Shielding U.S. Taxpayers from the Oilfield Paradox
New report offers framework to prevent well liabilities being transferred to taxpayers as oil well production declines and plugging costs mount
Solving the Oil Field Paradox
A solutions framework: solving the orphan well problem requires systemic solutions
Sign up today to download
the full report
The “oil field paradox” refers to the growing disconnect within industry, where some companies have created and profited from oil wells, walking away before the clean-up bill comes due, while others, who now own the wells, often lack the financial capacity – or the incentive – to clean up, transferring the risk to states, communities and ultimately taxpayers.
How does a domestic oil industry that generates tens of billions of dollars in after-tax profits annually leave millions of wells and billions in liabilities at risk of becoming the public’s responsibility? If the government will ultimately pick up the tab, what incentive is there for operators to accelerate plugging activity?
Past research found that the cost to plug orphaned wells might be $280 billion, with only 1-2% of that cost covered by financial assurance. Plugging wells with taxpayer dollars means legislating the very problem we are trying to avoid - the socialising of private liabilities from industry.
Part I of this series characterised onshore well productivity, ownership, financial assurance and decommissioning liability in the onshore United States today, with a focus on how the incentives implicit in the system failed to drive timely operator plugging activity and may result in greater well orphaning as the energy transition accelerates. Part II identifies the principles that should guide policymaking, including the types of solutions necessary to address these failures and to deliver necessary funding, whilst incentivising industry to cover the looming cost of retiring wells. Our Solutions Framework includes:- Right-sized financial incentives.
- Mitigate transferred liability risk through increased financial assurance.
- Allocate losses.
Quotes
Rob Schuwerk, report author with Redwater Insights, said: “Good policy is about proper incentives, and currently, in most jurisdictions, the incentives are to defer and offload AROs rather than settle them as the law requires. The legacy of poor policy choices has allowed many wells to remain unplugged, long after their economic lives have come to an end. Policy makers will have to act to prevent these liabilities from being offloaded to the public. Our framework is designed to help policymakers fix the system and restore accountability in the sector”