Background Life Cycle of Oil and Gas Wells Oil and gas exploration and production involves disturbing lands in several ways. For example, when operators drill oil and gas wells, they typically remove topsoil and construct a well pad, where the drilling rig will be located. Other equipment on-site can include generators and fuel tanks. In addition, reserve pits are often constructed to store or dispose of water, mud, and other materials that are generated during drilling and production, and roads and access ways are often built to move equipment to and from the wells. Once wells cease production, which may occur many decades after they are drilled, they can become inactive. Inactive wells have the potential to create physical and environmental hazards if operators do not properly reclaim them, a process that may involve plugging the well, removing structures, and reshaping and revegetating the land around the wells. For example, inactive wells that are not properly plugged can leak methane into the air or contaminate surface water and groundwater. Well sites that are not properly reclaimed can contribute to habitat fragmentation and soil erosion, and equipment left on-site can interfere with agricultural land use and diminish wildlife habitat. Costs for well reclamation vary widely and are affected by factors such as the depth of the well. Although BLM does not estimate reclamation costs for all wells, it has estimated reclamation costs for thousands of wells whose operators have filed for bankruptcy. Based on our analysis of these estimates, we identified two cost scenarios: low-cost wells typically cost about $20,000 to reclaim, and high-cost wells typically cost about $145,000 to reclaim. BLM’s Bonding Regulations and Policies As shown in figure 1, BLM regulations or policies outline how BLM is to initially collect bonds from operators, review bonds, and ultimately return the bond to the operator or use it to cover costs of reclamation. Bonds collected from operator. BLM regulations require operators to submit a bond to ensure compliance with all of the terms and conditions of the lease, including, but not limited to, paying royalties and reclaiming wells. BLM regulations generally require operators to have one of the following types of bond coverage: individual lease bonds, which cover all of an operator’s wells under one lease; statewide bonds, which cover all of an operator’s leases and operations in one state; or nationwide bonds, which cover all of an operator’s leases and operations nationwide. (See figure 2.) BLM can accept two types of bonds: surety bonds and personal bonds. A surety bond is a third-party guarantee that an operator purchases from a private insurance company approved by the Department of the Treasury. The operator pays a premium to the surety company that can vary depending on various factors, including the amount of the bond and the assets and financial resources of the operator. If operators fail to reclaim their wells, the surety company is responsible for paying BLM up to the amount of the bond to help offset reclamation costs. A personal bond must be accompanied by one of the following financial instruments: certificates of deposit issued by a financial institution whose deposits are federally insured, granting the Secretary of the Interior full authority to redeem it in case of default in the performance of the terms and conditions of the lease; cashier’s checks; negotiable Treasury securities, including U.S. Treasury notes or bonds, with conveyance to the Secretary of the Interior of full authority to sell the security in case of default in the performance of the lease’s terms and conditions; or irrevocable letters of credit that are issued for a specific term by a financial institution whose deposits are federally insured and meet certain conditions and that identify the Secretary of the Interior as sole payee with full authority to demand immediate payment in case of default in the performance of the lease’s terms and conditions. BLM bond reviews. BLM regulations provide flexibility to increase bonds above minimums and require increases above minimum amounts if operators meet certain criteria. Specifically, BLM regulations require BLM to increase the bond amount when an operator who applies for a new drilling permit had previously failed to reclaim a well in a timely manner. For such an operator, BLM must require a bond in an amount equal to its cost estimate for reclaiming the new well if BLM’s cost estimate is higher than the regulatory minimum amount. BLM regulations also authorize increases in the bond amount—not to exceed the estimated cost of reclamation and any royalties or penalties owed—whenever the authorized officer determines that the operator poses a risk due to factors such as that the expected reclamation costs exceed the present bond. In response to our previous recommendation in 2011 that BLM develop a comprehensive strategy to revise its bond adequacy review policy to more clearly define terms and conditions that warrant a bond increase, BLM issued a bond adequacy review policy in July 2013, Instruction Memorandum 2013-151. The policy contained directives for conducting reviews when bonds meet certain criteria. Specifically, the 2013 bond adequacy review policy called for field offices to, among other things, review each bond at least every 5 years to determine whether the bond value appropriately reflected the level of potential risk posed by the operator. If it did not, authorized officers were to propose an increase (or decrease) in the bond value. In November 2018, BLM issued a revised bond adequacy review policy, Instruction Memorandum 2019-014, which supersedes the 2013 policy. The 2018 policy continues to call for field offices to review each bond at least every 5 years, but it revised the point system worksheet that field offices are to use when determining whether a bond increase (or decrease) is warranted. Also, in response to our 2018 recommendation that BLM ensure that the reviews of nationwide and statewide bonds reflect the overall risk presented by operators, the 2018 policy calls for additional coordination between BLM headquarters, state offices, and field offices when reviewing nationwide and statewide bonds. BLM returns or uses bond. If operators reclaim their wells, BLM returns the bond to the operator. Many decades may pass between when BLM collects a bond and when it is returned. If operators do not reclaim their wells, BLM may redeem the certificate of deposit, cash the check, sell the security, or make a demand on the letter of credit to pay the reclamation costs. Liability for reclaiming a well on onshore federal lands can fall to either the lease holder or the operator, and BLM may also hold past owners or operators liable. The liability for past owners or operators extends only to reclamation obligations that accrued before BLM approved the transfer of their lease to a subsequent lessee. They are not liable for reclamation and lease obligations incurred after that transfer is approved. Average Bond Values Per Well Were Slightly Lower in 2018 as Compared to 2008 Based on our review of BLM data, the value of bonds held by BLM for oil and gas operations on a per-well basis were slightly lower in 2018 as compared to 2008. Although the total value of bonds held by BLM for oil and gas operations was higher in 2018 than in 2008 (about $204 million compared to about $188 million, in 2018 dollars), the average bond value per well was slightly lower because the number of wells on federal land was also higher in 2018 than in 2008 (96,199 wells compared to 85,330). Specifically, in 2008, BLM held bonds worth an average of $2,207 per well in 2018 dollars.23, BLM held