PA Environment Digest Blog: Ohio River Valley Institute Report Shows Diversified Energy, Owner Of Over 22,500 Conventional Oil & Gas Wells In PA, May Be Financially Insolvent

Thursday, January 12, 2023

Ohio River Valley Institute Report Shows Diversified Energy, Owner Of Over 22,500 Conventional Oil & Gas Wells In PA, May Be Financially Insolvent

On January 12, the Ohio River Valley Institute issued a new report showing the total financial liabilities of Diversified Energy, the nation’s largest owner of oil and gas wells, exceeded company assets by more than $300 million in June 2022.

By some definitions of insolvency, the shortfall renders Diversified technically insolvent, despite the company’s continued use of financial and accounting practices outside of industry norms.

[Diversified Energy owns over 22,500 conventional oil and gas wells in Pennsylvania.

[In 2019, the Department of Environmental Protection signed a settlement with Diversified that requires over 1,400 of the company’s wells be plugged. Read more here.

[The company also agreed to post a $7 million surety bond for the wells covered by the settlement, plus an additional $20,000 to $30,000 bond for each abandoned or nonproducing oil and gas well acquired in the future. Read more here.

[However, Diversified continues to regularly get notices of violation from DEP for attempting to abandon its wells without plugging them. Read more here.

[Attempts to abandon wells without plugging them are a pervasive practice in Pennsylvania’s conventional oil and gas industry. Read more here.

[A report issued by DEP on conventional oil and gas industry compliance cited well abandonments as the most frequent violation of the industry for the last five years. Read more here.]

“Since our last analysis of Diversified Energy’s questionable business model in April 2022, the company has doubled down on unusual accounting practices: lowering well-plugging cost projections, assuming unreasonably long economic lives of wells, and reporting production decline rates—an industry measure of future cash flow—far lower than internal bookkeeping suggests,” said report co-author Ted Boettner, Senior Researcher with the Ohio River Valley Institute. “Even still, Diversified’s accounting strategies could not prevent the company’s liabilities from surpassing its assets.”

Throughout 2022, Diversified continued to employ a number of highly unusual financial practices with significant bearing on its accounting statements, including:

-- Exceptionally low Asset Retirement Obligations (AROs), or plugging cost

assumptions.

-- Overinflated assumptions about the producing lives of its wells, allowing the

company to delay plugging expenses.

-- Significantly understated decline rates, an industry measure of future cash flow.

-- Continued use of Gain on Bargain Purchase (GoBP), an uncommon financial practice

of recording acquisitions as financial gains. The company has booked GoBP on its

income statements for nine consecutive years.

-- Carrying forward $183 million in unused marginal tax credits, generated when natural gas prices were low.

In the wake of historic legislation to fund orphaned well cleanup, Diversified’s recent push to acquire well-plugging companies raises further questions about its efficacy as a steward of the nation’s orphaned well crisis.

Its newly acquired well-plugging subsidiary, Next LVL Energy, recently secured funding to plug 100 wells in West Virginia at a per-well cost more than six times greater than Diversified’s in-house plugging assumptions.

“The sizeable discrepancy between Diversified’s internal plugging assumptions and the plugging awards received by its subsidiaries suggests a need for heightened scrutiny from state and federal regulators, especially as the company positions itself to capitalize on billions in federal well-plugging funds earmarked in the Bipartisan Infrastructure Law and the Inflation Reduction Act,” explained co-author Kathy Hipple, Ohio River Valley Institute Research Fellow.

Click Here for a copy of the report.

For media inquiries, please contact report co-author and Ohio River Valley Institute Senior Researcher Ted Boettner at ted@ohiorivervalleyinstitute.org.

PA DEP Public Notice Dashboards:

-- Pennsylvania Oil & Gas Weekly Compliance Dashboard - Jan. 7 to 13 [PaEN]

-- PA Oil & Gas Industrial Facilities: Permit Notices/Opportunities To Comment - Jan. 14 [PaEN]

-- DEP Posted 46 Pages Of Permit-Related Notices In Jan. 14 PA Bulletin [PaEN]

PA Oil & Gas Industry Compliance Reports:

-- PA Oil & Gas Industry Has Record Year: Cost, Criminal Convictions Up; $3.1 Million In Penalties Collected; Record Number Of Violations Issued; Major Compliance Issues Uncovered; Evidence Of Health Impacts Mounts

-- DEP Report Finds: Conventional Oil & Gas Drillers Routinely Abandon Wells; Fail To Report How Millions Of Gallons Of Waste Is Disposed; And Non-Compliance Is An ‘Acceptable Norm’