Will Low Oil Prices Accelerate Number Of 'Orphaned' Oil & Gas Wells In Texas?

Find out why the recent collapse in oil prices will likely accelerate the number of "orphaned" wells needing to be plugged by the texas Railroad Commission (TRCC).

By Steve Hendrickson

The unprecedented drop in oil prices due to global oversupply has begun a new round of oil company bankruptcies. You may have recently heard the phrase, "Oil companies go bankrupt, oil wells don't." —the implication being that wells will continue to produce regardless of the condition of their owner's balance sheet. The wells typically continue to operate, although with a new owner.

Eventually, however, all wells run dry and must be plugged. Times like these can accelerate the number of wells needing to be plugged because prices are so low that they can't generate enough revenue to cover their operating expenses, royalties and severance taxes. If a low-rate well has a mechanical failure during a low-price cycle, it may not be worth the cost of repairing.

Occasionally, there are no parties interested in owning those wells and sometimes the companies that owned them no longer have the money to properly plug them. In Texas, when a well has been inactive for 12 months and the operator no longer exists the wells are deemed "orphans" and responsibility to plug them falls to the state.

According to the Texas Railroad Commission (TRRC), the are currently about 6,200 orphaned wells in Texas. Meanwhile, Louisiana reports having about 4,300 orphaned wells, which was an increase of 50% over the prior year.

The map below shows the number of orphaned wells by county, colored by the average number of months the wells have been inactive. There’s a large number of wells in some of the old legacy fields such as the Panhandle, East Texas, McElroy and Luling Fields.

(Source: Texas Railroad Commission)

The TRRC has an active program to plug orphans through third-party contractors and has spent almost $350 million since 1984. They currently plug about 120 wells per month at an average cost of about $22,000 per well. At that rate, the backlog will be worked off in less than five years. Louisiana estimates it will take nearly 20 years to properly plug its orphans.

That there are many wells in the backlog that have been inactive for as long as 20 years reflects two things have to occur before the wells are orphaned: the well is inactive and the operator is out of business.

In Texas, operators are able to receive an extension of the normal time to plug an inactive well by filing a W-3X form. There are a number of ways an operator can qualify for this extension and those can allow a well to stay inactive for a long time. Undoubtedly, some of those wells will eventually become orphans when those operators go out of business. If low oil prices persist, many small operators are likely to go out of business, which will increase the number of wells the state ultimately has to plug.

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About The Author:

Steve Hendrickson is the President of Ralph E. Davis Associates, an Opportune LLP company. Steve has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, Steve possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Steve is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He currently serves as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.

Steve Hendrickson

PresidentRalph E. Davis Associates

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