The language slayers
Remember the old quip – Eternity is two people and a ham? People in Colorado learned a new definition the eternity late last November: Eternity is the dull, incessant drone of Governor Polis’s new million-dollar Commission taking public comment at a Colorado Oil and Gas Conservation Commission, COGCC, rulemaking. With the intensity one might expect of a two-year-old learning to ride a tricycle, the Commission dissected the meaning of the term ‘economic risk’ as it applies to the state’s oil industry.
Who knew the term has such fluidity of meaning? In the end, after days of back and forth, these highly paid, breathlessly bumbling amateur lexicographers turned the term into something as useless as campaign promises.
Until 2020, the Commission overseeing the COGCC was honorific, part-time, with heavy representation from the oil industry. This new five-person commission is full-time, with salaries ranging from $150,000 to $165,000, plus benefits. The commissioners serve at the Governor’s pleasure and are subject to the whiplash of partisan politics. Clearly, they are not independent watch guards. The situation cries out for more democracy, a citizen-elected, part-time, public-spirited oversight commission.
To give the Commission’s hearings ostensible integrity, the public and the oil industry were invited to participate in the debate on how much financial bonding is required to protect the public from taking on the cost of well plugging, a firm requirement of SB19-181, the Oil and Gas Reform Act of 2019. These commissioners turned the hearing turned into a debate on how much bonding the industry can afford.
The more important reform issue is the requirement that each operator demonstrate annually that it is financially capable of satisfying “every” requirement demanded of it by SB19-181. The legislation tells the COGCC that the annual test for financial solvency is not to be a wand waving exercise, the type you might expect at a birthday party for toddlers, but a principled examination conducted with maturity and rigor. The COGCC has said in the past that it doesn’t have the staff or ability to perform this foundational requirement of the law. Its staff of 140 is mainly engineers and contract lawyers, not students of the industry’s business plans.
They’ve attempted to mask their self-proclaimed incompetence by making bonding and financial assurance synonyms, which they obviously are not. Bonding, though important, is only one of many requirements established by the law, and by itself does not demonstrate financial fitness unless full-cost cash bonding is required by the state of every well in an ownership. Then it might prove a workable and cost efficient means of testing for financial solvency.
It was no surprise really to learn the oil industry thinks the people should continue to cover all but the tiniest sliver of the risks associated with the closing, cleanup, and long-term maintenance costs of their wells. Under the existing rules–rules that have been allowed to stand for almost 3 years after the passage of SB19-181–a large operator, say with 6000 wells, would, via the magic of blanket bonding, be required to post a maximum bond of $100,000 to cover the closing of all 6000 wells. Should that operator fail, and they do fail with regularity, this amount applied equally across all 6000 wells would come to roughly $16 per well. Under the draft rules trotted out during Eternity Week, the maximum bonding would increase to $1500 per well.
But the inadequacy of this proposed increase compared to the actual costs of closing wells is breathtaking and suggests the policymakers at the COGCC are more employees of the oil industry than they are of the people, that little has changed culturally within that agency even though it spent months discussing, in another previous rulemaking, how its mission had changed from encouraging oil and gas development to protecting the public, wildlife, and the environment as required by SB19-181.
The Players, the steely and mechanical kind
The state estimates that on average it takes $100,000 to close a well, but this is based on a small sample that does not include any of the newer, often deeper horizontally fracked wells. Neither does the estimate include the new state requirement that well closing include measurement of and remediation for radioactive waste, both in the soil and in the groundwater. Studies show radioactive material brought to the surface at well sites poses potential health risks.
North Dakota has much greater experience in well closing costs, which actually include radioactive waste disposal. Their average well-closing costs are about $280,000 per well.
Carbon Tracker has analyzed the closing costs from both states and determined that, given the evidence, the average well closing costs in Colorado are likely to be in the $150,000 range, something more than COGCC’s estimated average, but substantially less than North Dakota’s.
Using Carbon Tracker’s more polished and recent evaluation as the cost baseline, it’s obvious neither the old nor new proposed blanket bonding requirements do much to reduce public risk. They do nothing to satisfy the reasonable requirement in the law that all new wells should be fully bonded. Realistically, the public could be on the hook for in excess of 99 percent of the plugging and reclamation costs, and, therefore, the risks should the driller go broke.
