As Public Funding Commences for Abandoned Well Program, Private Capital Can Help
U.S. State Eligibility for Initial + Formula Grants to Clean Up Orphaned O&G Wells 
Key Points: Initial funding eligibility for U.S. states for Oil and Gas well cleanup was announced at the end of January. We maintain the view that a “carbon avoidance credit” — a tradable carbon offset — tied to plugging abandoned wells could let private capital subsidize these public funds. In a PA example, the offsets could generate ~15% of well costs.
Initial grants and first phase of formula grant eligibility announced. At the end of January, The U.S. Department of the Interior announced the first phases of funding availability to clean up Oil and Gas (O&G) wells, part of the $4.7 Billion in total funding allocated to create this program under the Bipartisan Infrastructure Law.
The announcement addressed two of three authorized types of grant funding: 1) Initial Grants, which are a flat $25 Million per eligible state (26 states have engaged thus far), designed to help them establish clean-up programs and commence plugging wells; and 2) Formula Grants, which are allocated to the states based on a combination of the number of documented orphaned O&G wells in the state (private lands only), the number of jobs lost from March 2020 through November 2021 and the estimated cleanup costs per well in each state. Only the first phase, or $500 Million, of Formula Grants have been authorized thus far, but the eventual combined total of Initial + Formula Grants is to be $2.6 Billion (see the above chart for estimated allocations by state). The last grant type is Performance Grants to which $1.5 Billion is allocated; the balance of the $4.7 Billion reflects allocations to Federal and Tribal land well clean-up.
The opportunity for private capital to help subsidize the costs. As we addressed recently, abandoned wells have been shown to have consistent levels of methane emissions that are inexpensive to measure. Proper closure of these wells therefore creates a measurable benefit in terms of permanent GHG avoidance, which suggests they can constitute attractive carbon offsets. As illustrated in the above referenced article, avoided methane for an abandoned well in PA, priced comparably to recent trades on CBL Nature-Based Global Emissions Offsets (a voluntary market) suggests carbon offsets could fund ~15% of estimated plugging costs for that well.
The scope of the abandoned well problem in the U.S. The EPA has estimated there are 2.1 million unplugged abandoned O&G wells in the U.S. (for comparison, the 26 states’ Notification of Interest identified ~130,000 wells, which highlights the important challenge of well discovery in the program). The EPA has further estimated that average emission per well is 0.13 metric tons of methane per year. For more context on the abandoned well problem and current consideration of how to avoid adding more orphaned wells, please see a recent report by the Payne Institute here.
2/18/2022
