HOW SOME OILFIELD OPERATORS AVOID THEIR DUTY TO PLUG WELLS AND CLEANUP SITES
In my last article, I explained the special problem that Louisiana has with abandoned oilfield sites, and how state agencies do not ensure that departing operators fulfill their duty to plug wells and cleanup sites. In this article, I will explain another way that certain operators disrupt the ownership rights of landowners.
Although the law requires operators who leave an oilfield site to plug wells and cleanup the site, a few operators try to avoid this responsibility by misusing a certain law called the “future utility” law. By law, when a well ceases production, an operator must quickly plug the well. “Plugging” a well is different than “capping” a well. A “cap” is a short-term fix that does not properly close a well. Instead, a “cap” is a temporary solution involving the placement of a cover on a well. On the other hand, the proper way to close a well is to “plug” the well. “Plugging” involves filling the wellbore with cement so that oil and gas contamination from deep underground does not travel up the wellbore into the drinking water or onto the surface.
Plugging can cost $10,000 or more, and if there is any contamination associated with the site, then an operator may try to avoid plugging the well entirely in order to “kick the can down the road” and push off the plugging/cleanup duty indefinitely. This is a red flag for landowners, who may discover that an oilfield on their property appears to be abandoned by the operator, and where there is no production, no royalties, a “capped” well that is not yet plugged, and, sometimes, indications of contamination or leftover equipment lying around.
Such a departure is generally not allowed by law. But there is a quirk to Louisiana’s law that can allow some operators to try to get around their duty to plug wells and clean up oilfield sites. That is the “future utility” law. Under this law, an operator whose wells run dry, and who otherwise would have to plug a well, can notify DNR that its wells are “future utility” wells. By doing so, the operator is telling DNR that it thinks its wells may have “future utility,” meaning that the wells may someday become viable producers again. This allows the operator to put a cheap “cap” on the well instead of properly plugging it. It also allows them to avoid pause their full “plug and abandonment” (“P&A”) duties, which can include cleanup and removal of old oilfield equipment. Unfortunately for landowners, this means that, in practice, an operator can depart a site and leave wells unplugged, leave old equipment lying around, and push off cleanup for years or decades.
Decades? Yes. The Louisiana Legislative Auditor studied this problem and found that DNR “does not have sufficient regulations regarding inactive wells with future utility.” The Auditor specifically noted that operators may be “hiding” inactive wells in future utility status “to avoid plugging the well.” As it stands there are over 1,500 wells that have sat in this status for over 25 years, and over 400 for over 50 years. Over 7,000 wells are currently listed as “future utility” that have had that status for over five years. Yet the figure is probably much higher because, as the Auditor noted, DNR “does not effectively monitor oil and gas wells to ensure that inactive wells that are no longer producing are identified.” DNR rules “do not specify how long a well can remain in future utility status.”
DNR does not appear to perform any meaningful scrutiny of an operator’s claim that a well can be utilized in the future. This makes Louisiana an outlier. In other states, if an operator departs a site and wants to leave a well unplugged, his equivalent “future utility” designation is not simply taken at face value like it is by Louisiana’s DNR. Instead, operators in some states must periodically present a plan to state regulators as to how they are going to put the well back into production. If those states’ regulators don’t buy the operator’s plan, they will order the well plugged. Contrast this with Louisiana, where some operators simply announce to DNR that their well is “future utility” and depart the site with the comfort that they will not be called to task for decades. The law may appear to limit “future utility” status, but the DNR’s Office of Conservation Administrator has unfettered discretion to allow “future utility” status for a well to continue indefinitely. And unlike other states, DNR also does not appear willing to add meaningful financial security for “future utility” wells. In Colorado, for example, if a company wants to label a well as “future utility,” it is required to put down and additional $10,000 to $20,000 per well in financial security.
If you have a “future utility” well on your property and want to learn more about your rights in getting your site properly managed, you should reach out to a Louisiana lawyer with your questions.
RECENT CHANGES IN LOUISIANA OIL AND GAS LAW AFFECT LOUISIANA LANDOWNER RIGHTS
RECENT CHANGES IN LOUISIANA OIL AND GAS LAW AFFECT LOUISIANA LANDOWNER RIGHTS
Louisiana’s oil and gas laws and regulations are in constant change. These changes directly affect Louisiana landowners who have leased their property to oil and gas companies, or who do not own the mineral rights on their property. The following is a general summary and critique of these changes. In short, the state has identified massive problems with operators walking away from their duties to Louisiana landowners, but the state Legislature and state DNR have not mustered the political courage to meaningfully address this problem.
SECTION TITLE: The 2014 Louisiana Legislative Auditor report criticized the state’s handling of abandoned oilfield sites.
