An Orphan Well Memo to Congress: You have Questions? We Have Answers!
By: Megan Milliken Biven & Regan Boychuk
We recently received a set of questions on the escalating American orphan well crisis. These are good questions because they get to the heart of the matter: Why? Who? What? How?
The truth is that the question of orphaned oil and gas wells is confusing. Oil and gas production takes place on private land, state and federal waters, federal and state lands, tribal lands, in downtown Los Angeles, and the Chukchi Sea of Alaska - and the laws and procedures governing the life of an oil and gas well are as diverse and varied as the locales that host this dangerous and polluting activity.
We hope to add some clarity to the conversation.
The bad news is that there is a common through line: based on current law and regulation, orphan wells are inevitable. The good news is that we can create new laws and create new inevitabilities.
1. How are orphaned wells created in the present-day?
The journey of an oil or gas well from generating profit for a private company to plaguing American communities is not one of happenstance. It’s an intentional business practice.
The life cycle of an oil well is dependent upon several variables, but all oil and gas firms base decisions upon Economic Limit (EL). When the operating cost of a well equals the income from the oil or gas coming out of a well, the EL is said to be reached; and then firms decide whether to abandon the well and shut-in production or divest the well and sell to another firm.
Decommissioning represents a liability as opposed to an investment (unless a company needs to fill to drill) and so oil and gas operators prefer to delay or avoid decommissioning entirely. Divestment of older wells to avoid these asset retirement obligations (AROs) is a well recognized and documented industry practice. This is how a large multinational firm knows when to sell an inventory of less producing wells to smaller companies — with the well’s remaining profits going to the new company’s executives and shareholders. Despite draining the remaining profits from these wells, these smaller and less capitalized firms are often unable to pay the full cost to decommission — and so the wells can languish for decades as unplugged and idle wells or the company can play “bankruptcy for profit” and leave the orphan wells to American communities and their governments to clean up.
The oil and gas industry and its political operatives have spent decades crafting regulatory programs that encourage and reward this practice. Everything from the easy threshold to produce oil and gas in the United States, non existent environmental enforcement, plugging extensions, inactive and idle well policies, tax treatment, and finally financial security regimes conspire to produce this outcome. Orphaned oil and gas wells are an inevitable consequence.
2. Are most orphaned wells the legacy of historical oil and gas production?
No. This is a matter of conflating terms and jargon. A legacy well is any previously undiscovered, unreported, or un-permitted historic well. Legacy wells are generally those wells drilled between 1859 when drilling began and the 1950s. For decades, regulations regarding plugging did not exist. But millions of wells have been drilled since the 1950s and new wells are orphaned every day. For instance, since 2005, the Railroad Commission of Texas has plugged 28,596 orphaned wells; but during that same time period, companies orphaned an additional 20,964 wells.
Legacy wells and orphan wells are the same in that they are both “wards of the state.” If there is a leak or a failed plug job on an orphaned well or a legacy well, then it is the local or federal regulator who will need to respond. Under current legal regimes, most American oil and gas wells will become legacy wells.
3. How might current bonding requirements impact or influence the creation of present-day orphaned wells?
The United States would not be facing an escalating orphan well crisis if current state and federal financial security instruments were sufficient. State governments would not be lobbying the federal government for federal dollars if these financial instruments were adequate. Current bonding regimes encourage and create orphaned wells.
Federal and state regulators require a certain amount of “bonding” to protect the public from the risk of an oil and gas company folding. “Bonding” here means buying a surety bond — paying a small amount upfront to an insurance company for a policy that will pay out a larger amount for well cleanup if the company goes bust. Carbon Tracker compared state bonding requirements to the actual costs of decommissioning and abandonment and found that states currently hold just 1% in bonds for the estimated $280 billion in oil and gas liabilities. The New Mexico State Land Office published a report in April of 2021 that estimates the state is holding just $201.42 million in “financial assurances” versus an $8.3 billion total price tag for closure and cleanup of roughly 25,000 wells on state and private lands. The oil and gas industry’s “insurance coverage” for cleanup of its activities on state trust and private lands in New Mexico is a minuscule 2.4%.
