Oil and Gas Bonds: BLM Needs a Comprehensive Strategy to Better Manage Potential Oil and Gas Well Liability
Published: 2011-02-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The number of oil and gas wells on leased federal land has increased dramatically. To help manage the environmental impacts of these wells, the Department of the Interior's (Interior) Bureau of Land Management (BLM) requires oil and gas operators to reclaim disturbed land in a manner it prescribes. To help ensure operators reclaim leased land, BLM requires them to provide a bond before beginning drilling operations. BLM refers to oil and gas wells and leased land that will require reclamation as potential liabilities because BLM may have to pay for reclamation if the operators fail to do so. GAO was asked to determine (1) BLM's policies for managing potential federal oil and gas well liability, (2) the extent to which BLM has implemented these policies, and (3) the challenges, if any, BLM faces in managing potential oil and gas well liability. GAO analyzed agency data on bonding and wells and interviewed BLM officials. We surveyed all 48 BLM field offices with an oil and gas program, and received 33 responses covering these offices.
section_title: What GAO Found
paragraphs: To manage potential liability on federal land, BLM has developed policies for reviewing bond adequacy and for managing idle wells (wells that have not produced for at least 7 years) and orphan wells (wells that generally have no responsible or liable parties). The bond adequacy policy is intended to ensure that bonds are regularly reviewed by BLM field offices when certain events occur, or periodically, and increased as necessary to ensure that they reflect the level of risk posed by the operator. BLM's idle and orphan well policy is intended to ensure that nonproducing wells are either plugged or returned to production; this policy directs BLM field offices to develop an inventory of such wells and rank and prioritize them for reclamation based on potential environmental harm, among other things. BLM has not consistently implemented its policies for managing potential liabilities. Specifically, for fiscal years 2005 through 2009, GAO found that 13 of the 33 field office survey respondents reported that they either did not conduct any reviews or did not know the number of reviews conducted. Most field office officials told GAO that a lack of resources and higher priorities were the primary reasons for not conducting these reviews. In addition, BLM state offices also did not consistently interpret BLM policy on when to increase bond amounts. For example, officials in three state offices told GAO that they generally require evidence of operator noncompliance before raising a bond amount, while another state office increased bond amounts for most operators because it viewed them as a potential risk to the government. With regard to reviews of idle or orphan wells, 11 of the 33 field office survey respondents reported that they had not conducted any reviews in one or more fiscal years during the 5-year period GAO examined. The shortage of resources was identified by officials as the primary reason that these reviews were not conducted. In addition, 2 BLM state offices and 22 field offices have not created action plans for reviewing bond adequacy and idle and orphan wells, as BLM policies call for. BLM faces two challenges in managing potential liability, according to field office officials. First, its bonding system impairs BLM's ability to manage potential liability. Specifically, the minimum bond amounts--not updated in more than 50 years--may not be sufficient to encourage all operators to comply with reclamation requirements. These officials also stated that criteria in the policy for deciding when to increase a bond is vague, creating ambiguity about whether a request for an increase should be submitted and whether it will be approved. Second, limitations with the data system BLM uses to track oil and gas information on public land restrict the agency's ability to evaluate potential liability and monitor agency performance. For example, the BLM field offices GAO surveyed reported a total of about 2,300 idle wells that had been inactive for 7 years or more as of fiscal year 2009. However, other Interior data indicate that the number of idle wells on federal land is nearly double the amount reported by the BLM field offices.
section_title: What GAO Recommends
paragraphs: GAO recommends that BLM develop a comprehensive strategy to, among other things, increase minimum bond amounts over time and improve its data system to better evaluate potential liability and agency performance. In commenting on a draft of this report BLM agreed with GAO's recommendations and noted that it has already taken steps to improve the completeness and accuracy of its oil and gas data.

section_title: Letter
paragraphs: The oil and natural gas resources located on federal land are important to  the U.S. energy supply. In fiscal year 2010, wells on federal land produced  11 percent of the nation’s gas supply and 5 percent of the nation’s oil  supply. Due in part to an interest in reducing our nation’s reliance on  foreign energy sources, the number of oil and gas wells on federal land has  increased dramatically in recent years. Of the approximately 93,000 wells  on federal land in fiscal year 2010, roughly 19,000 (about 20 percent) were  drilled within the past 5 years.
The Department of the Interior’s (Interior) Bureau of Land Management  (BLM) is responsible for managing onshore federal oil and gas resources.  On BLM land, the agency is also responsible for implementing the Federal  Land Policy and Management Act of 1976, as amended, which directs  Interior to manage federal land for multiple uses, such as recreation and  mineral extraction, while also taking any action required to prevent the  “unnecessary or undue degradation” of federal land, including federal land  that has been leased for oil and gas operations.
To carry out these responsibilities, BLM, among other things, issues leases  to oil and gas operators that require the operators to reclaim the leased  land once operations have ceased. Reclamation is intended to return land  disturbed by oil and gas operations to as close to its original condition as  is reasonably practical, including plugging wells, removing structures, and  reshaping and revegetating the land around the wells. BLM requires that  operators provide a bond to the agency before beginning drilling  operations to ensure that operators reclaim the land that they disturb, as  well as to satisfy the lease’s other terms and conditions.
All operators are required to complete reclamation, but they do not always  do so. In these circumstances, BLM may use the bond to help defray some  of the cost of completing reclamation. Wells become orphaned if an  operator does not perform the required reclamation and if the bond is not  sufficient to cover well plugging and surface reclamation and there are no  other responsible or liable parties to do so. In these cases, BLM uses  appropriated funds to complete the reclamation.
BLM is also concerned with the status of idle wells. These are wells that an  operator has decided not to operate for a period of time because, for  example, the operator is waiting for oil and gas prices to rise or for a  pipeline to be constructed. Under certain conditions, BLM must approve a  well’s “idle” status. BLM may also review the adequacy of bond amounts  and the status of idle wells that have not been in production for a period of  time. BLM refers to oil and gas wells and leased land that require  reclamation as potential liabilities because BLM may have to pay for  reclamation if the operators fail to do so. BLM uses its bond adequacy and  idle well status reviews to guide its management of idle wells.
In this context, you asked us to address a range of issues concerning  BLM’s bonding requirements and efforts to ensure that operators reclaim  federal land after oil and gas operations cease. We have previously  reported on the number, value, and coverage of bonds BLM holds for oil  and gas operations; the amount that BLM has paid to reclaim orphaned  wells over the past 20 years ($3.8 million to reclaim 295 orphaned wells)  and the number of orphaned wells BLM has identified but has not yet  reclaimed (144 orphaned wells); and the bonding requirements of the 12  western states for oil and gas operations on state and private land and  other Interior agencies’ bonding requirements for other resources. This  report provides the results of our work focused on BLM’s policies and  efforts to ensure that the federal government does not have to pay for oil  and gas well reclamation. Specifically, our objectives were to (1) identify  BLM’s policies for managing potential federal oil and gas well liability, (2)  determine the extent to which BLM has implemented these policies, and  (3) identify the challenges, if any, BLM faces in managing potential oil and  gas well liability.
