CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

OCTOBER 2003

Bonding for

Reclaiming

Federal Lands

CBO

CBO

A

P A P E R

Bonding for Reclaiming Federal Lands

October 2003

The Congress of the United States # Congressional Budget Office 

PREFACE

The federal government requires mining and oil and gas companies that operate on public lands to restore (or “reclaim”) the environmental condition of the lands once the companies complete their activities—and to demonstrate that they have the financial resources for

the reclamation before they initiate their activities. For such financial assurance, many operators have traditionally posted surety bonds, but a contraction in the supply of reclamation

surety bonds in recent years has led to proposals for the federal government to expand its

acceptance of alternative forms of financial assurance. While those alternatives would be less

expensive for operators than surety bonds, they could prove insufficient to cover reclamation

costs—leaving the public sector to bear the costs of reclamation or to accept the damaged

condition of the federal lands.

This Congressional Budget Office (CBO) paper—written at the request of the House Committee on Resources—provides background information on surety bonds and other forms of

financial assurance for the reclamation of federal lands after mining and oil and gas operations. It also examines conditions in the market for reclamation surety bonds and the factors

that affect the supply of those bonds. Finally, it analyzes the implications of prominent proposals for addressing the limited supply of the bonds. In keeping with CBO’s mandate to

provide objective, impartial analysis, the paper makes no recommendations.

Natalie Tawil of CBO’s Microeconomic and Financial Studies Division wrote the paper,

under the supervision of David Moore and Roger Hitchner. The author received helpful

comments from Angelo Mascaro and David Torregrosa of CBO and James Boyd of Resources

for the Future. Richard Moore of Aon Corporation; Rick Deery, Andrea Hauger, Eugene

Hay, Dennis Rice, and Barbara Russell of the Department of the Interior; Greg Conrad of the

Interstate Mining Compact Commission; Hal Quinn of the National Mining Association;

Jonathan Brown of the Nevada Mining Association; and Robert Duke of the Surety Association of America provided valuable information.

John Skeen edited the paper, and Christine Bogusz proofread it. Maureen Costantino produced the cover and the figures, Christian Spoor prepared the paper for publication, Lenny

Skutnik produced the printed copies, and Annette Kalicki prepared the electronic versions for

CBO’s Web site (www.cbo.gov).

Douglas Holtz-Eakin

Director

October 2003

CONTENTS

Summary vii

Background 1

The Value of Reclamation Obligations 1

Surety Bonds 2

Conditions in the Market for Reclamation Surety Bonds 3

Factors Influencing the Supply of Reclamation Surety Bonds 6

The Insurance “Cycle” 7

The Surety Industry 9

Reinsurance 9

Temporary Effects Following September 11 10

The Mining Industry 11

Acid Mine Drainage 11

Options for Addressing the Limited Supply of Surety Bonds

for Reclamation and Their Implications 13

Corporate Guarantees 14

Bond Pools 15

Incrementally Funded Trusts 16

Targeted or Segmented Financial Assurance 16

Appendix: Financial Assurance Requirements for Mining

Reclamation on Federal Lands 19
vi BONDING FOR RECLAIMING FEDERAL LANDS

Table

A-1. Selected Federal Financial Assurance Requirements

for Reclamation 20

Figures

1. Selected Areas of Property and Casualty Insurance 5

2. Types of Financial Assurance for Mining Operations 

on Bureau of Land Management Lands, 1990 to 2002 6

Box

1. The Chemistry of Acid Mine Drainage 12
Summary

Mining and oil and gas companies that operate

on federal lands are obligated to restore (or reclaim) the

environmental condition of those lands. The federal government requires operators to demonstrate, before they

begin their activities, that they have the financial resources

to accomplish the reclamation. To provide such financial

assurance, many operators have traditionally purchased

surety bonds, which the federal government can claim in

the event that the operators fail to perform the reclamation.1

 Using a specialized underwriting process under

which they assess operators’ financial strength and ability

to perform the reclamation, surety companies can generally provide operators with bonds at prices below those

the operators face when borrowing from lenders that lack

such expertise.

In the past few years, the supply of reclamation surety

bonds has contracted because of factors in the surety

industry, the broader property and casualty insurance

industry, and the mining industry itself. Surety companies’

capacity (or level of capital) has been reduced by large,

unanticipated losses on construction and financial guarantee bonds because of an increase in bankruptcies among

clients. In the broader property and casualty insurance

market, which helps determine the climate in the surety

industry, capacity has also been reduced by declining

investment earnings and a more restrictive reinsurance

market in the wake of September 11. Such reduced capacity means that insurers stop offering existing services at

existing prices. To the extent that insurers can easily shift

capacity among lines of business, they direct limited capacity away from the lines that are the riskiest. Reclamation

bonds, which constitute only about 1 percent of the surety

industry and only 0.01 percent of the property and casualty insurance industry, are one such line for several reasons. Recent years have seen lower prices for mined resources. Moreover, the long time from the point at which

a bond is posted at the beginning of an operation to the

point at which an operator must reclaim the site bespeak

uncertainty and, therefore, increased risk—as does the

possibility of acid mine drainage, which requires extended

treatment and, therefore, brings extended liability.

Citing sharp price increases for reclamation bonds and

surety companies’ withdrawal from the market over the

past few years, mining firms assert that obtaining the

financial assurance required for operations on federal lands

has become significantly more expensive than it was in

the previous decade. Consequently, mining groups have

proposed that the federal government expand the types

of financial assurance that it is willing to accept. However,

those proposals would have the government and, therefore,

taxpayers bear more risk.

One proposal would allow operators on lands managed

by the Bureau of Land Management, which is within the

Department of the Interior, to provide corporate guarantees, as some were able to do under pre-2001 regulations.2

1. Unlike traditional insurance, the surety bond agreements do not

transfer ultimate responsibility for the reclamation from the

operator to the surety company, regardless of the solvency of the

operator.

2. As of January 20, 2001, the Bureau of Land Management,

which had not expressly authorized corporate guarantees but did

accept them under the terms of a cooperative agreement with

the state of Nevada, stopped allowing mining companies to provide corporate guarantees to fulfill financial assurance requirements, following the bankruptcies of companies using such

guarantees. (One such company, Galactic Resources, abandoned

its reclamation obligations for the Summitville mine in Colo-
viii BONDING FOR RECLAIMING FEDERAL LANDS

A corporate guarantee lets an operator use independent

audit reports to document the financial strength of the

company, parent corporation, or affiliate—instead of

providing a more tangible form of financial assurance

dedicated exclusively to reclamation. Another proposal

endorses the use of bond pools funded by operators’

payments to provide financial assurance. Such payments

are generally structured so that the pools can cover some

participants’ obligations for reclamation if they default,

but not all participants’. A third proposal would allow

operators to incrementally fund trusts. Over time, an

operator would make a predetermined series of payments

into a trust dedicated specifically to fully funding its

ultimate obligations for reclamation. But if the operator

defaulted before the trust was fully funded, it would be

abandoning some portion of its obligations. Although all

three of those proposed forms of assurance could be less

expensive for operators than surety bonds, they could

prove insufficient to cover reclamation costs if companies

or the industry faced difficult circumstances. In that case,

the public sector would be left to bear the costs or accept

the damaged condition of the federal lands.

Having the public bear risks in support of reclamation

implies that some costs of the production of mined resources and oil and gas are not incorporated in their market prices. However, prices that incorporate the full costs

of production contribute to the efficient allocation of

society’s resources. Furthermore, shifting the risks of private activities to the public also undermines incentives for

innovation and development in private financial assurance

markets. To the extent that the short supply of reclamation

surety bonds is attributable to reduced capacity in insurance markets generally, it is a self-correcting phenomenon.3

 To the extent that the shortage is attributable to

conditions in the mining industry and the risks are

retained in the private sector, private financial assurance

markets will develop appropriate instruments. The supply

of coverage will rebound accordingly.

Finally, some industry participants have suggested variations that, unlike the other proposals, do not necessarily

involve public risk-bearing. Following those suggestions,

the federal government would consider regulatory changes

for mining operations that helped separate requirements

for short-term obligations from those that involve longer

time horizons and greater uncertainty. Short-term obligations for reclamation such as regrading and reshaping the

land may be best addressed by surety bonds, while longerterm obligations involving successful revegetation and

water treatment made necessary by acid mine drainage

may be more appropriately addressed by other kinds of

instruments. Regulatory changes such as allowing companies to post incremental financial assurances as phases

of work proceeded and clarifying the circumstances under

which the government could claim, or retain, bonds

(rather than release them) could increase the availability

of surety bonds to address short-term aspects of reclamation, while leaving the longer-term, more uncertain aspects

as targets for innovative financial assurance products.

rado. Now the mine is a national Superfund site, and the

cleanup may eventually cost the public well over $100 million.)

However, the two other agencies involved in overseeing reclamation—the Minerals Management Service and the Office of

Surface Mining, both also of the Department of the Interior—

continue to accept such guarantees. The former accepts them

from offshore oil and gas operators, and the latter, along with

most of the states that have assumed primary regulatory responsibility for the administration of the Surface Mining Control

and Reclamation Act of 1977, accepts them from coal-mining

companies.

Financial assurance requirements for reclamation are detailed in

the appendix.

3. See Congressional Budget Office, Federal Reinsurance for Disasters (September 2002).
Bonding for Reclaiming

Federal Lands

Background

Internalizing the cost of production in market prices contributes to the efficient allocation of resources in society.

When mining and oil and gas operators undertake work

on federal lands, the federal government fosters that internalization of costs by requiring the companies to demonstrate that they have the financial resources to restore (or

“reclaim”) the sites afterward (see the appendix). Those

requirements vary among the industries, as the regulatory

authorities responsible for operations for oil and gas, coal,

and locatable minerals accept different forms of financial

assurance.1

 Financial assurance instruments that hold

funds or collateral in reserve to pay for reclamation, and

deprive the operator of those assets in the event of a default, keep the risk of having to cover the cost of reclamation from being transferred to the public. Other instruments that provide less certainty of the operator’s assets

being available to cover reclamation costs allow the transfer of some of that risk.

An operator will often provide the required financial

assurance for its reclamation obligations—with the value

determined by agreement with the federal government

on the expected costs of fully reclaiming the site—by paying a private insurer to post a bond, known as a surety

bond.2

 Once the operator completes the reclamation, the

government releases the bond. However, in the event that

the operator becomes insolvent and fails to perform the

reclamation, the government can claim the bond. Surety

bonds thus protect the public from bearing the costs of

restoring federal lands when operators default on their

obligations to reclaim the lands, at least to the extent that

the costs have been accurately anticipated. 

The Value of Reclamation Obligations 

In 2002, the Department of the Interior estimated the face

value of the financial assurances that it held (in many different forms) at $2.9 billion for all purposes. The portion

for the reclamation of federal lands is not easily identified

because financial assurances are also held for purposes

other than reclamation and because mines may be jointly

sited on federal and nonfederal lands. But more than $1.2

billion was for the reclamation of federal lands. In addition, states that have assumed regulatory responsibility

for coal mining in the federal government’s stead held financial assurances for the reclamation of coal mines. 

