Money Well Spent: Plugging Orphan Wells

24 states are set to receive initial grants of up to $25 million to clean up orphaned wells. This new funding more than doubles the budget for plugging orphan wells in many states and is just the first portion of $4.7 billion allotted to address the problem as part of the Infrastructure Investment and Jobs Act of 2021.

As states finalize their plans to use the money, prioritizing which wells to address first and how to budget have arisen as major challenges. On paper plugging wells is straightforward, requiring a series of cement plugs to prevent methane and other compounds from escaping into the environment. Pennsylvania budgets around $33,000 to plug each well. However, the design, age, geology and a host of other factors impact plugging procedure, and in some cases it can cost millions of dollars to plug just one well.

Quantity over Quality?

States consider a variety of factors when assessing which wells to address first including age, integrity, leakage, surface contamination, emissions, and proximity to sensitive areas. Texas, for example uses the Railroad Commission system to rank orphan wells by risk to humans or the environment.

With the goal of the funds being to plug as much of the existing inventory of 130,000 documented orphan wells as possible, efficient and cost-effective operations are imperative. However, while low bid contracts may save money up front experience is paramount when it comes to effectively plugging wells. Experienced pluggers are much less likely to make costly mistakes that could balloon costs, but will demand a higher price for their services.

Limiting Liability

An orphan well is the result of a company becoming insolvent prior to properly plugging and abandoning a well, shifting the responsibility to decommission the well to the state. Historically state orphan well programs have contracted out the work to plug orphan wells to service companies with experience doing the work. In the past these contracts have kept the liability associated with the well in the hands of the state, but in an effort to incentivize service companies to be more efficient in their operations some states are considering shifting liability to the contractor.

While this might seem like a good way to ensure the budget is stretched as far as possible on the surface, it could very well result in veteran plugging companies passing on the work and it instead falling to inexperienced companies. The waterfall effect continues from there with these companies incurring higher costs, which don’t impact the state on the front end but could bankrupt the contractor and in turn shift liability back to the state.

Wild Workforce

Preliminary estimates project the initiative could create more than 30,000 jobs and provide a fallback for workers who are subject to a notoriously cyclical industry. However, in the short-term finding help to bolster the ranks of rig crews responsible for taking on this work could prove challenging. Incentivizing as many companies as possible to undertake this work is imperative to keep bids low and ensure as many wells are plugged as possible. In some basins rigs and crews have already been identified as a major bottleneck given the current uptick in drilling activity.

Industry Input

Some states like Ohio and Pennsylvania (cumulatively home to nearly 50,000 documented orphan wells), are consulting with industry experts to get their perspective on the best way to structure the program. Utilizing their feedback to develop a program that minimizes risk and seals wells more efficiently.

With effective cooperation between the industry and government these funds can have a tremendous impact, creating jobs while improving our land, water, and air.