By John McFerrin

The problem

Orphaned gas wells are everywhere. There are about 6,500 gas wells in West Virginia that are no longer producing and need to be plugged. West Virginia currently has a program to plug these wells and a stream (or a trickle) of money to pay for it. The difficulty is that West Virginia’s program is only big enough to plug a couple of handfuls of wells each year. At a rate of a couple of handfuls per year, it will take a long time to get to 6,500.

The Bipartisan Infrastructure Investments and Jobs Act, passed by Congress in late 2021, gives West Virginia a boost toward solving this problem. It provides money to plug these old wells.

None of the state efforts, even with the support of federal grants, would be enough to solve the problem of old wells. This is particularly true if we continue to allow wells to be drilled for which no one is able or willing to be responsible. To get out of the hole we are in, we must first stop digging.

A part of the solution

In 2021 the legislature considered the Orphan Oil and Gas Well Prevention Act of 2022; it will almost certainly consider similar legislation this year.  

West Virginia already has thousands of oil and gas wells that are no longer producing and need to be plugged. Many of the abandoned wells are leaking methane, a greenhouse gas, as well as other toxic materials. There are additional dangers when the abandoned wells are close to a well where hydraulic fracturing [fracking] is going on. The fracking can push oil or salty water up unplugged wells.

While the Orphan Oil and Gas Well Prevention Act would not plug those wells that are already abandoned, it would prevent any more wells from being abandoned. If these thousands of orphan wells are a hole what West Virginia finds itself in, the Orphan Oil and Gas Well Prevention Act is an attempt to stop digging.

The Act approaches the problem through requiring that operators set aside the money to plug the well as the well is being drilled. As part of the application for a permit to drill a new well, the operator must establish an escrow account with the West Virginia Treasurer. As the drilling continues, the operator is required to pay into the account in an amount determined by the West Virginia Department of Oil and Gas. The Department of Oil and Gas sets the rate at which operators must pay into the account, considering such things as the cost of plugging the well, estimates of inflation in plugging costs, and production of the well. When the Department of Oil and Gas determines that the well has been plugged, it can return the money in the escrow account to the operator.

The process is straightforward for new wells. The Act also accounts for other phases in the life of an oil or gas well.

While the gushers we see in movies occur only at oil wells and in the movies, it is true that production is usually strongest early in a well’s life. It diminishes over time until it stops altogether or becomes so low that it is not profitable. The Act addresses wells at various stages of their lives.

As wells proceed through the stages, they are often transferred from one operator to another. The Act addresses this. It requires that the company which transferred the well keep the responsibility for plugging the well until the company which bought the well establishes an escrow account to pay for future plugging. The Act also address wells that are a problem at the time of transfer. If a well is causing air, surface, or water pollution the previous owner must plug it if the new owner does not.

Gas wells routinely reach a stage in which they no longer produce gas in what the Act calls paying quantities. Even without considering the cost of drilling the well, some wells produce so little gas that its value is less than the cost to produce it. The Act requires that any operator who has a well that produces gas in paying quantities pay into an escrow account to pay for its plugging. 

The Act also addresses the question of what to do when a newer well drains gas from an area where there are already existing gas wells. This would typically occur when a hydraulic fracturing well is proposed to be drilled in an area where there are already conventional wells. In such a situation, the Act requires that the operator of the new well plug the existing wells.

Isn’t this just another form of bonding?

            Establishing an escrow account for future plugging with the West Virginia Treasurer sounds similar to requiring that the operator post a performance bond to assure plugging. This is the model the coal mining industry uses. While the mining industry bonds have their problems, that is one model.

            The bonding model only works if there are insurance companies who are willing to insure the risk of a mine being unreclaimed. Typically, mining companies pay insurance companies to post the bond. If the mine is unreclaimed and the bond is forfeited, the insurance company pays.

            In the oil and gas business, insurance companies are reluctant to post bonds.  Because of this reluctance, bonds to assure plugging are not a good solution. Requiring an escrow account is an alternative.