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Wards of the State: Abandoned Oil and Gas Wells in Texas

Mon, 07/24/2017 - 10:26 -- admin25

by Robert W. Roll

The roster of abandoned wells maintained by the Texas Railroad Commission (RRC) typically expands during extended commodity-price downturns. Many wells drilled in a higher-price environment are shut-in, and some operators struggle for survival. As this down-cycle surge intensifies, it is important to have an understanding of Texas’ regulatory process for abandoned wells and how to avoid being left with one.

The end-of-life process for Texas wells is initiated when a well becomes inactive. An inactive well is an unplugged well with no reported production for at least one year. As of April 2017, about 27 percent of the wells in Texas were inactive—approximately 118,000 wells. From September 2015 to August 2016, operators plugged 9,296 wells without dipping into the industry-funded Oil and Gas Regulatory and Cleanup Fund (OGRC Fund). Private industry plugs the vast majority of inactive wells without RRC intervention—consistently around 95 percent of all wells plugged.

If not addressed, however, a growing list of inactive wells is a millstone for a Texas operator. RRC rules require every operator to annually renew its organization report—its license to operate. Operators must plug inactive wells or obtain plugging extensions prior to the report-renewal date. Most operators avoid well-specific extensions by complying with the RRC’s operator-level, blanket-extension requirements—for example, by plugging or restoring to production ten-percent of their inactive wells from the prior compliance year. But, without an extension, the RRC cannot renew an operator’s organization report, resulting in suspension of all the operator’s activities in Texas.

A delinquent operator’s inactive wells are re-classified as orphaned wells. As of April 2017, there were approximately 8,300 orphaned Texas wells. Orphaned wells are often abandoned and become plugging liabilities of the State by insolvent or unlocateable operators.

The RRC plugged 544 orphaned wells in its 2016 fiscal year, and it is projected to plug more than 1,000 this year. When the RRC oversees plugging, the State takes a first lien on any wellsite equipment and seeks reimbursement of plugging expenses from the record operator. If the record operator is insolvent or unlocateable, the non-operator owners of an orphaned well—even those who went “non-consent” in the well—may be held accountable for plugging expenses.

Likewise, a prior operator may incur unexpected plugging liability if an operatorship transfer is botched, even if a now-orphaned well was in compliance when the transfer was attempted. The obligation to plug an inactive well is transferred to a new operator only when the transfer is approved by the RRC.

Transfer of operatorship is initiated by preparing a Certificate of Compliance (P-4) and filing it with the RRC. Upon approval, the RRC sends a written notification to both operators. P-4s approved after September 1, 1997, definitively establish record operatorship. Earlier P-4s create a rebuttable presumption that may be difficult to overcome due to passage of time. Either way, a transfer is only valid upon approval by the RRC.

Plugging is never the royalty owner’s obligation. Of course, this is little consolation if an abandoned well is left behind with no one around to plug it. At every stage of mineral development, landowners may take precautions to avoid this outcome.

One practical safeguard is the selection of an operator-lessee having the financial wherewithal to carry out plugging. Another is to negotiate a contractual plugging covenant in the oil and gas lease. For example, the lease may include a monetary penalty for failure to plug an inactive well prior to a certain date or a recurring monthly charge payable to the mineral owner for each month that passes before a non-productive well is plugged.

In addition, by monitoring the status of inactive wells, a landowner may prevent a well from sitting inactive for too long, thereby reducing the risk of operator absence or insolvency. Online records available at the RRC’s website are a vital resource, but equally important is an investigation (if one can be safely conducted) of the wellsite’s physical condition. Ultimately, if a well is leaking oil, gas or a hazardous substance, it should be plugged promptly by the RRC, which triages plugging priority based on the threat a well poses to the environment and public safety.

If all else fails, surface owners can take matters into their own hands. By statute, a surface owner has the right to coordinate plugging of an abandoned well by hiring an RRC-approved plugging contractor. Upon successful completion of plugging operations, the RRC reimburses the owner for up to fifty percent of the plugging costs out of the OGRC Fund.

Robert W. Roll, of Hoge & Gameros, LLP, is Board Certified in Oil, Gas & Mineral Law. He can be reached at rroll@legaltexas.com.

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