A discussion of North Dakota plugging and abandonment rules

On May 4, 2020, the West Texas Intermediate price of oil closed at $20.39 per barrel.[1] Brent closed at $27.20.[2] Analysts expect prices to remain low.[3] 

Such low prices are especially troubling for shale drillers many of whom require more than $45 per barrel to break even.[4] It is also troubling for traditional American producers that often stop drilling wells when oil reaches $25 per barrel.[5] But low prices are not exclusive to oil operators.[6] Experts expect natural gas prices to remain low too.[7][8] 

Amid this uncertainty, operators will look to avoid significant costs. Plugging and abandoning wells can be such a cost. 

Although these requirements apply regardless of the current low cost environment, a discussion of these rules may be helpful for current operators and those who may soon become operators through distressed sales or foreclosures – non-compliance with these rules may subject an operator to fines, forfeitures, and limitations on operations.[9]  

Moreover, plugging and abandoning rules are distinct from provisions in oil and gas leases that govern shutting-in wells and ceasing production, although all may involve non-productive wells.

While restrictions on shutting-in wells and ceasing production are generally lease specific, as mentioned, plugging and abandoning rules apply regardless.[10] Those considering shutting-in wells or ceasing production are encouraged to become familiar with plugging and abandoning requirements. This may allow them to avoid becoming subject to plugging and abandoning requirements despite complying with their leases.

In previous articles, we outlined the plugging and abandoning requirements in Texas and California. The article for Texas is available here and for California here. This article follows the same outline as those to discuss plugging and reclaiming requirements of oil and gas wells and well sites in North Dakota. As with Texas and California, this article also examines ties among these rules to bankruptcy. 

1.  Governing body and overview

Governing body. North Dakota’s Industrial Commission (the “Commission”) oversees plugging and reclaiming operations.[11] Title 38 of the North Dakota Century Code and Title 43 of the North Dakota Administrative Code are the primary sources for rules on compliance.[12]

Overview. A well that has not produced oil or natural gas in paying quantities for a year will be placed in abandoned-well status.[13] The operator must then (1) promptly return the well to this production level, (2) obtain approval to place the well in temporarily abandoned status, or (3) plug the well and reclaim the well site within six months.[14] If these actions aren’t taken, and the well remains in abandoned status for a year, the Commission may confiscate the well-site equipment.[15] The Commission can also seek reimbursement from the operator and working interest holder if it decides to plug the well and reclaims the well site itself.[16] Plugging and reclamation is complete when the Commission determines that the well is plugged and well site reclaimed according to North Dakota’s requirements.[17] 

2.  Identifying to whom plugging and abandoning rules apply 

What is abandoned well status? A well that has not produced oil or natural gas in paying quantities for a year will be placed in “abandoned well” status.[18] Whether a well produces in paying quantities is a fact specific question that North Dakota courts answer by analyzing if the well yields a profit over its operating costs and if a prudent operator would continue operating a well under these facts and circumstances.[19]  Removing production equipment can also place the well in abandoned well status.[20] Accordingly, a well that is shut-in may become a well placed in “abandoned well” status, but its status as “shut-in” for purposes of a lease may not in itself answer whether the well is classified as an “abandoned well” for purposes of plugging and reclamation requirements. Moreover, a well does not have to be placed in “abandoned well” status for the plugging and reclamation requirements to apply. “Abandoned status” makes it more likely that the well will be required to be plugged and the well site reclaimed sooner rather than later.

Who is an operator? An operator is the principal on the bond covering a well and the one responsible for drilling, completion, and operating the well.[21] Operator status over a particular well may be removed when that well is plugged and the well site reclaimed, or when the well is transferred to another.[22] However, a mere transfer does not by itself relieve the operator of its obligation to plug and abandon the well.[23] Instead, the operator must seek the Commission’s permission regarding the proposed transfer, and the transferee must accept responsibility of the well,[24] which involves filing a new bond to cover the well.[25]   

3.  Operator’s responsibilities

Commission rules on plugging wells and reclaiming well sites generally break into three categories: (1) duties of operators with wells in abandoned status; (2) methods for plugging; and (3) timing requirements. 

Operator’s duties. Apart from the sweeping requirement to plug wells and reclaim well sites according to Commission rules, operators of abandoned wells must observe other duties, such as filing financial securities for the well;[26] marking the well;[27] maintaining wellhead control;[28] filing well logs and reports;[29] and preventing waste.[30] These obligations are separate from contractual covenants and common law duties.

Methods for plugging. Plugging requirements can be split into two phases, planning and execution. 