On May 28, 2014, the Louisiana Legislative Auditor issued a Performance Audit that detailed the many ways in which DNR’s Office of Conservation (“OC”) has failed to ensure that oil and gas companies fulfill their duty to plug wells and clean up sites. After cataloguing the problems with DNR’s oversight, the Auditor issued 21 recommendations needed to address the problems. Based on data obtained by the Louisiana Legislative Auditor, the number of abandoned sites continues to grow at a rate beyond what the state is able to keep up with in terms of proper closure.[1] The growing problem was highlighted in the Louisiana Legislative Auditor’s Performance Audit titled Regulation of Oil and Gas Wells and Management of Orphaned Wells: Office of Conservation – Department of Natural Resources (the “Report”) (May 28, 2014).
SECTION TITLE: The DNR’s May 2015 Rule Change did not address the state’s abandoned oilfields problem.
In response to the 2014 Louisiana Legislative Auditor report, which strongly criticized the state’s management of abandoned oilfields, DNR moved to ostensibly address the problem. DNR stated in its Notice of Intent that the amendment “is made to implement recommendations of the Legislative Auditor in the performance audit issued May 28, 2014.”[2] Although it is DNR’s own stated intention to implement the Auditor’s recommendations, the rules did not address the vast majority of the recommendations. Only four of the twenty-one recommendations were addressed. Further, the DNR’s statement that this rule change would remove “any exemptions” from financial security is in contrast to the actual rule change. The actual rule change enshrined into law an exemption for up to 75% of all wells. That would be a massive exemption for over 40,000 wells, and this is inconsistent with the DNR’s stated purpose to remove exemptions.
Next, DNR stated that it’s rule change would increase financial security “to be consistent with actual plug and abandonment costs.” This is another contrast with the actual rule change because the amounts created by DNR: (1) do not rise to the suggested amount by the auditor, (2) allow for “blanket” financial security that waters down the already low amount, and (3) fail entirely to account for actual site cleanup, remediation, and restoration.
In short, not only did the actual rule change fail to make a meaningful advance to address the problems highlighted by the Auditor, but even worse, in certain areas the rule change actually worsened the problems. As a result, the problem of existing abandoned oilfield sites was not meaningfully addressed, and the stage was set for an increase in the number of abandoned oilfield sites, which indeed took place.
SECTION TITLE: The 2015 Legislative Session’s Abandoned Oilfields bills
In the 2015 legislative session, efforts by Sen. Allain (SB 41) and Rep. Montoucet (HB 785) attempted to pass legislation to proactively address the recommendations of the Louisiana Legislative Auditor. These two bills would partially address three of the Legislative Auditor’s recommendations. But these bills did not make it out of committee. A “resolution” was issued instead (Senate Committee Resolution 89). This resolution created a Task Force to report on the problem of “orphaned” wells. The Task Force later issued a report (the 2016 SCR 89 Task Force Report).
SECTION TITLE: The 2016 SCR 89 Task Force report resulted in no meaningful change to Louisiana’s abandoned oilfields problem.
On January 29, 2016, the SCR 89 Task Force issued a Report on Oil and Gas Wells and Management of Orphaned Wells. The Report noted that three of the Louisiana Legislative Auditor’s recommendations are directed to the legislature, not through a rule-making with the agency. However, the Legislature has not taken strong action to address the linger problem of abandoned oilfields.
SECTION TITLE: The 2016 DNR “emergency rule” made the Louisiana abandoned oilfields problem worse.
The new DNR Commissioner of Conservation significantly weakened protections against abandoned oilfields in several ways.
For standard shallow land wells, DNR had previously required $1/foot in financial security. The Auditor found that actual costs to plug were $7/foot, and recommended an increase. DNR then changed the requirement to $7/foot. But in April 2016, the new Commissioner by Emergency Rule reduced this to $2/foot. (Act 634 of 2016 later enshrined this artificially low amount of $2/foot into law). DNR previously agreed to the Auditor’s recommendation, before the new Commissioner changed course and reduced the amount from $7 to $2/foot.
The April 2016 Emergency Rule also retains the artificially low financial security amount of $8/foot in coastal areas. The Auditor declared that the actual cost to plug these wells is $18/foot. Once again, DNR had previously agreed to the Auditor’s recommendation to tie financial security to the actual plugging amount. But in this instance both the previous Commissioner and the current Commissioner rules create artificially low financial security amounts.
