A Cost Benefit Analysis of Shale Gas Well Bonding Systems in Pennsylvania

Abstract

Pennsylvania imposes bonding requirements to incentivize operators to take proper precautions when they choose to abandon an oil or gas well. Bonding requires operators to set aside funds before drilling a well, which are forfeited to the state if the well is improperly abandoned. The relatively high reclamation costs and potential environmental risks from shale gas wells have led stakeholders to consider whether current bond amounts are large enough to cover cleanup. Other stakeholders argue that operators would respond to increased bond amounts by drilling fewer wells. Less drilling could reduce economic benefits received by Pennsylvanians, such as those associated with employment and mineral royalty payments. This cost benefit analysis aims to identify whether there is an alternative bonding system that would produce net social benefits in Pennsylvania versus the current system. I find that current bond amounts are likely too low, and that increasing them to match actual reclamation costs would prevent society from bearing significant costs, without giving up many economic benefits. State officials should set bonds equal to the best estimates of reclamation costs, and revise them when evidence on the true cost of reclamation becomes available.