Federal financial assurance could cover only 4% of Big Horn Basin decommissioning costs

New York, April 4, 2024 – A combination of declining oil and gas production in Wyoming’s Big Horn Basin and weak new proposed bonding requirements from the Bureau of Land Management (BLM) could leave taxpayers paying up to $900 million to close and clean up abandoned wells.

This is one of the findings in the report Little Big Horn: How a bonding proposal can fall short, issued by the Carbon Tracker Initiative today. The proposed bonding requirements from the BLM are expected to only bring in $28 million, leaving the government to pay several hundred million in clean up costs.

Researchers looked at the Big Horn Basin as a case study for oil production on federal lands. Unlike some other federal lands, the Big Horn basin saw no boom in shale drilling. Production in the area is down 85% from its peak in the 1970s, and new drilling has declined to about five wells per year compared to about 5,000 unplugged wells. Currently, 37% of unplugged wells in the basin sit idle.

“The analysis suggests that, in aggregate, future cash flows from wells in the Big Horn Basin will be insufficient to cover existing liabilities, that high-producing wells are concentrated in the hands of a select few producers, and that a distribution of many smaller players operate portfolios of low-producing wells without new production on the horizon.  BLM’s proposed amendments to financial assurance will not fundamentally change these dynamics,” said Dwayne Purvis of Purvis Energy Advisors and the lead author of the report.

To improve the likelihood that companies pay for clean-up costs, BLM has proposed its first update in decades that has four elements:

  • Increase the minimum single lease bond amount from $10,000 to $150,000 per lease.
  • Increase the minimum statewide blanket bond across multiple leases from $25,000 to $500,000.
  • Eliminate nationwide and unit operator blanket bonds.
  • Include additional protections for surface owners.

The report concludes these actions are not enough to materially change the situation.

To highlight how production in the basin is declining researchers reviewed an analysis made by the Wyoming Oil and Gas Conservation Commission and found that the Commission’s work showed that for 112 of the 232 companies operating on federal land in Wyoming, the modest proposed increase in bonding would exceed their annual gross revenue.

If the government wants to protect taxpayers from high decommissioning costs, the research raises questions as to why BLM chose $150,000 as the value of the bond. Researchers used the example of North Dakota to show how that this amount is well below what is needed. Across North Dakota, which has similar conditions and challenges, the cost of plugging 250 wells averaged $259,000.

“Increasing financial assurance is one piece of the puzzle, but this is an example of too little, too late.  Financial assurance needs to be commensurate with the expected costs so that it provides operators with the incentives to plug wells with end-of-life cashflows,” said Rob Schuwerk, Executive Director of Carbon Tracker Initiative, Inc.

One of the trends highlighted in Little Big Horn is the separate concentration of profit and liability. Most decommissioning liabilities in Wyoming and the basin are concentrated in a few operators who pay statewide bonds of only $500,000. One group of these large operators have fewer, higher-producing shale wells, but the other group focuses instead on the much more common older, lower-producing wells. Plugging liability is concentrated in the large companies of less profitable, low producing wells like those in the Big Horn basin.

The top 10% of operators are responsible for 92% of production, and 96% of production recently added.  In contrast, the bottom 85% of oil companies contribute less than 5% of statewide production, less than 2% of all recent production additions, and less than 2% of shale production additions. Small producers in the state may be affected by the proposed bonding, but the state’s production will not be disproportionately affected by their difficulties.

To project future cash flow from the thousands of wells on federal lands, researchers put them into six more homogeneous groups based on operational and financial similarities. For each group forecast production and cash flow were calculated using economic inputs such as interests, price differentials, and operating costs. The calculations suggest that most fields and most groups cannot be expected to generate enough cash flow from future operations to fund their own decommissioning, emphasizing the urgency of the need for reform in financial assurance.

Little Big Horn: How a bonding proposal can fall short continues Carbon Tracker’s work examining the cost of closing and cleaning up oil infrastructure in across the US.

Once the embargo lifts the report can be downloaded here: https://carbontracker.org/?post_type=report&p=31227&preview=true


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