New Mexico to revisit bonds for oil and gas development

By SUSAN MONTOYA BRYAN apnews.com

ALBUQUERQUE, N.M. (AP) — It was the 1970s when New Mexico last increased the amount of bond money that oil and gas companies are required to put up before drilling. As development continues at a record pace, State Land Commissioner Stephanie Garcia Richard says it’s time to take another look.

Legislation that called for a study of the issue stalled during the recent session, but Garcia Richard announced just a day after lawmakers adjourned that she’s moving forward with the effort. She said her office has the funding to begin the work.

The review could take months. Given all the infrastructure and development on state trust lands, officials said the amount of bonding needed to ensure taxpayers aren’t left paying for any clean-up and restoration after oil, gas or other minerals are extracted is currently unknown.

Garcia Richard described it as an urgent issue that could leave “taxpayers and our state trust land beneficiaries on the hook for potentially millions of dollars.”

Concerns about the inadequacy of bonds goes beyond New Mexico. A report released last fall by the U.S. Government Accountability Office (GAO) highlighted bonding shortfalls on federal lands and found that oil and gas bond amounts largely have not been updated in 40 years or more and fail to serve their intended purpose.

Abandoned wells have been a major issue across much of the West and some officials are concerned the problem could grow given the exponential increase in development in places such as the Permian Basin, a booming area that straddles the Texas-New Mexico border.

Once the New Mexico study is complete, the State Land Office could propose raising bond requirements through a rule-making process. That would involve a series of public meetings.

The agency manages millions of acres of surface land and mineral estate throughout New Mexico. That includes more than 30,000 active leases and rights of way for everything from agriculture to oil and gas development, renewable energy projects and mining.

State officials are most concerned about unplugged and abandoned wells. According to the State Land Office, the average cost of plugging a well is more than $28,000 and the cost to remediate contamination associated with a single lease can range from $5,000 to millions of dollars depending on the extent of contamination.

The New Mexico Oil Conservation Division tallies the number of orphaned and abandoned wells throughout the state at 711, of which only 6% have been plugged. While the state has a restoration program funded by a tax on oil and gas operators, officials say its $5 million budget would be drained quickly considering the number of wells needing to be plugged and remediated.

The State Land Office pointed to a case of contamination in Lea County that occurred five years ago. The bond covered only $10,000, but the current estimated cost of cleaning up the spilled produced water is over $600,000.

Aside from well sites, the study will require the State Land Office to review over 10,000 miles (16,000 kilometers) of oil and gas-related pipelines in rights of way throughout the state. Officials say the existing exposure for decommissioning pipelines and remediating rights of way on state lands alone is hundreds of millions of dollars.

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And the state governments spent all the revenue that came in!

In both cases, the amount set aside from the fee(s) paid by O&G companies intended to cover proper plugging and abandoning of orphan wells is insufficient to cover the costs.  It's not the state governments spend all the revenue.  It's that the revenue was insufficient for the requirements of the programs.  In other words, the O&G companies are not being assessed an amount that accomplishes the aims of the orphan well programs.  The public is subsidizing the industry for the proper plugging and abandoning of orphan wells.

I didn't reserve any of my royalty payments to cover an obligation that the well operators incur for the plug and abandon, and site clean up costs.  Those responsibilities belong to the operator, not the land or mineral owner.   Abandoned wells means that the original operator is no longer in business, and the only option for the State is to put a claim against the bond for those activities.  The bond amounts are clearly insufficient.  

Yes, the LA program accomplishes the plugging and abandoning of fewer wells than are newly added to the list annually.  The backlog continues to grow.  There is a little more to the abundance of orphan wells the program is meant to P&A.  It is common practice within the industry for wells to change operators over their productive life span being transferred to smaller and smaller operating companies.  Of course the financial ability to cover the cost to P&A a well also declines accordingly.  A lot of the orphans were the property of operators no longer in business but a significant number are the responsibilities of companies and individuals easily located but that have simply refused to perform the P&A.  This should be an outrage to the average Louisianian.  They should all watch this video.

https://www.fox8live.com/story/36750057/zurik-orphan-wells-and-the-...

