How the infrastructure law creates state oil winners and losers

By Shelby Webb | 08/17/2023 06:54 AM EDT

The leeway the law gives to states on orphaned wells is raising concerns about misuse of funds.

Orphaned well, oil barrels, money, stock ticker, illustration.

Claudine Hellmuth/POLITICO (illustration); Freepik (stock ticker, money and oil barrels); Shelby Webb/POLITICO’s E&E News (orphaned well)

PECOS COUNTY, Texas — It’s hard not to gag when first smelling the sulfur emanating from Boehmer “Lake” in the middle of the scrubby desert here.

The 60-acre body of water wasn’t created naturally, but from an abandoned and unplugged well drilled by Pure Oil Co. in the early 1950s that wasn’t productive. Since 2003, the well officially known as Sloan Blair #1 has been spewing hundreds of gallons of putrid water every minute to create a toxic lake contaminated with hydrogen sulfide and other chemicals.

“It’s a damn cavern,” said Ty Edwards, general manager of the Middle Pecos Groundwater Conservation District, who called the lake an “environmental disaster” that is killing animals and trees.


The well could be prioritized for plugging with federal funds if it was formally classified as an orphaned well, but the state puts it in a different category because it was later repurposed for irrigation, he said.

Boehmer Lake highlights a central dilemma facing the Interior Department as it distributes $4.7 billion for oil well plugging under the 2021 Infrastructure Investment and Jobs Act: Does leeway given to states on how to define — and prevent — orphaned wells increase the risk that federal money will be misused? And how do you ensure that the money is being distributed to states and communities that most need it?

Some state definitions, for example, would count Boehmer Lake as an orphaned well eligible for federal money, while Texas says landowners are responsible for plugging it, since it’s no longer an oil well. The infrastructure law prevents Interior from requiring states to use a set definition, leaving it up to them to set the standards.

The different state metrics are reflected in widely varied counts of orphaned wells being reported to Interior, regardless of oil and gas production levels.

Texas is by far the nation’s largest producer, for example, but the 7,396 orphaned wells it reported to Interior in 2021 are more than three times less than Pennsylvania, which reported 26,908 wells. Texas also lagged behind Ohio, Oklahoma and Kentucky.

Critics say the different ways states are counting will lead to some states receiving federal funds to plug wells that have active operators. That means they have funds to plug the wells themselves, without using taxpayer dollars. Others say that because the federal funds don’t require states to bolster the fees oil and gas companies pay to state funds for plugging wells means the orphan problem will continue to grow.

“Some states have been designating basically any unplugged well as an orphaned well. They’re going to use federal taxpayer dollars for active companies that are profiting,” said Virginia Palacios, executive director of Commission Shift, an advocacy group in Texas working to reform the state’s oil and gas watchdog. “The problem with that is it creates a competitive imbalance. You’ll have companies operating in some states that have well plugging costs subsidized by the federal government, then operators in other states [are not] covered by taxpayers.”

To receive funding from the infrastructure law for plugging, states needed to report the number of orphaned wells within their borders by December 2021. The 26 states that qualified received $25 million each in initial grants last year.

The number of reported wells will be used to determine how much money they will get in later rounds of grant funding. The funds are funneled through various state agencies. In Texas, it is the state Railroad Commission.

When asked about criticism of the law, Interior said it is implementing what Congress directed it to do. The White House did not respond to requests for comment.

From Louisiana to ‘ground zero’

There is general consensus for defining what an orphaned well is — an oil or gas well that is unplugged but no longer active, and one that the entity responsible for drilling or using it either can’t be found or has no money to plug it.

That’s essentially the definition the Department of the Interior uses. For wells on tribal and federal land, Interior considers wells orphaned if they are not used for purposes such as production, injection or monitoring and if operators cannot be found or are unable to plug and remediate the site. All unused wells in the National Petroleum Reserve in Alaska fall into this category.

But to receive infrastructure law cash, Interior allowed states to use their own definitions for wells on state or private land. Using different metrics, states reported 126,806 orphaned wells nationally to Interior in 2021.

Louisiana, for instance, considers all of an operator’s wells orphaned if just one well continuously fails inspections. In Texas, many unplugged wells are considered idle or inactive, not orphaned, so they don’t count in the state tally. Other states are counting those idle or inactive wells in their orphaned wells numbers, said Palacios.

In other cases, the infrastructure law is spurring a plugging wave, highlighting the lack of funding in the past.

In Pennsylvania, orphans are considered to be wells abandoned before 1985 in which the operator or owner “has received no economic benefit other than as a landowner or recipient of a royalty interest from the well.”

State law says wells can be considered orphans if the Pennsylvania Department of Environmental Protection cannot determine ownership of a well within 30 days after it is reported.

