Weakened bonding rules for oil and gas companies knocked by environmental groups

Revised COGCC proposal leaves state on the hook for billions in potential cleanup costs, critics say

By: - November 11, 2021 5:00 am

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

Environmental and community groups are urging Colorado oil and gas regulators to go back to the drawing board on a new set of financial-assurance rules that they say are too favorable to industry.

The five-member Colorado Oil and Gas Conservation Commission heard testimony on pending regulations relating to financial assurance, also known as bonding, in a two-day hearing this week.

Bonds are provided to the state by oil and gas companies to cover potential cleanup costs in the event of bankruptcies and abandonment of drilling sites, known as “orphaned wells,” which can leak toxic substances and cause a variety of health and environmental hazards. Activists have long said that Colorado’s existing bond requirements are inadequate, letting the operators of the state’s 50,000 active wells off the hook for the industry’s growing financial risks.

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Now, the industry’s critics say the COGCC’s latest proposal to update its bonding rules doesn’t go far enough — and is even “in some ways worse” than the agency’s existing regulations, one group said in filed testimony.

Following industry objections, the latest draft of the new rules, issued by COGCC staff last month, significantly weakened a previous version proposed in June. In particular, environmental groups cried foul over the new draft’s amended definition of an “inactive well,” a status that triggers higher bonding requirements.

Rather than designating as inactive all wells that produce less than one barrel of oil per day — widely considered well below the threshold at which a well is profitable — the new definition would include only wells that “produce” on fewer than 90 days in the previous year. Critics say such a metric can be manipulated through tactics like “swabbing” a well to produce tiny amounts of fluid.

“The definition of ‘inactive wells’ is the most important definition in the proposed rules,” a coalition of environmental groups led by Conservation Colorado wrote in joint testimony to the commission. “We believe that the definition should meet two goals: (1) to prevent the abuse and gamesmanship occurring that has allowed operators to avoid inactive well bonding, and (2) to identify wells of greatest risk to the state.”

Members of the Colorado Oil and Gas Conservation Commission meet virtually on Nov. 10, 2021. (Screenshot)

Environmental activists also continue to press the commission to do away with “blanket” financial assurance bonds, which allow operators to insure large portfolios of wells for only a fraction of the potential cost to plug them and clean up the surrounding site. Instead, they call for “full-cost bonding” of $93,000 per well or more — an approach that advocates say would allow the private insurance market to evaluate and price risk through surety bonds.

But Mark Mathews, an attorney with Brownstein Hyatt Farber Schreck representing the Colorado Oil and Gas Association, told the commission on Wednesday that many operators could face severe difficulties and even be put out of business by the “exorbitant, stratospheric amounts” that full-cost bonding would require.

“These bonding amounts are nonstarters,” Mathews said. Based on average surety bond rates, he estimated that an operator with 1,500 wells would have to pay an annual insurance premium of $4.5 million; many smaller operators, he said, would be forced to put up significant collateral to satisfy underwriting requirements from insurers.

Advocates for stricter bonding rules say that given the health, safety and environmental risks involved in oil and gas drilling, such requirements should be the cost of doing business — and that the existing rules have let companies kick the can down the road for too long. “Colorado’s lax financial regulatory structure for oil and gas wells leads to business models where adequate financial assurance for asset retirement obligations can be an afterthought,” attorneys for Conservation Colorado said in its testimony.

“Not all companies can or should be saved from their own bad choices,” said Kate Merlin, an attorney for environmental group WildEarth Guardians.

Debate over industry’s future

The update to Colorado’s bonding rules has been years in the making. It’s the last of several major rulemakings required by Senate Bill 19-181, the overhaul of drilling laws passed by Democrats in the General Assembly in 2019, and was initially scheduled to be completed this year before the commission pushed a final decision back to early 2022.

At the heart of the extended debate over bonding requirements are divergent views of the financial and operational future of the oil and gas industry.

More abandoned oil and gas wells likely in Colorado — but how many?

Environmental groups predict that the state’s current list of 239 orphaned wells could grow as thousands of “functionally orphaned” inactive wells are abandoned over the next several years. They see even broader risks in the financial turmoil that has rocked the industry in recent years, amid flagging production from fracked wells and rising global pressure to shift from fossil fuels to clean energy.

Large oil and gas operators, meanwhile, have consistently downplayed the risks of orphaned wells and the need for strict new bonding requirements.

“In our view, there is no real crisis,” Jim Martin, an attorney with Beatty and Wozniak representing the American Petroleum Institute, told commissioners Wednesday. “Virtually all operators in Colorado are acting responsibly, very few wells have been orphaned, and we’ve seen very little evidence at all that that situation’s about to change.”

As publicly-traded companies, many of Colorado’s largest producers are obligated to account for future well-retirement liabilities in financial reports to federal regulators. And the industry has highlighted the thousands of wells it has voluntarily plugged over the past several years, reducing the state’s active well count by 10% since 2018.

But most of those sites were older, vertical wells plugged by companies only when they drill newer, horizontal wells in the same area. An analysis released this week by Carbon Tracker, a climate-finance research group, found that the “vast majority” of Colorado’s recently plugged wells are located in the northeastern region known as the Wattenberg Field, where drilling activity remains high.

“When market and policy shifts associated with the energy transition make the Wattenberg uneconomic to drill, operators will have no financial incentive to continue plugging in Colorado,” Carbon Tracker’s analysis concluded. “Regulators need to take decisive action to incentivize plugging before it’s too late.”

COGCC staff are expected to release a third version of the draft financial assurance rules in early December, ahead of a series of formal rulemaking hearings in January.

“We’ve still got a lot of work to do,” commissioner John Messner said Wednesday. “This is one step in a long process.”

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Chase Woodruff
Chase Woodruff

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

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