WY - BLM - Lease Sale

[VikingsGuy]

Seems like that's a failure of bankruptcy court?

If I was king for a day I would make a law that plugging liability comes before paying off service companies and banks.

They should make them bond it with general liability firms (not self-funded). They pay the premium up front. The bonders take the risk and price bonds accordingly - and chase the defaulters.

 

[Deleted member 28227]

They should make them bond it with general liability firms (not self-funded). They pay the premium up front. The bonders take the risk and price bonds accordingly - and chase the defaulters.

It's interesting I picked the brain of our ops team about it over drinks a couple of weeks ago.

Apparently if you owned a well at any point at time you are on the hook for the liability. So I buy some leasehold with vertical wells (holding the lease), then drill some horizontal wells, then sell the now (for me), valueless vertical well and the new buyer goes under I'm still on the hook with the state for plugging liability.

We plug a lot of wells rather than sell them if the value is super low, to avoid that issue. Your bonding only applies when you are the operator.

I'd be curious to see the well dataset for the abandoned wells and see who the operators were and when they were SPUD. The fact that the states with the biggest abandoned well counts are in PA/OH makes me think a lot of these are very very old wells.

Other thing to know is that some states like Texas have had a very strong regulatory structure in place for almost a century, but other states basically had very few rules until the shale boom.

 

[VikingsGuy]

It's interesting I picked the brain of our ops team about it over drinks a couple of weeks ago.

Apparently if you owned a well at any point at time you are on the hook for the liability. So I buy some leasehold with vertical wells (holding the lease), then drill some horizontal wells, then sell the now (for me), valueless vertical well and the new buyer goes under I'm still on the hook with the state for plugging liability.

We plug a lot of wells rather than sell them if the value is super low, to avoid that issue. Your bonding only applies when you are the operator.

I'd be curious to see the well dataset for the abandoned wells and see who the operators were and when they were SPUD. The fact that the states with the biggest abandoned well counts are in PA/OH makes me think a lot of these are very very old wells.

Other thing to know is that some states like Texas have had a very strong regulatory structure in place for almost a century, but other states basically had very few rules until the shale boom.

Wouldn't help for old wells, but I would make the owner of every new well or any new permitted location to bond for full life cycle. That moves the duty of "completion" to a party outside of the boom/bust "barely capitalized OG LLC" companies that come and go, and makes those O&G entities account for true life cycle costs upfront - not just pass the buck until everybody just chooses bankruptcy.

[It is likely at least some states are doing this already]

 

[nrpate05]

Wouldn't help for old wells, but I would make the owner of every new well or any new permitted location to bond for full life cycle. That moves the duty of "completion" to a party outside of the boom/bust "barely capitalized OG LLC" companies that come and go, and makes those O&G entities account for true life cycle costs upfront - not just pass the buck until everybody just chooses bankruptcy.

[It is likely at least some states are doing this already]

Yea. I think in any EA or EIS there needs to be language of some sort that the lessee/proponent is responsible for the life cycle of the project, same with green energy. The agency has to have some sort of recourse when these projects don't go as planned and then someone else is stuck with the bill.

 

[Deleted member 28227]

Yea. I think in any EA or EIS there needs to be language of some sort that the lessee/proponent is responsible for the life cycle of the project, same with green energy. The agency has to have some sort of recourse when these projects don't go as planned and then someone else is stuck with the bill.

That would never work, IMHO. That’s just not a model that works in a capitalist society.

Companies are temporary, the government is not. States should add a tax for plugging/remediation and make sure those funds can’t be pulled into the general fund. Same idea for green energy.

 

[Deleted member 18333]

My experience is it is the State that requires bonding be demonstrated prior to project implementation. Having the Feds involved often results in double bonding. I agree with VG that self bonding should be a non-starter.

Bonding for Fossil Fuel projects is getting very expensive and harder to find a Surety that will take the project on. ESG is b!tch.

 

[VikingsGuy]

That would never work, IMHO. That’s just not a model that works in a capitalist society.

Companies are temporary, the government is not. States should add a tax for plugging/remediation and make sure those funds can’t be pulled into the general fund. Same idea for green energy.

I trust bond companies more than I trust govts to save money for future need.

 

[Deleted member 28227]

I trust bond companies more than I trust govts to save money for future need.

