The oil and gas industry is getting out of a lot of obligations these days. They have pushed for and gotten regulatory pauses, rollbacks, tax breaks, all kinds of good stuff, although of course the American Petroleum Institute is still insisting that the industry is quote unquote not getting a bailout. One of the big ways that the industry is getting off the hook for its responsibilities is in the case of its wells, and more specifically, what happens to them
when they're not producing oil or gas anymore. That is becoming an even bigger problem amidst the COVID nineteen pandemic, because a lot of wells have been temporarily idled, and some percentage of those will end up being abandoned altogether. Shale gas companies are already starting to go out of business in various parts of the country, and more are announcing their downfall every day. It remains to be seen
whether demand will actually return to normal levels after the pandemic. Plus, there will be an energy transition at some point, and a lot of folks are starting to wonder what will happen to these oil and gas sites once that transition gets underway. In order to get permits to drill oil or gas wells. Fossil fuel companies are required to get permits, and with those permits, they have to commit to plugging
and remediating well sites when they're done with them. It's an expensive proposition and one that the industry tends to put off as long as possible, in part because no states actually require these companies to put up the money for plugging and remediating wells before they start drilling. A new report finds that, on top of all that, the oil and gas industry has been dramatically underestimating the cost
of doing this remediation for years. Report out today from Carbon Tracker finds that in fact, plugging shale wells can cost up to ten times what companies have been estimating. That's a huge financial liability that's not on the books of shale gas companies, which are already struggling financially for various other reasons. That report is called It's closing time
the huge bill to abandon oil fields comes early. Joining me today are this report's co authors, Greg Rogers, who we've heard from in previous episodes, and Rob Schuerck, executive director of Carbon Trak or North America to talk about just how many of these wells we're looking at, what these costs may be, and what the heck States are gonna do about it. We'll have that conversation in a minute after award from this week's sponsor, I Mimi Westervelt
and this is Drilled. I was hoping you could maybe start with sort of the genesis of the report. What made you realize that this was something that we needed data on.
Really, we started, and this is a combination of Greg's long standing interest in ROS and carbon trackers, focus on really the implications of the energy transition for fossil fuel companies and their investors. We started looking at how you know, a asset retirement obligations on the balance sheet were reported,
how frequently they were revised. Those estimates. Had had a working thesis that Greg is largely built over years of observation on this as to why that was the case, which was that as assets were retired, people had to revise those estimates to reflect the actual costs and those were a lot more significant. And we took sort of that work and sort of thinking about, well, in terms of an energy transition, what's going to happen here? Are
these assets all going to live? They're full estimated useful lives. Right, If we can't extract and burn all of these fossil fuels consistent with our climate targets, how are we actually really going to expect that these assets? Do you live another thirty forty fifty in some cases you know, to through the end of the century, if you're thinking about
oil sands assets, for example. So it was so so our initial focus was actually on individual companies and what they've got on the balance sheets and what kind of impact if we saw something called ro acceleration, and you see a little bit on that in this paper because it's still an important concept. But as we looked at it, we thought, well, okay, there's a great story here in the US. Let's focus on the US, let's focus on onshore,
and let's look and see. Right, you know what you know in addition to just looking at the corporate reported figures, which don't really give you any of the backstory, right, they give you the discounted present value at some discount rate that company has used. You don't have the undiscounted numbers. You don't know what it really costs. But when we looked around for what things really cost. We saw a lot of claims from industry and in many cases from
the regulators as well. I think comparating some of those industry numbers that were looking at you know, tens of thousands of dollars or less to close a lot of these wells, including you know the one with the one estimate from the from the Banker hues that we have in there that's focused on you know, thirty three thousand dollars to close wells in places like the Eagleford with average uh, you know, well board depths total vertical depths
of like nearly ten thousand feet. Looking at actual data there were there was a lot of evidence to suggest that those costs.
Were going to be far greater.
It was a big aha for for me Amy is we were we were searching for actual cost data, uh preferably not estimates, but you know, actual.
Cost What what did it cost to plug and abandon these onshore wells? And it started to look like there was a self referential loop going on between industry and state orphan well programs that are largely funded by industry, where industry would would point to the orphan well cost experience, which was the only available cost data we could find in the United States, and say, hey, we we we liked those costs, uh, which seemed to be you know, ranging from five thoul into up to forty thousand dollars
as well, and so we're going to reference those costs as in terms of the economic analysis of you know, shale and fracking in the in the US on shore on shore oil industry.
So we had we.
Had this orphan well data. But one thing that started to stand out from that is that most of those wells are old and they're shallow. So there's there's a there's just millions of undocumented wells, even preregulatory wells in the United States, and a lot of those have found their ways way into orphan well programs. Some of these wells are just a few hundred feet deep, uh and
don't even penetrate a groundwater source. So we knew that when we saw that that the average depth, the vertical depth the shale wheels was much much deeper, ranging from sixty five hundred to twelve thousand feet of vertical depth. And we're wondering, well, what's the correlation between depth and cost? And there were a few studies out. They looked at the US orphan well data suggesting that there was a correlation between depth and costs, but that it was linear.