The April 2016 Emergency Rule watered down the “blanket security” amounts for land-based wells by half. Blanket financial security was heavily criticized by the Auditor. The Auditor found that “blanket financial securities are also insufficient to plug all orphaned wells and create an even larger discrepancy between the financial security per well and the cost to plug the well.” Blanket securities allow the operator to water down financial security by, under the Auditor’s example, 75% in some cases. But rather than eliminate the blanket security option, and rather than improve the amounts to require adequate security, the new Commissioner instead reduced the blanket security. As noted, by the Auditor, “Not having sufficient financial security to cover the cost to plug wells may provide an incentive for operators to orphan wells instead of plugging the well.”
Lastly, the April 2016 Emergency Rule revived the “good operator” exception that had been so heavily criticized by the Auditor, a criticism that DNR had ostensibly agreed with. DNR’s actions did not match its stated agreement. This exemption allows so-called “good operators” to avoid financial security requirements. In fact, the Auditor already noted that when this exemption was previously in place, that 55% of the wells that were eventually orphaned were exempt. That is, “good operators” were orphaning their wells, so the Auditor suggested in not having such exemptions.
SECTION TITLE: The 2016 Legislature’s Act 634 made the Louisiana abandoned oilfields problem worse.
In 2016, the Louisiana Legislature passed a law that made things worse for landowners by removing protections that would otherwise ensure that their lands are properly managed by oilfield operators. Act 634 of the 2016 Legislature created a Revised Statute (La. R.S. 30:4.3) which did the following:
The Louisiana Legislative Auditor’s report should have served as a call to action motivating strong oversight of a failed effort to address the growing problem of abandoned oilfields. The DNR did not put forth a meaningful effort to address the problem. The legislature is in a position to force through solutions to the problem. However, for the most part this legislature is stepping in not to address the abandoned oilfields problem, but to weaken the laws that protect Louisiana landowners from abandoned oilfields on their property.
There are several ways that the new law, Act 634, worsens the problems for Louisiana landowners.
1. Act 634 weakened protections against abandonment of oilfields by creating exemptions, contrary to the Auditor’s recommendations.
The Auditor concluded that “Requiring that operators provide financial security on all wells would help ensure that the state has funds to plug the well in the event that the operator abandons the well.” The Auditor noted that in ALL states it reviewed, each state required financial security on ALL wells: Texas, North Dakota, California, Alaska, Oklahoma, New Mexico, Pennsylvania, Wyoming, and Colorado. Act 634 weakened the already weak rules such that even fewer wells in Louisiana would have financial security.
Exemptions make things worse. As noted by the Auditor, “Of the 716 wells that have ultimately been orphaned since financial security became a requirement, 397 (55%) were exempt from financial security.” There is no good reason that wells should be exempt from financial security. Financial security obligations are not a punishment that are punitively applied to bad operators; they are simply an assurance to the state and especially the landowners on whose property they have been invited to operate. So the focus on whether an operator is “good” or “bad” is the wrong focus. The Auditor concluded that as a matter of responsible state policy that Louisiana ought to fall in line with all the other states reviewed. Act 634 took this in the wrong direction.
The Auditor even noted that protecting the most financially irresponsible operators is not a good reason to give exemptions: “if operators cannot afford to pay financial security, then they likely will not be able to pay to plug the well and perhaps should not receive a permit to operate a well as they are demonstrating that they cannot afford to comply with the established regulations.”
DNR even agreed to the Auditor’s recommendations to require ALL operators to have financial security on wells. The Auditor made it clear, and DNR gave at least a stated acceptance of the Auditor’s recommendation. So there is no good reason to give exemptions to the rule, particularly because most orphaned wells were already found to have been exempt.
2. Act 634’s reductions in the amount of financial security worsened the abandoned oilfields problem.
The Auditor found that DNR’s previous financial security amounts were woefully low. In fact, as noted by the Auditor, the amounts do not even cover the site restoration and remediation obligations, as they are supposed to have been designed to cover. Even hypothetically accepting that all of those restoration/remediation/cleanup costs on every well in the state would be $0, the well-plugging amounts are regardless entirely inadequate. Where DNR had set the shallow land well rate at $1/foot, the Auditor found that the actual cost to plug was $7/foot. The DNR recently changed the rule to $7/foot, but then by Emergency Rule in April 2016 reduced this to $2/foot. This demonstrates again that DNR cannot be counted on to set financial security amounts in line with actual costs. Act 634 kept this amount at the artificially low $2/foot. The same is generally true of Act 634’s treatment of coastal wells. The Auditor found that the actual cost to plug these wells is $18/foot, and Act 634 did nothing to change the existing amount of $8/foot, less than half what is required to plug the well.
