Colorado’s new financial assurance rules will help mitigate orphan well risk, but the benefits are blunted by substantial flaws.
The legislative mandate is akin to demanding the Colorado Oil and Gas Conservation Commission (COGCC) to secure sufficient collateral on the environmental credit COGCC issues to companies when it approves a permit to drill in the same way a bank requires collateral to mitigate the risk of lending money.
In the context of a seemingly unequivocal legislative mandate to the COGCC, we seek to answer a simple question: can Colorado’s new rules be expected to effectively ensure that every operator is “financially capable of fulfilling every obligation” owed to the state and its residents?
The short answer is no.
- Despite strong legislative language mandating financial assurance rule changes, the outcome falls far short of full protection for Colorado.
- The maximum presumptive bond outcome should increase the statewide bond coverage ratio to 25%, amounting to $1.8 billion in total financial assurance, but extensive pathways for bond reductions exist.
- “Out of Service” well status designation allows companies to limit their financial assurance costs in the near term, but there is no apparent deterrent to gaming this status for financial benefit.
- We estimate that many high-risk operators could approach full-cost bonding under the new rules, but the initial phase-in period for paying the required financial assurance amounts is between 10-20 years.
- One financial assurance option is tailor made to reduce costs for a handful of the largest operators, as it will likely only benefit two or three companies but could result in a $100+ million reduction in statewide bond coverage.
- Option 5 offers near absolute discretion to the COGCC with no apparent guardrails, enabling operators to pursue preferential treatment due to “individual circumstances” that make it “unnecessary or unreasonable” to follow to one of the other plans.
- The new rules are structurally preferential to gas-weighted operators despite the fact that oil is a higher value commodity. Because of this, companies including TEP Rocky Mountain may qualify for a financial assurance plan with a bond coverage ratio of as little as 1% despite showing daily average production per well barely above stripper well status across their entire portfolio.
- Despite the empirical need for ongoing financial support to continually monitor and re-plug old wells, the new rules provide nothing of the sort.
- Fundamentally, the new rules fail to significantly backstop the near-term risks of the companies with the most fragile balance sheets, while the largest producers, who have historically been beneficiaries of Colorado’s lax plugging and financial assurance rules, are offered preferential treatment.
- In light of the energy transition, these rules cannot reasonably be expected to fully internalize the cost of retiring the oil industry.