Many states have fallen behind when it comes to plugging abandoned oil wells. Not only can they not keep up with wells as they are abandoned, they do not even know of all of the orphaned wells within their borders. Producers themselves currently lack the economic incentives to plug the wells, even though they may be required to do so by law. For these reasons, the American Carbon Registry is developing a new program that could promote the plugging of these wells.
Oil Wells Can Be Abandoned in an Uncapped State
Oil wells have a certain useful lifespan before most or nearly all of the crude oil is extracted from them. The average oil well has a lifespan of between 20 and 30 years. At a certain point in a well’s lifespan, it gets difficult and costly to further extract oil from it, so it will be abandoned. When the cost of production erodes an oil producer’s profit margins, it simply moves on to the next well where it is cheaper to produce oil. In some cases, these wells are abandoned in an uncapped state. Abandoned wells are those from which all the equipment has been removed. Orphaned wells are those that have no known owner.
Government Funding Only Covers a Fraction of Orphaned Wells
The federal government provides funding to cap some abandoned wells, but it covers just a small fraction of them. Although abandoned wells must be capped after five years of inactivity, oil producers may pay a fee in lieu of capping them. Existing uncapped wells may continue emitting methane for decades. It is simply not economical for oil producers to spend money to cap wells when they have lower-cost alternatives. It can take between two and six months to cap an oil well, and some efforts may have costs that reach into the six figures.
Some reports have placed the total cost of fully addressing and remediating documented unplugged orphan wells across the U.S. at close to half-a-trillion dollars. Clearly, there is a need for innovative solutions to incentivize dealing with this ongoing issue.
The ACR’s Proposal Gives an Economic Incentive to Cap the Wells
One such proposal has come from the American Carbon Registry. The ACR has released a proposal that allows oil producers to receive carbon offset credits in exchange for spending the money to cap an abandoned well. Carbon offsets are reductions in emissions that oil producers may use to compensate for emissions that occur elsewhere. Carbon offsets are transferable, and some producers may even sell them to others.
The ACR’s methodology is currently under peer review, but the proposed criteria that would make an abandoned well eligible for the program include:
- Wells must either predate 1950, or those opened afterward must have had no production for at least six consecutive months
- The capping would not happen were it not for the incentive provided by this program (this is known as the additionality requirement)
- Methane emissions must be monitored before plugging and abandonment
- Wells must be monitored after plugging and abandonment to determine the amount of methane reduction
The project proponent may be the well’s owner or another third party. The proponent would receive one carbon credit for each metric ton of carbon dioxide reduced or removed from the atmosphere. They could receive credits for a five-year period. The project proponent may be entitled to five more years of credits If they satisfy the additionality requirement.
The ACR Still Faces Challenges to Make the Program Effective
There are still some challenges the ACR must address with its proposed regulatory scheme. The methodology must line the economic incentive up with the cost of capping the well. Some wells may be particularly difficult to cap, even though the amount of methane may not be as high. In that event, the project proponent may not receive enough carbon offsets to compensate them for their investment in plugging the well. One can envision a scenario where project proponents compete to plug wells that have high methane emissions and low costs of plugging. They may avoid the more difficult projects that are not economically justifiable.
At present, there is no national market for carbon credits. Right now, these are voluntary measures taken by oil producers, unless a national cap-and-trade program comes into effect. Currently, California is the only state in the country with a cap-and-trade program. Nonetheless, many oil producers are purchasing carbon credits in order to market their products as carbon-neutral. The carbon credits they may receive for capping wells can serve multiple purposes. Not only would the credits help oil producers’ marketing, but they would also be sound environmental stewardship.
This program could be highly effective. As the U.S. moves toward a more restrictive environmental posture, the value of carbon offsets may increase. Moreover, oil producers have made a number of pledges to move towards carbon neutrality. These carbon offsets could be both economically valuable and worthwhile from a public relations perspective. Obtaining carbon offsets could enhance the values of oil producers’ brands and improve their public images.