Yves here. This is an important backgrounder on a topic that is likely to become more and more important: who gets stuck with the cost of decommissioning old oil wells? And what happens when they are simply abandoned?
By Nick Cunningham an independent journalist, covering oil and gas, energy and environmental policy, and international politics, based in Portland, Oregon. Originally published at OilPrice
- The number of non-operational orphaned wells could skyrocket at a time when the oil industry is in danger of entering structural decline
- North Dakota regulators are currently seeking federal money to pay for hundreds of newly orphaned wells
- The actual cost of plugging old wells is often way higher than is typically cited on company balance sheets.
Plugging old oil and gas wells may cost as much as ten times what the industry routinely estimates, according to a new report from Carbon Tracker. As oil and gas companies walk away from their “stranded liabilities,” the public may be left to pick up the tab. When oil and gas companies are finished with old wells, they are supposed to close them and pay for the cleanup. However, often the wells are abandoned, or “orphaned,” left idled but not plugged up for good. In many cases, these wells are dumped onto local and state governments, leaving taxpayers to pay for the cleanup.
The problem is not new, however. “Bonding” for oil and gas wells have been around for many years, but the actual requirements are lax almost everywhere. Companies are not required to pay the full cleanup costs upfront, the logic often being that they will earn money as they go, better equipping them to pay for cleanup later on.
But when it comes time to pay, many years later, some companies do not have the money to meet their obligations. In fact, more than 200 North American oil and gas companies have filed for bankruptcy since 2015, a rate of failure that is only accelerating with the recent oil market meltdown.
“Low bonding levels were an acceptable risk, as long as the vast majority of oil companies remained good credit risks,” Carbon Tracker said in its report.
However, “[s]tates have inadvertently created a moral hazard: it’s always in the operator’s financial interest to delay permanent abandonment of wells as long as possible, often by selling late-life and marginal assets to weaker companies,” Carbon Tracker wrote. “As a predictable result, inventories of largely self-bonded idle wells, some that have been nonoperational for more than 100 years, have ballooned.”
With more and more drillers in financial distress, many more wells will wind up unplugged, leaving the public to deal with the mess. State and local governments may decide to foot the bill and pay for permanent closure, which translates into a significant subsidy for the oil and gas industry. “If instead, they are not plugged, the price will be paid by landowners, citizens, and the environment,” Carbon Tracker warned.
Tens of thousands of oil and gas wells were temporarily shut in following the sharp plunge in prices in March and April due to the coronavirus pandemic. Carbon Tracker says that not all of those wells will be reactivated. “In a two-month time period, we went from zero orphan wells to almost 400,” North Dakota Department of Mineral Resources Director Lynn Helms recently said.
Canada, too, has tens of thousands of orphaned wells with no clear path forward.
There are enormous risks that stem from orphaned wells. A special report from Reuters found that 3.2 million abandoned oil and gas wells together emitted 281 kilotons of methane in 2018, equivalent to the emissions of 16 million barrels of oil, although that is likely a low estimate. More important to individual landowners living nearby, the wells can contaminate groundwater and soil, and emit toxic air emissions. There are also risks of explosions.
Looking out further, the prospect that a large portion of global oil reserves will be left in the ground as demand peaks and begins to decline means that the number of abandoned wells will not only increase, but will be brought forward in time. The fallout from the coronavirus pandemic, according to some experts, may hasten this transition.
The number of non-operational orphaned wells could skyrocket at a time when the oil industry is in danger of entering structural decline. “In short, the industry cannot afford to retire,” Carbon Tracker said.
But that’s not all. Carbon Tracker says that the actual cost of plugging old wells is way higher than is typically cited on company balance sheets. The industry routinely underestimates the cost of plugging old wells, and regulators tend to parrot those estimates.
“The true costs of plugging shale wells may be one of industry’s best kept secrets,” Carbon Tracker said. Instead of the $20,000 to $40,000 per well that is often cited, closing hundreds of thousands of shale wells could actually be an order of magnitude higher – as much as $300,000 per well. In extreme cases, it may even cost $1 million per well. Shale wells are deeper than shallow conventional wells, so the costs are much steeper.
Who is going to pay for all of this? In many cases, it won’t be the industry. North Dakota regulators are currently seeking federal money to pay for hundreds of newly orphaned wells.
“So, just look at the number of operating and idle wells that are out there. The numbers are pretty staggering,” Greg Rogers, Senior Adviser at Carbon Tracker, said in an interview with Drilled News. “Texas has over 400,000 wells. California over 100,000 wells. Pennsylvania, over 100,000 wells. Kansas, over 90,000. Ohio, over 90,000. New Mexico, over 50,000. In North Dakota, over 25,000.”