Blanket bonds, the practice that allows a company to bundle hundreds of wells into one lump policy, lowers the per well coverage and has exacerbated this shortfall. It’s as if a commercial real estate owner is only required to take out one single insurance policy for all of its properties. No banks holding those mortgages would shoulder that type of risk, and yet that is the precise bargain blanket bonds entail. As a result, oil and gas companies bear no risk, nor cost, nor consequence for not saving for the inevitable. But your local schools and parks do.
But bonding is but one public policy tool appropriate only to a category of wells. For wells beyond their economic limit or legacy wells, increased bonding will do nothing. State and federal regulators’ reluctance to consider instruments such as bankruptcy remote trust funds and industry wide levies have necessarily meant that regular people pick up the tab.
4. Can we expect a certain percentage of idled wells to become abandoned or orphaned?
Yes, we can expect a certain percentage of idled wells to become orphaned. Many states allow companies to leave a non-operating wells to remain “idled” or “inactive” for years or indefinitely. These current rules ensconce and encourage indefinite delay and increase the risks of orphaning. It’s a pro kick the can down the road policy.
Companies know when they are going to pull equipment and staff and shut-in production. Plugging and abandonment should commence and must proceed congruent with wind-down operations. It makes more sense to require plug and abandonment when staff and equipment are still at the well site versus the status quo which encourages a company to pack up, delay for years, then maybe return to cleanup. There is no public benefit from allowing private operators to delay their public obligations. There is only accumulating and compounding risk.
5. What data documents the relationship (if any) between idled and orphaned wells?
An independent data analysis courtesy of the Texas Observer and Grist with support by the Pulitzer Center determined that approximately 12,000 Texas inactive wells are nearly statistically indistinguishable from more than 6,000 already on the state’s orphan well rolls. They predicted that those wells would be orphaned in the next four years. They found that the best metrics to predict whether a well would be orphaned were time since last production and regulatory compliance. The longer a state allows a company to “idle” wells, the more likely they will be orphaned. Patrick Courreges, a spokesperson with Louisiana’s Department of Natural Resources, recently stated that “We know the longer a well stays in that shut-in status, the more likely it’s going to be that way forever and possibly end up with us [to orphan].”
Carbon Tracker noted that because Texas allows operators to delay closure of inactive wells in exchange for additional bonding, operators opt to defer closure indefinitely. The RRC requires a blanket bond in the amount of the estimated cost to plug all of the operator’s inactive wells or $2 million, whichever is less. Carbon Tracker collected inactive well data from the Railroad Commission’s website for the 15 largest operators in Texas and determined that Carbon Tracker’s estimates for P&A costs exceeded the RRC’s estimate by 267%. Both Carbon Tracker’s estimates and the RRC’s in house estimates exceeded $2 million for each operator. The RRC’s Inactive Well policy is a “one-two punch” for risk: 1. Pro-Delay 2. Pay to delay (but the insignificant revenue received intensifies the RRC’s exposure to the liability).
6. What regulatory mechanisms exist to prevent idled wells from becoming orphaned?
Current regulatory mechanisms incentivize indefinite delay and orphaning. The system is functioning as designed with predictable results.
In Louisiana, an oil and gas company can pay a $250 fee to delay plugging and stay on a “shut-in future utility list” rather than pay a low-end $50,000 to plug the well. In fact, the company could pay the small fee for 200 years before reaching that plugging amount. As a tragic consequence, thousands of unplugged wells and associated infrastructure threaten Louisiana parishes, including a shut-in well and tank battery that exploded and killed 14-year-old Zalee Day.