Skip:

Steve P raises a valid point here - the State (in fact, many of the oil and gas producing states and related governmental entities) takes in revenues and severance taxes and simply deposits them into the general fund to be spent by the government at large without a notable wit of directing any of it to a related program to plug orphan wells.  Nowhere in the state regs does it dictate that the orphan well program must be self-sustaining.  The three-legged stool (direct taxation, regulation-derived cost policy, and industry investment) is woefully broken.  Performance bonds stand as "insurance" to pay in lieu of non-performance by the operators - these requirements should be raised commensurate with P&A costs (at least in broad brush; not all wells and situations are the same - perhaps a cost-derived, depth-connected minimum bonding level?) and are not tied to bankruptcy / inactive operators.  A portion of severance tax inflows to the State should be earmarked to dealing with identified orphan wells in addition to emergency plugin / rehabilitation operations.  If necessary, fees earmarked to the orphan well program should be instituted and/or collected for new permits.

The other item that gets lost in this is that the federal government from time-to-time will fund orphan well P&A operations provided that matching state funds are made available, which can be a multiplier in terms of numbers of P&A wells addressed.  "Promised" funding from the state is not a substitute for actual dollars [much like the Highway Trust Fund or federal infrastructure bills, local funding must be both "identified" and "actual" (available for timely contribution) in order to secure federal funding.

One other thing to mention here - many older wells and/or wells that are drilled on a lease basis may be long-term "inactive" which the uninformed sometimes count as idle, "abandoned" and/or (potential) orphan wells.  This is not the case with respect to these types of wells in that the State is loathe to intervene into a validly operating contract (lease wells can hold "all", "part" or "some" of a lease depending upon the terms of the lease) - in these cases, it only takes as little as *ONE* producing well to hold the lease, while the operator has the right to reenter, deepen, plug back and/or recomplete any well on the lease (again, within the terms of the lease) in order to continue to maintain its rights.  There are more than a few "33" wells of long standing that fall into this category for which State will refuse to intervene until the last well ceases to produce and the land / mineral owner complains - they are not "abandoned" for these purposes, nor are they "orphans" [the correct term for wells for which there is/are no financially responsible party(ies)].

Severance taxes are a shrinking revenue source as more and more wells qualify for the "deep" and "horizontal" well exemptions. Yes, I agree the state should be increasing fees paid by the industry to cover P&A costs for orphan wells.  Any available federal funds would be appreciated, but should not be counted upon. I think we would all feel better if the operators highlighted in the above video were targeted for hefty fines and/or jail time.

Another issue is the bankruptcy laws.  Shoreline Exploration went bankrupt, threw all of the uneconomic wells into bankruptcy, changed their name to Marquis and presto back in biz with no responsibility to plug and clean up the old wells.  

Jay

The Office of Conservation is in a position to prohibit such a move.  The industry gets a black eye from a handful of irresponsible operators and would hopefully support regulatory as opposed to judiciary penalties.  If OOC would refuse to register/recognize a company like Marquis as an approved operator without posting a bond to cover their legacy P&A costs, the industry would be absolved of a PR problem and the tax payers would not get stuck with the P&A bill.

I would think there a lot of older wells that are classed as P&A but were plugged by some jack leg contractor that stuffed paper in the hole then poured 6 inches of concrete.

Quite possible and disturbing to consider.  I am unsure of the process as far as OOC field inspectors witnessing such P&A jobs.  The casings in some Caddo Pine Island wells are now well over 100 years old.  Since they are relatively shallow, I'd like to see some tests to see what shape they are in presently.  That might be opening a can of worms but would be a responsible act from an environmental safe guard point of view.  A lot of those shallow wells are in relatively close proximity depth wise to the potable water aquifer.

Even when a well has been properly P&A by state standards whose to say that something might not go wrong somewhere down the road. I leased a fellow one time just West of Alexandria that had moved his mobile home on top of a P&A well bore. This well had been drilled back in the 1980's by Shell or maybe Chevron, down to about 19000 feet. Back then there were several operators drilling deep wells across central Louisiana. When oil and gas hit the skids back then these projects were shut down. I think it was Chevron that stacked the big drilling rig on the drill site location just South of Black Lake in Concordia Parish. One of my friends that was from that part of the country told me that a guard was stationed on the site with the rig for maybe 3 or 4 years. He also said that the rumor was that well had real high pressure. Don't think I would want to live on top of that.

Ouch.  Not me.  Nor would I want anyone to have to.

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