This measure would urge the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

This measure would urge the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

This measure would urge the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

WHEREAS, In 2016, Rincon Island Limited Partnership, a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in Texas, and in 2017, quitclaimed their three leases to the state, deliberately ignoring their contractual and statutory obligations to plug and abandon 75 oil and gas wells and decommission two oil production facilities located on public lands; and

WHEREAS, In 2017, Venoco, LLC, a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in Delaware, without undertaking its legal obligation to plug 32 wells across the leases or to decommission Platform Holly and the associated facilities; and

WHEREAS, At the time of the bankruptcies, the leases operated by Rincon Island Limited Partnership were out of compliance with the lease requirements, creating greater risk of an uncontrolled release of oil or gas into the marine environment, and rather than bring the leases into compliance, as they were legally required to do, and as California governmental agencies were pressing them to do, Rincon Island Limited Partnership chose bankruptcy as a way to avoid the costs of compliance and decommissioning; and

WHEREAS, The leases operated by Venoco, LLC were ultimately deserted on the grounds that the company could no longer afford to operate, risking releases of hydrogen sulfide gas and oil from wells located on Platform Holly; and

WHEREAS, In both instances, the State of California was forced to use its police powers to enter and to manage the abatement of the deserted oil and gas facilities to ensure protection of human health and safety and the environment; and

WHEREAS, The obligations under the leases for both Rincon Island Limited Partnership and Venoco, LLC required each to permanently and safely plug and abandon all wells and restore public property to its natural condition at the lessees expense, an obligation now forced upon the State of California because of bankruptcy protections provided for in federal law, costing taxpayers more than $150,000,000; and

WHEREAS, The State of California has statutory obligations, enforced by the Department of Conservations California Geologic Energy Management Division, for operators to permanently plug and abandon oil wells and decommission oil and gas infrastructure at the end of its useful life; and

WHEREAS, By quitclaiming its leases before filing bankruptcy, Venoco, LLC was allowed to convert the contractual obligations that it agreed to when it became a lessee of the state, including the obligation to plug wells and restore public lands, into an unsecured claim, ensuring that the State of California would receive only a fractional payment of its estimated claim and only after all secured creditors were paid; and

WHEREAS, Despite active and aggressive attempts by the state to pursue Rincon Island Limited Partnership through the bankruptcy process, including traveling to Texas, where Rincon Island Limited Partnership filed bankruptcy, and retention of outside counsel specializing in these matters, Rincon Island Limited Partnership was legally able to dissolve and largely avoid its responsibilities to plug and abandon and decommission by virtue of the United States debtor-friendly bankruptcy laws; and

WHEREAS, Despite active participation in each bankruptcy, the State of California will likely receive little to no compensation from the debtors estates for the public monies spent to safely manage and abate the facilities deserted by the debtors; and

WHEREAS, Beyond these two cases, there are over 35,000 oil wells in California categorized as idle, with many owned by companies that could seek bankruptcy protection, requiring future plug and abandonment by the State of California, without recompense; and

WHEREAS, The risk remains that oil and gas companies could, in the future, employ the strategy of filing bankruptcy to circumvent their decommissioning responsibilities, thereby shifting the costs of remediation and abatement to California taxpayers; and

WHEREAS, The people of California believe it is important that the federal government ensure that bankruptcy does not provide a default pathway for oil and gas companies, or their equity owners, to shift critical environmental obligations to decommission oil and gas infrastructure to the public or to otherwise publicly subsidize the operations of these private companies; and

WHEREAS, On January 31, 2019, the Supreme Court of Canada held that, consistent with an order of the Alberta State regulator, a bankruptcy debtor had to comply with end-of-life abandonment obligations prior to any distribution to creditors (Orphan Well Association v. Grant Thornton Ltd. (2019) SCC 5); now, therefore, be it

Resolved by the Senate and the Assembly of the State of California, jointly, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations; and be it further

Resolved, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under Chapters 7 and 11 of the United States Bankruptcy Code (11 U.S.C. Sec. 101 et seq.), that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims; and be it further

Resolved, That the Secretary of the Senate transmit copies of this resolution to the President and Vice President of the United States, the Speaker of the House of Representatives, the Majority Leader of the Senate, and each Senator and Representative from California in the Congress of the United States, and to the author for appropriate distribution.