California has allowed 35,000 wells to languish for years, with half of this inventory idled for over a decade. In Colorado, it is cheaper for companies to pay a small idle well bond than to safely plug and abandon their wells, which helps explain why Colorado now has 60,000 unplugged wells. In Texas, the law is such that it is easier for a state regulator to grant a plugging extension than it is to deny one, which is why there are now 148,410 inactive wells across the state. States have huge inventories of unplugged and inactive wells because their laws and regulations are designed to produce huge inventories of unplugged and inactive wells.
The Bureau of Land Management (BLM) also allows oil companies to forestall plugging if the lessee asserts a nebulous and non-binding future “beneficial use” and BLM staff can subjectively approve indefinite temporary abandonments on a case-by-case basis (which is essentially like having no plugging requirement at all!) With a legal mandate to expand production, the agency processes more than 3,500 applications to drill each year; but with weaker rules and capacity to enforce plugging rules, BLM land has on average over 14,000 inactive wells. The GAO identified an additional 1,000 idle wells that had been inactive for 25 years or more.
State and federal regulators can create new regulatory mechanisms and repeal idle well and inactive well policies and repeal all plugging extensions. Regulators can require operators and lessees to report when production is planned to cease at least 6 months prior and require plugging to commence immediately after production has ceased. Oil and gas companies monitor well production decline and depletion rates and they plan accordingly. There is no public benefit to allowing oil and gas companies to delay plugging and abandonment obligations.
In order to successfully implement these reforms, both federal and state regulators will need to increase staff and budgets significantly. As it currently stands, most regulator confirmation and investigation of plugging operations is restricted to a paper audit. Regulators require significant staffing and budget increases to confirm plugging adequacy and status of wells.
7. How might a fee on idle wells potentially prevent additional wells from becoming abandoned or orphaned?
Unless the fee is set sufficiently high, it will continue to operate as a “pay to delay” fee. Any new fee should function as more stick than carrot and be paired with a repeal of both state and federal production tax credits. As it stands, existing oil and gas production tax law will undermine and counter any efforts to contain the conditions that lead to well orphaning. The government cannot with one hand incentivize orphan wells with tax credits and subsidies, while assuming those liabilities with the other hand.
There are a variety of state level crude oil and natural gas production tax exemptions, direct incentives, and sales tax exemptions that reward marginal production, inactive wells, and ultimately encourage orphaning. For instance, Texas doled out $372.6 million in incentives to oil and gas producers in 2020. Meanwhile, the Railroad Commission of Texas requested $114 million for 2022–2023 to carry out public well plugging and remediation of private orphaned wells. It’s important to understand that these tax incentives directly lower the marginal costs of producers, and recognize that many of these firms would not be in business without these exemptions making up their profit margins. While the low threshold to operate an oil and gas well in American communities increases the likelihood of less scrupulous operators, these tax incentives are an invitation to bad actors, who will be less likely to comply with environmental regulations and more likely to orphan their inventories.
Federal tax law also encourages indefinite delay. For instance, the marginal well production tax credit is particularly beneficial to small well producers, who typically produce limited barrels a day — a category of producers who are most likely to be both high methane emitters and orphan their inventories of wells. The marginal well credit can be carried back for five years and carried forward for 20 years. There is no limitation on the number of wells to claim the credit. Marginal production tax credits subsidize companies at the riskiest phase of production and when regulators should be determining solvency and whether the companies can pay for decommissioning obligations.
8. What factors determine the cost to plug a modern well?
Depth of the well, conventional versus fracturing, whether the well was previously plugged, whether that plug job was sufficient, whether there is fracking activity nearby, proximity to water aquifers, proximity to urban or rural areas, presence of Naturally Occurring Radioactive Materials (NORM), contractor availability, and many other factors.