In particular, in 2002, the department’s Bureau of Land

Management held $1.3 billion in financial assurances

associated with various purposes, the great majority of

which, or about $1.2 billion, were for the reclamation of

mining sites for locatable minerals. The department’s

Minerals Management Service held $1.0 billion in assurances posted by offshore oil and gas operators. The proportion of the total dedicated to reclamation is not known

because the assurances covered all “end-of-lease” activities—reclamation and outstanding royalties. The department’s Office of Surface Mining held an estimated $0.6

billion in financial assurances for the reclamation of coal

operations on Indian lands and (chiefly private) lands for

which it remained the regulatory authority under the

Surface Mining Control and Reclamation Act of 1977

(Public Law 95-87). The 24 states that have assumed primary responsibility for the administration of that law held

1. Locatable minerals are precious, base, light, ferrous, and nonferrous metals.

2. Even though the financial assurance represents the agreed-upon

expected costs of the reclamation, it does not represent a ceiling

(or a floor) on the operator’s ultimate expenditures for reclaiming the site.
2 BONDING FOR RECLAIMING FEDERAL LANDS

$2.5 billion in financial assurances for the reclamation

of coal mines that were at least partly on federal lands.3

As for the reclamation of sites on federal lands that is unfunded, no estimate of the costs exists. Many unreclaimed

sites were abandoned before federal requirements for

financial assurance were established in the mid to late

1970s. One study in the early 1990s estimated cleanup

costs for all mines abandoned in the United States on both

federal and nonfederal lands at $32 billion to $72 billion.4

A 1986 study by the General Accounting Office of a

sample of surveyed hardrock mining sites on the Bureau

of Land Management’s lands found that about 40 percent

of 246 sites had not been reclaimed.5

 In the mid-1990s,

the Bureau of Land Management began inventorying

abandoned mineral and coal mines on the lands that it

managed and identified nearly 900 environmentally hazardous abandoned sites.6

Even under current regulations, there is evidence that the

value of currently held financial assurances does not match

the outstanding reclamation costs for the sites for which

they were provided. A recent study of 150 large-scale

locatable minerals operations in the western United States

documents the financial failure of dozens of companies

and the abandoned reclamation obligations assumed by

federal taxpayers.7

 A well-known example is Colorado’s

Summitville mine, which was abandoned in 1993. Acid

drainage and leaks of cyanide-bearing processing solutions

from the site threaten the Alamosa River. Estimates of the

cleanup costs for what is now a Superfund site range from

$150 million to $180 million. Other examples are Montana’s Zortman and Landusky mines, some of the earliest

to use cyanide heap leach technology to extract gold.

Located on a mixture of private and public lands managed

by the Bureau of Land Management, the mines were abandoned when the owners declared bankruptcy in 1998. The

Bureau of Land Management and Montana’s Department

of Environmental Quality recently estimated the unfunded

reclamation costs at $33.5 million for earthwork and for

a trust fund to ensure water treatment over the long term.8

Surety Bonds

An operator incurs purchasing and contracting costs in

meeting financial assurance requirements. The government

incurs monitoring and enforcement costs. Those costs vary

depending on the financial assurance instrument, and

often an instrument’s effect on the operator’s costs differ

from its effect on the government’s costs.

Consider, for example, an operator at the beginning of

a mining operation posting either cash or a surety bond

for the full cost of reclamation. The operator’s cost for

the cash depends on the difference between the interest

rate at which it can borrow and the rate that it will earn

on the escrow. The operator’s cost for a surety bond (a

percentage of the face value) reflects the provider’s assessment of the associated financial and environmental risks.

Borrowing cash from lenders that lack the expertise to

make such assessments is comparatively more costly for

an operator. For the government, however, an assurance

in the form of cash or a surety bond involves negligible

monitoring and enforcement. Instruments that are less

costly for the operator, such as a corporate guarantee, demand greater expenditures for monitoring and enforcement. With a corporate guarantee, an operator does not

set aside funds dedicated to reclamation, so the govern3. The portions of such operations on federal lands varied from 2

percent to 100 percent, with a median value of 53 percent.

Personal communication from Dennis Rice, Office of Surface

Mining, June 26, 2003.

4. James Lyon, Thomas Hilliard, and Thomas Bethell, Burden of

Gilt (Washington, D.C.: Mineral Policy Center, 1993).

5. General Accounting Office, Public Lands: Interior Should Ensure

Against Abuses from Hardrock Mining, GAO/RCED-86-48

(March1986).

6. Department of the Interior, Bureau of Land Management,

Abandoned Mine Land Inventory and Remediation: A Status

Report to the Director (November 1996). For more information,

see the Web page of the bureau’s Abandoned Mine Lands

Cleanup Program, www.blm.gov/aml/statproj.htm.

7. James Kuipers, “Hardrock Reclamation Bonding Practices in

the Western United States” (Boulder, Colo.: National Wildlife

Federation, February 2000).

8. Department of the Interior, Bureau of Land Management,

Malta Field Office, and State of Montana Department of Environmental Quality, “Record of Decision for Reclamation of the

Zortman and Landusky Mines, Phillips County, Montana”

(May 2002), available at www.mt.blm.gov/ldo/zortman/ZLRecord_of_Decision1.pdf.
BONDING FOR RECLAIMING FEDERAL LANDS 3

ment must actively monitor the guarantor’s financial

health to ensure that the operator continues to comply

with a series of qualifications spelled out in regulations.

Were the operator to default on reclamation obligations

backed by a corporate guarantee, the government would

incur the additional costs of legal actions to compete with

other creditors for the guarantor’s assets.9

For a number of reasons, surety bonds have been an instrument of choice in meeting financial assurance requirements for reclamation following mining and oil and gas

activities. For operators, costs have been considered reasonable. Reclamation surety bond prices reported during

the 1980s and 1990s ranged from 0.37 percent to 3.5 percent of face value annually. Also, securities regulations do

not require operators to report surety bonds as contingent

liabilities on their balance sheets. For the government, a

system through which regulators can monitor surety

companies’ financial strength exists—the U.S. Treasury

annually publishes a list of acceptable surety providers.

Enforcement is relatively straightforward because surety

bonds are specific assets dedicated exclusively to financial

assurance for reclamation in a legally binding way. Thus,

surety bonds have been a mechanism for assigning responsibility for reclamation costs to operators while limiting the costs associated with the financial assurance

requirements themselves.

Conditions in the Market 

for Reclamation Surety Bonds

Surety currently represents just a sliver, about 1 percent,

of the premiums paid in property and casualty insurance.10

Of the surety premiums, two-thirds are for contract bonds

that ensure the completion of construction projects against

defaults by contractors. The remainder is for various

commercial bonds: fiduciary bonds, license and permit

bonds (which include surety bonds for reclamation), lostdocument bonds, and custom and excise bonds.11 Most

large property and casualty insurance companies have

surety departments, and some companies specialize in

surety bonds. In 2002, the top 10 surety companies accounted for 67 percent of a $3.8 billion market; their premiums ranged from $122 million to $522 million. The

top five companies accounted for more than 47 percent

of the market.12

For the 10 years beginning in 1993, companies providing

surety bonds collected an annual average of $2.6 billion

in premiums. Those premiums ranged from $2.2 billion

to $3.8 billion, rising every year until 2001, when a 0.5

percent decline occurred.13 That year, the surety industry’s

direct loss ratio, which measures direct losses relative to

direct earned premiums, was 82.5 percent—a significant

increase over the ratio of 45.4 percent in 2000.14 And that

ratio was already substantially higher than those in previous years: 20 percent in 1999, 25.8 percent in 1998,

25.3 percent in 1997, and 26.4 percent in 1996.15

9. In principle, a spectrum of potential corporate assurances exists,

ranging from those that require more monitoring (such as the

general obligation associated with the corporate guarantee discussed here) to those that require less monitoring (ones that

have a higher priority for payment to creditors compared with

a general obligation but a lower priority compared with cash

posted by the guarantor).

10. Insurance Information Institute, The I.I.I. Fact Book 2003 (New

York, 2003)

11. Fiduciary bonds enable clients to comply with probate and

bankruptcy laws; the judiciary uses the bonds as security for

court costs, for example. License and permit bonds include not

only reclamation bonds but also bonds to ensure compliance

with consumer protection laws and regulations. Lost-document

bonds protect corporations from the possibility of duplicates

when they reissue securities, certificates, or other valuable documents. Customs and excise bonds ensure the terms and conditions of duty and tax laws and regulations.

12. See Insurance Information Institute, “Surety Bonds, 1993-

2002" and “Top Ten Surety Companies, 2002,” available at

www.financialservicesfacts.org/financial2/insurance/pc/pby/

content.print/.

13. See Insurance Information Institute, “Surety Bonds, 1993-

2002," available at www. financialservicesfacts.org/financial2/

insurance/pc/pby/content.print/.

14. Direct earned premiums are the proportion of premiums paid

that, for accounting purposes, are recognized as income during

a period.

15. The property and casualty industry has not produced an underwriting profit (a net gain from premiums after loss payments,

costs of sales, dividends to policyholders, and loss adjustment

costs) since 1979. The difference has been covered by invest-
4 BONDING FOR RECLAIMING FEDERAL LANDS

Reclamation bonds, a specialized portion of the surety

industry, represent only about 1 percent of surety premiums and have performed similarly to, or perhaps slightly

better than, the industry as a whole (see Figure 1). The loss

ratio for the bulk of surety bonds issued for reclamation

was 39.3 percent in 2000 and 34.5 percent in 2001, lower

than the corresponding ratio for the surety industry as a

whole.16 During the five years from 1996 to 2000, the loss

ratio for the bulk of surety bonds issued for reclamation

averaged 28.5 percent, compared with an average loss ratio

of 30.4 percent for the entire surety industry.17

In 2002, a review of the commercial insurance market

reported “disarray in the reclamation bond market.”18

Surety providers, aiming to limit the size and duration

of their obligations, had instituted stricter underwriting

standards—lowering both the limit for a single bond and

the aggregate limit for a single purchaser. For example,

CNA Surety Corporation, one of the top five writers of

surety bonds in the nation, reduced the amount of risk

that it was willing to retain without purchasing reinsurance

from $250 million per risk to $25 million. Other insurers

made reductions so that the amount of retained risk rarely

exceeded $20 million.19 Surety providers also hesitated

to accept obligations that would extend beyond five years.

Both trends presented the mining industry with challenges, particularly in cases in which required bonding

amounts were large and operations typically continued

for decades.20 The top two gold producers in North

America, Newmont Mining Corporation and Barrick

Gold Corporation, had their surety companies advise them

that they no longer wanted to provide bonds. Prices rose.

According to one analysis, price increases for surety bonds

ranged from 20 percent to 500 percent.21

Some reinsurers—companies that sell coverage to primary

surety providers on an annual basis (as opposed to coverage tied to the life of a mine or a bond obligation)—were

choosing not to renew coverage. Some sureties trying to

reduce outstanding liabilities requested that their clients

seek replacement bonds or provide collateral. In August

2002, some members of the Surety Association of America

reported that they were making such requests as part of

a wholesale effort to pull out of the reclamation bond

market.22

Of four surety companies that became insolvent between

January 2000 and December 2001, three were significant

ment income from capital and surplus accounts, money set aside

for loss reserves and unearned premium reserves, and capital

gains. See Fitch Ratings, “U.S. Property and Casualty Insurers

Year-End 2002 Results” (May 8, 2003); see also Surety Association of America, “Top 100 Writers of Surety Bonds” (May

2002), “Top 100 Writers of Surety Bonds” (May 2001), and

“Top 50 Writers of Surety Bonds” (May 2000). Cited in an email from Robert Duke, Surety Association of America, April

23, 2003.

16. The reclamation bonds referred to are classified by the Surety

Association of America as those “related to strip mining and

other permits involving restoration of land.” The loss ratio for

surety bonds “related to mining operations such as drilling,

plugging or operating gas, oil, water, or mineral wells or leases”

was higher, at 69.0 percent, in 2000, but in 2001, it fell to 16.2

percent.

17. The loss ratio for surety bonds related to mining operations

such as drilling, plugging or operating gas, oil, water, or mineral

wells or leases was also 28.5 percent for the five years from 1996

to 2000. Data supplied to the Congressional Budget Office

from Robert Duke and Sean Foley, Surety Association of

America, April 23, 2003, and September 24, 2003.

18. Marsh Inc., “Insurance Market Report 2002,” vol. 6 (June 5,

2002).

19. Donald S. Watson and others, “Alarm Bells Ringing in U.S.

Surety Market,” Standard & Poor’s Ratings Direct (March 15,

2002).

20. These conditions characterize locatable minerals operations, but

describe oil and gas operations on the Outer Continental Shelf

less. Regulations for operators on the outer continental shelf

designate floors for bond amounts. In most cases, the estimated

costs of an operator’s obligations exceed those floors, but the

Minerals Management Service waives the requirement for a supplemental bond if the operator meets certain criteria for financial strength. Most operators meet those criteria.

21. Aon Corporation, “Commercial Surety—Market Analysis”

(April 30, 2002).

22. Letter from Mary Jean Riordan, Senior Counsel and Robert

Duke, Director of Underwriting, American Insurance Association, to Tom Fulton, Deputy Assistant Secretary for Land and

Minerals Management, Department of the Interior, August 23,

2002.
BONDING FOR RECLAIMING FEDERAL LANDS 5

Figure 1.

Selected Areas of Property and Casualty Insurance

Source: Congressional Budget Office based on information from the Insurance Information Institute, available at www.financialservicesfacts.org/financial2/insurance/

pc/pby/content.print; and personal communication from Sean Foley, Surety Association of America, September 17, 2003.

