[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
AVAILABILITY OF BONDS TO MEET FEDERAL REQUIREMENTS FOR MINING, OIL AND
GAS PROJECTS
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
July 23, 2002
__________
Serial No. 107-144
__________
Printed for the use of the Committee on Resources
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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______
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COMMITTEE ON RESOURCES
JAMES V. HANSEN, Utah, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska, George Miller, California
Vice Chairman Edward J. Markey, Massachusetts
W.J. ``Billy'' Tauzin, Louisiana Dale E. Kildee, Michigan
Jim Saxton, New Jersey Peter A. DeFazio, Oregon
Elton Gallegly, California Eni F.H. Faleomavaega, American
John J. Duncan, Jr., Tennessee Samoa
Joel Hefley, Colorado Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland Solomon P. Ortiz, Texas
Ken Calvert, California Frank Pallone, Jr., New Jersey
Scott McInnis, Colorado Calvin M. Dooley, California
Richard W. Pombo, California Robert A. Underwood, Guam
Barbara Cubin, Wyoming Adam Smith, Washington
George Radanovich, California Donna M. Christensen, Virgin
Walter B. Jones, Jr., North Islands
Carolina Ron Kind, Wisconsin
Mac Thornberry, Texas Jay Inslee, Washington
Chris Cannon, Utah Grace F. Napolitano, California
John E. Peterson, Pennsylvania Tom Udall, New Mexico
Bob Schaffer, Colorado Mark Udall, Colorado
Jim Gibbons, Nevada Rush D. Holt, New Jersey
Mark E. Souder, Indiana Anibal Acevedo-Vila, Puerto Rico
Greg Walden, Oregon Hilda L. Solis, California
Michael K. Simpson, Idaho Brad Carson, Oklahoma
Thomas G. Tancredo, Colorado Betty McCollum, Minnesota
J.D. Hayworth, Arizona Tim Holden, Pennsylvania
C.L. ``Butch'' Otter, Idaho
Tom Osborne, Nebraska
Jeff Flake, Arizona
Dennis R. Rehberg, Montana
Tim Stewart, Chief of Staff
Lisa Pittman, Chief Counsel/Deputy Chief of Staff
Steven T. Petersen, Deputy Chief Counsel
Michael S. Twinchek, Chief Clerk
James H. Zoia, Democrat Staff Director
Jeffrey P. Petrich, Democrat Chief Counsel
------
SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES
BARBARA CUBIN, Wyoming, Chairman
RON KIND, Wisconsin, Ranking Democrat Member
W.J. ``Billy'' Tauzin, Louisiana Nick J. Rahall II, West Virginia
Mac Thornberry, Texas Edward J. Markey, Massachusetts
Chris Cannon, Utah Solomon P. Ortiz, Texas
Jim Gibbons, Nevada, Calvin M. Dooley, California
Vice Chairman Jay Inslee, Washington
Thomas G. Tancredo, Colorado Grace F. Napolitano, California
C.L. ``Butch'' Otter, Idaho Brad Carson, Oklahoma
Jeff Flake, Arizona
Dennis R. Rehberg, Montana
------
C O N T E N T S
----------
Page
Hearing held on July 23, 2002.................................... 1
Statement of Members:
Cubin, Hon. Barbara, a Representative in Congress from the
State of Wyoming........................................... 1
Prepared statement of.................................... 2
Kind, Hon. Ron, a Representative in Congress from the State
of Wisconsin............................................... 3
Markey, Edward J., a Representative in Congress from the
State of Massachusetts..................................... 15
Prepared statement of.................................... 16
Rahall, Hon. Nick J. II, a Representative in Congress from
the State of West Virginia, prepared statement of.......... 70
Statement of Witnesses:
Borell, Steven C., Executive Director, Alaska Miners
Association................................................ 28
Prepared statement of.................................... 29
Done, Ken P., Director of Treasury Services, Rio Tinto
Services Inc., on behalf of the National Mining Association 47
Prepared statement of.................................... 49
Fulton, Tom, Deputy Assistant Secretary, Land and Minerals
Management, U.S. Department of the Interior................ 7
Prepared statement of.................................... 9
Jeannes, Charles A., Senior Vice President and General
Counsel, Glamis Gold Ltd................................... 44
Prepared statement of.................................... 45
Kuipers, Jim, Consulting Mining Engineer, Center for Science
in Public Participation.................................... 53
Prepared statement of.................................... 54
Schlief, Gerald W., Senior Vice President, ATP Oil & Gas
Corporation, on behalf of the National Ocean Industries
Association................................................ 35
Prepared statement of.................................... 36
Schubert, Lynn M., President, The Surety Association of
America.................................................... 22
Prepared statement of.................................... 24
Additional materials supplied:
Skaer, Laura, Executive Director, Northwest Mining
Association, Letter submitted for the record............... 5
Walker, David M., Comptroller General of the United States,
Letter submitted for the record............................ 18
OVERSIGHT HEARING ON ``AVAILABILITY OF BONDS TO MEET FEDERAL
REQUIREMENTS FOR MINING, OIL AND GAS PROJECTS''
----------
Tuesday, July 23, 2002
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Resources
Washington, DC
----------
The Subcommittee met, pursuant to call, at 10:04 a.m., in
room 1334 Longworth House Office Building, Hon. Barbara Cubin
[Chairman of the Subcommittee] presiding.
Mrs. Cubin. The oversight hearing by the Subcommittee on
and Mineral Resources will come to order.
The Subcommittee is meeting today to hear testimony on
availability of bonds to meet Federal requirements for mining,
oil and gas projects. Under Committee rule 4(g) the Chairman
and the ranking member can make opening statements but all
these other members that you see here today will have to put
their statements into the record unless someone else comes, in
which case the unanimous consent I am sure, would love to hear
their opening remarks.
STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WYOMING
Mrs. Cubin. The Subcommittee meets today to examine the
availability of surety bonds to meet Federal financial
assurance requirements for mining and oil and gas projects.
Operators in these industries are often required to post
financial guarantees either to ensure their compliance with
Federal statutes or to protect the public interest and assure
compliance with payment obligations, reclamation performance
and compliance with environmental standards.
Coal miners must secure the terms and conditions of Federal
coal leases, including rental, royalty and bonus bid payment
obligations as well as reclamation and performance obligations.
Hard rock miners must provide financial assurances for closure
and reclamation operations.
Oil and gas companies must provide financial assurances
that they will meet their obligations at the end of the lease
operations to plug abandoned wells, remove platforms and other
facilities and clear the lease site or the sea floor.
During the last decade, Federal land management agencies
have generally increased the amount and expanded the scope of
financial assurances that they require. Federal agencies have
also reduced the type of instruments acceptable for financial
assurances when for all practical purposes the only alternative
to a surety bond is cash or cash equivalence.
During the 1990's when Federal regulators were increasing
requirements for financial assurances, the surety industry was
very profitable. New players attracted to the surety market
battled existing players for market share. As a result,
underwriters reduced rates and were quite flexible with the
type of bond issued.
However, the surety industry had a significant underwriting
loss in the year 2000. This loss combined with the softening of
the economy that began in the latter part of the year caused
several bankruptcies in the surety industry. Since 2000,
underwriters and reinsurers have continued to exit the surety
market, causing a significant decline in capacity.
This crisis continues to worsen as existing surety bonds
are being canceled and rates are increasing, sometimes as much
as 500 percent, and more collateral is being required.
Presently, there is generally no market for surety bonds with
any risk of exposure over 5 years.
This problem is not restricted to mining and to oil and gas
production. Surety bonds are not being written for such markets
as workers compensation, either. Given the present situation,
mining and oil and gas companies cannot obtain surety bonds,
but the companies can be forced to tie up millions of dollars
in cash or cash equivalents to meet their financial assurance
obligations.
The use of large sums of cash in this manner is a very
inefficient use of capital. Only the largest, most financially
secure companies can afford to utilize capital in this manner.
But they have far more attractive opportunities to employ that
scarce capital.
The result is that it is no longer attractive to investors
to develop natural resources in cases where they must post cash
or cash equivalents to meet Federal financial assurance
requirements.
As a result, competition in the marketplace and available
supplies of domestic resources could be greatly reduced.
[The prepared statement of Mrs. Cubin follows:]
Statement of Hon. Barbara Cubin, a Representative in Congress from the
State of Wyoming
The Subcommittee meets today to examine the availability of surety
bonds to meet federal financial assurance requirements for mining and
oil and gas projects. Operators in these industries are often required
to post financial guarantees either to ensure their compliance with
federal statutes or to protect the public interest and assure
compliance with payment obligations, reclamation performance and
compliance with environmental standards. Coal miners must secure the
terms and conditions of federal coal leases, including rental, royalty
and bonus bid payment obligations, as well as reclamation and
performance obligations. Hardrock miners must provide financial
assurances for mine closure and reclamation operations. Oil and gas
companies must provide financial assurances that they will meet their
obligations at the end of lease operations to plug abandoned wells,
remove platforms and other facilities and clear the lease site sea
floor.
During the last decade, federal land management agencies have
generally increased the amount and expanded the scope of financial
assurances that they require. Federal agencies have also reduced the
type of instruments acceptable for financial assurances to the point
where, for all practical purposes, the only alternative to a surety
bond is cash or cash equivalents.
During the 1990's, when federal regulators were increasing
requirements for financial assurances, the surety industry was very
profitable. New players attracted to the surety market battled existing
players for market share. As a result, underwriters reduced rates and
were quite flexible in the types of bonds issued to meet financial
assurance requirements and the type of guarantee or collateral that
supported the a company's commitment to the underwriter issuing the
bonds. However, the surety industry had a significant underwriting loss
in 2000. This loss combined with the softening of the economy that
began in the latter part of the year caused several bankruptcies in the
surety industry.
Since 2000, underwriters and reinsurers have continued to exit the
surety market causing a significant decline in capacity. The crisis
continues to worsen as existing surety bonds are being cancelled, rates
are increasing--some as much as 500%--and more collateral is being
required. Presently, there is generally no market for surety bonds with
any risk of exposure over 5 years. This problem is not restricted to
mining and oil and gas production. Surety bonds are not being written
for such markets as workers compensation either.
Given the present situation, mining and oil and gas companies that
cannot obtain a surety bond can be forced to tie up millions of dollars
in cash or cash equivalents to meet their financial assurance
obligation. The use of large sums of cash in this manner is a very
inefficient use of capital. Only the largest, most financially secure
companies can afford to utilize capital in this manner, but they have
many far more attractive opportunities to employ scarce capital. The
result is that it is no longer attractive to investors to develop
natural resources in cases where they must post cash or cash
equivalents to meet federal financial assurance requirements. As a
result, competition in the market place and available supplies of
domestic resources could be greatly reduced.
______
Mrs. Cubin. The Chair now recognizes Mr. Kind, the Ranking
Democratic Member, for his opening statement.
STATEMENT OF HON. RON KIND, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF WISCONSIN
Mr. Kind. Thank you, Madam Chair. I will be brief. I want
to thank Mr. Fulton for your presence and testimony today as
well as the other panel of witnesses. We look forward to
reading your submitted testimony.
I am not sure how long I will be able to stay, since we
have some other obligations this morning. But I think this is a
very important hearing that we are having this morning. I thank
the Chair for recognizing the importance of the availability of
surety bonds generally, but also in a cost effective manner for
industry, more specifically in light of modern times and the
current market conditions and some of the bankruptcies that we
are now seeing in the private market.
Last fall, when announcing the Department of Interior's
decision to undo the Clinton Administration's more stringent
regulations for hard rock mining on Federal lands, Secretary
Gail Norton chose to maintain their bonding regulations. In a
letter to Congress explaining her decision, she stated that
keeping the more progressive rules for bonding reclamation
initiated under the former Bush administration, I think at that
time was Bush 41 that we are talking about, would more than
adequately protect the public interest.
Adhering to the ``polluter pays'' principle, she stated,
and I quote, ``stringent financial guarantee requirements, the
so-called bonding provisions, will ensure that the full cost of
any mine reclamation or environmental damage are borne by the
mining operator and not the U.S. taxpayer.''
Now, I am disturbed, however, that the administration
quietly forms a task force to meet and consult with the
industries it should be regulating and excludes from those
initiative meetings the groups that would be most impacted by
government action, namely the effected States, local
governments and communities that have to live with the adverse
effects of irresponsible mining as well as public interest,
environmental, and tax payer groups.
Perhaps today, Mr. Fulton, you can shed a little bit of
light in regards to the composition of the task force type of
work that you have been doing, who in particular you have been
meeting with to date and who you anticipate meeting in the
future.
Nevertheless, at a time when corporate malfeasance is
having such a devastating effect on the American economy and
psyche, it seems incomprehensible that this administration
would so cavalierly overlook the public interest in its zeal to
make life easier for the mining and energy sectors.
I have no doubt that there are mining and oil and gas
corporations having difficulty securing and even affording
surety bonds, given the history of mining and oil and gas
development. It is not surprising that surety companies facing
increasing losses would reconsider the level of risk associated
with these activities and adjust their premiums to reflect that
concern.
Yet, instead of looking for ways to relieve the industry of
reasonable requirements to protect the public and the
environment, the administration and this Committee should be
stressing the need to maintain an adequate level of financial
assurance to prevent deceptive corporate under-estimates of
liabilities and to ensure that the public and the environment
are not placed at risk by corporate ventures.
Simply put, cleaning up after mining or energy production
ends should be a cost of doing business, not something to
slough off onto the American taxpayer.
Again, I thank the Chair for holding this hearing, and Mr.
Fulton and the other witnesses for your testimony.
I look forward to hearing your testimony. Thank you.
Mrs. Cubin. Thank you, Mr. Kind.
Before I recognize our first witness, I ask unanimous
consent to enter into the record the written testimony from the
Northwest Mining Association. Hearing no objection, it is so
ordered.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T0881.002
[GRAPHIC] [TIFF OMITTED] T0881.003
[GRAPHIC] [TIFF OMITTED] T0881.004
Mrs. Cubin. The first panel I would like to welcome, Mr.
Tom Fulton, the Deputy Assistant Secretary of Land and Minerals
Management for the Department of Interior. Mr. Fulton is well
known to this Subcommittee. We do appreciate your many
appearances over the years and appreciate the valuable
information that you bring to us.
You are recognized to give us your full statement.
STATEMENT OF TOM FULTON, DEPUTY ASSISTANT SECRETARY, LAND AND
MINERALS MANAGEMENT, DEPARTMENT OF INTERIOR
Mr. Fulton. Thank you, Madam Chair, Ranking Member Kind.
Thank you for the opportunity to discuss actions the Department
of Interior is undertaking to ensure that Federal bonding
requirements necessary to protect the public's interest in its
public lands can continue to be met.
In order to protect the public's lands, Congress has
enacted laws requiring companies to demonstrate that they have
sufficient financial resources to perform the reclamation and
cleanup of the site after completion of exploration, mining and
production activities. These laws are outlined in my written
testimony.
The Bureaus under the Assistant Secretary for Land and
Minerals Management, BLM, Office of Surface Mining and the
Minerals Management Service, may require a reclamation Surety
Bond or proof of other financial security prior to approving a
plan of operation or issuing a lease or permit.
For example, for on-shore oil and gas leasing a minimum
bond of $10,000 must be posted before any surface disturbing
activities related to drilling can begin. Note that this is a
floor and not a ceiling. This bond is intended to help insure
compliance with all the lease terms, including protection of
the environment.
In some cases, as in Alaska, bond pools have been
established by States to meet these requirements. Additionally,
OSM and Minerals Management Service allow for self-bonding and
third-party guarantees, while insurance is often required for
unanticipated or catastrophic events.
Earlier this year, the Department learned that due to
significant losses in the surety industry post September 11th,
surety companies might stop writing new bonds, impose stricter
underwriting criteria, set higher premiums for surety bonds or
increase collateral requirements.
Any of these conditions could adversely affect the oil, gas
or mining industry's ability to get bonds to operate on those
public lands. Each Bureau is now analyzing its bonding
regulations to ensure they adequately protect the public
interest.
For instance, the BLM is evaluating comments including some
on the lack of available surety bonds on its 3809 regulations.
As a part of BLM's efforts to implement the President's
national energy policy, the Bureau is working to complete final
rules on bonding liability for onshore oil and gas operations.
The Office of Surface Mining, in May of this year,
published an advanced notice of proposed rulemaking seeking
comments on issues relating to bonding and other financial
assurance mechanisms for treatment of long-term acid or toxic
mine drainage.
The comment period is being extended through October of
this year in response to stakeholder request. The Minerals
Management Service is studying the costs associated with the
removal of older, offshore platforms to gauge if current
bonding requirements are sufficient.
In response to the concerns of the availability of
reclamation bonds, Secretary Norton formed a bonding task force
comprised of the Bureaus under the Associate Secretary for Land
and Minerals management, as well as the Secretary's immediate
office and the Office of the Solicitor to examine the scope and
severity of the bonding issue and to develop recommendations to
address identified problems.
As Chairman or this task force, I see an excellent
opportunity to apply the guiding principles of the Secretary's
four ``C's,'' consultation, cooperation and communication in
the service of conservation.
Using the Four C's, we hope to forge a more collaborative
relationship with State, local and tribal governments,
environmental organizations, as well as the surety and mining
industries regarding land use reclamation policies of mineral
development industries.
This will lead us toward our goal of managing our public
lands in an appropriate manner, while providing adequate
environmental protection and reclamation, including financial
guarantees.
The task force has identified current levels of extractive
activities for Department of Interior administered programs and
has estimated current financial guarantees for exploration and
mining activities. This information is in my written testimony.
The task force has also begun meeting with interested
parties in relation to those challenges. So far we have met
with members of the surety and mining industry who have not
only made us aware of their concerns, but also have given us
suggestions on how to tackle problems related to surety
availability.
We greatly value their insights into the problem and ideas
for satisfactory solutions. The task force will continue its
communication with interested stakeholders, including
environmental organizations, citizens groups and State and
local governments. Meetings with these groups are planned
between now and the end of August.
At the conclusion of these meetings, the task force will
report to the Secretary on the scope and extent of the problem,
concerns, insights and ideas of stakeholders and
recommendations for resolution of problems identified through
communication with those stakeholders and other interested
parties.
The plan for the task force is to submit its report by the
fall.
Madam Chairman, this concludes my comments and I would be
pleased to answer any questions the Committee might have.
Thank you.
[The prepared statement of Mr. Fulton follows:]
Statement of Tom Fulton, Deputy Assistant Secretary for Land and
Minerals Management, U.S. Department of the Interior
Madam Chairman and Members of the Subcommittee, thank you for the
opportunity to discuss with you actions the Department of the Interior
is taking to ensure that federal bonding requirements, necessary to
protect the public's interest in public lands, can continue to be met.
In order to protect the public lands, Congress has enacted several
laws (and Federal agencies have developed regulations) requiring
companies to demonstrate that they have sufficient financial resources
to perform the reclamation and clean up of the site after completion of
exploration, mining, and production activities. The Department of
Interior's bureaus may require a reclamation surety bond or proof of
other financial security prior to approving a plan of operation or
issuing a lease or permit. For example, for onshore oil and gas leasing
a minimum bond of $10,000 must be posted before any surface-disturbing
activities related to drilling can begin. This bond is intended to help
ensure compliance with all the lease terms including protection of the
environment.
Earlier this year, the Department learned that due to significant
losses in the surety industry after September 11, surety companies
might stop writing new bonds, impose stricter underwriting criteria,
set higher premiums for surety bonds, or increase collateral
requirements. Any of these conditions could adversely affect the oil,
gas or mining industry's ability to get bonds and operate on public
lands.
DOI's Bonding Task Force
In response to these concerns, Secretary Norton formed a Bonding
Task Force comprised of the bureaus under the Assistant Secretary for
Land and Minerals Management [Bureau of Land Management (BLM), Office
of Surface Mining (OSM), and Minerals Management Service (MMS)], the
Secretary's Immediate Office (Alaska), and the Office of the Solicitor,
to examine the scope and severity of the bonding issue and to develop
recommendations to address identified problems.
As Chairman of this Task Force, I see an excellent opportunity to
apply the guiding principles of Secretary Norton's 4 C's--
Communication, Consultation, and Cooperation, all in the service of
Conservation. Using the 4 C's, we hope to forge a more collaborative
relationship on extractive industries'' land use reclamation policies
with State, local, and Tribal governments, environmental organizations,
as well as the surety and mining industries. This will lead us toward
our goal of managing our public lands in an appropriate manner, while
providing adequate environmental protection and reclamation (including
financial guarantees).
The three Interior bureaus--BLM, OSM, and MMS--all require
financial guarantees in the form of surety bonds, cash or cash
equivalents. In some cases, as in Alaska, bond pools have been
established by States to meet these requirements. OSM and MMS allow for
``self-bonding'' and ``third-party guarantees,'' while insurance is
often required for unanticipated or catastrophic events.
Let me briefly describe the bonding requirements in applicable laws
administered by the Department of the Interior:
The Mining Law (the General Mining Law of 1872, 30
U.S.C.A. sec. 22-45) applies to ``locatable minerals'' such as precious
metals and gemstones. While the law does not require bonds, the
Department of the Interior requires 100 percent of the estimated
reclamation cost to be secured by a bond.
The Mineral Leasing Act of 1920 (30 U.S.C.A. sec. 181-
287) applies to coal, oil, gas, phosphate, sodium, potassium, and other
minerals and requires adequate bonds for bonus bids, onshore oil and
gas surface and down hole operations and pipeline rights-of-way. By
regulation, fixed bond amounts per lease for onshore oil and gas
exploration are required.
The Materials Act of 1947 (61 Stat. 681, as amended)
applies to sand, gravel, and other common materials and does not
require bonds for smaller sales and sales from community pits, although
the land must be reclaimed as required by the sale contract or when
mining is completed; the cost of reclamation is added to the cost of
the material sold by the BLM. For larger sales the BLM may require a
bond.
The Outer Continental Shelf Lands Act of 1953 (67 Stat.
462), as amended (43 U.S.C. 1331, et seq.) applies to offshore oil and
gas and allows for bonds. By policy, bonds are required to guarantee
offshore end-of-lease activities such as plugging wells and platform
removal.
The Surface Mining Control and Reclamation Act of 1977
(30 U.S.C.A. sec. 1201-1328) applies to surface coal mining on public
and private lands and requires performance bonds sufficient to cover
100 percent of the estimated reclamation cost.
The Federal Land Policy and Management Act of 1976, as
amended (43 U.S.C. 1701, et seq.), allows the Secretary to require a
bond for Title V rights-of-way such as power lines or communication
facilities.
The Oil Pollution Act of 1990 (33 U.S.C.A. sec. 2701-
2761) requires a showing of financial capability, which is frequently
met with an insurance policy.
Each Bureau is now analyzing its bonding regulations to ensure they
adequately protect the public interest. For example, the BLM is
evaluating comments, including some on the lack of available surety
bonds, on its final Surface Management regulations known as 3809. As
part of the BLM's efforts to implement the President's National Energy
Policy, the Bureau is working to complete final rules on bonding
liability for onshore oil and gas operations. OSM, in May 2002,
published an advance notice of proposed rulemaking seeking comment on
issues related to bonding and other financial assurance mechanisms for
treatment of long-term acid/toxic mine drainage. The comment period is
being extended through October in response to stakeholder requests. MMS
is studying the costs associated with removal of older offshore
platforms to gauge if current bond requirements are sufficient.
The Task Force also has identified current levels of extractive
activities for Department of the Interior-administered programs, and
has estimated current financial guarantees for exploration and mining
activities. This information follows my written statement.
The Task Force has also begun meeting with interested parties in
relation to the challenges we face. So far we have met with members of
the surety and mining industries who not only made us aware of its
concerns but also gave us suggestions on how to tackle problems related
to surety availability. We greatly value its insights into the problem
and ideas for satisfactory solutions.
The Task Force will continue its communication with interested
stakeholders, including environmental organizations, citizen groups,
and State and local governments. Meetings with these groups are planned
to be held between now and the end of August. At the conclusion of
these meetings, the Task Force will report to the Secretary on the
scope and extent of the problem, the concerns, insights and ideas of
stakeholders, and recommendations for resolution of problems identified
through communication with stakeholders and other interested parties.
The plan is for the Task Force to submit its report by the fall.
Madam Chairman, this concludes my statement. I would be pleased to
answer any questions that you may have.
