Carbon Tracker Fantasy: “Cleanup of abandoned oil and gas wells could cost Texans $117 billion”

Guest “this is horst schist” by David Middleton

BUSINESS // ENERGY
Cleanup of abandoned oil and gas wells could cost Texans $117 billion

Paul Takahashi Oct. 1, 2020

Plugging and cleaning up the open oil and gas wells in Texas could cost companies and taxpayers as much as $117 billion, according to a new report.

Carbon Tracker, a nonprofit financial think tank that studies the effects of climate change on financial markets, estimates there are some 3.8 million unplugged oil and gas wells nationally, including more than 783,000 across Texas. As the coronavirus pandemic forces more oil and gas companies into bankruptcy, Carbon Tracker fears more of these unplugged wells could be abandoned, leaving taxpayers on the hook for plugging and cleaning up so-called “orphan wells.”

“Texas by far has the highest number of wells of any state in the U.S. and orphan wells are going way up,” said Greg Rogers, a special advisor and co-author of the Carbon Tracker report. “We’re seeing a lot of operators go bankrupt and they can’t afford to fulfill their legal obligations to plug in abandoned wells.”

[…]

There are more than 6,200 abandoned oil and gas wells in Texas, according to the Texas Railroad Commission, which oversees oil and gas companies operating in the state.

[…]

The number of orphan wells could rise even higher as society shifts from fossil fuels to more sustainable energy sources. If the world has hit or is approaching peak oil demand, oil and gas companies could be less motivated to plug in wells, Rogers said.

“If you see the industry as fundamentally healthy with a bright outlook through the end of this century, then this is not really a problem,” Rogers said. “On the other hand, if peak oil demand occurred in 2019, then we have a big problem.”

Houston Chronicle

One would think that the “journalists” with the Houston Chronicle would have some knowledge of the oil & gas industry… Particularly since he mentioned the Texas Railroad Commission’s estimate of 6,200 orphaned wells. Otherwise there appears to have been no effort to verify crap fed to them by “Carbon Tracker”…

Our mission

We recognise that there is a limited global ‘carbon budget’ of cumulative emissions that must be respected to avoid overshooting 2˚C and destabilising the global climate. Our view is that capital markets are failing to align the capital allocation process, exposing the owners of fossil fuel companies – their shareholders – to potential lost value, as has already been witnessed in the EU utilities and US coal mining sectors. We further believe that companies have not sufficiently factored in the possibility that future demand could be significantly reduced by technological advances and changing policy.

Our role is to help markets understand and quantify these implied risks.

Carbon Tracker

European (misspellings of recognize and destabilizing) enviro-zealots on a mission from Gaia to destroy fossil fuel companies aren’t exactly reliable sources for information about the oil & gas industry. At the very least, Mr. Takahashi (2010 MA interactive storytelling) should have checked with oil industry sources or the Texas Railroad Commission, the responsible regulatory agency in Texas.

Carbon Tracker claims that Texas taxpayers are potentially on the hook for $117 billion for the plugging and abandonment (P&A) of 783,000 wells.

	Total P&A Liability	Number of Wells	P&A/Well
Carbon Tracker	$  117,000,000,000	783,000	$  149,425

$149,425 per well?

What is the basis for this claim? An average P&A cost of nearly $150,000/well sounds even more ridiculously high than the 783,000 potentially orphaned wells. The Houston Chronicle article links to a Carbon Tracker “report”, which links to another Carbon Tracker “report”, neither of which provide any useful information unless you log in to download the full reports. I already get enough SPAM email, so I didn’t register with Carbon Tracker… yet.

However, being a petroleum geologist, I kind of know where to look for useful information without subjecting myself to a barrage of SPAM.

Abandoned Wells
What happens to oil and gas wells when they are no longer productive?

Petroleum and the Environment, Part 7/24
Written by E. Allison and B. Mandler for AGI, 2018

Introduction

In 2017, there were one million active oil and gas wells in the United States.¹ When a well reaches the end of its productive life, or if it fails to find economic quantities of oil or gas, the well operator is required by regulators to remove all equipment and plug the well to prevent leaks.² Usually, cement is pumped into the well to fill at least the top and bottom portions of the well and any parts where oil, gas, or water may leak into or out of the well. This generally prevents contamination of groundwater and leaks at the surface. State or federal regulators define specific plugging procedures depending on the local conditions and risks, and may monitor the plugging operation.

However, there are many cases in which wells are not properly plugged before being abandoned, especially if the well operator goes bankrupt, leaving its wells “orphaned”.³ This is more common when oil prices fall rapidly, making many wells uneconomical, as in the 1980s oil glut, the 2008 financial crisis, and the 2014 downturn.