Even with that comparatively narrow definition, Pennsylvania is “ground zero” for orphaned wells due to the number of wells and lack of previous plugging efforts, said Adam Peltz, a senior staff attorney for the Environmental Defense Fund.

“Other states have a big problem too, but Pennsylvania is really in a class by itself,” he said.

Many of the state’s wells were originally drilled when oil production began in the United States in the late 1800s, he said, when there were few — if any — rules requiring drilled wells be closed.

Still, Pennsylvania did not spend much on plugging the wells before the federal dollars from the infrastructure law kicked in, said Jason Simmerman, orphan well program manager for the Ohio Department of Natural Resources. Pennsylvania officials declined requests for an interview.

“Their programs were funded with less than $1 million a year, during 2017 until really now as the federal dollars kick in,” he said. Pennsylvania was not alone in that, said Peltz.

“Most states spent very little on it, and it shows,” Peltz said. “This is the first time they’ve had real federal money behind it. It’s still not enough, but it’s a start. It’s bringing [the issue of orphaned wells] to light after it was previously flying under the radar.”

Neil Shader, a spokesperson for the Pennsylvania Department of Environmental Protection, said in an email that officials work to identify parties responsible for abandoned wells and, if they are found, order them to be remediated.

Bonding troubles

While the federal funding is allowing states to jump-start their programs, it does not mandate that they institute more stringent bonding requirements to prevent wells from being orphaned in the first place. Bonding essentially is insurance for oil and gas wells, but required policies also vary widely from state to state.

There are two types of bonds that operators can purchase in most states: single-well bonds for individual wells, which often range in price depending on the well depth, and blanket bonds where operators can pay more to cover multiple wells at once.

Overall, the median decommissioning costs are about $20,000 nationwide for plugging a well and $76,000 for plugging and reclaiming the surface around one well. Each additional 1,000 feet of well depth increases the costs by 20 percent, according to a 2021 study by the American Chemical Society that analyzed 19,500 wells. For sites with dozens of orphaned wells — which is not unusual — it can cost millions of dollars to fix the problem.

But many states fall short in requiring insurance that covers the average costs.

“Unfortunately, in most states, the bond amounts are very low, and in particular, states allow operators to get blanket bonds that cover all the wells within a state for pennies on the dollar,” Peltz said.

Pennsylvania dictates that if an operator has over 250 wells that are less than 6,000 feet deep, it pays a total of $100,000 for a blanket bond, plus $4,000 for each additional well over 250 wells. For wells over 6,000 feet deep, an operator would pay $430,000 in a bond if it has over 150 wells in that category, plus $10,000 for every additional well once 150 have been drilled. That $10,000 per well after a certain point is less than half the average cost of plugging alone.

Texas similarly requires bonds that don’t cover most plugging costs — $2 for every foot of depth, $100,000 for offshore wells, and blanket bonds from $25,000 for 10 or fewer wells up to $250,000 total if an operator has more than 100 wells.

The Bureau of Land Management also charges less than the median cost of plugging a well, with bonds of no less than $10,000 for individual well leases on federal lands, $25,000 for bonds covering a potentially unlimited number of federal leases in a single state, and at least $150,000 for operators with leases nationwide. There is no limit on the number of wells an operator can cover for the $150,000 bond for nationwide leases on federal lands.

The federal amounts could soon change. On July 20, BLM issued a proposed rule that would increase the bonding requirements to $150,000 for a single lease and $500,000 for all leases in a single state. It would eliminate the ability for companies to obtain a bond for all of their leases of federal land nationwide.

In a press release about the proposed rule, BLM officials wrote, “The current, outdated bond requirement increases the risk that taxpayers will end up covering the cost of reclaiming wells in the event the operator refuses to do so or declares bankruptcy.”

Sen. Ben Ray Luján (D-N.M.) said bonding reform is at the heart of preventing wells from becoming orphans in the first place. He was one of two authors of the “Revive Economic Growth and Reclaim Orphaned Wells Act,” most of which was wrapped into the infrastructure law in the form of the orphaned well plugging program.

“Federal bonding requirements haven’t been updated since the 1950s — they are so low that it is cheaper for companies to simply walk away from their obligations. Following abandonment, taxpayers are left to clean up those same wells that these companies just profited from,” Luján said in a statement.

A guidance document released by Interior in July says grant funding “should not be used where there is an identifiable financially responsible party capable of completing the plugging.” The law requires states to certify that “available financial assurance instruments” will be used in conjunction with the orphaned well program’s formula grant portion.

However, the infrastructure law does not require states to up the amount producers must pay for insurance to have bonds more accurately reflect the cost of plugging and remediating wells.

Luján said he is working to build bipartisan support for increasing bonding requirements at the federal level but did not say whether he is working to author additional legislation on the issue.

Alabama, national model?

Alabama may not be the first state that comes to mind when it comes to oil and gas production. It ranks 15th in oil and gas production and is home to 0.1 percent of the country’s recoverable crude oil reserves and 0.3 percent of its natural gas reserves.

