“Oil and gas companies are hurtling toward bankruptcy, raising fears that wells will be left leaking planet-warming pollutants, with cleanup costs left to taxpayers.”
Warned a recent New York Times article referenced in Joe Biden’s Clean Energy Plan Speech.
The U.S. oil and gas sector was in trouble even before Covid-19 struck. Last year declining energy prices and rising debt landed more than three dozen U.S. oil and gas companies in bankruptcy. The pandemic has added fuel to the fire. But even after the virus subsides — which is unlikely to be anytime soon — cheap renewables will extend the downward trend.
The economic consequences of a failing U.S. domestic oil industry presents oil producing states with three difficult policy challenges. First, states are experiencing a budget crisis as wellhead taxes and royalties implode. Second, oil and gas workers — some 100,000 have been laid off this year — and local communities that depend on fossil fuel extraction are suffering. Third, the ranks of largely self-bonded idle and orphan wells are exploding as strong companies shut-in thousands of producing wells and weak ones go belly up.
States operate on a balanced budget. They cannot print currency to fill budget shortfalls, hire workers, and clean up orphan wells. If the money for these state priorities does not come from industry taxes and royalties, it will have to come from Washington.
The emerging solution is that the federal government will help states fight climate change and clean up the environmental legacy of fossil fuels. In exchange, states will be expected to wean themselves from industry dependence and regulatory capture. Recent legislation passed by the U.S. House of Representatives offers a blueprint for this quid pro quo.
The immediate solution is to hire laid-off oil and gas workers to plug orphan wells. Section 84101 of the Moving Forward Act passed by the House in July would create a federal well-plugging and remediation program. It would distribute funding for reclaiming, remediating, and closing orphaned wells (the “quid”), while prioritizing funds to states with bonding “equal to the estimated full cost of well closure and land remediation” (the “quo”). It would also incentivize cost recovery from other potentially responsible parties. Key to this, of course, is ensuring that the cost estimates for well closure and remediation reflect actual costs.
To position themselves for federal assistance, states should:
- Get reliable cost estimates for closing wells (see our recent report It’s Closing Time).
- Require operators to start reporting actual closure costs.
- Increase minimum bond amounts to equal estimated closure costs.
- Eliminate blanket bonds which bear no proportional relationship to actual costs.
- Require full bonding on new drilling permits and lease transfers.
- Increase bonding on existing active and idle wells.
- Impose fees and limit durations for idle wells.
- Index bond amounts for inflation.
- Work with insurance markets to develop new financial assurance mechanisms to ensure operators pay the full cost of well closure and land remediation.
- Make necessary statutory or regulatory changes to enable recovery from prior operators and other potentially responsible parties when current operators default.
These long-overdue steps will shift financial responsibility from state taxpayers to where it rightly belongs under law —corporations that have benefited from decades of public subsidies — while employing laid off oil and gas workers to plug millions of orphan wells that pose daily threats to local communities and the global climate.
As Mike Bloomberg put it, “It’s a perfect example of how growing the economy and fighting climate change go hand in hand.”