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“Regulators need to recognize that plugging activity is not the result of corporate goodwill or good policy. It is simple economics that a financial incentive is required to ensure that operators plug their aging and unproductive wells. Today, that incentive is provided by the desire to drill new lateral wells in old oil fields. Regulators need to provide a new incentive to address the existing obligation to plug wells.”
Robert Schuwerk, Executive Director of Carbon Tracker North America and report co-author
Research finds companies only close wells to drill new ones
NEW YORK, JULY 15 – The failure of states to incentivize the plugging of oil and gas wells has led operators to postpone closing inactive wells until they have an economic incentive to do so. Today, that incentive is only supplied by the desire to drill new lateral wells in the same fields. As the energy transition causes the sector’s decline, states will see drilling stop and companies no longer plugging wells, potentially leaving taxpayers with billions in clean up costs.
These are the key finding in Carbon Tracker’s new analyst note, They Only Fill When They Drill: The economic motives behind plugging uneconomic wells.
In recent years, states have seen a rise in the number of inactive wells. Enverus data shows that of the 800,000 onshore wells drilled and completed (excluding dry holes) from 1970-2000, currently 540,000 are unplugged. Two-thirds of these wells produce no oil and gas, and just over a quarter of the unplugged wells produce less than 15 barrels of oil equivalent a day and qualify as “stripper” wells.
Robert Schuwerk, Executive Director of Carbon Tracker North America and report co-author, said: “Regulators need to recognize that plugging activity is not the result of corporate goodwill or good policy. It is simple economics that a financial incentive is required to ensure that operators plug their aging and unproductive wells. Today, that incentive is provided by the desire to drill new lateral wells in old oil fields. Regulators need to provide a new incentive to address the existing obligation to plug wells.”
Despite industry claims, the note finds that operators primarily plug wells as needed to drill new ones. The scale of drilling-related plugging, or “drill-filling”, has become significant. For example:
- In comments to the Colorado Oil & Gas Conservation Commission (COGCC), PDC Energy and Oxy USA stated that from 2017 through 2020, operators plugged 8,000 wells in Colorado. They went on to say, “For the most part, older vertical wells and sites are being plugged, abandoned, and reclaimed as operators complete new horizontal wells.”
- Noble Energy told the COGCC that it will plug 1,400 vertical legacy wells in connection with its Mustang Ranch Comprehensive Drilling Plan. Noble said it had “voluntarily plugged about six old wells for each new well it has drilled since 2017, which has eliminated more than 2,200 wells at a cost exceeding $200 million.”
- Since 2000, maps show that in Colorado, Noble Energy, PDC Energy, and Kerr McGhee Oil and Gas have plugged 8,875 wells, with 8,464 of them (95%) within 1,000 feet of existing or planned lateral wells.
By encouraging companies to drill even as the oil and gas sector shrinks, states are setting up a vicious cycle. The energy transition will cut demand for oil and gas and new drilling activity will also fall. Based on what we are seeing already, when the drilling stops, so will the plugging. Then industry will have less money to spend and no economic self-interest to expend capital on closing wells. Without the resources, companies will file for bankruptcy and pass along the closing and clean up costs for wells to taxpayers, which our past research has shown will cost billions.
This is the third in a series of reports. The first piece, It’s Closing Time, explained how industry has not set aside the resources to meet their AROs. In Billion Dollar Orphans, the scale of the orphan well risk on a state-by-state basis was quantified and it was found that plugging 2.6 million documented onshore wells in the U.S. alone will cost $280 billion.
Once the embargo lifts the report can be downloaded here: https://carbontracker.org/reports/they-only-fill-when-they-drill/
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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