To address these objectives, we reviewed federal laws and regulations  regarding BLM’s management of leases for onshore oil and gas production.  To identify BLM’s policies for managing potential federal oil and gas  liabilities, we interviewed officials in BLM’s Washington, D.C.,  headquarters office and reviewed and summarized relevant BLM policies.  To determine the extent to which BLM has implemented these policies, we  surveyed all 48 BLM field offices with an oil and gas program to gather  data on their efforts to implement bond adequacy and idle well polices,  including, among other things, the number of bond reviews and idle well  reviews they had conducted. We received responses representing all of the  48 BLM field offices that we surveyed. However, because some field  offices work together to implement these policies by sharing staff  resources, 15 of the 48 field offices combined their responses with that of  another field office, resulting in a total of 33 survey responses covering all  48 offices. In addition, as part of this survey, we asked BLM field offices to  provide additional data on the increases in amounts to existing bonds and  progress made in reducing their inventory of idle wells—that is, having the  wells plugged or returned to production. To identify the number of idle  wells in BLM’s inventory, we obtained oil and gas well production and  injection data, referred to as Oil and Gas Operations Report (OGOR) data,  from Interior’s Office of Natural Resource Revenue (ONRR)—formerly a  component of the Minerals Management Service. We analyzed these data  to determine which wells on federal land were idle and the length of time  since they had last produced oil or gas. To assess the reliability of the  OGOR data, we electronically tested all fields related to our analysis and  met with agency officials who administer the systems, among other things.  We found that these data were sufficiently reliable for the purpose of this  report. We then compared these results with the information from BLM’s  Automated Fluid Minerals Support System (AFMSS)—a database that BLM  uses to track oil and gas information on public land. AFMSS contains data  on, among other things, lease ownership and on well identification,  location, and production. To assess the reliability of these data, we  conducted electronic testing and met with BLM officials who administer  the AFMSS database. We also interviewed officials in 16 of the 33 BLM  field offices that have an oil and gas program. These 16 field offices  collectively manage more than 85 percent of the oil and gas wells on  federal land. We also interviewed officials in the corresponding six BLM  state offices that have jurisdiction over these 16 field offices. In these  interviews, we discussed BLM policies, steps these officials had taken to  implement the policies, whether they had fully implemented them, and if  not, the reasons for not doing so. During these interviews, we also  discussed the challenges, if any, BLM field office officials face in managing  their potential reclamation liability. We present data from AFMSS  regarding the number of wells managed by each of the 33 field offices. We  conducted electronic testing of this data and met with BLM officials who  administer the AFMSS database. We believe AFMSS data are sufficiently  reliable for this purpose, although our audit work determined reliability  issues for other AFMSS data used in other contexts. To better understand  the perspectives of operators and their views of BLM bonding  requirements, we interviewed industry officials with the Independent  Petroleum Association of New Mexico and the Interstate Oil and Gas  Compact Commission. Appendix I describes our scope and methodology  in more detail.
We conducted this performance audit from January 2010 to February 2011  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: BLM is responsible for issuing leases for oil and gas resources on and  underneath BLM land, underneath other federal agencies’ land, and  underneath private land where the federal government owns the mineral  rights—amounting to roughly 700 million subsurface acres. Approximately  44.5 million of these acres are leased for oil and gas operations, of which  about 11.7 million acres have active oil and gas production. In addition,  BLM manages about 250 million federal surface acres, of which 472,000  acres have surface disturbance related to oil and gas production.
subsections: section_title: BLM’s Headquarters, State, and Field Office Structure
paragraphs: To manage its responsibilities, BLM administers its programs through its  headquarters office in Washington, D.C.; 12 state offices; 38 district offices;  and 127 field offices. BLM headquarters develops guidance and regulations  for the agency, while the state, district, and field offices manage and  implement the agency’s programs. Because BLM has few acres of land in  the eastern half of the United States, the Eastern States State Office, in  Springfield, Virginia, is responsible for managing land in 31 states, while  the remaining state offices generally conform to the boundaries of one or  more states. Figure 1 shows the boundaries of the 12 BLM state offices.
BLM has 48 field offices with an oil and gas program managed by 33 of its  field offices that fall under the jurisdiction of 10 BLM state offices. The  Idaho and Oregon BLM state offices do not contain a field office with an  oil and gas program. Table 1 shows the number of wells managed by the 33  field offices and their associated BLM state office, as of May 26, 2010.
section_title: BLM’s Process for Oil and Gas Development on Federal Land
paragraphs: The Federal Land Policy and Management Act of 1976 requires BLM to  develop resource management plans, known as land use plans, which  identify parcels of land that will be available for oil and gas development.  BLM then offers for lease parcels of land nominated by industry and the  public as well as some the agency identifies. The number of acres covered  by a lease varies: the maximum number covered is 2,560 acres for leases in  the lower 48 states and 5,760 acres for leases in Alaska. Similarly, the  number of wells on a lease can also vary from 1 to more than 1,000, and well  depths can range from a few hundred feet to more than 26,000 feet deep.
Operators who have obtained a lease must submit an application for a  permit to drill (APD) to BLM before beginning to prepare land or drilling  any new oil or gas wells. The complete permit application package is a  lengthy and detailed set of forms and documents, which, among other  things, must include proof of bond coverage and a surface use plan. This  surface use plan must include a reclamation plan that details the steps  operators propose to take to reclaim the site, including redistribution of  topsoil, configuring the reshaped topography, and seeding or other steps  to re-establish vegetation. However, operators generally do not have to  submit cost estimates for completing the reclamation.
In reviewing the APD, BLM (1) evaluates the operator’s proposal to ensure  that the proposed drilling plan conforms to the land use plan and  applicable laws and regulations and (2) inspects the proposed drilling site  to determine if additional site-specific conditions must be addressed  before the operator can begin drilling. After BLM approves a drilling  permit, the operator can drill the well and begin production.
section_title: BLM’s Bonding Regulations
paragraphs: The Mineral Leasing Act of 1920, as amended, requires that federal  regulations ensure that an adequate bond is established before operators  begin to prepare land for drilling to ensure complete and timely  reclamation. Accordingly, BLM regulations require the operator to submit  a bond in order to ensure compliance with all of the terms and conditions  of the lease, including, but not limited to, paying royalties, plugging wells,  and reclaiming disturbed land. To ensure operators meet legal  requirements, including reclamation, BLM regulations require them to  have one of the following types of bond coverage:  individual lease bonds, which cover all the wells an operator drills under  one lease;    statewide bonds, which cover all of an operator’s leases in one state;    nationwide bonds, which cover all of an operator’s leases in the United  States; or    other bonds, which include both unit operator bonds that cover all  operations conducted on leases within a specific unit agreement, and  bonds for leases in the National Petroleum Reserve in Alaska.12 13  BLM accepts two types of bonds: surety bonds and personal bonds. A  surety bond is a third-party guarantee that an operator purchases from a  private insurance company approved by the Department of Treasury. The  operator must pay a premium to the surety company to maintain the bond.  These premiums can vary depending on various factors, including the  amount of the bond and the assets and financial resources of the operator,  among other factors. If the operator fails to reclaim the land they disturb,  the surety company either pays the amount of the bond to BLM to help  offset reclamation costs, or in some circumstances, BLM may allow the  surety company to perform the required reclamation. A personal bond  must be accompanied by one of the following financial instruments:    certificates of deposit issued by a financial institution whose deposits are  federally insured, granting the Secretary of the Interior authority to  redeem it in case of default in the performance of the terms and conditions  of the lease;    cashier’s checks;    negotiable Treasury securities, including U.S. Treasury notes or bonds,  with conveyance to the Secretary of the Interior to sell the security in case  of default in the performance of the lease’s terms and conditions; or  irrevocable letters of credit that are issued for a specific term by a  financial institution whose deposits are federally insured and meet certain  conditions.
