Modernizing Bonding Requirements for Natural Gas Producers

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Released: June 2012 • Discussion Paper

Related Topics: Effective Government, Energy & Environment

Authors:

  • Lucas DavisAssociate Professor of Economic Analysis and Policy, Haas School of Business, University of California, Berkeley
 
 

Abstract

Hydraulic fracturing and other recent technological advances have dramatically increased the availability of natural gas, potentially providing tremendous benefits to the U.S. economy. At the same time, however, these new forms of drilling raise a number of potential environmental concerns. Legislation dating back to the 1920s requires natural gas producers to post a bond prior to drilling to clean up sites when accidents occur, and to guarantee that producers adequately reclaim drilling sites after production is completed. This approach makes sense, but current minimum bond amounts provide inadequate levels of protection. Minimum bond amounts were set in 1960 and have never been updated for inflation.

This proposal would increase federal minimum bond amounts to adjust for inflation and encourage states to adopt similar minimum bond amounts for drilling on non-federal land. In addition, this proposal would eliminate provisions that currently allow companies to meet bonding requirements by posting a single “blanket” bond. Stronger bonding requirements would help ensure that funds would be available to clean up sites when accidents occur. But more importantly, stronger requirements would also incentivize producers to work hard to avoid environmental damages in the first place.


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