Mar 29, 2023
On March 24, The Capitol Forum’s Teddy Downey, Daniel Sherwood and Julia Arbutus discussed the most pertinent issues in energy markets and policy last week. The full transcript, which has been modified slightly for accuracy, can be found below.
DANIEL SHERWOOD: Hello, everyone, and welcome to our Energy Call today. I’m Daniel Sherwood, Editor of the Energy Team here at The Capitol Forum, joined by our Editor in Chief, Teddy Downey and our ace reporter Julia Arbutus, on the eve of publishing just a mammoth effort as far as it relates to our ongoing asset retirement obligation investigation. Thank you, everyone, for joining us on this Friday. Teddy and Julia, are you here with me?
TEDDY DOWNEY: I’m here.
JULIA ARBUTUS: Yes.
DANIEL SHERWOOD: Rock on. Well, I’m just going to kick us off as far as it relates to this most recent investigation. And then, Teddy, please feel free to chime in with any questions as far as it relates to what Julia has found for us. And then we’ll pivot to our more kind of standard format, Teddy, where you can guide the conversation through the two other items and we’ll get everybody on the way to the weekend. Sound good?
So broadly speaking, The Capitol Forum has been kind of on the forefront of looking at how asset retirement obligations impact the market and impact the industry in the last few years. For context, there’s been a lot more talk around the legacy liabilities as they’re associated with upstream oil and gas development in recent years, but it’s to catch up for a century or more of otherwise regulatory neglect. It wasn’t until the sixties until really the country started to think more critically about codifying certain obligations so that operators couldn’t just walk away from a mine, or in this context, an oil and gas well.
The preliminary efforts of our investigations over the last few years were largely just to get a handle of what the scope of the problem looked like in this country, and most regularly in the Appalachian Basin, though we have hit other regions in the country. The IIJA provided our team a unique opportunity to look on the ground of how this impacts the country and our regulatory ability to play catch up. And what Julia has done in this investigation that went live this morning is give a look in real-time at the earliest process of those IIJA funding efforts.
And so, it’s an incredibly dense piece. This is something that Julia has been following very closely since her tenure started here at The Capitol Forum. And I think first, what would help everyone, Julia, if you could just give us a little context about the actual methodology and how you started to kind of build the framework, the data framework, that allowed us to come to these state agencies based on these bidding documents, knock on their door and say, hey, what’s going on here? This doesn’t all add up.
JULIA ARBUTUS: Yeah, for sure. We’ve really been monitoring the well status of particularly inactive, abandoned, orphaned and shut-in wells since the orphaned well plugging program – that’s part of the Infrastructure Investment and Jobs Act bill – started. Over the past year, and particularly over the past eight to nine months, we’ve run a script through Upstream, our database, that monitors those IOAS wells. And we’ve seen a lot of movement with those numbers, inactive numbers shooting up, abandoned numbers and orphan numbers similarly shooting up. So we’ve started really drilling into what this means in the five states in the Appalachian Basin that have won initial grant funding as part of the IIJA, and looking at what it means in each state for a well to be considered orphan, what it means to be eligible for plugging, and really drilling into how each state is approaching this program. Because there’s no overarching federal consensus on what a state should classify an orphan well as. Typically, an orphan well is a well without an operator, but if a state has a different definition, it is that definition. So we’ve really been trying to drill down into what “orphan” means in each state so that we can accurately engage with each state and figure out, in this case, what active operators may actually own these wells.
DANIEL SHERWOOD: That’s right. And without federal guidelines and without federal precedent. This is the first national effort to address this issue, period. And so, we here, with this story, are giving a look underneath the hood of what that actually might look like. With Upstream and the work that Julia has done, we uniquely have maintained data on these non-producing wells that are sometimes neglected by other data providers. And then we map that over with other ownership information and external legal documents that would demonstrate chain of title to our best of our ability. But we do not have every piece of data. And so, Julia, I’d love if you could share some of the examples of kind of which operators you were able to track those fingerprints to and how sometimes once we replicated the processes that the states showed us – how we were able to kind of push back on, “Okay, you say that our interpretation is different than yours. But when we look at what you look at, it seems to actually support our thesis.”
JULIA ARBUTUS: The biggest example of this is in West Virginia. When you look at the wells that are on the plugging lists in the bidding documents that West Virginia put out, they have this interesting column that references a responsible party. While a lot of those responsible parties are listed as “unknown operator,” there are some that listed an operator, whether that operator was active or inactive, bankrupt or still operating. And West Virginia is one of those states that doesn’t have a statutory definition for orphan well, so they’re picking wells that don’t have an active operator attached to them. But it is interesting that they list this responsible party.
