UNFINISHED BUSINESS  

Bill No: SB 551

Author: Jackson (D)

Amended: 9/5/19

Vote: 21

SENATE NATURAL RES. & WATER COMMITTEE: 6-3, 4/23/19

AYES: Stern, Allen, Hertzberg, Hueso, Jackson, Monning

NOES: Jones, Borgeas, Caballero

SENATE APPROPRIATIONS COMMITTEE: 4-2, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Bates, Jones

SENATE FLOOR: 22-13, 5/29/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Dodd, Durazo, Hertzberg, Hill, Jackson, Leyva, McGuire, Mitchell, Monning, Portantino, Roth, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

NOES: Bates, Borgeas, Caballero, Chang, Galgiani, Glazer, Grove, Hurtado, Jones, Moorlach, Morrell, Nielsen, Stone

NO VOTE RECORDED: Hueso, Pan, Rubio

ASSEMBLY FLOOR: 50-17, 9/10/19 - See last page for vote

SUBJECT: Oil and gas: decommissioning, cleanup, and remediation: costs

SOURCE: Author

DIGEST:

This bill phases in a requirement that oil and gas well operators provide estimates of the cost to plug and abandon wells and decommission attendant oil and gas production facilities, as specified, and requires the Division of Oil, Gas, and Geothermal Resources to establish criteria for these estimates and perform certain related inspections, among other things.

Assembly Amendments

replace the proposed mechanism to ensure full cost recovery for the state with the requirements that operators provide estimates regularly, as specified, that the Division of Oil, Gas, and Geothermal Resources establish criteria for the estimates, perform certain related inspections and incorporate the results into legislative reports, as specified.

ANALYSIS:

Existing law:

1. Establishes the Division of Oil, Gas, and Geothermal Resources (division) in the Department of Conservation (department). The division is the state’s oil and gas well regulator. The State Oil and Gas Supervisor (supervisor) leads the division.
   1. The supervisor has broad authority to supervise the drilling, operation, maintenance, and abandonment of the state’s oil and gas wells, among other things, so as to prevent, as far as possible, damage to life, health, property, and natural resources, and certain other detrimental impacts. (Public Resources Code (PRC) §3106)
2. Requires an operator who engages in the drilling, redrilling, deepening, or in any alteration permanently altering the casing, of a well, or who acquires a well, to file with the supervisor an individual indemnity bond for each well so drilled, redrilled, deepened, permanently altered, or acquired in specified amounts depending upon the depth of the well. (PRC §3204)
3. Authorizes an operator who engages in the drilling, redrilling, deepening, or in any operation permanently altering the casing, of 20 or more wells at any time, to file with the supervisor one blanket indemnity bond to cover all the operations in any of its wells in the state, in a specified amount depending upon the total number of wells, in lieu of the requirement for an individual indemnity bond for each operation. (PRC §3205)
4. Requires the supervisor, by July 1, 2020, to estimate the cost of decommissioning of offshore oil and gas wells under the division’s jurisdiction, as specified, in coordination with the State Lands Commission. (PRC §3205.6)
5. Authorizes the division to impose a life-of-facility bond in certain circumstances of an amount to cover, among other things, the decommissioning of a production facility. (PRC §3270.4)
6. Defines an idle well as any well that has had 24 consecutive months of not producing, oil, natural gas, or water, as specified. A long-term idle well is one that any been idle for eight or more years. (PRC §3008)
7. Defines an idle-deserted well and a deserted facility to be a well or production facility that has no operator responsible for its plugging and abandonment, or decommissioning, as applicable, and authorizes the supervisor to order plugging and abandonment, or decommissioning of an idle-deserted well or facility, as specified. (PRC §3251, PRC §3255) An orphan well has a similar definition to an idle-deserted well. (PRC §3206.3) Idle wells are more likely to become orphan wells.
8. Requires the department to report on October 1, 2020, to the Legislature on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities remaining, the estimated costs of abandoning or decommissioning those wells and facilities, and a timeline for future abandonment and decommissioning of those wells and facilities with a specific schedule of goals. (PRC §3258)
9. Requires the supervisor, on or before July 1, 2019, and annually thereafter until July 1, 2026, to prepare and transmit to the Legislature a comprehensive report containing specified information on the status of idle and long-term idle wells for the preceding calendar year. (PRC §3206.3)
10. Provides that a person who fails to comply with requirements relating to the regulation of oil or gas operations, as specified, is potentially subject to civil and criminal penalties (PRC §3236, §3236.5)

This bill phases in a requirement that oil and gas well operators provide estimates of the cost to plug and abandon wells and decommission attendant oil and gas production facilities, as specified, and requires the division to establish criteria for these estimates and perform certain related inspections, among other things. Specifically, this bill:

1. Requires the division, starting July 1, 2022, to require each operator of an oil or gas well to submit a report that demonstrates the operator’s total liability to plug and abandon all wells and decommission all attendant production facilities, including remediation, as specified.
   1. The supervisor shall set a staggered schedule for compliance to ensure that some reporting starts immediately, one-half have submitted their initial report by July 1, 2024, and all initial reporting is completed by July 1, 2026.
   2. Followup reporting is required no less than once every five years after the initial report.
   3. The supervisor may request an operator to submit a revised report if the supervisor determines that the operator has not provided appropriate or credible estimates, as specified.
2. Requires the division to develop criteria for the operator to use for estimating costs, as specified.
3. Imposes certain requirements on operators in preparing the reports, as specified.
4. Requires the supervisor to conduct inspections of production facilities attendant to long-term idle wells, as specified, and to add certain information stemming from these inspection in the annual comprehensive report on the status of idle and long-term idle wells for the report due by July 1, 2021.
5. Delays the required legislative report on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities remaining, and other related information six months to April 1, 2021.
   1. The division is required to conduct field inspections, as specified, to inform the report and that are useful to prioritizing the wells and facilities with respect to the report’s required goals.
6. Establishes a state-mandated local program and provides for no reimbursement, as specified.

Background

Over a decade ago, the Legislature substantially strengthened and clarified the division’s authority to regulate oil and gas production facilities (AB 1960, Nava, Chapter 562, Statutes of 2008, see particularly PRC §§3270 et seq.).

Bankruptcies in 2017 left the state largely responsible for the decommissioning of Platform Holly in state waters off the coast of Goleta (Santa Barbara County) and Rincon Island just off Mussel Shoals (Ventura County). The State Lands Commission has received over $108 million net from the state’s General Fund to pay for the first phase of decommissioning these facilities. Infrastructure and well bonding requirements, additional funds from the operators or their successor entities and funds available from previous operators are insufficient to cover all of the state’s costs for maintaining safe operations prior to decommissioning. Additional requests for state funds on the order of tens of millions of dollars – if not more – are expected in two years to further the decommissioning effort.

In response to the two bankruptcies, SB 1147 (Hertzberg, Chapter 607, Statutes of 2018) required the supervisor and the State Lands Commission working in coordination to take certain actions to help ensure the state will not have to pay for any additional offshore oil and gas well and associated infrastructure decommissioning in the event of additional operator bankruptcies.

The division has several legislatively-mandated requirements to determine expected decommissioning and related costs. As follows:

• The division is required to issue, on or by July 1, 2019, the first of an annual report regarding the status of the recently revised idle well program, including estimated costs for the plugging and abandonment of orphan wells. (This report is not yet public.)
• The division will issue the first of two reports regarding hazardous wells and facilities – including estimated costs for plugging and abandonment of wells and decommissioning of facilities on October 1, 2020. (This deadline is delayed six months by this bill to allow the first of the required field inspections to be incorporated into the report.)
• The division by July 1, 2020, will report on the likely costs for decommissioning offshore wells and, if necessary, to implement a schedule to reach compliance should raising the bond amounts be necessary.

