Dan Haley is president of the Colorado Oil and Gas Association, a group representing the state’s oil and gas industry. Last week, Haley appeared on Kim Monson’s Colorado KLZ 560 radio show to discuss the state revising its oil-and-gas-well bonding rules and low-producing wells.
Later today, the Colorado Oil and Gas Conservation Commission (COGCC), the state-run commission meant to regulate the oil and gas industry, is scheduled to vote on new financial assurance rules. This would be the first revision of the rules in nearly 30 years.
The rules — the latest draft of which was released on Friday — hope to prevent abandoned and orphaned wells from falling into the hands of the state to plug and clean up.
During his appearance on the radio, Haley downplayed the concern of environmental groups over orphaned and low-producing wells and warned that the stricter bonding rules could backfire against the COGCC.
“Colorado has one of the lowest numbers of orphan wells in the country, so this is not a huge problem here, but the state is setting out trying to figure out ways to solve it,” Haley said on Monson’s show.
According to state records, just over 600 of Colorado’s 52,000 oil and gas wells have been orphaned. Haley explained that the oil-and-gas industry is happy to help plug these orphaned wells, but believes that the COGCC Orphaned Well Fund, which goes towards plugging orphaned wells, is overfunded. Oil-and-gas operators in Colorado have to pay between $200-300 per well into the fund.
It is misleading to say, with certainty, that the orphan well issue is not a “huge problem” in Colorado for two reasons.
First, a well can cost anywhere from $90,000 to — in extreme cases — $300,000 to plug. When the well is orphaned the state must pay to plug it. This is the impetus behind the proposed stricter bond rules: to force operators to pay money upfront in case they go bankrupt.
Second, it’s a fact that a large number of wells in Colorado could become orphaned, opening up the state to a liability that could stretch into the billions of dollars.
Almost half of all oil and gas wells here produce little-to-no oil or gas. Ten thousand of those wells are completely idle. Forty-three percent of the 300 operators in the state own exclusively low-producing wells.
These 10,000 wells are not orphaned, but they are dying. Operators keep wells running at the end of their life because it is often cheaper than plugging the wells and cleaning up the well sites, but even low-producing wells leak dangerous chemicals like methane.
Haley addressed these low-producing wells during his conversation with Monson.
“The state has decided that low-producing wells, those wells that don’t produce a lot of oil and gas are the problem. And that’s just really not true,” Haley said. “For some people that’s their business model. They have a small company, they have a couple of small producing wells they make enough money to get by, to hire a couple of employees. What business is it of the government that that is a low-producing well if they’re able to make a go of it and keep that well in production and have a business?”
A common practice in the oil and gas industry, both nationwide and in Colorado, is for larger oil and gas companies to shuffle their low-producing wells to smaller operators and shell companies, sometimes designed to go bankrupt, in order to avoid the cost of plugging. Again, these low-producing wells are often old and leak methane, a potent climate-change-causing gas.
A report from the Bell Policy Center, a research group that works to advance economic mobility in Colorado, found that without real reform, plugging orphaned oil-and-gas wells could cost the state more than $8 billion.
Haley also warned that increasing bonding costs could end up forcing oil and gas operators to go bankrupt if they cannot afford to pay the bond.
“But you really need to be careful here when you’re continually adding to the cost of business,” Haley said. “And we will be somewhere, when this is over, we’ll be somewhere close to the state adding $500 million each year to the cost of doing business in Colorado. So, when you’re doing that, you don’t want this to become a self-fulfilling prophecy where small businesses go out of business, they go bankrupt and you end up with more orphan wells right?”
Because the newest draft of the financial assurance rules was just released Friday, it’s unclear exactly how much the rules will increase the “cost of doing business.” But Haley’s argument is one that has been repeated multiple times during the COGCC public hearing process.
A lawyer representing the Colorado Oil and Gas Association during a November COGCC hearing last year said that a $15,000 bond per well would be widely unaffordable to Colorado operators.
The problem with this argument is that the oil-and-gas industry is both rejecting full-cost bonding because it might bankrupt its operators, but also says that it can afford to plug the wells once they are finished.
The Carbon Tracker initiative is an independent think tank that focuses on providing analysis on fossil fuels. From a Carbon Tracker report, analyzing this issue:
“The industry, led by the Colorado Oil and Gas Association (COGA) and Colorado’s largest operators, are asking the Commissioners to simultaneously believe two opposing things: first, that the industry cannot afford to secure its obligations, and second, that securing its obligations is unneeded because the industry poses no risk of default.”
Critics point out that the bonds should not be considered a new expense for these operators, which, they argue, should already be financially secure enough to plug each of their wells; the bonds are in place purely to make sure the operators are solvent enough to do so.
Also, the latest draft of the financial assurance rules does not enforce “full-cost bonding” essentially making each company pay the full cost of plugging (over $90,000) for each well they operate. The rules include bonding regulations that are far less expensive than full-cost bonding.
Lastly, it should be noted that the oil and gas industry receives some of the largest tax breaks in the country. Oil and gas operators benefit from low severance tax rates, the ad valorem tax credit, and the stripper well tax exemption.