FEATURE: US oil and gas veterans embrace carbon finance to cut methane emissions

Quantum Commodity Intelligence – Putting carbon credits and the oil the gas (O&G) industry together is a controversial combination for many engaged in tackling climate change, with several high-profile companies subject to accusations of 'greenwashing' over their offsetting activities.

But, despite the controversy, several initiatives have sprung up in the US recently that are using or planning to use carbon finance to literally 'plug' a major source of greenhouse gas (GHG) emissions from the O&G sector.

In May, US-based American Carbon Registry (ACR) published a methodology to use carbon finance to plug orphaned O&G wells in the US and Canada. Orphaned wells are unused, unplugged and have no owner, but, crucially, potentially leak into to the atmosphere methane, a potent GHG with a global warming potential 27-30 times greater than carbon dioxide (CO2) over 100 years.

Thousands of wells in the US

US Environmental Protection Agency (EPA) estimates of methane emissions from abandoned wells, which includes orphaned wells, are between 7 million and 20 million tonnes (t) of CO2 equivalent a year in the US alone. The large range is due to uncertainty over the actual number of wells, with EPA and McGill University having mapped at least 120,000 across 30 US states.

However, some estimates put the overall number in the millions, a legacy of 160 years of O&G operations in the country where anyone can own mineral rights, unlike most countries in the world where they are owned by the state.
In the wake of the ACR methodology, several companies have unveiled plans to develop projects, and some announced deals to sell the credits generated from plugging orphan wells.

In June, Rebellion Energy Solutions announced that a project in Oklahoma had become the first approved by ACR under the methodology, and, in July, US developer Zefiro Methane unveiled a pre-sale deal with the US arm of Swiss commodity trader Mercuria for "tens of thousands" of credits from the former's projects based on the ACR protocol.

Yet, ACR's methodology is not the only carbon credit protocol aimed at cutting methane emissions from orphan O&G wells in the US, with some organisations using carbon finance to plug wells for a number of years. For example, The Well Done Foundation (WDF) was set up in 2019 as a non-profit by O&G industry veteran Curtis Shuck with the intention of tackling the problem of emissions from orphan and abandoned wells.

A driver for more plugging

WDF plugged its first well in 2021 and has since dealt with 29 in total, reducing methane emissions by over 500,000 tCO2e, using carbon finance where possible as a driver to "create a financial vehicle to help us plug more wells", Shuck told Quantum. The carbon credit aspect adds a secondary source of funding on top of voluntary contributions to the non-profit, he said. The organisation has trademarked the Climate Benefit Unit (CBU), similar to a carbon credit and equivalent to one tCO2, for its projects.

The use of carbon markets to plug more wells was also an argument put forward by ACR at the launch of its methodology to provide financial incentives to complement other private, philanthropic, state- and government-led initiatives.

For example, US government funding is available to deal with orphaned wells, such as through the Regrow Act, but ACR said the amount available is "woefully inadequate to address the issue with estimates of a funding gap of many 10s of billions of dollars".

Another US company active in this area is CarbonPath, which has developed a couple of its own methodologies for companies to use to plug orphan and abandoned, as well as low-producing wells, known as marginal wells.

The company was also set up by ex-O&G industry workers motivated by finding a way to speed along the energy transition, said Dan Wrona, head of engineering at CarbonPath and with over 25 years of experience in the hydrocarbon business as geological engineer. CarbonPath eyed carbon credits as a way first to incentivise the early retirement of marginal wells and then also as an incentive to plug orphan and abandoned wells.

Wrona explained that in the US what normally happens to wells near the end of their lives is that they are often sold by oil companies to smaller companies, which removes any liability for the facility from the former, and then sold again and again, often ending up owned by firms comprising one or two people, which may go bust resulting in abandoned or orphaned wells.

"So we said, let's 'jump the line' before they sell it … We wrote this methodology to leave (the oil) in the ground, stop producing the well, don't sell the well, and turn that into carbon credits," he said. Essentially, rewarding a company with carbon credits for the greenhouse gas emissions that would have been emitted if the well had not been plugged for 10 years.

Orphan well methodology

CarbonPath then turned its attention to author a methodology to incentivise the plugging of orphan wells. "They're not producing anymore (and) … are just sitting there leaking. So how do we incentivise someone to pay for that plugging and to pay them back for that? Because somebody still has to take the financial risk," said Wrona. Once again carbon crediting was the answer and the CarbonPath team wrote a methodology to calculate the methane coming out of the orphan well and turn that into offsets.