Comments

Funding for decommissioning abandoned infrastructure likely insufficient. Despite the temporary increase to $3 million annually (PRC §3258), it is likely that the current funding for plugging and abandonment of idle-deserted and hazardous wells is insufficient. The costs for plugging and abandonment of hazardous wells can be highly variable and the scale of the issue may not be fully known. The costs per well for plugging and abandonment can vary from a few thousand dollars to up to a million dollars or more. For example, the recent plugging and abandonment of two wells on Firmin Street in a residential area of Los Angeles cost about $2 million for two wells. The reports required pursuant to SB 724 should provide estimates in coming years.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Assembly Appropriations Committee:

• First-year the division cost of $3.7 million, second-year costs of $3.4 million and annual ongoing costs of $3 million (Oil, Gas, and Geothermal Administrative Fund) for 17 permanent staff changes to the Well Statewide Tracking and Reporting System, a centralized database developed to improve record-keeping, help run operations and meet recent legislative requirements.
• All costs will be paid by increased assessments on oil and gas operators.

SUPPORT: (Verified 9/10/19)

Audubon California

Azul

California Coastkeeper Alliance

California League of Conservation Voters

Center for Biological Diversity

County of Santa Barbara

Environment California

Environmental Defense Center

Environmental Working Group

Natural Resources Defense Council

San Francisco Baykeeper

Sierra Club California

OPPOSITION: (Verified 9/11/19)

None received

ARGUMENTS IN SUPPORT: According to the author, “[a]s California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $150 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 15,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the Division of Oil, Gas, and Geothermal Recovery to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.”

ASSEMBLY FLOOR: 50-17, 9/10/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Cunningham, Eggman, Frazier, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gloria, Gonzalez, Holden, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Reyes, Luz Rivas, Robert Rivas, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Diep, Flora, Fong, Gallagher, Kiley, Lackey, Mathis, Melendez, Obernolte, Patterson, Salas, Voepel, Waldron

NO VOTE RECORDED: Arambula, Cooper, Daly, Gipson, Gray, Grayson, Irwin, Mayes, Medina, Ramos, Rodriguez, Blanca Rubio

Prepared by: Katharine Moore / N.R. & W. / (916) 651-4116

9/11/19 9:45:47

**** END ****

SENATE THIRD READING

STR Bill Id:SB 551

Author:(Jackson)

As Amended Ver:September 5, 2019

Majority vote

SUMMARY:

Requires, commencing July 1, 2022, each operator of an oil and gas well to submit a report with specified criteria to the Division of Oil, Gas, and Geothermal Resources (DOGGR) that demonstrated the operator's total liability to plug and abandon all wells and to decommission all attendant production facilities, including site remediation, on a schedule determined by the Oil and Gas Supervisor (Supervisor). Adds criteria to an existing report on the status of idle and long-term idle wells and delays the deadline for a report on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities.

Major Provisions

1. Requires, commencing July 1, 2022, each operator of an oil and gas well to submit a report with specified criteria to DOGGR that demonstrated the operator's total liability to plug and abandon all wells and to decommission all attendant production facilities, including site remediation, on a schedule determined by the Supervisor.
2. Requires DOGGR to conduct inspections of production facilities attendant to long-term idle wells to ensure compliance with the relevant laws.
3. Delays from October 1, 2020 to April 1, 2021 the deadline for DOOGR to provide a report to the Legislature on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities.

COMMENTS:

1. Idle wells. DOGGR has identified more than 2,000 potential orphan wells that require further investigation. Many of these are "buried-idle" wells with antiquated, vague, or nonexistent records below densely-built and populated urban areas in southern California. Some of these wells may never result in problems or may be remediated as a condition of permitting new construction projects as downtown Los Angeles and other areas are redeveloped. However, with so many wells, some dating back to the turn of the last century, it is probable that some will present health or safety concerns. Just one or two in any given year in an urban environment has the potential to consume DOGGR's entire hazardous deserted idle well budget, leaving it unable to plug more than a few orphan wells every year throughout the entire state. There are approximately 28,000 idle oil wells in the state, nearly a quarter of which have not produced oil or gas in over 25 years. An idle oil well can become an orphan well if the operator goes out of business or can't be located. AB 2729 (Williams), Chapter 272, Statutes of 2016, made various changes to the laws governing idle wells including increased fees, improved idle well management plans, and additional testing regulations. These changes create pressures for operators to reduce their stock of idle wells. According to DOGGR, last year 1,234 idle wells were plugged and abandoned. However, there is still significant potential state liability because operators' indemnity bonds are insufficient to cover the cost of plugging and abandoning the number of wells covered under the bond.
2. Production facilities. After a well produces oil and gas, the petroleum goes through a production facility comprised of equipment, tanks, pressure vessels, and pipelines. The equipment and systems prepare the oil and gas for sale to refineries or gas utilities. DOGGR's Pipelines and Facilities unit regulates this surface equipment to prevent damage to public health, public safety, and environmental resources. The Pipelines and Facilities unit ensures that operations, maintenance, and removal or abandonment of oil and gas production infrastructure are in compliance with applicable laws and regulations. In general, pipelines within an oil field are regulated by DOGGR; the State Fire Marshal has jurisdiction over certain lines. The Supervisor has the authority to order the decommissioning of attendant production facilities when a well is abandoned and operators may use their indemnity bonds to decommission production facilities. DOGGR's regulations require the decommissioning of related production facilities for an abandoned well unless an exception is granted. DOGGR also has very limited authority to require an additional indemnity bond for production facilities.

According to the Author:

As California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $150 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 15,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need DOGGR to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.

Arguments in Support:

The County of Santa Barbara, in support of a prior version this bill, states as the State meets targets to decarbonize its economy over the next several decades, the state will be faced with the significant challenge of infrastructure that remains from former oil & gas production. While the state and public presume that operators of oil [and] gas operations bear the ultimate financial responsibility for decommissioning wells, removing infrastructure, and remediating sites, in several important cases so far, California taxpayers are bearing considerable costs for removing major infrastructure and remediating sites.

Arguments in Opposition:

None received

FISCAL COMMENTS:

According to the Assembly Appropriations Committee:

1. First-year DOGGR cost of $1.8 million ongoing costs of $1.5 million (Oil, Gas, and Geothermal Administrative Fund) for eight permanent staff changes to the Well Statewide Tracking and Reporting System (WellSTAR), a centralized database developed to improve record-keeping, help run operations and meet recent legislative requirements.
2. All costs will be paid by increased assessments on oil and gas operators.

VOTES:

SENATE FLOOR: 22-13-3

YES: Allen, Archuleta, Atkins, Beall, Bradford, Dodd, Durazo, Hertzberg, Hill, Jackson, Leyva, McGuire, Mitchell, Monning, Portantino, Roth, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

NO: Bates, Borgeas, Caballero, Chang, Galgiani, Glazer, Grove, Hurtado, Jones, Moorlach, Morrell, Nielsen, Stone

ABS, ABST OR NV: Hueso, Pan, Rubio

ASM NATURAL RESOURCES: 8-3-0

YES: Friedman, Chau, Eggman, Cristina Garcia, Limón, McCarty, Muratsuchi, Mark Stone

NO: Flora, Mathis, Fong

ASM APPROPRIATIONS: 13-5-0

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

UPDATED:

VERSION: September 5, 2019

CONSULTANT: Michael Jarred / NAT. RES. / (916) 319-2092 FN: 0001968

SENATE THIRD READING

STR Bill Id:SB 551

Author:(Jackson)

As Amended Ver:September 3, 2019

Majority vote

SUMMARY:

Requires, commencing July 1, 2022, each operator of an oil and gas well to submit a report with specified criteria to the Division of Oil, Gas, and Geothermal Resources (DOGGR) that demonstrated the operator's total liability to plug and abandon all wells and to decommission all attendant production facilities, including site restoration, on a schedule determined by the Oil and Gas Supervisor (Supervisor). Adds criteria to an existing report on the status of idle and long-term idle wells and delays the deadline for a report on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities.

