A PENNY SAVED

Novel application of trusted financial model means cleaner oil and gas for the future

Smart financial tool from oil and gas industry veterans ensures funds are available to seal inactive wells in the future. Image via Shutterstock.

Think back to when your first friend got their driver’s license. Everyone wanted a ride, but when it came time to fill the tank, pay for repairs and maintenance, or – worst case, perform some autobody work to resolve damage incurred in a fender-bender – the driver usually got caught holding the bag.

For the oil and gas industry, the same thing often happens with old wells that have stopped producing at an economic rate. When production is high and prices are favorable, everyone wants a piece of the action. But as soon as a well’s production slows to a crawl or the bottom falls out of the market (again), investing partners scatter like cockroaches into obscurity, leaving the majority owner with the financial and environmental burden to properly seal up the well.

Just over 100 years ago, the Texas Railroad Commission, which serves as the primary governing body for oil and gas wells developed across the state, enacted the first regulation calling for due care when plugging inactive or otherwise deemed useless wells. The policy laid the groundwork for keeping potential contaminants contained to prevent environmental and safety hazards.

Oklahoma followed suit some 15+ years later, subsequently followed by California another dozen years after that. The remaining states have enacted similar laws within just the last 40 years. But that’s not to say that the industry was not properly closing off wellbores after useful life. Nay, it merely highlights the pace at which regulatory actions move across the nation after inception in a single state.

Of particular note, but perhaps not as obvious, is the time lag between Texas’s first policies demanding the costly, albeit necessary, activities to plug and abandon (P&A) a well and the Asset Retirement Obligation (ARO), an accounting treatment introduced in 2001 that ensures companies recognize and retain the financial liability for completing end-of-useful-life requirements.

Unfortunately, ARO is truly just an accounting concept, so if a company becomes insolvent, there is limited chance the investment necessary to properly P&A a well will be available. This does not bode well for the industry, nor the environment, as valuable hydrocarbons are lost from leaking, seeping, and weeping wells across the country.

Let’s not catastrophize the potential environmental damage here, however. Highly conservative estimates made by the EPA in 2022 claim over 2 million potentially orphaned wells produce methane emissions equivalent to approximately 1% of all cars on the road across the United States. No one argues that this is acceptable, but it does put things into perspective, given that approximately 1/3 of global emissions are attributable to light duty and commercial vehicles on the road.

To bolster the industry with confidence the cash investment necessary for P&A activities will be readily available upon asset retirement, one company looked outside of energy for guidance. Embracing a model most typically associated with life insurance, OneNexus Assurance provides contractual certainty to upstream operators that funds will be available to cover the associated end-of-useful-life costs (depending on the benefit amount purchased, of course).

“Our business model provides the oil and gas industry much-needed peace of mind that capital is available when inevitable ARO funding becomes imminent and offers a preferable alternative to trust funds, surety bonds, and sinking funds as a means of prefunding decommissioning liabilities," says Tony Sanchez, founder and CEO of OneNexus, in a recent release.

The OneNexus approach allows the primary operator to collect monthly payments for end-of-useful-life costs long before the well is depleted from other invested partners.

“OneNexus Assurance is a game changer,” continues Sanchez, “It enables responsible parties to pay towards decommissioning funding in today’s dollars at a substantial discount to the ultimate plugging cost, it guarantees that a pre-determined amount decided by the client is secured for the future, and it does away with the need to chase payments later.”

While this solution does not fully resolve the problem of orphaned wells – the aforementioned 2 million (or less) wells no longer producing but not fully sealed off, either – it does at least guarantee that whomever gets caught holding the bag at the end will find some dollars inside.

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A View From HETI

Lummus Technology has broken ground on a new plant in Texas that will support Advanced Ionics' hydrogen electrolyzer technology. Photo via lummustechnology.com

Houston’s Lummus Technology and Advanced Ionics have broken ground on their hydrogen pilot plant at Lummus’ R&D facility in Pasadena.

The plant will support Advanced Ionics’ cutting-edge electrolyzer technology, which aims to deliver high-efficiency hydrogen production with reduced energy requirements.

“By demonstrating Advanced Ionics’ technology at our state-of-the-art R&D facility, we are leveraging the expertise of our scientists and R&D team, plus our proven track record of developing breakthrough technologies,” Leon de Bruyn, president and CEO of Lummus, said in a news release. “This will help us accelerate commercialization of the technology and deliver scalable, cost-effective and sustainable green hydrogen solutions to our customers.”

Advanced Ionics is a Milwaukee-based low-cost green hydrogen technology provider. Its electrolyzer converts process and waste heat into green hydrogen for less than a dollar per kilogram, according to the company. The platform's users include industrial hydrogen producers looking to optimize sustainability at an affordable cost.

Lummus, a global energy technology company, will operate the Advanced Ionics electrolyzer and manage the balance of plant systems.

In 2024, Lummus and Advanced Ionics established their partnership to help advance the production of cost-effective and sustainable hydrogen technology. Lummus Venture Capital also invested an undisclosed amount into Advanced Ionics at the time.

“Our collaboration with Lummus demonstrates the power of partnerships in driving the energy transition forward,” Ignacio Bincaz, CEO of Advanced Ionics, added in the news release. “Lummus serves as a launchpad for technologies like ours, enabling us to validate performance and integration under real-world conditions. This milestone proves that green hydrogen can be practical and economically viable, and it marks another key step toward commercial deployment.”

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