Unit agreements refer to multiple lessees who unite to adopt and operate under a single  plan for the development of any oil or gas pool, field, or like area.
The amount of a unit operator bond is determined on a case-by-case basis by BLM  officials, and the minimum amount of a National Petroleum Reserve in Alaska bond is set  in regulation—not less than $100,000 for a single lease or not less than $300,000 for a  reservewide bond (submitted separately or as a rider to an already existing nationwide  bond).
If the operator fails to reclaim the land they disturb, BLM redeems the  certificate of deposit, cashes the check, sells the security, or makes a  demand on the letter of credit in order to pay the reclamation costs.
The regulations establish a minimum bond amount in order to ensure  compliance with all legal requirements. As we reported in 2010, these  minimum bond amounts were set in the 1950s and 1960s and have not  been updated. Specifically, the bond minimum of $10,000 for individual  bonds was last set in 1960, and the bond minimums for statewide bonds  ($25,000) and for nationwide bonds ($150,000) were last set in 1951.
BLM regulations require BLM to increase the bond amount when an  operator applies for a new drilling permit who had previously failed to  plug a well or reclaim land in a timely manner, resulting in BLM having to  make a demand on a bond in the prior 5 years. For such an operator,  BLM must require a bond in an amount equal to its cost estimate for  plugging the well and reclaiming the disturbed area if BLM’s cost estimate  is higher than the regulatory minimum amount.
BLM regulations state that BLM officials may require an increase in the  amount of any bond when the operator poses a risk because of factors that  include, but are not limited to, a history of previous violations, a notice  from ONRR of uncollected royalties due, or the total cost of plugging  existing wells and reclaiming land exceeds the present bond amount  according to BLM’s estimates.
When a BLM field office determines that an increase in the bond amount is  warranted, it forwards its recommendation to the BLM state office, which  decides whether and how much to increase the bond amount.
section_title: Idle and Orphan Wells
paragraphs: After production has ceased, the operator may delay performing  reclamation and instead allow the well to remain idle for various reasons.  For example, expected higher oil and gas prices may once again make the  well economically viable to operate in the future, or the operator may  decide to use the well for enhanced recovery operations. Enhanced  recovery operations involve, for example, using the well to inject water  into the oil reservoir and push any remaining oil to operating wells. Idle  wells include:    Temporarily abandoned wells. These are wells that are physically or  mechanically incapable of producing oil or gas of sufficient value to  exceed direct operating costs but may have value for a future use.  Operators must receive BLM approval prior to placing a well in  temporarily abandoned status for more than 30 days. This approval, which  lasts for up to 12 months, can be renewed annually at BLM’s discretion. All  temporarily abandoned wells must have current approval after the initial  30 days.
Shut-in wells. These wells are physically and mechanically capable of  producing oil or gas in quantities that are economically viable but that  have not produced for 30 days. According to BLM officials, operators do  not have to obtain BLM approval to place wells in shut-in status.
Wells become orphaned if an operator does not perform the required  reclamation and if the bond is not sufficient to cover well plugging and  surface reclamation and there are no other responsible or liable parties to  do so. This situation may occur, for example, when an operator has  declared bankruptcy. For orphan wells, BLM uses the bond and  appropriated funds as necessary to complete the reclamation. As we  reported in 2010, according to BLM data, the agency spent a total of about  $3.8 million to reclaim 295 orphan wells in 10 states from fiscal years 1988  through 2009. BLM also estimated that there were an additional 144  orphan wells in seven states that needed to be reclaimed, with an  estimated cost of approximately $1.7 million for 102 of these wells.
According to BLM officials, idle wells have the potential to create  environmental, safety, and public health hazards if they fall into disrepair,  and they are at greater risk than other wells for becoming orphan wells.  Therefore, these officials told us that it is important to manage idle wells  so that they do not become orphan wells. The Energy Policy Act of 2005  (EPAct 2005) directs the Secretary of the Interior, in cooperation with the  Secretary of Agriculture, to establish a program to remediate, reclaim, and  close idle or orphan oil and gas wells located on federal land. For the  purposes of this requirement, the act defines idle wells to be those wells  that have been nonoperational for 7 years or longer and for which there is  no anticipated beneficial use for the well. Specifically, the program must,  among other things,  include a means of ranking idle or orphan well sites for priority in  remediation, reclamation, and closure, based on public health and safety,  potential environmental harm, and other land use priorities, and    provide for the identification of the costs of remediation, reclamation, and  closure from those providing a bond or other financial assurance required  under state or federal law for an oil or gas well that is idle or orphan and  provide for the recovery of those costs from those operators or entities  providing the bond or other financial assurance or their sureties or  guarantors.
section_title: BLM Has Policies to Manage Potential Liabilities on Federal Land
paragraphs: BLM has developed two policies—one for bond adequacy and one for idle  and orphan wells—to manage the potential liabilities on federal land. First,  the bond adequacy policy directs BLM offices to review bonds and  increase amounts as necessary to ensure, among other things, that the  bond amount reflects the risk posed by the operator. Second, BLM’s idle  and orphan well policy, which implements EPAct 2005, directs field offices  to review these wells and ensure they are either plugged and reclaimed or  returned to production.
subsections: section_title: BLM’s Bond Adequacy Policy Directs BLM Field and State Offices to Regularly Review Bonds and Increase Them as Necessary
paragraphs: BLM has established a bond adequacy policy that directs its field and state  offices to periodically review bonds and increase the bond amounts as  necessary. This policy is documented in three instruction memorandums  (IM) sent to the BLM state offices administering an oil and gas program.  The first of these IMs—IM 2006-206, issued in August 2006—directs each  BLM state office administering an oil and gas program to establish an  action plan. The goal of these plans is to develop a process to ensure the  review of operations on federal oil and gas leases, including steps to  increase bond amounts when necessary. Two subsequent IMs—IM 2008- 122, issued in May 2008, and IM 2010-161, issued in July 2010—continue  and build on the bond adequacy policy established in IM 2006-206. Table 2  provides an overview of BLM’s oil and gas bond adequacy policy based on  these three IMs.
In summary, according to BLM policy, when the specified activities  occur—for example, when record title or operating rights are transferred  or when operators change—BLM field office staff must perform a review  to determine whether the existing bond amount is adequate. When  determining bond adequacy, BLM field staff are to take into account a  number of factors, including, but not limited, to the following:    Liabilities. Liabilities may include ponds containing excess water and  other materials produced from the well, wells with significant actual or  potential liabilities, surface production facilities, or other surface uses  with significant reclamation liabilities. The policy states that it is  important that idle wells be reviewed to identify potential problems and  liabilities and to assess adequacy of existing bond amounts.
A history of previous violations. Previous violations may include failing  to comply with the lease terms and notices or orders issued by BLM,  particularly with regard to the proper plugging and abandonment of wells  or reclamation of the disturbed surface area.
Unique or unusual conditions. Unique or unusual conditions may occur  either in the planned drilling operations or in the surrounding environment  that will make the operations potentially more hazardous or the potential  for significant environmental damage resulting from an accident.