Bond companies won’t bond you for someone else’s assets.

 

[VikingsGuy]

Bond companies won’t bond you for someone else’s assets.

Bond companies can bond anything the contracts say they bond - of course, the broader the bond promise the bigger the price. But I would rather force the companies to figure that out now and not just put it to the general public via bankrutcy/etc. in the future. It is about getting a trusted third party to collect sufficient funds at the time of drilling to ensure sufficient amounts are present at end of the life cycle. A properly structured bond would do that better than govt., as the govt just collects fees today and passed the bill to future generations to figure out. A legit bond company has to actually manage those funds in a trustworthy manner.

 

[Deleted member 18333]

Bond companies can bond anything the contracts say they bond - of course, the broader the bond promise, the bigger the price. But I would rather force the companies to figure that out now and not just put it to the general public via bankrutcy/etc. in the future. It is about getting a trusted third party to collect sufficient funds at the time of drilling to ensure sufficient amounts are present at end of the life cycle. A properly structured bond would do that better than govt., as the govt just collects fees today and passed the bill to future generations to figure out. A legit bond company has to actually manage those funds in a trustworthy manner.

Current Abandoned Mine Land fees get dolled out by the govt and used for all sorts of projects that it would be a stretch to say have anything to do with abandoned mine land. Additionally, I am 100% positive the bonding company would manage a far more cost effective project than any Govt. entity.

 

[Deleted member 28227]

Bond companies can bond anything the contracts say they bond - of course, the broader the bond promise the bigger the price. But I would rather force the companies to figure that out now and not just put it to the general public via bankrutcy/etc. in the future. It is about getting a trusted third party to collect sufficient funds at the time of drilling to ensure sufficient amounts are present at end of the life cycle. A properly structured bond would do that better than govt., as the govt just collects fees today and passed the bill to future generations to figure out. A legit bond company has to actually manage those funds in a trustworthy manner.

The current bonding process works kinda like car insurance, while you own a well you pay a monthly premium that covers the well to some level. When you sell a well coverage ends and you stop paying for it.
You have to be bonded to buy a well, so the bond burden transfers when ownership is severed.
So a well might have several different bonding companies over the course of it's life.

Any one who has operated that well can be held liable for it, but companies won't bond you for a well you don't own. Active operators that are permitting wells want to be on good terms with the state will agree to pay for a well if asked. This has happened several times at companies I've worked at. Plugging typically is like $50-120k, when you're drilling 300MM of wells a year plugging have a dozen wells here or there to stay on good terms with the state is a no brainer.

The problem, I imagine is there are/were a lot of fly by night companies drilling shallow wells for pennies that didn't plug them properly or just left them shut-in.

A modern HZ well might cost $5MM to $15MM to drill, apple to donuts with a well drilled in 1935 for $300 well with equipment delivered to the site by horses. My suspicion is that there are very few of the abandoned wells are horizontal. Most are these small cheap conventional wells.

Spindletop was over 120 years ago...

Two points being, not sure how you would have to change the current process, and then if that's even necessary are we are mostly dealing with wells drilled generations ago.

 

[VikingsGuy]

The current bonding process works kinda like car insurance, while you own a well you pay a monthly premium that covers the well to some level. When you sell a well coverage ends and you stop paying for it.
You have to be bonded to buy a well, so the bond burden transfers when ownership is severed.
So a well might have several different bonding companies over the course of it's life.

Any one who has operated that well can be held liable for it, but companies won't bond you for a well you don't own. Active operators that are permitting wells want to be on good terms with the state will agree to pay for a well if asked. This has happened several times at companies I've worked at. Plugging typically is like $50-120k, when you're drilling 300MM of wells a year plugging have a dozen wells here or there to stay on good terms with the state is a no brainer.

The problem, I imagine is there are/were a lot of fly by night companies drilling shallow wells for pennies that didn't plug them properly or just left them shut-in.

A modern HZ well might cost $5MM to $15MM to drill, apple to donuts with a well drilled in 1935 for $300 well with equipment delivered to the site by horses. My suspicion is that there are very few of the abandoned wells are horizontal. Most are these small cheap conventional wells.

Spindletop was over 120 years ago...

Two points being, not sure how you would have to change the current process, and then if that's even necessary are we are mostly dealing with wells drilled generations ago.

