What is there to be done about the “culture of non-compliance” that has resulted in a potentially $100 billion bill to clean up as many as 1 million oil and gas wells across Appalachia?
ORVI’s latest report has the answer. Part 2 of Filling the Hole presents a policy solution that would result in industry-financed well decommissioning, instead of passing the burden to the public, or leaving these potentially hazardous wells unplugged.
There are five key pieces to the new policy. First, the policy would create a centralized agency to adopt legacy, orphan, surrendered, and future bankrupt wells. The agency could be named the Abandoned Well Administration (AWA), and it could hire and train personnel to take action on currently orphaned wells. This agency would serve as an expert knowledge center and build a national database of wells, building the government’s capacity to address the problem.
The AWA would be funded by the second part of the policy, the implementation of a production fee on new oil and gas production. Filling the Hole estimates that the several hundred billion dollar nationwide decommissioning cost could be funded by a fee as low as $3.43 per barrel of oil and $0.17 per million cubic feet of fossil gas. The fee could be levied against all producing wells, though it could be amended to exempt wells that drop below a certain level of production. Production fee revenues would be invested by an independent board to accrue interest to fund decommissioning in the years to come.
The policy and funding mechanism would work best if implemented nationwide. This is because the fee is dependent on new production, which is unevenly distributed across the country. If the policy were adopted on a state-by-state basis, the states with new production (e.g. Texas, North Dakota, Oklahoma) would have sufficiently funded decommissioning programs while states lacking significant new production (e.g. Illinois, Kentucky, Kansas) would be unable to adequately fund decommissioning of their abandoned wells.
The report notes that this increase in cost could in theory reduce the supply and increase costs to consumers. However, in practice, this policy would have little effect on supply because the small fee would cause only the least productive wells to shut down. And due to the negligible impact on supply, costs to consumers would be hardly impacted. By contrast, the report notes that increasing exports would raise costs to consumers far more than funding decommissioning.
Together, these first two components create a properly funded agency that can address the problem of the hundreds of thousands of unplugged, leaking legacy wells.
The third part of the policy would require that companies fully fund escrow accounts for new wells. This would be a major improvement over existing financial assurance policy, which has failed to provide adequate funding for decommissioning. Financial assurance is a mechanism that requires owners and operators of polluting facilities to maintain resources to pay for the closure and cleanup of their facilities. Companies would be allowed a few years to supply the funds. Once the wells reach the end of their productive lives, companies could either fund the decommissioning of the wells by claiming the funds from the escrow accounts, or turn over both the wells and the funds to the AWA for decommissioning. Either way, the decommissioning of new wells would be funded by the industry, not the public.
Fourth, the AWA would be bolstered by tightened performance and enforcement regulations to ensure that companies follow the new policy. For example, oil and gas companies could be required to complete decommissioning within seven years for wells that have been idled for two years. The most profitable time for a well is in its early years, so by the time it has been idle for two years there is little economic reason to leave it unplugged unless it can be repurposed. Ultimately, if a company fails to meet its financial and statutory obligations, the AWA would have the power to revoke its operating license, and the company would have to sell its fields or file for bankruptcy.
Fifth, there could be an amnesty program for small producers and owners of old wells to help smooth the transition to the new policy. Without an amnesty program, the increased cost could result in large numbers of wells being newly orphaned. This would effectively be a bailout for companies that have not properly managed their statutory obligations. The report leaves the details of the amnesty program open for discussion, particularly around how old the wells or how small a company would need to be to qualify for the program.
Beyond the obvious environmental benefits of this comprehensive policy, there would also be huge social and economic benefits. Our companion blog post explores how decommissioning presents the opportunity for steady employment for oil and gas workers as the energy transition accelerates.