bonds worth an average of $2,122 per well in 2018, a decrease of 3.9 percent as compared to 2008 (see table 1). BLM bonds do not typically cover an individual well; however, we calculated the average bond value on a per-well basis (bond amount divided by the number of wells covered by the bond) to compare the value over time adjusted for the increased number of wells. When reporting on all wells, we calculated the average bond value per well as the aggregate value of all BLM bonds divided by the total number of producible well bores. Appendix I provides additional information on our scope and methodology. category for bonds that were linked to wells in the data. We found that, on average, as of 2018 an individual lease bond covered about 10 wells, a statewide bond covered about 49 wells, and a nationwide bond covered 374 wells. However, some bonds cover more than the typical number of wells and some fewer. As of 2018, individual lease bonds had the highest average bond value per well at $2,691, and nationwide bonds had the lowest average bond per well value at $890. Statewide bonds had an average bond value per well of $1,592. The share of the total value of bonds held by BLM that are individual lease, statewide, or nationwide bonds differed in 2018 from 2008 (see Figure 3). The share of individual lease bonds was slightly higher in 2018 as compared to 2008 (about 8 percent in 2008 and about 9 percent in 2018). In 2008, statewide bonds represented about 80 percent (approximately $130 million) of the total value of bonds. In 2018, statewide bonds represented about 59 percent of total bond value (approximately $120 million), but this category still represented the largest share of total bond value. In contrast, nationwide bonds were a lower share of total bond value in 2008 (about 6 percent, approximately $10.2 million) than in 2018 (30 percent, approximately $61.8 million). BLM officials told us that changes in the composition of the oil and gas industry may have contributed to these changes in the composition of bonds. In particular, officials said some larger companies may have expanded their operations in recent years, sometimes acquiring smaller companies. Large companies with expansive operations are more likely than small companies to have nationwide bonds because such bonds can cover operations in multiple states, which statewide and individual lease bonds do not. Therefore, an industry shift to larger companies would tend to increase the share of nationwide bonds. Bonds Held by BLM Are Insufficient to Prevent Orphaned Wells Bonds Do Not Provide Sufficient Financial Assurance to Prevent Orphaned Wells Bonds do not provide sufficient financial assurance to prevent orphaned wells for several reasons. First, BLM has identified new orphaned wells— wells whose bonds were not sufficient to pay for needed reclamation when operators or other parties failed to reclaim them. As we reported in May 2018, BLM does not track the number of orphaned wells over time and so cannot identify how many wells became orphaned over specific time frames. However, our analyses of BLM’s orphaned well lists from different years have shown that BLM has continued to identify new orphaned wells since 2009. We reported in January 2010 that BLM identified 144 orphaned wells in 2009. Then, in May 2018, we reported that BLM identified 219 orphaned wells in July 2017—an increase of 75 orphaned wells. In April 2019, BLM provided a list of 296 orphaned wells that included 89 new wells that were not identified on the July 2017 list. Bonds are not sufficient to prevent orphaned wells in part because they do not reflect full reclamation costs for the wells they cover. Bonds that are high enough to cover all reclamation costs provide complete financial assurance to prevent orphaned wells because, in the event that an operator does not reclaim its wells, BLM can use the bond to pay for reclamation. On the other hand, bonds that are less than reclamation costs may not create an incentive for operators to promptly reclaim wells after operations cease because it costs more to reclaim the wells than the operator could collect from its bond. We analyzed bonds that are linked to wells in BLM’s data, and found that most of these bonds would not cover reclamation costs for their wells. Specifically, we compared the average bond coverage available for these wells to the two cost scenarios we described above. About 84 percent of these bonds—covering 99.5 percent of these wells—would not fully cover reclamation costs under a low-cost scenario (these bonds have an average value per well of less than $20,000). Less than 1 percent of bonds—covering less than 0.01 percent of these wells—would be sufficient to reclaim all the wells they cover if they were high cost (these bonds have an average value per well of $145,000 or more). The remaining bonds—about 16 percent—have average bond values per well of between $20,000 and less than $145,000. The majority of bond values do not reflect reclamation costs in large part because most bonds—82 percent—remain at their regulatory minimum values. These regulatory minimums are not reflective of reclamation costs for a number of reasons: Regulatory bond minimums have not been adjusted since the 1950s and 1960s to account for inflation. As shown in figure 4, when adjusted to 2018 dollars, the $10,000 individual lease bond minimum would be about $66,000, the $25,000 statewide bond minimum would be about $198,000, and the $150,000 nationwide bond minimum would be about $1,187,000. Bond minimums are based on the bond category and do not adjust with the number of wells they cover, which can vary greatly. According to BLM’s data, in 2018 the number of wells covered by a single bond ranged from one well to 6,654 wells. On average, a single bond covered about 68 wells. As wells are added to a bond, the total associated reclamation cost increases even if the bond value does not. A bond that increases with each additional well it covers and then decreases as wells are reclaimed could increase the financial incentive for operators to reclaim their wells in a timely manner. This is because operators would have to contribute additional bond value or would recover some bond value when they add or reclaim a well, respectively. Currently, bond minimums do not automatically adjust in this manner and therefore provide limited financial incentives for an operator to reclaim wells in a timely manner. Bond minimums do not reflect characteristics of individual wells such as depth or location, but such characteristics can affect reclamation costs, according to BLM officials. Wells are being drilled deeper than in the past; in 1950, well depth averaged about 3,700 feet, and in 2008, it averaged about 6,000 feet. Newer wells may be drilled 10,000 feet vertically. Officials from one BLM field office told us they assume a cost of $10 per foot of well depth to plug a well, so as wells are drilled deeper, plugging costs typically increase proportionally. Additionally, the location of some wells makes them more expensive to reclaim. For example, BLM officials told us about several wells that may cost three times more to reclaim than other nearby wells because they are located in the middle of a river, making them hard to reach. In addition to BLM having identified orphaned wells over the last decade, we identified inactive wells at increased risk of becoming orphaned and found their bonds are often not sufficient to reclaim the wells. Our analysis of BLM bond value data and Office of Natural Resources Revenue production data showed a significant number of inactive wells remain unplugged and could be at increased risk of becoming orphaned. Specifically, we identified 2,294 