Should I ask for more docs regarding plugging invoice?

#1

I'm not sure where to post this. Please bear with this newbie as I explain. My brother sold me his working interest in an OK oil and gas well in 1989. I have a 3.57 leasehold interest and a 3.12 WI with a net revenue interest of 2.34. I received checks fairly regularly for about 20 years. The checks stopped coming a few years ago and after much digging, I found a cell number for the operator. I was told it had broken down and would not be repaired.

Earlier this year, I received correspondence informing me that the well would be plugged and asked if I had an objection. I did not. Recently, I received a bill for nearly $1,000. There is no contact info other than a PO box. There is very little detail on the invoice except a beginning balance of about $1400 and a credit around $500.

Should I be asking for a better detailed accounting, or is this typical?

Is an expense like this ever negotiable?

How can I protect myself from future invoices from this company?

Thanks, all.

#2

As a working interest owner, you are responsible for your share of the well costs, including any plugging and clean-up expenses. However, you can ask for copies of the underlying invoices or other evidence of expenses.

#3

I plan to ask for a record of all expenses. I would also like to know why the well is being plugged now after years of inactivity. Is this a requirement of the State of Oklahoma?

#4

States require that wells be plugged when they have been inactive for extended years or when leases expire. It is important to plug a well to maintain underground integrity by preventing the migration of water, oil and gas between formations and to protect water. An operator (and working interests) are supposed to 'set aside' or reserve funds for this out of the well revenues. Of course, most do this out of current income rather than establishing a savings account. The regulatory commission of each state sets the specific requirements for plugging each well to ensure that it does not deteriorate over the years. Operators are also obligated to clean up the surface and properly dispose of equipment. It is not the obligation of the state and the taxpayers to take on these costs. This is a real sore-point with mineral and surface owners as too often operators walk away and leave wells leaking and deteriorating and then the taxpayers end up footing the bill. Currently Texas RRC has 1,472 wells on state plugging list. There are an additional 4,212 oil wells and 1,524 gas wells on the 'orphan well' list which means that these are abandoned but not yet dangerous or an environmental problem. This is a total of 7,208 wells which Texas taxpayers will have to pay to plug. RRC reports that the estimated cost of plugging the 1,471 wells on the state plugging list is $31,037,514.34. In October 2017, RRC plugged 87 wells. A total of 544 wells were plugged during fiscal year 2016 and 918 wells were plugged in fiscal year 2017. Interesting to note that there were 117,927 shut-in/inactive wells as of October 2017 and that 41% of operators have more than 25% of their wells as inactive.

#5

Be sure to tell them you want an offsetting credit for the used equipment and any tubulars pulled. Also, make sure you have the water tested if you are drinking it; otherwise, you could die much earlier like a lot of other people who wondered why their animals were dieing.

Bob Malone, Malone Petroleum Consulting

#6

Bob, there is a credit of around $500 on their invoice listed as "current property activity". Could this be the offset? My problem with the statement is that it says so little... Just the credit and what I owe. Is this a common practice for an invoice to have so little detail?

In addition to receipts for plugging, I'm wondering if I should ask for contractors contact info.

Also, how do I know that this is a final bill?

Thanks.

#7

Thanks, TennisDaze. That's very helpful and surprising to learn that so many wells are abandoned. I wonder how far back some of them date. My grandfather was a wildcatter in Breckenridge and Pecos, TX around 1920.

#8

Toni, The credit could be anything. I doubt if it is a credit for used equipment. Your best friend is to keep asking very smart questions until you know enough facts. Good luck! Bob

#9

All good advice. As a former operator and auditor, don't pay a dime without detailed invoices from all the subs and review the charges. There are recoveries (possibly) from equipment, tubing, etc, that should be sold and proceeds distributed to other WI owners.

Secondly, I don't know the OK requirements, but somewhere there should be a filing that shows the plugging event, depths, methods, etc, and those should be matched to what the detailed invoices show was done.

What is interesting about Tennis' info is that I operated 12 wells, had to plug one and when i sold, had to show the purchaser acquired the liability for the others. In addition, i had a $50k bond with the Texas RRC and they would not release it until all i's were dotted and t's crossed. I assume the majority of the orphan wells were done before the RRC started getting serious about operator responsibility.

Good luck.

#10

Thanks to all for the advice and suggestions. I'll try to research OK requirements for the plugging process so I can ask the right questions. I may come back to the forum when I receive a response to my request for documentation. Hopefully, it won't smell so fishy!

#11

I am now waiting for the receipts and state form I requested from the operator. In the meantime, I have been told by two people in the business that I should have ignored these undocumented requests for payment because the operator should have had a savings account set aside to pay for the expense of plugging. It sounds like a wise thing to do on the part of the operator but are they required to do so or is there an ethical problem when they fail to set up such an account? I understand operators want to pull as much profit from the well while they can. Thanks.

#12

The very early invoicing for plugging has a great risk of being forgotten. That will result in your being charged for the actual plugging years later ... AGAIN.

#13

Sounds like I'm at the mercy of whatever they say I owe. Even if they provide the receipts for plugging I've requested, I have no way of knowing if the cost of plugging has already been collected.