By Michael Dalman
Introduction
The scope of ramifications of the ongoing COVID-19 pandemic is yet to be known. One aspect that will continue to develop with the pandemic, and afterwards through recovery, is the energy crisis and the downstream effects therefrom. In April of 2020, as the world continued to grapple with and project the full effect of the pandemic, commodity-watchers witnessed what had never been seen before: the price of oil falling below zero dollars per barrel.[1]This price plunge was driven by an economic “one-two” punch: a massive drop in demand without a corresponding drop in supply.[2]
This economic shock has caused many oil and gas producers in Louisiana to question the continued viability of their companies. Over half of the state’s independent producers and their service companies have indicated they would “likely” go bankrupt as a result of the plunge.[3]Bankrupt oil producers present many problems for the state of Louisiana such as decreased job opportunities for residents and decreased tax revenues, among others. Another issue the State faces during an economic downturn is the prospect of orphaned oilfield sites.
An orphaned oilfield site is one “which has no continued useful purpose for the exploration, production, or development of oil or gas and which has been declared to be an orphaned oilfield site by the Assistant Secretary [of the Office of Conservation].”[4]The assistant secretary may declare an oilfield to be orphaned if two elements are satisfied: (1) a responsible party cannot be located or is not financially able to restore the well and (2) the oilfield site in question was not closed properly or may constitute a danger to the public health or environment.[5] As a result, orphaned oilfield sites must be restored. This restoration process includes “plugging of oil and gas wells, pit closure, site remediation, and removal of oilfield equipment.”[6]The restoration of these oilfield sites can be a pricy endeavor. To ensure that these restoration costs would be covered, in 1993 the Louisiana Legislature enacted the Louisiana Oilfield Site Restoration Law, which included the establishment of a fund for oilfield site restoration as well as a mechanism for former owners of oilfield sites to rid themselves of liability for restoration: the site-specific trust account.[7]The site-specific trust account offers a way for the State to ensure adequate funding for site restoration while offering former operators of oilfield sites an avenue to relieve themselves of the liability to reimburse any restoration costs. The following sections discuss the background and importance of site-specific trust accounts in Louisiana, as well as some aspects that could be improved.
I. Restoration
At the end of an oilfield site’s life, the site must be properly restored to avoid the pollution and health crises that would result from an improperly abandoned site.[8]Many scenarios can occur at the conclusion of the life of an oilfield site.[9]In a “perfect” scenario, the final operating company of the oilfield site would complete the site restoration, with nothing left to be done and no risk of environmental or health-related damage.[10]However, it is not uncommon for the final operator of an oilfield site to experience bankruptcy, rendering the operator unable to fund the restoration.[11]
If the final operator is unable to fund the restoration of an orphaned well, the State, through the Assistant Secretary of the Office of Conservation, will fund the restoration using money from the oilfield site restoration fund (“the Fund”) provided for in La. R.S. 30:86.[12]The Louisiana Legislature created the Fund in 1993 as a way for the State to ensure that there would be sufficient financial resources “to provide for the proper and timely cleanup, closure, and restoration of oilfield sites.”[13]
The Fund is classified as a “special custodial trust fund which shall be administered by the commission which shall make disbursements from the fund solely in accordance with the purposes and uses authorized by [the Oilfield Site Restoration Law].”[14]A variety of monies are deposited into the fund.[15]The most notable of which are the oilfield site restoration fees housed in La. R.S. 30:87, which are placed on oil and gas producers in Louisiana. A notable distinction arises here: there is no “taxpayer money” within the fund. This is emblematic of the Fund’s larger purpose: ensuring there are sufficient financial resources available to restore oilfield sites without having to place that burden on the individual taxpayer. Site-specific trust accounts are also included within the Fund, but the money in those accounts can only be used in relation to the designated site for that account.[16]
II. Reimbursement
After money from the Fund has been expended to restore an oilfield site, the Secretary of the Department of Natural Resources must seek to recover all costs incurred.[17]The specifics on how that reimbursement is attained varies based upon whether the oilfield site had a site-specific trust account designated for it.[18]
For oilfield sites without site-specific trust accounts, the Secretary’s reimbursement ability is dependent upon whether the restoration costs exceeded $250,000.[19]If the costs do not exceed $250,000, the Secretary’s only source of reimbursement is the most recent operator of the site.[20]If the costs did exceed that number, the secretary may seek reimbursement from any party which formerly operated or held a working interest in reverse chronological order starting with the most recent operator of the site.[21]In practice, the State typically seeks reimbursement from all former operators at once.[22]Thus, in the absence of a site-specific trust account for restorations that cost more than $250,000, all former operators can be held liable to the State for reimbursement.[23]
Once a site-specific trust account has been created for an oilfield site, there is a hierarchy of financial sources from which the State may seek reimbursement.[24]The Secretary must first use funds in the site-specific trust account, then use funds collected from the last operator of the property.[25]Should the amount collected from the site-specific trust account and the last operator be insufficient, the Fund provides any amount necessary to make up the deficiency.[26]Here, the benefit of a site-specific trust account to former operators is apparent: once the account has been created, the State’s route for reimbursement ends with the last operator of the oilfield site.