In the late 1980s, the U.S. Environmental Protection Agency estimated that 200,000 of 1.2 million abandoned wells may not have been properly plugged.⁴ Since then, tens of thousands of orphaned wells have been plugged by state and federal regulators, as well as some voluntary industry programs. These efforts are ongoing, and many orphaned wells have yet to be properly plugged. The exact number is not known: some 3.7 million wells have been drilled in the U.S. since 1859,⁶ and their history is not always well documented. Older wells, especially those drilled before the 1950s, are particularly likely to have been improperly abandoned and poorly documented.

[…]

Abandoned Well Plugging Campaigns

For several decades, states have increased enforcement of plugging and cleanup requirements. States generally require a performance bond or other financial assurance from the operator that a well will be plugged and the well site restored. However, bond amounts may not meet the plugging and cleanup expenses if an operator goes bankrupt.¹¹ Most states therefore collect fees or a production surcharge from operators specifically for remediation of orphaned wells and associated surface equipment.¹² For example, Pennsylvania adds an orphaned well surcharge to drilling permit application fees,¹⁴ while Texas adds a 5/8-cent Oil Field Cleanup surcharge to the state’s 4.6% oil production tax.¹⁵ The Oklahoma Energy Resources Board remediates abandoned well sites using voluntary industry contributions amounting to 0.1% of oil and gas sales.¹⁶

[…]

American Geosciences Institute

Orphaned wells are a problem. It is mostly associated with very old, poorly documented wells. Wells can also be orphaned when the operators go bankrupt. States currently require some level of bonding and levy taxes and surcharges specifically to fund P&A work on orphaned wells. States also carry out ongoing P&A programs for orphaned wells. AGI sites specific numbers for state and federal P&A programs. Let’s compare Carbon Tracker’s fantasy to the real world.

	Total P&A Liability	Wells	P&A/Well
Carbon Tracker	$      117,000,000,000	783,000	$     149,425
TX 1984-2008	$              163,000,000	35,000	$         4,657
TX 2017	$                11,600,000	918	$       12,636
OK since 1994	$              100,000,000	15,000	$         6,667
CA since 1977	$                27,000,000	1,350	$       20,000
BLM 1988-2009	$                   3,800,000	295	$       12,881
Real World	$              305,400,000	52,563	$         5,810

A presentation at the 13th Annual Ryder Scott Reserves Conference cited Texas Railroad Commission numbers for 2013-2017:

	Wells	Cost (millions)	P&A/Well
2013	778	$                 20.9	$       26,900
2014	563	$                 15.0	$       26,600
2015	692	$                 10.7	$       15,500
2016	544	$                   8.5	$       15,700
Jan-June 2017	223	$                   2.4	$       10,800
Real World	2,800	$                 57.5	$       20,536

$5,800 to $20,500 per well is just a bit less than $150k/well. But, P&A costs for individual wells can vary widely. A 2015 Wyoming Public Radio report on orphaned wells in Wyoming featured the following graphs:

The vast majority of the wells cost less than $10,000 each to P&A. A few wells did get into Carbon Tracker territory, mostly deeper wells. But there’s clearly no robust relationship between depth and P&A cost.

Any bets on what the R² is? There should be at least some statistical relationship between depth and cost, but the sample size is way too small for meaningful statistics. Only five wells exceeded $100k, the most expensive being a shallow (~3,000′) well.

What happens to orphaned wells? At least four things can happen, only one of which involves taxpayer money.

Things that can happen to Orphaned Wells
• Plugged or brought back to production by
current operator
• Brought back to production by a new operator
• Surface owner can plug well
• Railroad Commission plugs well

Ryder Scott

Where do states get the money to P&A orphaned wells?

Texas

Sources of Money used by RRC to fund
orphan well plugging
• Recovered from responsible party
• Recovered from salvaged equipment
• Recovered from performance bonds, letters of
credit, and cash deposits
• Taxes and fees paid by industry and public

13th Annual Ryder Scott Reserves Conference

Wyoming

Between 1997 and 2014, it cost the State of Wyoming $11 million in total to plug orphaned wells, and only $3 million was covered by bonds. The other $8 million came from the conservation tax fund—a state tax levied on oil and gas production that funds the regulatory agency that oversees the industry and pays for things like well plugging.

The Rising Cost Of Cleaning Up After Oil And Gas

State governments recover the money from:

• The responsible party.
• Sale of salvaged equipment.
• Performance bonds.
• Taxes paid mostly by the oil & gas industry,

In the case of the federal government, they can actually go after the previous owners of a well if the current operator goes bankrupt and can’t cover the P&A costs.