Planning. Planning to commence plugging and reclaiming operations involve: (1) identifying water strata and production horizons;[31] (2) gathering permitted materials or ensuring that only permitted materials are used;[32] (3) timely filing required notices;[33] (4) seeking the Commission’s approval on its method;[34] and (5) making other necessary arrangements, such as those for reclaiming the surface.[35]

Execution. While the operator of a well may contract for plugging operations, the operator remains  responsible for ensuring plugging requirements are followed.[36] These requirements involve (1) verifying that operations follow the Commission director’s approved plan;[37] (2) ensuring that wells are plugged in a manner that permanently confines all oil, gas, and water in the separate strata originally containing them;[38] and (3) reclaiming the site, access road, and other associated facilities within a reasonable time, but not later than a year after when the well is plugged.[39] Operators can ensure that wells are plugged in the appropriate manner by using mud-laden fluid, cement, and plugs, singly or in combination, and cutting off casing strings at least three feet below the final surface contour before welding a cap with a file number onto the top.[40] Because North Dakota requirements are less explicit than other states on the precise requirements for materials and methods that must be taken, operators are encouraged to consult with experienced contractors to determine how to proceed.

Timing. When an operator is required to plug a well generally depends on whether the well is producing in paying quantities. If it is, it may be less likely that the well must be plugged and site reclaimed, but the Commission may still order this for reasons such as irreparable damage to the well or the removal of production equipment.[41] However, if the well has not produced oil or natural gas in paying quantities for one year, the operator has three options. It can (1) promptly return the well to such level of production; (2) plug the well and reclaim the well site within six months; or (3) seek approval from the Commission to place the well in temporarily abandoned status.[42]

A well in temporarily abandoned status means the Commission has waived the operator’s requirement to plug and reclaim that well for one year for good cause.[43] This status may only be given to wells that are used for purposes related to producing oil and gas within the next seven years.[44] If a well is given this status, the well’s perforations must be isolated, the integrity of its casing proven, and casing sealed at the surface.[45] The director may extend this status in one year increments.[46] Additionally, the director of the Commission may also waive the duty to plug and reclaim an abandoned well for any other good cause.[47]

4.  Economic and environmental consequence of non-compliance

Economic costs. Not only may the non-compliant operator be forced to re-plug an improperly plugged well, which can be costly in itself, but the Commission or attorney general may (1) seize well-site equipment and salable oil at the well site;[48] (2) plug the well itself and seek reasonable expenses from operators and working interest holders;[49] (3) seek injunctions against the operator;[50] (4) refuse to refund the operator’s deposited financial securities;[51] (6) use the violations as a reason to deny granting the operator a new drilling permit;[52] and (5) impose fines, which may be up to $12,500 a day with each day considered a separate violation.[53] 

Furthermore, the Commission states that a person who willfully violates any rule or order of the Commission that relates to preventing pollution or waste may be guilty of a class C felony, unless a penalty for the violation is specifically provided for and made exclusive.[54] Penalties for failing to plug and reclaim include those consequences provided above, suggesting the penalties for these violations are specifically provided for. However, operators are encouraged to be aware of this consequence in the many aspects of their operations.

Environmental costs. Unplugged or poorly plugged wells may affect groundwater, methane emissions, and the area around them.[55] Groundwater is infected because oil, gas, or salty water can leak into freshwater aquifers.[56] Unplugged wells may leak methane; methane is a gas that is linked to climate warming.[57] Further, unplugged wells affect the area around them when oil, gas, drilling mud, or salty water rises in the well and spills onto the ground.[58] 

5.  Bankruptcy/lender considerations 

Lenders are not in the business of operating wells. Instead, lenders looking to foreclose on their debtor’s well assets may consider either finding a contract operator before foreclosing, if they seek to continue to operate the wells, or finding a buyer that the Commission will recognize as a transferee.[59] Otherwise, the lender risks becoming liable for the plugging the debtor’s well and reclaiming the well site.[60] Any costs associated with the plugging and reclaiming a debtor’s wells may need to be factored into decisions the lender makes regarding their strategy to realize upon the debtor’s assets after a default.

Once a well is properly plugged and the well site reclaimed, the operator ceases to be an “operator” for that well.[61] The Commission may then refund the proceeds from the operator’s financial securities.[62] 

The Commission may confiscate the operator’s well-site equipment and any salable oil if the Commission intends to exercise or has exercised its right to plug a well or reclaim a well site.[63] This might affect other creditor’s claims to the debtor’s collateral. Any costs associated with the plugging of a debtor’s wells or reclaiming its well sites may need to be factored into decisions the lender makes regarding its strategy to realize upon the debtor’s assets after a default. 

An operator failing to comply with Commission rules may be prohibited from expanding its operations.[64] In turn, an operator’s ability to have its Chapter 11 plan approved may be affected.[65]

6.  Conclusion

Non-compliance with North Dakota’s plugging and reclamation rules can deprive operators of their ability to expand operations, retain assets, and modify its bankruptcy proceedings.[66] Accordingly, it is critical to know how and when to comply with Commission rules. Plugging requirements begin to have increasing relevance when plugging operations are undertaken or when the well is placed in abandoned status.[67] Once operators have determined that these regulations apply, they can organize their compliance efforts into planning and execution phases. Within each of these phases, operators are urged to carefully note and observe notice and method requirements. Careful compliance not only protects operators from financial liability, but it also benefits public health. Given the uncertainty of future oil and gas prices, operators are encouraged to become familiar with plugging and abandonment requirements that may be applicable now or in the future.

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