Regulatory agencies have weak controls for bad oil and gas operators

Aug 30, 2013

Pure Petroleum logo

We recently reported that an oil and gas company operating in Wyoming was fined by the federal Office of Natural Resource Revenue for not submitting production reports. Turns out, the company has a history of poor behavior in the state, fiscally and environmentally. Although Pure Petroleum’s gross neglect of its responsibilities is somewhat of an exception, it does point to big flaws in the oil and gas industry’s reclamation system.

IRINA ZHOROV: The Office of Natural Resources Revenue fined Pure Petroleum for not submitting production reports starting in 2006. The Bureau of Land Management started having issues with the company around 2008. The state Oil and Gas Conservation Commission filed a complaint in 2010.

Here’s Tom Kropatsch, of the Oil and Gas Commission, listing just some of the state’s complaints:

TOM KROPATSCH: …Failure to report the spill, failure to operate two pits in a workman like manner, they had unpaid conservation taxess, they weren’t posting their idle well bond that was past due, they hadn’t performed MIT, or mechanical integrity tests…

ZHOROV: Today, it is 2013, and Pure has not addressed any of the issues with any of the agencies. It did, however, leave behind abandoned wells, some of them messy, for the state to deal with.

KROPATSCH: To date with Pure Petroleum we’ve spent $645,743 on the cleanup.

ZHOROV: For just these sorts of instances, oil and gas operators have to put up bonds, in case they bail on their responsibility to clean up once they finish producing. But these bonds are just a fraction of what it actually costs to plug a well. For example, the BLM will take just a $25,000 state blanket bond to cover all of the wells an operator has in the state, which could be hundreds. Or it will take a $150,000 national blanket bond, which could cover thousands of wells. The Commission asks for a $75,000 blanket bond. Pure had a $25,000 BLM blanket bond and $93,000 bond with the state.

KROPATSCH: We’ve sent more money on the cleanup so far to date than they had posted in bond and the remainder of that money comes out of the orphan well fund which is paid from conservation taxes the operators pay.

ZHOROV: Pure, by the way, owes conservation taxes. So, to summarize: Pure had about $118,000 bonded to the state and feds combined. So far, the state alone has spent nearly six times that on cleanup. And Pure has 101 wells on the state’s orphan list, almost all of them on private land, which means the state will spend a lot more. 

So what happened?

JILL MORRISON: I think in Wyoming the proverbial chickens have come home to roost on the regular boom and bust we see in the oil and gas development.

ZHOROV: That’s the Powder River Basin Resource Council’s Jill Morrison, who has been following Pure’s demise and similar problems in the industry for years.

MORRISON: What I have observed as I have been watching this process unfold over the last 5-10 years is a lot of coddling and hand holding by the state of these companies that are clearly incapable of managing a decent business where they’re going to be responsible. And the state keeps giving them another chance and another chance and another chance.

ZHOROV: Indeed, neither the state nor the BLM has a clear policy on how patient to be with bad operators and approaches them on a case by case basis. The BLM Buffalo Office Supervisory Petroleum Engineer, Matthew Warren, worked with Pure:

MATTHEW WARREN: There’s not really any policy on that, and the way the regulation is written I don’t know necessarily how to be stricter.

ZHOROV: Then there’s the bonding system itself. University of Wyoming’s Department Head of the Agriculture and Applied Economics Department, Roger Coupal, studied this issue. Simply put, he says bonds are too low to cover reclamation if an operator doesn’t do the work. He estimates that it costs about $30,000 to reclaim one well, while the bond per well in the state is usually closer to $6,000.   

ROGER COUPAL: Why have a bond? Well, the bond is there, the stated reason is because it gives them an incentive to clean things up. Well, it it’s not big enough, it’s not going to give the incentive.

ZHOROV: Coupal says in theory, the bonds were supposed to be big enough to cover actual costs. That’s how it works in coal mining, for example.

The BLM and Wyoming’s Commission can ask for additional bonds after production starts, if they suspect they might need them. The state did ask, but Pure did not put up those bonds. The BLM never got around to asking.

Further, the bonds don’t grow over time. The BLM does not put them into interest accruing accounts. The state does, but the interest does not go towards reclamation.

Coupal points out that most companies do follow through and clean up. Their incentive, however, is not the bonds.

COUPAL: The companies tend to, especially the majors, tend to want to for reputation, if for no other reason, because they’re usually in here for the long run and they want to make sure they have a good reputation.

ZHOROV: But Pure certainly isn’t alone. The state has 1,200 wells on its orphan list, a large percentage of them from the coalbed methane boom. The BLM has many idle wells, though it’s not clear how many they will have to clean up. The Commission has promised to speed up its orphan well cleanup program next spring, but in 2011 and 2012 combined, it only got to 35 wells.

COUPAL: When it comes to reclamation, we don’t think much about it during the boom, but then all of a sudden, when the rigs have left, the employment is gone, the we start looking at what we have and wondering why we didn’t spend more time figuring out how to solve that before it became a problem.

ZHOROV: It’s not just the physical remains, either. Pure Petroleum owes over half a million dollars in severance taxes, interest, and penalties to the state. That’s not even counting what it owes to the feds.

For Wyoming Public Radio, I’m Irina Zhorov.