Identifying the End: Minimum Production Thresholds for Natural Gas Wells

Abstract

State governments require that oil and gas operators decommission wells at the end of their useful life, allowing the land to be put to other uses and reducing the risk that the well becomes (or remains) a threat to health and the environment. Because decommissioning is costly and generates no revenue, operators have incentive to postpone it. Our survey of major producing states shows that they generally allow operators to keep wells open as long as they produce any oil or gas, thereby permitting nearly indefinite postponement of decommissioning. For conventional natural gas wells in Pennsylvania, we estimate the production needed to cover operating costs based on data from the state’s largest operator of conventional wells. We find that conventional natural gas wells producing below 0.5 Mcf per day are highly likely to be uneconomical even if gas prices rise well considerably. We apply the threshold to a sample of ageing wells. As of 2019, only 4 percent of wells had been decommissioned, and the threshold suggests that an additional one-third of wells are likely uneconomical and in need of decommissioning. Using thresholds to identify uneconomical wells could increase the number of wells being properly decommissioned and decrease those becoming the responsibility of the state, benefitting the environment, those living near wells, and taxpayers.