PAYNE INSTITUTE COMMENTARY SERIES: COMMENTARY

By Jim Crompton, Brad Handler, and Vandan Bhalala

November 1, 2024

Source: Environmental Defense Fund

It is well understood that permanently plugging old, abandoned oil and gas wells in the U.S. can make a big impact in our nation’s efforts to combat global warming. Recent estimates suggest that nationally, annual methane emissions from unplugged wells are equivalent to the greenhouse gas emissions in a range from a CO2 equivalent of 7-20 million metric tons per year (approximately the emissions of 2 to 5 million cars)annually.

Plugging these wells can also offer communities relief from physical safety issues and toxic emissions that can contaminate drinking supplies and land. Over 4.6 million people live within 1 kilometer of a documented orphan well and 35% of documented orphans are located within 1 km of a groundwater well, although with documented orphans represented a likely small proportion of the estimated total number of orphan wells, these are likely understated.

It is worth noting that problem is also likely to grow. Many thousands of older wells, long past their prime, are held by operators that have not reserved enough capital to plug them. Squeezed by new methane emissions rules, there is risk these operators walk away (file for bankruptcy) and leave the wells as wards of the states to retire.

So, the call to action is clear. Some steps are being taken. Through the Bipartisan Infrastructure Law, public funding has increased to properly plug many orphan wells. States are re-examining their bonding and fee structures to provide for more funding. And many oil and gas operators are incrementally more proactive in dealing with abandoned wells on their leases. But the scale of the problem is vast and much more must be done.

The voluntary carbon market (VCM), and the use of carbon finance more generally, can raise funds for plugging orphans by tapping into private capital. Plugging orphans offers an attractive climate mitigation activity for the VCM, given critical attributes such as permanence, quantification, additionality and benefits to local communities. With processes (crediting methodologies) recently put in place for VCM participants, developers are getting started and are poised to accelerate plugging activity.

ORPHAN WELL METHANE LEAKAGE

There has been a growing focus on greenhouse gas emissions reduction efforts in the upstream oil and gas sector over the last decade. Reductions in emissions have been secured by several actions including: limiting flaring, replacing pneumatic valves, fixing fugitive emissions from faulty equipment and oil tank thief valves, and installing vapor recovery units. Further, there has been advancements in detecting gas emissions, with technology evolving from simple leak detection and repair (LDAR) procedures to include, in the EPA standard, FLIR (forward looking infra-red) cameras, fence-line continuous monitoring sensors, drones, aircraft and satellites. In short, the industry is getting better at recognizing emission sources and responding with appropriate maintenance steps.

Yet these capabilities are only applied to wells that are owned and actively operated. This leaves large categories of oil and gas wells that also need attention: orphan and idle wells. But just finding an orphan well can be a cross between a scavenger hunt and a detective story. Historical records can often be difficult to track down or they may not exist at all.

While oil and gas operators are required to seal wells at the end of their productive lives, one hundred seventy years of oil and gas development has nonetheless left a large inventory of so-called “orphan” wells across the United States — oil and gas wells that are inactive, unplugged, and have no solvent owner of record. The map shown above (developed by the Environmental Defense Fund) covers the 130,000 ‘documented’ orphan wells eligible for federal funding, but estimates of additional undocumented orphan wells range up to the many hundreds of thousands and of total abandoned wells to three+ million.

It has been estimated that each unplugged abandoned oil and gas well emits an average of 0.13 tons of methane per year. Methane is a particularly powerful global warming gas, considered as much as 86 times more potent than CO₂ when considering the impact over a 20-year period. Multiplying by, say, two million such wells points to methane emissions of over 276 thousand tons in 2019, equivalent to roughly 20 million metric tons of CO₂ per year. This represents roughly 2.6% of total U.S. energy-related methane emissions or roughly 0.2% of total U.S. energy-related greenhouse gas emissions in 2019.

FINANCING ORPHAN WELL PLUGGING

The 2021 Infrastructure Investment and Jobs Act (IIJA) contains the largest public investment to date to address the problem, allocating $4.7 billion to plug orphaned wells. Of this total, the Department of Interior (DOI) had distributed $700 million as of the end of September 2023; the funds can go to set up administrative capacity, identify and triage orphan wells, measure methane emissions, plug orphaned wells, and remediate and reclaim well sites. Twenty-six states are now eligible to apply for funding.

However, as much as this funding is welcome, it is nowhere near enough. The cost to plug an orphan well varies depending on its age, depth, and location. In North Dakota, where some wells are drilled to depths of nearly 15,000 feet, it can cost $150,000 to plug a single well and restore the land around it. In Pennsylvania, the state budgets about $33,000 to plug each well. Addressing a meaningful portion of these wells will cost tens, if not hundreds, of $ billions.

