Bankruptcies fuel environmental crisis in abandoned oil wells

A wave of failing energy companies is pushing government regulators to rush to tackle the stockpile of abandoned and leaking methane oil wells, as environmental liabilities come to a head in oil and gas bankruptcy proceedings.

Over 260 national 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 shifting their environmental obligations to government agencies amid the worst gross crash in history. Some of these companies use bankruptcy to shift dismantling costs of millions or even billions of dollars to predecessors and joint interest holders.

The protracted downturn has now prompted lawmakers and regulators to redouble their efforts to deal with an environmental crisis that has lasted for more than a century.

The bipartite infrastructure bill pass by the Senate last month would be allocate more than $ 4 billion for the plugging and remediation of abandoned oil wells, while federal regulators and lawmakers Carry on look at 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 Aug. 18, the Biden administration tightened requirements to ensure more offshore oil companies have funds for well decommissioning in the Gulf of Mexico.

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

But decades of lenient regulation coupled with the economy that have long guided a cyclical boom or bust 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 inactive, and about two-thirds of them are disconnected, collectively emitting several million tonnes of greenhouse gases each year, according to at the Environmental Protection Agency. Many sinks release methane, more than 25 times more powerful than carbon dioxide at trapping heat in the atmosphere and exacerbating climate change, according to the EPA.

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

“It’s basically a cost of capital with no return, so companies are obviously less motivated to invest money in these projects,” said attorney Paul J. Goodwine of Looper Goodwine PC, an advisor to oil and gas companies. gas.

Escape from responsibility

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

The big company that drills a well often sells it to a midsize company that runs it for a while, and then eventually to someone who can “remove the last molecules,” Defense Fund attorney Adam Peltz said. of the environment. “Really, these final sales are meant to escape the responsibility of plugging in. “

The federal government – which oversees 10% of leases – and the country’s oil-producing states typically require producers to post bonds for their wells, providing some financial assurance that drillers will pay for their own environmental liabilities.

“But the bonds have historically not been sufficient” to cover the cleanup costs, Peltz said. In many state-level cases, “there are really only a few cents on the dollar for the state to plug in if the operator goes bankrupt.

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

Three years later, Weatherly Oil & Gas LLC left Texas with millions of dollars in Chapter 11 abandoned well plugging liabilities.

And last year, the wells abandoned by PetroShare Corp. as part of its bankruptcy left the bill with Colorado taxpayers.

Crochet predecessors

It is unusual for oil and gas drillers to leave unprofitable wells to 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 climate change. But growing economic pressures, growing environmental concerns and tighter regulations seem to be changing that.

“In bankruptcies, you will start to see people using the power to quit,” he said, adding that PetroShare’s course to Chapter 11 could be the “ideal model for the industry”.

BOEM, a division of the Home Office that oversees offshore energy development, announced it was expanding its financial insurance efforts in the Gulf of Mexico just weeks after Fieldwood Energy LLC was cleared to operate. reorganize into bankruptcy through a plan that addressed about $ 7 billion in cleanup bonds. in the Gulf.

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

The Chapter 11 plan has attracted challenges from companies such as BP Exploration & Production Inc. and Exxon’s subsidiary, XTO Energy Inc., for imposing liability on them arising from leases they sold to Fieldwood ago. years.

But the restructuring plan was approved by federal regulators and was ruled by US bankruptcy judge Marvin Isgur as “in the best interests of the United States and the creditors of the estate.”

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

Changing landscape

While the Interior may be able to give its blessing to bankruptcy plans that shift responsibilities to financially healthy businesses, that call is not always the purview of federal officials. In fact, state-level regulators oversee around 90% of the country’s oil wells.

And not all states have the same power as the federal government to look to predecessors to foot the bill for the cleanup, said Kelli Norfleet, Houston-based bankruptcy lawyer at Haynes and Boone LLP. If an insolvent driller with an insufficient bond tries to abandon wells to a state without that capability, “you are placing the responsibility at the feet of the taxpayers of that state,” she said.

To lessen the likelihood that taxpayers will incur the costs of cleaning up after oil companies go bankrupt, states are looking to tighten their bond requirements.

In the most high-profile rule-making at the state level, Colorado is implementing rules that would increase the cost of bonding 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 law (S.2177) would also strengthen bonding requirements for wells on federal lands. This bill would go beyond simply plugging the approximately 57,000 abandoned wells that dot the United States and which have no last known solvent operator.

“Our bills not only invest in cleaning up orphaned wells, but also restore the role of local leaders in selling leases and keeping companies operating on public land to the same high standards that responsible operators already follow,” he said. main 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. “

Anne G. Cash

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