London-listed Diversified Energy (LON:DEC) has run into US legislative issues over its alleged failure to cover environmental liabilities.
A group of Democratic politicians in Congress expressed concern over “unsustainable amounts of methane pollution and reports that the company may be severely underestimating the costs of plugging and cleaning up its wells”.
Diversified denied it was failing to provide the guarantees required. Instead, its “ownership and stewardship of mature assets allow us to be part of the solution, and Diversified and its employees are very proud to be doing our part for the energy industry in the United States”.
The company also criticised a 2021 story from Bloomberg. The article “broadly speculated and inaccurately described numerous items, including how the company addresses emissions and well retirement”.
The letter from the four Democratic politicians said Diversified owned more than 70,000 wells, the largest single owner in the US.
“We are concerned that your company may be vastly underestimating well cleanup costs,” wrote the four, to Diversified CEO Rusty Hutson. “Such an underestimation would threaten Diversified Energy’s ability to cover environmental liabilities associated with cleaning up its oil and gas wells, which could create thousands of orphaned, methane-leaking wells and undermine efforts to respond to the worsening climate crisis.”
The four politicans are Frank Pallone, Jr. (D-NJ), Diana DeGette (D-CO), Kathy Castor (D-FL) and Paul Tonko (D-NY).
The letter questioned whether Diversified’s Smarter Asset Management could do what the company claims, in producing oil and gas from marginal wells, with fewer methane leaks.
CNX Resources sold a package of wells to Diversified in 2018. CNX put remediation at $197 million. Diversified, just $14mn.
Citing its analysis, the letter said it was “highly unlikely” that Diversified would “have adequate funds to clean up all of its marginal wells when they should be retired”. Failing to account for costs on these wells could lead to thousands of orphaned wells.
Hutson has said the company expected to be able to produce from its wells for 50 years. Such a move would push back decommissioning substantially, reducing liabilities. Because of this reassessment of how long the wells could produce, Diversified was able to declare a profit on its purchase immediately.
Diversified is also facing a court case claiming the sale of ageing wells from EQT, in 2018, was fraudulent. The case argued that landowners will be left holding the expense of decommissioning.
The letter asked Diversified to answer a number of questions by January 3. These include the company’s Smarter Asset Management programme, well visits, methane monitoring and more. What methodology the company uses to estimate the remediation costs of wells.
Diversified recently began trading on the NYSE. In the US, Diversified’s share price fell around 17% before recovering some losses, down around 5%. In UK trading, Diversifed is down around 15% following the US announcement.
The company was producing around 134,000 barrels of oil equivalent per day in September. In 2022, it decommissioned 214 wells and expects to do around the same this year.
The Ohio River Valley Institute, in a report earlier this year, said Diversified’s total liabilities exceeded its total assets. As such, the NGO said, the company was “technically insolvent”.