Note: Market shares are for 2001, the most recent year for which such a breakdown was available for the surety market.

a. Includes coverage for protection against legal liability resulting from negligence, carelessness, or failure to act—for instance, contingent liability insurance and

insurance for liabilities arising from environmental pollution.

b. Includes many other types of insurance, such as that for medical malpractice, fire, and product liability.

c. In addition to bonds for reclamation, which are a type of license and permit bonds, commercial surety bonds include fiduciary bonds (for complying with probate

and bankruptcy laws), lost-document bonds (for protecting corporations against the possibility of duplicates when they reissue securities or other valuable documents),

and customs and excise bonds (for ensuring the terms and conditions of duty and tax laws and regulations).

d. Contract bonds primarily ensure the completion of construction projects.

underwriters of reclamation bonds: Fireman’s Fund Insurance Company, Frontier Pacific, and Amwest Surety.23

Fireman’s Fund sold its 800 renewals of surety bonds to

two other providers, who in turn decided not to service

firms with a net worth of less than $50 million.24 One of

those providers subsequently discontinued writing reclamation bonds, and the other curtailed doing so.25

Anecdotal evidence suggests that some mining operators

have been unable to obtain surety bonds for reclamation

23. Richard Meyerholz, “They’re Not Your Mother’s Surety Bonds”

(presentation at a meeting of Casualty Actuaries of Greater New

York, New York, N.Y., May 29, 2002), available at www.casact.

org/affiliates/cagny/0502/meyerholz1.ppt. See William G.

Krizan and others, “Bonding Business Going for Broke,” Engineering News Record, vol. 428, no. 5 (February 11, 2002), p.12;

and Nevada Division of Environmental Protection, Nevada

Bonding Task Force, “Current Mining Bonding Issues in Nevada” (March 24, 2003).

24. Krizan and others, “Bonding Business Going for Broke.”

25. Gerson Lehrman Group, “Mining Reclamation Bond Market”

(survey, October 4, 2002).

Entire Market

Commercialc

 (31%)

Reclamation

 (1%)

Contractd

 (68%)

Surety Market

Total Premiums: $368 Billion Total Premiums: $3.6 Billion

Private

Automobile

 (36%)

Workers'

Compensation

 (11%)

Homeowners

(Multiple peril)

 (10%)

Liabilitya

 (9%)

Commercial

(Multiple peril)

 (7%)

Commercial 

Automobile (7%)

Surety (1%)

Otherb

 (20%)

Other

(Est. 1%

within

Commercial)
6 BONDING FOR RECLAIMING FEDERAL LANDS

or have had to pay higher prices.26 For example, in May

2002, the Alaska Miners Association reported that its

members were unable to locate any surety bonds for both

large locatable minerals operations and small placer

mines.27 Similarly, during an August 2002 conference call

between the Department of the Interior and state regulators, Idaho officials noted that mining companies were

meeting with increasingly stringent requirements and

higher costs for reclamation bonds and that fewer companies were providing them. Companies in New Mexico

also reported facing higher costs and increased requests

for collateral (such as land and water rights). Coal mine

operators in Wyoming reported that their bonding costs

had tripled. Companies pursuing small hardrock operations in Utah also reported difficulties obtaining bonds.28

In March 2003, the state of Nevada reported that three

of the four surety companies serving one large mining

company had requested that their client find different

financial assurances to release them from their existing

bonding contracts, and the fourth had offered only a

limited quantity of additional bonds. All four companies

charged higher annual premiums.29

Some empirical evidence supports the anecdotes. For

instance, surety bonds have accounted for a declining

proportion of the financial assurances filed by individual

locatable minerals operations on the Bureau of Land Management’s lands.30 From 1990 to 2002, the use of reclamation surety bonds peaked in 1999 at 60 percent but then

declined to 48 percent in 2000, 39 percent in 2001, and

20 percent in 2002 (see Figure 2).

Factors Influencing the Supply

of Reclamation Surety Bonds

Developments in the insurance industry and the economy

in general affect the availability of reclamation surety

bonds. For the property and casualty insurance industry,

2001 was challenging. High underwriting losses and significant declines in investment yields brought net after-tax

losses to that industry for the first time. Surety providers,

specifically, saw significant losses associated with the recession and the slowing commercial real estate market.

When capital holdings decline, insurers restrict the coverage that they will offer and raise prices. Those higher

premiums, in turn, restore capital, and supply rebounds.

Indeed, in 2002, the property and casualty insurance industry began to recover. Results for the first quarter of

2003 indicate a potential annual increase in capital holdings for the first time since 1999.

Still, even as insurers rebuild their capital holdings, they

remain selective about their use of that capital. Reclamation bonds involve relatively long time horizons and the

potential for indefinite obligations associated with acid

mine drainage. As a bond obligation extends farther into

the future, a surety provider’s assessment of the operator’s

financial and operational health becomes more uncertain,

raising the risk associated with the bond. Surety companies

also favor industries with more favorable capital structures

and balance sheets and greater rates of return.

Ultimately, the reluctance to provide reclamation bonding

for the mining industry is expected to ease as constraints

on capacity continue to loosen and insurers gauge their

risks more precisely. As of the close of 2002, however,

26. There is little evidence that oil and gas operators have experienced the difficulties faced by some locatable minerals and coalmining operations. In a letter to the Department of the Interior’s Deputy Assistant Secretary for Land and Minerals Management on April 9, 2002, the Director of the Minerals Management Service stated that oil and gas companies operating on the

Outer Continental Shelf had not reported being unable to obtain bonds. Also, the Bureau of Land Management has not been

informed of any measurable reduction in bond availability for

onshore oil and gas operations.

27. Letter from Steven C. Borell, Executive Director, Alaska Miners

Association, to the Director, Bureau of Land Management, May

13, 2002. Placer mines use water to work surface materials (such

as sand and gravel) and extract valuable minerals.

28. E-mails from Scott Nichols, Chief, Bureau of Surface and Mineral Resources, Idaho Department of Lands, to Jaime Besse,

Program Assistant, Alaska Affairs, Office of the Secretary, Department of the Interior, August 13, 15, and 16, 2002.

29. Nevada Division of Environmental Protection, Nevada Bonding

Task Force, “Current Issues.”

30. Data from the Bureau of Land Management’s LR2000 Bond

and Surety System.
BONDING FOR RECLAIMING FEDERAL LANDS 7

Figure 2.

Types of Financial Assurance for Mining Operations on the Bureau of Land

Management’s Lands, 1990 to 2002

Source: Congressional Budget Office based on data from the Bureau of Land Management’s LR2000 Bond and Surety System.

many industry observers were not expecting to see capacity

fully restored before 2005.31

The Insurance “Cycle”

To underwrite risks, a property and casualty insurer must

maintain a certain level of capital, or “capacity.” When

excess capacity exists, generally due to a high return on

investments, prices tend to decline as insurers compete

for market share. Such competition may lead insurers to

underprice their products. Declines in capacity—due to

underwriting losses resulting from underpriced premiums,

unanticipated increases in payments of claims, or unfavorable investment returns—lessen insurers’ ability and willingness to continue coverage at current prices. In the short

run, supply constricts and prices rise. Eventually, higher

premiums restore capital, supply rebounds, and prices

stabilize and then decline, although not necessarily to previous levels because insurers have reassessed their risks.32

Those periods of expanding coverage and lower prices

followed by rationing and higher prices have been referred

to as the insurance cycle.

Limited supply and higher prices should encourage competition among insurers for profitable new business, so

one might expect the rationing portion of the cycle to be

short-lived. In fact, economists have noted that rationing

in the market is persistent enough to be observed in annual

data. The total amount of capital that insurers raise by

issuing debt or equity or by reducing cash payments to

stockholders through cuts in dividends and repurchases

31. Robert P. Hartwig, “Industry Financials and Outlook: 2001—

Year End Results” (New York: Insurance Information Institute,

2002); and ABD Insurance and Financial Services, “State of the

Surety Market—December 2002,” available at www.cybersure.

com/documents/surety/Surety%20market%20-%202002.pdf.

32. See Congressional Budget Office, Federal Reinsurance for Disasters (September 2002).

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

0%

20%

40%

60%

80%

100%

Surety Bond Letter of Credit Cash Equivalent (Cashier's check, certificate of deposit, Treasury note) Personal 
8 BONDING FOR RECLAIMING FEDERAL LANDS

(commitments to buy back securities for a specified price

at a designated date) appears to be small relative to observed drops in the net worth of stock insurers, suggesting

that insurers rely primarily on future earnings to rebuild

their capital positions.33 Maintaining high rates on new

policies may be more profitable for insurers than raising

sufficient “external” funds to rebuild their capacity.34

Why? Because when a series of unanticipated developments causes declines in capacity, insurers have more information than investors do about taking on risks that will

be outstanding for long periods of time. Raising external

capital would be relatively costly because insurers would

have to compensate investors for their greater uncertainty

about those risks.

Property and casualty insurers in the United States offered

low prices and expanded coverage during the 1990s as they

built up capital at a fast pace. By 2000, their capital holdings stood at $319.0 billion, compared with $138.4 billion

in 1990. At the end of 2001, however, their capital

holdings had declined by $44.7 billion from their peak

during the previous decade ($334.3 billion in 1999). They

stood at $289.6 billion.35 High underwriting losses and

significantly lower investment yields were primarily to

blame. Notably, by the end of the second quarter of 2001,

the industry’s underwriting losses were already up 55.4

percent over the previous year’s. Ultimately, the events

of September 11 contributed to an 85.4 percent increase

in the insurance industry’s underwriting losses for 2001—

putting them at $52.6 billion. That year, insurers paid

out $1.16 for every dollar in earned premium. The Standard & Poor’s (S&P) 500 was down 13 percent in 2001

(following a decline of 10.1 percent in 2000), and realized

capital gains in the insurance industry dropped 58 percent,

to $6.9 billion. Declining interest rates brought the industry’s investment income down 9 percent, to $37.1 billion.36 In 2001, the industry experienced its first ever net

after-tax loss: $7 billion.

In 2002, the industry saw its capital holdings decline for

a third consecutive year, to $285.2 billion. But underwriting losses decreased; for 2002, they totaled $30.5 billion. Insurers paid out $1.07 for every dollar in earned

premium. The S&P 500 declined 23.4 percent, and the

industry had capital losses of $1.1 billion. With interest

rates at 40-year lows, investment income fell by 2.8 percent, to $36.7 billion. Ultimately, the industry did begin

a recovery, posting a 2002 gain of $2.9 billion after taxes,

although that corresponds to a return on equity of only

1 percent, which can be viewed favorably only in comparison with the prior year’s figure of -2.4 percent.37

Results in the industry for the first quarter of 2003 suggest

continued recovery. With capital holdings at $289.2 billion, the industry may report an annual increase for the

first time since 1999. Underwriting losses were -$1.5 billion. Insurers paid 99.5 cents for every dollar in earned

premium.38 The industry’s $6.4 billion after-tax gain

represented an increase of $1.1 billion over that in the first

quarter of 2002.39

33. Anne Gron and Deborah Lucas, “External Financing and Insurance Cycles,” in The Economics of Property-Casualty Insurance,

David F. Bradford, ed. (Chicago: University of Chicago Press,

1998), pp. 5-27.

34. Ralph A. Winter, “The Liability Insurance Market,” Journal of

Economic Perspectives, vol. 5, no. 3 (Summer 1991), pp. 115-

136; and Gron and Lucas, “External Financing and Insurance

Cycles.”

35. Congressional Budget Office, Federal Reinsurance for Disasters.

36. Robert P. Hartwig, “Industry Financials and Outlook: 2001”

and “Industry Financials and Outlook: 2002—Year End Results” (New York: Insurance Information Institute, 2003).

37. The gain in 2002 would have been larger but for the steps insurers took during the fourth quarter to strengthen their reserves. The gain stood at $5 billion at the end of the third quarter. See Ruth Gastel, “Insurance Issues Update: Financial and

Market Conditions” (New York: Insurance Information Institute, May 2003).

38. According to the Insurance Information Institute, that payout

is still above investors’ expected return: the industry must pay

less than 95 cents for every dollar in earned premium before its

financial performance approaches the value of the risks it

assumes.

