Overestimating Natural Gas Reserves Results in Bad Investments & Stranded Assets

Natural gas is viewed by many as a cost effective way to produce power that will be an important stepping stone as we move away from fossil fuels. Coupled with reports from government and industry claiming significant recoverable reserves, natural gas seems like a viable option for the future. So what’s the catch? As it turns out, gas companies are financially motivated to issue the most optimistic reports of their reserves, and overestimation of proved reserves grants a false (and dangerous) sense of security in the fossil fuel sector. This sense of security threatens to undermine the purportedly bright future of natural gas, and accurate reserve reporting education and strict implementation is the only way to avoid economic downfalls, as well as preserve our slow-but-steady transition away from fossil fuels.

When companies log proved reserves, they are claiming that they are at least 90 percent certain that they can produce that amount of energy at today’s prices. The Securities and Exchange Commission (SEC), which regulates this process, allows companies to count quantities of gas and oil as part of their proved reserves as long as they plan to drill them out within the next five years; these undrilled resources are referred to as proved undeveloped reserves (PUDs). The company is allowed to count the entire expected lifetime amount of gas for a specific drill site as part of their reserves – long before they break ground, much less understand how fast/slow flowing or dense the shale reservoir may be.

Investors and pipeline companies see proved reserves as the key ingredient for investments, so oil and gas companies are overtly incentivized to produce the rosiest reports possible. Since about half of industry’s proved reserves are undeveloped, this overstatement of ‘proved’ reserves becomes important economically for investors and pipeline companies. Companies such as Shell, El Paso, Stone Energy, and Repsol YPF, among others, have already found themselves in the spotlight, and courtroom, for overstatements of oil and gas reserves. See page 73 here for continued reading on these case studies.

Issues that arise from overestimating proved reserves are complicated, but generally result in stranded assets which can be expensive for rate payers and other companies.  When a gas company touts a large shale gas reservoir, a pipeline company then builds a huge well and pipeline infrastructures to collect and transport this resource and utilities scale up dependence on gas fired power plants (see here). If the gas company overstated the size of the reserve, or it was more complicated and costly to maintain than was initially reported, this will ultimately result in expensive stranded assets.

SEC regulations regarding accurate reserves reports are already in place and significant corporate and/or employee penalties have been issued. Only through rigorous education and ethical enforcement of these regulations can we hope to avoid the economic downfalls caused by overreliance on a limited fossil fuel resource such as stranded assets, financial penalties, and/or lawsuits.

Anadarko Shareholders File Class Action Lawsuit Against Company

A class action lawsuit filed by shareholders against Anadarko Petroleum paints a picture of a company with a culture of putting production ahead of safety.  The suit, with information provided by nine former employees and two contractor employees, says the company “repeatedly and deliberately” violated multiple Colorado safety regulations.  These violations led to the explosion of a home in Firestone, CO on April 17, 2017, killing two people and injuring a third.

According to the suit, Anadarko’s widespread violations of the Colorado Oil & Gas Conservation Commission (COGCC) safety rules “…all but guaranteed a disaster”.  The lawsuit alleges that negligence and safety violations by the company caused share prices to fall, hurting investors.  The lead plaintiff is the Philadelphia Ironworkers Benefit and Pension fund, which owns Anadarko stock.

One of the former employees states that a single person was responsible for checking the safety of all of Anadarko’s flow lines in the Wattenberg field in Weld County.  Twelve to twenty people would have been needed to adequately do the job.  The lawsuit states that “this employee brought up the issue of inadequate staffing with her superior approximately 12 times between late 2016 and March 2017, when she quit in disgust”.

The lawsuit concludes that “Anadarko’s senior executives… callously disregarded known, widespread violations of the [COGCC’s] rules that endangered the Colorado communities in which Anadarko did business.  They lied about it to the Commission.  They lied about it to investors.  They violated the securities laws.”

Events Leading Up to the Firestone Explosion

In October of 2013, Anadarko and its chief competitor in the Wattenberg field, Noble Energy, exchanged ownership of approximately 100,000 acres of land in the Wattenberg field in Colorado – the Land Swap.

Through the Land Swap, Anadarko acquired more than 1,550 existing wells, most of which had been drilled up to 50 years before in rural areas of Weld County and were in desperate need of repairs or needed to be plugged and abandoned altogether. These wells included the Firestone Well, which was drilled in 1993.

Starting in the early 1990’s, the area grew rapidly and developers built houses close to the wells. The COGCC does not require companies to disclose to the public or to developers the location of oil and gas lines.  It does, however, have regulations in place to protect public safety.  The lawsuit alleges Anadarko routinely violated five of the Commission’s regulations:

1) Rule 1102 a. (2) – “[w]henever an operator discovers any condition that could adversely affect the safe and proper operation of its pipeline, it shall correct it within a reasonable time.”

