What is SB 18-191 trying to address?
One of the key issues the bill sought to address was the cost to the state of plugging wells that are no longer in use and the remediation of drilling sites that may be contaminated. Millions of these wells exist across the United States, and thousands in Colorado.
As the state and its governor seek to lead the country in transition from fossil fuels, thousands more oil and gas sites will require plugging, remediation, and rehabilitation. The costs of these projects are high—thus, the bill and the following administrative rules have developed instruments to ensure that the industry helps pay those costs.
Who is responsible for executing the agenda?
SB 19-181 tasked the Colorado Oil and Gas Conservation Commission, a state administrative agency, with executing this new agenda. The COGCC went quickly to work, announcing a series of rulemakings that would effectuate the goals and objectives of SB 19-181.
This article will analyze the COGCC’s rules, including how the new financial assurance specifications have worked out in practice. Finally, we will examine the Commission’s experience with one oil and gas operator, KP Kauffman.
900 Series: Environmental Impact Prevention
The 900 Series of the COGCC Rules, known under the headline “Environmental Impact Prevention,” gives the Director of the COGCC broad powers to address the impacts and “potential impacts” posed to “public health, safety, welfare, the environment, or wildlife resources” by oil and gas operators.
These broad powers include suspending operations, initiating “immediate mitigation measures,” and requiring operators to submit a Form 27 Site Investigation and Remediation Workplan. Furthermore, decisions by the Director may be appealed, but they are explicitly not heard by an Administrative Law Judge; instead, the Commission will hear the appeal.
What is a Form 27?
Form 27 is a “site investigation and remediation workplan,” developed by the operator and submitted to the Commission. The Form specifies the “cause of condition,” which requires investigation and remediation; details about the site; the extent and nature of the contamination; and a detailed “remediation workplan” to clean up the site.
Under Rule 912, an operator which experiences a spill or release of contaminating material must also provide a Form 27 to the Commission if cleanup or “remediation” will continue for longer than 90 days; if the Director requests a Form 27 under Rule 901(a)(2), discussed above; or if otherwise required by the Commission’s rules.
How will remediation be considered complete?
For its remediation to be considered complete under Rule 913(h), an operator must accomplish certain standards of quality for the affected groundwater, lower concentrations of contaminating material to an acceptable level within the Commission’s guidelines, and satisfy any condition set by the Commission upon approval of the remediation plan.
700-Series: Financial Assurances
SB 19-181 requires the State of Colorado to ensure that “every operator is financially capable of fulfilling every obligation” that the operator is required to perform under state law. This includes remediation of sites subject to contaminants or spills and permanently plugging wells no longer in use.
To ensure compliance with remediation plans—including plugging defunct wells and environmental cleanup of oil and gas-related accidents—the COGCC passed the 700 series of rules on financial assurances. These required assurances give the Commission’s enforcement of compliance with remediation work plans real, substantive teeth.
What do the rules on financial assurance require?
In essence, these rules require oil and gas operators to provide the Commission with substantial financial assurances for the operator to “demonstrate its capacity to perform all of its obligations under the Act and the Commission’s Rules,” including state-imposed remediation plans of oil and gas extraction sites. Effectively, these “financial assurances” are collateral that secures an operator’s environmental, conservational, and operational obligations.
Under the rules, operators may choose between different means of providing the Commission with financial assurance. The Rules list as “preferred” means of financial assurances the provision of a cash or surety bond by the operation to the Commission. Alternatively, the operator may request a hearing to obtain approval to provide some other means of assurance or guarantee.
Options for Calculating the Amount of Financial Assurance Owed
The Rules propose multiple options to calculate the amount of financial assurance owed. These options give companies flexibility based on their unique circumstances. For example, Option 1, which allows companies to calculate their assurance amount with a uniform cost-per-well, is available to operators which produce a large amount of oil or gas. Option 4, on the other hand, is designed specifically for operators with low oil or gas production.
Because the financial assurances are designed to secure currently-operating wells—including their eventual plugging and remediation of surrounding sites—operators had to submit financial assurance plans by a specific date based on their size.
Large operators with 50 or more wells had to file their initial proposals by July 1, 2022; for smaller operators with fewer than ten wells, that date was December 31, 2022. After these submissions, the Director would review these initial financial plans for adequacy based on an operator’s compliance obligation; operators would then be required to submit revised financial assurance plans based on the Director’s input.
When are Additional Financial Assurances required?
In the context of remediation plans, the Commission may require additional financial assurances—over and above that mandated by the operator’s size—to ensure the remediation project is undertaken. The amount of such financial assurance may be an amount equal to the estimated total cost necessary for the remediation project.