“So, we’re talking numbers that are in the billions. For some states they’re going to be in the tens of billions,” he said.
Reuters estimates that at the current pace of spending to clean up abandoned wells, it would take several thousand years to work through the backlog.
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Quite a few years ago, when fracking was at its peak popularity I was watching the proceedings of a conference when one very prominent environmental scientist (who largely worked with the industry) was asked what he thought was the biggest environmental issue with fracking. He said straight out that he thought the long term impact of poorly capped wells would dwarf the impact of actual operations.
Its unfortunate that sometimes even people who work in the field think that capping a well is a simple matter of putting a big concrete plug on the wellhead. Unfortunately, its not so simple, as to prevent long term seepage through natural underground channels you have to adequately plug a well right through its length, and most frack wells are at least 5000 metres deep. Thats a lot of plugging. And to make matters worse, its almost impossible to tell when a well is abandoned whether its been properly sealed or not – only the actual operator will really know if the correct amount of sealing cement was placed at each appropriate level. So unless the regulator is actually on site when its going on, a lot of trust is required to be sure the operator has done the job properly. Its a very simple thing to falsify a drill log once the well is topped off.
And one other complication – leaks can sometimes occur not via the drill well, but by other wells in the vicinity – many areas are littered with abandoned wells used for exploration or other purposes. They are often long forgotten with no surviving drill logs, but can become conduits for hydrocarbons into the environment even if the actual production well has been adequately capped.
The Geo around the the concrete pipe erodes due to disturbance regardless of initial or post mitigation, landowners will be stuck with the bill.
What makes me think it will be the same story with decommissioned nuclear power stations and the long-term disposal of their waste?
Hanford is instructive. The contractor for the cleanup is Bechtel. They’ve been at it for decades’ coming up against things they didn’t expect; things they can’t handle with any efficiency. Baby steps almost. Their timeline estimate is 2050 for completion. And people are now saying that is too optimistic. So for 30 years of military plutonium we have a century of cleanup. Using the most qualified people and all the government’s money.
Hanford was created during WW II and continued into the early years of the Cold War. This was “win at all costs” time, different from modern power plants. The Grand Coulee Dam was built during the Great Depression to provide irrigation waetr and power for the Pacific Northwest. During WW II, all of its power was effectively diverted to Hanford to support its operations.
Hanford has several major contractors. I think the highest paid one is CH2M Hill. Bechtel now is in charge of the vitrifcation plant.
https://www.hanford.gov/page.cfm/Contracting
To find out how much the original contract was, pick a company from the left side and view the original contract, part B. It is an eye-opener for most people.
https://www.hanford.gov/index.cfm?page=713
But in any event, no matter what they claim, Hanford will never be cleaned up – it is just too much of a money generator for corporations to allow all that tax payers money to get away from them.
I used to work in the 300 Area at Hanford in the early 90’s. When I went back about 8 years ago, most of the buildings had been torn down but the ground was still as crapped up as ever. The rubble from tearing down the buildings was just moved to a new site which, of course, will have to be cleaned up later.
Moving crap around is not cleaning it up!
There is an easy solution but it probably won’t happen. Make the driller post a bond to cover the cost of plugging an abandoned well. The drilling industry isn’t alone with passing cost on to taxpayers. Solution from manufacturing is another example. Taxpayers spent billions or more cleaning up polluted sights. A big ons still going on is Hanford. This isa the site that manufactured much of the nuclear material for our weapons. You also have old nuclear power plants. When closed taxpayers pick up a lot of the clean up tab. Coal mining passes much of it’s clean up to taxpayers. PA and WVA. have hundreds of miles of polluted streams that need cleaning up.
Not to be harsh, but that’s not a solution here. That just funds what appears to be a solution. As the article says you can’t tell if a well is actually properly capped. Do you think 100% of these people are actually conscientious enough to do a good job, or do you, like I see a big rush into “well capping” with various levels of actual effort. It would take criminal, not civil, penalties.
And we don’t even need to get to the point of abandonment for them to (family blog) it up bigtime. I think I posted this before.
https://triblive.com/local/westmoreland/groups-call-for-end-to-deep-well-activity-near-beaver-run-reservoir/
The problem is that the governments aren’t willing to require the amount of bonds that would be required to ensure proper capping. As an engineer who deals with drilling, I know that it is possible to cap and seal these wells properly. But it is often not easy, especially modern fracked wells with deliberately created large fractured zones underground.