WHEREAS, In 2016, Rincon Island Limited Partnership, a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in Texas, and in 2017, quitclaimed their three leases to the state, deliberately ignoring their contractual and statutory obligations to plug and abandon 75 oil and gas wells and decommission two oil production facilities located on public lands; and

WHEREAS, In 2017, Venoco, LLC, a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in Delaware, without undertaking its legal obligation to plug 32 wells across the leases or to decommission Platform Holly and the associated facilities; and

WHEREAS, At the time of the bankruptcies, the leases operated by Rincon Island Limited Partnership were out of compliance with the lease requirements, creating greater risk of an uncontrolled release of oil or gas into the marine environment, and rather than bring the leases into compliance, as they were legally required to do, and as California governmental agencies were pressing them to do, Rincon Island Limited Partnership chose bankruptcy as a way to avoid the costs of compliance and decommissioning; and

WHEREAS, The leases operated by Venoco, LLC were ultimately deserted on the grounds that the company could no longer afford to operate, risking releases of hydrogen sulfide gas and oil from wells located on Platform Holly; and

WHEREAS, In both instances, the State of California was forced to use its police powers to enter and to manage the abatement of the deserted oil and gas facilities to ensure protection of human health and safety and the environment; and

WHEREAS, The obligations under the leases for both Rincon Island Limited Partnership and Venoco, LLC required each to permanently and safely plug and abandon all wells and restore public property to its natural condition at the lessees expense, an obligation now forced upon the State of California because of bankruptcy protections provided for in federal law, costing taxpayers more than $150,000,000; and

WHEREAS, The State of California has statutory obligations, enforced by the Department of Conservations California Geologic Energy Management Division, for operators to permanently plug and abandon oil wells and decommission oil and gas infrastructure at the end of its useful life; and

WHEREAS, By quitclaiming its leases before filing bankruptcy, Venoco, LLC was allowed to convert the contractual obligations that it agreed to when it became a lessee of the state, including the obligation to plug wells and restore public lands, into an unsecured claim, ensuring that the State of California would receive only a fractional payment of its estimated claim and only after all secured creditors were paid; and

WHEREAS, Despite active and aggressive attempts by the state to pursue Rincon Island Limited Partnership through the bankruptcy process, including traveling to Texas, where Rincon Island Limited Partnership filed bankruptcy, and retention of outside counsel specializing in these matters, Rincon Island Limited Partnership was legally able to dissolve and largely avoid its responsibilities to plug and abandon and decommission by virtue of the United States debtor-friendly bankruptcy laws; and

WHEREAS, Despite active participation in each bankruptcy, the State of California will likely receive little to no compensation from the debtors estates for the public monies spent to safely manage and abate the facilities deserted by the debtors; and

WHEREAS, Beyond these two cases, there are over 35,000 oil wells in California categorized as idle, with many owned by companies that could seek bankruptcy protection, requiring future plug and abandonment by the State of California, without recompense; and

WHEREAS, The risk remains that oil and gas companies could, in the future, employ the strategy of filing bankruptcy to circumvent their decommissioning responsibilities, thereby shifting the costs of remediation and abatement to California taxpayers; and

WHEREAS, The people of California believe it is important that the federal government ensure that bankruptcy does not provide a default pathway for oil and gas companies, or their equity owners, to shift critical environmental obligations to decommission oil and gas infrastructure to the public or to otherwise publicly subsidize the operations of these private companies; and

WHEREAS, On January 31, 2019, the Supreme Court of Canada held that, consistent with an order of the Alberta State regulator, a bankruptcy debtor had to comply with end-of-life abandonment obligations prior to any distribution to creditors (Orphan Well Association v. Grant Thornton Ltd. (2019) SCC 5); now, therefore, be it

Resolved by the Senate and the Assembly of the State of California, jointly, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations; and be it further

Resolved, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under Chapters 7 and 11 of the United States Bankruptcy Code (11 U.S.C. Sec. 101 et seq.), that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims; and be it further

Resolved, That the Secretary of the Senate transmit copies of this resolution to the President and Vice President of the United States, the Speaker of the House of Representatives, the Majority Leader of the Senate, and each Senator and Representative from California in the Congress of the United States, and to the author for appropriate distribution.

WHEREAS, In 2016, Rincon Island Limited Partnership, a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in Texas, and in 2017, quitclaimed their three leases to the state, deliberately ignoring their contractual and statutory obligations to plug and abandon 75 oil and gas wells and decommission two oil production facilities located on public lands; and

WHEREAS, In 2017, Venoco, LLC, a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in Delaware, without undertaking its legal obligation to plug 32 wells across the leases or to decommission Platform Holly and the associated facilities; and

WHEREAS, At the time of the bankruptcies, the leases operated by Rincon Island Limited Partnership were out of compliance with the lease requirements, creating greater risk of an uncontrolled release of oil or gas into the marine environment, and rather than bring the leases into compliance, as they were legally required to do, and as California governmental agencies were pressing them to do, Rincon Island Limited Partnership chose bankruptcy as a way to avoid the costs of compliance and decommissioning; and