Major Provisions

1. Requires, commencing July 1, 2022, each operator of an oil and gas well to submit a report with specified criteria to DOGGR that demonstrated the operator's total liability to plug and abandon all wells and to decommission all attendant production facilities, including site restoration, on a schedule determined by the Supervisor.
2. Requires DOGGR to conduct inspections of production facilities attendant to long-term idle wells to ensure compliance with the relevant laws.
3. Delays from October 1, 2020 to April 1, 2021 the deadline for DOOGR to provide a report to the Legislature on the number of hazardous wells, idle-deserted wells, deserted facilities, and hazardous facilities.

COMMENTS:

1. Idle wells. DOGGR has identified more than 2,000 potential orphan wells that require further investigation. Many of these are "buried-idle" wells with antiquated, vague, or nonexistent records below densely-built and populated urban areas in southern California. Some of these wells may never result in problems or may be remediated as a condition of permitting new construction projects as downtown Los Angeles and other areas are redeveloped. However, with so many wells, some dating back to the turn of the last century, it is probable that some will present health or safety concerns. Just one or two in any given year in an urban environment has the potential to consume DOGGR's entire hazardous deserted idle well budget, leaving it unable to plug more than a few orphan wells every year throughout the entire state. There are approximately 28,000 idle oil wells in the state, nearly a quarter of which have not produced oil or gas in over 25 years. An idle oil well can become an orphan well if the operator goes out of business or can't be located. AB 2729 (Williams), Chapter 272, Statutes of 2016, made various changes to the laws governing idle wells including increased fees, improved idle well management plans, and additional testing regulations. These changes create pressures for operators to reduce their stock of idle wells. According to DOGGR, last year 1,234 idle wells were plugged and abandoned. However, there is still significant potential state liability because operators' indemnity bonds are insufficient to cover the cost of plugging and abandoning the number of wells covered under the bond.
2. Production facilities. After a well produces oil and gas, the petroleum goes through a production facility comprised of equipment, tanks, pressure vessels, and pipelines. The equipment and systems prepare the oil and gas for sale to refineries or gas utilities. DOGGR's Pipelines and Facilities unit regulates this surface equipment to prevent damage to public health, public safety, and environmental resources. The Pipelines and Facilities unit ensures that operations, maintenance, and removal or abandonment of oil and gas production infrastructure are in compliance with applicable laws and regulations. In general, pipelines within an oil field are regulated by DOGGR; the State Fire Marshal has jurisdiction over certain lines. The Supervisor has the authority to order the decommissioning of attendant production facilities when a well is abandoned and operators may use their indemnity bonds to decommission production facilities. DOGGR's regulations require the decommissioning of related production facilities for an abandoned well unless an exception is granted. DOGGR also has very limited authority to require an additional indemnity bond for production facilities.

According to the Author:

As California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $150 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 15,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the Division of Oil, Gas, and Geothermal Recovery to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.

Arguments in Support:

The County of Santa Barbara, in support of a prior version this bill, states as the State meets targets to decarbonize its economy over the next several decades, the state will be faced with the significant challenge of infrastructure that remains from former oil & gas production. While the state and public presume that operators of oil & gas operations bear the ultimate financial responsibility for decommissioning wells, removing infrastructure, and remediating sites, in several important cases so far, California taxpayers are bearing considerable costs for removing major infrastructure and remediating sites.

Arguments in Opposition:

The Western States Petroleum Association (WSPA), in opposition to a prior version of SB 551, states the bill would impose an unnecessary bureaucratic burden on DOGGR and industry that will only provide highly speculative data with no real benefit to the state. This bill additionally fails to acknowledge the robust legal and program requirements currently in place that ensure operators fulfill their remediation obligations at an oil and gas facility's end of life.

FISCAL COMMENTS:

According to the Assembly Appropriations Committee:

1. First-year DOGGR cost of $1.8 million ongoing costs of $1.5 million (Oil, Gas, and Geothermal Administrative Fund) for 8 permanent staff changes to the Well Statewide Tracking and Reporting System (WellSTAR), a centralized database developed to improve record-keeping, help run operations and meet recent legislative requirements.
2. All costs will be paid by increased assessments on oil and gas operators.

VOTES:

SENATE FLOOR: 22-13-3

YES: Allen, Archuleta, Atkins, Beall, Bradford, Dodd, Durazo, Hertzberg, Hill, Jackson, Leyva, McGuire, Mitchell, Monning, Portantino, Roth, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

NO: Bates, Borgeas, Caballero, Chang, Galgiani, Glazer, Grove, Hurtado, Jones, Moorlach, Morrell, Nielsen, Stone

ABS, ABST OR NV: Hueso, Pan, Rubio

ASM NATURAL RESOURCES: 8-3-0

YES: Friedman, Chau, Eggman, Cristina Garcia, Limón, McCarty, Muratsuchi, Mark Stone

NO: Flora, Mathis, Fong

ASM APPROPRIATIONS: 13-5-0

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

UPDATED:

VERSION: September 3, 2019

CONSULTANT: Michael Jarred / NAT. RES. / (916) 319-2092 FN: 0001806

Date of Hearing: August 21, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 551

Author:(Jackson) – As Amended Ver:August 12, 2019

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill requires each oil and gas operator to report to the Division of Oil, Gas, and Geothermal Resources (DOGGR) the estimated cost to plug all of the operator’s wells and decommission associated production facilities and show how these liabilities have been addressed in the operator’s financial accounting. 

This bill also requires DOGGR to conduct additional inspections of oil and production operations associated with long-term idle wells and include the findings of those inspections in a report to the Legislature due April 1, 2021.

FISCAL EFFECT:

First-year DOGGR cost of $3.7 million, second-year costs of $3.4 million and annual ongoing costs of $3 million (Oil, Gas, and Geothermal Administrative Fund) for 17 permanent staff changes to the Well Statewide Tracking and Reporting System (WellSTAR), a centralized database developed to improve record-keeping, help run operations and meet recent legislative requirements.

All costs will be paid by increased assessments on oil and gas operators.

COMMENTS:

1. Rationale. DOGGR has identified more than 2,000 potential orphan wells that require further investigation. Many of these are “buried-idle” wells with antiquated, vague, or nonexistent records below densely built and populated urban areas. Some of these wells may never result in problems or may be remediated as a condition of permitting new construction projects as areas are redeveloped. However, with so many wells, some dating back to the turn of the last century, it is likely some will present health or safety concerns.

According to DOGGR, last year 1,234 idle wells were plugged and abandoned. Nonetheless, there is still significant potential state liability because operators’ indemnity bonds are insufficient to cover the cost of plugging and abandoning the number of wells covered under the bonds.

According to the author, “We need DOGGR to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.”

This bill begins that process.

1. Related Legislation. AB 1057 (Limón) authorizes the DOGGR supervisor to require an operator to provide an additional amount of security in an amount not to exceed the reasonable costs of plugging and abandoning all of the operator's wells. This bill is pending in the Senate Appropriations Committee.

Analysis Prepared by: Jennifer Galehouse / APPR. / (916) 319-2081

Date of Hearing: July 8, 2019

ASSEMBLY COMMITTEE ON NATURAL RESOURCES

Laura Friedman, Chair

SBPCA Bill Id:SB 551

Author:(Jackson) – As Amended Ver:May 17, 2019

SENATE VOTE: 22-13

SUBJECT: Oil and gas: decommissioning, cleanup, and remediation: costs

SUMMARY: Requires the Division of Oil, Gas, and Geothermal Resources (DOGGR) to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry and within DOGGR regulatory jurisdiction.

EXISTING LAW:

1. Requires the State’s Oil and Gas Supervisor (Supervisor) of DOGGR to supervise the drilling, operation, maintenance, and abandonment of wells and the operation, maintenance, and removal or abandonment of tanks and facilities attendant to oil and gas production.
   
