A Solutions Framework for the Oil Field Paradox

By Rob Schuwerk

Redwater Head of Research

Image credit: Steve Hillebrand / USFWS, Public domain, via Wikimedia Commons

In the United States alone, there are an estimated 3.2 million oil wells – 94% of these are undocumented, orphaned or non-producing. The cost to plug these wells is an estimated $280 billion – but only 1-2% of that is covered by financial assurance. That means the necessary funding for clean up and decommissioning must come from cash flows, but not all well owners are in a financial position to cover these costs. 

This problem is systemic and global. In the United States, it is exacerbated by three policy failures. First, the lack of sufficient financial assurance requirements. Second, the ability to transfer wells without residual liability for their plugging, often to operators with less ability to pay, and finally, lax regulatory enforcement that has led to an accumulation of legacy wells. 

Solving the Oil Field Paradox, a new report by Redwater and Carbon Tracker, asks how an industry with billions in post-tax profits annually cannot meet its clean up obligations. It offers a set of policy recommendations, using mechanisms that exist today, to ensure the costs of clean up and decommissioning are covered by industry not taxpayers. These include:

• Right-size financial incentives: well owners should be required to maintain financial assurance equal to or greater than the expected costs of plugging.

• Migrate transferred liability risk through increased financial assurance: allowing transfers without increases in financial assurance forces the state to absorb more counterparty credit risk, for free. 

Allocate loses: when owners can’t pay, the costs should be borne by industry not the public.