Add to the foregoing that many individual wells in urban Los Angeles and elsewhere have cost over $1,000,000 to close and reclaim, the ultimate costs begin to fog the mind.
All fracked horizontal wells have a very short productive life when compared to the traditional vertical wells, which may only decrease by 2 to 3 percent annually. According to the Post Carbon Institute, fracked wells in Colorado decline, on average, by 50 percent in the 1st year, and 90 percent by the 3rd year, making it very hard to recover costs or realize profits. Moreover, Colorado production in the traditional hot spots, which were largely rural, is declining rapidly. As a result, urban areas are increasingly targeted for drilling. With this comes the potential for greatly increased well closing costs and human harm. Incredibly, in Colorado, playgrounds, apartments, office buildings, and homes themselves have actually been built over the top of old infrastructure.
One well near Windsor, CO, has already cost over $1,000,000 in taxpayer money. Like Audrey in Little Shop Horrors, the well keeps asking for more. It seems the COGCC had permitted an operator to drill through a sealed medical waste facility to get to his elixir. The operator’s drilling rig took a nosedive in the unstable medical waste pile. He declared bankruptcy, forcing the state to pick up the ongoing reclamation costs. The operator is reportedly back in business under a different name, and assuredly in a different location. It doesn’t take an economist like John Kenneth Galbraith to understand that you fuel rocketing well-closing costs with dunderheaded regulatory decisions like this.
Using Carbon Trackers $150,000 average, the potential public risk associated with plugging and remediating all 51,000 unplugged wells in the state is about $7.7 billion. This is not to say that anyone expects all of the operators in the state to go belly up all at once or for all the wells to dry up in a day, but strictly speaking, these numbers represent the estimated maximum risk in monetary terms the state is asking its citizens to underwrite. Most people will understand it also represents the continuation of a mammoth subsidy to the industry.
Other Players, the human kind
As astonishing and disturbing as these numbers are, they did not embarrass the industry. They generally argued for stasis at the hearings, often pointing to the demonstratively nonsensical meme generated by it, and adopted by the state, that Colorado has the best oil and gas regulations in the universe. Yep, just give ‘er a squirt of WD 40, and God would be in his heaven again.
At least one oilman quoted Polis’s old saw that “one size doesn’t fit all” to argue that bonding should be fluid, individually devised. Polis had used this phrase to polish up his betrayal of the citizen led state-wide initiative in 2018 seeking voter approval for mandatory well setbacks of 2500 feet from homes and waterways.
Polis’s drugstore wisdom might be all right when applied to buying batteries and bed sheets, but it is infantile when applied to public health, safety, and the environment. The WHO’s declaration that it is unsafe for any human to breathe benzene, a ubiquitous fossil fuel product, is a one-size-fits-all statement intended to protect public health and safety. The WHO makes no exceptions, even for politicians. Aren’t most public health and safety laws and regulations, of necessity, a one-size-fits-all sort of thing?
Some studies indicate the industry enjoys a subsidy of at least $50 billion annually in this country, but this does not include the likelihood or risks of well-closing and maintenance costs being transferred to the public, since this is an emerging issue in the oil industry saga. The organization Carbon Tracker estimates the national cost of closing all the 2.6 million unplugged wells in the country could reach $280 billion. This estimate does not include the 1.2 million orphaned wells or the long-term maintenance costs of the country’s massive inventory of previously plugged wells, many of which still emit benzene and other gasses.
The public was not as sanguine at the hearing as the cat-bird sitting industry. Their comment, in summary, was hooey! The Oil Subsidies Forever Club be damned, it was past time the oil industry started covering its own risks. SB19-181, the new but earnestly evaded oil and gas act, demands it. And, as some of the people were quick to remind the new commission, this law had been double parked at their agency for almost three years. Progress for the Polis administration in protecting the people has been as slow it seems as nation building was for George Bush the Younger.
The definition of protected is obviously undergoing a major remake with this word-slaying commission as well. Its definition of ‘protect’ will rely on the concept of limiting financial risks and costs to what the industry says it can afford. This issue was roundly debated at the legislature when SB19-181 was being written in the spring of 2019. The industry lost that debate. The public was to be fully protected without regard to costs. At long last the industry was to pay its own way.
