accident impacting the surrounding area or permanent site damage.

The residual impacts of such an incident on local communities will take a significant economic toll. The unpleasant truth is that much of the fragile economic viability of natural gas fracking is due to the fact that it under-funds many of its costs, thereby externalizing them, imposing the costs of the environmental damage that it claims does not take place on the public who will be victimized by them.

Weak Bonding Rules for Oil and Gas Drilling Leave the Public At Risk

Released by: PennEnvironment Research & Policy Center
Release date: Tuesday, July 16, 2013

“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.

  • Financial assurance is not required for important impacts of fracking – Most states require financial assurance only for the costs of plugging a well and reclaiming the site – leaving no guarantee that funds will be available to fix environmental damage or compensate victims. States also generally do not require financial assurance to remain in place after a well has been plugged and the well site has been reclaimed, leaving the public at risk of having to pay for environmental damages that might emerge years or even decades later.
  •     Bonding levels are much too low – Only eight states require drillers to post bonds of $50,000 or more per well for plugging and reclamation at well depths commonly reached by fracking, despite documented instances in which fracking wells have cost $700,000 or more to plug. In addition, most states have “blanket bonding” options that further reduce the amount of financial assurance a driller must provide – in some cases to less than $100 per well.
  •     States allow types of financial assurance that don’t protect the public – Some states allow drillers to avoid financial assurance requirements by submitting statements demonstrating their financial health. These provisions leave the public at risk in the event that drillers run into unexpected financial trouble – a common occurrence in the “boom-bust” fossil fuel industry.
  •     Loopholes and exemptions let oil and gas companies off the hook – Lobbyists for the oil and gas industry have succeeded in convincing Congress and federal agencies to exempt the industry from a host of environmental laws, including those that would require the industry to provide financial assurance. Some states, meanwhile, allow drillers to escape financial assurance requirements by paying a small fee.

State and federal officials must adopt new financial assurance rules that ensure that oil and gas companies – not taxpayers – are 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” that provides an unjustified bulk discount on financial assurance should be eliminated. Provisions of state regulations that allow drillers to avoid posting financial assurance by undergoing financial tests, paying annual fees, or demonstrating 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 thepublic 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.

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