Managing Environmental Liability: An Evaluation of Bonding Requirements for Oil and Gas Wells in the United States

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March 13, 2018


Jacqueline Ho, Jhih-Shyang Shih, Lucija Muehlenbachs, Clayton Munnings, and Alan Krupnick


Journal Article

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Inactive oil and gas wells present an environmental hazard if not properly plugged. Upon drilling a well, operators are required to post a bond, which ensures that the operator has an incentive to plug and abandon (P&A;) at the end of the well’s life, and that, if the state is left with the liability of managing “orphaned” wells, it can cover the cost of P&A.; Using data from 13 state agencies on their orphaned well plugging expenditures, we provide new estimates of P&A; costs in the United States and compare them to bond amounts. Current state bonding requirements are insufficient to cover the average P&A; cost of orphan wells in 11 of these 13 states. These should be reviewed and revised where necessary. We also examine the factors influencing P&A; costs using detailed data on orphaned wells in Kansas. Given the variability of P&A; costs, bonds would be more effective if they varied by factors that are meaningful in explaining P&A; costs, such as well depth, location, and proximity to groundwater. State regulators can use the statistical approach developed in this paper to improve bonding requirements and to better predict the P&A; costs of their orphaned wells.


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