Nevertheless, this new, governor-selected, professional Commission is hell bent on resurrecting the past and thereby confounding if not repealing the law. It’s a lead-pipe cinch that, when finally debated again in scheduled late January hearings, their revised rules on how the law is to be implemented will demand only as much risk as the industry says it can reasonably take on and still draw breath. The remaining public risks, as demonstrated earlier, will be massive under a bankruptcy scenario–almost 100 percent. An unsuspecting public will simply have to accept the burden of the industry’s operating costs when it comes to well-closings so that the industry does not suffocate prematurely in its own debt. Language and the intent of SB19-181 will thereupon have been turned completely on its head.
It is almost universally acknowledged, except in some peculiar political circles of which Colorado is one, that fracking for oil and gas has been a monstrous financial and public health disaster. While fracking has indeed generated tremendous cash flow from train-loads of dollars being dumped on it by speculators, that cash flow has often not been adequate to cover costs, including the extravagant salaries and bonuses awarded company executives. The very short productive life span of these fracked wells adds to the economic diceyness. This is why, nationally, the industry is estimated to be over $300 billion in debt, with 572 oil and gas companies declaring bankruptcy over the last 6 years. It is the proverbial snake eating its own tail.
This new, watered-down definition of protection had already been used successfully in the flow-line rulemaking, the only other rulemaking of any consequence at the COGCC since SB19-181 was passed. Flow-lines are the small, generally on-site lines that carry waste and product to storage or transfer.
In that rulemaking, after listening to the industry’s insistence that removal of these lines might sometimes prove too costly, the commission deferred, creating ample room for exception. They did this despite the testimony of Erin Martinez who said flow lines had already cost her and her family incalculable loss. Her husband and her brother were both killed; she herself suffered severe burns; and her son barely escaped with his life by jumping from a second story window when their home exploded in flames caused by the build-up of methane in the basement. The methane’s source was a flow line that had supposedly been disconnected from an old, nearby well.
She reasoned, as did others who testified at this rulemaking of over a year ago, that if all flow lines were removed when well sites are closed, it would be impossible for her family’s tragedy to be repeated. Other oil and gas dangers would of course still exist, but the flow line danger would simply be eliminated.
The commissioners engaged in their obligatory nodding and clucking, but in the end decided it was wiser to protect the industry’s bottom line than any future Martinezes. Erin Martinez it should be noted has donated roughly $18 million from the settlement with Occidental, nee Anadarko, to increase public safety in the oil patch. This is significantly more than many operators in this state have paid or will likely ever pay to close and clean up their old wells as required by law.
The Boschian Nightmare Landscape
So just how many wells are out there and what is their status in terms of production and risk? As a general rule, the lower a well’s production the older it is and the greater the risk it will become an orphaned ward of the state. According to official records we have roughly 121,000 wells in this state. Over 70,000 are plugged, says the state. But that does not mean they don’t leak or that they are safe. For example, the COGCC’s own inspection reports show that among 30 of the largest operators, 568 wells failed both plugging and surface reclamation examinations. These reports get curioser and curioser not just because they are as infrequent as intergalactic travel, but because while some failure reports are over 20 years old, there is no record that any of the failures have ever been corrected.
Independent research indicates all plugged wells will likely someday leak as cement breaks down and steel corrodes over time, usually in 25 to 30 years. They’ve been drilling in this state since 1860. The possibility of more mayhem being out there is great, if and when the state starts looking in earnest.
Plus it’s not just methane leakage that is of concern. These wells probably leak fellow-traveler poisons such as benzene and radioactive particles such as radium, which quickly decays into Lead 210 and Polonium 210. These dangerous radioactive particles have been widely detected more than ten miles downwind from well sites. And as I said earlier, the WHO says for benzene there is no safe human limit.
But only one horror show at a time, please. The state doesn’t dare advertise a matinee double feature of oil-field financial deception and doom on its marquee, a deception in which it is heavily invested.
Thus, for now, the state’s concentration is on the 51,000 unplugged wells in its inventory. Of these about 10,000 are nonproducing, some having not produced for decades. Another 37,000 are so called stripper wells, roughly 72 percent of the state inventory. These are low producing wells nearing the end of their economic life. By definition they produce less than 15 barrels of oil daily, measured on an annual basis. But it gets worse. A large subset, almost half of the strippers, produce less than 1 barrel of oil a day.
