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Pennsylvania Shale Operator Bonding Too Low, Study Says

As Pennsylvania lawmakers move to increase the bonding requirements for shale operators, a new Carnegie Mellon University (CMU) study questions whether bonding adequately ensures reclamation.

The existing bonding requirements are "outdated and allow ownership transfers to entities less likely to be able to cover the expected costs of reclamation," CMU researchers Austin Mitchell and Elizabeth Casman wrote in a peer-reviewed study to be published in the journal Environmental Science & Technology.

Pennsylvania established its current bonding rates in 1984. They require an operator to post a $2,500 per well bond, or a $25,000 "blanket" bond for all the wells that a company plans to drill in the state.

Pennsylvania lawmakers are moving legislation that would require a minimum bond of $10,000 and a blanket bond to $250,000, significantly above the current rates, but Mitchell and Casman suggest those increases still might not guarantee reclamation because "if the level of bonding is set less than the associated reclamation costs, companies could be tempted to pursue strategies that avoid their liabilities."

The actual cost to reclaim a Marcellus Shale well is between $100,000 and $700,000, Mitchell and Casman estimated, using costs from other states and actual efforts in the Pennsylvania Marcellus.

The concern that bonding requirements won't create enough "incentive" for future reclamation is not unique to Pennsylvania or to shale drilling, but Mitchell and Casman also worry that the potentially steep decline curve of shale wells could prompt the larger operators that bring wells online to eventually sell their assets (and liabilities) to smaller companies as production and return on investment flattens.

"In Pennsylvania, there exists no formal regulatory mechanism to prevent fully bonded owners from assuming shale gas assets with reclamation liabilities substantially above their own financial means," they wrote.

While that problem could be solved by requiring companies to post a cash bond upfront in the full amount of reclamation, that solution would make development prohibitively expensive for small companies, and therefore the researchers propose establishing a per well "trust" collected from production revenues.

The increased bonding requirements working through the Pennsylvania General Assembly come from the Marcellus Shale Advisory Commission, based on recommendations by the Pennsylvania Department of Environmental Protection (see Shale Daily, July 19; June 6). A group calling itself the Citizens Marcellus Shale Commission subsequently recommended even higher requirements (see Shale Daily, Oct. 26).

As the birthplace of the modern drilling industry, Pennsylvania is home to as many as 350,000 wells, including some that are no longer producing but are not yet plugged. Pennsylvania established well site reclamation laws in 1984 and established the current bonding requirements to help ensure compliance.

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