wells that may be at increased risk of becoming orphaned because they have not produced since June 2008 and have not been reclaimed. Further, for a majority of these at-risk wells, their bonds are too low to cover typical reclamation costs for just these at-risk wells. Our analysis of oil and gas production data showed these wells have not produced oil or gas or been used in other ways, such as serving as injection wells, since at least June 2008, when oil and gas prices were at or near record highs. Given that the Energy Information Administration projects oil and natural gas prices will remain at levels significantly below the 2008 highs through 2050, it is unlikely price will motivate operators to reopen these wells. Some of these wells have been inactive for far longer. Since these at-risk wells are unlikely to produce again, an operator bankruptcy could lead to orphaned wells unless bonds are adequate to reclaim them. If the number of at-risk wells is multiplied by our low-cost reclamation scenario of $20,000, it implies a cost of about $46 million to reclaim these wells. If the number of these wells is multiplied by our high-cost reclamation scenario of $145,000, it implies a cost of about $333 million. When we further analyzed the available bonds for these at-risk wells, we found that most of these wells (about 77 percent) had bonds that would be too low to fully reclaim the at- risk wells under our low-cost scenario. More than 97 percent of these at- risk wells have bonds that would not fully reclaim the wells under our high-cost scenario. BLM has a policy for reviewing the adequacy of bonds but has not been able to consistently secure bond increases when needed, and this policy has not resulted in bonds that would be adequate to reclaim most wells. BLM’s bond adequacy review policy calls for field office staff to review oil and gas bonds at least every 5 years to determine whether the bond amount appropriately reflects the level of potential risk posed by the operator. However, according to BLM documentation, its offices did not secure about 84 percent of the proposed bond increases in fiscal years 2016 and 2017. BLM officials at one field office and one state office noted it is difficult to secure increases from bond reviews when firms are already in difficult financial situations. In November 2018, BLM updated its bond adequacy review policy and called for the agency to focus on securing bond increases from operators that show the highest risk factors. BLM’s updated policy more explicitly lays out steps to secure bond increases, including that BLM should not approve new applications to drill from an operator while waiting for a bond increase. The new policy also gives BLM officials discretion to not pursue a bond increase after considering other priorities demanding staff time and workload. It is unclear whether the update will improve BLM’s ability to secure bond increases, as it may not address the underlying challenge of attempting to increase bonds from operators who are already in a difficult financial position. While BLM’s federal oil and gas bond minimums do not sufficiently reflect the costs of well reclamation, requirements for bond amounts for other federal mining and energy development activities account for potential reclamation costs to some extent. For example, for bonds for surface coal mining and hardrock mining on federal lands, the Department of the Interior requires bond amounts based on the full estimated cost of reclamation. For grants of federal rights-of-way for wind and solar energy development in designated leasing areas, BLM requires bonds based on a minimum amount per wind turbine or per acre of solar. For such grants in all other areas, the bonds are based on the estimated cost of reclamation but cannot be less than the per-turbine or per-acre amounts previously mentioned. Additionally, some states have minimum bond requirements for oil and gas wells on lands in the state that, unlike federal bond minimums, adjust with the number of wells they cover or the characteristics of the wells, or both. For example, Texas and Louisiana offer operators with wells on lands in those states the choice of a bond based on total well depth or based on the number of wells. Specifically, the Texas Railroad Commission lets operators choose bonds based on either the total depth of all wells on lands in the state multiplied by $2 per foot, or minimums based on the number of wells covered. If operators choose the latter, the bond for 0 to 10 wells is $25,000; the bond for 11 to 99 wells is $50,000; and the bond for 100 or more wells is $250,000. In Louisiana, the Office of Conservation offers operators with wells on lands in the state the choice of a bond based on total well depth or based on the number of wells. Louisiana further specifies a multiplier that varies depending on the total depth of the well. For example, the bond calculation is $2 per foot for wells less than 3,000 feet deep, $5 per foot for wells from 3,001 to 10,000 feet deep, and $4 per foot for wells 10,001 feet deep or deeper. Operators in Louisiana can alternatively choose to follow a system based on number of wells, with a minimum bond for 10 or fewer wells set at $50,000, a minimum bond for 11 to 99 wells set at $250,000, and a minimum bond for 100 or more wells set at $500,000. Pennsylvania’s Department of Environmental Protection requires bonds for unconventional wells that vary based on the number of wells and well bore length. The Mineral Leasing Act of 1920, as amended, requires federal regulations to ensure that an adequate bond is established before operators begin surface-disturbing activities on any lease, to ensure complete and timely reclamation of the lease tract as well as land and surface waters adversely affected by lease operations. The Mineral Leasing Act of 1920 does not require that BLM set bonds at full reclamation costs. However, the gap between expected reclamation costs and minimum bond amounts has grown over time because the minimums have not been adjusted since they were established in the 1950s and 1960s, whereas reclamation costs have increased due to inflation and the changing characteristics of wells being drilled. In the absence of bond levels that more closely reflect expected reclamation costs, such as by increasing regulatory minimums and incorporating consideration of the number of wells on each bond and their characteristics, BLM will continue to face risks that its bonds will not provide sufficient financial assurance to prevent orphaned wells. In particular, adjusting bond minimums so that bonds more closely reflect expected reclamation costs up front could help decrease the need for bond increases later when companies are potentially in financial distress. BLM Does Not Currently Assess User Fees to Fund Orphaned Well Reclamation In addition to fulfilling its responsibility to prevent new orphaned wells, it falls to BLM to reclaim wells that are currently orphaned, and BLM has encountered challenges in doing so. We reported in May 2018 that 13 BLM field offices identified about $46.2 million in estimated potential reclamation costs associated with orphaned wells and with inactive wells that officials deemed to be at risk of becoming orphaned. There is also a risk more wells will become orphaned in coming years, as we described above. Based on the most recent orphaned well lists we received from BLM, 51 wells that BLM identified in 2009 as orphaned had not been reclaimed as of April 2019. The Energy Policy Act of 2005 (EPAct 2005) directs Interior to establish a program that, among other things, provides for the identification and recovery of reclamation costs from persons or other entities currently providing