39. Robert P. Hartwig, “Industry Financials and Outlook, 2003—

First Quarter Results” (New York: Insurance Information Institute, June 23, 2003).
BONDING FOR RECLAIMING FEDERAL LANDS 9

The Surety Industry

In the 1990s, when insurers were flush with capacity,

many industries—mining included— experienced a “soft

market” for surety bonds. Providers focused on gaining

market share and additional funds in order to make investments and were flexible about their underwriting standards, terms, and prices for bonds. Traditionally, because

surety underwriting had been viewed as a form of credit,

in choosing their clients, bond providers scrutinized companies’ past performance and financial stability. Historically, two-thirds of surety premiums each year came from

guaranteeing performance—primarily in the construction

industry. In the 1990s, however, surety companies were

interested in expanding their business by writing financial

guarantees—bonds to cover losses from specific financial

transactions and to ensure that investors in debt instruments received timely payment of principal and interest

if there was a default. The expansion was prompted in part

by Japanese banks’ withdrawal from the market because

of liquidity problems; such banks had been a main source

of letters of credit in the United States.

With flexible underwriting standards, surety companies

guaranteed performance in some construction projects

undertaken by developers with weak finances. As the boom

market in commercial real estate slowed and developers

failed, surety companies’ losses mounted.40 In 2000, direct

losses for surety companies in the construction industry,

at $744 million, showed a 78 percent increase over the

annual average from 1995 to 1999, which was $417 million. Whereas during the previous five years, sureties paid

out 30.1 cents for every dollar in earned premium on

average, in 2000 they paid 45.2 cents, and the projected

figure for 2001 is 66.5 cents.41

The expanded underwriting of financial guarantee bonds

caused sureties losses when the recession of 2001 hit. Two

hundred and fifty-five publicly traded companies filed for

bankruptcy during 2001, exceeding the previous annual

record of 176 in 1991 and 2000.42 One 2002 industry

analysis estimated the surety market’s exposure to Enron’s

bankruptcy at nearly $2.5 billion.43 K-Mart used surety

bonds to back, among other things, its self-funded workers’ compensation program and to protect against any

potential liability claims resulting from its sale of liquor

and firearms. Sureties’ estimated losses associated with KMart’s bankruptcy total $200 million.44

The decline in surety companies’ capacity associated with

losses on construction and financial guarantees affects the

market for reclamation bonds.45 When firms’ overall

capacity drops, to the extent that they can easily shift

among lines of business, they will avoid the riskiest lines

and even let them dry up altogether.46 Whereas most

surety contracts provide coverage for obligations that will

be completed in three to five years, financial assurances

for reclamation can, in some cases, remain outstanding

for three or four decades as mining on the site continues.

As a bond obligation extends farther into the future, a

surety’s assessment of the client’s financial and operational

health becomes more uncertain. Moreover, as discussed

below, the surety may also be concerned about an indefinite period of liability associated with acid mine drainage.

Reinsurance

Conditions in the primary market for surety bonds are

mirrored by conditions in the market for reinsurance for

those bonds. A reinsurer accepts a premium to indemnify

an insurer against the losses that it may sustain under the

policies that it issues. Historically, reinsurance contracts—

broad agreements covering some portion of a particular

40. Christopher Westfall, “Unsure Times for Surety Bonds,”

KPMG’s Insurance Insider’s Weekly Alert (February 25, 2002).

41. The Surety Association of America has not responded to requests for more recent data. See the Surety Association of America, “Twelve-Year Experience Summaries, 1989-2000” (statistical report, 2002) and “Fast Track Fidelity and Surety Results,

2001” (statistical report, 2002).

42. After the last wave of bankruptcies, in 1991, when there were

176 filings, the number dropped off to average 83.5 annually

over the next six years. The number began to climb in 1998 and

1999, when there were 122 and 145 filings, respectively. See

“Public Company Bankruptcies: Current Statistics and Trends

May Surprise,” available at www.AccountingMalpractice.com.

43. Meyerholz, “They’re Not Your Mother’s Surety Bonds.”

44. Krizan and others, “Bonding Business Going for Broke.”

45. Westfall, “Unsure Times for Surety Bonds.”

46. Winter, “The Liability Insurance Market.”
10 BONDING FOR RECLAIMING FEDERAL LANDS

class or classes of business—remain in force for long periods of time and are renewed annually on a fairly automatic

basis, unless either party wants to negotiate a change in

terms.

According to one industry analysis, upward of 80 percent

of the risk associated with sureties was reinsured for 10

to 20 percent of the premium through the latter half of

the 1990s.47 When reinsurers absorbed the majority of

sureties’ losses, some withdrew from the business by

declining to renew contracts. Others raised prices. In the

first two quarters of 2001, price increases of 15 percent

to 20 percent on “excess-of-loss” reinsurance contracts

were common. Other reinsurers limited coverage.48 In

response, some primary sureties narrowed their focus to

support short-term obligations with limited exposures.49

In a January 26, 2001, letter in which a reinsurer declined

a request for a reclamation bond, the broker explained,

“I know of very few surety companies who will write this

class of business even with collateral. The extended

duration of the bond guarantee makes it very difficult to

find a responsive surety market.”50

Temporary Effects Following September 11

The events of September 11, 2001, exacerbated the lack

of capacity in the markets for surety bonds and accelerated

the upsurge in reinsurance prices—following the typical

pattern in the wake of the losses associated with catastrophes. Estimates indicate that insurance payments for

economic losses on that day will ultimately be about $40

billion.51 Nearly a decade earlier, from 1992 to 1994, with

the occurrence of both Hurricane Andrew and the

Northridge, California, earthquake, losses totaled $38.6

billion (in 1994 dollars)—exceeding the cumulative losses

for the period from 1949 to 1991 by $4 billion—and

prices for reinsurance coverage more than doubled. According to an analysis of 489 reinsurance contracts, between 1970 and 1994 a $10 billion loss following a catastrophe pushed average contract prices higher by between

19 percent and 40 percent and reduced the quantity of

reinsurance by between 5 percent and 15 percent. Subsequently, though, those prices fell by 30 percent, mostly

between 1995 and 1998.52

The analysts’ observation that those effects on the reinsurance market were more pervasive than might have been

expected from the specific exposures that existed suggests

that the market for surety bonds in general, and reclamation bonds in particular, could expect no particular

insulation from the impact of September 11 on the

reinsurance market. Although the industry has rebuilt its

capital holdings, reinsurers remain selective about their

use of that capital. In August 2002, members of the Surety

Association of America reported a decline in their capacity

to obtain reinsurance for reclamation bonding ranging

from 90 percent to 100 percent.53 Furthermore, according

to some reports, some reinsurance contracts have specifically excluded coverage for long-term obligations, such

as reclamation bonds.54

Like companies in the primary property and casualty

industry, reinsurers improved their performance after

47. Aon Corporation, “Commercial Surety—Market Analysis.” In

addition to “excess-of-loss” reinsurance, the other main type is

“proportional” reinsurance, under which the reinsurer covers all

of the primary insurer’s losses and expenses on a prorated basis.

48. Westfall, “Unsure Times for Surety Bonds.”

49. Minutes of the Meeting of the Department of the Interior

Bonding Task Force and the National Mining Association, May

23, 2002.

50. Letter from Patricia J. Farmer, Associate in Fidelity and Surety

Bonding, Zurich U.S., to George C. Schroeder, Vice President/

Bonding Specialist, Marsh Advantage America, January 26,

2001.

51. Insurance Information Institute, Insurance Issues Update (May

23, 2003).

52. Kenneth A. Froot and Paul G.J. O’Connell, “The Pricing of

U.S. Catastrophe Reinsurance,” in The Financing of Catastrophe

Risk, Kenneth A. Froot, ed. (Chicago: University of Chicago

Press, 1999), pp. 195-227.

53. Letter from Riordan and Duke to Fulton.

54. Letter from Robert Duke, Director ofUnderwriting, Security

Association of America, to Tom Fulton, Deputy Assistant Secretary Department of the Interior for Land and Minerals

Management, May 28, 2002; and Gerson Lehrman Group,

“Mining Reclamation Bond Market.”
BONDING FOR RECLAIMING FEDERAL LANDS 11

2001. The Reinsurance Association of America reported

a net loss of $3.6 billion after taxes in 2001, but for 2002,

reinsurers had a net after-tax gain of $628 million—

yielding a 1.4 percent return on equity. As of the end of

the first quarter of 2003, the net gain was $1.2 billion—

$871 million higher than its value one year earlier. After

paying out $1.13 for every dollar in earned premium in

2001, reinsurers paid 93.7 cents in 2002. For the first

quarter of 2003, the figure was 71.3 cents, a slight decline

from the 74.7 cents of one year earlier.

The Mining Industry

In addition to the long time horizons associated with surety bonds for reclamation, the performance of the mining

industry may also influence their availability. According

to the Surety Association of America, providers are focusing on shorter-term obligations in industries with more

favorable financial circumstances.55

Companies mining for locatable minerals have faced a

particularly difficult time obtaining reclamation surety

bonds. Depressed prices for metals in the 1990s precipitated a number of bankruptcies among mining companies.

Sureties were called upon to forfeit bonds and became

increasingly wary of taking on such obligations.56 Currently, the near-term outlook for mining companies remains negative. Because of ongoing uncertainty about the

global economic outlook, prices have generally not risen

despite declines in production. The low prices of the past

several years prompted some large producers to acquire

smaller firms. In the process, they took on a debt burden

that is high given the industry’s poor performance. Nevertheless, some positive developments for the industry are

occurring. Gold is benefiting from the weakening of the

dollar, and prices for nickel are rising because of greater

demand.57

According to a 2002 survey, sureties are hesitant to underwrite obligations in the coal industry because of companies’ financial instability.58 Many coal companies

merged during the 1990s to benefit from economies of

scale, but lower prices and the need for high capital expenditures added to their debt burden and strained their

ability to generate profits. In addition, sureties are concerned about extended liability under federal law because

of unanticipated acid mine drainage—which requires

long-term treatment—and the resulting prospect of delays

in having their bonds released.59 But the outlook for the

coal-mining industry may be improving. In 2002, coal

prices increased for a second consecutive year for the first

time in two decades.60

Acid Mine Drainage

Acid mine drainage is partly responsible for the constrained supply of reclamation surety bonds (see Box 1).

Because surety bonds cannot be revoked once issued, they

are poorly suited to address obligations to treat such

drainage—which tends to have a long and indeterminate

horizon. In fact, federal regulations prohibit issuing coalmining permits if acid mine drainage is likely to occur.61

Nevertheless, unanticipated drainage does occur and can

result in violations of the Surface Mining Control and

Reclamation Act or other regulatory programs. If inspections identify such drainage, the Office of Surface Mining

can deny surety companies’ requests to release their bonds.

Recently, the Office of Surface Mining sought comments

55. Many companies in the mining industry currently carry a rating

of BBB or lower, according to the Northwest Mining Association, a 2,000-member nonprofit trade association.

56. Lisa A. Kirschner and Edward B. Grandy, “Mining and the

Vanishing Surety Bond Market,” Natural Resources and Environment, vol. 17, no. 152 (Winter 2003), pp. 142-149.

57. Diane Vazza, David Cantor, and John Bilardello, “U.S. NonFinancial Creditworthiness Continues to Moderate,” Standard

& Poor’s, Global Fixed Income Research (July 17, 2003).

58. Gerson Lehrman Group, “Mining Reclamation Bond Market.”

59. Ibid.

60. Fred Freme, “U.S. Coal Supply and Demand: 2002 Review,”

Energy Information Administration, Department of Energy

(April 17, 2003).

61. Department of the Interior, Office of Surface Mining, “AMD

Policy Statement” (March 1997).
12 BONDING FOR RECLAIMING FEDERAL LANDS

Box 1.

The Chemistry of Acid Mine Drainage

When surface mining activities expose waste materials

to an oxidizing environment, some mineral components

begin a series of chemical reactions called pyrite weathering, which is analogous to geologic weathering.1

Although geologic weathering takes place over hundreds

of thousands of years, pyrite weathering involves reaction rates that are orders of magnitude greater and

can release damaging quantities of acidity, metals, and

other soluble components into the environment. According to studies of surface coal mining, the peak acid

load occurs five to 10 years after mining, followed by

a gradual decline over 20 to 40 years, but drainage may

extend beyond 50 years before acid leachate is depleted.

For underground coal mines, no reliable predictions

of the discharges exist.2

 Acid mine drainage is most

prevalent in Appalachia coal mines, but it is also found

in western mines.

