More abandoned oil and gas wells likely in Colorado — but how many?

At some point in the next few weeks, PetroShare Corp., an Englewood-based oil and gas producer that has operated in Colorado since its founding in 2012, will legally cease to exist. Under a bankruptcy plan approved in May, its assets, which include 80 producing or shut-in wells scattered across Weld, Adams and Arapahoe counties, will be liquidated, and its chief creditor will decide which of them it wants to acquire under a newly-formed company with a clean financial slate.

The rest — an as-yet-undetermined number of oil and gas wells, storage facilities, equipment and other assets — will be abandoned, and become the permanent responsibility of the state of Colorado.

No matter what condition they’re in, they’ll be added to the ranks of the many “orphaned” wells managed by the Colorado Oil and Gas Conservation Commission, the agency that regulates drilling and production across the state. The state will be on the hook for any cleanup costs; eventually, the wells could be “plugged” and their sites reclaimed, drastically reducing the potential for any safety or environmental hazards — but only if the state has the budget for it.

According to the latest annual tally by the COGCC’s Orphaned Wells Program, released on July 1, Colorado has at least 215 orphaned wells and 454 associated sites, which can include well pads, storage tanks, flowline locations and other facilities. Some of the sites listed date to the earliest days of Colorado oil drilling, around the turn of the 20th century, and have been inactive for decades, the identities of their operators lost to history. Others were drilled far more recently, and left to the state as a result of chronic violations or bankruptcies, like PetroShare’s, typically involving smaller, lesser-known producers on the margins of Colorado’s decade-long oil and gas boom.

Amid pressure from environmental activists, state officials have prioritized the cleanup of these abandoned sites in recent years, expanding the Orphaned Wells Program to include more staff and a bigger remediation budget following an executive order signed by former Gov. John Hickenlooper in 2018. 

The coronavirus pandemic, however, has left the oil and gas sector reeling, causing Colorado producers to slash budgets and bringing their long-standing financial woes to a head. As activists, regulators and industry groups wrangle over how to respond to an unprecedented crisis, nearly everyone agrees that the number of orphaned wells in Colorado is set to rise in the coming months and years. But while environmental groups fear a coming “flood,” COGCC officials maintain that they expect a more manageable trickle.

“Regardless of the economic conditions,” agency leadership wrote in a memo on May 11, “the COGCC is poised to continue its responsible regulation of the oil and gas industry in Colorado in a manner that protects public health, safety, and welfare, the environment and wildlife resources.”

Environmental activists, who’ve lobbied the commission to strengthen its rules for years, aren’t convinced. Amid the economic turmoil caused by the pandemic, at least four Colorado-based oil and gas producers have filed for Chapter 11 bankruptcy protection in 2020, including Extraction Oil & Gas and Whiting Petroleum, respectively the state’s third and tenth largest producers of oil by volume in 2019.

“The price of oil crashed internationally and global consumption of oil has plummeted as a result of the COVID-19 public health crisis,” wrote advocates with Conservation Colorado in testimony submitted to the agency in May. “The combination of these two events could cause a dramatic increase in orphan wells and sites.”

Like many other oil and gas companies, PetroShare’s struggles predate the spread of COVID-19, and while it filed for bankruptcy in September 2019, the outcome of its liquidation in the coming weeks could be an early sign of what may be on the horizon for the COGCC’s orphaned well efforts.

PetroShare’s largest creditor was Dallas-based Providence Energy, which lent the Englewood operator $25 million through a subsidiary in 2018. Under the terms of a stipulated agreement negotiated by Providence, the COGCC and the office of Colorado Attorney General Phil Weiser, Providence was given 90 days to decide which of PetroShare’s assets it wants to claim — and which of them it considers not worth the trouble. The COGCC has identified spills and other alleged regulatory violations at over 25 wells and other facilities operated by PetroShare, according to the bankruptcy plan.

“So, basically, they can make the decision not to take all the bad wells, or the wells that have enforcement issues, and just take the clear wells,” said former COGCC commissioner Howard Boigon, a Denver attorney specializing in natural-resources law, during a June 10 enforcement hearing.

Abandoned wells can pose safety and environmental risks like methane leaks and soil and groundwater contamination, if not properly maintained. Plugging wells with cement, removing their equipment and reclaiming the surrounding site can virtually eliminate those risks, but that can be an expensive process; a frequently cited figure estimates the average price tag for plugging and fully remediating a site at roughly $80,000 per well.

