When the Price Drops and Drilling Stops

Neal Ellis Energy • Environment • Business • 4 minute read

As the energy industry continues to grapple with the effects of low oil prices, one recurring story is the burden of inactive and abandoned wells, and the associated costs of compliance. Stories from Canada and the US give some timely insight into a market where every company is working hard to cut costs, and the most at risk are trying to stave off insolvency.

The Financial Post profiles Midlake Oil and Gas Ltd in Alberta, where smaller producers are feeling the pressure of regulatory compliance under the Alberta Energy Regulator's licensee liability rating program.

Mr. Nixon said his company has paid $800,000 into the fund since October; it has another $90,000 due next month. He said Midlake is losing money right now — but believes it wouldn’t be if he didn’t have to pay into the fund. – Financial Post, February 27, 2015

There are an estimated 80,000 inactive wells in Alberta, with 37,000 of them failing to meet AER standards, and 3,300 indicating wellbore integrity problems. As the number of inactive wells continues to increase, there are significant implications for the cost of cleanup and compliance. In April, the Alberta Energy Regulator's new Inactive Well Compliance Program goes into effect with the aim of further strengthening requirements. 

Meanwhile, The Wall Street Journal profiles High Plains Gas Inc. in the Powder River Basin in Wyoming, and its nearly 3,000 wells that have been seized by the state and declared abandoned. Ed Presley originally acquired the company 'at no cost' from its prior owners, who already had outstanding bills of around $10 million in unpaid fees for royalties, idle wells and compliance fines.

Wyoming’s troubles with Mr. Presley’s wells are a cautionary tale for states amid the energy rush. Drilling booms historically leave legions of idle wells that become state or federal wards. Yet agencies in some states, and federal regulators, aren’t adequately equipped to clean up so-called orphaned sites at a time when shale drilling is raising the prospects of still more. – Wall Street Journal, February 25, 2015

While most of High Plains Gas Inc.'s wells are estimated to be relatively cheap to plug, prices can range from $25,000 to $100,000 for conventional wells, and unconventional sites (such as those used for fracking) can be much more.

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The US federal government and most states have regulations in place to try and prevent taxpayers from absorbing these costs, but the requirements, compliance rates and bond payments can vary widely.

In Pennsylvania, compliance bonds can range from $2,500 for a conventional well to a bulk $600,000 bond for a group of unconventional wells. PA had 8,371 identified orphaned wells in 2014, though it has an estimated 200,000 lost and abandoned wells to reckon with, and 96% of those are undocumented.

In Louisiana, 75% of the state's wells have no bond paid, and regulators there are working to improve that number with stricter compliance requirements. 

In Texas, there are about 9,300 identified orphaned wells, and abandoned wells have grown 25% since 2012. Producers are required to pay $2 per foot of depth drilled, or a $250,000 bulk bond.

The West Virginia regulator also has a $250,000 bulk bond option, and otherwise requires between $5,000 and $50,000 for conventional wells, and $50,000 per unconventional site.

Given the sheer number of wells that are being drilled by companies, many of which are small and medium sized, states really need to be worried about situations where no company is around anymore. Without increased bonding levels, these cleanups will be financed by the state and federal government. – Lucas Davis, University of California, Berkeley

Producers understandably want to manage and minimize these compliance costs, but there are unavoidable, long-term implications that both producers and the wider community need to recognize.

While it can be convenient to deactivate wells and wait for better market conditions, or tempting to acquire assets at fire-sale prices, the longer wells are in regulatory limbo or remain inactive, the higher the chance of wellbore issues, environmental consequences, and a costly cleanup.

Smaller players in the US and Canada are doubtless under heightened market pressures, but the liability that comes with drilling remains to be dealt with regardless.

The LLR parameters have been toughened up in the last number of years; that’s been a good thing. This is a volatile industry with some rapid swings in natural gas and oil prices that can dramatically affect the financial picture of licensed oil and gas producers in Alberta. – Gary Leach, President, Explorers and Producers Association of Canada

Read more about these stories in the Wall Street Journal, the Financial Post, and the Edmonton Journal.

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