A lawsuit filed in the U.S. state of Colorado hopes to hold an oil and gas company accountable for allegedly transferring ageing oil and gas wells to a separate entity that was designed to go bankrupt, leaving the public saddled with the clean-up costs. Those manoeuvres, the lawsuit states, amounts to a “massive fraud that is, to this day, endangering Coloradans.”
In February, the environmental law charity ClientEarth filed a class action complaint on behalf of a group of landowners in Colorado against HRM Resources. The lawsuit seeks to hold the company accountable for “unlawfully” abandoning 200 wells.
At issue is the seemingly common practice by oil and gas producers of handing off ageing wells to successively smaller entities, until ultimately those wells are abandoned and not cleaned up.
The majority of the 200 wells in question were originally transferred from Noble Energy (since acquired by Chevron) to a Denver-based company called HRM Resources.
HRM operated and profited from those wells for a period of time, before transferring them to another company called Painted Pegasus in September 2018. The problem was that Painted Pegasus filed for bankruptcy and liquidated a few years later, and the liabilities associated with cleaning up those wells were left with no owner. The state of Colorado was ultimately forced to pick up the tab — those 200 wells ended up in Colorado’s Orphaned Well Program.
ClientEarth alleges that this was all by design. “The demise of Painted Pegasus was inevitable; in fact, Painted Pegasus’ failure was the plan,” the complaint states.
The lawsuit states that HRM Resources “fraudulently transferred” those wells into a company destined to fail.
“It means that the transfer was made with an intent to defraud,” Camille Sippel, a staff attorney at ClientEarth, told Gas Outlook in an interview. “Fraudulent transfer,” she said, is a novel legal theory, one that could be replicated in many other parts of the country that are dealing with the same problems and similar industry practices surrounding the enormous crisis of orphaned oil and gas wells.
“In this context, the transfer was made with the intent to avoid the liabilities on purpose,” Sippel added.
There are an estimated 3.7 million abandoned oil and gas wells in the United States, and 58 percent of that total are “unplugged,” or not properly decommissioned. Unplugged wells leak methane and other toxic air pollutants such as benzene.
They are also a big source of climate pollution. In 2021, abandoned oil and gas wells leaked an estimated 295,000 tonnes of methane, equivalent to the annual emissions of 1.8 million cars, according to the U.S. Environmental Protection Agency.
The problem has grown so large because states do not impose adequate financial requirements on oil and gas companies when they want to drill a new well. At the state level, companies are typically required to post a bond, a sum that is set aside to clean up the well when its life is over. But the bonding requirements are so small, often as little as 1 or 2 percent of the total cost of clean-up.
“Our system is designed to incentivize indefinite delay of plugging oil and gas wells because the bonding is so pitifully low, that it incentivizes the oil and gas owner or producer to just walk away or transfer the wells to another company,” Ted Boettner, a senior researcher at the Ohio River Valley Institute, a Pennsylvania-based think tank, told Gas Outlook.
Plugging an old well can cost upwards of $100,000 apiece. Boettner said it tends to be vastly cheaper for the company to pay a fine for not plugging the well than to actually do proper cleanup.
There are more than 2 million unplugged oil and gas wells that will need to be cleaned up, and the current production boom and windfall profits for industry giants have obscured the bill’s imminent arrival. More than 90% of the country’s unplugged wells either produce little oil and gas or are already dormant.
By law, companies are responsible for plugging and cleaning up wells. Oil drillers set aside funds called bonds, similar to the security deposit on a rental property, that are refunded once they decommission their wells or, if they walk away without doing that work, are taken by the government to cover the cost.
But an analysis by ProPublica and Capital & Main has found that the money set aside for this cleanup work in the 15 states accounting for nearly all the nation’s oil and gas production covers less than 2% of the projected cost. That shortfall puts taxpayers at risk of picking up the rest of the massive tab to avoid the environmental, economic and public health consequences of aging oil fields.
The estimated cost to plug and remediate those wells if cleanup is left to the government is $151.3 billion, according to the states’ own data. But the actual price tag will almost certainly be higher — perhaps tens of billions of dollars more — because some states don’t fully account for the cost of cleaning up pollution. In addition, regulators have yet to locate many wells whose owners have already walked away without plugging them, known as orphan wells, which states predict will number at least in the hundreds of thousands.
We have the same problem in Alberta. A pretty simple game, with big payback. It should be a criminal offense.