Trying to balance a mandate to ensure the state is not stuck with abandoned oil and gas wells against the financial needs of the industry, Colorado regulators have issued a revised plan that has buoyed operators and left environmentalists in despair.
Gone from the Colorado Oil and Gas Conservation Commission’s initial draft rule for financial assurance is a set dollar-value for plugging each of the state’s 52,000 wells. And gone are definitions of inactive and low-producing wells, seen as key metrics for assessing the risk of orphan wells in the state.
In their place, plugging fees will be determined by operators based on “demonstrated” costs, blanket bonds would likely cover tens of thousands of wells and there is a new and looser definition of inactive wells.
It is the “inactive” designation that under the rules requires a company to take action to plug a well or put up added financial assurances that it will be plugged.
“The rules have taken a few steps forward,” said Dan Haley, CEO of the Colorado Oil and Gas Association, an industry trade group. “They remain very complex and have a way to go to avoid unintended consequences and higher costs.”
“The goal ought to be to not put people out of business and to bring low performers into compliance,” he added.
The response from environmental and community groups, however, has been one of dismay.
“It seems the commission gathered a whole bunch of data and got scared and retreated,” said Andrew Forkes-Gudmundson, deputy director of the League of Oil and Gas Impacted Coloradans, a nonprofit community group.
“They realized that the oil and gas industry is in a significantly weaker condition than they thought it was and that even modest financial assurance reform would be unattainable for the industry,” Forkes-Gudmundson said.
“Take this second draft and throw it in a lake of fire”
Kate Merlin, an attorney for the environmental group WildEarth Guardians, was so infuriated that in written comments to the commission she said of the proposed rules: “At this point, why have any financial assurances at all? Why not just buy them each a pony and call it a day?”
Merlin ended her comments urging the commission to “take this second draft and throw it in a lake of fire.”
The COGCC was charged with reviewing and increasing financial assurances for oil and gas companies in Senate Bill 181, the 2019 law that overhauled state oil and gas regulations and changed the commission’s mission from promoting fossil fuel development to protecting public health, safety and welfare.
“This rulemaking is particularly difficult,” COGCC director Julie Murphy said. There is “a lot more policy,” she said, than in issuing a rule for how much cement to use in drilling a well or how to do a well-integrity test.
The underlying issue is at what level of output wells and operators — particularly small companies that make up the bulk of the producers, though not the production — are profitable.
Industry officials maintain that many oil and gas wells, even at very low production, can be profitable for a small operator and that the requirements in the initial draft were too burdensome and could have actually left the state with more orphan wells to plug.
More than half of the state’s 52,000 wells are so-called stripper wells that produce no more than 15 barrels or oil or 90,000 cubic feet of gas a day.
“Don’t discriminate against a smaller operator,” said Carrie Hackenberger, associate director of API-Colorado, an industry trade group. “The rules have to account for differences in business models … How do we go about that? That is the line the commission is trying to walk.”
The commission staff is trying to balance the need for some level of financial assurance against the fact that many of the smaller companies live on cash flow and thin margins.
“If the state required $30,000 a well bond, I’d go out of business and the state would end up with 100 orphan wells,” said Sam Bradley, the owner of Impetro Resources which has 100 stripper wells on the Eastern Plains and who is also spokesman for the Small Operator Society, which represents 65 producers.
That is the point, say community and environmental groups. They call the business model a “shell game,” with larger operators transferring their less productive wells to small companies with limited resources rather than plugging them.
The companies then will transfer wells among themselves, trying to consolidate and maximize their positions, or just off-load wells again rather than plug them. In 2020, more than 9,000 wells changed hands among operating companies – almost a fifth of all the wells in the state, according to commission data.
Colorado’s orphan well count doubled on Oct. 6
Yet Colorado has had few orphan wells – 579 in all, compared with current estimates of 8,800 in Pennsylvania and 6,200 in Texas. At the start of October, there were 239 wells on the COGCC’s orphan well list that needed plugging and 535 orphan well sites needing remediation.
“It’s a pretty small problem if you just have 239 wells,” said Dave Kulmann, a COGA consultant. “You want to remedy the situation without being punitive.”
But on Oct. 6, the number of wells on the state’s orphan well list nearly doubled as the commission voted to seize about 200 wells from five defunct or non-responsive operators.
The largest portion of those wells – 157 – are owned by San Antonio-based PRC Operating LLC, which had not responded to violation notices for two years and had at least one well found, on inspection, to be venting gas.
The PRC wells are in the Adena oil field, south of Fort Morgan, which was first developed by the Union Oil Co. in the 1950s. PRC’s wells, many of which date to 1954, have changed hands at least four times over the years.
The commission also claimed PRC’s $535,000 in bonds, which comes to $3,400 per well. The COGCC calculated that its average cost to plug an orphan well is $92,000, although operators say old, shallow wells can be plugged for a quarter of that.
The orphan well list is poised to grow even more. “There will probably be a few more of these matters coming through,” Murphy told the commission.
“We have a huge problem on our hands and there is not an easy solution because it was a problem that was 70 years in the making,” said Matt Sura, an attorney representing environmental groups in the financial assurance proceedings.
