Colorado weighs new bonding rules to address ‘orphaned’ oil and gas wells

Just before he departed as director of the Colorado Oil and Gas Conservation Commission in 2018, Matt Lepore likened the potential threat of thousands of abandoned wells across the state to a “hurricane sitting offshore.”

“You know it’s out there, and you know it’s coming ashore,” Lepore said at the time. “You just don’t know if it’s going to be a tropical storm or a Category 5.”

In testimony before the COGCC last week, Lepore — who now represents Colorado’s three largest corporate oil and gas producers before the commission — was asked about his comments three years ago, and whether he believed the storm had made landfall yet.

“It’s pretty clear, I think, that the number of future orphaned wells is not zero — and as clear that it’s not 50,000,” Lepore said.

There are currently 50,499 active oil and gas wells scattered across Colorado, according to the COGCC, and exactly how many of them are likely to end up “orphaned” — abandoned to the state after an operator goes out of business — is the question at the heart of the agency’s next rulemaking. It’s the latest in a long series of reforms required by Senate Bill 19-181, the landmark overhaul of Colorado’s oil and gas laws passed by Democrats in the state legislature in 2019.

SB-181 directed the COGCC to consider a variety of new measures relating to “financial assurance,” the bonds that drillers must provide to the state to cover potential cleanup costs in the event that a site is abandoned.

Environmental advocates have long criticized Colorado existing bond requirements as inadequate. Operators can cover up to 100 wells statewide with a “blanket bond” of $60,000, while operators with more than 100 wells can provide a blanket bond of just $100,000. That’s despite the fact that the typical cost to “plug” and reclaim a single well — a process that drastically reduces the potential for safety or environmental hazards — can exceed $80,000.

“It’s beyond dispute that existing bonds do not cover full cleanup costs of existing wells,” Tom Delehanty, an attorney with environmental law firm Earthjustice, told commissioners in a March 31 hearing. “This means that the state’s taxpayers bear the substantial financial risk for nonperformance of well cleanup responsibilities.”

COGCC commissioners solicited feedback from industry groups, environmental advocates and others in hearings on March 31 and April 1, ahead of a formal rulemaking process in the coming months.

Reaching a consensus on new bonding rules could prove to be a challenge, with environmentalists favoring a “full cost bonding” approach that many oil and gas producers consider a nonstarter. Industry representatives say that they’re open to discussions about changes, but downplayed the need for a dramatic shift in financial-assurance regulations.

David Neslin, another former COGCC director who represents oil and gas clients as an attorney at Davis Graham and Stubbs, told commissioners: “We believe it’s premature to talk about solutions until we all better understand what problems exist.”

Hundreds of orphaned sites

The COGCC currently manages about 535 orphaned oil and gas sites, with a backlog of 239 orphaned wells remaining to be plugged at those sites, according to data from the agency’s Orphaned Well Program. The program spent more than $4.7 million on cleanup projects at 102 different sites in fiscal year 2020, with only about 10% of that cost covered by bond claims; the rest was appropriated by the Legislature, which increased the program’s annual budget to $5 million in 2019.

Colorado has relatively few orphaned wells compared to some other states, including Pennsylvania, which has documented nearly 9,000 orphaned wells, some of which date to the early days of oil production in the mid-19th century. But critics of current bonding requirements say that amid deep uncertainty about the future of the oil and gas industry, that’s no reason not to pass stricter rules.

“The orphaned well problem may not be as bad as other states yet … but given market volatility and the decline of the oil and gas industry, it will happen quickly,” former State Sen. Mike Foote, a sponsor of SB-181 and an environmental attorney representing anti-fracking group Colorado Rising, told commissioners on April 1.

The looming fight over new bonding rules has opened up a rift between larger oil and gas producers, who face relatively light financial-assurance requirements due to the blanket bond system, and smaller operators. Nearly all orphaned wells are the result of bankruptcies among small oil and gas firms, not corporate giants that are subject to stricter federal financial reporting rules.

“As operators, we report an asset retirement obligation within our balance sheets,” Brian Cocchiere, a senior asset engineer for Denver-based producer PDC Energy, told commissioners. “As publicly-traded companies … that’s a liability that we account for within our reporting to the SEC.”

Neslin said that his clients — PDC, Noble Energy and Occidental Petroleum — strongly oppose a proposal by the Small Operator Society, a coalition of more than 60 smaller Colorado producers, to implement a new, “pay as you go” bonding system, funded by a small fee on each barrel of oil or cubic foot of natural gas that a driller produces.

Environmental groups, meanwhile, urged the commission to adopt “full cost bonding,” requiring each well to be bonded at the full estimated cost of its plugging and reclamation — potentially $100,000 or more per well. That would, in effect, lead operators to turn to the private insurance market, seeking surety bonds to cover their obligations to the state.

“Require that bond up front, and let the financial markets price that risk,” said Greg Rogers, a senior adviser with the Carbon Tracker Initiative. “If the nonperformance risk is low, then the financial cost shouldn’t be that high. If the nonperformance risk is high, then (the financial cost) should be high, because otherwise the state is carrying that risk, and effectively, taxpayers are carrying that risk.”

Sam Bradley, co-founder of the Small Operators Society, called full cost bonding “flat out unworkable” for smaller producers. Lepore acknowledged that corporate operators with large balance sheets have better access to the surety bond market, but said that the size of Colorado’s orphaned well program doesn’t justify bonding requirements that would add up to billions of dollars.

“We feel pretty strongly that there’s not a need to have a fund that will cover 50,000 wells,” Lepore said. “Not all of today’s active wells are going to be orphaned. In fact, we think a pretty small percentage of the active wells today will ultimately be orphaned. At least that’s what history tells us.”