A Consequential Rulemaking for Colorado’s Oil and Gas Industry is Happening Right Now

The list of adverse impacts on the environment caused by drilling for oil and gas runs deep. Drilling can interrupt animal habitat. The extraction process releases methane, a greenhouse gas the Environmental Protection Agency says is 25 times more potent than carbon dioxide, into the air. The airborne pollution also contains various toxins and volatile organic compounds that contribute to smog and harm people’s health. Fluids used in hydraulic fracturing can contaminate surface water and underground sources of drinking water.

Still, the United States depends heavily on the energy generated by the oil and gas industry. In 2020, according to the U.S. Energy Information Administration, 35 percent of energy used in the nation came from petroleum, and 34 percent came from natural gas. Renewable energy sources, such as solar, wind, and hydropower, came in around 12 percent—combined. Centennial Staters rely on those fossil fuels, too, particularly natural gas. In fact, seven out of 10 Colorado households use natural gas as their primary heat source, while coal still leads the way in overall electricity generation.

That’s why regulations that try to balance society’s energy demands with environmental protections abound. One state requirement that has recently been kicking up dust in Colorado is the rule that oil and gas companies must clean up after themselves. Unfortunately, companies sometimes go bankrupt and “orphan” production sites—that is, walk away without tidying up. As of March 2021, there were 535 sites of orphaned oil and gas operations in the state, with 239 orphan wells still in need of plugging. In short, energy companies have left Coloradans—whose tax dollars ultimately could be used to fund the abatement if a new system of financial assurances fails to do so—with a real mess.

The state’s main regulatory body for the industry, the Colorado Oil and Gas Conservation Commission (COGCC), which was formed in 1951, says oil and gas companies have a well-defined check-out list. Wells must be plugged (often with cement) when operators are done extracting resources from them. Related operations, such as waste management facilities, must be cleaned up, too, along with production equipment and debris. Pits and access roads must be regraded to conform with the surrounding terrain. Land that’s been contaminated must be cleaned.

The goal is to return the land to its pre-well state, or at least get it as close as possible. While orphan wells produce less pollution than active wells, a COGCC report determined they can still release methane. “Methane is an incredibly powerful greenhouse gas,” says Kate Merlin, a climate and energy program attorney at regional environmental nonprofit WildEarth Guardians. “The climate is in crisis. We need to rapidly plug these wells.”

Colorado, like many states, has a mechanism that’s supposed to ensure operators pay for the required plugging. Critics from conservation organizations like WildEarth Guardians, Center for Western Priorities, and Conservation Colorado, however, say taxpayers may eventually be saddled with those clean-up costs because that mechanism—called financial assurances—doesn’t collect enough money.

A law passed by state Democrats in 2019 could change that. Dubbed SB-181, it called for the COGCC to review its rules, which would include a rework of its financial assurance regulations. The results of that rework, which began in early 2021, won’t go into effect until April 2022, mostly because rulemaking in the realm of state regulatory agencies is complicated. So complicated, in fact, that the COGCC has already released two drafts of the rules—the second of which is 44 pages long.

Beau Kiklis, public lands advocate for Conservation Colorado, compares financial assurances to the security deposit you put down on a rental house. If you make repairs and tidy up when you move out, you get your deposit back. If not, your property manager uses the deposit to restore the rental back to its pre-you form.

Similarly, before a company can drill a well, it must provide the COGCC with a financial assurance guaranteeing that the operator will clean up once it’s done mining resources. That guarantee frequently comes in the form of a surety bond—a contract in which a third party agrees to pay the COGCC if the well operator fails to properly plug the well and reclaim the site. If the operator sends in all the appropriate paperwork proving it completed these duties, it’s released from its financial assurance and doesn’t have to pony up.

The problem? “The bonds that oil and gas companies are required to post aren’t nearly enough to cover the costs of cleaning up after themselves if they go out of business,” says Aaron Weiss, deputy director of the Center for Western Priorities, a nonpartisan conservation and advocacy organization based in Denver.

