New Rules May Help Colorado Avoid an Orphaned Well Crisis

For about five years now, the specter of orphaned wells—oil or gas wells that have been deserted by their owner instead of properly plugged and cleaned up—has loomed large in the minds of environmental activists in Colorado. Among other concerns, orphaned wells can leak methane, a potent greenhouse gas that is speeding climate change.

Colorado, like many states, uses a mechanism called “financial assurances” in an effort to prevent companies from orphaning their wells. Under rules put forth by the Colorado Oil and Gas Conservation Commission (COGCC), the state’s oil and gas regulator, an operator must post financial assurance guarantees—usually in the form of a cash or surety bond (in which one party promises to cover another’s debt if the latter defaults)—to show that it has the means to clean up when it’s done extracting resources from the well.

Conservation Colorado’s public lands advocate Beau Kiklis, in this article about financial assurances, compared the process to putting a security deposit down on an apartment. If you properly clean up and leave the apartment the way you found it, you should get your deposit back. If you trash the place, your landlord keeps the money after you’ve left to pay for repairs.

For years, though, critics argued that the financial assurance rules didn’t require operators to put enough money on the line, which they feared would leave the COGCC without enough funds to plug orphaned wells—potentially putting that burden on taxpayers. And while the Centennial State currently doesn’t have as many orphaned wells as the 7,000 left behind by companies in Texas, the number of orphaned sites has grown from 523 sites in March 2021 to 814 today.

The recent completion of a year-long financial assurance rulemaking at COGCC, which was required under Colorado’s SB 19-181, could help avert the feared proliferation of orphaned sites. The Governor Polis–appointed members of the COGCC voted unanimously on March 1 to adopt a new set of financial assurance rules. Although the environmental groups 5280 spoke with wouldn’t go as far as COGCC Commissioner John Messner, who called the new rules a “paradigm shift,” most say the new rules are an improvement.

“We view this as a change, and we view this as a step forward,” says Kiklis. “We feel good about the fact that there are new tools in the toolbox to ensure industry is plugging their wells and paying to plug those wells.” 

One of the biggest changes involves the size of the financial assurance guarantee that an operator must contribute. In the past, the COGCC allowed companies with fewer than 100 wells to post just $60,000 to cover all of them; if the company had more than 100, it was required to post $100,000. That money would not have gone nearly far enough if the company went bankrupt and orphaned its wells: According to the COGCC’s own calculations, the average cost for plugging and reclaiming a single well is $92,710.

The new rules raise the price tag. Part of it works on a sliding scale that takes into account a company’s resources. A highly productive oil and gas company with many wells will pay less money per well than a company that isn’t very productive and has fewer wells—in part because many see operators with fewer wells  as more likely to go bankrupt and orphan their wells.  In one hypothetical scenario, a high-producing operator with 4,000 wells would have to pay $1,500 per well. That’s at least $6 million total—significantly more than the previous $100,000.

Environmentalists like Kiklis are particularly happy about the new rules for low-producing wells, which generate fewer than two barrels of oil per day on average. While these wells can be profitable for small companies, the conservation community says they can be used as loopholes: Even if a well is not generating revenue, keeping it running—and polluting—can be cheaper than paying to clean it up.

Now, though, many of those low-producing wells are subject to a $110,000 to $140,000 single well financial assurance. “That actually incentivizes industry to plug them,” Kiklis says.

Others would have liked to see that dollar figure set even higher. Jacob Smith, executive director of Colorado Communities for Climate Action, says setting the reclamation cost at $100,000 might not leave enough money to fully reclaim large drilling areas. “The reclamation costs should have been set on the number of acres disturbed,” Smith said in an email to 5280.

Smith is also frustrated by the protections put in place for out-of-service wells, a designation an operator can give an inactive well, while agreeing to plug it within eight years. Each year during over time period, the operator must perform an Audio, Visual, Olfactory (AVO) inspection of the well to ensure it isn’t leaking. However, methane does not have a smell, and Smith is concerned that the AVO test won’t catch every problem.

Still, Smith is happy that the COGCC closed a potential loophole by requiring operators to pay financial assurances when they purchase wells from other companies. As the Colorado Sun reported, larger operators occasionally sell wells that are not making enough money to smaller operators, to whom the profits are still worth the price of upkeep. Some of those smaller operators were struggling financially behind the scenes, and when they went bankrupt they left wells behind.

Under the new rules, any company purchasing a well must pay the $110,000 to $140,000 single well financial assurance to the COGCC before the transfer in ownership is made. That upfront cost deters small companies from buying riskier wells that they might not be able to afford to clean up down the road. 

Operators must also pay an annual registration fee of $125 or $225 per well they control (the fee depends upon the company’s average daily per-well production) . That money will go toward Colorado’s Orphaned Well Program, which performs plugging and reclamation when oil and gas companies don’t do the work themselves. Conservation Colorado estimates that this fee will generate an extra $10 million for the program each year.

Just as it did during the rulemaking process,  the industry’s trade association, the Colorado Oil and Gas Association (COGA) expressed fears that the changes would make operating in Colorado too expensive. COGA’s president and CEO, Dan Haley, said in a statement that Colorado has a small orphan well problem compared to other states, and that most companies in the state “maintain a consistent and responsible retirement schedule,” a practice Haley said will continue.

Haley added that the rules “come at a steep cost” and says that “by the state’s own calculations, the price to operators is approaching $500 million per year in new regulatory fees.” However, 478 companies are registered with the COGCC, so that cost will be divided between them.

Kate Merlin of Wild Earth Guardians, an environmental nonprofit, sees a much different problem. Despite the 50 pages of new financial assurance rules, the COGCC is allowed to set those guidelines aside on a case by case basis and require alternate financial assurance amounts if it sees fit. “I’m just completely flabbergasted we went though a year of rule making, ended up with 50 pages of new rules, and tucked into a sub-sub-sub-sub paragraph on page 39 it says that the Commission can allow an operator to pay a different amount of financial assurances than specified by the other rules,” Merlin said via email.

Megan Castle, a spokesperson for COGCC, told 5280 via email that the commission needs discretion to be flexible when the situation calls for it and added that, the discretionary power means the commission could set higher financial assurances, too.

Kiklis, for his part, says his worries center around the capacity of the COGCC to enforce the regulations. He wants to make sure the COGCC properly uses the influx of cash. “How they’re spending the money, if they’re bringing on more staff, how many more wells they’re plugging,” Kiklis says. “These are things that we will be tracking closely.”

Castle told 5280 that the commission has been planning for the influx of money since the fall of 2021: “[The COGCC] is currently prioritizing orphaned well work and expanding its program staffing in efforts to hit the ground running when the additional funds are available.”

The new rules take effect on April 30, 2022.