New Mexico is considering a new rule that would increase bonding requirements for oil and gas wells, particularly targeting marginal wells. Under the proposal, each marginal well would require a separate $150,000 bond. If more than 15% of a company’s wells are considered marginal, then all of the company’s wells would need individual $150,000 bonds. The rule also limits the ability for larger companies to sell low-producing wells to smaller operators.
George Sharpe, investment manager for Merrion Oil & Gas, argued that these changes could negatively affect jobs and state revenue. "If Merrion Oil & Gas had to comply with this proposed rule, then virtually all of our wells would require the $150,000 bonding at an annual cost of $15,000 per well. However, because many of our wells may not make more than $15,000 per year in profit, they would be uneconomic and would need to be plugged immediately. Even though those wells don’t make much profit, they still support a lot of jobs, from pumpers to compression companies to water haulers and on and on. Further, they still pay royalties and production taxes that will now go away," Sharpe said.
Sharpe noted that previous transactions allowed small independent operators like Merrion to purchase lower-producing wells from major companies such as ConocoPhillips. He explained that if the new rules had been in place earlier, these types of sales would not have occurred: "With the rule, there will be no more sales of wells from majors to small independents...Conoco would just have had to plug the wells out. But because Merrion can operate at a lower cost point than Conoco, those wells have produced for over twenty five years...and unless we are forced to plug them now, they will continue to do so for another twenty years."
He warned that higher bonding costs could lead small operators who cannot afford them to abandon their wells: "The biggest issue with the rule is that when you force small operators who are barely getting by to post $150,000 bonds for all of their wells, many won’t be able to afford an immediate cash outlay of that magnitude...So rather than protecting the state from the potential cost of orphaned wells, this new rule is going to immediately dump hundreds if not thousands of orphaned wells in the state’s lap to plug."
Sharpe concluded his remarks by stating: "In closing, the proposed rule is unnecessary, will cost the state millions in lost royalties and taxes, will result in the loss of hundreds if not thousands of jobs and will backfire by significantly increasing the number of orphaned wells for which the state is responsible. But the nongovernmental operators pushing the rule aren’t really concerned about protecting the state’s interest. Their real objective is to continue to make it harder to produce oil and gas in the state of New Mexico. The new rule will certainly accomplish that. Opponents of this misguided approach have until Nov. 7 to speak out."
Sharpe was born and raised in Farmington and works as investment manager at Merrion Oil & Gas.
