This year’s legislative session sure is starting to look like a firecracker. I know, I know. It’s an off-year and the hurdle for considering bills is higher. It’s supposed to be all budgets and boring stuff. But with Cindy Hill somewhere in the vicinity of the Department of Education and a few lawmakers talking firing squads how drab could the 20-day legislative confab be?
The bill I want to talk about isn’t as sensational as, say, decriminalizing marijuana possession of less than an ounce, but it is arguably more important.
Gov. Matt Mead has proposed spending $3 million over the next four years to plug 1,200 wells abandoned in the Powder River Basin after the bust of the coal-bed methane industry. All indications are that something is going to get done on this. The question is what exactly.
Almost everyone agrees on this much: the abandoned wells need plugging. The Wyoming Oil and Gas Conservation Commission closed a meager 183 wells between 2004 and 2013 and the tally provided by the governor’s office only includes wells currently orphaned on state land. Another 912 wells may become abandoned as a result of Colorado developer Luca Technologies Inc., which is in ongoing bankruptcy proceedings.
Groups as diverse as industry group Petroleum Association of Wyoming and Sheridan-based environmental group Powder River Basin Resource Council are behind a proposal to increase production taxes on oil and gas companies to cover the costs of a plugging program.
The disagreement is largely over the bonds companies pay to cover their wells. The bonds are intended to cover the cost of plugging a well in the event a company runs into financial trouble and doesn’t have the cash to close it.
The Powder River Basin Resource Council argues raising the requirements would keep smaller, less financially capable companies out of the equation. The Petroleum Association says that would increase production costs. It is also unnecessary, they say, as the WOGCC can always raise the bond on a well if a company runs into financial trouble.
The proposal to raise the bond limit is especially notable as it comes as the Powder River Basin is entering a new boom, this time fueled by unconventional oil plays in the “tight” Niobrara and Frontier shale formations. The Bureau of Land Management is preparing an environmental analysis in anticipation of seeing up to 5,000 new oil wells drilled in Converse County alone. Few industry observers expect the number to be that high, but even 1,500 new wells would double the number currently in the county.
Higher bond limits would apply to these wells too – and that’s a good thing. History is instructive here. For one, raising the bonds on companies when they run into trouble is a case of too little too late. Operators like Luca are often more willing to go bankrupt than assume the costs of plugging their wells, leaving Wyoming taxpayers and responsible operators holding the tab.
The CBM boom also taught us the majority of operators were responsible. No one is complaining that Anadarko won't close the CBM wells it drilled and still operates. The problem, once again, are those bad actors like Luca.
In the CBM boom, larger companies drilled the wells, milked them for the maximum return and then sold them to their smaller counterparts, who were often unable to cover the cost of plugging the old wells.
Unconventional plays are a different beast to be sure. They use different technology, extract oil - not gas - and the economics look promising. CBM was a flash in the pan. These unconventional plays look like they may last for years, if not decades.
But the nature of unconventional plays is that wells produce lots of oil in their first few years and then tail off dramatically. It is not hard to imagine a scenario where many of these new wells are drilled, the profits collected and then the wells sold to smaller operators who can’t pay the costs of closing them.
As the saying goes, those who don’t know history are destined to repeat it.