Statewide financial assurance covers only 7% of statewide decommissioning costs

New York, February 16, 2024 – Despite being promoted by Colorado’s Energy and Carbon Management Commission (ECMC) as leading the nation, the state’s new rules will provide approximately $4 million less financial assurance in 2024 than Colorado had in 2021. This financial assurance is needed to address more than $7 billion that Carbon Tracker has estimated it will take to plug all wells in the state.

These are the key finding in the report False Start: How Colorado’s bonding rules failed to increase coverage, issued by the Carbon Tracker Initiative today.

“We knew that loopholes in the rules would lead to lower bonding amounts but we are surprised to see the ECMC is set to have less in bonds in 2024 than they held in 2021,” said Drew Gibson of Carbon Tracker, lead author of the report.

The gap exists because of a number of loopholes written in the rules, the discretion given to operators, and the multi-decade time period in which operators are given to meet these obligations.

Moreover, the new rules have also allowed several large operators to reduce their bonding coverage, bringing down the total coverage.  This leaves Coloradoans potentially exposed to up to $7.2 billion in liability for existing wells.

The report outlines a number of problematic elements:

  • Out of Service Well Categories: Operators can designate wells as ‘out of service’ and schedule plugging over a 6-year period, during which they are unbonded.  There are 4,000 ‘out of service’ wells that are either not covered by financial assurance or are only covered by blanket bonds.
  • Time lag: The rules provide 10- and 20- year periods for operators to supply the required bonding, rather than forcing that bonding upfront.
  • First Year Financial Assurance: Operators in some cases are actually paying less in the first year than they did under the previous rules.
  • Demonstrated Costs: Operators can bond to their expected costs, rather than the costs of the state, in spite of the rules being intended to protect the State.  Had all operators used the ECMC’s presumed costs, they would have bonded at significantly higher rates.
  • Option 5:  Operators can use this option to craft plans and reduce bond coverage.  Own Resources used this to cut its bond from a presumed $338 million to $8.3 million.
  • Discretionary delays: Delays in plan approval allow companies to transfer wells to risky operators or merge to secure some blanket bonds to cover more wells.
  • Low-Producing Well Transfer: Exceptions to low-producing well transfers mean transfers will be done without outright provision of full financial assurance.
  • Non-compliance: The state’s inability to enforce the rules is highlighted by the fact that 167 out of the state’s 321 operators are in some form of noncompliance.

Delays in the process mean that as of today, nearly 22,000 wells covered by the rulemaking have not provided approved financial assurance.

An audit of ECMC financial assurance, combined with all approved plans, suggests the state will end with just over $268 million in bonds in the first year of the new rules, roughly $4 million less than the $272 million it held as of 2021.

“The lackluster results of this reform mean the State of Colorado needs to consider other reforms.  These rules don’t obtain assurance from high-producing operators when they have it, but instead give low-producing operators until 2044 to fund existing obligations.  That means that to make even marginal progress through bonding, Colorado is at the mercy of the state’s lowest producers,” said Rob Schuwerk, Carbon Tracker North America’s Executive Director and a co-author of the report.

If the ECMC does not strengthen the bonding rules, researchers say problems could spring up in the future. How the state will deal with noncompliance, the large number of ‘out of service’ wells, whether companies follow through on their bonding timelines, and a potential drop in bonding fees from operators are all areas that will likely have to be addressed.

False Start continues Carbon Tracker’s work examining the cost of closing and cleaning up oil infrastructure in Colorado and across the US.  Once the embargo lifts the report can be downloaded here: https://carbontracker.org/?post_type=report&p=29912&preview=true

 

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About Carbon Tracker

The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble, unburnable carbon, and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org