An Empire of Dying Wells

There are hundreds of thousands of such decrepit oil and gas wells across the U.S., and for a long time few people paid them much mind. That changed over the past decade as scientists discovered the surprisingly large role they play in the climate crisis. Old wells tend to leak, and raw natural gas consists mostly of methane, which has far more planet-warming power than carbon dioxide. That morning in Ohio we pointed our camera at busted pipes, rusted joints, and broken valves, and we saw the otherwise invisible greenhouse gas jetting out. A sour smell lingered in the air.

To Rusty Hutson, it smells like money.

Hutson is the founder and chief executive officer of one of the strangest companies ever to hit the American oil patch and the reason for our four-day visit to the Appalachian region. While other oilmen focus on drilling the next gusher, Hutson buys used wells that generate just a trickle or nothing at all. Over the past four years his Diversified Energy Co. has amassed about 69,000 wells, eclipsing Exxon Mobil Corp. to become the largest well owner in the country. Investors love him. Since listing shares in 2017, Hutson’s company has outperformed almost every other U.S. oil and gas stock, swelling his personal stake to more than $30 million.

But Diversified’s breakneck growth has alarmed some regulators, landowner groups, and industry insiders, not to mention environmental advocates. State laws require that every well be plugged with cement after it runs dry, an expensive and complicated chore. At the rate Diversified is paying dividends to shareholders, some worry there will be nothing left when the bills come due. If a company can’t meet its plugging obligations, that burden falls to the state, which means Ohio, Pennsylvania, and West Virginia could be stuck with a billion-dollar mess. “The model seems like it’s built on abandoning those assets,” says Ted Boettner, who’s studied abandoned wells at the Ohio River Valley Institute, a regional research organization. “It looks like a liability bomb that’s destined to explode.”

Hutson says there’s no cause for worry. He claims to be able to squeeze more gas out of old wells than other companies can and keep them going longer. On average, he figures his wells have an additional 50 years in them, which means there’s no hurry to start socking away money to plug them. It also means they could be spouting pollution long past 2050, the target date set by President Joe Biden for zeroing out emissions across the economy.

State regulators say Diversified hasn’t broken any rules by building an empire of dying wells. Nor has it violated any restrictions on methane emissions, because none apply. Indeed, state and federal policies—from plugging regulations to tax subsidies—encourage companies to do exactly what Diversified is doing: Keep almost dead assets on life support as long as possible, no matter how much they may damage the planet.

The results were worrisome. We found methane leaks at most of the places we visited. Some sites showed signs of maintenance in recent months, but others looked more or less abandoned. We saw access roads choked by vegetation, machinery buried under vines and weeds, oil dripping onto the ground, and steel doors rusted off their hinges. That’s not to say the wells were unattended. Mud wasps, spiders, mice, snails, and bees made their homes in them, and a porcupine napped under a brine tank.

Advocates for natural gas call it a cleaner fossil fuel because it releases about half the carbon dioxide as coal when burned. But there’s a catch: Left unburned, natural gas consists mostly of methane, which is much better at trapping heat. Released into the air, a ton of methane will cause at least 80 times more warming over the next 20 years than a ton of carbon dioxide. That’s one reason controlling methane is among the cheapest and quickest ways to slow climate change and limit the wildfires, heat waves, rising seas, and droughts it’s unleashing. According to one recent estimate, putting a lid on human-caused methane emissions could prevent as much as one-third of the warming expected in the next few decades.

Researchers around the world are racing to reexamine the world’s energy supply chain, finding where gas is leaking and showing what can be done about it. Scientists are training infrared cameras on methane emissions in Texas oil fields, using satellites to spot them in Turkmenistan, and driving sensor-laden vehicles around city streets in the Netherlands. One problem area they’ve identified: old wells that produce little or no salable gas.

Only about 3% of gas needs to escape on its journey from wellhead to power plant to make it worse for the planet than coal. If a well is producing next to nothing, even a small leak can put it over that threshold. “Marginal wells are emitting a very large proportion of the natural gas that they produce,” says Amy Townsend-Small, an associate professor of environmental science at the University of Cincinnati. “Some marginal wells are emitting more natural gas than they produce.”

Townsend-Small is a co-author of a 2020 study that examined old, low-producing oil and gas wells in Ohio, not far from Tri-Valley. She found their emissions amounted to 21% of gas production. Two other peer-reviewed studies, using different measurement techniques and examining gas wells in West Virginia and Pennsylvania, found loss rates of 9% and 18%. None of the papers identified the well owners. Taken together, the research suggests that gas from old wells in Appalachia is one of the dirtiest components of the U.S. energy system.