Unpaid royalties. BLM receives a notice from ONRR that royalties are  due.
Costs higher than bond amount. As estimated by BLM field staff, the total  cost of plugging existing wells and reclaiming land exceeds the bond  amount.
Taking these conditions into account, the policy gives broad discretion to  BLM field office staff to determine if a bond is adequate or should be  increased. For example, if, while performing a bond adequacy review,  BLM field staff determine that the operator poses a risk because the cost  of well plugging and reclamation exceeds the bond amount, BLM can  require an increase to the existing bond to cover the potential liabilities.  The policy also allows BLM field staff to reduce the amount of the bond if the potential federal liability is reduced, but not to a level below the  regulatory minimums.
When it has been determined that a bond amount is inadequate, BLM  policy states that the bond may be increased to any amount specified b BLM staff. While the policy does not specify how the exact bond increase amount is determined, it stipulates that the bond amount should not be  increased solely on the number of wells on the lease. Moreover, the bond amount is not to, in any circumstances, exceed the total of the estimated  cost of plugging and reclamation, the amount of uncollected royalties due and the amount of monies owed to the federal government due to  outstanding violations. BLM policy stresses that the judgment and  ds to  experience of its staff is paramount in deciding whether a bond nee be increased or is adequate. When BLM field staff determine that a bond  ,  increase is warranted, BLM state office officials review the proposed  increase and process or deny it.
According to BLM’s 2006 and 2008 bond adequacy policies, BLM is  “mindful” of the need to maintain an acceptable risk level, yet to not place  an undue financial burden on operators. Industry officials told us that  increasing bond amounts for small operators can be burdensome in that  surety companies may be unwilling to provide small operators a surety  bond without a financial audit of their business, which in some  circumstances can cost the operator between $25,000 and $30,000. As a  result, these officials told us that small operators frequently rely on  personal bonds to meet BLM’s bonding requirements, which in some  circumstances can further tie-up their already limited financial resources  and impair their ability to perform the required reclamation. Further, BLM  officials told us that in recognition of the potential burden on small  operators, they may work directly with a small operator to develop and  implement a plan for having the operator reduce their risk instead of  requesting a bond increase.
section_title: BLM’s Idle and Orphan Well Policy Directs Field Offices to Review These Wells and Ensure They Are Either Plugged or Returned to Production
paragraphs: By issuing IM 2007-192 in September 2007, BLM established a program to  rank all idle and orphan oil and gas wells on federal land, as required by  EPAct 2005. According to BLM officials the review process established by  this policy is used to manage potential liabilities. The policy directs the  field offices to rank idle and orphan wells and makes the field offices  responsible for using the priority rankings to take action to have the idle  wells either plugged and reclaimed or returned to production or service  and to have the orphan wells properly plugged and the surface reclaimed.
Specifically, under this policy the field offices are to develop an inventory  of the idle and orphan wells under their jurisdiction and then rank them  for priority in remediation, reclamation, and closure based on factors such  as public health and safety, sensitive environmental resource, and other  land use priorities. In order to aid the field offices with this work, IM 2007- 192 provides guidance on procedures for determining priorities for  plugging wells and reclaiming land. The policy contains factors for the  field offices to use when determining the idle wells’ priority ranking: (1)  the percentage of idle to active wells; (2) the number of years the well  has remained idle; (3) environmental, safety, and public health concerns;  and (4) sensitive environmental resource and other land use priorities,  such as the intensity of recreational use of the land and whether the well is  located in a significant wildlife area. These factors are each assigned a  score and the total sum is used to determine whether a well has a high-,  medium-, or low-priority ranking. BLM field office officials are then  expected to work with well operators to either plug these wells or return  them to production, or they may use this information to help support an  increase in the bond amount.
For orphan wells, field offices are to evaluate 14 factors to determine the  well’s priority ranking. The following 13 individual factors have specific  point scores associated with them; field office staff are to review each  factor, assign a point score, and then total them.
Well leaking at the surface.
Well not leaking at surface—possible pressure.
Well bore configuration.
Age of the well.
Presence of surface contamination.
Presence of vessels containing fluid (e.g., storage tanks).
Hydrogen sulfide (HS) concentration.
Proximity to surface water.
Proximity to water wells.
Contaminated water wells.
Proximity to residences or public buildings.
Sensitive environmental resources and other land use priorities.
Other environmental and safety concerns.
The 14th factor used to determine an orphan well’s priority ranking is the  cost for plugging and reclaiming the oil or gas well. The field office may  provide an estimate of this cost or use the standard estimate of $5 per foot  to determine the estimated cost. The policy then directs each field office  to send to the BLM Washington Office its priority ranking of orphan wells.  According to IM 2007-192, the Washington Office staff reviews the  information, develops a nationwide priority listing for all orphan wells on  federal land, and allocates available funds to properly plug and reclaim the  surface of these wells.
BLM’s idle and orphan well policy also directs each field office to develop  an action plan for having these wells plugged or returned to production.  The action plan is to include a timeline for when the field office expects to  have its current inventory of idle wells properly plugged or returned to  production. In addition, the action plan must discuss the field office’s plan  to manage wells that become idle in the future.
section_title: BLM Has Not Consistently or Completely Implemented Its Policies for Managing Potential Liability
paragraphs: BLM field and state offices have not consistently or completely  implemented BLM’s policies for managing the oil and gas wells on federal  land to reduce the likelihood that BLM will need to pay for or perform  reclamation. According to our analysis of 33 survey responses from 48  field offices, these offices did not (1) consistently conduct bond  adequacy reviews in accordance with BLM policy and their reliance on  professional judgment has resulted in varying interpretations of the  policy’s criteria for increasing bond amounts, (2) consistently review all  their idle and orphan wells or reduce their inventory of idle wells, and (3)  develop consistent or complete plans for bond adequacy and idle and  orphan well reviews.
subsections: section_title: BLM Field Offices Have Not Always Conducted Bond Adequacy Reviews and Have Not Consistently Interpreted Criteria for Increasing Bonds
paragraphs: According to our analysis of the number of bond reviews reported by 33  survey respondents, the field offices do not always regularly review bonds  and increase bond amounts as necessary. BLM policy calls for field offices  to conduct a bond adequacy review when certain events occur. For  example, 13 of the 33 survey respondents reported that they either did not  conduct any reviews or did not know the number of reviews they  conducted for fiscal years 2005 through 2009. For example, the Vernal  Field Office did not conduct any bond adequacy reviews during this  period. According to officials we interviewed in the Vernal Field Office,  they did not have sufficient staff resources to conduct any bond adequacy  reviews, in part because of a backlog in processing APDs. Table 3 shows  the number of bond adequacy reviews conducted by BLM field offices  from fiscal years 2005 through 2009.
In addition, the total number of bond adequacy reviews conducted by the  field offices varied substantially each year, from a low of 114 in fiscal year  2005 to a high of 693 in fiscal year 2008. BLM officials said that the  fluctuation in the number of reviews is typically the result of a higher  priority placed on other BLM activities such as completing APDs. As table  3 also shows, the bulk of the bond adequacy reviews was conducted by  just a few field offices. In particular, Bakersfield and Miles City conducted  781, or nearly 45 percent, of the total reported 1,760 bond adequacy  reviews conducted by the field offices included in our survey from fiscal  years 2005 through 2009.