The DNR’s excuse for such a low amount is troubling. According to DNR, requiring the actual amount “will likely result in Conservation orphaning the wells of these small operators, ultimately putting them out of business and thereby make the environmental concerns created by orphaned wells more severe.” This does not pass the smell test. Requiring wells to have adequate security will reduce the number of orphan wells, not increase it. This is reiterated by the clear words of the Auditor: “if operators cannot afford to pay financial security, then they likely will not be able to pay to plug the well and perhaps should not receive a permit to operate a well as they are demonstrating that they cannot afford to comply with the established regulations.” If some of Louisiana’s hundreds, and perhaps thousands, of operators are so financially irresponsible that they cannot establish even the most basic assurance that they can plug a well they want to drill, then that operator should step aside and let a financially responsible operator drill that well. It is not this Legislature’s job to ensure that the most financially irresponsible operators are given leeway at the expense of the rest of the state. And if there are gradually fewer financially irresponsible operators, then financially responsible operators will have good business opportunity to bring their responsible operations practices to work, replacing the bad operators. That is something that this Legislature should find appealing. Louisiana was one of the last states to require financial security, and we should learn the lesson that stems from the related burden of thousands of abandoned oil wells. In any event, this Legislature should learn the lesson from Texas’ experience: Previously in Texas, the state was dogged by the same problems of abandoned well sites. The state made changes to try to address these problems. Amid that effort, according to one law review article, “concern existed that these changes would make it difficult for small operators to stay in business” but “this fear has apparently not materialized.”[3]
On this point the Auditor’s conclusions are instructive: “Not having sufficient financial security to cover the cost to plug wells may provide an incentive for operators to orphan wells instead of plugging the well. For example, if the financial security amount is too low, operators may abandon the well and forfeit the financial security because it is cheaper to abandon the well than to pay the actual cost to plug the well. As discussed earlier, higher financial security amounts may affect an operator’s profitability. However, since financial security is released once operators comply with state regulations and properly plug their wells, higher amounts should not prevent responsible operators from doing business here.”
Keeping artificially low amounts makes Louisiana stand out among states for all the wrong reasons. The Auditor compared a 3,000 foot deep land well. In Louisiana, under the old rule it would be $3,000 in financial security, but $4,000 in Pennsylvania, $15,000 in California, and $100,000 in Alaska. The Auditor found that Louisiana had one of the lowest financial security amounts: “In comparison to other states we reviewed, Louisiana has one of the lowest financial security amounts for land wells that are less than 3,000 feet deep.” Auditor concluded by recommending “to increase the amount for financial security to be more reflective of the costs to properly plug and remediate orphaned well sites.” DNR even agreed with this, so at least its public acceptance acknowledges what is obvious.
Blanket security amounts are a bad idea because they are woefully inadequate. Yet Act 634 embraced them. As noted by the Auditor: “The blanket financial securities are also insufficient to plug all orphaned wells and create an even larger discrepancy between the financial security per well and the cost to plug the well.” Act 634 deferred entirely to DNR on coastal and offshore wells, which per DNR’s poor track record we knew would not be good.
There is no good basis for actual well-plugging costs, other than the Auditor’s conclusion that land and coastal wells’ actual costs are $7 and $18, respectively. So in matching the financial security cost with the actual cost, the only thing the legislature has a good basis to do would be to increase the financial security amounts to those amounts.
SECTION TITLE: Summary
In short, the Louisiana Legislative Auditor’s study highlighted what was already common knowledge, that the state’s laws and regulations had not stopped many operators from abandoning oilfield sites without properly cleaning up, plugging wells, and properly closing sites. Everyone involved has paid lip service to the need to fix the laws and regulations, and very specific reforms have been presented to address the problems. But neither the Legislature nor DNR has mustered the political courage to actually follow through with their statements. As a result, Louisiana’s landowners remain vulnerable to operators walking off their property without addressing their closure responsibilities. The laws constant changes further undermine a landowner’s ability to ensure that their particular operator fulfills its duties. If you are a landowner with concerns about oil and gas companies who have or are operating on your property, you should contact a Louisiana lawyer to discuss your concerns and find out how to ensure that your property rights do not expire.
[1] Louisiana Legislative Auditor’s Performance Audit, Regulation of Oil and Gas Wells and Management of Orphaned Wells: Office of Conservation – Department of Natural Resources at 2 (May 28, 2014) (the “Report”)
[2] See Preamble to the Rule, LR 41:952 (May 2015).
[3] Christopher S. Kulander, Surface Damages, Site-Remediation and Well Bonding in Wyoming – Results and Analysis of Recent Regulations, 9 Wyo. L. Rev. 413, 441 (2009).
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART ONE)
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART ONE)
Other states have regulation that require operators to thoroughly clean up a site when they depart, not simply plug the well. So why doesn’t Louisiana?
