Sunday, December 10, 2023

California Bill Requires Companies to Pay for Cleanup of Oil and Gas Wells in Limbo

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The California Legislature recently passed a bill that would give state taxpayers some of the nation’s strongest protections against paying for the cleanup of orphaned oil and gas wells. But Governor Gavin Newsom has not indicated if he will sign it.

AB1167 would require companies that buy idle or low-producing wells — those at high risk of leaving the state — to set aside enough money to cover the full cost of the cleanup. Assemblymember Wendy Carrillo, a Los Angeles Democrat who wrote the bill with the support of the Natural Resources Defense Council and Environment California, said it should “stem the tide” of orphan wells.

Newsom has until Oct. 14 to make a decision. A spokeswoman declined to comment, saying the governor would review the bill “on its merits.” The state Department of Finance released a two-page analysis opposing it.

It will cost more than $180,000 to clean up an average orphan well in California, the state’s U.S. Department of the Interior said in 2021, according to documents obtained by ProPublica through a public records request. This includes cementing the well, removing above ground infrastructure such as pumpjacks and decontaminating the site. But the bonds, which are financial instruments that guarantee payment for the cleanup, cover only a small part of that cost. A ProPublica analysis of state data found that oil and gas companies set aside only about $2,400 per well. (State oil regulators are now reevaluating the companies’ bonds to bring them within current law, without mandating that they cover the full cost of the cleanup.)

When not plugged, many wells leak climate-warming methane, brine and toxins used in the drilling process.

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“This is a setup for disaster,” said Ann Alexander, a senior attorney at the Natural Resources Defense Council.

The bill follows ProPublica reporting on the exodus of oil majors from the state’s declining industry — a selloff last year saw more than 23,000 wells move from Shell and ExxonMobil to the little-known German asset management group called IKAV – and at multibillion-dollar costs. to clean up the industry. ProPublica’s work has been repeatedly cited by the Legislature and the bill’s supporters.

Despite its green reputation, California has a long history of weak oversight of the oil and gas industry, leaving an estimated 5,300 orphan wells. Many are scattered across Los Angeles, complicating redevelopment. Others are spewing methane at large oilfields in Kern County.

Companies have little incentive to plug wells; it would be cheaper to sell or walk away and eliminate the small bonds that the state now requires.

“It’s very easy for them now to offload unproductive oil wells to newer or less resourceful companies that may turn around and go bankrupt and not have the financial capacity to do so. in the cleanup work,” said Laura Deehan, director of Environment California.

The Western States Petroleum Association and California Independent Petroleum Association industry trade groups warned state lawmakers that “this misguided bill will increase the number of orphan oil wells in California.” The organizations argue that requiring bonds covering the entire cost of the cleanup will prevent sales of companies hoping to enter the market. This, in turn, can lead to well owners being stuck with expensive cleanups, causing insolvency and ultimately abandoning the state’s wells.

Dwayne Purvis is a petroleum reservoir engineer who wrote a study that estimated it would cost $21.5 billion to clean up California’s oil industry. He pointed out that the most common type of bond — a surety policy — is like insurance that guarantees a well will be plugged, so oil companies don’t have to cover the entire cost of cleanup money to comply with AB1167. Federal regulators recently found these bonds relatively cheap.

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If that stops companies from buying California wells, Purvis said, then there’s a bigger problem: “It’s admitting — unequivocally but almost inevitably — that the cost of plugging exceeds the value of remaining production,” he told ProPublica via email.

A spokesman for the Western States Petroleum Association did not respond to questions about its claims. The California Independent Petroleum Association did not respond to requests for comment.

In negotiations over the bill, according to people present, trade associations pointed to one example in particular to highlight why the legislation would create more orphan wells — the sale of some of the more of the 750 wells orphaned following the bankruptcy filings of several entities of the Group of Greek companies. The sale, the industry argues, presents an opportunity for wells to be plugged by an oil company, not the state.

However, hundreds of wells remain on the orphan list to this day, but they are now associated with a new company: Team Operating.

Greka’s CEO and Team Operating did not respond to emails seeking comment.

The bill has a potential loophole, experts warn: if the additional bond requirements of the bill apply to wells transferred through shell companies, as is often the case.

The state Department of Finance’s opposition to the bill relies on three arguments.

The agency’s report said major companies with sufficient resources to plug wells are coming to the California market. But research shows that these producers are moving out of state and handing over their aging, unprofitable wells to smaller companies that can’t afford the cleanup.

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Its analysis also suggested that bond underwriting firms “have become reluctant” to do business in California. Purvis said that if these companies believe the situation is too dangerous to warrant cleanup costs being paid, “then California taxpayers probably shouldn’t be giving producers the same credit.”

Ultimately, the report argues that the bill is unnecessary because California regulators already have the authority to recover plugging costs from previous well owners.

While current law gives the state this authority, it only applies to wells transferred after January 1, 1996. Oil drilling in California began in the 1860s, and many thousands of wells were sold before the cut-off. law, which means the state can go after the former operators of the wells.

ProPublica reviewed the state’s list of orphaned wells and found several examples of well cleanups left by taxpayers despite wells being sold after 1996. In those cases, the state did not use the its authority or otherwise fails to secure plugging funds.

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Finance Department analysts directed questions at state oil regulators, which is where most of the report comes from. A spokesman for the California Geologic Energy Management Division said state regulators have gotten money from previous owners on occasion.

But going after the older operators is difficult, said Rob Schuwerk, a former assistant New York attorney and the North American executive director of the energy finance think tank Carbon Tracker Initiative, and the bonds are guaranteed money.

“There is no better substitute for having money,” he said.

Nation World News Desk
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