This week, the Colorado Oil and Gas Conservation Commission (COGCC) is holding public meetings concerning new, stricter rules on well operators that would ensure the state does not have to pay for plugging abandoned wells if the operators go bankrupt.
The meetings on the proposed rules — which concern the concept of financial assurances, a way for operators to pay part of the cost for plugging wells upfront — lead up to a vote on the rules from the COGCC commissioners currently scheduled for Jan. 31. If the new rules pass, it would be the first major reform of the state’s financial assurance rules in 28 years.
To read the most recent draft of the proposed rule changes, click here. To see the COGCC public meeting schedule, click here.
The financial assurance rules outline the size of the bond the state of Colorado can demand from oil and gas well operators for each well they drill. If the operator goes out of business before plugging the well, the bond provides at least some of the funds for the state to pay the clean-up cost.
It is important to plug wells when they are out of use because even abandoned wells can leak methane or cause environmental damage.
Kate Merlin is an attorney for the Climate and Energy Program at WildEarth Guardians, an environmental advocacy organization based in Wheat Ridge. Merlin explained that while Colorado has 52,000 oil and gas wells in operation today, almost half of those wells are considered “marginal wells,” defined by the Interstate Oil and Gas Compact Commission as wells whose production costs are higher than the value of the oil and gas it produces. Of those wells in Colorado, almost 10,000 are completely idle.
“But each of those wells could potentially cost anywhere from $30,000 to $300,000 to safely plug and clean up,” Merlin said. “Some wells can cost millions when pollution is discovered. Most of these guys don’t want to pay it — that’s why we have thousands and thousands of idle wells. They save boatloads of money every time they hang an “out of service” sign on a well instead of plugging it.”
Merlin is referencing the key problem with the current financial assurance rules in Colorado: that it costs less money to keep a dying well open than it does to plug it. The COGCC says it costs about $90,000 to plug a well, but as Merlin referenced the cost can vary depending on the environmental impact of the well.
To avoid paying the plugging cost, a common practice in the oil and gas industry is for larger firms to either drag out plugging the well for as long as they can — this Colorado well had not produced a profitable amount of oil in twenty years before finally stopping production in 2020 — or keep selling the dying well to smaller and smaller companies which have a greater chance of going bankrupt, pushing the cost to taxpayers.
It should be noted too that marginal wells — also called stripper wells — are still an incredible environmental liability despite their lack of production. A study by an independent think-tank in Pennsylvania, Kentucky, Ohio, and West Virginia found that, on average, each marginal well in the four-state region emitted over one ton of methane annually. That is the equivalent of the greenhouse gas emissions generated from burning almost 3,000 gallons of gasoline.
The idea behind stricter financial assurance rules, which Merlin supports, is that the bonds will relieve the financial burden put on the state by abandoned wells.
“They’ll say anything to get out of paying,” Merlin said. “They’ll say there’s no problem, they’ll promise to be good, they’ll say we’re killing them. But this entire state is littered with thousands of rusting and leaking wells, in suburban backyards, in wildlife habitats, under farms, even overlooking the Colorado River. With the rising price of oil Colorado needs to seize its chance — possibly its last chance — to make operators put some of these profits in a piggy bank. Citizens shouldn’t be burdened with abandoned wells or the cost of cleaning them up.”
While the proposed rule changes are stricter than the ones currently in place, environmental advocates are unhappy with the leeway that’s still allowed for oil and gas well operators. On Jan. 20 and 21 over 150 members of the public spoke to the COGCC in order to give their opinions on the financial assurance rulemaking. Those meetings can be watched on YouTube here and here, respectively.
Ramesh Bhatt is chair of the Conservation Committee of the Colorado Sierra Club, an environmental advocacy group. Bhatt criticized the latest drafts of the rules as not going far enough to ensure that oil and gas well operators behave responsibly.
“Unfortunately, the rules proposed by the staff are inadequate,” Bhatt said. “They are complex, ripe for manipulation, and require operators to provide bonds covering only a small fraction of the actual costs of retiring wells. There is a risk that the rest of the costs, which some estimate to be billions of dollars, will have to be paid for by taxpayers.”
The new rules propose a tiered financial assurance system, where the larger well operators with more wells pay smaller bonds per well to alleviate higher costs for those large firms. For example, operators with over 4,000 wells in operation would pay $1,500 per well while operators with 50 or fewer wells pay $15,000 per well.
Across the oil and gas industry in Colorado, the average an operator pays in financial assurances is $15,000, far less than the $92,000 average cost to plug a well. Also, under current rules, well operators who own at least 100 wells in the state can pay their financial assurances with a blanket bond: a flat fee of $100,000 to cover all of their wells.
For example, Colorado’s largest well owner is TEP Rocky Mountain LLC. The company operates 5,444 wells across the state, but according to COGCC data paid just $100,000 for their bond, an average of $18 per well. TEP Rocky Mountain is also required to pay an annual premium of $1,000, or $0.18 per well.
Kate Christensen, the oil and gas campaign coordinator for 350 Colorado, an anti-fossil fuels advocacy group, explained that 350 Colorado is calling for a full-cost bonding approach regardless of operator size. That would mean each operator would need to pay a bond of the full amount of how much it costs to plug the well site for each well it operates.
“The only way to protect Colorado taxpayers is to have single well full-cost financial assurance,” Christensen said. “This needs to happen for every well so that companies are saving for the retirement of wells when they are actually making money. If they don’t start doing that and they don’t start doing it now the problem is only going to get worse and worse. There is federal money coming from the infrastructure bill but we will most likely need that and more to plug, reclaim and remediate all these zombie wells that are not producing or barely producing but still emitting [greenhouse gases].”
For more coverage of the Colorado COGCC financial assurances debate over the past year and oil and gas wells in general, check out the great reporting of Chase Woodruff, from Colorado Newsline, and Mark Jaffe, from the Colorado Sun.
