Saturday, July 20, 2024

Offshore orphaned well proposal has small drilling companies crying foul

by BIZ Magazine

By Wes Muller, Louisiana Illuminator

A proposed regulation that attempts to prevent orphaned oil and gas wells in the Gulf of Mexico has prompted complaints from small drilling companies that say the rule unfairly hamstrings their ability to compete with major corporations, while environmental advocates say it’s a necessary reform to protect coastal waters. 

The Bureau of Ocean Energy Management (BOEM) recently announced proposed changes to the financial assurance requirements for offshore oil and gas infrastructure. Before companies can start drilling for fossil fuels in the Gulf of Mexico, they have to post a surety bond as a form of insurance in case the company goes bankrupt and leaves an oil or gas well unplugged or in disrepair.

An abandoned and unplugged well with no financially viable owner or former owner is known as an orphaned well. Aside from posing severe risks to the environment, they can be costly to taxpayers if the owner of the well goes bankrupt or posts an insufficient bond. 

BOEM is proposing to increase the required bonding amounts for oil and gas lessees that don’t have the investment grade credit rating most major exploration companies have. The average net worth of a lessee with an investment grade credit rating is $115 billion, according to BOEM’s analysis. 

Ken Beer, an executive with the small drilling company Cantium Oil & Gas, said this would effectively exempt all the major companies and hurt only the small independent drillers.

“What BOEM is saying is you need to be a major oil company or you have to bond,” Beer said. “It’s a slap in the face to the small business operators.”

Beer said the proposal doesn’t make sense when one looks at who owns the majority of the abandoned offshore infrastructure. Approximately “88% of the plugging and abandoning liability in federal waters is associated with wells currently or formerly owned by one of the large, financially stable ‘supermajor’ companies,” according to a recent study from researchers at LSU and University of California Davis. 

A key phrase from that statistic is “formerly owned,” according to environmental attorney Ava Ibanez Amador with Earthjustice. Many of the wells formerly owned by “supermajor” companies sold the leases to smaller companies that later went bankrupt, she said.

Earthjustice supports BOEM’s rule proposal based on the track record of offshore oil and gas companies in the Gulf of Mexico. 

“To this day, previously abandoned wells are still leaking oil and harmful gasses like methane, benzene, nitrogen oxides, and carbon dioxide into the Gulf of Mexico,” Amador said. “This is a sensible proposal that simply seeks to improve this system, by requiring offshore operators to show that they have the financial capacity to clean up after themselves before they receive the green light to set up drilling infrastructure.”

Beer and the industry trade group Gulf Energy Alliance argue that the rule would kill thousands of jobs in Louisiana. An alliance press release claims the Biden administration is trying to “shut down domestic oil and gas production.”

Healthy Gulf spokesperson Stephannie Kettle said the “job killing” narrative is a played-out claim industry always uses to oppose something they don’t like. Making sure there is money left to plug an old well after it stops producing will only ensure that workers stay on the job through the full lifecycle of the well, she said.    

“The oil and gas industry loves to threaten jobs unless we let them act with impunity,” Kettle said. “Right now, these companies’ executives cut and run, laying off thousands of workers instead of keeping them employed to use their skills to properly close wells and remove old infrastructure.”

At current rates, it will take more than 21 years to clean the Gulf of Mexico of useless platforms, Kettle said. 

Beer said there are very few examples of taxpayers being stuck with the bill to decommission an offshore oil or gas well. It has happened with onshore infrastructure but not so much in the offshore sector, he said. 

“It really is a problem that does not exist,” Beer said.

The government already has the authority to make former well owners pay to plug a well if the current owners go bankrupt. Forcing small exploration companies to purchase larger surety bonds would do nothing to help the situation and only eliminate competition for the big companies, he said.

Beer added that his current bonding cost of around $3 million would balloon to roughly $15 million if the proposal is adopted. The big oil companies would have to pay nothing, he said.   

Healthy Gulf attorney Scott Eustis feels Beer’s argument is a distraction from the goal of solving the orphaned oil well problem. 

“This is the playbook: Millionaires argue with billionaires so that nothing gets done,” Eustis said. “Look at the coast. Forty years of arguing, 400 square miles of wetlands gone [and] coastal Louisiana is out 18% of its population.”

There are 14,000 unplugged, non-producing wells in Gulf of Mexico offshore waters, inland waters and wetlands with a total estimated remediation cost of $30 billion, according to the LSU-UC Davis study.

The public comment period for BOEM’s proposal ends Monday. Interested parties can submit formal comments online through the Federal Register website.

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