I will note that modern landfills have largely disappeared from the headlines and a major reason is that RCRA Subtitles C & D require substantial financial assurances to be posted as waste is being placed in the landfills while the regulations also require significant environmental protection features to be built in. If one of these landfills has an operator go bankrupt, there is a good liner system in place and there is a piggy bank with cash (bonds, letters of credit etc.) that the federal or state government can tap to close the landfill. This is the same thing that should be in place for oil and gas wells with good environmental protection during operation and then posted financial assurance for post-operation closure. We need to deal with legacy wells, but there is no reason that legacy wells should continue to be created.
The irony in the article you post is that the geologic units cited are the Marcellus and Utica shales which are named after the towns in Central New York where they outcrop at the ground surface. These same areas were also at the forefront of the fight to ban fracking in NYS. The Town of Dryden which was the first to post a land use ban on fracking is only about 25 miles south of the Town of Marcellus.
similar to the old mines that are all over North America, oil and gas wells are going to be legacy sites that are going to be expensive for future generations to address. The life-cycle cost of these needs to be factored into future approvals. Everybody always burbles about jobs, but the real issue that the governments are loath to address are corrpoate profits. There are a lot of jobs in the environmental protection aspects of these industries, sometimes more than in the actual production, but that bites into corporate revenue and profits. It is likely that there could be almost as many jobs in properly done industries, although there may be fewer mines and wells installed and those would only be ones that would be highly profitable in today’s environment, not marginally profitable.
Thanks for the informative post. I can imagine that the corporate pivot to this issue is not to refer to low-producing wells as “abandoned”, but rather “mothballed” or “furloughed” until the price of oil makes it profitable to pump again. Seems to me they can run away from environmental responsibility indefinitely with this angle.
no offense, rd, but i always find phrases like “generations to come” ridiculously out of touch with the short future we’re most likely to face…
oops – I didn’t see your comment. great minds think alike ;-)
Orange jumpsuits need to be involved at some point.
Forcing oil companies to post bonds before they can drill is simply not enough.
Lest we forget the embodied energy and carbon footprint of the cement / concrete ….
It will be a big government project. One to last almost forever. Cleanup. So now we might want to change our attitude about the national interest – is it in our interest to develop such messes for the future? Clearly we will pay to clean it all up – and it will be a good thing to do – but an ounce of prevention could have been applied at some point. At this point, I will be amazed if the US gov. fails to nationalize the US oil industry because not only can the industry “not afford to retire” its wells; it cannot afford to produce oil at deindustrialized costs and prices. And that too might be a good thing.
This project has already been going on for asbestos. I think the University of Texas at Austin has about 10,000 miles of tunnels with asbestos it is remediating.
Without government subsidies, I don’t think “clean coal”, “freedom molecules”, or other fossil fuels are competitive with renewable energy.
I definitely agree. But it all has to be re-absorbed into the body. So to speak.
Privateer the profits
Socialize the costs
MMT to the rescue.
yes.
Indeed. Socialize the losses. (And the losses include health.) The technicalities of capping oil wells is over my head, but the profiteering that may follow is not. Years ago as a very young lawyer in training, one of our clients was Aerojet. All I can recall was denial of any environmental issues, and then whammo. It’s an EPA Superfund site that’s still an amazing mess. I appreciate learning about abandoned wells. Like under reserved self insurance, the cleanup bond part doesn’t surprise me.
The majority of wells will not be plugged, nor will much of any mitigation take place. Instead, large surface areas will become “national sacrifice zones”. See the Hanford Site in Washington state for an example of the huge mess created by the energy industry.
It wasn’t the energy industry that screwed up Hanford. It was Manhattan Project and early Cold War nuclear weapons that screwed it up.
Department of Energy is in charge of Hanford because they inherited the whole nuclear weapons program for the US other than final delivery to the overseas customer by air mail. See Michael Lewis “The Fifth Risk”.
The Trump appointees were baffled when they discovered that the Department of Energy had little to do with the energy industry and the Department of Commerce dealt mainly with data instead of business transactions and treaties.
Why the heck should government care about this? If they have a good business case, presumably they can get financing and investment to cover a proper bond? If not, why not? And why should government assume they’ll earn enough money to cover the rest of the bond if investors are demonstrating the opposite opinion?
This would seem like either race-to-the-bottom style competition for jobs or outright corruption. Try walking into a bank and suggesting that your home loan does not need to be secured against the property because you’ll earn money as you go, and see how far you get.
““So, we’re talking numbers that are in the billions. For some states they’re going to be in the tens of billions,” he said.”
But the numbers listed, in most of the big oil and gas states, total about 855,000. And no state is listed as more than 100,000. So are there really 10 to more than 100 times the numbers cited in some states?