2. Defines a “production facility” to mean any equipment attendant to oil and gas production or injection operations including, but not limited to, tanks, flowlines, headers, gathering lines, wellheads, heater treaters, pumps, valves, compressors, injection equipment, and pipelines that are not under the jurisdiction of the State Fire Marshal.
   
3. Requires that proper abandonment of wells include the plugging of the well, decommissioning the attendant production facilities of the well, or both, if determined necessary by the Supervisor.
   
4. Authorizes the Supervisor or district deputy to order the decommissioning of a production facility.
   
5. Authorizes the Supervisor to require a life-of-well or life-of-production facility bond for an operator with a history of violations or with outstanding liabilities to the state in an amount adequate to ensure all of the following:
   
   1. The proper plugging and abandonment of each well;
      
   2. The safe decommissioning of each production facility; and,
      
   3. The financing of spill response and incident cleanup.
      
6. Requires an operator of one or more wells located on submerged lands under ocean waters within the jurisdiction of this state to file with the Supervisor a blanket indemnity bond for $1 million to cover all his or her operations in drilling, redrilling, deepening, or permanently altering the casing in any of his or her wells located on those submerged lands.
   
7. Requires, in addition to the bond mentioned above, an operator of one or more wells that are located on tide or submerged lands within the jurisdiction of this state to provide an additional amount of security covering the full costs of plugging and abandoning all of the operator’s wells. Provides the operator with an opportunity to submit a cost estimate for decommissioning for consideration by the Supervisor.
   
8. Requires, on or before January 1, 2020, the Supervisor to do both of the following:
   
   1. Evaluate and estimate the costs associated with the decommissioning, including plugging and abandonment of the offshore oil and gas wells under its jurisdiction.
   2. If necessary develop a schedule to increase the bond amounts or other financial surety provided by an operator of an offshore oil or gas well to ensure sufficient moneys are available to the state to decommission the well if no other entity is responsible for those decommissioning costs.
   3. Coordinate with State Lands Commission to ensure the actions required by this bill are not duplicative and consistent with the current process of setting and adjusting bonds and securities.
9. Requires the Supervisor to submit to the Legislature a comprehensive report on the status of idle and long-term idle wells each year.

THIS BILL:

1. Requires DOGGR to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry and within DOGGR’s regulatory jurisdiction.
2. Authorizes the mechanism to be a standard formula or model from which the cost of decommissioning, cleanup, and remediation of infrastructure may be expeditiously assessed.
3. Requires the mechanism to be able to project the cost of decommissioning, cleanup, and remediation of infrastructure at the time of the expected decommission of the infrastructure or, if an expected date of decommissioning cannot be assigned, at an estimated date of decommissioning that is not later than 30 years from the date when the assessment is made.

FISCAL EFFECT: According to the Senate Appropriations Committee, ongoing annual special fund costs (Oil and Gas Administrative Fund) of around $1-2 million for DOGGR to develop the cost mechanism required by this bill.

COMMENTS:

1. Author’s statement:

As California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $150 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 15,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the Division of Oil, Gas, and Geothermal Recovery to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.

1. Background. California has a long history of oil production. In the early 1900s, the Los Angeles Basin produced one-quarter of the world’s oil. In 2017, 174 million barrels of oil were produced in California. A large portion of the oil produced in California is mixed with significant amounts of water, which is called produced water. That water is separated from the oil by the operator. Produced water can be treated and reinjected or disposed of either through underground injection or discharged into ponds or surface water. In limited cases, produced water is treated and used for irrigation. Oil production in California has been augmented by the application of several technologies, including water flooding, cyclic steaming, steam flooding, acidizing stimulation, and hydraulic fracturing.
2. Idle wells. DOGGR has identified more than 2,000 potential orphan wells that require further investigation. Many of these are “buried-idle” wells with antiquated, vague, or nonexistent records below densely-built and populated urban areas in southern California. Some of these wells may never result in problems or may be remediated as a condition of permitting new construction projects as downtown Los Angeles and other areas are redeveloped. However, with so many wells, some dating back to the turn of the last century, it is probable that some will present health or safety concerns. Just one or two in any given year in an urban environment has the potential to consume DOGGR’s entire hazardous deserted idle well budget, leaving it unable to plug more than a few orphan wells every year throughout the entire state. There are approximately 28,000 idle oil wells in the state, nearly a quarter of which have not produced oil or gas in over 25 years. An idle oil well can become an orphan well if the operator goes out of business or can’t be located. AB 2729 (Williams), Chapter 272, Statutes of 2016, made various changes to the laws governing idle wells including increased fees, improved idle well management plans, and additional testing regulations. These changes create pressures for operators to reduce their stock of idle wells. According to DOGGR, last year 1,234 idle wells were plugged and abandoned. However, there is still significant potential state liability because operators’ indemnity bonds are insufficient to cover the cost of plugging and abandoning the number of wells covered under the bond.
3. Production facilities. After a well produces oil and gas, the petroleum goes through a production facility comprised of equipment, tanks, pressure vessels, and pipelines. The equipment and systems prepare the oil and gas for sale to refineries or gas utilities. DOGGR’s Pipelines and Facilities unit regulates this surface equipment to prevent damage to public health, public safety, and environmental resources. The Pipelines and Facilities unit ensures that operations, maintenance, and removal or abandonment of oil and gas production infrastructure are in compliance with applicable laws and regulations. In general, pipelines within an oil field are regulated by DOGGR; the State Fire Marshal has jurisdiction over certain lines. The Supervisor has the authority to order the decommissioning of attendant production facilities when a well is abandoned and operators may use their indemnity bonds to decommission production facilities. DOGGR’s regulations require the decommissioning of related production facilities for an abandoned well unless an exception is granted. DOGGR also has very limited authority to require an additional indemnity bond for production facilities. This bill does not use the term production facility. However, the infrastructure it identifies is almost identical.
4. SB 551. SB 551 requires DOGGR to develop a mechanism to assess the full cost of decommissioning specified infrastructure. The bill allows this mechanism to be a standard formula or model. DOGGR is already required to do an inventory of wells and production facilities and report on the costs of plugging and abandoning them. This will provide actual costs for many real world examples that could be extrapolated to other real world examples. Why do we need a mechanism or model to estimate the costs of oil and gas liabilities when DOGGR is working on actual projects and will be reporting out actual costs? This bill also requires DOGGR to estimate a date when expected decommissioning will occur. These estimates may not be very accurate unless the operator is required to follow them. Overall, this bill uses odd terminology and does not seem to provide actionable information. There are liability issues associated with oil wells and production facilities that should be addressed. The author and committee may wish to, instead of pursuing the current approach in the bill, consider the following amendments:
   1. Require, on and after July 1, 2022 operators to begin submitting reports to the Supervisor to demonstrate the operator’s total liability. Require each operator to submit the report at least every five years;
   2. Require DOGGR to develop criteria for estimating costs to plug and abandon wells and decommission production facilities;
   3. Authorize penalties for failure to submit the report;
   4. Require DOGGR to conduct inspections of hazardous wells, specified idle and deserted wells, and production facilities to prioritize wells and attendant production facilities for DOGGR’s specific schedule of abandonment and decommissioning goals.
5. Related legislation.

AB 1057 (Limón) authorizes the Supervisor to require an operator to provide an additional amount of security in an amount not to exceed the reasonable costs of plugging and abandoning all of the operator's wells. This bill eliminates the sunset date on the Oil and Gas Environmental Remediation Account. This bill is awaiting hearing in the Senate Natural Resource and Water Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Audubon California
Azul
California Coastkeeper Alliance
California League of Conservation Voters
County of Santa Barbara
Environment California
Environmental Working Group
Natural Resources Defense Council
San Francisco Baykeeper
Sierra Club California

Opposition

Western States Petroleum Association

Analysis Prepared by: Michael Jarred / NAT. RES. /

Date of Hearing: June 24, 2019

ASSEMBLY COMMITTEE ON NATURAL RESOURCES

Laura Friedman, Chair

SBPCA Bill Id:SB 551

Author:(Jackson) – As Amended Ver:May 17, 2019

SENATE VOTE: 22-13

SUBJECT: Oil and gas: decommissioning, cleanup, and remediation: costs

SUMMARY: Requires the Division of Oil, Gas, and Geothermal Resources (DOGGR) to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry and within DOGGR regulatory jurisdiction.

