Louisiana not keeping pace with new orphan oil and gas wells, audit finds

Oct 29, 2024 | By Greg LaRose | Louisiana Illuminator

An unprecedented amount of resources are flowing into Louisiana to help address abandoned oil and gas wells that present environmental and safety risks throughout the state. But according to a state audit, the money is nowhere near enough to get ahead of the problem, which continues to grow despite progress made in recent years. 

State officials who oversee remediation of these orphan wells say a new entity under the Louisiana Department of Energy and Natural Resources (DENR) intends to better manage the problem — and find millions of dollars more to do so.       

A Legislative Auditor’s report made public Monday indicates 976 orphaned wells were plugged in fiscal years 2020 through 2023, based on numbers from the Oilfield Site Restoration Program and the Louisiana Oilfield Restoration Association. Over that same period, nearly 1,700 new orphaned wells were reported to the DENR’s Office of Conservation.

Furthermore, the number of inactive wells — those with a high risk of becoming orphaned — increased 21.7% from August 2019 to April of this year, reaching 21,629.

The audit connected the inability of the Office of Conservation to expand its orphaned well capping program to a state law that limits its ability to collect enough funding. 

The audit report estimates it will take nearly $543 million to address the current number of orphan wells, but state law calls for oil and gas production fees to be suspended if the Oilfield site Restoration (OSR) Program fund exceeds $14 million. Additionally, the audit report notes the rate for gas production fees, which account for almost 80% of the program’s revenue, hasn’t been changed since 2004.

“The legislature may wish to consider removing the $14 million cap on the OSR Fund or increasing it based on the total estimated costs to plug orphaned wells, which would provide more adequate funding for addressing the growing orphaned well population,” the audit report said.

Another recommendation in the report suggests the Legislature consider increasing the production fee for gas wells or making the fee variable based on market prices, similar to the method the state uses to calculate oil production fees.

DENR Secretary Tyler Gray and Office of Conservation Commissioner Benjamin Bienvenu issued a joint response to the Legislative Auditor’s report. In response to multiple findings and suggestions, they referenced the Natural Resources Trust Authority, a subdivision of the department created through a legislative act earlier this year. It’s mission is to better manage the proper plugging and abandonment of oil and gas wells and to help other secure the funding needed for that work.

An executive committee for the Trust Authority was appointed earlier this month, and the Department of Energy and Natural Resources is currently interviewing candidates for its executive director, according to DENR’s response to the audit report. State lawmakers will have to agree to fund the authority next year.  

In summary, the Trust Authority is expected to better track and manage inactive wells while collaborating with other fiscal authorities — including the state Bond Commission and Mineral and Energy Board — to obtain a reliable funding stream to cap orphan wells, Gray and Bienvenu wrote.

Second audit questions industry-backed insurance

In a separate report, the Legislative Auditor evaluated how well the Office of Conservation monitors an industry-driven effort to address orphan wells. The Louisiana Oilfield Restoration Association (LORA) was created in September 2019 to help drillers meet state financial security requirements — or, put another way, the insurance —  to plug wells if they are abandoned. LORA also collects fees from well operators to supplement the Oilfield Site Restoration Program.

Among the audit findings was that the Office of Conservation “does not conduct sufficient monitoring to ensure that LORA remains financially solvent …” LORA isn’t subject to federal or state regulations for financial institutions, so its operations and solvency aren’t tracked as closely as those of government-regulated banks.

The Office of Conservation allowed LORA to increase the percentage of fees its collects for administrative purposes from 20% to 36% once it meets a minimum $5 million reserve balance. 

Because the state office doesn’t keep tabs on LORA’s administrative spending, officials don’t know if the for-profit association expenses are reasonable, auditors said.  

“As a result, LORA retained $1.1 million from June 2022 through December 2023 that could have been used to plug orphaned wells,” according to the report.   

Over the same period, auditors also noted LORA paid more than $4 million in management fees — or more than 30% of operator fees paid to the association — to Arkus, a Baton Rouge company that shares the same address and chief executive as LORA.

Exactly what those payments covered is unclear, auditors said. The Office of Conservation has never asked LORA for detailed information on what administrative duties it’s paying Arkrus to perform or the company’s profits and salaries, the report said. As a result, the state doesn’t know if the wage increases were merited for expanded individual job duties or working longer hours.

In its response, the Department of Natural Resources and Office of Conservation agreed with auditors’ recommendations to better monitor LORA’s administrative spending.