Tony Sanchez’s OneNexus Offers P&A Insurance for Wells

Decommissioning liabilities for wells have long passed from one operator down to the next like a game of hot potato.

OneNexus, billing itself as a decommissioning operator, offers a product akin to a life insurance policy for the well. While not an insurance policy itself, the liability product follows the well as it changes hands, ensuring financing is available when the well is no longer profitable and must be plugged and abandoned (P&A).

The company was launched in June 2021 by Tony Sanchez III, founder and former CEO of E&P Sanchez Energy Corp., which now operates as privately held Mesquite Energy.

“These monies are lockbox secure so future generations know the money is there to P&A.” Tony Sanchez, OneNexus

“As the industry continues to operate, who plugs (the wells), who pays for the plugging becomes an increasingly large problem,” said Sanchez, OneNexus’ CEO and co-founder.

As wells age and production decreases, the wells are frequently sold off to smaller operators.

“When production ends, all that remains is the liability,” Sanchez said.

And without cash flow, operators may be reluctant to spend money on decommissioning.

“This is why you have orphaned wells. Those buyers or owners run out of money, and the well’s not producing anymore and they leave it to rot away in the sun,” he said. “We have to clean up after ourselves and be proactive. And the way to do that is to plan ahead.”

David de Roode, executive advisor to OneNexus said operators “kick the can down the road” when it comes to well P&A liability. He added that they may purchase P&A bonds that may not actually address the P&A obligations for the well in question.

“Operators aren’t excited about meeting those obligations [because] by the time they’re required to P&A a well, it’s no longer generating any income, or not enough for the operator of record to continue operating those wells,” de Roode said.

Even so, he said, those liabilities need to be dealt with.

Decommissioning includes activities like setting plugs, ensuring groundwater aquifers are plugged off, plugging producing zones, capping the well at the surface to prevent residual emissions and purging and flushing all gathering lines and systems.

“That costs money,” Sanchez said.

Like a life insurance policy

OneNexus, founded in 2021, calls itself a decommissioning operator. In Oklahoma, the company has formed a captive — an insurance company solely owned by OneNexus. Munich Re Energy Transition Finance, a wholly-owned subsidiary of AA-rated reinsurance company Munich Re AG, provides backstop capital for decommissioning liability policies.

“The reason why operators aren’t excited about meeting those obligations is by the time they’re required to P&A a well, it’s no longer generating any income, or not enough for the operator of record to continue operating those wells.” David de Roode, OneNexus 

Decommissioning liability policies purchased from OneNexus are similar to life insurance policies in that money can be pulled out of the fund only when a claim is filed, which happens when the well is decommissioned, said Steve England, president of OneNexus Services.

“We’re doing this within an insurance company structure” to guarantee the funding will be there “far into the future,” Sanchez said.

That’s important, he said, because liabilities for a plugged well extend for decades.

And, de Roode said, operators are not actually buying an insurance product; rather, OneNexus is using insurance, which is “a highly regulated mechanism for guaranteeing payment will be made at time of the death of the well.”

He said the product is similar to life insurance and is intended to pay for “burial expenses, aka P&A expenses.”

The structure of the program ensures that the money can only be used for P&A work, not for dividends, stock buybacks, debt repayment or further acquisitions, Sanchez said.

“These monies are lockbox secure so future generations know the money is there to P&A,” Sanchez said.

England said the overall approach pulls together finance, oil and gas operators, insurance, data science and petroleum engineering.

“It took all those skill sets to develop what we’ve developed,” he said.

Once the well is P&A’d, OneNexus takes the title to the wells and sets aside a little more money for those wells to ensure funds are available, should later remediation be required, Sanchez said.

Currently, the product is available for onshore wells in the U.S. and Canada, he said, but the company has been asked to look into providing a similar product for offshore wells.

“It’s a different kind of risk,” he said. “Instead of a lot of small claims, there is a smaller number of larger claims.”

'Incentivized to plug’

Sanchez said the product is intended to encourage timely P&A activity for onshore wells.

“The best time to buy this product is when they are drilling the well. That’s when we can offer the biggest discount to the plugging cost,” he said, noting policies for “older and chronic” wells will cost more. “For all intents and purposes, almost every conceivable P&A cost in the future is covered. They can buy it and put it away and know that funding will be there forever.”

The policy is tied to the well’s API number, and it’s transferrable when the well is sold. On the balance sheet, OneNexus’ assurance product offsets the well’s P&A liability for potential new owners, he said.

“They are incentivized to plug when it’s time, rather than kick the can down the road,” Sanchez said.