Officials announced the Mountain State Plugging Fund, a public-private collaboration between the State of West Virginia and Diversified Energy to work toward the retirement of oil and gas wells.
“This initiative sends a clear message: West Virginia can both be a leader in energy dominance and in environmental solutions,” Gov. Patrick Morrisey said in the announcement.
The initiative is meant to make sure more wells don’t get to the point that they would be considered orphaned. A well is considered abandoned in West Virginia after 12 months idle. If the operator is unknown or insolvent, the well becomes “orphaned.”
West Virginia has more than 6,500 documented orphaned wells, with thousands more undocumented.
The longstanding issue has origins with wells drilled since the late 1800s, often by companies that lacked the financial ability to manage retirement or operated during periods when well retirement was not considered a priority.
Orphaned wells are considered an environmental, public health, and economic liability, with hazards that include oil or gas leaks, methane emissions and groundwater contamination.
Typically, the responsibility for remediation falls upon the state, making it a big financial burden for West Virginia taxpayers. An ongoing problem has been that existing bond rates are insufficient to cover the cost of plugging these wells.
The initiative announced today is intended to prevent additional wells from becoming abandoned. It establishes the nation’s first financial assurance fund dedicated to well abandonment, with Diversified Energy committing $70 million over 20 years to cover plugging costs.
Morrisey and Diversified Energy chief executive Rusty Hutson, Jr. were set to appear jointly today to describe the partnership.
“You know, we obviously have significant production in wells in the state of West Virginia. And one of our main goals is not only to produce those wells and the economic development and impact it has on the state, but also to be good environmental stewards and to do what’s right,” Hutson said on MetroNews Talkline.
“And one of the things that we wanted to do was set this up to to manage what we call the asset retirement obligation of these wells over a long period of time, as the wells become uneconomic over a long period of time, to be able to make sure that they were responsibly retired and that it doesn’t become a burden on the taxpayers of West Virginia.”
The fund aims to provide $650 million in financial protection over time, with the state designated as a third-party beneficiary of the funds held by the insurer OneNexus.
Furthermore, Diversified will retire at least 1,500 wells in the first two decades through its subsidiary, Next LVL Energy, eventually increasing to a goal of 250 wells annually.
Diversified owns more than 23,000 wells in West Virginia, and roughly 2,200 of them are abandoned.
“They do need to be retired and done in an environmentally sound and safe way,” Hutson said, “so landowners don’t have to deal with them, you know, over the long haul.”
The announcement came as a surprise, said Dave McMahon, who represents the West Virginia Surface Owners Rights Organization. He said he has questions.
“In order to prevent orphaned wells, drillers should have been setting aside money from the first moment of production to have enough money with interest to pay themselves to plug them later, and that has not happened. Is this a small step toward putting money away now, which would be good, or a shell game?” McMahon said.
Greater detail would help shed more light on the arrangement, he said. For example, he wondered if this represents money to plug the same wells for which Diversified has already made agreements in court and with the state to plug.
“We would like to have talked with them ahead of time about this to have answers to our questions,” McMahon said.
“Mostly the concern is that even though those numbers look big, compared to the cost of plugging all of Diversified present and future non-producing wells, we doubt even with the best plugging cost accounting it will cover the cost.”