As the oil and gas industry navigates the economic downturn, state government officials and industry observers worry that insolvent companies will lead to more abandoned wells and a smaller funding pool to plug and reclaim the sites.
The industry has fielded a twofold blow from plunging oil demand due to the coronavirus pandemic and global oversupply, driven partially by an oil price war between Saudi Arabia and Russia. The market downturn may result in bankruptcies, leading to more orphan wells that can cause environmental damage, according to panelists speaking during a June 1 virtual forum hosted by Democrats on the House Natural Resources Committee's Subcommittee on Energy and Mineral Resources.
When an operator becomes insolvent and can no longer afford to care for idle sites, the state becomes responsible for those orphan wells. State governments in New Mexico and North Dakota rely largely on fees paid by the industry to fund efforts to plug and reclaim these sites, which can release methane and contaminate water sources, panelists said.
"We could be looking at huge numbers of oil and gas companies going bankrupt in the coming months, leaving behind more orphan wells and costing a lot of workers their jobs," subcommittee Chairman Alan Lowenthal, D-Calif., said during the forum. "Congress can create a program to properly plug and reclaim these orphan wells and in the process create thousands of jobs for unemployed oil and gas workers."
Citing a 2020 report from the Interstate Oil and Gas Compact Commission, Lynn Helms, director of the North Dakota Department of Mineral Resources, told the subcommittee that there are about 56,600 orphan wells across the nation. The commission estimated that there are between 210,000 and 746,000 undocumented orphan well sites in the U.S. On average, it costs nearly $19,000 to plug a well in the U.S., the director said, though that amount varies significantly depending on the well's depth and location.
Over two months during the coronavirus crisis, North Dakota's orphan well count sprang from zero to 366, Helms said. States are equipped to take the lead in addressing these sites in cooperation with the U.S. Department of Energy, Helms said, noting states' regulatory authority, expertise and relationships with landowners as well as service companies.
"We have everything we need except the budget," Helms said. "Funding this important work will provide an immediate, meaningful stimulus to both states and their citizens."
With federal funding, New Mexico could immediately begin ramping up its existing state program to plug and reclaim more wells, according to Adrienne Sandoval, director of the Oil Conservation Division of the New Mexico Energy, Minerals and Natural Resources Department. These efforts could be especially beneficial to oil and gas service companies, Sandoval said.
"The oil and gas service companies, which would have a direct benefit from this funding, are some of the hardest-hit employees right now, and this would directly benefit them," Sandoval said.
Sara Kendall, program director for the Western Organization of Resource Councils, a regional network of community organizations, called on the lawmakers to fully fund work needed to plug and reclaim all documented orphan wells on federal and tribal land and to reform federal bonding requirements.
"We also urge you to require that both federal and state agencies agree to update their programs," Kendall said. "If we continue to rely on blanket bonds that do not even attempt to cover the cost of reclamation and orphaned well funds that can't keep up with the problems of the past, let alone make a dent in the problems of the future, we should expect to face another orphaned well crisis with billions of dollars in taxpayer liability."