______
Appendix A:
Current levels of extractive activity administered by the Department of
the Interior
21,500 onshore ``producible'' oil and gas leases (out of
a total of 48,600 leases)
7,500 offshore oil and gas leases
300 federal coal leases
203,000 mining claims
About 80,000 producible, service, or temporarily
abandoned onshore oil and gas wells
Over 100 orphan wells
4,000 offshore platforms/facilities
23,000 active or temporarily abandoned offshore wells
8,500 inspectable units subject to Surface Mining Control
and Reclamation Act
1,000 mining law plans of operations
______
Appendix B:
Face value of financial guarantees held by the Department of the
Interior
BLM about 12,500 bonds for about $2.01 billion
MMS about 725 operations bonds for about $0.75 billion
MMS about 40 companies with $240 million in monetary
appeals bonds and 17 self-bonded companies with $48 million
OSM about $570 million in estimated performance bonds
Non-DOI Financial Guarantees:
The face value of non-DOI-held financial guarantees, especially the
amount of bonds held by individual states, is difficult to estimate.
For example, state primacy under the Surface Mining Control and
Reclamation Act (SMCRA) means that 24 States [each with its own program
including 8 with Alternative Bonding Systems (ABS)] cover most of the
bonding associated with surface coal mining in the United States. We do
not have data on financial guarantees held by individual states.
______
Mrs. Cubin. I will start the questioning actually by making
a statement. I think it is universally accepted by all Members
on both sides of the aisle that we want proper reclamation and
we want it done in as timely a fashion as possible.
I think where the disagreement comes is how to accomplish
that and how to weigh the efficiencies of doing that and the
cost. Having said that, we all recognize that this bonding and
surety issue is a problem. Could you tell me briefly what the
bonding requirements are that are dictated by legislation and
the requirements that are set by regulations?
Mr. Fulton. Yes. There are quite a few laws that dictate
how extractive industries perform on public lands. They include
the Mining Law, which does not require a bond, but the
Department and the Secretary require 100 percent of the
reclamation costs be secured by a bond.
The Mineral Leasing Act of 1920, in addition to the
Materials Act of 1947, the Outer Continental Shelf Lands Act,
and SMCRA, The Surface Mining Control and Reclamation Act. That
law does require in its provisions 100 percent reclamation.
FLPMA, the Federal Land Policy Management Act also has
provisions for reclamation for rights of way and communications
facilities.
Then the Oil Pollution Act of 1990 requires a showing of
financial capability.
So, there are several Federal laws on the books as well and
among them as a group often require bonding through their
legislation and others that have a regulatory effect.
Mrs. Cubin. And what are the regulations that evolve from
that legislation?
Mr. Fulton. Well, for instance, as Mr. Kind alluded to, the
3809 regulations which were promulgated in the last
administration and the Secretary, through a policy decision,
required that the reclamation provisions be as strong, that she
does not want taxpayers burdened with the cost of reclamation.
Mrs. Cubin. The reason I ask the question is because a
later witness will testify that the financial assurances and
acceptable forms of assurances among the BLM, MMS and OSM are
different. Could you explain to me some of those differences
and the reason that there is a difference?
Mr. Fulton. For instance, under SMCRA, coal mining has to
have a bond for reclamation, whereas offshore oil and gas often
Minerals Management Service requires basically a self-bonding.
So, it varies by bureau and by industry and by type of
operation. The task force is looking at those differences
across those bureaus, but I'm not sure we would effect a one-
size-fits-all solution.
Rather, I believe we would want to follow the bottom line
the Secretary gave us which is multiple uses and appropriate
use of our Federal lands, but reclamation should not involve
taxpayer expense.
Mrs. Cubin. OK, going back to your statement that one size
fits all, it is probably, in your opinion, not the best policy
for these assurances.
Explain to me then, say for example, within the coal
industry, when sometimes coal leases are sold and the entire
price for the lease is paid, I believe, it is over four
installments. Sometimes, at purchase, after the first payment a
coal company doesn't have to get a bond or a surety instrument
for the purchase price and sometimes they do. Do you understand
the question?
Mr. Fulton. Yes. I am not sure what the answer is. We could
get a written reply to your question. Is there a specific
example that you are referring to?
Mrs. Cubin. I know in the past, although not in the recent
past, that companies have been required to have a surety, which
they have done in terms of cash. So, they are tying up $350
million plus in cash because they can't get a bond or a surety
instrument.
I am aware that that has happened with a Kennecott purchase
recently, the Jacobs Ranch in Wyoming. I wonder why this
purchase is singled out when other purchases are not singled
out and what will happen if that practice continues is that
everyone will just bid a lower price.
If they know they are going to have to have hundreds of
millions of dollars tied up in bonding or financial sureties,
cash, they will bid lower. The Federal Government gets less
money. The States get less money, just because that is tied up.
I think really that is a foolish, foolish thing to do. I
certainly hope the task force will be looking at that.
I do have more questions that I want to ask you, but my
time has expired, so I will recognize Mr. Kind, realizing that
he has to go, and then we will do a second round.
Mr. Kind. Thank you, Madam Chair and thank you, Mr. Fulton,
for your testimony here today. I think this is a very serious
issue in regards to the availability of surety bonds. I hope
that we are going to be able to work in conjunction with one
another in order to delve into this subject matter.
I am sure everyone here is familiar with the controversy or
cloud under which Vice President Cheney's Energy Task Force
operated in regards to access to information of who he met
with, what was discussed, things like that that helped shape
the administration's policy.
I would certainly hope we can get off on the very best foot
in regards to the Bond Task Force, so you let the sunshine in
and that the import is expansive and that you open up the
Bonding Task Force to a myriad of individuals and players
including local and community leaders and others that have an
interest in this important subject.
Having said that, just looking for a little bit of
background, a little bit of detail in regards to formation of a
task force. When exactly was that task force formed?
Mr. Fulton. I am not exactly sure. It happened when the
Secretary was introducing the Minerals Management Service
Director, Johnny Burton, to an offshore oil and gas group. At
the end of the introductory remarks, the first question from
the audience was, ``What about this bonding problem?''
That coming with concerns that were being raised in the
hard rock mining industry and additionally in the coal industry
led her to contact Assistant Secretary Rebecca Watson and ask
for the task force to be set up. I can't remember exactly what
day that was, but we can get that for you.
Mr. Kind. How long ago was that, approximately?
Mr. Fulton. It was April, I think.
Mr. Kind. Could you submit to the Committee just for our
reference the names and titles of Department of Interior
employees who are currently serving on the task force?
Mr. Fulton. Certainly.
Mr. Kind. That would be very helpful. How often does the
task force meet?
Mr. Fulton. Irregularly.
Mr. Kind. How often have you met so far?
Mr. Fulton. We have had a meeting with the mining industry.
We had a meeting with the surety industry. We had a briefing
for Hill staff and we have met on an ad hoc basis several times
internally to just try to gather information of the size and
scope of our own surety activities inside the Department of
Interior.
Mr. Kind. Where are the meetings held?
Mr. Fulton. The meetings that were with the mining industry
were at the mining building. The meeting with the surety
industry was in their building.
Mr. Kind. Could we obtain a list of those who attended the
meetings?
Mr. Fulton. Sure, I think--
Mr. Kind. That would be helpful. Apparently, in reviewing
some of the written testimony that was submitted today, Ms.
Lynn Schubert, who is President of the Surety Association of
America emphasized in her written testimony that she has met
with the task force on a number of occasions and is working
closely with you to develop a set of recommendations for
Secretary Norton.
Is this a correct portrayal by Ms. Schubert?
Mr. Fulton. Well, we certainly did meet with the surety
industry and I believe she was also at the mining industry
meeting.
Mr. Kind. Have any of the outside groups including the
Surety Association submitted any documents or paperwork to the
task force?
Mr. Fulton. We have encouraged everyone who has some ideas
that might be of assistance to give us whatever they have to
help us understand this as best we can.
Mr. Kind. Could we have access to those documents? Is there
any way of submitting copies to us or providing access to what
has been submitted thus far?
Mr. Fulton. I believe that would be possible.
Mr. Kind. Have you met with any State or community leaders
thus far at the task force meetings?
Mr. Fulton. Not yet. We are attempting to set up a meeting.
Mr. Kind. It is anticipated then?
Mr. Fulton. Yes.
Mr. Kind. How about any taxpayer groups or NGO groups? Are
you anticipating meeting with them as well to discuss the
bonding issue?
Mr. Fulton. Yes, right.
Mr. Kind. I have no doubt that Secretary Norton is sincere
in her desire not to have any of these costs shift to the
taxpayers. I think there is common interest from all of us here
to ensure that that does not happen.
Can you inform the Committee today that there is no intent
or interest to weaken the bonding requirements that Secretary
Norton came out and spoke so forcefully in favor of as recently
as last fall?
Mr. Fulton. Well, the Secretary's directive to the task
force was that multiple use where appropriate should be
encouraged to conduct its business on public lands but that
clean up should not involve taxpayer expense.
Mr. Kind. Well, we will look forward to working closely
with you and see what further meetings are held. As I
indicated, I think this is a very important issue for us to
delve into in light of the current market place and the
difficulty that is increasing, being able to obtain this type
of bonds.
Again, I appreciate your testimony here today.
Thank you, Madam Chair.
Mrs. Cubin. Thank you, Mr. Kind.
The Chair now recognizes Mr. Markey for either an opening
statement or 5 minutes of questions, and knowing you, you can
handle them both.
Mr. Kind. But no singing.
Mrs. Cubin. Yes. Please don't sing.
STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. Markey. Thank you, Madam Chair. This hearing on the
availability of bonds to meet Federal requirements for mining,
oil and gas projects is very timely, coming as it does when the
nation's trust of corporations is at an all-time low and when
the administration is calling for increased extraction of
natural resources from our public lands.
Providing protection to the environment and rehabilitating
damaged lands is a legitimate cost of business, costs that the
public have the right to know are guaranteed and that investors
have a right to know are liabilities of the company.
Corporate guarantees are not enough in this era of
corporate irresponsibility. There is an unfortunate legacy of
orphaned mines and oil and gas wells in our nation forcing the
taxpayers to bear the burden of reclamation if they are
reclaimed at all.
Taxpayers deserve more concrete assurances that money will
be available for cleanup and restoration when the projects are
finished. Now this is not just an energy sector issue. It is a
business issue. When a businessman wants assurances that
something will be done in the future, he asks for a bond or
other types of financial guarantees.
Just look at the front page of today's Washington Post
sports page. It is the lead story. It says, ``Support for sale
of tracks is shaky. Maryland Commission members want buyers'
bond. Two members of the Maryland Racing Commission are
planning to ask for a bonded guarantee on promised upgrades to
Pimlico and Laurel Park by Magna Entertainment before the $117
million sale of the State's top thoroughbred tracks from Joe
DeFrancis.''
``'There is going to have to be some kind of security
interest put up,' said Commission Member, Terry Saxton,
'something more than just their word is needed if it is going
to get done. We have been burned before. We will need more than
verbal assurances of what will be done and we will need a
timetable.'''
Well, that is all that we ask of the energy companies using
public lands; that they provide financial guarantees for
reclamation after their work is finished. That is how
businesses work. All we are asking is that we run America like
a business.
President Bush and Vice President Cheney said, they were
going to run America like a business, and so far they have run
it like a business.
What we are asking for here now is the same kind of
guarantees that would be required in the private sector.
I recently released a General Accounting report on the
requirements of restoring lands after oil production ceases on
Alaska's North Slopes.
The GAO estimated that on the North Slope alone as much as
$6 billion was required for dismantlement, removal and
restoration. Unfortunately, existing bonds will cover only a
fraction of that clean up.
The State of Alaska only requires each oil company to set
aside a maximum of $200,000 for all wells and $500,000 for all
of its oil and gas leases. The report raises two major public
policy issues that need to be corrected in both the oil and gas
industry and the mining industry.
First, companies are refusing to publicly disclose their
liabilities, a troubling accounting issue that needs to be
addressed before it is sprung on unsuspecting investors,
workers and the public.
Second, the GAO report is an indictment of existing, of
vague financial assurances so inadequate that the public
interest in restoring these lands may never be redeemed.
I have sent letters to Secretary Norton and SEC Chairman
Pitt requesting their attention to these matters, but I believe
these issues are so important that we need to ensure that we
address them in today's hearing.
So, with billions of dollars of liability that has not yet
been bonded by the oil and gas industry, we have important
issues to address and I hope that as a matter of policy we
establish those requirements here in Congress.
I yield back the balance of my time.
[The prepared statement of Mr. Markey follows:]
Statement of Hon. Edward J. Markey, a Representative in Congress from
the State of Massachusetts
This hearing on the ``Availability of Bonds to meet Federal
Requirements for Mining, Oil and Gas Projects'' is very timely, coming
as it does when the nation's trust of corporations is at an all time
low and when the Administration is calling for increased extraction of
natural resources from our public lands. Providing protection to the
environment and rehabilitating damaged lands is a legitimate cost of
business--costs that the public have the right to know are guaranteed
and that investors have a right to know are liabilities of the company.
Corporate guarantees are not enough in this era of corporate
irresponsibility. There is an unfortunate legacy of orphaned mines and
oil and gas wells in our nation, forcing the taxpayers to bear the
burden of reclamation, if they are reclaimed at all. Taxpayers deserve
more concrete assurances that money will be available for cleanup and
restoration when the projects are finished.
This is not just an energy sector issue. It is a business issue.
When a businessman wants assurance that something will be done in the
future he asks for a bond or other types of financial guarantees. Just
look at the front page of today's Washington Post sports page.
``There's going to have to be some kind of security interest put
up,'' said commission member Terry Saxon, a strong critic of Magna's
management at other tracks, most notably Gulfstream Park in Florida.
``Something more than just their word [is needed] if it's going to get
done. We've been burned before. We will need more than verbal
assurances of what will be done, and we will need a timetable.''
That is all we ask of energy companies using public lands. That
they provide financial guarantees for reclamation after their work is
finished.
I recently released a General Accounting Report on the requirements
for restoring lands after oil production ceases on Alaska's North
Slope. The GAO estimated that on the North Slope alone as much as $6
billion was required for dismantlement, removal and restoration.
Unfortunately, existing bonds will cover only a fraction of that
cleanup--'the state [of Alaska] only requires each oil company to set
aside a maximum of $200,000 for all its wells and $500,000 for all its
oil and gas leases.'' The report raises two major public policy issues
that need to be corrected in both the oil and gas industry and the
mining industry. First, companies are refusing to publicly disclose
their liabilities, a troubling accounting issue that needs to be
addressed before it is sprung on unsuspecting investors, workers and
the public. Second, the GAO report is an indictment of existing federal
and state permitting processes that are so vague and the financial
assurances so inadequate that the public interest in restoring these
lands may never be redeemed. I have sent letters to Secretary Norton
and to SEC Chairmen Pitt, requesting their attention to these matters
but I believe these are important issues to present in today's hearing.
The testimony of Mr. Jim Kuipers will show us that the problems are
the same, if not worse, in the mining industry. As he says in his
statement, the three largest copper and the three largest gold mining
companies operating in the United States have a potential un-guaranteed
liability of $9 billion. Even when companies are accruing money for
eventual reclamation and closure costs, the amount is only a fraction
of the potential total liability. Drawing on Mr. Kuipers example, the
Phelps Dodge Corporation had accrued $135 million by 2001 for
reclamation but their potential liabilities could exceed $3 billion.
The bottom line is that corporations should have to provide ``rock-
solid'' guarantees that they can restore the public land after their
operations are done. If they cannot provide the assurances up front,
then they should not be permitted to develop public lands. The
taxpayers should not have to assume the risk of paying the clean-up
costs if the companies responsible cannot find the next gold mine or
oil well to pay for the cleanup of their previous work. Furthermore,
investors and the public have every right to know site-specific
information about reclamation costs, so that they can judge the
adequacy of a company's assets in meeting these liabilities. I look
forward to exploring with today's witnesses ways the federal government
can develop a coherent strategy for assuring funds are available for
restoration and reclamation of public lands when mining and oil and gas
production is complete.
______
Mrs. Cubin. Thank you, Mr. Markey.
I would like to refer to a letter from the GAO in response
to a letter written by the Senator Murkowski asking for
clarifications on some of the things that were put in that GAO
study and ask unanimous consent to enter this document into the
record.
[The letter referred to follows:]
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[GRAPHIC] [TIFF OMITTED] T0881.006
[GRAPHIC] [TIFF OMITTED] T0881.007
[GRAPHIC] [TIFF OMITTED] T0881.008
Mrs. Cubin. The question: Does the GAO believe that the
situation in Alaska is a world-class accounting scandal in the
same league as WorldCom or Enron?
No, our report provides no basis for alleging any
accounting scandal. We did not audit or evaluate the accounting
practices of oil companies operating on the North Slope.
Additionally, the lands that were referred to by my friend from
Massachusetts were State lands.
I am sure that no one thinks that the Federal Government
should go in and take over the State lands or take on the
financial responsibility that the States have in this
situation.
Mr. Markey. May I ask the gentlelady, I actually have a
response from the GAO to the letter which Mr. Murkowski sent to
GAO. Would it be possible for me to put the response from--
Mrs. Cubin. That is what I am entering into the record, but
we will check to make sure it is the same document.
Mr. Fulton, a later witness will testify that recent
changes in the surface mining regulations will preclude the use
of Alaska State Bonding Pool on BLM lands after 2004. Does
Interior feel that the Alaska Bonding Pool is not an adequate
financial assurance or does the BLM plan to work with the
Alaska State government to remedy this problem?
Mr. Fulton. We do feel that the Alaska Bonding Pool is
adequate, and yes, we do intend to work with the State of
Alaska and the Alaskan mining community to address this issue.
Mrs. Cubin. Here is another question that is interesting to
me. If there is a company that goes out of business or whatever
before the reclamation is done and there is a surety bond on
that lease, why doesn't Interior allow the surety company to go
in and complete the reclamation or clean up the site prior to
forfeiting the entire surety bond?
What is the reason for that practice?
Mr. Fulton. I am not sure what the reason is. It would be
an item that the task force would look at. The goal of the
Secretary is to make sure that the public lands are restored to
a satisfactory state.
That is going to be the end goal that the task force looks
at in all these matters relating to the adequacy of the bonds.
Mrs. Cubin. That is one of the things I was referring to
earlier when I said we all agree that we want the land
reclaimed and the State lands cared for, but we disagree on how
to get there. That is just one of the issues that I couldn't
understand.
I don't have any further questions then. I do thank you
very much for being here. We will keep the record open for 10
days and I am sure the members will have written questions and
we will appreciate your reply to them. Thank you very much.
Mr. Fulton. Thank you, Madam Chair.
Mrs. Cubin. I would like to call the next panel forward,
realizing we have a vote that is coming relatively soon.
At this time I would like to call the second panel forward,
Ms. Lynn Schubert who is the President of Surety Association of
America; Mr. Steve Borell, Executive Director, Alaska Miners
Association; and Mr. Gerald Schlief, Senior Vice President of
ATP Oil & Gas Corporation, testifying on behalf of the National
Ocean Industries Association.
STATEMENT OF LYNN M. SCHUBERT, PRESIDENT, SURETY ASSOCIATION OF
AMERICA
Mrs. Cubin. First, I would like to recognize Ms. Schubert
to testify. Please note the lights on the table. You are
recognized for 5 minutes, but your entire written statement
will be included in the record.
Ms. Schubert. Thank you very much and thank you for
inviting us here to testify today on this very important topic.
The Surety Association is a trade association whose members
write the vast majority of surety bonds in the United States.
We are aware of the difficulties that permittees are having in
obtaining surety bonds for oil, gas and mining projects and we
have been working closely with the Department of Interior
Bonding Task Force to identify the issues and to attempt to
craft solutions.
We also have met with the Interstate Mining Compact
Commission on the same issues. Surety bonds have been a vital
part of American business for over 100 years, facilitating
commerce and protecting taxpayer dollars. Our members wish to
continue to provide this valuable service for the mining gas
and oil industry.
Bonds, however, are not a panacea for all potential
problems. To understand the current market situation, it is
necessary to understand some very fundamental principles about
suretyship. The essence of suretyship is that one party
guarantees the performance of another to a third.
Essentially, surety bonds guarantee that a principal will
perform its obligations whether imposed by contract or by law.
In this case the permittees will fulfill the terms of the
permit including all applicable legal requirements.
Unlike traditional insurance where there are two parties,
this is a three party arrangement: The principal who is going
to perform, the surety who guarantees that performance, and the
obligee who is to receive the performance.
The principal always remains primarily liable and the
surety is secondarily liable. So, to guarantee someone's
performance of an obligation, what must you do?
Well, first you must understand the obligation itself.
Second, you must assess the risk of payment on the guarantee.
In other words, will the principal actually be able to perform?
Third, you must assess the likelihood that if you do pay as
a guarantor, that you will be repaid by the person who is
primarily liable, the principal.
So, essentially, it is a risk analysis. Keeping in mind
this analysis, a look at the risk characteristics of these
bonds and the changing interpretation and scope of the bonds
quickly reveals one reason why surety bonds have become less
available.
Understanding the obligation, let me start with just one
example, and that is when I started in the business over 22
years ago, reclamation bonds were very available. They were
very common bonds. The permittee was required to reclaim the
site. Reclaim meant put the site back into the state that it
was when you started the mining.
Well, sureties understand that obligation. We understand
about moving the dirt and grading the dirt and seeding and
putting in trees and we wrote those bonds. Unfortunately, that
is no longer the case. The duration is much longer. It is
sometimes 30 and 40 years. We are also looking at bonds not
being released when the reclamation is finished.
What used to happen is you had two phases. You graded, you
put in the revegetation and then you monitored it. At the end
of the vegetation stage, the bond would be significantly
reduced. That is no longer happening because of the concern of
acid mine drainage or water issues, those mines are being kept
in the full amount for an indefinite period.
So, understanding the obligation and analyzing your risk is
virtually impossible at that stage. You can't be sure as to the
obligation and you certainly can't be sure whether the
principal will still be there 40 years down the road. It is
very difficult.
Perhaps even worse, lease bonds required by the Minerals
Management Service not only are of long duration, but after
they are canceled, they can be reinstated by the obligee. It is
impossible to analyze what your risk is going to be on a bond
that can be reinstated.
The expanded scope of the obligation contributes to the
uncertainty. The acid mine drainage issue is a perpetual issue.
It requires a funding mechanism. A surety bond is an instrument
that provides a guarantee of a certain performance, the
reclamation or whatever it might be, a lease payment.
It does not provide for perpetual funding mechanism. While
all these increases in liability and uncertainty were being
created, the surety industry also was experiencing significant
losses.
Traditional loss ratios for surety are somewhere in the 20
percent range, 29 percent range. In 2000, loss ratios were
approximately 45 percent. In 2001 they were approximately 85
percent. So, as the sureties are looking at reducing their
risks, their obligations are becoming riskier.
That is the fundamental reason that you are seeing the
significant change in availability of surety bonding. We would
like to work with Congress, the regulators, the environmental
groups, as well as the permittees to solve these concerns.
There are some simple solutions, reduce the duration, make it
clear what the obligation is, make the bond cancelable, allow
options other than the full forfeiture as you stated earlier,
and look for another solution for perpetual issues such as acid
mine drainage.
I thank you very much for allowing us to be here today.
Thank you.
[The prepared statement of Ms. Schubert follows:]
Statement of Lynn M. Schubert, President, The Surety Association of
America
Introduction
The Surety Association of America is a voluntary, non-profit
association of companies engaged in the business of suretyship. It
presently has approximately 600 member companies, which collectively
underwrite the overwhelming majority of surety and fidelity bonds
written in the United States, and seven foreign affiliates. The Surety
Association of America is licensed as a rating or advisory organization
in all states, as well as in the District of Columbia and Puerto Rico,
and it has been designated by state insurance departments as a
statistical agent for the reporting of fidelity and surety experience.
Surety bonds provide a fundamental service to consumers, taxpayers
and the U.S. treasury and have been a vital part of business in America
for more than 100 years. The role of surety bonds is to reduce or
eliminate uncertainty in a variety of business transactions. For
example, the majority of surety bonds are written for construction of
our nation's infrastructure, which accounts for 10% of the Gross
Domestic Product. In 2000, nearly $175 billion in public works projects
were under construction in the United States with surety bonds
providing qualified contractors and protection against contractor
failure. Surety is vital to public construction, saving taxpayer
dollars and spurring economic activity. Surety also has been written
for mining, gas and oil projects for many years. Again, the fact that
bonds have stood behind miners and drillers has allowed the government
to be sure that these projects would be undertaken responsibly and with
a third party available if the permittee did not perform. The
capability of the surety industry continues to be there to meet the
challenges and needs of American business. However, surety bonds cannot
be a panacea for all potential problems. The surety industry continues
to support the need for responsible mining and drilling, reclamation
and general protection of the environment, and we look forward to
working with Congress, regulators, environmental groups and contractors
to find a way to best do this.
