Will the extraction industry’s economic turmoil blight Colorado?

Questions about gas well maintenance, clean up and public safety rise amid bankruptcies in the sector.

 

This story was originally published by The Denver Post and is republished here by permission.

Mark Schell’s family has farmed in Colorado since 1906 and even though he works as a certified public accountant, he hasn't left that way of life behind.

About a year ago, Schell bought a 310-acre farm in Mead, Colorado, that he leases to someone else to raise crops. But he was spending more and more time there, trying to get Occidental Petroleum to clean up, or “plug,” old wells the company inherited when it bought Anadarko Petroleum in 2019.

“(Occidental) started plugging these in April and then they told me they weren’t going to plug the rest of them. One of the guys flat out told me the reason they’re not going to do the rest of them is because they don’t have the money,” Schell said.

Last week, Occidental told Schell that it will close the five remaining wells. He’s glad for the news, which follows an inspection by the Colorado Oil and Gas Conservation Commission but said not everyone has time to keep after a company or the money to hire a lawyer like he did.

“They stepped up to the plate on this farm, but what about all the other places?”

Schell is not alone in wondering what the industry’s economic downturn, driven by low prices and sinking demand due to the coronavirus pandemic, might mean for Colorado landowners and communities. Is there a danger that struggling companies will walk away rather than pay tens of thousands of dollars to clean up just one well site? Will companies going through bankruptcy have the resources to safely maintain operations and adhere to agreements they’ve struck?

Public concern boiled to the point that in May the oil and gas commission issued a paper saying that it is “prepared for and continues to protect public health, safety, welfare, and the environment through the economic downturn” in the industry and changes due to the coronavirus pandemic.

An aerial view shows gas wells encroaching on the Roan Plateau near the town of Battlement Mesa, Colorado.

However, anxiety remains as the industry’s economic troubles continue.

In early September, the Denver-based company Ursa Piceance Holdings with 41,000 acres of oil and gas properties in western Colorado and about 580 active wells, filed for Chapter 11 bankruptcy protection. It has wells in Battlement Mesa, Colorado, and wants to drill more.

“My concern about a bankruptcy is they just won’t be able to maintain their wells very well. I hope they have a source of money,” Battlement Mesa resident Larry Forman, head of a community group, said of Ursa Piceance Holdings.

Ursa didn’t respond to requests for comment.

Another Denver company, Extraction Oil and Gas, filed for Chapter 11 protection in June. Cristen Logan of Broomfield, Colorado, who lives within a mile of an 18-well pad owned by Extraction, is worried about the company’s move to end a contract with a pipeline business that ships oil, gas and water from the wells, a system designed to reduce emissions.

“Are they going to start trying to truck this in and out now? That is not in compliance with the operating agreement” with Broomfield, Logan said.

Nothing in the bankruptcy process “detracts from the commitments we have made to our communities or calls into question the best-in-class provisions of our permits or operator agreements,” Extraction spokesman Brian Cain said in an email.

Broomfield is monitoring the bankruptcy proceedings to ensure the company “makes fulfilling its commitments to Broomfield a priority,” said Shaun Sullivan, attorney for the city and county.

Schell said cleanup work on his land started getting put off when Occidental took over Anadarko, which had an agreement with the previous owner of the farm in Mead. The property is a split estate, which means the company owns or leases the minerals and someone else owns the surface.

The $57 billion acquisition of Anadarko, Colorado’s largest producer, left Occidental with a huge debt load. The sale was finalized a few months before oil prices began slipping and then plunged when Russia and Saudi Arabia launched a price war and the pandemic torpedoed demand for oil and gas.

Schell, who doesn’t own the mineral rights on his farm, said he got different explanations for why work wasn’t being done. He said Occidental employees told him there wasn’t money in the budget and also said the old, vertical wells, which were barely producing, were still viable.

Occidental spokeswoman Jennifer Brice said in an Oct. 13 email that the company will do some of the work after Schell’s tenant farm finishes the harvest. The company will retire, or plug and abandon, the remaining older wells in early 2021 as well as remove an abandoned natural gas line and a gravel road.

