New Colorado rules to insure there is enough cash to plug each oil and gas well in the state at the end of its life may not generate enough money to do the job, according to an analysis by Carbon Tracker.
The report by the nonprofit environmental think tank said that in the short-run the state may end up with less in financial guarantees than it had before the new rules were adopted nearly two years ago and about 39% of oil and gas companies still have not completed financial assurance plans.
The Colorado Energy and Carbon Management Commission, which adopted and administers the financial assurance rules, disputes those findings.
In April 2022, the state held 1,593 active bonds totaling about $243 million, the commission said in a statement to The Colorado Sun. The new rules were adopted in March 2022, and the ECMC now has 1,827 active bonds totaling $399 million.
The commission said it has approved financial assurance plans that will grow that amount to a projected balance of $820 million.
The financial assurance rules were required under Senate Bill 181, which reoriented oil and gas regulation in Colorado from promoting drilling to protecting public health, safety and welfare and the environment and wildlife.
The biggest share of those funds, however, will come from operators with many low-producing wells paying into their state plans over the next 10 to 20 years.
“This is a story of the haves and have-nots,” said Rob Schuwerk, executive director of Carbon Tracker’s North American office and a co-author of the report.
The “haves” are the large companies, who in many cases will see their bonding requirements go down, and the “have-nots” are smaller operators with marginal wells, who may face increased obligations.
“The money will mostly come from operators producing less than 2 boe/d (the equivalent of two barrels of oil a day) per well,” the report said. “Thus, the bulk of future bonding is exposed to low-producing operator default risk over a 10-year time horizon, replicating the problems SB19-181 was intended to solve.”
The ECMC said that it will retain the bonds posted by these smaller companies under the previous rules, which required bonding for plugging wells and surface cleanup, and the status of each operator will be reviewed annually.
The rules create five categories of financial assurance depending on the volume of oil and gas a company produces, with large companies able to cover their operations with blanket bonds.
The smaller, low-producing companies could have either 10 or 20 years to pay into a fund to meet plugging costs for each well or seek a customized plan.
“These strategies really aren’t going to be able to fix the problem because if you think about it, that means those entities will be contributing an additional 5% or 10% of their burden every year, as their wells produce less and less,” Schuwerk said.
The go-slow approach was adopted, Schuwerk said, because the commission was concerned that tougher regulations would trigger a rash of operator failures and a flood of new orphan wells.
Kate Merlin, an attorney with the environmental group WildEarth Guardians, said “the commission was trying to balance setting reasonable bond amounts that would protect the state and bonds too burdensome for operators.”
“I think they were a little too credulous about operators’ claims of too heavy a financial burden,” said Merlin, who reviewed the Carbon Tracker report. “It looks clear we aren’t going to end up with a substantial increase in bonds.”
Companies file plans, then go out of business
Companies must submit a financial assurance plan, a Form 3, and if approved, proof of bonding or fund contributions, a Form 3A.
The ECMC said that as of November 2023, approved plans covered 89% of the state’s 46,312 active wells and another 6% of the wells are in plans being reviewed.
However, only 8% of the plans have yet submitted plans and had approved their 3A proof of financial assurance, Carbon Tracker said.
The Carbon Tracker study noted that some of these companies aren’t making it through the financial assurance process.
WME Yates, which averaged a gas production equivalent of 35 barrels of oil a year from 2000 to 2023, submitted a Form 3, but before it was approved the company went out of business leaving 212 wells to the state.
Omimex Petroleum, with an average production equivalent of 75 barrels of oil over the past four years, had its Form 3 approved and then ceased operations leaving behind 339 wells.
The rules have created a Orphan…
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