SAA is aware of the difficulty that permittees are having in
acquiring bonds and has been working with regulators and other
stakeholders to seek ways to address this issue. We believe that the
limited availability of bonds required in connection with mining, oil
and gas operations results from a change in the requirements as well as
a change in the current marketplace. Bonding remains a viable option to
address the concerns surrounding many of the risks associated with
these projects, but the responsibility of the surety must be clearly
defined and must be able to be underwritten.
What Are Surety Bonds
In analyzing the availability of any type of surety bond it is
critical to understand the concept behind surety bonds, how they differ
from traditional lines of insurance, and why they are underwritten the
way they are. The fundamental concept behind a surety bond is to
guarantee that someone will perform a duty. Whether it is a duty
imposed by contract, such as to build a building, pay a lease, etc., or
a duty imposed by law, such as to pay customs duties or to reclaim a
mining site, the bond provides an independent third party to ensure
that the principal, the person who agrees to the duty, performs, or
that there is money available to complete that obligation. The surety
is only secondarily liable. The principal remains primarily liable.
Unlike traditional insurance, a bond creates a tripartite relationship:
the principal, the surety, and the obligee, the one receiving
performance. This relationship is best explained by a triangle.
Each of the parties has rights and responsibilities with regard to
the other. While the surety has the obligation to the obligee to either
perform the obligation of the principal if the principal defaults, or
pay a sum of money, up to the amount of the bond, for performance, the
principal remains obligated for that performance. By performing on the
principal's behalf, the surety steps into the shoes of the obligee and
the principal is obligated to reimburse the surety for any money paid.
Theoretically, therefore, a surety should never have a loss. Similar to
a bank issuing a line of credit, the surety stands behind the
principal, allowing a third party to rely on that principal, knowing a
third party is guaranteeing the obligation. Unlike a bank, however,
sureties do not always take collateral or have the right of set off of
the principal's bank account to recover amounts paid on the principal's
behalf. Therefore, the surety must prequalify the principal as to
performance and financial strength.
It is critical to understand that the beneficiary of the bond is
not the principal; it is the obligee. Unlike a homeowners or auto
policy where there are only two parties to the contract and the
beneficiary of the policy is the policyholder, in the case of a surety
bond, the beneficiary of the bond is the obligee. In the case of the
bonds under discussion today, that obligee is the government. The
principal remains liable for performance. Therefore, in analyzing
whether or not to write a bond, a surety will review two crucial items:
the likelihood that the principal will perform its obligations, and the
likelihood if the principal defaults and the surety performs, that the
principal will be able to repay the surety for its losses. If the
surety decides to write the bond, whether or not the surety is correct
in its analysis, the obligee obtains the benefit of the bond.
Understanding these relationships makes it easier to understand that a
surety must be able to know the specific promise it is guaranteeing and
assess the risk of loss. An increase in the duties imposed under
reclamation and other bonds, as well as serious increases in losses for
sureties over the last two years, have contributed to the current
market situation.
Federal Mining, Oil and Gas Project Bonds
As mentioned above, SAA is quite aware of the difficulty that
permittees are having in acquiring bonds in today's surety market, and
we are in active dialogue with regulators and mining industry to seek a
resolution to the issue. For example, SAA is working closely with the
Department of the Interior's Bonding Task Force to provide information
and recommendations regarding bonding availability. In addition, we
recently participated in a bonding meeting sponsored by the Interstate
Mining Compact Commission, an organization of twenty state regulatory
authorities. We believe that the limited availability of bonds required
in connection with mining, oil and gas operations is a result the risk
characteristics of such bonds as viewed by an industry that has
returned to tighter underwriting standards. We hope to provide
information to this Subcommittee that will assist it in developing
solutions.
Risk Characteristics of These Bonds
First let us address the risk characteristics of these bonds and
why they present a concern to sureties. We reference specific types of
bonds for illustrative purposes.
Long-term Duration
A primary risk characteristic that concerns sureties is the long-
term duration of these obligations. For example, with respect to mining
operations, the Surface Mining Control and Reclamation Act of 1977
(``SMCRA'') requires the permittee to provide a bond to the regulatory
authority which is conditioned upon the faithful performance of the
requirements of the SMCRA, the applicable regulatory program and the
approved permit, and the completion of the reclamation plan (30 U.S.C
Sec. 1259(a)). The form of bond and the required bond amount depends on
the controlling statute and regulation (either federal or state).
However, in any case, reclamation bonds for surface mining operations
are long-term obligations. A mining operation under a permit can last
thirty or forty years. Considering that the duration of a reclamation
bond obligation must be for the duration of the mining and reclamation
operation (30 C.F.R. Sec. 800.13), and that the bond is non-cancelable
(30 C.F.R. 800.20), a surety's liability could conceivably extend for
thirty to forty years as well 1. This creates a high degree
of uncertainty and risk for the surety. To determine if a permittee
qualifies for a bond, a surety makes a judgment about the operational
and financial viability of the permittee. The surety essentially is
making a prediction about the permittee's future performance thirty or
forty years in the future. As the duration of the obligation extends
further into the future, the surety's judgment becomes less certain and
its risk increases. Of course, a thirty or forty year duration assumes
that the operation does not have water issues such as acid mine
drainage. In these cases, the regulatory authorities are holding the
bond to secure treatment that may be perpetual. This raises the
surety's risk to unworkable levels.
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\1\ The regulation allows a bond to be replaced by other bonds that
provide equivalent coverage. 30 C.F.R. Sec. 800.30.
---------------------------------------------------------------------------
Another type of bond that illustrates the long-term and uncertain
duration of bonds, this time for oil and gas operations, is the lease
bond required by the Minerals Management Service (``MMS''). MMS
requires lessees of Outer Continental Shelf mineral leases to provide a
bond to secure compliance of all the terms and conditions of the lease
(30 C.F.R. Sec. 256.52). The leases have an initial term of five or ten
years and continue for as long as oil and gas is produced in paying
quantities (30 C.F.R. Sec. 256.37). While the lease bond is cancelable,
cancellation does not release the surety from liability that accrued
while the bond was in effect, unless the replacement surety assumes
prior liabilities (30 C.F.R. Sec. 256.58). Further, the bond may be
reinstated after cancellation if any payment of any obligations of the
bond principal (the lessee or operator) is rescinded or must be
restored (30 C.F.R. Sec. 256.58(c)). Thus, the duration of the surety's
liability is uncertain, even after cancellation.
Expanding Scope of the Obligation
Over the years the obligation covered by surety bonds for mining,
oil and gas operations has expanded considerably and introduced risks
that are better covered by an instrument other than a surety bond. The
clearest example of this phenomenon is the relatively new requirement
by regulatory authorities that liability for acid mine drainage be
covered by the SMCRA reclamation bond. Under current regulation, the
surety bond is fully released after completion of the three phases:
backfilling and regrading, revegetation and monitoring (30 C.F.R
Sec. 800.40). With respect to actual reclamation activities - moving
the dirt - the surety has a clear understanding of the scope and
duration of the mining company's obligation and consequently the scope
of its liability. However, the presence of acid mine drainage and the
requirement to treat the water clouds prolongs the surety's obligation
considerably. Historically, regulatory authorities reduced the bond
penalty at the completion of phases one and two. Now, however,
regulatory authorities are not reducing the bond penalty when phases
one and two are completed if the site has water issues that must be
treated.
The defaults that a surety can underwrite and address effectively
are defaults of the permittee's performance: events that can be
prevented through sound practices and compliance with the reclamation
plan. A surety cannot underwrite effectively unanticipated acid mine
drainage problems that require treatment in perpetuity. It appears that
the problem of acid mine drainage requires a funding vehicle, and a
surety bond is not a funding vehicle, but rather an assurance of
performance which can be controlled. The post mining water issues
should be resolved outside of the surety bond, and the surety bond
obligation should be the phases of reclamation.
Limited Choices in Remedying a Default
A second risk factor is the limited approaches available to a
surety in addressing a bond default. A surety often is faced on these
types of bonds with forfeiture of the entire bond penalty as its only
means to discharge its obligations. In the case of reclamation bonds
required by SMCRA, state regulatory authorities may require the surety
to forfeit the full penal sum of the bond rather than giving the surety
the option to reclaim the site at possibly a lower cost. As another
example, under the Federal Coal Management Program, the Bureau of Land
Management requires bonds to secure lease obligations (43 C.F.R.
Sec. 3474.1). If a lease is canceled or terminated, all rentals and
royalties already paid are forfeited (43 C.F.R. Sec. 3452.3(b)).
Therefore, the surety may be liable for a substantial sum rather than
having the opportunity to step in and cure the default by undertaking
the monthly lease payment. The likelihood of a full bond payout without
opportunity to mitigate the loss to the obligee by undertaking
performance increases the surety's risk and limits the availability of
the bond only to those entities that have significant financial
resources.
State of the Surety Market
Sureties recently have refocused on the risk characteristics
discussed above as a result of a return to tighter underwriting
standards. This adjustment is the culmination of a decade long
underwriting cycle that recently generated significant losses in 2001.
According to the report entitled ``Top 100 Writers of Surety Bonds,''
released by SAA on May 21, 2002, the industry reported the following
results for the year ended December 31, 2001:
Direct Written Premiums: $3,473,100,578
Direct Earned Premiums: $3,330,170,608
Direct Losses Incurred: $2,748,411,932
Direct Loss Ratio: 82.5%
The results reflect significantly increased losses compared to
prior years. Although we are not privy to the company-specific
information that would be necessary to provide an explanation that
includes each and every factor, we are able to share with you some of
the dynamics in general terms that led to the 2001 results. The 2001
results are a continuation of a trend that first was manifested in 2000
and are a result of market activity over the past decade. There is no
one event that instantly triggered the 2001 results.
For over a decade, the surety industry had experienced considerable
profitability. The positive results attracted new players to the surety
market and caused existing players to battle for greater market share.
Two mechanisms to attract greater market share are to reduce pricing
and to relax underwriting standards. The combination of relaxed
underwriting and softened pricing can create a tenuous condition,
especially considering that surety theoretically is written to a 0%
loss ratio.
A significant factor in surety results is the financial strength of
bond principals as affected by the general health of the economy. A
surety bond is written with the expectation that the bond principal
will perform its obligations or hold the obligee harmless if it
defaults. Therefore, financial health is crucial. According to the
percentage change in Gross Domestic Product, the economy began to
experience some softening in the latter part of 2000.
The softened underwriting and pricing combined with declining
financial strength (as indicated by GDP) led to a downturn in results
in 2000. The 2000 Top 100 Writers Report reflected a loss ratio of
45.4%, compared to a 29% loss ratio in 1999. 2 Further,
according to the 2000 Insurance Expense Exhibit, the industry had an
underwriting loss (including incurred losses and operational expenses)
of $216.3 million. The 2001 results are a continuation of the 2000
results and magnified by losses attributable to some high profile
bankruptcies.
---------------------------------------------------------------------------
\2\ The 1999 loss ratio is based on the SAA Top 50 Writers Report.
This report was used in order to make a meaningful comparison. The
results of 2000 and 2001 Top 100 Reports are gross and before
reinsurance. The 1999 Top 100 Report's results are net of reinsurance.
Therefore, the 1999 Top 50 Writers Report which reflects gross results
was used for the sake of consistency.
---------------------------------------------------------------------------
To reverse this trend, we suspect that sureties have reversed the
factors that played a role in the downturn, softened underwriting and
pricing. We likely will see a firming of pricing and tightened
underwriting requirements in the coming years. For example, surety
companies have become especially hesitant to underwrite any type of
obligation that extends five, ten or fifteen years into the future.
Sureties seek to control risk in part by writing obligations that have
a reasonable duration.
Reinsurance companies suffered serious losses in this surety market
downturn as well. In response, reinsurance companies are requiring
primary sureties to retain more risk and have tightened the terms and
conditions in reinsurance treaties. For example, we are aware
anecdotally that certain reinsurance treaties exclude coverage for
long-term obligations such as self-insured worker's compensation bonds
or reclamation bonds unless specifically consented to by the reinsurer.
This in turn impacts the primary sureties'' underwriting decisions.
The correction in the surety market also includes a changed
perspective on underwriting risk. In the past, a determination of the
risk of a particular type of bond has been based on historical loss
experience. If a particular type of bond generated reasonably low
losses in the past it will have similar results in the future. The
results of 2000 and 2001 have altered that approach. Now sureties
determine risk by determining the probable maximum loss on a particular
type of bond. Sureties assess their exposure by considering bond
amount, duration and the likelihood of full bond forfeiture. In the
case bonds required in connection with mining, oil and gas operations,
the potential exposure is high, and sureties make their underwriting
decisions accordingly.
The September 11, 2001, terrorist attacks did not impact surety
companies directly. However, the impact was felt by the property and
casualty insurance companies that are the sureties'' parent companies
and affiliates. The terrorist attacks caused an erosion in capital as
property and casualty losses were paid out. Although much of this
capital has returned to the market, insurance companies have become
especially careful how capital is used. This decision regarding capital
usage affects underwriting decisions as well.
Developing Workable Solutions
The surety industry has played a vital role in securing obligations
to the federal government so that public interests are protected. As
the surety industry returns to financial health it will continue to
provide this protection. With respect to bonds for mining, oil and gas
operations, we believe that it is important to examine the current
bonding requirements and policies to address concerns of the permittees
and their sureties, particularly the duration of reclamation and lease
obligations. Such a review likely would create a market effect and
encourage surety participants to meet ongoing bonding needs of mining
operations. For example, we believe that the bond obligation should be
well defined and cover a specific scope of work. With respect to
reclamation, the bond should be limited to the three phases and should
not cover the obligation for water treatment that is uncertain and
long-term. In addition, we believe that regulatory authorities should
consider inserting a cancellation provision in bond forms that
currently lack one. Once cancelled, the obligee should not have the
ability to reinstate the bond. In addition, authority should consider
that the bond term should be tied to the permit term. At the end of the
permit term, the surety should have the option of renewing or not
renewing the bond. We also encourage regulators to provide additional
options to sureties in addressing claims short of a full bond
forfeiture. As to the issue of acid mine drainage, we urge Congress and
regulators to look at all options such as finite risk insurance
products, pools, trust funds and other similar mechanisms.
We look forward to continued discussion with the Subcommittee, the
Department of Interior, state regulatory authorities and other
stakeholders to develop concrete solutions.
______
Mrs. Cubin. Thank you, Ms. Schubert.
I would now like to recognize Mr. Borell to testify.
STATEMENT OF STEVE BORELL, EXECUTIVE DIRECTOR, ALASKA MINERS
ASSOCIATION
Mr. Borell. Thank you, Madam Chairman. We very much
appreciate this opportunity to testify and to testify on this
very crucial topic.
The Alaska Miners Association is a non-profit membership
organization established in 1939 with approximately 1,000
members. Our members range all the way from prospectors,
individual geologists, miners, family mining operations as well
as the largest mining companies.
Our written testimony explains, talks about five different
examples since early 2001 where we sought to find availability
for surety bonding. We found none. Simply stated, we have been
unable to locate any surety bonds or any other alternative form
of financial guarantee that is commercially available for
mining operations.
This includes mining operations on BLM-managed lands under
the current 3809 regulations. This situation exists for large
hard-rock mines, small hard-rock mines and for small family
placer mines that are not susceptible to acid rock drainage and
that do not use chemicals for processing the ores.
The current 3809 regulations list State bond pools as an
alternative, however, as written, such bond pools must provide
for 100 percent of the cost to reclaim 100 percent of the mines
100 percent of the time, indeed not a bond pool as we have been
meant to understand.
We have the five different examples there including a very
significant meeting that was held in Toronto with the Marsh
Group and I submit those with the written testimony. But it is
now very clear that the bonding marketplace will not be
offering commercial surety bonds or other financial guarantee
alternatives for mine reclamation in the foreseeable future.
However, some minor changes to the BLM 3009 regulations
would alleviate the crisis for mines that do not use chemicals.
These mines are typically placer mines which are essentially
the same as a gravel operation where the water is used to wash
the gravel and distribute it by size and specific gravity.
The National Research Council's report in 1999 encouraged
the use of these kinds of bonding pools to lessen the financial
risk, especially on small miners. It also encouraged the use of
standard bond pool amounts in lieu of detailed calculations.
There were only two State bond pools in place at the time,
the Alaska and Nevada pools. The Alaska State Bond Pool has
worked for more than 10 years without a single default and will
only grow stronger over time as more fees are paid into the
pool.However, it does not and cannot be expected to provide the
full cost of financial guarantee assuming that from mine went
bankrupt or went out of business at the same time which the BLM
regulations require.
In our May 13, 2002 comment letter to the BLM, we suggested
several changes to the wording, minor changes, if I will, to
the wording. It is our understanding that these are still under
review. These changes would allow mines on BLM-managed lands to
continue using the Alaska State Bond Pool and conform to the
recommendations of the NRC report.
Thank you very much, ma'am.
[The prepared statement of Mr. Borell follows:]
Statement of Steven C. Borell, P.E., Executive Director, Alaska Miners
Association
Thank you for the opportunity to provide testimony on the
availability of bonds or other financial guarantees for the mining
industry. This is a topic with which we have been involved for many
years.
The Alaska Miners Association is a non-profit membership
organization established in 1939 and has approximately 1000 members.
The Association represents individual prospectors, geologists and
engineers, small family mines, junior mining and exploration companies,
and major mining companies. Our members explore for and mine gold,
silver, copper, lead, zinc, nickel, platinum group metals, diamonds,
and various industrial minerals.
Commercial Financial Guarantees
Simply stated, we have been unable to locate any surety bonds or
any other alternative form of financial guarantee that is commercially
available for mining operations. This includes mining operations on
BLM-managed lands under the current 43 CFR Subpart 3809 regulations.
This situation exists for large hardrock mines, small hardrock mines,
and for small family placer mines that are not susceptible to acid rock
drainage and do not use chemicals for processing ores. The 3809
regulations list state bond pools as an alternative but as written,
such pools must contain 100% of the cost of reclamation, for 100% of
the mines, 100% of the time.
The Alaska Miners Association (AMA) and individual members of the
AMA have tried to locate financial guarantees at various times during
the past several years but all attempts have failed to identify any
commercially available financial guarantee. Some of the attempts are as
follows:
Example 1: We tried to identify financial guarantee alternatives
while preparing our May 7, 2001 comment letter on the Department of the
Interior's notice of proposed rulemaking published at 66 Fed. Reg.
16162-71 (March 23, 2001) (``the Suspension Proposal''). At that time
the Department of Interior proposed suspension of the new 43 CFR
Subpart 3809 and related regulations which had been published by the
Department on November 21, 2000, at 65 Fed. Reg. 70112-32 (``the New
3809's), and reinstatement of the pre-existing 43 CFR Subpart 3809
(``the Pre-existing 3809's''). We asked Mr. Gordon Depue, a surety bond
broker in Fairbanks, Alaska, to search out and identify commercially
available surety bonds or other financial products or mechanisms that
would satisfy the proposed rule. After an extensive investigation Mr.
Depue concluded that surety bonds or other forms of financial guarantee
were not available in the market for mining operations under the 3809
regulations. To quote his May 2, 2001 comment letter to BLM on the
Suspension Proposal, ``I have searched nationally for surety companies
willing to write bonds and I am unable to find any.
In his letter Mr. Depue touched on a basic problem with the BLM
3809 regulations. The 3809 regulations mandate the use of surety bonds
in an application for which they are not designed and in which they are
not appropriate. Mr. Depue identified three major problems in the 3809
regulations that preclude most, if not all, companies from issuing
surety bonds for mine reclamation under the 3809 regulations: 1)
Uncertainty of amount - the regulation allows the BLM to change the
scope of the work required and therefore the amount of the bond,
whereas bonds are designed for specific, definable projects; 2)
Uncertainty of duration - surety bonds are typically written for one or
two years. Reclamation bonding is considered to be high risk, extending
over a long period of time, whereas bonding companies will only accept
exposure on a single risk and for a specific period of time; and 3)
Uncertainty regarding bond release criteria - the regulation allows the
BLM to hold the financial assurance for an indefinite period of time
after the reclamation has been approved. There is no clear mechanism
for release of the financial assurance.
Example 2: During the winter of 2001-2002 some of our members were
being quoted huge increases in the rates for cargo aircraft flights
which were due primarily to increased insurance costs. For one small
placer miner, a single C-130 Hercules load to west-central Alaska had
previously cost $7,500 to $13,000 per load. Quotes for Spring 2002 were
$23,000 per load, the increase due specifically to increased insurance
costs. To determine if such insurance increases were happening
elsewhere, we sent letters to all AMA corporate members inquiring
whether they were seeing increased insurance costs. The responses
indicated that indeed these rates had risen significantly in 2002.
General liability rates had increased 15% to 20%, health insurance
rates had increased over 20% and air cargo rates had increased 10% to
78% due to insurance costs.
This example obviously deals with insurance, not surety bonds.
Surety bonds are a distinct product line that must not be confused with
insurance. The nexus between the two, however, is that the health of
one part of the business affects the other parts of the business.
Example 3: A third attempt to locate surety bonding or other
financial guarantee alternatives for our members occurred in April
2002. We sent letters to 14 companies that have in the past offered
surety bonding and/or various other forms of bonding and insurance
coverage for the mining industry. We received responses from only two
of these companies and only one was a written response. That response
was from St. Paul American Surety and to quote in part,
``Unfortunately, because of the risks associated with these
obligations, St. Paul American Surety is unable to provide a market for
this coverage.
Example 4: Even before the September 11 terrorist attacks, some
mining companies were not able to obtain bonding for mine reclamation,
at any price. We are aware of one major mining company that solicited
surety bonding from at least 20 bonding and insurance companies in
early 2001, seven months before September 11th. None of the companies
were willing to offer bonding or any other financial guarantee for mine
reclamation. That mining company has tried all manner of ``creative''
bonding approaches but, to our knowledge, no approach has yet been
found workable. This level of super-human effort is not working for a
large company having considerable expertise and staying power and such
effort will obviously not be feasible for small-scale Alaska family
mines.
In addition to the impacts of September 11th, major bankruptcies
such as Enron, K-MART, Global Crossings, etc., have resulted in a total
retrenchment within the surety bond industry. As we determined through
Mr. Depue and through our direct solicitation, companies that have
historically provided surety bonding have now withdrawn from the
market.
Example 5: On June 27, 2002, the international bonding and
insurance provider, MARSH (An MMC Company), met with mining industry
officials in Toronto, Ontario. The purpose of the meeting was to review
the status of the surety market, discuss the reclamation bond problems
and risk, and look for solutions to the current crisis:
Regarding the surety market - MARSH noted changes in the
economy, banks tightening credit policies, increased
bankruptcies (not in mining), deteriorating results for the
reinsurance market, Enron (potential for $2.5B in losses), and
KMART (potential for $470M in losses). They defined the major
surety issues as decline in capacity, reinsurers exiting the
business, more losses likely to come, and the fact that the
crisis is worsening. They also noted that: bond cancellations
are occurring; rates have increased as much as 500%; collateral
is being required; and that there are generally no markets for
workers compensation, reclamation, landfill closure, or any
risk with exposure over 5 years.
Regarding the surety bond problems - MARSH stated that the
surety industry: wants out of these bonds; companies that
previously provided reinsurance have dropped that business;
rates have increased; and there are generally no markets for
reclamation bonds.
Regarding reclamation bond risk - MARSH described the
impediments as: the ``long tail obligation'' (time a bond must
be in place) which keeps the surety company on risk for the
life of the mine; bonds not being released by regulatory
agencies--even when reclamation has been completed;
environmental uncertainties; and capacity for funding
reclamation exposure.
It is clear from bonding industry representatives Depue and MARSH
that ``surety bonds'', in their current form with the limitations
imposed in various parts of the 3809's, are not an appropriate product
for mine reclamation and closure.
As for the other financial guarantee alternatives--Subsection
3809.555 of the current BLM regulations lists the specific types of
individual financial guarantees that are acceptable to BLM. The other
financial guarantee alternatives are effectively cash or cash
equivalents. However, it is grossly impractical for any business entity
to tie up vast amounts of capital in a non-productive vehicle for a
long period of time. Any given plan of operation will likely cover work
occurring over several years and as a result the reclamation obligation
will be on-going. Virtually no mining company in the country is able to
shoulder such a burden. Due in part to this terribly onerous situation,
several mining companies have already begun shifting their focus to
non-BLM lands domestically or properties outside of the U.S.
Solutions for the Crisis in Bonding/Financial Guarantees
It is now quite clear that the bonding marketplace will not be
offering commercial surety bonds or other financial guarantee
alternatives for mine reclamation in the foreseeable future. However,
there are things that can be done to address some of the problems where
mines are operating on lands managed by the Bureau of Land Management.
