‘Orphaned’ oil wells to squeeze state coffers

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Zack Colman | Politico

The market bust that is expected to trigger a spate of bankruptcies in the oil patch is threatening to leave states holding a massive bill to seal up thousands of new “orphan” wells that pose pollution risks.

Tens of thousands of orphan wells already spread across oil-producing states, abandoned by failed companies that lacked the cash to properly plug them before walking away. Although states usually require deposits or bonding from operators to seal wells and ensure they aren’t leaking methane gas or other pollutants that can contaminate air or water supplies, the payments are often inadequate.

“Now comes the summer of Covid and the very ill-timed Russia and Saudi price war. We’re expecting to see another wave [of orphan wells] over the next couple of years,” said Patrick Courreges, spokesperson for the Louisiana Department of Natural Resources. “There’s a lot of marginal operators struggling out there right now. A lot of them aren’t going to make it.”

Louisiana doesn’t have enough money to clear its existing backlog of 4,334 orphan wells, much less deal with new ones, Courreges said. Loopholes and grandfather clauses exempt many financially weak operators from paying into the state’s cleanup funds, he said, and those companies are often thelikeliest to go under, leaving the state to pay.

Regulators in Louisiana have tried increasing payments required of producers over the years, but frequent price crashes — like those in 2008 and 2015 — often bring pressure to reduce burdens on already-stretched companies.

Now, with benchmark U.S. crude oil prices hovering in the mid-$20s per barrel, several states are actively taking steps to lessen the financial burden on companies. Wyoming slashed its conservation tax, the main funding source for orphan well cleanup. North Dakota is considering the same, and it already has reinstated waivers to extend the duration wells are allowed to remain idled, often a precursor for becoming an orphan.

“Orphan wells in the best of times are a big deal. The potential for a coming tsunami of additional orphan wells is of concern to many.”

 Adam Peltz, senior attorney at the Environmental Defense Fund

Critics said those moves will weaken states’ abilities to deal with the orphaned wells just as the problem those fees were designed to address worsens.

“Conservative governments are abandoning financial liabilities at the first sign of distress, exactly the situation these measures were designed for,” David Wieland, regional organizer with the Western Organization of Resource Councils, said in an email.

Some states are sounding the alarm. In New Mexico, which is home to a large portion of the prolific Permian Basin oil field, the state’s top land official said last week that cleanup of abandoned wells could cost the state billions in the wake of the coronavirus-fueled crash. Just before prices collapsed, the California Council on Science and Technology said it faced a potential liability of $528 million to remediatefewerthan 6,000 wells.

That’s likely to leave a huge financial burden on state taxpayers, according to a report compiled by the Interstate Oil and Gas Compact Commission.

“The risk of wells becoming orphans is heightened when oil and gas prices decline or are unstable, as in recent years, or when operators transfer aging wells to other companies,” the IOGCC report said.

State-reported figures for the IOGCC recorded 56,600 documented orphanwells across 30 states and between 210,000 and 746,000 undocumented orphan wells across 35 states and Canadian provincesas of 2018.

That figure might understate the problem. The EPA said there are 3.11 million abandoned oil and gas wells across the U.S. and 2.15 million of those were “unplugged.” Those wells accounted for 7 million metric tons of CO2 equivalent of methane emissions in 2018, roughly the same as the annual emissions as 1.5 million cars.

Those wells also leak contaminants into groundwater and cause methane to migrate into aquifers, said Adam Peltz, a senior attorney at the Environmental Defense Fund who has studied oil and gas wells in local environments for the past decade. The huge number of wells already abandoned and causing environmental harm and contributing to climate change is only going to grow because of the current oil market problems.

“Orphan wells in the best of times are a big deal. The potential for a coming tsunami of additional orphan wells is of concern to many,” Peltz said. “There’s a long way to go in putting our arms around the scope of the problem.”

Many states face funding crunches because they allow companies to use “blanket” bonding requirements in which operators pay a single fee for multiple or even an unlimited number ofwells. In New Mexico, drillers can pay $250,000 to cover as many wells as they wish; in Oklahoma, that rate is $25,000.

While some states have updated or are considering changes to address the growing problem from orphan wells, many haven’t, leading to “woefully inadequate programs,” said Kate Kelly, public lands director at the liberal think tank Center for American Progress. The program that covers wells drilled on federal lands fares poorly, too; a Government Accountability Office report last year said 84 percent of bonds tied to wells the Bureau of Land Management oversees are too low to cover full cleanup costs.

CAP said spending $2 billion for well plugging could create between 14,000 and 24,000 jobs. It has joined environmental organizations like Greenpeace and the Environmental Defense Fund in pitching the idea to federal lawmakers in a bid to win funding in a coronavirus economic relief package. The idea, however, hasn’t gotten traction in negotiations, said Democratic House Natural Resources Committee spokesperson Adam Sarvana.

Part of the problem for states is that theircleanup programs have failed to keep pace with industry practices. While many wells are covered by one bond, the costs to plug them are determined by the foot — and well depths have increased over the years. The average well depth reached 5,964 feet in 2008 compared with 4,213 feet in 1960, according to the U.S. Energy Information Administration.

The IOGCC report documents the mismatch. North Dakota reported its average well-plugging costs at $74,000 per well, based on historical figures. But Lynn Helms, the state’s mineral resources director, suggested the cost is double that, coming in at $150,000 per well. Louisiana’s Courreges said his department loathes to offer an average given how wildly costs vary.

Costs to plug wells swing dramatically even from county to county for Dick Schremmer, who operates 550 stripper wells —which produce less than 15 barrels per day and are near the end of their productive lives — and is chairman of the National Stripper Well Association.

Schremmer acknowledged that funds held by states were inadequate to clean up all the orphaned wells. But he said states needed less financial assurance now since newer operators aren’t as likely to “go out of business and just disappear” to avoid plugging wells as compared with older companies whose operations predate state bonding minimums. Many orphaned wells also may become attractive to future buyers once prices rise again, he added.

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