Briefing: Colorado's new orphan-well rule, fraudulent transfers, and the end of ZIRP

As the so-called “fracking boom” of the 2010s goes bust, oil and gas companies are leaving behind what has been described as “an empire of dying wells”— abandoned, unproductive oil wells that sometimes spew methane pollution into the air. When oil and gas firms secure permits to drill wells, they are supposed to pay a bond that ensures that they will pay the costs of cleaning up (or “plugging”) that well if it fails or is abandoned. But current law is woefully inadequate to ensure that these bonds cover the true cost of failed wells. Estimates place the total national cost of plugging these abandoned wells at $280 billion, yet because of inadequate bonding requirements, it is the public (and not industry) that will pay the bulk of these costs. Worse still, oil and gas companies are using the bankruptcy process to further unload whatever costs they do face onto the public. 

Last week, the Colorado Oil and Gas Conservation Commission (COGCC) finalized a new “financial assurance rule.” The COGCC’s rule would raise the amount in bonds that oil and gas operators must pay to cover the cost of cleanup when permitted wells they drill are abandoned or prove unproductive. Before, oil and gas operators were allowed to pay “blanket bonds,” covering up to 100 wells with a payment of just $60,000 and more than 100 wells with a payment of $100,000. These blanket payments are functionally useless for shielding the public from the costs of cleanup, which is roughly $92,000 for a single well. This has enabled major Colorado producers to pay truly meaningless sums. For instance, TEP Rocky Mountain LLC, which operates more than 5,000 wells in Colorado, currently pays a blanket bond that amounts to about $18 per well.

In 2019, Colorado lawmakers passed an overhaul of the COGCC, which mandated this financial assurance rule. (The same law also required that the COGCC regulate oil and gas development; previously, the COGCC’s mission was to “foster” oil and gas production.) Now, under the new financial assurance rule, oil and gas operators must provide $10,000 per well for wells that are 4,000 feet deep or less, and $30,000 or $40,000 for deeper wells. The rules also set up a new orphaned well program and plugging initiative, establish a quarterly process through which the COGCC will verify whether operators have the financial means to meet all their obligations (up to $100,000 per well), and seek to limit manipulation of the bankruptcy process by increasing financial assurance requirements for wells that are transferred from one company to another.

While raising bond requirements across the board, the COGCC preserved the general principle of blanket bonds, allowing companies that operate more wells to pay smaller amounts per well. Commissioners were urged to adopt a “full cost bonding” approach, but did not, meaning that there is “still a significant delta between what it’s going to cost the state to plug and abandon those wells and the cash on hand that they’ll be able to access from the operator.”

Although Colorado’s legislature initiated the COGCC’s rule-making process back in 2019, the strengthened financial assurance rule may also qualify Colorado for additional federal support that was recently approved to pay for the costs of well plugging.

When Congress passed the Bipartisan Infrastructure Plan last year, it included $4.7 billion in public money to plug abandoned wells. This is a big deal in Colorado, where COGCC estimates that nearly half of oil and gas companies now own exclusively unprofitable, inactive wells, and the state is on the hook for an estimated $8 billion in cleanup liabilities— in other words, nearly double what Congress approved to pay for cleanup across the whole country. COGCC is in the process of applying for some of that federal funding, and is expected to receive $79 million, or about 0.0009% of the total cleanup costs in the state.

COGCC Chair Jeff Robbins lauded the new rules as the strongest in the country and a model for other states, an assessment that the National Conference of State Legislatures seemed to confirm. Colorado’s oil and gas industry, meanwhile, responded to the new rules by lying about the scope of the orphaned well problem in the state, and threatening that the new costs for small operators could backfire if operators go bankrupt and leave the state paying the tab. In other words, oil and gas companies warned that the new rules might lead to exactly what is happening anyhow, and precisely the situation the rules seek to mitigate. Conservation Colorado and other environmental organizations mostly praised the rules as an improvement over the status quo, although attorneys for EarthJustice noted that the rules were complicated, and contain loopholes that COGCC commissioners or oil and gas firms might exploit.

Among the potential loopholes to watch are the COGCC’s limits on transferring abandoned wells. Oil and gas companies use a “complex series of transactions” in the bankruptcy process to transfer unproductive wells and cleanup liabilities to other producers and shell companies, which is ultimately how the public gets left picking up the tab. To discourage this practice, Robbins told advocates for 350.org that the Commission was considering setting up a a “legacy fee” to prevent previous operators from selling the well and thus absolving themselves of cleanup costs, but also said they were considering reducing the fee’s size because of the inadequate federal support they are due to receive for plugging wells. Ultimately, the COGCC settled on a process for managing transfers of assets requiring new operators to provide financial assurance and a plan for plugging the wells, though that process leaves a lot of discretion and oversight to the COGCC.

For the moment, the uptick in oil and gas bankruptcies observed since 2018 seems to be subsiding. The fracking industry, which faced significant financial distress for years leading up to the COVID-19 recession, has experienced an industry “reset” after the height of the pandemic, highlighted by dramatic consolidation and a surge in profits as the economy recovers. As Russia escalates its invasion of Ukraine, there have been pleas for American frackers to use this moment to increase production and fight Russian oil and gas, the dominant source of Putin’s power. Misguided though these pleas are (remember: “human-induced climate change and the war in Ukraine have the same roots: fossil fuels”), they aren’t being heeded in any case. Major frackers have colluded with Wall Street to keep production down, pouring profits instead into stock buybacks and dividend payments.

Regulators and lawmakers must not be fooled by the temporary boom occurring in an industry that is built on a boom and bust model. Importantly, fracking relied heavily on over seven years of sustained zero interest rate policy (ZIRP) during the recovery from the Great Recession. Next week, the Federal Reserve will end its ZIRP just two years after the start of the COVID-19 recession, and there is a substantial risk of “re-pricing of risky assets” as the Fed pursues a more aggressive rate of interest rate increases than it has in several decades.

Sooner or later, it will be necessary for Colorado and other states to exercise stringent oversight over distressed oil and gas firms to ensure that they are cleaning up their own mess. Ultimately, this should extend to federal and state bankruptcy reforms. A bill advanced out of the House Judiciary Committee last year would close some bankruptcy law loopholes. But to avoid a repeat of the bailouts of the bankrupt coal industry, legislators must prioritize regulatory liabilities in the bankruptcy process and impose penalties for the fraudulent transfers that the fossil fuel industry uses to escape responsibility for climate destruction.

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