WHEREAS, The leases operated by Venoco, LLC were ultimately deserted on the grounds that the company could no longer afford to operate, risking releases of hydrogen sulfide gas and oil from wells located on Platform Holly; and

WHEREAS, In both instances, the State of California was forced to use its police powers to enter and to manage the abatement of the deserted oil and gas facilities to ensure protection of human health and safety and the environment; and

WHEREAS, The obligations under the leases for both Rincon Island Limited Partnership and Venoco, LLC required each to permanently and safely plug and abandon all wells and restore public property to its natural condition at the lessees expense, an obligation now forced upon the State of California because of bankruptcy protections provided for in federal law, costing taxpayers more than $150,000,000; and

WHEREAS, The State of California has statutory obligations, enforced by the Department of Conservations California Geologic Energy Management Division, for operators to permanently plug and abandon oil wells and decommission oil and gas infrastructure at the end of its useful life; and

WHEREAS, By quitclaiming its leases before filing bankruptcy, Venoco, LLC was allowed to convert the contractual obligations that it agreed to when it became a lessee of the state, including the obligation to plug wells and restore public lands, into an unsecured claim, ensuring that the State of California would receive only a fractional payment of its estimated claim and only after all secured creditors were paid; and

WHEREAS, Despite active and aggressive attempts by the state to pursue Rincon Island Limited Partnership through the bankruptcy process, including traveling to Texas, where Rincon Island Limited Partnership filed bankruptcy, and retention of outside counsel specializing in these matters, Rincon Island Limited Partnership was legally able to dissolve and largely avoid its responsibilities to plug and abandon and decommission by virtue of the United States debtor-friendly bankruptcy laws; and

WHEREAS, Despite active participation in each bankruptcy, the State of California will likely receive little to no compensation from the debtors estates for the public monies spent to safely manage and abate the facilities deserted by the debtors; and

WHEREAS, Beyond these two cases, there are over 35,000 oil wells in California categorized as idle, with many owned by companies that could seek bankruptcy protection, requiring future plug and abandonment by the State of California, without recompense; and

WHEREAS, The risk remains that oil and gas companies could, in the future, employ the strategy of filing bankruptcy to circumvent their decommissioning responsibilities, thereby shifting the costs of remediation and abatement to California taxpayers; and

WHEREAS, The people of California believe it is important that the federal government ensure that bankruptcy does not provide a default pathway for oil and gas companies, or their equity owners, to shift critical environmental obligations to decommission oil and gas infrastructure to the public or to otherwise publicly subsidize the operations of these private companies; and

WHEREAS, On January 31, 2019, the Supreme Court of Canada held that, consistent with an order of the Alberta State regulator, a bankruptcy debtor had to comply with end-of-life abandonment obligations prior to any distribution to creditors (Orphan Well Association v. Grant Thornton Ltd. (2019) SCC 5); now, therefore, be it

Resolved by the Senate and the Assembly of the State of California, jointly, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations; and be it further

Resolved, That the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under Chapters 7 and 11 of the United States Bankruptcy Code (11 U.S.C. Sec. 101 et seq.), that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims; and be it further

Resolved, That the Secretary of the Senate transmit copies of this resolution to the President and Vice President of the United States, the Speaker of the House of Representatives, the Majority Leader of the Senate, and each Senator and Representative from California in the Congress of the United States, and to the author for appropriate distribution.

SENATE THIRD READING

STR Bill Id:SJR 12

Author:(Min)

As Introduced Ver:February 13, 2024

Majority vote

SUMMARY

Resolves that the Legislature urges the President of the United States and the United States Congress to 1) modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations, and 2) modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

Major Provisions

COMMENTS

In 2016, Rincon Island Limited Partnership (RILP), a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in federal court. Later, in 2017, RILP quitclaimed their three leases to the state. RILP failed to fulfill their obligations to plug-and-abandon 75 oil and gas wells and decommission two related oil production facilities.

In 2017, Venoco, LLC, also a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in the Delaware. Venoco failed to plug-and-abandon 32 wells across its leases or to decommission Platform Holly and its associated facilities.

The Venoco and RILP bankruptcies allowed the two companies to avoid the costs of lease and permit compliance and decommissioning. Due to the bankruptcy protections provided in federal law, the state, largely SLC as lessor, ultimately had to take over the plugging-and-abandonment of wells, and decommissioning and site restoration efforts in order to ensure public and environmental health and safety.

The Venoco and RILP bankruptcies have cost the state's taxpayers more than $200 million from the General Fund thus far. The state is likely to incur significant additional expenses associated with the final disposition of Platform Holly and Rincon Island.