Louisiana’s financial security law is based on well plugging, and does not include any amounts for site cleanup, such as remediation of contamination and removal of old equipment. Contrast this with other states, which include site cleanup and restoration in their laws and definitions for full plug and abandonment (“P&A”, the process by which an oilfield site is formally closed). For example, in the state of Washington, the law (WAC 332-12-210(23)) provides that “ ‘Plug and abandon’ means to place permanent seals in well casings or drill holes in the manner as provided by chapter 344-12 WAC and applicable regulations and in a way and at such intervals as are necessary to prevent future contamination; to remove all equipment from the site and rehabilitate the surface to its former state or usage as prescribed by the department.” And in the state of Colorado state: “Abandon” means “(1) The proper plugging and abandoning of a well in compliance with all applicable regulations, and the cleaning up of the wellsite to the satisfaction of any governmental body having jurisdiction with respect thereto and to the reasonable satisfaction of the operator. (2) To cease efforts to find or produce from a well or field. (3) To plug a well completion and salvage material and equipment.”[1] Federal lands are similarly protected. The Federal OSHA online dictionary includes surface reclamation of the site. OSHA: “Plug and abandon well” means “A well is abandoned when it reaches the end of its useful life or is a dry hole. The casing and other equipment is removed and salvaged. Cement plugs are placed in the borehole to prevent migration of fluids between the different formations. The surface is reclaimed.” It is not simply in the definitions. Other states and the federal government require cleanup and site restoration in the course of P&A responsibilities:
But Louisiana’s financial security requirements, which are designed to ensure proper closure, do not require any security for cleanup or removal of old oilfield equipment. This leaves landowners who lease their property to oil companies exposed to the risk that an operator will simply wander off a site without properly closing the site.
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART TWO)
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART TWO)
Other states require meaningful financial security amounts to ensure that oilfield operators properly plug wells and clean up sites, so why doesn’t Louisiana?
Louisiana’s financial security amounts are woefully inadequate and do not protect Louisiana landowners. DNR’s Office of Conservation’s (“OC”) rule change grandfathered in tens of thousands of existing wells as not needing financial security. This codifies into law a financial security exemption for 75% of Louisiana’s wells. Financial security is critical because it ensures that there will be funds to plug wells and clean up abandoned sites. By not requiring financial security, this can only lead to more abandoned oilfield sites. According to the Auditor, “Not requiring sufficient financial security amounts may provide an incentive for operators to abandon their wells ….”
No well should be exempt. The OC’s rule actually enshrined into law the precise exemptions that create the problem of abandoned oilfield sites. OC grandfathering exemption could, based on the language of the rule, amount to 75% of existing oilfield wells — 43,387 wells.
The Auditor found that Louisiana is unique among the states reviewed in that it does not require all operators to provide financial security. Requiring financial security on all wells would help ensure that the state has funds to plug a well where an operator fails to do so. The reason Louisiana doesn’t require all wells to provide financial security is that “it would not be profitable” for some operators to provide it. But the Auditor concluded that that is just all the more reason an operator may not be able to afford to plug the well when operations are through.
OC’s additional excuse for not applying financial security rules to older wells is that it would end up with “a massive number of wells” being declared orphaned. But this is not a good reason to allow existing wells to avoid financial security rules. Instead, this is just a demonstration that by not comprehensively requiring financial security, the state is simply creating a massive problem for a future generation to have to deal with.
Exemptions make things worse. As noted by the Auditor, “Of the 716 wells that have ultimately been orphaned since financial security became a requirement, 397 (55%) were exempt from financial security.” There is no good reason that wells should be exempt from financial security. Financial security obligations are not a punishment that are punitively applied to bad operators; they are an assurance to the state and the citizens of the state. So the focus on whether an operator is “good” or “bad” is the wrong focus. The Auditor concluded that as a matter of responsible state policy that Louisiana ought to fall in line with all the other states reviewed.
The Auditor even noted that protecting the most financially irresponsible operators is not a good reason to give exemptions: “if operators cannot afford to pay financial security, then they likely will not be able to pay to plug the well and perhaps should not receive a permit to operate a well as they are demonstrating that they cannot afford to comply with the established regulations.”
On this point the Auditor’s conclusions are instructive: “Not having sufficient financial security to cover the cost to plug wells may provide an incentive for operators to orphan wells instead of plugging the well. For example, if the financial security amount is too low, operators may abandon the well and forfeit the financial security because it is cheaper to abandon the well than to pay the actual cost to plug the well. As discussed earlier, higher financial security amounts may affect an operator’s profitability. However, since financial security is released once operators comply with state regulations and properly plug their wells, higher amounts should not prevent responsible operators from doing business here.”
