Alaska's North Slope: Requirements for Restoring Lands After Oil 
Production Ceases (05-JUN-02, GAO-02-357).			 
                                                                 
This report discusses the nature and extent of dismantlement,	 
removal, and restoration requirements for oil industry activities
that are occurring on both federal and state lands located on the
North Slope of the state of Alaska. The state of Alaska, which	 
owns the lands where most of the North Slope's current oil	 
production occurs, has adopted general dismantlement, removal,	 
and restoration requirements that contain no specific		 
stipulations on what infrastructure must be removed or to what	 
condition the lands used for oil industry activities must be	 
restored once production ceases. Alaska's requirements are	 
similar to those of some states but less explicit than those of  
other states, which create a fixed obligation to fully restore	 
the land according to specific requirements. Until the state of  
Alaska defines the condition in which it would like its lands	 
returned, there is no way to accurately estimate the cost of	 
dismantling and removing the infrastructure and restoring the	 
disturbed land on Alaska's North Slope. Existing financial	 
assurances, such as bonding requirements, ensure the availability
of only a small portion of the funds that are likely to be needed
to dismantle and remove the infrastructure used for oil industry 
activities and to restore state-owned lands. Current		 
dismantlement, removal, and restoration requirements and	 
financial assurances for federal lands on the North Slope vary by
agency, but are generally insufficient to ensure that any federal
lands disturbed by oil industry activities will be restored.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-357 					        
    ACCNO:   A03489						        
  TITLE:     Alaska's North Slope: Requirements for Restoring Lands   
After Oil Production Ceases					 
     DATE:   06/05/2002 
  SUBJECT:   Cost analysis					 
	     Crude oil						 
	     Land management					 
	     Offshore oil drilling				 
	     Arctic National Wildlife Refuge (AK)		 
	     North Slope (AK)					 
	     Trans-Alaska Pipeline System			 

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GAO-02-357
     
A

Report to Congressional Requesters

June 2002 ALASKA?S NORTH SLOPE Requirements for Restoring Lands After Oil
Production Ceases

GAO- 02- 357

Transmittal Letter 1 Executive Summary 2

Purpose 2 Background 3 Results in Brief 7 Principal Findings 10
Recommendations for Executive Action 13 Matter for Congressional
Consideration 13 Agency Comments and GAO?s Evaluation 14

Chapter 1 17

Introduction Alaska?s North Slope Is a Sensitive Environment 17

Oil Industry Activity Occurs Primarily on State- Owned Lands 20 Many
Entities Benefit from Revenues Generated by Oil Production on the North
Slope 25

Dwindling Production Focuses Greater Attention on the Disposition of Oil
Company Infrastructure on the North Slope 26 Dismantlement and Removal of
Infrastructure and the Restoration

of Land Involves Many Agencies at Multiple Levels of Government 28
Objectives, Scope, and Methodology 30

Chapter 2 33

Current DR& R The State of Alaska Determines DR& R Requirements for Existing
Oil

Production 33 Requirements for

Parties Disagree on Whether State Requirements Should Be More Existing Oil
Production

Specific 43 Are Very General

Alaska?s DR& R Requirements Are Similar to Some States?, but Less Explicit
Than Others? 46

Chapter 3 48

Actual Cost of DR& R Is Costs Depend on What DR& R Will Be Required, Which
is Uncertain

48 Unknown, but Likely to

Oil Company Disclosures Provide Some Indication that DR& R Costs Cost
Billions of Dollars

Will Likely Be in the Billions of Dollars 49

Chapter 4 53

Financial Assurances Previously Abandoned Sites on State Land Had
Insufficient

Financial Assurances 53 That Funds Will Be

Alaska?s Statewide Bonding Requirements for DR& R Cover Only a Available for
Projected

Small Portion of the Potential Liability 55 DR& R Costs Are

The Corps of Engineers, Local Government, and Alaska Native Corporations
Have Not Required Financial Assurances for DR& R

Limited Activities 57

Major Oil Companies Operating on the North Slope Do Not Believe Full
Financial Assurances Are Necessary 58 Alaska?s Bond Amounts Exceed Those of
Most of the Other

Oil- Producing States We Reviewed 58 Chapter 5

60 Specific DR& R

As Oil Production on State Lands Declines, Development of Federal Lands Is
Being Pursued 61 Requirements and

DR& R Requirements for Federal Lands on the North Slope Vary 62 Improved
Financial

Assurances That Funds Will Be Available to Implement Federal Assurances
Should Be

DR& R Requirements Are Limited 69 Previously Abandoned Oil Exploration Sites
on Federal Lands

Considered for North Remain a Problem 72

Slope Federal Lands DR& R Requirements and Financial Assurances for TAPS and
the

Mining and Nuclear Power Industries Are Explicit 74 Conclusions 77
Recommendations for Executive Action 78 Matter for Congressional
Consideration 79 Agency Comments and Our Evaluation 79

Appendixes

Appendix I: Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of Other Oil- Producing States 82

Appendix II: Comments from the Department of the Interior 91

Appendix III: Comments from the State of Alaska 94 GAO?s Comments 100

Appendix IV: GAO Contacts and Staff Acknowledgments 106 GAO Contacts 106
Acknowledgments 106

Tables Table 1: GAO?s Estimate of North Slope Infrastructure, as of January
2000 23

Table 2: North Slope Oil Units, Production, Operator, and Ownership 23 Table
3: Number and Status of North Slope Oil Well and Drill Sites,

as of March 28, 2002 34 Table 4: State Oil and Gas Well Permitting Surface
Restoration

Provisions 82 Table 5: State Oil and Gas Lease Surface Restoration
Provisions on State- Owned Lands 83

Table 6: State Oil and Gas Well Permitting Financial Assurance Provisions
for Well- plugging and Abandonment 84 Table 7: State Oil and Gas Lease
Financial Assurance Provisions

that Cover Well- plugging and Abandonment on State- Owned Lands 87

Figures Figure 1: Map of North Slope Land Ownership 4 Figure 2: Prudhoe Bay
Oil Production and Support Facilities 7

Figure 3: Map of Alaska and the North Slope 18 Figure 4: Aerial Photo of
Area Surrounding Alpine Oil Field 19 Figure 5: Development of North Slope
Oil Producing Area in

1999 22 Figure 6: Alaska North Slope Oil Production History and

Projections 28 Figure 7: Alaska Oil and Gas Conservation Commission?s
Location

Clearance Requirements 36 Figure 8: Series of Well Sites on Prudhoe Bay Unit
and Kuparuk

Unit Well Pads 37 Figure 9: Alaska Department of Natural Resources Past and
Recent

Rights upon Lease Termination Provisions 39 Figure 10: Endicott Production
Islands 45

Executive Summary Purpose Alaska?s arctic coastal plain, also referred to as
the ?North Slope,? is a harsh

yet sensitive environment that has been a center of controversy for the
United States? energy and environmental policy throughout the past four
decades. Since the opening of the 800- mile- long Trans- Alaska Pipeline in
1977, more than 13 billion barrels of oil have flowed from thousands of oil
wells on the North Slope to international and domestic markets. During this
period, North Slope oil has contributed about 20 percent of the United
States? annual domestic production.

The process of finding and producing oil on the North Slope has required the
build- up of a considerable infrastructure, including thousands of well
sites; hundreds of miles of pipelines, roads, and airstrips; and numerous
oil production facilities and living facilities. Most of this infrastructure
is located on lands owned by the state of Alaska. However, oil companies and
the state are now seeking additional sources of oil on adjoining federal
lands to compensate for declining oil production on state lands. Eventually,
even with additional oil production from federal lands, production on the

North Slope will decline to the point that operating the Trans- Alaska
Pipeline will no longer be profitable. After that, the oil industry?s
considerable infrastructure, estimated to be as much as $53 billion, will no
longer be needed. Concerned about whether this infrastructure will be
removed from the North Slope and to what condition the land will be restored
when oil production activities cease, the House Minority Leader, the Ranking
Minority Member of the House Resources Committee, and Representative Edward
Markey asked us to determine

 the nature and extent of dismantlement, removal, and restoration
requirements for existing oil industry activities on state- owned land on
Alaska?s North Slope, including how these requirements compare to those of
other oil- producing states;

 whether any cost estimates exist for the dismantlement and removal of the
infrastructure and for the restoration of North Slope state- owned land;

 what financial assurances the state of Alaska has that funds will be
available to cover the eventual dismantlement, removal, and restoration
costs and how these assurances compare to those of other oil- producing
states; and

 the nature and extent of dismantlement, removal, and restoration
requirements and financial assurances governing future oil industry
activities on federal lands located on the North Slope and how these compare
with requirements and financial assurances in other related industries, such
as mining and nuclear power.

Background Alaska?s North Slope covers about 89,000 square miles of federal,
state, and native land holdings stretching from the Brooks Range north to
the Arctic

Ocean- an area larger than the state of Utah (see fig. 1). Currently, most
oil production on the North Slope takes place on state lands in the general
vicinity of Prudhoe Bay, which, in 1968, was the site of the largest oil
field ever discovered in North America. Recently, remote offshore oil
production also began in the waters of the Arctic Ocean north of Prudhoe
Bay. The

state and the federal government are jointly responsible for regulating this
oil production.

Figure 1: Map of North Slope Land Ownership

Notes: The areas designated in the map as the National Petroleum Reserve-
Alaska and the Arctic National Wildlife Refuge contain some Alaska Native
lands. Similarly, the area titled ?Mostly State Lands? also contains some
Alaska Native lands. Finally, the area on the far left portion of the map
labeled ?Mostly Native Lands? also includes some state and federal lands.
The Trans- Alaska Pipeline System (TAPS) extends from Prudhoe Bay to Valdez,
Alaska.

Source: GAO?s adaptation of a Bureau of Land Management map.

Active oil exploration is also underway in the federally owned National
Petroleum Reserve- Alaska, a 23- million- acre tract located west of Prudhoe
Bay. The Bureau of Land Management manages the National Petroleum Reserve-
Alaska for both oil resources and natural values. The Congress has not
determined whether to open portions of the federally owned Arctic National
Wildlife Refuge, east of Prudhoe Bay, to oil and gas development activities.
The refuge, which is managed by the U. S. Fish and Wildlife Service, was
created in 1960 and expanded in 1980 to its present size of 19 million
acres- of these, about 8 million acres have been designated as wilderness. A
1.5- million- acre coastal section of the refuge was set aside in

1980 for study of its fish and wildlife resources as well as for possible
oil and gas development, but the Congress would need to specifically
authorize oil and gas development activity.

Oil industry activities in the Arctic require special environmental
considerations because of the extremely cold temperatures and the sensitive
nature of the surface tundra. The peat layer of the tundra, which is no more
than 3 feet thick, consists of soils, plant life, and ponds. It rests upon
permafrost, which may extend down 2, 000 feet and creates an impermeable
layer of frozen earth immediately below the thin active

surface layer. Because moisture can?t penetrate the permafrost, almost the
entire North Slope is a wetland consisting of ponds and vegetation during
the summer that are frozen and snow- covered during the remainder of the
year. According to the Fish and Wildlife Service, tundra, which supports a
wide variety of plants and animals, can be damaged easily if disturbed and
may require decades to recover fully.

Federal, state, and local governments share responsibility for regulating
oil industry activities on the North Slope. The state of Alaska, which owns
the land where most current oil industry activity occurs, has primary
responsibility for establishing requirements for how these lands will be
restored when oil industry activity ceases. Specifically, two groups are
responsible for developing dismantlement, removal, and restoration
requirements: Alaska?s Department of Natural Resources, which manages state
oil and gas leases, and Alaska?s Oil and Gas Conservation Commission, which
issues permits for drilling wells on state, federal, and

Alaska Native lands. 1 The Alaska Department of Environmental Conservation
and the Alaska Department of Fish and Game provide additional regulatory
guidance. The North Slope Borough, the area?s local government, can regulate
oil industry activities on state, native, and municipal lands, including
dismantlement, removal, and restoration

requirements, through zoning ordinances. In addition, local Alaska Native
regional and village corporations control a considerable amount of surface
lands and subsurface mineral rights on the North Slope and can establish
environmental and reclamation requirements through contractual arrangements
made with the oil companies. Finally, the U. S. Army Corps of

1 Alaska Native lands include lands deeded to native regional and village
corporations that were created under the Alaska Native Lands Claim
Settlement Act of 1971 as well as individual native land allotments. These
lands include both surface rights and the rights to

subsurface minerals.

Engineers, which issues permits for certain aspects of development on
wetlands and navigable waters regardless of land ownership, also has the
authority to require, through its permit process, the restoration of the
land. Oil industry activities on federal lands located on the North Slope
are primarily regulated by federal land management agencies. These agencies
include the Department of the Interior?s Bureau of Land Management, which
manages the National Petroleum Reserve- Alaska, and Interior?s Mineral
Management Service, which oversees oil industry activities that

occur in waters 3 or more miles off the coast. Three other federal agencies-
Interior?s Fish and Wildlife Service, the Department of Commerce?s National
Marine Fisheries Service, and the Environmental Protection Agency- have
regulatory authority that may apply to resources affected by oil industry
activities on federal, state, or private land.

The oil industry and many public landowners use the term ?dismantlement,
removal, and restoration,? or DR& R, to refer to the dismantlement and
removal of infrastructure and the restoration of the land following the

completion of extraction activities. DR& R can take many forms, from
complete restoration (a natural state approaching original condition) to
some form of enhanced rehabilitation (e. g., providing habitat that
previously did not exist) to simply removing some structures. Oil
exploration, which involves seismic mapping and test wells to measure
potential reserves, requires relatively little permanent infrastructure and
less surface disturbance than production activities. Recently, exploration
on the North Slope has been conducted in the winter using ice roads and ice
drilling pads that melt away after they are used, although they may still
compress the tundra. After oil is found, production activities involve the
development of an extensive infrastructure. Such infrastructure can include
wells to extract the oil and re- inject byproducts and wastes into
subsurface formations; pipelines and transmission lines for water, gas, oil,

fuel, and electricity; industrial plants to separate the oil from water;
housing and other structures for workers and support services; roads, ports,
and airstrips to access and support the facilities; and the acres of gravel
upon which most of this infrastructure is built (see fig. 2). The costs of
constructing this infrastructure and the performance of any industrial work
on the North Slope, including dismantlement, removal, and restoration
activities, exceed similar costs in the rest of the U. S. because of the
North Slope?s remote location and harsh climate.

Figure 2: Prudhoe Bay Oil Production and Support Facilities

Note: This figure is intended to provide a general depiction of the
production process associated with the Prudhoe Bay complex. Not all
facilities or infrastructure associated with the complex are illustrated.

Source: GAO?s adaptation of figures prepared by Phillips Petroleum and the
Alaska Department of Natural Resources.

Results in Brief The state of Alaska, which owns the lands where most of the
North Slope?s current oil production occurs, has adopted general
dismantlement,

removal, and restoration requirements that contain no specific stipulations
on what infrastructure must be removed or to what condition the lands used
for oil industry activities must be restored once production ceases.
Alaska?s requirements specify that the oil companies have to return the land
to a condition that is satisfactory to the state- a condition that it has

yet to define. The removal of the infrastructure and restoration of the land
is generally not required on a full scale until most oil and gas production
ceases. Other entities, such as the Corps of Engineers, native landowners,
and the local North Slope Borough, have the authority to impose
dismantlement, removal, and restoration requirements; generally, however,
they have not done so. The Corps prefers the landowner, in this case the
state, to retain primary responsibility for developing dismantlement,
removal, and restoration requirements. Alaska Native landowners and the
North Slope Borough stated that they would generally defer to the state to
impose such requirements. Dismantlement, removal, and restoration
requirements in other oil producing states vary. Alaska?s requirements are
similar to those of some states but less explicit than those of other
states, which create a fixed obligation to fully restore the land according
to specific requirements.

Until the state of Alaska defines the condition in which it would like its
lands returned, there is no way to accurately estimate the cost of
dismantling and removing the infrastructure and restoring the disturbed land
on Alaska?s North Slope. Thus far, oil companies are the only entities to
have estimated future dismantlement, removal, and restoration costs. To
comply with generally accepted accounting principles, oil companies have

estimated their future liability based on several assumptions, including
what infrastructure will be removed; to what condition land will be restored
when dismantlement, removal, and restoration requirements are implemented;
and other variables. However, oil companies stated that

without specific state requirements, these estimates are hypothetical. The
companies? estimates are also considered proprietary and are therefore not
publicly available. However, limited information obtained from oil company
annual reports, a tax court case, and other sources indicate that the
dismantlement, removal, and restoration liability for existing oil industry
activities on the North Slope will be in the billions of dollars.

Existing financial assurances, such as bonding requirements, ensure the
availability of only a small portion of the funds that are likely to be
needed to dismantle and remove the infrastructure used for oil industry
activities and to restore state- owned lands. The state of Alaska requires
oil companies to post bonds or other forms of financial assurance as a
condition for obtaining a lease and drilling permits. Such financial
assurances total only about $200,000 for each oil company?s statewide
drilling operations and $500, 000 to cover all of a company?s oil and gas
leases in the state. These amounts represent a small fraction of the funds
that may be needed for dismantlement, removal, and restoration of state

lands on the North Slope should a company refuse to or be unable to pay. The
local municipality, Alaska Native landowners, and the Corps of Engineers all
have the authority to impose financial assurance conditions on oil industry
activities on the North Slope, but none has ever done so, preferring to
defer this authority to the state. In the past, when early North Slope oil
exploration and development activities were improperly abandoned, the state
had to assume financial responsibility for the dismantlement, removal, and
restoration of these sites. The oil companies still operating on the North
Slope are assisting the state in cleaning up and

restoring these sites. Although the state has not developed any estimates of
the total cost of this effort, such costs could be substantial. For example,
as part of an agreement between the state and various oil companies, BP and
Phillips Petroleum are spending about $10 million to clean up and restore 14
abandoned North Slope sites. 2 Even though the state of Alaska?s bonding
requirements ensure only a small portion of the potential cost of cleaning
up the North Slope, when compared to nine other major oil- producing states,
Alaska?s bonding requirements are generally higher.

Current dismantlement, removal, and restoration requirements and financial
assurances for federal lands on the North Slope vary by agency, but are
generally insufficient to ensure that any federal lands disturbed by

oil industry activities will be restored. As oil production on state lands
declines, oil companies and the state of Alaska are looking to develop
federal lands in order to sustain North Slope production levels. The Bureau
of Land Management, which oversees the National Petroleum ReserveAlaska,

has an overall restoration goal of returning the reserve to its previous
use, which includes fish and wildlife habitat, after oil production ceases.
However, the Bureau has yet to develop specific dismantlement, removal, and
restoration requirements for companies to use to meet that goal. On the
other hand, Interior?s Minerals Management Service has specific
dismantlement, removal, and restoration requirements for offshore drilling
in federally regulated waters. In addition, both agencies have the

authority to require full financial assurances to fund dismantlement,
removal, and restoration. However, where Minerals Management has an
escalating bond structure that considers, among other things, the future

2 The state, BP, and Atlantic Richfield agreed to the ?Charter for
Development of the Alaskan North Slope? on December 2, 1999. As set forth in
the charter, BP and Atlantic Richfield agreed to sell a predetermined
percentage of their Alaska interests to a third ?qualified company? prior to
their merger in order to prevent a monopoly and to ensure continued
competition on the North Slope. Phillips Petroleum purchased the stock of
ARCO Alaska, Inc., and, with BP, assumed responsibility for fulfilling the
charter obligations.

cost of reclamation, the Bureau uses minimum bond amounts that will only
cover a fraction of the funds potentially needed to meet the future
dismantlement, removal, and restoration costs. For example, the Bureau only
requires a company to obtain a $300,000 bond for all leases the company
holds in the National Petroleum Reserve- Alaska. However, in 2001 the Corps
approved about $16 million to plug two abandoned wells and remediate
contaminated soil at the two sites that are located in the National
Petroleum Reserve- Alaska. Further, since the Congress is still considering
whether or not to open the Arctic National Wildlife Refuge to oil and gas
activities, no specific restoration goal or dismantlement, removal, and
restoration requirements have been established for the

refuge. In the past, prior to the establishment of such requirements and
financial assurances, many oil exploration wells drilled by the federal
government on federal lands on the North Slope were improperly plugged

and abandoned. According to the Bureau of Land Management, these wells
remain potentially costly environmental problems. In contrast to the varying
federal requirements and financial assurances for oil industry activities on
the North Slope, the Trans- Alaska Pipeline System and the mining and
nuclear power industries have explicit dismantlement, removal, and
restoration requirements that are set before any industry activities start.
In addition, the federal agencies that regulate these entities require full
financial assurance that funds will be available to meet these requirements.

Principal Findings Existing North Slope Oil

The state of Alaska?s dismantlement, removal, and restoration Industry
Activities Are

requirements, which apply to most current oil industry activities on the
Subject to General

North Slope, stipulate that oil companies return the land to a condition
that Restoration Requirements

is satisfactory to the state. Because this requirement has not been further
defined, there is no specific guidance on what infrastructure needs to be
removed and to what condition the land must be restored. The state may also
waive requirements altogether if it decides that it wants the development to
remain in place.

Alaska?s dismantlement, removal, and restoration requirements are generally
not imposed until all oil production in a unit ceases. To date, no units on
the North Slope have ceased production. As a result, there is little
indication of what DR& R the state will actually require oil companies to

perform. The federal and local governments also affect DR& R requirements on
state- owned lands on the North Slope. However, at the federal level, Corps
of Engineers permits, which are needed for certain aspects of development on
wetlands, stipulate only that restoration of the area may be required. At
the local level, the North Slope Borough may require a rehabilitation plan
for the land before issuing a development permit, but it has never done so.
Although oil companies accept the state?s general requirements and like the
flexibility they provide, the companies would prefer more specific
requirements so that they could better estimate their future financial
liabilities and make better cost- based restoration decisions.

Dismantlement, removal, and restoration requirements imposed in other oil-
producing states vary. For example, Alaska?s requirements mirror those in
Louisiana and Pennsylvania. In contrast, other states, such as Florida and
New Mexico, have more specific requirements that create a fixed obligation
to, among other things, remove all surface material and structures and fully
restore the land according to its original contour and with native
vegetation.

Dismantlement, Removal, Without specific requirements, it is impossible to
arrive at any reasonable

and Restoration Is Likely to estimate of the future cost associated with the
dismantlement and removal

Be Costly of North Slope infrastructure and restoration of the land. Under
generally

accepted accounting principles, oil companies are required to report their
DR& R liabilities annually. However, these estimates are reported in
aggregate for worldwide operations, and specific estimates for the North
Slope are not available to the public. Dismantling and removing more than 30
years? worth of accumulated infrastructure- including 224 miles of pipeline;
more than 10,000 acres of gravel pads, roads, and airstrips; and numerous
production facilities and plants- will be an enormous undertaking, given the
North Slope?s remote location and harsh climate. Even more problematic will
be the efforts to restore the sensitive arctic tundra, which may take
decades to recover. Examining the increase in Phillips Petroleum?s
liabilities when they acquired Atlantic Richfield

Company?s assets on the North Slope in 2000 provides some indication of the
magnitude of the oil company?s potential cost for cleaning up the North
Slope. At the time of the merger, Atlantic Richfield Company accounted for
about 30 percent of the North Slope oil production. After the acquisition,
Phillips increased its worldwide estimate of total future dismantlement,
removal, and restoration costs by nearly $1.6 billion. This increase was

primarily due to Phillips?s acquisition of Atlantic Richfield?s North Slope
operations.

