Bonding Requirements for U.S. Natural Gas Producers

Hydraulic fracturing and other recent technological advances have dramatically increased the availability of natural gas in the United States. Moreover, since peaking in 2008, U.S. natural gas prices have fallen dramatically, and industry analysts are forecasting that prices will remain low for the next several decades (e.g., U.S. DOE 2013a). These trends have broad implications for energy markets, the economy, and the environment. Energy is a key input in virtually all sectors of the U.S. economy, and inexpensive natural gas is good for growth. Natural gas is also less carbon-intensive than other fossil fuels, leading some experts to describe the fuel as a possible “blue bridge to a green future” (Rotman 2012). However, these new forms of natural gas production have also raised a number of environmental concerns, including the potential contamination of groundwater and the increased scope for large-volume surface spills. In response, the U.S. Environmental Protection Agency (EPA) and other organizations are working to better understand the potential risks that hydraulic fracturing and other natural gas production methods pose to human health and the environment, but it will be years before comprehensive analyses are completed. Although the scope for environmental damages from these new forms of gas production is still poorly understood, it is not too early to examine the underlying incentives faced by producers. Natural gas producers are constantly making tradeoffs between money, time, and environmental risk. While the private costs and benefits of drilling are realized immediately, the external costs are not. This means that by the time external costs are well understood, producers may no longer exist or may not have sufficient resources to finance necessary cleanups or to compensate those who have been adversely affected. Because producers do not face the total cost of potential external damages, they may take too many risks.