According to the COGCC’s own calculations, it costs $92,710 on average to properly plug a well, shut down the surrounding operations, and perform reclamation—a process the industry has performed 9,902 times between 2015 and 2020, according to COGCC statistics. The current rules ask for far less: $10,000 if the well is less than 3,000 feet deep, and $20,000 if the well is 3,000 or more feet deep. Blanket bonds, wherein an operator pays a lump sum on many wells, make financial assurances even cheaper. Right now, an operator with fewer than 100 wells may pay $60,000 to cover all of them; if the operator has 100 or more wells, the price tag is $100,000.

The Orphaned Well Program, created by then Governor John Hickenlooper’s executive order in 2018, receives some funds from the oil and gas industry to plug wells left behind by bankrupt operators. But certain estimates, like this one from an independent financial think tank called Carbon Tracker, think the problem could be too big (like, $8 billion big) for the program to cover.

So will the changes presented by the COGCC so far fix the problem? It depends who you ask. After the second draft of the rules was published on October 8, neither conservation groups nor representatives of the oil and gas industry were pleased. “We still have a ways to go to avoid leading to unintended consequences,” says Dan Haley, president and chief executive officer of the Colorado Oil & Gas Association (COGA). Haley is concerned that the new requirements will be so expensive that they’ll force responsible companies to go out of business and leave even more orphan wells behind.

It’s difficult to say at this point exactly how much a company would have to pay per well. The first draft required a $78,000 bond for each individual well, but the second draft removed that figure. “We could benefit from some additional details about how [the COGCC] plans to calculate single well financial assurances,” Kiklis says, adding that it’s a topic likely to be discussed at the next hearing on November 9 and 10.

No matter what that amount is, environmentalists are frustrated to still see a blanket bonding option in the second draft. It’s more stringent than the original rules—operators with fewer than 20 wells must pay $100,000. There are also more levels in the new blanket bond structure: Operators with fewer than 50 wells would pay $500,000 under this model, all the way up to operators with fewer than 6,000 wells, who would owe $8 million. (The full list is on page 28.)

The higher cost of those blanket bonds would still leave the COGCC short if an operator goes under, according to WildEarth Guardians’ Merlin. She points to Petroshare, a Centennial-based oil company that filed for bankruptcy in 2019. Denver Business Journal reported that Petroshare left 50 orphan wells behind. Under the blanket bond model described in draft two of the financial assurance rules, Petroshare would have had to put down $1 million in financial assurances, while the average cost to plug all 50 wells is $4,635,500. (Of course, Petroshare never actually paid its bonds, but that’s another issue altogether.)

Haley of COGA also has a problem with the blanket bonds—he says they’re too high. “We’ve seen 10, 15, 20-fold increases in that blanket bonding,” Haley says. “That’s going to be a costly jump for those paying $100,000 that have to go up to $1.5 million.” Operations like Petroshare, which wasn’t part of COGA, are outliers, Haley says, and the responsible companies are being punished for the actions of a few.

But activists like Merlin worry more wells could be on the brink of joining the orphan well list. She points to the many inactive wells (wells that produce less than the equivalent of one barrel of oil per day) and low-producing wells, which totaled about 25,734 in 2020, according to state data. “The rules incentivize operators to avoid paying financial assurances on their wells by turning on the spigot, even if they’re not getting economic amounts of production,” says Merlin. “They can still save money by not having to pay to plug them.”

The picture is more complicated than that, according to Haley, who says low-producing wells can be a viable business model for smaller companies. But Kiklis says it shouldn’t just be about business. “The COGCC has a mission to protect public health and safety, and the environment,” Kiklis says. He wants to know if profit is worth the risk—a balancing act at the heart of so many debates around environmental regulations.

Get Involved: There is an upside to the lengthy bureaucratic process associated with the financial assurances rules. Coloradans have time to voice their concerns with regulators about the standards they want oil and gas companies to be held to. Page 3 of this document gives detailed instructions for submitting a comment.