So just you know, ten dollars of foot, let's say, and doesn't matter whether it's one thousand foot well or twenty thousand foot well, it's going to cost ten dollars a foot. And you had some state bonding regimes actually incorporated a dollar per foot and determining bond values to as financial assurance for the plug and abandon that cost. So that was interesting and something that obviously made depth relevant.
But the most important finding was came out of research of industry data outside the United States in Australia that indicated that the correlation between depth and cost was exponential rather than linear. And when we looked more closely at the orphan well data that was available in the US, it also seemed to support an exponential correlation rather than a linear correlation.
Could you guys speak a little bit to how or why is it that there's no transparency about these costs.
No one has made them provide that cost information, They have no interest in providing that information. Just to make that clear, right, right, So someone need to be interested in having them do it, and I think that really is, you know, at the regulatory level, you're suffering from some level of capture, which you'll typically see when you have
a regulator for a specific regulated industry. But that was also combined with the belief that I think a lot of people have had about oil and gas, the idea that this industry may not have the money on its balance sheet today to close all of its wells immediately, but they will close over time, and it will keep making money and keep drilling wells, and they'll be cash
flows in the future. Because we all need energy, right, if we're going to have economic growth, it's correlated with it, and so it's going to be you know, this is going to be cash in the future to close these So why worry about it?
Why worry about what.
The actual costs are? Right? The problem, of course, is all those assumptions have been completely upended by the energy transition, right, and in the pandemic rights has been sort of a shot across the bow on that to realize how quickly things can turn potentially shut in and it gives a glimpse also of the financial condition that the companies are then in and the arguments, of course they're going to make, which is that we can't afford to do that now.
So I think that has kind of shaken things up, and so the question is, really, should regulators still not pay attention to what these actual costs are and or will they continue to do that? And I think that those you know, that's that's becoming increasingly bigger and bigger issue.
For most of the oil and gas industry's history, it's been sort of a self bond, self reporting situation, and states are starting to realize, oh, this is this is potentially going to leave us holding a bill that we can't necessarily afford to pay either. Can you just talk about what this problem looks like for states and what some of them are trying to do about it.
One of the things that's that's happening is that the coronavirus pandemic has accelerated the shut in of wells, which has drawn a lot of attention to this topic and kind of shining a light on the reality that the orphan well funds are not sufficient to plug and abandon you know a large number of wells that are becoming
idle and non economic. At the same time, but the states were realizing the problem they were in before the pandemic hit, and they were starting to do things like increasing bond amounts, increasing idle wealth fees, and tightening up on the regulatory flexibility about allowing temporary abandonment of wells. So temporary abandonments this state went. A well is shut in, but not permanently, so production has stopped, but the well is left in a state of limbo, where at least
in theory, it can be started back up again. So those are the types of things I think that we see states doing. And there's a there's a few other actions, but essentially they're tightening up on the credit aman. I think the easiest way to think about this is that the legal obligation to plug an abandon an oil well at the end of its economic you know, useful life is a is a liability to the state. And normally you think of a debt like this as a that
has a financial consequences. The creditor would charge interest on that or require collateral. So effectively, self bonding means free credit on these liabilities, and that's largely been the case for decades. But what the states are doing, they can either require immediate permanent retirement of wells that have been sitting idle for a long time, or they can increase the carrying costs of that outstanding debt.
I feel like every day I'm seeing another news story about a shell company declaring bankruptcy or warning that it will be going bankruptcy. So what is the real situation that a lot of these states are in right now? How much of this debt does it look like some states are going to be absorbing no matter what you know?
Initially, the parameters that are important trying to understand a statewide orphan well risk would include the number of wells, an average cost per well, the bond coverage, So how many is proble speaking, how much security is actually in place. Then then you get into some more complex issues like the useful life of the well. I mean, are all the wells do they need to be plugged in abandon now? Or you know, are some going to continue to produce
for many years into the future. And then the credit risk of the operators, so to the extent that they're self bonding, can can is the operator good for it? Will the operator remain good for it? I'll give you just a couple of pieces of information you know, that help fill in that framework. So just look at the number of operating and idle wells that are out there, and the numbers are pretty staggering. So these are not
These are not orphan wells, preregulatory wells, documented wells. These are wells that are currently out there, tagged to a specific operator and they're either producing now or they're in a state of temporary abandonment or shut in. Texas has over four hundred thousand wells, California over one hundred thousand wells, Pennsylvania over one hundred thousand wells, Kansas over ninety thousand, Ohio over ninety thousand, New Mexico over fifty thousand, in
North Dakota over twenty five thousand. So one is we're talking about a large population of wells, and our research is indicating that the cost to plug these wells is going to be significantly more than the orphan well cost experience, and that for the for the shale wells may be as much as three hundred thousand dollars a well. That's based on evidence that we have. Cost data is coming out of Australia, so maybe more, maybe less in that but still a pretty big number.