Minor changes to the BLM 3809 regulations would alleviate the crisis
for mines that do not use chemicals for the processing of ores, that
is, for mines that are processing placer/alluvial gravels. Also,
expanding the list of acceptable forms of financial guarantees for
hardrock mines would improve the situation for those operations.
Bonding Solution for Mines that do not Use Chemicals in Processing Ores
We believe that the use of state bond pools is the only solution
for many mines that do not use chemicals in processing ores. These
mines are typically placer/alluvial mines which are essentially the
same as a sand or gravel operation where the product is processed in a
movable plant by washing the gravel to separate the various products
based on size and/or specific gravity. However, as written, the 3809
regulations require that bond pools provide for 100% of the cost of
reclaiming 100% of the mines, 100% of the time.
The National Research Council (NRC) of the National Academy of
Sciences specifically addressed the use of state bond pools in its
September 1999 report entitled ``Hardrock Mining on Federal Lands''
(NRC Report). (Note that in this report, the term ``hardrock'' includes
``placer/alluvial'' mining.) The NRC Report not only contemplated the
use of bond pools, in Recommendation 1 (page 95) it ``encourages the
use of bond pools to lessen the financial burden on small miners.'' It
also encouraged the use of standard bond amounts in lieu of detailed
calculations. There were only two state bond pools in place at the time
the NRC Report was prepared, the Alaska pool and the Nevada pool.
Use of Bond Pools in General - Pools, by their very intent and
nature, are designed so the full cost of reclamation will not have to
be posted by each miner. Pools recognize that only a few mines are
likely to default and by using a pool, the risk of default can be
spread over a large number of operations with the cost to each miner
set at a reasonable level. The miner pays a reasonable fee in order to
participate in the pool and the fees from many miners maintain the pool
at a level that will provide funding for reclamation of the very
limited number of operations that may actually go into default. The
bond pool is available for the full cost of reclamation for a mine,
even though the individual miner in default had not paid that much into
the bond pool.
This is a basic premise of any bond pool but it not recognized by
the BLM 3809 regulations. The 3809 regulations require that the bond
cover the ``full cost of reclamation'' for each operation so the BLM
could reclaim all operations, assuming all operations would go into
default at the same time. Such a requirement defeats the very premise
of a bond pool.
The Alaska State Bond Pool - The Alaska State Bond Pool was
established in 1990 and it was specifically designed to allow use by
mines operating on lands managed by the BLM under the Pre-existing 3809
regulations. Appendix A to this testimony provides a history of the
Alaska State Bond Pool. The Alaska state bond pool is based on the
basic premise of spreading the small risk of default over a large
number of operations, as described above. If an operation were to go
into default, the bond pool would be available to reclaim 100% of that
operation, even though the individual miner in default had not paid
that much into the pool. The bond pool does not contain, and was not
designed to contain, funding that would pay the cost of all reclamation
obligations it is covering at any one time. The Alaska state bond pool
has worked for more than 10 years without a single default and will
only grow stronger over time as more fees are paid into the pool.
However, it does not and cannot be expected to provide ``full cost''
financial guarantee for all of the operations it is covering, as now
required in the BLM 3809 regulations.
Some further comments on the Alaska state bond pool are
appropriate. It is important to note that there are several significant
requirements in the Alaska statute and regulations that restrict the
types of operations, and the types of operators, that can utilize the
Alaska bond pool. The bond pool cannot be used for facilities or areas
where cyanide or other chemicals are utilized in the processing ores.
It cannot be used for settling ponds or other facilities designed for
waste rock or tailings that have been treated with chemicals. In short,
the Alaska bond pool is limited to placer mining or other operations
that do not use chemicals to process ore. These limitations greatly
decrease the universe of mines that can use the pool and greatly reduce
the opportunity for catastrophic long term treatment costs. Also,
operators with a record of non-compliance cannot use the bond pool. In
addition, the State and BLM can deny an applicant the right to
participate in the bond pool any time they feel it is appropriate.
Specific Solution Recommendation - As stated in our May 13, 2002
comment letter to the BLM on the Proposed Rule of Surface Management
Regulations, 67 fed. Reg. 17962 (April 12, 2002), we recommend the
following changes be made in subsections 3809.570 and 3809.571 with new
material in italics and material to be removed [bracketed]:
State-Approved Financial Guarantees
Sec. 3809.570 Under what circumstances may I provide a State-
approved financial guarantee?
When you provide evidence of coverage by an existing financial
guarantee program under State law or regulations that covers your
operations, you are not required to provide a separate financial
guarantee under this subpart [if--
(a) The existing financial guarantee is redeemable by the
Secretary, acting by and through BLM;
(b) It is held or approved by a State agency for the same
operations covered by your notice(s) or plan(s) of operations;
and
(c) It provides at least the same amount of financial guarantee
as required by this subpart].
Sec. 3809.571 What forms of State-approved financial guarantee are
acceptable to BLM?
You may provide a State-approved financial guarantee in any of the
following forms, subject to the conditions in Secs. 3809.570 and
3809.574:
(a) The kinds of individual financial guarantees specified
under Sec. 3809.555;
(b) Participation in a State bond pool, if----
(1) The State agrees that, upon BLM's request, the State
will use part of the pool to meet reclamation obligations
on public lands, provided however that the state bond pool
shall be the remedy of last resort and shall be required to
disburse such funds only after the state has had a
reasonable opportunity to pursue a defaulting party through
civil litigation; and
(2) The BLM State Director determines that the State bond
pool provides a [the equivalent] level of protection
adequate to meet the requirements of [as that required by]
this subpart; or
(c) A corporate guarantee that existed on January 20, 2001,
subject to the restrictions on corporate guarantees in Sec.
3809.574.
(d) For purposes of this section, the state bond pools existing
in Alaska and Nevada on November 21, 2000 provide a level of
protection adequate to meet the requirements of this subpart.
(e) No administrative or oversight charges shall be included in
the reclamation costs charged against any state bond pool.
These changes would allow mines on BLM managed lands to continue
using the Alaska state bond pool. These changes are also in accordance
with the NRC Report.
Solutions for Expanded Forms of Individual Financial Guarantees for
Hardrock Mines that Use Chemicals
Due to the fact that, as discussed previously, surety bonds are not
appropriate for mine reclamation, it is imperative that BLM allow
additional types of financial guarantees. These should include liens on
property, corporate guarantees with specific requirements, and other
mechanisms. Given the tremendous crisis that now faces the bonding and
financial guarantee markets, several additional alternatives, and
combinations of these alternatives, will likely be required to provide
effective financial guarantees without killing the mining industry.
The use of liens or other pledges of property would help alleviate
the financial guarantee crisis. Property can be used as collateral with
specific review periods to ensure continued adequacy. Some form of
collateralization is often used to support surety bonds.
Past problems with corporate guarantees have been due to incomplete
or inappropriate qualification criteria that allowed financially weak
companies to qualify. Other federal agencies such as the EPA, Nuclear
Regulatory Commission (NRC) and Office of Surface Mining now recognize
corporate guarantees as an acceptable financial guarantee. The NRC has
a regulatory guidance document, Reg. Guide 3.66 (DG-3002), that defines
qualifications for Escrow Agreements, Certificates of Deposit, Trust
Funds & Standby Trust Agreements, Government Security Transactions,
Payment Surety Bonds, Irrevocable Standby Letters of Credit, and
Corporate Guarantees. In the past BLM has accepted NRC-approved
corporate guarantees for uranium projects on BLM-managed lands in
Wyoming, Utah, and New Mexico. BLM should consider a corporate
guarantee program for the hardrock mining sector based upon sound
qualification criteria, just as EPA, NRC and OSM programs have done in
order to provide other mechanisms to satisfy financial assurance
requirements.
Other mechanisms including liens against the metal being produced
should be established. This may not be feasible for all mines but it
should be a benefit to some.
Conclusion
This country in general, and mining specifically, is now facing a
huge crisis regarding bonding and financial guarantees. Mining
companies are finding that due to the restrictions now being imposed,
surety bonds will not work for mine reclamation. As a result, such
bonds no longer exist in the marketplace. There are, however, actions
the BLM can take that will help alleviate the problem in some
instances. The simple, straight-forward change we have suggested for
Subsections 3809.570 and 3809.571 will solve the crisis for several
hundred small placer family mines in Alaska and elsewhere. Other
changes to expand the allowed forms of financial assurances will be
needed for hardrock mines.
Thank you for the opportunity to testify on this important issue.
______
APPENDIX A
A History of the Alaska State Bond Pool
The Alaska State Bond Pool was developed in large part in response
to a letter from former BLM Assistant Director for Minerals Hillary
Oden. In about March of 1990, Mr. Oden sent a memo to all BLM State
Directors instructing them to require bonding for all plans of
operation for mining on BLM managed lands. The letter directed BLM
offices to implement this requirement before the next mining season.
Although placer miners can not begin mining until May or June, they
begin moving supplies and equipment into their sites in March and
April. AMA immediately contacted the BLM in Washington, DC and
explained why this was not workable for miners (large and small alike)
in Alaska. The BLM Director at that time, Cy Jamison, understood the
problems and extreme hardship, if not impossibility, of imposing this
bonding requirement, and he withdrew the requirement that all plans of
operations be bonded.
At that time the AMA was working with the Alaska State Legislature
to develop a reclamation law that would apply to mining on all lands in
Alaska - State-owned, municipal, private, and federal. Given BLM's
bonding initiative, it became a major priority to ensure that miners
operating on federal lands, whether managed by BLM or the Forest
Service, had access to the bonding pool that was being developed in
State law. AMA told Director Jamison of our intent and he encouraged
AMA to proceed in that direction.
The Alaska reclamation statute established standards consistent
with those in section 302(b) of FLPMA, 43 U.S.C. Sec. 1732(b). A.S.
Sec. 27.19.020 requires, ``A mining operation shall be conducted in a
manner that prevents unnecessary and undue degradation of land and
water resources, and the mining operations shall be reclaimed as
contemporaneously as practicable with the mining operation to leave the
site in a stable condition.'' Again consistent with the proper
definition of the statutory term in FLPMA, the Alaska Legislature
defined ``unnecessary and undue degradation'' as ``surface disturbance
greater than would normally result when an activity is being
accomplished by a prudent operator in usual, customary and proficient
operations of similar character and considering site specific
conditions'' and including ``failure to initiate the complete
reasonable reclamation under the reclamation standard of A.S. 27.19.020
``.'' A.S. Sec. 27.19.100(8).
While the Alaska State Legislature considered Alaska's mine
reclamation statute (A.S. Title 27, Chapter 19), it became clear to
everyone working on it that no commercial bonding of any kind was
available for most Alaska miners. As a result, the Alaska State
Legislature decided to utilize a bonding pool. A.S. Sec. 27.19.040(b).
Key elements included in the statutory design of the state bonding pool
were: (1) the recognition that most operators were good responsible
miners and that only a very few were likely to default; (2) by using a
pool, the risk of default could be spread over the entire industry and
the cost of bonding to each individual operator could be set at a
reasonable level, far below the cost of any commercial, private bond
coverage; (3) if a default were to occur, the bonding pool must be
available for the full cost of reclamation, even though the individual
miner in default had not paid that much into the bonding pool; and (4)
the agencies needed statutory tools to ensure that, if a miner
defaulted, that miner would still be responsible for the full cost of
the reclamation and, until he repaid the full cost of that reclamation,
he would be barred from using the bonding pool.
The bond pool contains provisions that are built-in incentives to
encourage the miner to do things right, such as minimizing the area of
disturbance, keeping reclamation as contemporaneous as possible, and
the like. It also contains ``hammers --only after a prior defaulter has
paid the fund back would he be covered again, and then the cost to him
would be five times the current cost to a non-defaulting participant.
The cost to the miner was maintained at a reasonable level in two
primary ways. First, the cost per acre was set at a specific level for
all operations. This meant that the miner did not have to develop, and
the agency did not have to evaluate, a detailed cost estimate for the
specific project, a detailed cost estimate some third party could use
to challenge and harass the miner and/or the agency. A detailed cost
estimate was not necessary because the bond pool would pay the actual
cost of reclamation, the reclamation specified in the approved plan of
operations and the miner was always liable for this full cost. Second,
the cost to the miner was established in two parts. Part one was an
annual fee per acre that went to building the bonding pool. The other
part was a set amount per acre that was placed in the bonding pool as
an escrow account in the name of the miner. Interest from this account
also went into the bond pool to build the pool. When reclamation is
complete and approved by the agency, this escrowed money is returned to
the miner, without interest.
The State Bond Pool has worked very well for more than 10 years.
There has not been a single default, including operations on BLM lands
bonded through pool participation. Because the State reclamation law
applies to all mining in Alaska irrespective of land ownership, the
State Bonding Pool has been utilized by miners on BLM lands during this
10 year period. It was not until June 30, 1997, however, that the BLM
and the State of Alaska executed their formal Cooperative Agreement
(the MOU), to agree on administration of the State Bond Pool as it
covered miners operating on BLM land. This MOU formalized the
procedures now followed by both the State and BLM, especially in
connection with supervision and enforcement of potential defaults.
On June 4, 2001 the MOU between the BLM and the State of Alaska was
extended through January 20, 2004. This will allow miners on BLM lands
to continue using the Alaska State Bonding Pool as they have for
approximately 10 years. We appreciate the explanation in the preamble
to the final rule of October 30, 2001 at 54842. However, these
assurances (see the following) are in the preamble to the regulation,
not in the regulation itself and contain significant conditions that
are open to interpretation (emphasis added) -
At this time we want to reiterate the Department's commitment
to allow the use of existing state bond pools, if the BLM State
Director determines that they provide an adequate level of
protection to meet the requirements of this subpart. In
particular, we wish to respond to comments suggesting that the
State of Alaska bond pool would no longer be available for
operations on BLM lands. That is an erroneous interpretation.
Under these regulations, BLM could continue to use the State of
Alaska bond pool to satisfy the requirements of subpart 3809.
BLM and the State of Alaska are currently negotiating a revised
Memorandum of Understanding to continue use of the bond pool.
The previous Memorandum of Understanding allowing use of the
bond pool has been extended until January 6, 2002 and may be
extended twice again for a total of two years at the request of
the State Governor. Thus negotiations can take place through
the year 2003 before there would be a question as to whether
BLM will accept a financial guarantee that uses the bond pool.
In addition, you should note that BLM can accept other
instruments, such as insurance.
The extension of the MOU is now in place but before January 20,
2004 the BLM State Director must be satisfied the bond pool level of
protection will ``meet the requirements of this subpart.
The intent of the extension was to provide time for the state and
BLM to develop a new MOU that would meet ``the requirements of this
subpart.'' However, in a joint meeting of AMA, the State of Alaska, and
the BLM, all agreed that, given a reasonable interpretation of the
language of the 3809 regulations, the Alaska bond pool will not qualify
for use by operators on BLM lands.
______
Mrs. Cubin. The Chair now recognizes Gerald Schlief.
STATEMENT OF GERALD SCHLIEF, SENIOR VICE PRESIDENT, ATP OIL &
GAS CORPORATION, TESTIFYING ON BEHALF OF THE NATIONAL OCEAN
INDUSTRIES ASSOCIATION
Mr. Schlief. Thank you. Good morning, Madam Chairwoman. I
appreciate the opportunity to testify here today on the
availability of bonds to meet MMS requirements.
I have a short statement, but I ask that the full written
statement be entered into the record.
Mrs. Cubin. Without objection.
Mr. Schlief. Thank you. I am the Senior Vice President of
ATP Oil and Gas Corporation, a Texas Corporation engaged in the
acquisition, development and production of natural gas and all
properties primarily of the Outer Continental Shelf of the Gulf
of Mexico.
ATP was formed in 1991 and in 2001 we became a public
company under the NASDAQ. We own about 50 offshore blocks in
the Gulf of Mexico.
I am here today representing the National Ocean Industries
Association, the Domestic Petroleum Council, the Independent
Petroleum Association of America, the Natural Gas Supply
Association and the U.S. Oil and Gas Association.
We work to develop, produce and supply the nation's
valuable offshore natural gas and all resources in an
environmentally responsible manner. We strive to be good
stewards by protecting and enhancing the coastal and marine
environments where we conduct our business.
Therefore we understand and are supportive of the MMS and
agree to the Federal regulators need to require bonds in order
to ensure against default of obligations by smaller and
possibly underfunded entities.
However, recent events have dramatically altered the bond
market for everyone, including the offshore oil and gas
industry. Large bankruptcies such as K-Mart caused sizable
losses for the surety industry.
Several companies such as Reliant, Amwest and Frontier have
gone out of business. Several other companies such as St. Paul
and CNA have severely restricted the writing of commercial
sureties.
On a personal note, ATP had used Frontier and Amwest and
had to obviously get different companies to provide bonding.
For the offshore oil and gas industry, the effect has been to
require that industry pay many times more for the same bonds
they used to receive and sometimes to pay cash when a bond is
not available.
Industry supports bonding and is committed to conducting
our operations including termination of those operations in the
most environmentally responsible manner. Bonding is an
efficient tool, an effective tool for both industry and the
regulators to allow to meet our commitments.
Unfortunately, even though there have been no incidents in
our industry to raise liability costs or risks, the
increasingly tight bonding market has made the bonding process
an impediment rather than a tool. Some sureties now require
companies to deposit cash for a portion, sometimes 50 percent
of the bond amount, in order to obtain a bond. There is no
additional coverage or protection for the environment provided
with these changes.
When the surety industry is unable to meet the bonding
requirements, cash is the alternative. Cash for 100 percent of
the required bonding amount may have to be posted for the
plugging and abandonment obligation. This takes cash directly
out of the pool of money available for exploration and
development and is a much less efficient manner to employ in
order to meet our obligations.
In some cases the net effect is also prohibited operations
because of the inability to obtain sureties.
Just last week this market affected our company's
operations. We were looking at a package of four producing
properties from a large independent company. As we looked at
those properties we were very interested, however there was
about $35 million of bonding obligations associated with those
properties.
Based on discussions with our insurer, if we could find the
bonds, we would have to put up at least 50 percent cash deposit
in order to acquire these properties. That made the transaction
economically unappealing and we decided to pass. We are also
looking at other obligation that require such levels of cash
bonds. We have to take the cost of this type of cash deposit
into account.
As you can see, the tight bonding market is a major problem
for my industry. This concludes my prepared remarks. I will be
happy to answer any questions.
[The prepared statement of Mr. Schlief follows:]
Statement of Gerald W. Schlief, Senior Vice President, ATP Oil & Gas
Corporation on behalf of the National Ocean Industries Association,
Independent Petroleum Association of America, Natural Gas Supply
Association, and U.S. Oil & Gas Association
Madam Chairwoman and Members of the Subcommittee, I appreciate the
opportunity to testify here today on the subject of the availability of
bonds to meet the requirements of the Minerals Management Service for
offshore oil and gas operations. ATP is a member of the National Ocean
Industries Association (NOIA), the only national trade association
representing all segments of the offshore energy industry. This
testimony is submitted on behalf of NOIA, the Independent Petroleum
Association of America, the Natural Gas Supply Association, and the
U.S. Oil & Gas Association.
I am the Senior Vice President for ATP Oil and Gas Corporation. ATP
Oil & Gas Corporation was formed in 1991 as a Texas corporation and
became a public company in February of 2001. ATP trades publicly as
ATPG on the NASDAQ National Market. The company is engaged in the
acquisition, development and production of natural gas and oil
properties primarily on the Outer Continental Shelf (OCS) of the Gulf
of Mexico. During 2001, ATP additionally entered into agreements to
expand its business in the shallow-deep waters of the Gulf of Mexico
and in the Southern Gas Basin of the U.K. North Sea. The company
focuses on natural gas and oil properties with proven reserves that are
economically attractive to ATP but are not strategic to major or
exploration-oriented independent oil and gas companies.
We work to secure reliable access to the nation's valuable offshore
hydrocarbon resources in order that they may be developed, produced and
supplied in an environmentally responsible manner. As such, we
understand and are supportive of the Minerals Management Service's
(MMS) intent to insure against default of obligations by smaller and
possibly underfunded entities owning leases, rights-of-way, or
exploration permits. However, external events beyond the control of
industry have severely limited the availability of bonds and led to a
relatively tight market that it is now hampering exploration and
development efforts on the OCS to the extent that hydrocarbons are not
being recovered due to an inability of industry to obtain the bonds
necessary to satisfy the regulators.
Minerals Management Service Bonding Requirements
In recent years, there have been changes in the regulatory
requirements for the oil and gas business, as well as an increase in
bonding requirements to cover end-of-life obligations on the plugging,
abandonment and site remediation of oil and gas wells and their related
support equipment.
At the end of lease operations, oil and gas lessees must plug and
abandon wells, remove platforms and other facilities, and clear the
lease site sea floor. The MMS requires that companies operating on the
OCS obtain surety bonds to ensure that the companies meet these
obligations. In 1997, the MMS issued a final rule amending the agency's
surety bond requirements for operations on the OCS. Under the MMS rule,
lessees and owners are jointly and severally liable for compliance with
the terms and conditions of the leases. Furthermore, when leases are
transferred from one company to another, the assignor of the lease, as
well as the new lessee, remains responsible for all wells and
facilities that were in existence at the time the assignor assigned its
interest until the wells are plugged and abandoned, the facilities are
decommissioned, and the site is reclaimed. There is also a higher level
of bonding required for the holder of geological and geophysical
permits to drill deep stratigraphic test wells. The MMS is authorized
to demand a supplemental bond from the holder of these permits or
pipeline rights-of-way.
There are three tiers of bonds prescribed by the MMS. First, when
there are no operations, the agency requires a $50,000 bond per lease,
or a $300,000 areawide bond. These bonds are for leases with no MMS-
approved operational activity plan or leases under an MMS-approved
operational activity plan with no submittal to MMS of assignment or
operational activity plans. A lessee does not need to provide this bond
if an applicable lease or areawide bond is in place in accordance with
one of the following, higher requirements.
The second tier of bond is for exploration. The agency requires a
$200,000 bond per lease or a $1,000,000 areawide bond for leases of a
proposed exploration plan or a significant revision to an approved
exploration plan, or a proposed assignment of a lease with an approved
exploration plan. A lessee does not need to provide this bond if an
applicable lease or areawide bond is in place in accordance with one of
the following, higher requirements.
The third tier of bond is for development. Here, the agency
requires a $500,000 lease bond or $3,000,000 areawide bond for leases
of a proposed Development and Production Plan or Development Operations
Coordination Document, or a significant revision to an approved
Development and Production Plan or Development Operations Coordination
Document or a proposed assignment of a lease with an approved
Development and Production Plan or Development Operations Coordination
Document.
In practice, these bond requirements are often floors the agency
uses in setting bond rates. This is due to the fact that under the MMS
regulations, the Regional Director is authorized to raise these levels
on a case-by-case basis, requiring companies to provide additional
security in the form of supplemental bonds or an increase in the amount
of coverage of an existing general lease surety bond. This
determination is based on his evaluation of the company's ability to
carry out present and future financial obligations. Companies may
submit evidence to rebut the determination of the agency, and in
principle the agency may then reduce the amount of the bond required,
based on that information. In our experience, the amount is seldom
reduced after the determination is made. In effect, this means that
often the bond requirements are higher than prescribed above, leading
to regulatory uncertainty for companies, and little recourse if they do
not agree with the analysis of the agency.
Bonds for Plugging and Abandoned Older Wells
Earlier this year, the MMS announced that the agency was reviewing
its methodology for supplemental bonding requirements for all unplugged
well bores which are twenty years of age or older. Currently, the
agency uses the sum of $100,000 per well bore to calculate liability.
The MMS suggested that they thought the number might need to be
increased to as much as $450,000 per well bore, with a rebuttal of the
amount on a case by case basis. For companies subject to bonding, a
change such as this would require posting of additional supplemental
bonds, and for those companies that are now exempt, the new figure
would be added to the companies'' liabilities. This, in turn, could
cause some companies that are currently exempt to lose their exemption.
Such changes would have been unnecessary and overreaching. The data
on the costs to plug and abandon wells did not support such drastic
measures. Fortunately, MMS did not simply implement the changes. The
agency admitted that it did not have data to determine the average cost
to plug a well, and sought information before making its decision.
Industry representatives, including NOIA members, the Louisiana
Independent Oil and Gas Association, Louisiana Mid-Continent Oil & Gas,
and Energy Partners Ltd., provided the MMS with extensive data on close
to 600 wells that had been plugged and abandoned over the past six
years. The data showed that the average cost of plugging a well is
actually less than $100,000. The MMS reviewed the data provided, and
made a reasoned decision that there was no cause to raise the bonding
floor. This decision was based on facts and statistical data, rather
than on speculation and unfounded concerns.
