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Colorado oil, gas companies offer $459 million to guarantee wells are plugged eventually

Plans seek to meet new state financial requirements, but some smaller operators hope to put up only a fraction of the needed funds

Colorado oil and gas companies are proposing to meet new state requirements by putting up $459 million in guarantees that their wells will be plugged at the end of their lives – 60% of the amount regulators targeted.

But more than a quarter of the companies filing financial plans, primarily smaller operators with low-producing wells, are offering to cover only 14% of the Colorado Oil and Gas Conservation Commission’s $360 million estimate for their plugging and remediation costs.

Those 45 operators have nearly 8,600 wells with more than half of them shut-in or producing no more than two barrels of oil or 10,000 cubic feet of gas a day – an output that defines them as low-producing and potentially uneconomical.

The analysis is based on a review by The Sun of the financial plans filed with the COGCC and an oil and gas data mapping project done by the environmental group Rocky Mountain Wild.

“These are bottom-of-the-barrel operators looking to put in bottom-of-the-barrel financial assurance,” said Kate Merlin, an attorney with the environmental group WildEarth Guardians. “If these companies can’t be made to adequately provide financial assurance the cost is going to fall on taxpayers.”

The COGCC’s orphan well program, as of September, had ongoing or planned work at 968 sites in the state, with 494 wells to plug, and in fiscal 2022 the commission had $5 million appropriated for projects, according to the program’s annual report.

Those funds were generated from the bonds from defunct operators and fees levied on oil and gas operators. Under the new rules, operators will also pay into a $10 million orphan well fund.

The number of companies submitting financial assurance plans has been a moving target as some operators have filed, then withdrawn and then refiled plans. The Sun’s analysis is based on early March filings by 156 companies.

The Rocky Mountain Wild website map also identifies the wells and production of operators filing financial assurance forms by municipalities, county and legislative districts.

Operators and the oil and gas commission did agree on the level of funding in about 60% of the cases. Overall, the amount of bonding and financial guarantees would be nearly double what it was under the old rules.

“The financial assurance rule-making was a paradigm shift for Colorado,” Lynn Granger, the American Petroleum Institute’s Midwest/Mountain West director, said in an email. “At the end of the day, the focus of the rule-making was to protect the state’s taxpayers and we believe that is being accomplished.”

Largest operators have ambitious cleanup schedules

In addition, under a program included in the new rules, operators have committed to plug more than 4,600 of their wells and remediate the sites in the next seven years – about a quarter of the marginal or shut-in wells in the state.

That effort is being led by the state’s largest oil and gas producers with Occidental Petroleum Corp. putting 1,800 wells on the plugging list. Noble Energy, a subsidiary of Chevron Inc., placed 1,900 wells on the list and Civitas Resources, 538 wells.

“We’re proud of our robust plugging and reclamation schedule,” Civitas spokesman Rich Coolidge said, adding that in addition to its wells, the company voluntarily plugged 42 orphaned wells last year.

Workers from Ranger Energy Services are pictured during plugging and abandonment operations at an Extraction Oil & Gas well in Lafayette on Aug. 3, 2021. (Andy Colwell/Special to The Colorado Sun)

It isn’t only the biggest companies that have committed to plug and abandon wells. Loveland-based Magpie Operating said it will plug and abandon its 62 low-producing wells. The company has a total of 87 wells.

The incentive for the companies is that they do not have to include wells set to be closed on their financial assurance list.

“The rule is working as we had hoped for the majority of the operators, but there is a quarter of them that are not appearing to comply with the letter or intent of the financial assurance rules,” said Matt Sura, an oil and gas attorney who represents communities and local governments and served as a consultant on the Rocky Mountain Wild project. “The financial assurance plans for those operators should be rejected by the commission.”

Megan Castle, a COGCC spokeswoman, said in an email, that “staff is conducting reviews of the operators’ plans and are very pleased with many received that meet the rule requirements and will communicate with operators who have submitted plans that are inadequate based on the rules.”