1. The information in this box comes from National Research

Council, Hardrock Mining on Federal Lands (Washington D.C.:

National Academies Press, 1999), pp. 80, 154-156. 

2. “Factors Controlling Acid Mine Drainage Formation,” available

at www.osmre.gov/amdform.htm.

Such drainage is not unique to coal mines. A common

feature of most ores is the presence of large quantities

of sulfur (as pyrite or marcasite or pyrrhotite). It often

occurs with copper, zinc, lead, silver, arsenic, and other

elements that constitute the valuable content of the mineralization. It also commonly occurs as a component

of waste rock.

In sulfur-rich deposits, sulfur is naturally released by

the slow processes of oxidation, weathering, and erosion.

The sulfuric acid produced is diluted and dispersed, creating local, and generally minor, natural degradation.

Also, some natural acid springs exist.

But mining can expose sulfur-rich material to the atmosphere at a much faster pace, leading to more rapid

oxidation. Environmental problems result if the sulfuric

acid is released through runoff. The acidity of the water

and its proximity to metals in the ore may generate

waters of low pH that are high in copper, iron, zinc,

aluminum, arsenic, selenium, and other elements. 

Acid mine drainage may take years to occur or to cause

a concern about water quality, but once acid production

has begun, it is difficult to stop. Lead mines that were

operating at the time of the Roman Empire are still producing acid drainage 2,000 years later.

on what types of financial guarantees are appropriate and

available, or may be created, for adequately funding the

treatment of unanticipated long-term acid mine drainage.62

Ultimately, the reluctance to provide reclamation bonding

for the mining industry is expected to wane as constraints

on capacity continue to ease and insurers gauge their risks

more precisely. As of the close of 2002, many industry

observers were not expecting to see capacity fully restored

before 2005.63 Sureties examining the type of precautions

taken by mining operators may see benefits in returning

to the industry with honed abilities to predict and price

exposure.64 In addition, financial assurance providers may

tailor new products to specific risks. There are many such

examples of problems in markets for financial assurance

62. Department of the Interior, Office of Surface Mining Reclamation and Enforcement, “Bonding and Other Financial Assurance Mechanisms for Treatment of Long-Term Pollutional

Discharges and Acid/Toxic Mine Drainage (AMD) Related Issues,” Federal Register, vol. 67, no. 96 (May 17, 2002) p. 35070.

63. Hartwig, “Industry Financials and Outlook: 2001—Year End

Results”; and ABD Insurance and Financial Services, “State of

the Surety Market—December 2002.”

64. Kirschner and Grandy, “Mining and the Vanishing Surety Bond

Market.”
BONDING FOR RECLAIMING FEDERAL LANDS 13

coverage that have been resolved over time as private

financial markets developed.65

Options for Addressing the Limited

Supply of Surety Bonds for Reclamation

and Their Implications

When capacity is constrained in financial assurance markets, prices rise. Because of the long horizons associated

with reclamation obligations (and the decline in prices

for some mined resources), surety bonds are no longer

available to the mining industry at prices that are more

attractive than those for other forms of financial assurance

(such as cash or its equivalent) that entail minimal risk

for the public. Consequently, industry participants have

proposed that the federal government expand its acceptance of certain assurance instruments that are allowed

under limited circumstances now. However, such instruments—such as corporate guarantees, bond pools, and

incrementally funded trusts—would transfer additional

risk to the public, along with greater monitoring and

enforcement costs.

A corporate guarantee is a general obligation of a firm.

The government allows operators to use independently

audited reports documenting that the financial strength

of their company, parent corporation, or affiliate (the

corporate guarantee) is sufficient to cover obligations in

place of a more tangible form of financial assurance dedicated exclusively to reclamation. If an operator defaults

on obligations backed by a corporate guarantee and the

regulatory authority is unsuccessful in competing for assets

with other creditors, the public is left to either bear the

costs of reclamation or accept the damaged condition of

the federal lands.

A bond pool is a fund into which a group of qualified

mining operators, generally within a given state, pay fees.

The pool then provides for its participants financial assurance for reclamation. Operators pay a fee to join the

pool and make payments associated with their reclamation

obligations—generally assessed at a fixed amount per acre,

with supplemental charges based on acreage, tonnage produced, and the number of permits. Participants’ payments

are not traditionally structured to enable the pool to pay

the estimated costs of all of the reclamation obligations

that it is covering at one time. In the event that abandoned

obligations exceeded a bond pool’s resources, the responsibility for outstanding reclamation could ultimately fall

to the public.

Incrementally funded trusts, administered by a third party,

are accounts into which an operator makes a series of

payments dedicated specifically to fully funding its own

reclamation obligations. The operator establishes the trust

by making an initial payment before mining begins; subsequent payments take place once work has begun.66 Incrementally funded trusts allow the operator to take advantage of the time value of money while also mitigating the

opportunity costs associated with providing the larger

amount of funds needed for a fully funded trust. Although

the government is the sole beneficiary of the trust, because

the operator has not deposited the total estimated costs

of the reclamation obligations at the time the trust is established, the public risks being left with the responsibility

for any unfunded obligations if the operator defaults

before fully funding the trust.67

65. See Congressional Budget Office, Federal Reinsurance for Disasters, Appendix B; James Boyd, “Financial Responsibility for

Environmental Obligations: Are Bonding and Assurance Rules

Fulfilling Their Promise?” Resources for the Future, Discussion

Paper 01-42 (August 2001); and James Boyd, “Bonding Requirements for Coal and Hardrock Mines in the U.S.,” in

Elizabeth Bastida, Thomas Wälde, and Janeth Warden, eds.,

International and Comparative Mineral Law and Policy: Trends

and Prospects (New York: Kluwer Law International, forthcoming).

66. For example, in Nevada, which allows such trust funds, the

minimum payment is equal to the estimated reclamation costs

that are unfunded divided by the expected number of years of

operation that are remaining.

67. Participants in the industry have also advocated the federal government’s involvement in providing reinsurance for reclamation

bonding. Federal intervention in reinsurance markets, even at

prices expected to cover costs, could delay the rebound of private reinsurance markets for reclamation bonding as well as innovation by private insurers and capital markets to address the

constrained supply. Federal subsidies of such reinsurance could

lead to less cautious underwriting, risking future losses and

exposing taxpayers to greater liabilities. See Congressional Budget Office, Federal Reinsurance for Disasters.
14 BONDING FOR RECLAIMING FEDERAL LANDS

Other industry proposals include regulatory changes to

accommodate greater use of phased or incremental bonding to facilitate the use of different financial assurance

instruments for different aspects of reclamation. Corporate

guarantees, bond pools, and incrementally funded trusts

might then be specifically targeted to address acid mine

drainage—making it easier to obtain traditional forms of

financial assurance for other reclamation obligations. Such

proposals narrow, but do not eliminate, the risk to the

public of being left with the responsibility for unfunded

obligations.

Corporate Guarantees

Two of the three Department of the Interior offices responsible for overseeing reclamation on federal lands allow

at least partial use of corporate guarantees to fulfill financial assurance requirements. Qualified companies with

offshore oil and gas operations can use corporate guarantees under the Minerals Management Service’s regulations

to claim an exemption from requirements for supplemental bonding.68 As of March 2003, only 520 leases on

the Outer Continental Shelf—about 7 percent of the

total—were not eligible for such an exemption. Coal mine

operators can use corporate guarantees under the Office

of Surface Mining’s regulations associated with the Surface

Mining Control and Reclamation Act. The federal government administers the law in only two states with active

coal mines, neither of which has operators that are currently using corporate guarantees. However, of the 24

states that have adopted primary responsibility for administering the law, 20 allow the use corporate guarantees,

and a number of coal mine operators on federal lands in

those states are using them. As of January 20, 2001, the

Bureau of Land Management stopped accepting new corporate guarantees to fulfill financial assurance requirements for reclamation in the wake of some bankruptcies

of mining companies and abandoned obligations for

reclaiming sites such as Colorado’s Summitville mine.69

In particular, industry participants would like the Bureau

of Land Management to accept corporate guarantees. Such

guarantees are attractive to the mining industry because

they eliminate the need to purchase coverage from a third

party and do not require funds to be set aside for reclamation. However, they provide less of a guarantee for the

government that costs will be recoverable in the future.

Unlike surety bonds, corporate guarantees do not allow

the regulator to lay claim to a specific financial asset in

the event that an operator becomes insolvent and cannot

meet its reclamation obligations. In a bankruptcy proceeding, since reclamation obligations are likely to be but some

of many of the bankrupt firm’s general obligations (all

subordinate to the claims associated with debt that has

a higher priority for payment to creditors), the government could recover only a fraction of the costs of reclaiming the lands.

Corporate guarantees also require considerable administrative oversight. Interpreting, verifying, and monitoring

companies’ finances over time require significant expertise

or reliance on audits by third parties.70 Moreover, there

tends to be great variability in the way environmental

obligations are recognized for accounting purposes.71 Auditors have additional challenges fully accounting for

overseas liabilities and those attached to subsidiaries. Fin68. In almost all cases, the estimated cost of “end-of-lease” obligations exceeds the minimum bond amount specified in regulations. the Minerals Management Service may require a supplemental bond if it finds that an operator’s financial strength

is not sufficient to protect the public from default.

69. As noted above, the bureau had not expressly authorized corporate guarantees but had accepted them under the terms of a

cooperative agreement with the state of Nevada.

70. According to some accounting industry analysts, there is an

increased risk that third-party audits are fraudulent when firms

are in financial distress, which is precisely the kind of situation

that can pose the most serious problems for financial assurance.

See Mark Beasley, Joseph Carcello, and Dana Hermanson,

Fraudulent Financial Reporting 1987-1997: An Analysis of U.S.

Public Companies (prepared for the Committee of Sponsoring

Organizations of the Treadway Commission, November 30,

1999).

71. Financial Accounting Standards Board, “Proposed Statement of

Financial Accounting Standards: Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets,”

No. 158-B (exposure draft, February 7, 1996).
BONDING FOR RECLAIMING FEDERAL LANDS 15

ally, a firm’s financial status can deteriorate quickly, and

regulators may not be notified of such conditions for some

time.

Data on experience with corporate guarantees for mining

reclamation are scarce. But in Nevada, for example, as of

March 2003, of the approximately $560 million in financial assurances held by the state for hardrock mining

operations, about $275 million was in the form of corporate guarantees. In the 10 years that corporate guarantees have been used by Nevada mines, only one associated

default has occurred. A copper mining company called

Arimetco Inc. declared bankruptcy in 1997 and abandoned its operations in early 2000. Those operations

included the Yerington mine (on federal lands under the

jurisdiction of the Bureau of Land Management) and the

Paradise Peak mines (on lands under the jurisdiction of

the Bureau of Land Management and the state of Nevada).

Arimetco used a corporate guarantee for $3.5 million as

part of its financial assurance for reclamation. After the

company’s bankruptcy, that guarantee was worthless, and

the Bureau of Land Management and the state were left

with only $1.2 million in other financial assurances—

which amounts to only a fraction of the funding necessary

to close the mines and reclaim the lands. Since Arimetco’s

bankruptcy, the state has taken some measures to add

security to its corporate guarantee process and to decrease

the risk of default. Nevertheless, the process still admits

risk because the state does not consider whether a company is using corporate guarantees in other jurisdictions

and does not have an overall limit on the amount of corporate guarantees that a company may have in Nevada.72

Bond Pools

The mining industry has also expressed interest in expanding the use of bond pools, especially for locatable minerals

operations. Currently, such pools exist in Alaska and

Nevada.73

In 1997, the state of Alaska and the Bureau of Land Management entered into a cooperative agreement certifying

the use of the state’s bond pool to meet federal requirements for financial assurance for reclamation obligations.

The Alaska pool ensures that funds are available to reclaim

the land of an operation even if the defaulting miner has

not made sufficient payments into the pool. Operators

that have previously defaulted on a bond can rejoin the

pool only if they reimburse it for all associated costs and

pay additional participation costs. The state and the Bureau of Land Management can deny any applicant the right

to participate. As of May 2002, no participant had defaulted on reclamation obligations.74 Of the 73 participants in the state bond pool, 53 operate on public lands.