The Bond Market
Some of the events in recent years have dramatically altered the
bond market for everyone, including the offshore oil and gas industry.
There have been large bankruptcies of companies like K-Mart, Enron and
Superior National. In addition, there have been natural disasters such
as tropical storm Allison, and the disaster of September 11.
These events have severely impacted the bonding industry, as well
as the insurance industry. Insurance and surety companies are for-
profit entities. Their response to these types of losses has been to
raise premiums, cut risks or exit lines of business. All of these
responses are present in the market today. In the oil and gas arena,
premiums for insurance have multiplied by as much as five or six times
over what it was last year, with no change in conditions. Furthermore,
some coverages are not available at any price. OPA 90 coverage, where
there have been no losses, has increased several times over what it
was, with only a few syndicates in London providing the coverage.
Like insurance, the surety industry has been severely affected by
large bankruptcies. Sureties have been in a long period of depressed
pricing. When conditions converged to bring large losses into contact
with falling investment income, the shock to the surety industry was
profound. Several companies, such as Reliance, Amwest and Frontier,
have gone out of business. Several other companies, such as St. Paul
and CNA, have severely restricted the writing of commercial sureties.
In many cases, these impacts were driven by reinsurers, who were
hit with the same loss from many different sureties. Reinsurers write
for many sureties. Several direct surety companies were writing
different bonds for the same account, such as K-Mart, so that when
losses occurred, there were huge aggregations at the reinsurer's level.
Since reinsurers have for years been writing commercial surety (of
which oil and gas is a subset) at low premiums, this type of loss
resulted in enormous changes in reinsurance. Rates went up
dramatically; exclusions were greatly increased, and much larger
retentions by the direct insurer were required. The trickle down on
direct surety has increased the prices for oil and gas surety and
severely limited the capacity.
The effect of all of this on the oil and gas industry has been to
require that industry pay many times more for the same bonds they used
to receive, and sometimes to pay cash when a bond is not available.
Industry supports bonding, and is committed to conducting our
operations, including the termination of those operations, in the most
environmentally responsible manner possible. Bonding is an effective
tool for both industry and the regulators to allow us to meet our
commitments. Unfortunately, even though there have been no incidents in
our industry to raise liability costs or risks, the increasingly tight
bonding market has made the bonding process an impediment to our safe
operations, rather than a tool.
Some sureties are now requiring that companies deposit cash for a
portion, sometimes 50% of the bond amount, in order to obtain the bond.
There is no additional coverage or protection for the environment
provided with these changes. And, when the surety industry is unable to
meet the bonding requirements, cash is the alternative. Cash for 100%
of the required bonding amount may have to be posted for the plugging
and abandonment obligations. This takes cash directly out of the pool
of money available for exploration and development, and is a much less
efficient manner to employ in order to meet our obligations. In some
cases, the net effect has also prohibited operations because of the
inability to obtain sureties.
Summary
The tight bonding market impacts virtually every company that
conducts business on the OCS. Companies that are required to bond their
activities are finding it more and more difficult to do so. Companies
that self bond find it difficult to transfer operations to entities
that are not exempt. It is a fairly common practice for large (normally
exempt) companies to sell producing properties in the sunset phase of
their productive life to smaller (normally not exempt) companies;
however, the lack of adequate bonding capacity is making this
increasingly more difficult and costly, and in some cases impossible.
Too much capital pulled out of the exploration and development
budgets because the surety industry is unable to meet the bonding
demands leads to less development, which impacts our country's energy
security, as well as tax and royalty collections to the federal and
state governments. The tight bond market, combined with the high
bonding amounts often imposed, is creating a situation where offshore
operations are unreasonably costly, and sometimes prohibitive.
This concludes my prepared remarks. I will be happy to answer any
questions.
______
Mrs. Cubin. Thank you very much.
Thank you very much. I will begin the questioning with a
question for Ms. Schubert.
In your testimony you said that in the case of bonds for
mining oil and gas operations that the potential exposure to
the underwriter is high because of long-term exposure,
expanding scope and limited default remedies.
First of all, I want you to say whether that is a correct
summary of your statement and if it is, could you tell me in
your view how much of that potential increased exposure is due
to poor reclamation performance by mining and oil and gas
companies?
Ms. Schubert. That is a correct summary and it appears
really to be due more to a change in the interpretation of the
regulations than poor reclamation by the permittees in the
past.
Mrs. Cubin. From your point of view of the surety industry,
what changes in surety bond requirements can be made to reduce
the risk to the underwriter while we still maintain the utility
of the surety bond as a guarantee of performance?
Ms. Schubert. It is important to recognize that what we are
really talking about is defining the risk as opposed to
reducing the risk. It is critical that we can project what our
risk is into the future. The only way to do that is to have a
limited duration to know exactly what the obligation,
relatively exactly, what the obligation is, and then we can
analyze also the ability of the permittee to perform that
obligation.
Mrs. Cubin. Thank you very much.
Next question for Mr. Schlief: Mr. Fulton discussed in his
testimony the minimum bonding requirements for the oil and gas
industry. Realistically, what are the bonding levels that are
required, if you had to put cash up.
Mr. Schlief. Currently, on the examples that I gave, if we
have to increase our bonding levels and ATP currently has about
$25 million in bonds that we currently have with no cash
deposits. With respect to additional bonds, we have been
informed that we would generally have to put about 50 percent
cash deposit with respect to those bonds.
Mrs. Cubin. Well, I think the answer is pretty obvious. I
would like to ask you this question to have it on the record.
What do you think the impacts of the tight bonding market on
oil and gas production from marginal wells is?
Mr. Schlief. It is my expectation that what will happen is
that the properties that I gave the examples to were properties
that were owned by larger companies. These properties are
relatively less significant to them and they are going to tend
to plug and abandon these properties at an earlier stage.
ATP and other small companies would be interested in
acquiring these properties. Our expectation would be to produce
these properties for a longer period of time, therefore
producing more oil and gas and paying more royalties and trying
to extract more value. They are relatively more important so it
is basically an issue of scale.
Mrs. Cubin. Your testimony discusses insurance as well as
bonding. How have these changed for ATP in the last year?
Mr. Schlief. Insurance costs have gone up dramatically. We
are seeing at least a doubling in costs for less coverage and
higher deductibles. The cost of insurance is becoming very
significant.
Mrs. Cubin. I understand that there are more than 4,000
operating platforms and 7600 active leases on the Outer
Continental Shelf. A few weeks ago I took a trip out, 100 miles
out, went on a deep well, a deep-water platform and then came
30 miles in and went on a production and drilling platform. It
was very interesting.
I was not surprised during that time to find out that a
quarter of the total production of the United States comes from
the Gulf of Mexico. At the end of those operations the lessees
have to plug and abandon the wells, remove the platforms and
any other facilities that are there.
Are you aware of any incidents in which this has not
occurred or in which the government has had to pay to restore a
site or just difficulties that the government has had about
those wells that are finished being closed down?
Mr. Schlief. To my knowledge, the government has not had to
pay anything with respect to plugging and abandoning any wells
or any removals that have had to be performed in the off shore
OCS.
Mrs. Cubin. You did describe very well in your testimony,
Mr. Borell, what effect the new BLM bonding requirements have
on the Alaska placer miners so I won't go into that. I will
have some questions that I will submit to you in writing about
that.
But one thing I do want to ask you, realizing that my time
is already up, to ask the indulgence of Mr. Inslee, a later
witness will testify that Illinois Creek in Alaska is an
example of a mine that highlights the consequences to the
taxpayer and to the environment from inadequate financial
assurances combined with the recent spate of bankruptcies and
inadequate reclamation plans.
Could you describe the situation for me at Illinois Creek?
Mr. Borell. Well, Madam Chairman, Illinois Creek is a heap
leach operation about halfway between Anchorage and Nome. It is
purely a fly in, fly out. There are no roads whatsoever in the
area. Illinois Creek operated under two different companies for
several years, USMX was one of them and Dakota Mining was
another.
Because of factors at one of Dakota's other operations,
which was in South Dakota, the company went bankrupt. The State
of Alaska took the operation over. It is all on State land. It
is not on Federal land. They took the operation over and have
since found a contractor that is in there mining it to
completion. It is not going to cost the State of Alaska
anything to clean up the operation whatsoever.
As the price of gold continues to go up, hopefully not the
State but the contractor will make some money on it and the
taxpayer will not pay anything.
Mrs. Cubin. Could you just very briefly discuss for me the
reclamation process for placer mines in terms of the amount of
disturbed acreage, concurrent reclamation, toxic chemicals and
closure problems such as acid rock drainage.
Mr. Borell. Well, regarding chemicals and acid rock
drainage, there is no connection because the placer mines, as I
briefly described, are basically a process where you take the
gravels and you put them through a wash plant just like you
would for cleaning sand for a concrete facility if you are
making concrete. And you wash that gravel and in the process of
putting it in the water the heavier gold particles fall out to
the bottom and you separate those out and hopefully you can
make a living in doing that.
That is the basic process for placer mining. The amount of
acreage depends on the operation. I visited about seven
operations over the 4th of July weekend. Historically, the
miners shut down for the 4th of July. It is the only day of the
year they will shut down when they are operating. One of those
operators had, I would say, seven or eight acres disturbed. All
of the others were probably less than five acres disturbed.
Every one of them is a long-term miner. They have been miners
for years and years. They have mined in various places and
reclaimed them. They have come back to other places.
As a matter of fact, the fellow who had mined, he probably
had eight acres disturbed, he complained to me at the picnic
that the BLM had not used the opportunity to remove some trash
from an abandoned operation long before the regulations
required it. This older mine had operated. It had shut down.
He told them. He said, ``We have tractor-trailer semis
bringing our dozers and equipment in. I would like to put some
trash on those as they go out and they will take it to the
dump. For some reason, the local BLM office didn't see it in
their ability to utilize the free resource that he had
offered.''
I don't know if I answered your questions.
Mrs. Cubin. Thank you very much.
The Chair now recognizes Mr. Inslee for 5 minutes of
questions.
Mr. Inslee. Thank you, Madam Chair. You know, if you are
around here you try not to be shocked at anything. But I have
to tell you, the timing of this hearing and this effort to move
the responsibility for cleanups of mines onto the shoulders of
potentially the taxpayers is just stunning to me, while the
stock market has been just melting down due to these multiple
cases of corporate responsibility of Enron and WorldCom.
Now, we are here talking about a request to shift
responsibility off corporations that may act irresponsibly onto
the shoulders of the taxpayers.
I have to tell you, my constituents have loss enough money
in the last several weeks in the stock market not to have
further exposure for lost put on their shoulders for corporate
responsibility. So, to me it is stunning that this morning we
are having a hearing that could potentially result in putting
the burden of corporate irresponsibility on my constituents.
I can tell you for 600,000 people out in the northwest part
of the country, out north of Seattle, they don't want that
responsibility. They have seen enough corporate responsibility.
They want that responsibility to stay on the corporation's
shoulders and the individuals who are responsible for this
injury to the public watersheds.
So, I just want to tell you, the timing of this, in my
view, could not have been worse from your perspective given the
losses that have been suffered by people when people haven't
hued to their legal responsibilities.
Secondly, it is stunning to me that we are here this
morning when the administration and the Secretary rolled back
existing requirements to protect our clean water and our
watersheds. When she did so, she said, ``But don't worry, we
are keeping the bonding requirements.''
You know, if these roll backs of Clean Water law results in
damage to watersheds, we are at least going to keep the bonding
requirements so the taxpayers don't end up footing the bill.
And now here we are, after reducing those requirements,
increasing the risk to the environment and taxpayers.
Now, there is talk, I am told, and I don't know, I am going
to ask you about this, about now reducing those bonding
requirements and putting that burden on the taxpayers. So, I
just want to tell you I think it is a very unfortunate, from
your perspective, time to have this hearing in this regard.
I wanted to tell you how my constituents feel about it.
With that in mind, perhaps I can start with Mr. Schlief. I
would like to ask you about your participation in getting the
administration to weaken these existing requirements that the
Secretary of the Interior did a while back in relationship to
your current request to also, as I understand it, to reduce the
bonding requirements.
Did the Secretary know you were going to come back for that
second bite of the apple? Did she tell you at that time you
weren't going to get to do it? Did she tell you to relax and we
will do this later? What happened there?
Mr. Schlief. Well, sir, I really don't have an answer for
that question. We didn't really come to ask for any relaxing of
bonding. The main emphasis of what we were talking about was
the lack of capacity within the industry.
Mr. Inslee. Well, let me ask you why you are here. I mean I
appreciate your coming. We always do. I assume that you are
here because there is something brewing to reduce and relax
bonding requirements.
I am told that there is some task force talking about this
issue. I mean, are you suggesting that we not? Tell me what you
think, what you would like to see happen.
Mr. Schlief. Well, sir, what I was making reference to is
the fact that we have difficulty in obtaining bonds and
sureties with respect to offshore bonding obligations. That was
really the focus of my talk. There could be others on this
particular panel that might be better suited to answer your
question, sir.
Mr. Inslee. Thank you. Is there anyone at the table there
who is suggesting that we relax the bonding requirements?
Ms. Schubert. What we are here to talk about and what we
were asked to come and talk about is what is causing the
difficulty in the capacity of the surety market. We are not
talking about reducing bonding requirements. Surety bonds
continue to be in effect for mines and leases and we will
continue to make payments on those obligations.
What we are talking about is trying to clarify the
obligations so that we can continue to provide that taxpayer
protection in the future.
Mr. Borell. Madam Chairman, Mr. Inslee, from the mining
industry in Alaska standpoint, the bond pool has functioned for
more than 10 years without a single default. Our interest is
just to be able to see that bond pool continue to be used. And
the way 3809 regulations are written right now, we don't
believe it will be usable after January 20 of 2004.
Mr. Inslee. Mr. Borell, do you have suggestions for us on
what to do to solve this problem?
Mr. Borell. Yes, sir, in our testimony that was submitted,
there is a recommendation in there which is the same
recommendation that we provided the BLM in a May 13 comment
letter on the 3809 regulations. Basically some minor
adjustments of the wordage in there would allow continued use
of the State bond pool.
Again, this bond pool has been in place for more than 10
years and there has not been a single default either on State
lands, on private lands or on BLM lands.
Mr. Inslee. I am out of time. Thank you.
Mrs. Cubin. I would like to say for the record that the
only thing I see stunning about the timing of this hearing and
the testimony that has been presented to this hearing is the
lack of preparation by the gentleman from Washington.
Obviously, he was not informed. I don't know whether it is
poor staffing or just political diatribe that we have heard
today from him. But I want you to know that I personally thank
you very much for being here.
I am glad that we have a coalition of people trying to work
together to see that the environment is protected, that the
surety business remains intact and that there is adequate
bonding and financial capability for clean up and reclamation
and still allow us to produce resources.
So, thank you very much for your testimony.
Mrs. Cubin. I would like to call the third panel forward.
I would like to introduce our third panel of witnesses, Mr.
Chuck Jeannes, Senior Vice President and General Counsel of
Glamis Gold, Limited; Mr. Ken Done, Director of Treasury
Services, Rio Tinto Services, Inc., testifying on behalf of the
National Mining Association; and Mr. Jim Kuipers, Kuipers
Engineering, testifying on behalf of the Mineral Policy Center.
STATEMENT OF CHUCK JEANNES, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, GLAMIS GOLD LIMITED
Mr. Jeannes Members of the Committee, Glamis Gold, Limited
is a gold-mining company headquartered in Reno, Nevada. We
explore for, develop and produce gold in Nevada at our Marigold
Mine which is currently undergoing an expansion and at the Rand
mine in southeastern California.
Although a small company relative to others, we have a long
history of responsible and profitable operations in the U.S. We
have been continuously producing gold and providing economic
benefits to our shareholders, our employees and the communities
in which we operate for over 20 years.
Unfortunately, these benefits have been threatened recently
by our inability to obtain surety bonds to meet Federal
regulatory requirements for mine reclamation. Glamis operates
in the U.S. primarily on Federal lands and our bonding
requirements are found in the 3809 regulations that we have
been discussing here earlier.
I want to make clear the Glamis fully recognizes its
responsibility to properly close and reclaim its mining sites
at the end of operations and to provide appropriate financial
assurance to make certain for the benefit of the taxpayers that
that gets done.
You have heard from other witnesses as to the reasons for
the surety crisis. What I would like to do is give you some
details about how it is actually affecting companies like ours
on the ground. I mentioned our Marigold expansion in Nevada.
The permitting for that is in process. We are anticipating
approximately $10 million of incremental bonding increase for
that expansion.
We have conducted a thorough search through our broker,
Marsh, actually on a worldwide basis and have found no surety
companies willing to even give us a quote for those bonds.
Now, let me give you a little detail about our company. We
have an absolutely clean balance sheet, no debt, short-term or
long-term. We have $45 million in the bank. We are profitable.
We have been for some time even at low gold prices. We have an
absolutely clean environmental and reclamation record.
In fact, we just completed closure of a mine that we
operated in Southern California for 20 years, the Picacho mine.
This spring, after completing the reclamation and closure, we
received our bonds back from the BLM and the State of
California.
Now even with this record, we are unable to get any surety
bonding in the current market.
Now, fortunately, we have the cash to put up to build the
Marigold Expansion. Fortunately, its economics are robust
enough to support that additional cash infusion. But I would
submit that that will not be the case for many other companies
or projects.
The additional cash required to put up at the outset of a
project will increase the capital requirements, thereby
decreasing the economic benefit and just taking some projects
below the line as to whether you get a strong enough return to
build that line.
Secondly, I would expect that premature closure of existing
operations is a possibility if bonds cannot be replaced in an
economic way.
Finally, I think this situation will be almost an absolute
impediment to the entry of new businesses, small business
startups in our industry. It is difficult enough to raise risk
capital for mining; to have to raise the capital in addition to
that for bonding will be extremely hard.
You have heard various solutions from others. I would like
to second what has been said in terms of public-private
collaboration. We would love to see the regulations and the
manner in which the bonding is administered by the regulatory
agencies attempted to fit more with the needs and the market
realities of the surety industry in terms of the long tails,
the lack of certainty of obligation, things like this.
If we can somehow improve the ability of the surety
industry to work in our industry, I think we will all be much
better off. Thank you. I would be happy to answer any
questions.
[The prepared statement of Mr. Jeannes follows:]
Statement of Charles A. Jeannes, Senior Vice President and General
Counsel, Glamis Gold Ltd.
Introduction
Thank you for the opportunity to present written and oral testimony
regarding the impact of the surety industry crisis on the U.S. minerals
industry. My name is Charles Jeannes, Senior Vice President
Administration and General Counsel of Glamis Gold Ltd. A synopsis of my
background and qualifications are included in the Disclosure Form
submitted to the Subcommittee with my written testimony.
This testimony is presented on behalf of Glamis Gold Ltd., an
intermediate gold mining company headquartered in Reno, Nevada. Glamis
is involved in the exploration for, development and mining of precious
metals--primarily gold--at operations located in the United States and
Central America. We operate the Marigold Mine in Nevada which is
presently undergoing a significant expansion, the Rand Mine in
southeastern California and our newest mine, San Martin in Honduras.
Glamis has two advanced stage development projects in Mexico and
Guatemala and is also engaged in active closure and reclamation
activities at two mines in Nevada that have reached the end of their
productive lives.
Although a small company in terms of gold production relative to
some of its peers in Nevada--Glamis will produce approximately 260,000
ounces this year--the company has a long history of successful and
responsible operations in the United States, having been in continuous
operation for more than 20 years. Glamis was one of the pioneers of
heap leaching technology so prevalent in the gold industry today, and
we are very proud of our environmentally sound operating mines and our
innovative and award-winning reclamation practices at the closed
operations. In fact, Glamis had the distinction of becoming one of the
few companies to take a mine ``cradle to grave'' when it successfully
completed closure and reclamation activities at its Picacho heap leach
gold mine in California earlier this year. Following over twenty years
of exploration, mining and related operations, Glamis completed all
requisite reclamation and was granted the full return of all of its
bonds from the State of California and the Bureau of Land Management.
Unfortunately, the continued benefits of Glamis' success to its
shareholders, employees and the communities in which it operates in the
United States are threatened by the present crisis in the surety
industry. Despite an exhaustive effort undertaken during the first half
of this year, we have been unable to obtain surety bonds either for the
replacement of existing bonds at the Rand mine in California or the
issuance of new bonds in connection with the expansion of the Marigold
mine in Nevada. This problem has significantly increased the up-front
cost of development and mining for our company, as it doubtless has for
others in the U.S. minerals industry.
Discussion
Bonding for closure and reclamation of mining operations is
required by both state and federal agencies, and Glamis Gold both
recognizes and endorses the policy of requiring appropriate financial
assurances to provide for necessary reclamation efforts. With respect
to hard rock operations on federal lands, the requirements are
contained in the new 43 CFR 3809 regulations, the bonding portion of
which was adopted on June 15, 2001 (66 FR 32571; 43 CFR Part 3809,
sec.500 - .599).
The problems being experienced today in attempting to secure
bonding for mining operations have been the subject of continuing
review and discussion, including by the National Mining Association's
Surety Bond Working Group and the Department of the Interior Bonding
Task Force. Witnesses with more direct involvement in those efforts are
better able to describe the details of the causes of the bonding
problem, but they can be generally classified as resulting both from
the financial problems in the insurance and surety industries worldwide
as well as the current regulatory regime for mining on federal lands.
Problems associated with the surety industry itself include
extraordinary losses and a resulting lack of capital to fund
reinsurance. This situation has been caused by many factors, most
directly as a result of the events of September 11 as well as losses
incurred in connection with the Enron and K-Mart bankruptcies.
Regulatory issues that have contributed to the inability to obtain
surety bonding include the extremely long term of risk exposure
throughout a mine's operational and closure phases, burdensome bond
release standards that delay or deter a principal's seeking bond
release in a timely manner, regulatory policies that result in
overstating the cost of the appropriate surety exposure, and changing
policies that create new reclamation obligations as a part of an
existing financial assurance. Even though the historical loss
experience for mine reclamation bonding has been less than overall
surety industry averages, each of these problems increases the
potential length and amount of exposure to an insurance company, making
reclamation bonds an undesirable risk.
The combination of these problems has made it impossible for Glamis
to acquire surety bonds to secure its reclamation requirements. Glamis
is currently permitting a significant expansion at its Marigold Mine in
Nevada, operated and owned two-thirds by Glamis and one-third by
Barrick Gold Corporation. This is a $55 million capital project that
will nearly triple the mine's annual production, extend the mine life
to twelve years and provide significant economic benefit to north-
central Nevada. While reclamation bond calculations have not yet been
made, Glamis anticipates new bonding requirements to be in the range of
$10 million, in addition to the existing $7 million in bonding already
in place for the existing Marigold operations. A thorough review of the
surety market by Glamis' insurance broker, Marsh, resulted in not a
single company willing to even review the file to consider a quote.
As mentioned above, Glamis has been in continuous and for the most
part, profitable operations for over twenty years. The Company has
current assets of over $60 million, including $45 million in cash in
the bank and zero short-term or long-term debt. In other words, the
balance sheet is completely clean. In addition, the company's ongoing
low-cost operations are generating significant earnings and cash flow
and are projected to continue to do so well into the future, even at
gold prices below current levels. From an operations and reclamation
liability standpoint, Glamis' record is pristine, with no history of
environmental problems and no long-term liabilities. In fact, the
company has received awards and been commended for its innovative
desert mine reclamation efforts at the Picacho mine by the California
state legislature.
Despite this record, Glamis is unable to obtain surety bonding in
the current regulatory and market environment. Its only options in
connection with the Marigold expansion will be to put up cash or
equivalents in the amount of 100% of the required bond amount, or to
attempt to enter into a banking credit facility that provides for the
issuance of letters of credit for bonding. Glamis is fortunate to have
the financial capacity to meet its bonding requirements in this
fashion. However, many existing companies and nearly all start-up
businesses would lack the ability to cash bond in the absence of surety
bonding. We are equally fortunate that the Marigold expansion project
has relatively robust economics and its rate of return to the company
remains acceptable even when the up front cash for bonding is included.
But for many projects, the up front cash investment required for
bonding in the absence of a surety alternative may well render an
otherwise viable project uneconomic.