Lack of resources was a recurring theme at many of the 16 field offices  where we interviewed field office staff. For example, officials at 14 field  offices reported that they face resource limitations for conducting bond  adequacy reviews. Officials in seven field offices told us that their offices  had not reviewed bonds in all instances called for in the policy, in part  because of a lack of staff resources. Similarly, at 13 field offices, officials  told us that they found it difficult to conduct bond adequacy reviews  because BLM headquarters and state offices give priority to other work  activities through annual work plans.
We found that while many field offices use similar methodologies for  evaluating bond adequacy and deciding whether to increase bonds, some  apply other approaches. Some field office officials told us that they  generally rely on their professional judgment to evaluate bond adequacy,  as allowed by BLM policy. These officials said that they typically gather  and evaluate a variety of information, such as the location and depth of the  wells, the ratio of idle wells to active wells, and whether any money is  owed by the operator for previous violations, as well as any other  pertinent or unusual facts regarding the operator or the wells. They then  use their professional judgment to decide (1) whether to keep the current  amount of the bond; (2) work with the operator to reduce the risk the  operator poses, for example, by developing a plan and a schedule to plug  wells or bring wells back into production; or (3) increase the bond.  Officials in two field offices stated that their offices took the following  additional steps when making bond adequacy determinations:    The Carlsbad Field Office evaluated the remaining oil and gas reserves  available and the estimated remaining lifespan of the well—known as the  production decline curve—to determine when the well might become idle.
The Farmington Field Office developed an electronic spreadsheet for  evaluating potential liability and automating the process of analyzing of  data. The spreadsheet uses formulas to uniformly assess the number,  depth, and production of wells; the bonding amount; the inflation rate; and  operator compliance history. It then identifies whether there is a need to  increase the bond and the amount of the bond increase. Officials in the  Farmington Field Office told us that the goal is to use this spreadsheet to  ensure that all operators are reviewed for bond adequacy at least once  every 2 years.
According to our analysis, BLM state offices, like the field offices, have  varied in how they interpret BLM’s policy for deciding whether to approve  an increase to a bond amount requested by a field office. As mentioned  earlier, BLM’s 2006 and 2008 bond adequacy policies stated that “BLM is  mindful of the need to maintain an acceptable risk level, yet not to place  an undue burden on industry.” However, the current policy does not  include this statement and none of the policies define the term “acceptable  risk” or offer guidance on when to increase a bond. Instead, the policy  instructs BLM to rely on the judgment of BLM state office officials in  deciding when to increase a bond, and we found that these officials have  varied in their approaches to increasing bond amounts. For example, BLM  state office officials in Colorado, Montana, Utah, and Wyoming told us that  they generally interpreted BLM policy as only allowing bond increases  when the operator is not in compliance, among other things. In contrast,  officials in BLM’s California State Office told us that in 2002 they broadly  interpreted BLM regulations and policy as allowing them to increase bond  amounts for all wells identified as a potential risk to the government. In  coordination with the Bakersfield Field Office, they therefore raised the  bond amounts on all but 40 of their more than 300 leases from regulatory  minimum bond amounts to $20,000 for an individual bond and $75,000 for  a statewide bond. In addition, in situations where an operator only has a  nationwide bond, they require the operator to post a rider to the bond to  cover their wells in California.  This is because they were concerned that  nationwide bonds could cover other wells and that other BLM state and  field offices could draw upon them to reclaim orphan wells, leaving the  wells in California without adequate bond coverage. BLM officials in the  California state office were the only state level officials we interviewed  who interpreted the policy in this manner. According to BLM headquarters  officials responsible for overseeing the oil and gas program, the policy was  intended to allow states some flexibility in making these decisions, and  they have not done a comprehensive review of the implementation of the  policy.
section_title: BLM’s Field Offices Have Not Reviewed All Their Idle and Orphan Wells and Vary in Their Ability to Reduce the Idle Well Inventory
paragraphs: According to our survey of BLM field offices, not all field offices have  conducted reviews to identify wells that were idle or orphan on an annual  basis as specified in BLM policy. In particular, 11 of the 33 survey  responses indicate that many field offices had not conducted reviews for  at least one of the years from fiscal year 2005 through fiscal year 2009, and  16 responses indicate that several did not know how many wells they had  reviewed for at least one of the years during this period. Furthermore,  three field offices—Bakersfield, Farmington, and Worland—had reviewed  76 percent of the 15,660 wells reviewed by the field offices included in our  survey. Table 4 shows the number of wells each field office reviewed  from fiscal years 2005 through 2009.
BLM field office officials cited a number of reasons why field offices have  not conducted reviews under the idle and orphan well policy. In addition  to the shortage of resources and other higher priority work mentioned  earlier, some officials told us that they do not have access to complete and  accurate well data, which we believe can impact their ability to conduct  well reviews. For example, officials in the Rock Springs Field Office in  Wyoming told us that they rely on BLM’s AFMSS data to determine which  wells are idle. However, BLM officials have told us that well status data in  AFMSS are not routinely updated on the basis of production data, which  makes it difficult to identify idle wells from these data. In contrast, field  offices that rely on well data that are compiled and updated by the state in  which they are located are more easily able to identify idle well status. For  example, the Farmington and Carlsbad field offices in New Mexico have  access to data compiled by the New Mexico Oil Conservation District, a  New Mexico state agency that regulates oil and gas wells. According to  officials we interviewed, these state data are more complete, accurate, and  user-friendly than BLM well data.
Finally, field offices we surveyed reported mixed results in getting wells  plugged or returned to production. For example, while three field  offices—Buffalo, Carlsbad, and Casper—had plugged or returned to  production more than 100 wells since fiscal year 2007, several offices we  surveyed had not reduced their number of idle or orphan wells. In  addition, officials in the Newcastle Field Office reported that due to  staffing issues they did not know how many wells had been plugged or  returned to production since fiscal year 2007. Table 5 shows the actions  taken by the field offices we surveyed to either plug or return wells to  production since fiscal year 2007.
Some of the field offices that had taken steps to have wells plugged or  returned to production were assisted by state programs that create funds  for plugging and reclaiming idle and orphan wells. For example, New  Mexico has created an oil and gas well reclamation fund that is paid for by  production taxes on oil and gas operations. Using this fund, the BLM  Carlsbad Field Office has plugged 26 orphan wells from August 1995 to  December 2008.
section_title: A Few BLM State Offices and Many Field Offices Have Not Created Action Plans for Bond Adequacy and Idle Wells, and the Plans Varied in the Elements They Contain
paragraphs: Two of BLM’s 10 state offices (Alaska and Arizona) have not developed an  action plan to help ensure that bonds are regularly reviewed for adequacy,  as directed by BLM’s policy in IM 2008-122. In addition, two of the other  eight state offices’ action plans—California and Wyoming—do not contain  an element specified in the IM (i.e., indicates the steps to take when a  bond increase is considered necessary). Some of the eight plans also vary  in the elements they contain that would be useful to field offices in  meeting the IM’s goals, according to our analysis and comments provided  by officials at BLM field offices. For example, none of the state bond  adequacy action plans we reviewed contained guidance for field offices on  how to determine the amount a bond should be increased by, an element  that some field office officials we interviewed said would be helpful. Table  6 shows the elements that we identified as contained in or missing from  the BLM state office’s bond adequacy action plans.