And still like around ten times what they've been saying.
Yeah, so we're talking, we're talking numbers that are in the billions. For some states are going to be in the tens of billions, and the exercise is going to require getting a full inventory of the of the wells in each state and knowing the depth of those wells, so that because when you're talking about an exponential correlation,
depth becomes really important. But I think what I think we can get at that, and you know, we will be able to put a rough cost estimate for statewide orphen well risk, and I think the numbers are going to be shocking to a lot of folks.
At a certain point. The states don't have money to do this either, and some of this work will just be left undone. Is that something that you're looking at and what the impact of that on you know, communities that might lives near these wells.
Number of different ways of thinking about the environmental impact from these welds. So you could think even in places where people are not nearby, you have the potential. You know, when you have improperly plugged or you have wells that are abandoned but have not been plugged, right, you have the potential for leakage, you have the potential for toxic emissions, you have the potential for greenhouse gas emissions, and the
potential to infiltrate groundwater right and contaminate groundwater. But the reality is that actually you do have situations in Colorado, right, you know Burnfield's classic example. There are many places in Colorado where you have wells that are literally within neighborhoods. The same as true in California, right, whether you go to you know, from Los Angeles to Long Beach, those
are often credibly costly to close. I mean we were talking with we were talking with somebody from Calgium the other day about this, who is responsible for that in Los Angeles and they had to close some wells that were like seven hundred feet deep something like that, actually quite shallow, but it was over a million dollars well to close it because they had to redrill the well board.
Costs can be quite significant. I mean, when you think of the three hundred thousand that we're talking about here, that's sort of an average. There's all kinds of contingencies that could make it much more costly as well. But you have to do that because you have people that are getting sick, you know, headaches, you know, nose bleeds. Obviously there's plenty of carcinogens and petroleum.
No, the question is really who's going to pay. So once we once we get a handle on what's it going to cost, the questions who are actually going to pay this bill? And I think you can start, you know, first, and say is it going to be industry as well? The orphan well funds are are not even close to being up to the task of retiring all the existing producing and temporarily idled wells. And then you get into
landowners and citizens. So you know, landowners have a have a lot at stake here because many of them have abandoned equipment on their land and surface contamination. It's not what they bargained for, and so they're just kind of left with a mess on their property. And then you've got citizens that are impacted by can be impacted by toxics or groundwater contamination. And then you get to the environment. There are a lot of negative consequences to abandon and unplugged wells.
I guess this is naive, but I'm still sort of shocked at how willing states have been to just be left holding the bag on this.
We talk a little bit about that in the paper to try to make sense of how did we get here? So Rob describes the moral hazard that exists, which is quite evident when you look at it. So it begs the question, well, why did states do this? Why did they operate this way? And I think it's actually pretty obvious this was inevitable. These regulatory agencies were initially set up to protect the oil and gas resource, basically right
to protect itself. We could get as much of that hydrocarbon resource out of the ground as possible, and putting additional costs on the industry was viewed negatively because that was going to reduce the amount of oil and gas that could be extracted. And then you add to that the dynamics of the various oil producing states and the ability of industry to play one state against the other,
creating a race to the bottom. And you still hear this kind of discussion from states that well, if we increase the cost on industry, they're going to withdraw from our state and go someplace else, though it's in our financial best interests to keep their costs low and you know, that makes perfect sense until you look at the liability
side of the balance sheet. So as long as you're pushing those costs off, discounting them over decades, and essentially sort of out site out of mind on the closure cost issue, then the idea of reducing the bonding costs
makes good economic sense. What we're trying to do in the paper is draw attention to that, to the liability side of the balance sheets so that folks don't just see the asset side and realize that there is a huge bill to pay here and we simply haven't planned for it because the incentives were all going in the other direction for the past one hundred years.
Has there been any indication of willingness from states to potentially take these things to court? I covered the climate liability cases for a long time, and this sounds so similar to a lot of kind of the basis of those suits, and especially the fact that you know we're getting more specific costs in place here. Are you seeing any potential for liability suits that would cover the cost of damages here?
You'll know if the stage is interested in doing that when they actually follow complaint. Probably not, probably not before then. But the fact is what you know, are the conditions there for that? And I think the answer to that is yes.
That's it for this time. We will stick a link to the report in the show notes so you can read through the entire thing. We will have a couple more episodes for you here and there in the next few weeks, but otherwise we are going on production hiatus until we're ready to release the next investigative series. That will be in July sometime. I'm not going to commit
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