Taking Care of Orphans (Orphan Wells, That Is)

When do you plug a well? In theory, you should do so when the cost of operating the well is higher than the income it produces. However, that point is very difficult to ascertain. Remaining reserves, cost of production and sales price of production are all unknowns that directly affect the equation. In practice, when do you plug a well? When the Railroad Commission of Texas says so. The Commission’s Rule 14 says: ‟Plugging operations on each dry or inactive well shall be commenced within a period of one year after drilling or operations cease … unless the Commission or its delegate approves a plugging extension under Rule 15 (§3.15).”

The operator is responsible for plugging the wells it operates. There are a number of exceptions to the general plugging requirements of Rule 14 laid out in Rule 15. If followed correctly, an operator will gain well plugging requirement extensions. If the requirements of Rule 15 are not followed, one of two things will happen. Either the Railroad Commission will issue an order that a certain well should be plugged or, more likely, the operator’s organization report (P-5) will not be renewed.

Wells not properly plugged by their operator become part of the orphan well program. Orphan wells are defined by the Commission as noncompliant wells that have been inactive for more than a year with an operator’s P-5 that has been delinquent for more than a year. Once a well becomes an orphan well — one of four scenarios can happen. The responsible operator brings the well back into compliance or plugs the well. Another operator with a valid P-5 takes over operations. Surface owners get the well plugged and get partial reimbursement from the Commission, which rarely happens. Finally, orphan wells can be plugged by the Railroad Commission.

The Commission plugs wells according to a well plugging priority determination system. There are five well priorities (from highest to lowest): priority 1, 2H, 2, 3, and 4. Priority 1 is a well that is leaking oil, gas or saltwater. Priority 2H takes into account if usable quality water is not protected or the points assigned to the well are above a certain amount. Priority 2, 3 and 4 are based on a numerical ranking. Points are assigned to wells based on such factors as wellbore integrity, mechanical problems, proximity to water, area population or environmentally sensitive areas.

One of the most important functions of the Railroad Commission of Texas is to plug these orphan wells. Plugging wells has been tied to oil prices since the 2011 Legislature moved the oil and gas division toward self-funding the amount of money the Commission can spend. In fiscal year 2013, the Commission spent $20.9 million; in 2014 it spent $15 million; in 2015, $10.7 million; and in 2016, $8.5 million — pretty much following the trajectory of oil prices over those years. The vast amount of money used to plug orphan wells comes from the Oil and Gas Regulation and Cleanup Fund. Very roughly speaking, in most periods this accounts for more than two-thirds of the money spent. The Commission also tries to recoup plugging costs from the responsible operator. By the time it gets to this point, the operator typically has very little if any funds to pay. The Commission will salvage equipment on wells that are plugged. However, many times the equipment has already been stripped from the lease. Lastly, money is collected from the bonds, letters of credit and deposits required from operators.

 

About the author: David Porter has served as a Railroad Commissioner (2011–17) and Chairman (2015–16), as well as Vice Chairman of the Interstate Oil and Gas Compact Commission (2016). Prior to service on the Commission, Porter spent 30 years as a CPA working with oil and gas producers, service companies and royalty owners in Midland, Texas. Since leaving the Commission, Porter works as a consultant for oil and gas companies. He also serves as Chairman of the 98th Meridian Foundation, a nonprofit concerned with water, energy and land issues.

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