Orphaned wells are poised to overwhelm the US. Millions of oil and gas wells have been abandoned by drilling companies around the country. More are expected as bankruptcy or dwindling oil supplies leave companies unable to pay for their clean up.
These orphaned wells, often leaking methane into the air and other pollutants into local groundwater, have been targeted in President Joe Biden’s new infrastructure plan seeking to allocate $16 billion to “put hundreds of thousands to work in union jobs plugging oil and gas wells.”
It’s a laudable goal. But the recent experience of Texas, home to more of these wells than any other state, shows that without better financial regulation of oil companies, that money won’t put a cap on the problem. Instead, it could put taxpayers on the hook for a ballooning expense while some company executives cash out—even though the overall infrastructure plan is billed as eliminating subsidies for the fossil fuel industry.
“We’re rewarding the worst-performing operators,” said Virginia Palacios, executive director of Commission Shift, an advocacy group focused on the Railroad Commission of Texas, the state’s oil and gas regulatory agency. “Without substantive reform attached to [the Biden plan’s] funding, you’re sending the message that it’s ok to socialize the cost of bad business.”
How taxpayers get stuck with orphan wells
Texas was once a pioneer in orphan well remediation. Since the early 1990s, it has channeled some tax revenue from oil companies into a cleanup fund, and also required drillers to pay for cleanup bonds upfront, so they couldn’t stick the state with the bill if they went bankrupt. The program is working in a sense: Texas plugs about 1,800 wells per year.
But that’s the same number of wells that are being abandoned annually as well. The total number of orphaned wells in the state has stalled around 6,000 for more than a decade, according to state data. Now, Texas is a ticking time bomb. According to a terrific April 5 analysis by Grist and The Texas Observer, at least 12,000 wells are poised to be abandoned just in the next four years. The number could be still higher—and more of the cleanup cost shifted to taxpayers—if Texas continues to lead the nation in oil and gas bankruptcies, a trend started by the long-term collapse of shale drilling and accelerated by the pandemic.
“Texas is known for having one of the better plugging programs, but we’re still so far behind,” Palacios said.
The main reason is that bonds are far too low. In Texas, bonds can cost as little as $2,500 per well, even though the actual median cost to plug a well and remediate the surface around is $48,000, according to Resources for the Future (RFF). Altogether, bond revenue in Texas covers less than 16% of actual plugging costs; 43%, meanwhile, comes from the state’s general coffers. And that’s actually better than most states: Nationwide, bonds cover just 1% of the $280 billion total projected cleanup cost for all oil and gas wells.
The solution is a race to better bonding
Bonding requirements need to be much higher, and any federal funding for well cleanup should be restricted to states that adopt them, Palacios said. One of Biden’s supporters on the plan, Colorado senator Michael Bennet, has pushed legislation that would set a federal minimum of $200,000 to cover all of a company’s wells in a given state, which is less than what Texas requires for companies with more than 100 wells, but above the requirement of some other states. That type of minimum could be adopted in the Biden plan.
Another issue, Palacios said, is the judicial system. Too often during bankruptcy proceedings, remediation costs are shunted to the back of the breadline after creditors, executives, employees, and vendors take their share of the company’s assets. Taxpayers have to pick up the remainder. In one 2019 bankruptcy case, an oil company dumped $10 million cleanup costs on the state the year after paying its top executives nearly $9 million. State judges should commit to prioritizing the payment of cleanup costs, she said, and consider holding company principles personally accountable or bar those with outstanding cleanup costs from starting new drilling companies, as many often do.
Lastly, more research is needed on the real costs of sealing different types of wells, and on tracking their emissions. In a recent paper, economist and RFF fellow Daniel Raimi argued that wells with low methane leakage but high sealing costs (those that are particularly deep, for example) may not be worth addressing, while others, especially those located near residential communities, should get priority.
Without a clear federal standard, any bailout funds won’t keep up with pace of new orphaned wells, Palacios said: “We absolutely need this federal funding to come with some strings attached.”