a bond or other financial assurance for an oil or gas well that is orphaned, abandoned, or idled. One way in which BLM may be able to accomplish this is through the imposition of user fees. In 2008, we found that well-designed user fees can reduce the burden on taxpayers to finance those portions of activities that provide benefits to identifiable users. Further, according to Office of Management and Budget guidance, it may be appropriate for an agency to request authority to retain the fee revenue if the user fees offset the expenses of a service that is intended to be self-sustaining. The volume of drilling applications and inactive wells provide an opportunity to fund reclamation costs. According to BLM data, the agency processes more than 3,500 applications to drill each year, on average, and has over 14,000 inactive wells. Based on our calculations, a separate fee of about $1,300 charged at the time a drilling application is submitted (in addition to the current drilling application filing fee, which is $10,050), or an annual fee of less than $350 for inactive wells could generate enough revenue to cover, in a little over a decade, the entire $46 million potential reclamation costs field offices identified to us. In commenting on a draft of this report, BLM stated that it does not have the authority to seek or collect fees from lease operators to reclaim orphaned wells. Developing a mechanism to obtain funds from operators to cover the costs of reclamation, consistent with EPAct 2005, could help ensure that BLM can completely and timely reclaim wells without using taxpayer dollars. Other federal programs, including other BLM programs, collect fees from users to fund reclamation activities. For example, the federal government collects fees from mining companies to reclaim abandoned mines. Specifically, the federal abandoned mine reclamation program is funded in part by fees on coal production. We reported in March 2018 that the program had spent about $3.9 billion to reclaim abandoned mine lands since the program’s creation in 1977. Additionally, some states with oil and gas development have dedicated funds for reclaiming orphaned wells. In Wyoming, the state’s Oil and Gas Conservation Commission’s Orphan Well Program reclaims orphaned wells on state or private lands for which bonds and operator liability are unavailable or insufficient to fund reclamation. The program is funded through a conservation tax assessed on the sale of oil and natural gas produced in Wyoming. Through this program, the Wyoming Oil and Gas Conservation Commission has reclaimed approximately 2,215 wells since 2014, according to a Commission official. Similarly, in Arkansas, operators make annual payments to its abandoned well plugging fund based on the number of wells and permits they have, on a sliding scale. For example, at the low end, operators with one to five wells or permits pay $100 per well, and at the high end, operators with over 300 wells or permits pay $4,000 per operator. The Arkansas fund was used to reclaim 136 wells in fiscal years 2016 through 2018, according to an official with the state’s Oil and Gas Commission. Virginia’s Orphaned Well Fund is funded through a $200 surcharge on each permit application. The fund is administered by the Virginia Division of Gas and Oil, which prioritizes wells to reclaim according to their condition and potential threat to public safety and the environment. Conclusions BLM oversees private entities operating thousands of oil and gas wells on leased federal lands and has taken steps over the years to strengthen its management of the potential liability that oil and gas operations represent should operators not fully reclaim wells and return lands to their original condition when production ceases. For example, the agency’s 2013 bond adequacy review policy outlined how bonds were to be reviewed every 5 years and bond amounts adjusted depending on risks presented by operators. However, we found average bond values were slightly lower in 2018 as compared to 2008 and BLM has not obtained bond increases for the majority of instances in which its reviews identify that increases are needed. Instead, most bonds are at their regulatory minimum values, which are not sufficient to cover reclamation costs incurred by BLM. Without adjusting bond levels to more closely reflect expected reclamation costs—such as by considering the effects of inflation, the number of wells covered by a single bond, and the characteristics of those wells—BLM faces ongoing risks that not all wells will be completely and timely reclaimed, resulting in additional orphaned wells. Further, BLM faces a backlog of orphaned wells to reclaim—with 51 dating back at least 10 years. Unlike some other federal and state programs that obtain funds from industry through fees or dedicated funds, BLM does not do so for reclaiming orphaned wells. According to BLM, it does not have the authority to seek or collect fees from lease operators to reclaim orphaned wells. Authorizing and requiring the implementation of a mechanism to obtain funds from oil and gas operators to cover the costs of reclamation could help ensure BLM can completely and timely reclaim wells. Matter for Congressional Consideration Congress should consider giving BLM the authority to obtain funds from operators to reclaim orphaned wells, and requiring BLM to implement a mechanism to obtain sufficient funds from operators for reclaiming orphaned wells. (Matter for Consideration 1) Recommendation for Executive Action The Director of BLM should take steps to adjust bond levels to more closely reflect expected reclamation costs, such as by increasing regulatory minimums to reflect inflation and incorporating consideration of the number of wells on each bond and their characteristics. (Recommendation 1) Agency Comments and Our Evaluation We provided a draft of this product to BLM for comment. In its written comments, reproduced in appendix II, BLM concurred with the recommendation. BLM stated that it is committed to ensuring that its field offices continue to review oil and gas bonds at least every 5 years, or earlier when warranted, and noted its November 2018 Instruction Memorandum 2019-014 updated its bond review policy. BLM further stated that, while the adjustment of bond values may not reflect the inflation index, the policy is intended to increase bond amounts while fostering an environment conducive to BLM’s leasing operations. As we point out in this report, BLM has historically had difficulties securing bond increases through bond reviews, and so additional steps may be needed to adjust bond levels to more closely reflect expected reclamation costs. In the draft we provided to BLM for comment, we included a recommendation that the Director of BLM should take steps to obtain funds from operators for reclaiming orphaned wells. BLM did not concur with this recommendation, saying it does not have the authority to seek or collect fees from lease operators to reclaim orphaned wells. We continue to believe a mechanism for BLM to obtain funds from oil and gas operators to cover the costs of reclamation for orphaned wells could help ensure BLM can completely and timely reclaim these wells, some of which have been orphaned for at least 10 years. We have therefore instead made a matter for Congressional consideration. BLM also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Interior, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Appendix I: Objectives, Scope, and Methodology This report (1) describes the value of bonds for oil and gas wells in 2018 compared to 2008, and (2) examines the extent to which the Bureau of Land Management’s (BLM) bonds ensure complete and timely reclamation