In 2013, Apache sold its Gulf of Mexico Shelf operations and properties
(Transferred Assets) to Fieldwood Energy LLC (Fieldwood). Under the terms of the purchase agreement (Agreement), Apache received cash consideration of $3.75billion and Fieldwood assumed $1.5 billion of discounted asset abandonment liabilities. In respect of such abandonment liabilities, Fieldwood posted letters of credit in favor of Apache (Letters of Credit) and established a trust account (Trust A), which is funded by a 10 percent net profits interest depending on future oil prices and of which Apache is the beneficiary. On February 14, 2018, Fieldwood filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In connection with the 2018 bankruptcy, Fieldwood confirmed a
sferred plan under which Apache agreed, inter alia, to accept bonds in exchange for certain of the Letters of Credit. Currently, Apache holds two bonds (Bonds) and the remaining Letters of Credit to secure Fieldwood’s asset retirement obligations (AROs) on the Transferred Assets as and when such abandonment and decommissioning obligations are required to be performed over the remaining life of the Transferred Assets.

Given the current commodity price environment, decreased demand for oil and gas, and recent media reports, Fieldwood may be experiencing financial distress. If Fieldwood is in financial distress, then Apache does not know if, or to what extent, Fieldwood will be able to continue to perform its AROs with respect to the Transferred Assets. If Fieldwood fails to perform any of its AROs with respect to the Transferred Assets, then Apache’s remedy would be a claim for damages against Fieldwood for breach of its contractual obligations under the Agreement.

If Fieldwood fails to perform any of its AROs on the Transferred Assets, then Apache would expect the relevant governmental authorities to require Apache to perform, and hold Apache financially responsible for, such AROs to the extent not performed by Fieldwood. Pending resolution of any claim by Apache for breach of the Agreement, Apache may be forced to use available cash to cover the costs it incurs for performing such AROs. While Apache anticipates that all, or a portion, of such costs would be reimbursable to Apache under the remaining Letters of Credit, the Bonds and Trust A, it is possible that such decommissioning security may not be sufficient to cover all of the costs and expenses incurred by Apache in performing such AROs.

Market Screener

States generally don’t have laws that allow them to go after previous owners of wells. Costs that can’t be recovered from the responsible parties are covered by tax revenue and other fees collected from oil & gas producers.

From 2007-2019, Texas oil & gas well operators paid the state over $149 billion in taxes and royalties on oil & gas production.

“Last year alone, the Texas oil and natural gas industry paid the equivalent of $38 million a day to fund our schools, roads, universities and first responders,” said Todd Staples, president of TXOGA. “More tax and royalty revenue from the oil and natural gas industry means our lawmakers have more to work with to meet the needs of our growing state.”

In fiscal year 2018, Texas school districts received $1.24 billion in property taxes from mineral properties producing oil and natural gas, pipelines, and gas utilities.  Counties received $366.5 million in oil and natural gas mineral property taxes.

“In addition to taxes and royalties, Texas oil and natural gas companies are investing billions in advanced technologies that are protecting and improving our environment – proof that we can grow our economy, protect the environment and enhance our energy security at the same time,” Staples said. U.S. CO2 emissions are near 20-year lows and methane emissions from oil and natural gas systems are down 14 percent since 1990 – all while production has skyrocketed.

State royalties paid by the oil and natural gas industry in fiscal year 2018 increased 18 percent to a total of $2 billion, money that is used to capitalize the Permanent School Fund (PSF), which benefits the public schools of Texas, and the Permanent University Fund (PUF), which benefits public higher education in Texas. Oil and natural gas royalties constitute the only substantive new money deposited annually to the PSF and PUF, according to Staples.

“What’s remarkable to me is that the Texas Permanent School Fund, seldom recognized outside of Texas, leads the pack among ALL educational endowments in the country,” he said. “With a balance of $44 billion at the end of fiscal year 2018, the PSF is the largest educational endowment in the nation – bigger than Harvard University’s endowment worth $39.2 billion.”

Texas Oil and Natural Gas Industry Paid More than $14 Billion in Taxes and Royalties in 2018, Up 27% from 2017

What’s even more remarkable than the fossil fueled Texas Permanent School Fund being the largest educational endowment in the country? Over-educated idiots at the University of Texas in the Peoples Republic of Travis County are actually demanding that the UT System divest from fossil fuels. I schist you not.