EXISTING LAW:

1. Requires the State’s Oil and Gas Supervisor (Supervisor) of DOGGR to supervise the drilling, operation, maintenance, and abandonment of wells and the operation, maintenance, and removal or abandonment of tanks and facilities attendant to oil and gas production.
   
2. Defines a “production facility” to mean any equipment attendant to oil and gas production or injection operations including, but not limited to, tanks, flowlines, headers, gathering lines, wellheads, heater treaters, pumps, valves, compressors, injection equipment, and pipelines that are not under the jurisdiction of the State Fire Marshal.
   
3. Requires that proper abandonment of wells include the plugging of the well, decommissioning the attendant production facilities of the well, or both, if determined necessary by the Supervisor.
   
4. Authorizes the Supervisor or district deputy to order the decommissioning of a production facility.
   
5. Authorizes the Supervisor to require a life-of-well or life-of-production facility bond for an operator with a history of violations or with outstanding liabilities to the state in an amount adequate to ensure all of the following:
   
   1. The proper plugging and abandonment of each well;
      
   2. The safe decommissioning of each production facility; and,
      
   3. The financing of spill response and incident cleanup.
      
6. Requires an operator of one or more wells located on submerged lands under ocean waters within the jurisdiction of this state to file with the Supervisor a blanket indemnity bond for $1 million to cover all his or her operations in drilling, redrilling, deepening, or permanently altering the casing in any of his or her wells located on those submerged lands.
   
7. Requires, in addition to the bond mentioned above, an operator of one or more wells that are located on tide or submerged lands within the jurisdiction of this state to provide an additional amount of security covering the full costs of plugging and abandoning all of the operator’s wells. Provides the operator with an opportunity to submit a cost estimate for decommissioning for consideration by the Supervisor.
   
8. Requires, on or before January 1, 2020, the Supervisor to do both of the following:
   
   1. Evaluate and estimate the costs associated with the decommissioning, including plugging and abandonment of the offshore oil and gas wells under its jurisdiction.
   2. If necessary develop a schedule to increase the bond amounts or other financial surety provided by an operator of an offshore oil or gas well to ensure sufficient moneys are available to the state to decommission the well if no other entity is responsible for those decommissioning costs.
   3. Coordinate with State Lands Commission to ensure the actions required by this bill are not duplicative and consistent with the current process of setting and adjusting bonds and securities.
9. Requires the Supervisor to submit to the Legislature a comprehensive report on the status of idle and long-term idle wells each year.

THIS BILL:

1. Requires DOGGR to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry and within DOGGR’s regulatory jurisdiction.
2. Authorizes the mechanism to be a standard formula or model from which the cost of decommissioning, cleanup, and remediation of infrastructure may be expeditiously assessed.
3. Requires the mechanism to be able to project the cost of decommissioning, cleanup, and remediation of infrastructure at the time of the expected decommission of the infrastructure or, if an expected date of decommissioning cannot be assigned, at an estimated date of decommissioning that is not later than 30 years from the date when the assessment is made.

FISCAL EFFECT: According to the Senate Appropriations Committee, ongoing annual special fund costs (Oil and Gas Administrative Fund) of around $1-2 million for DOGGR to develop the cost mechanism required by this bill.

COMMENTS:

1. Author’s statement:

As California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $150 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 15,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the Division of Oil, Gas, and Geothermal Recovery to begin assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.

1. Background. California has a long history of oil production. In the early 1900s, the Los Angeles Basin produced one-quarter of the world’s oil. In 2017, 174 million barrels of oil were produced in California. A large portion of the oil produced in California is mixed with significant amounts of water, which is called produced water. That water is separated from the oil by the operator. Produced water can be treated and reinjected or disposed of either through underground injection or discharged into ponds or surface water. In limited cases, produced water is treated and used for irrigation. Oil production in California has been augmented by the application of several technologies, including water flooding, cyclic steaming, steam flooding, acidizing stimulation, and hydraulic fracturing.
2. Idle wells. DOGGR has identified more than 2,000 potential orphan wells that require further investigation. Many of these are “buried-idle” wells with antiquated, vague, or nonexistent records below densely-built and populated urban areas in southern California. Some of these wells may never result in problems or may be remediated as a condition of permitting new construction projects as downtown Los Angeles and other areas are redeveloped. However, with so many wells, some dating back to the turn of the last century, it is probable that some will present health or safety concerns. Just one or two in any given year in an urban environment has the potential to consume DOGGR’s entire hazardous deserted idle well budget, leaving it unable to plug more than a few orphan wells every year throughout the entire state. There are approximately 28,000 idle oil wells in the state, nearly a quarter of which have not produced oil or gas in over 25 years. An idle oil well can become an orphan well if the operator goes out of business or can’t be located. AB 2729 (Williams), Chapter 272, Statutes of 2016, made various changes to the laws governing idle wells including increased fees, improved idle well management plans, and additional testing regulations. These changes create pressures for operators to reduce their stock of idle wells. According to DOGGR, last year 1,234 idle wells were plugged and abandoned. However, there is still significant potential state liability because operators’ indemnity bonds are insufficient to cover the cost of plugging and abandoning the number of wells covered under the bond.
3. Production facilities. After a well produces oil and gas, the petroleum goes through a production facility comprised of equipment, tanks, pressure vessels, and pipelines. The equipment and systems prepare the oil and gas for sale to refineries or gas utilities. DOGGR’s Pipelines and Facilities unit regulates this surface equipment to prevent damage to public health, public safety, and environmental resources. The Pipelines and Facilities unit ensures that operations, maintenance, and removal or abandonment of oil and gas production infrastructure are in compliance with applicable laws and regulations. In general, pipelines within an oil field are regulated by DOGGR; the State Fire Marshal has jurisdiction over certain lines. The Supervisor has the authority to order the decommissioning of attendant production facilities when a well is abandoned and operators may use their indemnity bonds to decommission production facilities. DOGGR’s regulations require the decommissioning of related production facilities for an abandoned well unless an exception is granted. DOGGR also has very limited authority to require an additional indemnity bond for production facilities. This bill does not use the term production facility. However, the infrastructure it identifies is almost identical. The author and committee may wish to consider amending the bill to use the already defined term production facility. There could be significant liability and costs associated with production facilities that do not serve a single well or when the operator’s bond is only sufficient to abandon the well and not the production facilities. SB 724 (Lara), Chapter 652, Statutes of 2017, authorized DOGGR to order the decommissioning of deserted production facilities and to make expenditures up to $3 million for four years to plug and abandon hazardous or deserted wells or hazardous or deserted production facilities. This will be insufficient to cover all of the costs associated with deserted production facilities. The bill will require DOGGR to develop a mechanism to assess the costs and liability of decommissioning production facilities. It would be beneficial for the state to know those costs. Last year SB 1147 (Hertzberg), Chapter 607, Statutes of 2018, requires the evaluation and estimate of costs decommissioning offshore oil and gas wells. The author and committee may wish to consider amending the bill to model the evaluation and estimate of production facilities after the offshore oil and gas wells evaluation. In addition, the author and committee may wish to consider adding production facilities to DOGGR’s comprehensive report on the status of idle and long-term idle wells. Finally, the author wishes to amend the bill to specify that the evaluation be complete on July 1, 2021 and be provided to the relevant policy committees in the Legislature.
4. Related legislation.

