Landowners stuck with idled natural gas wells on their pastures in northwestern South Dakota are asking why state government doesn’t require higher bonds from oil and gas drillers.

The answer is simple, according to one of the landowners’ legislators, state Sen. Ryan Maher, R-Isabel.

“It’s because gas and oil companies have way bigger impact with their lobbyists than what one senator can do,” Maher said. “That’s what it comes down to.”

Maher’s Legislative District 28 includes Harding County, where state regulators have commenced revocation proceedings against the permits for 40 natural gas wells that were drilled from 2006 to 2010 by Spyglass Cedar Creek LP, of San Antonio, Texas.

After the project began with $22 million in financing, a series of financial and legal calamities caused the project to go dormant. A Spyglass official is accused of cashing out a $20,000 bond that state government required Spyglass to post when the project started.

The bond was meant to help state government pay for the plugging of the wells in the event that the project went bust; instead, state government now has only $9,850 from another bond the company was required to post for surface restoration costs.

Donn Hett, a rural Buffalo landowner with some of the project wells on his land, said he thinks a far higher bond should have been required.

"The little bit of bonding that was posted, that won't even clean up one well site," Hett said.

Stephen Harmon, a contractor for Montana-based Remuda Energy Development, which has tried unsuccessfully to acquire the Spyglass project, said it could cost $30,000 apiece to plug the wells and repair the surface if nobody is able to put the wells back into production. That's a total of $1.2 million, which could end up falling on the landowners or the state and its taxpayers.

Harmon said he was surprised to see such low bond amounts for the Spyglass project.

“That is totally insufficient,” Harmon said. “Probably when they wrote the regulations years ago that was sufficient, but not anymore."

The South Dakota Legislature changed the state’s bonding amounts in 2013, after the amounts had been unchanged for about 30 years. But a bill sponsored by Maher to increase the required bond amounts for oil and gas drillers was watered down by a legislative committee before it was passed into law.

The old amounts for so-called “plugging and performance bonds” were $5,000 per well, or $20,000 for a statewide blanket bond. The Maher-sponsored bill, as originally proposed, would have raised the bond amounts to $50,000 per well or $100,000 for a statewide blanket, while repealing the requirement for a separate surface restoration bond.

After an amendment, the bill passed into law with bond rates split at the 5,500-foot depth. Wells deeper than that must now be covered with a $50,000 per-well bond or a $100,000 blanket, and wells of 5,500 feet or shallower must be covered with a $10,000 per-well bond or a $30,000 blanket. As in the original version of the bill, the requirement for a separate surface restoration bond was repealed, and the plugging-and-performance bonds may now be applied to surface restoration if needed.

The Spyglass project was not affected by the law change, because the new law exempted wells permitted or drilled prior to 2013.

Hypothetically, if the Spyglass project were to begin today, its backers might pay the $100,000 blanket bond, because of the large number of wells involved and because two of the project’s 40 wells are deeper than 5,500 feet.

But if those two wells were kept shallower than 5,500 feet, the project would only have to post a $30,000 blanket bond, which is equal to the sum of the $20,000 plugging-and-performance bond plus the $10,000 surface restoration bond that Spyglass was required to post when the project began roughly 12 years ago.

The old law and the new law both include a provision granting the state Board of Minerals and Environment the power to impose additional bonds if circumstances require it.

The legislation to change the bond amounts emerged after two work groups reported to Gov. Dennis Daugaard in 2012 about South Dakota’s preparedness for increased oil-and-gas activity spilling over from North Dakota’s oil-and-gas boom.

A report from the work groups said higher bond amounts would “likely have a negative economic impact on oil and gas operators, especially the smaller and less capitalized oil and gas drilling companies, and may be a disincentive to wildcat exploration.” In the industry, “wildcatting” is exploratory drilling in areas where knowledge of the underground resource is not fully developed.

The report noted that other states have programs to plug orphaned wells left behind by failed companies. The plugging costs in those states ranged from $4,500 to $120,000 per well, the report noted, depending on the type and depth of the well.

“Given the costs to plug wells delineated above,” the report said, “it is clear that no state requires bonds to fully cover the cost of plugging wells in all cases, especially under the statewide blanket bonds.”

The amounts of plugging bonds required by states varies widely, according to a report on orphaned wells published last month by Stateline, an initiative of The Pew Charitable Trusts. Under the rates listed for Colorado, a new project like the Spyglass project would require a $60,000 bond. In Wyoming, Stateline reported, companies may opt to pay either $100,000 to cover potential reclamation costs for an unlimited number of wells, or $10 per foot of drilling depth.

The Stateline report cited EPA statistics estimating that there may be upwards of 1 million orphaned oil and gas wells across the United States. South Dakota is a relative newcomer to the phenomenon, but in some other states there are thousands of orphaned wells waiting to be plugged.

Sen. Maher said South Dakota’s bond amounts and its lack of a program for orphaned wells may need to be reviewed by the Legislature during its next lawmaking session beginning in January.

Steve Willard, a South Dakota lobbyist for the American Petroleum Institute, said he would have to see any legislation affecting bond amounts before forming an opinion.

“We’d sure look at it, and we’d sure have a position,” Willard said. “But the challenge with setting bond amounts is you’re essentially making up numbers in trying to figure out how big it should be.”

Ray Gilbert, another affected rural Buffalo landowner, said the Spyglass project's failure is evidence of the need for higher bonds.

“I never have understood in this state why we roll over for these companies,” Gilbert said. “If the resource is here, they’re coming for it, and we should get a little something out of them.”

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Contact Seth Tupper at seth.tupper@rapidcityjournal.com

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