Pittsburgh Post-Gazette

Gas driller expects to push idle well-plugging liabilitie­s decades into the future

- By Anya Litvak and Laura Legere

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.

Well-idling schedule

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.

Future funding

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.

 ?? Darrell Sapp/Post-Gazette ?? A view of the Margaret Hamilton 4 Well owned by Diversifie­d Gas & Oil near a field of corn in Plum.
Darrell Sapp/Post-Gazette A view of the Margaret Hamilton 4 Well owned by Diversifie­d Gas & Oil near a field of corn in Plum.

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