AB 1057 (Limón) authorizes the Supervisor to require an operator to provide an additional amount of security in an amount not to exceed the reasonable costs of plugging and abandoning all of the operator's wells. This bill eliminates the sunset date on the Oil and Gas Environmental Remediation Account. This bill is awaiting hearing in the Senate Natural Resource and Water Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

County of Santa Barbara
Sierra Club California

Opposition

Western States Petroleum Association

Analysis Prepared by: Michael Jarred / NAT. RES. /

 THIRD READING  

Bill No: SB 551

Author: Jackson (D)

Amended: 5/17/19

Vote: 21

SENATE NATURAL RES. & WATER COMMITTEE: 6-3, 4/23/19

AYES: Stern, Allen, Hertzberg, Hueso, Jackson, Monning

NOES: Jones, Borgeas, Caballero

SENATE APPROPRIATIONS COMMITTEE: 4-2, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Bates, Jones

SUBJECT: Oil and gas: decommissioning, cleanup, and remediation: costs

SOURCE: Author

DIGEST:

This bill requires the Division of Oil, Gas, and Geothermal Resources to develop a mechanism, as specified, to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities.

ANALYSIS:

Existing law:

1. Establishes the Division of Oil, Gas, and Geothermal Resources (division) in the Department of Conservation (department). The division is the state’s oil and gas well regulator. The State Oil and Gas Supervisor (supervisor) leads the division.
   1. The supervisor has broad authority to supervise the drilling, operation, maintenance, and abandonment of the state’s oil and gas wells, among other things, so as to prevent, as far as possible, damage to life, health, property, and natural resources, and certain other detrimental impacts. (Public Resources Code (PRC) §3106)
2. Requires an operator who engages in the drilling, redrilling, deepening, or in any alteration permanently altering the casing, of a well, or who acquires a well, to file with the supervisor an individual indemnity bond for each well so drilled, redrilled, deepened, permanently altered, or acquired in specified amounts depending upon the depth of the well. (PRC §3204)
3. Authorizes an operator who engages in the drilling, redrilling, deepening, or in any operation permanently altering the casing, of 20 or more wells at any time, to file with the supervisor one blanket indemnity bond to cover all the operations in any of its wells in the state, in a specified amount depending upon the total number of wells, in lieu of the requirement for an individual indemnity bond for each operation. (PRC §3205)
4. Requires the supervisor, by July 1, 2020, to estimate the cost of decommissioning of offshore oil and gas wells under the division’s jurisdiction, as specified, in coordination with the State Lands Commission. (PRC §3205.6)
   1. The State Lands Commission – the state entity that manages the state’s sovereign and tidelands, including offshore mineral, oil and gas leases – is also authorized to seek additional bonding or other financial surety, as applicable, when an operator seeks a change in an offshore oil and gas lease, as specified. (PRC §6829.3)
5. Authorizes the division to impose a life-of-facility bond in certain circumstances of an amount to cover, among other things, the decommissioning of a production facility. (PRC §3270.4)

This bill requires the division to develop a mechanism, as specified, to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities. The mechanism may be a standard model or formula, as defined, and shall be able to estimate the cost of decommissioning, cleanup, and remediation at the expected decommissioning date or 30 years, as applicable.

Background

Over a decade ago, the Legislature substantially strengthened and clarified the division’s authority to regulate oil and gas production facilities (AB 1960, Nava, Chapter 562, Statutes of 2008, see particularly PRC §§3270 et seq.).

Bankruptcies in 2017 left the state largely responsible for the decommissioning of Platform Holly in state waters off the coast of Goleta (Santa Barbara County) and Rincon Island just off Mussel Shoals (Ventura County). The State Lands Commission has received over $108 million net from the state’s General Fund to pay for the first phase of decommissioning these facilities. Infrastructure and well bonding requirements, additional funds from the operators or their successor entities and funds available from previous operators are insufficient to cover all of the state’s costs for maintaining safe operations prior to decommissioning. Additional requests for state funds on the order of tens of millions of dollars – if not more – are expected in two years to further the decommissioning effort.

In response to the two bankruptcies, SB 1147 (Hertzberg, Chapter 607, Statutes of 2018) required the supervisor and the State Lands Commission working in coordination to take certain actions to help ensure the state will not have to pay for any additional offshore oil and gas well and associated infrastructure decommissioning in the event of additional operator bankruptcies.

Over the last few years, the department and the division have made a concerted effort through department-sponsored bills to revise and update several outdated elements of state law governing certain requirements imposed upon operators of oil and gas wells and related infrastructure. This is one aspect of the division’s “Renewal Plan,” originally released in October 2015. These bills include:

• AB 2729 (Williams, Chapter 272, Statutes of 2016) which substantially revised idle well requirements, and required individual indemnity bonds for oil and gas wells – or a blanket bond for multiple wells, as specified – remain in place so long as the well is not properly plugged and abandoned. AB 2729 increased well bond amounts too.
• AB 2756 (Thurmond, Chapter 274, Statutes of 2016) substantially enhanced the division’s penalty and investigative authority and allowed penalties to be spent on environmentally beneficial projects, among other things.
• SB 724 (Lara, Chapter 652, Statutes of 2017) substantially revised the division’s processes for addressing hazardous and deserted wells and facilities, and temporarily increased the annual cap on expenditures for plugging and abandoning wells such as these to $3 million.

The division has several legislatively-mandated requirements to determine expected decommissioning and related costs. As follows:

• Pursuant to AB 2729, the division will issue, on or before July 1, 2019, the first of an annual report regarding the status of the recently revised idle well program, including estimated costs for the plugging and abandonment of orphan wells.
• Pursuant to SB 724, the division will issue the first of two reports regarding hazardous wells and facilities – including estimated costs for plugging and abandonment of wells and decommissioning of facilities on October 1, 2020.
• Pursuant to SB 1147, the division by July 1, 2020, will report on the likely costs for decommissioning offshore wells and, if necessary, to implement a schedule to reach compliance should raising the bond amounts be necessary.

Additionally, the State Lands Commission is required to seek additional financial surety, if appropriate, when an offshore lease is amended (pursuant to SB 1147). The State Lands Commission sought and received in late 2017 certain lease modifications and other changes in requirements to help minimize any potential liability to the state associated with the eventual decommissioning of the offshore platform and related wells and infrastructure for the Huntington Beach oil field (Orange County).

Further, AB 585 (Limón, 2019) seeks additional revisions to the State Lands Commission’s leasing authority to protect the state financially, and AB 926 (O’Donnell, 2019) seeks to address expected funding shortfalls for the eventual decommissioning of oil and gas-related infrastructure for the City of Long Beach.

Comments

Funding for decommissioning abandoned infrastructure likely insufficient. Despite the temporary increase to $3 million annually (PRC §3258), it is likely that the current funding for plugging and abandonment of idle-deserted and hazardous wells is insufficient. The costs for plugging and abandonment of hazardous wells can be highly variable and the scale of the issue may not be fully known. The costs per well for plugging and abandonment can vary from a few thousand dollars to up to a million dollars or more. For example, the recent plugging and abandonment of two wells on Firmin Street in a residential area of Los Angeles cost about $2 million for two wells. The reports required pursuant to SB 724 should provide estimates in coming years.

The Administration has proposed funding related actions. In the recently-released May Revise to the Governor’s Budget, the Newsom Administration increased its earlier proposal to $35 million over five years to help fund training and other activities as the state transitions to a carbon-neutral economy in areas, such as Kern County, that have traditionally been dependent on fossil fuels. Additionally, the May Revise proposed a $1.5 million study “laying out the key actions the state must take to transition toward a carbon-neutral economy. The study will emphasize environmental and economic programs and policies to dramatically reduce fossil fuel demand by 2050, in line with the state’s overall climate goals.” It is unclear if costs of decommissioning and restoration will be addressed by this study should the Legislature authorize it.