Bankruptcy is covered under Chapters 7 and 11 in the United States Bankruptcy Code (11 United States Code Section 101 et seq.). Chapter 11 generally provides for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Usually, the debtor remains "in possession," has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money. Chapter 7 deals with liquidation; it wipes out most of a corporation's (or person's) debts and, in return, the corporation may have to surrender some of its property. Chapter 7 doesn't include a repayment plan; debts are simply eliminated forever.

According to the Author

My district bore the brunt of a 2021 oil spill off the Huntington Beach shore from an undersea pipeline serving offshore oil platforms. Our beaches were blackened with oil, fish and coastal wildlife were sickened or killed, sensitive coastal habitats were harmed, and the local small businesses dependent on a clean coastline suffered significant economic losses. Those responsible for the spill continue to be held to account financially.

Unfortunately, farther up the coast other operators recently found it in their best interest to declare bankruptcy and walk away from dozens of oil wells, and associated equipment and infrastructure. The bankruptcies of Venoco and Rincon Island Limited Partners have cost the state's General Fund over $200 million so far. This doesn't even include the onshore costs to address orphan wells, which is estimated to be in the billions of dollars. In Alberta, Canada, the obligation to plug-and-abandon oil wells, decommission associated equipment and infrastructure, and remediate the site is no longer dischargeable in bankruptcy. This resolution asks our federal government to make that change to bankruptcy law too and improve the state's position as a creditor in bankruptcy.

Arguments in Support

The California Coastal Protection Network supports SJR 12, which would urge the U.S. Congress and the President to change bankruptcy laws to ensure that seeking bankruptcy protection does not provide a pathway for oil and gas companies to shift decommissioning responsibilities to the state and the public.

Arguments in Opposition

None on file.

FISCAL COMMENTS

This resolution in non-fiscal.

VOTES

SENATE FLOOR: 29-2-9

YES: Alvarado-Gil, Archuleta, Ashby, Atkins, Blakespear, Bradford, Caballero, Cortese, Durazo, Eggman, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Min, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

NO: Grove, Jones

ABS, ABST OR NV: Allen, Becker, Dahle, Dodd, Glazer, Nguyen, Niello, Ochoa Bogh, Seyarto

ASM NATURAL RESOURCES: 9-3-0

YES: Bryan, Bauer-Kahan, Connolly, Friedman, Kalra, Muratsuchi, Pellerin, Wicks, Wood

NO: Flora, Hoover, Lackey

UPDATED

VERSION: February 13, 2024

CONSULTANT: Paige Brokaw / NAT. RES. / (916) 319-2092 FN: 0003691

Date of Hearing: July 1, 2024

ASSEMBLY COMMITTEE ON NATURAL RESOURCES

Isaac G. Bryan, Chair

SBPCA Bill Id:SJR 12

Author:(Min) – As Introduced Ver:February 13, 2024

SENATE VOTE: 29-2

SUBJECT: Oil and gas leases: bankruptcy

SUMMARY: Resolves that the Legislature urges the President of the United States and the United States Congress to (1) modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations, and (2) modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

EXISTING LAW:

1. Establishes the Division of Geologic Energy Management (CalGEM) in the Department of Conservation, under the direction of the State Oil and Gas Supervisor (supervisor), who is required to supervise the drilling, operation, maintenance, and abandonment of oil and gas wells, as provided. (Public Resources Code (PRC) 3000 et seq.)
2. Establishes certain bonding and other methods of financial surety to help indemnify the state in the event the operator is no longer viable and the state becomes responsible to plug-and-abandon the well, decommission associated equipment and infrastructure, and remediate the site. (PRC 3204, 3205, among others)
3. Establishes the State Lands Commission (SLC) in the Natural Resources Agency and has exclusive jurisdiction over ungranted tidelands and submerged lands owned by the state.

THIS BILL:

1. Resolves that the Legislature of the State of California respectfully urges the President of the United States and the United States Congress to:
   1. Modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations; and,
   2. Modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under Chapters 7 and 11 of the United States Bankruptcy Code (11 U.S.C. Sec. 101 et seq.), that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.
2. Resolves that the Secretary of the Senate transmit copies of this resolution to the President and Vice President of the United States, the Speaker of the House of Representatives, the Majority Leader of the Senate, and each Senator and Representative from California in the Congress of the United States, and to the author for appropriate distribution.

FISCAL EFFECT: This measure is non-fiscal.

COMMENTS:

1. Oil & gas in California. Commercial oil production started in the middle of the 19th century. In 1929, at the peak of oil development in the Los Angeles Basin, California accounted for more than 22% of total world oil production. California’s oil production reached an all-time high of almost 400 million barrels in 1985 and has generally declined since then. Despite that decline, California remains the third largest oil and gas producing state, and as of 2022, produced 3% of the crude oil of the nation. That same year, California supplied about 26% of all oil going into the state’s 17 oil refineries.