These financial assurances can be significant and impose substantial costs on cash-strapped companies. The collateral held by the state will not be released until the Commission itself—the Director specifically—determines that the operator has complied with its obligations under the remediation work plan and its submitted Form 27. In theory, the companies will be pressured to comply with their work plans to prevent forfeiture of their collateral.
Additionally, the collateral would cover the cost of remediation projects should the operator fail to comply with the terms of the work plan or file for bankruptcy and can no longer perform under the work plan. The State is generally responsible for the remediation of spills, the plugging of wells, and other issues arising from so-called “orphaned wells,” i.e., abandoned wells.
Financial Assurances in Practice
The financial assurance rules require companies to submit their financial assurance proposals under the multi-tiered approach described above. Predictably, observers scoured the proposed financial assurances for insight into the future of the program’s effectiveness.
Carbon Tracker, an environmental advocacy group, reviewed the financial assurance proposals and found them wanting, noting that most operators had proposed financial assurance amounts below what the COGCC forecasted. Nonetheless, Colorado’s oil and gas companies had offered considerable financial assurances—$459 million to guarantee the plugging and remediation of their well sites.
Omimex Petroleum
Because the financial assurance regulations gave oil and gas companies the flexibility to determine the amount of their bond, predictably, some producers proposed bond amounts far below what the COGCC’s predicted cost-per-well. For example, Omimex Petroleum has “334 low-producing wells” in Colorado.
While Omimex’s own quotes and estimates put the total cost for plugging and remediation of each of its wells at over $12,000, Omimex argued in its filing that the cost of plugging would be “offset” by selling the steel casings used to construct the well. Factoring in this “offset,” Omimex proposed $1 million in financial assurances—compared to the Commission’s forecast of $37 million. The Commission forecasts the average cost of plugging a well, removing equipment, performing remediation, and site reclamation, at $92,000.
KPK
KPK, or KP Kauffmann, is a large operator, with more than 1200 wells operating across the state. However, most of its wells are low-producing; thus, the company filed under Option 4 for low-production operators. In its financial assurance proposal, the company proposed $10.3 million in financial assurance—compared to the “commission target of $133 million.”
The Case of KPK
In practical terms, from the perspective of oil and gas companies, the financial assurance rules impose significant cash-flow costs on operators. While the rules intend to assure that operators make good on their obligations to plug wells and remediate sites or provide the state with the funds to do so if the operator does not comply, the scheme does not quite work that way.
What is the major problem?
The problem is acute for operators that own many low-producing wells. These wells are at the highest risk of being shut down or abandoned in the near future. Likewise, the cost of plugging and remediation may be even higher than the remaining lifetime production of the well.
Likewise, the owners of such wells may be cash-flow poor or have weaker financial forecasts. While it is only proper that they should pay for the remediation of their own sites, in practice, operators may be unwilling or unable to do so. Thus the operators with the most at-risk wells, with costs set to come due very soon, are also the most likely to be unable to meet their commitments, leaving the state to handle remediation and plugging.
KPK as the Example for Future
The Commission’s experience with KP Kauffman is illustrative. A large operator with many low-producing wells across the state, the cost projections for remediation and plugging of its wells runs well over $100 million. KPK is also somewhat frequently a subject of the Commission’s enforcement hearings—the company, according to a Commission enforcement filing in 2021, has been responsible for “numerous spills and releases“ since 2018.
The Commission alleged that KPK “has been unable, or unwilling, to commit the attention and resources that are required to adequately address these matters.” Since that enforcement action, the company and the Commission agreed to a compliance plan—KPK failed to meet its obligations under that plan. In 2022, the Commission again delayed punishment, giving KPK six months to comply. “At that time,” High Country News reported, “Assistant Attorney General Caitlin Stafford said that [KPK] had completed work at just two out of 58 remediation projects.” In January 2023, “that number stands at three,” Assistant Attorney General Stafford stated.
In February of 2023, the Commission took drastic action against KPK by suspending its ability to operate its wells in Colorado and immediately imposing $2 million in deferred fines.
As KPK’s representatives note, not without some merit, the inability to operate its wells also means it can hardly pay its obligations to the Commission, including, presumably, its financial assurances.
COGCC’s Challenges for the Future
KPK illustrates the difficult bind that the COGCC is in—and the likely situation that other oil and gas-producing states may confront. The wells most at risk for abandonment and financial insolvency are also the wells least likely to have their plugging and rehabilitation costs assured. Likewise, cracking down on the operators of these sites may force them into bankruptcy, putting the entire cost of remediation and plugging on the state itself.
Furthermore, the financial assurances offered by the oil and gas companies to date do not cover the projected costs of remediation and plugging—and the companies and operators most able to fulfill their financial assurance requirements are also the owners of wells with the least risk of financial insolvency and abandonment.
Questions?
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