Carbon Tracker has been following the development of the Energy and Carbon Management Commission’s (ECMC) financial assurance rules (Rules) in Colorado since 2021. After the new Rules were published, our September 2022 report, Feet to the Fire, assessed the Rules’ potential and shortcomings. We predicted a best-case scenario of $1.8 billion in resulting financial assurance (roughly 25% of expected costs)—a material improvement even if it left billions in liability uncovered.

Our February 2024 update, False Start analyzed implementation challenges that were resulting in less financial assurance than before the rules were implemented. By then, many of the anticipated shortcomings had materialized, with operators taking advantage of loopholes in the rules and when that failed, simply avoiding compliance.

The maximum expected potential bonding plummeted from over $1.8 billion at the time of Feet to the Fire to an expected $688 million 20 years after implementation by the time of writing False Start.

In June 2024, Carbon Tracker’s comprehensive Rocky Mountain Highs and Lows assessed whether the future cash flows from production could cover the costs of decommissioning the wells in the state. We found that, while in the aggregate there is enough production to cover those costs, over half the wells in the state are in portfolios that do not have the requisite productivity to fund their own decommissioning. As for the estimated costs of decommissioning compared to the financial assurance, the situation looked more dire, with the total costs estimated to be 10 times the expected total financial assurance.

This report builds on our past work. Through our research we want to analyze what is happening in Colorado and how to address the problem going forward.

Colorado was right to reform its bonding requirements but an honest review shows there still is work to be done if they want to hold companies accountable and protect taxpayers.

Key Findings

  • Colorado’s new ‘best in the nation’ financial assurance rules have failed to meet expectations. The new rules were mandated by the passage of Senate Bill 19-181 in 2019 to reduce the state’s exposure to the financial burden of thousands of orphan wells.
  • With a current minimum $6.8 billion of estimated well decommissioning liability, the new rules’ promise of $1.8 billion in financial assurance (our initial estimate) has failed to materialize.
  • Presently, the Colorado Energy and Carbon Management Commission (ECMC) holds only $218 million of bonds ‘in hand’ to plug and abandon, remediate, and reclaim over 47,000 wells and to reclaim an additional 13,000 plugged and abandoned wells that have not yet passed Final Reclamation.
  • If 100% of all approved Form 3 financial assurance plans yield bonds, the ECMC can expect only $589 million in bonds by 2042, and that assumes collection of $133 million from KP Kaufmann which is litigating the amount and has indicated it cannot pay.
  • Implementation has been hampered by administrative delays that have resulted in financial assurance not being timely posted.
  • 117 listed operators, holding approximately 5,860 (14%) Rule 702 wells, have not yet filed proof of financial assurance.
  • The ECMC is currently owed approximately $66 million in first year financial assurance from 89 listed operators that have filed a Form 3 with $12 million unlikely to ever come as it is owed by KP Kauffman.
  • Overall, the ECMC has $25 million less financial assurance ‘in hand’ than in 2022 prior to the Rules being passed.
  • The rules imposed annual payments for up to 20 years for low-producing operators with the first financial assurance past due and the second due July 01, 2024; however, many operators have failed to satisfy these requirements.
  • The ECMC began to act by sending out Notices of Alleged Violations (NOAVs) on April 23, 2024, however, some come nearly a year after violations began, and these may be insufficient to enforce substantial change.
  • The ECMC has consistently revised downwards its expectations for total financial assurance. They went from a total estimate of $820 million in February to $613 million in May. Current ECMC approved Form 3s total $589 million.
  • If KP Kauffman’s total proposed $133.2 million bond is subtracted from this revised amount, only $456 million of that expected financial assurance remains.
  • Our analysis also reveals a further structural problem with the new rules; reclamation costs for wells that have been plugged and abandoned but that have not passed Final Reclamation do not appear to be covered under this new financial assurance regime. There are approximately 13,000 such wells in Colorado, implying $1.3 billion in liability based on the ECMC’s $100,000 presumptive costs for remediation & reclamation.