The damage doesn’t end when these wells stop producing. Some continue to leak methane for years if they’re not properly plugged. Another paper estimated that as much as 8% of Pennsylvania’s human-caused methane emissions was coming from these inactive wells.

Our own survey wasn’t scientific. But it provided some hints that problems noted by academic researchers, such as poor maintenance and frequent leaks, were also present at Diversified’s operations. At 59% of the sites we visited, emissions were significant enough to cause our detector to sound a safety alarm, indicating that the concentration of methane near the instrument’s sensor exceeded 5,000 parts per million. Normal air contains about 2 parts. In a few cases the source appeared to be a pneumatic controller designed to release gas, but the vast majority were leaks.

In a statement to Bloomberg Green, Diversified said that the wells we visited were “not representative of our entire portfolio” and that many had been neglected by previous owners and acquired only recently. Some of the leaks we found were tiny, the company added, and all of them were repaired within a few weeks of our inquiries. The cost for quickly fixing these wells, according to Diversified, was less than $90 on average. The company also said it fixed a leak in an underground pipeline in West Virginia after we reported finding a high concentration of gas nearby.

Diversified said that it’s committed to reducing methane emissions across its operations and that it’s investing in training and equipment to help field personnel find leaks. As for the academic studies showing high emissions rates in the region’s old wells, Diversified questioned their accuracy and said its own wells are better maintained than those of other companies, with staff visiting wells once a month on average. “We firmly believe that we are the best custodian of these wells,” the company said.

No one, including Diversified executives, knows how much methane is actually leaking. Unlike carbon emissions, which are usually a function of intentional fuel use, methane emissions are often inadvertent and intermittent. That makes them almost impossible to measure comprehensively across thousands of locations. Like most oil and gas producers, Diversified estimates emissions using formulas, most of them developed by the U.S. Environmental Protection Agency, that assign a theoretical leak rate to each valve, connector, and tank. For 2020, Diversified told investors those numbers added up to about 38,000 tons of methane, or less than 1% of its gas production. The formulas don’t take into account the age or condition of hardware or whether any efforts were made to fix leaks.

Researchers say the actual measurements they get in the field are often wildly different from those predicted by formulas. The study of wells in West Virginia found emissions rates more than seven times EPA numbers.

In February, Diversified told Pennsylvania regulators it had self-inspected 1,412 of its least productive wells in the state and reported that none was leaking gas. We visited three of those wells in June. Two were leaking.

By his early 30s, while working at a bank in Birmingham, Ala., Hutson turned back to the family business. He borrowed against his house to buy a few old gas wells near where he grew up. Then he bought several more. Within a few years he quit finance to focus on gas full time. He set up company headquarters near his home in Birmingham while working closely with his father in Lumberport.

The fracking revolution in the early 2000s created opportunity. Companies were pouring money into new drilling techniques to unlock vast amounts of oil and gas from shale fields. When they lost interest in their older, less productive conventional wells, Hutson was there to buy. By 2017 he’d amassed 7,500 wells. That February he floated the company’s shares on AIM, a lightly regulated arm of the London Stock Exchange for small companies.

Hutson, who has a square jaw and carefully parted gray hair, started appearing in videos on stock-promotion websites, talking up his company’s prospects. He unveiled a Diversified program called Smarter Well Management, a sort of Fountain of Youth for decrepit gas wells. Over time, wells tend to bring forth less and less oil and gas until they’re finally spent. Hutson said Diversified had developed a system to slow the decline and even resurrect wells that others had left for dead.

Sometimes the most profitable reason to extend the life of an old well isn’t the extra oil or gas that comes out. It’s the delay in the date when a well has to be plugged. When companies tell investors how much they expect to spend on retiring wells, they discount it by how far away that day of reckoning is. On the books, a 50-year timeline makes Hutson’s cost almost disappear.

Because it plugs so many wells and keeps much of the work in-house, Diversified says it can retire wells for under $25,000, less than industry norms. Thanks to that, and the unusually long time horizon, Diversified often records its plugging liabilities at a fraction of what other companies would. In 2018 the company bought a portfolio of wells from CNX Resources Corp. CNX had pegged its cleanup liability at $197 million. Diversified put the liability for the same wells at only $14 million.

