Speaker 1: The oil and gas industry is getting out of a
Speaker 1: lot of obligations these days. They have pushed for and
Speaker 1: gotten regulatory pauses, rollbacks, tax breaks, all kinds of good stuff,
Speaker 1: although of course the American Petroleum Institute is still insisting
Speaker 1: that the industry is quote unquote not getting a bailout.
Speaker 1: One of the big ways that the industry is getting
Speaker 1: off the hook for its responsibilities is in the case
Speaker 1: of its wells, and more specifically, what happens to them
Speaker 1: when they're not producing oil or gas anymore. That is
Speaker 1: becoming an even bigger problem amidst the COVID nineteen pandemic,
Speaker 1: because a lot of wells have been temporarily idled, and
Speaker 1: some percentage of those will end up being abandoned altogether.
Speaker 1: Shale gas companies are already starting to go out of
Speaker 1: business in various parts of the country, and more are
Speaker 1: announcing their downfall every day. It remains to be seen
Speaker 1: whether demand will actually return to normal levels after the pandemic. Plus,
Speaker 1: there will be an energy transition at some point, and
Speaker 1: a lot of folks are starting to wonder what will
Speaker 1: happen to these oil and gas sites once that transition
Speaker 1: gets underway. In order to get permits to drill oil
Speaker 1: or gas wells. Fossil fuel companies are required to get permits,
Speaker 1: and with those permits, they have to commit to plugging
Speaker 1: and remediating well sites when they're done with them. It's
Speaker 1: an expensive proposition and one that the industry tends to
Speaker 1: put off as long as possible, in part because no
Speaker 1: states actually require these companies to put up the money
Speaker 1: for plugging and remediating wells before they start drilling. A
Speaker 1: new report finds that, on top of all that, the
Speaker 1: oil and gas industry has been dramatically underestimating the cost
Speaker 1: of doing this remediation for years. Report out today from
Speaker 1: Carbon Tracker finds that in fact, plugging shale wells can
Speaker 1: cost up to ten times what companies have been estimating.
Speaker 1: That's a huge financial liability that's not on the books
Speaker 1: of shale gas companies, which are already struggling financially for
Speaker 1: various other reasons. That report is called It's closing time
Speaker 1: the huge bill to abandon oil fields comes early. Joining
Speaker 1: me today are this report's co authors, Greg Rogers, who
Speaker 1: we've heard from in previous episodes, and Rob Schuerck, executive
Speaker 1: director of Carbon Trak or North America to talk about
Speaker 1: just how many of these wells we're looking at, what
Speaker 1: these costs may be, and what the heck States are
Speaker 1: gonna do about it. We'll have that conversation in a
Speaker 1: minute after award from this week's sponsor, I Mimi Westervelt
Speaker 1: and this is Drilled. I was hoping you could maybe
Speaker 1: start with sort of the genesis of the report. What
Speaker 1: made you realize that this was something that we needed
Speaker 1: data on.
Speaker 2: Really, we started, and this is a combination of Greg's
Speaker 2: long standing interest in ROS and carbon trackers, focus on
Speaker 2: really the implications of the energy transition for fossil fuel
Speaker 2: companies and their investors. We started looking at how you know,
Speaker 2: a asset retirement obligations on the balance sheet were reported,
Speaker 2: how frequently they were revised. Those estimates. Had had a
Speaker 2: working thesis that Greg is largely built over years of
Speaker 2: observation on this as to why that was the case,
Speaker 2: which was that as assets were retired, people had to
Speaker 2: revise those estimates to reflect the actual costs and those
Speaker 2: were a lot more significant. And we took sort of
Speaker 2: that work and sort of thinking about, well, in terms
Speaker 2: of an energy transition, what's going to happen here? Are
Speaker 2: these assets all going to live? They're full estimated useful lives. Right,
Speaker 2: If we can't extract and burn all of these fossil
Speaker 2: fuels consistent with our climate targets, how are we actually
Speaker 2: really going to expect that these assets? Do you live
Speaker 2: another thirty forty fifty in some cases you know, to
Speaker 2: through the end of the century, if you're thinking about
Speaker 2: oil sands assets, for example. So it was so so
Speaker 2: our initial focus was actually on individual companies and what
Speaker 2: they've got on the balance sheets and what kind of
Speaker 2: impact if we saw something called ro acceleration, and you
Speaker 2: see a little bit on that in this paper because
Speaker 2: it's still an important concept. But as we looked at it,
Speaker 2: we thought, well, okay, there's a great story here in
Speaker 2: the US. Let's focus on the US, let's focus on onshore,
Speaker 2: and let's look and see. Right, you know what you
Speaker 2: know in addition to just looking at the corporate reported figures,
Speaker 2: which don't really give you any of the backstory, right,
Speaker 2: they give you the discounted present value at some discount
Speaker 2: rate that company has used. You don't have the undiscounted numbers.