But its requirements that oil and gas producers insure wells they drill, and its efforts to track down responsible parties when an abandoned site is unplugged, have made it a national example of how to keep wells from becoming orphaned, Peltz said.

“In Alabama in particular, they have a long-standing policy of hunting all these people down,” he said.

At the helm of those efforts is Marvin Rogers, longtime general counsel for the Alabama Oil and Gas Board.

The state reported 91 orphans to the Department of the Interior for the infrastructure law funding, but Rogers said only about 10 remain where the state could not find an operator or responsible party. Part of that is timing — the state’s first oil and gas well wasn’t drilled until 1944, so there are records of what was drilled where. But it is also a result of the state’s efforts to fund enforcement, observers say.

Another factor was the state Legislature giving Alabama’s Oil and Gas Board the authority to require operators to purchase surety bonds. The board enacted the policy when founded in 1945.

The bonds companies must buy for plugging costs in Alabama for individual wells range from $5,000 to $50,000 for onshore wells depending on depth, and $500,000 for offshore wells. That offshore bonding requirement is five times more than charged in Texas.

Larger operators can purchase a blanket bond for land-based wells for $100,000, but Rogers said the state’s Oil and Gas Board has the authority to up that amount depending on the number of wells drilled, “which they often do,” he said.

The insurance Alabama requires is often enough to plug wells that operators abandon, and state law requires either a hearing or an annual report on every inactive well in the state.

“That way, they don’t get out of sight, out of mind,” Rogers said.

Some worry that adding federal requirements for bonding could lead to unforeseen issues, however. Staci Taruscio, founder of Rebellion Energy Solutions, said there isn’t a one-size-fits-all solution to insuring wells across the country.

“Imagine the federal government telling the state of Texas they have to get rid of blanket bonds for operators, and instead institute a $25,000 surety bond for every well in the state. Imagine the chaos,” Taruscio said, referring to the bureaucratic headache of changing the system and the time it would take to obtain bonds for each individual well.

“There are reasons Colorado might handle this differently than Kentucky, and there are good reasons, like the type and size of the operators that work in a given state,” she added. “People operate in Texas differently than people off in Louisiana.”

‘Before I die, that’s my goal’

With Boehmer Lake, the Texas Railroad Commission has fought with local authorities over who should pay the potentially millions of dollars to pump enough cement into the hole to keep contaminated water from ruining nearby land. While the commission says landowners are responsible for plugging the well, the original landowners left the area long ago.

Classifying Boehmer Lake as an orphaned well would automatically put it at the top of the state’s list for plugging, because Texas rules rank wells with surface leakage at the highest priority level.

Edwards, with the Middle Pecos Groundwater Conservation District, said the fight has become more tense within the past couple of years.

His three-person agency hired a lobbyist to set up virtual meetings with Interior and Sen. John Cornyn (R-Texas), and secured multiple letters by state and federal elected officials asking to plug Boehmer Lake and other problem wells.

Edwards went to the Railroad Commission’s headquarters in Austin, Texas, and in the basement found the original drilling permit for Sloan Blair #1.

The now-defunct operators wrote in 1951: “In consideration of the granting of this application, we hereby obligate ourselves to complete the plugging of said well any time it becomes polluted with mineral water, or constitutes a menace to any oil or gas producing strata in that area, when so ordered by the Railroad Commission of Texas or its representatives.”

Despite that document, the Railroad Commission maintains that because Sloan Blair #1 became a water well, it is not responsible for it.

“Water wells are not under the RRC’s jurisdiction. The landowner is the responsible party and the owner of this water well,” spokesperson Patty Ramon wrote in an email. “The Boehmer Lake is not orphaned. Statutes clearly define what an orphaned well is.”

Another issue is money, according to Edwards. The cost of plugging Sloan Blair #1 could balloon to above $100 million because of how technical the work would be and how deteriorated the well has become. The money it would take to plug that one well could plug thousands of orphaned wells across the state.

The Railroad Commission has started plugging orphaned wells with backing from the infrastructure law, reportedly fixing more than 600 from when the funds were dispersed in October 2022 through May of this year.

The Texas Legislature this year allocated some funds for plugging former oil wells that were reclassified as water wells, but the amounts are not enough to fix Boehmer Lake and many other sites. Edwards’ agency, for example, was given $10 million to plug such wells, far less than what Boehmer Lake and other large sites need.

Edwards doesn’t know what it will take to get enough funds to finish the work, or when it will happen. He just wants the poison lake gone. He said he used a waterproof, specialized camera to look 500 feet underground and found the casing of the well was gone, revealing a hole “so big you couldn’t see.”

“Within my lifetime, I’d like to get that well plugged,” he said. “Before I die, that’s my goal.”