INSIGHT by ClientEarth
A group of property owners and farmers in Colorado, burdened with polluting abandoned oil and gas wells on their properties, have filed a lawsuit against oil and gas companies in a landmark case that could dramatically overhaul responsibility for the nation’s more than two million unplugged oil and gas wells.
The plaintiffs’ class action complaint alleges the oil and gas companies took part in a common oil industry tactic of fraudulent transfers in order to evade their legal responsibilities to ‘plug’ the wells once they have stopped producing oil or gas.
Plugging is a critical process that involves securely sealing the well to prevent harmful pollutants from escaping into the environment and to reduce contamination risks.
The lawsuit, McCormick v. HRM Resources, was filed in Colorado state court. The claimants are represented by ClientEarth, an environmental legal non-profit, and law firms Richards Carrington, LLC and Borison Firm, LLC.
The plaintiffs allege that, instead of plugging the wells, the company knowingly sold them to a privately owned Texas shell company that was designed to go bankrupt and shed the cleanup liability.
Consequently, the plaintiffs were left with toxic ‘zombie wells’ on their property that continue to pollute and contaminate air and groundwater even after they are no longer actively used to pump oil and gas.
Once an operator enters bankruptcy, the responsibility for safely cleaning up the wells falls to the state, and the considerable clean-up costs are often left to the taxpayer.
The property owners and farmers are asking the court to establish their right to collect clean-up costs from the company they allege fraudulently sold the wells to escape its obligations.
Should the court validate this right, communities burdened with abandoned wells nationwide would have a new avenue for pursuing oil and gas companies for clean-up costs amounting to hundreds of billions of dollars.
| Fraud on taxpayers an open secret
The plaintiffs argue the transfers of these oil and gas wells to a small private company deliberately designed to go bankrupt was fraudulent, and consequently the responsibility for plugging the wells must remain with the previous owner. They contend that this fraud occurred within an industry practice of oil and gas companies, like Chevron, disregarding their clean-up responsibilities. By failing to account correctly for well-plugging costs even after potential future profits have fallen below these clean-up costs—making the wells financially “upside down”—the industry routinely dodges its liabilities.
Confident in their ability to evade the clean-up costs, companies buy and sell upside down wells, and money that should be earmarked for well-plugging is instead paid out in distributions to owners, dividends to shareholders, or used for other parts of the business. Landowners and farmers are left to deal with polluting, hazardous wells on their land and in their communities.
In this case, Denver-based HRM Resources purchased the wells from Chevron (via its acquired entity Noble Energy) and other oil and gas companies when the wells were nearing depletion and the clean-up costs already likely exceeded their value.
The landowners and farmers assert that a small operator like HRM would only take these wells off major oil companies’ hands by ignoring liabilities.
HRM operated the depleted wells even though any possibility of profit was not nearly enough to ever cover the extensive clean-up costs it had taken on.
HRM ultimately transferred the wells to a designed-for-bankruptcy entity, Painted Pegasus Petroleum, which subsequently did go bankrupt in 2021. The plaintiffs assert that this fraudulent transfer allowed the oil and gas companies to extract the maximum profit from the wells while leaving Coloradans to suffer the harm and stuck with the cleanup bill.
“Our lawsuit explains that these oil and gas corporations participated in an industry system of fraudulent transfers of oil and gas wells designed to help them evade their legal responsibility to clean up their mess. This case aims to ensure that oil and gas companies finally make these wells safe, and shut down a system that harms property owners, worsens the climate crisis, and sticks taxpayers with a giant clean-up bill.
“The oil and gas industry has offloaded billions of dollars of liabilities onto the taxpayer. But if this case is successful the costs they dodged could come back to haunt them.”
-ClientEarth attorney Camille Sippel
| The dangers of abandoned wells
Fossil fuel companies have abandoned 3.7m oil and gas wells across the United States and the majority of them (2.1m) have not been plugged, according to figures from the Environmental Protection Agency.
Unplugged wells are 100x more polluting than plugged wells. A single well emits an average of more than 100kg of methane per year, a gas that is more than 28 times more potent than carbon dioxide in warming the atmosphere, and that experts estimate is responsible for driving 30% of human-induced global warming.
In 2021, abandoned oil and gas wells emitted 295,000 tons of methane into the atmosphere, the carbon equivalent of the annual emissions of 1.8m cars on the road.
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Abandoned wells also harm human health. Experts estimate that for every 10 million tons emitted, methane leads to roughly 761 deaths per million Americans aged 30 and over from respiratory and cardiovascular diseases. Methane contributes to ozone pollution which can cause serious health problems, such as breathing difficulties and premature deaths due to heart and lung conditions.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
