NEW YORK, June 18 – By failing to plan for an orderly energy transition, and underestimating the cost of closing deep shale wells, oil and gas companies will pass on to investors and taxpayers billions in clean up costs as wells close prematurely, Carbon Tracker found in a new report on Thursday. Driven by the Coronavirus pandemic and the energy transition, the trend of falling demand and prices is forcing the premature shut-in of tens of thousands of producing wells and jeopardizing any chance for the reactivation of hundreds of thousands more idle wells.  These shut-ins are occurring decades ahead of schedule and exceeding industry expectations. It’s Closing Time: The Huge Bill to Abandon Oilfields Comes Early, finds that the cost for plugging a typical 10,000-foot shale well is in the proximity of $300,000.  This number vastly exceeds past projections from industry and regulatory sources of $20,000-40,000 a well. The difference reflects a failure to consider that modern shale wells are much deeper than older orphaned wells, which drives up costs. Federal and state regulations require that once a well is no longer usable for beneficial purposes operators are required to plug the well and restore the location to a safe and clean condition.  These liabilities, which companies must pay, are also known as Asset Retirement Obligations (AROs). However, currently, states do not require companies to report these costs or set aside money to pay the complete ARO cost for new and producing wells, also known as full bonding.  This gives operators an incentive to delay closing wells, resulting in a ballooning number of idle wells.

Robert Schuwerk, Executive Director of Carbon Tracker North America and report co-author, said: “States are in a bind of their own making.  By not requiring pre-funding of retirement liabilities, they have encouraged companies to delay closure costs as long as possible.  The pandemic and energy transition now risk a wave of closures that industry can’t afford.”

As our report shows, self-bonded oilfield AROs have left industry and oil producing states in a deep hole.  Companies and regulators have banked on settling AROs with future cash flows—but those cash flows will be challenged by the energy transition.  Companies that can’t pay for closures will pass those liabilities on to taxpayers.  States can see this coming, and some are starting to take action to mitigate ARO credit risk. The report anticipates that, in reaction to new state regulations that require companies to secure these liabilities, investors may impose risk premiums and de-rate based on lower growth prospects, driving what the report calls an “impairment-retirement” cycle.

Greg Rogers, Senior Advisor to Carbon Tracker, co-author of the report, stated: “Rising regulatory costs for bonding and idle well fees will increase asset impairments and investment risk, which will increase company financing costs.  We foresee that long overdue state actions to mitigate ARO credit risk will reduce oilfield asset valuations and deplete available cash needed to pay for well closures.  This will further increase ARO credit risk to states, and so on in a downward spiral.”

The report builds on Carbon Tracker’s work on the oil and gas industry’s potential for “stranded assets” as investors increasingly ask whether oil demand is or will soon be in terminal decline. As that happens, the think tank is turning its attention to the flipside of stranded assets—“stranded liabilities.”  Specifically, this is the cost of retiring long-lived oil and gas infrastructure.  The study is the first in a series of three reports.

###

To arrange interviews please contact: Daniel Cronin                         dcronin@carbontracker.org                  1-617-678-5263 About Carbon Tracker The Carbon Tracker Initiative is a not-for-profit financial think tank that seeks to promote a climate-secure global energy market by aligning capital markets with climate reality. Our research to date on the carbon bubble unburnable carbon and stranded assets has begun a new debate on how to align the financial system with the energy transition to a low carbon future. www.carbontracker.org