The COVID-19 disaster and a catastrophic fall in oil prices could leave the state on the hook for billions in environmental cleanup costs if oil and gas companies go bankrupt during the health crisis, New Mexico's top land official says.
The crash in the oil and gas market is fueling long-standing concern from State Land Commissioner Stephanie Garcia Richard and environmental groups that bonding requirements for oil and gas companies are nowhere near enough.
"We never dreamed that we would be in this position," she said. "It's a double whammy, right? We rely on them for our day-to-day operation funding. ... In addition, we could be left holding the financial bag for cleanup."
Before drilling an oil or gas well, companies must set aside a bond meant to cover the cost of cleanup if they go under.
It costs about $29,000 to plug and remediate the average well, according to the state Energy, Minerals, and Natural Resources Department. Yet the current State Land Office bonding requirement for companies to pump oil is $25,000 per operator, regardless of how many wells that company is operating.
Additional funding known as "blanket bonding" required by the state ranges from $50,000 for up to 10 wells to $250,000 for more than 100 wells. The state is authorized this year to spend $4.92 million of a total $8.75 million oil and gas cleanup fund.
But that's just money for wells on state land. Bonding amounts for companies on federal land have not changed in decades, and critics have argued they are nowhere near high enough to cover an industry collapse.
When oil prices plummeted into negative territory in April, concerns were raised about bonding requirements. But, even before that crash, an oil price war between Saudi Arabia and Russia resulted in layoffs, wells being shut in, and dismal projections for the fossil fuel market created uncertainty that was unimaginable in the industry just a few months ago.
Adrienne Sandoval, who oversees the oil division within the Energy, Minerals, and Natural Resources Department, acknowledged state officials do not know whether bonding requirements and money from the oil reclamation fund are enough to cover what may unfold in the next several months.
In the past, it has been enough, she said. And, in the past, large hydraulic fracturing operations usually have not gone bankrupt, and, if they have, they've typically been purchased by other oil and gas companies.
But these are not typical times.
"I can't speculate on how many wells we may see in the future that are abandoned," Sandoval said. "That's all going to depend on price and how the companies leverage themselves over time. I don't want to speculate if we have enough going forward because I don't know how many wells are going to be shut in."
Dozens of smaller operators in New Mexico don't have the financial reserves available to energy giants such as Chevron or ExxonMobil. In the event of a flood of bankruptcies, wells would be plugged, machinery disassembled, and millions of gallons of toxic hydraulic fracturing water left untended, Garcia Richard said.