Oil and gas regulators float tiered financial-assurance system, ‘amnesty’ for risky wells

Six years ago, officials in one of Colorado’s fastest-growing school districts set out to build a much-needed third high school to serve several north Denver suburbs.

The site they selected, on unincorporated land eventually annexed by the city of Thornton, became Riverdale Ridge High School and the adjacent Rodger Quist Middle School — but not before the district was forced to plug and remediate three low-producing oil and gas wells, at a cost to local taxpayers of over $300,000.

“First, we had to find the operator,” Terry Lucero, chief operations officer for School District 27J, told the Colorado Oil and Gas Conservation Commission on Thursday. “He was difficult to locate — no longer existed in the state of Colorado.”

The wells in question weren’t technically “orphaned,” the term for wells that are abandoned to the state following an operator’s bankruptcy. But they belonged to a subset of thousands of aging, unprofitable wells that are generally agreed to be as good as orphaned already; they produced almost nothing, and their operator couldn’t afford to plug them.

“He agreed to sign the forms necessary for the plugging and abandonment, (but) he had no resources to provide for it,” Lucero said. “And if we were going to use those school sites for the development of schools, we would have to absorb those costs.”

Orphaned wells, and those at risk of being orphaned, are at the center of a rulemaking process currently underway at the COGCC, the state agency that regulates drilling. The commission’s new rules on financial assurance, also known as bonding, have been in the works for more than a year, and are the last major policy required to be implemented by Senate Bill 19-181, the overhaul of drilling laws passed by Democrats in the General Assembly nearly three years ago.

Financial assurances are the security deposits provided to Colorado regulators by oil and gas companies seeking to drill within its borders. They’re meant to cover cleanup costs in the event that an operator goes bankrupt and their wells are abandoned or “orphaned” to the state.

COGCC regulators, oil and gas companies and other groups appear to be nearing broad agreement on a set of ideas aimed at limiting the negative impacts of Colorado’s highest-risk wells. But precisely how to define that risk — and the scope and stringency of the requirements to be placed on tens of thousands of other active wells across the state — remains up in the air.

Agency staff have released three drafts of proposed rule changes, and are expected to release a fourth early next month. Jeff Robbins, chair of the COGCC, on Thursday described the commission’s multi-pronged approach to the new rules.

“It’s got an orphaned well backstop, it’s got tiers, it’s got financial assurance plans, it’s got an out-of-service program, it’s got plugging and abandonment incentives,” Robbins said. “It’s coming at it from various angles.”

‘Amnesty’ program considered

Colorado’s current financial assurance rules have long been criticized by environmental groups as inadequate. Operators can cover up to 100 wells statewide with a “blanket bond” of $60,000, while operators with more than 100 wells can provide a blanket bond of just $100,000. That’s despite the fact that the typical cost to plug and reclaim a single well — a process that drastically reduces the potential for safety or environmental hazards — can exceed $80,000.

Oil and gas interests, in turn, have long warned that raising those bonding amounts could lead to drastic increases in the number of orphaned wells by pushing the operators of low-producing wells into bankruptcy.

Advocates for stricter rules say that may be true, but they argue that sooner or later, the state is going to have to reckon with a problem that isn’t going away.

“I think there’s probably going to be a minimum of 3,000 wells that are going to be orphaned if you do anything with these rules,” said Matt Sura, an attorney representing several environmental groups before the commission.

“These orphaned wells are not going to be caused by these regulations, merely revealed by them,” he added. “These wells were going to be orphaned regardless of what you (do) or don’t do.”

The COGCC has gotten a boost in its efforts to address orphaned wells from the federal government, in the form of more than $90 million over the next decade apportioned to Colorado by the recent congressional infrastructure bill. With federal funds and new financial assurance rules on the way, Robbins and other commissioners have floated what he described this week as “some form of amnesty” for high-risk operators.

“(Within) six months, you can give us the keys to your wells, you can give us all your financial assurance, you sign a pledge that you’ll never operate in the state again,” Robbins said. “And we take advantage of the fact that we’ve got federal funds coming in, and we use that to plug and abandon those wells.”