Carbon finance is emerging as a means to generate private capital for well plugging. Carbon finance is essentially results-based finance, in which carbon credits serve as a unit of exchange (with one carbon credit set to represent one metric ton of carbon or its equivalent (MTCO2e) that is either not emitted to or is removed from the atmosphere). Carbon credits are issued to the project developer, which can then sell the credits to buyers through negotiated transactions or through exchanges (broadly known as the voluntary carbon market, or VCM).

While carbon crediting has many skeptics, high quality carbon credits can be defined by the Core Carbon Principles. See Figure 1.

Source: Integrity Council for the Voluntary Carbon Market

CREDITING METHODOLOGIES

Methodologies to issue carbon credits related to plugging orphan and abandoned wells have been developed. These include by the American Carbon Registry (ACR), BCarbon and CarbonPath. All three have now issued credits against at least one project and have backlogs as they review more applications.

The three methodologies differ in some important ways. They vary in their reliance on historical production information, which, as noted above, is often lacking for older, undocumented wells. They also differ in their approach to determining how many credits should be issued. ACR and CarbonPath assume that an emissions rate established during testing remains constant over time; BCarbon assumes decline from a last known production rate. On the other hand, ACR, at least implicitly, and BCarbon issue credits based on evidence of how the well can be expected to emit over the next 20 years (including that capping hardware is likely to erode, and therefore leak, further), while CarbonPath effectively limits credit issuance to what is currently leaking from the well. See Figure 2.

Figure 2: Select attributes of orphan well crediting methodologies

Source: American Carbon Registry, BCarbon, CarbonPath, Payne Institute

To understand BCarbon’s declining basis better, it is worth delving into oil and gas well production behavior. Oil and gas wells produce at their highest rate just after being drilled, driven by the natural pressure in the oil and gas reservoir. Over time, the pressure in the reservoir declines (as oil and gas and water are produced) and their production rate falls. The production decline is not a fixed amount every year. Rather it tends to fall at its fastest rates earlier in a well’s productive life and gradually settle into a fixed, “terminal” (percentage, i.e., exponential) decline rate. See Figure 3.

Figure 3: Illustrative methane emissions rates by phase of a “typical” oil well

Source: Payne Institute

With adequate production history before a well was shut in, it follows accepted practice to “fit” that production history to a “type curve” reflecting this exponential decline and thereby estimate the remaining production over a given number of years.

To illustrate this point with real data, Payne aggregated the production from over 800 wells, predominantly from the Anadarko basin with at least 30 years of production history. The fitted type curve declines at ~9.5% per year in years 1-10, followed by ~7% per year in years 11-20 and then ~6% per year in years 21-30. Assuming the 6% annual decline rate persists, the production “tail” eventually becomes asymptotic and resembles a “flat” profile. See Figure 4. (Note: although it is not unreasonable to imagine the decline rate falls further beyond year 30, the universe of wells with such long production history is meaningfully smaller and so a year 30 cutoff was used to maintain a larger data set.)

Figure 4: Decline curve, aggregate “well” Anadarko basin

Source: Payne Institute (data from Enverus)

However, many orphan wells in the U.S. were drilled before production reporting was mandated. Thus, production history from which to develop a type curve is not available. The ACR/CarbonPath methodologies work around this limitation by assuming the well has produced for most of its productive life and therefore is at the flattish/asymptotic portion of its decline curve. (It is worth noting, that this logic was based on studies of orphaned wells in the Appalachia region.) The BCarbon methodology, in contrast, by design allows for orphans earlier in their lifecycle and applies a decline/“type” curve to establish credits; again, however, BCarbon requires historical production amounts.

STRIKING BALANCES

Project developers’ experience with using these crediting methodologies has revealed some challenges in applying them. Wellhead testing offers an important example. Younger wells are more likely to have some form of hardware (cap and valves) at the surface that keeps methane from leaking from the well. This contrasts with many much older orphans that were abandoned with little or no attempt to stop such emissions. The wells that are eligible to be credited are all leaking “through” this hardware, i.e., there is a crack or deterioration in the hardware that is allowing methane to be emitted.

The fact that there is hardware, however, complicates the evaluation of methane emissions amounts. To get an understanding of the methane emissions outlook for the well, valves in the well capping hardware can be opened (creating safety considerations that have a bearing on how, and how much, valves can be opened). How these valves are managed during testing affects emissions rates. When the methodologies are seeking stability of emissions through a well test, it is a means to establish that the valves have been opened to a point that supports a “steady state” level that reflects the “natural” production rate of the well.