An idle well is a well that has not been used for two years or more and has not yet been properly plugged and abandoned (sealed and closed). According to CalGEM, there are more than 37,000 known idle wells in California, all of which will eventually come to their end of life. Idle wells can become orphan wells if they are deserted by insolvent operators. When this happens, there is the risk of shifting responsibilities and costs for decommissioning the wells to the state. As of December 31, 2021, CalGEM had identified more than 5,300 wells as orphan or potentially orphan. The cost to plug a well is highly variable depending on well and facility condition, size, location, and other factors, but a recent CalGEM analysis found the average cost to be about $95,000 per well.

In August 2022, California was awarded $25 million in initial grant funding from the federal government's orphan well program authorized in the bipartisan Infrastructure Investment and Jobs Act.  California is potentially eligible for an additional $140 million in future grants.  These are taxpayer dollars that would be used to plug and abandon a well financially deserted by its owner.

1. Bankruptcy. In 2016, Rincon Island Limited Partnership (RILP), a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in federal court. Later, in 2017, RILP quitclaimed their three leases to the state. RILP failed to fulfill their obligations to plug-and-abandon 75 oil and gas wells and decommission two related oil production facilities.

In 2017, Venoco, LLC, also a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in the Delaware. Venoco failed to plug-and-abandon 32 wells across its leases or to decommission Platform Holly and its associated facilities.

The Venoco and RILP bankruptcies allowed the two companies to avoid the costs of lease and permit compliance and decommissioning. Due to the bankruptcy protections provided in federal law, the state, largely SLC as lessor, ultimately had to take over the plugging-and-abandonment of wells, and decommissioning and site restoration efforts in order to ensure public and environmental health and safety.

The Venoco and RILP bankruptcies have cost the state’s taxpayers more than $200 million from the General Fund thus far. The state is likely to incur significant additional expenses associated with the final disposition of Platform Holly and Rincon Island.

In 2020, California Resources Corporation (CRC), the state’s largest oil and gas company, filed for Chapter 11 bankruptcy protection and sought relief from $5 billion in debt and interest payments. Under a Chapter 11 restructuring filed in U.S. Bankruptcy Court for the Southern District in Texas, CEC’s plan cancelled pre-existing debt and consolidated its ownership in the Elk Hills power plant and cryogenic gas plant. 

On the heels of the CRC bankruptcy case, Haynes and Boone, a law firm that tracks bankruptcies in American and Canadian oilfields, reported that 248 oil and gas producers carrying more than $175 billion in debt entered bankruptcy between 2015-2020, with 49 in 2019-2020 alone.

1. Bankruptcy rules. Bankruptcy is covered under Chapters 7 and 11 in the United States Bankruptcy Code (11 United States Code Sec. 101 et seq.). Chapter 11 generally provides for reorganization, usually involving a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Usually, the debtor remains “in possession,” has the powers and duties of a trustee, may continue to operate its business, and may, with court approval, borrow new money. Chapter 7 deals with liquidation; it wipes out most of a corporation’s (or person’s) debts and, in return, the corporation may have to surrender some of its property. Chapter 7 doesn’t include a repayment plan; debts are simply eliminated forever.

The resolution finds that despite active participation in past bankruptcies, the State of California will likely receive little to no compensation from the debtor’s estates for the public monies spent to safely manage and abate the facilities deserted by the debtors. The author expressed concern in the resolution that other companies could seek bankruptcy protection, requiring future plug and abandonment by the State of California, without compensation. The risk remains that oil and gas companies could, in the future, employ the strategy of filing bankruptcy to circumvent their decommissioning responsibilities, thereby shifting the costs of remediation and abatement to California taxpayers.

1. SJR 12. Since bankruptcy is federally regulated, this resolution would urge the federal government to modify bankruptcy rules to treat the plug and abandonment and lease restoration obligations for debtor held oil and gas leases, quitclaimed or accepted, as nondischargeable obligations, and modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims.

REGISTERED SUPPORT / OPPOSITION:

Support

Azul
California Coastal Protection Network
California Environmental Voters
California State Lands Commission
Climate Action California
Environment California
Environmental Defense Center
Orange County Coastkeeper
Surfrider Foundation

Opposition

None on file

Analysis Prepared by: Paige Brokaw / NAT. RES. /

 THIRD READING  

Bill No: SJR 12

Author: Min (D)

Introduced: 2/13/24

Vote: 21

SENATE NATURAL RES. & WATER COMMITTEE: 8-0, 4/15/24

AYES: Min, Allen, Eggman, Hurtado, Laird, Limón, Padilla, Stern

NO VOTE RECORDED: Seyarto, Dahle, Grove

SUBJECT: Oil and gas leases: bankruptcy

SOURCE: Author

DIGEST:

This resolution urges the President of the United States and the United States Congress (1) to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims; and (2) to treat the plug and abandonment and lease restoration obligations as nondischargeable obligations.

