A pulling unit on an oil well in Utah. Jon G. Fuller/VW Pics/ZUMA
This story was originally published by High Country News and is reproduced here as part of the Climate Desk collaboration.
Where private equity investors make acquisitions, bankruptcies tend to follow. Brands from Radio Shack to Toys R Us went under after being bought by these firms, as did the company that made the Instant Pot, and hundreds of local newspapers endured layoffs and reduced coverage. Now, private equity investors appear to have found a new target: oil and gas companies operating on public land in the Western US.
A new report from Public Citizen, a nonprofit progressive think tank, reveals the industry’s interest in oil and gas extracted from public land in the West (the Private Equity Stakeholder Project co-authored the report). Companies backed by private equity have taken in 78 percent of all federal drilling permits approved in Colorado since 2017, and 50 percent of those in Utah. In total, according to the report, private-equity-backed companies hold approximately $380 million in unplugged oil and gas wells in four Western oil states: Colorado, New Mexico, Utah, and Wyoming.
In general, private equity refers to investors, such as hedge funds or venture capital outfits, that borrow large amounts of money to acquire struggling companies. The newly acquired company is then saddled with that accumulated debt. Meanwhile, the private equity firm tends to repay itself and its investors using fees, shareholder payments, and debt restructuring. These tactics often mean big returns for the private equity fund’s investors.
But since private equity tends to focus on declining industries, this profit-squeezing model can result in the acquired companies going bankrupt. The Public Citizen study noted that private equity firms chew through companies quickly, holding them for an average of five years. And when oil companies go bankrupt, orphaned wells can be left behind to leak methane into the atmosphere, while the costs of plugging them ultimately falls on the public.
“The overall point that we’re trying to make is that private equity’s involvement in Western oil drilling adds a layer of uncertainty because these companies turn over,” said Alan Zibel, a research director at Public Citizen. “They get in and they get out very quickly. So it really starts this chain of selling these companies to more and more potentially irresponsible actors.”
Private equity investment in the oil industry isn’t new. When the pandemic caused energy prices to tank in 2020, nearly 60 percent of the oil companies that declared bankruptcy had private equity backing, according to the Private Equity Stakeholder Project. Energy prices recovered with global consumption and got another boost from the war in Ukraine.
Even so, there’s a documented trend in the past several years of large, publicly traded oil and gas companies offloading their less-desirable assets to private companies with fewer financial resources to pay for cleanup—a trend that fits nicely with the private equity playbook. In the past two years, the Private Equity Stakeholder Project has found that private equity firms spent $25 billion acquiring oil and gas assets from public markets and taking them private.
Some of private equity’s biggest players are getting into the oil and gas game—among them Blackstone, Carlyle Group, Apollo Global Management and KKR—with a noticeable focus on companies in the Western US.
Pumpjacks along the Animas River north of Durango, Colorado.
Luna Anna Archey/High Country News
One such company is Terra Energy, a major driller in western Colorado and owner of several thousand wells and nearly 600 approved federal oil and gas permits since 2017. Terra’s growth in recent years is a result of consolidations and bankruptcies, beginning with a $910 billion acquisition of WPX Energy Rocky Mountain in 2016.
In 2020, Terra scooped up the assets of a bankrupt driller called Ursa Energy. These deals were fueled by a reported $800 million in backing from two major private equity funds. One is Kayne Anderson, a $34 billion Los Angeles-based fund whose executives have been known to boast about investing in renewables, though those investments appear to be heavily outweighed by the firm’s continued interest in oil and gas. Terra’s other backer is Warburg Pincus, led by Timothy Geithner, Treasury secretary under President Barack Obama.
WP’s website describes major cost-cutting measures: “In the years following the acquisition, Terra has managed to hold production flat while driving per-unit lease operating expenses and drilling and completion costs down by approximately 30 percent and 10 percent, respectively.” (Kayne Anderson and Warburg Pincus did not reply to emailed requests for comment).
The report also details how private equity firms have joined the oil and gas industry cycle of passing along rather than plugging under-performing wells. In 2022, High Country News reported on a company named Bonanza Creek, which sold several dozen old, low-producing wells in northwestern Colorado. In financial disclosures, the company acknowledged at one point that those wells had a resale value of zero dollars. Even so, the wells were passed along to a troubled company called K.P. Kauffman.
After shedding its bad assets and emerging from bankruptcy, Bonanza Creek was acquired by a private equity fund and rolled together with another driller to create Civitas Resources, now one of the state’s largest oil companies. Civitas, backed by private-equity firm Kimmeridge Energy Management, recently bought up billions of dollars’ worth of high-value oil and gas assets in Texas. Now, it is looking to sell some of its underperforming Colorado wells, according to the Denver Business Journal.
This is a persistent problem within the industry. Rather than plug their low-performing assets, companies often sell them to less financially solvent operators. Existing regulatory regimes, meanwhile, are unable to force companies to put forward the true cost of cleanup. This is a particular problem on federal public land. A 2019 report by the U.S. Government Accountability Office found that 99 percent of federal oil and gas leases have financial assurance bonds that would be unable to pay for the full cost of cleanup.
In July, the Biden administration proposed substantial increases to the bonds for federal oil and gas operators. But for now, private equity-backed drillers continue to operate on public land with only a fraction of the full cost of cleanup set aside.
Nichole Heil, research and campaign coordinator with the Private Equity Stakeholder Project and one of the study’s authors, said that the standard private equity model—making large, debt-backed investments and moving through companies quickly, all in the name of immediate profit—undercuts efforts to manage public resources responsibly.
If bankruptcies follow, the public could be be left with a hefty price tag. “The fact that the private equity model looks to find outsized profits in a short amount of time doesn’t allow a lot of room for how we think about the plugging of oil and gas wells,” Heil concluded.
