The Colorado Oil & Gas Compact Commission (COGCC) is considering improvements to its oil and gas bonding regime. These surety bonds make a third party liable to pay a fixed amount to the state if oil and gas operators fail to plug their wells, as they are legally obligated to do.
It is widely acknowledged that existing bond amounts are too low to cover plugging costs. By our estimates, Colorado has financial assurance for only 2% of an estimated $7 billion liability for wells that have already been drilled.
Last year’s oil and gas bankruptcies in Colorado show what happens when the state is financially unsecured—it receives pennies on the dollar, along with more wells to plug.
Industry contends that increasing surety bond requirements will be an onerous financial burden. But ironically, because of blanket bonding, industry only pays pennies on the dollar every year for the financial assurance it provides the state. In Colorado, operators can obtain a state-wide blanket bond for less than 100 wells for $60,000, or a state-wide blanket bond for an unlimited number of wells for $100,000.”[1]
According to COGCC data, 50,782 unplugged wells in Colorado are covered by blanket bonds with a total face value of around $19,310,000. Assuming a 1% premium, these companies are paying an average of $3.47 per well, per year, to secure these liabilities.[2] That’s not a lot of money.
Moreover, it is not “mom and pop” oil and gas producers that benefit from the incredibly low costs of blanket bond coverage. The top ten unplugged well owners in the state are, TEP Rocky Mountain LLC, Noble Energy, Kerr McGee Oil & Gas, Caerus Piceance LLC, PDC Energy Inc., Evergreen Natural Resources LLC, Own Resources Operating LLC, Foundation Energy Management LLC, Crestone Peak Resources Operating LLC, and Laramie Energy LLC.
Those companies secure 31,707 unplugged wells (62% of the unplugged wells in the state’s database) with blanket bonds. The average per well, per year premium payment for these companies is a mere $0.32 — significantly lower than the already ultra-low state average. When it comes to cheap surety bonds, it appears that it pays to be big.
But it also appears that you get what you pay for. These blanket bonds provide coverage of a mere $31.53 per well—orders of magnitude less money than the lowest low-ball plugging estimates of $30,000 per well. That’s far lower than our model, which estimates that a 6,000 ft well will cost over $100,000 to plug, and far lower than the recent single-well bonding requirements in North Dakota, which are averaging $180,000 per well. [3]
The problem is not that bond premiums might cost too much, it’s that today they cost so little, it’s much easier to pay those premiums indefinitely rather than to plug the wells.
Colorado might be well served reconsidering the blanket bond program as well as considering other options, like sinking funds, which are already on the books and which require well owners to put away cash for the inevitable well closure. But whatever they decide, it is surely the case that industry’s leading companies can afford more than $0.32 per well in premiums. If not, the state will be tossing its taxpayers’ pennies into thousands of abandoned oil and gas wishing wells for many years to come.
