The bipartisan infrastructure bill that recently passed the Senate allocates billions in funds for cleaning up orphaned oil and gas wells, but additional reforms are necessary at the state and federal levels to fully address the growing problem.
This week, the Senate passed the historic INVEST in America Act, which authorizes spending of more than $1 trillion over ten years to address a wide range of infrastructure needs. In this blog post, I’d like to zoom in on the 0.5 percent of spending (which amounts to around $5 billion) that is dedicated to addressing orphaned oil and gas wells.
As I’ve written, written, written, and written (with fantastic collaborators too numerous to name!) over recent months, the orphaned well issue in the United States is daunting and poses considerable environmental and economic risks to the public. For all your statistical, definitional, and accounting questions, I’ll refer you to those earlier pieces. Today, let’s take a look at what the INVEST in America Act does for orphaned wells and what further challenges remain. (Hint: a lot of them!)
The best national estimate for the number of orphaned oil and gas wells—those with no solvent owner or operator—in the United States comes from the Interstate Oil and Gas Compact Commission, which has gathered data from states and come to an estimate in the neighborhood of 60,000 wells scattered across more than two dozen states. If decommissioning these wells costs $76,000 a pop, then $5 billion should just about cover it.
Problem solved? Sadly, no. Several major issues remain.
A Drop in the Well
The Interstate Oil and Gas Compact Commission’s estimate of 60,000 orphaned wells covers only the documented orphans: those whose locations are known to regulators. In addition to the documented population of wells, there are hundreds of thousands and perhaps even more than one million undocumented orphans—those wells that we have good reason to believe were drilled 75, 100, or even 150 years ago, but that were never catalogued and tracked by governments.
So, it’s probably best to think of the $5 billion (to be precise, $4.7 billion) as a modest down payment on a much larger tab. To address the full backlog of undocumented orphaned wells, major new investments would be needed to identify the location of those wells and then decommission them. Of course, we can’t plug a million wells overnight—so more investments are needed to prioritize the riskiest wells: those that leak the most methane (or other harmful gases), pose the greatest threat to public health, or threaten groundwater resources. Thankfully, the infrastructure bill makes a start at this by funding $32 million in research that should help us get a better handle on which wells pose the greatest risk to public health and the environment. The bill also funds activities to measure methane emissions, water contamination, and impacts to vulnerable communities from orphaned wells, which will further enhance our knowledge.
Reforming State Regulations
As many others have noted over the years, most states are setting the stage for millions more wells becoming orphaned in the years and decades ahead. In theory, companies are supposed to clean up their wells when those wells stop producing. If they don’t, state regulators are empowered to take a pound of flesh from these companies in the form of a surety bond (or some other financial instrument) to pay for cleanup. And if that company has gone bankrupt, the bond will outlast the company.
Unfortunately, state regulations have consistently priced that pound of flesh at a hefty discount. The inadequacy of current state bonding requirements is best illustrated by the “blanket bond,” a single financial instrument that companies can post to cover all of their wells within a state. In Pennsylvania, for example, $25,000 covers every well a company operates, whether the number of wells is two or two hundred. (Recall that our recent research found decommissioning costs of $76,000 per well.) If an operator of 200 wells goes bankrupt, and all those wells become orphaned, the state would be left with $25,000 to cover a decommissioning tab in the neighborhood of $15 million. And Pennsylvania is hardly unique.
The INVEST in America Act opts for the “carrot” rather than the “stick” when it comes to addressing this problem. As we’ve seen with many other energy policies over a matter of decades, federal lawmakers typically prefer to incentivize good stuff rather than discourage bad stuff. (And yes, this is a not-so-subtle dig at the failure of the federal government to price greenhouse gas emissions.) To be fair, however, the “stick” approach presumably would entail new federal financial assurance requirements for oil and gas well operators and would encroach into regulatory territory typically held by states, which means it’s probably off the table for now.
So, what’s the carrot? The legislation establishes a mechanism that to rewards states that improve their financial assurance requirements with additional dollars to plug additional wells. To its credit, $1.5 billion in decommissioning funds will flow through this incentive-based program, which hopefully will encourage states to update their laws to better match reality. But will this carrot be enough to encourage the Eeyores of the regulatory world to step up their game? Time will tell, but consider me a bit skeptical, particularly in states where the industry lobby is strong.
Reforming Federal Regulations
What about federal regulations, you ask? When wells are drilled on federal (rather than private- or state-owned) lands, the US Department of the Interior is the lead regulator. And when it comes to insufficient bonding requirements, Interior may well take the cake. Federal bonding levels for oil and gas wells were set in the middle of the twentieth century and, amazingly, have not been adjusted for inflation. As a result, a spate of oil patch bankruptcies would leave federal taxpayers on the hook for billions more in reclamation costs.
The INVEST in America Act does not attempt to address this woefully inadequate federal bonding level. But numerous bills have been introduced in recent years to do just that, so keep your eyes peeled for future developments.
Seeing the Forest for the Trees
Not all bills are meant to do all things. The INVEST in America Act has been negotiated carefully over months, and the orphaned wells provision is hardly a top-ticket item. And, as encapsulated by an early analysis I did with Jason Bordoff and Neelesh Nerurkar of Columbia’s Center on Global Energy Policy, the working title of which was “Seeking Green Stimulus Consensus,” the idea of employing laid-off oil and gas workers to reduce pollution was—to use the old saw—the good, rather than the perfect, approach for confronting the full scale of the problem.
Given the political moment, a down payment on the backlog of orphaned wells might be the best we can hope for. But let’s be clear: without regulatory reform, millions more oil and gas wells could become orphaned in the future. That means hundreds of billions of dollars in decommissioning costs may fall to taxpayers rather than the operators that are legally obligated to pay them. To prevent this enormous transfer from undercapitalized oil and gas operators to the taxpaying public (also known as you, me, and our kids), state and federal regulators need to own up to the growing problem of orphaned wells.