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At the time of writing, prices for Brent Crude oil had ascended to $120 per barrel of oil, and the Henry Hub natural gas price hovered at $9 per million Btu. For an oil well in Midland, Texas, with a breakeven price of $51, this leaves a potential profit margin of $63 per barrel of oil. Some of the larger operators break even at even lower prices. The average estimated ultimate recovery (EUR) of a single Permian Basin well can produce 113,000 barrels of oil, which at current prices would net the owner a tidy $7.1 million. Some wells produce as much as 350,000 BOE with a potential profit of $22 million, for a single well.
Most of these West Texas wells are hydraulically fracked and therefore deplete quickly. This has two implications: First, the transition from asset to liability happens much faster compared to conventional wells. Second, at today’s prices, an operator can make the cost to safely plug and abandon its own well in mere days.
It seems like long ago, but just two years ago fossil fuel commodity prices went negative. In April 2020, media coverage foretold of an impending wave of corporate bankruptcies that evoked a finality. It felt like the end was nigh for many oil and gas companies. But most of these companies merely filed Chapter 11, which allowed them to reorganize debt and continue business as usual. Even if a company did not survive the downturn, its limited liability owners typically walked away unscathed.
But what of the liabilities: unplugged oil wells, battery tanks, and other infrastructure? Well, state regulators, who represent more red carpet than red tape for domestic oil and gas production, were left holding the bag. In the U.S., oil and gas regulation is delegated to the states, where lax rules have conspired to swell the nation’s inventory of discarded and orphaned oil and gas wells. Any calls for commonsense bonding or other financial assurances from the producers that they would pay the freight for capping wells and preventing significant methane release were met with whimpers that even nominal monthly fees would push these companies into bankruptcy.
So instead of using the liability wave to reform rules and protect the public, the Interstate Oil and Gas Compact Commission (an intimidating-sounding name, but really a club of captured state regulators) hatched a plan to craft a federal bailout. Tucked inside of the bipartisan infrastructure law was a $4.3 billion orphan well grant program to states that is all carrot and no stick. With leakage continuing every day, federal dollars for rapid cleanup might sound promising. But despite the best efforts of the federal regulators charged with implementing the program, the program both subsidizes private firms and conceals the failures of state public regulators.
The program allows state oil and gas regulators to apply for grant funding that would go toward plugging abandoned wells. While the statute has tight deadlines on when the federal money should be obligated, there is no explicit goal to collect from the private oil and gas operators that drilled and profited from these wells. Meanwhile, performance-based grants have very low thresholds on what constitutes state regulatory “improvement.” As it stands, no state rules around who is responsible for capping wells will need to change as a condition of receiving federal money. It’s hard to call it anything but a bailout.
In the U.S., oil and gas regulation is delegated to the states, where lax rules have conspired to swell the nation’s inventory of discarded and orphaned oil and gas wells.
At the same time public dollars are about to go out the door, the U.S. oil and gas industry is doing very well. Texas operators are extracting 4.6 million barrels of crude oil out of Texas soil per day, bringing in $552.4 million in gross revenue and an estimated $290 million in profit. In Texas’s Notice of Intent to apply for federal orphan well grants from the feds, the Railroad Commission of Texas estimated that it will cost $481.8 million to plug the state’s known inventory of 7,396 orphan wells. In other words, in just two days, there’s enough profit sloshing around the state to take care of the state’s entire orphan well inventory. But instead, Texas will receive an estimated $343.6 million in federal dollars without changing a single rule on the books that contributed to the crisis.
Meanwhile, states like Louisiana are passing legislation that will allow state regulators to bundle “non-priority” wells to qualify for federal orphan well grants. Pennsylvania regulators have even classified active wells with known owners as orphaned wells eligible for federal bailout, and West Virginia is using federal dollars to outsource regulatory oversight to private contractors. It’s as if the funds were intended to enrich modern private companies with taxpayer dollars rather than clean up active pollution or reduce methane emissions.
States have neither the backbone nor the appetite to prepare for the inevitable retirement of oil and gas infrastructure. With the passing of the federal orphan well grant program, oil and gas regulation has revealed itself to be what it always was: an area of national concern. If state managed resources warrant federal subsidy because of state regulatory failure, then it follows that additional federal intervention is required.
We recommend a national policy for managing the retirement of oil and gas infrastructure: Amend the Safe Drinking Water Act to include all classes of oil and gas wells, and implement a single national financial assurance requirement. A requirement like this would force companies to actually set aside enough money to safely retire their wells once they’re done producing. Helpfully, state applications for the federal orphan well grant program and future program data will provide a spread of decommissioning estimates to inform national financial assurance requirements. This data can be used to estimate how much money companies should set aside.
Under the current system, oil and gas companies can file for bankruptcy to stick taxpayers with the cost of well cleanup. But with a uniform federal rule, the money would come out of corporate profits instead. Every single American oil or gas well should possess an individual trust fund with the federal government as the beneficiary. This means that operators will put aside real money for future asset retirement obligations, and that those funds will be beyond the reach of bankruptcy processes. Operators would be able to choose either a lump-sum payment upon establishment of the trust that reflects the estimated full costs of decommissioning, or pay an annual payment into a sinking trust fund until it reaches the estimated full cost. Everyone should set aside a little bit each month for retirement. It’s time the oil and gas industry is forced to prepare for the end as well.
To deal with the millions of already abandoned and inactive wells, the federal government should also implement an industry-wide levy that goes into a separate trust fund, similar to the federal Abandoned Mine Land Fund. Either the oil and gas industry pays for the sins of its own industry, or it forces the tab upon the general public. We shouldn’t accept the latter.
Federal and state law requires the full plugging and abandonment of all oil and gas wells to protect communities and resources like safe drinking water. When prices come down, which they will, we will be back to where we were two years ago, and the only solution on offer is another federal bailout. Or we can prepare for the inevitable.
As anyone seeking to collect on an overdue debt can attest, the best time to collect is on payday.
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