ACR, through an iterative process, has published “Errata & Corrections” in 2024 that seek to strike a balance between the desired precision of testing and the practical nature of well production. The new rules allow for some fluctuation (10% across the measured averages through the testing period) and for removal of an outliers due to signal-to-noise attributes, including natural short-term pressure and flow fluctuations due to subsurface conditions.

It seems clear that more such balances must be struck. This may be particularly true if there is to be crediting for younger wells with less documented production history. But balances may need to be found regarding various standards — e.g., ensuring permanence (via plugging design and practices) and that plugging one well doesn’t result in leakage from surrounding wells.

The key to managing this balancing is transparency — buyers must be able to understand the assumptions and procedures that are being used, to allow them to reach their own conclusions. There are likely to continue to be different orphan well crediting methodologies, and thus buyers can select the one with which they are most comfortable. To some degree, developers and standard setters will also need to err on the side of conservatism (and, again, to explain those choices) when precision is not possible. In these ways, crediting can move forward without, to quote the adage, letting the perfect be the enemy of the good, and allow plugging orphans to realize its significant climate mitigation potential.

ABOUT THE AUTHORS

Jim Crompton, Affiliate Professor, Petroleum Engineering, Colorado School of Mines

Jim Crompton retired from Chevron in 2013 after 37 years with the major international oil & gas company. After moving from Houston to Colorado Springs, Colorado, Jim established the Reflections Data Consulting LLC to continue his work in data management and analytics for Exploration and Production industry. From 2019 to 2023, Jim was a teaching faculty member and a Professor of Practice in the Petroleum Engineering Department lecturing on petroleum data analytics and the Digital Oilfield 2.0. He retired from active teaching in 2023 but still continues as a guest lecturer in several courses.

Jim was a Distinguished Lecturer for the Society of Petroleum Engineers in 2010-2011 speaking on the topic of “Putting he Focus on Data”. In 2024 he received a “Distinguished Member” award from the SPE. He is a frequent speaker a SPE conferences on digital/Intelligent Energy and the Data Foundation. His interests lie in the full spectrum of the information value chain from data capture, data management, data visualization, data access modeling and analytics, simulations, and serious gaming.

Jim graduated from the Colorado School of Mines (BS in Geophysical Engineering in 1974 and MS in Geophysics in 1976) before joining Chevron in Denver, Colorado. He later earned an MBA degree (1976) from Our Lady of the Lake University in San Antonio Texas.

Brad Handler, Payne Institute Program Manager, Sustainable Finance Lab, and Researcher

Brad Handler is a researcher and heads the Payne Institute’s Sustainable Finance Lab. He is also the Principal and Founder of Energy Transition Research LLC. He has recently had articles published in the Financial Times, Washington Post, Nasdaq.com, Petroleum Economist, Transition Economist, WorldOil, POWER Magazine, The Conversation and The Hill. Brad is a former Wall Street Equity Research Analyst with 20 years’ experience covering the Oilfield Services & Drilling (OFS) sector at firms including Jefferies and Credit Suisse. He has an M.B.A from the Kellogg School of Management at Northwestern University and a B.A. in Economics from Johns Hopkins University.

Vandan Bhalala, MS Petroleum Engineering, Colorado School of Mines

Vandan Bhalala is a student researcher at The Payne Institute at the Colorado School of Mines. Currently pursuing an M.E. in Petroleum Engineering, His work centers on addressing methane emissions from orphaned oil and gas wells, with a focus on decline curve analysis (DCA), production forecasting, and reservoir engineering. With a B.Tech in Petroleum Engineering specializing in upstream exploration from UPES, Dehradun, Vandan joined The Payne Institute in January 2024. Passionate about sustainable practices in energy, I aim to leverage my expertise to contribute to responsible resource management and mitigation of environmental impacts within the petroleum sector.

ABOUT THE PAYNE INSTITUTE

The mission of the Payne Institute at Colorado School of Mines is to provide world-class scientific insights, helping to inform and shape public policy on earth resources, energy, and environment. The Institute was established with an endowment from Jim and Arlene Payne and seeks to link the strong scientific and engineering research and expertise at Mines with issues related to public policy and national security.

The Payne Institute Commentary Series offers independent insights and research on a wide range of topics related to energy, natural resources, and environmental policy. The series accommodates three categories namely: Viewpoints, Essays, and Working Papers.

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DISCLAIMER: The opinions, beliefs, and viewpoints expressed in this article are solely those of the author and do not reflect the opinions, beliefs, viewpoints, or official policies of the Payne Institute or the Colorado School of Mines.