“Having looked to government for bread, on the first scarcity they will turn and bite the hand that fed them.”
Edmund Burke, 18th century British champion of conservatism.
In It’s Closing Time, we argued that oil states have inadvertently created a moral hazard by setting bond coverage levels too low: if it’s cheaper to idle a well than to plug it, expect more idle and orphan wells. The fundamental solution is full bonding, including the elimination of blanket bonds.
Industry contends full bonding will impose an onerous financial burden. “When it comes to financial assurance for current or future wells, we need to ensure that the potential solution doesnʼt create an even bigger problem by raising the cost of doing business in Colorado for small businesses,” said Colorado Oil and Gas Association (COGA) President Dan Haley in a statement to High Country News. “For our state to stay competitive, regulators and lawmakers need to be cognizant of that growing tally and the rising cost of doing business.”
But oil and gas companies are already responsible for plugging their wells. COGA’s self-hostage scenario is an implied threat to bite the hand that feeds it if its bread rations are scaled back. The supposed burden on “small business” is a diversion—the largest operators already pay far less, per well, to secure their wells than the smaller operators.
In this case, the “bread” is not food for the hungry, but free, unsecured credit to large oil companies for end-of-life cleanup obligations.
When you buy a new home, the lender takes a mortgage on your home and requires you to buy insurance. When oil companies drill a new well, they accept the legal obligation to plug and reclaim the well at the end of its useful life. The equivalent of a home mortgage and homeowner’s insurance is a surety bond that guarantees these retirement activities will be done. When states accept bonds worth only pennies on the dollar, it is like your bank providing a loan to purchase your home and taking only a mortgage on your mailbox in return.
So, let’s be clear. Low bonding subsidizes the oil industry’s retirement obligations at taxpayer expense. Seen for what it is – a government handout – is it good policy for states to subsidize a mature industry with a well-established private financing stream that is contributing to destabilization of the global climate?
Here are a few reasons why we believe it’s far past time to stop asking taxpayers to fund oil’s retirement:
- Low bonding encourages drilling of wells that cannot afford their own burial.
- Subsidies retard innovation in plugging technology that could lower costs and better protect the environment.
- Free, unsecured credit for well closure creates an unfair playing field, favoring fossil fuels relative to renewable energy. It’s like a negative carbon tax.
- Idle and orphan wells have significant adverse social and environmental impacts, including toxic air, groundwater poisoning and methane emissions that contribute to global warming.
- Special bonding and fees for idle wells encourage gamesmanship. Examples of this include the Colorado finding that some operators maintain “active” status for wells by selling past production from leasehold tank inventory or by “swabbing” the well to extract and sell a small amount of fluid product each year, and the pending lawsuit against Range Resources that alleges the company artificially decreased its reported asset retirement obligations by misclassifying the status of its wells.
Milton Friedman made the point that, “there is nothing so permanent as a temporary government program.” The oil industry is addicted to low bonding. To get elected, oil state politicians feel they must promise to keep the bread flowing, even though it’s harmful to their constituents and society. Politicians accept industry’s self-hostage scenario, hoping taxpayers won’t notice the free, unsecured credit that they are extending to subsidize the oil industry.
In a prior era, oil subsidies may have made sense. But now, with the industry entering a state of permanent structural decline, it’s time for taxpayers to demand change – before they get the bill for these Billion Dollar Orphans. Withdrawing subsidies is not the same as imposing new costs. Oil should fund its own retirement.