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Bankruptcies Fueling Environmental Crisis at Abandoned Oil Wells

Sept. 2, 2021, 10:01 AM

A tide of failing energy companies has government regulators racing to address the nation’s stockpile of abandoned, methane-leaking oil wells as environmental liabilities come to a head in oil and gas bankruptcy proceedings.

More than 260 domestic oil producers filed Chapter 11 over a six-year period marked by depressed commodity prices and the global economic shock caused by the Covid-19 pandemic.

Many distressed fossil fuel companies are passing environmental obligations on to government bodies amid the worst crude crash in history. Some of those companies use bankruptcy to shift multimillion or even multibillion-dollar decommissioning burdens to predecessors and joint interest holders.

The prolonged downturn now has lawmakers and regulators enhancing efforts to address an environmental crisis more than a century in the making.

The bipartisan infrastructure bill passed by the Senate last month would allocate more than $4 billion for plugging and remediating abandoned oil wells, while federal regulators and lawmakers continue to look at tougher rules that would require fossil fuel companies to set aside more money to plug wells at the end of their productive life.

In a federal policy update announced Aug. 18, the Biden administration tightened requirements to ensure more offshore oil companies have funds in place for decommissioning wells in the Gulf of Mexico.

“In general, we don’t want the taxpayer picking up the bill for decommissioning,” said John Filostrat, a spokesman for the Bureau of Ocean Energy Management. “We want to make sure there’s no public bailout of companies and their obligations.”

But decades of lenient regulation coupled with the economics that have long guided a cyclical boom-or-bust industry in the U.S. have made it challenging to ensure drillers are covering their cleanup costs.

More than 3 million oil and gas wells in the U.S. sit idle, and roughly two-thirds of them are unplugged, collectively emitting several million metric tons of greenhouse gases each year, according to the Environmental Protection Agency. Many of the wells leak methane, more than 25 times as potent as carbon dioxide at trapping heat in the atmosphere and exacerbating climate change, the EPA says.

The chemicals from abandoned wells also can be noxious to people living near them and can contaminate groundwater.

“It’s basically capital cost without a return, so companies are obviously less motivated to put money into those projects,” said attorney Paul J. Goodwine of Looper Goodwine PC, an oil and gas company adviser.

Escaping Liability

Oil and gas drillers are legally obligated to plug abandoned wells that have reached the end of their useful life, but often leaseholders run out of money and abandon these orphaned wells. If they’re to be plugged, usually with cement pumped into the wellbore, American taxpayers often foot a bill ranging from $20,000 to $145,000 per well, according to the Government Accountability Office.

The large company that drills a well often sells it to a midsize company that operates it for a while, then finally to someone who can “eke out the last few molecules,” said Environmental Defense Fund attorney Adam Peltz. “Really these end sales are about escaping the plugging liability.”

The federal government—which oversees 10% of leases—and the nation’s oil producing states generally require that producers post bonds for their wells, providing some financial assurance that drillers will pay for their own environmental liabilities.

“But bonds have historically not been sufficient” to cover cleanup costs, said Peltz. In many instances at the state level, “there’s really only pennies on the dollar for the state to plug if the operator goes bankrupt.”

For example, Louisiana-based Shoreline Energy LLC turned its oil well decommissioning obligations over to the state after filing for bankruptcy in 2016.

Three years later, Weatherly Oil & Gas LLC left Texas with millions of dollars in plugging liabilities from wells abandoned in Chapter 11.

And last year, wells abandoned by PetroShare Corp. as part of its bankruptcy left Colorado taxpayers with the bill.

Predecessors on the Hook

It’s atypical for oil and gas drillers to leave unprofitable wells to the state because they could more easily be sold to other producers, said Robert Schuwerk, an executive director at Carbon Tracker, a think tank focused on climate change. But mounting economic pressures, growing environmental concerns, and stricter regulations appear to be changing that.

“In the bankruptcies you will start to see that people use the power of abandonment,” he said, adding that PetroShare’s course through Chapter 11 could be the “industry ideal model.”

BOEM, a division of the Interior Department that oversees offshore energy development, announced it was expanding financial assurance efforts in the Gulf of Mexico just weeks after Fieldwood Energy LLC was cleared to reorganize in bankruptcy through a plan that addressed an estimated $7 billion of cleanup obligations in the Gulf.

The Houston-based offshore operator’s plan relied on a complex series of transactions, abandoning old wells, and foisting potentially hundreds of millions of dollars’ worth of decommissioning obligations on its well-capitalized predecessors and joint business partners.

The Chapter 11 plan drew challenges from companies like BP Exploration & Production Inc. and Exxon subsidiary XTO Energy Inc. for saddling them with liabilities stemming from leases they sold to Fieldwood years ago.

But the restructuring scheme passed muster with federal regulators and was deemed by U.S. Bankruptcy Judge Marvin Isgur to be “in the best interest of the United States and the creditors of the estate.”

Fieldwood wasn’t the first offshore oil producer to use bankruptcy to isolate bad assets and abandon idled wells. But the extent of what happened in that case “was on a different scale,” said Goodwine, who has built a career from counseling drillers in the Gulf states. “I think it’s indicative of where things are going or how things will be handled in the future.”

Changing Landscape

Although Interior may be able to give its blessing to bankruptcy plans that shift liabilities to financially healthy companies, that call isn’t always up to federal officials. In fact, state-level regulators oversee about 90% of the nation’s oil wells.

And not every state has the same power as the federal government to look to predecessors to foot the cleanup bill, said Kelli Norfleet, a Houston-based bankruptcy lawyer at Haynes and Boone LLP. If an insolvent driller with insufficient bonding tries to abandon wells to a state without that ability, “you’re placing the liability squarely at the feet of the taxpayers in that state,” she said.

To mitigate the likelihood that taxpayers must shoulder the costs of cleaning up after failed petroleum companies, states are looking to bolster their bonding requirements.

In the most high-profile rulemaking at the state level, Colorado is in the process of implementing rules that would raise the cost of bonding for each new well drilled in the state. Michigan, Oklahoma, Ohio, Pennsylvania, West Virginia, and Utah all are making similar efforts, Peltz said.

Recently introduced federal legislation (S.2177) also would strengthen bonding requirements for wells on federal land. That bill would go beyond simply plugging the roughly 57,000 abandoned wells dotting the U.S. that have no known solvent last operator of record.

“Our bills not only invest in orphaned well clean up, but also restore the role of local leaders in lease sales, and hold companies operating on public lands to the same high standards that responsible operators already follow,” lead sponsor Sen. Michael Bennet (D-Colo.) said in a June 22 statement. “These bills will reduce methane emissions—which is the fastest way to protect our climate, restore wildlife habitat, and create good-paying jobs.”

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Gregory Henderson at ghenderson@bloombergindustry.com