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Copyright by Kristin Alexandra Cook 2019 Copyright by Kristin Alexandra Cook 2019 The Thesis Committee for Kristin Alexandra Cook Certifies that this is the approved version of the following Thesis: An “Inescapable Obligation” –The Treatment of Well Decommissioning Liability in Recent Oil and Gas Bankruptcies APPROVED BY SUPERVISING COMMITTEE: David B. Spence, Supervisor John S. Dzienkowski Sheila M. Olmstead An “Inescapable Obligation” –The Treatment of Well Decommissioning Liability in Recent Oil and Gas Bankruptcies by Kristin Alexandra Cook Thesis Presented to the Faculty of the Graduate School of The University of Texas at Austin in Partial Fulfillment of the Requirements for the Degree of Master of Science in Energy and Earth Resources The University of Texas at Austin December 2019 Acknowledgements The writing of this thesis paper has proven to be as rewarding as it has been arduous. The seeds for this thesis topic were planted early in my career as a production engineer when I witnessed firsthand the repercussions of improperly abandoned wells. As the culmination of many years’ contemplation and discussion, this paper would not be possible without the support of a great number of individuals. In particular I would like to recognize my father, Robert Weyand, whose passion for the oil and gas industry set me on the path to a career that I have found deeply fulfilling. I am forever grateful to the professors in the petroleum engineering department at the University of Oklahoma: I may not be Sooner born, but I am surely now Sooner bred! Likewise, I am deeply appreciative of the experience and friendships I gained while working at ConocoPhillips. My graduate studies would not have been possible without the financial support of both the Lyndon B. Johnson School of Public Affairs and the Energy and Earth Resources program in the Jackson School of Geosciences. I am indebted to the professors at the University of Texas at Austin who contributed to ideas and discussions that found their way into this final paper: Dr. Sheila Olmstead, Professor John Dzienkowski, Dr. Patrick Brockett, and Dr. John C. Butler, to name a few. Thank you especially to Dr. David Spence, who supervised the writing of this thesis paper. I would be remiss if I did not thank Richard Chuchla for his vision and support of my professional and academic goals—Richard, thank you for investing your time in me! And last, but certainly not least, I would like to recognize my husband Kevin Cook, whose love and support has allowed me to complete this monumental task: “I can do all things through Christ who gives me strength” (Phil. 3:14). iv Abstract An “Inescapable Obligation” –The Treatment of Well Decommissioning Liability in Recent Oil and Gas Bankruptcies Kristin Alexandra Cook, MSEER The University of Texas at Austin, 2019 Supervisor: David B. Spence Oil prices fell by fifty percent during the latter half of 2014, tumbling from a high of $105 per barrel in June to a mere $53 per barrel by year’s end (U.S. Energy Information Agency 2019). As a result of sustained depressed commodities prices, more than 350 North American oil and gas operators and service companies filed for bankruptcy between January 2015 and September 2019, representing more than $162 billion of debt (Haynes and Boone LLP 2019b, 2019c). Despite the existence of federal and state statutes ensuring that operators decommission wells at the end of economic life, these environmental laws frequently lose efficacy in bankruptcy proceedings. This unresolved conflict, among other contributing factors, has led to the existence of tens of thousands of “orphaned wells” in the United States. This thesis paper examines the bankruptcies of American oil and gas operators after the precipitous decline in oil prices to determine whether operators successfully discharged v decommissioning liability during bankruptcy. A survey of 2015 bankruptcies shows that 33% of oil and gas operating companies abandoned properties with unmet decommissioning liability and created 285 new orphan wells in eight states. This paper also estimates the cost to plug and abandon wells orphaned from bankruptcies between 2015 and 2019 at more than $200 million. The paper concludes with a discussion of the advantages and disadvantages of several possible solutions to the orphan well problem. vi Table of Contents Introduction ..........................................................................................................................1 Outline of the Thesis Paper .........................................................................................5 Chapter 1: Origins of the Orphan Well Problem .................................................................6 1.1 What is an Orphan Well? ......................................................................................6 1.1.1 Well Production Cycle: Timing the Decision to Plug ...........................6 1.2 Permanent Plugging and Abandonment (P&A)....................................................8 1.2.1 Procedure and Standards ........................................................................8 1.2.2 Plugging Costs .....................................................................................11 1.3 Safety and Environmental Hazards of Improper Abandonment .........................11 1.3.1 Example from New York’s Orphan Well Plugging Program ..............13 1.3.2 Leaky Wells Challenge Future Field Development .............................14 1.4 How Many Wells? Assessing the Magnitude of the Problem ............................14 1.4.1 Are Orphan Wells an International Problem? ......................................15 1.5 Potentially Liable Parties: Who Pays for Decommissioning Costs? ..................17 1.5.1 Complexity of Lease and Well Ownership ..........................................17 1.5.1.1 Chain of Title ...........................................................................18 1.5.2 Operators Past and Present: Liabilities in Federal Offshore Leases ....18 1.5.3 On the Hook after Assignment: Monahan v. United States Dept. of the Interior ..............................................................................................19 1.5.4 Banks as Operators? The Wells Fargo Case .......................................20 1.6 Contributing Factors to Oil and Gas Bankruptcies .............................................22 1.6.1 The 2014 Oil Crash ..............................................................................22 1.6.2 Credit Crunch: Reserves-Based Lending .............................................24 vii 1.6.3 Catastrophic Losses and Insolvency ....................................................25 Chapter 2: State and Federal Protections Against Orphan Well Liability .........................28 2.1 Federal Environmental Liability for Oil and Gas Producers ..............................28 2.1.1 Surface Mining Control and Reclamation Act (SMRCA) ...................29 2.1.2 Resource Conservation and Recovery Act (RCRA) ............................30 2.1.3 Superfund: The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) .........................................31 2.1.4 Oil Pollution Act (OPA) ......................................................................34 2.2 Decommissioning Liability for Oil and Gas Producers ......................................35 2.2.1 Federal Onshore Leasing .....................................................................36 2.2.2 Federal Offshore Leasing .....................................................................38 2.2.2.1 2016 Updates to Financial Assurance Requirements...............39 Chapter 3: Relevant Aspects of the United States Bankruptcy Code ................................42 3.1 Overview of the Bankruptcy Process..................................................................42 3.1.1 Chapter 11 Reorganization ..................................................................43 3.1.2 Chapter 7 Liquidation ..........................................................................44 3.1.3 Fiduciary Responsibilities to the Debtor’s Estate ................................44 3.2 Bankruptcy Tensions with Environmental Laws ................................................45 3.3 Mechanisms for Discharging P&A Liability in Bankruptcy ..............................46 3.3.1 The Automatic Stay .............................................................................46 3.3.1.1 Environmental Exception to the Automatic Stay: The Penn Terra Test .......................................................................................47 3.3.1.2 Example: In Re Security Gas & Oil, Inc. (1987) .....................48 3.3.2 Administrative Claims Priority for Government Cleanup ...................49 viii 3.3.2.1 Example: H.L.S. Energy’s Inescapable Obligation ................49 3.3.3 Section 554 Abandonment of Burdensome Property...........................50 3.3.3.1 Example: S. Parish Oil Co.’s Offshore Well Abandonment ....51 3.3.4 Section 363 Asset Sales .......................................................................52 3.3.4.1 Example: Dune Energy Excludes Burdensome Property from Asset Sale ..............................................................................52 3.3.5 Section 365 Rejection of Leases ..........................................................54 3.3.5.1 Example: Powell’s Attempt to Reject a Lease in Pennsylvania ..................................................................................55 3.3.6 Eliminating Liability through the Reorganization Plan .......................56
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