Everyone understands that Wyoming is dependent on its oil and gas industry. And since we are in competition with other hydrocarbon-producing states, we need to find ways to attract investment in exploration and production. The worst thing we could do is continue with expensive and unnecessary regulations that drive investment away.
An obvious example is the policy that requires oil and gas operators to post bonds on idle wells. And that’s what made it so peculiar to see an op-ed in the June 2 edition of WyoFile in praise of these bonds. The author, Bob LeResche, claims credentials in energy resources, but he seems to be in over his head when he talks about idle wells.
The fact is that idle wells may still provide recoverable hydrocarbon reserves, and we should not be eager to see them plugged. Mr. LeResche’s defense of Wyoming’s policy is based on the mistaken assumption that every idle well will become orphaned. A 2015 study by Stephanie Joyce, for example, shows that, historically, only 3-4% of idle wells become orphaned. The vast majority of oil and gas operators do not walk away from their wells, leaving them to be plugged at taxpayer expense.
Mr. LeResche’s odd math worsens his defense of Idle Well Bonds. He claims, for example, that the website of the Wyoming Oil and Gas Conservation Commission shows 2,898 unplugged orphan wells. He then assumes the wells average 2,000 feet in depth and will cost $10 per foot to plug. At $20,000 per well, that gives a total cost of nearly $58 million. How, he demands, can the state afford to plug these wells without Idle Well Bond money?
Easily, as it turns out. Mr. LeResche mentions the 1,710 wells that the WOGCC has already plugged (all coal-bed methane) at a cost of $13.9 million, or $8,129 per well. In fact, publicly available records at the WOGCC reveal that at the end of 2019 there were 3,026 orphan wells. Of that total, 2,657 were coal-bed methane, 348 were oil, and 21 were gas. (One operator, a speculator from Minnesota who has since gone out of business, is responsible for 84% of the orphaned oil wells.) These same records show an average depth of 869.5 feet. A 2019 WOGCC summary notes that the state has spent an average of $4.90 per foot to plug orphan wells. Using these actual numbers, plugging all the orphan wells would cost the state under $12.4 million — around a fifth of the $58 million Mr. LeResche estimates.
Worse, none of the Idle Well Bond money can be used for these previously existing orphan wells, since this fund allows plugging only the particular wells for which the bonds are assigned. With a total liability of $12.4 million to plug every current orphan well, and none of the Idle Well Bond Fund available for this purpose, it’s hard to understand why the WOGCC claimed this March to need $158 million in operators’ capital tied up in the Idle Well Bond Fund. Contrary to Mr. LeResche’s description, the fund does not increase state revenue. That money just sits idly, benefitting no one and harming many oil companies.
Even the distinction between idle and orphaned wells is muddled by Mr. LeResche. He claims, for example, that a well which “has not produced for three years” is “idle.” In truth, the policy adopted by the WOGCC is that a well is deemed idle if it has not produced for a period of one year, not three. And despite this policy, operators have cited many instances when the WOGCC has demanded Idle Well Bonds for wells that have been inactive for much less than the one-year threshold. Through it all, the Idle Well Bond Fund sits, unable to be used to plug existing orphaned wells.
We should eliminate the Idle Well Bond policy and replace it with an Orphan Well Fund. There are several options to raise money to create an Orphan Well Fund. In reality, the state has been spending less than $3 million a year on plugging orphan wells. This can be accomplished by means that do not act as a deterrent to oil and gas exploration and production.
One obvious option is to take the $3 million from the annual production taxes already levied on the oil industry. Wyoming has the highest tax on oil production in the United States, with a combined tax burden of 13.4%. Typical royalty payments to mineral owners reduce production revenue by an additional 16.6% — leaving oil companies only around 70% of their production revenue, from which all other costs must be paid. Additional demands, such as the Idle Well Bond policy, make it more difficult for operators, particularly small operators, to survive.
Mr. LeResche ends with an ocean analogy, claiming that the current economic situation in Wyoming has revealed how vulnerable we are: When the tide goes out, you can tell who was swimming naked (a line he attributes to Warren Buffett). If we have to use this kind of clichéd flourish to conclude an op-ed, it would be better to say that the Idle Well Bond policy kills the goose that lays the golden egg.