That about fifteen companies account for 90 percent of the production in the state should fill in the picture that the oil and gas business is actually a bone yard full of zombie wells producing nothing or next to nothing, with only a few operators contributing to the industry fabrication that the system is a flowering Eden. The state claims, probably for political reasons, there are close to 802 operators out there over which it has jurisdiction—there are other operators on federal and Indian land over which it claims no jurisdiction. If the COGCC’s annual operating budget of around $18 million in taxpayer money were being allocated to basically service only the largest 15 businesses, that might be difficult to explain to budget hawks, so 802 provides better cover.
Maybe it’s not a deliberate deception, but of these 802 operators, 433 operators have only plugged wells. So they will not be directly affected by this rulemaking. Of the other 368 operators, 157 have only nonproducing wells. It is fair to say these operators by definition are already insolvent, no matter the outcome of this rulemaking. The remaining 211 operators form the active or majorly impacted universe for this rulemaking, and remember just fifteen of them produce 90 percent of the product.
Are sharpie and villain synonyms?
Near the end of the second day, Matt Matthews, an attorney from the giant law and lobbying firm Brownstein Hyatt Farber Shreck, addressed the Commissioners. He was the lawyer of record for Anadarko in the Martinez settlement. Some think Brownstein-Hyatt is the gatekeeper to the state’s Democrat top-of-the-ticket selection process. Make of that what you will, and how it may reflect on the quality of their judgment, they are clearly equal opportunity influencers, playing both sides of the street for their clients. Their chief Washington lobbyist for energy and agribusiness interests, David Bernhardt, was Donald Trump’s Secretary of Interior. Doug Friednash, another Brownstein-Hyatt partner, was Senator Hickenlooper’s chief of staff when Hickenlooper was governor. He now regularly writes swoon-inducing editorials for the Denver Post.
This time Matthews was representing COGA, the largest oil and gas association in the state. He said that after talking to a variety of insurance companies that he doubted most, maybe even none, of the operators in Colorado could acquire adequate bonding. He also suggested most could not afford full cost bonding of their wells, that annual premiums were going through the roof. He even suggested that a bond as small as $15,000 would be widely unaffordable to drillers.
The fact Moody’s Investment Services is saying that “financial institutions are facing a $22-trillion time bomb due to their investments in carbon-intensive industries” might help to explain why bonding might not be available or run-away expensive.
Nevertheless, one thing his testimony does expose, if his testimony is in fact accurate, is that most of the oil operators in this state cannot meet the requirement of demonstrating financial solvency. If the financial industry won’t bond you, isn’t that rather serious evidence that you aren’t economically sound, that you aren’t risk worthy, or that the risks are so great that the premium is cost prohibitive?
But this is not the direction questioning from the professional Commissioners took. They questioned Mr. Matthews about alternatives to full risk coverage–Whether like bankers they, as commissioners, couldn’t sit down with individual operators and devise a bonding plan that was acceptable to both them and the operator. They’ve openly declared they don’t have the expertise to determine operators’ financial fitness. Nevertheless, it appears they, too, like the country lady in The Makado who didn’t know how to dance, “would rather like to try.” Often disguised as deep, public-service deliberation, their service to the industry, from all appearances, is single minded and bottomless.
Indeed, the draft rules are almost fixated on the Commissioners meeting individually with drillers to iron out a payment plan for closing their crap wells. In this general vein, commissioners also asked whether a 10-year sinking fund into which delinquent operators might pay to cover their well closing costs was not a possibility. The impact? Bye, bye transparency.
Rarely, if ever, do these Commissioners seem to evaluate industry-favoring alternatives against the fiery breath of the climate crisis right outside their windows. For instance, is a 10-year sinking fund compatible with the scientific consensus that methane from fracking is a major driver of climate warming over the critical next 8 to 10 years, and that we must wean ourselves from it as quickly as possible if we are to avert the dreaded climate tipping point at which time the unpredictable becomes the predictable?
Sam Bradley, the founder and spokesperson for a new operator group calling itself SOS, Society of Small Operators, and himself one of the so- called small operators, also said he couldn’t afford full-cost bonding. But there appears to be considerable hedging in Bradley’s lament. His company, Impetro Resources, owns about 90 wells. All of them are stripper wells, about 80 holes producing oil at an average rate of about 4 barrels per day. In 2020, he reported producing about 98,000 barrels of oil. At $70 per barrel, roughly the present market price, that production would fetch about $6,860,000 in today’s market.
