Decommissioning Colorado’s Two Oil Industries

In 2018, Colorado became one of the first US states to recognize the insufficient financial assurance that oil companies would plug, remove, and remediate tens of thousands of aging wells. Nearly six years after the issuance of an executive order and statutory mandate to ensure that oil and gas companies can afford to decommission their wells and sites in Colorado, it is clear that the revised system for financial assurance has not materially increased the total financial assurance in the state. Meanwhile, drilling continues in only one region, but production in legacy regions continues their long decline.

The need for additional assurance that oil companies will not leave the task to taxpayers is both urgent and complex. For most areas of the state—particularly in its mountainous parts—the estimated decommissioning liability exceeds the estimated future cash flow from operations available to pay for decommissioning. In another area, those future profits do exceed current estimates of end-of-life costs, but our work shows that the inversion will occur within a few years. For these areas starting now or in a few years, every dollar of profit from oil and gas operations distributed to owners will be a dollar less that operators have to fulfill their decommissioning obligations, yet the pace of voluntary decommissioning remains trivial. Despite years of hard and diligent effort by regulators, we find that the reform has not accomplished its intention. Thus, minimizing the costs to taxpayers requires quick and comprehensive action by the state.

Key Findings

  • The current cost to decommission nearly 48,000 unplugged oil and gas wells and related facilities in the state of Colorado is estimated to be $6.8 to $8.5 billion, not including the remaining cost of surface reclamation for thousands of other wells.
  • Recent bonding reforms do not protect against the fiscal liability falling to the state’s taxpayers. In a best-case scenario, all forms of financial assurance—plus state and federal funding for orphan wells—amount to only about $654 million over the next five years, even as the population of orphan wells is set to increase dramatically.
  • Production from the state peaked five years ago. The recent renaissance includes many wells and higher production rates but is isolated to a fraction of one producing basin. The remainder of the state, including eight other basins, has continued the systematic, legacy decline of low-producing wells.
  • Drilling and new production located east and north of Denver is dominated by the only three public oil companies still active in the state. Legacy areas are dominated by companies with concentrated portfolios of systematically low-producing wells.
  • Though there are a large number of oil companies in the state, ownership is concentrated in a small number of companies, mostly large and private. Of 375 oil companies, the bottom 80% account for 3.3% of wells and 1.6% of production, including 86 oil companies with no active production to fund the decommissioning of their wells. The top 10% of companies account for 93% of wells and 95% of production, they are almost exclusively private companies with hundreds or thousands of wells.
  • Despite low production and many idle wells, operators of legacy areas plug only about 0.4% of their wells each year. If this pace were held constant, these companies would spread out the cost of decommissioning over about 250 years.
  • Legacy areas range across 30 counties and include more than 27,000 wells, 57% of the statewide total. In these areas, we estimate a decommissioning cost of $4.0 to $5.0 billion but only about $1 billion of remaining cash flow. It is unreasonable to expect or hope that future production can pay for asset retirement, even if every future dollar of projected profit were dedicated to decommissioning.
  • Previous policy reform took many years and ultimately failed, leaving the state’s legacy areas more depleted and owned by smaller companies. Taking this history into account, the state will require new and still undefined concepts of policy—implemented quickly—to protect Colorado and its citizens. The solution must be tailored to the present reality if the state wishes to manage the near-zero-sum issue of whether the industry pays for its clean-up or whether the public does.