With respect to asset retirement obligations in the oil patch, every regulator has to answer three questions:
- How do you provide financial incentives for the industry to pay for decommissioning going forward, and through the energy transition?
- How do you distinguish between those operators that cannot afford to plug wells and those that want to appear that way so they don’t have to?
- Who pays for retiring oil and gas infrastructure when current operators don’t?
The Colorado Oil and Gas Conservation Commission (COGCC) provided its answers in its February 11, 2022, proposal. Carbon Tracker will provide a thorough review of those rules in due course, however, one piece of the rulemaking stands out as urgently problematic—an amnesty program to allow firms to voluntarily “orphan” their wells to the state.
This unprecedented move could put Coloradans on the hook for billions in clean-up costs. It also provides a disincentive for industry to ever plug its wells—why spend money on plugging when the state will pick up the tab?
To recap: in 2018, the Colorado legislature enacted a new law stating that COGCC “shall require every operator to provide assurance that it is financially capable of fulfilling any every obligation imposed” by the state’s oil and gas statutes. Securing funds to plug wells and reclaim well sites was a key focus of the new law. The point is to avoid having taxpayers pay to clean up after private companies who profited from the business.
There are real concerns that the proposed regulations do not meet these statutory requirements, but an immediate issue is the so-called “voluntary relinquishment” program—a proposal for corporate amnesty good through the end of this year. The crux of the amnesty proposal is that upside-down operators will forfeit their wells, bonds, and operating license to the state, and in exchange, the COGCC will declare “the Operator’s Wells and any associated Oil and Gas Locations or Facilities as Orphaned Wells and Orphaned Sites. “[1] The orphan well fund and, presumably, Colorado taxpayers will cover the shortfall.
Industry’s main selling point for “amnesty” is that companies won’t tie the COGCC up in endless litigation over whether they are actually required to cover the plugging and abandonment obligations they willingly signed up for when they drilled or acquired the wells.
Appropriations to the orphan well program are capped,[2] yet the COGCC is proposing to allow an uncapped number of wells to be freely dumped into it. An amnesty combined with a paltry orphan well fund is a perfect recipe for ensuring that taxpayers get to pay to retire these wells.
Lessons from Australia
Colorado’s amnesty proposal lies in stark contrast with the approach in Australia.
Colorado and Australia produce similar volumes of oil (approximately 4-500,000 bbls/d production), but radically different outcomes on who pays for orphaned oil and gas infrastructure.
Australia’s National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA), like the COGCC, is faced with operators who have shirked decommissioning responsibilities. In Australia, Woodside Petroleum sold offshore assets with an estimated $1.2 billion in decommissioning liability to Northern Oil & Gas Australia (NOGA), which defaulted before it fulfilled its obligations.
The Australian government’s response? A levy on industry, passed by the legislature, with the NOPSEMA imposing “trailing liability”[3] to ensure that past operators are next in line to cover costs.[4] Chevron has cried foul, estimating that it might pay up to one-sixth of the total cost, though it never owned or operated the assets.[5] However, NOPSEMA concluded that if the choice is between average citizens and industry, justice dictates that industry should absorb the loss.
By contrast, the COGCC is now inviting industry to abandon an unlimited number of marginal and inactive wells that will become the responsibility of the State.
If the COGCC’s proposed amnesty is promulgated, we can expect the orphan well count to balloon leaving Coloradans on the hook. It is not clear how a law requiring COGCC to ensure industry can fund its obligations allows the COGCC to shift costs to an under-financed orphan well fund. Even if this action proves to be outside the COGCC’s remit, the chaos that these mass forfeitures will cause will be hard to undo.
Kicking the can down the road
But putting aside the legal issues, the proposed rule represents an unfortunate answer as to who should pay when operators don’t fulfill their obligations. As we have noted previously, many of these defunct wells were once cash cows for larger operators that continue to do quite well for themselves. Between 2019-2021, roughly 513 million barrels of oil were produced in Colorado. Benchmarked to average WTI prices in those years, that amounts to approximately $27.8 billion in gross revenues. Over that period, oil averaged about $55/bbl—far less than the approximately $90/bbl WTI is trading at today. Should plugging costs be visited first on everyday Coloradans, or on the industry that profits from drilling the holes?
Colorado’s legislature asked the COGCC to fix the old system that created this mess, but contrary to the Legislature’s mandate that industry is made to pay its debts, the COGCC’s amnesty proposal seeks to put those debts onto the shoulders of Coloradans.
[1] COGCC Draft Rules, Rule 205(d) (Feb. 11, 2022).
[2] Currently, appropriations are capped at $5 million per year.
[3] Trailing liability is a rule by which owners preceding the current owner remain responsible for clean-up costs, if the current owner cannot afford them. This provides incentives to ensure that the asset remains in responsible hands, unlike what happened in the Woodside-NOGA transfer.
[4] https://www.ogv.energy/news-item/offshore-oil-and-gas-may-finally-have-to-cough-up-for-its-56b-clean-up-bill
[5] Id.