2) Rule 1101 a. – all pipelines shall be locatable by a tracer line or location device to facilitate the location of such pipelines.

3) Rule 1102 d. – flowline and pipeline locations must be registered with the Utility Notification Center, CO 811. CO 811 operates a hotline for information about the location of flowlines that utilities companies and the general public can call before digging to ensure they do not rupture flowlines.

4) Rule 1101 e. (1) – every year all flowlines must be pressure-tested to their maximum anticipated
operating pressure.

5) Rule 1103 – every abandoned pipeline shall be disconnected from all sources of natural gas and petroleum and cut off and sealed at the ends. Notice of such abandonment shall be filed with the Commission and with the local governmental jurisdiction. This rule applies even if a flowline is not located near a building.

Because Anadarko routinely failed to comply with these five regulations, as development encroached closer and closer to the old wells developers severed flowlines without being aware they had done so.

Even knowing this, Anadarko elected to turn on many of the old wells in desperate need of repairs because lease terms required Anadarko to actually operate the wells in order to maintain its lease. If Anadarko lost a lease, it would have to renegotiate it with the owner of the mineral rights. Since the leases were often signed decades earlier, at prices much lower than today’s prices, it was top priority for Anadarko to maintain these old leases so they wouldn’t have to be renegotiated.

The Firestone Well was one of those old Land Swap wells which had been turned on. However, when the well was activated “…Anadarko’s measurements did not report any methane production through the meter, a physical impossibility.  Though Anadarko had sent a work crew to inspect this anomalous result,  the overworked employees had not found the problem.  The flowline had leaked methane into the home, which exploded when the homeowner tried to install a heater”.

“Following the explosion, Anadarko admitted that 2,400 of its flowlines had been abandoned, but not sealed, in violation of Commission Rule 1103. Anadarko also added an additional 400 wells to the list of wells it needed to plug and abandon, more than doubling the number of wells on that list”

Read the complete Class Action Lawsuit here.

Xcel’s Colorado Energy Plan “Stipulation” – Another Xcel “Deal” That is Not a Deal At All

In late August 2017, Xcel-Colorado (Public Service Company of Colorado or “PSCo”) submitted a plan to the Colorado Public Utilities Commission (“PUC”) which it named the Colorado Energy Plan or “CEP.”  The Colorado Energy Plan was submitted to the PUC as a “Stipulation” in Docket 16A-0396E and the CEP is sometimes referred to as “The Stipulation.”  While Xcel’s Colorado Energy Plan includes moving up the retirement date for two coal plants—Comanche 1 and 2 in Pueblo, Colorado—the Plan also contains a number of adverse provisions including:

  • Reducing Xcel’s Renewable Energy Standard Adjustment which is supposed to be used to support renewable energy additions and using the “head room” created by that reduction to pay off the undepreciated portion of Comanche 1 and 2.
  • Paying Xcel their full level of profit (known as “return at the WACC” or Weighted Average Cost of Capital of about 7 %) on the now stranded coal plants.
  • Establishing ownership targets for Xcel ownership of replacement generation, potentially reducing the competitive nature of Colorado’s energy market.
  • Including natural gas in the replacement generation and potentially constraining the analysis of the over 50,000 MW of very cost-effective wind, solar and storage bids that Xcel received in November 2018.  The CEP would consider adding about 2000 MW of wind and solar to Xcel’s Colorado system, leaving over 90% of the wind, solar and storage bids “on the table.”

Clean Energy Action Board member Leslie Glustrom submitted extensive comments on the “Stipulation” and a final statement.

Photo Courtesy of Alan Best

In addition, Clean Energy Action hosted several trainings on the CEP/Stipulation in late January 2018 and numerous citizens that attended the trainings testified at the Colorado PUC on February 1, 2018 in Docket 16A-0396E.  Many citizens pointed out that Xcel’s Colorado Energy Plan “deal” was not as good a “deal” as Xcel wanted the Commission to believe it was.

On Wednesday March 14, 2018 the Colorado PUC allowed Xcel to bring forth a plan that retires Comanche 1 and 2 early, but did not accept many other parts of the Colorado Energy Plan “Stipulation.”  The decision is here.

Unfortunately the Colorado PUC did not specify that Xcel should develop a plan that no longer uses “must-run” requirements for Xcel’s Colorado coal plants, but it did require a “least-cost” modeling run which should begin to show the vast potential for lowering utility costs by incorporating low-cost wind, solar and storage onto Xcel’s Colorado system.  Importantly, the sensitivity runs with lower discount rates should show even greater savings from adding wind, solar and storage resources.  The modeling report is expected in late April 2018.

The mission of Clean Energy Action is to “accelerate the transition to the post-fossil fuel world,” and we are strong supporters of retiring coal and natural gas plants, but we will also advocate for a “just transition” that does not unduly burden utility ratepayers. The Colorado Energy Plan, while containing some admirable proposals, transfers too much accountability for stranded fossil fuel assets from Xcel to its customers.

