Exploring for oil and natural gas is a tough and competitive business, one with many risks.
It can cost a company $10 million or more to drill and hydraulically fracture a well in Wyoming, with no guarantee of any returns on that investment. And there are risks to the environment, too—including the potential contamination of water resources.
The life cycle of an oil or natural gas well includes three primary phases: drilling, production, and plugging. Normally a production company will set aside adequate funding for the costs associated with plugging, which is to say filling the entire well bore (often measured in thousands of feet) with cement.
If a company fails to plug its wells, it will forfeit a bond that it posted with the state prior to production. That bond is intended to provide the money necessary for the state to plug the wells. Unfortunately, the bond is often not enough to cover the cost and the wells go unplugged. And an open well bore creates the risk of groundwater contamination.
Properly plugging a well before abandonment is necessary to protect groundwater—it prevents leaving behind an open conduit that could serve as a path for contaminants to get into groundwater.
What we mean by orphaned wells
When an operator doesn’t take responsibility for plugging a well, it becomes known as an orphaned well. At present there are more than 1,200 orphaned coalbed methane wells on state and private minerals in Wyoming, most of which are in the Powder River Basin. Anywhere between 1,000 and 4,500 additional coalbed methane wells could become orphaned in the coming months.
The state is required to find funding and resources to plug these orphaned wells. Not surprisingly, plugging a production well comes with an expensive price tag. The cost can vary widely, but it’s never cheap. An average cost of $10/foot adds up quickly when a well bore is thousands of feet deep.
Bonds, then, are essentially intended to be insurance policies for reclamation and cleanup at well sites. Often companies will pay what’s called a blanket bond of $75,000 to the Oil and Gas Commission, which can cover more than one well. But the problem is, at today’s costs, $75,000 is only enough, on average, to pay for the plugging of approximately 7,500 cumulative feet of well depth. It’s not unheard of for a single oil or gas well in Wyoming to have that depth.
And after paying a blanket bond of $75,000, a company can drill a number of wells with cumulative depths adding up to much more than 7,500 feet—say 100,000 feet—without paying additional bonds as long as those wells are producing.
It isn’t until a company temporarily removes any of those wells from production without plugging them (called “idling” the well) that the Oil and Gas Commission asks for additional idle well bonds. These additional bonds are requested partially because the longer a well is idled, no longer generating income for the company (or revenue for the State), the commission must hedge against the risk that the company won’t have the funding to eventually plug the well.
Too often, operators fail to plug their wells, some filing bankruptcy before they complete payment of the additional bonds they owe the state. This leaves Wyoming with the responsibility not just to plug those orphaned wells, but also to find the additional funding to get it done.
Why orphaned wells are a problem
The longer orphaned wells remain unplugged, the greater the environmental risk. Well casings weaken with age. Any contaminants—such as high-pressure chemicals and gases from nearby unconventional well operations—that find their way into the unplugged wellbore will have direct access to any exposed, intersected aquifers.
There are additional risks: accidental surface spills can also occur from unplugged wells. Operators hydraulically fracturing new wells—an operation that involves injecting water, sand, and chemicals at very high pressure underground to break up tight rock formations—can inadvertently send those chemicals and/or gases up an orphaned well to the surface.
Until recently, the state has not aggressively addressed these problems—only 183 orphaned wells have been plugged since 2004. Recently however, Governor Matt Mead’s administration, in recognition of the severity of the risk and as an initiative within his Energy Strategy, proposed a plan for plugging Wyoming’s orphaned gas wells.
The plan, if adopted, requires the Legislature, the Office of State Lands and Investments, and the Wyoming Oil and Gas Conservation Commission to take action to plug the state’s orphaned gas wells over the course of the next four years.
In the plan, the governor has requested a budget authorization from the Oil and Gas Commission’s account of an additional $3 million (versus the typical authorization of an additional $1 million) to work in conjunction with forfeited operator bonds to fund the plugging program.
The cost and how to pay for it
It is important to note that the Oil and Gas Commission’s account is not funded by taxpayer money.
The account generally holds funds acquired from (1) the conservation tax (paid by operators on each barrel of oil and thousand cubic feet of gas produced for sale); (2) bonds held by the Commission that will be returned to operators once they have properly plugged their wells; and (3) forfeited bonds from those operators who have orphaned their wells, which can only be used on the specific wells for which those bonds were paid.
Governor Mead’s office estimates the cost for plugging the 1,220 currently orphaned coalbed natural gas wells to be around $7.7 million. Add to that 912 wells that were drilled by Luca/Patriot—a company in the midst of bankruptcy—and the anticipated total orphaned well count climbs to 2,132, with an estimated cost to the state of more than $13 million. Luca currently has $3.2 million bonded, which the governor’s office estimates is approximately $2 million short of what those 912 wells will cost to plug.
There are additionally 2,270 coalbed methane wells “of concern”—belonging to companies currently out of compliance in some form with the Oil and Gas Commission. Should these companies also choose to walk away, the governor’s office estimates the total cost of plugging orphaned gas wells to reach approximately $32 million.
The bonding and the additional $3 million that the governor is calling for should cover—or go a long way toward covering—the existing 1,200 orphaned wells. So the governor’s plan is certainly a good down payment on this very important issue. But additional funding in the future will likely be needed to cover the total cost if more wells are orphaned, as expected.
Additional measures must be taken to ensure the necessary funds are available to address the whole problem. And we believe this should be accomplished while continuing to keep the state’s general fund off the table.
Industry must step up to the plate to cover these costs. This is something the Petroleum Association of Wyoming has spoken favorably of doing through an increase in the conservation tax—and something the Outdoor Council supports.
And to prevent this from happening in the future, we are urging state regulators to see to it that operators are required to post adequate bonds prior to development to ensure the state does not continue to be short-changed on plugging and reclamation costs.
It is also important to note that the governor’s plan only considers orphaned coalbed methane wells, but the state has other types of orphaned oil and gas wells and they also need to be plugged to safeguard our groundwater.
A plan for the future
Orphaned wells are a longstanding problem in Wyoming. If fully implemented, the governor’s plan can begin to solve the problems of the past, but what do we do to make sure this doesn’t happen again?
The boom/bust cycle of commodity development has often left the state vulnerable to economic and environmental risks imposed by the developers who might be here one day and gone the next.
We believe the state can more effectively mitigate its risk in the future by implementing sound bonding regulations that both fully account for the actual cost to plug wells and also include an additional labor charge—enough to incentivize operators to plug their wells and have their bonds returned rather than leaving it up to the state.
We encourage the state to consider increasing the cost of a bond on a per-foot basis and apply that cost in its calculation for bonding requirements prior to development. For example, the Wyoming Oil and Gas Conservation Commission could require an operator to report all anticipated well depths in a development and use the sum of the depths to increase (or even refund a portion of) the bond. By charging a bond that meets and slightly exceeds the actual cost of well plugging, operators will have incentive to plug wells at a lower cost themselves.
A reformed bonding regulation, if properly administered, could sharply reduce the number of orphaned wells in our state. A fair, equitable system of bonding regulation—one regularly updated to reflect new costs, techniques, and technologies—will benefit operators, the state’s economy, and Wyoming’s water resources now and for future generations.