COVID-19 ISO Insights

More Exposures from Abandoned Oil and Gas Wells Come Into Focus

July 13, 2020

By: David Geller, CPCU, SCLA

In recent years, the increasing number of abandoned oil and gas wells have reportedly corresponded with heightened concerns pertaining to a slew of environmental issues. We have been posting on some of these developments that have made these abandoned wells a focus for governments and environmental experts. Below is a refresher on some of our most recent updates:

Report: Financial Constraints Begin to Hit Hydraulic Fracturing Industry – July 2019

Key Takeaways:

  • Even while oil prices were dropping around 2014, an influx of capital from different bankers was reportedly poured into the oil and gas sector (nearly $176 billion) from 2015-2018, leading, in part, to a spike in volume of oil and gas wells.
  • However, the Wall Street Journal reported at the outset of 2019 that the oil production expected by different shale companies has lagged about 10% on average (and sometimes as much as 50%) from the projections that were originally suggested.
  • Additionally, the WSJ reported on an industrywide epiphany that shale wells peak with their oil and gas production at the beginning of operations, but ultimately lag behind as they age. Researchers involved with a case study on modern fracking opined that roughly 73% or more of production from these wells will occur in their first decade of existence. Additionally, the researchers believe that these wells would provide little value after 20 years. Per the article, this means that continuous investment would be needed to build out new wells that can continue to produce oil.
  • From 2010-2018, producers of oil have spent more cash than they take in from operations, per the Wall Street Journal. In 2016, when dozens of these companies went bankrupt, federal regulators reportedly tightened standards for lending to oil-and-gas companies, cutting off a key supply of capital while many of these companies were struggling to maintain profitability but still needed money to keep producing oil.

Financial Hardships Leading to Increased Oil Well Abandonment: What Does This Mean? – March 2020

Key Takeaways:

  • Piggybacking off the last bullet from our July 2019 post, this difficulty in being profitable appears to have increased the potential that oil and gas drillers go bankrupt, leading to the abandonment of their wells, a domino effect that could have a detrimental effect on the environment.
  • The plugging and remediation of wells that are no longer needed is reportedly not a cheap process. But there are financial tools in place that appear to be intended to help pay for these operations in the event that a company goes bankrupt and can’t pay. According to the LA Times, federal, state, and local laws in the U.S. require fossil fuel companies to post bonds to ensure that, when these wells will no longer be used, they will be appropriately plugged and remediated. The article notes that this is akin to a unit renter sending over a security deposit to the owner upon starting a lease—if there are no issues to take care of, then the renter may get his or her deposit back at the end of the term. If not, then the deposit could go towards repairs.
  • However, the LA Times states that the bonds posted by these companies in California proved to be “woefully inadequate” to meet the expected costs. For example, the bonds posted by California’s seven largest drillers would reportedly cover about $230 for each well that they must decommission. This doesn’t appear to put a dent into what the actual cost to plug the well would be, which per the LA Times, ranges from $40,000 to $152,000, depending on the well’s location. The LA Times also reported that this issue is not contained to just California; Utah and Colorado appear to be facing similar shortfalls as well.
  • What could the consequences of not handling these wells be? The LA Times states that, if left unremediated, oil wells can contaminate water supplies, as well as lead to fumes entering homes that are in proximity to the wells. The article provides an anecdote about a woman who lived nearby to a site that contained several abandoned wells. According to the article, in 2014, flames inexplicably shot out of wall sockets in her home. Government inspectors reportedly discovered that explosive levels of gas were leaking from a pipe servicing wells at the end of the block.
  • Perhaps an earthquake could trigger a disaster as well—our report, Verisk Perspectives, dives into a potential occurrence known as a natural-technological disaster (natech) that occurs when a natural event contributes to the release of a hazardous material (hazmat).

The Latest Update in Abandoned O&G Wells: Methane Leaks

Back in 2016, we posted on a study published in the Proceedings of the National Academy of Sciences examined possible methane emissions from abandoned oil and gas wells in Pennsylvania.

A comprehensive report from Reuters recently dove deeper into the methane risks—as well as other potential issues—that can emerge from these abandoned wells.

Methane, according to the Environmental Protection Agency (EPA), is a greenhouse gas that stays in the atmosphere for a shorter period of time than carbon dioxide, but is more efficient at trapping radiation. And according to Reuters, more than 3.2 million abandoned oil and gas wells in the U.S. alone emitted 281 kilotons of methane in 2018, the equivalent of burning 16.2 million barrels of crude oil. Reuters estimates that, despite not being able to obtain concrete data from the governments some of the world’s leading oil and gas producers (Russia, China, and Saudi Arabia), there are 29 million abandoned wells around the world, emitting about 2.5 million tons of methane annually.

While this level of methane emission could potentially have significant climate change implications, there could be adverse health effects involved as well. For example, Reuters profiled a Kentucky couple that was confronted with a noxious odor from an abandoned well in 2012. The smell reportedly made them nauseous, dizzy, and short of breath, but when the couple sought assistance from regulators, there was trouble in ascertaining who the well had once belonged to and attribute responsibility for remediation.

It turns out that the well reportedly was drilled by a company that went bankrupt in 2008, then was sold to a company that reportedly is denying responsibility for maintaining that well. Eventually, per the article, Kentucky’s Division of Oil & Gas hired a contractor to plug it. And during the repairs, it was determined that the well was leaking hydrogen sulfide and methane.

In addition to these odors, groundwater contamination resulting from these wells is also a major concern. Since the 1980s, Ohio and Texas, per Reuters, have found on average of nearly two groundwater contamination incidents per year resulting from “orphaned” wells. According to E&E News, orphaned wells are “wells that have no ties to a solvent company or responsibility, and so their cleanup falls to the state or federal government.” Another incident, per the Reuters article, included:

In 2018, the U.S. EPA was alerted to the presence of nearly 50 abandoned oil and gas wells on Navajo Nation lands within the borders of Utah and New Mexico that were bubbling water at the surface. Tests showed the [water] from some of the wells contained potentially dangerous levels of arsenic, sulfate, benzene and chloride.

From a risk perspective, it appears that, even when attempts are made to plug and remediate a well, there are significant hazards involved. According to Argonaut News, a well in Marina del Rey (in California) that was drilled in 1930, abandoned in 1956, and was recently being repaired, erupted for 15 minutes in 2018, leading to a mixture of methane gas and mud being shot over 60 feet into the air.

Reuters notes that, given a potential spike in bankruptcies that may occur in the aftermath of the financial stresses the O&G industry has experienced during the COVID-19 crisis, the hazards posed by abandoned and orphaned wells could prove to rise in tandem in the coming years.