He has been in business since 2016 and has invested exclusively in older vertical and low producing, shallower wells of depths less than 5000 feet. Given these circumstances and the probability he has limited debt load, since he probably acquired these aging wells on the cheap, a bond of $100,000 per well might be adequate. If analysis were to support the assumption that, on average, shallow, vertical wells can be closed for $100,000, Bradley would have to find $9,000,000 to satisfy full cash bonding. This is more than his annual gross, but, despite Mr. Matthews contention to the contrary, it certainly doesn’t appear that finding a loan to be repaid over several years would be impossible for Mr. Bradley. If the debt could be repaid in 3 years or less, the state might even consider becoming his banker.
But most importantly, this overwrought concern about his ability to pay what he legitimately owes by law and simple decency exposes the fundamental issue: should a guy who may gross close to $7 million some years have to pay his legitimate operating costs, from which heretofore he has been sheltered with the help of a complicit government, or should a whole bunch of Coloradans, most of whom will never make $7,000,000 in several life times of labor or ever dream of owning even one tiny oil well, pay his cleanup costs should he become insolvent?
The Bradley example should not be taken to mean that there won’t be operators who wouldn’t be able to bond up to cover their well closing and cleanup costs, for as reported earlier there are about 10,000 wells out there that are unplugged but produce nothing, and roughly another 13,000 wells that produce less than 1 barrel a day. This is almost half of all unplugged wells in the state.
But here again, despite the industry and COGCC dirge-singing chorus to the contrary, requiring full cost cash bonding for every well in the state does not create insolvency. It simply exposes it. That is fact simple.
In fact, the earlier an operator’s insolvency is exposed, by imposing full cash bonding, the better it is for the people. Any residual production can then be captured by the state and applied to help defray the ultimate well closing costs. Otherwise the trickle of cash from these wells would continue to be captured by the operator who is clearly a free rider in a regulatory system created long ago to encourage oil and gas development in the state, a system SB19-181 was meant to reverse. Unfortunately, the COGGC and the Polis administration are fiercely resistant to implementing the just changes required by that law except in the most stuttering and clumsy way possible.
And be forewarned, the state’s graveyard of nonproducing and low producing wells is not the exclusive property of small operators. Many are owned by the big guys.
Notes on a couple of the big feeders in the tortured landscape
For example, in Colorado, Chevron/Noble owns about 6400 wells, almost 2900 of which are nonproducing. Of the 3500 producing wells, over half are low producing stripper wells.
Chevron, which bought Noble Energy over a year go for $13 billion, just declared a 3rd quarter net profit of $6.1 billion on total revenues of $43 billion. Mike Wirth, Chevron’s CEO, bragged, “we paid dividends of $2.6 billion, reduced debt by $5.6 billion, and repurchased $625 million of shares during the quarter.” He said nothing about sending a billion dollars to Colorado to cover full cash bonding of their wells. He’s also received a compensation package of $33,000,000.
Last year in the 3rd quarter Chevron lost $250 million. So full bonding must be pursued while the good times roll, for, as most observers know, the good times are rare and fleeting in the fracking business.
If Chevron’s 6400 wells were required to be fully bonded at Carbon Trackers average cost of $150,000 per well, the total one time bill if paid in cash would come to $960,000,000, eating up only 15 percent of the net profits Chevron shelled out to its investors and itself in the 3 months of the 3rd quarter. Chevron’s profits are expected to be even greater in the 4th quarter of 2021.
Chevron, though rolling in the dough right now, is not always a good actor as their relentless prosecution of environmental attorney Steve Donziger shows. He was the leader of a legal team that won a $9 billion judgment against Chevron through the Supreme Court of Ecuador for the wholesale destruction of Indian lands and water resulting from drilling activity in the Ecuadorian rain forests. Chevron has refused to pay, and has hounded Denziger for years. He is currently serving a year’s prison term for refusing a court order to turn over his computer. Some sources claim the New York judge in the case was acting openly on behalf of Chevron, even going so far to hire their lawyers in developing the Javert-like persecution of Donziger.
