PA Environment Digest Blog: EDF: Pennsylvania Has 55,000 Oil/Gas Wells At High Risk Of Being Abandoned; 51,000 Wells At Risk Of Being Transferred To Low Solvency Owners; Current Conventional Well Owners Abandon 561 Wells A Year, On Average

On April 24, the Environmental Defense Fund announced the results of a new study that found 55,000 oil and gas wells owned by operators in Pennsylvania are at high risk of becoming abandoned leaving state taxpayers holding the bag for $3.7 billion in well plugging and cleanup costs.

The overwhelming majority of these wells are conventional oil and gas wells.

“There's all the incentive in the world for those operators to walk away,” said Adam Peltz, EDF Senior Attorney for Energy Transition. “If they're bankruptcy-proof, then the state can't get them and they save all the money unplugging.”

The study also found another 51,000 wells owned by solvent operators are at risk of being transferred to new financially unhealthy companies because the net present value of the wells is negative. The state taxpayer liability for these wells is an estimated $3.5 billion.

“Solvent operators are not going to orphan [abandon] the wells because they're solvent. And if you abandon a well and you're solvent, someone's going to come get you,” said Peltz. “But what those operators are incentivized to do is transfer the wells down the value chain until they get to a low solvency entity that might then go bankrupt.”

Only 11,500 wells were determined to be of no risk of being abandoned in Pennsylvania, according to the EDF study.

There are a total of 117,500 active or idle [inactive] conventional and unconventional oil and gas wells in the state, according to EDF.

The study was based on a review of the net present value of the wells and the relative insolvency and fiscal health of the operators.

[Note: DEP reported in December that between 2017 and 2021, current conventional oil/gas well operators were issued notices of violation for abandoning without plugging 2,246 wells-- 561 a year, on average. At least these were the wells DEP found doing inspections. Read more here.]

Peltz made these comments in testimony before the House Environmental Resources and Energy Committee on April 24.

“Now, that's a worst case scenario. Not all of these wells are going to become orphaned [abandoned], of course,” said Peltz. “[The] Industry's already plugging 500 wells a year in the state, which is good.

“But on the other hand, if you think about [taking] that through 2050, if the rate stays consistent, that's 13,500 wells. If there's 115,000 wells in the state, that's not very many wells that are going to be plugged by industry through 2050,” said Peltz.

“And the likely thing to happen for a lot of the rest of them is to become orphaned [abandoned] and we all want to avoid that,” said Peltz. “So what do we do?

“So the solution set is a combination of bonding, which we've been talking about, idle [inactive] well management, well transfer considerations, and state orphan well funds,” said Peltz.

Bonding

“The primary mechanism for states to avoid future orphan well burden is adequate financial assurance, or bonding. Financial assurance takes the form of some amount of money that operators set aside for the benefit of the state in case no solvent responsible party is available to plug the well at the end of its useful life.

“Ideally, this amount of money is risk-targeted so as not to overspend or underspend the amount needed for well closure.

“Pennsylvania’s current bonding framework is famously lax compared to its 30 oil and gas producing peer states, and likely has the lowest average bond amounts in the country, largely because wells drilled before 1985 are exempt from bonding entirely.

“As a general matter, no wells should be exempted from bonding, because future orphan risk only increases with older vintage wells. Single-well bonds, when applicable, should be based on actual plugging and remediation costs, using a combination of average industry plugging costs and average state orphan well plugging costs, and updated regularly.

“Blanket bonds, when applicable, should be based on risk, and eligibility should be predicated on the financial wherewithal of the operator, which can be determined a variety of ways.

“EDF recognizes that the sudden imposition of large bonds on marginal wells would likely induce an immediate wave of well orphaning, for which Pennsylvania is not prepared. Changes to the bonding framework, which are absolutely essential, must be developed in consultation with all stakeholders and phased in appropriately.

“Nevertheless, failing to reform Pennsylvania’s financial assurance framework essentially guarantees high levels of well orphaning in the decades to come, a shameful legacy for a proud energy-producing state.”

Idle [Inactive] Well Fees

“Idle, or non-producing wells, are required to be plugged in Pennsylvania after one year without production. However, operators are eligible for essentially indefinite extensions of inactive status, and unfortunately, this is a common way that operators avoid plugging obligations around the country.

“While there are legitimate business reasons for temporarily idling a well, the vast majority of idle wells are never returned to service.”

Peltz also suggested Pennsylvania adopt idle [inactive] well fees that escalate over time to encourage these wells to be plugged and raise monies for an orphan well fund. He also suggested the wells be regularly tested for mechanical integrity.

Idle wells are at the highest risk for becoming orphan wells and should be bonded appropriately, Peltz said.

Well Transfers

“Because well transfer is a gateway to orphaning without proper guardrails, EDF strongly recommends that the Pennsylvania DEP evaluate the financial wherewithal of transferees and use risk metrics to determine appropriate bonding amounts on well transfer.

“Alternatively, Pennsylvania can follow Arkansas’ lead, which in 2018 adopted regulations requiring essentially full-cost bonding for marginal wells on transfer – this policy has led to a significant reduction in the rate of well orphaning in that state.

“Given that half of the expected future orphan well burden in Pennsylvania comes from “transfer risk” wells, Pennsylvania could obviate billions of dollars in future orphan well closure expenditures by adopting this straightforward risk-oriented rule with a track record in oil and gas producing states (Colorado adopted a similar rule just last year).”

Now Is The Time

“Given the intense attention being paid to the issue of orphan wells on the national and state level, Pennsylvania’s unfortunate status as the locus of the orphan well problem in the United States, the funding opportunities presented by the new federal orphan well closure funding mechanism, and the desire of Pennsylvania policymakers to use the Commonwealth’s geology for alternative purposes, now is the moment to adopt reforms needed to tackle the existing orphan [abandoned] well problem and to prevent today’s active and idle [inactive] wells from becoming tomorrow’s orphan wells,” said Peltz.

Click Here for a copy of the written testimony by Peltz.

Other Testimony

Other comments presented at the April 24 House Environmental Resources and Energy Committee hearing included--

-- David Hess, former Secretary of the Department of Environmental Protection

-- Kelsey Krepps, Sierra Club

-- Kurt Klapkowski, Acting DEP Deputy Secretary for Oil & Gas Management

-- Arthur Stewart, Cameron Energy

Click Here to watch a video of the hearing.

Rep. Greg Vitali (D-Delaware) serves as Majority Chair and can be contacted by calling 717-787-7647 or sending email to: gvitali@pahouse.net. Rep. Martin Causer (R-Cameron) serves as Minority Chair and can be contacted by calling 717-787-5075 or by sending email to: mcauser@pahousegop.com.

NewsClips:

-- The Center Square - Anthony Hennen: House Committee Warned Of Lurking Taxpayer Cost For Plugging Conventional Oil & Gas Wells

-- Bradford Era/The Center Square: Committee Warned Of Lurking Taxpayer Cost For Plugging Conventional Oil/Gas Wells

-- Bradford Era: Rep. Causer Applauds Conventional Oil/Gas Well Owner Art Stewart For Testimony On Orphan Wells [Actually They’re Confused-- Current Conventional Operators Abandon 561 Wells A Year, On Average; 55,000 More At High Risk Of Abandonment]

Monday, April 24, 2023

EDF: Pennsylvania Has 55,000 Oil/Gas Wells At High Risk Of Being Abandoned; 51,000 Wells At Risk Of Being Transferred To Low Solvency Owners; Current Conventional Well Owners Abandon 561 Wells A Year, On Average

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