I understand how it is being done in OG now. But I am not talking about a "performance bond", I am suggesting something more like a "bid bond" - where the finished outcome is bonded, not just the day-to-day performance. In this scenario, the bonding industry would create a "well closure bond" that guaranteed in the end the well would be properly plugged and cleaned up. Maybe there would be a time cap on it like 25yr and then the cap well/cleanup would be due unless the then-current owner/operator wanted to keep it open and then would buy a new 25 yr "closure bond" to keep it open. It would be expensive and take some time to work out the risk tables. The OG folks would hate it. It will never happen because the only beneficiary would be the future public and no one cares about them.

To be very clear - there are financial structures (not just my one flyer hypothetical) than can absolutely account for the boom/bust, come/go, nature of the current OG industry, and our governments spend now, borrow now and later approach - but our govt doesn't care enough (and is likely, not competent enough) to do these things. So whenever we want to yell at OG for wrecking the environment we should look in the mirror on election day - we have met the enemy and they are us.

[None of my posts were about old wells - you are right, there probably has to be a production tax to fund remediation]

 

[Deleted member 28227]

@VikingsGuy so here is an example... these are wells I show as active that were drilled before 1945 in Oklahoma City, folks probably don't think about wells in City Limits.

Often you have to really dig to figure out of wells are active as plugging information can be super spotty. I bet a large majority of these are plugged despite their status in the state database... but there are around 10,000 wells still showing as active that are pre-1945.

This well I picked is still active 90 years after it was drilled.

 

[Khunter]

That would never work, IMHO. That’s just not a model that works in a capitalist society.

Companies are temporary, the government is not. States should add a tax for plugging/remediation and make sure those funds can’t be pulled into the general fund. Same idea for green energy.

That is kinda where Colo is headed. Will be an enterprise fund to protect the funds from being swept ito whatever last minute ‘pressing need’ gthe legislaturee or the governor may wish to steal the funds for.

 

[VikingsGuy]

That is kinda where Colo is headed. Will be an enterprise fund to protect the funds from being swept ito whatever last minute ‘pressing need’ gthe legislaturee or the governor may wish to steal the funds for.

There is no way to shield funds from a govt that wants to spend it.

 

[Khunter]

There is no way to shield funds from a govt that wants to spend it.

Are you familair with a case in Colo where an enterprise fund balance was raided to fund something different? I am not. It is pretty air tight.

 

[VikingsGuy]

Are you familair with a case in Colo where an enterprise fund balance was raided to fund something different? I am not. It is pretty air tight.

I am not suggesting specific knowledge of this specific fund. But since no legislature may bind a future legislature they can always change their mind. Lots of ways to loot from the future.

 

[Deleted member 28227]

I am not suggesting specific knowledge of this specific fund. But since no legislature may bind a future legislature they can always change their mind. Lots of ways to loot from the future.

Fair, though CO is a bit different than most states in that "departments" can be set up as enterprise funds where they are basically treated as a corporation and are restricted from pulling/allocating funds in to the general fund.

CPW is set up as an enterprise as well.

The legislature could make changes but they would have to repeal TABOR, in many ways I think legislatures in the state have a reluctance similar to US Senators getting rid of the filibuster.

 

[Khunter]

Fair, though CO is a bit different than most states in that "departments" can be set up as enterprise funds where they are basically treated as a corporation and are restricted from pulling/allocating funds in to the general fund.

CPW is set up as an enterprise as well.

The legislature could make changes but they would have to repeal TABOR, in many ways I think legislatures in the state have a reluctance similar to US Senators getting rid of the filibuster.

In this case it is not tax dollars going to the orphan well enterprise fund but fees. No tabor issue.

A local govt group I represented during recent financial assurance rulemaking fought hard to ensure the fees would go into an enterprise cuz we we were looking at many millions of dollars that would otherwise be easy pickings for misapplication and appropriation.

This just-passed legislation is the culmination of that agreement to protect the funds.

SB22-198 Orphaned Oil & Gas Wells Enterprise | Colorado General Assembly

 

[Deleted member 28227]

In this case it is not tax dollars going to the orphan well enterprise fund but fees. No tabor issue.

Exactly, what I meant is if the legislature tried to pull those enterprise funds into the general fund they would run into TABOR rules which establish the vehicle of the enterprise.