Six years ago, Colorado began the lengthy process of revising its financial rules for companies that drill for oil and gas. Today, those new rules are active, making Colorado one of the first states to overhaul its financial assurance system for oil and gas operators.
State officials say the updated standards have been a great success. In a 2022 press release, Jeff Robbins, chairman of the Energy and Carbon Management Commission (ECMC), the regulatory body that oversees oil and gas drilling in Colorado, described the standards as “the most robust in the country with by far the highest financial assurance requirements.”
But a new report from Carbon Tracker, a nonprofit climate think tank, raises doubts about whether this optimism is justified. The study’s two co-authors, Dwayne Purvis and Greg Schuwerk, question the efficacy of the reforms, especially since so many of the state’s oil basins are no longer economically viable. Operators are supposed to clean up their own wells, but, according to the report, the rules are not stringent enough to guarantee that this happens.
In addition, many older, low-producing wells are held by companies that are unlikely to be able to pay the full cost of cleanup. When such wells become orphaned, taxpayers risk having to shoulder much of the cleanup cost.
State officials “were right to be worried” when they implemented the reform process, said Purvis, a registered petroleum engineer with decades of experience in the oil and gas industry.
“The conventional sort of reforms that they attempted did not work,” he told High Country News.
“The conventional sort of reforms that they attempted did not work.”
Colorado has nearly 48,000 unplugged oil and gas wells, a number that includes all active wells, as well as those non-producing wells that have yet to be plugged. According to the study, plugging all these wells will cost between $6.8 and $8.5 billion, an estimate that does not include the cost of removing surface equipment and addressing aboveground pollution at many of them. But even in the best-case scenario, the study says that Colorado would have just $654 million on hand in five years to ensure that cleanup occurred. The ECMC declined to comment on the report.
Colorado is not alone in this problem. Many prominent oil states face even larger financial assurance shortfalls. An investigation by ProPublica found that the nation’s top 15 oil states have less than 2% of the estimated cleanup costs set aside.
Lack of sufficient financial assurance often means that vast numbers of wells go unplugged for years. And unplugged wells often spew methane, a potent greenhouse gas, and can leach pollutants and heavy metals into local groundwater.
“For years, environmentalists and public watchdog groups have been warning the state about the billions of dollars in oil and gas cleanup costs being passed invisibly to Colorado taxpayers,” Kate Merlin, a staff attorney with WildEarth Guardians who reviewed the report, said in a statement. “It’s wildly irresponsible how little the state of Colorado has done to address this problem.”
COLORADO’S FINANCIAL ASSURANCE REFORM does increase the amount of money that operators must put forward, most often in the form of bonds, to pay for plugging and reclaiming their wells.
Companies are supposed to perform the cleanup on their own; if they do, they get their bonds back. The bonds, often held by third-party financial institutions, serve as insurance in case a company decides to walk away. When that happens, regulators call on the bonds to pay for cleanup.
For regulators, the challenge is to ensure that operators set aside enough bonding while their wells are still profitable, because by the end of a well’s lifespan, it no longer generates enough money to pay for cleanup.
“Plugging comes due when profitable production ends,” the study authors wrote, but the new rules are still not doing enough to ensure that it takes place.
The study’s most optimistic estimates suggest that Colorado operators will submit less than 10% of the state’s total well cleanup liability by 2029. And the way the new rules are currently enforced is not encouraging.
The study’s most optimistic estimates suggest that Colorado operators will submit less than 10% of the state’s total well cleanup liability by 2029.
Every company active in the state was supposed to submit a plan detailing how it would increase its financial assurance to comply with the new rules. But more than two years after the rules were introduced, 37% of Colorado operators had failed to submit a plan at all, while another 10% offered plans that the ECMC ruled insufficient.
As of June 22, 2024, the ECMC had less financial assurance immediately on hand than it did before the new rules were implemented in April 2022. This is due, in part, to the fact that smaller companies were given extra time to increase their bonds, sometimes as long as 10 or 20 years.
