The United States is facing a crisis in abandoned infrastructure, or “orphanage,” among the oil and gas industry. This crisis has been succinctly described by Megan Milliken Biven & Regan Boychuk as well as extensively reported on by the think tank Carbon Tracker, as in here, here, and here. The problem is that properly decommissioning oil wells is expensive, and simply walking away from them (so far) has not been. Many wells can produce indefinitely in lower and lower amounts, until the cost of operating them exceeds the available profits. At this point the operator will plug (if they are willing and able to plug) or walk away (if they aren’t).
The problem with orphans has many facets. Having operators profit from assets and abandon their liabilities is a massive subsidy to the oil and gas industry at a time we should be investing in renewable energy. These wells can cost hundreds of thousands of dollars apiece to plug, even before reclaiming the land or remediating pollution costs are considered. Additionally, a well is a piece of property — the state can’t just go plug it, it has to go through a formal legal process of being declared abandoned. This imposes administrative burdens, delays, and costs as public agency staff must essentially build a legal case against an operator. It can take years to move a particular operator into “orphan status.” Then there are the constraints around publicly run plugging operations. In Colorado, where I live, our Oil and Gas Conservation Commission’s Orphan Well Program has a budget of up to 5 million dollars per year and five full time staff. However the Program has never plugged more than 61 wells in a year. Even if the program could be doubled or even tripled in size, the state currently has approximately 11,000 inactive wells — and is expecting many thousands more in the near future.
We need the oil and gas industry to pay their closure costs up front
Increasing the up-front payment of abandonment costs for all oil and gas sites and facilities, including wells, locations, pits, tanks, waste disposal sites, and processing facilities, is absolutely critical to the goal of preventing future abandonment. Up-front payment of 100% of the expected costs would remove the profit incentive to abandon an oil and gas facility. It would also take advantage of the fact that wells are most productive at the beginning of their useful lives, meaning the greatest amount of cash is flowing then.
The oil and gas industry has proven that it is not a trustworthy one. It has already left a landscape across the United States that is littered with abandoned oil and gas facilities, including the one in Louisiana that killed 14 year old Zalee Gail Day-Smith in February of 2021. Many of these orphans are created by small “wildcat” operators — but not all. One reason we see more small operators abandoning their facilities is that large operators originally spun off those facilities when they became less profitable.
We must confront the two problems facing the United States with respect to our aging oil and gas infrastructure. First is the fact that we already have an enormous number of wells that are legally orphaned, functionally abandoned, or are producing such low quantities that their owners could never afford to pay to plug and abandon them (unless they had other, more productive assets). The second is that we have some very large operators with many thousands of wells, and these wells are often much more expensive to plug and abandon because they are deeper, fracked wells, on larger disturbed area locations, and have much more infrastructure associated with them. If we charged these operators the “up-front” costs of plugging and abandoning these assets it would run into many billions of dollars for a single company. The logistics of collecting and managing such large sums, not to mention the potential for protracted (although likely frivolous) litigation from the industry, are daunting.
Colorado’s proposed new financial assurance rules
Pursuant to a change in the law made in 2019, the Colorado Oil and Gas Conservation Commission just a few months ago put forward a set of draft rule proposals for amending their rules on bonding, or “financial assurances.” These rules would require the majority of Colorado’s oil and gas operators to pay $78,000 per well, but would allow other operators to bond their wells under a blanket bonding regime for as little as $1,250. The only condition to qualify for these blanket bonds is to have a low number of low producing (under 5 barrels of oil equivalent or “BOE”*/day) wells, or to plug a certain percentage of their own wells per year. The choice of $78,000 as a representative amount is just wrong. It’s a number that will be 3x too high for some wells, and 3x too low for many, many others, and was based on faulty data inputs that have since been corrected. However, it is the blanket bonding option that poses the most serious kinds of financial and safety risks to the state.
We cannot afford to assume that operators with large amounts of production relative to their total number of wells will not abandon their facilities. In Colorado in 2020 an oil producer called Petroshare declared bankruptcy and abandoned its wells to the Orphan Well Program at an estimated cost of about 16 million dollars. At the time, Petroshare was among the top 15% of producers per well with an average of over 26 BOE per well per day. Petroshare might have actually qualified for blanket bonding as a “Tier 2” operator prior to its bankruptcy.** The state would have collected 1.5 million dollars for its blanket bond, and another 1.26 million dollars for its inactive wells. While 2.76 million would have been an improvement over the $325,000 the state actually had from Petroshare, it is still almost six times less than the state is anticipated to spend to deal with Petroshare’s orphans. Even under the lowest “Tier 3” status, where operators would have to pay a bond for each individual well, at $78,000 per well the company would have had only 4.35 million in bonds, while the projected costs of its orphans are 3.5 times larger.
Why is adequate bonding a health and safety issue?
When companies walk away from their oil and gas assets they leave physical problems behind. Leaking methane is one of the biggest. Methane from inactive wells averages 12 grams per hour per well, but there can be “super-emitters” that spew methane at rates thousands of times higher. When wells are abandoned and fall into disrepair it can take a lot longer for this problem to be identified and corrected. This methane is potentially explosive, and these explosions can be and have been deadly. It happened in February, killing a girl who was playing near an abandoned oil tank in Louisiana. It happened here in Colorado when a temporarily abandoned well leaked methane into the basement of a house, which exploded in 2017 killing Joey Irwin and Mark Martinez. Methane is also an incredibly potent greenhouse gas, trapping heat 100 times more strongly than carbon dioxide over a 20-year timeframe.
When oil and gas facilities are abandoned it takes time for the responsible state agency to move through its routine. The staff of that agency must identify rule violations, provide warnings, make allegations, and provide notice and a hearing. Each one of these steps can take months to years. In Colorado, once the operator has had its bond claimed and its licensing revoked, the state’s Orphan Well Program will add the facility to its list of projects which can itself be many years long even with the current “low” number of official orphans. In the meantime, the gas just keeps escaping.
Preventing well abandonment
I believe that the two problems of (1) undercapitalized operators with too many wells that need plugging, and (2) big operators with a lower probability of imminent failure, but whose “real” bonding levels would easily reach into the billions, might cancel each other out if an appropriate regulatory framework could be crafted. On the one hand: semi-broke operators with tens of thousands of wells in Colorado alone that the owners cannot afford to plug or pay bonds on, and don’t want to have to pay to keep in safe condition. On the other hand: a fistful of giant companies with enormous future plugging/bonding costs that are also less likely to pose an imminent risk (assuming they are preventing from spinning off their less productive wells to more vulnerable operators the way they have done). Give the rich guys some incentive to plug wells for the poor guys, and make the poor guys pay what they can.
But the only way to provide the incentives to both the rich guys and the poor guys is for the state to set the financial assurance/bond levels at the true cost of plugging and abandonment. If the bonds are lower than the true cost, there will always be a financial incentive to walk away. If we “pull punches” up front we are robbing ourselves of the tools we need to hold the industry accountable for cleaning up its own messes, and we will continue to barrel headlong into the orphan well crisis already in progress.
*Barrel of oil equivalent, or BOE, is equal to one barrel of oil or 6 MCF (thousand cubic feet) of fracked gas.
** A Tier 2 operator would be one where at least 40% of its wells produce more than 5 BOE/day.