Occidental is another of the largest operators in Colorado. They own about 5500 wells in the state, about 40 percent of which are either low-producing strippers or nonproducing.
Occidental paid a reported $55 billion for Anadarko a couple of years ago so as to become a major participant in Colorado’s shale play. Many on Wall Street thought Occidental overpaid, and as a result its stock dropped precipitously after the acquisition. Major overproduction of oil and gas resulting in low market prices at the time didn’t help.
Still in the 3rd quarter of this year they posted a net profit of over $1 billion. If we applied Carbon Tracker’s averaged closing costs, Occidental’s cash bonding requirements would come to $835 million, leaving at least $165 million for bonuses and dividends. Profits from the other 3 quarters in 2021 would be all gravy with bonuses galore. The people of Colorado would also be grateful. Some projections have Occidental doing much better next year, generating free cash flow of $33 billion.
These felicitous projections are dependent, however, on oil prices staying high and none of the major oil producing nations breaking ranks, historically a common practice, to increase their share of the money river. The decrease in demand the pandemic is causing is the wild card. And of course it also means Joe Biden was unsuccessful in getting other major producers such as Saudi Arabia to increase production in exchange for bombs and bombers. Biden knows, as did Jimmy Carter, that extended oil inflation is a terrible thing to fight in a reelection campaign.
It is worth noting that the two lawyers representing Chevron and Occidental at Eternity Week were former COGCC Directors, David Neslin and Matt Lepore. It is a cozy world they share.
Lepore left as Director of the COGCC in the summer of 2018 to become an oil and gas attorney in a company formed by the former director of the Colorado Oil and Gas Association, COGA, Tisha Schuller. With characteristic oil-patch immodesty, it anointed itself Adamantine. Lepore has since broken from it.
It was during Lepore’s reign at the COGCC that the practice of companies dumping old played out wells onto less well healed parasitic companies, in it for a quick buck, started to become recognized as the way unscrupulous companies used to escape the cost of closing their old wells—just pass them on to a company that was under capitalized, but was more than willing to wring the last drop of oil from the well before pulling up stakes and disappearing into the western sunset; thereby the parent company gets the closing costs off its back, a cost that will almost certainly become the public’s when the well can produce no more. This realization is probably why SB19-181 calls for individual bonding of wells before they can be transferred to a new owner. The COGCC’s draft rules do not honor that requirement.
A Texas company, PCR Operating LLC, provides the most recent in-the-flesh example of this practice. A few years back it acquired about 157 wells in an old oil field east of Denver. Dating from the 1950s, these wells had gone through at least 3 different ownerships prior to PCR’s acquisition of them. For the last two years the COGCC has tried to get the San Antonio company to respond to numerous violation notices, with no luck. As a result, the COGCC says it was forced to condemn the property. It now belongs to the people. If the wells can be closed for $100,000 each, a big if since they are old, leaking, and unmaintained, the public cost will be over $15,000,000, even if the state collects the existing bonds. Had the new bonding requirements proposed by the COGCC been in place, the cost to the taxpayers would still be over $15,000,000. We should also note that the problems with these wells didn’t start a couple of years ago. They go back to at least 2014 and the previous owner, Black Raven Energy. The COGCC’s own records show that in 2014 BRE was by order of the state obligated to either bring into compliance or plug 20 wells annually. There is no evidence this order was in any way satisfied, but in 2017, PCR agreed to take on these responsibilities in what can only be viewed as one of the state’s longest running shell games, a game that SB19-181 would correct if properly implemented.
It’s also interesting the COGCC couldn’t find the owners of PCR because PCR was certainly able to find the feds. They received roughly $454,000 in 2020 and 2021 combined under the CARES Act for payroll protection.
Recently Attorney General Phil Weiser also took on 55 nonproducing wells from a company called PetroShares so that a bankruptcy settlement could be completed. He also agreed to forgive $700,000 in uncollected fines the company owed the state. The investors got 35 producing wells in the settlement to reduce the debt owed them. In a deal that even Neville Chamberlain might balk at, AG Weiser took all of the nonproducing wells in the name of the people. PetroShare’s CEO was a former safety for the Denver Broncos.
From Colorado to California, a less tortured landscape?