and thus prevent orphaned wells. To describe the value of bonds for oil and gas wells in 2018 compared to 2008, we analyzed oil and gas well data from BLM’s Automated Fluid Minerals Support System (AFMSS) as of May 2018 and data from BLM’s Legacy Rehost 2000 (LR2000) system on bonds as of May 2018. Bond data we reviewed included the bond category (e.g., individual lease or nationwide) and bond value. We compared these data to data obtained from the same systems for 2008 and reported by GAO in 2010. We matched the May 2018 data from the two systems based on the bond number—a variable in both systems—to identify how many wells were covered by each bond and to determine the average bond value per well for each bond category. To assess the reliability of AFMSS and LR2000 data elements, we reviewed agency documents, met with relevant agency officials, and performed electronic testing. We found these data to be sufficiently reliable for our purposes. We also interviewed BLM headquarters officials to understand why bond composition may have changed over time. To report on the number of bonded wells held by BLM, we used a published BLM value for producible well bores—wells capable of production—which should represent a lower bound on the number of bonded wells in September 2018 because some wells may be plugged or temporarily incapable of production but would still require a bond if the surrounding site had not been fully reclaimed. To determine the average value of bonds per well in 2018, we divided the total value of all bonds held by BLM by the total number of producible well bores. To examine the extent to which BLM’s bonds ensure complete and timely reclamation and prevent orphaned wells, we conducted the following analyses: Reclamation cost scenarios: To determine whether bonds are sufficient to cover potential reclamation costs for the wells they cover, we identified typical high- and low-cost scenarios for well reclamation (including plugging the well and reclaiming the surrounding well site) and compared those scenarios to the average bond value available per well. To determine high- and low-cost reclamation scenarios, we analyzed BLM’s well reclamation cost estimates on proofs of claim submitted to the Department of Justice from calendar year 2016 through May 2018. These 59 proofs of claim listed estimated reclamation costs for 8,664 well sites. We calculated the average reclamation cost per well for each individual proof of claim by dividing the total dollar value claimed for reclamation liability (actual liability plus potential liability) by the total number of wells listed in each proof of claim document. We found the average reclamation cost estimates for each proof of claim have a bimodal distribution, meaning that data are clustered around two distinct cost levels, rather than clustered around a single average cost. As a result, we determined that using two separate measures that indicate typical values for separate groups of low-cost and high-cost wells would provide more meaningful statistics about cost. We therefore selected reclamation costs of $20,000 for the low-cost reclamation scenario and $145,000 for the high-cost scenario based on the 25th and 75th percentiles of the distribution of average estimated reclamation cost per proof of claim, weighted by the number of wells on each proof of claim. Bond value per well: To determine the average bond value available per well, we analyzed bonds listed in LR2000 that were tied to wells listed in AFMSS using the bond number—a variable in both systems. We found that 1,547 out of the 3,357 unique bond numbers in LR2000 had wells tied to them in AFMSS. These 1,547 bonds covered about 80 percent of the wells in AFMSS. The other 20 percent of wells in AFMSS either did not list a bond number, or the bond number listed was not in LR2000. For each bond in LR2000 covering wells in AFMSS, we calculated the bond available per well as the bond value divided by the number of wells it covers. We then compared the bond values per well against both high ($145,000 per well) and low ($20,000 per well) reclamation cost scenarios to identify which bonds would be adequate to reclaim all the wells they covered under different cost scenarios. If AFMSS bond information was incomplete, it is possible that there are more wells covered by bonds than we were able to identify—and therefore the bond value per well would be lower than we found. At-risk wells: To identify wells that may be at greater risk of becoming orphaned and determine whether their bonds are sufficient to cover potential reclamation costs, we used well production data from the Office of Natural Resources Revenue’s Oil and Gas Operations Report (OGOR) as of June 2017 and bond values from LR2000. First, we defined wells as “at risk of becoming orphaned” if they met several criteria. Specifically, we identified wells that (1) had recent OGOR reports (on or after March 2017); (2) had not been used productively from at least June 2008 through the most recent record (meaning the well did not report producing any volume of oil or gas during this timeframe, nor were any volume of water or materials injected into the well during this timeframe); (3) were not being used as a monitoring well in the most recent record, which we considered a productive use; and (4) had not been plugged and abandoned. We selected June 2008 as the cutoff date for productivity because in June and July of 2008, oil and gas prices hit peaks that have not since been reached again, and which the Energy Information Administration does not expect prices to reach again through at least 2050. We believe our analysis is a conservative estimate of wells at greater risk, in part because we did not include wells that produced when prices were at their peaks and stopped producing soon afterward and may be unlikely to produce in the future unless prices reach the same peaks again. In addition, our lower-bound estimate does not include some coalbed methane wells that have been inactive for less than 9 years but are unlikely to produce at current prices because of the relatively higher cost of coalbed methane production. We also excluded wells that reported any volume of oil or gas production or water injection since June 2008, although some very low-producing wells may also be at risk of becoming orphaned. Bond value for at-risk wells: To calculate the average bond value per at-risk well, we identified bonds listed in LR2000 that were tied to at- risk wells in AFMSS to determine the value of bonds available to reclaim these at-risk wells if needed. We identified 2,041 of the 2,294 at-risk wells were linked to bonds. For each bond, we divided the bond value by the number of at-risk wells it covered to determine the bond amount per at-risk well. In cases in which an at-risk well was linked to more than one bond, we additionally calculated the average of the bond value per at-risk well for each bond linked to the well. To determine the sufficiency of bonds for at-risk wells, we identified the number of wells with an average bond value per at-risk well equal to or greater than $20,000 (low cost reclamation scenario) or $145,000 (high cost reclamation scenario). Orphaned wells: We compared three lists of orphaned wells based on data provided by BLM in 2009, July 2017, and April 2019. The 2009 data are from our January 2010 report, which used Orphaned Well Scoring Checklists that list information such as the well’s name and location. The July 2017 data are from our May 2018 report, which used an orphaned well list generated through a query of AFMSS by BLM. The April 2019 list was generated through a query of an updated version of AFMSS known as AFMSS 2. We compared the lists to