Colorado oil and gas regulators looking to avoid a rash of abandoned and unplugged oil and gas wells are proposing to increase financial guarantees by operators for each of their wells — a price tag that could add up to billions of dollars.
The draft financial assurance regulations, released by the Colorado Oil and Gas Conservation Commission, cover all 50,000 oil and gas wells in the state and in general require a full-cost of plugging financial guarantee of $78,000 for each of a company’s wells.
The rules, however, take particular aim at what the commission sees as the greatest risk of abandonment: the state’s inactive wells — those shut-in, temporarily abandoned or producing less than a barrel of oil a day, as well as low-producing wells yielding less than than five barrels a day.
At the heart of the issue is the question of how great a risk these wells pose and whether there are adequate funds to insure sites are clean and wells are plugged. The industry maintains that the orphan well problem is small in Colorado.
“The goal should be for the oil and gas industry to be cleaning up its mess and that the taxpayer isn’t on the hook,” said Andrew Forkes-Gudmunson, deputy director of the League of Oil and Gas Impacted Coloradans, a community group. “The aim is to avoid some orphan well crisis down the road.”
The industry, however, points to the fact that over decades a total of 579 wells have been orphaned and for the last five years companies have plugged more wells than they have drilled. For example, 2,087 were drilled between 2019 and 2020 and 3,488 were plugged.
“It is critical that the conversation moving forward is rooted in an important reality: the risk of new orphan wells in Colorado is extremely low,” API-Colorado, an industry trade group, said in a statement.
Nevertheless, the COGCC database indicates that there may be tens of thousands inactive and low producing wells..
“Some wells produce so little as to be functionally inactive,” the commission said in its statement on the new rules — a sign that those wells may be near the end of their productive lives.
It is in this group of inactive and low-producing wells the commission sees the greatest threat of wells being abandoned — orphaned — and left for the state to plug.
Colorado currently has 535 orphan-well sites to remediate with 239 wells to plug. A well is classified as orphan when no owner, operator, or responsible party is capable of covering the cost of plugging, reclamation and remediation.
The rules would also charge companies an annual fee of $200 a well to raise $10 million a year to deal with orphan wells.
The COGCC was directed to upgrade its financial assurance rules by Senate Bill 181, which in 2019 made the mission of the commission to protect public health, safety and welfare.
Not all inactive wells are at the end of their lives. Some wells are shut-in or temporarily abandoned when oil prices are low or for maintenance or when a large, new well in the area is being hydrofractured or fracked.
There are 8,458 shut-in wells, which could be put back in production, and 2,903 temporarily abandoned wells, where key equipment has been removed from the site, according to COGCC data.
The rules would give companies six months to return the wells to production, increase the bonds on the wells to full-cost or plug them. Operators would have to supply the commission with a list of wells to be plugged and would have three years to complete the task.
Under present bonding requirements, an operator has to post a bond of $10,000 for each well shallower than 3,000 feet and $20,000 for wells deeper than 3,000 feet or a statewide blanket bond of $60,000 for fewer than 100 wells or $100,000 for 100 or more wells.
The commission created an additional category of “low-producing” wells.
“Once you get to inactive status it may be too late,” Julie Murphy, the commission’s executive director, said during a Zoom meeting Wednesday, the category was a “way to keep an eye on” potentially problematic wells.
For operators with low-producing wells the financial requirements would depend on how many of those wells they have.
An operator with more than 60% of its wells producing less than five barrels a day falls into “Tier 3,” and would have to start paying into a fund over the next 10 years to cover each well at full-cost bonding, $78,000.
“Tier 3 operators may have the highest risk of orphaning their wells, because they have a higher percentage of low producing wells that generate relatively little revenue, and they are plugging a relatively low percentage of their wells,” the commission said.
Those companies below that threshold fall into two categories where they can get blanket bonds for all their wells, with the top category, Tier 1, paying 50% less than Tier 2.
Sam Bradley, a spokesman for the Small Operator Society, representing 65 small oil companies, said the regulations will put small operators out of business, creating a significant number of orphan wells.
“Repeatedly over the last two years we cautioned the commission that this approach would create orphan wells if they weren’t careful, and they completely ignored us,” Bradley said.
Impetro Resources, Bradley’s company, operates 100 wells that each produce less than 15 barrels of oil a day – so-called stripper wells. This includes 15 wells producing less than 2 barrels a day, and 61 producing less than five barrels a day.
That puts Bradley into Tier 3 and would require full bonding at $7.8 million for his operation. If he had two fewer low-producing wells he would be in Tier 2 and his financial obligation would be $1.8 million, he said.
“This is unfair,” he said. “Individual wells don’t go bankrupt, operators go bankrupt.”
The rules would also require full-cost bonding of all wells transferred between two operators and a commission review of any deal in which 30% or more of the wells are low-producing.
“Based on the commission’s experience, transactions in which a large number of low producing wells are transferred are likely to result in higher risk to the public of the new operator orphaning the wells,” the commission said.
Jeremy Nichols, climate and energy program director for the environmental group WildEarth Guardians, called the proposed rules “a mixed bag.”
While “clearly improving things to a degree,” Nichols said the rules are “overly complicated and don’t go far enough in getting industry to pony up and clean up its messes.”
The proposed rules are scheduled for 17 days of hearings in September and October with the regulations going into effect in January.
“We’re hopeful we can end up with a framework that remedies our state’s last orphan wells without punishing the committed companies who are operating responsibly,” Dan Haley, president of the Colorado Oil and Gas Association, a trade group, said in a statement.