Natural resource development projects include government oversight in the permitting process because of a project’s environmental or property rights impacts. Regulations, sometimes frustrating, protect the public in the event a problem arises from a permitted project. End-of-project decommissioning is a typical regulated event. But government is not always well endowed with the skills of planning and foresight.
When a big project ends or is abandoned, will the government be left holding the bag? The phrase ‘left holding the bag’ is an old English phrase. A person left holding the bag is stuck with the stolen goods in hand. He or she will take the blame by the police while the rest of the enterprise escapes. Is that the way it should be with South Dakota state oversight of permitted projects? Governments left holding the bag, indeed, may be either the state or federal government. It matters not. They are the party stuck if a permitted project fails, is shut down, files for Chapter 7 Bankruptcy or is abandoned when the project’s end-of-operations plan is not funded properly. Left holding the bag is the equivalent of holding the responsibility for cleanup, remediation and reclamation if financial responsibility for the project’s end is not well planned.
Providing financial assurance at the end of a permitted project includes the use of bonds, letters of credit, cash deposits (rare) and sureties. All of these are often referred to as sureties. Government agencies and their boards set surety requirements. While setting the amount of a surety agencies run into several issues, some self-inflicted. A recent report by the GAO found that state agencies struggled with determining the financial health of an operator; and with determining whether the operator qualifies for self-bonding; determining the cost of reclamation; and determining the financial stability of surety companies.
The US DOJ Inspector General in a prior report opined, “Restrictions on states’ abilities to require reasonable levels of financial assurance could result in states’ inabilities to adequately respond to a catastrophic release of hazardous contaminants to the environment, such as occurred at the Summitville mine site in Colorado. If a state is unable to respond, EPA may have to assume responsibility under Superfund.” I have in prior pieces given challenging illustrations of surety problems in South Dakota and elsewhere.
If an agency or its board fails to set the surety correctly, the public is in danger of paying for that mistake. Montana provides an example of taking the bull by the horns. In 1996 operations ceased at Zortman and Landusky gold and silver mines. A couple of year later, in 1998, the parent company, Pegasus Gold, filed for bankruptcy. The reclamation bonds were well short of necessary cleanup costs. As a result, the State of Montana has allocated $32 million for reclamation, and it is estimated that the Federal Bureau of Land Management has contributed over $17 million. Montana responded to the incident with the Metal Mine Reclamation Act. This resulted in an increase from $198.7 million in bonds in 2004 to about $347 million in bonds in 2017. The Act also had other effects, like preventing former mining companies and executives from pursuing new projects in Montana if they have outstanding cleanup obligations to the state.
Setting surety amounts too low is not unusual. The GAO has found by way of some examples: 1/3 of the wind and solar rights-of-way were underfunded by as much as $15 million. And operators forfeited more than 450 sureties for reclaiming coal mines between July 2007 and June 2016, and that the amount of surety forfeited was sufficient to cover the cost of required reclamation in about 52% of the cases.
A better title for this piece may be ‘The greater fool theory.’ In the greater fool theory, the price of an object is determined not by its true value but rather by the demand of an irrationally exuberant consumer. The consumer is the government agency or board eager to support and approve complicated natural resource projects. Under my ‘The greater fool theory’ government places a greater value on approving and getting a project on the road rather than using proper oversight to protect the public and environment from the consequences of a closed project.