Carbon Tracker estimated that the average cost to plug an oil and gas well is $140,000 across the country. In 2018, the Governmental Accountability Office (GAO) analyzed data from 13 of the Bureau of Land Management’s (BLM) 33 field offices that manage oil and gas programs, and found the average annual reclamation cost was $267,600, an increase compared to the $171,500 annual average across all BLM offices that GAO reported in 2010.
Commission Shift recently demonstrated that Texas state managed plug and abandonment costs are increasing. In 2015, the Commission paid less than $16,000 each to plug each well, and in 2020 it paid an average of almost $21,000 per well. Commission data shows most wells it plugged were less than 4,000 feet deep, far shallower than most wells being drilled today. Additionally, state managed plugging programs tend to focus on a certain narrow subset of wells; and as a result, the current cost of plugging wells may be a poor indicator of future expense.
In California, the California Council on Science and Technology found that the average per-well cost for capping wells and dismantling associated surface infrastructure can range between $40,000 and $152,000 depending on whether a well is in a rural or urban area.
Exclusive reliance on private contractors also increases costs. When regulators respond to an orphan or legacy well related emergency, both the regulators and affected communities must often wait on approved contractor availability. This creates unnecessary operational inefficiencies and imposes real costs onto stakeholders near these sites. If instead, the government maintained its own trained workforce and equipment to perform this work directly, it could more efficiently plan yearly budgets and schedules, as well as respond to emergencies more nimbly. Instead of costly management and oversight of contractors, governments could create uniform procedures and processes that it perfects in house. While initial capital costs for rigs and equipment would have an initial sticker shock, regulators could retain exclusive use of that equipment and not be forced to respond to ever changing industry rates.
9. What factors determine the cost to plug and reclaim an orphaned well?
Depth of the well, conventional versus fracturing, whether the well was previously plugged, whether that plug job was sufficient, whether there is fracking activity nearby, proximity to water aquifers, presence of Naturally Occurring Radioactive Materials (NORM), contractor availability, and many other factors.
For state or federal managed plugging programs, regulators are often required to outsource and use only private contractors. Contractor management and built-in profit margins for private contractors increase total costs. With arbitrary caps on state orphan well trust funds and limited contractor availability, efforts are prioritized, or put another way — rationed. There are more than 2,000 sites across Texas that are eligible for cleanup using OGRC funds. The Commission’s Oil and Gas Site Remediation program investigates, assesses, and clean-ups approximately 250 abandoned sites a year.
In the Gulf of Mexico, California and Alaskan waters — offshore orphaned wells are more expensive. In 2020, a barge collided with a submerged, unmarked orphan well causing an oil spill in Louisiana’s Barataria Bay. The well spewed a 100-foot-high geyser of natural gas and light crude oil for weeks. Louisiana’s Oilfield Site Restoration program reported that because of the accident, “the program would [only] plug and abandon urgent and high priority scored orphan wells in marine environments that are potential hazards to navigation instead of plugging urgent, high, moderate and low priority orphan wells statewide.” The program office acknowledged that the program realignment would result in a significant decrease of total number of orphan wells plugged and abandoned by the program per fiscal year due to the increased costs associated with this work (from $26,000 to $163,000 per well average). Therefore, the Louisiana Oilfield Site Restoration Program currently does not even address onshore wells, but only those offshore wells that directly interfere with navigation.
10. What factors determine the cost of reclaiming an orphaned well site?
Reclamation is the process of returning a site to its previous state with topsoil and landscaping. Ideally the the full process should proceed as followed:
1. Plug & Abandon the Well
2. Remediate
3. Reclaim
4. Monitor/maintain in perpetuity
The factors determining the cost include: geography, topography, hydrology, duration and depth of drilling, duration of orphaned status, whether there is fracking activity nearby, proximity to water aquifers, proximity to urban or rural areas, presence of Naturally Occurring Radioactive Materials (NORM), contractor availability, and many other factors.
