Published on Mar 24, 2023
Bidding documents produced during the first stages of states’ efforts to plug wells with federal funds reveal that certain wells identified for plugging appear to be owned by active operators like Chesapeake Energy (CHK), Diversified Energy (LON: DEC), or BP (BP), according to The Capitol Forum’s investigation.
In the four Appalachian states that have begun the bidding process—Kentucky, West Virginia, Pennsylvania and New York—The Capitol Forum has identified 203 wells with ties to active operators, representing roughly $29.6 million in plugging costs based on estimates the respective states submitted to the Department of Interior.
Additionally, The Capitol Forum’s investigation identified how, in certain instances, larger companies transferred wells to smaller companies that were financially incapable of adequately retiring the assets. Despite some of those transfers requiring financial assurances like bonds, due to the low legal requirements of state regulations, those funds were exhausted without fully covering the cost of retirement, leaving the state to cover the deficit.
Unless states change course and more thoroughly inventory nonproducing wells and modernize predecessor liability statutory provisions, major energy companies are poised to continue to escape significant plugging liabilities.
The state agencies responsible for overseeing the bidding process for well retirement contracts generally disputed The Capitol Forum’s findings of wells with ties to active operators. In response to emailed questions to four state regulators, the states detailed the processes they follow to ensure responsible parties or pre-existing funds do not exist for the wells they plug.
However, the state’s processes revealed errors and discrepancies, including conflicting ownership between state records and bidding documents, duplicate wells across different contracts, and wells listed by permit numbers that did not match the well API number.
State agencies also stated that they do not always have the resources or the statutory authority to track well ownership through mergers, acquisitions and company name changes.
As the federal government formulates how it will disperse $2 billion in upcoming formula grants to state agencies, addressing any pitfalls from the initial grants will be necessary to prevent taxpayer dollars from covering corporations’ asset retirement obligations.
The Department of Interior declined to comment regarding The Capitol Forum’s findings. In the past, the Department of Interior has stated it expects “states will verify the wells they plan to plug are indeed orphaned” before using grant funding.
Across the Appalachian Basin, there are nearly 9,600 active operators with ties to 104,841 wells classified as inactive, abandoned, orphan or shut-in, according to Upstream. These operators include both large, publicly traded companies like EQT Corp. (EQT) and Shell plc (SHEL), and also lesser-known, private companies such as Energex Power or Oil Well Shares.
Full statements and responses from state agencies for this story can be found here. The data supplement here reflects Appalachian Basin total non-producing well count, wells identified in bidding documents for plugging by the four states available, ownership information, and an index of the 27 Capitol Forum stories regarding retirement obligations. For more information on Upstream’s methodology visit page seven here.
Title records appear to conflict with orphan status of wells in West Virginia. In West Virginia, 184 wells identified as eligible for plugging appear to be owned by an active, public operator, according to a Capitol Forum analysis of the state’s eight regional plugging projects and Upstream.
For example, there are 15 wells that, despite evidence they were bought by Chesapeake, are now listed in state plugging packages. For 14 of the 15 wells, West Virginia lists a “responsible party” as “Columbia Natural Resources LLC”—a company that Chesapeake Appalachia acquired in 2006 for $2.95 billion. Securities Exchange Commission, WV Secretary of State, and WV DEP transfer records reflect that Columbia was merged into Chesapeake in its entirety.
“There is currently no reliable method to identify every defunct well operator or to collect data on every well drilled prior to the industry being regulated,” the WV DEP spokesperson commented despite Chesapeake’s acquisition and subsequent transfer occurring decades following the establishment of the agency and its jurisdiction over oil and gas operations in the state.
“However,” the WV DEP continued, “regardless of whether or not a given well appears on the list of wells the agency put out at the time it solicited bids for contracts, the WVDEP has various checkpoints and requirements built into its procedures to ensure no wells belonging to an active operator are plugged.” The WV DEP explained, for example, that contractors who won bids are required to identify well owners through title records that are then verified with the WV DEP, according to the agency’s emailed comment. Wells are also inspected before plugging permits are issued.
But when The Capitol Forum reviewed county deed records as they pertained to the Columbia Natural Resources wells at issue, deeds submitted electronically in eight counties just days after the merger clearly convey “all of the real estate and mineral interests” and “any right, title, interest, estate or claim” from Columbia Natural Resources to Chesapeake. An example of a deed transfer from Ritchie County, West Virginia can be viewed here.
The WV DEP did not specifically address the Columbia Natural Resources wells when pressed, instead reiterating the department “will not issue a well-plugging permit for a well associated with an operator who could be considered active in any way, and a permit is required prior to initiating plugging operations,” in response to The Capitol Forum’s follow-up.
Chesapeake did not return requests for comment.
