North Dakota, Using Taxpayer Funds, Bailed Out Oil and Gas Companies by Plugging Abandoned Wells

By Nicholas Kusnetz - Inside Climate News, May 23, 2021

The bailout, environmentalists say, raises bigger questions about who will pay, in an energy transition, to close off the nation’s millions of aging wells.

When North Dakota directed more than $66 million in federal pandemic relief funds to clean up old oil and gas wells last year, it seemed like the type of program everyone could get behind. The money would plug hundreds of abandoned wells and restore the often-polluted land surrounding them, and in the process would employ oilfield workers who had been furloughed after prices crashed.

The program largely accomplished those goals. But some environmental advocates say it achieved another they didn’t expect: It bailed out dozens of small to mid-sized oil companies, relieving them of their responsibility to pay for cleaning up their own wells by using taxpayer money instead.

Oil drillers are generally required to plug their wells after they’re done producing crude. But in practice, companies are often able to defer that responsibility for years or decades. Larger companies often sell older wells to smaller ones, which sometimes go bankrupt, leaving the wells with no owner.

These “orphaned wells” become the responsibility of the federal or state governments, depending on where they were drilled. While oil companies are required to post bonds or other financial assurance to pay for plugging them, in reality those bonds cover only a tiny fraction of the costs, leaving taxpayers on the hook. One estimate, by the Carbon Tracker Initiative, a financial think tank, found that those bonds cover only a tiny fraction of the expected costs of cleaning up the nation’s oil and gas wells.

But in North Dakota, it turned out that most of the wells the state plugged were not truly orphaned, but had solvent owners. After the industry warned last year that the pandemic-driven oil-crash was threatening its finances, state regulators stepped in, assumed ownership of more than 300 wells, and used CARES Act funds to plug them, meaning the companies avoided paying anything themselves.

“What happened was a bunch of people got a free ride,” said Scott Skokos, executive director of the Dakota Resource Council, a grassroots environmental group in the state.

Skokos said it only deepened his sense that the state had bailed out the industry. In October, regulators were granted permission from state lawmakers to send about $16 million of the CARES Act funds as grants to oil companies to help them buy water to hydraulically fracture new wells, a step the regulators said was necessary to expend the funds by the end of the year. Nine companies took advantage of the program. In one case, a single company, Continental Resources, received $5.4 million, according to state records.

Wyoming also sent about $30 million in Covid relief funds to oil companies as grants to either frack new wells or revive or plug old ones.

Some advocates say that such well-plugging programs highlight a larger problem: Millions of aging, unplugged oil and gas wells dot the ground from Appalachia to California, often carrying oil and toxins to the surface, contaminating groundwater and leaking climate-warming methane gas into the atmosphere.

The Environmental Protection Agency estimates that the nation’s unplugged wells leaked about 263,000 tons of methane in 2019, which, when compared to carbon dioxide over a 20-year period, is equivalent to the climate-warming emissions of more than 5 coal-fired power plants. The agency added that the actual figure could be significantly smaller or three times greater.

While many of the wells—hundreds of thousands at least—are orphaned, many more are still operated by oil companies that critics say have avoided plugging them because of regulations that allow the industry to postpone cleaning them indefinitely, eventually dumping the responsibility on taxpayers.

President Joe Biden’s American Jobs Plan calls for spending $16 billion to clean up the nation’s orphaned wells and coal and hardrock mines, and lawmakers have drafted bills with similar goals.

Environmentalists, leaders in both political parties and the oil industry all support directing federal dollars to plug orphaned wells as a way to address climate change and pollution, while creating jobs for oilfield workers. But some advocates say that what happened in North Dakota shows the risks of spending billions of dollars without sufficient scrutiny and without requiring oil companies to put up more money to pay for plugging their wells.

“There’s an incredible opportunity to begin cleaning up and better cataloging orphan wells while creating well-paying jobs,” said Sara Cawley, a legislative representative for Earthjustice, an environmental nonprofit. But, she said, any federal spending needs to be tied with regulatory reforms, including requiring companies to set aside more money for plugging, “so that taxpayers are not continuing to pay for clean-up in perpetuity.”

Two bills have been introduced so far. Both would direct billions of dollars to plug orphaned wells on state, federal and tribal lands, and both include language that would encourage states to improve well-plugging regulations by tying a portion of the funding to reforms. Only one, however, by Rep. Teresa Leger Fernandez (D-N.M.), would require oil companies to purchase more expensive bonds when drilling on federal land, leaving more money available in case of default.