For 14 wells, across all of West Virginia’s bidding documents, a responsible party is listed as Columbia Natural Resources, LLC, which is a company that, as we know, Chesapeake acquired in 2006. And that’s something that we’ve mapped in Upstream. It’s something that’s supported by SEC documents, West Virginia Secretary of State documents and then West Virginia Department of Environmental Protection transfer records.
We brought that to the West Virginia Department of Environmental Protection, and they didn’t really address the wells specifically. They said that they go through a process to make sure that wells with active operators aren’t plugged. They told us a little bit about that process, which included a requirement to identify well owners through title records, so we went to the county clerk’s website for each of the counties. Two of the ten counties do not digitize their county deed records, but for eight other counties, we did find county deed records that included deed transfers from Columbia Natural Resources to Chesapeake. We’ve linked one example of the deed transfer in the article – they all say the same thing, just with different county names. We interpreted that as something the West Virginia Department of Environmental Protection or a plugging company would find, if they are supposed to look at these records.
DANIEL SHERWOOD: Incredible.
JULIA ARBUTUS: Yeah. We again, brought that to the DEP and we said, “Hey, here’s the links to all the records we found. Would this not be something that someone plugging a well would find?” They still didn’t address the wells in question and just doubled down on their original statement, which is that they will not be plugging wells with active operators.
That’s probably the biggest example of us following the trail, seeing where it leads and saying, “Okay, well, we found this information that would most likely disprove the fact that this well is eligible for funding.” Unfortunately, we couldn’t get the DEP to engage with us on a well‑specific level. But we’ll see as these plugging projects get underway whether or not these wells are plugged.
TEDDY DOWNEY: Julia, what is that process? So is there really any oversight here? Does the Department of Interior keep an eye on these states when they’re getting ready to release more money? What are the oversight mechanisms there for the states to ultimately get it right? Or alternatively, are we looking at a situation where these companies are going to be able to sort of get the government to cover their asset retirement cost?
JULIA ARBUTUS: The DOI declined to comment for this story, so it’s hard to say, specifically in relation to what we found with this story, what oversight looks like. I will say that the DOI did post new draft guidance for the next round of orphan well plugging funding which does include a certification that states will have to sign that says that they’ve looked for and exhausted all financial assurances that may be attached to wells, whether that’s bonding, identifying an active operator, et cetera. Again, that’s a draft guidance, so we don’t know if it’s going to make it to the official formula grant guidance, but that is one step.
It appears so far that the DOI is deferring to states even as far as we’ve seen with definitional things. For example, saying that if you don’t have – like in the case of West Virginia, not to keep picking on West Virginia – but they don’t have a statutory definition for orphan well. And so the DOI is saying that if you don’t have a statutory definition for orphan well, or if you have a different definition than what we said, we defer to your definition. The DOI has said that it expects states will verify that wells they plan to plug have been orphaned and they have introduced a new orphan well plugging department that’s supposed to oversee these plugging projects. But again, it is a huge project and will be ongoing for the next decade, so right now we’re in a wait and see period.
TEDDY DOWNEY: So what were some of the companies whose wells were being deemed orphaned, that you found were actually not orphaned, that actually had an active operator attached to them?
JULIA ARBUTUS: Well, as I mentioned before, Chesapeake in West Virginia. We also found some evidence of some ties to BP through Sinclair Oil Corp in Kentucky and New York. And in those states, they both told us that when determining well ownership, they typically check Secretary of State records to verify if an operator is active or inactive. So we went to the Secretary of State records. And we found, in Kentucky, there are three entities listed for Sinclair Oil. One is listed as active and the other two are listed as inactive. But one of the ones listed as inactive shares an address with the active entity. And then the third that lists the company as inactive documents Sinclair’s divestiture to ARCO in 1969. They’re all referencing the same or related entity there.
And then in New York, Sinclair Oil Corp. is also listed twice. And also, again, it would appear to refer to the same entity as the entries have addresses that match Sinclair Oil Corp’s district marketing addresses and then references the current CEO.
In Kentucky, the wells that we matched went to Sinclair Oil Corp. In New York, we linked the well that we found to Sinclair Refining, which merged into Sinclair Oil in 1968. None of those Secretary of State filings referenced that merger, even though Sinclair Refining is fully encapsulated by Sinclair Oil. And both states did tell us that they are, in a lot of cases, aware of successor and predecessor liability. In Kentucky specifically, they told us that they don’t have statutory authority to do corporate history investigations. But we found Secretary of State records listing Sinclair Oil as active.