The negative impacts resulting to the U.S. minerals industry from
the surety bonding crisis described above are significant. First, the
additional capital required for cash bonding will render certain new
projects uneconomic, meaning those projects will not get developed and
the local, state and national economies will forego the benefits
derived from capital investment, employment and tax revenues. Likewise,
the absence of surety bond renewals could cause certain existing
projects to be prematurely shut down if the operators are unable to
secure alternative financial assurance. Additionally, even for those
projects and companies that can absorb the additional cost of bonding,
devoting scarce capital to sit in an account as a bond-equivalent will
reduce the amount of funds otherwise available for exploration and
discovery of new deposits and related economic development. Finally,
the need for cash bonding will severely hamper start-up companies and
other small businesses. New and small businesses will find it very
difficult to finance substantial cash bonds in addition to the regular
costs of exploration and development. Hard rock exploration and mining
is already a high risk venture for investors--this additional capital
requirement will make it even more so.
These new and additional impediments mineral development are
contrary to the policy of the United States to promote the development
of mineral resources on public lands, and will ultimately threaten the
nation's supply of domestic minerals. While the problem and possible
solutions are made more complex by the events of September 11 and
difficulties in the insurance industry world wide, there are certain
regulatory changes that could be taken to help alleviate the problem.
Others will testify in more detail on these suggestions, but from
Glamis' standpoint the reinstatement of some form of self-bonding (also
known as a corporate guaranty) that was eliminated in the new 3809
regulations would be of substantial and immediate assistance.
Self-bonding essentially provides for a guaranty of reclamation
obligations by the operator or its parent company, which guaranty is
secured by the assets and cash-generating capacity of the entire
company. This means of securing at least a portion of a company's
bonding obligation was allowed by the Bureau of Land Management prior
to the recent 3809 revisions and continues to be an allowed method of
financial assurance under SMCRA. The State of Nevada continues to allow
self-bonding for reclamation plans within its purview, and is currently
examining and revising its financial tests to assure that self-bonding
is permitted only for those companies that have the financial
wherewithal to meet their ultimate obligations.
For companies that meet strict criteria to test financial well-
being, based on audited financial statements, both presently and on a
continuing basis subject to active periodic review, self-bonding of at
least a portion of the total bonding requirement should be considered
as a viable alternative to otherwise unavailable surety bonds.
Conclusion
Glamis Gold Ltd. looks forward to participating in a collaborative
effort among the public and private sectors to find appropriate
regulatory and market solutions to the surety bonding problems. We
appreciate the opportunity to testify before the Subcommittee and will
be happy to answer any questions.
______
Mrs. Cubin. Thank you.
I would now like to recognize Mr. Done.
STATEMENT OF KEN P. DONE, DIRECTOR OF TREASURY SERVICES, RIO
TINTO SERVICES, INC.
Mr. Done. Thank you, Chairman Cubin, Members of the
Subcommittee. I appreciate this opportunity to address the
crisis in the surety industry and its impact on the mining
industry, our ability to provide minerals.
I also have some ideas for some initiatives that we may
want to consider to address this crisis.
I represent the U.S. business units of Rio Tinto and the
National Mining Association today. Rio Tinto is a world leader
in the finding developing and extracting mineral resources. We
are strongly represented in Australia and the United States.
And we have assests in many parts of the world.
In the U.S. we have business interests that I will refer to
as the Kennecott group of companies, Borax and Luzenac. Borax
has operations in California. Luzenac has operations in Montana
and Vermont.
The Kennecott group has operations in Montana, Utah,
Nevada, Colorado, Alaska and the great State of Wyoming.
I am the Director of Treasury Services for Rio Tinto.
Mrs. Cubin. I am glad you recognized that great State.
Mr. Done. I am Director of Treasury Services for Rio Tinto
Services, Inc. My group provides treasury and risk management
services to Rio Tinto's North America business units.
One of our key functions over the years has been the
procurement of surety bonds and other forms of financial
assurances as required by our business units as they are
required to provide these by law.
I have been in this role since 1994. I have a little bit of
history about the good times and the bad times in the surety
business. The crisis in the surety industry first came to my
attention in the fourth quarter of 2001. Our broker indicated
that many of our surety providers were losing their
reinsurance.
This indicated that the rates would increase, our
requirements for collateral would increase and we may have
difficulty finding capacity for new operations. This was
further exasperated this spring when we were successful in our
bid under the LBA (Lease by Application) Program for the North
Jacobs Ranch coal.
This LBA Program requires that you pay one-fifth of the bid
down and if successful then you will have to bond for four
deferred payments. These deferred payments can be secured by a
surety bond, cash or personal lease bond secured by U.S.
Treasuries.
This is a key point of my testimony: Despite Rio Tinto's
AA- minus credit rating, a clean record of reclamation for
Kennecott Energy and Coal where they have never forfeited on a
reclamation bond and a 20 percent down payment of almost $75
million, we were unable to secure a surety bond for a
reasonable price with reasonable terms.
As a result we were required to purchase U.S. Treasury
bonds for $303 million. The utilization of capital in this
manner was not in Rio Tinto's strategy or strategic plan. This
type of money is only available to very large companies. This
reduces competition and jeopardizes the government's efforts to
secure a reliable national energy policy.
To address this crisis, the National Mining Association has
formed a surety bond work group comprised of a cross-section of
producers. The group has confirmed the crisis is not limited to
our sector of the mining industry. It has become difficult or
impossible to find bonding for new operations or increases in
bonding for existing operations.
I am running out of time so I am going to jump ahead. We
all understand the history of why bonding is required. Mining
companies are not trying to shirk their responsibilities here.
They just cannot find bonding. In the '90's it was easy to find
bonding. It was never a concern of mine to find bonding. But
what has changed?
The economy has changed. September 11th changed. Enron, K-
Mart, the surety industry is refocusing on underwriting. They
don't like their risk here, OK?
The four items that I will bring to your attention that the
surety industry has expressed that they don't like to
underwrite in our business is the non-cancel ability of the
bonds, the extreme long tail, their lack of reinsurance and a
key risk reward factor.
In the year 2000, the surety bond business in the United
States of America, their total premiums were $3.3 billion, of
which only $29 million of that related to our industry for
reclamation.
We are asking them to expose their balance sheet for
premiums that are less than eight-tenths of 1 percent of their
book of business.
I could go on. I have run out of time. But I do appreciate
this opportunity to address the Committee. I do have some
suggested solutions in my written testimony. But I will address
any questions as they come up.
Thank you again.
[The prepared statement of Mr. Done follows:]
Statement of Ken P. Done on behalf of Rio Tinto Services, Inc.,
Kennecott Energy Company, Kennecott Minerals Company, Kennecott Utah
Copper Corporation, U.S. Borax, Luzenac America and the National Mining
Association
Chairwoman Cubin, we appreciate this opportunity to address the
crisis in the surety industry, its impact on the mining industry on
federal lands nationwide and initiatives to address the crisis.
This statement is presented on behalf of the U.S. business units of
Rio Tinto plc, and the National Mining Association. Headquartered in
London, Rio Tinto is a world leader in finding, developing, extracting
and processing mineral resources. Diversified by both product and
geography, Rio Tinto is strongly represented in Australia and North
America, with major assets in South America, Asia, Europe and southern
Africa. Rio Tinto's U.S. business units include Kennecott Energy
Company (``Kennecott Energy''), Kennecott Minerals Company, Kennecott
Utah Copper Corporation, U.S. Borax and Luzenac America. Rio Tinto
Services, Inc., is located in Salt Lake City, Utah, and provides
assistance for the North American business units on a number of
business issues including treasury and risk management services and
government affairs. Kennecott Energy is headquartered in Gillette,
Wyoming, and has low-sulfur coal mining operations in Colorado, Montana
and Wyoming. Kennecott Utah Copper Corporation has mining operations
near Salt Lake City, Utah. Kennecott Minerals has hardrock operations
in Nevada, California and Alaska. U.S. Borax has mining operations in
California. Luzenac has mining operations in Vermont and Montana.
The surety industry crisis first came to the attention of Rio Tinto
Services, Inc. when it was warned by its broker late in the Fourth
Quarter of 2001 that the reinsurance market for surety bonding was
eroding. At that time, sureties began to require additional collateral
and higher premiums to secure Kennecott Energy's existing surety bonds.
Kennecott Energy had even more difficulty obtaining surety bonding for
new mining obligations when it acquired the North Jacobs Ranch Tract
coal reserves on January 16, 2002, under the Department of Interior's
(``DOI's'') competitive bid, Lease by Application (``LBA'') program.
Through this acquisition, which consisted of 515 million tons of
recoverable, compliance coal in the Southern Powder River Basin
(Wyoming), Kennecott Energy was able to extend the life of the Jacobs
Ranch Mine for an additional 18 years.
The LBA program allows lessees to pay for reserves in five ratable
payments made over four years, with the first payment due on the date
the bid was awarded. Four subsequent installments must be bonded by one
of three means: (1) a surety bond obtained from a government-approved
(U.S. Treasury listed), bonding company; (2) a cash bond; or (3) a
personal lease bond secured by government securities.
Despite Rio Tinto's AA- credit rating, one of the highest credit
ratings in the mining industry, Kennecott Energy was unable to find a
surety company or a combination of companies willing to issue a bond(s)
totaling $300 million for a reasonable price with reasonable terms.
Unable to obtain a surety bond because of the current U.S. bond and
insurance industry crisis, Rio Tinto was forced to tie up $303 million
to purchase Treasury Bonds to back the remaining financial obligation
to the DOI under the North Jacobs Ranch Lease. This financial
obligation was not part of Rio Tinto's strategic plan for the use of
capital. The utilization of capital in this manner is only available to
very large financially secure companies. This reduces competition and
jeopardizes the Bush Administration's efforts to secure a reliable
national energy policy.
To address the crisis in the surety industry, the National Mining
Association (``NMA'') has formed the ``NMA Surety Bond Working Group''
(the ``NMA Working Group''), comprised of a cross section of the
association's producer membership. The NMA has confirmed that the scope
of the problem is not limited to any particular sector of the mining
industry. Companies across the board are finding it difficult if not
impossible to access surety bonds not only for new operations but also
to obtain required increases to existing bonds for coverage for
obligations at existing operations.
I. BACKGROUND
A. History.
The federal and state governments have required the posting of
surety bonds and other forms of financial guarantees to protect the
public interest and assure compliance with payment obligations,
reclamation performance and environmental compliance. Within the U.S.
Department of the Interior (``DOI''), the Bureau of Land Management
(``BLM'') has required surety bonds to secure the terms and conditions
of federal coal leases, including rental, royalty and bonus bid payment
obligations. Section 509 of the federal Surface Mining Control and
Reclamation Act (``SMCRA''), specifically requires financial assurance
to secure reclamation obligations and the performance of the coal mine
permittee. The Office of Surface Mining (``OSM'') is also considering a
rule regarding bonding and financial assurance for long-term acid mine
drainage. The hardrock mining industry has been required to provide
financial assurance for reclamation operations pursuant to BLM's
surface management regulations set forth at 43 C.F.R. Sec. 3809. States
have also required financial assurance for environmental and workers''
compensation programs. Until recently, numerous insurance companies
(herein ``sureties'') serviced the surety market and, as a result of
competition during the 1990's, sureties reduced rates and were flexible
in the types of bonds issued to meet federal and state financial
assurance requirements and in the terms (guarantees/collateral)
supporting the mining company's commitment to the surety issuing the
bonds.
B. What's Changed.
Due to no fault of the mining industry, the surety market has
tightened with the decline in the economy beginning in 2000 and losses
incurred by sureties in 2001 and 2002 from surety forfeitures involving
Enron and KMart and insurance claims from the September 11, 2001
tragedy. The insurance industry sustained substantial losses over this
time period and has attempted to reduce its exposure to high risk lines
of business. As a result, several primary surety underwriters and
reinsurers have elected to leave the business.
The sureties'' recent re-evaluation of the risk associated with
surety bonds underwritten for the mining industry has resulted in
increased costs for maintaining existing surety bonds due to higher
premiums and requests that operators provide additional collateral
backing. New long-term environmental and reclamation performance bonds
have become nearly impossible to obtain. Surety companies and
underwriters are focusing on risk and are not inclined to issue new
reclamation bonds for the following reasons:
1. Objection to the non-cancelable nature of the obligation, i.e.,
sureties are unable to re-evaluate the risk that an operator will fail
to perform, even if the operator's financial condition or environmental
performance record has changed for the worse;
2. Concerns about the indefinite duration of reclamation bonding
commitments for the life of the mine, sometimes in excess of thirty
years (referred to in the surety industry as ``long tails'');
3. Reinsurers provide coverage to primary surety companies on an
annual basis and therefore the reinsurance is not tied to the life of
the mine or the bond obligation. Additionally, as many reinsurers have
chosen not to renew coverage for surety bonding, surety companies have
little or no reinsurance support;
4. LThe risk versus the reward for issuance of bonds is not
justified in the underwriter's eyes. Although the loss ratios of bonds
written for mining operations are lower than the year 2000 loss ratios
for all surety bonds, reclamation bonds for mining and other permits
associated with the restoration of land represent only $29 million in
premiums of the $3.3 billion in total premiums, earned industry-wide;
1 and
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\1\ Letter dated May 28, 2002, from The Surety Association of
America to the Honorable Tom Fulton, Deputy Assistant Secretary for
Lands and Minerals, U.S. Department of the Interior.
---------------------------------------------------------------------------
5. LThe surety industry is even less inclined to issue bonds for
hardrock mining operations, particularly those involving heap leach
operations.
II. RESULTS
The surety market for mining and reclamation bonds under the terms
and conditions prevailing in the 1990's no longer exist. Over the past
decade, many industries, including the mining industry, have benefited
from the ``soft market'' for surety bonds. Due to competition, sureties
were flexible regarding the terms and pricing of bonds and there was
adequate capacity to meet large obligations. The downturn in the
economy and tightening of the surety and insurance market has changed
this dynamic.
Rather than competing for new business, sureties want out of the
bonds that are currently outstanding. However, due to the nature of the
surety bond agreement, sureties cannot be released without a
replacement bond or other form of financial assurance. Therefore,
sureties are requiring increased rates and additional collateral to
maintain existing coverage. As a result, the higher cost of maintaining
existing coverages means prohibitive increases in costs for the mining
industry. In addition, the surety industry now lacks reinsurance and it
is not inclined to issue new surety bonds especially for larger
obligations. In short, surety capacity for new mining projects is very
difficult to obtain at any price.
III. WHAT THIS MEANS TO MINING COMPANIES AND THE INDUSTRY
IN GENERAL
A. Increased Costs and Reduction in Activity.
The crisis in the surety industry has resulted in higher costs to
the mining industry due to premium rate increases and surety companies
demand for additional collateral to secure existing mining obligations.
Mining companies are being forced to seek alternatives to surety bonds,
including utilization of letters of credit (``loc'') capacity or the
diversion of operating capital to fund obligations with cash or U.S.
Treasury Bonds. Mining companies with bonds issued by sureties who have
lost their Treasury rating or have become insolvent, have been ordered
by OSM and state regulators to replace bonds or cease mining. The
erosion of the surety market also threatens new operations unable to
post bonds to continue exploration, expand existing operations or to
bid for new coal leases.
B. Specific Needs of Government/Taxpayer.
The surety industry has played a vital role in securing obligations
of the federal government so that public interests are protected.
Reclamation bonds have assured the completion of reclamation by mine
operators in the coal and hardrock industries. Lease bonds have
guaranteed performance of the terms and conditions of federal coal
leases and have allowed the successful bidder to defer the bonus bid in
installment payments for up to four years. Recently, OSM has proposed
financial assurance mechanisms to address long-term acid mine drainage.
Without a surety market willing to provide financial assurance, the
mining industry may be required to bear substantial costs to fund these
obligations up front or to cease mining activities.
C. Issues Identified by Surety Bond Industry and Mining Companies.
The NMA and the surety and reinsurance industries have identified
several obstacles which should be addressed to encourage sureties to
meet the bonding needs of mining operations. First, surety companies
are concerned by the indefinite duration of the current reclamation
bond commitment. Surety companies also feel that they are unfairly
called upon to perform after operator default or bankruptcy when they
could be notified much earlier and take over performance when an
operator is developing financial or compliance problems. With respect
to lease bonds, sureties believe that they should be provided with
notice and an opportunity to cure prior to forfeiture of the lease
bond. BLM rules at 43 C.F.R. Sec. 3452.3(b) (2001) provide that in the
event of lease relinquishment, termination or cancellation for any
reason, the entire bonus bid is forfeited, which appears to unduly
enrich the federal government. Certain sureties have indicated that
they would be unwilling to provide a deferred bonus bid bond without a
rule change on this matter.
Second, regulators, both federal and state, are reluctant or slow
to release bonds although reclamation has been achieved; or attempt to
impose additional environmental performance standards which did not
exist at the time a particular surety bond was written. In the context
of SMCRA, this impediment is exacerbated by several states'' reluctance
to release surety bonds.
Third, the acceptable forms of financial assurance or bonds vary
among DOI's programs as well as among those states which administer
state programs in cooperation with DOI. For example, BLM does not allow
self-bonding under its Sec. 3809 rules although this has been an
acceptable form of assurance in many states with surface management and
environmental programs. On the other hand, OSM allows self-bonding, but
a number of states with primacy under SMCRA will not allow this form of
meeting the SMCRA bonding requirements.
Finally, the recent OSM proposal regarding financial assurance for
acid mine drainage imposes indefinite obligations for very long and
uncertain periods. The surety industry is unlikely to take on the risks
of such a surety bond. Indeed, the surety industry may not touch the
acid mine drainage issue with a ``ten-foot pole.''
IV. SOLUTIONS/ITEMS TO CONSIDER
The erosion of the surety market was not caused by the mining
industry. However, the mining industry is willing to partner with the
DOI and the surety industry to encourage surety companies to meet
bonding requirements imposed by statute and regulation. Although we
have not identified at this point all of the initiatives that might
alleviate some of the capacity constraints, we can suggest several
general areas that merit further consideration:
A. Establish/Maintain Reasonable Bond Amounts.
Policy changes are required to encourage state and federal
regulators to set bond amounts at reasonable and attainable levels. Too
often bond amounts are calculated in a manner that includes various
speculative contingencies which artificially inflate the amounts
required for bonds.
B. Impose Time Limitations on Bonds.
New rules are required to set time limitations to fix the duration
of bonds. Surety companies are concerned by the indefinite nature of
the current reclamation bond commitment.
C. Timely Release.
The DOI should issue a policy statement to state program directors
alerting them to the crisis in the surety market and encouraging the
timely release of reclamation bonds.
D. Accept Other Forms of Financial Assurance.
1. Self Bonds.
Federal and state regulatory authorities should be encouraged to
accept self-bonding for companies that meet the criteria. The criteria
to qualify for self bonds should factor in the size and strength of the
company. In the global marketplace, regulatory agencies should be
willing to accept the guarantees of multi-national companies and
foreign parents of mining operators.
2. Letters of Credit and Other Forms of Collateral.
BLM's coal leasing program should be amended to accept a range of
financial assurance, including letters of credit and collateral.
3. Combinations of Financial Assurance.
Finally, state and federal regulatory authorities should be
flexible enough to accept a combination of forms of financial
assurance. Rather than requiring one form of surety for each lease or
each phase of mining operations, a combination of vehicles should be
considered, including bonds, letters of credit, self bonds and some
form of government involvement, i.e., reinsurance, tax relief.
V. CONCLUSION
With the increasing requirements imposed by regulatory programs for
financial assurance and the shrinking capacity of the surety industry
to serve those needs, the bonding requirements of these regulatory
programs have now become a barrier to market entry or continuation in
the mining business. This development poses grave consequences for the
mining industry's ability to meet the Nation's needs for fuel and non-
fuel minerals that are essential to its economic growth and well being.
Both the public and the private sectors will need to collaborate to
find public policy and market solutions for the present crisis. As we
continue to explore for those solutions, we will welcome the
opportunity to keep this Subcommittee informed of our progress.
We appreciate this opportunity to address the Subcommittee and will
be happy to entertain your questions.
______
Mrs. Cubin. Thank you. Mr. Kuipers.
STATEMENT OF JIM KUIPERS, J. KUIPERS ENGINEERING
Mr. Kuipers. Chairman Cubin, Members of the Committee, I am
a consulting mining engineer with the Center for Science in
Public Participation. Thank you for inviting me to testify. The
public's interest is served by financial guarantees, so that
extractive industries like mining companies meet all Federal
and State requirements for cleaning up pollution and reclaiming
sites.
As a starting point, it is critical that financial
assurances provide funds for clean up in the form of a rock
solid, irrevocable guarantee.
We must not allow mining companies to use financial
instruments such as corporate pledges that are not real
guarantees. To allow the use of such instruments would be to
potentially transfer the risk of clean up to the taxpayer.
In an era of Enron and Worldcom, it is more important than
ever to protect the public stockholders from hidden costs and
surprise liabilities. Cleaning up a mine site should be the
cost of doing business.
If the mining company cannot guarantee funds for clean-up,
then it should not be permitted to mine. As the Worldcom
example shows, size is no guarantee against bankruptcy.
I was raised in a mining family in Montana. I have worked
as an engineer, operator and manager of mines for over 20
years. Since 1996 I have worked with public interest groups,
state and tribal governments to address mining environmental
issues at mine sites in the U.S. and Canada.
I am currently involved in reclamation, closure and
financial assurance matters in numerous different mine sites in
the U.S. and have been qualified as a technical expert in
hearings on this subject.
I do quite a bit or work with the mining industry trying to
help them out in certain situations. My grandfather is a small
miner. I have secured the reclamation and closure costs, or he
has secured those costs at his small mines with cash financial
assurances since the early 1990's.
He felt that it was the right thing to do and that mine
operators needed to ensure that they weren't perceived as being
irresponsible. His greatest concern was that the big companies
would fail to adequately estimate or ensure their costs, which
he thought were much greater than were being reported, putting
the entire mining industry, including small miners, at risk.
I think my grandfather was pretty insightful. Mining
companies have responded to changes in the availability of
surety bonds in a number of different ways. Some companies are
keeping their existing bonds and paying the costs associated
with those bonds.
Some are putting in place other forms of acceptable
guarantees such as irrevocable letters of credit. I would point
out that that is the case with both Rio Tinto and Glamis.
However, there are some other companies that are seeking to
exempt themselves from these requirements by lowering or
weakening cleanup standards and by gutting bond requirements to
be allowed to put up soft financial guarantees. These amount to
nothing more than a promise.
The public interest is not protected by granting
exemptions, lowering standards, or softening regulations. This
Committee and the Bush Administration, as well as responsible
mining companies have an interest in keeping the bar at an
acceptable standard.
There is no doubt that the prices for rising legitimate
natural guarantees are going up. In my experience, recent
regulatory actions at the State and Federal level have led to
more realistic estimates of mine reclamation costs. These new
cost projections are substantial, but they are real.
Many in the mining industry responded to these increased
costs by seeking to avoid responsibility. Rather than pay the
new, more accurate costs associated with the environmental
risks of mining, some in the industry are essentially
petitioning State and Federal Governments to ship the costs of
risk to the taxpayer for cleanup.
The present situation with respect to bonding difficulties
is only a symptom of the much larger problem that the mining
industry faces in regard to corporate accountability and public
disclosure.
Total cost of cleanup that the mining industry has failed
to recognize could be as high as $10 billion or more for the
U.S. hard rock mining industry alone. This raises an important
question. If we are aware of these potential risks and no doubt
many companies are, is this risk being fully and accurately
reported to investors, insurers and regulators?
Unfortunately today, instead of dealing with this situation
in a proactive and responsible manner, too many companies are
seeking a special exemption or short-term solution. However, we
call on the Committee and the Bush Administration to hold the
line and enforce the current 3809 regulations as good public
and environmental policy that is pro-taxpayer and pro-investor
protection.
At a time when the Enron and Worldcom scandals have rocked
public confidence and demonstrated a need for much greater
corporate accountability, why is the Bush Administration
considering allowing the mining industry to evade
responsibility for paying to clean up toxic pollution from
mines?
Instead of proposing to weaken the regulation, the
Administration should embrace its own corporate responsibility
rhetoric by enforcing current regulations and seeking new tools
to ensure the polluters, not taxpayers, pay for the cost of
mine cleanup.
Thank you.
[The prepared statement of Mr. Kuipers follows:]
Statement of Jim Kuipers, Consulting Mining Engineer, Center for
Science in Public Participation
Chairwoman Cubin, members of the Subcommittee. My name is Jim
Kuipers and I am a consulting mining engineer with the Center for
Science in Public Participation. Thank you for inviting me to testify
on the important subject of reclamation bonds, which are used as a
method to ensure cleanup at mine sites.
Professional Background and Affiliation
I was raised in a mining family and attended Montana School of
Mines, obtaining a B.S. degree in Mineral Process Engineering in 1983.
I have worked as an engineer and manager at base and precious metals
mines in the U.S. and abroad and at the corporate level for one of the
world's largest mining companies. I am a registered professional
engineer in Colorado and Montana. My main area of expertise is hardrock
metals mining and includes mineral processing, project design and
permitting, mine reclamation and closure, water treatment, and
financial assurance including cost estimating. My professional
background is further described in a resume attached to this testimony.