III. Creating the Account
The instructions for setting up and maintaining the site-specific trust account are found in La. R.S. 30:88. If an oilfield site has been transferred from one party to another, the parties may elect to establish a site-specific trust account.[27]The statute includes the sole purpose of the account: “providing a source of funds for site restoration of that oilfield site at such time in the future when restoration of that oilfield site is required.”[28]Should the parties to an oilfield site transfer elect to establish a site-specific trust account, the Assistant Secretary of the Office of Conservation within the Department of Natural Resources shall require a restoration assessment to determine the requirements and costs as measured at either the time of transfer or the time the site-specific trust account is established.[29]An approved contractor must conduct the assessment.[30]A list of approved contractors is provided on the website of the Department of Natural Resources’s Office of Conservation’s Oilfield Site Restoration Program.[31]
Either the transferee or transferor of the oilfield site shall propose a funding schedule for the site-specific trust account.[32]At a minimum, there must be some contribution into the account at the time of the transfer and at least quarterly payments into the account.[33]The statute provides that “[c]ash or bonds in a form and of a type acceptable to the assistant secretary, or any combination thereof, may…be considered for funding.” In practice, this means that there are several ways to fund the site-specific trust account: cash; a certificate of deposit from a bank; a letter of credit from a bank; a bond from a bank, bond company, or insurance company, a bond from LORA (Louisiana Oilfield Restoration Association); or any combination of these methods if one method is not sufficient enough to satisfy the requirement that the site-specific trust account be fully funded.[34]
Section F of La. R.S. 30:88 provides the release from liability that transferors seek through the creation of the account:
“Once the assistant secretary has approved the site-specific trust account, and the account is fully funded, the party transferring the oilfield site and all prior owners, operators, and working interest owners shall not thereafter be held liable by the state for any site restoration costs or actions associated with the transferred oilfield site. The party acquiring the oilfield site shall thereafter be the responsible party for the purposes of this Part.”[35]
An integral aspect of this statute is that the release from liability does not occur until the Assistant Secretary has approved the account and the account is fully funded.[36]In other words, the protection provided to a transferor by a site-specific trust account does not attach before those elements have been satisfied. Another aspect of this provision is that a site-specific trust account being formed by one transferor also removes liability from any earlier transferors as well.[37]Once the site-specific trust account has been created, the transferee is the only responsible party from whom the State may seek any reimbursement for any money used from the Fund in the restoration of an oilfield site.[38]The State routinely reevaluates the cost of restoration and should there be a rise in the estimated price of restoration for the site, the difference between the amount in the site-specific trust account and the newly estimated cost of restoration is the responsibility of the final operator.[39]
IV. Room for Improvement
As mentioned above, a site-specific trust account can only be created “[i]f an oilfield site is transferred from one party to another.”[40]Thus, a site-specific trust account cannot be created merely at the outset of an oilfield site’s production lifetime. While this does make sense when one considers that the State can always seek reimbursement from the most recent operator, which would be the first and only operator if the oilfield site is new, it may be overly restrictive. Considering the importance of ensuring sufficient funding for site restoration, there is no particular reason why operators should be precluded from creating a site-specific trust account at the outset of a site’s life or after a transfer with no future transfer in sight.
Another aspect of the laws providing for site-specific trust accounts that can be improved is the number of contractors that have been approved to conduct oilfield site restoration assessments pursuant to La. R.S. 30:88(B). Currently, there are only 47 approved contractors named on the list available from the Office of Conservation.[41]With over 30,000 wells currently operating in Louisiana, an increased number of approved contractors could prove beneficial in making it easier for parties to an oilfield transfer to create a site-specific trust account.[42]An increased use of site-specific trust accounts would help ensure an availability of funds to properly restore oilfield sites while giving former operators of those sites peace of mind knowing they are released from financial liability to restore the site.
The site-specific trust account provides a peace of mind to two entities: the State of Louisiana and the oil and gas producers that operate within the State. Usage of the site-specific trust account helps ensure the State that there will be sufficient financial resources to restore oilfield sites within the state. For oil and gas producers, the site-specific trust account offers an assured way to remove themselves from liability should the State have to restore the oilfield site using money from the Fund and then seek to recover that money.
* The author wishes to thank Stacy Smith Brown of Thompson & Knight, John Adams of the Office of Conservation (Louisiana Dept. of Natural Resources), and Monnie Greer of Evangeline Natural Resources.
