80,000 Inactive Oil Wells: A Blessing or a Curse?

16 Pages Posted: 26 Apr 2017

See all articles by Lucija Muehlenbachs

Lucija Muehlenbachs

Resources for the Future; University of Calgary

Date Written: February 8, 2017

Abstract

For a century, oil and gas wells have been Alberta’s economic pride. That there could be a hidden cost in maintaining these wells past their productive life is difficult to imagine, much less accept. The financial burden of abandoning a well officially is no doubt why Alberta producers delay doing so as long as possible. Turning a blind eye, they routinely keep non-producing wells in a state of “inactive” suspension and refuse to rule out the possibility that someday oil prices or technology, or both, will change significantly enough to make those wells profitable again. In most cases that will never happen, but the province plays along anyway: It enforces no limit on how long a well can be kept inactive before it must be reactivated or abandoned. While a convenience for well owners, there is no benefit to Albertans. They are exposed to the risk of thousands of inactive wells becoming a hazardous threat to public safety.

The longer a well is inactive, the higher the likelihood that its owner may no longer be around to arrange and pay for its official abandonment, a process whereby wells are permanently sealed using regulated methods that insure they cause no environmental damage. Oil and gas producers come and go. Periodic price shocks, like the one that recently ravaged the sector, drive companies into insolvency. When the owner of an inactive well is no longer around to pay for its abandonment costs, the well becomes orphaned. Alberta’s permissive policies have led to a situation where there are now more than 80,000 inactive wells in the province. Some have been inactive for decades. If the possibility existed that they could eventually become economical, those wells might be considered a blessing. However, the simulations that model scenarios where prices are substantially higher or where production technology is significantly improved, clearly show that the vast majority of these wells will never be reactivated, no matter how dramatically conditions improve.

If oil prices rise 200 per cent, the modeling shows that just 12 per cent of oil wells become reactivated, and just seven per cent of gas wells. When the model tests to see what happens when a technological innovation improves so that the remaining oil or gas in a well that cannot be recovered is suddenly made recoverable (i.e., a 514 per cent increase in oil reserves), just 10 per cent of inactive oil wells are reactivated, and just six per cent of gas wells. The most effective way to reduce the number of inactive wells, the model finds, is by reducing the cost of their abandonment. With a 25 per cent reduction in abandonment costs, the pool of inactive wells shrinks by 20 per cent for both oil and gas, while the number of abandoned wells increases by nearly 50 per cent for both oil and gas. In all cases, the amount of oil and gas production that would change one way or the other — either by a minimal level of reactivation or a significant wave of abandonment — is marginal and not of meaningful benefit to Albertans.

Creating an industry fund that takes responsibility for a well that has been orphaned has been Alberta’s approach to managing all its orphan wells. The deemed liability of 80,000 inactive wells is so large presently that the fund would be insufficient to cover the costs. The only way to prevent the province’s vast and growing number of inactive wells from remaining an ongoing risk to the public is by limiting the ability of owners to keep wells inactive as long as they like. Policies should recognize that most inactive wells will likely never produce oil or gas again.

Keywords: oil wells, vacant oil wells, Alberta oil wells, vacant Alberta oil wells, gas wells

Suggested Citation

Muehlenbachs, Lucija, 80,000 Inactive Oil Wells: A Blessing or a Curse? (February 8, 2017). SPP Research Paper No. Volume 10 • Issue 3. February 2017. Available at SSRN: https://ssrn.com/abstract=2957847

Lucija Muehlenbachs (Contact Author)

Resources for the Future ( email )

Washington, DC 20036
United States

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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