Colorado oil and gas wells can’t fund their own cleanup. Taxpayers may foot the bill | Colorado

This story is co-published with DeSmog

Thousands of oil and gas wells across Colorado cannot generate enough revenue to cover their own cleanup costs, according to a new report. Unless state officials act “simply and quickly”, it says, Coloradans can expect to be on the hook for a $3bn shortfall.

In its report, the thinktank Carbon Tracker found that 27,000 low-producing oil and gas wells in Colorado – more than half the state’s total – will generate, at most, $1bn in revenue. The state’s oil and gas reserves peaked five years ago, with production volumes declining dramatically in all but one region. It will cost $4bn to $5bn to decommission those sites responsibly, the analysts found – meaning the state can expect a cash crunch of at least $3bn.

Unless properly decommissioned, unplugged wells can leak carcinogens and methane, a potent greenhouse gas. But according to Colorado’s energy and carbon management commission (ECMC), the state’s energy regulator, it can cost $110,000 or more to close a single site. Many companies have avoided paying those costs, either by delaying cleanup indefinitely, selling off ageing wells to smaller competitors or simply going out of business. Today, there are at least 120,000 “orphan” wells across the US that lack financially solvent operators, making them instead a problem for government entities to solve.

“The biggest problem here is just the nature of this activity: You make a lot of cash at the beginning, and then you have a big cost at the end,” said Rob Schuwerk, executive director of Carbon Tracker and a co-author of the report. “The way you cover a cost like that is you make people save along the way, and this is not done now.”

In 2022, Colorado rolled out a much-lauded approach to ensuring fossil fuel companies foot the cleanup bill. The regulations, which Colorado governor, Jared Polis, last year called “an example the nation can follow”, included major changes to the state’s bonding requirements – the system of financial assurance it uses to make it harder for operators to walk away from polluting wells.

Yet a review of public financial documents by DeSmog and the Guardian showed that Colorado’s modest reforms failed to keep pace with the fossil fuel industry’s ballooning liabilities.

“Even under the new rules, the gap between projected cleanup costs and secured bonding is measured in the billions of dollars,” said Margaret Kran-Annexstein, director of the Sierra Club’s Colorado chapter. “It’s frankly dangerous for Colorado to imply this is the best we can do.”

This dynamic is widespread across the US. In the 15 biggest oil- and gas-producing states, funds on hand for cleanup amount to less than 2% of estimated costs, a recent analysis by ProPublica and Capital & Main found. That Colorado, a state that’s been celebrated for an unusually proactive approach to bonding, still faces such a dramatic shortfall suggests that other state governments have much more to do before the trend can be reversed.

“The bonding isn’t enough. It’s never been enough,” said Kelly Mitchell, a senior analyst at Documented, a watchdog group. “And I think the states typically aren’t being very sober in considering the scale of the problem they’re facing.”

In emailed comments, Megan Castle, ECMC’s community relations supervisor, noted that plugged wells outnumber unplugged wells in Colorado.

“Colorado’s financial assurance structure is designed to ensure operators – not the State – remain responsible for the entire lifecycle of the well and site,” she wrote, adding that Colorado’s bonding programs are meant to act as “a backstop” only when companies cannot fulfill that obligation themselves.

But the rules, by law, were designed to ensure that all operators have the ability to meet their plugging obligation fully – and that outcome is still very far away.

‘More loopholes than net’

In 2019, Colorado became one of the first states to try to take comprehensive action on the soaring costs of oil and gas cleanup. That year, lawmakers passed sweeping legislation that set the stage for a broad regulatory overhaul, while also giving ECMC a mandate to protect human health and the environment over industry profits. The commission imposed a fee on producers and set restrictions around transferring wells, an effort to stop bigger companies from selling off low-producing assets to smaller, poorer companies without adequate plugging resources. But the centerpiece was the revised financial assurance requirements, which ECMC officials called “by far the highest” in the nation and “truly a paradigm shift”.