DANIEL SHERWOOD: Which begs the question, right Julia?
JULIA ARBUTUS: Yeah.
DANIEL SHERWOOD: And another incredibly series of compelling findings. And it demonstrates, and as Julia rightly points out, the DOI’s process, a huge aspect of it is deferring to those states largely guided by the IOGCC, which we’ve covered as well and discussed at our conference. So we know where that’s going to lean. And we understand that industry’s engagement is an important aspect of this.
But when you see, on the other hand, industry is getting such an easy pass, it begs the question of should we be deferring to the states processes this much even when we have relatively low lift type queries with the Secretary of State? And yes, it takes a little bit of corporate knowledge to understand the relation. But the addresses are explicit. The names are explicit. As long as you have an Internet connection, regardless of whatever files you have in a cabinet at a state regulatory agency, those connections should be able to be drawn.
And our third example of a company, an active operator with ties to one of these wells identified, is our oft-cited friend Diversified Energy. And they had production records where they had reported as recently as the most recent full year of production. So, I mean, that really puts some of this on its head, right? If that well is not even non‑producing. Or it might be no production, but there’s a production record being filed by a company that is also getting bids through this process to plug wells? And Julia found that specifically some of the wells that the Diversified plugging entity won bids for is in the same area and relevant to where their own wells have been identified, which I mean that just can’t be the intent of this program, nor of the regulators. And so that’s why we need to ask these questions.
TEDDY DOWNEY: And just to double down on that. So Diversified may be getting paid with federal government money to plug its own wells? But the money is for an orphan wells program?
DANIEL SHERWOOD: That’s right. Based on our research, it looks like that’s happening.
TEDDY DOWNEY: That seems problematic.
So, if you’re looking at this, something obviously would need to happen, either at the federal level or at the state level, for more oversight to occur. Because this is not a small problem. I mean, you’ve written about this. There are so many wells to cap. And we’re just at the beginning of this process, right? How do you put all this context of where is it that we’re seeing a lot of problems at the beginning and there’s a lot of work that needs to be done to sort of iron out a process that will actually make sense? Or how do you interpret the other problems that came up in this investigation?
DANIEL SHERWOOD: Thank you. That’s a perfect question and a great setup, Julia, for you to share what you found with the Ashland wells. And Julia answered an aspect of this question earlier of how this is a decades long process. So even though it looks alarming now, a dose of hope sometimes is needed. And this is going to be a long tail issue where we need to have regulators that are tuned in and be proactive. I mean, just look at the degree of engagement that the regulators gave us in this piece. They’re obviously trying to pay attention to the best of their ability.
Quickly, there’s two policy solutions that seem to come to the top. People talk about financial assurances a lot, and I think that’s kind of old hat. And then predecessor liability, which is kind of where I think, from a legal perspective, what would be necessary to enhance the notion of past operators, these active companies that either received an economic benefit from drilling and producing these wells or who were responsible for drilling a dry hole, being on the hook for retirement costs. And that’s, I think, going to be something big. We have it on some state legislation in California. Pennsylvania has it to a certain extent, but very limited. And then we have it in federal offshore waters.
So I think making that more ubiquitous, whether it’s through a federal process or a state process, is going to be the only true way we recoup some of these costs. And that’s why I think it’s concerning, from Julia’s and my perspective, when we see in the formula grant guidance that the most stringent provision in the draft guidance is about exhausting financial assurances. And the Ashland example serves as a very clear reason as to why financial assurances are wholly inadequate to actually address these retirement obligations. So, Julia, can you tell us what you found there?
JULIA ARBUTUS: Before I jump into that, I will say, we have links to full state responses. Also, there’s an attached Excel sheet that dives into the data and also includes links to almost 30 articles about asset retirement obligations we’ve published over the past four years. If you want to look at any of them, we have an Excel sheet that discusses those findings. It’s really important because this article itself is all encompassing, but then there’s still so much more because it is an ever-evolving piece.
So, Ashland. Ashland is a fun example. When I was looking at the Kentucky plugging lists, I found 25 wells that have well records tying them to Ashland Oil Incorporated, which is a company that has a long legacy in Kentucky. We have written about Ashland before, and it’s still considered active within Kentucky Secretary of State and then also within their Division of Oil and Gas records. If you search it in the Secretary of State filings, you’ll come up with an active operator.
When we brought those wells to the DOG, they told us that Ashland doesn’t own those wells. And because they don’t own them, they obviously don’t have any obligation to plug them. So we filed a public records request for the transfer records of those wells, because in Upstream, we use a lot of well and production records to track ownership. We also have transfer records in Upstream, but it seems like these documents were something that the DOG had that we didn’t ‑‑ I don’t want to say we didn’t have public access to them because we literally filed a public records request, but they’re not available on their website.