The division already has some implicit and explicit authority with respect to land restoration. PRC Section 3270.4, cited above, already authorizes the division to impose – if an operator has a history of violations or outstanding liabilities to the state associated with a particular well or facility – a life-of-production facility bond to help ensure the safe decommissioning of the production facility. This decommissioning can include site restoration, as applicable. The division’s regulations – see, for example, Title 14, California Code of Regulations, Section 1776 – address at least some site restoration when oil- and gas-related site is being decommissioned. The division’s regulations note that – in the event of the presence of hazardous waste – the requirements of the Department of Toxic Substances Control – must be followed.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, this bill’s fiscal impact is ongoing annual special fund costs (Oil and Gas Administrative Fund) around $1-2 million for division to develop a cost mechanism required by this bill.

SUPPORT: (Verified 5/15/19)

Azul

Center for Biological Diversity

County of Santa Barbara

Environmental Defense Center

OPPOSITION: (Verified 5/15/19)

California Independent Petroleum Association

Western States Petroleum Association

ARGUMENTS IN SUPPORT: According to the author, “[a]s California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $100 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 10,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the [division] to being assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.”

ARGUMENTS IN OPPOSITION: Writing in opposition, the California Independent Petroleum Association (CIPA) “questions the necessity of SB 551,” and believes it to be duplicative of existing requirements. CIPA continues, “[l]egislation has been adopted to address a multitude of changes to California’s indemnity bonding requirements over past legislative sessions.” CIPA also states that the division “currently maintains two separate operator financed funds earmarked for orphan wells and ‘acute’ orphan wells that need to be abandoned on an emergency basis,” and that “site specific remediation considerations are frequently driven by the outcome of an evaluation under the California Environmental Quality Act (CEQA).”

The Western States Petroleum Association raises similar points, and finds it both “premature and highly speculative” for the division to perform an analysis that involves land remediation as it depends upon the future use of the parcel.

Prepared by: Katharine Moore / N.R. & W. / (916) 651-4116

5/20/19 13:31:23

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 551 (Jackson) - Oil and gas: decommissioning, cleanup, and remediation: costs

Bill Summary:

This bill would require the Division of Oil, Gas, and Geothermal Resources (DOGGR) to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 16, 2019

Fiscal Impact:

Ongoing annual special fund costs (Oil and Gas Administrative Fund) around $1-2 million for DOGGR to develop a cost mechanism required by this bill.

Author Amendments:

Adds certain criteria for DOGGR to develop a cost mechanism.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 551 (Jackson) - Oil and gas: decommissioning, cleanup, and remediation: costs

Bill Summary:

This bill would require the Division of Oil, Gas, and Geothermal Resources (DOGGR) to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities.

Fiscal Impact:

Ongoing annual special fund costs (Oil and Gas Administrative Fund) around $1-2 million for DOGGR to develop a cost mechanism required by this bill.

Background:

Existing law authorizes DOGGR to impose a life-of-facility bond in certain circumstances of an amount to cover, among other things, the decommissioning and site restoration of a production facility. Despite this, bankruptcies in 2017 left the state largely responsible for the decommissioning of Platform Holly in state waters off the coast of Goleta (Santa Barbara County) and Rincon Island just off Mussel Shoals (Ventura County). The State Lands Commission (SLC) has received over $108 million net from the General Fund to pay for the first phase of decommissioning these facilities. Existing funds were insufficient to cover all of the state’s costs for maintaining safe operations prior to decommissioning. Additional requests for state funds in the tens of millions of dollars are expected in two years to further the decommissioning effort.

In response to the two bankruptcies, SB 1147 (Hertzberg), Chapter 607, Statutes of 2018, requires DOGGR and SLC working in coordination to take certain actions to help ensure the state will not have to pay for any additional offshore oil and gas well and associated infrastructure decommissioning in the event of additional operator bankruptcies.

Proposed Law:

This bill would require DOGGR to develop an unspecified mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities.

Related Legislation:

AB 1057 (Limón, 2019) would double the specified amounts for individual and blanket indemnity bonds an operator is required to file with the state's Oil and Gas Supervisor based on the number and depth of the wells they operate, and authorizes the supervisor to require an operator to provide an additional amount of security in an amount not to exceed the reasonable costs of plugging and abandoning all of the operator’s wells. This bill is currently pending in the Assembly Committee on Appropriations.

AB 926 (O’Donnell, 2019) would eliminate the $300 million cap on the Oil Trust Fund, which funds abandonment costs from oil production operations in the City of Long Beach. This bill is currently on the Suspense file of the Assembly Committee on Appropriations.

AB 585 (Limón, 2019) would, among other things, revise the SLC’s requirements for oil, gas and mineral lease transfers to help ensure the state is not left financially responsible for decommissioning. This bill is currently pending on the Assembly Floor.

Staff Comments:

Estimating the fiscal impacts from this bill is difficult due to the ambiguity in what constitutes a cost mechanism, as well as oil and gas infrastructure. As currently written, it is unclear as to what type of cost mechanism DOGGR is required to develop. Cost mechanisms can take many forms, from decision support mechanisms to software programming models, each entailing different costs to develop. Additionally, it is unclear as to what type of oil and gas equipment and facilities are subject to the bill. For example, there are estimated to be around 100,000 oil and gas wells within the state. Each one of these wells will have a unique remediation cost estimation process based on its age and location, as well as costs for collecting information from the well operators. As such, a broad interpretation of what constitutes oil and gas infrastructure could lead to very high costs for DOGGR to implement this bill.

DOGGR has several upcoming legislatively-mandated requirements to determine expected decommissioning and related costs. Reports by DOGGR are due in the next couple of years and include estimated costs for the (1) plugging and abandonment of orphan wells, (2) plugging and abandonment of wells and decommissioning of facilities, and (3) decommissioning of offshore wells. Once these reports are published, the Legislature may have a better understanding of what the state costs will be for issues this bill is attempting to address.

Recommended Amendments:

Staff recommends amending the bill to clarify and narrow the definitions of “mechanism” and “infrastructure”. This clarification will allow for a better understanding of the fiscal impacts from the implementation of this bill.