Mark Mathews, an attorney with Brownstein Hyatt Farber Schreck representing the Colorado Oil and Gas Association before the commission, told Robbins that the amnesty concept had “facial appeal.”

But he and other industry representatives cautioned against enacting stricter requirements on individual wells or operators based solely on production levels, arguing that low production alone isn’t an indicator of high risk.

“There are many low-producing wells, they are low-producing for many different reasons — legitimate, operational reasons,” said Matt Lepore, a former COGCC director who testified Thursday on behalf of three Colorado oil companies. “There are routine maintenance issues and so forth.”

“It’s misleading, I think, to talk about an impending orphaned well crisis based on the number of inactive wells, the number of low-producing wells, without looking at the operators themselves,” Mathews said.

Tiered system

The COGCC’s new bonding rules will almost certainly sort operators into multiple tiers with a spectrum of financial assurance requirements.

In the agency’s latest draft, the riskiest operators would be required to provide “single well financial assurance,” at a full cost of $70,000 or more for each well they operate. It’s an approach that, under certain circumstances, industry groups acknowledge may be necessary.

“There is no doubt that there are operators with extremely low production, that don’t have an active well fleet to provide … an average daily well production value that’s meaningful,” said Mathews. “Those assets represent a risky proposition, and I think that in those circumstances single well financial assurance may be something that you want to consider.”

On the other end of the spectrum, the largest companies would potentially still be able to provide financial assurance under a blanket-bond structure, though the amounts would be increased significantly — perhaps $30 million for operators like Occidental Petroleum and Chevron, Lepore suggested Thursday. Large operators, many of which are publicly traded companies that are required to account for “asset retirement obligations” on their balance sheets, are considered to be the lowest risk for orphaned wells.

A large percentage of operators in the middle could fall into what commissioners and industry representatives have referred to as a “bespoke” tier, in which companies would be required to submit a mix of bonds and other financial instruments, or otherwise demonstrate their solvency according to criteria yet to be determined by the commission.

Some environmental activists, however, continue to press for single well financial assurance, or “full cost bonding,” to be applied to all of Colorado’s roughly 50,000 active wells. Such an approach would effectively force drilling companies to obtain surety bonds on the private insurance market, which supporters of the idea say would allow the industry’s risk to be efficiently managed — especially amid the growing uncertainty of its long-term future in an age of accelerating climate impacts and a global transition to clean energy.

Industry groups have repeatedly said that full-cost bonding is a “nonstarter” for the vast majority of operators, who wouldn’t be able to pay the premiums or put up the collateral that surety companies would require. It’s especially burdensome, they say, because over the last several years surety companies have increased their underwriting requirements for oil and gas drillers.

Those objections have raised some commissioners’ eyebrows.

“I’m wondering if that’s because oil and gas operations have become more risky over time, and so therefore it’s become more expensive to become bonded,” commissioner Karin McGowan said to a panel of industry witnesses during a Wednesday hearing.

Trevor Gilstrap, an insurance broker testifying on behalf of COGA, acknowledged that a wave of bankruptcies, including that of Texas’ Fieldwood Energy, had led the surety market to increase premiums and underwriting requirements on the oil and gas business, but claimed that this didn’t represent a systematic reevaluation of the industry’s risk.

“It’s like anything, right — when a hailstorm rolls through, and it damages houses in your neighborhood, even if your house wasn’t damaged, your property premiums are typically going to go up,” Gilstrap said. “It’s really some of these massive shock losses that have created this ripple effect throughout the market.”

Gilstrap told commissioners that he couldn’t say exactly where the COGCC should land on new bonding requirements.

“I know that the end result is that the (bonding) amount is going to go up … and it’s going to go up significantly,” he said. “I wish I could give you better direction on, ‘This is the magic number that would create a win across the industry.’ Admittedly, I don’t have that, because underwriting is so individually based on each company, their financial assets, their reserve reports, et cetera.”