The company also provides a blockchain-based registry and platform to buy and sell credits generated by its methodologies. Wrona said modelling by CarbonPath indicated a price of $30/tCO2e as the average cost of plugging a well. "We thought that was a fair price … (but credits) can literally sell at anything. And if no one buys it at $30, then it's not worth $30. If everybody wants to buy it at $15, then that's the price," he said, adding that the company also acts as a sort of "middleman" between buyers and sellers with some purchasers interested in locking in long-term contracts for credits.

A price between $25 and $30/tCO2e is what another company in the space, ZeroSix, believes will make its projects work. The company has also developed a methodology – the Production Reserves Carbon Offset Protocol – targeting marginal wells to keep O&G in the ground and then sell credits on its own blockchain-based platform. "Everyone asks what's the break-even price, and it depends on how marginal the well is, what's the current oil price, what's the price you get for your carbon credit," said ZeroSix chief executive Martijn Dekker.

In contrast, WDF's Shuck said the price of its CBUs is about $7/tCO2e, which would likely be a reflection of the other funding sources for its well-plugging activities. Shuck was keen to stress that although plugging methane could be viewed as low-hanging fruit in the voluntary carbon market, developing a project is not an easy process. "It's a very dangerous sport, it's very risky. There's a lot of unknowns, and it's expensive too," he said.

Developing a project can take between six to 12 months, of which the actual plugging takes about a week's work, with the other time taken up by a range of activities, such as project due diligence or securing authorisation to plug the well. "Then it can be up to 12 months after that before you may even see a single dollar raised from a credit generated," Shuck said. The WDF bases its approach on the ACR protocol and has its projects third-party verified.

The first step is identifying the orphaned well, before carrying out field analysis to determine if it is feasible to plug – measure methane emissions, assess surface conditions and accessibility.

A well is monitored and analysed and, if it is deemed feasible to go ahead with the plugging, a bond is posted and the well is 'adopted' from the state to carry out the work. WDF then looks to raise money and apply carbon finance, if it can applied as an additional funding source to plug the well and carry out surface restoration. Once plugged it works with state and local agencies to carry out the latter and instigate a long-term monitoring plan to ensure permanence.

CarbonPath includes a buffer pool of credits, the same as similar mechanisms used in forestry projects, to cover any potential credit reversals. It also includes safeguards to stop anyone in the future from drilling a new well and extracting oil or gas from the same underground reservoir as the plugged well.

Wrona, the geologist, is able to determine the size of the reservoir and the volume of the hydrocarbon left in the ground, together with the help of company filings to the Securities and Exchange Commission (SEC).

An area is then mapped to cover the project boundary and monitored. "So because the oil and gas industry is so regulated, you have to have a permit to drill and so we monitor our polygons for new permits continually," he said. A permanence polygon is an indication of the remaining oil reserve in a given well.

In the US state of Colorado, O&G producer Civitas Resources is using one of CarbonPath's methodologies to plug 42 orphan wells, with decommissioning specialist Greenfield Environmental Solutions also involved in the projects. Credits from these projects will be marketed to the open market, said Wrona. CarbonPath also currently lists two other wells on its website, both in the state of Louisana and operated by CEP Production.

5 million credit pipeline

ZeroSix's Dekker said the company is working on a pilot project that could deliver as much as 200,000 carbon credits, and is working with about 30 companies that could result in a pipeline of as large as 5 million credits by the end of next year. As part of following the ZeroSix protocol these companies will commit to not exploiting the plugged reserves for at least 50 years, similar to how many forest carbon projects have to commit to 100 years of permanence.

"It could have been longer, but that felt reasonable," said Dekker. "I mean, this needs to be a near-term action, I mean if we're still relying on the voluntary carbon market 50 years from now to reduce emissions then something's gone significantly wrong (with the energy transition)."

The US is the main focus of activity in this space currently, although the ACR methodology also applies to Canada, but that does not mean that plugging wells for carbon credits could not be expanded elsewhere, despite the advantages the country offers with its mineral rights laws.

"That's why we are starting on private land, because landowners can decide what they want to do," said ZeroSix's Dekker, adding that the company is also looking at doing projects in Canada. "In most other legislation, the governments own the land, but the principle actually works. So we think this will expand internationally," he said.

WDF's Shuck agreed. "The mechanics are applicable … universally – plugging wells, measuring methane – all of the technical stuff that we do is 100% transferable," he said. The question is just whether additionality can be proven elsewhere to use carbon finance because outside the US mineral rights or the wells themselves are owned by the government, he added. "So that complicates the market element, but it certainly doesn't complicate the impact."

CarbonPath's Wrona also noted that there is "huge potential" to expand to other countries. He said Canada is a "logical" next step for the company "because it's our neighbour … and is similar regulation-wise (to the US)". But, in the future, he added, these types of methane reduction projects that generate carbon credits could be developed in"South America, Europe and everywhere".

Photo credit: Well Done Foundation