The Railroad Commission of Texas has found that the costs for site assessment and remediation services have increased. Throughout 2020–21, the Commission deferred site remediation cleanup activities for larger cleanup projects, focusing instead on smaller projects. The longer projects are deferred, the more the cost to remediate sites increase.
11. Do wells ever need to be re-plugged?
Yes. More often than you think.
Prior to the 1950s, thousands of wells were left unplugged or ineffectively plugged (e.g., using very little cement). In the 1970s, regulations developed further to focus on environmental protection. According to NPC, “modern regulatory standards in all U.S. jurisdictions require specific provisions for plugging and documenting oil and natural gas wells before they are abandoned. Most wells are still plugged with cement using methods and materials developed in the 1970s.” But even modern plug jobs have an expiration date: cement degrades, salty brine water corrodes pipes, subterranean conditions change, pressure builds, and extreme weather forces extreme conditions onto engineered products with engineered lives.
In a well documented saga between the Antina Cattle Ranch and Chevron, several oil wells plugged in the 1990’s are now blowing out and threatening the future of the ranch. In addition to discovering that some of the wells contain fraudulent plugs (*cardboard* instead of cement), brine water has eaten away well casings and turned them into Swiss cheese. This is not an isolated incident.
12. Are orphaned wells monitored? Are plugged wells monitored?
No, orphaned wells are not monitored. No, plugged wells are not monitored.
In 2018, the Railroad Commission of Texas committed to inspecting every producing oil and gas well in the state at least once every five years. This well count does not include previously abandoned wells or legacy wells which can also require emergency response activities. The Railroad Commission of Texas is made up of just 730 employees and oversees 250,000 miles of pipelines, and monitors upwards to 1,830,493 oil and gas wells of various types and status. There are just 173 inspectors in the oil and gas safety inspection team and 65 inspectors on the pipeline safety team. That’s just one site inspector per 3,856 miles of pipeline and one inspector per an estimated 10,580 wells across the state of Texas. Assuming the Commission’s own estimates “this is over 2,000 inspections per inspector. Assuming 260 workdays per year, each inspector would have to average nearly 8 inspections per day every single day or nearly 1 per hour of every hour worked.”
To revisit the question: orphaned wells and plugged wells are not monitored.
13. What are the economic impacts of orphaned wells (property value, land use, etc.)?
Legion.
A 2020 study found that women who lived close to inactive wells in rural California were more likely to give birth to underweight and preterm babies. A follow-up study in the Eagle Ford producing region of Texas reached a similar conclusion. If an orphan well doesn’t kill your loved ones, then it will most certainly erode your home’s resale value. Assuming that your water is not radioactive and a salted earth does’t sabotage all future use.
14. How many jobs could be created dedicated to plugging and reclaiming the documented (~56,000) orphaned wells?
If the program is restricted to only the IOGCC figures, then the job creation impact will be discrete and limited. For instance, higher-end estimates for a Federal grant program to merely plug orphaned oil wells are estimated to only support 100 jobs in New Mexico. Part of this low employment impact can be explained by the small scope of the program; restricting the efforts to a small set of polluting wells limits job creation potential.
It is estimated the current annual Texas Oil and Gas Well Plugging and Remediation Program provides employment for just 90 to 100 oil field services workers. It requires between 45–50 days to plug an orphaned well with state-managed funds and between 90–105 days to complete a state-managed cleanup. The Texas program plugged 1,477 wells in 2020 and projects to plug 1,400 wells in 2021 and 1,000 wells in 2022.
15. How many jobs could be created dedicated to plugging and reclaiming all undocumented/estimated orphaned wells?
It depends on the true intent and purpose of the program. It depends on how the program defines undocumented. If this definition includes all legacy wells then it would require a significant workforce.
Most proposed federal legislation have sought only to target a narrow slice of derelict wells. We believe a comprehensive program to unwind the massive accumulation of environmental liabilities can sustain more jobs and begin transitioning oilfield communities and decarbonizing our economy.
