Bankruptcies fuel environmental crisis at abandoned oil wells

A tide of failing energy companies is pushing government regulators to rush to deal with the nation’s stockpile of abandoned, methane-leaking oil wells as environmental liabilities reach a fever pitch in oil and gas bankruptcy proceedings.

More than 260 domestic oil producers deposit Chapter 11 over a six-year period marked by falling commodity prices and the global economic shock caused by the Covid-19 pandemic.

Many struggling fossil fuel companies are transferring environmental obligations to government agencies amid the worst crude oil crash in history. Some of these companies use bankruptcy to transfer multi-million or even multi-billion dollar dismantling charges to predecessors and co-shareholders.

The prolonged downturn is now prompting lawmakers and regulators to step up their efforts to address an environmental crisis that has been brewing for more than a century.

The bipartisan infrastructure bill past by the Senate last month would be allocate more than $4 billion to plug and clean up abandoned oil wells, while federal regulators and lawmakers Continue to consider tougher rules that would force fossil fuel companies to set aside more money to plug wells at the end of their productive life.

In a federal policy update announced on August 18, the Biden administration has tightened requirements to ensure that more offshore oil companies have funds for dismantling wells in the Gulf of Mexico.

“In general, we don’t want the taxpayer footing the decommissioning bill,” said John Filostrat, spokesman for the Bureau of Ocean Energy Management. “We want to make sure there is no public bailout of companies and their bonds.”

But decades of lenient regulations, coupled with the economics that have long guided a boom-and-bust cyclical industry in the United States, have made it difficult to ensure drillers cover their cleanup costs.

More than 3 million oil and gas wells in the United States are idle, and about two-thirds of them are disconnected, collectively emitting several million metric tons of greenhouse gases each year. according to the Environmental Protection Agency. Many sinks leak methane, which is more than 25 times more powerful than carbon dioxide in trapping heat in the atmosphere and worsening climate change, according to the EPA.

Chemicals from abandoned wells can also be harmful to people living nearby and can contaminate groundwater.

“It’s essentially a capital cost with no return, so companies obviously have less incentive to invest in these projects,” said attorney Paul J. Goodwine of Looper Goodwine PC, an adviser to oil and gas companies.

Escaping responsibility

Oil and gas drillers are legally required to plug orphan wells that have reached the end of their useful life, but often tenants run out of money and abandon these orphan wells. If they need to be plugged, usually with cement pumped down the wellbore, US taxpayers often pay a bill ranging from $20,000 to $145,000 per well, according the Office of Government Accountability.

The big company that drills a well often sells it to a mid-sized company that operates it for a while, then eventually to someone who can “pull out the last molecules,” said Environmental attorney Adam Peltz. DefenseFund. “Really, these final sales are about escaping clogging liability.”

The federal government — which oversees 10% of leases — and oil-producing states nationwide generally require producers to post bonds for their wells, providing some financial assurance that drillers will pay their own environmental liabilities.

“But the bonds were never enough” to cover cleanup costs, Peltz said. In many cases at the state level, “there are really only pennies on the dollar that the state can use if the operator goes bankrupt.”

For example, Louisiana-based Shoreline Energy LLC handed over its oil well decommissioning obligations to the state after filing for bankruptcy in 2016.

Three years later, Weatherly Oil & Gas LLC left Texas with millions of dollars to pay off Chapter 11 orphan well debts.

And last year, abandoned wells by PetroShare Corp. in connection with its bankruptcy left the bill to the taxpayers of Colorado.

Predecessors on the hook

It’s atypical for oil and gas drillers to leave unprofitable wells with the state because they could more easily be sold to other producers, said Robert Schuwerk, executive director of Carbon Tracker, a think tank focused on on climate change. But growing economic pressures, growing environmental concerns and stricter regulations seem to be changing that.

“In bankruptcies, you’ll start to see people use the power of quitting,” he said, adding that PetroShare’s journey through Chapter 11 could be the “ideal model for the industry.” .

BOEM, a division of the Department of the Interior that oversees offshore energy development, announced that it was expanding its financial assurance efforts in the Gulf of Mexico just weeks after the formation of Fieldwood Energy LLC. erased to reorganize in bankruptcy through a plan that dealt with approximately $7 billion in Gulf cleanup obligations.

The Houston-based offshore operator’s plan hinged on a complex series of transactions, abandoning old wells and potentially imposing hundreds of millions of dollars in decommissioning obligations on its well-capitalized predecessors and business partners.

The Chapter 11 plan has drawn challenges from companies such as BP Exploration & Production Inc. and Exxon subsidiary XTO Energy Inc. for facing them with liabilities stemming from leases they sold to Fieldwood years ago.

But the restructuring plan was passed by federal regulators and was deemed by US Bankruptcy Judge Marvin Isgur to be “in the best interests of the United States and the estate’s creditors”.

Fieldwood was not the first offshore oil producer to use bankruptcy to isolate bad assets and abandon unused wells. But the magnitude of what happened in that case “was on a different scale,” said Goodwine, who built his career advising drillers in the Gulf states. “I think that indicates where things are going or how things will be handled in the future.”

changing landscape

While the Interior may be able to give its blessing to bankruptcy plans that shift liabilities to financially sound businesses, that call doesn’t always come down to federal officials. In fact, state-level regulators oversee about 90% of the country’s oil wells.

And not all states have the same power as the federal government to look to their predecessors to foot the cleanup bill, said Kelli Norfleet, a Houston-based bankruptcy attorney at Haynes and Boone LLP. If an insolvent driller with insufficient bail tries to abandon wells to a state without that ability, “you’re placing the liability squarely at the feet of the taxpayers of that state,” she said.

To mitigate the likelihood that taxpayers will have to pick up cleanup costs after oil companies go bankrupt, states are looking to strengthen their bonding requirements.

In the most publicized regulation at the state level, Colorado is implementing rules that would increase the cost of bail for every new well drilled in the state. Michigan, Oklahoma, Ohio, Pennsylvania, West Virginia and Utah are all making similar efforts, Peltz said.

Recently introduced federal legislation (S2177) would also strengthen bonding requirements for wells located on federal lands. This bill would go beyond simply plugging the approximately 57,000 abandoned wells that dot the United States and have no last known solvent operator.

“Our bills not only invest in cleaning up orphan wells, but also restore the role of local leaders in lease sales and hold businesses operating on public lands to the same high standards that responsible operators already follow,” senior sponsor, Sen. Michael Bennet (D-Colo.) said in a June 22 statement. “These bills will reduce methane emissions, which is the fastest way to protect our climate, restore wildlife habitat and create well-paying jobs.”