As the oil market craters and the economy is throttled by the novel coronavirus pandemic, environmental and grassroots groups are worrying about a potential surge in abandoned oil and gas wells, but state regulators maintain that the risk appears to be limited.
The Colorado Oil and Gas Conservation Commission held a meeting Monday to review the status of oil and gas operations in Colorado and regulatory oversight of those activities.
“I want to debunk the myth that operations are not safe during economic downturns,” COGCC Executive Director Jeff Robbins said.
Nevertheless, groups such as Conservation Colorado and the League of Oil and Gas Impacted Coloradans say the state will be ill-prepared — logistically or financially — to cope with an upsurge in abandoned wells.
“The commission does not have sufficient insight into the financial health of operators in the state, and the reports and filings submitted by the operators are not sufficient to give a clear picture of the environmental and public safety risks this market volatility poses for the people of Colorado,” Andrew Forkes-Gudmundson, deputy director of LOGIC, said in an email.
There certainly has been market volatility as the price of oil, first battered in a price war between major producers Saudi Arabia and Russia and then throttled by the pandemic-induced economic recession, has plummeted.
The spot price for West Texas Intermediate crude, the U.S. benchmark, slid from a high of $60.05 a barrel at the end of 2019 to a low of $16 a barrel in April. It closed Monday at $24.65 a barrel. Prices for Colorado oil, because of transportation limitations, are slightly lower.
This has led to widespread cutbacks in investment by operators and concerns of bankruptcy. The first company to file for bankruptcy reorganization was Denver-based Whiting Petroleum Corp. on April 1.
Howard Boignon, COGCC vice chairman and an oil and gas attorney, said industry sources are saying the oil glut has made it hard to find takers for their production and that has led to companies not completing wells and shutting down ones that were recently drilled.
The number of drilling rigs operating in the state has dropped to four on May 4 from 22 at the end of 2019, according to the COGCC.
Notices to drill new wells or hydrofracture a well, to release oil and gas from shale rock, were cut by half between March and April to a little more than 50 for each. In April 2019, there were 160 notices to drill and 186 to frack.
The number of temporarily abandoned wells is also up to 2,049 in April, a 37% increase from April 2019.
The decline in drilling, however, actually poses less of a risk to public health and safety, state regulators told the commission.
“Spills come from flow lines and tanks,” said Mike Leonard, the commission’s field operation manager. “If there is no product or less product moving through them there is less risk.”
Robbins said that despite limitations created by the pandemic, the commission staff has continued to inspect wells.
Inspectors made 4,193 well checks in April and 4,685 inspections in March – an increase of 45% over the inspections made in March and April 2019.
“There is no less scrutiny today than the rigorous oversight that was in place before this pandemic,” Dan Haley, president of the Colorado Oil and Gas Association, a trade group, wrote in a statement to The Sun. “Industry is adhering to this oversight while taking appropriate safety precautions in the field to prevent coronavirus infection.”
Leonard also made the distinction between the different ways an operator stops production. A well can be shut in, which basically means turning off the valves and leaving everything in place so it can quickly be put back into production.
An operator temporarily abandons a well by removing key equipment, making the well incapable of production. Wells also can be drilled but not fracked, leaving them as holes in the ground.
For example, Extraction Oil and Gas Inc., one of the most active drillers on the Front Range, said in its earnings call with analysts Monday that it is releasing its drilling and fracking crews and not drilling any more wells until prices improve. The company also is putting in place a shut-in plan aimed at closing the least productive wells.
The wells that are of greatest concern to environmental and community groups are those that are fully abandoned. Most of these wells are plugged, according to COGCC specifications, by the operators no longer using them.
The number of plugging operations in Colorado in March and April is down about 18% to 485 compared with the same period in 2019.
Leonard said most plugging operations are focused on old vertical wells in areas where new horizontal shale wells are drilled. As new drilling drops, so have plugging activities, he said.
One operator also shut down a plugging crew because members tested positive for COVID-19, the disease caused by the coronavirus, he said.
The bigger concerns of environmentalists and community advocates are the wells that could be left unplugged and abandoned, or orphaned, if an operator goes bankrupt or leaves the state.
There are 275 orphan wells and 422 associated orphan well sites in the state and there is an annual $5 million budget to deal with the sites, according to the COGCC’s annual orphan well report. The average cost of plugging a well is $82,500.
Even with reductions in next year’s budget for the program, as part of the effort to reduce the state’s budget deficit, there will still be about $5 million to spend as a result of money rolled over from previous years, the COGCC said.
Conservation Colorado, in a letter to the commission, noted that the U.S. Energy Information Administration is projecting 2020 to have the largest year-over-year decline in global oil consumption since 1990. “These events will lead to a wave of oil bankruptcies in the coming months,” the group warned.
The commission staff concedes it does not have the capacity to monitor and identify operators that may be at risk. At the end of 2019 there were 42,153 operating active wells in Colorado and 421 operators — but just 40 drillers controlled 90% of the wells, Robbins said.
“COGCC does not have access to operators’ confidential financial information or the fiduciary expertise required to determine whether or not an operator is solvent or insolvent,” the staff said in a white paper.
Robbins said the commission depends upon the monthly production reports submitted by each operator to assess the status of their operations. COGCC also tracks bankruptcy filings and press reports.
“The COGCC was wise to reexamine the pressing issue of orphan wells in our state, a multimillion dollar problem that may only grow due to outside economic pressures and the oil and gas industry’s poor financial decisions from before this public health crisis,” Kelly Nordini, executive director of Conservation Colorado, said in a statement. “Big polluters must be held accountable to the full cost of their business impacts without leaving Coloradans on the hook.”