-- END --

SENATE COMMITTEE ON NATURAL RESOURCES AND WATER

Senator Henry Stern, Chair

2019 - 2020 Regular

Bill No: SB 551 Hearing Date: April 23, 2019

Subject: Oil and gas: decommissioning, cleanup, and remediation: costs

BACKGROUND AND EXISTING LAW

1. Existing law establishes the Division of Oil, Gas, and Geothermal Resources (division) in the Department of Conservation (department). The division is the state’s oil and gas well regulator. The State Oil and Gas Supervisor (supervisor) leads the division.
   1. The supervisor has broad authority to supervise the drilling, operation, maintenance, and abandonment of the state’s oil and gas wells, among other things, so as to prevent, as far as possible, damage to life, health, property, and natural resources, and certain other detrimental impacts. (Public Resources Code (PRC) §3106)
2. Over a decade ago, the Legislature substantially strengthened and clarified the division’s authority to regulate oil and gas production facilities (AB 1960, Nava, Chapter 562, Statutes of 2008, see particularly PRC §§3270 et seq.)
3. In the last few years, the department and the division have made a concerted effort through department-sponsored bills to revise and update several outdated elements of state law governing certain requirements imposed upon operators of oil and gas wells and related infrastructure. This is one aspect of the division’s “Renewal Plan,” originally released in October 2015. These bills include:
   1. AB 2729 (Williams, Chapter 272, Statutes of 2016) which substantially revised idle well requirements, and required individual indemnity bonds for oil and gas wells – or a blanket bond for multiple wells, as specified – remain in place so long as the well is not properly plugged and abandoned. AB 2729 increased well bond amounts too.
   2. AB 2756 (Thurmond, Chapter 274, Statutes of 2016) substantially enhanced the division’s penalty and investigative authority and allowed penalties to be spent on environmentally beneficial projects, among other things.
   3. SB 724 (Lara, Chapter 652, Statutes of 2017) substantially revised the division’s processes for addressing hazardous and deserted wells and facilities, and temporarily increased the annual cap on expenditures for plugging and abandoning wells such as these to $3 million.
4. Existing law requires an operator who engages in the drilling, redrilling, deepening, or in any alteration permanently altering the casing, of a well, or who acquires a well, to file with the supervisor an individual indemnity bond for each well so drilled, redrilled, deepened, permanently altered, or acquired in specified amounts depending upon the depth of the well. (PRC §3204)
5. Existing law authorizes an operator who engages in the drilling, redrilling, deepening, or in any operation permanently altering the casing, of 20 or more wells at any time, to file with the supervisor one blanket indemnity bond to cover all the operations in any of its wells in the state, in a specified amount depending upon the total number of wells, in lieu of the requirement for an individual indemnity bond for each operation. (PRC §3205)
6. Existing law authorizes the division to impose a life-of-facility bond in certain circumstances of an amount to cover, among other things, the decommissioning of a production facility. (PRC §3270.4)
7. Bankruptcies in 2017 left the state largely responsible for the decommissioning of Platform Holly in state waters off the coast of Goleta (Santa Barbara County) and Rincon Island just off Mussel Shoals (Ventura County). The State Lands Commission – through its authority over the state’s 4 million acres of tidelands and submerged lands, including mineral resource development – has received over $108 million net from the state’s General Fund to pay for the first phase of decommissioning these facilities. Infrastructure and well bonding requirements, additional funds from the operators or their successor entities and funds available from previous operators were insufficient to cover all of the state’s costs for maintaining safe operations prior to decommissioning. Additional requests for state funds on the order of tens of millions of dollars – if not more – are expected in two years to further the decommissioning effort.
8. In response to the two bankruptcies, SB 1147 (Hertzberg, Chapter 607, Statutes of 2018) requires the supervisor and the State Lands Commission working in coordination to take certain actions to help ensure the state will not have to pay for any additional offshore oil and gas well and associated infrastructure decommissioning in the event of additional operator bankruptcies.

PROPOSED LAW

This bill would require the division to develop a mechanism to assess the full cost of decommissioning, cleanup, and remediation of infrastructure related to the oil and gas industry, including pipelines facilities, pump facilities, and storage facilities.

ARGUMENTS IN SUPPORT

According to the author, “[a]s California moves to meet our ambitious climate goals, the state is at significant risk of being saddled with hundreds of millions, if not billions, in liabilities from abandoned oil and gas infrastructure. This is not mere conjecture. Already, states throughout the West are increasingly dealing with significant costs from production sites left abandoned with no responsible operator to name. In just the past few years, California has assumed responsibility over just two major pieces of infrastructure in the Santa Barbara Channel, budgeting over $100 million of taxpayer funds thus far for both projects, equivalent to the cost of education for 10,000 schoolchildren. Our state has nearly 30 such platforms off its coasts, hundreds of similar facilities, and tens of thousands of currently and formerly operating wells. We need the [division] to being assessing these costs in a systematic, wholesale, across-the-board, thorough, comprehensive and regular way, or we risk entering into billions in liabilities with no plan and no recourse.”

ARGUMENTS IN OPPOSITION

Writing in opposition, the California Independent Petroleum Association (CIPA) “questions the necessity of SB 551,” and believes it to be duplicative of existing requirements. CIPA continues, “[l]egislation has been adopted to address a multitude of changes to California’s indemnity bonding requirements over past legislative sessions.” CIPA also states that the division “currently maintains two separate operator financed funds earmarked for orphan wells and “acute” orphan wells that need to be abandoned on an emergency basis,” and that “site specific remediation considerations are frequently driven by the outcome of an evaluation under the California Environmental Quality Act (CEQA).”

The Western States Petroleum Association raises similar points, and finds it both “premature and highly speculative” for the division to perform an analysis that involves land remediation as it depends upon the future use of the parcel.

COMMENTS

This bill is a work-in-progress. While the author’s intent is evident, the bill, as currently written, is not incorporated within the state’s existing statutory and regulatory framework to protect the state from costs associated with oil and gas development, production and decommissioning. Should the bill pass the Committee, the Committee may wish to direct staff to continue working with the author and her office to clarify and sharpen the bill’s language to better meet the author’s goals. Elements to consider may include, among other things:

• Clarification of which equipment and/or facilities are subject to the bill (e.g. wells? onshore and offshore equipment/facilities? under the division’s jurisdiction only?).
• Clarification of the definition of “mechanism” – Is this a decision support or modeling tool? Are regulations needed to implement the mechanism or is the mechanism internal to the division’s operations?
• Clarification of how the proposed mechanism works within the framework established for hazardous and/or deserted facilities, including their decommissioning.

Current efforts. The division has several legislatively-mandated requirements to determine expected decommissioning and related costs. As follows:

• Pursuant to AB 2729, the division will issue, on or before July 1, 2019, the first of an annual report regarding the status of the recently revised idle well program, including estimated costs for the plugging and abandonment of orphan wells.
• Pursuant to SB 724, the division will issue the first of two reports regarding hazardous wells and facilities – including estimated costs for plugging and abandonment of wells and decommissioning of facilities on October 1, 2020.
• Pursuant to SB 1147, the division by July 1, 2020 will report on the likely costs for decommissioning offshore wells and, if necessary, to implement a schedule to reach compliance should raising the bond amounts be necessary.

Additionally, the State Lands Commission is required to seek additional financial surety, if appropriate, when an offshore lease is amended (pursuant to SB 1147). The State Lands Commission sought and received in late 2017 certain lease modifications and other changes in requirements to help minimize any potential liability to the state associated with the eventual decommissioning of the offshore platform and related wells and infrastructure for the Huntington Beach oil field (Orange County).

Further, AB 585 (Limón, 2019) seeks additional revisions to the State Lands Commission’s leasing authority to protect the state financially, and AB 926 (O’Donnell, 2019) seeks to address expected funding shortfalls for the eventual decommissioning of oil and gas-related infrastructure for the City of Long Beach.

Despite the temporary increase to $3 million annually (PRC §3258), it is likely that the current funding for plugging and abandonment of idle-deserted and hazardous wells is insufficient. The costs for plugging and abandonment of hazardous wells can be highly variable and the scale of the issue may not be fully known. The costs per well for plugging and abandonment can vary from a few thousand dollars to up to a million dollars or more. For example, the recent plugging and abandonment of two wells on Firmin Street in a residential area of Los Angeles cost about $2 million for two wells. The reports required pursuant to SB 724 should provide estimates in coming years.

The division already has some implicit and explicit authority with respect to land restoration. PRC §3270.4, cited above, already authorizes the division to impose – if an operator has a history of violations or outstanding liabilities to the state associated with a particular well or facility – a life-of-production facility bond to help ensure the safe decommissioning of the production facility. This decommissioning can include site restoration, as applicable. The division’s regulations – see, for example, Title 14, California Code of Regulations, §1776 – address at least some site restoration when oil- and gas-related site is being decommissioned. The division’s regulations note that – in the event of the presence of hazardous waste – the requirements of the Department of Toxic Substance Control – must be followed.

Select recent related legislation

AB 926 (O’Donnell, 2019) would remove the cap on funds in the Oil Trust Fund. (This bill is currently on the Suspense file of the Assembly Committee on Appropriations.)

AB 585 (Limón, 2019) would, among other things, revise the State Lands Commission’s requirements for oil, gas and mineral lease transfers to help ensure the state is not left financially responsible for decommissioning. (This bill is currently pending before the Assembly Committee on Appropriations.)

SB 44 (Jackson, Chapter 645, Statutes of 2017) created and funded a program to remove and remediate hazardous and legacy coastal oil and gas wells and related infrastructure.

SUPPORT

Azul

Center for Biological Diversity

County of Santa Barbara

Environmental Defense Center

OPPOSITION

California Independent Petroleum Association

Western States Petroleum Association

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