Gov Mead wants additional $3M from industry account to plug orphaned wells

— December 11, 2013

Gov. Matt Mead announced an “aggressive” plan on Tuesday to speed up reclamation of abandoned coal-bed methane gas wells in the Powder River Basin — a costly legacy of a drilling boom that swept through northeast Wyoming from 1997 to 2005.

In his budget recommendation, the governor is asking the legislature to appropriate an additional $3 million toward the state’s effort to plug and reclaim 1,220 wells over the next four years.

The money will come from the state’s existing “conservation tax” mill levy imposed on oil and gas producers. That means the industry itself will pay for the cleanup, but it doesn’t take into account the toll that abandoned facilities impose on land values and agricultural operations.

It’s also likely that the number of abandoned coal-bed methane gas wells in Wyoming will grow far beyond the 1,220 wells targeted in the governor’s plan. Luca Technologies, Inc., and it’s subsidiary, Patriot Energy, have at least 912 idle wells, and they’ve struggled for years to secure the financing needed to maintain the facilities. The state estimates the total cost to plug and reclaim those wells is another $5.9 million. There are another 2,300 idle coal-bed methane gas wells “at risk” of being abandoned, according to the state, adding another $18 million to the total liability.

In laying out this larger picture, Gov. Mead indicates that his plan is intended to fix and accelerate what has been a slow and bungled response to the growing abandoned well problem in the Powder River Basin. The plan includes hiring a special coordinator to oversee the effort, identify priority wells, and a review of the state’s reclamation bonding rules and regulations — all of which will hopefully prevent the abandoned well trend from growing into a full-blown $30 million cleanup.

“Many of the wells that are currently idle will be taken care of by the private operator. We all appreciate the companies that are responsible and we can promote good performance,” Mead said in a prepared statement on Tuesday. “My plan includes active monitoring so we can make adjustments as necessary. It also identifies steps to ensure wells are adequately bonded in the future and do not become the responsibility of the state.”

Jill Morrison, organizer for the landowner advocacy group Powder River Basin Resource Council, has tracked the problem for years, and is frustrated at the state’s long record of granting multiple extensions to companies that fail to meet reclamation bonding and mechanical integrity testing requirements. She said she commends Gov. Mead for taking serious action this week.

“This is a real serious lesson, and we need to learn from it, address it, and prevent something like this from happening in the future. And that means increasing the bonding,” Morrison told WyoFile.

At the onset of the coal-bed methane gas rush in the late 1990s, Morrison and others warned the state that the reclamation bond required of operators was too low — a small fraction of an operator’s actual liability if it were to go bankrupt and walk away from its facilities in the basin. But the state encouraged the booming play with such bravado under the Jim Geringer and Dave Freudenthal administrations that such concerns were often marginalized and portrayed by industry supporters merely as attempts to obstruct the coal-bed methane gas industry.

Unfortunately, Morrison and others were right. The U.S. shale gas revolution drove prices for Powder River Basin coal-bed methane far below cost of production. Big, financially-secure operators in the play sold off large chunks of their marginal properties to smaller companies willing to take a risk, betting they could weather the price slump — all the while never having enough bonding in place to properly reclaim the facilities.

How under-bonded was the industry?

After years of the state’s repeated extensions allowing California-based USA Exploration & Production to meet bonding, reclamation and mechanical integrity testing of its wells in the basin, the Wyoming Oil and Gas Conservation Commission in April finally called-in the company’s reclamation bonds: $154,000. Estimated cost to plug and reclaim the company’s wells: $1.4 million.

“This is the difficulty of being an involved citizen in this state; you raise legitimate questions and you’re marginalized. … The state is set up to serve industry,” Morrison said. “You get marginalized, and in this case you see what happens; the state is left holding the bag and a lot of landowners are left holding the bag.”

Several companies face a similar fate, potentially with similar results to the state’s orphan well account — the account that the state dips into when a company’s bond doesn’t cover its cost to pay for reclamation. Luca and Patriot — the companies with at least 912 idle wells and a $5.9 million unmet reclamation liability — was granted yet another extension by the Wyoming Oil and Gas Conservation Commission on Tuesday. Gov. Mead, who serves on the five-member commission, was among the unanimous yay votes.

Morrison said she’s pleased that Gov. Mead has developed a plan to improve the state’s response to the issue, and said her organization will continue to encourage the state to increase its minimum required reclamation bond. Some policy advocates have suggested that the state borrow a standard from the Mine Safety and Health Administration; require an operator be bonded at 100 percent of cost of reclamation.

That level of bonding is a non-starter for the powerful oil and gas lobby in Wyoming. “(The Petroleum Association of Wyoming) supports (the state) raising the mill levy so they can plug and reclaim well sites as needed,” Petroleum Association of Wyoming executive director Bruce Hinchey told WyoFile. “As has always been done, our companies support using the mill levy which places the burden squarely on the good actor operators who have not gone bankrupt, not the taxpayers via the General Fund.”

However, state officials may ask lawmakers to consider legislation aimed at holding an operator liable for divested assets (state leases) should the new owner not meet the liability. Wyoming Office of State Lands director Bridget Hill is scheduled to discuss draft bill 14LSO-0180 “Restrictions on Leasing State Lands” before the Joint Minerals, Business and Economic Development interim committee on Friday, the second day of the committee’s 2-day hearing in Casper (click here for the full agenda).

Richard Garrett, energy policy analyst and legislative advocate for the Wyoming Outdoor Council, also praised Gov. Mead for putting forth a plan to expand efforts to address abandoned coal-bed methane gas wells.

“We’re thinking of it as a downpayment,” said Garrett.

He noted that until abandoned facilities are fully reclaimed, they remain a potential hazard. He said stakeholders should examine whether the current four-year plan is aggressive enough to meet the potential hazards.

“We believe there needs to be more money spent,” he said. “If the state can’t do this … in a time that makes sense, then industry ought to step up to the plate.”

Wyoming Idle and Orphan Well Draft Plan

Meads Orphan Well Plan (Text)
For more on this topic read these WyoFile stories and reports:

— Wyoming’s multi-million dollar effort to clean up abandoned wells fails to launch — September, 2013

— Aftermath of a Drilling Boom: Wyoming stuck with abandoned gas wells — May, 2013

— Orphaned oil and gas wells on the rise in Wyoming — May, 2013

— Wyoming betting on coal-bed methane comeback despite industry bankruptcies — May, 2012

— CBM: Bugs vs Bankruptcy — December, 2011

— Dustin Bleizeffer is WyoFile editor-in-chief. He has written about Wyoming’s energy industries for 15 years. You can reach him at (307) 577-6069 or (307) 267-3327, or email dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer

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