Operators are required to provide financial assurance to the COGCC to help cover cleanup costs in the event that they abandon their wells, but environmental activists have long criticized these bonds as woefully inadequate. Inactive wells can be bonded for as little as $10,000 each, while operators with up to 100 active wells can provide a statewide “blanket” bond of just $60,000. Senate Bill 19-181, the sweeping package of oil and gas reforms passed in 2019, directed the COGCC to enact rules requiring increased bonding amounts, but the commission isn’t expected to implement such rules until later this year.

Under current financial assurance requirements, the COGCC secured a total of $325,000 in bonding from PetroShare, according to bankruptcy documents. While COGCC officials note that plugging and remediation costs can vary widely between sites, that figure suggests that if more than a handful of wells are orphaned as a result of the company’s liquidation, cleanup costs could exceed the financial assurance PetroShare provided in order to operate in the state.

“At this time it is not possible to estimate what potential cost there may be to the state for any well that PetroShare may abandon,” said COGCC spokeswoman Megan Castle. “We understand that Providence is still conducting its due diligence and that we won’t know exactly how many wells it plans to acquire until later this year.”

Mike Allen, Providence Energy’s CEO, declined to specify how many of PetroShare’s wells his company plans to assume ownership of, but said in an email: “This has been a very difficult process, but we are pleased to start the transition and make a difference in the community.”

COGCC officials remain confident that the energy sector’s financial struggles won’t end up overwhelming the capacity of the Orphaned Well Program, or any of its other inspection or enforcement efforts. During a special hearing convened on May 11 to discuss the agency’s “readiness to address recent developments in the oil and gas industry,” director Julie Murphy told commissioners that concerns about a surge in orphaned wells had been voiced during past downturns, but those fears hadn’t been realized.

“At the end of the day, even after 2014 and 2015, there was not a huge onslaught of orphaned wells or bankruptcies, which many people were worried was going to happen at that point in time as well,” Murphy said.

But some analysts say that the financial reckoning that the fossil-fuel industry is facing as a result of the pandemic — driven in large part by its massive debt loads, as well as increasing global pressure to transition to clean energy — will be far more disruptive than anything it has dealt with before.

“You’re going to wind up seeing more and more of this kind of thing, where orphaned wells, and cleaning up after the oil and gas party, is going to be driving a lot of financial decisions in the industry, and forcing the hands of regulators in various ways,” said Clark Williams-Derry, an analyst with the Institute for Energy Economics and Financial Analysis who studies the oil and gas industry.

Industry representatives reject such claims. In comments submitted to the COGCC ahead of its May 11 special hearing, a coalition of trade groups, including the Colorado Oil and Gas Association and the American Petroleum Institute, called many of the concerns about orphaned wells “embellished or unwarranted.”

“If related mitigation is the priority of the state and of this commission … the resources are available, and we as an industry wholeheartedly support these efforts,” the groups wrote.

The COGCC — which, pursuant to SB-181, underwent a transition to a “professionalized” five-member commission as of July 1 — is scheduled to draft and adopt a new set of financial-assurance rules later this year. Environmental activists are sure to pressure the commission to adopt much higher bonding requirements; one prominent anti-fracking group, Colorado Rising, planned to gather signatures to put a stricter bonding measure on Colorado’s 2020 ballot before dropping the effort due to the pandemic.

Williams-Derry notes that increased bonding could also have the effect of exacerbating the industry’s financial troubles.

“If they say, ‘OK, now’s the time when you really have to ante up, you have to put up money to keep drilling’ — in a market downturn, regulators are afraid to do that, because if they do, they could push companies bankrupt and wind up with a worse problem on their hands in the short term,” he said.

It’s unlikely that the annual orphaned wells report released on July 1 reflects any substantial impact from the COVID-19 crisis. As PetroShare’s case shows, bankruptcy proceedings can take months, if not years, and the economic fallout may have only just begun. Erin Overturf, an environmental attorney who served on the COGCC’s volunteer commission before its dissolution last week, suggested during the May 11 hearing that it could be a while before a possible “surge” in orphaned wells becomes reality.

“I don’t think it’s imminent,” Overturf said. “But if it does occur that we see a lot of operators having real troubles with these challenging financial times, it certainly could emerge as an even larger issue in the coming year or two.”