ECMC required every operator to develop a unique, company-specific bonding plan based on well count, production levels and other factors. But the rules’ high degree of flexibility and customization allowed some companies to exclude certain poorly performing wells from their totals or to propose their own bespoke plans.

The result, said Dwayne Purvis, a petroleum engineer and consultant who co-authored the Carbon Tracker report, is that companies generally aren’t bonding enough. The rules are so flexible they end up being “more loopholes than net”, he said.

Rich reserves in a single region – the Denver-Julesburg basin – could generate more than enough to one day close down all of the state’s wells, something that will cost between $6.8bn and $8.5bn, according to Carbon Tracker. But most of those longer-term future profits will be concentrated in the hands of just three publicly traded companies: Chevron, Occidental and Civitas.

Schuwerk called it “a case of haves and have-nots” and said existing ECMC policy doesn’t do much to correct that fundamental imbalance: one group is sitting on billions in profits while the other can’t afford to resolve its billions in liabilities.

At least one operator, KP Kauffman, has already said it can’t pay. Reportedly Colorado’s largest owner of low-producing, so-called “marginal” oil wells, the company in 2021 said it could not afford to pay a $2m fine ECMC levied for environmental violations, and in January it sued regulators in protest of the amount ECMC had ordered it to bond.

The commission has struggled to enforce other bonds, according to an analysis of an ECMC database that tracks daily activity. As of 25 June, 66 companies representing 1,075 wells hadn’t even filed initial paperwork to develop bonding plans. And at least two dozen operators have still not filed financial assurance after their bonding plans were approved. Two of those companies are more than a year late, according to a review of public documents.

The non-compliant companies “have been sent some enforcement letters”, then-ECMC commissioner Karin McGowan said in a public webinar on 22 May. “We are trying to close that out and find out what’s going on with those operators.” She added that this group represented a small overall proportion of the total number of unplugged wells in the state, about 2%.

After initially telling the Colorado Sun it planned to have $820m in bonding in hand by 2044, ECMC now plans to have just $613m in financial assurance on hand in 20 years. Even if every dollar of that amount materializes, it’s still $2.4bn less than the state will need to safely shutter its lowest-producing wells.

A separate analysis by Carbon Tracker, shared exclusively with DeSmog and the Guardian, showed that the state’s wells that face near-term risk of being orphaned represent at least $520m in liabilities. In other words, the amount of assurance ECMC plans on for 20 years from now may barely cover what’s already needed today.

“Negotiation and compromise cost six years of delay with no tangible improvement” in covering budget shortfalls, the Carbon Tracker analysts conclude.

‘Socialize the cost of plugging these wells among operators’

Adam Peltz, a lawyer for the Environmental Defense Fund who praised the ECMC’s rules in 2022, said Colorado is still better off than other states like Pennsylvania and New Mexico, which both have more unplugged wells than Colorado and have struggled to pass more rigorous rules.

He said Colorado will need to look outside the bonding system to solve its massive shortfall.

“You can’t solve this problem with bonds alone, because for so many companies it’s too late,” he said. “They’ll never generate enough money to pay to close their own wells.”

He pointed to another aspect of the rules developed in 2022 as a potential revenue source: the fee on producers. Currently, that program only generates $10m a year, which Peltz conceded is not enough to overcome the billions Colorado faces in oil and gas liabilities, even factoring in the availability of matching federal funds. But, he said, raising that fee significantly could help to redistribute funds from resource-rich Denver-Julesburg to depleted areas in the state.

“Colorado’s innovation was saying, here’s this additional fee, you need to pay to socialize the cost of plugging these wells among all operators,” he said. “I wish every state would do that.”

Ultimately, the Carbon Tracker analysts conclude, policymakers must decide between developing new, rigorous alternatives, or sending the bill to taxpayers by default. That will likely involve compelling resource-rich firms to start setting aside savings from their profits now.

Mitchell, the Documented analyst, recalled advice she first heard from a former colleague at the Department of the Interior: “The best time to collect is on payday.”

“In this period of record profits for the oil and gas industry,” she said, “this is kind of it.”

A longer version of this story appears on DeSmog