Speaker 2: You don't know what it really costs. But when we
Speaker 2: looked around for what things really cost. We saw a
Speaker 2: lot of claims from industry and in many cases from
Speaker 2: the regulators as well. I think comparating some of those
Speaker 2: industry numbers that were looking at you know, tens of
Speaker 2: thousands of dollars or less to close a lot of
Speaker 2: these wells, including you know the one with the one
Speaker 2: estimate from the from the Banker hues that we have
Speaker 2: in there that's focused on you know, thirty three thousand
Speaker 2: dollars to close wells in places like the Eagleford with
Speaker 2: average uh, you know, well board depths total vertical depths
Speaker 2: of like nearly ten thousand feet. Looking at actual data
Speaker 2: there were there was a lot of evidence to suggest
Speaker 2: that those costs.
Speaker 3: Were going to be far greater.
Speaker 4: It was a big aha for for me Amy is
Speaker 4: we were we were searching for actual cost data, uh
Speaker 4: preferably not estimates, but you know, actual.
Speaker 3: Cost What what did it cost to plug and abandon
Speaker 3: these onshore wells? And it started to look like there
Speaker 3: was a self referential loop going on between industry and
Speaker 3: state orphan well programs that are largely funded by industry,
Speaker 3: where industry would would point to the orphan well cost experience,
Speaker 3: which was the only available cost data we could find
Speaker 3: in the United States, and say, hey, we we we
Speaker 3: liked those costs, uh, which seemed to be you know,
Speaker 3: ranging from five thoul into up to forty thousand dollars
Speaker 3: as well, and so we're going to reference those costs
Speaker 3: as in terms of the economic analysis of you know,
Speaker 3: shale and fracking in the in the US on shore
Speaker 3: on shore oil industry.
Speaker 4: So we had we.
Speaker 3: Had this orphan well data. But one thing that started
Speaker 3: to stand out from that is that most of those
Speaker 3: wells are old and they're shallow. So there's there's a
Speaker 3: there's just millions of undocumented wells, even preregulatory wells in
Speaker 3: the United States, and a lot of those have found
Speaker 3: their ways way into orphan well programs. Some of these
Speaker 3: wells are just a few hundred feet deep, uh and
Speaker 3: don't even penetrate a groundwater source. So we knew that
Speaker 3: when we saw that that the average depth, the vertical
Speaker 3: depth the shale wheels was much much deeper, ranging from
Speaker 3: sixty five hundred to twelve thousand feet of vertical depth.
Speaker 3: And we're wondering, well, what's the correlation between depth and cost?
Speaker 3: And there were a few studies out. They looked at
Speaker 3: the US orphan well data suggesting that there was a
Speaker 3: correlation between depth and costs, but that it was linear.
Speaker 3: So just you know, ten dollars of foot, let's say,
Speaker 3: and doesn't matter whether it's one thousand foot well or
Speaker 3: twenty thousand foot well, it's going to cost ten dollars
Speaker 3: a foot. And you had some state bonding regimes actually
Speaker 3: incorporated a dollar per foot and determining bond values to
Speaker 3: as financial assurance for the plug and abandon that cost.
Speaker 3: So that was interesting and something that obviously made depth relevant.
Speaker 3: But the most important finding was came out of research
Speaker 3: of industry data outside the United States in Australia that
Speaker 3: indicated that the correlation between depth and cost was exponential
Speaker 3: rather than linear. And when we looked more closely at
Speaker 3: the orphan well data that was available in the US,
Speaker 3: it also seemed to support an exponential correlation rather than
Speaker 3: a linear correlation.
Speaker 1: Could you guys speak a little bit to how or
Speaker 1: why is it that there's no transparency about these costs.
