Operators May Earn and Sell Carbon Credits for the P&A of Inactive, Shut-in, or Temporarily Abandoned Wells

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The carbon credit market continues to evolve as oil and gas companies face increasingly stringent regulations to reduce greenhouse gas emissions. Operators may now have the potential to sell carbon credits in exchange for the P&A of inactive, shut-in, or temporarily abandoned wells.

The EPA estimates that there are over 3 million known abandoned and orphaned oil and gas wells (AOOG wells) in the United States. These AOOG wells often emit methane, a greenhouse gas that is considered 25 to 84 times more potent, per ton, than carbon dioxide. The EPA conservatively estimates that annual methane emissions from known AOOG wells are equivalent to greenhouse gas emissions from 2.1 million vehicles per year.

In Louisiana, state and federal funding has been allocated to address the more than 4,500 unplugged orphan wells in the state. However, an estimated 23,000 AOOG wells, which include wells classified as inactive, shut-in, or temporarily abandoned wells, are not part of the orphan well program and are unlikely to benefit from the significant, incoming funding. Although LDNR regulations generally require that wells be plugged within 5 years of inactivity, Louisiana is one of many jurisdictions that provides alternative routes which allow inactive wells to remain unplugged for the purpose of future use, sometimes indefinitely. Permitted alternatives to P&A are often more convenient and less expensive, such as paying a $250/year fee, and can deter the timely plugging of wells, which results in continued methane emissions, potentially for decades.  Although Louisiana is allocating significant funds to P&A orphan wells, there is a lack of financial incentive for operators to address AOOG wells.

Developments in the carbon market may provide a new solution: operators may earn and sell carbon credits for the P&A of AOOG wells. The American Carbon Registry (ACR) released a new methodology, which is under peer review and will be finalized by the end of the year, that provides a regulatory framework for oil and gas companies to receive carbon credits, which can be sold in cap-and-trade markets, for the P&A of AOOG wells. The methodology is designed to incentivize and accelerate the plugging of inactive wells that would otherwise continue to emit methane into the atmosphere and to allow operators to take advantage of the growing carbon market to help finance this expensive, but important, activity.

For a plugging project to qualify for carbon credits, it must meet the following requirements:

1. Well Eligibility

The ACR methodology defines eligible abandoned wells to include: (1) unplugged wells with a spud date prior to 1950, which are eligible because they predate standardized regulations for P&A, and (2) unplugged wells with a spud date of 1950 or later and having no production for six consecutive months. In Louisiana, wells classified by LDNR as inactive, shut-in, or temporarily abandoned may be eligible.

2. Additionality

All carbon crediting mechanisms require additionality­—methane reductions are additional if the mitigating project would not have happened without the incentive of the carbon credits. Additionality is typically not met if the project is mandated by the government because it hinges on the creation of new methane reductions. Accordingly, the project proponent must show that no laws or regulations exist that require P&A at the time the project is executed.

In Louisiana, inactive wells with future utility can remain inactive for 5 years before they are required by law to be plugged.  Inactive wells with no future utility must be plugged within 90 days. However, operators may submit a schedule of abandonment, for wells with or without future utility, to be approved by the Office of Conservation, allowing for plugging activities to occur years later. Moreover, operators have the option to pay a $250/year fee per well, in perpetuity, in lieu of plugging a well, for reasons of future utility. Therefore, because current regulations provide alternatives that permit inactive wells to emit methane for decades, P&A of these wells at or after the regulatory deadline may still satisfy the additionality requirement.

3. Accounting and Crediting Period

Project developers can register their projects with a carbon emissions registry in order to earn carbon offset credits that can be sold into the voluntary carbon credit market. The project proponent, who may be the owner, operator, or a third party, ultimately receives the credits. Each credit represents 1 metric ton of carbon dioxide reduced or removed from the atmosphere. To determine the credits generated by plugging an inactive well, the calculated methane reductions are multiplied by the number of years in the crediting period. For inactive wells, the crediting period is 5 years, but it can be renewed for another 5 years if the project still satisfies the additionality requirement.

4. Methane Emissions Monitoring

Methane emissions must be measured before P&A in order to accurately quantify reductions. The baseline determination is the amount of methane emissions that would continue to be released over the crediting period (5 or 10 years) without the P&A project.  After P&A, measurements for atmospheric leakage must be taken to ensure that the methane reduction was successful. Then, once the well is classified as plugged with the State, the carbon credits can be issued.

Carbon Credit Values

One potential challenge facing these ventures is the financial value of the carbon credits relative to the costs of plugging inactive wells. Carbon credit market values may vary greatly, from $5-$50 per metric tons of CO2 equivalent. Similarly, the total cost of plugging wells varies case by case depending on the location, depth, and age of the well, among other factors.  Also, because the quantity of carbon credits attainable depends on the amount of methane reduced, plugging high-emitting wells would result in greater emissions reductions and more marketable credits.

As operators adapt to increasingly stringent greenhouse gas regulations and pledge to make related reductions, carbon crediting may help operators turn the liabilities and expenses associated with idle wells into an additional source of revenue, while also reducing emissions.

Co-authored by Juliane Mahoney, Summer Associate. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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