[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



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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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    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.
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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.

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