Speaker 2: No one has made them provide that cost information, They
Speaker 2: have no interest in providing that information. Just to make
Speaker 2: that clear, right, right, So someone need to be interested
Speaker 2: in having them do it, and I think that really is,
Speaker 2: you know, at the regulatory level, you're suffering from some
Speaker 2: level of capture, which you'll typically see when you have
Speaker 2: a regulator for a specific regulated industry. But that was
Speaker 2: also combined with the belief that I think a lot
Speaker 2: of people have had about oil and gas, the idea
Speaker 2: that this industry may not have the money on its
Speaker 2: balance sheet today to close all of its wells immediately,
Speaker 2: but they will close over time, and it will keep
Speaker 2: making money and keep drilling wells, and they'll be cash
Speaker 2: flows in the future. Because we all need energy, right,
Speaker 2: if we're going to have economic growth, it's correlated with it,
Speaker 2: and so it's going to be you know, this is
Speaker 2: going to be cash in the future to close these
Speaker 2: So why worry about it?
Speaker 3: Why worry about what.
Speaker 2: The actual costs are? Right? The problem, of course, is
Speaker 2: all those assumptions have been completely upended by the energy transition, right,
Speaker 2: and in the pandemic rights has been sort of a
Speaker 2: shot across the bow on that to realize how quickly
Speaker 2: things can turn potentially shut in and it gives a
Speaker 2: glimpse also of the financial condition that the companies are
Speaker 2: then in and the arguments, of course they're going to make,
Speaker 2: which is that we can't afford to do that now.
Speaker 2: So I think that has kind of shaken things up,
Speaker 2: and so the question is, really, should regulators still not
Speaker 2: pay attention to what these actual costs are and or
Speaker 2: will they continue to do that? And I think that
Speaker 2: those you know, that's that's becoming increasingly bigger and bigger issue.
Speaker 1: For most of the oil and gas industry's history, it's
Speaker 1: been sort of a self bond, self reporting situation, and
Speaker 1: states are starting to realize, oh, this is this is
Speaker 1: potentially going to leave us holding a bill that we
Speaker 1: can't necessarily afford to pay either. Can you just talk
Speaker 1: about what this problem looks like for states and what
Speaker 1: some of them are trying to do about it.
Speaker 3: One of the things that's that's happening is that the
Speaker 3: coronavirus pandemic has accelerated the shut in of wells, which
Speaker 3: has drawn a lot of attention to this topic and
Speaker 3: kind of shining a light on the reality that the
Speaker 3: orphan well funds are not sufficient to plug and abandon
Speaker 3: you know a large number of wells that are becoming
Speaker 3: idle and non economic. At the same time, but the
Speaker 3: states were realizing the problem they were in before the
Speaker 3: pandemic hit, and they were starting to do things like
Speaker 3: increasing bond amounts, increasing idle wealth fees, and tightening up
Speaker 3: on the regulatory flexibility about allowing temporary abandonment of wells.
Speaker 3: So temporary abandonments this state went. A well is shut in,
Speaker 3: but not permanently, so production has stopped, but the well
Speaker 3: is left in a state of limbo, where at least
Speaker 3: in theory, it can be started back up again. So
Speaker 3: those are the types of things I think that we
Speaker 3: see states doing. And there's a there's a few other actions,
Speaker 3: but essentially they're tightening up on the credit aman. I
Speaker 3: think the easiest way to think about this is that
Speaker 3: the legal obligation to plug an abandon an oil well
Speaker 3: at the end of its economic you know, useful life
Speaker 3: is a is a liability to the state. And normally
Speaker 3: you think of a debt like this as a that
Speaker 3: has a financial consequences. The creditor would charge interest on
Speaker 3: that or require collateral. So effectively, self bonding means free
Speaker 3: credit on these liabilities, and that's largely been the case
Speaker 3: for decades. But what the states are doing, they can
Speaker 3: either require immediate permanent retirement of wells that have been
Speaker 3: sitting idle for a long time, or they can increase
Speaker 3: the carrying costs of that outstanding debt.
Speaker 1: I feel like every day I'm seeing another news story
Speaker 1: about a shell company declaring bankruptcy or warning that it
Speaker 1: will be going bankruptcy. So what is the real situation
Speaker 1: that a lot of these states are in right now?
Speaker 1: How much of this debt does it look like some
Speaker 1: states are going to be absorbing no matter what you know?
