Dec 24
By Justin Mikulka
In over their heads with debt,
U.S. shale oil and gas firms are now moving from a boom in fracking to a boom in bankruptcies. This trend of failing finances has
the potential for the U.S. public, both at the state and federal levels, to be
left on the hook for paying to properly shut down and clean up even more
drilling sites.
Expect these companies to try
reducing their debt through the process of bankruptcy and, like the coal industry, attempting to get out of environmental
and employee-related financial obligations.
The Bankruptcy of EP Energy
In October, EP Energy — one of
the largest oil producers in the Eagle Ford Shale region in Texas — filed for bankruptcy because the firm couldn't pay
back almost $5 billion in debt, making it the largest oil and gas bankruptcy since 2016.
EP Energy hasn't produced a
profit since 2014 and Bloomberg reported that the company would need oil to
be at "a price closer to $70 per barrel" for EP to be profitable. Oil
has not come close to averaging over $70 a barrel since 2014.
Despite its financial
struggles at current low oil prices, the company plans to continue operating
after restructuring and eliminating up to $3 billion in debt. However, EP has
not identified any funds that it would be setting aside for well cleanup, which
is not unusual for an oil and gas company.
In response, as part of the bankruptcy proceedings, the U.S. Department of the Interior filed a document arguing
that EP Energy is still responsible for its obligations to assure the
"decommissioning, plugging, and abandonment" of any of the EP Energy
wells that are located on leased federal and tribal lands.
Ideally, that would mean EP
Energy sets aside funds for the proper cleanup and end-of-life processes for
its oil and gas wells, which number more than 800 in the Eagle Ford region.
However, the federal
government hasn't even named a number yet for how much that should be. The
Bureau of Land Management and Bureau of Indian Affairs "are currently
still assessing the status of reclamation and plugging and abandonment
obligations across the Debtors' onshore federal and Indian leases," writes
the Interior Department.
In EP Energy #bankruptcy, US
Interior Department wants to make sure that enough money is set aside for
cleanup. For financially struggling companies, cleanup is becoming the tail
that's wagging the dog. https://www.reuters.com/article/bankruptcy-epenergy/us-wants-enviro-assurances-on-oil-well-leases-from-bankrupt-ep-energy-idUSL2N27W00Z …
The federal government is only
getting around to assessing EP Energy's potential liabilities once the firm is
already in the bankruptcy process, revealing one of the flaws in the current
system. Federal and state governments have not been holding fracking companies
fully liable for the environmental damage and cleanup costs of their drilling
activity.
Joshua Caleb Macey, a visiting
assistant professor at Cornell law school who specializes in bankruptcy and
energy law, told DeSmog that the situation with EP Energy was "frustrating
and completely normal."
According to the Interior
Department filing, "Regardless of its bankruptcy, the Debtor is required
to comply with all applicable federal laws."
As I've reported before, oil and gas companies are legally required to hold a certain amount of funds to pay for well cleanup costs, a process known as bonding that varies by state and for public lands.
As I've reported before, oil and gas companies are legally required to hold a certain amount of funds to pay for well cleanup costs, a process known as bonding that varies by state and for public lands.
Because companies are rarely
required to have those funds available before they start drilling (and thanks
to industry-friendly regulators and politicians), in reality oil and gas
companies can walk away from cleanup obligations with relative ease, which has
become the pattern for bankrupt coal companies.
Including Cleanup Costs Would
Make Extraction 'Uneconomic'
Federal and state regulators
have been failing to require companies to fully fund expected cleanup liabilities, which helps mask
the true cost of oil and gas production. Passing environmental cleanup costs on
to the taxpayer amounts to a backdoor subsidy for the oil and gas industry.
Requiring oil and gas
companies to pay for shutting down and cleaning up wells would greatly increase
the cost of drilling for many oil and gas wells. The fracking industry
already can't make money pumping fossil fuels out of
shale in the U.S., and that's without these firms coming even close to
fully funding their cleanup costs.
However, more state governments are realizing the scale of this problem and starting to look at
increasing and enforcing bonding requirements for oil and gas well cleanup.
However, in oil-rich places like Alberta, Canada, and Alaska, regulators are
realizing that the money just isn't there.
Hey @jkenney @Alberta_UCP after
your sustained attacks on the Liberal government, why are you now begging for
taxpayer money to clean up Alberta's abandoned oil wells? Oil companies must
pay for that. Not us. Hands off our tax dollars. The oil shareholders should
pay. #cdnpoli
— Trish Palmer
(@TrishPalmerYVR) December
1, 2019
In 2018, the natural gas
driller Amaroq Resources acquired
the Nicolai Creek assets in southwest Alaska from the bankrupt Aurora
Gas. This transaction was delayed when the Alaska Oil and Gas Conservation
Commission (AOGCC) announced $7 million in bonding required for the gas wells
associated with the purchase. This is the point where the state government had
the power to make Amaroq provide adequate bonding for well cleanup.