Existing Financial Oil companies are required to assure the availability of
only a small portion

Assurances Are Insufficient of the funds needed to dismantle and remove
existing infrastructure and

to Fund the Potential Cost restore the lands currently used for oil industry
activities on the North of Dismantlement, Removal,

Slope. The state of Alaska requires oil companies to post bonds for their
wells and leases, but the state only requires each oil company to set aside
a and Restoration on State-

maximum of $200, 000 for all its wells and $500, 000 for all its oil and gas
Owned Land

leases- a fraction of the potential total dismantlement, removal, and
restoration cost. Other entities, such as the Corps of Engineers, local
government, and native landowners, do not require any assurance that funds
will be available to perform DR& R after oil production ceases. Alaska?s
bonding requirements are generally higher than eight of the nine other oil-
producing states that we surveyed. Specifically, only California, Florida,
and Michigan have higher bonding requirements than Alaska for wells, while
only California and Pennsylvania require oil companies to post larger bonds
for oil and gas leases than Alaska.

Future Oil Industry Oil companies and the state of Alaska are looking to
federal lands for future

Activities on Federal Lands oil development on the North Slope. These lands,
which include the

Are Subject to Uncertain National Petroleum Reserve- Alaska, the Outer
Continental Shelf, and the

Requirements and Financial coastal plain of the Arctic National Wildlife
Refuge, are managed by various

federal agencies. The agencies have varying requirements and financial
Assurances

assurances for dismantlement, removal, and restoration activities. For
example, in the National Petroleum Reserve- Alaska, the Bureau of Land
Management has an overall restoration goal of returning the disturbed land
to its previous primary uses as fish and wildlife habitat and for
subsistence use by native villagers; however, it has yet to develop specific
DR& R requirements to implement that goal. In addition, the Bureau currently
uses minimum bond amounts that do not reflect differences in oil company
experience and financial viability and are unlikely to cover the potential
restoration costs that could be incurred. Further, since the Congress has
not yet authorized oil and gas development in the Arctic National Wildlife
Refuge, neither the Bureau nor the Fish and Wildlife Service- each of which
currently has differing responsibilities for oil and gas activities in
refuges- has a restoration goal for the refuge or any requirements in place
to implement that goal. In addition, neither agency currently requires bonds
in amounts that are sufficient to meet the potential cost of future
restoration. In the past, as a result of inadequate dismantlement and

restoration requirements, about 80 wells drilled on federal lands in what is
now known as the National Petroleum Reserve- Alaska remain improperly
plugged and abandoned. Today, some of these wells are leaking oil and other
substances that could result in an environmental hazard. Although the total
cost of restoring these sites is unknown, a recent Bureau of Land Management
internal working document estimated that the total cost to plug and abandon
these wells would exceed $100 million. According to the Bureau, federal
monies will be used to restore these sites, because these wells predate the
existence of DR& R requirements.

In contrast to federal lands on the North Slope, dismantlement, removal, and
restoration requirements for the Trans- Alaska Pipeline System and for the
mining and nuclear industries are predetermined and fixed. The TransAlaska
Pipeline has mandatory DR& R requirements and fixed financial arrangements
to comply with the requirements, which predate the pipeline?s construction.
In the mining industries, companies are typically required to submit
abandonment plans and fully ensure that funds for future reclamation costs
will be available through bonds and other financial arrangements made prior
to initiating operations. Likewise, in the nuclear power industry, power
plant licensees are required to submit abandonment plans and provide full
financial assurance before plant decommissioning begins.

Recommendations for In order to ensure that the lands of the National
Petroleum Reserve- Alaska

Executive Action are properly restored after oil and gas activities cease,
we are recommending that the Secretary of the Interior instruct the Director
of the Bureau of Land Management to issue specific dismantlement, removal,
and

restoration requirements that will allow the Bureau to meet its overall goal
of returning the land to a condition that will sustain its previous uses
including fish and wildlife habitat and subsistence uses. In addition, we
recommend that the Bureau review its existing financial assurances for oil
and gas activities in the National Petroleum Reserve- Alaska to determine
whether they are adequate to assure the availability of funds to achieve its
overall restoration goal.

Matter for Any future decision to open additional federal lands, including
those on

Congressional Alaska?s North Slope, to oil and gas activities is a public
policy decision that rests with the Congress. In any such decision, one
factor that would be Consideration

important to consider is the restoration of the land after oil and gas

activities are completed. If the Congress wants to provide guidance on the
condition to which these lands should be returned following the completion
of such activities, it should consider providing in the authorizing statute

 a restoration goal that will allow the federal agency or agencies
responsible for developing dismantlement, removal, and restoration
requirements to have a clear understanding of what the Congress wants
achieved; and

 specific assurances that the federal agency or agencies responsible for
implementing dismantlement, removal, and restoration requirements will
obtain adequate financial assurances that funds will be available to meet
the goal of returning the land to a condition that the Congress has
specified.

Agency Comments and We provided copies of a draft of this report to the
Department of the

GAO?s Evaluation Interior and the state of Alaska for their review and
comment. The

Department concurred with the findings and recommendations of the report.
The state of Alaska, however, raised concerns about the scope and
appropriateness of the GAO review and disagreed with GAO?s recommendations.
Specifically, the state commented that it was not aware of any other
circumstances where GAO resources were devoted to the

review of state practices on state lands. GAO often examines state practices
on state lands, especially if federal agencies have a regulatory role in the
state activity or if federal agencies can learn from state

practices. For example, GAO has reviewed the state of Florida?s land
acquisition program as it relates to the South Florida Ecosystem Restoration
Initiative. In another example, GAO reviewed state management practices in
state- owned parks, wildlife and waterfowl areas, and forests in New Mexico,
North Carolina, and Utah and compared them to federal practices on federally
owned land. Further, for state lands on

Alaska?s North Slope, federal agencies such as the U. S. Army Corps of
Engineers and the U. S. Fish and Wildlife Service have issued regulations
that can significantly affect the state of Alaska?s dismantlement, removal,
and restoration requirements. It is within GAO?s authority and
responsibility to review the federal role with regard to this issue.

The state also commented that by performing this review, GAO was
promulgating a particular political agenda, which also brought into question
its credibility. We strongly disagree. The GAO has a statutory

obligation to fulfill requests from the Congress and its committees. To
effectively accomplish this obligation, GAO prioritizes its work in
accordance with its published congressional protocols. These protocols state
that congressional mandates, senior leader requests, and committee leader
requests receive the highest priority followed by committee member requests,
and then by individual member requests. GAO does not differentiate between
the majority and the minority staff when implementing these priorities.
Congressmen who represent the highest of these priorities requested this
work. To effectively support the Congress, GAO must be professional,
objective, fact- based, nonpartisan, nonideological, fair, and balanced in
all its work. All GAO products and

services must conform to generally accepted and applicable auditing,
accounting, investigative, and evaluation principles and standards. GAO
strives to exercise the independence necessary to guarantee that its
products and work conform to professional standards and the agency?s core
values of accountability, integrity, and reliability.

The state also disagreed with GAO?s recommendations to the Department of the
Interior. Specifically, concerning GAO?s recommendation that the Bureau of
Land Management issue specific dismantlement, removal, and restoration
requirements prior to the initiation of oil production in the National
Petroleum Reserve- Alaska, the state commented that it is better to address
this issue when oil production ceases and the obligation actually becomes
due. Although the state said it is not too early to think about appropriate
requirements, it believes that the discretion it has to deal with particular
dismantlement, removal, and restoration issues when they are about to occur
provides the state with greater flexibility to respond to changes in such
things as technology and the regulatory environment. GAO does not draw any
conclusions nor make any recommendations concerning the appropriateness or
inappropriateness of the state of Alaska?s current dismantlement, removal,
and restoration practices for its lands. GAO recognizes that overall
restoration goals such as the Bureau of Land Management?s goal of returning
the National Petroleum ReserveAlaska to a condition that will sustain its
previous uses can change. In addition, GAO agrees that the specific
processes used to achieve those goals can change as technology, science, and
circumstances change. However, GAO believes that for federal lands on
Alaska?s North Slope it is appropriate to establish overall restoration
goals and specific dismantlement, removal, and restoration requirements
prior to oil and gas development and production activities. Doing so
provides all interested parties, including the Congress, the federal land
management agency, the

oil companies, environmental groups, and the public, an opportunity to

make informed decisions about whether they would support such development on
public lands. It also provides oil companies with better information on what
is expected of them, which allows for better planning and budgeting to
achieve restoration.

The state of Alaska commented that it also disagrees with GAO?s
recommendation on the level of financial assurances that are needed to
ensure that required dismantlement, removal, and restoration activities take
place. The state?s disagreement appears to be based on a misinterpretation
of GAO?s recommendation. Specifically, the state commented that GAO is
recommending the level of financial assurance that should exist for federal
lands on the North Slope and that GAO believes that level should be higher
than the financial assurances required by the state of Alaska for its lands.
GAO did not make any determination of what level of financial assurance
should exist to ensure that restoration occurs on federal lands on the North
Slope. Further, GAO did not make any comparison of the state of Alaska?s
financial assurances to those of federal agencies that mange land on
Alaska?s North Slope. GAO found that for the National Petroleum Reserve-
Alaska, the Bureau of Land Management?s minimum bond amounts are (1) fixed,
(2) do not reflect differences in oil

company experience and financial viability, and (3) would only cover a
fraction of the potential future cost of dismantlement, removal, and
restoration. In the context of these findings, GAO recommends that the
Bureau review its existing financial assurances for oil and gas activities
in the National Petroleum Reserve- Alaska to determine whether they are
adequate to ensure the availability of funds to achieve its overall
restoration goal for the land after oil and gas activities cease. The
Department of the Interior agrees with this recommendation and stated that
the Bureau?s review will focus on protecting the environment and

taxpayers, should lessees default. More detailed discussions of the comments
from the Department of the Interior and the state of Alaska are included at
the end of chapter 5. Both the Department and the state also provided
clarifications on several technical points that have been included in the
report as appropriate. The full text of the comments and GAO?s responses are
included in appendix II for the Department of the Interior and appendix III
for the state of Alaska.

Chapt er 1

Introduction The North Slope of Alaska- a vast, ecologically sensitive area
north of the Arctic Circle- is home to the largest oil reserve in the United
States. This sparsely settled area consists primarily of public lands owned
by the federal government, state government, and Alaska Native corporations.
To date, oil production activity has occurred mostly on state land and, to a

limited extent, on Alaska Native lands. In the next couple of years,
however, oil industry activity on federal lands adjacent to the state and
Alaska Native corporation lands is expected to move from the exploration
phase to the production phase. As of January 2002, only two companies- BP
and Phillips Petroleum- operate producing oil fields on the North Slope.
Several other large oil companies, including ExxonMobil, Anadarko, and
Chevron, among others, also have ownership interests in this production
under various collective operating agreements. Since the state lands were
opened to oil industry activities, oil companies, federal, state and local
governments have all shared in the profits. Once oil production ceases,
responsibility for determining to what extent oil companies will

have to dismantle and remove their production facilities and associated
roads, pipelines, and airstrips, and restore the disturbed lands is
generally divided among federal, state, and native entities, depending, in
part, on who owns the land.

Alaska?s North Slope Is Alaska?s arctic coastal plain, often referred to as
the ?North Slope,? extends

a Sensitive from the foothills of the Brooks Range to the Arctic Ocean and
from the

Canadian border to Point Hope (see fig. 3). Covering approximately 89,000
Environment

square miles, this area is the boundary of the North Slope Borough-
geographically the largest local government unit in the United States. The
North Slope is also one of the least populated areas in the world, with a
total population of about 7,400- of which almost 70 percent are native
Inupiat Eskimo. It is a harsh climate with winter temperatures as low as -60
O Fahrenheit and average annual wind speeds of 12 to 13 mph. For almost 2
months during the arctic winter, the sun never rises above the horizon. Snow
generally remains on the ground until the beginning of June and begins
accumulating again in September. Annual precipitation is quite low,
averaging less than 5 inches per year.

Figure 3: Map of Alaska and the North Slope

Source: GAO?s adaptation of a map prepared by the Department of the
Interior?s Bureau of Land Management.

The North Slope coastal plain is a vast treeless expanse of tundra
vegetation. Many lakes, streams, and rivers are scattered across this
generally flat terrain, despite the limited precipitation. Because the
entire area is underlain by permafrost (permanently frozen subsoil), which
allows no water absorption, the surface consists mostly of wetlands (see
fig. 4). Accordingly, this area provides excellent habitat for a variety of
wildlife, especially large numbers of breeding migratory birds and caribou
that calve on the coastal plain. In addition, the immediate coastal area is
inhabited by an estimated 2,000 polar bears that spend most of their time
feeding, resting, and denning on the drifting ice pack in the Beaufort Sea.

Permafrost is vulnerable to surface disturbance because such disturbance
usually results in thawing and the subsidence and erosion of soil. Damage
due to surface disturbance is very difficult to reverse. In order to prevent
thawing of the permafrost and provide a stable foundation, any

development, such as roads, airstrips, and production facilities, must occur
on gravel fill that is laid down to a depth of about 6 feet.

Figure 4: Aerial Photo of Area Surrounding Alpine Oil Field

Source: GAO.

Oil Industry Activity The current mix of federal, state, and Alaska Native
lands on the North

Occurs Primarily on Slope evolved after Alaska achieved statehood in 1959.
Before Alaska

obtained statehood, the federal government owned almost all the land. The
State- Owned Lands

Alaska Statehood Act of 1958 gave the new state government the right to
claim land in the newly formed state. In 1964, the state selected, among
other areas, a corridor of federal land on the North Slope that was about
100 miles wide. On the basis of geophysical surveys, this land was thought

to hold large oil deposits. In 1971, under the Alaska Native Claims
Settlement Act (ANCSA), the Arctic Slope Regional Corporation (ASRC) claimed
surface and subsurface mineral rights across the North Slope. In addition,
eight village corporations claimed surface lands surrounding their

villages. These claims resulted in Alaska Native corporation lands being
scattered across the North Slope.

Soon after the state made its claims, it opened the North Slope lands to
commercial leasing for oil industry activities. At first, exploration
yielded only dry holes, but in 1968 Atlantic Richfield Company (ARCO) and
Humble Oil (a predecessor of ExxonMobil Corporation) announced a major oil
find in the Prudhoe Bay area of the North Slope. A year later, the companies
announced plans to construct an 800- mile oil pipeline called the Trans-
Alaska Pipeline System (TAPS), which opened in 1977. The pipeline is used to
transport oil from Prudhoe Bay on the North Slope down the length of the
state to Valdez, where it is then carried by oil tankers to markets
primarily in the continental United States but also to other world markets.

The federal government retained ownership of the land on either side of the
state- owned lands on the North Slope; the National Petroleum ReserveAlaska
(NPR- A) lies to the west, and the Arctic National Wildlife Refuge (Arctic
Refuge or ANWR) lies to the east. Management of the NPR- A, originally named
the Naval Petroleum Reserve Number 4 Alaska, which is roughly the size of
Indiana, was transferred from the Navy to the Department of the Interior?s
Bureau of Land Management (BLM) in 1977. In 1980, the Congress granted the
Secretary of the Interior the authority to lease land in the NPR- A for oil
and gas exploration. While the BLM issued some leases in the early 1980s,
almost no exploration occurred. It was not until leases were issued under
the 1998 Integrated Activity Plan/ Environmental Impact Statement that the
most current oil exploration in the NPR- A was initiated. In 2001, Phillips
Petroleum and Anadarko announced the discovery of likely commercial
quantities of oil in the NPR- A.

The Arctic National Wildlife Refuge was created in 1960, enlarged in 1980,
and currently includes 19 million acres. In 1980, the Congress passed the
Alaska National Interest Lands Conservation Act (ANILCA), which designated
about 8 million acres of the Arctic National Wildlife Refuge as wilderness
and as such prohibited oil industry activities. However, the coastal plain
area of the refuge was not designated as wilderness. This area, known as the
?1002 Area? after section 1002 of the Alaska National Interest Lands
Conservation Act, was set aside for special study which would allow the
Congress to subsequently decide whether to permit oil and gas industry
activities, designate the area as wilderness, or make no changes. The
Congress is currently debating the future status of this area.

The extent of North Slope industry activities has grown progressively since
the first oil was discovered there in 1968. Figure 5 shows the current range
of growth, which originally centered on Prudhoe Bay, the largest oil field
(as measured by volume) in North America. 3 As exploration has yielded
additional finds, the network of wells, roads, pipelines, and production
facilities has expanded from the border of the NPR- A almost to the border
of the Arctic Refuge. As a result, state lands on the North Slope now
contain a web of industrial complexes spread across 1, 500 square miles of
state and native lands.

3 An oil field consists of a reservoir of oil in a shape that will trap
hydrocarbons and that is covered by a layer of impermeable or sealing rock.
A field refers to the surface area above the oil accumulation.

Figure 5: Development of North Slope Oil Producing Area in 1999

Note: The ANWR is an abbreviation for the Arctic National Wildlife Refuge
and NPR- A is an abbreviation for the National Petroleum Reserve- Alaska.

Source: GAO?s adaptation of a map prepared by BP.

A complete inventory of current North Slope infrastructure is not available.
However, using information obtained from BP, the state, and data in a recent
environmental impact statement (EIS), we identified the following
infrastructure of wells, pipelines, roads, and facilities as presented in
table 1 below.

Table 1: GAO?s Estimate of North Slope Infrastructure, as of January 2000
Gravel fill a Gravel mines b Roads b Well pads c Wells c Pipelines b
Facilities b

10,653 acres 15 mines covering 364 miles and

109 3,520 well sites 520 miles,  13 production centers (excluding the

1,601 acres 22 river excluding TAPS  14 industrial plants

Dalton Highway crossings  5 docks and causeways

and reclaimed (excluding the

 5 airstrips and exploratory

Dalton sites) Highway)

a Aero Map U. S. 1999. b Liberty Draft EIS. c Alaska Oil and Gas
Conservation Commission data, December 2001 and March 2002.

North Slope oil production is organized by units, which are a collection of
leases. Each unit has a cooperative plan for oil exploration, development,
and operation within a geographic area covering one or more oil fields. The
reason for organizing leases owned by different companies into a unit is to

prevent waste and enhance oil recovery. Within each unit one leaseholder is
designated as the unit?s operator and is responsible for all oil production
activities in the unit. The operator of a unit conducts oil field operations
on behalf of leaseholders and is responsible for field operations,
maintenance, and any current (but not future) DR& R expenses. As of 2001,
two firms- BP and Phillips Petroleum- were performing most North Slope oil
exploration and production activities. 4 These two companies are also the
only two operators of oil- producing units on the North Slope. ExxonMobil

is the operator of the Point Thomson unit, but as of January 2002 that unit
was not in production. Table 2 lists the North Slope units, production,
operator, and ownership interests.

Table 2: North Slope Oil Units, Production, Operator, and Ownership 2001
Working interest owners Unit 1999 Production (thousands of barrels) Unit
operator (approximate ownership share)

Badami 1,150 BP BP 70% Petrofina 30%

4 In 1998, BP merged with Amoco and in 2000 merged with ARCO. As part of the
BP- ARCO merger, the U. S. required BP to divest itself of ARCO?s Alaska
assets. In 2000, Phillips Petroleum acquired ARCO?s Alaska assets.

(Continued From Previous Page)

2001 Working interest owners Unit 1999 Production (thousands of barrels)
Unit operator (approximate ownership share)

Colville River Production began in 2000 Phillips Petroleum Phillips
Petroleum 78% Anadarko 22%

Duck Island a 15,225 BP BP 68%

(Eider) ExxonMobil 21% (Endicott)

Unocal 10% (Sag Delta)

Others 1% Kuparuk 95, 045 Phillips Petroleum Phillips Petroleum 55%

BP 39% Unocal 5% Others 1%

McCovey Exploration; unit approved in 2000 Alberta Energy Corporation
Alberta Energy Corp. 33.3% Phillips Petroleum 33. 3% Chevron 33.3%

Milne Point 19, 586 BP BP 100% Northstar Production began in 2001 BP BP 98%

Murphy 2% Point Thomson Exploration ExxonMobil ExxonMobil 37%

BP 32% Chevron 25% Phillips Petroleum 5% Others 1%

Prudhoe Bay 273, 243 BP BP 26% ExxonMobil 37% Phillips Petroleum 36% Others
1%

Sakonowyak River Exploration; unit approved in 2001 BP BP 62% Alaska Venture
Capital Group 38%

SE Delta Exploration; unit approved in 2001 Phillips Petroleum Phillips
Petroleum 100% Slugger Exploration; unit approved in 2001 BP BP 39%

Phillips Petroleum 31% Chevron 30%

Tot al 404, 249

a Ownership of the Duck Island Unit is based on a weighted average of
production from three fields within the unit. Sources: Alaska Department of
Natural Resources, Division of Oil and Gas, 2000 Annual Report, and oil
company data.

Many Entities Benefit Federal, state, and local governments as well as the
oil companies all share

from Revenues in the revenues generated by oil production on the North
Slope. The nation

has benefited from North Slope oil production in terms of jobs, corporate
Generated by Oil

taxes, and royalties provided by oil and associated companies, and a
Production on the

reduction in oil imports and the balance of trade deficit. One estimate,
North Slope

made by a consulting firm hired by the oil companies, attributed $40 billion
in federal taxes and rents collected between 1977 and 1999 to North Slope
oil production. 5

The state of Alaska collects petroleum- based revenues from North Slope oil
production and transportation in a variety of taxes (principally corporate
income, severance, and property), royalty payments (generally 12. 5 percent
of the value of the oil), and bonuses and rents from oil leases. 6 Because
of the state?s oil revenues, residents of Alaska pay no state income tax or
state sales taxes. Oil revenues also fund about 80 percent of the state?s
general fund operating budget. In addition, in 1980, using mostly oil
revenues, the state was able to establish a permanent fund that provides an
annual dividend payment to every state resident.

The North Slope Borough, the local municipality, also uses revenues from
North Slope oil production to fund its government services. Oil companies
pay nearly all of the borough?s property taxes and provide about 60 percent
of borough revenues. A recent study developed by the Bureau of Land
Management for the renewal of federal rights- of- way for the Trans- Alaska
Pipeline System (TAPS) estimates that if the pipeline closed, the borough

would lose almost $1.9 billion (1998 dollars) in property tax revenues for a
30- year period starting in 2004. 7

According to an analysis done by Alaska?s Department of Revenue, for the
fiscal year period 1988 through 2000 accounting profits (i. e., all returns
on investment) for North Slope oil are split 41.6 percent to industry, 36.1

5 L. Daniel Maxim, Everest Consulting Associates, September 2001, for the
Alaska Oil and Gas Association. 6 A small portion of Alaska?s oil and gas
revenues comes from the Cook Inlet area southeast of Anchorage. According to
a former commissioner of the Alaska Department of Natural Resources, 90
percent of state oil and gas revenues are generated from the North Slope.