At the field office level, 22 of the 33 survey respondents reported that they  did not have an idle well action plan as directed by BLM’s IM 2007-192.  While 11 field offices reported that they had developed idle well action  plans, our review of these plans indicated that the plans lacked elements  that the IM states should be included, such as the timeline for having its  current inventory of idle wells properly plugged or returned to production.
Table 7 shows the elements contained in or missing from the BLM field  office’s idle well action plans for the 11 field offices that had developed  such a plan.
section_title: BLM Faces Challenges in Managing the Potential Liability on Federal Land
paragraphs: According to most field office officials we interviewed, they face  challenges in two interrelated areas for managing potential liability on  federal land. First, BLM’s bonding system—including the minimum bond  amounts and inconsistent interpretation of policy for increasing bond  amounts—impairs BLM’s ability to manage potential liability. Second,  limitations with BLM data restrict the agency’s ability to evaluate potential  liability and measure agency performance in managing potential liabilities  on federal land.
subsections: section_title: BLM’s Bonding System Impairs the Agency’s Ability to Manage BLM’s Potential Liability
paragraphs: At 15 of the 16 field offices, BLM officials we interviewed noted challenges  associated with the agency’s outdated minimum bonding amounts.  Specifically, the bond minimum of $10,000 for individual bonds was last  set in 1960, and the bond minimums for statewide bonds and for  nationwide bonds—$25,000 and $150,000 respectively—were last set in  1951. As we reported in 2010, if adjusted to 2009 dollars, these minimum  amounts would be $59,360 for an individual bond, $176,727 for a statewide  bond, and $1,060,364 for a nationwide bond. Figure 2 shows the current  amounts set in 1951 and 1960 and these amounts adjusted to 2009 dollars.
According to BLM officials we interviewed at 12 of the 16 field offices,  these minimum bond amounts are inadequate for managing potential  liability. This is because these minimum amounts may not be sufficient to  serve as an incentive to encourage operators to comply with plugging and  reclamation requirements and the cost to plug and reclaim a well site may  far outweigh the value of the bond. For example, these officials told us  that the cost to plug a well ranges from approximately $2.50 to $20 per  foot depth of well and that wells can range from being just a few hundred  feet deep to more than 26,000 feet deep. In addition, the reclamation costs  can range from $200 to $15,000 per acre. In other situations, these officials  noted, the cost to plug and reclaim a single well may cost more than  $100,000, and it can cost more than $10,000 simply to get a work crew to  the well site. Consequently, in most circumstances, a $10,000 individual  lease bond is insufficient to cover the plugging and reclamation costs for  one well, according to the officials we interviewed.
Given these factors, a few field office officials we surveyed noted that  some operators, particularly small, independent operators with wells  producing only small amounts of oil and gas, may be inclined to declare  bankruptcy and default on the bond rather than pay to properly plug and  reclaim the well site. These officials also told us that raising bond amounts  for these small operators may in some situations make matters worse  because the operators may not be able to provide the higher bond amount,  and BLM’s effort to seek a bond increase may only hasten their decision to  declare bankruptcy. To avoid this situation, BLM officials told us that they  must devote significant time and resources to supervising these small  operators and persuading them to properly plug and reclaim their wells,  which places a drain on staff resources. Officials at 12 of the 16 field  offices reported that they had too few resources to effectively manage  potential liability.
Officials in 15 of the 16 field offices we interviewed said that they face  challenges conducting bond adequacy reviews. They noted the following  examples:    BLM staff have a limited amount of time available for conducting bond  adequacy reviews because a significant amount of staff resources are  needed to complete the process—potentially months of work—and BLM  places a higher priority on other activities, such as processing APDs.
The criteria for increases outlined in IM 2008-122 are vague, creating  ambiguity about whether a request for an increase should be submitted  and whether it will be approved.
The BLM state office process for reviewing requests for a bond increase  can, in some circumstances, be time consuming—sometimes taking a year  or longer before a decision is made, by which time the conditions  supporting the request may have changed or worsened.
The Bakersfield Field Office in California was the only field office that did  not report facing challenges conducting bond adequacy reviews. This is  because this office is the only field office that raised bond amounts above  the regulatory minimums for the majority of its bonds.
Our analysis of data reported by the officials we surveyed indicates that  about one-third of the field offices requested bond increases and many of  the increases requested by field offices have not been approved by state  offices. According to our survey of field offices, 13 of the 33 survey  respondents reported that they did not request any bond increases, and 3  survey respondents reported that they did not know the number of bond  increases they had requested. The 17 survey respondents that did request  bond increases from May 2008 through November 2010 sought 93 bond  increases worth about $19 million, and BLM state offices approved 59 (63  percent) of these increases, worth about $7 million, or 38 percent of the  total value of increases sought, as shown in table 8.
section_title: BLM Data Limitations Restrict the Agency’s Ability to Evaluate Potential Liability and Measure Performance
paragraphs: We identified three limitations in BLM’s data systems that restrict the  ability of BLM field and state offices to evaluate potential liability and  measure performance of BLM field offices’ implementation of the agency’s  policies: (1) incomplete bond information in AFMSS, (2) unreliable field  office counts of the number of idle wells, and (3) incomplete AFMSS data  on the number of reviews for bond adequacy and idle wells.
subsections: section_title: Incomplete Bond Information in AFMSS
paragraphs: According to our analysis of AFMSS data, of the approximately 93,000  individual wells recorded in the database, more than 22,500 (about 24  percent) lack an associated bond number. Consequently, BLM field office  officials told us it is difficult to accurately determine the oil and gas wells  covered by a particular bond. To address this problem, BLM has developed  a process to link well data from AFMSS to bond data in the LR2000 Bond  & Surety System—which contains data on the amount and value of bonds  held by BLM—to provide field office officials conducting bond adequacy  reviews with the number of wells covered by a particular bond. For this  system to work, however, BLM field office staff must manually enter bond  data into AFMSS, yet they are not required to do so. As a result, the data  necessary to make this process useful for evaluating potential liability  across field offices are incomplete. The link between AFMSS and the  LR2000 Bond & Surety System could address this problem for future bond  entries if BLM required field office staff to enter and maintain bond  number data into AFMSS.
In addition, BLM field office officials told us that it is difficult to evaluate  which bonds are associated with which potential liabilities when the wells  are covered by a statewide or nationwide bond because BLM field offices  generally cannot access AFMSS data for wells in areas managed by other  field offices. Therefore, the data available to them have been insufficient  to fully evaluate all of the potential liabilities that are covered by a  particular statewide or nationwide bond. The link between AFMSS and the  LR2000 Bond & Surety System will not fully address this problem since the  link only shows the number of wells associated with a bond, and does not  show further details about the wells, such as their production status, age,  or condition.
section_title: Unreliable Counts of the Number of Idle Wells
paragraphs: The 33 BLM field offices that responded to our survey reported a total of  about 2,300 idle wells that had been inactive for 7 years or more as of  fiscal year 2009. However, according to our analysis of ONRR’s Oil and  Gas Operations Report (OGOR) data system, into which operators input  monthly oil and gas production quantities, the number of idle wells on  federal land under the jurisdiction of these offices is nearly double what  was reported to us by BLM field offices—about 4,600 wells. Table 9  shows the number of wells we identified as inactive for 7 years or more  using OGOR data and the number of idle wells reported by the 33 BLM  field offices.