ANALYSIS:

Existing law:

1. Establishes the Geologic Energy Management Division (CalGEM) in the Department of Conservation as the state’s oil and gas production regulator. CalGEM authorizes the drilling/re-drilling of oil and gas wells, among other related actions. (see, for example, Public Resources Code (PRC) §3106, §3203)
2. Establishes certain bonding and other methods of financial surety to help indemnify the state in the event the operator is no longer viable and the state becomes responsible to plug-and-abandon the well, decommission associated equipment and infrastructure, and remediate the site. (e.g. PRC §3204, §3205, §3205.1, §3205.2, §3205.3, §3205.8, among others)
3. Establishes the State Lands Commission (commission) in the Natural Resources Agency. The commission has exclusive jurisdiction over ungranted tidelands and submerged lands owned by the state. The commission has had exclusive jurisdiction over the leasing of offshore state lands for oil and gas production since 1938.
4. Authorizes an oil and gas lessee of the commission to at any time make and file with the commission a written quitclaim or relinquishment of all rights under any lease or any portion thereof, as provided. The lessee remains subject to the continued obligation of applicable lease terms and regulations. No quitclaim or relinquishment shall release such lessee or his surety from any liability for breach of any obligation of the lease, as provided. (PRC 6804.1)

This resolution:

1. Urges the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims, and to treat the plug and abandonment and lease restoration obligations as nondischargeable obligations.
2. Includes numerous legislative findings describing the Venoco, LLC and Rincon Island Limited Partnership (RILP) bankruptcies and the risks to the state’s taxpayers stemming from onshore idle and orphan wells, among other findings.

Background

In 2016, RILP, a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in federal court. Later, in 2017, RILP quitclaimed their three leases to the state. RILP failed to fulfill their obligations to plug-and-abandon 75 oil and gas wells and decommission two related oil production facilities.

In 2017, Venoco, LLC, (Venoco), also a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in the Delaware. Venoco failed to plug-and-abandon 32 wells across its leases or to decommission Platform Holly and its associated facilities.

The Venoco and RILP bankruptcies allowed the two companies to avoid the costs of lease and permit compliance and decommissioning. Due to the bankruptcy protections provided in federal law, the state, largely the commission as lessor, ultimately had to take over the plugging-and-abandonment of wells, and decommissioning and site restoration efforts in order to ensure public and environmental health and safety.

The Venoco and RILP bankruptcies have cost the state’s taxpayers more than $200M in appropriated General Fund thus far. The state is likely to incur further significant expenses associated with the final disposition of Platform Holly and Rincon Island.

According to the commission, “decommissioning is a foundational part of the lessee contract – these leases were issued based on the premise the lessee would restore the land when operations end.” However, because Venoco quitclaimed its leases prior to filing bankruptcy, Venoco was able to convert its obligations to permanently plug-and-abandon its wells and decommission and restore the site to an unsecured claim. All secured claims would be paid in bankruptcy before the unsecured ones which makes it likely the state would not receive full reimbursement for its expenses.

Similarly, RILP was able to largely escape its obligations to plug-and-abandon wells and decommission and restore the site through federal bankruptcy protections.

In addition to these two specific offshore examples, there are approximately 40,000 idle wells onshore currently. Recent estimates suggest that the cost to plug-and-abandon idle and certain other wells, should their operators declare bankruptcy, is on the order of billions of dollars. Indemnification bonds held to offset this expense were on the order of $107M in 2020 - far less than the potential need.

The risk remains that the oil and gas companies could use bankruptcy as a strategy to get out of their decommissioning obligations. These risks are not unique to California. For example, the recent Bipartisan Infrastructure Law signed into law by President Biden provides $4.7B for the plugging and abandonment of orphan wells and site remediation and restoration on federal, tribal, state, and private lands.

On January 31, 2019, the Supreme Court of Canada held that, consistent with an order of the Alberta State regulator, a bankruptcy debtor had to comply with end-of-life abandonment obligations prior to any distribution to creditors (Orphan Well Association v. Grant Thornton Ltd. (2019) SCC 5).

Comments

Bankruptcy appears to provide a pathway for oil and gas companies to shift decommissioning responsibilities to the state and public. While recent legislative efforts have provided authority to CalGEM and the commission to seek additional funds for indemnification, it remains unclear that implementation has been consistent. In some instances, the commission is precluded from obtaining additional indemnification due to the original lease terms.