There remains, however, a debate over precisely how big the orphan well risk is in Colorado. Industry points to the fact that over the last five years, more wells have been plugged than drilled, with 1.6 wells plugged for each of the 2,087 drilled in the state between 2019 and 2020.
In its first draft rule the commission staff identified an inactive well as one that produced less than the equivalent of one barrel of oil a day (BOE) and a low-producing well as one yielding less than five barrels a day. This was seen as the at-risk population.
In 2020, there were 17,196 inactive wells, under this definition, including 9,585 wells that produced no oil or gas at all. There were another 8,538 low-producing wells, according to state data. Together they added up to almost half of all the wells.
That was a misreading of the economic viability of many of these assets, said Bradley, he well owner and spokesman for the Small Operator Society. “I thought 2 BOE was the cutoff, but some of my members are telling me, ‘Sam, we can make money at less than 2 BOE,’ ” he said.
In the revised draft, an inactive well is one that hasn’t been in production, that is turned on, for 90 days out of the last 365 days. There is no set amount of oil or gas it has to produce.
Monthly tax reporting gives COGCC a grip on which wells are producing
“Everything [in the regulations] flows from the definition of inactive well,” said Beau Kiklis, public lands advocate for the environmental group Conservation Colorado. “There is no clarity on what production is. It allows for gamesmanship and for the industry to continue with business as usual.”
Murphy said that every operator has to submit production reports every month, for tax purposes, and that gives the commission a good handle on each operator and each well. After a critical report from the state auditor that noted the failure of many companies to file their reports, the reporting system has been tightened, she said.
Still, a 2018 commission task force report cautioned that some operators have maintained “active” status for wells through the ploy of “selling past production from leasehold tank inventory or by ‘swabbing’ the well to extract and sell a small amount of fluid product each year.”
About a third of the wells in the state still qualify as inactive under the new definition, Murphy said.
There are other proposed changes to the rules, which depending upon one’s viewpoint provide flexibility or weaken oversight.
“The fundamental change is a shift in focus to the operator’s entire portfolio or the portfolio of a transaction rather than looking at an individual well at a point in time,” Murphy said.
The initial draft rules, issued in June, started with a base requirement of a financial guarantee, a bond or other financial instrument, for each well of $78,000.
The draft also required operators to get idle wells – those that have been shut-in or temporarily abandoned – back in production in six months, increase their bonds or have them plugged within three years.
In place of individual bonds, an operator could post a blanket bond, offered in two tiers. Bonds in Tier I, for top performing companies, were 50% cheaper than for Tier II companies.
Operators with more than 60% of their wells producing less than five barrels a day, Tier 3 companies, would have to start paying into a fund for the next 10 years to cover each well at full-cost bonding.
“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.
Under the revised rules the financial assurance per well would be set by the driller, with commission approval, based on “demonstrated cost” of plugging.
The revisions get rid of the low-producing well definition and add a new one for “out-of-service” wells. These are put on a list to be plugged within three years. If a company puts 50% or more of its inactive wells on its out-of-service list it has until 2030 to complete the job.
Once a well is on the out-of-service list it is removed from the count of inactive wells a company has.
For operators such as Noble Energy, which has an active drilling program, more than 1,700 inactive wells and an ongoing plugging program that in four years has plugged 2,100 wells, according to the company, the proposed rule change fits in with their business activities.
“The out-of-service component is one our operators are very supportive of,” API-Colorado’s Hackenberg said.
Industry has plugged 46,000 wells in Colorado
Environmentalists voice concern, however, that like the new inactive-well definition, it could be a way to game the system. “They are just kicking the can down the road, avoiding the problem,” said Forkes-Gudmundson.
The rules keep the tiers for blanket bonds. An operator with 100 wells qualifying for Tier 1 would have to put up $500,000 in bonds. If the company fell into Tier 2 it would have to provide $1.5 million in bonding.
The draft adds a fourth tier for an operator who can’t manage to comply with any of the tiered requirements allowing it to come before the commission with an alternative plan.
The draft, however, loosens the requirements for qualifying for Tier 1.
An analysis of companies and their well production by WildEarth Guardians’ Merlin, found that 206 of the 301 active operators in the state, accounting for almost 90% of all the wells, would qualify for Tier 1.
“What’s the point of even having tiers?” Merlin asked.
The rule would also raise $10 million a year for the state’s orphan well fund by charging a fee of $200 for each well a company owns.
Small operators own the bulk of the wells and so would be major contributors to the fund creating a backstop for plugging their wells regardless of the size of their bonds, Bradley said. Impetro Resources has posted about $85,000 in bonds for its 100 wells, according to state data.
Another draft of the rules will be issued in December before the commission is set to hold hearings early next year, Murphy said. “We can continue to review and refine them. They are more rigorous than the ones we have in place,” she said. “There is a lot of time to refine this before we get to the end of January.”
A goal of the rules, Murphy said, should be to incentivize the industry to plug wells. “The industry has plugged 46,000 wells in the state of Colorado,” she said.
The environmental community remains unassuaged. “It’s hard for me to talk about these rules without swearing like a sailor,” said Kate Christensen, oil and gas campaign coordinator for 350 Colorado, an environmental group. “Our position is that you need single-well financial assurance for every well in the state. If you build an off ramp for a regulation, the industry is just going to go racing down it.”