Lance Astrella, Schell’s lawyer, would like to see the oil and gas commission, which is revamping state regulations, look at requiring companies to shut down extremely low-producing wells.

Environmental attorney Matt Samelson said that requiring companies to post higher bonds would also provide more protection during economic downturns. The commission is expected to consider bigger bonds as part of implementing Senate Bill 181, a 2019 law that mandates prioritizing public health, safety and the environment.

“Colorado has a really low statewide bond. An operator can put up a $100,000 bond, and that covers all of your wells in the state.” The price tag for taking care of the existing ones would be about $30 million.

“Colorado has a really low statewide bond. An operator can put up a $100,000 bond, and that covers all of your wells in the state,” Samelson said.

The bond doesn’t go far when plugging one well, and cleaning up the site costs an average of $82,000, Samelson added. The state picks up the tab when a company goes out of business or walks away without properly closing and cleaning up, resulting in so-called orphaned wells.

The price tag for taking care of the existing ones would be about $30 million, Samelson said.

As of July 1, there were 215 orphaned wells and 454 associated sites. Orphan wells were a problem before the current downturn. Former Gov. John Hickenlooper issued an executive order in 2018 to allocate $5 million a year for the work. Taxes on the industry also provide money for the cleanup.

The industry and the state have been proactive in recent years in tackling such issues as orphaned wells, Lynn Granger, executive director of the American Petroleum Institute-Colorado, said in an email.

“We have the utmost confidence in the ability of both our operators and the state to ensure that energy development occurs in a manner protective of public health, safety, welfare and the environment,” she added.

The oil and gas industry on Colorado’s front range is suffering from an economic downturn, driven by low prices and sinking demand due to the coronavirus pandemic.

During the recession, production has slowed. Out of Colorado’s 51,303 active wells, 10,151 had been shut as of Oct. 13, meaning they can start producing by opening valves or activating existing equipment. Another 2,691 have been temporarily abandoned, which requires more work or equipment to start.

In October 2019, 9,431 wells were shut in and 1,608 were temporarily abandoned, according to data from the oil and gas commission. Thousands of oil and gas jobs have been lost. There are about four drilling rigs in the state, down from 22 at the end of 2019.

The number of fracking crews recently rose to four from zero in July and August, said Bernadette Johnson, vice president of strategic analytics at Enverus in Denver.

Oil prices have been steady, in the $30s and $40s per barrel, Johnson added. That’s an improvement from earlier in the year, but prices are still depressed, she said.

And Colorado is not bouncing back as quickly as other areas, Johnson said. The Permian Basin in western Texas and southern New Mexico is seeing more activity because it costs less to drill there and the politics are more favorable, she said. Johnson pointed to SB181 and a 2,000-foot buffer in Colorado between new wells and homes and schools, which would be the largest statewide setback in the country if it is given final approval in November.

Companies say the 2,000-foot setback will drastically limit where they can drill.

“Senate Bill 181 is a regressive bill in that it moves us back to where we were in the 1990s, where we didn't have any revenue,” said Tom Jankovsky, a commissioner in Garfield County, Colorado’s second-biggest oil and gas producer.

“When the operator is filing bankruptcy and can’t pay his bills you have to wonder just how safe everybody is.”

Jankovsky said he’s more worried about the economic impact of Ursa’s filing for bankruptcy than he is about whether the company will maintain its wells and other equipment. He believes the county will eventually get the $5.3 million in taxes the company owes it, but he worries about the fire and hospital districts and other smaller entities.

Dave Devanney, former chairman of Battlement Concerned Citizens, said people living close to the wells are nervous.

“Right now there are two active well pads and 52 wells and miles of gas pipelines. Many residents feel they're kind of sitting on a time bomb,” Devanney said. “When the operator is filing bankruptcy and can’t pay his bills you have to wonder just how safe everybody is.”

Judith Kohler reports for The Denver Post as part of the business team, writing about energy, aerospace, agriculture and other topics. Email High Country News at [email protected] or submit a letter to the editor.

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