P&A Liability
It’s a real issue - for wind, solar, mining and O&G
The Nobles Wind project in Minnesota offers a glimpse into the underbelly of renewables, and I'm going to be fair, the underbelly of all energy projects: decommissioning. Tomorrow, I head to Midland to talk about the business of plugging and abandoning wells, and I'm going to be very very unpopular when I say this: but it is a true problem, and one that can only be solved by increased bonding, in my opinion.
Xcel energy has said that in 2009 dollars, abandoning each wind turbine will cost $445,000 ($532,000 in 2019 dollars, pre inflation). If you have ever seen a turbine on a truck or a railcar, you know how absolutely gigantic these are. A 2 MW, 328' high wind turbine needs 30,000 tons of cement in the base. At Nobles Wind project, there are 134 1.5 MW turbines with a useful life of 25 years.
However, we know from oil and gas, the best and lowest cost day in a wells life is on day 1, after which production declines and costs increase. As turbines torque day after day, blades erode, efficiency drops, is the power created in year 20 economic?
The challenge with abandonment is you can use any discount rate you wish to marginalize dollars in the future, but when the bill comes due, you better have the reserves. Diversified Oil and gas has 69,000 gross wells producing 12 mcfe/d each, on average. They estimate the cost to abandon each well at $25,000 and abandon 80 a year, with the last useful economic life of wells being 2095. Do the math on the rate of abandonment and cash outlay per well, it gets scary because they won't have $1.5 billion in the bank when the bill comes due. It will have been paid out to shareholders and debt owners.
But, to address this will massively reduce the amount of capital available to companies- both to drill wells and build wind turbines. There are a lot of ways to socialize costs, but the best way to address the problem is to preserve cash up front when the capital is being invested to ensure that tax payers aren't left holding the bag. The dirtiest secrets of the oil and gas industry will be the same for renewables, and we should be addressing them before it is too late.
#hottakeoftheday