This may explain why Diversified frequently determines the wells it’s buying are worth far more than what it paid—so much so that it books the difference as profit upfront. Since 2014 the amount Diversified has made from these accounting gains is more than its cumulative reported profit. In its statement the company noted its books are reviewed by outside engineers as well as independent auditors at PricewaterhouseCoopers.

After going public, Hutson accelerated his buying spree. By last year he owned about 1 in 5 wells across Ohio, Pennsylvania, and West Virginia. Tom Loughrey, an oil and gas data analyst in Chapel Hill, N.C., remembers the day in 2019 when someone on a phone call mentioned a new company that had more wells than anyone else. “I’ve worked in upstream oil and gas finance and investing since 1998,” he says. “I had never heard of the company before.”

Loughrey was intrigued. Could Diversified really make money from such geriatric wells? In a blog post last year, he wrote that he analyzed 37,000 Diversified wells and wasn’t optimistic. About half of the ones he looked at were producing less than 15,000 cubic feet a day, he wrote, “which in this price environment will barely buy you lunch.”

“Every oilman since the beginning of time has wanted to buy proved, producing assets,” Loughrey says. “Why is it that Diversified is the only company that’s able to pull this off this decade and be successful with it? Why is one company basically beating the market? It boggles my mind.”

Hutson’s company represents a new link in the chain. Many of his wells were once owned by the biggest explorers, such as Exxon Mobil and Chevron. But rather than scattering among hundreds of small-time operators, the wells are now ending up with him. That’s great if Diversified can keep its promises. It also concentrates the risk if something goes wrong.

The Diversified takeovers set off alarms. In 2018 a group of West Virginia landowners sought to block the transfer of 3,865 wells, warning of “one of the most, if not the most, widespread environmental and property-rights disasters ever in West Virginia.”

Some regulators were worried, too, but they had little leverage. Although well owners must post bonds to cover cleanup costs, the amounts required are so small they’re almost meaningless. Regulators have limited powers to block transfers to a new owner. The West Virginia transfers were approved after the state denied the landowners’ request for a hearing.

In Pennsylvania, Scott Perry, the state’s chief oil and gas regulator, told an advisory council in 2019 he had “considerable concern” that so many wells had been bought by the same company, according to the Pittsburgh Post-Gazette. “No one broke the law by selling wells to that company, and they didn’t break the law by buying them,” he said at the meeting. “But the law is weak.”

Thousands of wells Diversified bought were producing nothing at all, meaning they were already out of compliance. State laws require nonproductive wells to be plugged promptly, so they don’t endanger groundwater or catch fire. But enforcing this law is difficult. Regulators worry that if they push companies too hard, it can cause financial distress and reduce the chances that anything will be plugged. “If the burden is so high to plug a well, then a company may not be able to do it, and you’ve defeated the purpose,” says Eric Vendel, chief of Ohio’s Division of Oil and Gas Resources Management. That concern was especially acute for Diversified, which was juggling an unprecedented number of idle wells in multiple states.

Instead, four states—Kentucky, Ohio, Pennsylvania, and West Virginia—cut deals that give Diversified about a decade or more to bring roughly 3,000 idle wells into compliance. If the company revives enough of those wells, it’s required to plug only 20 unsalvageable ones a year in each of the four states. At that pace it would take about 750 years for Diversified to plug everything it currently owns in the region.

State officials say the company has kept up its end of the bargain so far. Last year, Diversified said, it plugged 92 wells, a dozen more than required. The company said its pace beats any other company in Appalachia, an assertion that couldn’t be independently confirmed. It also reported reviving production at hundreds of idle wells, which means it’s off the hook from retiring them anytime soon. The states don’t have enough inspectors to verify these production claims, so they mostly rely on what Diversified tells them.

An incident in Ohio shows the risk of that approach. In 2019, Diversified told state officials it had revived a well in Trumbull County, squeezing a modest amount of gas from a site that had produced nothing the previous year. That put the well back into compliance with state law. But when a state inspector visited the following June, she found the site idle, according to a report she filed. A field employee explained that the well was filled with water and hadn’t produced anything the year before, contradicting what the company had claimed. Diversified said any misreporting wasn’t intentional.