Keeping artificially low amounts makes Louisiana stand out among states for all the wrong reasons. The Auditor compared a 3,000 foot deep land well. In Louisiana, under the old rule it would be $3,000 in financial security, but $4,000 in Pennsylvania, $15,000 in California, and $100,000 in Alaska. The Auditor found that Louisiana had one of the lowest financial security amounts: “In comparison to other states we reviewed, Louisiana has one of the lowest financial security amounts for land wells that are less than 3,000 feet deep.” Auditor concluded by recommending “to increase the amount for financial security to be more reflective of the costs to properly plug and remediate orphaned well sites.”
The Auditor found that DNR’s previous financial security amounts were woefully low. In fact, as noted by the Auditor, the amounts do not even cover the site restoration and remediation obligations, as they are supposed to have been designed to cover. Even hypothetically accepting that all of those costs on every well in the state would be $0, the well-plugging amounts are entirely inadequate. Where DNR had set the shallow land well rate at $1/foot, the Auditor found that the actual cost to plug was $7/foot. The DNR recently changed the rule to $7/foot, but then by Emergency Rule in April 2016 reduced this to $2/foot. This demonstrates again that DNR cannot be counted on to set financial security amounts in line with actual costs. Act 634 kept this amount at the artificially low $2/foot. The same is generally true of Act 634’s treatment of coastal wells. The Auditor found that the actual cost to plug these wells is $18/foot, and Act 634 did nothing to change the existing amount of $8/foot, less than half what is required to plug the well.
The DNR’s excuse for such a low amount is troubling. According to DNR, requiring the actual amount “will likely result in Conservation orphaning the wells of these small operators, ultimately putting them out of business and thereby make the environmental concerns created by orphaned wells more severe.” This does not pass the smell test. Requiring wells to have adequate security will reduce the number of orphan wells, not increase it. This is reiterated by the clear words of the Auditor: “if operators cannot afford to pay financial security, then they likely will not be able to pay to plug the well and perhaps should not receive a permit to operate a well as they are demonstrating that they cannot afford to comply with the established regulations.” If some of Louisiana’s hundreds, and perhaps thousands, of operators are so financially irresponsible that they cannot establish even the most basic assurance that they can plug a well they want to drill, then that operator should step aside and let a financially responsible operator drill that well. It is not this Legislature’s job to ensure that the most financially irresponsible operators are given leeway at the expense of the rest of the state. And if there are gradually fewer financially irresponsible operators, then financially responsible operators will have good business opportunity to use bring their responsible operations practices to work. That is something that this Legislature should find appealing. Louisiana was one of the last states to require financial security, and we should learn the lesson that stems from the related burden of thousands of abandoned oil wells. In any event, this Legislature should learn the lesson from Texas’ experience: Previously in Texas, the state was dogged by the same problems of abandoned well sites. The state made changes to try to address these problems. Amid that effort, according to one law review article, “concern existed that these changes would make it difficult for small operators to stay in business” but “this fear has apparently not materialized.”[10]
Not only does the financial security amount set by law not cover site cleanup, restoration, and remediation, but it is not even enough to cover plugging the well. For example, although the Auditor found that the median cost to plug wells in inland waters is $18 per foot, OC is proposing to only require financial security in the amount of $8 per foot. That is, the OC’s new rule provides that in the sensitive coastal zone, that financial security not even cover half the amount to ensure that the well is plugged. Importantly, the Auditor concluded that higher security amounts “should not prevent responsible operators from doing business here” because they will have their security released upon compliance. Therefore, there should be no problem for operators to comply. OC even agreed to increase the financial security amount, so why is the amount required in the coastal zone the exact same and not heightened by these rules?
On balance, the Legislature and DNR failure to require adequate financial security on every well leaves Louisiana landowners exposed to risk, because it removes the assurance that an operator will properly plug and well and clean up a site.
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART THREE)
LOUISIANA’S DNR DOES NOT PROTECT ITS CITIZENS LIKE OTHER STATES DO (PART THREE)
Other states block oil companies from indefinitely leaving abandoned wells in place, so why doesn’t Louisiana?
Louisiana’s oilfield laws and regulations create loopholes for operators at the expense of Louisiana landowners. Operators are avoiding their cleanup duty by labeling wells “future utility” and holding that status indefinitely, some for over fifty years.
The OC rule change allows the problems associated with the “future utility” loophole to remain. The rule change did not create a meaningful standard for a well to receive “future utility” status, and instead allows a well to linger for five years unplugged, with plenty of extensions, all at the unfettered discretion of DNR. An oil company should have to demonstrate (as in some other states and by the federal government[11]) why it should be allowed to push back its duty to plug a well and clean up a site. This is important because it ensures that companies don’t just say they will re-use a well in the future in order to avoid their duty. “Future utility” should have strict limitations to ensure that sites are actually cleaned up.