Lynn Helms, director of North Dakota’s Department of Mineral Resources, defended the state’s program from criticism that it bailed out the industry, saying it targeted companies that were facing financial stress because of last year’s crash in oil prices, and that in some cases, small, mom-and-pop operations did not have the funds to plug the wells. He said his department has begun to pursue reimbursement from some of the companies that are still solvent, and has already obtained more than $3 million to reimburse a state well-plugging fund that covered some costs beyond the $66 million from the CARES Act.

He said the program served the intent of the CARES Act—to stimulate the economy and support employment—by creating more than 3,700 jobs, “and that was the number one purpose for why we did this.”

Helms said the $16 million in grants for fracking was also intended to support workers and state finances, which are highly dependent on tax revenues from oil production. The grants, he said, supported about 600 jobs and boosted production in December, shoring up funding for schools and other programs. While he acknowledged that Continental and other companies were essentially given a multi-million dollar discount, “that wasn’t the purpose,” he said.

Some environmental advocates have countered that, whatever the intent, North Dakota effectively gave the oil industry a backdoor subsidy and sent an implicit signal that taxpayers will come to its rescue when times are tough.

“In North Dakota I think the story is in some ways a fairly succinct one,” said Nikki Reisch, director of the climate and energy program at the Center for International Environmental Law, which highlighted the state’s program in a recent report. “Taxpayer dollars were being used to pick up polluters’ tabs, while at the same the state was repurposing federal funds to support new fracking, making the very same problem worse.”

’Pollution Vectors’

No one knows how many old wells are scattered across the nation’s oil and gas fields. According to the Interstate Oil and Gas Compact Commission, states have identified nearly 57,000 orphaned wells, but estimate there are hundreds of thousands more undocumented ones. The EPA has estimated there are more than 3 million abandoned wells, regardless of whether they have owners or not. Often, companies can avoid plugging wells when they are no longer productive by calling them idled, a status that can last decades.

Locally, old wells can contaminate groundwater and foul farmland, spewing not only petroleum but also toxic, highly salty water. Abandoned well sites render sections of farmers’ fields unusable.

Companies are generally required to purchase bonds when they drill wells as a form of insurance—governments can confiscate the bonds if companies fail to plug their own wells. Lawmakers or regulators determine the levels for those bonds—for example, $10,000 per well or $150,000 for all a company’s wells within a state—but in many cases those levels were set decades ago, and barely begin to cover plugging costs.

Carbon Tracker has collected data on more than 2.4 million catalogued, unplugged wells, including all the nation’s active wells, and has estimated it would cost about $288 billion to plug them. But its analysis showed that state and federal bonds would cover only about 1 percent of that cost, raising the question of who will pay the difference if companies go bankrupt or fail to plug their wells. That estimate for the coverage of bonds excluded Texas, for which Carbon Tracker was unable to obtain data. Last week, New Mexico’s State Land Office released a report that found that oil company bonds in the state covered 2 percent of the expected cleanup costs, falling $8.1 billion short.

Rob Schuwerk, executive director of Carbon Tracker’s North American office, said the looming transition away from oil and gas will make the problem worse. It is one thing if industry revenues are stable or growing, and companies only occasionally bail on their cleanup responsibilities. But if oil and gas demand begins to decline, the industry is likely to face falling revenues and a spike in bankruptcies, just as companies abandon a wave of unprofitable wells. They might not have money to plug their own wells, leaving taxpayers on the hook.

Last year served as a preview, when global lockdowns sent oil demand plummeting. In North Dakota, that meant oil companies had to shut their wells and layoff workers as their revenues dwindled.

The conditions prompted warnings of bankruptcies, and led regulators to ask the state to spend CARES Act relief funds on plugging and remediating abandoned wells, which they warned could become orphaned if not addressed.

In order to plug the wells, the state had to assume ownership of them, a step that was welcomed by Ron Ness, who runs the North Dakota Petroleum Council, which represents the industry. But at a state hearing last year, Ness warned regulators against also seizing the bonds companies had bought as insurance for plugging the wells. Although the bonds might help pay plugging costs, seizing them would have “very real” impacts that would prove to be “extremely problematic,” Ness said.

Ness argued that the CARES Act was effectively reimbursing the state for the cost of plugging the wells. If regulators did seize the bonds, he argued, the state could have to return funds to the federal government.

