On October 23, 2024, Senior Researcher Ted Boettner presented at the 2nd Annual Orphan & Idle Wells Texas Conference on the need for a federal solution to clean up America’s orphaned and abandoned wells. His presentation is summarized below. An upcoming report will provide further detail on the topic.
Key findings:
- The nation is saddled with millions of abandoned or soon-to-be-abandoned oil and gas wells, which can pollute water supplies and leak climate-warming methane.
- Cleaning up—i.e. “decommissioning”—these wells could cost over $270 billion, but oil and gas operators only have about 1 percent of this amount in financial assurance. Since a large portion of these wells are orphaned or at risk of being orphaned, a federal production fee along with regulatory reform may be needed to ensure that most of these wells are plugged and well sites are cleaned up.
- A federal program, similar to the Abandoned Mine Land program, could not only decommission millions of wells but also provide thousands of good-paying jobs to help revitalize struggling energy economies across the nation.
For more than 200 years, the oil and gas industry has drilled millions of wells across the United States from which hundreds of billions of barrels of oil and trillions of cubic feet of natural gas have been extracted. Throughout this history, without federal or state cleanup requirements, the industry routinely abandoned wells—and the damage caused by those wells—once they ran dry or were no longer profitable. Modern laws have attempted to prevent more sites from being abandoned, and the Bipartisan Infrastructure Law (BIL) makes the first federal investment in cleaning up wells that have been abandoned. But the investment provided by the BIL is far too small to address all of the damaged sites across the country, and operators continue to abandon wells in some cases.
Unplugged and improperly decommissioned oil and gas wells pose a severe threat to our environment, landowners, and the public. Many of these unplugged wells and contaminated well sites are leaking hazardous pollutants into groundwater, soil, and air, including large amounts of methane, which is a powerful greenhouse gas contributing to climate change.
There are an estimated 4 million (onshore) abandoned wells in the US, meaning these wells are no longer active. About 1.7 million of these abandoned wells have been plugged, but about 2.3 million of them remain unplugged. There are also over 900,000 active (onshore) wells in the United States. This means there are currently an estimated 3.2 million unplugged onshore wells that will need to be decommissioned, along with thousands of wells that will likely be drilled in the future.
It’s not just old wells abandoned decades ago that are the problem. About 78 percent of active producing wells produce so little gas—just six percent of total supply in 2022—that some experts consider them at risk of being abandoned. In fact, a big subset of those low-producing wells—or, more than a third (35 percent) of all active wells–—may not yield enough income to even cover operating expenses and decommissioning costs. Thus, more than three quarters of all active wells are likely to be abandoned soon, and many could be idled or orphaned in the not-so-distant future.
How much could it cost to decommission the nation’s unplugged wells?
Based on analysis of data from state agencies and two large unconventional shale operators, it could cost approximately $271 billion to decommission the estimated 3.2 million unplugged wells in 36 states. This includes decommissioning 2.3 million abandoned wells, 770,0000 conventional non-shale wells, and 171,000 horizontal shale wells. The average decommissioning cost for conventional wells is estimated at $73,700 while the average cost to decommission horizontal wells—which tend to be more complex, deeper, and costly to plug—is $261,000 per well. Using the lowest and highest decommissioning cost estimate per state reveals a range between $232 billion and $316 billion. More details on these estimates can be found in this methodology document.
These estimates do not include offshore wells. One estimate from researchers at Columbia University pegs the cost of decommissioning offshore wells in the US at $47 billion, meaning that the total cost to decommission all onshore and offshore unplugged wells in the US would be about $320 billion. For comparison, this figure exceeds the total 2023 annual economic output, or GDP, of the oil and gas industry of $257 billion in 2023.
Oil and gas operators have very little in the way of financial assurance or bonding that could pay to clean up these unplugged wells. A recent report by ProPublica found that state regulators in the 12 largest oil and gas states have just $2.7 billion in total bonds held for unplugged wells. This is about 1 percent of the funds needed to decommission the nation’s unplugged wells.
To help put these figures in context, compare the oil and gas industry to the coal industry, which is often invoked as a case study in bonding failure. A recent analysis by Appalachian Voices found that seven of the nation’s largest coal mining states have bonding coverage that is less than half of reclamation cost. And this doesn’t include the thousands of older (pre-1977) abandoned mines that have to be reclaimed through a federal cleanup program.
