Industry guarantees cover only 1% of estimated costs.
NEW YORK, October 1 – By failing to require that oil and gas companies provide sufficient financial assurance when drilling new wells, U.S. state and federal regulators have put taxpayers at risk of $280 billion in cleanup costs, just as wells are closing prematurely due to falling demand and prices. The decline in prices is driven by the energy transition and the pandemic.
This is the key finding in Carbon Tracker’s new report, Billion Dollar Orphans: Why millions of oil and gas wells could become wards of the state. The report examines the financial risk facing taxpayers in each of the major U.S. oil producing states as industry defaults grow.
Orphan wells are non-producing wells that have no financially viable operator capable of plugging them. When a company cannot pay, responsibility shifts to minimally funded state orphan well programs and then to taxpayers. To assure performance of end-of-life obligations regulators require companies to obtain “surety” bonds. Unfortunately, bonds currently cover roughly 1% of the closure costs; operator defaults may put taxpayers are at risk of picking up costs in excess of available bonds.
“For the first time, regulators, taxpayers and investors can see the scale of environmental debt burdening the U.S. oil industry as it heads into the energy transition.”
Said Robert Schuwerk, Executive Director of Carbon Tracker North America and report co-author.
The report estimates the total undiscounted cost to retire existing onshore wells for the top oil producing states:
- Texas $117 billion
- Oklahoma $31 billion
- Pennsylvania $15 billion
- Ohio $13 billion
- New Mexico $10 billion
- Louisiana $10 billion
- Wyoming $10 billion
- North Dakota $8 billion
- West Virginia $8 billion
- California $7 billion
- Colorado $7 billion
- Utah $5 billion
- Alaska $1 billion
This dire situation is a result of (a) outdated and unrealistic estimates of well closure costs; (b) single-well bonds with low face amounts relative to estimated costs; and (c) “blanket” bonds that reduce the bond amount per well for large operators.
The risk is more pronounced for unconventional shale drilling than older conventional wells which have been used to estimate costs to date. Shale production has more wells, with greater depths, and shorter lifespans. The new math of shale production implies higher well closure costs sooner, raising the chances of operator default.
States can lower their orphan well liability risk and protect taxpayers by demanding higher bond rates and forcing companies to plug long-inactive “zombie” wells. These actions will shift responsibility for oilfield cleanup costs to industry and also position states to qualify for U.S. federal aid.
“By continuing to extend free unsecured credit for oilfield closure liabilities, states are subsidizing oil and gas to the detriment of their citizens, the environment, and the competitiveness of renewable energy needed to combat climate change.”
Said Greg Rogers, Senior Advisor to Carbon Tracker, co-author of the report.
The report estimated closure costs using well data from Enverus and a depth-based exponential cost function that produces a modeled cost of $300,000 to plug a 10,000-foot modern shale well. This contrasts with some industry and regulatory projections that apply a flat cost of $30,000 per well, regardless of depth.
This is the second in a series of reports. The first piece, It’s Closing Time, explained how industry has not set aside the resources to meet their AROs.
Once the embargo lifts the report can be downloaded here: https://carbontracker.org/reports/billion-dollar-orphans/
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About Carbon Tracker
The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org