Study: Cutting costs or cutting corners: Asset reallocation in oil and gas production
Oil and gas companies use wells to extract the raw materials eventually sold to consumers as everyday goods. But what happens when wells begin to yield less product?
Large oil and gas companies transfer low-value wells to companies with smaller portfolios and lower profits, according to a working paper co-authored by Catherine Hausman, associate professor at the University of Michigan's Ford School of Public Policy and an economist at the National Bureau of Economic Research.
While these transfers may bring some cost savings, the study finds, they are also associated with greater environmental risks.
Using data from state regulatory agencies in 4 major oil- and gas-producing states (California, Texas, Colorado and Pennsylvania), Hausman and colleagues tracked hundreds of thousands of well transfers between 1992 and 2023.
They found three key trends:
- Wells transfers are common and frequent: A typical well is transferred to a new firm every 13 years, with roughly 20,000-30,000 well transfers occurring annually in the four measured states. Although some wells are more likely to be transferred than others, transfers are common across characteristics such as size, age and production volume.
- Low-production wells are transferred more often, typically to low-value firms: Older, less productive wells yielding less oil or gas are more likely to be transferred than younger, more productive wells. These low-value wells are often transferred from high-value firms to smaller, undercapitalized firms. This could occur either because the buyer has lower operating costs, or because the seller is trying to avoid environmental compliance costs.
- Transferred wells are less likely to be plugged: At the end of wells' productive life, operators can seal off the flow of gases or oil by "plugging" the site. Unplugged wells are associated with greater environmental risks, including groundwater contamination, air pollution and explosion risks. Hausman's research shows transferred wells are significantly less likely (5 percentage points) to be plugged than wells that have not been recently transferred.
Many companies avoid plugging due to high costs, as the process can range from $22,000-$180,000 for a typical well. State governments attempt to incentivize companies by requiring firms to provide financial assurances for the process, but these requirements are often too low to encourage companies to plug their wells.
Hausman's study highlights opportunities for governments to provide further incentives for these firms.
"Policy fixes are needed to ensure that oil and gas wells are responsibly plugged," she said. "And these policies need to work for all wells, owned by all companies, so that companies can't just walk away from their environmental obligations."
Hausman's co-authors are Sarah Armitage of Boston University and Judson Boomhower of the University of California San Diego. Armitage discussed the findings on Resources Radio with Daniel Raimi, a fellow at Resources for the Future and a lecturer at the Ford School.
Written by Margaret Peterman, Ford School of Public Policy
