Profitable oil and gas production in Colorado is increasingly concentrated in a few basins leaving the rest of the operations with few resources  and posing risk to getting all 47,000 of the state’s active wells plugged and remediated, according to a report from Carbon Tracker.

At least 27,000 wells — more than half the state tally — don’t generate enough cash to pay for their eventual plugging and site remediation, the report by the nonprofit think tank focused on climate and finance.

In 2022, the Colorado Energy and Carbon Management Commission, which regulates the oil and gas industry, adopted financial assurance regulations requiring every operator to have a plan and financial reserves to plug their wells.

So far, 158 plans accounting for 90% of the wells that fall under the rules have been approved raising $613 million over the next 20 years. Another 40 plans are under review covering another 8% of the wells in the state.

The rules also created a $10 million per year fund for plugging, financed by fees on the industry, as well as a projected $65 million in federal grants.

But by Carbon Tracker’s estimate based on per-well closure costs the state funds will cover less than 10% of the plugging price tag. An earlier study by the group identified so-called loopholes in the rules.

Industry representatives pushed back on those calculations. The regulations and plans approved by state regulators adopted “appropriately balance the need to safeguard taxpayers from paying for decommissioning obligations while promoting continued energy development,” Kait Schwartz, director of API-Colorado, a trade group, said in an email.

The ECMC declined to comment.

The analysis identified only four areas in Colorado where oil and gas wells are making enough money to set some aside for plugging and abandoning their wells.

“The single basin in the state uniformly able to set aside money now to fund its decommissioning is the San Juan basin south of Durango,” the report said. “The wells are productive, decline slowly and cost little to decommission.”

The Denver-Julesburg Basin — where most of the drilling in the state is taking place, and the most profitable horizontal wells, boring through shale formations, are being brought online — also has the resources to plug wells.

In the past three years the three major operators in the basin — Chevron, Occidental Petroleum and Civitas — have plugged more than 3,330 wells, according to state records.

A small group of horizontal wells in the North Park Basin and a few hundred oil-producing wells in the Anadarko Basin, near the Texas-Kansas border, are also producing adequate revenues to fund plugging.

Where the at-risk wells are

In the rest of the state, however, from the Eastern Plains to the Piceance Basin on the Western Slope and from Green River in northwestern Colorado to Raton Basin on the New Mexico border, wells do not produce enough oil and gas to pay for their plugging.

“This is where the risk is,” said Dwayne Purvis, the report’s author and principal at Fort Worth, Texas-based Purvis Energy Advisor, a petroleum engineering consulting firm.

The area with the largest number of wells at risk is the Piceance Basin and the greatest challenge comes not from the dozens of small wildcatters or mom-and-pop operators, who collectively account for about 1,000 wells, but large, privately held companies with thousands of wells.

“It’s easy to think that a small company represents the majority of the risk,” Purvis said, “ … but the risk is concentrated in large companies.”

Two companies backed by private equity — Caerus Oil and Gas and TEP Rocky Mountain — own three-quarters of the 16,200 wells in the Piceance. TEP Rocky Mountain is owned by Terra Energy Partners.

Purvis contrasted these companies focused on local gas resources with Chevron, Occidental and Civitas, the three publicly traded operators. “The publicly traded companies have more diverse portfolios and more flexibility,” he said.

“To the extent that the portfolio is systematically low margin, low profit, it can survive better in the short term,” Purvis said. “A small operator is less able to tolerate variations, but both small and large operators with the same kinds of assets both systematically have low profitability.”

 In 2023, 10 wells were plugged in the Piceance, the report said.

TEP Rocky Mountain and Caerus have financial assurance plans approved by the ECMC. TEP Rocky Mountain has 7,145 wells and a $19.5 million financial assurance commitment. Caerus operates 4,885 wells and a $15.2 million financial assurance plan.

“We are committed to reducing our environmental footprint and operating in a responsible and environmentally sensitive manner,” Kristin Lingley, a spokeswoman for Denver-based Caerus, said in an email.

Terra Energy Partners, based in Houston, did not return a phone call seeking comment.

The report also noted another private operator, concentrated on low-producing gas wells on the Eastern Plains and in Kansas, Own Resources, which used a special option in the rules to design an $8.6 million financial assurance plan.

“We respect Carbon Tracker’s efforts, but it is important to base discussions on accurate data. As we presented in our public assurance hearing, our actual costs for plugging, abandonment and reclamation (P&A&R) are around $14,000 per well, not the $110,000 default amount,” Wray-based Own Resources CEO Niels Phaf said in an email.

“We have no wells on the out-of-service list and only two inactive wells out of 3,265, which is less than 1%, compared to the state average of nearly 20% in Colorado,” he said. “This significantly lowers the orphan-well risk, which is why the ECMC approved our assurance plan.”