The US state and federal regulators have put taxpayers at risk of $280 billion in cleanup costs by failing to require that oil and gas companies provide sufficient financial assurance when drilling new wells at a time when they are prematurely closing due to falling demand, according to a new report by UK-based research center, Carbon Tracker, on Thursday
The Carbon Tracker report, Billion Dollar Orphans: Why Millions of Oil and Gas Wells Could Become Wards of the State revealed the existence of 2.6 million unplugged onshore oil and gas wells in the US, with another estimated 1.2 million that are undocumented.
The $280 billion estimate to plug 2.6 million documented onshore wells in the US excludes costs of plugging an additional estimated 1.2 million undocumented onshore wells, the report showed.
The report explained that "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 but the bonds currently cover roughly 1% of the closure costs. Thus, operator defaults may put taxpayers at risk of picking up costs in excess of available bonds, the report showed.
The oil and gas industry is legally obligated to plug and abandon wells, but Carbon Tracker argues in the report that, "by not requiring the savings, states continue to make matters worse. Failing to require bonding gives operators every incentive to spend on drilling more wells or pay investors first whilst pushing closure costs down the road."
- Industry needs to take financial responsibility
Carbon Tracker advised states to act now to protect their citizens and taxpayers as "recent bankruptcies are showing the cracks in this system, as some states have thrown in the towel and allowed debtors to abandon unplugged wells to the state."
The report estimated that Texas ranks first for total undiscounted costs to retire existing onshore wells at $117 billion while Oklahoma follows with $31 billion and Pennsylvania with $15 billion. There are 10 more states facing costs ranging from $13 billion to $1 billion.
Carbon Tracker suggested increasing bond amounts to reflect actual costs so states can shift financial responsibility to the oil and gas industry while simultaneously putting themselves in a position to receive US federal aid.
Robert Schuwerk, executive director of Carbon Tracker North America and report co-author stated that for the first time, regulators, taxpayers and investors can see the scale of environmental debt burdening the US oil industry as it heads into the energy transition.
"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," he noted.
The report also estimated closure costs using well data from leading energy data, software, and insights company, 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.
By Nuran Erkul Kaya