The petroleum council did not respond to phone messages or emails. But Schuwerk said that confiscating a bond could pose problems for the company that purchased it. Bond companies could suddenly view that company as a risk, and require it to pay higher premiums for its other bonds, for example, driving up drilling costs.

Regulators have largely granted Ness’s request, at least so far. According to data provided by the Department of Mineral Resources, the state confiscated 320 wells and had plugged 280 as of May, at a cost of $39.3 million, including $6.1 million that came from a state well-plugging fund financed with industry fees and penalties and taxes on production. The state “reclaimed”—or cleaned up—only 173 of the sites. 

But so far, the state has confiscated bonds worth only about $3.4 million, while it is pursuing another $1.5 million through civil action, Helms said. All of that money would go to reimburse the state fund, rather than the CARES Act money. Helms said that while they are still looking into it, the rules of the CARES Act may dictate that the state cannot or should not reimburse the federal government.

The department said that seven companies, responsible for 77 of the confiscated wells, have either entered bankruptcy or were determined to be insolvent. The rest of the wells, however, were owned by companies that continue to pump oil in the state.

Cobra Oil and Gas, for example, had 121 wells confiscated. State records say the Texas-based company has another 369 active wells, suggesting there may have been revenue to cover plugging costs. Cobra did not respond to phone messages or emails.

Last year served as a preview, when global lockdowns sent oil demand plummeting. In North Dakota, that meant oil companies had to shut their wells and layoff workers as their revenues dwindled.

The conditions prompted warnings of bankruptcies, and led regulators to ask the state to spend CARES Act relief funds on plugging and remediating abandoned wells, which they warned could become orphaned if not addressed.

In order to plug the wells, the state had to assume ownership of them, a step that was welcomed by Ron Ness, who runs the North Dakota Petroleum Council, which represents the industry. But at a state hearing last year, Ness warned regulators against also seizing the bonds companies had bought as insurance for plugging the wells. Although the bonds might help pay plugging costs, seizing them would have “very real” impacts that would prove to be “extremely problematic,” Ness said.

Ness argued that the CARES Act was effectively reimbursing the state for the cost of plugging the wells. If regulators did seize the bonds, he argued, the state could have to return funds to the federal government.

The petroleum council did not respond to phone messages or emails. But Schuwerk said that confiscating a bond could pose problems for the company that purchased it. Bond companies could suddenly view that company as a risk, and require it to pay higher premiums for its other bonds, for example, driving up drilling costs.

Regulators have largely granted Ness’s request, at least so far. According to data provided by the Department of Mineral Resources, the state confiscated 320 wells and had plugged 280 as of May, at a cost of $39.3 million, including $6.1 million that came from a state well-plugging fund financed with industry fees and penalties and taxes on production. The state “reclaimed”—or cleaned up—only 173 of the sites. 

But so far, the state has confiscated bonds worth only about $3.4 million, while it is pursuing another $1.5 million through civil action, Helms said. All of that money would go to reimburse the state fund, rather than the CARES Act money. Helms said that while they are still looking into it, the rules of the CARES Act may dictate that the state cannot or should not reimburse the federal government.

The department said that seven companies, responsible for 77 of the confiscated wells, have either entered bankruptcy or were determined to be insolvent. The rest of the wells, however, were owned by companies that continue to pump oil in the state.

Cobra Oil and Gas, for example, had 121 wells confiscated. State records say the Texas-based company has another 369 active wells, suggesting there may have been revenue to cover plugging costs. Cobra did not respond to phone messages or emails.

But so far, the state has confiscated bonds worth only about $3.4 million, while it is pursuing another $1.5 million through civil action, Helms said. All of that money would go to reimburse the state fund, rather than the CARES Act money. Helms said that while they are still looking into it, the rules of the CARES Act may dictate that the state cannot or should not reimburse the federal government.

The department said that seven companies, responsible for 77 of the confiscated wells, have either entered bankruptcy or were determined to be insolvent. The rest of the wells, however, were owned by companies that continue to pump oil in the state.

Cobra Oil and Gas, for example, had 121 wells confiscated. State records say the Texas-based company has another 369 active wells, suggesting there may have been revenue to cover plugging costs. Cobra did not respond to phone messages or emails.

Disclaimer: The views expressed here are not the official position of the IWW (or even the IWW’s EUC) and do not necessarily represent the views of anyone but the author.