So, we filed that open records request. We got 25 documents back. Seventeen of them were completely illegible. They were just electronic scans of microfilm. And we were told that there was no way of enhancing those records. But the records obviously exist. For eight of those wells, though, we saw that they were transferred to now defunct, much smaller companies than Ashland. The Kentucky DOG told us that because there was a transfer and because it was after a point where bonding legislation had gone into effect, when those successor operators acquired those wells, they bonded them. But those bonds didn’t end up covering plugging costs. And instead, they went to covering unabated violations of the successor operator, which is what the DOG told us. So as those smaller companies shut down, the wells could be considered eligible for plugging with initial grant funding.
And that’s an example of how bonds in some cases maybe not being enough. But it’s also an example of Ashland successfully offloading these asset retirement obligations onto these smaller operators that, at the end of the day, had some other issues going on and couldn’t afford to plug them. And these wells, they didn’t have any production records associated with them, even though they had spud and completion dates on record in the early 1960s, which means that, again, Ashland got to sell these non-performing wells and just get rid of those plugging obligations.
TEDDY DOWNEY: So Julia, this is really interesting stuff all around. Before we move onto our next topic here today, anything else that you want to highlight from the investigation, the big piece?
JULIA ARBUTUS: Something else that we saw when we were going through these well lists is, first of all, in a lot of cases, the scale of them. These states are definitely attempting to make good use of all of these federal funds. But however, because of, especially in this first case of initial grant funding, what some states have described in the past as a bit of a rushed process, the well plugging lists revealed some errors and discrepancies like duplicates, permit numbers that didn’t match API numbers, and in some cases conflicting ownership, as we’ve discussed.
At the end of the day, it really is a mammoth task. But it’s also something that is really important for states to get right. Because in cases like with Chesapeake, with Diversified, with BP, they have the money to be plugging these wells. They’re huge companies. Or even Ashland. And it’s not great that they’re offloading these retirement obligations. When they first drilled the well, they signed up to plug it. My biggest takeaway is that at the end of the day, it’s really important that despite the scale of this and the fast-paced timeline that this funding is on, it is really important for these states to get it right. Because they shouldn’t be plugging wells that have any relation to active operators at all.
TEDDY DOWNEY: Yeah, it’s a massive environmental and economic undertaking. And they need every single one of those dollars to plug wells that wouldn’t otherwise be paid for by someone else. So it’s important work. Thank you so much for the highlights here. Obviously, I encourage everyone to take a read and dig in. It’s fascinating stuff and the culmination of a ton of work. So, thank you so much, Julia.
JULIA ARBUTUS: Thank you so much.
TEDDY DOWNEY: And Daniel, let’s move onto MVP, one of my favorite topics. There’s an amendment that is sort of turning heads a little bit. I wanted to get your take on whether that changes your overall thinking or how you’re interpreting the legislative language.
DANIEL SHERWOOD: Absolutely. And we’ll be fast here. Thanks, everybody, for joining us. And congratulations again, Julia. That’s really, really awesome work.
So, yeah, we love Mountain Valley Pipeline. We got some traffic this week on this East Daley note. And not to compare and contrast in such an explicit way, but it really does demonstrate the value add that our insights give. I mean, we’ve been talking about this every week for the last, what? Three months now? Four months. And we’re just way ahead.
So last week we discussed this biological opinion being issued. That’s kind of the sentiment that now this week is catching up with that. We already discussed the reasons why that isn’t necessarily as huge of a win for the overall process as some would like to think. There is a letter to the editor in the Star Tribune to that effect.
I think the most pertinent thing for us, as I highlighted, is this amendment to the Lower Energy Costs Act as we try to figure out what’s hot air and what’s not. And this is what we’ve been waiting for. We’ve talked a lot about, “When will there be explicit language as it relates to Mountain Valley Pipeline like we saw at the end of the year?” Last week, when we discussed the Lower Energy Costs Act, which is the Republican introduced policy on the Hill our biggest note on that was there was nothing on MVP. Even the language on natural gas pipelines was relatively weak. And you asked me what do I mean by weak? I mean not targeted enough to accelerate this construction timeline to the point that Equitrans will be on time, which they’re forecasting still is the end of this year.