West Virginia’s bidding process allows the awardee to choose which wells in the bundle it will plug—ultimately, 160 wells will be plugged with initial grant funding while the thousands of eligible wells West Virginia identified will eventually be plugged in the future.
Diversified may plug some of its own wells with federal funds intended for orphan wells. Meanwhile, Diversified’s plugging arm appears to be successfully winning federal plugging bids that include wells the company operates in West Virginia.
Next LVL Energy, which was acquired by Diversified in 2022, won three plugging contracts in West Virginia, two of which are in regions home to five total Diversified wells, according to Upstream. Production records for four of the wells had been submitted to the state as recently as 2021 by Diversified Production LLC, and as recently as 2017 for the fifth well by Diversified Resources Inc, which merged into Diversified Production in 2019.
Diversified did not respond to requests for comment regarding its ownership of these wells and if Next LVL Energy would be plugging them with federal funds.
Secretary of State records used to determine well ownership, but some records indicate “active” operators. Sinclair Oil Corp. is reflected as the owner or operator of three wells listed in bidding documents (two in Kentucky and one in New York). Sinclair Oil, curiously, is listed as an active operator in both states’ Secretary of State filings.
Both Kentucky and New York’s regulatory agencies told The Capitol Forum that, when determining well ownership, they typically check Secretary of State records to verify if an operator is active or defunct.
Within Kentucky’s Secretary of State records, for instance, there are three entities for Sinclair Oil that all refer to the same or related entity: one listing the company as active that shares an address with one of Sinclair Oil’s district marketing offices, one listing the company as inactive sharing that same address, and the third listing the company as inactive and documenting Sinclair’s 1969 divestiture to Atlantic Richfield Company, or ARCO, which was later merged into BP.
While the KY DOG told The Capitol Forum, it “do[es] not have statute authority or resources to do any corporate history investigations of mergers and name changes,” Sinclair Oil’s relationship to ARCO, at the least, is documented with the Secretary of State records.
Like Kentucky, the New York State Department of Environmental Conservation has identified one well for plugging that can be linked to Sinclair Oil through well records referencing its subsidiary Sinclair Refining, which merged into its parent company Sinclair Oil in 1968, according to a document from the Department of Justice.
Within New York’s Secretary of State filings, Sinclair Oil Corporation has two listed entries, one inactive and one active, that both, again, seemingly refer to the same entity. The inactive entry refers to the same district marketing office address listed in Kentucky’s Secretary of State filings, while the active entity references current CEO Michael C. Jennings, who is set to remain as CEO until May 8, 2023 when Tim Go takes over, according to a recent press release. Neither company listing references any merger history as it relates to Sinclair Refining, and multiple searches for Sinclair Refining within New York’s Secretary of State filings did not return any relevant results.
NYSDEC told The Capitol Forum the agency is “aware” of successor and predecessor liability and how it impacts plugging liability but stated that “while DEC may have records indicating potential connections between the referenced entities and wells in the past, DEC does not have records to prove chain of ownership and/or that the referenced entities have plugging liability.” Should information be provided to NYSDEC that enables the agency to connect plugging liability to a well owner, the agency stated it would “pursue cost recovery or require the party to undertake the work.”
While Sinclair Oil is owned by HF Sinclair, Sinclair hasn’t operated an exploration unit since its divestiture to Atlantic Richfield, or ARCO, so it’s likely that the wells are not associated with Sinclair’s parent company, but rather with BP.
HF Sinclair (DINO) did not reply to requests for comment.
When asked about these three wells, BP did not confirm or deny ownership, and instead stated over email, “Kentucky and New York authorities have not contacted BP about these wells, but we are ready to work with them to determine ownership/responsibility. We comply with all applicable state and federal regulations to safely decommission legacy wells.”
Wells with forfeited bonds plugged under federal program. Some wells identified with active operators even have spud or transfer dates after state legislation was put on the books requiring financial assurances be made by the operator. This increases the likelihood that states could be plugging bonded wells without utilizing the bond, that a bond was never issued in accordance with the law, or that the bonded amount was insufficient to cover the retirement costs.
In Kentucky, for instance, 25 wells named in the commonwealth’s plugging lists have well records tying them to Ashland Oil Inc, a company with a long legacy in Kentucky that is still considered active within Kentucky Secretary of State and Division of Oil and Gas records.
Ashland, however, no longer owns the wells at issue and thus does not have any obligation to plug them, according to the KY DOG’s emailed comment to The Capitol Forum and documents received via an open records request submitted by The Capitol Forum.
When all 25 wells were acquired from Ashland, the successor operator bonded the wells, according to the KY DOG, but those bonds didn’t cover plugging costs and instead went to ameliorating “unabated violations of that successor operator,” the DOG explained. Thus, as the several successor operators shut down, the wells are considered eligible for plugging under the IIJA.
