Abandoned Unconventional Natural Gas Wells: A Looming Problem for Pennsylvania?

Posted on 06-13-2017

By Associate Professor Jeremy Weber and Andrew Earle

Pennsylvania has a long legacy of natural gas drilling. One unfortunate aspect of the legacy is a host of abandoned shallow gas wells throughout the state, some of which likely leak gases or liquids harmful to animals, plants, or people. This raises the question of the fate of the more than 10,000 unconventional natural gas wells that have been drilled in the state over the last decade, with more drilled each day.  

Pennsylvania, like many other states, uses a bonding system to motivate companies to properly reclaim wells. Before the state grants a permit for a well, it requires that the company operating the well commits funds that, if the well is eventually abandoned, would be forfeited and used by the state for reclamation. Bond amounts vary in a tiered structure based on the quantity of wells operated by a company (see table). As an example, a company with 55 wells must pay a flat fee of $290,000 to cover the first 50 wells and an additional $10,000 for each of the last 5 wells, leading to a total of $340,000 in bonds.  Companies operating many wells benefit from caps on total bond amounts: a company operating up to 150 wells would never pay any more than $430,000; a company operating more than 150 wells would never pay more than $600,000.

Bonding Requirements for Unconventional Natural Gas Wells in Pennsylvania

Number of Wells Bonded by the Company

<26

26-50

51-150

>150

Flat Fee

None

$140,000

$290,000

$430,000

Bond per Additional Well

$10,000

$10,000

$10,000

$10,000

Maximum Payment

$140,000

$290,000

$430,000

$600,000

Source: PA Const. Title 58, §3225. 

For the bond system to be expected to work well, bond amounts should be similar to the cost of reclamation. If bond amounts are small relative to reclamation costs, companies may have the incentive to abandon wells. To be clear, abandoning a well and forfeiting the bond does not absolve the company of legal responsibility for the well. However, enforcement by the state requires resources and companies can dissolve or enter bankruptcy, making it difficult to hold them accountable. Another problem with low bond requirements is that if the state is not able to require companies to reclaim wells, the bond will be insufficient to cover reclamation costs, leaving taxpayers with the cleanup bill. 

The few unconventional wells that have been reclaimed suggest that reclamation costs greatly exceed current bond requirements. Austin Mitchell and Elizabeth Casman of Carnegie Mellon University estimate the cost of plugging the average unconventional well at about $100,000. This is an estimate of the plugging cost only; it does not account for other aspects of reclamation. In one case, Cabot Oil & Gas Corporation paid Pennsylvania $2,190,000 to reclaim three unconventional wells, which is more than $700,000 per well.  At this rate, a company that has 10 wells and abandons them all would forfeit $100,000 but leave the state with a cleanup bill of $7 million. 

To date, however, very few of the state’s unconventional wells have been abandoned.  Data from the PA Department of Environmental Protection shows 659 unconventional wells classified as permanently inactive, of which 653 have been plugged and 6 are abandoned, an abandonment rate of less than 1 percent.  The low abandonment rate is promising but might be misleading. Regulatory Inactive Status is granted to a non-producing well that is expected to enter (or return to) production.  The status lasts five years, but companies can apply for an extension. After the state began charging a per well Impact Fee in 2012, the number of regulatory inactive wells rose quickly, increasing from 75 in 2012 to 507 in 2013 (see figure). The number of regulatory inactive wells has generally continued to increase and currently stands at about 750 wells according to the DEP’s data.

The Growing Number of Regulatory Inactive Unconventional Wells 

Source: PA Department of Environmental Protection. Elaboration by the authors. 

Because most regulatory inactive wells received their status designation in 2012 and 2013, the five-year duration of the status for many of the wells will end in 2017 or 2018. Unless the company operating the well applies for and receives an extension of the regulatory inactive status, it must become active, plugged, or abandoned. The need to drill wells to hold leases, low natural gas prices, or incomplete pipeline infrastructure could create incentives for companies to keep promising wells in the regulatory inactive status. In other cases, companies might simply seek to postpone the costs of plugging and reclaiming an uneconomical well. 

The next three years will be telling. Unless the state allows all inactive wells to remain as such, many companies will have to bring an inactive well into production or incur the cost of plugging it. Abandonment might occur if they are unwilling or unable to do either. The change in the abandonment rate over the next three years will indicate whether the state’s low bonding requirements have sowed the seeds for an abandoned well problem that it is financially unprepared to address.  

Andrew Earle is a rising senior at the University of Pittsburgh majoring in Mathematical Economics. His current research interests include the management of natural resources and housing blight. After graduation, he intends to pursue a graduate degree in Economics.

Jeremy G. Weber is an Associate Professor at the University of Pittsburgh, Graduate School of Public and International Affairs and the Department of Economics. His research cuts across energy, agriculture, the environment, and well-being. He teaches classes in quantitative methods and energy and environmental policy. 

About the blog: The GSPIA Energy and Environment blog provides commentary and analysis that furthers understanding of E&E issues of public interest. Its primary contributors are GSPIA faculty and students. 


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