The main point of contention for smaller operators is the commission’s estimate of plugging and remediation costs, which they contend are excessive, as is a requirement to post an amount for each well.

The commission has calculated that the cost of remediating a well site is about $100,000 and the cost of plugging a well, depending on its depth, ranging from $10,000 to $40,000, with an average total of $120,000 per well.

This figure the commission said should be sufficient to cover all but the most expensive projects.

For the Vernal, Utah-based Plug Nickel Oil Co., which operates 23 low-producing wells in Rio Blanco County in northwestern Colorado, the commission’s calculated coverage is $880,000.

“There is no way we could pay that,” said Lana Hogue, one of the owners of the family operation.

In 2022, when the domestic price of oil soared, Plug Nickel had an estimated $181,260 in oil sales (a rough calculation based on average spot prices for the year and the company’s reported sales). But in 2020, when the price of oil plummeted during the pandemic, the company made perhaps half as much.

“This is creating a lot of anxiety for small operators,” Hogue said.

Menu of financial assurance options is complex

The overhaul of the financial assurance requirements was required by Senate Bill 181, the 2019 law that changed the COGCC’s mission from promoting industry development to protecting public health, safety and welfare.

After months of hearings, the commission in March 2022 adopted a complicated set of options for companies to meet new financial assurance requirements.

Castle said the new rules are “the best in the nation” and ensure each operator has the financial capability to meet its financial obligations.

The rules offer companies with sufficient oil and gas production three ways to use blanket bonds to fulfill their requirements.

In Option 1, large volume producers, with output the equivalent of at least 60 barrels of oil a day, or BOE, per well, can pay a blanket of $12,000 per well for up to 50 wells down to $1,500 per well for operators with more than 4,000 wells.

Medium-size operators, producing between 15 BOE and 60 BOE can also blanket bond at $18,000 to $8,000 per well depending upon the number of wells.

Twenty-seven companies chose Option 1 and 28 opted for Option 2. These companies have about 24,500 wells, based on the early March filings.

A special category, Option 6, was created for the biggest operators allowing them to post $40 million bonds for all their wells. Four companies – Civitas Resources, Great Western Operating Co., PDC Energy and Occidental Petroleum – chose this option. Their bonds will cover 12,300 wells.

Noble Energy, the second largest oil and gas producer in the state after Occidental, is proposing to pay $6.6 million in bonding under Option 1, Paula Beasley, a company spokeswoman, said in an email.

The company also has the biggest plugging program in the state.

“We anticipate continuing to plug an average of 500 vertical wells and remove associated facilities and infrastructure per year in the DJ Basin for the next four years,” Beasley said.

Small companies have big problems with bonding

The challenge comes in the three other options for operators who are low producers or say they need special consideration for their financial assurance. These categories – 3, 4 and 5 – contain 96 companies that have 9,800 wells.

“These rules will be difficult to comply with for small operators, and we encourage the commission to find a path forward for them,” Dan Haley, president of the Colorado Oil and Gas Association, a trade group, said in an email.

The companies in 3 and 4 must provide financial assurance for each well, unless the COGCC director approves an alternate amount. They can make an annual contribution to a fund to meet their obligation over 10 to 20 years.

Option 5 is a special circumstance category for companies that can’t meet any of the criteria, allowing them to come before the commission to plead their case.

When the rules were adopted then COGCC Commissioner Bill Gonzales described Option 5 as a way for a company to get “a bespoke, customized financial assurance plan.” Eighteen companies have filed for Option 5.

About 40 of the companies in these three options also are meeting the COGCC-specified levels of financial assurance, but others are seeking to put up as little as 3% of the COGCC per-well requirement.

45 companies labeled “irresponsible operators”

It was in this group that Rocky Mountain Wild identified 45 “irresponsible operators” for seeking to put up insufficient financial backing and for failing to provide adequate documentation of their proposed lower costs.

Under the regulations, to use an alternative financial assurance amount a company must provide documentation of its “demonstrated costs” for plugging and remediation and an assessment of each of its well sites.