So we got that language this week, Teddy. Why does it not change our sentiment? Well, because this legislation has already been deemed dead on arrival. There’s no coincidence that the Republican party would be willing now to introduce kind of more explicit language for their party line. Because it generates headlines and it can make someone who wants to be optimistic, more optimistic. But the truth remains that this legislative package isn’t moving. But it does demonstrate – you know, if I was Equitrans, I would be happy to see that there’s a concerted legislative effort that explicitly states what the project itself needs. So there’s our update on that important natural gas artery.
TEDDY DOWNEY: And just a quick question here. So, I mean, the more sort of specific they get with this, does that make the overall legislation more controversial? Or is the overall legislation already controversial enough that it’s hard to see movement in the Senate? So I’m just curious to get your take on that.
DANIEL SHERWOOD: I think it depends on what happens to the underlying package. So the last time that Mountain Valley Pipeline got this explicit of a name call from our members of Congress was as a negotiation token in relation to passing the Inflation Reduction Act, if my memory serves. And so there was a lot of concessions from principally the holdover of Senator Manchin that he made to the administration that included a more green, so to speak, spin on the IRA. There’s plenty of stuff in the Inflation Reduction Act, though, that benefits the oil and gas industry. So I don’t want that talking point to be overhyped on our call.
That being said, Manchin did take a political hit from the moderate Republicans because what did he get promised by Biden? “Okay, we get this out and then we’ll support you on Mountain Valley Pipeline.” And then that didn’t happen. As we’ve discussed, the power dynamic has shifted in more ways than one. And so now it’s kind of a new ballgame. And I think Manchin’s accepted defeat on that negotiation and had less power. And I think now this bid, this package, that the House Republicans formulated on its own, to your point, is politicizing enough that any rider on it is going to be a no game for them. So either the greater package that the Republicans are proposing needs to scale back if they want to have a rider that’s specifically calling out Mountain Valley Pipeline or it will continue to flounder.
TEDDY DOWNEY: Yeah, it’ll be interesting to watch. I mean, I wonder if they, to your point, try to stick it on an appropriations bill or something at some point just to keep it alive or give it some semblance of hope. So we’ll have to keep an eye on that.
But let’s turn to LNG, one of my other favorite topics. There are some developments there. I would love to get your take on the latest when it comes to LNG.
DANIEL SHERWOOD: You bet. So, for starters, I want to just do a little update on the Rio Grande Project. That’s NextDecade. I’m going to go in order of the invite. So that got moved from March 15th to June 15th for an extension of a notice to proceed on construction. So that means that they have an EPC contract out. They have a firm on standby and they’re waiting for a full, that final investment decision we discussed two weeks ago. They need more equity commitment, more financial support on the back side to say, “Okay, shovels in the ground. Let’s get this started.”
Why do we highlight this, Teddy? Because it’s interesting. We talked about the Energy Transfer extension and citing the amount of competition in the Gulf. Here the NextDecade disclosure, it was parsimonious with the explanation as to the delay in their securities filing about this. But it does demonstrate – what I would attribute this to is that intense competition on the Gulf. And so that’s NextDecade.
Moving onto Repsol’s St. John. The St. John Project got scuttled. That was going to be an Atlantic facing project in Canada, in New Brunswick. It’s an LNG import facility. Repsol was going to add onto it the export functionality. They said, “no dice.” Why is that? Why do we keep coming back to these stories? Because we talk about winners and losers. Everyone speaks about LNG in this very broad-brush fashion. And the models do not, in my opinion, accommodate the flexibility and fluidity of the status of these projects.
Which is a fine segue to the last group which, not to do a victory lap, but I’m going to, we correctly predicted that Sempra would reach FID within March as it forecasted for Port Arthur. Sempra has a pretty good track record on that. That’s one of the reasons that informed our sentiment. But it demonstrates that while other projects struggle to find offtake agreements or equity commitments, some winners, like Sempra’s Port Arthur, does not. So they announce that they’re moving forward within their timeline. They also announced money from KKR and a joint venture with ConocoPhillips. Those are big names. ConocoPhillips gets offtake aspects of that. It’s another example of a more upstream/integrated operator getting exposure to LNG.
So that was on our radar and rounding it out, Teddy, that FERC approved Sempra’s Cameron LNG expansion. So it’s a different facility but approved an expansion of that operating facility. So a good week for Sempra and a less bullish week, I suppose, for the other entities that we covered. And not on the invite, but Plaquemines also advanced.
TEDDY DOWNEY: Okay, great. I don’t have anything else. It’s very interesting all around. Julia, thank you again for all your hard work on the asset retirement investigation. Daniel, thanks for your insights, as always. And thanks to everyone for joining the call today.
DANIEL SHERWOOD: Thank you.
JULIA ARBUTUS: Thank you.
TEDDY DOWNEY: All right. This concludes the call.