Colorado's new rules to prevent 'orphaned' oil wells could fail to cover cleanup costs, report says

A pump jack is seen in Frederick on June 24, 2020. (Andy Bosselman for Colorado Newsline)

The bonds required by Colorado's new financial assurance rules for oil and gas drillers may cover 25% or less of the total cost to clean up the state's 50,000 wells, a new report estimates.

That's a major increase over the state's previous bonding requirements, which had long been a target for environmentalists before the Colorado Oil and Gas Conservation Commission approved new rules earlier this year. But the report released Wednesday by Carbon Tracker, a London-based think tank, argues the state could still be on the hook for billions in remediation costs.

"Fundamentally, the new rules fail to significantly backstop the near-term risks of the companies with the most fragile balance sheets," said the analysis authored by Carbon Tracker researcher Stephen Greenslade.

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Financial-assurance bonds are provided to cover potential cleanup costs for oil and gas sites, often in the case of an operator bankruptcy — an outcome that frequently results in wells being "orphaned" to the state. The COGCC approved its new rules in March, as the last major component of a sweeping overhaul of its regulations required by Senate Bill 19-181, the oil and gas legislation passed by Democrats in 2019.

SB-181 directed the COGCC to establish rules that ensure oil and gas companies are "financially capable of fulfilling every obligation" under state law. The cost to "plug" and remediate oil and gas wells — a process that dramatically reduces the risk of methane leaks and other environmental hazards — can exceed $100,000 per well.

The new rules created a complex tiered system that significantly increased the required bonding amounts for smaller firms that operate low-producing wells, which are considered to be at the highest risk of bankruptcy. COGCC commissioners trumpeted the new rules as "the strongest in the nation" and the product of more than a year of negotiations and collaboration between the industry, environmental groups and local governments.

A spokesperson said Thursday that the agency hadn't yet reviewed the Carbon Tracker report.

Using COGCC data, the report estimated that the cost to plug Colorado's 50,000 active wells could exceed $7.2 billion. Overall, the new financial assurance system could require bonds totaling $1.8 billion, for a "bond coverage ratio" of about 25%.

But Carbon Tracker's report also says the new system is "riddled with discretionary loopholes."

"The COGCC now has enormous control over — and responsibility for — the outcomes that proceed from these rules," wrote Greenslade. "This may prove to be a major administrative burden depending on how aggressively companies lobby for exceptions, and it significantly raises the likelihood that the presumptive bond amounts we have derived from the rules will prove far too high."

Colorado's Orphaned Well Program currently manages 981 abandoned oil and gas sites, with an estimated 528 wells at those sites remaining to be plugged, according to the program's latest report. Alongside the new bonding requirements, the COGCC's new financial assurance rules enacted a fee that will raise a projected $10 million annually to help clean up the backlog of orphaned wells.

The state is also receiving cleanup funding as a result of the bipartisan infrastructure law passed by Congress in 2021. The Interior Department awarded an initial grant of $25 million to Colorado late last month, which will help the state plug a projected 140 wells.

"Methane leaks are more dangerous than carbon dioxide to communities and the environment," Sen. John Hickenlooper said in a statement on the funding. "Now we will stop leaks and create good-paying union jobs in the process."

The very largest oil and gas producers face the least burdensome financial requirements under the state's new rules. The publicly traded corporations that dominate Colorado's oil industry are already required to account for "asset retirement obligations" on their balance sheets, and active producers have an incentive to routinely plug older wells in an area before drilling new ones using modern methods.

Amid the increasing urgency of the climate crisis, however, environmental activists warn that regulators should prepare for a new underlying reality in which the industry could enter a steep decline.

"The energy transition is underway, and must rapidly accelerate if the world is to avoid catastrophic climate disruption," Greenslade wrote. "These rules fail to grapple with a future that will not resemble the past, placing Colorado taxpayers at risk of taking on the substantial burden of cleaning up after oil and gas."

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by Chase Woodruff, Colorado Newsline September 9, 2022

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Reporter Chase Woodruff covers the environment, the economy and other stories for Colorado Newsline.