Weakened bond rules for oil and gas companies hit by environmental groups

Environmental and community groups are urging Colorado oil and gas regulators to get back to the drawing board on a new set of financial insurance rules they deem too favorable to the industry.

The five-member Colorado Oil and Gas Conservation Commission heard testimony about pending regulations relating to financial insurance, also known as surety, in a two-day hearing this week.

Bonds are provided to the state by oil and gas companies to cover potential clean-up costs in the event of bankruptcy and abandonment of drilling sites, known as “orphan wells,” which can leak toxic substances and cause various risks to health and the environment. Campaigners have long said that Colorado’s existing bonds are inadequate, leaving the operators of the state’s 50,000 active wells to extricate themselves from the industry’s growing financial risks.

Now industry critics say COGCC’s latest proposal to update its bonding rules doesn’t go far enough – and is even “in some ways worse” than the agency’s existing regulations, one said. group in a testimonial.

Following industry objections, the latest draft of the new rules, released by COGCC staff last month, significantly weakened a previous version proposed in June. In particular, environmental groups have shouted at the new project’s amended definition of “inactive well,” a statute that triggers higher bond requirements.

Rather than designating as inactive all wells that produce less than one barrel of oil per day – widely considered to be well below the threshold at which a well is profitable – the new definition would only include wells that “produce” less than 90 days in the past. during the previous year. year. Critics say such a metric can be manipulated through tactics such as “swabbing” a well to produce tiny amounts of fluid.

“The definition of ‘inactive sinks’ is the most important definition in the proposed rules,” a coalition of environmental groups led by Conservation Colorado wrote in joint testimony to the panel. “We believe that the definition should meet two objectives: (1) prevent abuses and maneuvers that have allowed operators to avoid inactive well connections, and (2) identify the most risky wells for the state. “

Environmental activists also continue to pressure the commission to remove “blanket” financial insurance requirements, which allow operators to insure large portfolios of wells for only a fraction of the potential cost of plugging and cleaning them. the surrounding site. Instead, they call for a “full bond” of $ 93,000 per well or more – an approach that proponents say would allow the private insurance market to assess and price risk through bonds. .

But Mark Mathews, a lawyer for Brownstein Hyatt Farber Schreck representing the Colorado Oil and Gas Association, told the commission on Wednesday that many operators could face serious hardship and even be bankrupted by the “sky-high and stratospheric amounts.” than the full cost the gluing would require.

“These bond amounts are not for beginners,” said Mathews. Based on average bond rates, he estimated that an operator with 1,500 wells would have to pay an annual insurance premium of $ 4.5 million; many small operators, he said, would be forced to post large collateral to meet underwriting requirements of insurers.

Proponents of stricter bonding rules say that given the health, safety and environmental risks involved in drilling for oil and gas, such requirements should be the cost of doing business – and that the existing rules have let companies go for too long. “Colorado’s lax financial regulatory structure for oil and gas wells leads to business models where adequate financial insurance for asset retirement obligations can be an afterthought,” Conservation attorneys said. Colorado in his testimony.

“Not all businesses can or should be saved from their own bad choices,” said Kate Merlin, lawyer for the environmental group WildEarth Guardians.

Debate on the future of the industry

Colorado’s bailout rules took years to update. This is the latest of several major regulations required by Senate Bill 19-181, the overhaul of drilling laws passed by Democrats at the General Assembly in 2019, and was originally scheduled to be completed this year before that the commission postpone a final decision until early 2022..

At the heart of the protracted debate over surety bonds are divergent views on the financial and operational future of the oil and gas industry.

No more abandoned oil and gas wells likely in Colorado – but how many?

Environmental groups predict that the state’s current list of 239 orphaned wells could grow as thousands of inactive “functionally orphan” wells are abandoned over the next several years. They see even wider risks in the financial turmoil that has rocked the industry in recent years, amid declining production from frack wells and growing global pressure to switch from fossil fuels to clean energy. .

Large oil and gas operators, meanwhile, have consistently downplayed the risks of orphan wells and the need for new and stringent bond requirements.

“In our view, there is no real crisis,” Jim Martin, a Beatty and Wozniak lawyer representing the American Petroleum Institute, told Commissioners on Wednesday. “Virtually all Colorado operators are acting responsibly, very few wells have been orphaned and we have seen very little evidence that this situation is about to change. “

As publicly traded companies, many of Colorado’s largest producers are required to record future well retirement liabilities in financial reports to federal regulators. And the industry has highlighted the thousands of wells it has voluntarily plugged in recent years, reducing the state’s number of active wells by 10% since 2018.

But most of those sites were older vertical wells plugged by the companies only when they drilled newer horizontal wells in the same area. Analysis released this week by Carbon Tracker, a climate finance research group, found that the “vast majority” of Colorado’s recently plugged wells are located in the northeast region known as the Wattenberg Field, where drilling activity remains high.

“When market and policy changes associated with the energy transition make Wattenberg drilling unprofitable, operators will have no financial incentive to continue connecting to Colorado,” Carbon Tracker analysis concluded. “Regulators must take decisive action to encourage hook-up before it is too late. “

COGCC staff are expected to release a third version of the draft financial insurance rules in early December, ahead of a series of formal rule-making hearings in January.

“We still have a lot of work to do,” Commissioner John Messner said on Wednesday. “It’s a step in a long process.”