It would cost $500 billion to cap all of the oil and gas wells in the United States that are currently in production, according to industry estimates.
Yet most oil companies have set aside little money to fund the cleanup process, expecting to use revenue from future oil production or to sell them off to other operators before the bill comes due.
That’s created a massive unfunded liability for the industry — a problem that’s expected to grow as climate-driven efforts to electrify the energy system sap demand for oil and gas.
Now a new company, backed by one of the world’s largest underwriters, is offering a potential solution: life insurance for oil and gas wells.
OneNexus is wagering that with enough proprietary information about the productive longevity of wells and the costs to eventually cap them, it can turn oil companies’ environmental liabilities into profits for its business partners. Those include Munich Re, the German insurance giant, which in October agreed to provide financing that’ll allow OneNexus to write up to $1.2 billion of well capping contracts, or enough to cap some 25,000 wells.
The Houston-based startup was founded in June 2021 by Tony Sanchez III, who was previously CEO of Sanchez Energy, a mid-sized oil and gas producer with more than 1,000 wells. Sanchez Energy filed for bankruptcy in August 2019, largely in response to low oil and gas prices, and is now known as Mesquite Energy.
“It was that experience that led me to come up with this idea,” Sanchez said. “I looked and said, ‘who’s going to plug these wells ultimately, far out in the future’?”
Properly capping old wells, which involves plugging the well bores with cement and removing surface equipment, is important because inactive or abandoned wells can contaminate groundwater and emit methane, a highly damaging climate pollutant.
“Somebody is going to have to come out of pocket to plug the wells. And if the wells are no longer producing oil and gas, there’s not going to be any money,” Sanchez said.
In that all-too-common scenario, the wells could become what are known as orphans, in which the former owners are either insolvent or unknown. Then taxpayers are on the hook for the capping costs, which typically range from $20,000 to $300,000 per well, according to the Carbon Tracker Initiative, a climate think tank.
The bipartisan infrastructure package President Joe Biden signed into law last year provided $4.7 billion to plug some of the nation’s more than 117,000 orphaned wells. By comparison, there are roughly 937,000 wells currently in operation.
OneNexus isn’t looking to cash in on that windfall of federal dollars to cap orphaned wells. Instead, the firm is trying to work with onshore oil and gas producers to ensure their wells don’t eventually add to taxpayers’ cleanup burdens.
“If a well is covered by our product, it will never become orphaned because there will always be money there to plug the well,” Sanchez said.
A ‘foolproof’ plan?
Here’s how OneNexus is attempting to make money by resolving a costly problem for oil and gas companies.
The startup has built a database of every well in the continental United States that includes estimates of each well’s productive life and expected plugging costs. Based on those factors, it is offering oil and gas firms the option to either buy life insurance of sorts or to pay OneNexus now to cover the future funeral expenses and any post-burial problems associated with their dead wells.
In the first, cheaper option, an oil and gas firm would purchase a defined benefit that OneNexus estimates will cover the future cost of plugging a well. A firm then would get its benefit payment years or decades later, after properly decommissioning the well.
The second, more expensive option would allow a firm to transfer the title and legal liability for a well to OneNexus as soon as it reaches the end of its useful life. OneNexus then would be in charge of capping the well and responsible for any cost overruns or future legal problems.
The money OneNexus needs to fulfill the well-capping deals it hopes to sign would be held by its Oklahoma insurance subsidiary. That arrangement means state regulators can ensure that the subsidiary has enough capital reserves to fulfill the contracts OneNexus signs and that the subsidiary only pays out claims to OneNexus or other firms for well-capping jobs.
“Once those monies go in, the regulators are the ones that have the say,” Sanchez explained.
“This is about as foolproof as we could set it up,” he said. “And a lot of these decisions to go above and beyond — from a regulatory standpoint, from a financial standpoint — are all I’d say influenced by my past experiences.”
OneNexus hasn’t yet signed up any customers, but Munich Re isn’t concerned.
“I know that the company has had a lot of inquiries from very good companies in the U.S.,” said Vikram Nath, the managing director of the insurer’s energy transition finance division. “We have seen some positive developments, so we hope to hear some publicly announced transactions in the next few months.”
Business challenges
Some outside experts think the life insurance model can work in the oil and gas industry. After all, drillers already purchase coverage to protect against spills, worker injuries and many other potential complications.
But experts question whether the OneNexus approach can succeed without stricter government oversight of unproductive wells. While many states already have bonding regulations that require oil and gas companies to set aside money for well capping, most of those don’t cover the full cost of plugging and aren’t aggressively enforced.
“There is a regulatory requirement to have to bury these wells. It’s just the lack of sufficient enforcement that leads some people to say, ‘Well, I can just skip out on this and I’m not going to have to pay,'” said Robert Schuwerk, the head of Carbon Tracker’s North America office. For the same reason, he said, “some operators might opt not to pay for this insurance either.”
Even if companies do buy what OneNexus is selling, there are challenges associated with applying the life insurance formula to something more costly and difficult to manage than a corpse.
“If they don’t make the initial price sufficient, then they won’t have the resources to clean up,” said Daniel Bens, an accounting professor at France’s INSEAD, a business school.
Another potential problem is what OneNexus does “with the funds once they received them,” he said. “Because they need to now invest those in a way where it will grow, such that when the well needs to be plugged there will be enough there.”
“What you’re always worried about, from a society standpoint, is if OneNexus goes bankrupt,” Bens added.
Munich Re is confident the numbers OneNexus is relying on are solid. The insurer also expects that investors’ concerns about environmental, social and governance issues will force oil and gas companies to fund their well-capping liabilities, whether policymakers require them to or not.
“These [oil and gas] companies have become way too pregnant with this ESG idea,” Nath said. “They cannot change course.”
Reporter Mike Lee contributed.
