Wyoming is a national leader in many aspects of oil and gas industry management, but recent developments threaten to undermine our effective and conservative approach.
Currently we require financial assurance that wells are drilled to the highest safety standards and that they will be competently plugged, abandoned and site-reclaimed when they no longer produce. The Wyoming Oil and Gas Conservation Commission also requires modest bonds to assure operators clean up and plug wells when their useful lives are over. And we require when a well has not produced for three years (is “idle”) the operator must provide a bond (like an insurance policy or a cash guarantee) of $10 per foot, which can be used by the state to properly plug and reclaim the well if the operator does not do so.
Without these bonds or the recently eliminated Conservation Tax that helped fund the WOGCC’s work, Wyoming taxpayers would be liable for paying for this work on private (“fee”) and state mineral deposits. There are many thousands of such wells, and tens of thousands of additional permitted wells not yet drilled.
This system has worked reasonably well over the years. WOGCC data show that, from 1997 through July 2016, the commission spent $13.9 million to plug 1,710 orphan wells. But only $3.5 million of this came from forfeited operator bonds, and the commission was forced to make up the extra $10.4 million from the Conservation Tax fund.
As of May 7 this year, the WOGCC website showed 2,898 orphan wells remain unplugged. Not shown are the depths of those wells, total estimated cost of plugging them or the total value of forfeited bonds available to pay for the work. If we assume these wells average 2,000 feet deep and cost $10 per foot to plug and reclaim, the state’s liability will approach $58 million, less the value of any forfeited bonds. If the wells are deeper, the cost will be greater.
Fiscal prudence demands that Wyoming maintain bonding of idle oil and gas wells. In the past, the majority of orphaned wells were shallow (2,000 feet or less) coalbed methane wells on small pads. Today, horizontal oil wells range from 10,000 to 15,000 feet deep, with pads up to 40 acres, and could cost exponentially more to plug and reclaim. (The WOGCC has spent between $500,000 and $1 million to plug individual deep wells.)
More daunting, today’s record low fossil energy prices and the current financial turmoil in the industry almost surely presage an avalanche of un-bonded idle wells becoming orphans.
Moreover, chaotic energy markets and COVID-19 disruption are threatening Wyoming’s conservative approach to risk management. First, the WOGCC has reduced the Conservation Tax to 0 mils. Second, there is an ongoing campaign by a publically funded state-industry organization, the Enhanced Oil Recovery Institute, to essentially eliminate idle well bonding requirements, and to severely limit the efficacy of our underlying well bonding program.
If idle well bonding were to be removed at this time of severely reduced state revenues, it is unclear how WOGCC would begin to fund its liability to plug the nearly 2,900 orphan wells already on the books, not to mention additional wells being shut in and orphaned each week.
These idle and orphan wells are primarily on private surface — owned mostly by Wyoming citizens, taxpayers and voters. These landowners are burdened with the damages caused by idle or orphaned wells. They degrade and devalue property, provide a breeding ground for noxious weeds and threaten groundwater. How will the WOGCC or the legislature address this responsibility if industry is no longer required to provide bonds?
Essentially, industry is trying to finance production of oil and gas into a down market by using the cash and credit that now insures the state against having to pay to clean up orphan wells. This is happening at a time when other jurisdictions — from Saudi Arabia to Russia to Texas — are considering curtailing production. Industry is asking for this break at a time when ExxonMobil is shutting down 75% of its Permian Basin rigs, and ConocoPhillips is reducing production by 460,000 barrels a day. Yet Wyoming is being asked to finance sustained production by shouldering more risk.
Warren Buffett is fond of saying, “When the tide goes out you see who’s swimming naked.” If there ever was a time Wyoming should not expose our state to the risk of un-bonded wells being idled or abandoned, that time is now.