October 1, 2015

The Rising Cost Of Cleaning Up After Oil And Gas

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When oil and gas wells run dry or are shut down, they have to be plugged before they can be abandoned in order to keep them from contaminating fresh water aquifers below the surface or leaking aboveground. Most of the time that responsibility falls to the company that owns the well. But when companies go bankrupt or abandon their wells, the state becomes responsible for cleaning up. In Wyoming, the state is currently in the middle of a multi-year, multi-million dollar effort to plug orphaned coal bed methane wells, and we wondered: How much does it cost to plug an orphaned well? Where does that money come from? And how much could the state be on the hook for in the future? Here’s what we found.

How much does it cost to plug an abandoned well?

The short answer is: it varies, a lot. The Wyoming Oil and Gas Conservation Commission plugged 452 wells between 1997 and 2014. The cheapest well cost $569 to plug. The most expensive cost $527,829. These graphs show the distribution of plugging costs:


Even though the costs for plugging vary a lot, there is one factor that plays a clear role: the depth of the well. The deeper a well, the more expensive it is to plug it. As you’ll see below, that’s really important when it comes to how much the state could be on the hook for in the future.


Who pays to plug orphaned wells?

Each state has its own regulations governing orphaned well plugging, as does the federal government, so it’s hard to talk in general terms, but Wyoming’s system is similar to many other states.

In Wyoming, before oil and gas companies can start drilling, they have to put up a bond—basically an insurance policy that says “if I go bankrupt or walk away, you can have this money to clean up any mess I leave behind.” Wyoming is in the process of changing its rules, but right now, that bond is either $10,000-$20,000 per well, or $75,000 for ALL of an individual company’s wells on private land in the state (the new rules will double that, to $150,000).

There’s also an additional bond, of $10 per foot, that a company is supposed to pay when it ‘idles’ a well—basically, when it stops producing oil and gas. Historically though, companies haven’t always paid that idle well bond.

Between 1997 and 2014, it cost the State of Wyoming $11 million in total to plug orphaned wells, and only $3 million was covered by bonds. The other $8 million came from the conservation tax fund—a state tax levied on oil and gas production that funds the regulatory agency that oversees the industry and pays for things like well plugging.


How much could the state be on the hook for in the future?

This is a really hard question to answer, because there are so many different variables that affect whether a well is orphaned, but we did some back of the napkin estimates based on what we do know.

Let’s focus on the wells drilled in the past five years. Between 2011 and today, 5,125 wells have been drilled in Wyoming. According to historical trends, we know that between three and four percent of wells end up orphaned. Even if we are at the low end of that in the future, we still can expect that of the wells currently active in the state, about 150 will eventually become the state’s responsibility.

These wells will likely cost more to plug than those of the past. Why? Because companies have been steadily drilling deeper and deeper for oil and gas (for more detail, check out our nerd notes), and as we demonstrated above, the cost of plugging gets more expensive the deeper the well.


The national data shows even more clearly how wells are getting deeper.


So, based on the relationship between well depth and plugging cost, Wyoming is looking at a future price tag in the range of of $14.7 million to $19 million for its newest, deepest wells, or an estimated average cost of more than $100,000 per well. (For an explanation on how we came up with this estimate, read our nerd notes.) Although there are many unknown factors, it will still be difficult for the state to cover those costs under the new bonding rules.


While we’ve mostly focused on Wyoming, this is a nationwide issue. Companies have drilled tens of thousands of new wells in the last few years; deeper wells, that will be more expensive to plug when they run dry. Numerous reports and studies have criticized state and federal bonding regulations for being inadequate to cover the costs of cleaning up abandoned wells. Some states, like Wyoming, have responded by updating those regulations, but even so, the changes may not be enough. As researchers from the University of Wyoming concluded in a 2009 study, the best way to ensure wells get cleaned up is to require companies to put up the full estimated cost in advance. So far, no state has taken them up on the suggestion.