BLM field offices did not question the accuracy of the OGOR data, but they  noted three challenges associated with identifying idle wells that are likely  the cause of the discrepancy. First, information on idle well status may be  incomplete because BLM policy allows operators to keep wells in a shut-in  status without alerting the field office that the well is not producing.  According to our analysis of AFMSS data, about 1,600, or 32 percent, of the  idle wells we identified from OGOR data are in shut-in status. However,  this number may actually be higher because operators do not have to  notify BLM when they place their well in shut-in status. As a result, BLM  officials cannot solely rely on AFMSS data to accurately identify all wells  that have been idle for 7 years or more, as directed by EPAct 2005 and  BLM policy.
Second, until October 1, 2010, a process BLM had developed in 2007 to  link BLM’s well data in AFMSS with oil and gas production data from  ONRR’s OGOR reports had not worked properly, according to BLM  officials. OGOR data are based on information directly entered into an  ONRR database by oil and gas operators. ONRR staff conduct data  reliability checks and make corrections as appropriate. BLM officials told  us that the problems with the linkage were addressed on October 1, 2010.  However, even with this link between OGOR and AFMSS, it is still difficult  to reconcile the data from the two systems. Reconciliation requires staff to  manually compare well status data in AFMSS with production data from  OGOR. Officials in BLM field offices told us that this process can be time  consuming, depending on the total number of wells that must be reviewed,  and can involve months of work looking through significant quantities of  data.
Third, according to some BLM field office officials, while some field  offices have access to other more reliable sources of production data  gathered by state conservation commissions and the global energy  information provider IHS, these data sources also have limitations. For  example, they generally do not distinguish between wells on federal, state,  and private land. To use these data, field offices typically have to reconcile  the wells from the state and IHS data with federal well numbers contained  in AFMSS to identify those wells overseen by BLM.
In addition, OGOR data show that BLM has a significant number of long  term idle wells—which BLM officials told us pose the greatest risk for  causing environmental degradation. Our analysis of OGOR data as of July  7, 2010, shows that of the approximately 5,100 wells idle for 7 years or  longer, roughly 45 percent, or about 2,300 wells, have not produced oil or  gas for more than 25 years. Figure 3 shows the total number of idle wells  calculated using OGOR data, by the number of years they have been idle.
6 years (450) 5 year (490) 4 years (694) 3 years (962) 2 years (1,380) 1 year (1,706)
section_title: Incomplete AFMSS Data on the Number of Reviews for Bond Adequacy and Idle Wells
paragraphs: Field offices vary in how they use AFMSS to record bond adequacy  reviews; as a result, AFMSS data on the number of reviews for bond  adequacy are inconsistently entered and therefore incomplete. This makes  it difficult for BLM officials to track the efforts of BLM field offices in  managing potential liability. Although BLM field office staff manually enter  bond review data into AFMSS, the bond adequacy review policy did not  instruct staff to do so until July 2010. In addition, as mentioned earlier,  some field offices did not know the number of bond adequacy reviews  they conducted in some fiscal years from 2005 through 2009.  Consequently, the data that have been entered into AFMSS do not reflect  the actual number of reviews that a field office may have conducted. For  example, 8 of the 33 field offices survey respondents reported to us that  they had conducted more bond adequacy reviews from fiscal years 2005  through 2009 than the total number recorded in AFMSS covering the  period from May 1, 1990 through March 17, 2010. Table 10 shows the  number of bond adequacy reviews reported to us by the BLM field offices  we surveyed and the number of bond adequacy reviews recorded in  AFMSS.
A similar discrepancy occurs with data for idle and orphan well reviews in  part because BLM’s policy does not direct field office staff to record idle  and orphan well reviews in AFMSS. Consequently, the data that have been  entered into AFMSS do not reflect the actual number of idle and orphan  well reviews that a field office may have conducted. For example, 11 of the  33 field office survey respondents reported to us that they had conducted  more idle and orphan well reviews from fiscal years 2005 through 2009  than the total number recorded in AFMSS covering the period from April  25, 2002 through March 12, 2010. In addition, of the almost 10,000 idle and  orphan well reviews in AFMSS for all field offices, more than 68 percent of  the records have blank date fields, making it impossible for BLM staff to  know when an idle and orphan well review occurred by looking at data in  AFMSS. Table 11 shows the number of idle and orphan well reviews  reported to us by the BLM field offices we surveyed and the total number  of idle and orphan well reviews recorded in AFMSS.
section_title: Conclusions
paragraphs: To ensure that federal taxpayers do not have to cover the costs of  reclamation for each of the approximately 93,000 oil and gas wells in  BLM’s inventory, BLM has established a number of policies. However,  most BLM offices have not fully implemented these policies because they  have not always conducted bond adequacy reviews, consistently  interpreted the policy for increasing bonds, identified all idle or orphan  wells on federal land, or made progress in reducing their inventory of  these wells. These deficiencies have the potential to increase the federal  government’s exposure to paying for reclamation costs for idle and orphan  wells on federal land.
BLM’s ability to effectively manage potential liabilities is further impaired  by a number of interrelated challenges. Because minimum bond amounts  have not been updated or adjusted for inflation in more than 50 years, they  may not be sufficient to serve as an incentive to encourage operators to  comply with plugging and reclamation requirements and the cost to plug  and reclaim a well site may far outweigh the value of the bond. As a result,  BLM officials must devote additional time and resources to manage the  potential liability, which is difficult given their limited resources and other  agency priorities. This situation is further exacerbated by BLM’s vague  policy for increasing bond amounts, which field offices have interpreted  differently, and have not led to consistent and regular bond increases.  BLM staff are also challenged by a lack of complete, consistent, and  reliable data that can help them readily evaluate potential liabilities, make  informed decisions about them, and evaluate agency performance for  conducting bond adequacy and idle and orphan well reviews. We believe  that the challenges BLM faces in managing potential liabilities are  interdependent and cannot be solved in a piecemeal fashion. Instead we  believe that BLM needs a comprehensive approach to address these  challenges in a holistic fashion that will ensure that the agency has (1) a  complete understanding of the extent of the potential liability, (2)  adequate bond amounts to ensure that operators and not taxpayers pay for  reclamation, and (3) appropriate processes to ensure that the agency is  able to effectively manage and reduce this liability.
section_title: Recommendations for Executive Action
paragraphs: To better manage potential liability on federal land, we recommend that  the Secretary of the Interior direct the Director of BLM to develop a  comprehensive strategy to include four actions:  increasing regulatory minimum bonding amounts over time to strengthen  bonding as a tool for ensuring operators’ compliance,  revising the bond adequacy review policy to more clearly define terms and  the conditions that warrant a bond increase,  implementing an approach for ensuring complete and consistent well  records in AFMSS so that BLM field and state offices can better evaluate  potential liability and improve decisionmaking, and  implementing an approach for better monitoring agency performance in  conducting reviews for bond adequacy and idle wells.
section_title: Agency Comments and Our Evaluation
paragraphs: GAO provided Interior with a draft of this report for its review and  comment. Interior concurred with all four of our recommendations and  noted that, among other things, it has already started to take steps to  improve the data in AFMSS to ensure the completeness and accuracy of  these data. Interior’s written comments are presented in appendix II of this  report.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Interior, the Director of BLM, and other  interested parties. The report also is available at no charge on the GAO  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: This appendix details the methods we used to examine the Department of  the Interior’s (Interior) Bureau of Land Management’s (BLM) policies and  efforts to ensure that the bonds for oil and gas wells are adequate to cover  the cost of reclaiming land disturbed by oil and gas operations.  Specifically, we were asked to (1) identify BLM’s policies for managing  potential federal oil and gas liabilities, (2) determine the extent to which  BLM has implemented these policies, and (3) describe the challenges, if  any, BLM faces in managing potential oil and gas well liability.
