Business, Government Legal News from throughout WVProposed Marcellus Bonds May Not Ensure Plugging

Proposed Marcellus Bonds May Not Ensure Plugging

If West Virginia is to avoid a costly future environmental legacy like that left behind by coal mining and natural gas extraction of the past, bonds for horizontal wells in the Marcellus and other shales must be high enough to ensure those wells will be plugged.

Legislation currently in draft may set a sufficient level, or may not.

The draft legislation establishes for horizontal wells a bond of $50,000 per well and a "blanket" bond of $250,000 for a company with five or more wells.

"We clearly talked about it and we clearly made a decision," said Delegate Tim Manchin, D-Marion, co-chairman of the House-Senate Select Committee on Marcellus Shale that has been drafting the broad legislation." If we've failed to address it properly within that code section, we've done that inadvertently."

W.Va. Legacy Wells Unplugged

Inadequate bonding in West Virginia left the state with an abandoned well problem already a decade ago.

An abandoned well initiative undertaken by the Gov. Bob Wise administration in 2002 invited oil and gas producers to avoid enforcement action by committing to plug their abandoned wells over a decade at 10 percent per year.

That initiative sunsets at the end of next year.

"There are companies that did do it but there are a lot that didn't," said state Department of Environmental Protection spokeswoman Kathy Cosco.

The agency has not pursued the threatened enforcement action on those that didn't.

Meanwhile, the number of abandoned wells was higher in 2010 than in 2002, according to the DEP's 2011 State of the Environment report, totaling fully 13,000 across the state.

Abandoned, unplugged wells may leak crude oil or salt water at the surface, according to the report, while improper reclamation may leave erosion control problems, all of which could affect surface waters.

Of greater concern might be what goes on under the surface, the report continued.

"Unplugged wells or improperly plugged wells can lead to groundwater contamination with crude oil, salt water and natural gas," it reads. "The problem may go unnoticed for a period of time, resulting in potentially more damage to groundwater or hydrocarbon-bearing zones."

Today's bond of $5,000 is not released until after a well is plugged, but it wasn't always that way, according to WVDEP Office of Oil and Gas Chief James Martin.

Some of the 13,000 abandoned wells are under bond and some are not, Martin said.

Since the abandoned well initiative was begun, WVDEP itself has reclaimed or plugged about 250 wells at a total cost of $6.2 million, according to the report — about $25,000 per well, far above the bonding level.

Horizontal Wells Cost More

The advent in this region of horizontal drilling into shale formations has created a new set of wells that will be more expensive to plug.

In Pennsylvania, inadequate bonding leaves the state's taxpayers vulnerable to the cost of plugging these wells, according to a Carnegie Mellon University study appearing in the journal Environmental Science and Technology and reported by the Pittsburgh Post-Gazette.

The Pennsylvania Department of Environmental Protection has estimated the average cost of plugging a 3,000-foot well in the state at $60,000, and Marcellus wells, at 5,000 feet and more, would cost more.

Neither the state's current bond of $2,500 per well and $25,000 for all of a company's wells, nor a proposed increase to $10,000 per well, covers the cost, the CMU study said.

Marcellus wells in Pennsylvania are estimated to number in the tens of thousands over the coming decades, according to the study.

W.Va.'s Proposed Bond

In West Virginia, the draft legislation bond of $50,000 per well is about what the committee's research showed to be the right level, according to Manchin.

An environmental lobbyist and industry expert agreed.

"A $50,000 individual well bond would cover the cost of plugging an individual Marcellus well," said Don Garvin, legislative coordinator with the West Virginia Environmental Council and a long-time board member of STRONGER, the national nonprofit State Review of Oil and Natural Gas Environmental Regulations, which helps states improve their oil and gas regulatory programs.

"But a $250,000 blanket bond is a joke," Garvin said.

Blanket bonds should be eliminated, he said, and replaced with bonds for individual wells — it's the best approach he's seen in all of the states he's reviewed. He suggests $20,000 for a conventional shallow well and $50,000 for an unconventional, horizontal well.

Manchin is aware that not everyone likes the blanket bond approach but said he has faith that it's adequate.

"I look at it as more of an enforcement tool than I do actually having to call it in," he said.

"It helps DEP to get producers to do what they're supposed to do when it's time to do it because DEP can hold that over their heads — ‘If you don't do this, we're going to call in the bond to get this done' —  and that then becomes a black mark on the company's credit record."

But an author of the CMU study pointed out another reason to establish bonding that covers the real cost of plugging wells.

Other shale gas plays have shown that assets are transferred from large companies to smaller companies as production declines, Austin Mitchell told the Post-Gazette. Those smaller companies may not have the financial assets to pay for well plugging when production ends.