As president of the West Virginia Royalty Owners Association, Tom Huber represents individuals who share in the profits of oil and gas production on private land. He has every reason to cheer for a company that says it can boost output and keep wells going longer—the more production, the bigger the payments to his members. “I want Rusty and Diversified to make a bunch of money and to stay in business 50 years,” Huber says. But he fears Diversified won’t be able to meet its obligations, leaving a mess for taxpayers to clean up. “I hate to sound pessimistic about it,” he says, “but I’m pessimistic.”

We took Townsend-Small to three wells we’d identified as leakers. At each, she used a handheld detector to find where gas was escaping. Then she lugged a metal suitcase to the site and opened it, revealing a contraption called an Indaco Hi-Flow Sampler. It looked like a relic from a 1950s sci-fi movie, with a chrome control panel and a coil of plastic hoses. She held one hose near the leak after covering the area with plastic sheeting. The machine’s display panel showed the concentration of methane in the sample as well as the rate of flow. That allowed her to calculate the amount of methane pouring out.

Townsend-Small found emissions of 38, 50, and 91 grams an hour at the wells she measured. If those rates continued over the course of a year, the three wells would cause the warming equivalent of 134 tons of carbon dioxide. Diversified said those amounts aren’t inconsistent with the emissions figures it already discloses to investors.

An employee had visited the biggest leaker we measured, Wilson Coal Land No. 89, a few days before we showed up and hadn’t noticed any problems, the company said. After our inquiry, Diversified said it sent someone back to make a $300 repair. West Virginia records show No. 89 produced only a trickle of salable gas last year—about 8,000 cubic feet. That means it may have been leaking six times what it produced for sale, making its gas a far more potent warming agent than coal.

No. 89 was drilled in 1964 and passed through a handful of owners before Diversified bought it last year from a small Colorado company. The gas it produced in 2020 would have been worth about $25 wholesale. It’s hard to imagine how a well like that could ever be profitable again.

Keeping a well like No. 89 going makes more sense after considering the government policies that shape Diversified’s business. By not requiring drillers to post cleanup costs upfront, state laws incentivize companies to delay plugging as long as they can. Marginal well owners also collect a federal tax credit, meant to support jobs in the oil and gas industry when prices fall below a certain level. Last year, Diversified reported an $80 million benefit from the subsidy, or about one-fifth of what it got from selling oil and gas.

In West Virginia there’s an additional benefit. Last year the legislature cut the severance tax on the lowest-producing wells in half. Diversified, by far the biggest beneficiary of the cut, told investors it “engaged with state regulators in West Virginia to help craft” the bill, which also directs revenue toward plugging orphaned wells.

In a state that’s been losing coal jobs and was mostly left out of the fracking boom, Hutson is burnishing his company’s image as a local success story. Diversified, which now employs more than 1,000 people, recently became the “official energy partner” of West Virginia University’s Mountaineers, and Hutson’s name graces a laboratory at Fairmont State University, his alma mater. The state has been good to him, too. Not long after passing the tax break for low-producing wells, it allowed Diversified to experiment with a less expensive process for plugging wells than state regulations require.

The $4.7 billion measure working its way through Congress would help states deal with thousands of wells that must be plugged at taxpayer expense because owners disappeared or went belly up. While the spending would reduce methane emissions and create oilfield jobs, it doesn’t address the reason those wells were orphaned to begin with: state laws that fail to ensure the industry cleans up its own messes.

Although some environmental agencies have begun regulating methane emissions, they’ve shied away from targeting the kind of older, low-producing properties that Diversified owns. Trade groups argue that the cost of inspection would make these wells unprofitable and could kill local jobs and hurt small businesses. The EPA, which issued a methane regulation for new wells in 2016, is now crafting a rule for older wells but hasn’t said how it will treat low producers. Meanwhile, Pennsylvania exempted low-producing wells when it proposed a statewide methane rule last year, sparing more than 99% of Diversified’s holdings in the state.

In Appalachia the rust accumulates. State records show that more than 1 in 10 of Hutson’s wells there aren’t producing anything at all. Among them is one known as Fee A 36, almost hidden by weeds in a forest in central Pennsylvania. Drilled during World War II, Fee A 36 once belonged to Chevron Corp., but by the time the well stopped producing gas in 1998, it had already been through several different owners. It’s no longer even connected to a gathering line. A rusty pipe leading from the wellhead ends in an open shaft, where our camera recorded methane trickling past two large bees sheltering inside.

Even Diversified acknowledges this well can’t be resurrected. But its deal with Pennsylvania requires it to plug only 20 wells a year, and there are hundreds of wells to retire. Fee A 36 will have to wait its turn.