Occidental may be the master at shedding its old wells so as to reduce its liabilities and improve its balance sheet. Federal law requires the estimated cost of closing all wells in an ownership be reported to the SEC. This calculation is termed the operator’s Asset Retirement Obligation, ARO. The industry is solely responsible for deciding what that obligation is, but eliminating or reducing the number of old wells that are non or marginally producing will always improve the balance sheet as any sharpie would know.
In 2014, Occidental created a spinoff corporation called CRC, California Resources Corporation. Occidental transferred its aging and “underperforming” wells, along with the associated AROs to its newly created spinoff. It also paid itself $6 billion for its new creation, thus loading CRC down with new debt, plus the AROs. CRC owns roughly 18,000 on-shore wells, over half of which are nonproducing, and 1500 aged offshore wells, more wells than any operator in California. If we use Carbon Trackers Colorado’s estimated individual well closing cost of $150,000, it would cost CRC $2.7 billion to close all its wells. CRC reported its projected well closing costs to the SEC at a little over $500 million. Low-ball self-evaluation and self-reporting has always been and continues to be the hallmark of oil and gas regulation in this country.
The state of California estimates offshore well closing costs at between $19 million and $189 million per platform. Local watchdogs think these estimates low since one platform retirement at Santa Barbara, in shallower water, has already cost $350 million and is still asking for more.
After Occidental created CRC, the sharpies at Chevron cashed in on the opportunity. In 2018, it offloaded its old Kern County wells onto CRC. CRC paid $450 million and got some stock. Located in the Central Valley, the Kern County oil fields are among the oldest in the state. Kern County is also rightfully known as home to some of the worst air and water quality in the U.S. Farm workers, notoriously poor, majority Latino, dominate the population.
In 2020 with 545 creditors pounding on the door and over $6 billion in debt CRC declared bankruptcy. Through the miracle of Texas bankruptcy court, they are back in business.
Given the foregoing, can a stronger argument be made for requiring upfront cash bonding of all wells with a surcharge of perhaps 15 percent for long-term maintenance? This approach is simple, transparent, and straight forward, with the result that not only is regulatory trust created, but the public’s enforcement and regulatory costs are greatly reduced. SB19-181 requires full bonding of all new wells and individual bonding of any well before it can be transferred. It is silent on existing wells, but the annual financial fitness requirement, plus the overarching requirement that the public interest must be protected makes full cash bonding of existing wells the only rationally consistent conclusion. This concept got little consideration from the new pros at the COGCC.
Fortunately, Colorado doesn’t have any offshore wells to worry about, but neither does it have the protection the U.S. has built into the licensing of offshore wells, which it alone permits. The wells are subject to a concept developed from Superfund legislation in the 1980s requiring environmental cleanup be paid by those responsible no matter where they are to be found in the ownership or management chain. This concept of financial recovery to protect the public interest is called joint and several liability. So, though Occidental may have dumped its old offshore wells, the U.S. can still pursue it and others who benefitted, including subcontractors. California recently passed a similar law for onshore wells.
Colorado has no law like this, but should seriously consider such legislation in the upcoming session so that CRC-like gamesmanship is quashed. This legislation should include past royalty beneficiaries, with compensation to the state at least equal to the past benefits. Royalty owners have been among the most fierce objectors to oil and gas regulation which they say infringes upon their rights to develop their property and enjoy the income therefrom. If joint and several liability legislation were passed, the only drawback would be the regulatory black hole created by the Polis administration through which nothing of substance passes.
A last peek into the regulatory Chamber Pot
After a relatively short break at the close of the two-day hearing on bonding and language mangling that seemed like an eternity, the new professional Commission met to discuss a petition from activists asking that there be a hiatus on approving any transfers of oil and gas ownerships until after rules on bonding are completed.
With a fierceness not often publically exhibited, Jeff Robbins, a Uriah Heap doppelganger and the Director of the new commission, dismissed the petition as out of sync with their regulations. He said that under their present rules it couldn’t even be considered. He asked for a favorable vote, and it was quickly done.
The issue behind this request was the formation of a green washed company calling itself, Civitas, Latin for citizen. It is comprised of three operators, Extraction, Bonanza Creek, and Crestone.
