Last month, the House Committee on Energy and Commerce sent a letter to the CEO of Diversified Energy Company expressing concern and seeking information about the company’s “policies and practices related to well management, well cleanups, and methane emissions.” While there is a political tinge to the letter, it does raise potentially valid points about estimating and accounting for oil and gas well closures – the first under the auspices of EPA’s new methane rule. Originally listed on the London Stock Exchange, the company’s stock only began trading on the NYSE on December 18, 2023 (the date of the letter). The letter sets the stage like this:
“As the largest owner and purchaser of oil and gas wells in the United States, Diversified Energy is responsible for remediating a substantial share of the country’s aging oil and gas wells, but we are concerned that your company may be vastly underestimating well cleanup costs. Such an underestimation would threaten Diversified Energy’s ability to cover environmental liabilities associated with cleaning up its oil and gas wells, which could create thousands of orphaned, methane-leaking wells and undermine efforts to respond to the worsening climate crisis.”
Then it moves into some surprisingly detailed information about the company’s operations and well closure cost estimates:
“The company estimates that its average well lifespan is 50 years, which could keep thousands of highly polluting marginal wells in operation long past 2050, when the United States must meet net-zero greenhouse gas emissions… Diversified Energy claims its ‘Smarter Asset Management’ initiative and other proprietary practices allow it to extract oil and gas from marginal wells for long periods of time with fewer methane leaks.
… when Diversified Energy acquired wells from CNX Resources Corp. (CNX Resources) in 2018, CNX Resources estimated remediation would cost $197 million. Diversified Energy determined remediating the same wells would only cost $14 million…”
The heart of the matter is then laid out:
“Researchers examining Diversified Energy’s accounting practices found that agreements with states would allow the company to defer environmental liabilities that they estimated at more than $2 billion. Deferring and underestimating environmental liabilities would provide Diversified Energy the appearance of profitability on paper, which would allow your company to payout hundreds of millions of dollars to creditors and shareholders over the next decade without ensuring adequate funds to cover those liabilities. If this analysis is accurate, it is highly unlikely that Diversified Energy will have adequate funds to clean up all of its marginal wells when they should be retired.”
Objectively, there are reasonable questions raised by the Committee. While the EPA regulates and mandates financial assurance for hazardous waste operations, it had not done so for oil and gas well closure – that is typically left to state regulators. However, Section 60.5397b(l) of the new methane rule requires regulated companies to include a description of the financial requirements and disclosure of financial assurance to complete closure as part of their well closure plans.
Diversified’s Form 20-F offers no information on the matter.
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Disclaimer: I do not directly own stock in any companies discussed above.
Photo credit: Timon – stock.adobe.com
