According to the International Monetary Fund, fossil fuel companies were subsidized globally to the tune of $5.9 trillion in 2020. That’s $11 million a minute!
One way in which the oil and gas industry is subsidized in the U.S. is by being allowed to keep hundreds of thousands of low-producing wells open on their books indefinitely, or even abandon them without capping.
Such wells are dangerous because they tend to leak methane, a greenhouse gas that is 86 times more potent than carbon dioxide. These wells are a potent driver of climate change and health hazards.
Taxpayers are left to deal with the mess. Carbon Tracker estimates that it will take at least $280 billion to properly retire all current U.S. wells.
In Colorado, out of the approximately 52,000 wells on the books at the Colorado Oil and Gas Conservation Commission, 36,930 produce less than the equivalent of 15 barrels of oil a day. Of those, 17,285 produce less than 1 barrel.
The state considers any well that produces less than the equivalent of 15 barrels per day to be a “stripper” well, one of such low production that it is exempt from the usual severance taxes. Overall, then, 71% of Colorado’s wells are strippers.
Carbon Tracker estimates that it will take about $8.3 billion to properly retire all Colorado wells. The Oil and Gas Conservation Commission has required operators to put up just 2% of the estimated plugging costs.
All of which means there is a great danger that their cleanup cost will fall into the lap of taxpayers.
On one hand, operators say they are hanging on to these low-producing wells because they will be profitable in the future. On the other hand, they claim that requiring bonding for these wells will make it uneconomical.
In other words, operators want to make profits without guaranteeing that they will pay for plugging the wells, leaving taxpayers to bear the risk.
Our legislators understood this problem and passed Senate Bill 19-181, explicitly requiring the the Oil and Gas Commission to ensure that operators meet all financial obligations. Unfortunately, the commission staff has posted draft rules that fall considerably short of this goal.
Instead of requiring full-cost bonding for all wells, which is the only surefire way to ensure that operators fulfil their obligations, they have proposed complex rules that, in the vast majority of cases, do not require adequate bonding. The proposed bonding levels are based upon a number of complex tiers, inviting operators to game the system to reduce their obligations.
In an earlier version of the rules, the commission said the average cost for plugging a well was $78,000. Later, they changed the amount to $92,700. Now, they are requiring bonds that provide as little as $1,000, and in many cases do not require any bonding at all. The rules do not define full-cost bonding, nor do they list the criteria that will be used to determine bonding levels in the rare occasions when full bonding will be required.
A particularly disturbing aspect of the rules is that, despite repeated requests by many stakeholders, the Oil and Gas Commission has refused to require full-cost bonding for new wells. This perpetuates the problem and guarantees that the current practice of operators transferring liability to taxpayers will continue indefinitely.
Another problem pertains to transfer of wells between operators. Transferring is one way in which operators avoid paying to retire wells.
In California, for example, Occidental Petroleum spun off a subsidiary called California Resources Corp. to which it transferred 15,300 wells in 2014. The subsidiary borrowed $5 billion from the debt market and paid that money to Occidental. Then, in 2020, California Resources Corp. declared bankruptcy, leaving California taxpayers with a bill of more than $1 billion to clean up the wells. Meanwhile, Occidental walked away with $5 billion and avoided having to pay to retire wells.
One way to prevent this kind of selfish maneuvering by companies is to require operators to put up full-cost bonds when wells are transferred. Unfortunately, Colorado’s proposed rules do not require full-cost bonding in the vast majority of cases.
All in all, the Oil and Conservation Commission staff rules are convoluted, inadequate, ill-defined, and fail to protect public health and the interest of taxpayers. They definitely do not meet the requirements of SB19-181.
Many economically feasible ways to ensure full-cost bonding, such as allowing operators to spread out bonding over several years, have been proposed by several conservation and community groups, but they are not reflected in the staff draft. We hope that the COGCC Commissioners step in, as is their prerogative, and require the staff to promulgate strong rules that compel operators to meet their responsibilities.
As it is, the oil and gas industry does not pay for the costs of pollution and climate change effects such as wildfires, smog, and droughts. It should not be allowed to also dodge the cost of well closure and mitigation.
Ramesh Bhatt, of Boulder, is chair of the Conservation Committee of the Colorado Sierra Club.
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