Additionally, while the 25 wells have spud and completion dates on record in the early 1960s, no production records were ever submitted by Ashland or any other entity for these wells, according to an Upstream review, meaning Ashland successfully unloaded asset retirement obligations onto the state by selling nonperforming wells to small operators that couldn’t afford to cap them.
A public records request submitted by The Capitol Forum to the DOG revealed eight of these wells were transferred by Ashland to a variety of now-defunct and much smaller companies, like Mar-Shan Company Inc, AN-Car Oil Company Inc and Petroleum Management Inc.
The seventeen other records The Capitol Forum received back were illegible, as they were scans of microfilm. A public records officer told The Capitol Forum that there was no way of enhancing the records.
More than half of these 25 wells have already been plugged with federal funds. Ashland Oil is still reflected as the last known operator of 1,710 nonproducing wells in the Appalachian Basin, according to Upstream.
While Ashland Oil’s exploration business was bought in whole by Equinor ASA (EQNR) in 1997, which was then known as Statoil, its parent entity Ashland Global (ASH) remains in business and is an international manufacturer of chemicals products. EQT eventually bought the package of wells operated by Ashland and subsequently divested those wells to Diversified, according to DOG inventory records and well information.
The Capitol Forum has previously reported on the chain of entities tied to Ashland—which are all still in business in varying capacities. All entities affiliated with the various transactions pertaining to Ashland’s exploration business previously denied ownership.
Errors related to production records and bidding documents. Each state had varying degrees of conflicting or inaccurate information related to their production records and bidding documents. Some states had erroneous or duplicative information within the state’s bidding documents.
In Pennsylvania, for example, at least three wells could be linked to the active operator Range Resources via production records filed by its subsidiary Range Operating Co. and predecessor Appalachian entity Great Lakes Energy Partners.
When The Capitol Forum asked the PA DEP about the production history of these wells, the PA DEP stated that “there is some confusion in production reporting,” referring specifically to two of the three wells identified by The Capitol Forum. The PA DEP did not comment specifically on the third well.
“Please note that the production data available on our website is reported by operators, and currently there is limited review and verification of this data by Department staff,” the PA DEP told The Capitol Forum.
“PA DEP will continue to evaluate the wells on this list and if a responsible party is found, they will be removed from the bid process or if they were mistakenly included, cost recovery will be pursued,” a spokesperson for the PA DEP told The Capitol Forum in an emailed statement.
In Kentucky, six wells scattered through the commonwealth’s well packages are identified by permit numbers and APIs that do not match – seemingly referencing two different wells to be plugged.
In one such case, a well set to be plugged in Russell County was misidentified with an API belonging to a Diversified well. The KY DOG told The Capitol Forum that the well with the API belonging to Diversified is “not abandoned and has no current violations. Diversified is responsible to plug this well at end of well life.”
Well packages also include countless examples of repeated wells—with 169 duplicates identified in the four states—which could make it difficult for different contract winners to discern which company is meant to actually plug the well.
Well plugging lists and underlying data in flux as states review available information. Across the Appalachian Basin, regulatory agencies stressed the ever-changing nature of their well lists and plugging processes.
Pennsylvania, in particular, has narrowed the list of wells it will be able to plug with the first round of $25 million, removing 160 wells from its 398 well “starter list.” Some of the removed wells were marked as “high priority” on the starter list, but may be included in future packages, as they have been identified as eligible for plugging.
According to the DEP website, “Risks associated with abandoned wells that are considered in the prioritization process include oil leakage into water resources, health and safety issues like methane migrating into homes and private water wells, and fugitive methane emissions being released into the atmosphere.”
The Capitol Forum’s supplemental data source showcases how often state well counts and statuses fluctuate within Excel sheets named “IAOS-By-State” and “IAOS-By-Company.” As companies shuffle around plugging liabilities and acquire new assets, the number of inactive, abandoned, orphan and shut-in wells has increased by the thousands in some states over the past nine months.
More to come. Ohio, the fifth state in the Appalachian Basin to receive initial grant funding, has not yet identified the wells the state will be plugging and did not have a timeline for when it would be available, according to a statement to The Capitol Forum on February 6 from the Ohio Department of Natural Resources Division of Oil and Gas Resources Management.
Just in the Appalachian Basin alone, states have identified over 69,500 orphan wells to the Department of the Interior that they would like to begin plugging with IIJA funds, a number which does not include numerous abandoned, inactive and shut-in wells that will become plugging liabilities over the course of the IIJA funding rollout.
The Department of the Interior’s new draft guidance for formula grants may address some of these issues. The public comment period ended on February 24 and the guidance is expected to be finalized in the coming months.