Speaker 3: Initially, the parameters that are important trying to understand a
Speaker 3: statewide orphan well risk would include the number of wells,
Speaker 3: an average cost per well, the bond coverage, So how
Speaker 3: many is proble speaking, how much security is actually in place.
Speaker 3: Then then you get into some more complex issues like
Speaker 3: the useful life of the well. I mean, are all
Speaker 3: the wells do they need to be plugged in abandon now?
Speaker 3: Or you know, are some going to continue to produce
Speaker 3: for many years into the future. And then the credit
Speaker 3: risk of the operators, so to the extent that they're
Speaker 3: self bonding, can can is the operator good for it?
Speaker 3: Will the operator remain good for it? I'll give you
Speaker 3: just a couple of pieces of information you know, that
Speaker 3: help fill in that framework. So just look at the
Speaker 3: number of operating and idle wells that are out there,
Speaker 3: and the numbers are pretty staggering. So these are not
Speaker 3: These are not orphan wells, preregulatory wells, documented wells. These
Speaker 3: are wells that are currently out there, tagged to a
Speaker 3: specific operator and they're either producing now or they're in
Speaker 3: a state of temporary abandonment or shut in. Texas has
Speaker 3: over four hundred thousand wells, California over one hundred thousand wells,
Speaker 3: Pennsylvania over one hundred thousand wells, Kansas over ninety thousand,
Speaker 3: Ohio over ninety thousand, New Mexico over fifty thousand, in
Speaker 3: North Dakota over twenty five thousand. So one is we're
Speaker 3: talking about a large population of wells, and our research
Speaker 3: is indicating that the cost to plug these wells is
Speaker 3: going to be significantly more than the orphan well cost experience,
Speaker 3: and that for the for the shale wells may be
Speaker 3: as much as three hundred thousand dollars a well. That's
Speaker 3: based on evidence that we have. Cost data is coming
Speaker 3: out of Australia, so maybe more, maybe less in that
Speaker 3: but still a pretty big number.
Speaker 1: And still like around ten times what they've been saying.
Speaker 3: Yeah, so we're talking, we're talking numbers that are in
Speaker 3: the billions. For some states are going to be in
Speaker 3: the tens of billions, and the exercise is going to
Speaker 3: require getting a full inventory of the of the wells
Speaker 3: in each state and knowing the depth of those wells,
Speaker 3: so that because when you're talking about an exponential correlation,
Speaker 3: depth becomes really important. But I think what I think
Speaker 3: we can get at that, and you know, we will
Speaker 3: be able to put a rough cost estimate for statewide
Speaker 3: orphen well risk, and I think the numbers are going
Speaker 3: to be shocking to a lot of folks.
Speaker 1: At a certain point. The states don't have money to
Speaker 1: do this either, and some of this work will just
Speaker 1: be left undone. Is that something that you're looking at
Speaker 1: and what the impact of that on you know, communities
Speaker 1: that might lives near these wells.
Speaker 2: Number of different ways of thinking about the environmental impact
Speaker 2: from these welds. So you could think even in places
Speaker 2: where people are not nearby, you have the potential. You know,
Speaker 2: when you have improperly plugged or you have wells that
Speaker 2: are abandoned but have not been plugged, right, you have
Speaker 2: the potential for leakage, you have the potential for toxic emissions,
Speaker 2: you have the potential for greenhouse gas emissions, and the
Speaker 2: potential to infiltrate groundwater right and contaminate groundwater. But the
Speaker 2: reality is that actually you do have situations in Colorado, right,
Speaker 2: you know Burnfield's classic example. There are many places in
Speaker 2: Colorado where you have wells that are literally within neighborhoods.
Speaker 2: The same as true in California, right, whether you go
Speaker 2: to you know, from Los Angeles to Long Beach, those
Speaker 2: are often credibly costly to close. I mean we were
Speaker 2: talking with we were talking with somebody from Calgium the
Speaker 2: other day about this, who is responsible for that in
Speaker 2: Los Angeles and they had to close some wells that
Speaker 2: were like seven hundred feet deep something like that, actually
Speaker 2: quite shallow, but it was over a million dollars well
Speaker 2: to close it because they had to redrill the well board.
Speaker 2: Costs can be quite significant. I mean, when you think
Speaker 2: of the three hundred thousand that we're talking about here,
Speaker 2: that's sort of an average. There's all kinds of contingencies
Speaker 2: that could make it much more costly as well. But
Speaker 2: you have to do that because you have people that
Speaker 2: are getting sick, you know, headaches, you know, nose bleeds.