We are at a fork in the road: we can either continue the status quo, subsidizing oil and gas companies at the expense of workers and communities; or we can change our laws to force companies to pay for their messes and craft a jobs program that utilizes the necessary and needed skills of the displaced oil and gas workforce.
The Abandoned Well Act of 2021 would create the Abandoned Well Administration (AWA) to create a federal capacity and workforce necessary to confront, remediate, and monitor the massive wreckage of the oil and gas industry. It is very clear that existing state and federal programs have been gamed, undermined, understaffed, and under budgeted for decades. They are intentionally outgunned with rules that force them to accommodate industry and absorb its costs.
The AWA is the muscular anecdote to a parasitic industry. The AWA will meet “need with need,” pairing displaced oil and gas workers to the massive undertaking of locating, decommissioning, and monitoring the oil and gas industry’s discarded wreckage. From rig managers to drillers, roughnecks, and roustabouts — each possesses valuable and needed skills to make our communities safer and healthier. We don’t need oil and gas companies. But we do need oil and gas workers. And those AWA paychecks will pay local mortgages, fund local governments and schools, and support real families long after the oil and gas companies have closed up shop.
16. What are the economic benefits to federal funding and support for plugging and reclaiming orphaned wells?
The benefits depend on the mission and purpose of the federal program. Evidence from 2020 stimulus programs suggests that just federal support for plugging and reclaiming orphaned wells has only a substitution effect for routine plugging activity or merely facilitates new drilling activity.
Wyoming’s Energy Rebound Program received $42 million in CARES Act funding, which was distributed to 67 private producers for three activities: completing new drilling, retooling existing wells to boost or extend productivity, and to plug old wells no longer in production. In other words, federal dollars went to companies to drill or plug their own wells. In North Dakota, $62 million in CARES Act funding went to wells with solvent owners instead of truly orphaned wells.
Meanwhile, the Canadian government embarked upon a similar program, dispersing $1 billion in 2020 to provinces to plug wells. An impact report of the program found that “some of the jobs created by the program would have existed without it, and that oil and gas producers [were] using the grant funding to replace activities they would — or should — have performed regardless,” In other words, the program was just another oil and gas subsidy.
Carbon Tracker recently undertook unprecedented analysis of the factors that drive private plug and abandonment trends. The authors found that oil and gas firms were more likely to plug and abandon a well to maintain pressure integrity and avoid “frack hits” when fracking new wells, “The scale of drilling-related plugging, or “drill-filling”, is significant. In other words, operators tend to “fill to drill.”
At best, a program of just federal dollars without significant reforms to state and federal programs will merely replace and subsidize routine plugging; and at worst, will aid and abet new fracking activity, which will in turn, lead to new orphaning.
Would you like to know more?
Do we reward the very same C-Suite ghouls who golden parachuted their way out of the liabilities in the first place? Or do we center the very communities and workers that have powered our nation and born its greatest costs?
It is often said that we must stall the energy transition for the sake of jobs and the economy. But we think this analysis is backwards. If you travelled outside of the beltway and around West Virginia, Louisiana, or New Mexico, you would arrive at the opposite conclusion. We must begin an ambitious, national mobilization so that we can create jobs right now.
Identifying, cataloguing and reducing the risks of oil and gas infrastructure is a precondition for protecting our communities from the escalating threats of the global climate crisis. Oil and gas wells add accelerant to catastrophic wildfires. Abandoned wells and the tangled nests of rusting pipelines and leaking wells undermine coastal restoration projects to protect our coasts from more violent tropical storms. Oil and gas well leaks threaten scant freshwater resources in drought prone regions. If we confront and staff this crisis with the needed resources, not only will we create tens of thousands of good family-sustaining jobs, but we will protect American communities.
There is a policy solution to every single of the identified problems above. We have them ready to go. It’s time to stop listening to the companies and their political servants that created the problem, and listen to those voices ready to solve it.
