Carbon Credits - Plugging Orphaned oil & Gas Wells

In the last few years there has been a lot of interest surrounding carbon credits earned by plugging orphaned oil and gas wells in the US. There are several carbon markets across the globe for buyers to shop for carbon offsets. Whether governmental or voluntary, markets allow carbon emitters to buy credits that have been awarded to projects that remove carbon from the atmosphere (eg. planting trees, direct air capture, plugging leaking orphan wells).  There have been a lot of players moving into orphan well plugging space and it resembles a bit of the wild west as several new registries are being started to award credits for projects.  The challenge is that each registry can have wildly different methodologies for quantifying, measuring, monitoring, reporting and verifying greenhouse gas emissions reductions. Almost all require the rule of additionality to be applied when selecting orphan wells. In short, a plugging project cannot be awarded credits if there is an existing legal obligation that the well be plugged. This could create challenges that need to be investigated for an orphan well under state and federal laws.

Currently, the major challenge with the registries is that they each have different standards for measuring emissions reductions achieved through well plugging.

On a high level view, here are two very different methodologies for carbon credit calculations from plugging orphaned oil and gas wells:   

A). Utilize the wells final decline rate and derive a leak rate probability based on wellhead components failure and project future volumes for a period (eg. 20 years).

B.) Use emissions detection equipment around orphan wells and determine gas composition and leak rates with approved flow measurement equipment. This creates a strong incentive to plug the largest and active emitting wells first as they generate the highest return for the project developers in terms of carbon credit.

Both methods convert the leaking gas composition to an equivalent warming effect in CO2 metric tons.

The biggest challenge to option B is agreeing on how emissions are projected into the future to get a total emissions reduction volume. One protocol allows a developer to attach a flow meter to the wellhead and the valves opened. An average flow rate is taken over a period of time. Follow up flow tests are done to confirm the flow rate from the well. This rate is then multiplied by a number of years to find the total emissions. This methodology does not honor reservoir behavior. Wells can build up significant pressure when they are initially shut in and abandoned. If wells with built up pressure are flow tested for a short period of time it is possible to achieve some very high rates which leads to potentially erroneous carbon emissions calculations. In fact a recent project was awarded a huge number of credits based on this methodology. This well was awarded enough credits to equal over 2 BCF of gas reserves remaining at abandonment. If the operator had produced and sold the gas at $2 per MCF it would have an approximate value of $4 million!

This ambiguity, and complexity of methodology is creating hesitancy for carbon credit buyers. Buyers want quality and integrity in their credits.  Buyers may look at plugged orphan well credits and feel that they are financing the cleanup of messes left behind by major oil and gas companies as they sell legacy assets to smaller operators.  

There are also proposals for early decommissioning of oil and gas wells. This would lock up the hydrocarbons in the ground and permanently eliminate their combustion into emissions. Additionally, a mineral owner may choose not to have their hydrocarbon minerals developed for the same reason and sign a legal document forbidding future extraction.  Both scenarios require geoscience and engineering review to determine the volumes of hydrocarbons that could be produced and supporting data that those hydrocarbons will not be drained by wells on adjacent lands.  

There are a lot of businesses flocking into this market to have a piece of the pie. From emissions equipment builders, investors, verification bodies, block-chain companies, and companies that want to handle the paperwork for developers. Unfortunately, there is a lack of developers willing to front the capital to plug wells if they do not have interested buyers lined up.  

The industry is in its infancy, and I am hopeful that future innovation and regulations can help foster solutions to the orphan well problem.