Big Oil May Make US Taxpayers Take Care Of Its Orphaned Oil & Gas Wells

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In a report by Carbon Tracker, we learn that there are billion-dollar orphans that the oil and gas industry will most likely abandon — and these wells will become wards of the state. This means that taxpayers will be left with another bill. There are a total of 2.6 million unplugged onshore wells in the US, and there are an estimated 1.2 million that could be undocumented.

The report, Billion Dollar Orphans, shows that wells used for related oilfield purposes such as injection, waste disposal, water, monitoring, and even those classified as “unknown” are incidental to oil and gas production yet produce no revenue and need to be closed just like those that produce. In another report, It’s Closing Time, it was revealed that the oil and gas industry has a legal obligation to plug its wells, but it hasn’t set aside the resources to do so.

“States have inadvertently created a moral hazard: it’s always in the operator’s financial interest to delay permanent abandonment of wells as long as possible, often by selling late life and marginal assets to weaker companies. As a predictable result, inventories of largely self-bonded idle and orphan wells are exploding. This trend will only accelerate as the industry’s state of permanent decline continues.” — Billion Dollar Orphans

Data suggests that states on average have secured less than 1% in surety bonds, and this assumes that every insurer can and will pay. In other words, as a whole, oil- and gas-producing states are susceptible to serial operated defaults and are exposed to hundreds of billions of dollars in orphan well liability risk. To be more direct, states that produce oil could pay billions in liability — so if you live in an oil-producing state, this affects your tax dollars.

Taxpayers Footing Massive Bills for Oil & Gas

States that don’t require the savings will make matters worse by giving operators every incentive to spend on drilling more wells or paying back investors first while pushing closure costs down the road. There’s more — recent bankruptcies also show cracks in the system. Some states have given up and allowed debtors to just leave their unplugged wells to the state. Here’s a list of a few states, how many wells are orphaned there, and the potential costs to taxpayers:

  • California — 108,00 wells, $7 billion
  • Utah — 27,000 wells, $5 billion
  • Alaska — 5,000 wells, $1 billion
  • Wyoming — 64,000 wells, $10 billion
  • North Dakota — 29,000 wells, $8 billion
  • Colorado — 60,000 wells, $7 billion
  • Ohio — 170,000 wells, $13 billion
  • New Mexico — 73,000 wells, $10 billion
  • Texas — 783,000 wells, $117 billion
  • Louisiana — 71,000 wells, $10 billion
  • Oklahoma — 288,000 wells, $31 billion
  • Pennsylvania — 174,000 wells, $15 billion
  • West Virginia — 102,000 wells, $8 billion

These estimates do not include the costs of undocumented orphaned wells. The report noted that the pandemic has also temporality shut in tens of thousands of the production wells, and that the energy transition may prevent the reactivation of these along with the hundreds of thousands more idle wells. It pointed out that the industry’s asset retirement obligations are accelerating, and this puts additional pressure on distressed corporate balance sheets.

Back in August, we covered a story about Covid-19 bankrupting 19 oil and gas companies. If any of these companies had unplugged wells, guess who is left footing the bill? You, the taxpayer. The average person may think, “Well, just leave them unplugged. What harm could it do?” However, leaving these wells idle poses a major risk. Unplugged wells could leak explosive gases into neighborhoods or leach toxic fluids into drinking water supplies, and it’s just important to get these wells permanently sealed. The longer these wells are left idle, the higher the risk of well casing failure. In California, over half of the state’s idle wells have been open for more than 10 years. And around 4,700 of them have been open for over 25 years. California is one of the states that doesn’t provide the necessary regulatory oversight to protect its underground sources of drinking water from idle wells.

Defining & Estimating Orphan Well Liability Risk

The report estimated the total orphan well liability risk for each major oil-producing state in the US. It defines orphan well liability risk as a state’s potential costs to close orphaned oil and gas wells, measured as 100% of the estimated cost to plug all documented wells in the state. These wells do not produce any type of oil or gas and they don’t have any known financially viable, responsible operator who is able to plug the well.

“It is increasingly clear that many companies cannot pay for cleanup,” the report stated, and cited the example of Petroshare Corporation, which declared bankruptcy in the fall of 2019. Its bankruptcy plans envisioned selling its assets to a major creditor. As a part of that plan, it convinced the State of Colorado to allow Petroshare’s unwanted wells to be abandoned without being plugged. This puts the responsibility of the cleanup on the state — meaning that the taxpayers have to foot the bill.

A major factor that impacts the costs of closing these wells is the depth of the well bore. Plugging costs are linked with well depths, and the estimated cost to plug modern deep shale wells is likely to be higher than industry’s estimates. The report built upon well depth data from Enverus and based its estimates of orphan well liability risk on the number and depth of unplugged wells in each state.

Enversus reported a large number of existing unplugged wells in the U.S. that ranged from 1,200 in Florida to 800,000 in Texas, and estimated the range of the plugging costs per well from a few thousand to over a million dollars per well. The report also “conservatively capped” its estimates for ultra-deep wells, which are deeper than 10,000 feet, at the estimated cost to plug a 10,000-footwell. Furthermore, it did not include reclamation costs even though these are legally required.

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A Possible Solution

The solution to this problem is for states to act now. All they need to do is increase bond amounts to reflect the actual costs and shift the financial responsibility to the industry that is responsible for these orphaned and idle wells. If states were to require companies to assure these cleanup costs by requiring operators to purchase surety bonds, this could protect the taxpayers from having to foot the fossil fuel industry’s bill of closing these wells. But, as the report noted, state bonding requirements are based on very low-cost estimates and are woefully insufficient. More than 99% of the estimated closure costs are not covered by existing bonds, it stated.

As long as these states continue to extend free and unsecured credit for oil field closure liabilities, they are subsidizing oil and gas to the detriment of their taxpayers, the environment, and even the competitiveness of renewable energy needed to combat climate change.

Some states do have policies in place to protect taxpayers from both the potential financial and environmental costs of orphaned and idle wells. One example is that operators are required to obtain indemnity or surety bonds — a form of financial assurance to support the cost of plugging a well if it is deserted. Some states also require the operators of idle wells to pay fees or develop plans to plug and abandon the wells that have been idle for many years.

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Johnna Crider

Johnna owns less than one share of $TSLA currently and supports Tesla's mission. She also gardens, collects interesting minerals and can be found on TikTok

Johnna Crider has 1996 posts and counting. See all posts by Johnna Crider