7 When TAPS was constructed, it was granted a 30- year right- of- way across
federal and state lands; the lease will expire in 2004. The BLM recently
initiated development of an EIS as it determines whether to renew the
federal lease.

percent to the state, and 22.3 percent to the federal government. A number
of other studies support the level of revenues accumulated by industry, the
state, and the federal government. 8 For example, a 1989 statecommissioned
study found that for the period 1969 to 1987 oil companies generated $42.6
billion in net profits after taxes on total gross revenues of $131 billion
from the production and transportation of North Slope oil. The study
estimated a similar split in accounting profits for this earlier period of
44 percent for industry, 30 percent to the state, and 26 percent to the
federal government. 9

Dwindling Production The production of oil on the North Slope peaked in 1988
at 2 million barrels

Focuses Greater per day. By 1999, production had fallen to 1.1 million
barrels per day, or about 16 percent of total U. S. production. Total
production on the North

Attention on the Slope through 2000 was 13.3 billion barrels, while another
6.1 to 13.3 billion

Disposition of Oil barrels of technically recoverable oil from known and
undiscovered

sources remain on the North Slope, according to the Department of Company
Energy. 10 As a result of declining production on state lands, efforts to

Infrastructure on the develop federal lands on the North Slope have
intensified.

North Slope Overall production on the North Slope will most likely continue
to decline

even as new fields are brought on line. According to the U. S. Department of
Energy, most North Slope oil has already been produced. The remaining life
of existing North Slope oil fields will depend partly on future economic
factors. As oil fields age, the per- barrel cost to extract additional oil
increases as each barrel requires greater effort to extract. Oil companies

will continue to produce oil from a field only as long as it is profitable
and will normally stop producing before an oil field is completely depleted.
Because the cost of transporting oil from the North Slope tends to be higher
than oil produced elsewhere in the United States, North Slope fields must
produce at a lower cost to remain competitive. The amount of oil that can be
produced at a profit, known as proven reserves, integrally depends

8 We did not independently verify the results of any of these studies. 9 Ed
Deakin, Ph. D., director of the Institute of Petroleum Accounting at the
University of North Texas, conducted the study from 1969 to 1987. 10
Technically recoverable refers to the amount of oil that can be extracted
using current technology. The economically recoverable amount is generally
less because it considers the market price of oil and the cost to extract,
process, and transport the oil to market, which generally increases as the
recoverable amount declines.

on the market price for the oil and its cost to produce. These two
variables, the price and cost, change over time. If the price of oil
increases or new technology makes extraction less costly, the amount of
economically recoverable oil will increase. Conversely, if the price of oil
decreases or the cost of oil production increases, the amount of
economically recoverable oil will decrease.

The Trans- Alaska Pipeline is an additional and unique limiting factor in
the North Slope?s oil production. TAPS carries all North Slope oil field
production and requires a minimum amount of oil flow to make it

economical to operate. While the exact minimum operating level for TAPS
depends on the mechanics of pumping decreasing quantities of oil through the
pipeline, the cost to operate TAPS, and the market price of oil, currently
the U. S. Department of Energy estimates the volume to be roughly 300,000
barrels per day. Once North Slope production falls below the minimum
economic operating level, producing oil on the North Slope will no longer be
profitable and TAPS will be shut down. Recent proposals to build a natural
gas pipeline from the North Slope could additionally extend the projected
life of North Slope fields because many of the existing fields contain
considerable natural gas reserves.

In May 2001, the Department of Energy updated its estimates of North Slope
production based on current production, undiscovered reserves, and future
NPR- A production. These estimates exclude any production from the Arctic
Refuge or the development of natural gas reserves. The new

estimates, as shown in figure 6, have North Slope production falling below
the TAPS minimum operating level of 300,000 barrels per day sometime between
2017 and 2031. In their application for lease renewal, the owners of TAPS
anticipate that the pipeline will operate at least through 2034.

Figure 6: Alaska North Slope Oil Production History and Projections

Note: The NPR- A is an abbreviation for the National Petroleum Reserve-
Alaska. Source: Department of Energy, Energy Information Administration, May
2001.

Dismantlement and The end of oil and gas production on the North Slope will
likely render

Removal of much of the current infrastructure of production facilities,
pipelines, and

roads unnecessary. Responsibility for regulating and overseeing the
Infrastructure and the

dismantlement and removal of this infrastructure and restoring the land on
Restoration of Land

which it was built will be the shared responsibility of the state, federal,
and Involves Many

local governments, depending in part on which party owns the land. Agencies
at Multiple

Oil production requires the construction of a considerable infrastructure
Levels of Government

of, among other things, drilling pads, production facilities, pipelines,
roads, airstrips, and gravel mines. Because most of this infrastructure has
been built on state lands, the state is primarily responsible for regulating
oil

industry activity, including any requirements for dismantling and removing
the infrastructure and restoring the land after oil production ceases.
However, new oil production in the Arctic Ocean, combined with new oil
discoveries in the NPR- A and the potential opening of the Arctic Refuge to

oil exploration, has elevated the importance of federal jurisdiction on the
North Slope.

Alaska?s regulation of dismantlement, removal, and restoration for the North
Slope oil industry is principally divided among four state agencies: the
Alaska Oil and Gas Conservation Commission (AOGCC), the Alaska Department of
Natural Resources (ADNR), the Alaska Department of Environmental
Conservation (ADEC), and the Alaska Department of Fish and Game. The Alaska
Oil and Gas Conservation Commission issues permits for drilling oil wells
throughout Alaska, regardless of land ownership. AOGCC is primarily
concerned with maintaining the subsurface integrity of oil fields during
exploration and production and the proper plugging and abandoning of wells
after their use. The Alaska Department of Natural Resources leases state
lands for oil and gas industry activities and collects royalties on oil and
gas production in the state. Such leases stipulate how the land will be
returned to the state after production ceases.

In addition, the Alaska Department of Environmental Conservation, which
regulates waste management practices at exploration, development, and
production facilities on private, state, and federal lands, and the
Department of Fish and Game, which oversees habitat issues, have a limited
and principally advisory role in regard to DR& R.

Municipal government and Alaska Native corporations also have control over
oil activities on the North Slope. The North Slope Borough, which
encompasses all of the North Slope, has zoning authority over industry
activities on non- federal lands on the North Slope. In addition, the
borough is consulted under the Coastal Zone Management Act for development
on federal lands. Alaska Native regional and village corporations own
significant portions of surface and subsurface rights on the North Slope.
These rights were the result of claims made under the Alaska Native Claims
Settlement Act of 1971. In particular, the Arctic Slope Regional
Corporation, a Fortune 500 Alaska Native corporation, owns 5 million acres
of surface lands and subsurface mineral rights on the North Slope. In
addition, eight Alaska Native village corporations own surface lands

surrounding their villages on the North Slope. For example, the Kuukpik
Village Corporation owns 146,000 acres of surface lands near the village of
Nuiqsut on the Colville River, site of the Alpine oil field (Colville River
Unit).

Several federal agencies also have responsibility for regulating oil
activities on the North Slope. The Department of the Interior?s Bureau of
Land Management (BLM) manages the National Petroleum Reserve- Alaska and

also issues and oversees leases for oil activities on any federal lands. The
Department of the Interior?s Minerals Management Service (MMS) regulates oil
activities on the Outer Continental Shelf, defined as 3 or more miles from
shore. The U. S. Army Corps of Engineers issues permits for

dredging or fill activities in U. S. waters, including wetlands. Almost the
entire North Slope is designated wetland and, because gravel underlies most
production facilities, airstrips, and roads, the Corps has a permitting role
in basically all oil company construction activities. Interior?s Fish and

Wildlife Service (FWS), the Environmental Protection Agency (EPA), and the
Department of Commerce?s National Marine Fisheries Service (NMFS) can offer
advisory comments to the Corps as part of the permit evaluation process.
Further, the EPA also has veto authority over Corps permits. In addition,
should the Congress decide to authorize oil industry activities in the
Arctic Refuge, the FWS would oversee the issuance of right- of- way

permits, while BLM would issue and oversee the federal leases. This
regulatory construct assumes that the Arctic Refuge would be managed
similarly to other refuges; various bills introduced in the 107th Congress
to open the Arctic Refuge to oil and gas development were unclear on FWS?s
role and regulatory authority. 11

Objectives, Scope, and The Minority Leader of the House of Representatives,
the Ranking Minority

Methodology Member of the House Resources Committee, and Representative
Edward

Markey asked us to examine dismantlement, removal, and restoration
requirements for Alaska?s North Slope. Specifically, we agreed to determine
 the nature and extent of dismantlement, removal, and restoration
requirements for existing oil industry activities on state- owned land on

Alaska?s North Slope, including how these requirements compare to those of
other oil- producing states;

 whether any cost estimates exist for the dismantlement and removal of the
infrastructure and for the restoration of North Slope state- owned land;

11 For additional information on oil and gas activities in U. S. Fish and
Wildlife Service refuges, see GAO?s report U. S. Fish and Wildlife Service:
Information on Oil and Gas Activities in the National Wildlife Refuge
System, GAO- 02- 64R (Washington, D. C.: Oct. 31,

2001).

 what financial assurances the state of Alaska has that funds will be
available to cover the eventual dismantlement, removal, and restoration
costs and how these assurances compare to those of other oil- producing
states; and

 the nature and extent of dismantlement, removal, and restoration
requirements and financial assurances governing future oil industry
activities on federal lands located on the North Slope and how these compare
with requirements and financial assurances in other related industries, such
as mining and nuclear power.

To determine the nature and extent of federal, state, and local requirements
for dismantling, removing, and restoring existing industry activities on the
North Slope, we met with federal, state, and local government officials;
Alaska Native corporations; oil company spokesmen; outside experts; and
interest groups. We also researched state and local statutes, regulations,
policies, and analyses relating to DR& R requirements and practices in
Alaska. Finally, we visited Alaska?s North Slope in July 2001 to examine
existing production facilities and DR& R reclamation projects. To compare
Alaska?s DR& R requirements to those of other states with oil production, we
surveyed the 10 states, including Alaska, that account for nearly 90 percent
of the domestic oil production in the United States, excluding federal
offshore production. 12 For each state, we surveyed the office that issues
permits for drilling oil and gas wells and the office that manages oil

and gas leasing on state- owned lands. We asked each office to provide
information on, among other things, its requirements for surface
restoration.

To determine whether any cost estimates exist for the dismantlement and
removal of infrastructure and restoration of the North Slope, we sought
estimates from officials of federal and state government, oil companies
operating on the North Slope, academicians, and various interest groups,
including conservation and pro- oil development organizations. We also
submitted a formal written request to the oil companies operating on the
North Slope to estimate their future dismantlement, removal, and

restoration liability. In addition, we met with petroleum accountants and
studied financial reporting requirements to understand how oil company?s
estimate and report their DR& R liability. Finally, we obtained information

12 The states we surveyed were Alaska, California, Florida, Louisiana,
Michigan, New Mexico, Oklahoma, Pennsylvania, Texas, and Wyoming.

on the inventory of oil company assets that currently exist on the North
Slope from oil companies, academics, and government agencies.

To determine what financial assurances exist that funds will be available to
pay for dismantlement, removal, and restoration costs, we interviewed and
obtained documentation from federal, state, and local government officials
and Alaska Native corporations. We also researched federal, state, and local
statutes, regulations, policies, and analyses relating to DR& R financial
assurance requirements and practices in Alaska. To compare Alaska?s
financial assurances to those of other states with oil production, we

surveyed the 10 oil- producing states, including Alaska, that account for
nearly 90 percent of domestic oil production excluding federal offshore
production. For each state, we surveyed the office that issues permits for
drilling oil and gas wells and the office that manages oil and gas leasing
on state- owned lands. We asked each office to provide information on what,
if any, financial assurances it obtains to ensure that funds will be
available for plugging and abandonment of oil and gas wells and surface
reclamation.

Finally, to determine what dismantlement, removal, and restoration
requirements and financial assurances exist for federal lands on the North
Slope, we reviewed federal regulations and interviewed officials in Alaska

and Washington, D. C., from the U. S. Army Corps of Engineers; the
Department of the Interior?s Bureau of Land Management, Minerals Management
Service, and Fish and Wildlife Service; the Environmental

Protection Agency; and the Department of Commerce?s National Marine
Fisheries Service. We also compared these requirements to reclamation
requirements and financial assurance requirements for the Trans- Alaska
Pipeline System and those found in the hardrock and coal mining industries

and for nuclear power plants. The mining industry is comparable to the oil
industry in that it extracts a nonrenewable resource from the ground and in
so doing requires industrial facilities to process and deliver these

resources. Likewise, we reviewed the nuclear utility industry because it
generates electricity through a complex infrastructure with a fixed useful
life span.

We conducted our work from March 2001 through March 2002 in accordance with
generally accepted government auditing standards.

Current DR& R Requirements for Existing Oil

Chapt er 2

Production Are Very General The state of Alaska?s dismantlement, removal,
and restoration requirements, which apply to almost all existing oil
production on the North Slope, offer no specifics on what infrastructure
must be removed or to what condition lands used for oil industry activities
must be restored.

Additionally, the Corps of Engineers, the local North Slope municipality,
and native landowners, all of which have authority to impose DR& R
requirements, have for the most part not done so. The state, the oil
industry, and environmental groups disagree about the benefits and risks
associated with the state?s general requirements. The state believes that
its requirements are sufficient and provide flexibility, the oil companies
like the flexibility but would prefer more specific guidelines, and
environmental groups feel the requirements are so vague that there is no
assurance that any dismantlement, removal, and restoration will occur. A
comparison of

Alaska?s DR& R requirements to those of nine other oil- producing states
reveals a spectrum of requirements; some states have general requirements
like Alaska?s, while other states have more explicit requirements that
create a fixed obligation to fully restore the land according to specific
standards.

The State of Alaska Because existing oil production activities occur almost
entirely on state

Determines DR& R lands, the state of Alaska largely determines the
requirements for

dismantling and removing the infrastructure and restoring the land
Requirements for

following completion of oil activities. The state?s requirements are very
Existing Oil Production general, especially with regard to surface
restoration requirements. Two agencies within the state have the authority
to impose DR& R requirements upon the oil companies- the Alaska Oil and Gas
Conservation Commission and the Alaska Department of Natural Resources.
AOGCC issues permits for drilling oil wells throughout Alaska, regardless of
land ownership. AOGCC is concerned primarily with maintaining the subsurface
integrity of oil fields during exploration and production and the proper
plugging and abandonment of wells after production ceases. AOGCC regulations
impose specific requirements on oil companies for plugging and abandoning
wells, but what will be required regarding surface restoration beyond the
immediate well site is uncertain. ADNR leases state lands for oil and gas
industry activities and collects royalties on oil and gas production in the
state. ADNR lease agreements contain only general language regarding DR& R
requirements. What specific surface dismantlement, removal, and restoration
will be required is unknown and left to the discretion of the state. In
addition, Alaska?s Department of Environmental Conservation has certain
statutory responsibilities for preventing air, land, and water pollution.
Therefore, if a site on the North Slope is contaminated, ADEC

requires the polluter to remediate the site. The Corps of Engineers, which
issues permits for certain aspects of development occurring on both private
and public wetlands, also has only general DR& R requirements as part of its
permitting process. The Corps prefers the landowner to have primary
responsibility for establishing DR& R requirements. Finally, the local
municipality and Alaska Native landowners have authority over existing
industry activities on their lands through zoning and the development of
coastal management plans. However, these entities have largely deferred to
the state to impose DR& R requirements.

DR& R Requirements in AOGCC drilling permits contain detailed requirements
for well- plugging

State Drilling Permits and abandonment, but provide minimal guidance on
surface restoration.

The primary purpose of AOGCC?s well- plugging and abandonment regulations
are to protect subsurface oil reservoirs and aquifers. An improperly plugged
well could allow oil to escape from one pool to

another, intrude into fresh water supplies, or cause fires or seepage. AOGCC
regulations contain several pages of technical specifications on plugging a
well, which involve setting a series of cement plugs to seal each stratum.
13 As of March 28, 2002, 412 individual well sites on the North Slope have
been plugged and abandoned- most of these well sites are in the Prudhoe Bay
and Kuparuk units or were exploratory well sites in other units. As of that
date, 3,108 well sites remain active (see table 3).

Table 3: Number and Status of North Slope Oil Well and Drill Sites, as of
March 28, 2002 Number of plugged Number active

and abandoned well Total number of Unit well sites

sites well sites

Prudhoe Bay 1, 583 47 1, 630 Kuparuk 1,037 62 1, 099 Milne Point 254 4 258
Duck Island 112 1 113 Colville River 49 0 49 Pt. Thomson 1 14 15 Badami 9 0
9

13 20 AAC 25.112 Well- Plugging Requirements.

(Continued From Previous Page)

Number of plugged Number active

and abandoned well Total number of Unit well sites

sites well sites

Northstar 8 0 8 All other units a 55 284 339

Totals 3, 108 412 3,520 Number active drill

Abandoned drill sites Total drill sites sites Production pads b 109 0 109

Total drill sites 164 284 448

a Includes exploration wells not on pads. b Wells not included in ?All other
units? are located on 109 pads.

Source: Alaska Oil and Gas Conservation Commission data.

In contrast, AOGCC?s post- production DR& R requirements for the surface
area of a well site, which are known as location clearance requirements, are
not nearly as specific as its well- plugging provisions. As shown in figure
7, AOGCC?s regulations for location clearance require the operator to remove
equipment and other associated infrastructure from the location, fill and
grade all pits, and leave the location in a clean and graded condition
before a well site can be granted final clearance and the surety bond
returned to the owner. 14 AOGCC?s location clearance provisions are not
specific as to the physical reach of DR& R around the well site- that is,
whether it extends to the general vicinity of the well, to the well pad, or
to the entire oil field. Further, AOGCC regulations defer to the relevant
state or federal land management agency for the appropriate level of
dismantlement, removal, and restoration.

14 AOGCC?s offshore location clearance provisions [20 AAC25.172] require the
removal of all platforms, equipment, casings, and pilings, unless a state or
federal agency approves leaving the platform or offshore island in place.
Depending on whether the well is drilled from an offshore platform, a mobile
structure like a floating drilling vessel, or an island, the AOGCC

requires the operator to remove the wellhead equipment and casing to a depth
of at least 5 feet below the mudline. For offshore operations on an
artificial island or shifting natural island, AOGCC regulations require the
operator to remove the oil equipment and other associated infrastructure
from the location, fill and grade all pits, and leave the location in a
clean and graded condition.

Figure 7: Alaska Oil and Gas Conservation Commission?s Location Clearance
Requirements

AOGCC location clearance requirements have yet to be tested because the oil
companies have not abandoned all the well sites of any producing well pads
on the North Slope. An AOGCC official stated that location clearance for a
well site is not granted until all the wells on a well pad are plugged and
abandoned. 15 However, this official stated that as of December 2001 there
were no instances where all wells on a production well pad located on the

North Slope had been plugged and abandoned. As a result, AOGCC commissioners
stated that they had not granted location clearances for any producing well
sites on the North Slope. Figure 8 contains photos of producing well pads in
the Prudhoe Bay and Kuparuk units.

15 A well pad is a gravel platform built over the tundra with a collection
of oil wells. Typically associated with producing wells, early exploratory
wells also used gravel platforms.

Figure 8: Series of Well Sites on Prudhoe Bay Unit and Kuparuk Unit Well
Pads

Source: GAO

DR& R Requirements in The Alaska Department of Natural Resources administers
lease agreements

State Lease Agreements for oil industry activities on state- owned land in
Alaska?s North Slope.

However, these agreements do not specifically describe DR& R requirements
for the infrastructure and wetlands on which the infrastructure was built.
ADNR has used several different lease forms on the North Slope. Many
producing North Slope leases, including Prudhoe Bay, used a form [DL- 1]
that was in use until 1979. The rights upon termination provisions contained
in the original and most current ADNR Competitive Oil and Gas Leases are
similar (see fig. 9). 16 Specifically, both leases give the lessee the right
to remove from the leased area all machinery, equipment, tools, and
materials. But the leases also provide that ?when so directed by the state?
or ?at the option of the state,? the lessee

may leave its infrastructure behind. While the current lease termination
provisions require the lessee to rehabilitate the leased areas to the
?satisfaction of the state,? ADNR has not defined what constitutes the
?satisfaction of the state.? The older lease has no specific rehabilitation
provisions, stating that the lessee must ?deliver up said lands in good
order and condition.?

16 Two other lease forms, with substantially similar termination provisions,
were used prior to the most current lease form, which was introduced in
2000.

Figure 9: Alaska Department of Natural Resources Past and Recent Rights upon
Lease Termination Provisions

In addition to lease agreements, DR& R requirements are also addressed in
unit agreements. The unit agreement contains termination provisions that are
similar to those contained in the state oil and gas lease. For example,
Article 15 of the state?s standard unit agreement for 2001 reads ?at the
option of the State, all improvements such as roads, pads, and wells must

either be abandoned and the sites rehabilitated by the Unit Operator to the
satisfaction of the State, or be left intact and the Unit Operator absolved
of all further responsibilities?.? 17 Similarly, the unit agreement states
that the ?Unit operator shall deliver up the Unit Area in good condition.?
The

various owners of a unit are responsible for unit- wide DR& R. However, DR&
R requirements are not activated for leases that are organized into a unit
until the unit agreement is terminated, though the unit operator may
voluntarily elect to perform some DR& R prior to termination. An ADNR
official in the Division of Oil and Gas maintained that the state would not
release a unit operator from its unit- wide DR& R obligations until all
leases in the unit expired.

17 State Only Royalty Owner Unit Agreement revised April 2001.

State Pollution In addition to well permit and lease requirements, the state
has established

Requirements requirements and programs to address air and water contaminated
by

pollution. The Alaska Department of Environmental Conservation is charged
with enforcing requirements for such things as the disposal of drilling mud
and cuttings, the flaring of hydrocarbon gases, the discharge of

wastewater, and the cleanup of oil spills. While many of these
responsibilities affect oil company?s ongoing activities, ADEC also
determines if hazardous substances, including oil, have contaminated a site
following oil industry activities. ADEC has standards to which a site must
be minimally cleaned before it is considered uncontaminated. For example,

ADEC has overseen the cleanup of oil company reserve pits in which drilling
wastes were contained.

