With approximately 2.1 million abandoned wells across the U.S., there is growing concern about unfunded asset retirement obligations (AROs) to decommission oil and gas wells.
Fueling the rise in abandoned and orphan wells are the perverse regulatory incentives for operators to strip the last remaining resources from mature wells before defaulting on AROs and filing bankruptcy. A recent class action lawsuit on behalf of West Virginia landowners offers a potential judicial solution to this regulatory failure.
This paper describes the new theory of ARO creditors’ rights asserted in the lawsuit and how it might be applied elsewhere.
- An oil and gas well is “upside-down” when its ARO exceeds its future net cash flows from production. Oil and gas wells are often operated and sold to undercapitalized firms long past the point where future cash flows could be reasonably expected to fund AROs.
- The amount of financial assurance required by U.S. state and federal oilfield regulators is typically only a small fraction of estimated AROs. If settlement of AROs by undercapitalized firms cannot be funded from future cash flows, eventual default is predictable.
- A recent federal class action lawsuit asserts that landowners whose property is burdened by inactive wells are “creditors” with legal rights against operators for decommissioning costs.
- The suit could expose current and former operators to legal liability for AROs, reducing the incentives for late-life sales of upside-down wells to undercapitalized firms.
- A successful outcome for landowners could provide a significant source of funding for decommissioning wells that will otherwise become wards of the state.