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As Fracking Firms Face Financial Trouble, States Enter Uncharted Waters

Frontier Group intern and University of Massachusetts student Toby Armstrong contributed this blog post. This is the third in a series of posts on the implications of the fracking bust and inadequate bonding requirements on taxpayers and the environment. The first two posts can be found here and here.

The history of the fossil fuel industry has shown that unless strong regulation exists to guarantee that mining and drilling companies set aside enough money for environmental cleanup (often in the form of bonds) when times are good, cleanup won’t get done when times turn sour. The result: taxpayers wind up footing the bill for cleanup, or else are forced to deal with the environmental and public health consequences of unplugged wells.

Pennsylvania has experienced this firsthand, and is now dealing with thousands of orphaned oil and gas wells from past decades, yet the future doesn’t look bright. As the fracking boom begins to wane, thousands of new and uniquely dangerous wells may be abandoned if operators go under, posing unique burdens to the state’s budget, public health, and environment.

So, how much financial trouble are Pennsylvania operators in? One example is Chesapeake Energy, the second biggest operator in the state, operating over 800 wells, and the second largest natural gas producer in the US in terms of overall production.

Chesapeake has frequented headlines as of late due to its worsening financial situation. The financial problems stem from the $10 billion in debt Chesapeake incurred early in the fracking boom to finance its operations, assuming the money to be made over time would more than cover the large upfront costs. Now that gas prices have collapsed and production has waned, the company is struggling to stay afloat under the pressure of debt payments and a lack of cash.

In 2015, Chesapeake reported a net loss of $14.8 billion. The company has also seen the value of its stock fall 80% in the last year, and had its credit rating recently downgraded by the S&P, which called the company’s finances “unsustainable.”

As the fracking boom wanes, many companies like Chesapeake are finding it harder and harder to stay in business. A total of 35 exploration and production companies, with a total debt of around $18 billion, filed for bankruptcy between July 1, 2014, and December 31, 2015 alone. Some analysts even predict, based on current prices, that up to a third of fracking companies could go bust by the end of 2016.

Chesapeake has managed to survive thus far by aggressively selling off its assets while engaging in debt-for-equity swaps. Additionally, the company has cut its operating costs by more than half for 2016, and plans to stop the drilling of new wells for the first time in 10 years, only operating only the most profitable sites it owns.

While these strategies have allowed Chesapeake to stay in business for the time being, it will only get harder for the company to kick the can down the road. The next hurdle will be $1.3 billion in debt due at the end of 2017, and it is unclear how Chesapeake plans to cope.

If Chesapeake were to go bankrupt or sell out, one can only speculate on what will become of its wells across the Pennsylvania and the nation. In past busts, large companies like Chesapeake have chosen to sell their assets to smaller operators. This may delay well abandonment, however, these smaller operators often have even less financial capability to plug than the original owner, and meet the same fate of insolvency.

Chesapeake’s own environmental record is far from sterling. Between January 2011 and August 2014 Chesapeake committed 253 environmental and health violations in Pennsylvania, only second to Cabot Oil & Gas, according to Frontier Group’s 2015 report with PennEnvironment Research & Policy Center, Fracking Failures. The company has also been cited for six violations for failure to reclaim a site after plugging a well and two violations for failure to plug.[1]

States that have experienced a recent boom in fracking are now sailing into uncharted waters. With inadequate requirements for bonding, they must hope that wounded companies like Chesapeake or their successors will have the resources to clean up the damage their drilling has done to the local environment. Now is the time for states like Pennsylvania to set in place strong bonding requirements to ensure that money is available for environmental cleanup and the health of people living in the shadow of fracking are not put at risk – regardless of how financially sick drilling firms may be.

   

[1] Based on data from State Impact. Violations reviewed were “Failure to plug a well upon abandonment,” “Failure to restore site w/in 9 months of completion of drilling or plugging,” and “Failure to restore site w/in 9 months of plugging well.”