On top of the lack of funds to decommission inactive and active wells, plugged wells will need to be monitored and re-plugged. The typical lifespan of a plugged well is largely unknown, but it is broadly acknowledged that it is not “one and done.” Plugs can last five years or 50 years. Modern plugging standards that incorporate Portland cement were not widely used until the 1950s, and some states did not require cement plugs in the 1970s. This means a large portion of the wells considered “plugged” may be improperly plugged. Even if plugged properly, cement can shrink and crack and cause leaks into adjacent zones and into the atmosphere and groundwater. There are plenty of stories of failed plugged wells but no comprehensive studies examining the longevity of plugged wells by vintage, type, or geological formation.
How did we get here?
On top of not having federal requirements to clean up abandoned wells, states historically did not require operators to plug their wells. It has only been over the last several decades that state requirements have existed, and yet, those requirements have not been properly enforced. This is due to a combination of factors, including a “culture of non-compliance,” chronic understaffing of inspection and oversight, inadequate financial assurance requirements, and state consent agreements with operators that help them sidestep the law.
According to the IOGCC, state orphan well programs and private operators have plugged about 19,100 wells per year on average from 1992 to 2023. Over this same period, 27,400 oil and gas wells were drilled per year on average, according to the EIA. The EPA estimates that the number of unplugged abandoned oil and gas wells has grown by about 172,000 since 1990. States are not stemming the tide and if robust action is not taken to prevent orphaned wells, it is highly likely that a large portion of today’s active wells—especially low-producing and uneconomical wells—and over 700,000 new wells projected to be drilled in coming decades will be orphaned in the future.In 2023, states spent $106 million (state-sourced funds) to plug 1,884 orphaned wells. At this rate, it would take over 500 years to plug just the one million or so estimated orphaned wells in the country—and that doesn’t even include wells that may be abandoned in the future.
While requiring bonding that matches decommissioning costs on new and recently drilled wells could help prevent future orphaned wells, it would not provide any funds to decommission the nation’s existing stock of orphaned wells. The same can also be said about most of the inactive (abandoned) and low-producing wells owned by operators. It is highly unlikely that most stripper well or conventional well operators can afford, let alone purchase, bonding insurance set at the full cost to decommission their wells since they likely do not have the reserves necessary to decommission their well inventory. Requiring full cost bonding of stripper operators is more likely to cause them to go out of business or file bankruptcy, which would likely result in an avalanche of wells being orphaned and made wards of the state. That said, large shale operators can do so, since they are responsible for over 90 percent of the nation’s oil and gas production. However, shale operators are only responsible for a small share of the nation’s total well liability. Instead of bonding, states should be requiring operators to set up site-specific trust accounts that are based on the actual cost to decommission their wells.
Federal action could help solve the nation’s orphaned well crisis.
To prevent future orphaned wells and to provide enough funds to decommission most of the nation’s unplugged wells will likely require federal action. Taking action at the federal level also helps provide a more level playing field, because states are often engaged in a race to the bottom on taxes and regulations due to regional business competition. There have been several precedents of federal action to clean up fossil fuel pollution, waste, extraction sites, and to decommission energy sites.
For example, the US Nuclear Regulatory Commission (NRC) requires nuclear plant owners to set aside funds (financial assurance) for the decommissioning of their nuclear power plant facilities. The NRC requires plant owners to set aside a minimum amount of funds to cover the “bulk” of decommissioning costs based on a formula or a site specific amount estimated by an engineering company that is higher than the NRC formula estimate. The balance of all NDT funds in 2022 was $81 billion.
In addition to requiring companies to set aside or pre-pay for decommissioning costs, there are several environmental fees and taxes the federal government utilizes to clean up waste, spills, and pollution. For example, there is a tax on chemicals and crude oil to clean up Superfund sites, which was recently reauthorized in the IIJA and IRA, respectively. The Oil Spill Liability Trust Fund was also reinstated in the IRA to help clean up spills in navigable water. Altogether, the two petroleum taxes equaled 25.4 cents per barrel in 2023. The IRA also included a new methane Waste Emissions Charge (WEC) on harmful methane emissions from oil and gas facilities.