Extraction, the largest producer of the three, is just coming out of bankruptcy. It had piled up about $5 billion in debt in its brief 10-year existence. Three days before declaring bankruptcy it paid $6.7 million in retention bonuses to its managerial brain trust. One of the newer companies invading urban space as the rural hotspots expire, it is the bête- noir of many people living in the urban corridor north of Denver. It claims to be carbon neutral because it employs electric drilling apparatus and buys carbon indulgences, known as offsets, from others.
Crestone is built upon the remains of Encana, a Canadian corporation that went belly up and exited the fracking scene in Colorado in 2017. Like its predecessor, it too is owned by the Canadian public employees retirement system. It owns over 1600 wells, of which two thirds are either strippers or non-producing.
Bonanza recently ate up another bankrupt operator. Of its 725 wells, about one-third are not producing. Of the producing wells over half are strippers.
One might see why citizens would ask that the state not allow this consolidation to be finalized, if for no other reason than the law requires all wells transferred to a new ownership be individually bonded. It also means that if the final rule on bonding still relies primarily on some sort of blanket bonding, as seems inevitable, Civitas might enjoy a two thirds reduction in its bonding requirement since the blanket bonding maximum is presently reached at 100 wells. Each of these companies has over 100 wells, over 3600 in total. But almost a quarter of the wells are nonproducing, and of the producing wells, 2775, almost 60 percent are aging strippers. Why would anyone want to review this entity for financial solvency even though it bears some resemblance to CRC in terms of non-producing or marginally producing wells?
That the law requires it is a problem that Mr. Robbins has solved for himself. He dubbed himself the oil czar when he was appointed by Polis to take over operations at the COGCC. Since then he has made decision after decision that only vaguely comports with the law, suggesting we may need our own sort of October Revolution to rid ourselves of czardom.
A couple months earlier a similar conflict arose between the requirements of SB19-181 and the COGCC rules. A wildlife group sought relief for an eagle nesting area along Boulder Creek in Weld County. Crestone, the same company now being folded into Civitas, received a drilling permit near a Bald Eagle nesting area. Crestone received the permit on the condition that activity be limited during the eagle nesting and rearing season. More than twenty nesting Bald Eagles were counted in the area. The problem was that the restriction expired after a year, so Crestone concluded the restrictions satisfied and authorized its subcontractor to use large diesel engines for pumping from a nearby pond. The Commission ruled it didn’t have authority to regulate the subcontractor since its pumps were not on the well site. Only one eagle has been spotted briefly in the nesting area since. SB19-181 is specific that wildlife and the environment must be protected as a condition for oil development. It says nothing about the law being voided by a subcontractor’s actions or artificially established boundaries, but it cannot protect against the enemy within.
About the same time the Commission was granting Crestone protection from the eagles, another story was developing across town at the state’s Air Pollution Control Division, APCD. It seems the director there had decided that no modeling for pollution would be done by his staff even though this is a requirement of the Clean Air Act and more specifically SB19- 181, which declares that the cumulative impact of all oil and gas activities shall be calculated as necessary to protecting the people and the environment. This director, Garry Kaufman, a former corporate lawyer for the mining industry, felt it more important to get pollution permits out the door to protect the engines of commerce than to slow them down or restrict them based on modeling results. Because of a whistleblower complaint that has been validated, Kaufman has been bumped upstairs, as they say. A new position was created for him. Apparently with no ironic intent, he has been made the Deputy Director for Regulatory Oversight.
Jared Polis is neither dashing nor brilliant. Neither is he a spellbinding orator, but he is wealthy. He has used that wealth to shinny up the greasy pole of politics. In 2014, while still a member of Congress, his wealth was reported to be in the $400 million range. It has undoubtedly risen since, though in several recent years he, like others of his tribe, has paid no federal taxes at all.
As with all his previous political campaigns, he spent freely to get himself elected governor, reportedly in the $50 million range, almost half of it his own money. But even so, it is doubtful he would have won the 2018 Democratic primary for Governor had he not openly and repeatedly promised climate and anti-fracking activists that he would regulate the oil industry. He lied, most regally. How his 2018 feint will play out in the upcoming gubernatorial election, for which he is already running hard, is unknown. He has his money and the predictable dimness of his Republican Party opponent on his side. And maybe oil and gas money will leave his candidacy alone since he’s left them alone. They might even contribute, but only dark money, for it’s important to keep the lie alive.