Oil Industry Downturn Leaves States With Massive Well Cleanup Costs

The worst oil bust since the 1980s is putting Texas and other oil producing states on the hook for thousands of newly abandoned drilling sites at a time when they have little money to plug wells and seal off environmental hazards.

As U.S. rig counts plunge to historic lows, and with at least 60 oil producers declaring bankruptcy since 2014, energy-producing states are confronting both holes in their budgets and potentially leaking ones in the ground. In Texas alone, the roughly $165 million price tag of plugging nearly 10,000 abandoned wells is double the entire budget of the agency that regulates the industry.

The problem is forcing states to get creative: Texas regulators now want taxpayers to cover more of the clean-up, supplementing industry payments. Wyoming and Louisiana are riling drillers with steeper fees. Oklahoma is reshuffling money among agencies in the face of a $1.1 billion state budget shortfall, while regulators also grapple with earthquakes linked to oil and gas activities.

“As downtown turns go, this one happened faster and accelerated. It moved downward faster than the big downturn we had in the `80s,” said John Graves, a Houston oil consultant. “For some people in our industry, it’s been more intense.” Crude prices that peaked above $100 a barrel in 2014 plunged by 60 percent in just six months.

But these responses – if they even wind up working – are still years from meeting the growing backlog of untended wells. Texas officials predict the number of orphaned wells could soar to 12,000, which would be nearly 25 percent more than what regulators can’t keep up with now. Landowners, meanwhile, are growing restless with abandoned pump jacks and damage while drillers warn that crackdowns would only put them out of business faster at a time when oil has finally crept from below $30 a barrel to about $50.

“It’s the magnitude because this bust is so deep. In Wyoming they had a single operator walk away, and instead of it being 5, 10, 20 wells, it was 150,” said Bruce Baizel, who monitors oil and gas regulators for the environmental group Earthworks. “It’s not the small, marginal operators. You’re starting to get into some medium-sized independents walking away from things.”

Orphaned wells are potential environmental hazards below ground as well as rusted-out eyesores above. A 2011 report by the multistate Ground Water Protection Council found at least 30 cases of groundwater contamination in Texas caused by orphan wells between 1993 and 2008.

In the Bigfoot Field south of San Antonio, tall stalks of weedy thistle surround dormant wellheads, some stained with crude or leaking fluids. State regulators place a higher priority on bigger hazards.

The problem is not new. Energy-rich state had thousands of orphaned wells on the books for decades, particularly in Texas, where the backlog exceeded 25,000 in the early 2000s before landowners pressured lawmakers to light a fire under state regulators. Landowners are getting antsy again, as the state’s Republican comptroller, Glenn Hegar, has predicted that a third of oil producers in Texas will go bankrupt this summer.

“These landowners are chained to a corpse,” said Trey Scott, a managing partner of Trinity Mineral Management, which represents landowners who own thousands of acres in the Texas oil patch. With the state facing an average cost of $17,000 per well, Scott said, “If you have those wells, your chances of getting them plugged are slim to none.”

Such expenses are normally covered by fees paid by producers, a reliance that Texas regulators say is no longer sufficient as they appeal for more taxpayer funding. Texas hasn’t raised the price of required bonds on drillers since 1991, which are as low as $25,000 for smaller operators. Last year, Texas collected $4 million from drillers who abandoned more than 1,500 wells – about a fifth of the cost of plugging all of them. Texas lawmakers won’t decide whether to give regulators more money until 2017, while a critical report by the state’s Sunset Commission in April urged finally hiking bonding rates “to protect both the environment and public safety.”

Last winter, Louisiana started requiring producers to put up a new bond of $7 for every foot drilled in an attempt to deal with the state’s roughly 3,000 abandoned wells. After drillers revolted, however, Louisiana’s Office of Conservation in April suspended the new bonding until August.

“The state’s broke and they’re trying to raise funds however they can,” said Dempsey Oil Company owner Jimmy Dempsey, an operator in northwest Louisiana. “It doesn’t take a genius to fill a well with concrete.”

In Oklahoma, budget cuts to the Oklahoma Corporation Commission have led to fewer well-plugging contracts. Nearly $400,000 in emergency funding that Oklahoma Gov. Mary Fallin sought for the agency this year was used instead for technology upgrades and earthquake monitoring.

“We’re not going to have that same luxury next year,” Oklahoma Corporation Commission’s Director of Finance Cleve Pierce said of the state’s well-plugging dollars.

(Associated Press writer Sean Murphy in Oklahoma City contributed to this report.)