By failing to require that oil and gas companies provide sufficient financial assurance when drilling new wells, U.S. state and federal regulators have put taxpayers at risk of $280 billion in cleanup costs, just as wells are closing prematurely due to falling demand and prices. The decline in prices is driven by the energy transition and the pandemic.
This is the key finding in Carbon Tracker’s report, which examines the financial risk facing taxpayers in each of the major U.S. oil producing states as industry defaults grow.
Cabon Tracker estimates that plugging 2.6 million documented onshore wells in the U.S. alone will cost $280 billion. This estimate excludes costs to plug an additional estimated 1.2 million undocumented onshore wells. Available bonding data suggests that states on average have secured less than 1% of that amount in surety bonds — and that assumes every insurer can and will pay. This means that, as a whole, oil and gas producing states are susceptible to serial operator defaults and exposed to hundreds of billions of dollars in orphan well liability risk.
Moreover, by not requiring the savings, states continue to make matters worse. Failing to require bonding gives operators every incentive to spend on drilling more wells or pay investors first whilst pushing closure costs down the road. Recent bankruptcies are showing the cracks in this system, as some states have thrown in the towel and allowed debtors to abandon unplugged wells to the state.
This outcome is not a foregone conclusion. States can act now to protect their citizens and taxpayers. By increasing bond amounts to reflect actual costs, states can shift financial responsibility to industry where it belongs and simultaneously position themselves to receive U.S. federal aid.