In 2019, Texas oil & gas producers paid over $16 billion in taxes and royalties. This is how the state spent 25% of the revenue:

FY2019	Billions
Taxes & Royalties Paid	$    16.28
Spent		%
School Districts	$       1.54	9%
Counties	$       0.40	2%
Permanent University Fund	$       1.02	6%
Permanent School Fund	$       1.11	7%
TX RRC P&A	$       0.03	0.21%
TX RRC Pollution Clean Up	$       0.00	0.01%

In FY2019, the Texas Railroad Commission spent about $35 million on P&A work for orphaned wells and about $2 million on oil & gas related pollution abatement. This amounts to less than 0.3% of the taxes and royalty revenue the state generated from oil & gas production.

	Total	Wells	P&A/Well
FY2019	$  34,942,911	1,710	$       20,434

The average P&A cost over recent years has been around $20,000 per well. Taxes and fees already paid by oil & gas producers comfortably cover these costs.

Now that we have thoroughly destroyed Carbon Tracker’s assertion of an average P&A cost of nearly $150k per well, let’s move on to the actual number of wells for which taxpayers might be on the hook.

783,000 orphaned wells in Texas?

Carbon Tracker claims that there could be as many as 783,000 orphaned or potentially orphaned wells in Texas.

Carbon Tracker, a nonprofit financial think tank that studies the effects of climate change on financial markets, estimates there are some 3.8 million unplugged oil and gas wells nationally, including more than 783,000 across Texas.

We’ll have to assume that Carbon Tracker’s 783,000 figure is based on the belief that every well in Texas will become a ward of the state. Even then, we can’t get to 783,000.

	Wells
Shut-in and/or Inactive	146,428
Producing	294,271
TX RRC Total	440,699
Carbon Tracker	783,000

Maybe they’re simply tabulating the total number of wells that have ever been drilled in Texas. From 1960-2018, a total of 696,406 wells were drilled in Texas. 431,257 of those wells have been properly P&A’ed.

At this time, the Texas Railroad Commission can only identify 6,208 orphaned wells that are not in compliance with the Commission’s Plugging Rule out of a total of 146,428 shut-in and/or inactive wells in the state.

Let’s break the inactive wells down.

Only 13% (19,267) inactive wells are currently not compliant with plugging rules.

Inactive Wells		% of Inactive
Compliant with Bond/LOC	78,316	53%
Compliant Shut-in <1 yr	48,845	33%
Non-Compliant	19,267	13%
Total	146,428	100%

Operators of almost half of the non-compliant wells are in the process of bringing them into compliance (active P-5).

Non-Compliant		% of Inactive
Active P-5	8,866	6%
Delq P-5	10,401	7%
Total	19,267	13%

About 40% of the non-compliant wells have been out of compliance for less than 12 moths and not considered orphans.

Delq P-5		% of Inactive
<12 Months	4,193	3%
>12 Months (Orphans)	6,208	4%

About 75% of the currently orphaned wells have been prioritized for P&A.

Orphaned Wells		% of Inactive
Prioritization Complete	4,513	3%
Prioritization In Progress	1,695	1%
	6,208

Of the 4,513 prioritized orphaned wells, only 1,818 are considered “high priority.” The rest are considered “low risk” (not urgent).

Prioritization Complete		% of Inactive
High Priority 1	3	0.002%
High Priority 2H	1,045	0.7%
High Priority 2	770	0.5%
High Priority Subtotal	1,818	1.2%
Low Risk Priority 3	1,341	0.9%
Low Risk Priority 4	1,354	0.9%
Low Risk Subtotal	2,695	1.8%
Total	4,513	3.1%

Just over 1% of the inactive wells are orphaned and considered a high priority for plugging.

Conclusion

Unless Joe Biden wins the election and is actually serious about the bat schist crazy things he promised to do, before promising not to do, Texas taxpayers aren’t potentially on the hook for $116 billion to cover the cost of plugging and abandoning 783,000 wells. The only way that Carbon Tracker’s fantasy could come to fruition is if the world suddenly stopped consuming oil & gas, in which case we’d all be dead in a few months… Of if the US government did something really fracking moronic, like banning frac’ing. If the federal government forced the oil & gas industry out of business, the taxpayers would be on the hook for hundreds of billions of dollars in P&A liabilities… And rightfully so because they elected the idiots who would have forced the industry out of business. They would also be potentially liable for trillions of dollars in damages awarded in lawsuits filed by oil & gas companies for violations of the “takings clause” of the US Constitution.

The vast majority of oil & gas wells in Texas are properly P&A’ed at the end of their productive lives. A tiny fraction of the taxes and fees paid by oil & gas producers covers the costs of P&A work that can’t be paid by the operators of the wells.