Colorado oil and gas regulators Tuesday adopted complex financial assurance rules aimed at guaranteeing there is enough money to properly plug all the wells in the state — especially the ones that are low-producing or left orphaned by defunct drillers.
The rules come after months of hearings that pitted environmental and community groups that wanted financial guarantees for every well, against the industry, which warned that too heavy a financial burden would end-up driving operators out of business and create more orphan wells.
In the end, the commissioners said they had come up with a comprehensive rule overhaul that reduces the risk to the state.
“I think it creates a robust orphan well funding mechanism paid for by industry. I think it is protective of the taxpayers of the state, and really sets the standard for thoughtful and responsible oil and gas development,” said Commissioner John Messner, who called the rules a “paradigm shift” that could serve as a model nationwide.
Environmental groups, however, said the complexity of the rules make it impossible to evaluate how effective the new regulations will be.
“These rules are extraordinarily complicated,” said Michael Freeman, an Earthjustice attorney representing environmental and community groups in the commission proceedings. “Virtually every rule has exceptions and off ramps that make it unclear whether operators will fully comply. Colorado could be better off in a decade or in the same position it is now.”
Colorado has relatively few orphaned wells, about 276 documented in 2020 according to an Interstate Oil & Gas Compact Commission report. The report estimated California had at least 2,777 orphan wells that year, and Pennsylvania, 27,972.
There are, however, more than 20,000 low-producing wells in Colorado yielding less than the equivalent of two barrels a day of oil (BOE), a level considered uneconomical to operate and at risk in some cases of being abandoned.
Environmental groups call these zombie wells. “This is a problem that has been years in the making,” said Kate Merlin, an attorney with the environmental group WildEarth Guardians.
The oil and gas commission was mandated to revise the financial assurance rules by Senate Bill 181, the 2019 law that changed the commission’s mission from promoting oil and gas development to protecting public health, safety and welfare and the environment.
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The new rules, some 50 pages in all, replace four pages of regulations that generated $276.5 million in plugging and remediation bonds from operators of the state’s 52,000 wells.
It’s unclear by how much that pool of money — the operators’ guarantee that cleanup costs will be covered — will increase with new rules.
“It’s hard to calculate some of the specifics,” commission director Julie Murphy said.
The rules will add an annual well fee intended to raise $10 million a year to fund a state orphan well plugging program that deals with abandoned wells from defunct operators. Orphaned wells in Colorado currently are cleaned up using fines and fees levied on oil and gas operators, and operators’ financial assurance.
So what are the complex rules?
The rules set up different levels of required financial security depending upon the depth of wells, the total number of wells and number of low-producing wells an operator has, and that operator’s financial ability to put up funds.
“These rules are really complicated,” Merlin said. “We really won’t know for months how they are going to play out.”
Commissioner Bill Gonzalez called the rules “an ongoing rock n’ roll mixture” of interrelated elements.
Except for in certain circumstances, financial assurance is required for each individual well.
Wells less than 4,000 feet deep would each need $10,000 in financial assurance in the form of a bond or other financial instrument. Wells between 4,000 and 8,000 feet would need $30,000 in assurance and those deeper than 8,000 feet $40,000.
A surface reclamation bond of $100,000 would be required for each well site.
The rules, however, also set up a complex set of options that oil and gas companies can use to meet their financial assurance:
Option 1 enables high producing operators — those generating more than 60 BOE per well — to post blanket bonds ranging from $12,000 a well if an operator has fewer than 50 wells to $1,500 a well for those with more than 4,000 wells.
Option 2, for moderate producers, allows for per well bonding ranging from $18,000 to $8,000 depending on the number of wells.
Lower producing operators — between 2 and 15 BOE — fall into Option 3. These lower producing operators would have to provide single well assurance — unless the commission approves an alternative amount. They could also contribute annually into a fund, approved by the commission, that would over 10 years cover their plugging costs.
Operators that do not meet Option 3 targets fall into Option 4 and must provide single-well financial assurance unless the COGCC director approves an alternate amount.
Option 5 would be for companies unable to meet the requirements of any of the other options. Gonzalez called it the regulations “relief valve” through which operators could apply for “a bespoke, customized financial assurance plan.”
This option allows an operator to present its financial circumstances and its own plan for the commission for approval.
“The rules give too much discretion to the director and the commission,” Merlin said. “So much depends on implementation because they left themselves so much discretion.”
Option 6, the final alternative, would enable large producers to post $40 million bonds to cover all their operations. That sum is the highest blanket bond requirement nationwide, according to statutes reviewed by the National Conference of State Legislatures at The Colorado Sun’s request.
Operators must currently post a bond for plugging and cleanup of $10,000 or $20,000 per well, or a single blanket bond of $60,000 for four to 100 wells. Operators with 100 wells or more can post a blanket bond of $100,000.
Focus on low-producing wells
The regulations pay particular attention to low-producing wells.
The number of low-producing wells that can be included in the blanket bonds of various options is limited — from 25% for Option 6 to 5% under Option 2. The rest of the low-producing wells need single-well financial assurance.
Operators can get out from under low-producing-well requirements by putting them on an out-of-service list with a date to be plugged within eight years.
The regulations also add greater scrutiny of the transfer of those low-producing wells.
The seller must tell the commission how many low-producing wells and inactive wells — those that have not produced oil or gas for 12 consecutive months — are changing hands, and if any are located within 2,000 feet of certain facilities, such as schools and child care centers.
Before the transfer goes through, both operators must submit a revised financial assurance plan and the buying operator must post the financial assurance.
“There are some good features to these rules, in particular the requirement for larger bonds for lower producing wells and the incentive for operators to plug their old wells,” said Freeman, the Earthjustice attorney.
“They could have been stronger, but this is a dramatic improvement”
State data shows Colorado currently has 414 orphan wells to plug and 815 sites to remediate. Those numbers are up 75% and 49% respectively from July 2021 as the commission has seized wells and clean-up bonds from defunct or non-responsive operators.
It costs on average $82,500 or more to clean up a well in Colorado’s orphaned-well program, according to the commission.
The approval of the new rules comes as the federal government is spending $4.7 billion to help states clean up abandoned oil and gas wells, part of the Biden administration’s infrastructure package passed last November. Colorado could be in line for at least $79 million and has requested $25 million from the initial $1 billion round of grants. Allocations are based in part on oil and gas job losses during the pandemic, and the number and cleanup costs of orphaned wells in each state.
A coalition of 40 towns, cities and counties across Colorado applauded the commission’s rule overhaul saying it would ensure wells are plugged and reclaimed, and help prevent dangerous pollutants from leaking out of abandoned wells. Wells that are not properly cleaned up can leak methane, a powerful greenhouse gas, and pollutants like benzene.
“They could have been stronger, but this is a dramatic improvement,” said Jacob Smith, executive director of the coalition, called Colorado Communities for Climate Action.
Industry groups said the commission had forged a workable set of rules with enough flexibility for operators. Still, they added significant costs.
“By the state’s own calculations, the price to operators is approaching $500 million per year in new regulatory fees. That’s nearly a half billion each year added to the cost of doing business in this state,” said Dan Haley, president of the Colorado Oil and Gas Association.
Lynn Granger, executive director of the American Petroleum Institute Colorado, said the rules are the strictest in the nation while also offering incentives for operators to retire lower producing wells.
“We anticipate that in years to come operators will plug and reclaim thousands of wells at no cost to the state,” she said.