DR& R Requirements in the The U. S. Army Corps of Engineers issues permits
to oil companies on the

Corps of Engineers Permits North Slope. These permits contain very general
dismantlement, removal,

and restoration requirements and only rarely contain specific requirements.
Corps permits are issued under a variety of statutes for actions that affect
wetlands or navigable waters whether located on federal, state, local,
native, or private lands. 18 Of these authorities, section 404 of the Clean
Water Act, which allows for the placement of fill or

dredged material, such as gravel for the construction of roads, pads, and
airstrips, is the most common type of permit that the Corps issues in the
North Slope. The Corps? DR& R requirements are contained in its permits as a
general condition, which states that upon abandonment, the Corps ?may

require restoration of the area.? 19 The level of restoration that may be
required is not specified in Corps regulations nor is it generally specified
in the permit. Corps of Engineers officials noted that Corps permits are
issued for all types of operations involving wetlands throughout the United
States. As such, they indicated that their permits? general restoration
language provides more flexibility to adapt the level of restoration to
site- specific needs. Corps officials told us that specific restoration
requirements, such as gravel removal upon abandonment of a site, are
generally not appropriate, but may be warranted under special circumstances.
In these 18 Section 404 of the Clean Water Act of 1972; section 10 of Rivers
and Harbors Act of 1899;

section 103 of the Marine Protection, Research and Sanctuaries Act of 1972.
19 According to the Corps, the current restoration language has been in
effect since 1986; before 1986, Corps permits contained a general condition
stating that a permittee must restore the area to the satisfaction of the
district engineer.

instances, specific restoration requirements are established as special
conditions to the permit. For example, the permit for the placement of
gravel in the Alpine oil field in the Colville River Unit contains special
conditions specifying areas where the permittee will remove the gravel,
rehabilitate the gravel footprint area, and restore the hydrology of the
project area upon abandonment. For other permits, when special circumstances
do not occur, Corps officials stated that restoration requirements are
better determined at the time of abandonment. The Corps was unable to
determine how many of its more than 1,100 North Slope permits carried
special conditions regarding dismantlement, removal, and restoration, though
officials estimated that less than 1 percent of all their permits contained
such conditions. 20

In addition to the permit itself, the Corps can also incorporate DR& R
requirements into abandonment plans. The Corps requires permit holders to
submit an abandonment plan when an oil company is planning to abandon a
site. As of May 2001, only seven abandonment plans have been submitted, five
of these stemming from offshore oil industry activities. According to Corps
officials, the initial requests for abandonment plans do not contain minimum
restoration requirements. Corps officials noted, however, that approved
plans do contain site- specific restoration requirements. For abandonment of
offshore facilities, such as gravel

islands, removal of gravel would likely only be required if the gravel were
found to be contaminated. For such projects in deep water, the abandonment
requirements call for the removal of gravel bags used for erosion
protection, removal of all hardware, plugging the well, and allowing the
gravel island to erode naturally into the sea.

Corps of Engineers officials stated that the landowners or land manager
should bear the primary responsibility for establishing DR& R requirements.
In the case of current oil production on the North Slope, the landowner is
the state of Alaska. Corps officials state that the Corps typically works
with the state to determine appropriate dismantlement, removal, and
restoration requirements and generally accepts the state?s

recommendations, provided that important aquatic resources are protected and
there are no overriding factors of national public interest. For example, 20
Since 1979, the Corps has issued over 1,100 general and specific permits for
the North Slope and denied 3. According to the Corps, about half of the
gravel that has been used in the North Slope was put in place prior to 1979,
not under Corps permits. In 1979, the Corps? Alaska District asserted its
regulatory authority to include wet and moist tundra in Alaska.

the Corps approved the abandonment of several offshore exploratory islands
that were subject to state leases and state- imposed DR& R requirements.
Alaska?s Department of Natural Resources established the DR& R requirements
for the oil companies: plugging and abandoning the wells, removing all
equipment, and allowing the gravel islands to erode naturally. If
disagreements occur between the state and the Corps, they are

usually resolved at the local level. However, in most circumstances, the
Corps retains the authority to enforce its permit requirements for a site.
Local and Alaska Native

While the North Slope Borough and two Alaska Native corporations have DR& R
Requirements

the authority to impose DR& R requirements for certain North Slope oil
fields, this authority is not always exercised; when it is, the requirements
that are established vary. 21 Specifically, the North Slope Borough has
zoning authority over state and privately owned lands within its boundaries.
The borough?s Department of Planning and Community Services is responsible
for ensuring proper land use through the zoning process. While the zoning

regulations give the borough the authority to require a DR& R plan as a
condition for project approval, an official stated that the borough has not
required such a plan for any oil industry activities on the North Slope.
Instead, the official stated, the borough would coordinate with state and
federal authorities to develop dismantlement, removal, and restoration
requirements as part of any abandonment plan.

The Kuukpik Corporation, which represents the Nuiqsut Village, owns a
portion of the surface land on which the Alpine oil field is located (part
of the Colville River Unit). According to the General Manager of the Kuukpik
Corporation, a 1997 surface use agreement between ARCO and the Kuukpik
Corporation requires that all chemicals and wastes, well fixtures,
equipment, fill, pads, roads, grading, and other improvements be removed and
all lands reclaimed and revegetated with native flora. In implementing this
agreement, the operator is to provide Kuukpik with a plan for reclamation
prior to initiating any activities. According to a Kuukpik official,
although the corporation has not yet enforced this aspect of the

21 Under the 1971 Alaska Native Claims Settlement Act, Congress granted the
Indians, Eskimos, and Aleuts of Alaska title to over 40 million acres of
land and nearly $1 billion to settle their claims to land in Alaska. The
ANCSA set up a two- tiered corporate structure and

shareholding to administer settlement benefits. Village corporations such as
the Kuukpik Corporation control the surface estate in land, while regional
corporations such as the Arctic Slope Regional Corporation control the
financial benefits and other lands, both

surface and subsurface.

agreement, it is confidant that the oil company will meet its DR& R
obligations.

The Arctic Slope Regional Corporation, which shares subsurface rights with
the state of Alaska for certain oil leases, including those in the Alpine
oil field, by statute must defer to the state regarding termination
provisions in the lease agreement. Specifically, the joint ASRC and ADNR oil
and gas lease for the Alpine field states that at the option of the state,
all improvements such as roads, pads, and wells must be abandoned and the
site rehabilitated by the lessee to the satisfaction of both the state and
ASRC. With regard to whether a lessee satisfactorily completes DR& R, an
ASRC official stated that the lessee would need to satisfy the state, ASRC,
and any village corporations that may have surface ownership.

Parties Disagree on The state of Alaska, oil companies, and environmental
groups hold

Whether State different opinions on the adequacy of the state?s current DR&
R

requirements. State officials believe that their DR& R requirements are
Requirements Should sufficient and allow for greater flexibility to maximize
eventual DR& R

Be More Specific activities. Oil companies operating on the North Slope,
while finding the

state requirements to be acceptable, would prefer more specific guidance
that allows them to better plan and estimate their future DR& R liability.
Because the state has not specified what DR& R it will ultimately require,

the oil companies have made different assumptions on their levels of
liability. Finally, representatives from some environmental groups in Alaska
believe that the state requirements are too vague and could allow the oil
companies to walk away from their responsibilities. The general lack of
agreement on what the requirements should be has led the state to not
develop a land use plan for the North Slope.

State Officials View Alaska?s State of Alaska officials, including the
Governor?s Special Counsel, Alaska?s DR& R Requirements as Commissioner of
Revenue, and the head of the Oil, Gas, and Mining Section

Sufficient of Alaska?s Attorney General?s office, stated that specific
dismantlement, removal, and restoration requirements are not necessary for
the restoration

of the North Slope. They maintain that the DR& R requirements contained in
state oil and gas leases are clear and contractually enforceable.
Specifically, one state official emphasized, the principal requirement to

close a lease is to dismantle and remove structures, equipment, and personal
property, and to restore the land to a condition that is satisfactory to the
state. He noted that this could include returning the site to its

original condition. The oil companies, state officials maintain, have
cooperated with the state to date and have cleaned up some contaminated
sites on the North Slope, even those where others caused the contamination.
According to these state officials, general requirements are preferable to
specific requirements because they provide the state and the oil companies
with more flexibility. Specifically, given the fact that no one

can predict when North Slope oil production will cease, general requirements
allow the state to hold out for new technologies and processes that may
change DR& R requirements. For example, until 1987, it

was standard practice to contain drilling wastes in reserve pits. However,
following a lawsuit by environmental groups, North Slope operators have
developed and adopted a practice of grinding and re- injecting the wastes
into the subsurface, a practice that the state and environmental groups
prefer.

Oil Companies Accept the Oil companies told us they accept the state?s broad
DR& R requirements. State?s DR& R Requirements,

The companies agree that general requirements provide flexibility to 1) but
Would Prefer More

evaluate each site on its own merits and tailor restoration accordingly, 2)
Specific Guidance allow for changes in technology that affect how DR& R is
performed, and 3) allow for changes in land use decisions. However, the two
major operators on the North Slope- BP and Phillips Petroleum- also stated a
preference for more specific DR& R guidance and policy from the state.
According to spokesmen from these two companies, more specific guidance
would allow the oil companies to better plan for existing activities and
allow the companies to make better, cost- based restoration decisions.
Currently, the general requirements have resulted in uncertainty surrounding
the issue of how much infrastructure and gravel will be left in place. For
example, an ExxonMobil spokesman stated that his company currently assumes
that the state will only require a minimal amount of gravel to be removed on
the North Slope; for this reason, the company does not include the cost of
gravel removal when estimating its future DR& R liability. A Phillips
Petroleum spokesman stated that his company assumes that some gravel will
have to be removed, but could not specify how much. Finally, a BP spokesman
stated that his company anticipates leaving some gravel in place, but also
could not disclose the amount. He also stated that the Endicott Production
Islands (Duck Island Unit)- two man- made gravel islands connected to shore
by a 5- mile gravel causeway- would most likely be left in place and allowed
to erode naturally after all the associated facilities are removed (see fig.
10).

Figure 10: Endicott Production Islands

Source: Arctic Power.

Environmental Groups Environmental groups in Alaska are critical of the
state?s DR& R

Consider State DR& R requirements because the requirements are, in their
view, vague and

Requirements Inadequate indefinite. Officials from the Trustees for Alaska,
the Alaska Conservation

Foundation, and the Sierra Club stated that the state?s general requirements
provide no assurance that DR& R will ever occur. Some officials believe that
the state will waive oil company liability for performing DR& R on the North
Slope in exchange for the production of oil that is only marginally
profitable for the companies. The officials explained that the state has
very little incentive to impose DR& R costs on the same oil companies that
serve as the principal source of state revenue and payments to state
residents. They believe that if the state must choose between oil companies
spending

money on dismantlement, removal, and restoration or spending money on new
oil production, the state will choose new oil production. These groups cite
several historical examples, from the limited environmental review that took
place before the initiation of oil industry activities on the North Slope to
the current need for the state?s reserve pit cleanup program- begun only
after environmental groups settled a lawsuit with ARCO for violating the
Clean Water Act.

Lack of Specific The state of Alaska once attempted to develop more specific
DR& R

Requirements Reflects guidance for the North Slope, but internal
disagreement over the extent of

Disagreement within Alaska restoration, including what gravel should be
removed from the land,

Over the Extent of DR& R derailed those efforts. In the early 1990s, a
state- industry task force was and the Future Use of the

formed to clarify lease- closure policy. The task force recommended that
gravel be allowed to remain at certain sites after lease closure. The state
North Slope Land

chose not to adopt this recommendation because Alaska?s Department of Fish
and Game insisted on the complete removal of all gravel and restoration of
the land to its natural condition.

In addition, the state of Alaska has not developed a land use plan for the
North Slope or identified the condition to which the state would like its
lands returned after oil production ceases. Alaska?s Department of Natural
Resources? Division of Mining, Land, and Water is responsible for developing
land use plans to guide the use, development, and disposal of state lands.
Thus far, a state official reports, the ADNR has prepared area plans
covering roughly 70 percent of state- owned land. However, according

to an official in the Division of Mining, Land, and Water, there is no land
use plan for the North Slope because its current use, resource development,
is the state plan for the area. Some state and Alaska Native officials have
stated that once oil production ceases, they believe the state should have a
long- term goal of guaranteeing that the North Slope would support wildlife

habitat and native subsistence. Alaska?s DR& R

DR& R requirements in the major oil- producing states vary; some states
Requirements Are

have general requirements like Alaska?s, while others are much more
explicit. We surveyed dismantlement, removal, and restoration Similar to
Some

requirements in nine other states: California, Florida, Louisiana, Michigan,
States?, but Less

New Mexico, Oklahoma, Pennsylvania, Texas, and Wyoming. In total, these
Explicit Than Others?

nine states and Alaska account for nearly 90 percent of the oil produced in
the United States, excluding federal offshore production. All nine states

surveyed have an oil and gas regulatory structure that is similar to
Alaska?s. Specifically, all 10 states have one office that regulates oil and
gas industry activities at the wellhead (similar to AOGCC) and another
office that

manages oil and gas leases on state- owned lands (similar to ADNR). All the
states we surveyed have specific requirements for plugging and abandoning
oil and gas wells that are similar to Alaska?s. However, whether these
wellhead requirements contained specific surface restoration

requirements varied. For example, while well- plugging and abandonment
provisions in all the states we surveyed mandated the removal of surface
material and the filling and closure of all holes, only four states-
Florida,

Oklahoma, Pennsylvania, and Wyoming- mandated revegetation of the surface
area, while only three states- Florida, Oklahoma, and Wyoming- mandated
returning the site to a natural condition. Alaska, California, Louisiana,
and New Mexico reported no such requirements.

We found greater variance in the survey responses regarding dismantlement,
removal, and restoration requirements found in state oil and gas leases. For
example, Florida requires a site to be restored to original condition to the
greatest extent practicable. California reported that specific DR& R
requirements are not determined until completion of an

environmental review under the California Environmental Quality Act. In
contrast, New Mexico, Oklahoma, Pennsylvania, and Wyoming reported that
their oil and gas leases have mandatory requirements to remove surface
material, such as equipment, debris, and structures; close holes; and
revegetate the area upon lease termination. DR& R requirements in Alaska?s
oil and gas leases can require the lessee to rehabilitate the roads, pads,
and wells ?at the option of the state.? (See app. I for additional
information on DR& R requirements in the states we surveyed.)

Actual Cost of DR& R Is Unknown, but Likely

Chapt er 3

to Cost Billions of Dollars The actual cost to dismantle and remove oil
industry infrastructure and restore the land on Alaska?s North Slope cannot
be determined, but several indicators show that it is likely to amount to
billions of dollars. Estimating the eventual cost of these actions is
complicated by several factors, including the lack of specific requirements
from the state and uncertain timeframes for restoration. Oil companies
operating on the North Slope are the only entities that have estimated
future dismantlement, removal, and

restoration costs. Under generally accepted accounting principles, companies
are required to report their liabilities annually, but these estimates are
reported in aggregate for worldwide operations and specific estimates for
the North Slope are not available to the public. However, limited
information obtained from oil company annual reports, a tax court

case, and other sources indicates that the current DR& R liability for
existing infrastructure on the North Slope is in the billions of dollars.

Costs Depend on What Oil company spokesmen gave us two reasons that explain
why estimating

DR& R Will Be future DR& R costs for the North Slope is difficult. First,
lacking specific

federal, state, and local DR& R requirements, oil companies must make
Required, Which is

assumptions about the amount of DR& R they will ultimately be required to
Uncertain

perform. A Phillips Petroleum spokesman pointed out that it is hard to
develop a cost estimate for removing infrastructure when one does not know
what infrastructure will be removed and what will remain in place. He
explained that the state and local governments might decide to keep some of
the infrastructure, such as roads and airstrips, but that determination has
not been made and probably will not take place until after oil production
ceases. Spokesmen from ExxonMobil and Phillips

Petroleum stressed, for example, that estimating future DR& R costs is
dependent upon gravel removal requirements.

Second, the length of time remaining in the life of oil production on the
North Slope- 20 to 30 years or more based on estimates of the economic
viability of the North Slope oil fields and the Trans- Alaska Pipeline
System- combined with the potential development of natural gas production
adds further uncertainty to estimating DR& R costs. Spokesmen from five oil
companies that currently have ownership interests in oil production on the
North Slope told us that a number of other factors could change over time
and could also affect their eventual DR& R costs, including:

 the addition of new infrastructure- wells, pipelines, roads, airstrips,
and production facilities- as development continues;

 dismantlement and removal of some facilities, including the plugging of
wells, before units are abandoned;

 increases in the cost of services such as labor and transportation; 
future market value of useable equipment and scrap material;  technological
advances in drilling, production, and rehabilitation;  inflation; 
alternative uses for facilities or gravel, such as for natural gas

production; and  changes in environmental regulations or abandonment
stipulations.

Oil Company There is no definitive estimate of the cost of performing DR& R
on the

Disclosures Provide North Slope, but available evidence suggests that the
total liability is in the

billions of dollars. Generally accepted accounting principles require that
oil Some Indication that

companies estimate their future DR& R liability, but this liability only
needs DR& R Costs Will

to be reported on a worldwide basis. Oil company spokesmen told us that
Likely Be in the their individual company estimates for DR& R liabilities on
the North Slope were for internal use and not available to the public.
Companies fear that if

Billions of Dollars they make their internal estimates available, they could
someday be used

for a purpose other than the accounting estimates they were intended to be.
Nevertheless, limited financial reporting, a tax court case, and a few
limited studies indicate that the costs are likely to be substantial.

Generally Accepted Generally accepted accounting principles require oil
companies to estimate

Accounting Principles their future DR& R liability. The Financial Accounting
Standards Board

Require Estimation of (FASB) and the Securities and Exchange Commission
require oil

companies to estimate future DR& R costs in order to determine annual DR& R
Liability

depreciation and amortization rates. 22 However, accounting principles do 22
FASB requires companies using the successful efforts accounting method to
capitalize those costs directly related to producing properties (Statement
of Financial Accounting Standard 19, Dec. 1977). The Securities and Exchange
Commission requires companies using the full cost accounting method to
capitalize all costs incurred in exploration and development (SEC Regulation
S- X, 17 CFR 210.4- 10).

not require oil companies to separately report their DR& R liability for
each operation, such as those on the North Slope. The intent of these
principles is to match DR& R costs with associated oil revenue during the
period in which the oil is produced, rather than when the actual expense is
incurred. 23 In contrast, environmental contamination treatment costs- the
costs to remove, contain, neutralize, or prevent existing or future
contamination- are generally expensed in the current period, rather than
capitalized, if the cost is probable and can be estimated. 24

As a result of the differing treatment of asset retirement costs and a
desire to better disclose liabilities, the Financial Accounting Standards
Board recently issued new rules for disclosing asset retirement liabilities.
For financial statements issued for fiscal years beginning after June 15,
2002, oil companies will have to report the discounted amount of their DR& R
liability at the time an asset is placed into service. 25 Spokesmen
representing oil companies that operate on the North Slope told us that they
were uncertain, at this time, how this new rule would be implemented or how
it would affect their companies? balance sheets.

Oil Company Estimates Are None of the five oil companies with substantial
ownership interests in

Not Available to the Public current oil production on the North Slope were
willing to provide their

estimated DR& R liability for these operations. 26 Spokesmen from these
companies stated that their estimates have been calculated for accounting
purposes only and were not intended for public review. While oil companies
publish their worldwide liability estimates, they are not required to make
public regional or field- wide estimates. The companies were reluctant to
provide their accounting estimates for purposes other

23 For oil companies on the North Slope, this is accomplished through unit
of production amortization. Generally, this means that an oil company
estimates its total future DR& R liability and divides that by estimated
reserves, which yields a per barrel accrual. 24 Contamination costs include
costs resulting from oil spills, leaking underground tanks, pollution
control equipment, site decontamination, environmental studies, and costs of

fines. 25 Financial Accounting Standards Board, ?Accounting for Asset
Retirement Obligations,? Statement 143, June 2001.

26 We contacted three companies that operate North Slope units- BP,
ExxonMobil, and Phillips Petroleum- and two companies that are large
nonoperating interest holders- Anadarko and Chevron.

than their own internal accounting. The BP spokesmen stated that any current
cost estimates may not be valid with tomorrow?s technology, and that costs
calculated today represent a set of assumptions that will probably differ
from when the actual costs are ultimately incurred.

Although no comprehensive estimates are available for future dismantlement,
removal, and restoration costs for the North Slope, there are a number of
indicators that, although not precise, imply that the order of magnitude of
such costs could be in the billions of dollars. Specifically

 Phillips Petroleum?s acquisition of ARCO Alaska increased its total DR& R
liability by $1.6 billion. Phillips Petroleum reported in its 2000 annual
report that its acquisition of ARCO Alaska increased its total estimated
future dismantlement, removal, and restoration costs from $1.0 billion to
$2.6 billion. Prior to the merger, ARCO accounted for 30 percent of the
North Slope oil production.

 Abandonment costs are a function of construction costs. For the proposed
Liberty offshore project, MMS assumes that abandonment will cost roughly 5
percent of the original investment cost. With an estimated investment cost
of $500 million, MMS estimated that the planned Liberty project could
eventually cost an estimated $25 million to abandon. However, the MMS figure
excludes gravel and pipeline removal. In another case, a detailed DR& R
study of TAPS estimated that it will cost $1 billion (1977 dollars) or
approximately 11 percent of the original $9 billion (1977 dollars)
construction cost to dismantle and remove the

pipeline and restore the land to a natural condition. A recent study of oil
and gas industry capital investment on the North Slope from 1968 through
2001 estimated a cumulative investment of $20.6 billion (1977 dollars),
which if revalued in 2004 dollars (the earliest estimated time that major
DR& R activities are assumed to begin on the North Slope) would be $53.6
billion. 27 Estimating future DR& R costs based on this investment level and
a DR& R cost percentage ranging from 5 to 11 percent of the total investment
yields a DR& R estimate of $2.7 billion to $6 billion for existing North
Slope infrastructure (2004 dollars).

27 Based on a time series analysis by Dr. Scott Goldsmith of the University
of AlaskaAnchorage for the TAPS Renewal Environmental Report. The 2004
revaluation is based on Anchorage Consumer Price Index for Wage Earners
(CPI- W) and is assumed to be the earliest that DR& R could commence on the
North Slope.

 Exxon estimated nearly $1 billion in DR& R costs for oil wells and oil
production equipment and facilities at Prudhoe Bay. In a May 2000 U. S. Tax
Court case, Exxon submitted detailed engineering studies to support its
estimate that future DR& R costs for the Prudhoe Bay Field infrastructure
installed as of 1984 would total $928 million. (Exxon estimated that its
share amounted to 22 percent of this cost based on its then current
ownership percentage of the Prudhoe Bay field.) The DR& R cost estimate
excluded any gravel removal or revegetation costs. The $928 million included
$111.6 million in well- site DR& R costs-$ 85 million for plugging 645 wells
and $26.6 million for closing the pits next to the wells and cleaning up the
37 well sites. In 1970, the cost of plugging each well was estimated at
$131, 976 (1980 dollars). While the court found the estimated costs of well-
plugging and related site restoration reasonably estimable, the court stated
that the estimated DR& R costs relating to field- wide oil production
equipment and facilities located in the Prudhoe Bay oil field were not
sufficiently fixed and definite to base the tax accruals sought by Exxon.
The court noted that neither the Alaska Oil and Gas Conservation Commission

regulations for the years at issue, nor the particular oil and gas leases
involved, contained express language imposing fixed and definite DR& R
obligations on the oil companies relating to field- wide production
facilities located in the Prudhoe Bay oil field. The court further noted
that Alaska?s general policy to permit development, while at the same time
insisting that the environment be preserved or, if necessary, restored to
the fullest reasonable extent, did not establish any specific oil company
DR& R obligations with regard to Prudhoe Bay that could

be legally recognized for federal income tax purposes. According to
ExxonMobil spokesmen, the company has already accrued $200 million in
dismantlement, removal, and restoration costs for its North Slope

operations, including its interest in Prudhoe Bay.

