In March of 2022, the ECMC announced Colorado’s new financial assurance rules with much fanfare, referring to the Rules as the “strongest protections and oversight of oil and gas development in the country,”[1] with “by far the highest financial assurance requirements [in the country].” Most importantly, ECMC touted that the bonding rules’ would, “[e]nsur[e] each operator has the financial capability to meet all of their obligations under the Act.” The rulemaking was prompted by SB 19-181, a 2019 law that required ECMC to ensure that Colorado citizens are not forced to plug the oil and gas industry’s wells in Colorado. Have the rules actually delivered for the people of Colorado? In seeking to answer this question, our researchers found that the state’s new bonding rules will provide approximately $4 million less financial assurance in 2024 than Colorado had in 2021. False Start looks at why this has happened and what steps can be taken to address the problem.

[1] https://ecmc.state.co.us/documents/media/Press_Release_FA_Rulemaking_Adoption_20220301.pdf (Last accessed Feb. 6, 2024).

• The Energy and Carbon Management Commission (ECMC) touted its bonding rules (Rules) as the strongest in the nation. Our review suggests the contrary.
• Our pre-implementation analysis, Feet to the Fire, estimated that in a best-case scenario, Colorado could anticipate up to $1.8 billion in total financial assurance against $7.2 billion in plugging costs. The ECMC has fallen far short of these expectations, too.
• In 2024, the ECMC will likely end up with almost $4 million less effective financial assurance than the $272 million it had in 2021.
• The result suggests that the ECMC has not made progress and may jeopardize federal performance grants that are tied to improvements, compounding the problem.
• An audit of the ECMC documents indicates that it currently has $268 million in financial assurance in 2024, less than the $272 million in 2021,[1] but included in this are $73 million in financial assurance that exceeds what those operators are required to provide under the new Rules.
• Looking beyond this year, the ECMC allows companies up to 20 years to fully bond. Counting those contributions, the ECMC claims it will eventually have $688 million—less than 40% of what our initial analysis suggested they could obtain.  Adjusting for inflation, this is the equivalent of $593 million in today’s dollars.
• The money will mostly come from operators producing less than 2 boe/d per well today. Thus, the bulk of future bonding is exposed to low-producing operator default risk over a 10-year time horizon, replicating the problems SB 19-181 was intended to solve.
• The shortfall has structural causes. The Rules provide ample discretion to adjust bonding downwards.  The results are, unsurprisingly, less financial assurance.  While these effects are overlapping, we calculate that:
  • The “Out of Service” designation will leave over 4,000 wells without financial assurance, with approximately half of these subject to a blanket bond.
  • The ability for operators to “demonstrate” lower costs will sharply reduce bonds from $840 million to $177 million.
  • One option, Option 5, allows some operators to simply create their own bespoke plans. The one company that has been approved for it, Own Resources, reduced its required financial assurance from $338 million to only $8.3 million, a whopping $330 million reduction.
• The Rules aimed to reduce transfers of low-producing wells, but the provisions are fraught with loopholes, allowing these wells to be transferred without new bonding under most circumstances.
• There is a silver lining: ECMC staff have used their discretion to reject the most egregious operator proposals. However, this cannot compensate for the Rules’ structural flaws.
• The Rules fail to address the system of transfers from the ‘haves’ to the ‘have nots.’ Higher producing operators can delay providing meaningful financial assurance, lower-producing operators can both reduce requirements but have decades to do so.
• Until Colorado recognizes that ‘haves’ and ‘have nots’ are two sides of the same coin, it will not be able to effectively manage the risk.
• SB 19-181 sought to shield the Colorado taxpayer from delinquent industry liability. In their first year, the Rules have made it worse and left any marginal improvements to the mercy of the state’s lowest producers.

    [1] See:  https://drive.google.com/file/d/17GyEwZZ1KON6DCGBoRhrGL08fSUsOfLJ/view