Diversified’s deal with West Virginia on plugging old oil wells shows rules need to change, environmental groups say

As Appalachian states are increasingly dotted with abandoned and unplugged oil wells, environmental groups that have been pressuring state regulators to get tougher on the issue say they’ll need to appeal to legislatures to change the rules.

A deal announced Tuesday in West Virginia illustrated the efforts that states are making to address the problem and, environmentalists say, the loopholes in them.

Diversified Gas & Oil Plc — the Alabama-based public company that has given them a rallying cry — has been negotiating with environmental regulators across four Appalachian states, trying to secure long-term settlements on plugging schedules. The company is seeking agreements that would push the vast majority of its liabilities decades into the future.

On Tuesday, Diversified announced a deal with West Virginia that would obligate the company to plug about 300 wells over the next 15 years and either plug, turn production back on or otherwise dispose of 450 more.

The high range of that obligation amounts to just more than 4 percent of Diversified’s wells in West Virginia. The low range is less than 2 percent. The deal also involves posting a $3 million bond.

Diversified declined to comment beyond a statement from CEO Rusty Hutson saying the agreement “provides the state, its citizens and the communities in which we work clarity and a commitment to a long-term program of well plugging.”

Empty and abandoned wellbores are a problem across Appalachia. Some may be leaking or can serve as conduits for stray gas, creating the potential for a safety risk if the gas pools and explodes.

Dave McMahon, who heads the West Virginia Surface Owners’ Rights Organization, said the agreement marked his deepest disappointment with the regulators that he’s been lobbying to prevent this kind of deal.

After an ambitious buying spree — scooping up thousands of conventional wells from shale-minded companies such as Downtown-based EQT Corp. and Cecil-based CNX Resources Corp. — Diversified has emerged as the largest operator of shallow wells in Appalachia and, likely, the U.S. It has about 60,000 wells in its portfolio, with 24,000 or so in Pennsylvania.

Last month, Mr. McMahon held a press conference to publicly pressure the West Virginia Department of Environmental Protection to hold a public hearing on the transfer of thousands of wells from EQT to Diversified.

The wells are part of a $575 million deal that closed in July. But the permits are still in EQT’s name in the state.

Mr. McMahon was looking for some mechanism, perhaps a bond that’s a condition of the transfer, that would secure the funds to plug the wells.

The way he sees it, Diversified may not have the money to do it.

And the company’s plan of avoiding plugging by putting nonproducing wells back into service alarms Mr. McMahon because West Virginia — like some other Appalachian states — regards any production as a sign that a well is still active and therefore doesn’t belong on a plugging list.

The company said in its latest investor presentation that since January 2017, it has made gas flow again in 650 previously inactive wells.

“Diversified is just taking advantage of weak West Virginia laws,” Mr. McMahon charged on Tuesday.

“We are definitely going to do something in the legislature,” he vowed. “Certainly something on transfers. Hopefully something on bonds.”

‘Established consolidator’

Across the border in Pennsylvania, negotiations for a long-term plugging settlement are likely to stretch into the new year.

Diversified has stopped promising investors an imminent announcement on its Pennsylvania liabilities and the Pennsylvania Department of Environmental Protection would only say that “settlement negotiations are continuing. That’s about the long and the short of it.”

Last month, Adam Peltz, an attorney with the New York-based nonprofit Environmental Defense Fund, traveled to Pittsburgh for a National Academy of Sciences workshop on the environmental legacy of oil and gas production.

He was there, he said, to force Diversified into the conversation. So when the panel that included Scott Perry, the DEP’s oil and gas chief, got to the question-and-answer session, Mr. Peltz rose to the occasion.

Mr. Perry said the state is using the tools it has to ensure the company doesn’t shirk responsibility.

He cited the plugging orders that the DEP issued to operators that sold their wells to Diversified. The orders, which require plugging hundreds of wells a year,  — some 1,000 wells between them that would require hundreds of wells to be plugged each year, are now part of the ongoing negotiations that Diversified is carrying on with the department.

But the Pennsylvania DEP can’t block the transfer of assets on the basis of a concern that the company can’t handle the liabilities, Mr. Perry said, according to Mr. Peltz and another workshop attendee, John Walliser.

Maybe that requires “tweaks to those laws and regulations that could help the state prevent future transfers like that from taking place,” Mr. Peltz said on Tuesday.

Other states have tackled these concerns with higher bonding requirements that accompany the transfer of wells from one company to another, and by allowing regulators to reach back to previous well owners to satisfy liabilities when current ones can’t pay, he said.

Mr. Walliser, who is a senior vice president for legal affairs with the Pennsylvania Environmental Council, said his group is also weighing how to press the issue in the Pennsylvania General Assembly.

One idea is to get rid of blanket bonding — the rule that allows companies to pay $25,000 to cover the plugging liability for all of their wells in the state. Then, he’d like to see bond amounts raised from the $2,500 per well currently on the books to something more in line with the actual cost of well plugging, which can vary widely depending on the condition of the well and the operating costs of the company.

Diversified says it’s averaging $23,800 for the wells it has plugged so far this year.

A New York hedge fund, Mangrove Partners, also has an interest in how regulators and legislators skin this cat. Mangrove has a short position in Diversified’s stock, meaning it stands to make money if the company’s stock falls.

With the West Virginia agreement now under its belt, Diversified told investors this month that it expects to negotiate similar 15-year deals with all the states where it operates.

The way the company envisions it, those deals would involve plugging about 120 wells per year over the next 15 years, then escalating rapidly to the point where in 30 years and for the next 40, Diversified would be plugging more than 1,000 wells each year.

This would be at a time when its wells are producing less gas than they are today, as the company’s annual production decline is around 5 percent.

Instead of drilling to replenish its lost reserves, Diversified has been growing them through acquisitions. And it has promised more of deals, calling itself an “established consolidator of choice in Appalachia,” in its latest investor presentation.

Its critics are mobilizing around the same point: If Diversified is going to continue to consolidate, they will lobby for new rules to secure the funeral costs for these old wells at the point they pass into Diversified’s hands.

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