Financial Assurances That Funds Will Be Available for Projected DR& R Costs
Are

Chapt er 4

Limited Despite incurring responsibility for some costly dismantlement,
removal, and restorations that resulted from improperly abandoned sites, the
state of Alaska?s current financial assurances cover only a small portion of
the potential cost of DR& R for existing infrastructure on the North Slope.
In the past, several drilling and service companies that supported early
North Slope oil industry activities went out of business and improperly
abandoned their operations and sites. Without adequate financial assurances,
the state of Alaska was left financially responsible for the costs of
dismantlement, removal, and restoration. Oil companies currently operating
on the North Slope have assisted the state in this cleanup effort and are
spending millions of dollars to restore some of these abandoned

sites. The state is the only entity on the North Slope that requires oil
companies to post bonds for their activities on state lands. However, the
state bond limits are set without regard to the potential future costs of
DR& R. The Corps of Engineers, the local government, and Alaska Native
landowners all have the authority to impose financial assurances, but have
never done so, preferring to defer to the state. Still, in Alaska, where the
cost of restoration might be significant, bonding requirements are higher
than those of most other oil- producing states that we surveyed.

Previously Abandoned The state of Alaska is faced with a number of
improperly abandoned sites

Sites on State Land on the North Slope. Most of these sites were the result
of early oil industry

activities by various oil companies and oil- related service companies, some
Had Insufficient of which have gone out of business. The state has
identified 217

Financial Assurances contaminated sites on state- owned North Slope lands;
many sites are the

responsibility of various federal agencies based on activities that occurred
before statehood, as well as TAPS- related and various oil and service
companies. Of these, the state has cleaned up and closed about 25 sites and
is working with responsible parties, when possible, to clean up the rest.
The state does not know how many non- contaminated sites on the North

Slope also require DR& R. The state has sought the assistance of the
remaining North Slope oil companies to help fund and, in some cases, perform
the cleanup of abandoned sites when no responsible party remains. For
example, as part of the BP- ARCO merger, the state obtained an agreement
from BP and Phillips Petroleum to clean up 14 abandoned North Slope sites.
These sites, called ?orphan sites,? were suspected of being contaminated by
hazardous substances. One of the commitments BP and Phillips Petroleum made
under the agreement was to spend $10 million to assess these 14 sites and
clean them up by 2007. Additionally, BP and Phillips Petroleum agreed to

identify, collect, and dispose of abandoned empty barrels found on the North
Slope. According to state officials, the parties that caused the
contamination or left the barrels are either unknown or unable to clean up
the sites. The officials noted that some of these sites were contaminated
and abandoned before environmental requirements were established and

during a period when the state had little environmental oversight of
activities on the North Slope. Further, in many of these cases, the
companies were operating under state land use permits that contained minimal
bonding requirements, not state oil and gas leases. In these cases,
according to these officials, the state has little recourse against such
companies. The state also asserts that in the absence of its agreement with

BP and Phillips Petroleum, the state would have had to clean up the orphaned
sites using state funds and on a less aggressive schedule. By the end of
2001, the state and the oil companies had inspected the abandoned
contaminated sites, characterized them by type of contamination, and ranked
them by risk priority. The state and the oil companies had also

inventoried several abandoned oil drum sites, and the oil companies had
completed dismantlement, removal, and restoration at five of the orphan
sites.

One example of the dismantlement, removal, and restoration of a site
abandoned on state lands is an area called Service City. Oil field service
companies that operated near Prudhoe Bay used Service City. Beginning in the
mid- 1960s, these companies, operating under state leases, used the site for
staging, servicing, and storing oil field equipment and supplies. By 1986,

the area was essentially abandoned, leaving behind metal buildings,
equipment, lead acid batteries, and tons of other debris and waste. By 1989,
the leases for this area were not active, and some leases were in default
for nonpayment of rent. As a result, the state revoked the area leases in
1990. That same year, BP took the lead for cleaning up Service City, working
under a cooperative agreement between the state and three oil companies- BP,
ARCO, and ExxonMobil. The cleanup and restoration of Service City is still
ongoing and, according to BP, has already cost about $2 million.

Alaska?s Statewide The state of Alaska?s bonding requirements- established
by the Alaska Oil

Bonding Requirements and Gas Conservation Commission for well sites and by
the Alaska

Department of Natural Resources for oil and gas leases- cover multiple for
DR& R Cover Only a purposes and if called by the state would only cover a
small portion of the

Small Portion of the potential total DR& R liability on the North Slope.
AOGCC requires each Potential Liability

operator to post a single bond to ensure that every well in the state is
properly drilled, operated, maintained, repaired, and abandoned. ADNR?s
bonding provisions also allow a company to post a single bond to ensure its
compliance with all lease conditions for all leases in the state, including
provisions for royalty payments to the state and lease termination
provisions. In both cases, the bond amounts are far less than the cost to
reclaim a single well site, let alone all wells and other existing
infrastructure on state- owned land on the North Slope.

Alaska?s Well- Site Bonding AOGCC?s bonding requirements are insufficient to
fully cover the cost of

Requirements well- plugging and abandonment liabilities on the North Slope.
AOGCC

requires a bond of not less than $100,000 to cover a single well, or a
blanket bond of $200,000 covering all of an operator?s wells in Alaska. The
bond remains in effect until the company abandons all wells covered by the
bond and AOGCC provides final location clearance. According to its

Commissioners, the AOGCC currently has blanket bonds from five companies to
cover all the wells on state- owned land on the North Slope. With plugging
and abandonment costs for a single well running as much as $250, 000,
according to a 1991 state of Alaska legislative audit report, current
bonding could fund only a small fraction of plugging and abandonment costs
for all of the wells in the state, let alone the thousands of wells on the
North Slope. The same audit report recommended that AOGCC increase its bond
amounts. 28 The state did not adopt the audit report recommendation, and
AOGCC Commissioners acknowledge that bonding amounts are still inadequate to
fund all well- plugging and abandonment, particularly for companies that
operate many wells under a single blanket bond. 29 However, these officials
noted that companies are now required to plug and abandon wells that are no
longer being used on

an ongoing basis. 28 State of Alaska Legislature Budget and Audit Committee,
Audit Control Number 08- 4393- 91, March 11, 1991.

Alaska?s Oil and Gas Lease Current ADNR bonding levels are far below the
potential cost of

Bonding Requirements dismantling and removing existing infrastructure and
restoring the land

used for oil industry activities on the North Slope. Although ADNR
regulations require a bond of at least $10,000 before oil companies can
commence operations in the state, an ADNR official stated that currently
ADNR requires a $100,000 bond for single well operations. ADNR

regulations also allow a lessee to furnish a statewide bond of $500,000 to
cover all of its oil and gas leases in the state. In place of separate bonds
for each lease committed to a unit agreement, ADNR requires the unit
operator to furnish a statewide oil and gas lease bond of $500,000.

The ADNR can also require an unusual risk bond in addition to single well
and statewide bonding requirements. State of Alaska regulations provide the
ADNR Commissioner with the discretion to require additional financial
assurances based on, among other factors, the degree of risk involved for
the operations proposed or conducted on the lease, which includes, according
to an ADNR Division of Oil and Gas official, the financial background of the
lessee. However, this official told us that the ADNR has no formal mechanism
or procedure in place to systematically evaluate the creditworthiness of a
lessee. ADNR has required a lessee to post additional financial assurances
in two cases. Specifically, in 1998, the state required XTO Energy (formerly
Cross Timbers Oil Company) to post additional financial assurances before
approving its acquisition from Shell Oil of two

offshore oil platforms in the Cook Inlet. 30 Later in 2000, ADNR required an
oil company in bankruptcy proceedings to post a $3.8 million bond prior to
obtaining approval to install a well platform in Cook Inlet.

Although state officials acknowledge that the financial assurances obtained
in oil and gas leases are minimal, they maintain that the major operators on

29 The AOGCC may require bonding levels greater than the minimum levels of
$100,000 for a single well and $200,000 for a statewide bond. However, an
AOGCC official stated that the amount and criteria to increase these bonding
levels are not specified by regulation or by statute, and AOGCC officials
told us that they have not required a higher amount on the North Slope. 30
These financial assurances include a $3 million bond to remove the immediate
risk to the

state of raising the cash to maintain and operate the offshore platforms
should the lessee declare bankruptcy and a $31 million escrow fund to pay
for the actual cost of abandoning the facilities. Since the existence of
proved oil and gas reserves serves as collateral for the lessee, XTO Energy
would not have to start paying into the escrow account until the value of

the proven reserves drops to a level insufficient to act as collateral for
the cost of platform abandonment.

the North Slope are large corporations with the capacity to pay their
eventual DR& R costs. A state official also noted that additional financial
requirements, such as those imposed by the state on XTO Energy, might become
more common if current leaseholders sold their interests to smaller
companies as oil production on the North Slope declined. According to a
state official, as oil fields age and oil recovery becomes

marginally profitable, it is common practice in the industry for the large
operators to sell their interests to smaller companies. Since these smaller
companies may have fewer resources to meet existing DR& R liabilities, the
official noted that the state might require additional financial assurances.
However, the state currently has no criteria to determine when additional
financial assurances are needed.

The Corps of The U. S. Army Corps of Engineers, the North Slope Borough, the
Kuukpik

Engineers, Local Village Corporation, and the Arctic Slope Regional
Corporation have not

required oil companies to provide any financial assurances that funds will
Government, and be made available to perform DR& R when oil production
ceases on the

Alaska Native North Slope. The Corps may attach financial assurance
requirements to its Corporations Have Not

permits, but it has never done so on the North Slope. According to the
Corps, without specific restoration requirements, it is difficult to
quantify

Required Financial the size of the bond and, further, there is no need to
duplicate bonds

Assurances for DR& R required by other agencies. The Corps considers it the
responsibility of the

landowner- in this case, the state of Alaska- to ensure that funds are
Activities

available to perform DR& R activities. The North Slope Borough has financial
assurance provisions in its zoning regulations, but the borough?s Director
of Planning and Community Service stated that they have not specifically
required oil companies to provide surety as a condition for zoning approval.
Borough zoning regulations accept evidence of selfinsurance, proof of
financial responsibility, or the existence of sufficient surety filed with
another government entity as fulfilling the borough?s surety requirements.
The Kuukpik Corporation?s Surface Use Agreement with Phillips Petroleum
contains a provision that allows the corporation to require financial
assurances such as a performance bond or letter of credit. However, the
General Manager of the Kuukpik Corporation stated that thus

far, he does see a need for bonding since future DR& R costs are
undetermined. The ASRC?s Director of Lands stated that he relies on the
state of Alaska bonding requirements to ensure that funds will be available
to perform DR& R.

Major Oil Companies Although the two major oil companies currently
responsible for oil

Operating on the North production on the North Slope generally agree that
the state?s existing bond amounts would not cover the potential cost of
future DR& R, they do not

Slope Do Not Believe believe that increasing bond amounts is necessary.
Spokesmen for BP and

Full Financial Phillips Petroleum said that their companies would do
whatever the state

Assurances Are ultimately decided in terms of DR& R, and both companies plan
to meet or

exceed their DR& R obligations. The spokesmen also stated that their
Necessary

companies have the assets to cover the costs of DR& R. Further, the Phillips
Petroleum spokesman noted that requiring full financial assurances by
increasing bond amounts ignores the fact that the companies have already
accounted for this obligation on their financial statements. Additionally,
spokesmen for both companies stated that all the North Slope operators

are well capitalized and, therefore, the funding for DR& R is substantiated
by the general credit of the companies and their partners. The Phillips
Petroleum spokesman noted that, for this reason, the state has full
assurance that whatever DR& R is required will occur. A BP spokesman further
noted that his company has to behave in a responsible manner on the North
Slope and elsewhere in order to operate in the United States.

Finally, spokesmen for both BP and Phillips Petroleum added that instead of
requiring the companies to spend money on financial assurance, a more
beneficial return for all parties involved would result from allowing the

companies to invest their resources in more North Slope research- including
technology improvements for future DR& R- and for further exploration and
production.

Alaska?s Bond Bond amounts required by Alaska for oil companies operating on
the North

Amounts Exceed Slope are generally higher than those reported by the other
nine oil-

producing states we surveyed. Like Alaska, the other nine states have two
Those of Most of the

offices that require bonding for oil and gas activities. These states have
an Other Oil- Producing

office (like Alaska?s AOGCC) that regulates the subsurface integrity of the
States We Reviewed

oil or gas field and requires bonding to ensure that each well is properly
plugged and abandoned. Each state also has another office (like Alaska?s
ADNR) that focuses on the management of oil and gas leases on state

lands, and these offices also use bonds to ensure compliance with all the
provisions of the lease, including DR& R provisions.

Alaska?s AOGCC?s minimum bonding amounts of $100,000 for single well bonds
and $200,000 for statewide blanket bonds are generally higher than the
bonding requirements of the other states we surveyed. Except for Alaska,
Michigan, and Pennsylvania, the other states reported that the

actual amount of a single well bond is determined by the depth of the well
multiplied by an amount that ranged from $1 per foot to $10 per foot of
depth. Three states- California, Florida, and Michigan- reported having
higher blanket bonding levels than Alaska. Specifically, California has a $1
million blanket bond that covers all of a company?s wells in the state,
Florida has a $1 million blanket bond that covers a maximum of 10 wells in
the state, and Michigan has a $250,000 blanket bond. In addition, Louisiana,
Michigan, and Texas reported that their blanket bonding amounts are based

in part on the number of wells in the state. For oil and gas leases on state
lands, only two states- California and Pennsylvania- have financial
assurance amounts greater than Alaska?s. California, with only offshore oil
and gas leases, reported that current assurances range up to $1.25 million.
Pennsylvania assesses a well- bonding requirement of up to $100,000 per
well, and some of its leases may contain numerous wells. Florida?s bond
amounts are the same as Alaska?s, while

three other states- New Mexico, Oklahoma, and Wyoming- reported having the
discretion, like Alaska, to increase bonding levels on a case- bycase basis.
Finally, Texas and Louisiana reported that they relied on their oil and gas
well regulatory agency for DR& R requirements and thus had no financial
assurance provisions in their oil and gas leases.

Specific DR& R Requirements and Improved Financial Assurances Should Be
Considered

Chapt er 5

for North Slope Federal Lands To date, most North Slope oil production has
taken place on state- owned lands and has, therefore, been subject to state
DR& R requirements and financial assurances. However, as oil production on
state lands declines, oil companies and the state of Alaska are looking to
federal lands- the NPR- A, the Arctic Refuge, and offshore- to maintain
North Slope oil production. Currently, DR& R requirements and financial
assurances for these federal

lands vary, depending on the responsible federal agency. For example, in the
NPR- A, where only oil exploration has occurred, BLM has not yet developed
DR& R requirements for oil production activities to meet its goal of
returning disturbed land to its previous use. Furthermore, although BLM
regulations allow for escalating bond amounts up to the full cost of DR& R,
the current bond amounts in the NPR- A would only cover a fraction of the
potential future DR& R liability. In contrast, for federally regulated
offshore oil activities, MMS has developed explicit DR& R requirements for
both oil exploration and production, and its bond amounts are based on an
escalating scale that depends on, among other things, the estimated cost of
future reclamation. Further, in the Arctic National Wildlife Refuge, which
the Congress is currently considering whether to open to oil and gas
development, no specific restoration goal or DR& R requirements exist for
reclaiming the refuge if oil production occurs, and existing financial
assurances are not adequate to cover the potential cost of restoration.
Historically, oil exploration on federal lands on the North Slope was
conducted through contracting for the Department of the Navy and the U. S.
Geological Survey (USGS). The Navy exploration predated any DR& R

requirements, and financial assurances were through the federal government.
Without DR& R requirements, early oil exploration activities resulted in
improperly abandoned well sites and unrestored land- two problems that
remain to this day.

In contrast to varying federal DR& R requirements and financial assurances
for oil industry activities on the North Slope, the Trans- Alaska Pipeline
System and the hardrock mining, coal mining, and nuclear power industries
have explicit DR& R requirements that are set prior to the initiation of any
activities. In addition, the federal agencies with regulatory authority over
these three sectors require full assurance that funds will be available to
meet these requirements.

As Oil Production on With oil production declining on state- owned lands,
oil companies and the

State Lands Declines, state of Alaska are seeking to develop production on
federally regulated

lands and waters of the North Slope. Three areas under the jurisdiction of
Development of

the Department of the Interior are being considered: the National Federal
Lands Is Being

Petroleum Reserve- Alaska, which is managed by BLM; the Outer Pursued

Continental Shelf (OCS), which is managed by MMS; and the coastal plain of
the Arctic Refuge, which is managed by the Fish and Wildlife Service. The
status of oil industry activities in each of these areas follows.

BLM manages the entire NPR- A, which according to USGS estimates holds oil
reserves of between 800 million and 15.4 billion barrels. Following the
completion of a 1998 Integrated Activity Plan/ Environmental Impact
Statement (IAP/ EIS) on the potential impact of oil activities in the
northeastern part of the NPR- A, BLM began to lease certain areas for oil
and gas exploration. 31 By May 2001, oil companies reported that they had

discovered oil reserves in the NPR- A. The next step in this process is for
the oil companies to submit a production plan. According to BLM, this may
occur as early as 2003. However, before oil production can begin, BLM must
complete another National Environmental Policy Act (NEPA) analysis, likely
an EIS, to assess the environmental effects of such

production. To date, the only offshore oil production from the Outer
Continental Shelf has occurred at BP?s Northstar unit, which is located
primarily in stateregulated water. The Northstar field is estimated to
contain 175 million barrels of oil. In 1998, BP submitted another
development and production plan to MMS for a proposed offshore project
called Liberty, which would

have been located solely in federally regulated water, 6 miles off of
Alaska?s north coast. BP estimated that the Liberty field contained 120
million barrels of economically recoverable oil. However, in January 2002,
because of the high cost of developing the similar Northstar field, BP
announced plans to focus its resources on its core oil production areas
closer to Prudhoe Bay and to not pursue development of the Liberty project
as

31 The Naval Petroleum Reserves Production Act of 1976 gave the Secretary of
the Interior the authority to conduct oil and gas leasing in the NPR- A. In
1980, the Congress directed the Secretary to undertake an expeditious
program of competitive leasing of oil and gas in the NPR- A. The most
current oil exploration activity is taking place as a result of BLM?s 1998
IAP/ EIS and Record of Decision. The IAP/ EIS describes the future multiple-
use management of 4.6 million acres of the NPR- A and made about 87 percent
of the area available for oil and gas leasing.

proposed at this time. BP is re- evaluating alternative development
strategies for this area. MMS officials told us that other oil companies
were still examining the potential for oil exploration projects on the Outer
Continental Shelf.

Finally, for the last 40 years, the Congress has been debating opening the
coastal plain of the Arctic Refuge (known as the ?1002 Area?) to oil and gas
exploration. The USGS estimates that federal lands in the 1002 area likely
contain between 4.3 billion and 11.8 billion barrels of technically
recoverable oil, not all of which will be economically recoverable. 32

DR& R Requirements Federal requirements for dismantling and removing oil
industry

for Federal Lands on infrastructure and restoring federal land when
production ceases vary from

agency to agency. Although BLM has an overall restoration goal for the the
North Slope Vary

NPR- A, it has specific requirements only for plugging and abandoning wells.
Because only oil exploration activities have occurred in the NPR- A, BLM has
yet to develop DR& R requirements for when oil production facilities are
abandoned. The MMS has specific well- plugging and

abandonment requirements that require the removal of all obstructions built
for offshore oil activities. MMS can make exceptions to these requirements
based on an end- of- the- life project review. For example, MMS requirements
for some site- specific infrastructure, such as buried pipelines and gravel
islands constructed for drilling sites, are not specified until the end of
the field?s productive life. While the FWS has a general DR& R policy for
oil industry activities in the National Wildlife Refuge System, specific
requirements are developed at individual refuges. Because oil industry
activities are not authorized in the Arctic Refuge, FWS has not yet
developed any DR& R requirements for the refuge. Finally, the Corps of
Engineers, which issues permits for certain activities that result in the
loss of wetlands and for offshore structures, has the same very general
restoration language in its permits for activities on federal land as it
does for those on state land.

32 The U. S. Geological Survey also estimates that the entire 1002 area,
including Native lands and state offshore lands, contains between 5.7
billion and 16 billion barrels of technically recoverable oil.

BLM Plans to Develop More According to BLM?s Field Manager in Alaska, BLM
has an overall

Specific DR& R restoration goal of returning any land disturbed by oil
industry activities in

Requirements for the the NPR- A to a condition that is similar to its
previous use. To achieve this

National Petroleum goal, BLM has developed an overall general oil field
abandonment standard

for the northeast NPR- A as part of the development of an Integrated
Reserve- Alaska

Activity Plan/ Environmental Impact Statement. In addition, BLM has specific
requirements for plugging and abandoning all types of wells and specific DR&
R requirements for oil exploration activities. However, in the

NPR- A, because the only oil- related activities that have occurred to date
involve exploration, BLM has yet to develop DR& R requirements for oil
production activities.

BLM?s overall restoration goal for the NPR- A is to return the land to a
condition that will support its previous use. In developing its 1998 IAP/
EIS for the northeast NPR- A, the BLM identified the previous uses of the
NPR- A to be primarily fish and wildlife habitat and subsistence use.
Specifically, several areas within the northeast NPR- A contain wildlife
habitat that

includes important nesting, staging, and molting habitat for a large number
of water birds and shore birds and also contains caribou calving and
insectrelief habitat. The northeast NPR- A also contains numerous water
bodies that provide spawning, migration, rearing, and over- wintering
habitat for both anadromous and resident species of fish. Fish harvested
from these waters are an important subsistence resource for the Alaska
Native residents of Barrow and Nuiqsut. In addition, residents of Nuiqsut
obtain

approximately one- third of their subsistence diet from caribou. In its 1998
IAP/ EIS, BLM also developed a general DR& R standard for oil industry
activities in the northeastern part of the NPR- A. The standard states that
upon field abandonment or expiration of a lease, all facilities shall be
removed and sites rehabilitated to the satisfaction of BLM. BLM may,
however, determine that it is in the public?s best interest to retain some
or all of the facilities at the site. In addition, BLM has specific
requirements for plugging and abandoning all wells in the NPR- A, whether
they are used for oil exploration activities or oil production. Currently,
the only oil- related activity occurring in the NPR- A is exploration.

In addition to the general standard for oil field abandonment and specific
requirements for plugging and abandoning wells, BLM has also developed
specific requirements for oil exploration activities in the NPR- A. For

example, BLM requires that all exploration activities occur during the
winter months so that ice pads are used to support exploration well rigs and
ice roads are used to service the well sites. According to BLM, these

requirements limit the impact of exploration activities on the surface area.
Further, at the end of the exploration season, BLM requires the companies to
remove all drilling equipment and supplies, haul all debris to an approved
disposal site, and chip and scrape ice pads to pick up any spills. Finally,
after the ice pads and ice roads melt in the summer, the companies

are required to conduct an inspection of each location and to pick up any
remaining debris.

