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Four Important Facts to Keep In Mind On Latest Abandoned Wells Report

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It’s true that the ongoing global pandemic and oil price drop earlier this year resulted in challenging times for the U.S. oil and natural gas industry. But the industry has also shown its resilience time and again – and is doing so now as it continues to meet global demand.

And yet a new report from climate investment group the Carbon Tracker Initiative (CTI) claims the United States is on the precipice of an orphan well crisis due to the potential insolvency of hundreds of companies across the country. And like similar previous claims, this report features findings based on faulty assumptions and exaggerated data, including downplaying the existing regulations and funding for managing plugging and abandonment.

Here are four important facts to keep in mind when reading the report.

Fact #1: CTI exaggerated the number of wells drilled.

CTI claims there will be approximately 3.8 million wells orphaned in the future:

“We estimate that plugging 2.6 million documented onshore wells in the U.S. alone will cost $280 billion. This estimate excludes costs to plug an additional estimated 1.2 million undocumented onshore wells.”

But in order to get such a high estimate of numbers, CTI acknowledges it used a database with estimates for drilled wells that is far higher than state-reported data. From the report:

Enverus’ unplugged onshore well counts may be significantly higher or lower than the figures listed on state databases…For example, the Railroad Commission of Texas reported a total of 439,695 oil and gas wells in the state, as of July 30, 2020. By comparison, Enverus lists 444,000 wells classified as either “oil” or “gas”. Enverus also lists 32,000 wells classified as “oil & gas”, in addition to another 130,000 nonproduction wells (e.g., injection, disposal, and water wells), and 187,000 wells of unknown production type. In total, Enverus counts 783,000 unplugged wells in the Texas onshore oilfields. In another example, Enverus counts 73,000 unplugged wells in New Mexico, whereas the State of New Mexico reports only 66,000 wells.”

CTI assumes that every U.S. well will be orphaned or abandoned, and also uses a sweeping, broad definition of wells that includes not only oil, gas, oil and gas, and coalbed methane, but also injection, disposal, dry hole, monitor, storage, unknown, and water wells which are very different and as such, would have varying costs to properly plug.

Fact #2: CTI assumes that peak oil and natural gas demand has already occurred.

The reality is that demand is rising following declines related to the global pandemic, despite what the CTI report insinuates. Earlier this year McKinsey & Company released a telling report on the future of natural gas in North America, finding that demand for the resource is set to grow for years to come. From the McKinsey report:

“Demand will continue to grow from 95 billion cubic feet per day (bcfd) to 125 bcfd by 2035 then plateau. More than 70 percent of the demand growth is driven by gas exports (both LNG and also piped exports to Mexico).”

Carbon Tracker’s report frames the future of the oil and natural gas industry in a way that undermines the current and future role of natural gas in the global economy. As the International Energy Agency’s Gas 2020 report explained earlier this year, demand growth is expected to be slower than projections made prior to Covid-19, but growth is still on the horizon starting in 2021:

“We have adjusted this year’s forecast to account for Covid‑19 resulting in expected global natural gas demand reaching over 4 370 bcm annually in 2025, or an average annual growth rate of 1.5 percent per year for the 2019-25 period, compared to initial forecast which assumed an average growth rate of 1.8 percent per year over the same period.”

IEA continues:

“After a 4 percent drop in 2020, natural gas demand is expected to progressively recover in 2021 as consumption returns close to its pre-crisis level in mature markets, while emerging markets benefit from economic rebound and lower natural gas prices… The Asia Pacific region accounts for over half of incremental global gas consumption in the coming years, driven principally by the development of gas in China and India.”

And IEA explains the U.S. will have a role to play in the increased production needed to meet demand growth:

“If almost all regions are expected to contribute to the growth in natural gas production in the next five years, half of the net increase in supply comes from North America and the Middle East.”

Fact #3: CTI’s cost estimate has “significant” uncertainty.

As CTI explains:

“Our cost estimates are subject to significant estimation uncertainty. Actual well closure costs may be higher or lower.”

Part of that uncertainty is from the high estimates of the database of well activity that CTI uses compared to state records. But costs can also vary from state to state and depending on what type of land (federal, state, private), how old and how deep a well is.

For instance, the Government Accountability Office estimates costs to properly plug a well on federal lands, where not as many wells have been drilled as on private property, can run anywhere from $20,000 to $145,000. CTI’s $30,000 ‘flat rate’ is based on two sources which place average costs between $20,000-$40,000. The Interstate Oil & Gas Compact Commission (IOGCC) meanwhile found that the average cost to plug a well in 2018 ranged from $3,700 to $97,626 – an average of $18,940. And environmental think tank Resources For the Future estimates a $24,000 per well price tag.

Typically cost analyses give estimates for already idled or orphaned wells, so these figures are able to use real time dollars. But CTI’s report is a projection of what’s to come – with no date for when that will happen. Will the wells currently drilled in the United States someday stop producing – probably. But that could be decades down the road. Improvements to technology could allow for previously declining wells to produce at higher levels again or lower the costs for plugging and abandonment.

CTI’s premise that this $280 billion cost also ignores both potential and existing funding mechanisms at the federal- and state-level which support the costs for plugging wells.

Lawmakers, both at the state and federal level have put forth initiatives to adequately respond to orphan wells – idled wells where the owner or operator is unknown, most of which are legacy wells from the 1800s through the mid-1900s. For example in 2015, the Texas Railroad Commission (RRC) implemented a new Oil Field Cleanup Fund from oilfield regulatory fees and bonds alone which generated more than $15.7 million in its first year alone. In fact, Texas has maintained a well plugging fund to cover the costs associated with well plugging and recovery since 1965.

At the federal level, Congress is evaluating possible legislation to provide additional funding as part of the COVID-19 response to have funding for federal well-plugging.

Fact #4: Operators adhere to strict regulations to properly plug and abandon wells.

There are many rules set in place to circle all liability and a majority of the costs back onto the industry. Current federal regulations mandate that oil and natural gas well operators be held liable for the full cost associated with plugging and abandoning wells, as well as reclaiming wells. The Bureau of Land Management, which oversees all well operations on federal lands, has the final say in terms of when a well operator is no longer liable. In instances where wells are unclaimed and no operator has ownership, which is an extremely rare occurrence today, BLM has the agency to hold previous operators of a specific well liable.

Many states also have funding mechanisms dedicated to covering the costs of plugging orphaned wells—most of which is supported by the oil and natural gas industry through taxes and fees. Failure to follow plugging and abandonment regulations can have significant consequences, including in some states future permit denials, foreclosure of equipment and daily fines.

Conclusion

It is clear from projections by respected institutions like IEA that the industry’s fundamental driver – the need for oil and natural gas – has not waned and will continue long into the future while advancing environmental progress. Existing federal and state regulations already govern this process and the industry is fully committed to operating under the highest standards, including once it’s time to properly plug and abandon a well.

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