The state of Nevada’s reclamation bond pool, which has

been serving mining operations—including those on federal lands—since 1991, is funded by participants’ deposits,

premiums paid by participants, revenue from collateral

sales, and earned interest. Over most of the pool’s existence, the deposit amount has been 15 percent of the

amount of financial assurance, annual premiums have been

5 percent, and there has been a $1 million maximum bond

amount for each participant. The total bonded amount

of the pool has ranged from $124,017 to $2.12 million,

and it has never made a payout because of a default.75

As traditionally designed, bond pools are not fully funded.

If the participation requirements do not adequately screen

for manageable risk levels or if unanticipated developments

in the industry simultaneously hurt the majority of participants in a bond pool, the resources in the pool could

prove inadequate to cover its financial assurances. The

public would be left with the responsibility for the abandoned reclamation obligations.

72. “Current Mining Bonding Issues in Nevada,” Nevada Bonding

Task Force (March 24, 2003).

73. In August 2003, the governor of Oregon signed legislation

establishing a bond pool for small mining operations in that

state. The Bureau of Land Management’s regulations allow for

bond pools managed by states (43 C.F.R. 3809.571). Also,

there are eight states with bond pools for coal operations authorized under the provision for alternative bonding systems in the

Surface Mining Control and Reclamation Act.

74. In order to limit the pool’s exposure to costs for long-term treatment, participation is restricted to placer mines or other operations that do not use chemicals to process ore.

75. E-mail from Alan R. Conyer, Administrator, Nevada Division

of Minerals, to Jaime Besse, Program Assistant, Alaska Affairs,

Office of the Secretary, Department of the Interior, August 15,

2002.
16 BONDING FOR RECLAIMING FEDERAL LANDS

As of January 20, 2001, regulations by the Bureau of Land

Management clarified that state bond pools must cover

100 percent of the cost for reclaiming participants’ operations on public lands.76 The bureau signed an agreement

with the state of Alaska on August 6, 2003, ensuring that

full coverage would be available for federal reclamation

requirements. In Nevada, to expand coverage, the state

Division of Minerals raised the deposit amount to 100

percent for bonds of less than $10,000. For bonds of more

than $10,000, the deposit amount is 50 percent to 80

percent of the financial assurance amount, and the cap

per participant is now $3 million. The annual premium

is 3 percent for bonds of less than $10,000, but ranges

from 5 percent to 10 percent for bonds of more than

$10,000. Once the sum of the deposit and the premiums

paid equals the bond amount, the premium is 3 percent.

The Division of Minerals expects the changes to cut the

time from a participant’s entry into the pool to the time

its obligation is fully funded by at least one-third; in

addition, the pool’s interest earnings will rise. As of October 1, 2003, the pool was 91 percent funded—its highest level to date.77

As traditionally designed, bond pools offer operators a

financial assurance option that is less expensive than posting cash because the participation fees are not structured

to fully fund all of a pool’s obligations simultaneously.

Prioritizing the payment of federal claims on the resources

of such a pool shifts the risk associated with unfunded

obligations away from federal taxpayers at the potential

expense of state taxpayers. Restructuring bond pool participation fees to allow for 100 percent coverage of all participants’ obligations out of funds on hand would thoroughly eliminate public risk, but offer operators little

distinct advantage over posting cash to fulfill financial

assurance requirements.

Incrementally Funded Trusts

The mining industry has also proposed using trusts that

an operator would fund incrementally over the life of an

operation to provide financial assurance for reclamation.

Currently, offshore oil and gas operators can consider the

use of such trusts. Under the Minerals Management Service’s regulations, the government may allow the use of

an incrementally funded trust on a case-by-case basis to

meet supplemental bonding requirements. But the trust

fund would have to be combined with another form of

financial assurance to guarantee outstanding responsibilities if the operator halted its payments to the fund. Operators must generally make an initial payment equal to at

least 50 percent of the Minerals Management Service’s

estimate of the cumulative potential liabilities and must

fully fund the trust within four years (or by the beginning

of the year in which the agency projects that, cumulatively,

80 percent of the originally recoverable reserves will have

been produced, whichever is earlier).78 The Bureau of Land

Management also currently allows for incrementally

funded trusts but, until operators fully fund them, the

companies must provide additional financial assurance

to cover outstanding liabilities.

The expanded use of incrementally funded trusts—that

is, without supplemental financial assurance prior to full

funding, which some participants in the mining industry

have advocated—implies that the public assumes the risk

of the cost of any reclamation obligations incurred but

not yet funded. Such trusts require additional monitoring

to ensure that operators adhere to payment schedules. And

even fully funded trusts require oversight to ensure that

they maintain sufficient value to honor future reclamation

obligations. 

Targeted or Segmented Financial Assurance

Some observers have suggested targeting the proposed

alternative forms of financial assurance exclusively at the

reclamation obligations associated with acid mine drainage. Because of the challenges that such drainage presents

for coal and locatable minerals operations in obtaining

bonds, addressing it with a separate form of financial

76. Department of the Interior, Bureau of Land Management,

“Mining Claims Under the General Mining Laws; Surface Management; Final Rule,” Federal Register vol. 65, no. 225 (November 21, 2000) pp. 69997 and 70073.

77. The release of the bond of one of the pool’s larger operators

—which had been participating under the lower, original deposit and premium requirements—significantly boosted its

funding level. Personal communications from Doug Driesner,

Nevada Division of Minerals, October 1 and 17, 2003.

78. Department of the Interior, Minerals Management Service,

“Supplemental Bond Procedures,” NTL No. 2003-N06 (June

17, 2003).
BONDING FOR RECLAIMING FEDERAL LANDS 17

assurance may “free up” the surety market for the other

aspects of reclamation and foster bond sales there. For

example, the Bureau of Land Management has considered,

but not yet issued, guidance on the use of interest-bearing

trusts to cover long-term water treatment and other reclamation obligations. Currently, that approach is being

used, with the agency’s approval, at Placer Dome’s Cortez

gold mine. A bond covers the reclamation now, and in

2005, Placer Dome will make the first of five annual payments into a trust fund, whose appreciating value will

cover the long-term (250-year) contingency of potential

water pollution effects in a pit lake at the mine.79 Even

limited to the treatment of acid mine drainage, however,

the proposed alternative forms of assurance still involve

transferring risk to the public.

Finally, industry groups have also proposed regulatory

changes that would allow operators to post successive

financial assurances for increments of work or to simultaneously post separate financial assurances to cover different phases of the reclamation. In concert, the government

would work to clarify the requirements that operators

must meet in order to fulfill their reclamation obligations

and to have their financial assurances released. By lessening

the uncertainty and duration of some aspects of reclamation, such segmenting of financial assurance would be

intended to make surety bonds more readily available for

short-term obligations, such as regrading and reshaping

the land to conform with adjacent areas and initiating

revegetation. Financial assurances for longer-term and

more uncertain aspects of reclamation, such as successful

revegetation, stabilizing erosion, and the water treatment

associated with acid mine drainage, could then be addressed through alternative instruments developed by

private markets.

79. Nevada Division of Environmental Protection, Nevada Bonding

Task Force, “Current Issues”; Letter from Placer Dome America

to the Director of the Bureau of Land Management, “Placer

Dome America’s Supplemental Comments on the 43 C.F.R.

Subpart 3809 Rulemaking and the U.S. Bonding Crisis” (May

9, 2002). 

Trust funds that allow payments over time have been used successfully under other regulatory programs to demonstrate financial assurance for long-term obligations. For example, under the

Resource Conservation and Recovery Act, Subtitle C, owners

and operators of hazardous waste disposal facilities and municipal solid waste landfills use trust funds to demonstrate financial assurance for obligations lasting as long as 30 years after a

cleanup. See Department of the Interior, Office of Surface Mining, Final Report on the Feasibility of Using Various Financial

Mechanisms to Demonstrate Financial Assurance for the LongTerm Treatment of Acid Mine Drainage (prepared by Tetra Tech

EM Inc., June 21, 2000).

Financial Assurance Requirements

for Mining Reclamation on Federal Lands

This appendix presents key federal requirements for

financial assurance for the reclamation of public lands.

It reviews the regulations that define reclamation, identify

acceptable financial assurance instruments, specify the

necessary amount of financial assurance, and stipulate the

conditions under which the government will avail itself

of the funding provided through the financial assurance

(see Table A-1).

Bureau of Land Management

The Bureau of Land Management (BLM) is the regulatory

authority for locatable minerals operations and onshore

oil and gas operations on its lands. Coal operations on

BLM lands are essentially regulated by the Office of

Surface Mining.

Reclamation for Locatable Minerals Operations

“Components of reclamation include, where applicable:

(1) Isolation, control, or removal of acid-forming, toxic,

or deleterious substances; (2) Regrading and reshaping

to conform with adjacent landforms, facilitate revegetation, control drainage, and minimize erosion; (3) Rehabilitation of fisheries or wildlife habitat; (4) Placement of

growth medium and establishment of self-sustaining revegetation; (5) Removal or stabilization of buildings, structures, or other support facilities;(6) Plugging of drill holes

and closure of underground workings; and (7) Providing

for post-mining monitoring, maintenance, or treatment.”1

Financial Assurance Instruments for Reclamation

Obligations of Locatable Minerals Operations

Financial assurance may take the form of a surety bond,

cash, or cash equivalents. Cash equivalents include irrevocable letters of credit, certificates of deposit, savings

accounts, and “Either of the following instruments . . .

maintained in a Securities Investors Protection Corporation insured trust account by a licensed securities

brokerage firm for the benefit of the Secretary of the

Interior, acting by and through BLM: (1) Negotiable

United States Government, State and Municipal securities

or bonds; or (2) Investment-grade rated securities having

a Standard and Poor’s rating of AAA or AA or an equivalent rating from a nationally recognized securities ratings

service.” Operators can also use insurance if it is “used to

guarantee performance of regulatory obligations in the

event of default on such obligations by the operator.

Insurance must have an A.M. Best rating of “superior”

or an equivalent rating from a nationally recognized insurance rating service.”2

 The federal government will also

accept participation in a state bond pool if: “(1) The state

agrees that, upon BLM’s request, the State will use part

of the pool to meet reclamation obligations on public

lands; and (2) The BLM State Director determines that

the State bond pool provides the equivalent level of

protection as that required by [43 C.F.R. Subpart 3809].”

As of January 20, 2001, the BLM stopped accepting new

corporate guarantees.3

1. 43 C.F.R. 3809.5.

2. 43 C.F.R. 3809.555.

3. 43 C.F.R. 3809.571

APPENDIX
20 BONDING FOR RECLAIMING FEDERAL LANDS

Table A-1.

Selected Federal Financial Assurance Requirements for Reclamation

Financial 

Assurance

Oil & Gas

Coal (OSM)

Locatable

Minerals

(BLM)

Offshore

(MMS)

Onshore (BLM)

Continental

United States

National

Petroleum

Reserve-Alaska

Amount Required $50,000 to

$500,000 for a

lease-specific

bond, $300,000

to $3 million for

an areawide general lease bond

MMS may require

supplemental

bonds if needed

to ensure compliance with lease

obligations and

regulations, unless a lessee’s

financial qualifications merit an

exemption.

$10,000 for a

lease-specific

bond, $25,000

for a statewide

bond, $150,000

for a nationwide

bond 

BLM requires a

bond to cover

reclamation costs

beyond those specified here if it

has demanded a

bond payment

from the operator

within the past

five years. It may

require a bond

for additional

costs if it determines that the

operator poses a

risk.

$100,000 for a

lease-specific

bond, $300,000

for Reserve-wide

activities

BLM requires a

bond to cover

reclamation costs

beyond those

specified here if it

has demanded a

bond payment

from the operator

within the past

five years. It may

require a bond

for additional

costs if it determines that the

operator poses a

risk.

Expected cost of fully

reclaiming the site (as

specified in the operator’s approved plan) if

the regulatory authority

has to perform the work

The amount of the initial

bond cannot be less

than $10,000.

Expected cost of

fully reclaiming

the site (as specified in the operator’s approved

plan) when the

regulatory authority contracts

with a third party

to do the work

Does the Regulatory 

Agency Accept:

Corporate guarantee

from qualified 

applicant

For supplemental

bonding only

No No Yes

However, prohibited

under state law in four

statesa

No

Discontinued

acceptance as of

January 20, 2001

Participation in a

state bond pool 

No No No Yesb Yesc

Incrementally

funded trust

No No No No No

(Continued)
BONDING FOR RECLAIMING FEDERAL LANDS 21

Table A-1.