BLM officials stated that the agency plans to develop specific DR& R
requirements for oil production activities in the NPR- A when oil companies
apply for production permits. According to BLM officials, once oil companies
request production permits, BLM will be required to conduct another NEPA
analysis, likely an EIS. The officials stated they plan to use the NEPA
analysis process to develop specific measures, including specific

DR& R requirements, to mitigate the impact of oil production activities in
the NPR- A and return the land to a condition that will support its previous
use. Specifically, when a company submits an application for development,
BLM requires the applicant to also submit a surface reclamation plan. Such a
plan must be approved by BLM and is made a condition of the permit.
Reclamation of the land may include reclaiming disturbed areas, reshaping
topography, disposing of waste, and revegetating affected areas. For
example, surface reclamation plans may require the reclamation of well pads
by removing the fill material to the approximate height of the original
ground contours and applying a specific seeding mixture to that land during
a particular time of the year.

Furthermore, BLM?s current regulations require oil companies to submit and
obtain approval of well- abandonment plans before operators can begin well-
plugging and abandonment activities. Well- abandonment plans not only
address the plugging and abandonment of wells, but also include plans for
removing drilling equipment and reclaiming the disturbed surface. In May
2001, oil companies conducting exploratory work in the NPR- A announced
their first oil discoveries. According to BLM officials, the oil companies
may submit production plans for these areas within the next year.

MMS Has Specific DR& R MMS has an overall goal of restoring offshore areas
used for oil industry

Requirements for Offshore activities to their previous condition.
Specifically, MMS regulations for

Oil Wells offshore oil industry activities include specific well- plugging
and

abandonment requirements and, for restoration, generally require the removal
of all obstructions in the water. For some site- specific

infrastructure, however, such as buried pipelines and the gravel used to
construct man- made islands, restoration requirements are not specified
until the end of the field?s productive life.

MMS requires oil companies to submit a notice of intent to abandon a well
before the companies start abandonment operations. The notice must show the
reason for abandonment and include supporting data and a description of the
proposed abandonment work. For well- plugging and abandonment, MMS
regulations generally require that all structures be removed and all
wellheads, casings, and other obstructions be removed to a depth of at least
15 feet below the seafloor or to a depth approved by the district
supervisor. However, on the North Slope, during the EIS process for offshore
projects, it was determined that specific restoration requirements for site-
specific buried pipelines and man- made gravel islands used as drilling
platforms would be determined later. Specifically, MMS may allow pipelines
to be cleaned and abandoned in place if they constitute no hazard to
navigation and commercial fishing and do not interfere with other uses of
the Outer Continental Shelf. In addition, where oil companies have
constructed gravel islands in the Beaufort Sea to conduct oil exploration
activities, MMS has allowed these islands to erode naturally, as opposed to
requiring their removal. MMS says that it has consulted with a federal/
state task force that examined the effect of oil exploration activity on
biological

resources in the Beaufort Sea. The task force determined that leaving gravel
islands in place is ecologically preferable to removing them, because it
causes the least amount of disturbance. However, environmental groups and
some local inhabitants are still concerned about the environmental
consequences of leaving the islands in place. Finally, once an oil company
completes its well- plugging and abandonment efforts, MMS requires the
lessee to submit a well- abandonment report describing the manner in which
the work was accomplished and certifying that the area was cleared of all
obstructions. As of September 2001, there have been 30 exploratory wells
drilled in the Beaufort Sea. According to MMS, all 30 wells have been

permanently plugged and abandoned, and the drilling facilities have been
removed.

Initially, all oil- related activity in federally regulated waters off the
North Slope was exploratory. However, in November 2001, BP and the
Department of the Interior announced the first offshore oil production

activity on the North Slope at BP?s Northstar project. Although the
Northstar facilities are located in state waters, the oil reservoir extends
into federal waters. 33 Consistent with its regulations, MMS will require
detailed plans for the plugging and abandonment of wells on federal leases.

Fish and Wildlife Service FWS has an overall goal of restoring to their
original condition those

DR& R Requirements wildlife refuges in which oil industry activities occur.
Specifically, FWS has

a general policy that requires the removal of all structures and equipment
when oil industry activities cease, as well as the restoration of the area
to its original condition, or as near to it as possible. FWS does not have
more specific restoration requirements for oil activities that occur in the
national wildlife refuge system. Instead, FWS allows its individual refuge
managers to develop more specific restoration requirements, usually in
consultation with BLM; these requirements are imposed as conditions to BLM
leases and

permits and to their own special- use permits and right- of- way permits.
Although oil industry activity is currently not permitted in the Arctic
Refuge, if the Congress were to authorize such activity in a manner similar
to other refuges, both BLM and FWS would manage it. Specifically, BLM would
regulate subsurface activities by issuing drilling permits and would
regulate the drill site surface area by issuing oil and gas leases in which
FWS would provide recommendations on stipulations for all activities,
including DR& R requirements. Under the National Wildlife Refuge System
Administration Act, the Secretary of the Interior, through the FWS,

manages surface activities within refuges. Specifically, FWS would regulate
the surface area not covered by BLM leases through the issuance of
specialuse and right- of- way permits. Special- use permits authorize
commercial activities, such as seismic surveys, in national wildlife
refuges. Further, in Alaska, Title 11 of ANILCA provides for rights- of- way
across federal conservation areas, such as the Arctic Refuge, for
transportation and utility systems. 34 Specifically, right- of- way permits
are provided for the construction of such things as roads and pipelines that
are related to the commercial activity. These permits would contain
requirements for restoration, revegetation, and the curtailment of erosion
on the surface of the land. For example, in the Kenai National Wildlife
Refuge in Alaska, a right- of- way permit was required for the
reconstruction of a gravel road. The permit stated that upon cessation of
drilling operations, the company would remove culverts, re- grade the
roadway, and restore the area to its original topography and drainage
patterns.

33 While the Northstar facilities are located within the 3- mile state
limit, the field extends across the state/ federal boundary. As such, the
field is managed under a joint federal/ state unit that includes both state
and federal leases.

34 If the Congress opens the Arctic Refuge to oil and gas development, Title
11 of ANILCA also requires the Secretary of the Interior to grant access
rights to Alaska Native inholdings that may be developed. Such inholdings
are located throughout the refuge?s coastal plain.

The Corps? DR& R The U. S. Army Corps of Engineers issues permits to oil
companies on the

Requirements for Federal North Slope that contain very general
dismantlement, removal, and

Lands restoration requirements and only rarely contain specific
requirements.

The Corps issues permits for certain actions that affect wetlands or
navigable waters regardless of land ownership. The Corps? DR& R requirements
are contained in its permits as a general condition that states that upon
abandonment ?restoration of the area may be required.? This is the same
language that is used in all Corps permits, including those issued for oil
industry activities on state- owned lands on the North Slope.

For federal lands, the Corps? position on restoration requirements is the
same as its position on state- owned land; it believes that the landowner
holds primary responsibility for DR& R requirements. In the case of the NPR-
A, the Arctic Refuge, and the Outer Continental Shelf, the landowner is the
responsible federal resource management agency. The Corps would prefer to
accept the federal agencies? recommendations for dismantlement, removal, and
restoration of an area, provided that important aquatic

resources are protected and there are no overriding factors of national
public interest. However, the Corps does maintain the authority to enforce
the provisions of its permits if disputes with the landowner occur.

DR& R Requirements in As of April 2002, the Congress had considered a number
of bills and

Current Legislative amendments that would authorize the opening of the
Arctic Refuge?s coastal plain to oil and gas industry activities. 35 In some
cases, the bills and

Proposals amendments included language that specified the condition to which
the

lands used for oil and gas activities should be returned after oil and gas
production ceases. For example, in August 2001, the House of Representatives
passed H. R. 4, which authorizes oil and gas activities in the Arctic
Refuge. Concerning land restoration, H. R. 4 requires reclamation of the
land to a condition capable of supporting the uses which the lands were
capable of supporting prior to any oil exploration, development, or
production activities, or, upon application by the lessee, ?to a higher or
better use? as approved by the Secretary of the Interior. H. R. 4 also
requires

35 As of February 2002, four bills had been introduced in the 107th Congress
that would open the Arctic National Wildlife Refuge?s coastal plain to oil
and gas development- H. R. 4, H. R. 39, H. R. 2436, and S. 388. In addition,
in April 2002, the Senate considered and rejected an amendment (S. A. 3132)
to the Senate energy bill (S. 517) to open the Arctic Refuge to oil and gas
development. The House and Senate energy bills will be reconciled in
conference committee.

the removal of all oil and gas facilities, structures, and equipment upon
completion of operations. However, the bill also states that the Secretary
of the Interior may exempt from removal those facilities, structures, or
equipment that the Secretary determines would assist in the management of
the Arctic Refuge. A Senate bill and an amendment to open the Arctic Refuge
to oil and gas exploration, S. 388 and S. A. 3132, respectively, contain

a reclamation standard identical to that in H. R. 4. The inclusion of the
phrase ?or to a higher or better use? to the surface reclamation goal
contained in H. R. 4, S. 388, and S. A. 3132 could compromise the guidance
that the land be reclaimed to a condition capable of supporting its previous
use, which is predominantly wildlife habitat. Under H. R. 4, S. 388, and S.
A. 3132, if the lessee requests, the restoration goal is subject to
interpretation by the Secretary of the Interior on what would be a higher or
better use of the land. According to a November 2001 report by the
Congressional Research Service that discussed legal issues

related to proposed drilling in the Arctic Refuge, under general zoning law,
?higher or better? uses are those that ?bring the greatest economic return.?
36 As such, those uses that are ?higher and better? than undeveloped
wildlife habitat could include many possibilities, such as the development
of the area for tourism. The reclamation requirements contained in H. R. 4,
S. 388, and S. A. 3132 for the Arctic Refuge are similar to the state of
Alaska?s general requirement for the dismantlement, removal, and restoration
of its land on the North Slope. As previously discussed, this general
requirement has resulted in differing interpretations of what will
ultimately be required in terms of dismantlement, removal, and restoration
on the North Slope by the parties involved. In April 2002, the Senate voted
to block S. A. 3132, which would have authorized drilling for oil and gas in
the Arctic Refuge. However, the Senate and House energy bills must still be
reconciled in conference, where, once again, members of Congress have the
opportunity to reconsider. 36 Congressional Research Service, Legal Issues
Related to Proposed Drilling for Oil and

Gas in the Arctic National Wildlife Refuge, CRS Report RL31115 (Washington,
D. C.: Nov. 23, 2001).

Assurances That Funds Generally, existing bond amounts for oil industry
activities for federal lands

Will Be Available to on the North Slope will not cover the potential costs
of eventual

dismantlement, removal, and restoration activities. Financial assurances,
Implement Federal such as bonds, can ensure that if a company defaults on a
lease or contract,

DR& R Requirements the obligations will still be completed. The amount of
the financial

Are Limited assurance can be fixed or can vary and be based on, among other
things,

such factors as the company?s experience and financial viability and the
estimated cost of future restoration. While BLM has some bonding
requirements on its land and on FWS refuges, its $300,000 bond for all
leases a company holds in the NPR- A and its $25, 000 amount for a statewide
bond on refuges are unlikely to meet all restoration costs that

could be incurred on the lands. Although both BLM and MMS have the authority
to ensure that full funding be available for restoration activities, only
MMS has implemented a general bonding structure that provides for higher
bond amounts as the scope of oil industry activity increases. The Corps has
not required any financial assurance that funds will be available to conduct
DR& R requirements as part of its permit process on the North Slope.

In the NPR- A, the Bureau of Land Management requires oil companies to post
a bond for oil activities conducted on federally leased land. BLM bonds are
used to ensure compliance with all the terms of the lease, including the
payment of rentals and royalties and the performance of DR& R. Specifically,
BLM requires a minimum bond of $100,000 per lease, or a $300,000 bond for
all leases a company holds in the NPR- A, or a rider upgrading a nationwide
bond to $300,000. 37 Currently, most companies operating in the NPR- A have
nationwide bonds; these bond amounts will

only cover a small fraction of the potential future DR& R liability.
Although BLM has the authority to require full financial assurance to fund
the cost of DR& R, it has not yet done so. According to BLM officials, its
current bond amounts are not intended to cover the full cost of future
restoration activities, but instead serve as an assurance of performance.

Generally, BLM officials in Alaska do not believe it necessary for major oil
companies operating in the NPR- A to provide full financial assurance that
they will comply with their lease requirements, including DR& R. BLM

37 BLM also requires a bond for geophysical exploration such as seismic
surveys in the National Petroleum Reserve- Alaska. BLM requires an
exploration bond of at least $5,000 for the NPR- A, or a $25,000 statewide
exploration bond, or a $50,000 nationwide exploration bond.

officials noted that these companies are large international firms whose
future business depends on the successful completion of all lease
requirements and whose total assets will easily cover the full cost of DR&
R. BLM?s field manager in Alaska stated that when the companies go from
exploration to production in the NPR- A, BLM plans to determine whether

the existing bonding amounts are adequate. At that time, if BLM deems it
necessary, it can increase the required bond amounts. In addition, this
official noted that if a large company sells its NPR- A interests to a
smaller firm, BLM would again review the need to increase bond amounts.

In national wildlife refuges, BLM also issues leases for oil exploration,
development, and production activities and requires companies to post a
bond. FWS may require additional bonding from companies operating in a
wildlife refuge as part of a right- of- way permit. Specifically, in
wildlife refuges, BLM requires a minimum bond amount of $10,000 per lease,
$25,000 for a statewide bond, or $150,000 for a nationwide bond. In
addition, if oil companies? activities such as the construction of roads or
pipelines disturb refuge lands outside the BLM leased area, FWS requires the
companies to post bonds as part of the process to obtain right- of- way
permits. 38 The amounts of these bonds vary according to the scope and type
of activity. FWS does not prescribe a set amount for the bond. According to
an FWS official in Alaska, in the limited instances where FWS has required
bonds, the bonds have not exceeded $150,000. FWS officials stated that they
believe neither BLM?s nor FWS?s bonding requirements are sufficient to cover
the potential cost of future land restoration.

Some of the bills recently considered by Congress regarding the opening of
the Arctic Refuge to oil and gas development also address the financial
assurance issue. For example, S. 388 included a bonding requirement to
ensure the financial responsibility of the lessee. Specifically, the Senate
bill

required the Secretary of the Interior to establish bonding requirements ?to
ensure the complete and timely reclamation of the lease tract and the
restoration of any lands or surface waters adversely affected by lease
operations after the abandonment or cessation of oil and gas operations on
the lease.? The bonding arrangement in S. 388 would have been in addition to
any existing bonding requirements that could be applied by the federal
agency or agencies responsible for managing oil industry activities in the

38 FWS also requires special- use permits for commercial activities, such as
seismic surveys, on national wildlife refuges. As part of the special- use
permits, FWS requires a certificate of insurance or the posting of a bond.

Arctic Refuge. Under S. 388, the Secretary of the Interior, in accordance
with an approved exploration or development and production plan, would
determine the specific amount of the bond or financial arrangement. In
contrast, H. R. 4 didn?t address financial assurances or contain provisions
for bonding. Under this bill, bonding requirements for the Arctic Refuge
could be the same as those authorized for other refuges. As previously
discussed, requiring the minimum BLM and FWS bond amounts would not be
sufficient to cover the potential cost of future land restoration.

MMS has the authority to require companies conducting operations in
federally regulated waters to provide full financial assurance that funds
will be available to conduct dismantlement, removal, and restoration
activities.

MMS?s bonding requirements for its offshore leases on the Outer Continental
Shelf are based on an escalating scale and depend on what activity is
occurring. Specifically, MMS regulations state that every owner of an OCS
oil and gas lease must maintain a $50,000 lease bond or a $300,000 area-
wide bond for all oil and gas leases in the state. The intended purpose of
these bonds is to ensure compliance with all the terms and

conditions of the lease. In addition, if exploration or development and
production activities occur, MMS requires total bond amounts to increase to
$200,000 and $500, 000, respectively. 39 Furthermore, under MMS regulations,
the regional director has the authority to require additional bonding if a
determination is made that additional financial assurances are needed to
cover potential underpayment of royalties or obligations to remove
infrastructure, such as drilling platforms, and clear the seafloor of
obstructions. According to MMS officials, the complete bonding package is
intended to cover the delinquent royalties, abandonment, and final site

clearance and takes into account, among other things, the company?s
experience and financial viability, as well as the estimated future cost of
restoration.

39 The additional bond for exploration activities is not required if the
lessee maintains an area- wide bond for $1 million. Similarly, an additional
bond for development and production activities is not required if the lessee
maintains a $3 million area- wide bond.

Previously Abandoned The history of oil industry activities on federal lands
of the North Slope

Oil Exploration Sites demonstrates the importance of adequate financial
assurances for the

taxpayers. The federal government?s oil exploration activities on the North
on Federal Lands

Slope have resulted in its current DR& R responsibility for many improperly
Remain a Problem

abandoned well sites. These well sites are now commonly known as legacy
wells. Starting in 1945 and continuing through 1981, the U. S. Navy and the
USGS drilled 126 wells in the area now known as the NPR- A. 40 According to
BLM, the federal government is currently responsible for the cleanup of 102
of these wells. Ownership of the other 24 wells was transferred to the North
Slope Borough to assist in gas production for local use. 41 According to
BLM, of the 102 wells, the Navy drilled 76 of them in the 1940s and 1950s,
and drilled a single well in 1975 that was properly plugged and abandoned.
The USGS was responsible for drilling the remaining 25 wells. According to
BLM, 3 of the 25 USGS wells have been properly plugged and abandoned, 1 has
not been properly plugged and abandoned, and USGS is currently using 21 for
climate studies. According to USGS, these study wells are extremely valuable
for long- term climate information and should remain unplugged.

As a result of inadequate dismantlement and restoration requirements, about
80 wells drilled on federal lands under the federal government?s direction
remain improperly plugged and abandoned.

The federal government is responsible for cleaning up the improperly
abandoned wells and drill sites. In 1976, the Navy initiated a cleanup
program for its own well sites, which USGS assumed in 1977. In later years,
USGS assumed responsibility for cleaning up both the Navy?s and its own
sites. Although no precise records exist, during a 7- year period the
agencies

collected and removed thousands of tons of debris and over 50,000 55- gallon
drums, at a cost of over $7 million (late 1970s and early 1980s dollars)
from NPR- A sites. Additionally, in 1995, the state?s Department of
Environmental Conservation decided that no further cleanup work was required
on 27 NPR- A drilling waste sites to reduce their risk to the area?s surface
waters. However, according to BLM officials, most of the abandoned wells and
surrounding sites still need additional work,

40 The U. S. Geological Survey wells were drilled under a contract with
Husky Oil Company. Five other wells were drilled in NPR- A, two by the U. S.
Air Force, and three by the North Slope Borough. All five of these wells are
now under the borough?s jurisdiction. 41 During early oil and gas
exploration in the NPR- A, one of the discoveries was the Barrow Gas Field,
which contained 24 wells. Ownership of these wells was transferred to the
North Slope Borough and they currently provide gas to the people of Barrow.

including the proper plugging of wells and restoration of the surface area.
The officials also noted that some of these legacy wells have leaked oil,
gas, and other substances, and have the potential to create a future
environmental hazard. However, remote locations and severe weather make it
difficult to access the well sites and very expensive to reclaim them. For
example, in 1999, BLM authorized a study of the cost to properly plug and
abandon 11 Navy well sites in the Umiat area of the NPR- A. The contractor
conducting the study estimated the cost to be almost $7 million. However, in
2001, when the Corps of Engineers approved the plugging and surface
remediation of 2 of the 11 Umiat well sites under an existing contract, the
total cost had escalated to about $16 million. According to the

Corps, this cost escalation was caused primarily by increases in the cost of
accessing the area, unanticipated problems with plugging one of the wells,
and an increase in the amount of surface that needed to be rehabilitated.
Further insights on the cost of cleaning up of these old well sites are
provided in a September 2001 BLM draft internal working document. The
document estimates that just plugging the wells in NPR- A will cost more

than $100 million over the course of 10 to 20 years. Another example of an
abandoned site on federal land is at Sagwon, Alaska. Sagwon served as an oil
company aviation base and staging area. It was built in the 1960s and was
used commercially until the mid- 1970s. However, it was not until 1975 that
the owner obtained a lease from BLM to operate an airport on the property.
In 1985, after the site had been

abandoned, BLM approached the lessee, asking it to remove roughly 4, 500
metal drums and several tons of scrap metal, clean up unused drilling
fluids, and remove other miscellaneous debris left on the site. The lessee
refused and later filed for bankruptcy. In 1993, BLM asked oil companies
that may have used the airfield to help clean up the site. In response, BP,
ARCO, and Alyeska (TAPS?s operating company) voluntarily agreed to clean up
the 2, 500- acre site. According to BP officials, by the time the cleanup
was finished in 2000, it cost $2 million to complete and required the
removal of 138 tons of waste from the site. Although the surface
dismantlement, removal, and restoration is finished, according to a BLM
official, some subsurface issues remain.

DR& R Requirements DR& R requirements and financial assurances for similar
infrastructure and

and Financial other energy- related industries are more explicit than those
applied to the oil industry on the North Slope. The Trans- Alaska Pipeline
System, which is

Assurances for TAPS similar in purpose and geography to other oil industry
infrastructure on the

and the Mining and North Slope, has DR& R requirements and fixed financial
arrangements.

Nuclear Power TAPS established these requirements prior to construction of
the pipeline

and negotiated the financial arrangements later. Furthermore, both
Industries Are Explicit

hardrock and coal mining have reclamation requirements for surface lands
that are determined before the initiation of any mining activities. Federal
regulators also require mining companies to demonstrate full financial
assurance that these requirements will be met. Finally, decommissioning
requirements for all nuclear power plants are established by federal
regulation; the regulations also require financial assurances sufficient to
fully fund decommissioning.

DR& R Requirements and The Trans- Alaska Pipeline System has DR& R
requirements contained in the

Financial Assurances for 1974 right- of- way lease agreement between the
federal government and the

TAPS state of Alaska. Specifically, the 30- year right- of- way lease
contains a

stipulation that when the pipeline is no longer used (? completion of use?)
the lessee shall ?promptly remove all improvements and equipment? and shall
restore the land?.? 42 In general, this stipulation has been understood to
mean the complete dismantlement and removal of the above- ground portion of
the pipeline (the buried portion of the pipeline would be purged of residue
and capped in place) and associated infrastructure and

restoration of the land on which the pipeline was built. The lease does not
provide specific restoration requirements; instead, it requires the lessee
to restore the land to a condition that is approved by federal and state
officers. Even so, the U. S. Tax Court found in May 2000 that ?in contrast
to the generally vague language of the [state] leases relating to oil
company [dismantlement, removal, and restoration] obligations? language in
the TAPS right of way? is more specific.? 43

Regarding financial assurances, the Federal Energy Regulatory Commission,
which regulates pipeline fees, permits the pipeline owners 42 Stipulations
for the Right of Way Lease for the Trans- Alaska Pipeline, Section 1.10, May
3, 1974. The current lease is up for renewal before May 2004. 43 ExxonMobil
Corporation v. Commissioner of Internal Revenue, United States Tax Court,
114 T. C. 293, May 3, 2000.

