This story was co-published with DeSmog
Thousands of oil and gas wells across Colorado can’t generate enough revenue to cover their cleanup costs, according to a new report. If state officials don’t act “simply and quickly,” he says, Coloradans can expect to be on the hook for a $3 billion shortfall.
In its report, thinktank Carbon Tracker found that 27,000 low-producing oil and gas wells in Colorado — more than half of the state’s total — would generate, at most, $1 billion in revenue. The state’s oil and gas reserves peaked five years ago, with production volumes falling dramatically in all but one region. Analysts found it will cost $4 billion to $5 billion to dismantle those sites responsibly — meaning the state could face a cash crunch of at least $3 billion.
If not properly shut down, unplugged wells can leak carcinogens and methane, a powerful greenhouse gas. But according to the Colorado Energy and Carbon Management Commission (ECMC), the state’s energy regulator, it can cost $110,000 or more to shut down a single site. Many companies have avoided paying these costs by either delaying cleanup indefinitely, selling aging wells to smaller competitors, or simply going out of business. Today, there are at least 120,000 “orphan” wells across the US that lack financially solvent operators, making them a problem for government entities to solve.
“The biggest problem here is just the nature of this activity: You make a lot of money in the beginning and then you have a big cost in the end,” said Rob Schuwerk, executive director of Carbon Tracker and a co-author of the report. “The way you cover that kind of cost is to make people save along the way, and that’s not done now.”
In 2022, Colorado created a much-vaunted approach to making sure fossil fuel companies foot the cleanup bill. The regulations, which Colorado Gov. Jared Polis called last year “an example the nation can follow,” included major changes to the state’s requirements for bonding — the financial insurance system it uses to make it harder for operators removal from polluting wells. .
However, a review of public financial documents by DeSmog and the Guardian showed that Colorado’s modest reforms failed to keep pace with the growing liabilities of the fossil fuel industry.
“Even under the new rules, the gap between projected cleanup costs and the connection provided is in the billions of dollars,” said Margaret Kran-Annexstein, director of the Colorado chapter of the Sierra Club. “It’s frankly dangerous for Colorado to imply that this is the best we can do.”
This dynamic is widespread across the US. In the 15 largest oil and gas producing states, funds available for cleanup amount to less than 2% of estimated costs, a recent analysis by ProPublica and Capital & Main found. That Colorado, a state that has been noted for an extremely proactive approach to connectivity, still faces such a dramatic shortfall suggests that other state governments have much more to do before the trend can be reversed.
“The connection is not enough. It’s never been enough,” said Kelly Mitchell, a senior analyst at Documented, a watchdog group. “And I think that states are usually not very prudent in considering the scale of the problem that they are facing.”
In emailed comments, Megan Castle, ECMC’s community relations supervisor, noted that capped wells outnumber disconnected wells in Colorado.
“Colorado’s financial assurance structure is designed to ensure that operators — not the state — remain responsible for the entire life cycle of the well and site,” she wrote, adding that Colorado’s bonding programs are intended to act as “back” only when companies cannot fulfill. that obligation itself.
But the rules, by law, were designed to ensure that all operators have the ability to fully meet their shutdown obligation – and that outcome is still a long way off.
‘More loopholes than nets’
In 2019, Colorado became one of the first states to try to take comprehensive action on the rising costs of oil and gas cleanup. That year, lawmakers passed sweeping legislation that paved the way for a sweeping regulatory overhaul, also giving the ECMC a mandate to protect human health and the environment over industry profits. The commission imposed a tariff on producers and placed restrictions around the transfer of wells, an effort to stop larger companies from selling low-producing assets to smaller, poorer companies without adequate capping resources. But the centerpiece was the revised financial assurance requirements, which ECMC officials called “by far the highest” in the country and “truly a paradigm shift.”
ECMC required each operator to develop a unique, company-specific plan based on well counts, production levels and other factors. But the high degree of flexibility and customization of the rules allowed some companies to exclude some poorly performing wells from their total or to propose their own customized plans.