Since 1996 I have worked on behalf of public interest groups, and
tribal and state governments to address environmental mining issues at
a large number of mine sites throughout the U.S. and Canada. In
February 2000 I authored a report entitled: Hardrock Reclamation and
Bonding Practices in the Western United States. The approximately 500
page report examines the principles of mine reclamation and closure,
financial assurance, and financial assurance cost estimating and
includes information on each state's mines and financial assurance and
each state's applicable regulations, and contains 20 different specific
mine site case studies. It concluded that financial assurance
shortfalls could exceed $1 billion, an extreme underestimate, in
retrospect. I am at present involved in reclamation, closure and
financial assurance matters at over 20 different mine sites in the U.S.
and am a qualified technical expert and have testified before on the
subject.
Introduction/Overview
My testimony starts from the premise that the public's interest is
served by the availability and use of surety bonds, and other financial
guarantees, so that extractive industries, like mining companies meet
all federal and state requirements for cleaning up pollution and
reclaiming sites. As a starting point, it is critical that whatever
financial instrument we use to set aside funds for cleanup, it comes in
the form of a rock-solid, irrevocable guarantee. To do otherwise, as
some mining companies have recommended, is to put the public,
communities and other natural resources at risk. Therefore, from the
perspective of the public and taxpayer interest, it is important that
we explore and mandate all forms of guarantees, not just bonds. But we
must not allow mining companies to use financial instruments such as
corporate pledges that are not guaranteed. To allow the use of such
instruments, as we have seen in too many examples in recent years,
would be to potentially transfer the risk of cleanup to the taxpayer.
In the era of ENRON and Worldcom, it is more important than ever to
protect the public from hidden costs and surprise liabilities. Cleaning
up a mine site should be a cost of doing business. If the mining
company cannot guarantee funds for cleanup, then it should not be
permitted to mine.
There is not doubt that today, there are instances where the costs
of bonds are increasing and they are becoming more difficult to secure.
Unfortunately, I am intimately familiar with a number of mines, where
this is occurring. In my experience, the most direct cause of this is
that companies that provide bonds are responding, as one would expect
in a market economy, to greater risk. There is greater risk in the
sector because over the past few years, in case after case, it has been
demonstrated that mining companies and regulators substantially
underestimated the cost of mine closure and cleanup. I have seen
companies respond in a number of ways. Some are securing larger bonds
and paying the costs associated with those bonds. Some are putting in
place other forms of acceptable guarantees such as letters of credit.
And some are seeking to exempt themselves from these requirements by
seeking to lower or weaken cleanup standards or by gutting bonding
requirements to be allowed to put up soft financial instruments such as
so-called corporate ``guarantees'' that amount to nothing more than a
promise. The public interest is not protected by granting exemptions,
lowering standards, or softening regulations. This committee and this
Administration have an interest in keeping the bar at an acceptable
standard.
There is no doubt that prices are rising for legitimate financial
guarantees, but these prices are rising for the right reasons. In my
experience recent regulatory actions at the state and federal level
have led to more realistic estimates of mine reclamation costs to
financial guarantee providers. These new cost projections are
substantial, but they are real. For example, the three largest copper
and three largest gold mining companies operating in the United States
have a potential combined un-guaranteed liability of $9 billion. Many
in the industry have responded to these increased costs by seeking to
avoid responsibility. Rather than pay the new, more accurate costs
associated with the environmental risks of mining, some in the industry
are essentially petitioning federal and state governments to shift the
costs of risk to the taxpayer for cleanup.
Mine reclamation and closure addresses water quality, air quality,
adjacent property owner impacts and land use in the aftermath of mining
operations. As it pertains to modern mines it deals with large waste
rock dumps, leach piles, tailings ponds, open pits and other mining
facilities which may disturb 10,000 or more acres at a typical large
mine site. Mine reclamation and closure tasks include regrading and
reshaping mine features, applying covers to control water infiltration
and provide growth media, and revegetation. The goal is to control and
eliminate if possible ground water and surface water pollution, air
pollution, and to restore the land to a suitable post-mining land use.
In addition, water treatment is often a necessary component of mine
closure. At many mine sites acid drainage can result in the leaching of
harmful contaminants such as lead, copper, zinc, arsenic and cadmium,
which are known carcinogens and toxins that can cause cancer and
reproductive disorders, into ground water and surface water, seriously
impacting water quality. The incidence of acid drainage, which has been
shown to be much more common than has been assumed, can increase the
cost of reclamation and closure by ten times or more, and is the
leading cause of insufficient reclamation and closure plans and cost
estimates that exist today. In many cases water treatment will be
required for hundred of years or more, resulting in a need to address
financial guarantees that will last long into the future Altogether,
mine reclamation and closure costs are extremely expensive, from tens
of millions to almost a billion dollars--per mine.
In my experience, it should not come as a surprise that mining
companies are having difficulty securing bonds today as this problem
has been brewing for years. In a report that I authored two years ago
entitled, Hardrock Reclamation and Bonding Practices in the Western
United States, this problem was evident. While there are no doubt other
factors that influence the price and availability of bonds, and are
doing so today, we are now facing the reality that bonding companies
are to a great degree adjusting price and availability to a more
realistic assessment of risk. We don't expect insurance companies to
charge the same for a policy covering a Honda Civic or a Jaguar, and
nor should they charge the same for a low risk construction surety bond
and a higher risk mine reclamation and closure bond.
Not to be a pessimist, but the worst isn't over. In my experience,
there is even more uninsured risk out there than is being recognized by
the insurance industry and regulators. What we are facing today is
simply the symptom of a larger problem. The problem is the significant
underestimation of the actual cost of modern hardrock mine reclamation
and closure and the lack of financial guarantees to ensure that
taxpayers will not foot the bill. This problem is likely to get worse
before it gets better.
An example is the disparity that exists between the estimated
amount for clean-up and the amount presently shown as reclamation
liabilities in many mining company's annual statements. For example,
according to Phelps Dodge Corporation's 2001 Annual Report, reclamation
and closure reserve activities (funds accrued by the company for
eventual reclamation and closure costs) at the end of the year totaled
$135 million. While the report goes on to disclose the potential for
significantly higher costs, and anticipates making significant capital
and other expenditures in future years, the report concludes with the
statement that ``we are unable to reasonably estimate the total amount
of such expenditures over the longer term, but it may be potentially
material.'' Evidence suggests that the company can reasonably predict
expenditures significantly in excess of the amount accrued so far, and
that it may be highly material as to the company's ability to deal with
its reclamation and closure liabilities, which could exceed $3 billion
or more.
The present situation with respect to bonding difficulties is also
only a symptom of the much larger problem that the mining industry
faces in regard to corporate accountability and public disclosure. The
total cost of clean-up that the mining industry has failed to recognize
could be as high as $10 billion or more for the U.S. hardrock mining
industry alone. This raises an important question, if we are aware of
these potential risks, and no doubt many companies are, is this risk
being fully and accurately reported to investors, insurers and
regulators?
Unfortunately, today, instead of dealing with this situation in a
pro-active and responsible manner, to many companies are seeking a
special exemption or a short-term solution. Any efforts to weaken the
Bureau of Land Management's 3809 regulations which were specifically
intended to address the gap between expected costs and current
financial guarantees fall into this category, as do efforts to weaken,
soften or avoid state regulations. In fact, today we call on the
committee and the Bush Administration to hold the line and enforce the
current 3809 regulations as good public and environmental policy that
is pro-taxpayer protection and pro-investor protection. We also
recommend that the BLM significantly strengthen its closure
requirements. They have simply not gone far enough. We are concerned
that the task force recently created by the Bush Administration to
review these issues, may only be responding to the interest of the
extractive industries, rather than the interest of the public,
taxpayers, the environment and investors. The task force should not
consider any weakening of the current bonding rules. And, specifically,
corporate self-guarantees (which amount to nothing more than a pledge
to pay) should not be accepted. To do so would amount to shifting the
cleanup risk from the mining company, where it is today, to the
taxpayer. We are already seeing overburdened states with budget
problems struggling to use taxpayer funds to pay for cleanup.
At a time when Enron and Worldcom scandals have rocked public
confidence and demonstrated a need for much greater corporate
accountability, transparency and fair dealing, the Bush Administration
should reject any efforts that allow mining companies to under-report
environmental liabilities or evade responsibility for paying to clean
up toxic pollution from mines? Today we call on the Bush Administration
to embrace its own public position by enforcing current regulations and
seeking new tools to ensure that polluters pay, not taxpayers. And the
mining industry should, because it's in their own interest, come
forward and acknowledge its liabilities and support efforts to ensure
that mines are cleaned up by mining companies, and not at taxpayer
expense.
The Real Cost of Closure Lead to Higher Risk and Higher Bonds
The issues the industry faces today in regard to securing
reclamation bonds can be directly attributed to the fact that for years
mining companies have proposed and regulators have approved
insufficient reclamation and closure plans and financial assurance
amounts industry-wide. The net discrepancies between what should be
secured for mine closure and what is on the books today could be as
high as $10 billion or more. Although other factors are no doubt
impacting the surety bond market, this is a key issue.
Progressive improvements have been made in the regulations and
enforcement on these issues at the federal level and in some states.
However, instead of moving forward in this direction, some are
beginning to argue that the federal government should gut recent
improvements to existing regulations. If the government accedes,
industry could successfully avoid addressing and accounting for water
pollution impacts, and could be allowed the use of so-called corporate
guarantees--enabling industry to avoid corporate responsibility and
shifting billions of dollars of clean-up costs from the industry to
taxpayers.
Surety bonds, after corporate guarantees, have been the preferred
form of financial assurance by the mining industry. The mining industry
has utilized these instruments because the cost, typically limited to
$5 to $15 per $1000 in value, is relatively low. However, the low cost
has caused the mining industry to use financial assurances in place of
actually conducting reclamation concurrently during mining (at least to
the extent possible). The best means for mining companies to reduce
their liability for cleanup is to simply perform the required
reclamation and closure activities.
As a result, mining companies have left the cost of reclamation and
closure entirely to the post-production period. There is little
incentive for the mining company to conduct the agreed-upon tasks of
reclamation and closure, so the use of surety bonds may actually
exacerbate the problem rather than address it and in some cases may
actually encourage eventual bankruptcy. The only effective means to
ensure corporate accountability and that the polluter pays is to
require cash or equivalent forms of financial assurance.
Industry's practice of leaving all reclamation costs until post-
production has resulted in numerous environmental and financial
disasters over the past 10 years that have cost taxpayers hundreds of
millions of dollars. In response, the Bureau of Land Management and the
states of Montana and New Mexico began requiring financial guarantees
that more fully covered mine reclamation costs.
The Department of Interior's Bureau of Land Management (BLM) 3809
regulations describe the agency's requirements for mine regulation,
including that of mine reclamation and closure planning and financial
assurance. In an October 25, 2001 letter, Interior Secretary Gale
Norton, in discussing her agency's and the Bush Administration's
support for the revised BLM 3809 regulations, stated ``Stringent
financial guarantee requirements--the so-called bonding provisions--
that will ensure that the full costs of any mine reclamation or
environmental damage are borne by the mining operator, and not the U.S.
taxpayer.'' In fact, the revised regulations do include requirements
for water treatment in reclamation and closure plans, the calculation
of agency oversight and contracting costs in financial assurances, and,
most importantly, the elimination of corporate guarantees as an
acceptable form of financial assurance. Secretary Norton and others in
the Interior Department touted those measures as an example of the Bush
administration's commitment to corporate responsibility. Proposals to
continue or even enhance the ability to use corporate self-guarantees
in response to the bonding situation would clearly decrease, not
increase, corporate accountability.
Insurance companies providing surety bonds began to examine their
risk exposure for mining industry guarantees as a result of the
Pegasus, Alta Gold and other mining company bankruptcies and the
increased evidence of higher clean-up costs and company bankruptcy risk
because of the incidence of acid drainage at many mine sites long
before the current so called ``crisis.'' Evidence beginning in 1999
shows those surety bond providers began charging higher rates for
mining surety bonds and reconsidered providing coverage at some mine
sites and for some companies. The current ``crisis'' has as much or
more to do with risk associated with the mining industry than anything
else.
What are the real liabilities?
Table 1 (Source: data from Kuipers, J., Hardrock Reclamation
Bonding Practices in the Western United States, February 2000) shows
the estimated aggregate reclamation and closure financial assurance
amounts for the three largest gold and copper mining companies. The
third column in the table shows the estimated range of actual liability
for reclamation and closure costs faced by those companies. The
estimated range of potential costs was estimated by taking 60% of the
existing financial assurance cost as the ``Low,'' and estimating the
``High'' costs based on the sites owned by each company and
professional experience in estimating costs at similar mine sites where
actual cleanup has been proposed and undertaken. The ``Mid'' cost,
based on experience at other mine sites, represents the typical cost
resulting from actual cleanup determined and/or conducted by state and
federal agencies in response to an abandoned or bankrupt mine cleanup
situation.
As the range demonstrates, while it may be possible for the
companies to conduct the actual reclamation and closure tasks for less
than the cost estimated in their existing financial assurances (by
deducting agency oversight and contracting costs and realizing company
efficiencies), those estimates typically represent the lowest cost of
all possible reclamation and closure outcomes. The actual cost may be
significantly higher as history has shown that in most cases, typically
because of failure to address acid drainage, actual costs are higher
than the amount of financial assurance available once actual site
conditions are assessed upon mine closure. If the mid cost within the
range shown is the actual realized cost for reclamation and closure by
the responsible state and federal agencies, then the total estimated
shortfall amount for the major companies in the gold and copper
industries would be approximately $4.3 billion. Taxpayers may
unfortunately wind up footing that bill, or the mining pollution may be
left unaddressed.
Of the amount of existing total financial assurances shown ($682
million), approximately half of the total is presently in the form of
corporate guarantees (primarily at mines in Arizona and Nevada), 40% is
in the form of surety bonds, and the remainder (less than 10 percent)
in various forms of cash. If those corporate guarantees are not
honored, potential taxpayer costs for clean-up would be even greater.
[GRAPHIC] [TIFF OMITTED] T0881.001
(Source: Kuipers, J., Hardrock Reclamation Bonding Practices in the
Western United States, February 2000)
Note: The figures shown in Table 1 are for mine reclamation and closure
only and do not include additional liabilities for smelters, refineries
and other industrial sites. ASARCO, Phelps Dodge and Rio Tinto all own
major smelting and refining facilities with additional significant
costs for clean-up.
Is Financial Assurance Really Necessary?
Both historic and modern mining operations have demonstrated that
the mining industry has failed to adequately consider reclamation and
closure requirements and costs prior to mining, and have failed to pay
for those costs post-mining. The legacy and cost of abandoned mine
sites is known all too well by the industry, government, and the
public. We are seeing today that cleanup of a specific mine site can
cost tens to hundreds of millions and often requires pollution
treatment systems that will be required to operate for hundreds of
years.
While the intent of regulations enforced before 2002 was to prevent
a similar situation at modern mines, at an even greater scale due to
their methods and size, the following examples show how that system
failed. The examples demonstrate that the system failed due to both
inadequate regulation requirements and inadequate enforcement.
In 1998, Pegasus Gold Corp. filed for bankruptcy protection. At the
time, Pegasus owned and operated at least eight different gold or base
metals mines in the states of Montana (six mines), Nevada (one mine)
and Idaho (one mine). As a part of the bankruptcy restructuring, those
properties deemed valuable by the company were formed into Apollo Gold,
and the remainder of the mines (four in Montana and one in Idaho) were
relegated to the bankruptcy court for disposal with the responsibility
for reclamation and closure activities and costs left to the
responsible state and federal regulatory agencies to resolve.
In Montana and Idaho, the regulators had existing financial
assurance at all the mines in the form of either cash or bonds. The
Zortman and Landusky mines in Montana, the world's first large-scale
open pit cyanide heap leach mines, had financial assurances of
approximately $80 million in face value. The state was forced to
negotiate the bonds and trust fund accruals that had not yet been
placed by the company prior to bankruptcy and as a result received
approximately $70 million in actual cash value after negotiations, less
reclamation and closure work (approximately $20 million) actually done
by the mining company prior to its foreclosure. Subsequent analysis by
the Bureau of Land Management and Montana Department of Environmental
Quality determined that the actual amount needed for reclamation and
closure will total approximately $103 million due in part to acid mine
drainage pollution that will continue for hundreds of years. $103
million represents a shortfall of about $33 million that must be paid
for by taxpayers.
Similarly, Pegasus's Beal Mountain mine in Montana has revealed
that the existing $6 million financial assurance is inadequate.
Reclamation and closure tasks required to clean up and provide water
treatment in perpetuity for mine discharges are likely to cost $12
million or more, representing a shortfall in the bond amount of 50% or
greater. That shortfall has been paid for by the Montana Department of
Environmental Quality (DEQ) and the U.S. Forest Service, which had not
predicted any long term water treatment requirements. According to
Warren McCullough, Bureau Chief of the Montana DEQ's Permitting and
Compliance Division, ``It's not going to be something that we're ever
going to be able to walk away from, ... and people should realize that
no one really understands all the chemistry that occurs after
reclamation begins on the pile of ore where the cyanide milling process
had been used. It's a very complex thing,'' he said. In total, the
shortfalls in Montana alone are approximately $40 million or more,
which will be shouldered by state and federal taxpayers.
However, it should be noted that had Montana accepted corporate
guarantees, which their regulations did not allow for, the shortfall
would have been much greater (BLM did accept corporate guarantees at
the time, but Montana and the federal agencies were able to rely on
stricter state requirements to determine the financial assurance
amounts and forms).
In the mid-1990s FMC Gold Corp./Meridian Gold Corp. sold to
Arimetco Mining Co. its Nevada assets, which included the reclamation
and closure liability for the closed Paradise Peak and other mines.
Arimetco also owned the Yerington Copper mine, which had been operated
for a number of years by others including the Anaconda Mining Company.
Arimetco subsequently declared bankruptcy in 1999 and it was determined
that the company lacked any assets to back its financial assurance for
the Yerington and Paradise Peak projects, which not only was
significantly less in amount than was actually necessary to effect
reclamation and closure, but was also primarily in the form of
corporate guarantees. While the State of Nevada and responsible federal
agencies (primarily the Environmental Protection Agency) have yet to
determine how to address reclamation and closure at these sites (the
Yerington mine has been proposed as an EPA Superfund site), it is
probable that the financial assurance shortfall will be at least $10
million or more and could be more than $100 million (site
investigations are currently underway). The State of Nevada's
regulations, because they result in underestimation of reclamation and
closure costs and allow financial assurance in the form of corporate
guarantees, exposes state and federal regulators and taxpayers to an
unreasonable degree of risk and actually serves to discourage corporate
accountability.
These experiences highlight the consequences to taxpayers and the
environment from inadequate financial assurances, combined with the
recent spate of bankruptcies and incidences of inadequate reclamation
and closure plans throughout the Western U.S. Insufficient money means
less protection for communities, water, wildlife, etc. Other similar
examples exist in South Dakota at the Brohm Mine owned by bankrupt
Dakota Mining Company, the Cunningham Hill mine in New Mexico (also
owned at one time by Pegasus), the Grouse Creek mine in Idaho, and
Illinois Creek mine in Alaska to name just a few.
So far these have been mostly limited to small and medium size
mining companies, with a limited aggregate liability. However, the
situations leading to and resulting from these bankruptcies are highly
similar to those that are now occurring with some of the largest copper
mining companies with extensive operations in the U.S. and potentially
additional gold mining companies.
We now have an opportunity to learn from past problems and ensure
that regulators require strong corporate responsibility at current and
future mines through enforcement and strengthening of financial
assurance requirements. The Bush Administration should not now turn its
back on the taxpayers or the communities that have been burdened by
corporate irresponsibility and inadequate regulatory controls.
Financial Assurance--Where does bonding fit?
Bonding, or more correctly, ``surety bonding,'' is just one of many
forms of financial assurance that are recognized by the various state
and federal agencies. The types of financial assurance and their
various forms can be listed in three general categories as follow:
1.Forms of Cash or Equivalent
2.Surety Bonds
3.Corporate Guarantees
Forms of cash or equivalent are the preferred form of financial
assurance since they are the most secure and are readily available in
the event they are necessary. The regulatory community, much of the
financial community, and public interest groups agree that these forms
of financial assurance are the best protection against taxpayers paying
for the cost of clean-up. Where closure costs are long-term (in many
water-treatment situations, costs are ``in perpetuity'' ), forms of
cash are the only practical way to provide a financial guarantee. Forms
of cash include irrevocable letters of credit (bank guarantees), CD's,
and trust funds.
Surety bonds are essentially guarantees from an insurance company
or its equivalent for the performance of the work. Surety bonds are
generally assumed to be applicable to low-risk circumstances where the
surety bond company, in the event of forfeiture, can expect to be able
to hire another contractor to perform the work in the event the
original contractor defaults on the job. Surety bonds are for a set
amount of money and have the option of being cancelled or renewed on a
regular (typically yearly) basis. Although surety bonds are considered
an acceptable form of financial assurance, experience has shown that
the amount of payout is likely to be reduced by 10-20% or more as a
result of seemingly inevitable negotiation by the surety company.
Corporate guarantees are essentially self-guarantees or more
accurately pledges made by the mine or mining company, or parent
company (typically also a mining company). Although corporate
guarantees are sometimes accompanied by financial tests as a measure of
qualification, in some states the financial tests amount to little more
than the existence of a business license. In cases where financial
tests do exist, experience has shown that companies that have gone
bankrupt continued to meet those tests right up to the moment of their
filing. Corporate guarantees, although allowed in some states, should
not be considered an acceptable form of financial assurance since any
payout at all is doubtful, and replacing a corporate guarantee with
another form of financial assurance once a company experiences
financial difficulty is problematic. The evidence is compelling that
corporate guarantees do not protect the taxpayer.
Principles of Financial Assurance
While the government and regulators need to work with industry and
public interest groups to resolve the short-term and long-term mine
reclamation and closure planning and financial assurance issues,
certain principles of corporate responsibility and accountability must
be strictly adhered to in formulating a response to the current
situation. These principles include the following:
Enforcement of existing state and federal laws that
ensure against taxpayer cost for clean-up of mine pollution where
already established (such as in the revised BLM 3809 rules and Montana
statutes and regulatory practice), and improvement of other state and
federal laws as necessary to provide equivalent protection to all state
and federal jurisdictions.
Polluter provides a cash or equivalent financial
guarantee; no corporate or third party guarantees or transfer of risk
to taxpayers.
Financial assurance should cover the entire cost of
reclamation and closure including source control, surface reclamation,
contaminated water capture and treatment, and monitoring, with
allowances for agency oversight and management should it become
necessary.
By adhering to these principles the mining industry and government
can ensure that the responsible corporation and its shareholders
shoulder the burden of liability created by their activities, and that
adjacent landowners and the public at large can be assured that no
significant harm will occur to their health, natural resources or
quality of life as a result of corporate malfeasance.
Mining Industry Response to Surety Bond Market
While some mining companies have indicated difficulty obtaining
surety bonds and voiced concerns about their ability to provide
alternative forms of assurance that are considered acceptable, there
are ready solutions to the problem. Many companies, even facing
difficult financial situations, have managed to provide both increased
and acceptable financial assurances. For example, Stillwater Mining
Company in Montana recently saw its financial assurance requirement for
its East Boulder platinum group metals mine increase from about $4
million to nearly $12 million. Kennecott Greens Creek Mining just
secured an $18 million letter of credit to fill out its $24.4 million
surety obligation for the Greens Creek mine in Alaska (the remainder of
the surety is a $6.4 million surety bond already in place). Despite
financial difficulties and the inability to obtain a surety bond, these
companies agreed to put up letters of credit for the amount necessary.
Similarly, other companies such as Placer Dome and Barrick Gold, the
second and third largest gold producers in the U.S. respectively with
significant operations in Nevada and other western states, have
reportedly experienced little difficulty in retaining their existing
surety bonds or replacing them with forms of cash or its equivalent.
The companies complaining the most about the current situation are
the largest companies with the greatest amount of unrealized liability
associated with the cost of clean-up. These companies are responsible
for some of the largest modern mining sites that require extensive
reclamation and closure measures, and at this time the costs for those
measures are either drastically underestimated or have been largely
ensured by corporate guarantees. These costs are a direct result of the
companies'' own poor environmental practices during operations and the
lack of environmental controls to encourage the companies to have
conducted their operations differently.
Does the Industry Recognize This Problem?
