Oil and Gas Lawyer Blog
There are at least 150,000 unplugged inactive oil and gas wells in Texas, and the number is growing. Of these, almost 9,000 are “orphan wells,” having no active operator because the owner has gone out of business or gone bankrupt. Senate Bill 1150, passed by the Legislature, is the Legislature’s effort to address the problem–“a rare example of the Texas Legislature regulating the state’s oil and gas industry,” according to the Texas Tribune. In my opinion it is a weak effort.
Prior to SB 1150 operators could avoid plugging wells indefinitely, as long as they held a lease on the property where the well is located. Operators could obtain extensions of plugging obligations as long as the held the lease and they filed the necessary paperwork.
SB 1150 amends Section 89.023 of the Natural Resources Code. The amendment provides that an operator cannot obtain a plugging extension if the well was completed more than 25 years ago and has been inactive “for more than 15 years.” But there are exceptions. An operator doesn’t have plug a well even if it is more than 25 years old and has been inactive for more than 15 years if the commission finds that “the operator’s demonstrated history of returning inactive wells to operation warrants the granting of the extension,” or “the operator’s financial hardship in complying [the plugging requirement] warrants the granting of the extension.” The operator must submit a compliance plan committing to plug the well or bring it back into production by September 1, 2042 (not a typo). The operator must also provide a performance bond in an amount not less than the full cost for plugging the inactive well, “as established by the commission, that runs with and covers the lifetime of the well, regardless of a change in the operator.”
Finally, the plugging requirements in the bill don’t become effective until September 1, 2027.
In Texas (unlike wells in federal offshore waters, and other states), when a well changes ownership, only the operator assigned to the well at the time it must be plugged is responsible for plugging the well. Prior operators have no liability if the current operator is unable to plug the well. As a result, it is common practice in Texas for operators to assign leases to less financially responsible operators simply to avoid plugging liability. Although operators must submit bonds to the commission assuring financial resources are available to plug wells, those bond requirements are woefully inadequate. Operators with inactive wells have every financial incentive to delay plugging wells as long as they can obtain extensions.
Inactive wells are potential sources of pollution of surface and groundwater. The commission, responsible for plugging of orphan wells, has recently spent millions of dollars plugging orphan wells that have erupted with brine in West Texas.
In my view the exceptions in SB 1150 are potentially large enough to allow operators to continue delaying plugging of inactive wells. The commission is well known as a “captive agency.” It will decide whether an operator has a “demonstrated history of returning inactive wells to operation,” or whether the operator’s “financial hardship” warrants granting an extension. It will decide the amount of the performance bond necessary to plug the well. Even if the commission severely limits exceptions, allowing an operator to leave a well unplugged for 15 years after it has become inactive is hardly a remedy to the problem of unplugged wells in Texas.
SB 1150 also adds Section 89.049, requiring the commission to issue an annual report on inactive wells:
Sec. 89.049. ANNUAL REPORT. Not later than December 1 of each year, the commission shall produce and deliver to the governor, lieutenant governor, and legislature a report that includes:
(1) the number of inactive wells in this state;
(2) the age and length of inactivity of each inactive well;
(3) the number of inactive wells for which an extension of the deadline to plug the inactive well has been granted by the commission under Section 89.023;
(4) the financial assurance methods used by operators of inactive wells, including the number of wells using each financial assurance method available;
(5) the number of wells plugged in the preceding year, including a breakdown of wells plugged by operators versus wells plugged by the commission using state money;
(6) the number of inactive wells returned to production or put into use as an injection well or other operation in the preceding year;
(7) a summary of the number of operators of inactive wells based on organization reports submitted to the commission under Section 91.142, including the total number, based on the reports, of operators and inactive wells that are in compliance, are delinquent, are delinquent for longer than a year, or have been granted an extension under Section 89.023;
(8) the number of organization reports the commission has not renewed or approved under Section 91.142, including:
(A) for each report that has not been renewed or approved:
(i) the associated well count; and
(ii) the total amount of financial security submitted by the operator; and
(B) the total amount of financial security collected from each operator who filed a report that has not been renewed or approved; and
(9) the annual cost calculation for plugging an inactive well, as described by Section 89.023(a).
The first commission report is due December 1, 2026.