The result, said Dwayne Purvis, an engineer and oil consultant who co-authored the Carbon Tracker report, is that companies generally aren’t connected enough. The rules are so flexible that they end up being “more loopholes than nets,” he said.
The rich reserves in a single region — the Denver-Julesburg Basin — could generate more than enough to shut down all the state’s wells one day, something that would cost between $6.8 billion and $8.5 billion, according to Carbon Tracker. But most of these future long-term profits will be concentrated in the hands of just three publicly traded companies: Chevron, Occidental and Civitas.
Schuwerk called it “a case of the haves and the have-nots” and said ECMC’s existing policy does little to correct this fundamental imbalance: one group is sitting on billions in profits while the other can’t afford to settle billions in debt. his. .
At least one operator, KP Kauffman has already said that he cannot pay. Colorado’s largest owner of low-producing, so-called “marginal” oil wells, the company said in 2021 it could not afford to pay a $2 million fine imposed by ECMC for environmental violations and in In January, she sued regulators in protest over the amount. ECMC had ordered her bond.
The commission has struggled to enforce other bonds, according to an analysis of an ECMC database that tracks daily activity. As of June 25, 66 companies representing 1,075 wells had not submitted even the initial paperwork to develop connection plans. And at least two dozen operators have yet to submit financial guarantees after their connection plans were approved. Two of those companies are more than a year behind, according to a review of public records.
Non-compliant companies “have been sent several enforcement letters,” then-ECMC Commissioner Karin McGowan said in a May 22 public webinar. “We’re trying to shut it down and find out what’s going on with those operators.” She added that this group represented an overall small portion of the total number of disconnected wells in the state, about 2%.
After initially telling the Colorado Sun it planned to have $820 million in bonds by 2044, ECMC now plans to have just $613 million in financial security on hand in 20 years. Even if every dollar of that amount materializes, it’s still $2.4 billion short of what the state would need to safely shut down its lowest-producing wells.
A separate analysis by Carbon Tracker, shared exclusively with DeSmog and the Guardian, showed that the state’s wells facing near-term risk of being orphaned represent at least $520 million in liabilities. In other words, the amount of guarantees that ECMC plans for 20 years from now can barely cover what is already needed today.
“Negotiations and compromise cost six years of delay without any tangible improvement” in covering budget shortfalls, Carbon Tracker analysts conclude.
“Socialization of the cost of closing these wells among the operators”
Adam Peltz, an attorney for the Environmental Defense Fund, which evaluated the ECMC rules in 2022, said Colorado still fares better than other states like Pennsylvania and New Mexico, both of which have more disconnected wells than Colorado. and have fought to pass more rigorous rules.
He said Colorado will have to look outside the bond system to solve its massive shortage.
“You can’t solve this problem with bonds alone, because for so many companies it’s too late,” he said. “They will never generate enough money to pay to cap their wells.”
He pointed to another aspect of the rules rolled out in 2022 as a potential source of revenue: the manufacturer fee. Currently, that program generates just $10 million a year, which Peltz acknowledged is not enough to overcome Colorado’s billions in oil and gas liabilities, even considering the availability of federal funds. But, he said, raising that fee significantly could help redistribute funds from resource-rich Denver-Julesburg to impoverished areas of the state.
“Colorado Innovation was saying, here’s this surcharge, you have to pay to socialize the cost of shutting down these wells among all the operators,” he said. “I wish every state would do this.”
Ultimately, Carbon Tracker analysts conclude, policymakers must decide between developing new, rigorous alternatives or sending taxpayers the bill by default. This is likely to involve imposing resource-rich firms begin to set aside savings from their profits now.
Mitchell, the documented analyst, recalled the advice she first heard from a former colleague at the Interior Department: “The best time to collect is on payday.”
“In this period of record profits for the oil and gas industry,” she said, “this is one of a kind.”
A longer version of this story appears in Desmog