identify how many wells that were on the 2009 list remained on the 2019 list, and how many wells that were on the 2017 list were on the 2019 list. To assess the reliability of the AFMSS, LR2000, and OGOR data elements we used, we reviewed agency documents, met with relevant agency officials, and performed electronic testing. We found these data elements to be sufficiently reliable for our purposes. Similarly, to assess the reliability of the 2019 orphaned well list, we reviewed agency documents and met with relevant agency officials. Though we identified shortcomings with data on orphaned wells, we nevertheless found these data to be sufficiently reliable for the purpose of describing the orphaned wells BLM has identified. To assess the reasonableness of proofs of claim data, we interviewed relevant agency officials and reviewed agency documents. To understand how BLM manages bonds, we reviewed BLM’s policies and interviewed officials from four BLM state offices and four BLM field offices. We selected these state and field offices because, according to AFMSS data, they were responsible for managing the largest numbers of wells on federal land. These BLM state offices were California, New Mexico, Utah, and Wyoming. These BLM field offices were Bakersfield, Buffalo, Carlsbad, and Farmington. We also interviewed officials from BLM’s headquarters office in Washington, D.C. Findings from the selected BLM offices cannot be generalized to officials we did not interview but provide a range of views. To understand how some states with oil and gas development on state lands set minimum bonds and fund orphaned well reclamation, we contacted officials from oil and gas oversight agencies in Arkansas, Louisiana, Pennsylvania, Texas, Virginia, and Wyoming. We conducted this performance audit from January 2018 to September 2019 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Comments from the Department of the Interior Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Quindi Franco (Assistant Director), Marietta Mayfield Revesz (Analyst-in-Charge), Marie Bancroft, William Gerard, Cindy Gilbert, Gwen Kirby, Joe Maher, Shaundra Patterson, Dan Royer, and Jerry Sandau made key contributions to this report.


Background MDA is responsible for developing a number of systems, known as elements, with the purpose of defending against ballistic and hypersonic missile attacks. MDA’s mission is to combine these elements into an integrated system-of-systems known as the Ballistic Missile Defense System (BMDS). The goal of the BMDS is to combine the abilities of two or more elements to achieve objectives that would not have been possible for any individual element. These emergent abilities are known as integrated capabilities or BMDS level capabilities. Table 1 provides a brief description of selected BMDS elements. MDA was established in 2002 with exceptional flexibilities to manage the acquisition of the BMDS—developed as a single program—that allow MDA to expedite the fielding of assets and integrated ballistic missile defense capabilities. These flexibilities allow MDA to diverge from DOD’s traditional acquisition life cycle and defer the application of certain acquisition policies and laws designed to facilitate oversight and accountability until a mature capability is ready to be handed over to a military service for production and operation. In addition, MDA has been operating in an environment of tight timeframes for delivering capabilities—beginning with a presidential directive in 2002 to field a limited capability by 2004. This was followed by a presidential announcement in 2009 to begin deploying U.S. missile defense in Europe in 2011 finishing in 2020. This schedule required concurrency among technology, testing and other development activities. More recently, MDA has been directed to develop and deploy defenses against hypersonic and cruise missile threats as soon as technologically able. These schedule pressures compound challenges associated with complex technology, design, and integration associated with the missile defense mission that normally require careful planning, disciplined engineering practices, extensive coordination, and effective management and oversight to be successful. MDA Has Taken Steps to Improve Management Practices, Reduce Acquisition Risks, and Deliver Capability MDA has taken important actions to increase transparency, reduce high- risk approaches in its management of BMDS elements, and test and deliver BMDS capability. Specifically, MDA has improved reporting in its annual progress reports to the Congress and made advances across a broad range of management activities, including the involvement of stakeholders, reducing concurrency, and continued efforts to improve key aspects of testing necessary to demonstrate delivered capability. Increased Transparency: MDA, consistent with several of our recommendations has increased the ability to track progress over time in the BMDS Accountability Report (BAR). This is MDA’s annual report that presents the current estimate of the BMDS programs’ baselines. To increase insight into MDA’s management of the BMDS, MDA implemented significant changes to its key acquisition processes and for the first time developed and reported detailed baselines for each element in the BAR in 2010. As we found in March 2011, MDA’s prior approach limited the ability for DOD and congressional decision makers to measure MDA’s progress on cost, schedule, and testing. While MDA’s changes were positive, over the years, we made additional recommendations to further improve MDA’s reporting. In response to our recommendations, MDA made improvements to the BAR that include providing details on variances to its test plan from year to year and including information on its use of contract actions known as an Undefinitized Contract Actions (UCA) and Unpriced Change Orders (UCO). Improved Stakeholder Outreach: MDA has increased its outreach to DOD stakeholders over the past few years. Our prior work on defense acquisitions has shown that establishing buy-in from decision makers is a key factor in achieving better acquisition outcomes because DOD components provide varying perspectives due to their unique areas of expertise and experience. For example, as we reported in December 2019, MDA has recently increased its interaction with the defense intelligence community. Specifically, MDA engaged the defense intelligence community on an analysis of alternatives the agency completed in February 2017 that assessed future sensor options for the BMDS. In addition, MDA reached out to the defense intelligence community on another analysis of alternatives pertaining to defense against hypersonic missiles. In fact, officials from several DOD organizations we met with over the past two years observed that MDA’s engagement with their organizations was improving. Reducing Concurrency: MDA continues to take steps to reduce concurrency, an issue we have reported on for many years. Concurrency is broadly defined as the overlap of development, testing, and production; coupled with an aggressive testing schedule. MDA’s concurrent development has often left the agency committing to production and fielding before development is complete. This approach has resulted in performance shortfalls, cost increases, and schedule delays. MDA has taken steps to mitigate this risk consistent with our recommendations. For example, as we found in May 2017, MDA took steps to reduce concurrency in the Aegis BMD SM-3 Block IB by adding in tests and delaying the full-rate production decision until the tests were completed. Figure 1 represents a highly concurrent acquisition schedule as compared to an approach based on gaining knowledge before proceeding