The Auditor found that OC “does not have sufficient regulations regarding inactive wells with future utility.” The Auditor specifically noted that operators may be “hiding” inactive wells in future utility status “to avoid plugging the well.” As it stands there are over 1,500 wells that have sat in this status for over 25 years, and over 400 for over 50 years. Over 7,000 wells are currently listed as “future utility” that have had that status for over five years. Yet the figure is probably much higher because, as the Auditor noted, OC “does not effectively monitor oil and gas wells to ensure that inactive wells that are no longer producing are identified.” OC rules “do not specify how long a well can remain in future utility status.” This creates a higher risk that a well becomes “orphaned.” OC does not appear willing to add meaningful financial security for “future utility” wells. In Colorado, if a company wants to label a well as “future utility,” it is required to put down and additional $10,000 to $20,000 per well in financial security.
The OC rule change retained the Commissioner’s complete power to grant indefinite extensions of the requirement to plug dry wells and cleanup sites. See La Admin Code 43:XIX.137(A)(1). While it is reasonable to allow a DNR Commissioner some discretion to grant limited extensions on the requirement to P&A wells, it is a bad idea to give a Commissioner unfettered discretion to grant unlimited extensions. Even if there should be a way to extend plugging wells and clean up of sites, there should be strict upper limits on how long the extension can last, and there should be standards in place to ensure that the only the rare, good reason exists to give a company a brief extension.
The OC’s rule change created the power to grant indefinite extensions, and this goes against the Auditor’s warnings about extensions “for extended periods of time” that make the wells “at a higher risk of becoming orphaned.” The Auditor specifically noted that operators may be “hiding” inactive wells in future utility status “to avoid plugging the well.” OC rules “do not specify how long a well can remain in future utility status.” This creates a higher risk that a well becomes “orphaned.”
For non-dry hole wells (i.e., formerly productive wells), the rule change provided that the Commissioner be similarly given the power to grant indefinite extensions of the requirement to plug wells and cleanup sites. See La Admin Code 43:XIX.137(A)(2)(d); 137(A)(3)(c). The Commissioner may only do so in this instance “for cause,” but the rule does not define that “cause” nor provide a standard. So unlike some other states where an operator must justify an extension by submitting a plan to the state, which is then scrutinized by the state, here OC simply allows the Commissioner to give companies indefinite extensions for any reason. As such, the new default five-year limit on how long a well can linger unplugged (a timeframe that is already far too long because it does not take five years to plug a well) is not an actual upper limit, and is thus in contradiction of Auditor Recommendation #17. Where the Auditor noted that the rules currently “do not specify how long a well can remain in future utility status,” the new rule merely established a figure while giving the Commissioner total discretion to reject that figure entirely. In any event, even if the Commissioner does not give a company an extension, a company’s “assessment” for breaking this rule is a mere $250. Particularly for coastal zone sites, where the cost to P&A can grow high, a $250 assessment allows a company to defer its work. And because for many sites this is not a meaningful disincentive, and it would rather be seen as a “cost of doing business” fee that results in more sites not getting promptly plugged and abandoned. The new rule’s “for cause” is not specific because there is absolutely no standard or limit associated with it, meaning that anything the Commissioner states is a “cause” is sufficient to give blanket extensions to oil companies without any limitation.
OC has created an annual “assessment” of $250 per year, which is a tiny fee that allows a company to indefinitely avoid its duty to plug wells and cleanup sites so long as they make a small payment to the state. This “assessment” gives oil companies the ability to avoid their duties indefinitely for a cost that is low, particularly because relative to dry-land states, the cost of P&A in Louisiana’s coastal zone tends to be higher. Compare this to Colorado. In that state, if a company wants to label a well as “future utility,” it is required to put down and additional $10,000 to $20,000 per well in financial security.
[1] http://cogcc.state.co.us/COGIS_Help/glossary.htm
[2] A specific provision dealing with well abandonment, 30 CFR 221.34(a), has been in effect since 1942: “The lessee shall promptly plug and abandon or condition as a water well any well on the leased land that is not used or useful for the purposes of the lease, but no productive well shall be abandoned until its lack of capacity for further profitable production of oil or gas has been demonstrated to the satisfaction of the supervisor. Before abandoning a well the lessee shall submit to the supervisor a statement of reasons for abandonment and his detailed plans for carrying on the necessary work, together with duplicate copies of the log, if it has not already been submitted. A well may be abandoned only after receipt of written approval by the supervisor, in which the manner and the method of abandonment shall be approved or prescribed. Equipment shall be removed and premises at the well site shall be properly conditioned immediately after plugging operations are completed on any well.” 7 FR 4132, 4136 (June 2, 1942).
