Gas driller expects to push idle well-plugging liabilities decades into the future
It has been more than two months since Pennsylvania regulators began negotiations with Diversified Gas & Oil PLC, the largest conventional well operator in Appalachia, with the goal of ensuring that thousands of wells are plugged when they should be.
Their opening salvo in July was ordering the Alabama company and the previous owners of its wells to plug more than 1,000 idle wells over the next five years.
Diversified has a different number in mind: 2,000 wells over the next 15 years. And not just in Pennsylvania, but across all five Appalachian states where the company has gobbled up older, shallow wells over the past several years.
Its expectation, as disclosed to investors in financial statements issued earlier this month, is to push the bulk of its environmental liabilities some three decades
into the future.
It’s not clear yet if Pennsylvania regulators will work out a settlement with the company or what that might look like.
The Pennsylvania Department of Environmental Protection has sharpened its focus on Diversified as the company more than doubled its giant portfolio this year by acquiring assets considered unattractive by other operators. Now regulators worry that such a concentration of plugging liabilities could swamp a company.
If Diversified can’t pay to plug these wells — or if the company doesn’t exist 40 years from now — the responsibility will fall on taxpayers. The DEP has vowed not to let well owners add to the estimated $3.7 billion cleanup tab that state taxpayers already are facing for generations of unplugged wells.
Abandoned wells are open pathways that can leak oil, gas or brine, polluting streams and drinking water, creating explosion hazards in homes and adding greenhouse gases to the atmosphere.
With the company owning more than 55,000 wells across five states — and 24,000 in Pennsylvania alone — Diversified’s CEO Rusty Hutson told investors that it is close to announcing settlements with regulators that would “really draw a line in the sand for a fairly long period of time of what our true plugging commitment should be.”
He previously had said a settlement would be announced before the company’s earnings release on Sept. 11.
The company did not respond to requests for an interview.
The picture that Diversified painted for its investors during an earnings call earlier this month would backload the company’s plugging responsibilities, shifting the vast majority of them to the sunset years of its wells.
A key issue is when the wells are determined to be idle, triggering state requirements that they be plugged.
In its most recent financial report, the company projects that all of its current wells will reach the end of their lives by 2048.
But in a presentation prepared for investors and reviewed during an earnings webcast, Diversified used 2090 as the final date.
That would dramatically push back any deadlines — and the related expenses.
The company said it assumes it will plug 70 to 100 wells a year over the next 15 years. Thirty years from now — and for the next 40 years after that — the company expects to plug 1,000 wells a year.
Executives told analysts how the company already has brought down the cost of well plugging by using their own equipment, tailoring the cement needed for the job and cutting the work hours.
“We will be the hands that ultimately take these to the end of their lives,” chief financial officer Eric Williams said.
According to Diversified’s financials, the company recorded $128,000 in well plugging costs during the first six months of this year. That’s up from $78,000 in 2017. In 2016 and 2015, the number was zero.
That spending amounts to a few handfuls of wells.
In the meantime, Diversified said it brought more than 500 non-producing wells back online through inexpensive adjustments to the wells themselves or the infrastructure that serves them.
Mr. Williams explained that a “key part” of the company’s business is reducing the number of wells that appear on state regulators’ plugging lists by keeping production above whatever the state-specific threshold is for when wells are deemed abandoned.
“The states have very, very low minimum production standards. It could be as low as 10 mcf per year,” he said, using the abbreviation for thousand cubic feet.
That amount of gas would heat one average U.S. home for about a month.
Pennsylvania’s standards are even lower than that. State law requires operators to plug abandoned wells, which it defines as those that have produced nothing for 12 months or are lacking necessary production equipment.
“As long as they produce ‘any’ gas or oil in the previous year, they are not ‘abandoned,’” DEP spokesman John Repetz said.
He declined to comment on Diversified’s plugging plans because they are the subject of ongoing legal appeals.
Vacillating on costs
In July, Mr. Hutson told the Pittsburgh Post-Gazette that the company’s wellplugging costs tend to fall between $8,000 and $10,000 a piece, with “the high end” reaching $25,000.
On Aug. 10, the company put out a public statement setting the average at $20,600 and expecting that to “trend lower as it continues to reduce reliance on third-party contractors and increases the utilization of its internal resources.”
Three days later, financial news service Proactive Investors UK broadcast an interview with Mr. Hutson in which he said the average cost is “anywhere from $8,000 to $21,000.”
He also said that, while unusual, Diversified plugged two deeper wells at a cost of $41,000 each. Depth, along with geology and condition of the well, can drive up the cost to plug it.
In its biannual financial report, Diversified increased the estimate once more, predicting that more than 98 percent of its wells could be plugged “at the lower end of the range at around $25,000 per well.”
But in the accompanying investor presentation — a deck of slides that executives walk through during a call with analysts — Diversified said “over 87 percent” of its portfolio would fall under that mark.
Diversified also discloses how much money it has committed for state bonding requirements. In 2015, it was $115,000, rising slightly to $117,000 in 2016. Last year, the number jumped to $744,000.
Bonds are supposed to ensure that states don’t get stuck paying to plug wells, but they rarely cover the true costs. Pennsylvania law sets bonding amounts for conventional oil and gas wells at $2,500 per well or a blanket bond of $25,000 for all wells that the operator owns.
Mr. Repetz said Pennsylvania’s conventional well bonding requirements — like its definition of abandoned wells — do not protect the state against operators walking away from their liabilities, but the state Legislature would have to act to change them.
“Wells drilled before 1984 do not require a bond, and the most bond any operator is required to post is $25,000,” he said, “which is not enough to plug a single typical conventional gas well.”
It’s not known if Diversified’s negotiations with DEP involve the company posting a larger bond, such as those the state agency has negotiated with other operators.
EQT Corp. agreed to pay a $3 million performance bond as part of a plugging settlement in 2016. A Royal Dutch Shell subsidiary agreed to a $3.98 million performance bond in 2013.