The AOGCC then agreed to
reduce that amount to $200,000 and the deal went ahead.
Since that deal, the
commission increased the minimum statewide bonding level to $400,000 per well
for the first one to 10 wells. Amaroq would be required to abide by these new
regulations and has appealed this decision. Company president Scott Pfoff
explained that these new bonding requirements make the business
"uneconomic."
And that is the reality. If
oil and gas companies were required to pay for the full end-of-life cost of
their wells, much of their inventory becomes uneconomic. This is where
taxpayers come in.
Fracking Industry Wants to
Dump Wastewater in Streams and Rivers to Save Money
Failure to require adequate bonding for oil and gas cleanup costs is just
one of many backdoor government subsidies for the oil and gas industry. The
failure to regulate flaring and venting of the potent greenhouse gas methane during
oil drilling is another example.
Fracking firms, which spend a
lot of borrowed money to pump out a lot of oil and gas for not much (or any)
profit, are experiencing a collapse in financing. Thanks to the industry's failed
business model, these companies are desperate for ways to cut costs.
One of the major costs
associated with hydraulic fracturing, or fracking, is acquiring, pumping and disposing of water, which, after a
driller is finished with it, typically contains corrosive levels of salts and
contaminants including naturally occurring radioactive materials, chemicals and
oil residues. This area has become a major target for the industry to save
money.
A graphic showing the water
cycle during hydraulic fracturing. U.S. Environmental Protection Agency, 2016
As The Washington Post pointed out in 2015 (and as I
highlighted last year), when it comes to fracked shale oil and gas production,
"currently there is no way to treat, store, and release the billions of
gallons of wastewater at
the surface." The industry's current range of (legal) approaches to disposing of its massive amounts of wastewater involves
injecting it underground, which in some cases is tied to increased earthquake
activity, using it to irrigate crops or de-ice roads, and sending it to
municipal water treatment plants lacking equipment to properly treat it.
Treating oil and gas drilling
wastewater is possible, but expensive. As S&P Global Platts recently reported, according to a study by the Texas
Alliance of Energy Producers and Independent Petroleum Association of America,
for Permian drillers in Texas, "Economically, treatment costs must come
down."
The study concludes that
dealing with wastewater is already a limiting factor in this prolific region:
"Some Permian sub-basins are currently constrained due to insufficient
injection well capacity. Projected production growth will worsen the
situation."
With this glut of wastewater
combined with high costs, the industry is looking for a cheap alternative. The
latest preferred approach seems to be lobbying governments to change the rules
to allow dumping wastewater with limited treatment into rivers and streams.
In November, E&E News
reported that there's movement to allow or expand such wastewater dumping
in Oklahoma,
Texas, New Mexico and Pennsylvania,
all states with major fracking industries. "Within a year, Oklahoma could
get approval from EPA to start issuing permits that will allow the oil industry
to dispose of briny oil field waste in waterways," E&E wrote.
As space for injection wells
becomes scarce, the industry hopes to dump its wastewater in streams and
rivers, once again passing on potential environmental and financial liabilities
to the public.
A 2017 working group looking
for alternatives for Oklahoma oil field wastewater (also known as
"produced water") found "the most cost-effective means of
reducing disposal is for oil companies to treat and clean that produced water
so it can be reused for things like fracking," reported NPR's StateImpact Oklahoma.
However, recycling produced
water to again frack wells results in more toxic produced water, which can't be
recycled indefinitely. With injection wells increasingly unable to handle the
volume of water produced by the industry, shale firms have been seeking cheap
alternative disposal methods, including dumping the water in rivers and
streams.
However, the 2017 analysis
concluded that treating produced frack water to the point it could be safely
dumped into rivers or used to irrigate agriculture wasn't economically viable.
Owen Mills, the director of
water planning for the Oklahoma Water Resources Board, explained to StateImpact
Oklahoma why this wasn't an option for the industry: "It's incredibly
expensive to do that and it takes a lot of energy."
To properly treat the fracking
wastewater to the point it is no longer a threat to human health and the
environment would be incredibly expensive, and that is why the industry is
lobbying to change the rules about disposing its wastewater. If it succeeds,
expect the eventual clean up costs — also incredibly expensive — to be billed
to the American public.
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