Speaker 2: Obviously there's plenty of carcinogens and petroleum.
Speaker 3: No, the question is really who's going to pay. So
Speaker 3: once we once we get a handle on what's it
Speaker 3: going to cost, the questions who are actually going to
Speaker 3: pay this bill? And I think you can start, you know, first,
Speaker 3: and say is it going to be industry as well?
Speaker 3: The orphan well funds are are not even close to
Speaker 3: being up to the task of retiring all the existing
Speaker 3: producing and temporarily idled wells. And then you get into
Speaker 3: landowners and citizens. So you know, landowners have a have
Speaker 3: a lot at stake here because many of them have
Speaker 3: abandoned equipment on their land and surface contamination. It's not
Speaker 3: what they bargained for, and so they're just kind of
Speaker 3: left with a mess on their property. And then you've
Speaker 3: got citizens that are impacted by can be impacted by
Speaker 3: toxics or groundwater contamination. And then you get to the environment.
Speaker 3: There are a lot of negative consequences to abandon and
Speaker 3: unplugged wells.
Speaker 1: I guess this is naive, but I'm still sort of
Speaker 1: shocked at how willing states have been to just be
Speaker 1: left holding the bag on this.
Speaker 3: We talk a little bit about that in the paper
Speaker 3: to try to make sense of how did we get here?
Speaker 3: So Rob describes the moral hazard that exists, which is
Speaker 3: quite evident when you look at it. So it begs
Speaker 3: the question, well, why did states do this? Why did
Speaker 3: they operate this way? And I think it's actually pretty
Speaker 3: obvious this was inevitable. These regulatory agencies were initially set
Speaker 3: up to protect the oil and gas resource, basically right
Speaker 3: to protect itself. We could get as much of that
Speaker 3: hydrocarbon resource out of the ground as possible, and putting
Speaker 3: additional costs on the industry was viewed negatively because that
Speaker 3: was going to reduce the amount of oil and gas
Speaker 3: that could be extracted. And then you add to that
Speaker 3: the dynamics of the various oil producing states and the
Speaker 3: ability of industry to play one state against the other,
Speaker 3: creating a race to the bottom. And you still hear
Speaker 3: this kind of discussion from states that well, if we
Speaker 3: increase the cost on industry, they're going to withdraw from
Speaker 3: our state and go someplace else, though it's in our
Speaker 3: financial best interests to keep their costs low and you know,
Speaker 3: that makes perfect sense until you look at the liability
Speaker 3: side of the balance sheet. So as long as you're
Speaker 3: pushing those costs off, discounting them over decades, and essentially
Speaker 3: sort of out site out of mind on the closure
Speaker 3: cost issue, then the idea of reducing the bonding costs
Speaker 3: makes good economic sense. What we're trying to do in
Speaker 3: the paper is draw attention to that, to the liability
Speaker 3: side of the balance sheets so that folks don't just
Speaker 3: see the asset side and realize that there is a
Speaker 3: huge bill to pay here and we simply haven't planned
Speaker 3: for it because the incentives were all going in the
Speaker 3: other direction for the past one hundred years.
Speaker 1: Has there been any indication of willingness from states to
Speaker 1: potentially take these things to court? I covered the climate
Speaker 1: liability cases for a long time, and this sounds so
Speaker 1: similar to a lot of kind of the basis of
Speaker 1: those suits, and especially the fact that you know we're
Speaker 1: getting more specific costs in place here. Are you seeing
Speaker 1: any potential for liability suits that would cover the cost
Speaker 1: of damages here?
Speaker 2: You'll know if the stage is interested in doing that
Speaker 2: when they actually follow complaint. Probably not, probably not before then.
Speaker 2: But the fact is what you know, are the conditions
Speaker 2: there for that? And I think the answer to that
Speaker 2: is yes.
Speaker 1: That's it for this time. We will stick a link
Speaker 1: to the report in the show notes so you can
Speaker 1: read through the entire thing. We will have a couple
Speaker 1: more episodes for you here and there in the next
Speaker 1: few weeks, but otherwise we are going on production hiatus
Speaker 1: until we're ready to release the next investigative series. That
Speaker 1: will be in July sometime. I'm not going to commit
Speaker 1: to a date just yet. As a reminder, if you
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