Venoco and Rincon Island bankruptcies. Venoco filed for Chapter 11 in Delaware, and Rincon Island filed for Chapter 7 in Texas. (There is a further discussion of federal bankruptcy by the Senate Judiciary Committee below.) According to the commission, the bankruptcy code prioritizes repayments to creditors, and administrative and attorney fees over satisfying lease obligations. In both bankruptcies, the commission’s costs to fulfill the lease terms were not prioritized.

The Senate Judiciary Committee has provided the following comment regarding bankruptcy. Bankruptcy is intended to provide certain insolvent debtors with a “fresh start.” (E.g., Grogan v. Garner (1991) 498 U.S. 279, 286.) Broadly speaking, bankruptcy gives persons and entities an orderly process in which the court oversees the distribution of the debtor’s assets to their various creditors. In a Chapter 11 bankruptcy case, the goal is to allow the debtor-entity to reorganize and resume business, which may involve a restructuring or discharge of the entity’s debts, or a change in the entity’s ownership or organizational structure. In a Chapter 7 case, the purpose is liquidation: a debtor-entity’s assets will be entirely liquidated, and an individual debtor’s assets will be distributed to the greatest extent possible in exchange for a discharge from all remaining liabilities. (See 11 U.S.C. § 727.)

Bankruptcy law is exclusively federal: the United States Constitution gives Congress the authority to “establish…uniform Laws on the subject of Bankruptcies throughout the United States.” (U.S. Const., art. I, § 8.) Congress, therefore, has the sole power to establish the priorities and exemptions that govern the bankruptcy process (for example, child support, alimony, and most student loans cannot be discharged in bankruptcy (11 U.S.C. § 523), which significantly hinders the ability of individuals to obtain the intended “fresh start.”). Accordingly, as acknowledged by this resolution, only Congress has the authority to make the statutory changes necessary to ensure that priority is given to a debtor’s outstanding plug and abandonment and restoration obligations.

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

SUPPORT: (Verified 4/16/24)

350 Humboldt

350 Sacramento

Azul

California Coastal Protection Network

California Environmental Voters

California State Lands Commission

Climate Action California

Climate Reality Project, Silicon Valley Chapter

Environment California

Environmental Defense Center

Orange County Coastkeeper

Santa Cruz Climate Action Network

Surfrider Foundation

OPPOSITION: (Verified 4/16/24)

None received

ARGUMENTS IN SUPPORT: According to the author, “My district bore the brunt of a 2021 oil spill off the Huntington Beach shore from an undersea pipeline serving offshore oil platforms.  Our beaches were blackened with oil, fish and coastal wildlife were sickened or killed, sensitive coastal habitats were harmed, and the local small businesses dependent on a clean coastline suffered significant economic losses.  Those responsible for the spill continue to be held to account financially.

“Unfortunately, farther up the coast other operators recently found it in their best interest to declare bankruptcy and walk away from dozens of oil wells, and associated equipment and infrastructure.  The bankruptcies of Venoco and Rincon Island Limited Partners have cost the state’s General Fund over $200 million so far.  This doesn’t even include the onshore costs to address orphan wells, which is estimated to be in the billions of dollars.  In Alberta, Canada, the obligation to plug-and-abandon oil wells, decommission associated equipment and infrastructure, and remediate the site is no longer dischargeable in bankruptcy.  This resolution asks our federal government to make that change to

bankruptcy law too and improve the state’s position as a creditor in bankruptcy.”

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

4/17/24 10:09:42

**** END ****

SENATE COMMITTEE ON NATURAL RESOURCES AND WATER

Senator Dave Min, Chair

2023 - 2024 Regular

Bill No: SJR 12 Hearing Date: April 15, 2024

Subject: Oil and gas leases: bankruptcy

SUMMARY

This measure would urge the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims; and to treat the plug and abandonment and lease restoration obligations as nondischargeable obligations.

