Colorado has been in the oil and gas business since 1860 when the first western oil well was drilled. This extraction legacy has left a damaged landscape the state is not prepared to repair. Unplugged wells present a toxic environmental hazard, and the state is on the hook for cleaning the mess up. About 200 wells are in its "orphan well" program--wells that have been abandoned without a solvent owner to pay for reclamation. [photo credit: High Country News]
If that figure represented the extent of the problem, it could be worse. And it is. A closer look at state data shows that half of Colorado's unplugged wells are so-called "stripper" wells. These are low producing operations that are on the edge of profitability. In many of these cases it is cheaper and easier for the drillers to walk away, or transfer the operation to other owners. These marginal wells change ownership often. The owner at the end of the transfer chain often winds up bankrupt. An industry financial analyst says, “This is a common tactic in the oil and gas industry: Spinning off liabilities to progressively weaker companies, until the final owner goes bankrupt and none of the previous owners are on the hook for cleanup.” This industry version of holding the bag goes on despite the preferential tax treatments for their operating expenses oil and gas businesses enjoy.
There are also inactive wells on the state's books. About 10% of Colorado wells are inactive. Drillers pay a single bond for an inactive well of $10,000 or $20,000 depending on depth. It is far cheaper for a company to pay for an idle well and the premium on the bond than plug the well, estimated by the state Oil and Gas Conservation Commission (OGCC) to cost an average of $82,500. OGCC also estimated that the average costs of plugging a well and cleaning up the drilling site “exceed available financial assurance by a factor of fourteen.” Two companies account for 70% of idle wells in the state: Noble Energy Inc. (now Chevron after a buyout in 2020), and Kerr-McGee. The latter company was responsible for the home explosion in Firestone, CO that killed two people. Kerr-McGee was fined a record $18 million last year for the accident. Both companies own numerous wells in the prolific Denver-Julesburg Basin. Abandonment of wells is not just a hypothetical problem. Last summer California's biggest driller filed for Chapter 11, leaving billions in debt for 17,000 unplugged wells. In the fall of 2019, a small company called Petroshare Corporation went bankrupt leaving Colorado with the bill for cleaning up 90 wells, which will run into the millions. More bankrupt operators are on the way: in six out of the past seven years, energy has been either the worst or second-worst performing sector on the S&P 500.
Colorado is trying to change its dependent relationship to an industry it has lived with for 150 years. A new law passed in 2019 requires the OGCC to reform the financing of well reclamation in the state, and it rewrote the agency's mission, giving localities control over oil and gas development. The agency has banned flaring of natural gas, a common practice, and instituted a range of wildlife and public health policies. Recently it voted to institute the nation's largest set-back rule (2000 ft) for operations near homes and schools. The bottom line is that oil and gas producers are not footing near enough of the bill for their damage to the land and its inhabitants, wild and human. Industry complains constantly about increased costs of operations in Colorado due to regulatory changes. Experts predict that more marginal operations will be handed off in a game of "hot potato". When the potato explodes, its "Coloprful Colorado" that suffers.