Continued

Financial 

Assurance

Oil & Gas

Coal (OSM)

Locatable

Minerals

(BLM)

Offshore

(MMS)

Onshore (BLM)

Continental

United States

National

Petroleum

Reserve-Alaska

Incremental or

phased financial 

assurance

No No No Yes

The operator can post

successive incremental

assurances in accordance with approved 

reclamation costs corresponding to initial operations on succeeding

increments. The liability

of the incremental assurance is limited to the

associated increment of

the operation. Alternatively, prior to any

disturbance, the operator can simultaneously

post separate assurances to cover three

different phases of reclamation requirements

identified in regulations.

The liability of the

phased bond is limited

to the scope of the reclamation work it covers.

No

Source: Congressional Budget Office based on 43 C.F.R. 3104 and 3809, and 30 C.F.R. 256, 740, and 800.

Notes: BLM = Bureau of Land Management; OSM = Office of Surface Mining; MMS = Minerals Management Service.

In general, the three Department of the Interior offices that regulate mining and drilling activities for different resources accept the following forms of financial

assurance: surety bonds, irrevocable letters of credit, negotiable securities/bonds (federal, state, municipal, and commercial securities with an acceptable

rating), certificates of deposit, and cash.

a. Under the Surface Mining Control and Reclamation Act of 1977, state authorities may assume primacy (and take over the relevant regulatory activities of the federal

government) if their regulatory program meets all applicable federal requirements. Mining on federal lands in states with primacy is governed principally by the

federally approved state program. Of the 24 states with primacy, 20 allow corporate guarantees. The four that do not are Kansas, Kentucky, Maryland, and Montana.

The Office of Surface Mining does not maintain records on what types of bonds are filed with the states, but information gathered recently from the Western region

indicates some states currently have a number of mines using corporate guarantees: Alaska (four), Colorado (two), New Mexico (six, and one additional mine

on tribal lands for which the federal government acts as the regulatory authority), and Wyoming (nine). Only two states with federal programs, Tennessee and

Washington, have active coal mines but neither has mines currently using corporate guarantees. (Conversation with Eugene Hay, Office of Surface Mining, May

6, 2003 and e-mails from Dennis Rice, Office of Surface Mining, May 7 and 8, 2003.)

b. There are eight state bond pools authorized under the provision of the Surface Mining Control and Reclamation Act allowing alternative bonding systems.

c. There are two state bond pools, one in Alaska and one in Nevada, that serve locatable minerals operations.
22 BONDING FOR RECLAIMING FEDERAL LANDS

Financial Assurance Amount 

for Locatable Minerals Operations

The amount of assurance for locatable minerals is determined by agreement between the operator and BLM on

the basis of the expected cost of fully reclaiming the site

as specified in the operator’s approved reclamation plan.

“When BLM identifies a need for it, [the operator] must

establish a trust fund or other funding mechanism available to BLM to ensure the continuation of long-term treatment to achieve water quality standards and for other long

term, post- mining maintenance requirements. The funding must be adequate to provide for construction, longterm operation, maintenance, or replacement of any treatment facilities and infrastructure, for as long as the treatment and facilities are needed after mine closure.” The

assurance amount “must cover the estimated cost as if

BLM were to contract with a third party to reclaim [the]

operations according to the reclamation plan, including

construction and maintenance costs for any treatment

facilities necessary to meet Federal and State environmental standards. The financial guarantee must also cover any

interim stabilization and infrastructure maintenance costs

needed to maintain the area of operations in compliance

with applicable environmental requirements while

third-party contracts are developed and executed.”4

Forfeiture 

BLM must notify the operator how to avoid forfeiture,

including: “(1) Providing a written agreement under

which [the operator] or another person will perform reclamation obligations in accordance with a compliance

schedule which meets the conditions of . . . the reclamation plan, and a demonstration that such other person has

the ability to satisfy the conditions; and (2) Obtaining

written permission from BLM for a surety to complete

the reclamation, or the portion of the reclamation applicable to the bonded phase or increment, if the surety can

demonstrate an ability to complete the reclamation in

accordance with the reclamation measures incorporated

in [the operator’s reclamation plan].5

Onshore Oil and Gas Leasing 

Financial assurance must consist of a surety or personal

bond (accompanied by a certificate of deposit, a cashier’s

check, a certified check, negotiable Treasury securities of

the United States, or an irrevocable letter of credit ) of an

amount not less than $10,000 to ensure “compliance with

all terms and conditions of the entire leasehold(s) covered

by the bond . . . including complete and timely plugging

of the well(s), reclamation of the lease areas, and the

restoration of any lands or surface waters adversely affected

by the lease operations. . . .” Alternatively, operators may

furnish a minimum bond of $25,000 to cover all leases

and operations in any one state or a minimum bond of

$150,000 to cover all leases and operations nationwide.6

National Petroleum Reserve-Alaska regulations set minimum bond amounts at $100,000 for an individual lease

bond or $300,000 for a bond that covers all leases held

by a party in the National Petroleum Reserve-Alaska.

Coal Leasing

Financial assurance for the coal leasing program (under

the Surface Mining Control and Reclamation Act of 1977)

must be sufficient to cover anticipated reclamation costs.

Bonds are submitted to the Office of Surface Mining or

to the state regulatory agency.7

Office of Surface Mining

The Office of Surface Mining (OSM) is the principal

regulatory authority for coal operations on federal lands.

Reclamation

Reclamation for coal operations consists of backfilling,

regrading, and drainage control (Phase I); successfully establishing revegetation on the regraded mined lands (Phase

II); and completing all surface coal mining and reclamation activities (Phase III).8

4. 43 C.F.R. 3809.552.

5. 43 C.F.R. 3809.596.

6. 43 C.F.R. 3104.1 to 3104..3

7. 30 C.F.R. 740.

8. 30 C.F.R. 800.40.
BONDING FOR RECLAIMING FEDERAL LANDS 23

Financial Assurance Instruments 

for Reclamation Obligations

The financial assurance may be provided through (a combination of) a surety bond, a collateral bond, or a “selfbond.” A collateral bond must be supported by one or

more of the following: a cash account; negotiable municipal, state, or federal bonds; negotiable certificates of

deposit; an irrevocable letter of credit; a perfected, first-lien

security interest in real property; other investment-grade

rated securities having a rating of AAA, AA, A, or the

equivalent.9

 A self-bond is acceptable only if the following

series of requirements is met by the applicant or its parent

corporation guarantor: “(1) The applicant designates a

suitable agent to receive service of process in the State

where the proposed surface coal-mining operation is to

be conducted. (2) The applicant has been in continuous

operation as a business entity for a period of not less than

5 years. . . . (3) The applicant submits financial information in sufficient detail to show that the applicant meets

one of the following criteria: (i) The applicant has a current rating for its most recent bond issuance of “A” or

higher as issued by either Moody’s Investor Service or

Standard and Poor’s Corporation; (ii) The applicant has

a tangible net worth of at least $10 million, a ratio of total

liabilities to net worth of 2.5 times or less, and a ratio of

current assets to current liabilities of 1.2 times or greater;

or (iii) The applicant’s fixed assets in the United States

total at least $20 million, and the applicant has a ratio of

total liabilities to net worth of 2.5 times or less, and a ratio

of current assets to current liabilities of 1.2 times or

greater. (4) The applicant submits: (i) Financial statements

for the most recently completed fiscal year accompanied

by a report prepared by an independent certified public

accountant in conformity with generally accepted accounting principles and containing the accountant’s audit

opinion or review opinion of the financial statements with

no adverse opinion; (ii) Unaudited financial statements

for completed quarters in the current fiscal year; and (iii)

Additional unaudited information as requested by the

regulatory authority. . . . [T]he total amount of the outstanding and proposed self-bonds of the applicant for

surface coal-mining and reclamation operations shall not

exceed 25 percent of the applicant’s tangible net worth

in the United States. . . . [T]he total amount of the parent

corporation guarantor's present and proposed self-bonds

and guaranteed self-bonds for surface coal-mining and

reclamation operations shall not exceed 25 percent of the

guarantor’s tangible net worth in the United States. . . .

[T]he total amount of the non-parent corporate guarantor’s present and proposed self-bonds and guaranteed

self-bonds shall not exceed 25 percent of the guarantor's

tangible net worth in the United States.”10

State regulatory authorities can assume primary responsibility for regulation of coal exploration and surface coalmining and reclamation operations (including review of

and decisions on permits and bonding for surface coalmining and reclamation operations).11 While the OSM

allows self-bonding under the Surface Mining Control

and Reclamation Act, four states with primacy do not

allow self-bonding.12

With OSM’s approval, eight states have adopted “alternative bonding systems.” In contrast to full cost bonding

systems, in which operators post bonds to cover all reclamation costs, alternative bonding systems use supplemental funds to guarantee some reclamation costs. The

bond pools are generally composed of two parts: a flat rate

per-acre bond and a supplemental reclamation fund consisting of a mixture of permit fees, taxes, and penalties paid

by operators. If an operator defaults, the flat-rate bond

is applied first to cover site reclamation costs and the supplemental fund makes up the shortfall. OSM requires a

bond pool to assure that “the regulatory authority will

have available sufficient money to complete the reclamation plan for any area which may be in default at any

time; and . . . [to] provide a substantial economic incentive

for the permittee to comply with all reclamation provisions.”13

9. 30 C.F.R. 800.5.

10. 30 C.F.R. 800.23.

11. 30 C.F.R. 900.4.

12. Currently, 24 states have primacy and 20 allow self-bonding.

There are federal programs in 12 states, but only two of those

states have active coal mines. 

13. 30 C.F.R. 800.11.
24 BONDING FOR RECLAIMING FEDERAL LANDS

Operators can file (if approved): “(1) A performance bond

or bonds for the entire permit area; (2) A cumulative bond

schedule and the performance bond required for full

reclamation of the initial area to be disturbed; or (3) An

incremental bond schedule and the performance bond

required for the first increment in the schedule.”14 “With

the approval of regulatory authority, a bond may be posted

and approved to guarantee specific phases of reclamation

within the permit area provided the sum of phase bonds

posted equals or exceeds the total amount required.”15

Financial Assurance Amount

“The amount of the bond shall be sufficient to assure the

completion of the reclamation plan if the work has to be

performed by the regulatory authority in the event of

forfeiture, and in no case shall the total bond initially

posted for the entire area under one permit be less than

$10,000.”16

Forfeiture 

The regulatory authority must “advise the permittee and

surety, if applicable, of the conditions under which forfeiture may be avoided. Such conditions may include, but

are not limited to—(i) Agreement by the permittee or

another party to perform reclamation operations in accordance with a compliance schedule which meets the

conditions of the permit, the reclamation plan, and the

regulatory program and a demonstration that such party

has the ability to satisfy the conditions; or (ii) The regulatory authority may allow a surety to complete the reclamation plan, or the portion of the reclamation plan applicable to the bonded phase or increment, if the surety

can demonstrate an ability to complete the reclamation

in accordance with the approved reclamation plan.”17

Acid Mine Drainage

In May 2002, OSM sought comment on what types of

financial guarantees are appropriate and available, or may

be created, to adequately fund the treatment of unanticipated long-term acid or toxic mine drainage. Standing

policy only allows permit approval “where the operation

is designed to prevent off-site material damage to the

hydrologic balance and minimize both on- and off-site

disturbances to the hydrologic balance.” Permits are not

to be approved “if the determination of probable hydrologic consequences or other reliable hydrologic analysis

predicts the formation of a postmining pollutional discharge that would require continuing long-term treatment

without a defined endpoint.” For unanticipated acid mine

drainage, although unaccounted for in the reclamation

plan, OSM requires that financial assurance mechanisms

be adjusted accordingly to fully address it when noticed

(including holding bonds subsequent to bond release request inspections that identify acid mine drainage, “unless

a financial guarantee or some other enforceable contract

or mechanism to ensure continued treatment exists.”)

OSM also invited comment on “what standards should

be used to determine water treatment, such as effluent

limits or other water quality standards, in the calculation

of financial assurance amounts” (because the required level

of treatment for the regulatory authority in the event of

forfeiture may not be the same as the level of current

treatment by the permittee—traditionally it depends upon

permitting authorities of the National Pollution Discharge

Elimination System, who “establish effluent limits for

bond forfeiture sites on a case-by-case basis after forfeiture

14. 30 C.F.R. 800.11.