to the next acquisition phase. Improving BMDS Testing: MDA has improved the accuracy of tools it uses to assess integrated BMDS capabilities. The BMDS is a system of systems that cannot be completely assessed using intercept flight tests because of the system’s scope and complexity, and because of safety constraints. Consequently, MDA, independent DOD testing organizations, and the warfighter must rely heavily on representations of the integrated BMDS called models and simulations in ground testing. This approach is used, rather than live tests, to test the operational performance of the whole BMDS against attacks with more threats represented. Our preliminary observations for fiscal year 2019 are that the number of accredited models and simulations that are needed to assess the integrated performance of the BMDS has steadily risen over the last 3 years. Over the past several years, we have reported on MDA’s progress in delivering assets and capabilities to counter attacks as well as cyber threats. MDA delivered important BMDS capabilities for architectures in the United States as well as those defending U.S. troops and allies in Europe, the Middle East, and the Eastern Pacific. For example: Homeland Defense: In fiscal year 2017 and 2018, MDA delivered a significant integrated capability for defending the United States, including improvements in the ability to discriminate lethal objects in targets, and increased capacity. This was a key achievement in fulfilling a directive from the Secretary of Defense to increase inventory of ground-based interceptors by the end of 2017. Regional BMD: In fiscal year 2016, MDA delivered capabilities for the second phase of its effort in Europe, called European Phased Adaptive Approach (EPAA). This effort required coordinated development of a number of elements and their integration to provide integrated BMDS-level integrated capabilities against short and medium range ballistic missiles. More recently, in fiscal years 2018 and 2019, MDA rapidly delivered capabilities for its effort to meet an urgent regional need. In addition, preliminary observations from our review covering fiscal year 2019 indicate that cybersecurity assessments in fiscal year 2019 informed the network defense posture in U.S. Northern Command and provided data on how to reduce mission risk for these elements operating in a cyber-contested environment. Moreover, the agency is incorporating lessons learned from prior cyber activities, and continues to address issues discovered in prior testing, improving its overall cybersecurity survivability. However, our preliminary observations indicate much remains to be done to ensure cyber resiliency of the BMDS including the completion of cybersecurity testing for capabilities delivered in 2017 and 2018, along with conducting element-level operational cooperative and adversarial assessments. MDA Faces Ongoing Challenges to Improve Transparency and Reduce High-Risk Acquisition Practices MDA has made efforts to put some programs on a more sound footing and it has taken actions to address the issues I just mentioned. However, MDA can go further to align itself with best practices for acquisitions. Today, I will highlight certain acquisition challenges MDA still faces. Stakeholder involvement: While MDA has increased its outreach to the stakeholders over the past few years, opportunities remain for further engagement on key decisions. For instance, as we found in December 2019, although MDA has been increasing its engagement with the intelligence community, MDA provides the defense intelligence community with limited insight into how the agency uses threat assessments to inform its acquisition decisions. MDA is not required to obtain the defense intelligence community’s input; however, the community is uniquely positioned to assist MDA keep pace with rapidly emerging threats. Moreover, this limited insight has, in part, prevented validation of threat models designed to assess BMDS capabilities. Without validation, any flaws or bias in the threat models may go undetected, which can have significant implications for the performance of MDA’s weapon systems. MDA and the defense intelligence community recently began discussing a more suitable level of involvement in the agency’s acquisition processes and decisions. As we recommended in May 2017 and December 2019, MDA also needs to strengthen its collaboration with other stakeholders, including the warfighting community and independent cost and technical experts. In the early stages of the RKV program, concerns raised about the design—which ultimately was a key reason for the cancellation of the RKV—went unheeded. For example, preliminary observations for our assessment covering fiscal year 2019 showed that MDA and contractors did not adequately address technical risks despite numerous warnings from stakeholders about the performance issues. However, MDA officials indicate they are working with stakeholders more closely as they plan for the Next Generation Interceptor, a new more advanced interceptor. Concurrency: Although MDA has taken steps to reduce concurrency as we have previously recommended, the agency still turns to this practice when experiencing developmental delays or schedule pressures. For example, we reported in June 2019 that delays to construction resulted in MDA’s introduction of increasing levels of concurrency into the delivery schedule for the Aegis Ashore site in Poland. We found that key phases of the delivery process had been shortened from 16.5 months to 6.5 months. While overlapping acquisition activity, in theory, could speed up the construction process, this risky practice ultimately failed to mitigate the effects of problematic construction practices. However, program plans indicate that the site has experienced further delays and will not be ready for operational use until at least 2022—a 4 year delay from the original 2018 delivery date. In addition, the recently canceled Redesigned Kill Vehicle (RKV) program originally sought to avoid concurrency by aligning production decisions with flight testing. However, later—in response to the advancement of the North Korean missile threat—the program accelerated RKV development by concurrently performing development and production and reducing the number of necessary flight tests. This acceleration altered the schedule for the previously aligned flight tests and production decisions. Contracting: Although MDA has flexibilities in managing its acquisition process, it must follow the same contracting regulations that apply to DOD, including the Federal Acquisition Regulation and the Department of Defense Federal Acquisition Regulation Supplement. These regulations allow MDA to use a particular type of contract action called an undefinitized contract action when the negotiation of a definitive contract is not possible in sufficient time to meet the government’s requirements and government interests demand that the contractor be given a binding commitment so that contract performance can begin immediately. These actions authorize contractors to begin work before an agreement on terms, specifications, or price have been agreed upon. In May 2018, we found that the average length of the undefinitized period and the not- to-exceed price of MDA’s undefinitized contract actions had increased over the past 5 years. While MDA policy permits use of undefinitized contracts on a limited basis, we and others have found that they can place unnecessary cost risks on the government. As we reported in June 2019, while MDA improved its performance in timely definitization of these contract actions, the total not-to-exceed value of the undefinitized contract actions MDA initiated in 2018 far exceeded