[1]Will Englund, Oil Drops Below $0, Signaling Extreme Collapse in Demand. But You’re Still Going to Have to Pay for Gas, Wash.Post, Apr. 20, 2020, https://www.washingtonpost.com/business/2020/04/20/oil-barrel-below-zero/.
[2]Stay-at-home orders as well as business and school closures precipitated a drastic drop in demand. The difficulty of rapidly shutting down production of oil coupled with what many believe to be a price war between Russia and Saudi Arabia prevented a stabilizing decrease in supply to accompany that fall in demand. SeeDavid Brancaccio and Rose Conlon, Explaining How Oil Prices Work, After the Cost of a Barrel Dropped Below Zero, MarketplaceApr. 21, 2020, https://www.marketplace.org/2020/04/21/covid-19-negative-oil-prices-us-russia-opec/.
[3]Nathaniel Rich, In Louisiana, Covid-19 Has Achieved What Big Oil Protestors Could Not, The New York Times Magazine,May 26, 2020, https://www.nytimes.com/interactive/2020/05/26/magazine/coronavirus-louisiana-unemployment-jobs.html.
[4]La. R.S. 30:82(7).
[5]La. R.S. 30:91(A).
[6]La. R.S. 30:82(11).
[7]La. R.S. 30:80.
[8]“Orphan wells often leak oil and brine and emit methane, an air pollutant that harms air quality and contributes to climate change.” Tristan Baurick, ‘A Win-Win’: Plugging Louisiana’s 4,300 ‘Orphaned’ Wells Could Boost Industry, Cut Emissions, The Times-Picayune, Jul. 22, 2020, https://www.nola.com/news/environment/article_6209ccc2-cc33-11ea-98b3-6ff39d64c7c1.html.
[9]Telephone Interview with John Adams, Att’y. Supervisor, Office of Conservation, La. Dept. of Natural Res. (Dec. 29, 2020) (notes on file with author).
[10]Id.
[11]“The oil price collapse four years ago that sent operators into bankruptcy and the state into a prolonged recession left Louisiana with another problem: nearly 2,000 new “orphan” oil and gas wells that pose the risk of a slow-moving environmental crisis if left unplugged.” Sam Karlin, What’s an ‘Orphan Well?’ Louisiana Oil Recession Leaves Plenty of Them Behind. The Times-PicayuneJul 15, 2018, https://www.nola.com/news/business/article_e93b93fc-d7bc-56a2-aa21-640a2f9e796f.html.
[12]Telephone Interview with John Adams, Att’y. Supervisor, Office of Conservation, La. Dept. of Natural Res. (Dec. 29, 2020) (notes on file with author).
[13]La. R.S. 30:81(B).
[14]La. R.S. 30:86(A).
[15]La. R.S. 30: 86(D).
[16]La. R.S. 30: 86(D)(6).
[17]La. R.S. 30:93(A).
[18]CompareLa. R.S. 30:93(A)(1) withLa. R.S. 30:93(A)(2).
[19]La. R.S. 30:93(A)(1).
[20]Id.
[21]Id.
[22]Telephone Interview with John Adams, Att’y. Supervisor, Office of Conservation, La. Dept. of Natural Res. (Dec. 29, 2020) (notes on file with author).
[23]Id.
[24]La. R.S. 30:93(A)(2).
[25]Id.
[26]Id.
[27]La. R.S. 30:88.
[28]La. R.S. 30:88(A).
[29]La. R.S. 30:88(B).
[30]Id.
[31]SeeLouisiana Dept. of Natural Resources, Office of Conservation, Oilfield Site Restoration (OSR) Program, http://www.dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&pid=155&pnid=26&nid=76.
[32]La. R.S. 30:88(C).
[33]Id.
[34]LORA is a new bond company that the State recently created. Information from Monnie Greer, Evangeline Natural Resources via e-mail interview with Stacy Smith Brown, Partner, Thompson & Knight (Dec. 28, 2020) (notes on file with author).
[35]La. R.S. 30:88(F).
[36]Id.
[37]Id.
[38]La. R.S. 30:93(A)(2).
[39]Telephone Interview with John Adams, Att’y. Supervisor, Office of Conservation, La. Dept. of Natural Res. (Dec. 29, 2020) (notes on file with author).
[40]La. R.S. 30:88(A).
[41]Louisiana Dept. of Natural Resources, Office of Conservation, Oilfield Site Restoration (OSR) Program, http://www.dnr.louisiana.gov/index.cfm?md=pagebuilder&tmp=home&pid=155&pnid=26&nid=76.
[42]Timothy Boone, Half of Louisiana Oil, Gas Wells Could Be Shut In, 70% of Industry Jobs Lost Within 90 Days, Trade Group Survey Says, The Advocate,Apr. 7, 2020, https://www.theadvocate.com/baton_rouge/news/coronavirus/article_431c2ea0-78f9-11ea-ae04-677757648aaa.html.