(Alyeska) to collect tariffs from pipeline users sufficient to fully fund
eventual DR& R. The amount collected by TAPS?s owners for DR& R has varied
by year of operation, ranging between $127 million in 1980 and $2.4 million
in 1999, for a total of $1.5 billion in collections through 1999. The
tariffs were last adjusted in 1985 under a settlement agreement between the
TAPS?s owners, the state of Alaska, and the Department of Justice. 44 The
pipeline?s owners do not have to place collected funds for DR& R in escrow
or any other special account. Instead, TAPS?s owners can reinvest those
funds as they choose, but retain a liability to fund DR& R costs. If funds
collected exceed the cost of DR& R, as some assert they will, the owners of
the pipeline may realize additional benefits if they are not required to
refund excess funds collected.

Mining Reclamation The federal government requires other extractive
industries, such as

Requirements and Financial hardrock mining and coal mining, to restore
surface land that is disturbed Assurances

during mining operations and related activities. For example, both BLM,
which regulates hardrock mining on its lands, and Interior?s Office of
Surface Mining (OSM), which regulates the surface aspects of coal mining
itself or through states with approved programs for regulation of surface

coal on any land, require operators to obtain approval of their reclamation
plans before mining operations can begin. As part of the approval process,
operators are required, by regulation, to develop a reclamation plan that
describes in detail how land that is disturbed will be restored after mining
activities cease. The plan must describe how the operator will reclaim the
land to meet specific requirements, such as backfilling and grading the mine
pit; reshaping the disturbed land to blend with pre- mining natural
topography; achieving successful revegetation; and removing roads and
structures that are not approved for retention. Mining operators are
required to perform the activities specified in their approved reclamation
plan or face a financial penalty.

Both BLM and OSM require the hardrock and coal mining industries,
respectively, to provide financial assurance sufficient to cover the full
cost of reclamation before mining operations can begin. Under federal
regulations, companies that engage in hardrock mining on BLM lands or

44 The consortium of companies that own TAPS today includes BP Pipelines
(Alaska) Inc., 50.01%; ExxonMobil Pipeline Company, 20.34%; Amerada Hess
Corporation, 1.5%; Phillips Transportation Alaska, Inc., 23.7%; Unocal
Pipeline Company, 1.36%; and Williams Alaska

Pipeline Company, L. L. C., 3.08%.

surface coal mining on any lands must submit a cost estimate for the DR& R
activities specified in their reclamation plan before the start of mining
activities. The cost estimate must represent the full amount that the
regulatory authority- BLM, OSM, or state- would need to reclaim the
disturbed area if the mining operator were unwilling or unable to complete
the planned reclamation. The estimate must also include the regulatory
agency?s cost to contract with a third party to do the work and administer
the contract. Mining operators may provide financial assurance in many
different forms, such as pledged assets of the operator including cash,
certificates of deposit, negotiable bonds, and investment- grade securities;
surety bonds; or irrevocable letters of credit.

Nuclear Power The Nuclear Regulatory Commission, the federal entity that
regulates the

Decommissioning nation?s civilian use of nuclear power and materials,
requires its licensees,

Requirements and Financial as a condition for obtaining a license to operate
a nuclear power plant, to

Assurances agree to decommission (i. e., clean up) the plant after
operations cease. The

commission has specific requirements for acceptable radiation levels that
decommissioning must accomplish. Such requirements vary depending upon,
among other things, the proposed future use of the land. For example, a
decommissioned site may have unrestricted future use if the residual
radiation at the site would not cause a person to receive a total effective
dose equivalent in excess of 25- millirems of radiation per year after
decommissioning, and this level of reduction is as low as is reasonably
achievable. 45 The commission does not require the licensee to submit a
decommissioning plan before obtaining a license. Rather, within 2

years following permanent cessation of a plant?s operations, the licensee
must provide the commission with a plan describing the decommissioning
activities that the licensee will perform to meet a radiation standard. Such
activities may include removing the spent nuclear fuel, dismantling
structures containing radioactive materials that were created in the
powergenerating process, and removing other materials that were contaminated
during the process. The Nuclear Regulatory Commission does not release

the plant licensee from its liability for the site until decommissioning is
completed and the license is terminated.

Nuclear power plant licensees must also provide financial assurance that the
decommissioning work will be done, and must provide the assurance

45 A millerem, or 1/ 1000 of a rem, is a measure of radiation absorption. A
rem is a unit of dose equivalent from ionizing radiation to the total body
or any internal organ or organ system.

before plant decommissioning begins. Beginning at plant licensing, and at
various times throughout a plant?s operations, the commission reviews the
adequacy of the financial assurance. The financial assurance amount must be
equal to or greater than the amount specified in the commission?s
regulations; amounts are based on the type of reactor and its power level.
Plant licensees may provide financial assurance in one or more of the
following ways:

 periodic deposits (at least annually) into a trust fund outside of the
owner?s control;

 prepayment of the entire estimated decommissioning liability into a trust
fund outside of the owner?s control;

 obtaining a surety bond, insurance, letter of credit, or line of credit
payable to a trust established for decommissioning costs; or

 guaranteeing the payment of decommissioning costs, provided that the
guarantor (usually an affiliate or parent company of the owner) passes
specific financial tests.

Conclusions In the past, the lack of dismantlement, removal, and restoration
requirements and inadequate financial assurances have led to some

improperly abandoned sites and subsequent environmental problems on both
federal and state land located on Alaska?s North Slope. To date, most oil
production has occurred on state- owned land, and for this reason the state
of Alaska has borne responsibility for cleaning up these sites when oil
companies or their related industries have failed to do so. However, with
oil exploration activities underway in the NPR- A and on the Outer
Continental Shelf, and the Congress currently debating whether to open the
Arctic Refuge?s coastal plain to oil and gas development activities, the
need for federal dismantlement, removal, and restoration requirements, and
assurances that funds will be available to implement those requirements, is

becoming increasingly important. Presently, the Bureau of Land Management
has not established specific DR& R requirements for oil production
activities in the NPR- A. In addition, its current minimum bond amounts are
fixed, do not reflect differences in company experience and financial
viability, and would only cover a fraction of the potential future cost of
DR& R. Furthermore, since the Congress has not yet authorized oil and gas
industry activities in the Arctic Refuge, neither the Bureau of Land
Management nor the Fish and Wildlife Service has developed specific

DR& R requirements for the refuge. The Fish and Wildlife Service, like the
Bureau, uses bond amounts that are not sufficient to meet the potential
future cost of restoration. Both agencies need to ensure that their
financial

guarantees are adequate in case a company is unwilling or unable to pay for
returning the land to whatever standard has been established. To do
otherwise would leave the taxpayer with an unacceptable risk.

Paramount to the development of any DR& R requirements should be a
determination of what the ultimate restoration goal of these areas should
be. In the NPR- A, this decision has been made; that is, the Bureau wants
the land returned to a condition that will support its previous uses, such
as fish and wildlife habitat and subsistence use by Alaska Native villagers.
What remains to be done is for the Bureau to establish specific DR& R
requirements that will allow companies to meet that goal. Should the
Congress decide to open the Arctic Refuge to oil industry activities, it
would be important for the Congress to consider establishing a legislatively
mandated restoration goal for the disturbed area. This would allow the
Secretary of the Interior to establish specific DR& R requirements aimed at
meeting that goal. In turn, specific requirements would provide oil

companies with another piece of information they need to make better
investment decisions on whether the potential benefits of oil industry
activities in the Arctic Refuge are worth the cost. Goals, like all plans,
can change over time. However, if a restoration goal for the Arctic Refuge
is not established before oil exploration begins, there will only be
continued debate similar to that faced by the state of Alaska on its
restoration requirements for state- owned land on the North Slope. In
addition, establishing a mechanism that would ensure that funds were
available to meet those requirements would protect taxpayers, should lessees
default.

Recommendations for In order to ensure that the lands of the National
Petroleum Reserve- Alaska

Executive Action are properly restored after oil and gas activities there
cease, we are

recommending that the Secretary of the Interior instruct the Director of the
Bureau of Land Management to issue specific dismantlement, removal, and
restoration requirements that will allow the BLM to meet its overall goal of
returning the land to a condition that will sustain its previous uses,
including fish and wildlife habitat as well as subsistence uses. In
addition, we recommend that the BLM review its existing financial assurances
for oil and gas activities in the National Petroleum Reserve- Alaska to
determine whether they are adequate to ensure the availability of the funds
needed to achieve its overall restoration goal.

Matter for Any future decision to open additional federal lands to oil and
gas

Congressional activities, including those on Alaska?s North Slope, is a
public policy

decision that rests with the Congress. In making such a decision, one factor
Consideration

that would be important to consider is the restoration of the land after oil
and gas activities are completed. If the Congress wants to provide guidance
on the condition to which these lands should be returned following the

completion of such activities, it should consider providing in the
authorizing statute

 a restoration goal that will allow the federal agency or agencies
responsible for developing dismantlement, removal, and restoration
requirements to have a clear understanding of what the Congress wants
achieved, and

 specific assurances that the federal agency or agencies responsible for
implementing dismantlement, removal, and restoration requirements will
obtain adequate financial assurances that funds will be available to meet
the goal of returning the land to a condition that the Congress has
specified.

Agency Comments and The Department of the Interior agreed with our
recommendation that the

Our Evaluation Bureau of Land Management issue specific dismantlement,
removal, and

restoration requirements that will allow the Bureau to meet its overall goal
of returning the land to a condition that will sustain its previous uses,
including both fish and wildlife habitat and subsistence uses. The
department stated that the Bureau plans to accomplish this by attaching
special stipulations and conditions of approval on a lease- by- lease basis.

The state of Alaska, however, disagreed with this recommendation. The state
commented that dismantlement, removal, and restoration requirements can be
better addressed when oil production ceases and the obligation actually
becomes due. The state believes that this approach provides greater
flexibility and will allow the state to ultimately issue requirements that
reflect changes in, among other things, technology and the regulatory
environment. The state also commented that our recommendation does not
recognize the scope of the government?s power to change the regulatory
standards it adopts and ignores the fact that specific standards that seem
appropriate today may not be appropriate at some distant point in the
future. We did not draw any conclusions nor make any recommendations
concerning the appropriateness or inappropriateness of the state of Alaska?s
current dismantlement, removal,

and restoration practices for its lands. Currently, the state has no
restoration goal for its North Slope lands that have been used for oil and
gas activities. Without a restoration goal, we agree with the state that it

would be difficult to issue specific DR& R requirements. We also acknowledge
in our report that restoration goals and the specific processes used to
achieve those goals can change as technology, science, and circumstances
change. However, the Bureau of Land Management has

established a restoration goal for its lands used for oil and gas activities
in the National Petroleum Reserve- Alaska. That goal is to return the lands
to a condition that will sustain its previous uses, including both fish and
wildlife habitat and subsistence uses. As such, we believe, and the
Department of the Interior concurs, that it is appropriate for the Bureau to
establish specific dismantlement, removal, and restoration requirements to
achieve that goal prior to the initiation of oil production activities.
Doing so will provide the oil companies with better information on what is
expected of them, which will allow them to make better investment decisions,
and if they decide to proceed, will allow for better planning and budgeting
to achieve restoration.

The state of Alaska also commented that it disagrees with GAO that the
Congress, when considering opening additional federal lands to oil and gas
activities, should consider establishing a restoration goal for that land in
the authorizing statute. In general, the state believes that, as with
dismantlement, removal, and restoration requirements, restoration goals can
be better set at some future date closer to the actual time that oil and gas
activities cease. The state points out in its own comments that both oil
companies and environmentalists, two groups that are usually opposed, would
prefer to know what restoration activities the state has planned for

the North Slope because each currently perceives a risk that their view of
the appropriate level of DR& R may not be adopted by the state in the
future. By recommending the establishment of restoration goals for federal
lands prior to the start of oil and gas activities, it is our intent to
alleviate such concerns and allow all interested parties the opportunity to
make informed decisions on these matters before the land is used. Further,
establishing goals prior to oil and gas activities would provide for greater

transparency and allow for agreements to be reached on what restoration will
be required.

The Department of the Interior also agreed with our recommendation that the
Bureau of Land Management review its existing financial assurances for oil
and gas activities in the National Petroleum Reserve- Alaska to determine if
they are adequate to ensure that funds will be available to

achieve its overall restoration goal. The department stated that this review
would focus on protecting the environment and taxpayers, should lessees
default. The state of Alaska, however, commented that it disagrees with this
recommendation. According to the state, GAO is suggesting that financial
assurances greater than those required by the state of Alaska

should be adopted for federal lands on the North Slope, even though Alaska?s
bonding requirements are among the highest in the nation. Our report does
not make any comparison of the state of Alaska?s financial assurances to
those of federal agencies that manage land on the North Slope. Further, the
report does not make any determination regarding what level of financial
assurance should exist. GAO does report that the

Bureau?s current minimum bond amounts are fixed, do not reflect differences
in oil company experience and financial viability, and would only cover a
fraction of the potential future cost of DR& R. We also state that the level
of financial assurance required will vary depending on such factors. As a
result, we continue to believe that the Bureau should review its existing
financial assurances for oil and gas activities in the National Petroleum
Reserve- Alaska to determine whether they are adequate to assure the
availability of funds necessary to achieve its overall restoration goal for
the land after oil and gas activities cease.

Appendi xes Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of Other

Appendi x I

Oil- Producing States The following tables summarize information that we
collected on DR& R requirements and financial assurances from 10 oil-
producing states, including Alaska. These 10 states account for nearly 90
percent of the domestic oil production in the United States, excluding
federal offshore production. The states are Alaska, California, Florida,
Louisiana, Michigan, New Mexico, Oklahoma, Pennsylvania, Texas, and Wyoming.
We selected

these states based on U. S. Energy Information Administration projections of
their 1999 oil production and their geographic diversity.

Table 4 shows that as reported by oil well permitting agencies in each
state, all the states have mandatory surface restoration requirements for
drill sites, such as removing surface material, closing or filling drill
holes, and restoring the contour of the land.

Table 4: State Oil and Gas Well Permitting Surface Restoration Provisions
Remove surface

Remove Close or fill Revegetate or Return to natural State material
structures holes Restore contour reseed state or condition

Alaska Mandatory Mandatory Mandatory California Mandatory Mandatory
Mandatory Mandatory a Florida b Mandatory Mandatory Mandatory Mandatory
Mandatory Mandatory Louisiana Mandatory Mandatory Mandatory Discretionary
Michigan Mandatory Mandatory Mandatory Mandatory Discretionary New Mexico
Mandatory Mandatory Mandatory Mandatory Oklahoma Mandatory Mandatory
Mandatory Mandatory Mandatory Mandatory Pennsylvania Mandatory Mandatory
Mandatory Discretionary Mandatory Discretionary Texas Mandatory Mandatory
Mandatory Mandatory Discretionary Discretionary Wyoming Mandatory Mandatory
Mandatory Mandatory Mandatory Mandatory

a The California Department of Conservation responded to this survey
question by stating ?the site must be cleaned up and restored to as near its
natural state as possible.? b The Florida Department of Environmental
Protection stated that exceptions may be granted on all of these provisions
upon request of the landowner, provided that other natural resources are not

endangered. It also stated that all surface land owned by the state of
Florida is returned to the original condition.

In addition, all states but Alaska reported mandatory requirements to remove
all structures. Other requirements, such as restoring the surface of the
land to a natural state or condition, were less common. Only three states-
Florida, Oklahoma, and Wyoming- reported mandating restoration of the
surface to a natural state or condition.

Table 5 shows a greater variance in surface restoration provisions as
reported by the states? oil and gas lease management offices.

Table 5: State Oil and Gas Lease Surface Restoration Provisions on State-
Owned Lands Remove surface

Remove Revegetate or

Return to natural State material structures Close or fill holes Restore
contour reseed state or condition

Alaska Discretionary Discretionary Discretionary Discretionary Discretionary
Discretionary California a Florida b Louisiana c Michigan d New Mexico
Mandatory Mandatory Mandatory Mandatory Mandatory Oklahoma Mandatory
Mandatory Mandatory Mandatory Mandatory Mandatory Pennsylvania Mandatory
Mandatory Mandatory Mandatory Mandatory Texas Mandatory Mandatory Mandatory
Mandatory Wyoming Mandatory Mandatory Mandatory Mandatory Mandatory
Mandatory e

a The California State Lands Commission responded to our survey by stating
that leases that are being abandoned and quitclaimed must undergo an
environmental review under the California Environmental Quality Act. They
added that this review would specify the surface restoration requirements of
the leased lands. b The Florida Department of Environmental Protection cited
the following in response to the survey question: ?After the cessation of
any oil, gas, or mineral lease, the site shall be restored by the lessee

to the original condition to the greatest extent practicable.? (Florida
Administrative Code, Chapter 18- 2.018 (3) 8( a)) c The Louisiana Department
of Natural Resources did not submit a written response to our survey.

d The Michigan Department of Natural Resources responded to this survey
question by citing a provision in the Michigan Oil and Gas lease that states
that ?restoration shall be completed within nine (9) months of surface
disturbance within the premises for well site( s), pipeline( s), road( s)
and other oil and gas development activities unless otherwise specifically
approved in writing by the Lessor?s authorized representative. Restoration
shall be pursuant to requirements identified within the Surface Use Permit,
easement or other similar written permission for the development activity.?
e The Wyoming Office of State Lands and Investments added that the site is
to be returned to the

natural state or condition ?as closely as possible.?

Specifically, four states- New Mexico, Oklahoma, Pennsylvania, and Wyoming-
reported that their oil and gas leases contain mandatory requirements to
remove surface material and structures, close or fill holes, and revegetate
the area upon lease termination. Four states- California, Florida,
Louisiana, and Michigan- could not describe their surface restoration
provisions in the checklist format we requested and provided either a
written or verbal response. In the case of California, a California

State Land Commission official stated that specific DR& R requirements are
not determined until an environmental review under the California
Environmental Quality Act. Florida reported that it requires the site to be
restored by the lessee to the original condition to the greatest extent
practicable. Alaska reported discretionary requirements for all the items in
the checklist, because all of its lease termination provisions are at the
option of the state.

Table 6 describes the financial assurance provisions each state reported
including in its permits to drill wells.

Table 6: State Oil and Gas Well Permitting Financial Assurance Provisions
for Well- plugging and Abandonment State Office or Agency Single wells
Blanket provisions Other

Alaska Not less than $100,000 to cover a

Not less than $200,000 for a blanket The Commission will allow an Alaska Oil
and Gas

single well. bond covering all wells in the state. amount less than $100,000
if Conservation the operator can demonstrate Commission

that well abandonment and location clearance will cost less than $100,000.
The Commission can increase the security amount, which is at the discretion
of the Commissioner.

California Single well bond amounts are based Blanket bond amounts are based
on Wells idle for 5 years or Department of

on the depth of the well as follows: the number of wells an operator owns,

longer that have been Conservation, Division of

$15,000 for a well up to 5,000 feet and whether or not idle- well coverage
released from individual or

Oil, Gas, and deep

is provided certain blanket bond Geothermal Resources

$20,000 for a well 5, 000 to 10,000 feet $100, 000 - for operators with 50
or coverage are subject to one deep

fewer wells and does not provide longterm of the following options: an
$30,000 for a well 10, 000 or more feet

idle- well coverage annual fee, an escrow deep.

$250, 000 - for operators with more account, a $5, 000 bond, or a than 50
wells and does not provide well elimination plan. long- term idle- well
coverage $1 million - Covers all wells and provides long- term idle- well
coverage.

Florida Single well drilling security amounts

Each blanket bond may cover up to 10 The Florida Department of Department of
are based on the depth of the well:

wells, regardless of well depth, and is Environmental Protection is
Environmental $50,000 for a well up to 9,000 feet $1, 000, 000.

authorized to increase the Protection, Florida

deep, or $100,000 for producer well; amount of security based on Geological
Survey

$100,000 for a well more than 9,000 estimates of potential liability

feet deep, or $200,000 for producer for damages to persons or well.

property.

(Continued From Previous Page)

State Office or Agency Single wells Blanket provisions Other

Louisiana Single well financial assurance Blanket bond amounts depend on the

The amount of security may Department of Natural

amounts are based on well depth: number of wells covered by the bond:

be increased at the discretion Resources, Office of $1 per foot for a well
up to 3, 000 feet $25,000 for up to 10 wells

of the Commissioner of Conservation

deep $125, 000 for 11 to 99 wells

Conservation. $2 per foot for a well 3,001 to 10,000 $250, 000 for more than
99 wells. feet deep $3 per foot for a well more than 10, 000 feet. Michigan

Single well financial assurance Blanket bond amounts depend on the

The Michigan Department of Department of

amounts are determined by the depth number and depth of the wells:
Environmental Quality does

Environmental Quality, of the well: $100, 000 for up to 100 wells less than
not have the authority to alter

Geological Survey $10,000 for a well up to 2,000 feet 2, 000 feet deep

the amount of security, but Division

deep $200, 000 for up to 100 wells 2,000 to

compliance agreements may $20,000 for a well 2, 000 to 4, 000 feet

4, 000 feet deep require addition bond if the

deep $250, 000 with no limit on the number

general operations bond is $25,000 for a well 4, 000 to 7, 500 feet

of wells or their depth. not adequate to cover

deep plugging and restoration

$30,000 for a well more than 7, 500 costs of the well plus other

feet deep. obligations under the

compliance agreement. This additional bonding is not required if the
permittee has a $250, 000 blanket bond.

New Mexico The amount of single well financial

Blanket financial assurance may be New Mexico Energy, assurance depends on
the depth and

deposited in lieu of one well financial Minerals and Natural location of the
well:

assurance. Such assurance is in the Resources Department,

Northwest part of New Mexico: amount of $50,000.

Oil Conservation $5, 000 for a well less than 5,000 feet Division

deep $7, 500 for a well 5,000 to 10, 000 feet deep $10,000 for a well more
than 10, 000 feet deep Southeast part of New Mexico: $7, 500 for a well less
than 5,000 feet $10,000 for a well 5, 000 to 10000 feet $12,500 for a well
more than 10, 000 feet deep.

Oklahoma Single well financial assurance

Blanket assurances are available at The Commission may alter Oklahoma
Corporation provisions are based on the total

$25,000. the amount of security Commission, Oil and

depth of the well at $2 per foot. depending on the history of Gas
Conservation the company and whether Division

they have fines in excess of $2,000.

(Continued From Previous Page)

State Office or Agency Single wells Blanket provisions Other

Pennsylvania Single well financial assurance is

Blanket assurances are $25, 000. These financial assurance Department of

$2, 500. provisions only apply to wells Environmental drilled after April
17, 1985. Protection, Bureau of Oil The Pennsylvania and Gas Management

Department of Environmental Protection may revise the amount of security
required every 2 years, based on the projected cost to perform well-
plugging.

Texas For operators without an An organization may file a single

Texas statute also gives the Railroad Commission of

organizational form of security, wells bond, letter of credit, or cash
deposit

operator the option of filing Texas, Oil and Gas that have been inactive for
36 months

covering all wells operated by on of financial security as an Division

must be covered by an individual bond two ways:

Unbonded Operator by or letter of credit calculated at $3 per $2 per foot of
aggregate depth for all

remitting 12% of the bond foot of depth for land wells, $60,000 wells
operated by company; or otherwise required (or, for bay wells, and $250,000
for based on the number of wells:

alternatively, after offshore wells.