previous years we reviewed. Transparency in test cost estimates: As we reported in May 2017, MDA requests more than $1 billion in funding each fiscal year for the tests outlined in its integrated test schedule based on MDA’s internally developed test cost estimates. However, our analysis found these estimates were inconsistent and lacked documented traceability. A cost estimate is the summation of individual costs using established methods and valid data. Developing and maintaining reliable cost estimates ensures the appropriate amount of funds are needed when requested and for the expressed purpose. We found, however, in May 2017, MDA’s testing budget lacked transparency and could be improved. Specifically, we found that MDA’s annual budget submission did not provide insight into the funding for each specific test. MDA regularly makes changes to its test schedule without reporting the impacts to its costs and funding needs. Without a breakout of MDA’s costs by test in its annual budget submission and BAR, how many times or how much funding has been requested, received, or used for a specific test will continue to be unclear. Therefore, we recommended that MDA break out funding request by test. DOD did not concur with our recommendation and stated that MDA’s current approach for assigning resources prior to the test execution, is adequate. We continue to believe that breaking out funding requests by test will improve transparency into planned versus actual test costs and aid departmental and congressional decision makers as they make difficult choices of where to invest limited resources. Changes to MDA’s Test Schedule Persist, Reducing Knowledge to Support Asset and Capability Deliveries MDA also continues to struggle with fully achieving its annual flight testing goals. After MDA revised its approach to developing the annual Integrated Master Test Plan in 2009, in February 2010, we recognized the new test schedule’s potential to address prior issues with shifting testing requirements or test dates, and adding or deleting tests. MDA also focused its testing to collect data necessary to support the development of models and simulations. However, MDA’s test plan has not stabilized. Since it formalized its approach in 2010, MDA has continued to revise its test schedule frequently by adding new tests, and deleting or delaying tests, in some cases, multiple times and further into future fiscal years. As a result, less testing is being conducted prior to delivery than originally planned, which means less data are available to understand BMDS capabilities and limitations. Specifically, preliminary observations from our fiscal year 2019 review show that from fiscal year 2010 through fiscal year 2019, MDA has conducted only 37% of its planned testing as originally scheduled, while the remainder has been either been delayed, deleted or conducted in a later fiscal year, as shown in figure 2. In addition, we reported in June 2019 that European Phased Adaptive Approach (EPAA) Phase 3 testing against intermediate range ballistic missiles (IRBM) had been reduced by 80 percent and MDA no longer planned to conduct a flight test against a raid—a likely tactic in a real- world attack—prior to delivery. The lack of raid flight testing prevented the accreditation of Aegis BMD models for assessment under those circumstances in all fiscal year 2019 ground tests that included Aegis BMD. Balancing New Efforts with Existing Portfolio Needs will be Challenging MDA is currently at a pivotal crossroads, needing to balance its ability to pursue new and advanced efforts while also maintaining its existing portfolio of BMDS elements that have not transferred to the military services as originally planned. The new and advanced efforts, such as hypersonic defense and a Next Generation Interceptor (NGI) for GMD, are research and development-intensive tasks, which carry significant technical risks and financial commitments. If MDA’s elements are not transferred as originally intended, as they move further into production and operations and sustainment these elements will continue to consume a growing portion of the agency’s budget. MDA and military services have taken some actions to prepare for transferring the BMDS elements; however, the actions have not enabled transfer primarily due to a lack of early and frequent coordination, according to officials from the Undersecretary of Defense for Research and Development and Acquisitions and Sustainment. Consequently, there are overarching concerns related to transfer such as who funds the sustainment of the elements which have not been resolved. Congress and the Secretary of Defense have directed multiple reviews to determine how to address these concerns and chart a path forward for MDA. Chairman Cooper, Ranking Member Turner, and members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions you may have at this time. GAO Contact and Acknowledgements: If you or your staff members have any questions about this testimony, please contact Cristina T. Chaplain, Director, Contracting and National Security Acquisitions, at (202) 512-4841 or Chaplainc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are LaTonya Miller (Assistant Director), Steven Stern (Analyst in Charge), Matthew Ambrose, Pete Anderson, Helena Johnson, Michael Moran, Wiktor Niewiadomski, Miranda Riemer, Brian Tittle, and Alyssa Weir. Related GAO Products: Missile Defense: Delivery Delays Provide Opportunity for Increased Testing to Better Understand Capability. GAO-19-387. Washington, D.C.: June 2019. Missile Defense: The Warfighter and Decision Makers Would Benefit from Better Communication about the System’s Capabilities and Limitations. GAO-18-324. Washington, D.C.: May 2018. Missile Defense: Some Progress Delivering Capabilities, but Challenges with Testing Transparency and Requirements Development Need to Be Addressed. GAO-17-381. Washington, D.C.: May 2017. Missile Defense: Ballistic Missile Defense System Testing Delays Affect Delivery of Capabilities. GAO-16-339R. Washington, D.C.: Apr. 2016. Missile Defense: Opportunities Exist to Reduce Acquisition Risk and Improve Reporting on System Capabilities. GAO-15-345. Washington, D.C.: May 2015. Missile Defense: Mixed Progress in Achieving Acquisition Goals and Improving Accountability. GAO-14-351. Washington, D.C.: Apr. 2014. Missile Defense: Opportunity to Refocus on Strengthening Acquisition Management. GAO-13-432. Washington, D.C.: Apr. 2013. Missile Defense: Opportunity Exists to Strengthen Acquisitions by Reducing Concurrency. GAO-12-486. Washington, D.C.: Apr. 2012. Missile Defense: Actions Needed to Improve Transparency and Accountability. GAO-11-372. Washington, D.C.: Mar. 2011. Defense Acquisitions: Missile Defense Transition Provides Opportunity to Strengthen Acquisition Approach. GAO-10-311. Washington, D.C.: Feb. 2010. Defense Acquisitions: Production and Fielding of Missile Defense Components Continue with Less Testing and Validation Than Planned. GAO-09-338. Washington, D.C.: Mar. 2009. Defense Acquisitions: Progress Made in Fielding Missile Defense, but Program is Short of Meeting Goals. GAO-08-448. Washington, D.C.: Mar. 2008. Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results but Delivers Less at a Higher Cost. GAO-07-387. Washington, D.C.: Mar. 2007. Defense Acquisitions: Missile Defense Agency Fields Initial Capability but Falls Short of Original Goals. GAO-06-327. Washington, D.C.: Mar. 2006. Defense Acquisitions: Status of Ballistic Missile Defense Program in 2004. GAO-05-243. Washington, D.C.: Mar. 2005. Missile Defense: Actions Are Needed to Enhance Testing and Accountability. GAO-04-409. Washington, D.C.: Apr. 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.