Many of the smaller operators are providing far less. Tulsa, Oklahoma-based Williford Energy Company, which has 51 wells in La Plata County producing an average 2.5 BOE a day, simply said on the state form:

“Williford Resources’ financial condition as related to its Colorado assets is strong – as a small nimble operator it is able to control production cost … and it is capable and willing to plug and abandon any well which requires it (having done so as recently as Nov. 3, 2020).”

The company did not propose any dollar amount of financial assurance.

It was accompanied by a one-paragraph letter from Williford’s chief financial officer, certifying the company had adequate financial resources and insurance.

Wichita, Kansas-based McCoy Petroleum Corp., which has two producing wells and one shut-in well and no record of production, according to COGCC records, did not fill out the required forms. Instead, it sent a letter from a bank saying it had $390,000 to meet financial obligations.

“Implementation of these rules is everything,” WildEarth’s Merlin said. “If the state allows some of these facially inadequate plans, then we will know that the rule-making is a failure.”

While many of the companies in this group are small, some control hundreds of wells.

Dallas-based Omimex Petroleum has 334 low-producing gas wells across the Eastern Plains in Yuma and Phillips counties.

The oil and gas commission calculated the single-well assurance would be $37 million. Omimex submitted a one-page estimate from a Sterling contractor for site remediation of $1,642 a well and a quote from an oil field services company estimating plugging costs at $10,900 a well.

But the plugging would be offset by selling the steel casing pulled out the well, so the per-well plugging costs would be $1,525 a well, according to one of the bids.

That is assuming the well is accessible, the case is intact and not leaking, the wellbore is not abnormal and no obstructions are encountered, the Wray-based oil field service company Excell Services said.

Instead of $37 million, Omimex proposed a little more than $1 million in financial assurance funds or 2.78%.

Christopher Chambers, the designated contact on the COGCC form, did not return an email request for comment. The voicemail on the phone listed on the form said the mailbox was full.

“We are all waiting to see what happens”

Two large independent operators K.P. Kauffman, known as KPK, and OwnResources have also filed under Option 5.

KPK has more than 1,200 wells, 90% of which are low producing, and it is facing a $2 million fine from the COGCC. If it doesn’t clean up 78 production sites it could lose its right to do business in the state. The company has sued in Denver District Court to challenge the commission rulings.

The company has proposed $10.3 million in financial assurance as opposed to the commission target of $133 million. It is not clear how KPK arrived at its figure since all its filings are marked as confidential.

A K.P. Kauffman Company tank battery is pictured at the corner of Weld County roads 39 and 40 on May 14, 2022. (Andy Colwell/Special to The Colorado Sun)

OwnResources, which has nearly 3,300 Eastern Plains gas wells, with more than half of them low producers, is proposing $8.5 million in guarantees as opposed to the commission’s estimate of $24 million.

“We are proposing financial assurance based on basin geology, operating costs, demonstrated P&A costs, footprint and our operating model, not the “one size fits all” model of the other options,” Niels Phaf, the company’s managing partner, said in an email. ” This is exactly why the commission created Option 5.”

Hearings on the financial plans for Options 5 and 6 are scheduled for April.

Facing the prospect of an $880,000 financial requirement, Plug Nickel’s Hogue called the COGCC and said the staff was very helpful in walking her through the application process.

Since Plug Nickel didn’t have its own demonstrated well costs it had another operator in the area, the Hayes Petroleum Co., in Rangely, provide some of their data with an estimate of plugging and remediation for sites in Rio Blanco at $20,000 to $30,000.

“We own a well service company so we have all the equipment and can do it ourselves so that makes it even cheaper,” Hogue said.

As for well-by-well evaluation, she said the whole area is wide-open and sparse. “We are in Rangely, it’s like the moon out there.”

“Currently all of our wells are low producing wells,” she said. “They are shallow stripper wells. We have no plans of plugging any of them. If we do decide to plug some, we have access to all the equipment needed.”

Will that be enough to convince the COGCC?

“We are waiting to see what happens,” she said. “We are all waiting to see what happens.”

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