$25,000 for up to 10 wells qualification and a hearing at

$50,000 for 11 to 99 wells which they show that bonds

$250, 000 for more than 99 wells. are not available at

reasonable cost, $1, 000). As Unbonded Operators, they are still subject to
single- well

bonding requirements. Wyoming

Financial assurances for a single well Blanket provisions are available at
Wyoming Oil and Gas depend on well depth at:

$75,000. Conservation $10,000 for a well less than 2,000 feet Commission

deep $20,000 for a well more than 2, 000 feet deep.

Specifically, while Alaska reported higher financial assurance provisions
than most of the surveyed states, three states- California, Florida, and
Michigan- reported higher amounts. Eight of the 10 states we surveyed
reported single- well financial assurance provisions based at least in part
on the depth of the well. Pennsylvania and Alaska were the only two states
to report rates not based on well depth. All the states surveyed included
blanket

financial assurance provisions, which covered more than one well, though
five states reported that the amount of financial assurance required is
based on the number of wells covered.

Finally, table 7 shows the financial assurance provisions each state
reported for its oil and gas leases.

Table 7: State Oil and Gas Lease Financial Assurance Provisions that Cover
Well- plugging and Abandonment on State- Owned Lands

State Office or Agency Single lease provisions Blanket provisions Other

Alaska Before operations

$500,000, though the Commissioner may The Commissioner may

Department of Natural commence on oil or gas

also require an additional unusual risk require a bond greater than

Resources, Division of Oil and lease, a bond in the amount

bond. For a unit, instead of separate the amount specified where a Gas

of at least $10,000 must be bonds for each lease, the unit operator greater
amount is justified by furnished to ADNR. ADNR

must furnish a lease bond of $500,000. the nature of the surface, the

currently requires a uses and improvements on or

$100, 000 bond for singlewell in the vicinity of the lease, and operations.

the degree of risk involved. California

Most current offshore state A California State Land Commission State Lands
Commission leases were issued from

official stated that California has blanket 1938 to 1968 with initial
securities to cover all offshore leases performance bond

ranging from $4 million to $45 million to requirements of $25, 000 for

cover the performance of lease leases issued before 1956 requirements. and
$50, 000 for leases issued after 1957.

Florida Prior to commencement of Department of Environmental

drilling, the state of Florida Protection, Division of State may require
proof of financial Lands

responsibility. Currently the Division of State Lands policy requires a
$100, 000 surety bond.

Louisiana None. Relies on the None. Relies on the Louisiana Department of
Natural Louisiana Department of Department of Natural Resources, Office
Resources, Office of Mineral Natural Resources, Office of

of Conservation, for financial assurance Resources, State Mineral

Conservation, for financial provisions. Board, Petroleum Lands

assurance provisions. Division, Leasing Section

(Continued From Previous Page)

State Office or Agency Single lease provisions Blanket provisions Other

Michigan The Department of Natural Resources

The Department of Natural Department of Natural

requires a Lease Performance Bond to Resources may increase or

Resources, Land and Mineral ensure compliance with all express and decrease
the bonds if the Lease Services

implied covenants of the lease. The lessee drops state leases to department
has a bond schedule that ties the point that the acreage the amount of the
bond to the total held under the lease is less number of state minerals held
under the

than required for the bond it lease. The bond schedule is as follows:

currently carries; it can $10, 000 - 0- 5,000 acres under lease

replace the existing lease $25, 000 - 5,001- 10, 000 acres under

performance bond in lease accordance with the $50, 000 - >10, 000 acres
under lease.

schedule. If the lessee acquires additional state leases that would push its
total acreage

under lease to the next bonding level, it would have to submit a new bond in

accordance with the bonding schedule before it could acquire the additional
leases.

New Mexico The State Land Office allows The State Land Office allows the use
of

A ?megabond? in the amount State Land Office, Oil Gas, the use of single-
lease multi- lease (blanket) bond of $20, 000. of $25,000 may be used for
and Minerals Division

bonds of $10, 000. state leases for oil and gas, minerals, coal, geothermal
resources, or rights- of- way. The single lease and multilease bonds are
minimum amounts and ?are deemed sufficient unless and until the Commissioner
determines, or one or more surface lessees or purchasers show the
Commissioner, that such an amount is not adequate in a given case.? (State
Land Office Rule 1.016)

Oklahoma $10, 000 blanket bond or pay into the

On a case- by- case basis, the Commissioners of the Land

performance fund as a one- time payment. Commissioners can require Office,
Minerals Management

The performance fund is based on the more bonding to cover a Division

number of leases owned. major problem.

(Continued From Previous Page)

State Office or Agency Single lease provisions Blanket provisions Other

Pennsylvania Well- plugging bond (per

The surety for both blanket Department of Conservation well):

and plugging bonds can be and Natural Resources, Well depth/ Minimum Bond

altered by the terms of the Bureau of Forestry, Minerals

<2, 500 feet/ $5, 000 lease agreement if the

Section 2, 500- 5,000 feet/$ 10,000

Department of Conservation 5, 000- 8,500 feet/$ 30,000 finds that the cost
estimates 8, 500- 10, 000 feet/$ 50, 000

for the actual plugging of any >10,000 feet/$ 100, 000

class of wells are generally Oil and gas lease bond (per exceeding the
required lease) conditioned on the

security. faithful compliance to all

All Pennsylvania state oil and lease terms, including gas leases have an
inflation removal of equipment and

clause that allows the well abandonment: $25, 000.

department to inflate the amount of surety required at the rate of inflation
of the ?All Commodities Index? as

published by the federal Department of Labor. This readjustment period is
every 5 years.

Texas None. Relies on the Texas

None. Relies on the Texas Railroad General Land Office Railroad Commission
for

Commission for financial assurances. financial assurances.

Wyoming At least $10,000 per lease. At least $100,000 blanket bond for all

The Office of State Lands and Office of State Lands and leases. Investments
has the unilateral Investments

ability to change the amount of security depending on the number and depth
and type of well or exploration activity, surface uses in conjunction with
production, and the

observed amount of environmental responsiveness.

Two states, Texas and Louisiana, reported that their oil and gas leases did
not contain financial assurance provisions that covered DR& R. Rather, they
stated that they relied instead on the well permitting office in their state
for financial assurance that proper DR& R would be performed. Alaska?s
financial assurances are higher than most of the states we surveyed except
California, Florida, and Pennsylvania. A California State Lands Commission
official stated that while California?s performance bonding provisions are

not specified in California statute, the bonding amounts are specified in
the oil and gas lease, which range from $25,000 in earlier leases to $1.25
million in a later lease. In addition to performance bonds, the California
State

Lands Commission can require additional assurance for DR& R, and these
amounts have ranged up to $7.5 million. Florida reported a single lease
provision that matches Alaska?s at $100,000, but no blanket bond provision.
Finally, Pennsylvania reported a well- plugging bond of $100,000 per well
for well depths in excess of 10,000 feet and an additional $25,000 bond to
ensure dismantlement, removal, and restoration and cover miscellaneous

problems or missed royalty payments. By comparison, ADNR?s financial
assurances are either a $100, 000 single- lease bond that cover all wells in
a lease, or a $500,000 statewide blanket bond that covers all leases in the
state.

Comments from the Department of the

Appendi x II Interior

Appendi x III

Comments from the State of Alaska Note: GAO comments supplementing those in
the report text appear at the end of this appendix.

See comment 1. See comment 2.

See comment 3. See comment 4.

See comment 5. See comment 6. See comment 7.

See comment 8. See comment 9. See comment 10. See comment 11. See comment
12.

See comment 13. See comment 14.

The following are GAO?s comments on the state of Alaska?s letter dated May
24, 2002.

GAO?s Comments 1. GAO often examines state practices on state lands,
especially if federal agencies have a regulatory role in the state activity
or if federal

agencies can learn from state practices. For example, GAO has reviewed the
state of Florida?s land acquisition program as it relates to the South
Florida Ecosystem Restoration Initiative (South Florida Ecosystem
Restoration: A Land Acquisition Plan Would Help Identify Lands That Need to
Be Acquired. GAO/ RCED- 00- 84. April 5, 2000). In another example, GAO
reviewed state management practices in stateowned parks, wildlife and
waterfowl areas, and forests in New Mexico, North Carolina, and Utah and
compared them to federal practices on federally owned land. (Land Ownership:
Similarities and Differences in the Management of Selected State and Federal
Land Units.

GAO/ RCED- 97- 158. June 27, 1997). Further, for state lands on Alaska?s
North Slope, federal agencies such as the U. S. Army Corps of Engineers and
the U. S. Fish and Wildlife Service have issued regulations that can
significantly affect the state of Alaska?s dismantlement, removal, and
restoration requirements. It is within GAO?s authority and responsibility to
review the federal role on this issue.

The state also commented that by performing this review, GAO was
promulgating a particular political agenda, which also brought into question
its credibility. We strongly disagree. The GAO has a statutory obligation to
fulfill requests from the Congress and its committees. To effectively
accomplish this obligation, GAO prioritizes its work in accordance with its
published congressional protocols. These

protocols state that congressional mandates, senior leader requests, and
committee leader requests receive the highest priority followed by committee
member requests, and then by individual member requests.

GAO does not differentiate between the majority and the minority staff when
implementing these priorities. Congressmen who represent the highest of
these priorities requested this work. Specifically, House Minority Leader
Richard A. Gephardt; Ranking Minority Member, House Committee on Resources,
Nick J. Rahall; and member of the House Committee on Resources, Edward J.
Markey. To effectively support the Congress, GAO must be professional,
objective, fact- based, nonpartisan, nonideological, fair, and balanced in
all its work. All GAO products and services must conform to generally
accepted and applicable auditing, accounting, investigative, and evaluation
principles

and standards. GAO strives to exercise the independence necessary to
guarantee that its products and work conform to professional standards and
the agency?s core values of accountability, integrity, and reliability. It
should also be noted that this review draws no conclusions and makes no
recommendations on the appropriateness or inappropriateness of the state of
Alaska?s current DR& R requirements for its lands. We used the knowledge
gained from the state?s experiences on the North Slope to draw conclusions
and make recommendations to federal land managers.

We disagree with the state?s contention that our report does not draw a
distinction between dismantlement, removal, and restoration requirements and
environmental cleanup. Our report clearly defines DR& R requirements as the
dismantlement and removal of infrastructure and the restoration of the land
following the completion of oil and gas activities. Our report also
distinguishes between the DR& R requirements imposed by Alaska?s Department
of Natural Resources and Alaska?s Oil and Gas Conservation Commission and
the requirements for air and water contaminated by pollution. We note that
Alaska?s Department of Environmental Conservation enforces these
requirements, which include the cleanup of oil spills. We further
distinguish between DR& R requirements and cleanup of environmental
contamination in our analysis of the costs of DR& R requirements. We
acknowledge that in some instances, especially for orphan well sites

located in the National Petroleum Reserve- Alaska, both DR& R and
environmental cleanup are necessary and discussed together. However, in
these cases, we believe we appropriately characterize the required actions.

2. We agree with the state that the report incorrectly describes Prudhoe Bay
as an area that spreads across 1, 500 square miles and contains Native
Corporation lands. We meant this sentence to be a description of state lands
on the North Slope and have changed the report accordingly.

3. Establishing overall restoration goals and corresponding specific DR& R
requirements prior to development is not an inflexible exercise. As stated
in the report, we recognize that established goals can change and the
process used to achieve those goals can also change as technology and
circumstances change. However, we believe that to avoid confusion and
concerns about what, if anything, might happen to federal lands used for oil
and gas development, it is important to

establish restoration goals and corresponding dismantlement, removal, and
restoration requirements prior to the initiation of such activities. We
believe that such action will provide a number of benefits. First, it will
allow all interested parties, including the Congress, the federal land
management agency, the oil companies, environmental groups, and the public,
to know what is planned for the restoration of the land after oil and gas
activities cease. Such information will allow all interested parties to make
more informed decisions about whether they will support or carry out such
development. Second, oil companies will have better information on what is
expected of them and thus will be better able to compare the benefits of oil
production to the total costs before deciding whether to make such an
investment. If they do decide to proceed, it will also allow the companies
to better plan and budget

for the eventual cost of restoration, which improves the likelihood that the
needed funds will be available. Finally, if there is a public record of the
planned restoration activities, it increases the likelihood that such
restoration will occur or that any modification of planned restoration is
justified.

4. Alaska?s current lease stipulations, which are reprinted in the report,
state that, at the option of the state, all improvements such as roads,
pads, and wells ?shall? either be abandoned and the sites rehabilitated by
the lessee to the satisfaction of the state, or left intact and the lessee
absolved of all further responsibility as to their maintenance, repair and
eventual abandonment and rehabilitation. We did not characterize the
obligation of the lessee as optional, but one that can be waived at the
discretion of the state. However, we did use the word ?should? to
characterize the lessee?s obligation instead of the word ?shall.? We agree
with the state that the word ?must? is a more appropriate

characterization of the state?s actual use of the word ?shall? in the lease.
Therefore, we have revised the report by replacing our use of the word
?should? with the word ?must,? when appropriate.

5. We believe that because the state lacks a restoration goal for its lands
on the North Slope and corresponding DR& R requirements, that these two
usually opposed groups- oil companies and environmentalists- are concerned
about what will be required and what will ultimately happen to the land. By
recommending the establishment of restoration goals for federal lands, and
the issuance of specific DR& R requirements to achieve those goals, it is
our intent to alleviate such concerns and allow all interested parties to
make informed decisions on these

matters before the land is used. Establishing goals and requirements

prior to development would provide for greater transparency and would allow
agreements to be reached on what restoration will be required before the
loss of any leverage for ensuring adequate performance.

6. We agree with the state that the development of new technology and
science as well as changing circumstances can cause regulatory agencies and
policymakers to revise their DR& R requirements. However, we do not agree
with the state that these acts are mutually exclusive. Establishing overall
restoration goals and related specific DR& R requirements prior to
development is not the same as dictating

the process used to achieve these goals and requirements. For example, a
goal of returning the land to as near as the original condition as possible
and a corresponding requirement to remove gravel from

abandoned development to achieve that goal does not dictate how that gravel
is to be disposed of. Nor do establishing goals and DR& R requirements as
part of the lease negate the ability of the lessor to alter those
requirements at a later date, if the lease allows for such a modification.

7. We do not agree with the state. We do not offer any comments, draw any
conclusions, or make any recommendations as to whether the state of Alaska?s
current DR& R practices are appropriate or inappropriate for its lands.
However, we do believe that for federal lands subject to federal regulatory
authority and responsibility on Alaska?s North Slope, it is appropriate to
establish restoration goals and DR& R requirements prior to development for
the reasons stated in the report.

8. GAO is not recommending a specific level of financial assurance for
federal lands on the North Slope. Rather, we state, and the Department of
the Interior agrees, that the current financial assurances required by the
Bureau of Land Management for oil and gas activities in the National
Petroleum Reserve- Alaska would only cover a fraction of the

potential future cost of DR& R. For this reason, GAO recommends, and again
the Department of the Interior agrees, that the Bureau should review its
existing financial assurances for the National Petroleum Reserve- Alaska to
determine whether they are adequate to ensure the availability of funds
needed to achieve its overall restoration goal. 9. We believe that the
state?s current bonding requirements are

insufficient to cover the likely eventual cost of DR& R. The state has
agreed with this statement in the past. We recognize in the report that

the state has chosen to place most of its reliance that funds will be
available to perform whatever DR& R requirements the state may eventually
establish on the overall financial condition of the companies

currently operating on the North Slope. However, the state has no assurance
that these firms will continue to operate on the North Slope or that, once
the oil is depleted, they will be as committed to the state?s intentions as
the state may believe.

10. We agree that the owners of the Trans- Alaska Pipeline System (TAPS) do
not escrow the actual funds collected for DR& R. We did not review whether
requiring this to occur would have been a more appropriate mechanism for the
regulators of the pipeline to employ to ensure that DR& R requirements are
met. However, the state fails to note two very important differences between
the financial assurances that exist for DR& R requirements for TAPS and the
financial assurances that exist for oil and gas activities on state land on
the North Slope. First, the DR& R requirements for the owners of TAPS are
more definite than the requirements that have yet to be determined for state
lands. Second, by defining these requirements, the owners of TAPS have been
able to create a formula known to all parties for determining an amount to
be collected from the users of the pipeline to meet DR& R requirements. 11.
About 100 wells located in the National Petroleum Reserve- Alaska were

drilled by the federal government and are still its responsibility. BLM, the
federal agency responsible for managing the National Petroleum Reserve-
Alaska, has specifically stated that many of these wells were improperly
plugged and may pose an environmental hazard. These wells, and the risks
they represent, provide an important illustration of the substantial costs
involved in attempting to rectify this problem. For example, in 2001, when
the Corps of Engineers approved the plugging and surface remediation of just
two of these well sites, the total cost was about $16 million. Further, in
2001, BLM estimated that just properly plugging the abandoned wells in the
National Petroleum Reserve- Alaska would cost more than $100 million over
the course of 10 to 20 years.

12. We believe that abandoned surface leases used to support oil and gas
activities on the North Slope provide another useful illustration of the
costs of cleaning up and restoring such environments. In addition, because
the state had inadequate restoration requirements and financial assurances
in these old leases, they also illustrate the risks involved in having to
correct the problem today.

13. GAO acknowledges in its report that in two instances the state has
sought and obtained additional financial assurances before it would approve
the transfer of a lease to a less financially secure company. However, as
stated in the report, the state currently has no criteria to

determine when additional financial assurances are needed. 14. The state
feels that GAO is making a recommendation that will unnecessarily impede
future oil and gas activities on federal lands on

the North Slope. To the contrary, we report that the Minerals Management
Service, which regulates offshore oil industry activities on federal lands,
sets its bond amounts based on an escalating scale that depends on, among
other things, the company?s experience and financial viability, as well as
the estimated future cost of reclamation.

These requirements have not impeded oil companies from exploring and
recently initiating the production of oil from offshore facilities located
in federally regulated waters. We also report, and the Department of the
Interior agrees, that the current financial assurances required by the
Bureau of Land Management for oil and gas activities in the National
Petroleum Reserve- Alaska are minimum fixed amounts

that do not take into consideration differences in company experience and
financial viability and would only cover a fraction of the potential future
cost of DR& R. As such, we believe that the Bureau should review its
existing financial assurances for the National Petroleum Reserve- Alaska to
determine whether they are adequate to ensure the availability of funds
needed to achieve its overall restoration goal. The Department of the
Interior agreed with this recommendation and stated that the Bureau?s review
will focus on protecting the environment and taxpayers, should lessees
default.

GAO Contacts and Staff Acknowledgments

Appendi x IV

GAO Contacts Barry T. Hill (202) 512- 3841 Jim Yeager (202) 512- 6780

Acknowledgments In addition to those named above, Paul Aussendorf, Jose
Alfredo Gomez, Cheryl Pilatzke, and Arvin Wu made key contributions to this
report.

(360037)

a

GAO United States General Accounting Office

Page i GAO- 02- 357 Alaska's North Slope

Contents

Contents

Page ii GAO- 02- 357 Alaska's North Slope

Contents

Page iii GAO- 02- 357 Alaska's North Slope

United States General Accounting Office Washington, D. C. 20548

Page 1 GAO- 02- 357 Alaska's North Slope

A

June 5, 2002 Transmi t tal Lett er

The Honorable Richard A. Gephardt Minority Leader House of Representatives

The Honorable Nick J. Rahall Ranking Minority Member Committee on Resources

House of Representatives The Honorable Edward J. Markey House of
Representatives

In response to your request, this report discusses the nature and extent of
dismantlement, removal, and restoration requirements for oil industry
activities that are occurring on both federal and state lands located on the
North Slope of the state of Alaska. We include recommendations to the
Secretary of the Interior aimed at ensuring that such lands managed by the
Bureau of Land Management are properly restored after oil and gas activities
cease.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
the date of this letter. At that time, we will send copies to the Secretary
of the Interior and to the heads of the Bureau of Land Management, the
Minerals Management Service, and the Fish and Wildlife Service. We will also
send copies to the governor of the state of Alaska. We will make copies
available to others on request.

Please contact me at (202) 512- 3841 if you or your staffs have any
questions. Major contributors to this report are listed in appendix IV.
Barry T. Hill Director, Natural Resources and Environment

Page 2 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 3 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 4 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 5 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 6 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 7 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 8 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 9 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 10 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 11 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 12 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 13 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 14 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 15 GAO- 02- 357 Alaska's North Slope

Executive Summary Page 16 GAO- 02- 357 Alaska's North Slope

Page 17 GAO- 02- 357 Alaska's North Slope

Chapter 1

Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Page 33 GAO- 02- 357 Alaska's North Slope

Chapter 2

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 34 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 35 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 36 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 37 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 38 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 39 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 40 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 41 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 42 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 43 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 44 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 45 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 46 GAO- 02- 357 Alaska's North Slope

Chapter 2 Current DR& R Requirements for Existing Oil Production Are Very
General

Page 47 GAO- 02- 357 Alaska's North Slope

Page 48 GAO- 02- 357 Alaska's North Slope

Chapter 3

Chapter 3 Actual Cost of DR& R Is Unknown, but Likely to Cost Billions of
Dollars

Page 49 GAO- 02- 357 Alaska's North Slope

Chapter 3 Actual Cost of DR& R Is Unknown, but Likely to Cost Billions of
Dollars

Page 50 GAO- 02- 357 Alaska's North Slope

Chapter 3 Actual Cost of DR& R Is Unknown, but Likely to Cost Billions of
Dollars

Page 51 GAO- 02- 357 Alaska's North Slope

Chapter 3 Actual Cost of DR& R Is Unknown, but Likely to Cost Billions of
Dollars

Page 52 GAO- 02- 357 Alaska's North Slope

Page 53 GAO- 02- 357 Alaska's North Slope

Chapter 4

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 54 GAO- 02- 357 Alaska's North Slope

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 55 GAO- 02- 357 Alaska's North Slope

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 56 GAO- 02- 357 Alaska's North Slope

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 57 GAO- 02- 357 Alaska's North Slope

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 58 GAO- 02- 357 Alaska's North Slope

Chapter 4 Financial Assurances That Funds Will Be Available for Projected
DR& R Costs Are Limited

Page 59 GAO- 02- 357 Alaska's North Slope

Page 60 GAO- 02- 357 Alaska's North Slope

Chapter 5

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 61 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 62 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 63 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 64 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 65 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 66 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 67 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 68 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 69 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 70 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 71 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 72 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 73 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 74 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 75 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 76 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 77 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 78 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 79 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 80 GAO- 02- 357 Alaska's North Slope

Chapter 5 Specific DR& R Requirements and Improved Financial Assurances
Should Be Considered for North Slope Federal Lands

Page 81 GAO- 02- 357 Alaska's North Slope

Page 82 GAO- 02- 357 Alaska's North Slope

Appendix I

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 83 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 84 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 85 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 86 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 87 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 88 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 89 GAO- 02- 357 Alaska's North Slope

Appendix I Comparison of Alaska?s DR& R Requirements and Financial
Assurances with Those of

Other Oil- Producing States Page 90 GAO- 02- 357 Alaska's North Slope

Page 91 GAO- 02- 357 Alaska's North Slope

Appendix II

Appendix II Comments from the Department of the Interior

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Appendix II Comments from the Department of the Interior

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Appendix III

Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix III Comments from the State of Alaska

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Appendix IV

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