The federal program that is most applicable to the orphaned well predicament is the Abandoned Mine Land (AML) fee-based reclamation fund. The AML program was created in 1977 under the Surface Mining Control and Reclamation Act (SMCRA) with the explicit goal of addressing the legacy costs associated with thousands of coal mines that were left abandoned across the country. The AML Reclamation Program, which is run by the Office of Surface Mining Reclamation and Enforcement (OSMRE), has been funded by a per-ton fee on coal production since 1977 and those funds are primarily sent to states to reclaim AMLs. About $8.3 billion has been spent to address AML problems to date, and another $2.2 billion remains unappropriated in the AML Trust Fund. Since the AML fees were too low and because the formula that distributed AML funds to states is based primarily on a state’s coal production and not the amount of AML cleanup needed in each state, there is still a significant amount of reclamation needed. One consequence of setting the AML fee too low is that you eventually have to use public funds to make up the difference. For example, the IIJA included nearly $12 billion in additional AML clean up funds, but even it won’t reclaim all of the outstanding AMLs in the country. Despite its shortcomings, the AML program provides a key precedent and learning experience for how a federal program could be designed to address the millions of abandoned and orphaned wells in the country.
The graph below looks at the potential revenue from an AML-equivalent fee on crude oil and dry natural gas production from 2025 to 2050. In 1978 when the AML fee was created, the average price of coal in the US was about $22 per ton and the AML fee, from 1977 to 2007, was 35 cents per ton on surface mine coal for an effective rate of 1.6 percent of production value.
Using forecasted oil and natural gas production and prices from 2025 to 2050 from the EIA’s 2023 Annual Energy Outlook, a 1.6 percent production fee would yield an estimated $8 billion in 2025 and about $207 billion over this time period (in 2022 dollars). For 2025, this would be a fee of roughly 5 cents per Mcf on natural gas and $1.17 per barrel of oil based on a dry gas price of $3.17 per Mcf and crude oil price of $73.13 per barrel. These funds could potentially pay for the decommissioning of most of the country’s existing orphaned and abandoned wells, but not the active wells that may be orphaned in the future. To ensure the decommissioning of active wells, it would be imperative to enact significant regulatory reforms, such as requiring all recently drilled and new wells to set aside funds in the form of a site-specific trust fund or escrow account based on a formula similar to the NRC’s formula for decommissioning nuclear plants. Other policies could include full cost bonding for transferred wells and the creation of a Resolution Trust Corporation to resolve insolvent operators.
Federal funding for orphaned well cleanup can grow jobs and revitalize struggling energy economies.
A federal program to decommission abandoned wells could also have other features and be structured to ensure that it is built to last. The program could have tiered fee rates that adjust to prices to help ensure that operating costs are below the minimum prices at which producers can compete without incurring a loss. It could also allow operators to deduct well plugging expenses from the production fee, and they could invest their pre-paid trust fund or escrow accounts for their existing inventory. This would help lower their exposure to risk and retirement obligations (AROs), which would make it easier to borrow money while improving relationships with investors and other stakeholders. The federal program could also invest some of the production fees collected in long-term monitoring, locating orphaned wells, workforce development, research and development into more permanent plugging solutions, to name just a few.
Another model to explore is the creation of the Abandoned Well Administration by researcher Megan Milliken Biven, upon which many of these ideas are based. An AWA would be a new executive-level agency with field offices across the country that would perform the decommissioning of abandoned wells in-house by a federal workforce.
The creation of an Abandoned Well Trust Fund program could not only help decommission millions of orphaned and abandoned wells, but it would create a significant number of jobs and steady work for people in the oil and gas industry. For example, if 80 percent of the funds over the next 25 years were spent to directly decommission abandoned wells, it could create nearly 29,000 direct jobs per year and decommission around 2 million abandoned wells. This is based on a recent US Department of the Interior analysis that estimated the creation of one direct job per $230,000 spent on the federal orphaned well program. Including secondary jobs (indirect and induced), the number of jobs would be around 80,000 per year over this period.
The oil and gas industry has been hemorrhaging jobs over the last decade. According to the US Bureau of Labor Statistics, upstream oil and gas employment has declined by 38 percent since its peak in 2014, losing about 238,000 jobs. A large-scale federal program to decommission unplugged wells could recoup about 7.5 percent of upstream oil and gas jobs in 2023. Shale oil and gas drilling is a very capital-intensive industry compared to decommissioning wells, which is more labor-intensive. In terms of job creation and local economic development, this means decommissioning offers a better economic bang for the buck than shale drilling. If the oil and gas industry and operators make decommissioning an integral part of their operations, the program could provide a guaranteed market and source of income. And when the price of oil and gas is low and drilling has slowed down, it could help companies keep workers on payroll since filling and drilling requires a similar skill set.