The present actions of the U.S. mining industry suggest that it
neither acknowledges nor is prepared to address the problem of
inadequate reclamation and closure plans and financial assurance.
However, the world-wide mining industry has specifically recognized it
as a priority issue. The world mining industry has been undertaking a
concerted project to address the specific steps that the industry needs
to take to change mining/minerals related activities to the broader
societal trend towards sustainable development. Towards this end the
mining industry formulated the Mining, Minerals and Sustainable
Development (MMSD) process, which recently culminated with the Global
Mining Initiative conference held in Toronto, Canada. It should be
noted that all the major copper and gold mining companies doing
business in the U.S. participated in the MMSD process and conference.
By the end of the process priority issues and actions emerged, with
the Mining Legacy Issue, that of dealing with reclamation and closure
of both historic and modern mines, identified as a top priority. Among
the final recommendations was to enhance efforts to address the legacy
of past mining and mineral activities, and to strengthen the basket of
legislated rules, market incentives, and voluntary programs to prevent
the same problem from continuing into the future. A key feature of the
recommendations was adherence to the principle that the ``polluter
pays'' all costs for reclamation and closure. The process also
recognized that, in order to ensure the government and taxpayers do not
inherit these costs, financial guarantees such as cash or bonds are
necessary to ensure that they will comply with reclamation and closure
plans. By requiring real financial guarantees, the specific obligations
for mine closure will be carried out; costs will be internalized, and
economic efficiency will be promoted. The report concludes that
``Without such surety, the legacy of abandoned sites and their
attendant problems are certain to grow'' (from Final MMSD report, pp
408-409).
The present use of corporate guarantees is in stark contrast to the
priorities and actions identified by the mining industry as a whole to
address what it considers to be a key issue to its future survival as a
business sector, and also all too often fails to protect taxpayers, or
communities faced with mining pollution.
Conclusion
The so-called surety bond ``crisis'' is related to the much larger
and significant issue of underestimated and unguaranteed hardrock mine
reclamation and closure costs. The lack of corporate accountability has
resulted in a potential risk to taxpayers for mine cleanup of billions
of dollars for modern mine sites. This has resulted both from a lack of
adequate regulation as well as weak enforcement of existing
regulations. At a time when corporate accountability is being seriously
questioned, and when increased costs for and unavailability of surety
bonds are a perfectly logical free market response, weakening existing
regulations and accepting self-guarantees appears to be highly
inappropriate.
Serious efforts should be undertaken to address reclamation and
closure planning and financial assurance estimation to avoid taxpayers
paying for clean-up at the nation's mine sites. Regulations such as the
revised BLM 3809 rules, which were intended to address and remedy this
situation, should be retained and enforced, rather than weakened as has
been suggested by the mining industry and being considered by the Bush
Administration. The solution involves not weakening protections against
corporate irresponsibility. Instead, the government should work with
the industry and other stakeholders to ensure that adequate financial
guarantees are in place so that the industry is able to pay for mine
pollution clean-up and spare taxpayers the cost.
______
Mrs. Cubin. Thank you. I will start my questioning with Mr.
Jeannes. Does Glamis use professionals to estimate reclamation
and closure costs?
Mr. Jeannes Yes, certainly professional engineers on staff
and in some cases third-party independent consultants. But in
all cases, the regulatory agency is the one who ultimately
determines the amount of the bond, not the company.
Mrs. Cubin. Would you comment on Glamis' experience with
reclamation and planning costing? Do you find it difficult to
accurately estimate reclamation and closure costs and is it
also your practice to do reclamation as you move along in a
site?
Mr. Jeannes Yes. We call it concurrent reclamation and
absolutely, we do that at all of our mines. We actually have
quite a bit of experience at reclamation. Because Glamis
operates only heap leach oxide minutes above the water table,
no pit lakes, no acid drainage, it is quite simple to estimate
the costs of reclamation because you are simply talking about
the time of rinsing a heap and then of moving a certain number
of yards of dirt and then reseeding and revegetating.
So, we have done a lot of it and we think we are very good
at estimating the cost, yes.
Mrs. Cubin. How come this is not practiced in the industry?
Isn't' that what is required?
Mr. Jeannes Certainly in my experience in Nevada, everybody
does concurrent reclamation. Because most of the operations
there are fairly mature, everyone has a pretty good idea of the
cost of doing it.
Mrs. Cubin. In Mr. Kuipers' testimony, in his written
testimony anyway, it says that a mine site may disturb 10,000
or more acres, which is about 15 square mines of land. How many
mines in the United States do you think disturbs 15 square
miles of land at any given time?
Mr. Jeannes I am really not qualified to say. I can
certainly say that ours are many magnitudes smaller than that.
I can't imagine that even Gold Striker, one of the big ones, is
disturbing that much ground.
Mrs. Cubin. Could you comment on that, Mr. Kuipers?
Mr. Kuipers. Yes, I would. Mostly copper mines, major
copper mines, for example, the Chino and Tyrone Copper mines
owned by Phelps Dodge in New Mexico. The Kennecott operations,
or I should say the Rio Tinto operations in Utah and a number
of different mining operations in Arizona do have mine sites
that large or larger. There are at least ten in the U.S. that I
am aware of.
Mrs. Cubin. I have seen the one in Utah and it certainly
didn't look like a 15 square mile site.
Mr. Kuipers. I have the figures and it is over 10,000
acres.
Mrs. Cubin. I think we will ask for those figures and we
will also get that information from the companies, actually,
how big their footprint is. We thank you for that.
Lastly, Mr. Jeannes, what is currently the general practice
regarding reclamation and closure in the mining industry.
Mr. Jeannes That is very strong. As I said, everybody does
concurrent reclamation. It makes financial sense in addition to
being the right thing to do because you don't want to be hit
with a large and time consuming effort to close a mine when you
are not reporting revenues at the end of production.
Mrs. Cubin. That is one of the problems that the long tail
on the surety bonding doesn't take into consideration, that
reclamation has gone on and part of that obligation also, I
think, speaks to the problem that has been addressed on the
other side of that, ``appropriate bookkeeping'' and how the
liability of reclamation isn't included in the books and so the
liability isn't the same as you go because you are cleaning up
as you go.
Mr. Jeannes Well, it is certainly included in our books and
that accrued reclamation liability changes every year as we
continue to do work. I would say that one of the problems is
that it is so difficult to get a bond modified or released,
when you do finish an amount of work and want to go in to get
that changed, your surety would love to be able to see you do
that because that would take them off the hook for some new
amount of work that has been completed to the satisfaction of
the agency.
But it is such a difficult process that I am afraid many
operators simply wait until the end of the mine to do it all at
once.
Mrs. Cubin. Mr. Done, I referred to this problem earlier,
but I would like you to go into an explanation about the
bonding requirement for lease by application program.
Tell me everything you know about that and especially, what
is the risk of the Federal Government in requiring that
bonding?
Mr. Done. Well, there is a big difference between an LBA
type bond and a reclamation bond. The release by application
bond is going to be a bond which guarantees the company is
going to pay for the coal that they are leasing.
The company will pay 20 percent down and then on an annual
basis for the next 4 years, make another payment of the 20
percent. So that within 4 years you have purchased the lease.
Mrs. Cubin. Could I interrupt for just a second?
Mr. Done. Sure.
Mrs. Cubin. So, within 4 years you have purchased the
lease. Where along that timeline does production actually
start, before the 4 years are up or after the 4 years are up?
Mr. Done. In most cases, I would believe it would always be
before the 4 years are up. You may not produce, but you would
start developing. As soon as you get the lease, you are going
to start developing that as part of your game plan, at least
that has been part of our practice.
On a reclamation bond, we have talked about the tail is
very long and surety companies are not prepared at this point
in time to go out that long. The problem we had on the lease
bond was very simple. The terms of the lease indicate that if
the mining company defaults, the entire amount of the bond
defaults with it. This, by the estimation of our surety
underwriters unduly enriches the government, point blank.
Let me give you the example that I have been using. In
Kennecott's situation, we purchased the coal for about $380
million; $75 million down and $75 million more four more times.
Mrs. Cubin. And half of that went to the Federal Treasury
and half of that went to the State Treasury.
Mr. Done. I believe that is correct. Now, the issue
becomes, let us just make the assumption that Rio Tinto goes
away in that period of time, like a Worldcom. What happens is
the surety company pays for that coal, but they don't get the
coal because they are not a qualified coal buyer.
The government gets the money, gets the lease back, and
then can re-lease that coal. Now, they may not re-lease it
again for $380 million because you have taken a Rio Tinto out
of the equation. But they are going to lease it for some fair
market value at that time based on who can bid.
But the Federal Government therefore will get $380 million
from Kennecott and its surety, plus whatever they're going to
get from the new guy. The surety underwriter is saying unless
that rule is changed, we will not write that type of surety
bond again because that is a default, penalty, punitive bond.
All they are asking is that the Federal Government at the end
of the day not be put in a position that it makes them better
off than if Kennecott had paid for the $380 million up front.
There are ways to do that.
Mrs. Cubin. Well, I wonder if that is not maybe where--if
that isn't where the breakdown comes with Mr. Inslee's
assumption that we are asking for a weakening of bonding for
reclamation when, in fact, what we do need to do is something
about this unreasonable enrichment of the Government .
Tell me what effect that that will have on future leases.
Mr. Done. Great question. In the fall of 2003, Kennecott
and other mining companies will be bidding on a tract that is
fairly close to the tract that was just awarded. If we go into
this bidding process knowing that we will not be able to secure
a surety bond and our competitors go into that also with the
same background information, I firmly believe that each company
will have to assess the risks associated with securing that
lease and the risk would be tying up corporate assets, similar
to what we have done on the North Jacobs Ranch.
Ultimately, without putting probability on it, you could
have a serious reduction in the amount that a coal company was
willing to pay for coal, which does have, any way you want to
cut it, a severe impact on the Federal economy and the State
economy where that coal is coming from.
Mrs. Cubin. In Mr. Kuipers' testimony--and, believe me, Mr.
Kuipers, I am going to give you a chance to respond to all of
this--he says in his written testimony that based on
professional experience, Rio Tinto may be liable for nearly
$1.5 billion in mine closure costs.
I asked Mr. Jeannes this question. I will ask it of you.
Does Rio Tinto use professionals to estimate these costs? And
how do your estimates differ from Mr. Kuipers'?
Mr. Done. I will tell you, I can answer half of that
question. The half I can answer is, yes, we do use
professionals both internal and external to estimate our
reclamation responsibilities. And we record our reclamation
responsibilities in our financial statements as an accrued
liability on an annual basis, adjusted annually, and our
auditors are involved in the process of signing off on that.
Can I tell you the difference between Kennecott's or Rio
Tinto's numbers and Mr. Kuipers'? I can at a later date. I
don't have that information in front of me at this time.
Mrs. Cubin. We will ask you to provide that to us in
written questions and follow-up.
[The information referred to follows:]
Dear Chairman Cubin:
Thank you for allowing me to testify before the Energy and Mineral
Resources Subcommittee on behalf of Rio Tinto, Kennecott Energy and
Coal Company and the National Mining Association. I wanted to follow up
regarding a few questions that you asked during the hearing.
As you know, Kennecott Utah Copper Corporation (KUCC) is a copper
operation located near Salt Lake City, Utah. KUCC owns approximately
95,000 acres of which 7,700 are associated with the open pit mine and
the mine's related waste dumps, and 9,700 are associated with the
tailings impoundment. KUCC has established a reserve for reclamation
costs of several hundred million dollars and over the last several
years has spent in excess of $200 million on environmental cleanup.
Again, thank you for allowing me to testify. If you need any
additional information, please do not hesitate to contact me.
Regards,
Ken Done
Director Treasury Services
Rio Tinto Services, Inc.
______
Mrs. Cubin. Mr. Kuipers, would you like to comment on that?
Mr. Kuipers. Yes, I would. When I say that there is a
potential higher liability, it is primarily associated with
acid drainage. I would like to point out that the testimony of
the gentleman from Glamis I think is very accurate. There are
companies out there that are doing a good job. They don't mine
below the water table. They haven't been involved in mining
sulfides. They do concurrent reclamation. That is not the case
with many of the copper mining companies and at least some of
the gold mining companies that we are talking of today.
In the case of Rio Tinto's Bingham Canyon operation, my
records show that there is a total disturbance area of
approximately 27,000 acres, and their existing reclamation
assurance amount for those properties in combined total is
about $36 million.
Recently, I was involved at the Chino Mine in New Mexico
working out a cooperative agreement with the New Mexico State
Governor's Office, the Phelps Dodge Mining Company, and others,
and we came up with a $385 million number for a mine of about
12,000 total acres. These two mines have many similar
characteristics, and the difference is that the assessment in
New Mexico included the cost of acid drainage which resulted in
a requirement of water treatment in perpetuity, which, of
course, is one of the things that are affecting the
availability of bonds.
But the need for long-term assurance--and, really, the only
way you can do it is in the form of cash--is very much there.
The actual amount of these liabilities I just based upon an
average amount typical for increases in the cost for acid
drainage. It may be even higher than what I have estimated.
Mrs. Cubin. Back to you, Mr. Done. How long does it usually
take for OSM to release a reclamation bond once the mining is
complete?
Mr. Done. Well, right now, we are having difficulty getting
anything released. It has to do with the fact that when many of
the bonds were issued, it was for certain requirements that
existed at the time when the bond was issued. And as those
regulations have changed and now acid mine drainage has become
a problem, there has been a reluctance to release bonds. And I
am not privy to exactly the numbers for the entire mining
industry, but for the Kennecott family, it has been an awful
long time since we had a release of a bond, even though
reclamation has been completed for the work that was
anticipated when a bond was originally issued.
Mrs. Cubin. So it would appear that shortening that time
period without jeopardizing the purpose of the bonding is
pretty impossible?
Mr. Done. There is an impasse on that issue, yes.
Mrs. Cubin. In his written testimony--and, again, I hate--
my mother always taught me you don't refer to somebody when
they are sitting in the room. It reminds me of during the
Watergate hearings, I think it was, where they said, ``What do
you think I am, a house plant?'' Anyway, so I hate to be asking
these questions about your testimony, but I do want to have all
sides on the record, so I will get back to you again, Mr.
Kuipers.
In his written testimony, he argues that the mining
industry is not facing a crisis because many companies,
including Rio Tinto, continue to secure bonds for their
operations. I understand that recently Rio Tinto was unable to
obtain bonding for a talc operation in Montana and was forced
to post $10 million in cash.
Would you please comment on the current problem that your
company is having with that operation in Montana?
Mr. Done. Yes. In the Montana operation, Luzenac, one of
our companies, had a $10 million plus bond that was
underwritten by a surety company, and the surety company
elected to leave the business, and they asked our operation,
Luzenac, if they could get off the bond, and they also asked
the State government if they could get off the bond.
At the time they asked, our Luzenac people were not aware,
as maybe they should have been, of the crisis, and so they
elected to get off that bond without having a back-up bond in
place.
We have been unable to secure a bond for that operation,
and we have also been unable to secure a letter of credit at
this time due to the language that has been required by the
State of Montana for a letter of credit. We have been unable to
find a bank that would be willing to write that letter of
credit.
We are working with the State of Montana and hopefully we
can come to some type of resolution very quickly for a letter
of credit. But we are unable to find a bond from any
underwriter up there.
And let me add one other thing. That $10 million in the
State of Montana has been posted for several months now and is
non-interest-earning to the mining company. So we have handed
them $10 million plus in cash. We are getting nothing other
than we continue to mine from that. The risk to the taxpayers
of the State of Montana to reclaim that operation has not
changed.
Mrs. Cubin. Thank you very much.
In your testimony, Mr. Kuipers, on page 12, you refer to
this so-called surety bond crisis, and you have ``crisis'' in
parentheses. Does that mean that you don't believe the surety
bond market is in crisis?
Mr. Kuipers. No, I don't believe this is a crisis, though
the mining industry is portraying it to be. I have been
involved in the mining industry for over 20 years, and I think
at least 10 years ago, if not long before that, most of the
mining companies knew this situation was going to happen sooner
or later. Many companies changed their practices. Many
companies began accruing funds. Many companies looked forward
to this situation. Others didn't.
I think the crisis is being called by those companies who
really are in a situation that they haven't taken care of the
reclamation closure obligations, and I don't believe they have
an intention to.
Mrs. Cubin. On page 4 of your written testimony, you said
that at a time when Enron and WorldCom scandals have rocked
public confidence, the Bush administration should reject any
efforts to underreport environmental liabilities.
Are you saying that mining companies are engaging in fraud
to hide environmental liabilities on their balance sheet? And
if so, what evidence do you have of that?
Mr. Kuipers. I don't know that I would call it fraud
because I am not an attorney and I don't know how to actually
define that. But I can tell you that the way mining companies
are reporting their potential liabilities appears to be far
short of what is real. Take Phelps Dodge, for example. Their
current 2001 annual report shows that they have an accrual of
approximately $135 million in reclamation liabilities. At the
same time, they go on to state that they are recognizing the
State of New Mexico has looked at their Chino and Tyrone Mines
and recognized an aggregate potential probable reclamation
closure amount of approximately $800 to $900 million.
Now they aren't saying anything on their books anywhere
about needing to spend $800 or $900 million over the next ten
or twenty years. All they say is the costs may go up, may go
up, when in fact their books, I believe, should show that there
is a certainty that their reclamation and closure costs will
rise substantially.
Mrs. Cubin. Would you respond to that, Mr. Done?
Mr. Done. I can't respond as to what Phelps Dodge is doing
and what their books say, but I can tell you like both of us
have said earlier, we do an annual estimate of what our
reclamation obligations are and it is recorded in our financial
statements and fully disclosed.
Mrs. Cubin. Mr. Jeannes?
Mr. Jeannes I don't know the Phelps Dodge situation, but I
could probably offer that it might be the difference between
the third party contractor costs of clean up that might be
assessed or anticipated by the State versus Phelps Dodge
internal costs which are usually about one third, in our
experience at least.
When the BLM sets up a bond, they have to base it on third-
party contracted costs in the event that we are not around. Our
actual costs to clean up are generally about one third of that
amount.
Mrs. Cubin. Thank you.
Mr. Done expressed the desire to make suggestions to help
solve this problem. So, Mr. Kuipers, I am going to start with
you, but since you don't think there is a problem, maybe you
don't have anything to say.
Mr. Kuipers. Well, I do have quite a bit to say. It is not
that I am saying there isn't a problem. There certainly is a
problem, but the problem is not just the surety bond situation.
It is the overall situation facing the mining industry and
needing to deal with reclamation and closure costs.
I just spent the last two and a half months in negotiations
representing a public interest group in the State of New Mexico
with the Governor's office, with the Mining and Mineral
Division, the Environment Department and Phelps Dodge, trying
to come up with a solution to their existing problem.
The company has refused to put up any forms of cash or
other guarantees and instead wants a very, very large corporate
guarantee. I can tell you I told my client who represents the
public interest in the State and to the agencies in the State,
that situation is not acceptable.
So, I think there are ways to work at this. We are trying
to work closely with the mining companies. Those companies are
willing to discuss this matter and work creatively. We are
looking at things like collateral, getting things where they
can go ahead and put their land up, their water up to an
insurance company and use that as part of the bonding
mechanism.
I think there are a number of different ways to address
this problem. What we can't do is put together a situation
where we go backwards and where we are beginning to address the
problem over the last five or 10 years, we now go back and act
like there isn't a problem. That would be a great failure.
Mrs. Cubin. Mr. Done, would you suggest what regulators and
Congress should examine and your suggestions to help solve this
problem?
Mr. Done. I appreciate the opportunity to address this is.
I think that the formation of this task force by the Department
of Interior is a great idea. It needs to have input from both
the mining industry, from citizens, from the surety industry to
see if there is some type of solution we can come to
collectively that meets the needs of protecting the taxpayer.
I don't think any group, including myself or the National
Mining Association will at this point in time tell you we have
done any more than basically kicked over the first stone to try
to come up with ideas. So, there are lots of things and lots of
discussions that need to take place.
But we have come up with some general areas that we think
merit some additional consideration.
The first is, we need to establish and maintain reasonable
bond amounts. We also need to make sure that once a bond is
written, that if sureties are willing to write a bond, that the
rules it was written under need to apply throughout the
duration of that bond. The continual adding of new requirements
for release of the bond after the bond is written is going to
provide a barrier to keep the surety industry out of this
business.
We need to consider how we can find a way to impose some
time limitations onto these bonds. That would entice the re-
insurance business to maybe take a look back at this business.
It also would be nice if the Department of Interior would issue
some type of a policy statement to the field encouraging timely
release of reclamation bonds. This would show the surety
industry a positive step that they can eventually get their
bonds back.
The last thing I would like to address is that there may be
mechanisms outside of surety bonding that should be considered.
Self bonding is an acceptable alternative under current
regulations.
However, some of the government entities that are in charge
of allowing self bonding have chosen not to accept it, even
though it is allowed in some cases.
I would hope that if we do get to a position where we could
look at the strength of a company and maybe even compare it to
the strength of maybe an insurance company, we may find out
that some mining companies are just as strong, if not stronger,
than the surety companies that are providing support.
I would hope that both domestic and foreign parents would
be allowed to self bond.
Another idea is to standardize the acceptance of letter of
credit and standardize the types of letter of credit and the
form of the letter of credit so that each government entity
would not set up their own type of letter of credit form.
It is very difficult to go to a bank with numerous
different forms and say, can you provide it here? They may be
able to. Then you go there, ``No, we can't write that.''
If we could standardize both bond forms and letter of
credit forms, it may be beneficial to enticing the surety
industry and enticing banks to provide financial insurance.
The last thing I would like to address is that there may be
a way, instead of saying it is an all or nothing, it is for one
particular site to say you have to provide me a reclamation
bond, maybe it can be a combination, maybe some surety bonding,
maybe some letters of credit and maybe some self-bonding so
that the government is not completely exposed to a self-bond,
but also the surety industry realizes that the company has got
a stake in this also.
Thank you very much.
Mrs. Cubin. Thank you.
Mr. Jeannes, do you have anything to add to that?
Mr. Jeannes Nothing in addition to what I have already said
or what Mr. Done provided. Thank you.
Mrs. Cubin. Thank you. One last question, I meant to ask
this earlier on, Mr. Done. I asked Mr. Fulton and he is going
to provide written information later.
Do you know how the Interior Department goes about
selecting which leases will be included in the lease-by-
application program?
Mr. Done. That caught me so off-guard because I thought
everybody had to post cash or sureties. I did not know there
was some mechanism that maybe you didn't. I was under the LBA
Program where those rules are very firm and that you either
post a surety or you post case or U.S. Treasuries. There was no
option available other than that.
If I am unaware of those regulations, I need to be
informed.
Mrs. Cubin. This is the first one I have ever heard of, not
that I know in-depth the practices or in great depth. But I
have not even heard of this happening before.
I had to check with staff to make sure. It isn't common
practice. I just wondered how that selection was made. We will
inquire of the department about that as well and then you will
want to read the record.
I want to thank all of you for your valuable testimony and
taking the time to come and helping the Committee out. I do
look forward to having some good results from the task force to
try to see if we can protect our environment to the utmost and
still be able to produce the rich resources that we were given
by God.
So, thank you very much.
The record will be kept open for 10 days in case any member
of the Subcommittee has further questions of the panel. Having
no more business, the Subcommittee is adjourned.
[Whereupon at 11:53 a.m., the Subcommittee was adjourned.]
[The prepared statement of Mr. Rahall follows:]
Statement of Hon. Nick J. Rahall, a Representative in Congress from the
State of West Virginia
This is indeed a timely hearing and I would like to thank the
distinguished gentle lady from Wyoming for scheduling it.
In my view this hearing is timely for two reasons. First, it is
providing the public with an opportunity to learn about yet another
Administration task force that has apparently been operating behind
closed doors in relative secrecy.
This task force on an alleged ``bonding crisis'' has met with
industry, has solicited industry's input, but has not met with
representatives of public interest or environmental groups. Whether or
not this task force will get around to soliciting input from entities
other than industries the Interior Department regulates remains to be
seen.
I would simply hope that these consultations occur prior to the
task force sending any recommendations it may make to the Government
Printing Office.
This hearing is also timely because the topic is fundamentally
about corporate responsibility, which is an issue that is very much in
the news these days.
A cynic would perhaps suspect that a ``bonding crisis'' may be used
as an excuse to rollback environmental regulations governing the
mining, oil and gas industries starting with what is left of the `3809'
regulations for hardrock mining on federal lands.
For my part, I would prefer to take the view that as a result of
the changes taking place in the surety industry, the mining industry
would become even better corporate citizens, more fully internalize the
costs of conducting its business, and vow to no longer leave a legacy
of acidified streams and tortured landscapes for future generations to
cope with.