Race To The Top Internalizing Oil And Gas Retirement Costs

Document summary

There are millions of unplugged idle and marginal wells in the United States, most of which industry is obligated by law to plug. However, virtually no money is set aside to cover these obligations, and many producers are in default. The result is a swelling inventory of marginal, idle, and orphan well, many of which are de facto orphans with undercapitalized, insolvent, or non-existent operators.

The U.S. Congress has proposed billions in funds to pay for retiring orphan wells, but that won’t come close to paying for the more than $250 billion in estimated onshore plugging liability. To address the growing orphan well crisis, state and federal regulators must take steps to ensure that solvent operators fulfill their existing obligations to pay for this plugging and reclamation liability before they too become insolvent. This will require revisions to (primarily) state regulatory regimes.

The federal government can incentivise states to adopt regulatory improvements by conditioning federal bailout dollars on regulatory reforms to reduce future orphaned well burdens. To do so, federal and state governments need a means of assessing regulatory reforms and measuring their effectiveness.

This report offers two related tools for assessing the effectiveness of state regulatory reforms at shifting well retirement costs from taxpayers to the legally responsible parties in industry.