Financial upheaval in fracking industry: With overextended gas companies collapsing, questions arise about who will handle the resulting environmental cleanup.
The fracking industry, once hailed as a game-changer for American energy production, is facing a series of challenges that have raised concerns for both financial stability and environmental safety.
Despite a boom in gas output, oil and gas companies in the Appalachian region have consistently failed to produce positive cash flow over the past five quarters. This financial instability is further highlighted by a report from the Institute for Energy Economics and Financial Analysis (IEEFA), which found that seven of the largest producers in Appalachia burned through half a billion dollars in the third quarter of 2019 alone.
The industry's financial woes are not limited to Appalachia. The Wall Street Journal reported in August 2019 that the industry had $9 billion in debt maturing over the second half of 2019, with $137 billion coming due between 2020 and 2022. Chesapeake Energy, once worth billions as the nation's second biggest fracker, is now facing financial instability, with its junk level stock trading below $1 per share.
The financial troubles are compounded by environmental concerns. The Government Accountability Office (GAO) found that the average bond per well for over 100,000 active wells on public lands in 2018 was worth only $2,122. This is significantly less than the estimated cost to reclaim a well, which ranges from $20,000 to $145,000. In Pennsylvania, the Department of Environmental Protection (DEP) admits that it can only properly document 8,000 orphaned and abandoned wells, but estimates the state has over half a million. Pennsylvania's DEP anticipates as many as 560,000 abandoned wells in the state that it doesn't know of yet, and the clean up costs could potentially break records.
In remote western fields like North Dakota and the Rockies, gas is so cheap that many producers haven't even bothered to extend flow lines all the way to their wellheads, instead choosing to flare the gas off. This practice not only wastes a valuable resource but also contributes to greenhouse gas emissions.
Regulators in North Dakota are beginning to worry about companies abandoning oil and gas wells as they enter their second decade of production at much reduced "stripper" volumes. Bruce Hicks, Assistant Director of the North Dakota Oil and Gas Division, stated in August that companies abandoning oil and gas wells is starting to become out of control and needs to be reined in.
The issue of abandoned wells is not unique to North Dakota. Across the United States, state-level regulatory agencies are responsible for the cleanup and reclamation of abandoned oil and gas wells and affected land. However, if operators default or funds fall short, the cost often falls to state-managed orphan well funds or ultimately taxpayers.
The BLM agreed with the GAO's conclusion that bond prices should be raised, as current requirements are outdated. The Western Organization of Resource Councils summarized that bonding requirements by state are inadequate to cover the necessary estimated costs.
Many analysts are predicting a sector-wide fracking collapse, with producers in Appalachia being particularly vulnerable. Gas prices in the Permian, the largest fracking play in America, have plunged close to zero, even turning negative at times.
The fracking industry, which matured in the first years of the new millennium, has never been profitable and has generated a sea of new debts. Major companies like Exxon, BP, Anadarko, Chesapeake Energy, and thousands of independents have been involved in fracking. As we move forward, it is crucial to address both the financial and environmental challenges posed by this industry to ensure a sustainable energy future.
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