With a cumulative bond schedule, prior to subsequent disturbances, the operator has to post additional bond amounts in accordance with the approved schedule submitted at the time the

initial bond was posted. OSM can partially release a bond under

a cumulative schedule, but liability of a cumulative bond extends over the entire permit area. Thus, in forfeiture, the government can use bond money anywhere within the permit area

to cover reclamation costs.

With an incremental bond schedule, as work begins on succeeding increments, the operator must provide additional bonds to

cover those increments. In forfeiture, the government may not

use bond money that is associated with one increment to cover

reclamation costs for another increment. 

15. 30 C.F.R. 800.13. The operator simultaneously posts separate

bonds to cover Phase I, Phase II, and Phase III reclamation

requirements (described above) prior to any disturbing of the

approved permit area. Liability under phased bonds extends to

the approved permit area, but one attractive feature for a surety

is that its legal liability is limited to the scope of the reclamation

work being covered.

16. 30 C.F.R. 800.14. 17. 30 C.F.R. 800.50.
BONDING FOR RECLAIMING FEDERAL LANDS 25

has occurred”), what time frame to use in calculating the

present value of long-term treatment costs for sites without

a defined endpoint, and appropriate enforcement in cases

where existing financial assurance is not fully adequate

for the long term, but the permittee is currently treating

the acid mine drainage. (If there is no longer any active

mining in the permit area when the discharge develops,

there is less leverage to use in obtaining the increased bond

amount. Insisting on immediate posting of an increased

bond amount may give permittees an incentive to cease

operations and abandon the site rather than continue to

treat the discharge.)18 The comment period for the advance notice of proposed rule ended on October 15, 2002.

Minerals Management Service

The Minerals Management Service (MMS) regulates “oil,

gas and sulphur exploration, development, and production

operations on the Outer Continental Shelf (OCS).”19 “All

exploration, development, and production activities except

for preliminary activities shall be conducted in accordance

with an Exploration Plan or a Development and Production Plan approved by [MMS].”20 “All oil and gas leases

shall be issued for an initial period of 5 years, or not to

exceed 10 years. . . . An oil and gas lease shall continue

after such initial period for as long as oil or gas is produced

from the lease in paying quantities, or drilling or wellreworking operations as approved by the Secretary are

conducted. . . . Sulphur leases shall be issued for a term

not to exceed 10 years and so long thereafter as sulphur

is produced from the leasehold in paying quantities, or

drilling, well-reworking, plant construction, or other operations for the production of sulphur, as approved by the

Secretary, are conducted thereon.”21

Reclamation for Outer Continental Shelf

Oil, Gas, and Sulphur Operations

Holders of leases must plug and abandon all wells, remove

all platforms and other facilities, decommission all pipelines, and clear the sea floor of all obstructions to users.22

MMS may approve partial removal for platforms and

other facilities, or toppling in place, for conversion to an

artificial reef.23 Wells shall be permanently plugged, and

platforms and other facilities removed, within one year

of lease termination.24 Colessees and operating rights owners are jointly and severally responsible for these obligations.25

Financial Assurance Instruments for Reclamation

Obligations for Oil, Gas and Sulphur Operations

Lease bonds must be (a combination of) a surety bond

issued by a U.S. Treasury-certified surety, Treasury securities, or another form of security approved by the Regional Director of MMS.26 Supplemental bond requirements (see below) may essentially be waived with a corporate guarantee under the following conditions: “(1) [A

lessee’s] [c]umulative lease abandonment liability is less

than or equal to 50 [percent] of . . . [the lessee’s] net

worth. . . (2) [A lessee] [d]emonstrates reliability as evidenced by the following: (a) number of years of successful

operations and production of oil and gas or sulphur in

the OCS or in the onshore oil and gas industry; (b) Credit

rating(s), trade references, and verified published sources;

©) A record of compliance with the current and previous

governing laws, regulations and lease terms; and (d) Other

items that indicate financial strength or reliability; and,

the lessee either: (3) Produces fluid hydrocarbons in excess

of an average of 20,000 barrel oil equivalents (BOE) per

day from the OCS leases . . . or (4) Has stockholders’

equity or net worth of at least $50 million and demonstrates meeting the criteria set forth in the table below by

providing audited financial statements. . . .

18. Department of the Interior, Office of Surface Mining, “Bonding

and Other Financial Assurance Mechanisms for Treatment of

Long-Term Pollutional Discharges and the Acid/Toxic Mine

Drainage (AMD) Related Issues,” Federal Register, vol. 67, No.

96 (May 17, 2002), pp. 35070-35073.

19. 30 C.F.R. 250.101.

20. 30 C.F.R. 250.200.

21. 30 C.F.R. 256.37.

22. 30 C.F.R. 250.700 and 250.1703.

23. 30 C.F.R. 250.1730.

24. 30 C.F.R. 250.1710 and 250.1725.

25. 30 C.F.R. 250.146 and 250.1701.

26. 30 C.F.R. 256.54.
26 BONDING FOR RECLAIMING FEDERAL LANDS

For lessees with stockholders’ 

equity or net worth of:

If the lessee’s cumulative potential 

lease abandonment liability is #25% 

of stockholders’ equity or net worth, 

the lessee’s debt-to-equity ratio 

(total liabilities/net worth) must be:

If the lessee’s cumulative potential lease

abandonment liability is ,25% but #50%

of stockholders’ equity or net worth, 

the lessee’s debt-to-equity ratio 

(total liabilities/net worth) must be:

$50 Million to $100 Million #2.5 #2.0

Above $100 Million #3.0 #2.5

. . . (6) The determination of the lessee’s financial strength

is valid for 1 year.”27

Financial Assurance Amount for Oil, Gas, 

and Sulphur Operations 

Lessees must maintain a “$50,000 lease-specific or

$300,000 area-wide general lease surety bond for leases

with no MMS-approved operational activity plan, or for

leases under an MMS-approved operational activity plan

but with no submittal to MMS of assignment or operational activity plans.” No such bond is required if, before

lease exploration activities commence, lessees furnish a

“$200,000 lease-specific or $1,000,000 area-wide general

lease surety bond for leases in a proposed EP [exploration

plan] or a significant revision to an approved EP, or for

a proposed assignment of a lease with an approved EP.”

Neither is required if, before lease production and development activities commence, lessees furnish a “$500,000

lease-specific $3,000,000 area-wide general lease surety

bond for leases in a proposed DPP [development and production plan] or DOCD [development operations coordination document], or a significant revision to an approved

DPP or DOCD or for a proposed assignment of a lease

with an approved DPP or DOCD.”28 If MMS determines

that amounts greater than those specified are necessary

to ensure compliance with lease obligations and regulations, the amount of the required supplemental bond will

be equal to “the cost to meet all potential present and

future lease obligations including rents, royalties, and

amount of plugging and abandonment costs necessary to

ensure performance of regulatory requirements.”29

Forfeiture 

Forfeiture can be avoided if within five days the lessee,

the corporate guarantor, or the surety agrees to, and demonstrates that they will, bring the lease into compliance

within the MMS-prescribed time frame.30

Right-of-Use and Easements

MMS may grant a right-of-use and easement on leased

and unleased lands on the OCS to operators who can

qualify as lessees and meet bonding requirements.31

Holders of a state lease must furnish a surety bond for

$500,000 “before MMS issues . . . a right-of-use and

27. Department of the Interior, Minerals Management Service,

“Supplemental Bond Procedures,” NTL No. 2003-N06 (June

17, 2003). See also 30 C.F.R. 256.53.

28. Department of the Interior, Minerals Management Service,

Gulf of Mexico OCS Region, “Guidelines for General Lease

Surety Bonds,” NTL No. 2000-G16 (September 7, 2000). See

also 30 C.F.R. 256.52-53.

“When a lessee can demonstrate . . . that wells and platforms

can be abandoned and removed and the drilling and platform

sites cleared of obstructions for less than the [required

$500,000], [MMS] may accept a lease surety bond in an

amount less than the prescribed amount but not less than the

amount of the cost for well abandonment, platform removal

and site clearance.” (30 C.F.R. 256.53(c).

29. Department of the Interior, Minerals Management Service,

Gulf of Mexico OCS Region, “Supplemental Bond Procedures,”

MMS Regulation NTL 98-18N (December 28, 1998).

30. 30 C.F.R. 256.59.

31. 30 C.F.R. 250.160.

“Easement means an authorization for a nonpossessory, nonexclusive interest in a portion of the OCS, whether leased or

unleased, which specifies the right of the holder to use the area

embraced in the easement in a manner consistent with the terms

and conditions of the granting authority” (30 C.F.R. 150.105).
BONDING FOR RECLAIMING FEDERAL LANDS 27

easement on the OCS.” “[MMS] may require . . . a supplemental bond . . . or an increase in the coverage of an

existing surety bond [to] . . . [c]over additional costs and

liabilities for regulatory compliance, including well abandonment, platform and structure removal, and site clearance from the seafloor of the right-of-use and easement.”32

Oil Spill Financial Responsibility 

MMS also requires demonstration of “oil spill financial

responsibility” (OSFR) for covered offshore facilities

(COFs).33 Four methods (or a combination) can be used:

self-insurance,34 insurance,35 an indemnity,36 or a surety

bond.37 At the discretion of the director, MMS “may accept other methods to demonstrate OSFR . . . includ[ing]

pooling, letters of credit, pledges of treasury notes, or other

comparable methods.”38 The OSFR demonstration

amount depends on the worst-case oil-spill discharge

volume. If it is between 1,000 and 35,000 billion barrels,

the amount is $35 million; if it is between 35,000 and

70,000 billion barrels, the amount is $70 million; if it is

between 70,000 and 105,000 billion barrels the amount

is $105 million; and if it is over 105,000 billion barrels

the amount is $150 million. If a COF is located entirely

outside the OCS and has a worst-case oil spill discharge

volume between 1,000 and 10,000 bbls, the OSFR

demonstration amount is $10 million instead of $35

million. If a firm is demonstrating OSFR for more than

one COF, the relevant amount is the highest that applies

to any one of the COFs. The MMS may determine a

greater OSFR demonstration amount (not to exceed $150

million) “based on the relative operational, environmental,

human health, and other risks that [a] COF poses.”39

Leases Other Than for Oil, Gas, and Sulphur 

For leases for minerals other than oil, gas, and sulphur

in the OCS, lessees must “submit a surety or personal

bond to cover . . . royalty and other obligations under the

lease. . . . Personal bonds shall be accompanied by a cashier’s check, certified check, or negotiable U.S. Treasury

bonds . . . in the minimum amount of $50,000 . . .

[unless] the lessee already maintains or furnishes a

$300,000 bond conditioned on compliance with the terms

of leases for OCS minerals other than oil, gas, and sulphur

held by the lessee for the area in which the lease is located.”40

32. 30 C.F.R. 250.166.

33. 30 C.F.R. 253.1. This provision addresses catastrophic, onetime events while other financial guarantee requirements address

known or predicted events such as reclamation, rents and royalties, and bonus bids.

COF means a facility that “includes any structure and all its

components, . . . equipment, pipeline, or device . . . used for

exploring for, drilling for, or producing oil or for transporting

oil from such facilities.” A COF “is located [s]eaward of the

coastline; or [i]n any portion of a bay that is: [c]onnected to the

sea, either directly or through one or more bays; and . . . has a

worst case oil-spill discharge potential of more than 1,000 bbls

[billion barrels] of oil, or a lesser volume if [MMS] determines

in writing that the oil-spill discharge risk justifies the requirement to demonstrate OSFR.” (30 C.F.R. 253.3.)

34. An operator “must annually pass either a net worth test under

Sec. 253.25 or an unencumbered net asset test under Sec.

253.28” (30 C.F.R. 253.21).

35. One must submit “insurance certificates issued by insurers that

have achieved a “Secure” rating for claims paying ability in their

latest review by A.M. Best’s Insurance Reports, Standard &

Poor’s Insurance Rating Services, or other equivalent rating

made by a rating service acceptable to MMS” (30 C.F.R.

253.29).

36. One “may use only one indemnity by only one indemnitor

. . . [and the] indemnitor must be [one’s] corporate parent or

affiliate” (30 C.F.R. 253.30).

37. 30 C.F.R. 253.20.

38. 30 C.F.R. 253.32.

39. 30 C.F.R. 253.13.

40. 30 C.F.R. 282.40.


This publication and others by CBO

are available at the agency's Web site:

www.cbo.gov