Louisiana auditor flags gaps in oversight for orphaned oil wells

(The Center Square) — The Louisiana Legislative Auditor has raised concerns over the Department of Energy and Natural Resources Office of Conservation's oversight of the Louisiana Oilfield Restoration Association and its effectiveness in handling orphaned oil and gas wells.

The evaluation focused on the Cooperative Endeavor Agreement established in November 2019, which delegated oilfield restoration association to help fund financial security for well operators and assist in plugging orphaned wells—a growing environmental and financial issue for the state.

As of October 2023, the oilfield restoration association has provided nearly half of Louisiana's well security funds, totaling $157.3 million, aimed at ensuring that orphaned wells do not further proliferate.

However, the audit found several significant gaps in the conservation office's oversight and the CEA terms. Oilfield restoration association's operations, run entirely by Arkus Management Services, lack clear state-mandated financial monitoring or contingency plans for potential shortfalls.

Additionally, the CEA's lack of comprehensive guidelines has allowed oilfield restoration association to retain substantial financial flexibility, including investment income, which the audit suggests could incentivize delays in well-plugging efforts.

The conservation office also permitted oilfield restoration association to increase its retained fees for administrative costs from 20% to 36% after a minimal reserve requirement was met, resulting in an additional $1.1 million retained by oilfield restoration association since mid-2022.

This fee adjustment notably increased Arkus Management's earnings, averaging a 151.5% boost for its owners over three months.

Since oilfield restoration association calculates administrative expenses as a set percentage of annual fees — rather than based on actual costs — any leftover funds can count as profit.

The oilfield restoration association claims to operate as a nonprofit since it pays 100% of these expenses to Arkus as management fees, but acknowledges Arkus itself may retain a profit from these fees.

"LORA and Arkus are owned by the same five individuals, all of whom were Arkus employees during 2020-2023," the report writes.

Despite these changes, the conservation office has not verified whether these increased expenses align with oilfield restoration association's administrative needs, nor has it audited oilfield restoration association's spending patterns.

Furthermore, the conservation office has not ensured that oilfield restoration association prioritized plugging wells it secured that later became orphaned; of the 175 such wells orphaned through 2023, 130 remain unaddressed. Without an audit clause in the CEA, the auditor's office itself is unable to access oilfield restoration association's financial records, thereby limiting comprehensive oversight.

The auditor's report recommends enhanced conservation office monitoring, including tighter controls on oilfield restoration association's spending, stricter prioritization of well-plugging and periodic evaluations of administrative expenses.