LFC finds major state liability for orphaned oil and gas wells; EMNRD and industry dispute causes and remedies

LFC staff told the Legislative Finance Committee that New Mexico faces substantial and uncertain liabilities to plug and reclaim orphaned oil and gas wells, and recommended reforms to procurement, financial assurance, and oversight to limit the state’s exposure.

The issue matters because LFC estimated the state’s current and likely obligations for orphaned and low‑producing wells total at least several hundred million dollars and could exceed $1 billion depending on which wells are counted, how costs evolve and whether additional liabilities emerge.

“The state faces significant and growing financial liabilities for oil and gas well cleanup,” LFC program evaluator Stephanie Joyce summarized during a staff presentation that reviewed how wells are classified, how plugging is contracted and how costs have changed.

LFC said the Oil Conservation Division (OCD) has substantially increased plugging activity using federal Infrastructure Investment and Jobs Act (IIJA) funds, that IIJA grants to New Mexico totaled about $55.5 million with eligibility for roughly $100 million more, and that those federal funds — together with the state reclamation fund balance — are still small relative to the study’s mid‑ and long‑term cost estimates. The report identified three liability categories: 1) wells the state already has authority to plug (LFC estimated 702 on state and private land), 2) a larger set of inactive wells likely to become state responsibility, and 3) a much larger group of very low‑producing wells that could become orphan liabilities if operators sell or dissolve them.

LFC presented numerical estimates: plugging and remediation of currently authorized orphan wells would likely cost at least about $130 million for plugging plus at least another roughly $100 million for remediation and reclamation for a combined current liability on the order of $200 million; adding the nearly‑certain backlog of inactive wells increased the report’s likely liability to roughly $700 million; and including at‑risk low‑production wells produced a possible total liability in the upper hundreds of millions to more than $1.6 billion depending on which wells ultimately transfer to state responsibility.

The report documented rising per‑well and per‑foot costs: average state‑contracted plugging rose from about $30,000 in FY19 to roughly $163,000 in FY24, and per‑foot costs rose from roughly $11 to about $43 in the same period. LFC staff attributed part of the rise to plugging deeper, more complex wells and to broader market inflation for oilfield services, and they flagged procurement and oversight practices — including limited competitive bidding on some state contracts and billing controls — as potential contributors to higher costs.

LFC recommended several reforms aimed at reducing state cost and risk, including: strengthening financial assurance rules so operators carry sufficient upfront liability; exploring trust‑style or site‑specific escrow accounts that operators fund over a well’s life; improving OCD contracting and oversight (for example, placing a state representative on site during plugging for quality control and invoice verification); and prioritizing operator‑led cleanup over agency contracting where feasible.

Deputy Secretary Shelton of the Energy, Minerals and Natural Resources Department told the committee the report was “an exhaustive, comprehensive, well researched, accurate, and fair report” and emphasized technical reasons that individual wells can be far more expensive to plug than initial estimates suggest. Shelton described examples where cement circulation and damaged casings made plugs far more time‑ and material‑intensive than anticipated and said OCD’s costs were comparable to private industry once transportation and statutory plugging requirements were included.

Industry representatives told the committee they support efficient cleanup but urged caution about raising bonding limits or other rules in ways that could force smaller operators out of business and thereby increase orphaning. Jim Winchester of the Independent Petroleum Association of New Mexico said industry already pays reclamation taxes and that those funds have been reduced over time by legislative draws; he argued restoring that fund and using it efficiently would address many problems. Ashley Wagner of the New Mexico Oil and Gas Association emphasized that operators plug the large majority of wells and urged procurement and oversight fixes so state dollars buy more plugging for each dollar spent.

LFC and EMNRD staff acknowledged the state must balance competing risks: increasing financial assurance can reduce the chance of future state liability but can also impose costs that may affect small operators; better procurement and oversight can reduce per‑well cost, but unpredictable downhole conditions create unavoidable cost variability. The committee asked staff and agencies to return with follow‑up information on contract procurement, the list and location of wells included in various liability buckets, and precise balances and recent uses of the reclamation fund so legislators can weigh possible statutory or policy changes.

The report and discussion give the Legislature a menu of policy levers — higher bonding and different bonding forms, trust funds, procurement and on‑site inspection rules, and more active pursuit of financial assurance forfeiture — that will require follow‑up hearings and legal drafting to consider tradeoffs and avoid unintended consequences, industry leaders said.

Committee members asked for more operational detail on how many wells could be plugged this year under expanded contracting and whether the state could shift to more operator‑led cleanup with targeted oversight to keep costs down. LFC recommended additional oversight and clearer accounting of plugging costs and invoices as immediate next steps while the larger policy questions — how to fund long‑term plugging and whether to change bonding rules — are considered.