But the study casts doubt on how profitable many of those companies will be in the long term. Colorado ranks in the top 10 producers of both oil and gas nationally, but production is not evenly distributed. Of the state’s nine main basins, only a few are in good shape. The gas wells in the San Juan Basin near Durango remain productive and profitable, with low cleanup costs. And the Denver-Julesburg, the oil field on the plains east and north of Denver, far outstrips the rest of the state in production and in new drilling activity.
Colorado’s three remaining publicly traded oil companies — Chevron, Occidental Petroleum and Civitas Resources — dominate production in the Denver-Julesburg. Operators are profitable there and regularly plug old wells to make room for new ones. Horizontal wells drilled in the Denver-Julesburg Basin in the past 15 years account for less than a quarter of Colorado’s unplugged wells but more than 81% of its and gas production.
But in the rest of the state, the forecast is far less sunny. The horizontal wells drilled in the Denver-Julesburg tend to be newer and more productive. In contrast, the average production for every other basin in the state would qualify as that of a “stripper well.” By definition, stripper wells produce less than 15 barrels of oil per day. They are often economically marginal, close to the end of their productive lives and in need of plugging in the near future.
In these older oil fields, with their minimal production and many idle wells, operators plug fewer than 1% of their wells each year, according to the study. In 2023, for example, only 10 wells were plugged in the Piceance Basin, even though there are more than 16,000 unplugged wells on the Western Slope near Grand Junction. The risk here is concentrated in two large companies, Caerus Oil and Gas and Terra Energy Partners, which own a substantial majority of the basin’s wells. Both are owned by private equity firms.
The study authors conducted a cash-flow analysis of Colorado’s unplugged wells, using production figures, price data and publicly available operating cost estimates. They found that approximately 27,000 wells — more than half of the unplugged wells in the state — were unlikely to generate enough future profit to fund their own cleanup.
“They may continue to operate,” the authors wrote, “but they are likely falling into disrepair and are unlikely to make enough money in the future to change our conclusion that they cannot pay for their decommissioning.”
Co-author Schuwerk, the executive director of Carbon Tracker’s North American office, described Colorado’s oil and gas economy as a tale of the “have’s and have not’s.”
The large companies with healthy cash flows have concentrated their operations in the Denver-Julesburg area. But thousands of economically marginal, low-producing wells are scattered across the rest of the state, especially on the Western slope.
“You have a bunch of legacy operators in mature oil fields that have an inability to pay for the plugging of their wells,” he said.
When operators go bankrupt, the wells become the responsibility of the state — and ultimately of the taxpayers. Colorado currently has just under 1,000 orphan wells, but that figure is set to grow. More than 330 wells from a single company, Omimex Petroleum, will soon be added to the list. And the ECMC faces an ongoing legal fight with KP Kauffman, an operator with more than 1,000 wells. The company’s lawyers have warned that the fines levied against it could force it into bankruptcy, making its wells the responsibility of the state. The company has also filed a lawsuit against the ECMC, challenging the bonding increase required by the new rules.
Schuwerk and Purvis recommend that Colorado draft new bonding rules that reflect the industry’s split between its remaining profitable companies and the operators whose well portfolios are unlikely to pay for cleanup. This would mean major financial assurance increases for the wealthy companies, while the state would have to find ways to obtain whatever bonding it can from the economically marginal companies. But such a rule change would likely require a new law from the state Legislature.
During the process of creating the current rules, the oil and gas industry argued that stronger financial requirements would drive small operators into bankruptcy. The ECMC has begun enforcement proceedings against the more than 60 companies that have not submitted updated financial assurance plans under the new rules.
The authors acknowledged that the stronger bonding rules that they recommend would likely result in some bankruptcies — and thus orphaned wells — but Purvis noted that well plugging and cleanup will inevitably need to be paid for, no matter what.
“The question is, what’s the least painful way to go forward?” he said. “There’s not a solution that doesn’t involve pain.”
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