[3] Rule 3.14: “(12) The operator shall fill the rathole, mouse hole, and cellar, and shall empty all tanks, vessels, related piping and flowlines that will not be actively used in the continuing operation of the lease within 120 days after plugging work is completed. Within the same 120 day period, the operator shall remove all such tanks, vessels, and related piping, remove all loose junk and trash from the location, and contour the location to discourage pooling of surface water at or around the facility site. The operator shall close all pits in accordance with the provisions of §3.8 of this title (relating to Water Protection (Statewide Rule 8)). The district director or the director's delegate may grant a reasonable extension of time of not more than an additional 120 days for the removal of tanks, vessels and related piping.”
[4] Kell, S., State Oil and Gas Agency Groundwater Investigations and their Role in Advancing Regulatory Reforms, A Two-State Review: Ohio and Texas, report by the Ground Water Protection Council (2011) (http://fracfocus.org/sites/default/files/publications/state_oil__gas_agency_groundwater_investigations_optimized.pdf).
[5] (2) The board shall adopt rules and make orders as necessary to administer the following provisions: … (f) The operator shall furnish a reasonable performance bond or other good and sufficient surety, conditioned for the performance of the duty to: (i) plug each dry or abandoned well; (ii) repair each well causing waste or pollution; (iii) maintain and restore the well site; and (iv) except as provided in Subsection (8), protect a surface land owner against unreasonable: (A) loss of a surface land owner's crops on surface land; (B) loss of value of existing improvements owned by a surface land owner on surface land; and (C) permanent damage to surface land. Utah Code Ann. § 40-6-5.
[6] 62C-29.009. Plugging and Abandonment of Wells. (“Operators must specify exactly how the well will be plugged and the site restored.”); see also same (“(d) Restoration of location. 1. Mud pits. All fluids and recoverable slurry that remain in the pits shall be either returned to the wellbore below all USDW during the process of plugging, placed between plugs in the casings, or removed to an approved land fill. 2. 2. Drilling sites. The operator shall remove all waste, debris, and equipment and shall restore the site as necessary to prevent erosion, invasion of exotic species, interruption of sheetwater flow or other similar impacts. Land drilling sites and access roads shall be restored to the approximate original contour of the surface and revegetated with native vegetation. However, upon written request of the landowner, or the operator with the landowner's consent, and where other natural resources are not endangered, the Department shall permit alternate restoration standards, including landowner retention of the access road, pad, or other improvements.”).
[7] 52 Okl.St.Ann. § 318.1 (financial security must be “at least sufficient to cover the estimated cost of all plugging, closure, and removal operations currently the responsibility of that operator”).
[8] 43 C.F.R. § 3106.7–6 (If I acquire a lease by an assignment or transfer, what obligations do I agree to assume?) (“(a) If you acquire record title interest in a Federal lease, you agree to comply with the terms of the original lease during your lease tenure. You assume the responsibility to plug and abandon all wells which are no longer capable of producing, reclaim the lease site, and remedy all environmental problems in existence and that a purchaser exercising reasonable diligence should have known at the time. You must also maintain an adequate bond to ensure performance of these responsibilities. (b) If you acquire operating rights in a Federal lease, you agree to comply with the terms of the original lease as it applies to the area or horizons in which you acquired rights. You must plug and abandon all unplugged wells, reclaim the lease site, and remedy all environmental problems in existence and that a purchaser exercising reasonable diligence should have known at the time you receive the transfer. You must also maintain an adequate bond to ensure performance of these responsibilities.”); see also 43 C.F.R. § 3104.1 (Bond obligations) (“(a) Prior to the commencement of surface disturbing activities related to drilling operations, the lessee, operating rights owner (sublessee), or operator shall submit a surety or a personal bond, conditioned upon compliance with all of the terms and conditions of the entire leasehold(s) covered by the bond, as described in this subpart. The bond amounts shall be not less than the minimum amounts described in this subpart in order to ensure compliance with the act, including complete and timely plugging of the well(s), reclamation of the lease area(s), and the restoration of any lands or surface waters adversely affected by lease operations after the abandonment or cessation of oil and gas operations on the lease(s) in accordance with, but not limited to, the standards and requirements set forth in §§ 3162.3 and 3162.5 of this title and orders issued by the authorized officer.”).
[9] Id.
[10] Christopher S. Kulander, Surface Damages, Site-Remediation and Well Bonding in Wyoming – Results and Analysis of Recent Regulations, 9 Wyo. L. Rev. 413, 441 (2009).
[11] See, e.g., the U.S. Dept. of Interior Mineral Management Service’s rules at 30 CFR 250.703(c) (“In order to maintain the temporarily abandoned status of a well, the lessee shall provide, within 1 year of the original temporary abandonment and at successive 1-year intervals thereafter, an annual report describing plans for reentry to complete or permanently abandon the well.”)