daniel raimi is a senior research associate at Resources for the Future, an independent non-profit environmental research institution in Washington.
Published September 11, 2020
The Covid-19 pandemic and ensuing recession have pounded virtually every sector of the economy, from travel to education to spectator sports. Energy is no different. In the oil and gas sector, the U.S. ascendance as the world’s largest producer hit a wall, with oil output falling by some 2 million barrels per day (from almost 13 million) since the start of the year. It is impossible to know how long this downturn in the industry’s fortunes will last. But we do know that dozens of producers are going bankrupt, shedding assets and laying off tens of thousands of workers.
In adversity there is potential — or sometimes, anyway. One approach to blunting the blow to oil and gas production could prove a win-win, putting money in the pockets of idle workers (not to mention their families and communities) while also generating considerable environmental benefits. The idea: a federal program to plug “orphaned” oil and gas wells.
What Are Orphaned Wells?
Since (self-described) “Colonel” Edwin Drake brought in the first commercial well in 1859, the U.S. oil and gas industry has drilled literally millions of wells from Appalachia to California and from south Texas to the North Slope of Alaska. For many decades, these wells were drilled without meaningful government oversight. As a result, hundreds of thousands — perhaps millions — of wells that are no longer viable lie scattered and unmapped with no one responsible for the ongoing damage many of them cause.
In the era of modern regulation, well locations are documented and logged by state, federal and tribal authorities. However, if a company goes bankrupt and is unable to sell its wells, no private party has an incentive to mind the store.
To address this concern, regulators require companies to provide a financial backstop, such as bonds to pay for the costs of plugging wells in the event the owners go under. There’s just one problem: the minimum sums set by regulators rarely cover the cost of plugging wells and remediating the surface around them. For example, Pennsylvania requires that an owner proffer $10,000 per well, or $25,000 for a “blanket” security that covers each of the company’s wells statewide. But the average cost of plugging a single well in Pennsylvania is almost $80,000. Harrisburg, we have a problem.
Pennsylvania is far from alone. Bonding levels in just about every state, and on federal property, are typically less than the sums needed to plug wells and restore sites. As a result, the number of orphaned wells in the U.S. is almost certain to grow substantially in the months ahead.
With smart policy design, federal intervention could temporarily support serious numbers of unemployed energy workers, contain some methane emissions — and create incentives to reduce the risk of more wells becoming orphaned in the years to come.
What’s So Bad About Orphan Wells?
Lots. Near their sites, they pose risks to groundwater and to air quality — and, like any abandoned hole in the ground, can injure the curious and unlucky. But arguably the most significant environmental hazard comes from the ongoing leakage of methane, a gas that is 34 times more potent than CO2 as a greenhouse gas emission over 100 years. Methane, which is odorless and colorless, is the primary component of natural gas and can waft into the air from producing wells, natural gas pipelines, orphaned wells and many other points across the natural gas system.
Because the number of orphaned wells is unknown, and because the data on methane emissions from these wells is very limited, their total contribution to climate change is highly uncertain. The EPA does, however, estimate that unplugged abandoned oil and gas wells (of which orphaned wells are a subset) emit roughly 280,000 metric tons of methane per year, equivalent to 9.5 million metric tons of CO2. That’s almost as much CO2 as all the power plants in Massachusetts pumped out as recently as 2017.
An Elegant Solution?
Citing a report authored by me, Neelesh Nerurkar (Clearview Energy Partners), and Jason Bordoff (Columbia University), former New York City Mayor Michael Bloomberg called a federal program to plug wells an “elegant solution.” That’s because along with environmental benefits, the skills needed to plug wells and restore sites would neatly mesh with the skills of oil and gas workers now languishing on the sidelines. Moreover, the specialized equipment needed to do the work is sitting idle in industry storage yards from Texas to North Dakota.
In our report, which was jointly published by Resources for the Future and the Columbia Center on Global Energy Policy, we estimate that plugging the known inventory of 57,000 orphaned wells would provide some 10,000 job-years of work at a cost between $1.4 and $2.7 billion Scaling the program to hundreds of thousands of wells would, of course, cost much more and require more time to complete but would contain proportionately greater volumes of methane.
Before we get too carried away here, though, it’s worth acknowledging one potential downside: what economists and insurance companies call “moral hazard.” To be specific, if the federal government pays to clean up the mess left behind by irresponsible companies and inadequate regulation this time around, what’s to stop a repeat the next time oil and gas prices crash?
Two fixes come to mind. First, Washington could encourage the states to prioritize plugging older wells, particularly those that were drilled prior to the era of regulation. By focusing on these wells, the government would not be covering the liabilities of today’s oil and gas operators. Second, the federal government could incentivize states to enhance their standards to prevent the cycle from repeating itself. If the federal government tied grants for well plugging to requirements that states update their regulations to reflect real plugging and remediation costs, it could reduce the risk of creating a new generation of orphans in the future.
If at First You Don’t Succeed …
It is unlikely that a near-term federal stimulus could make more than a dent in the numbers of orphaned wells scattered across the country. But the best shouldn’t be the enemy of the good. With smart policy design, federal intervention could temporarily support serious numbers of unemployed energy workers, contain some methane emissions — and create incentives to reduce the risk of more wells becoming orphaned in the years to come.
John Maynard Keynes famously (and only half-jokingly) suggested that, in times of recession, government should pay workers to dig holes and fill them back in again. Well, the holes are already dug. We have a golden opportunity to put some laid-off oil and gas workers back on a task that is to everyone’s benefit.