Xcel’s Colorado Energy Plan “Stipulation” – Another Xcel “Deal” That is Not a Deal At All

In late August 2017, Xcel-Colorado (Public Service Company of Colorado or “PSCo”) submitted a plan to the Colorado Public Utilities Commission (“PUC”) which it named the Colorado Energy Plan or “CEP.”  The Colorado Energy Plan was submitted to the PUC as a “Stipulation” in Docket 16A-0396E and the CEP is sometimes referred to as “The Stipulation.”  While Xcel’s Colorado Energy Plan includes moving up the retirement date for two coal plants—Comanche 1 and 2 in Pueblo, Colorado—the Plan also contains a number of adverse provisions including:

  • Reducing Xcel’s Renewable Energy Standard Adjustment which is supposed to be used to support renewable energy additions and using the “head room” created by that reduction to pay off the undepreciated portion of Comanche 1 and 2.
  • Paying Xcel their full level of profit (known as “return at the WACC” or Weighted Average Cost of Capital of about 7 %) on the now stranded coal plants.
  • Establishing ownership targets for Xcel ownership of replacement generation, potentially reducing the competitive nature of Colorado’s energy market.
  • Including natural gas in the replacement generation and potentially constraining the analysis of the over 50,000 MW of very cost-effective wind, solar and storage bids that Xcel received in November 2018.  The CEP would consider adding about 2000 MW of wind and solar to Xcel’s Colorado system, leaving over 90% of the wind, solar and storage bids “on the table.”

Clean Energy Action Board member Leslie Glustrom submitted extensive comments on the “Stipulation” and a final statement.

Photo Courtesy of Alan Best

In addition, Clean Energy Action hosted several trainings on the CEP/Stipulation in late January 2018 and numerous citizens that attended the trainings testified at the Colorado PUC on February 1, 2018 in Docket 16A-0396E.  Many citizens pointed out that Xcel’s Colorado Energy Plan “deal” was not as good a “deal” as Xcel wanted the Commission to believe it was.

On Wednesday March 14, 2018 the Colorado PUC allowed Xcel to bring forth a plan that retires Comanche 1 and 2 early, but did not accept many other parts of the Colorado Energy Plan “Stipulation.”  The decision is here.

Unfortunately the Colorado PUC did not specify that Xcel should develop a plan that no longer uses “must-run” requirements for Xcel’s Colorado coal plants, but it did require a “least-cost” modeling run which should begin to show the vast potential for lowering utility costs by incorporating low-cost wind, solar and storage onto Xcel’s Colorado system.  Importantly, the sensitivity runs with lower discount rates should show even greater savings from adding wind, solar and storage resources.  The modeling report is expected in late April 2018.

The mission of Clean Energy Action is to “accelerate the transition to the post-fossil fuel world,” and we are strong supporters of retiring coal and natural gas plants, but we will also advocate for a “just transition” that does not unduly burden utility ratepayers. The Colorado Energy Plan, while containing some admirable proposals, transfers too much accountability for stranded fossil fuel assets from Xcel to its customers.

Save the Date: Panel on Paying Off Xcel’s Stranded Assets

SAVE THE DATE:
MONDAY MAY 14TH 6:45 PM
1ST PRESBYTERIAN CHURCH

 

Leslie Glustrom is a co-founder and board member of Clean Energy Action based here in Boulder, and has more than a decade of experience with Xcel Energy and Colorado’s energy regulatory environment. She will be discussing the current situation we are facing here in Colorado in 2018.

Jacqui Patterson is the Director of the NAACP’s Environment and Climate Justice program. She has worked with the U.S. Climate Action Network, Interfaith Moral Action on Climate, and many other organizations on climate, gender, and racial justice, and will be discussing climate justice and equity.

Mariel Nanasi is the Executive Director of New Energy Economy in New Mexico. Her organization, New Energy Economy, recently faced a battle over stranded assets strikingly similar to the fight currently confronting Xcel ratepayers in Colorado. She will be telling us about her organization’s recent successes in bringing equity to stranded asset decisions.

Clean Energy Action is dedicated to taking coal and other fossil fuel assets offline as quickly as possible in a fashion that is just, equitable, and will encourage more responsible behavior by Xcel and other utilities in the future. The legal challenges posed by stranded assets are nuanced and important to understand if we want to move forward to a clean energy future responsibly and equitably, which is why we are thrilled that Ms. Patterson and Ms. Nanasi will be joining us for an evening right here in Boulder to offer their expertise.

Our discussion is open to the public, so join us for what promises to be a fascinating evening, and bring a friend!

Where: 1st Presbyterian Church
1820 15th Street
Boulder, CO 80302

When: Monday, May 14th 2018 6:45 PM

See you there!

Accelerating the transition from fossil fuels to a clean energy economy