To identify BLM’s policies for managing potential liabilities, we first  interviewed officials in BLM’s Washington, D.C., headquarters office to  identify the BLM policies intended to manage these potential liabilities.  These officials identified policies in two areas: bond adequacy and idle and  orphan wells. The bond adequacy policy, which implements the increased  bond amount regulation, included instructional memorandums (IM) IM  2006-206, Oil and Gas Bond Adequacy Reviews; IM 2008-122, Oil and Gas  Bond Adequacy Reviews; and IM 2010-161 Federal Oil and Gas Bonds. The  idle and orphan well policy included IM 2007-192, Priority Ranking of  Orphaned and Idled Wells; Section 349(b) of the Energy Policy Act of 2005,  which implements Section 349 of EPAct of 2005. We analyzed these  policies to summarize the actions they outlined for BLM state and field  offices.
To determine the extent to which BLM has implemented its policies for  managing potential liabilities, we reviewed laws and federal regulations  related to onshore oil and gas bonding and idle wells on federal land and  interviewed officials at BLM’s Washington D.C., headquarters office. We  developed a Web-based survey, which we sent to all 48 BLM field offices  with an oil and gas program and received responses from all these offices.  Because some field offices work together to implement these policies by  sharing staff resources, 15 of the 48 field offices we surveyed combined  their responses, resulting in a total of 33 survey responses. We also  interviewed officials in the 16 BLM field offices that collectively manage  more than 85 percent of the oil and gas wells on federal land, as well as  officials in the corresponding 6 state offices in which the 16 field offices  are located. We also visited 12 BLM field and state offices. Table 12 shows  the 10 BLM state offices and 48 field offices and notes which field offices  combined their responses.
Among other things, we asked officials in the 48 BLM field offices we  surveyed to provide information on the number of bond adequacy and idle  well reviews conducted each fiscal year from 2005 to 2009. We also asked  these officials whether their field office had created an idle well action  plan and completed the ranking procedures outlined in the idle and orphan  well instruction memorandum.
We also asked the field office officials to provide information on the most  current inventory of idle wells their office manages. To evaluate the  accuracy and completeness of these data, we compared the information  the field offices provided with the oil and gas well production data,  referred to as Oil and Gas Operation Report (OGOR) data, from Interior’s  Office of Natural Resource Revenue (ONRR)—formerly a component of  the Minerals Management Service—on all wells that had been idle for 1  year or longer. The OGOR data was extracted by ONNR on July 7, 2010.  We present this data of idle wells on federal land, broken out by the  number of years idle, in figure 3. To compare the OGOR data to the data  provided by BLM field offices, we limited our set of OGOR data to cover a  period through fiscal year 2009—the most current year with complete BLM  data. This comparison is presented in table 9. To assess the reliability of  the OGOR data provided by ONRR, among other things, we electronically  tested all elements related to our analysis and met with agency officials  who administer the systems. We found that these data were sufficiently  reliable for the purpose of this report. We analyzed the production data to  determine which wells on federal land are idle and the length of time since  they last produced oil or gas.
In our Web-based survey, we also requested the BLM field offices to  submit detailed information on requests for increases in bond amounts  from May 1, 2008 to December 16, 2010. We asked the field offices for  information on the amount of the requested increases and the disposition  of the requests. We used this information to determine the total number of  bond increases requested, the value of the requested bond increases, the  percentage of requests that were approved, and the total value of  approved bond increases. We also asked the field offices to provide  information on the wells they have plugged or returned to production  since September 1, 2007. We used this information to determine the  progress BLM field offices have made in reducing their inventory of idle  wells. We also analyzed the information officials in the 16 BLM field  offices provided during our interviews on BLM policies and steps these  officials had taken to implement these policies. If the officials had not fully  implemented the policies, we asked them why they had not done so.
The practical difficulties of developing and administering a survey may  introduce errors—from how a particular question is interpreted, for  example, or from differences in the sources of information available to  respondents when answering a question. Therefore, we included steps in  developing and administering the survey to minimize such errors. We  obtained comments on a draft of the survey from officials in BLM’s  Washington, D.C., headquarters office. We also pretested the survey in  person at three BLM field offices—Bakersfield, California, and Carlsbad  and Farmington, New Mexico. We conducted these pretests to check that  (1) the questions were clear and unambiguous, (2) terminology was used  correctly, (3) the information could feasibly be obtained, and (4) the  survey was comprehensive and unbiased. We made changes to the content  and format of the Web-based survey after these pretests, based on the  feedback we received.
To identify the challenges BLM faces in managing potential liabilities, we  analyzed the information officials in the 16 BLM field offices and the  corresponding six state offices provided during our interviews on what  challenges they face, if any, in implementing BLM policies for managing  the potential liability on federal land; whether they had sufficient tools and  resources to implement the policies; and what their views were on BLM’s  bonding system and minimum bonding amounts.
To assess challenges related to the electronic data available to BLM  officials when evaluating and managing potential oil and gas liabilities, we  requested electronic data, including OGORs from ONRR and data on bond  adequacy reviews and idle well reviews from BLM’s Automated Fluid  Minerals Support System (AFMSS). The OGOR data was extracted by  ONNR on July 7, 2010. The AFMSS data was extracted by BLM on March  17, 2010; May 26, 2010; and October 1, 2010. First, we analyzed the OGOR  and AFMSS data to count the number of idle wells (i.e., wells that have not  produced for 7 years more) as of fiscal year 2009 for each field office, and  we compared these data with idle well data provided by the 33 field offices  we surveyed. We also grouped the idle wells we identified by the number  of years they have remained idle. Second, we counted the number of bond  adequacy reviews and idle well reviews in AFMSS and compared them  with the number of reviews reported by the BLM field offices in our Web- based survey. Third, to determine the number of well records without  bond numbers, we selected current well records in AFMSS without any  information on their associated bond numbers and counted them by their  unique 10-digit American Petroleum Institute number to identify individual  wells that could not be easily associated with a bond.
We present data from AFMSS regarding the number of wells managed by  each of the 33 field offices. We believe AFMSS data are sufficiently reliable  for this purpose although our audit work determined reliability issues for  other AFMSS data used in other contexts.
To better understand the perspectives of operators regarding BLM  bonding requirements, we interviewed industry officials with the  Independent Petroleum Association of New Mexico and the Interstate Oil  and Gas Compact Commission.
We conducted this performance audit from January 2010 to February 2011  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Interior
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Andrea Wamstad Brown  (Assistant Director), Jeffrey B. Barron, Casey L. Brown, Ying Long, Kevin  Remondini, Jerome Sandau, JulieMarie Shepherd, Carol Herrnstadt  Shulman, Jeanette Soares, and Walter Vance made key contributions to  this report.