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Who Pays for Stranded Assets? Taxpayers Are Footing The Bill For 100-Year Old Oil Wells

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Who Pays for Stranded Assets? Taxpayers Are Footing The Bill For 100-Year Old Oil Wells

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Yves here. This is an important backgrounder on a topic that is likely to become more and more important: who gets stuck with the cost of decommissioning old oil wells? And what happens when they are simply abandoned?

By Nick Cunningham an independent journalist, covering oil and gas, energy and environmental policy, and international politics, based in Portland, Oregon. Originally published at OilPrice

  • The number of non-operational orphaned wells could skyrocket at a time when the oil industry is in danger of entering structural decline
  • North Dakota regulators are currently seeking federal money to pay for hundreds of newly orphaned wells
  • The actual cost of plugging old wells is often way higher than is typically cited on company balance sheets.

Plugging old oil and gas wells may cost as much as ten times what the industry routinely estimates, according to a new report from Carbon Tracker. As oil and gas companies walk away from their “stranded liabilities,” the public may be left to pick up the tab. When oil and gas companies are finished with old wells, they are supposed to close them and pay for the cleanup. However, often the wells are abandoned, or “orphaned,” left idled but not plugged up for good. In many cases, these wells are dumped onto local and state governments, leaving taxpayers to pay for the cleanup.

The problem is not new, however. “Bonding” for oil and gas wells have been around for many years, but the actual requirements are lax almost everywhere. Companies are not required to pay the full cleanup costs upfront, the logic often being that they will earn money as they go, better equipping them to pay for cleanup later on.

But when it comes time to pay, many years later, some companies do not have the money to meet their obligations. In fact, more than 200 North American oil and gas companies have filed for bankruptcy since 2015, a rate of failure that is only accelerating with the recent oil market meltdown.

“Low bonding levels were an acceptable risk, as long as the vast majority of oil companies remained good credit risks,” Carbon Tracker said in its report.

However, “[s]tates 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,” Carbon Tracker wrote. “As a predictable result, inventories of largely self-bonded idle wells, some that have been nonoperational for more than 100 years, have ballooned.”

With more and more drillers in financial distress, many more wells will wind up unplugged, leaving the public to deal with the mess. State and local governments may decide to foot the bill and pay for permanent closure, which translates into a significant subsidy for the oil and gas industry. “If instead, they are not plugged, the price will be paid by landowners, citizens, and the environment,” Carbon Tracker warned.

Tens of thousands of oil and gas wells were temporarily shut in following the sharp plunge in prices in March and April due to the coronavirus pandemic. Carbon Tracker says that not all of those wells will be reactivated. “In a two-month time period, we went from zero orphan wells to almost 400,” North Dakota Department of Mineral Resources Director Lynn Helms recently said.

Canada, too, has tens of thousands of orphaned wells with no clear path forward.

There are enormous risks that stem from orphaned wells. A special report from Reuters found that 3.2 million abandoned oil and gas wells together emitted 281 kilotons of methane in 2018, equivalent to the emissions of 16 million barrels of oil, although that is likely a low estimate. More important to individual landowners living nearby, the wells can contaminate groundwater and soil, and emit toxic air emissions. There are also risks of explosions.

Looking out further, the prospect that a large portion of global oil reserves will be left in the ground as demand peaks and begins to decline means that the number of abandoned wells will not only increase, but will be brought forward in time. The fallout from the coronavirus pandemic, according to some experts, may hasten this transition.

The number of non-operational orphaned wells could skyrocket at a time when the oil industry is in danger of entering structural decline. “In short, the industry cannot afford to retire,” Carbon Tracker said.

But that’s not all. Carbon Tracker says that the actual cost of plugging old wells is way higher than is typically cited on company balance sheets. The industry routinely underestimates the cost of plugging old wells, and regulators tend to parrot those estimates.

“The true costs of plugging shale wells may be one of industry’s best kept secrets,” Carbon Tracker said. Instead of the $20,000 to $40,000 per well that is often cited, closing hundreds of thousands of shale wells could actually be an order of magnitude higher – as much as $300,000 per well. In extreme cases, it may even cost $1 million per well. Shale wells are deeper than shallow conventional wells, so the costs are much steeper.

Who is going to pay for all of this? In many cases, it won’t be the industry. North Dakota regulators are currently seeking federal money to pay for hundreds of newly orphaned wells.

“So, just look at the number of operating and idle wells that are out there. The numbers are pretty staggering,” Greg Rogers, Senior Adviser at Carbon Tracker, said in an interview with Drilled News. “Texas has over 400,000 wells. California over 100,000 wells. Pennsylvania, over 100,000 wells. Kansas, over 90,000. Ohio, over 90,000. New Mexico, over 50,000. In North Dakota, over 25,000.”

“So, we’re talking numbers that are in the billions. For some states they’re going to be in the tens of billions,” he said.

Reuters estimates that at the current pace of spending to clean up abandoned wells, it would take several thousand years to work through the backlog.

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