BACKGROUND AND EXISTING LAW

1. Existing law establishes the Geologic Energy Management Division (CalGEM) in the Department of Conservation as the state’s oil and gas production regulator. CalGEM authorizes the drilling/re-drilling of oil and gas wells, among other related actions. (see, for example, Public Resources Code (PRC) §3106, §3203)
2. Existing law establishes certain bonding and other methods of financial surety to help indemnify the state in the event the operator is no longer viable and the state becomes responsible to plug-and-abandon the well, decommission associated equipment and infrastructure, and remediate the site. (e.g. PRC §3204, §3205, §3205.1, §3205.2, §3205.3, §3205.8, among others)
3. Existing law establishes the State Lands Commission (commission) in the Natural Resources Agency. The commission has exclusive jurisdiction over ungranted tidelands and submerged lands owned by the state. The commission has had exclusive jurisdiction over the leasing of offshore state lands for oil and gas production since 1938. The commission also issues right-of-way leases for pipelines necessary to support offshore oil and gas infrastructure, and onshore oil and gas infrastructure located in tidelands may also require a commission lease.
4. According to the commission, “decommissioning is a foundational part of the lessee contract – these leases were issued based on the premise the lessee would restore the land when operations end.”
5. In 2016, Rincon Island Limited Partnership (RILP), a lessee of state oil and gas leases offshore of the County of Ventura, filed for bankruptcy in federal court. Later, in 2017, RILP quitclaimed their three leases to the state. RILP failed to fulfill their obligations to plug-and-abandon 75 oil and gas wells and decommission two related oil production facilities.
6. In 2017, Venoco, LLC, (Venoco), also a lessee of state oil and gas leases offshore of the County of Santa Barbara, surrendered its leases to the state and then declared bankruptcy in Delaware. Venoco failed to plug-and-abandon 32 wells across its leases or to decommission Platform Holly and its associated facilities.
7. The Venoco and RILP bankruptcies allowed the two companies to avoid the costs of lease and permit compliance and decommissioning. Due to the bankruptcy protections provided in federal law, the state, largely the commission as lessor, ultimately had to take over the plugging-and-abandonment of wells, and decommissioning and site restoration efforts in order to ensure public and environmental health and safety.
8. The Venoco and RILP bankruptcies have cost the state’s taxpayers more than $200M in appropriated General Fund thus far. The state is likely to incur further significant expenses associated with the final disposition of Platform Holly and Rincon Island.
9. Because Venoco quitclaimed its leases prior to filing bankruptcy, Venoco was able to convert its obligations to permanently plug-and-abandon its wells and decommission and restore the site to an unsecured claim. All secured claims would be paid in bankruptcy before the unsecured ones which makes it likely the state would not receive full reimbursement for its expenses.
10. Similarly, RILP was able to largely escape its obligations to plug-and-abandon wells and decommission and restore the site through federal bankruptcy protections.
11. In addition to these two specific offshore examples, there are approximately 40,000 idle wells onshore currently. Recent estimates suggest that the cost to plug-and-abandon idle and certain other wells, should their operators declare bankruptcy, is on the order of billions of dollars^[1]. Indemnification bonds held to offset this expense were on the order of $107M in 2020^[2] - far less than the potential need.
12. The risk remains that the oil and gas companies could use bankruptcy as a strategy to get out of their decommissioning obligations. These risks are not unique to California. For example, the recent Bipartisan Infrastructure Law signed into law by President Biden provides $4.7B for the plugging and abandonment of orphan wells and site remediation and restoration on federal, tribal, state, and private lands.
13. On January 31, 2019, the Supreme Court of Canada held that, consistent with an order of the Alberta State regulator, a bankruptcy debtor had to comply with end-of-life abandonment obligations prior to any distribution to creditors (Orphan Well Association v. Grant Thornton Ltd. (2019) SCC 5).

PROPOSED LAW

This measure would urge the President of the United States and the United States Congress to modify bankruptcy rules to provide, in the event of liquidation and termination of oil and gas leases under the United States Bankruptcy Code, that priority is given to plug and abandonment and restoration obligations, to protect the environment, over all secured creditor claims, and to treat the plug and abandonment and lease restoration obligations as nondischargeable obligations.

This measure would include numerous legislative findings describing the Venoco and RILP bankruptcies and the risks to the state’s taxpayers stemming from onshore idle and orphan wells, among other findings.

ARGUMENTS IN SUPPORT

According to the author, “My district bore the brunt of a 2021 oil spill off the Huntington Beach shore from an undersea pipeline serving offshore oil platforms.  Our beaches were blackened with oil, fish and coastal wildlife were sickened or killed, sensitive coastal habitats were harmed, and the local small businesses dependent on a clean coastline suffered significant economic losses.  Those responsible for the spill continue to be held to account financially.” 

“Unfortunately, farther up the coast other operators recently found it in their best interest to declare bankruptcy and walk away from dozens of oil wells, and associated equipment and infrastructure.  The bankruptcies of Venoco and Rincon Island Limited Partners have cost the state’s General Fund over $200 million so far.  This doesn’t even include the onshore costs to address orphan wells, which is estimated to be in the billions of dollars.  In Alberta, Canada, the obligation to plug-and-abandon oil wells, decommission associated equipment and infrastructure, and remediate the site is no longer dischargeable in bankruptcy.  This resolution asks our federal government to make that change to bankruptcy law too and improve the state’s position as a creditor in bankruptcy.”

ARGUMENTS IN OPPOSITION

None received

COMMENTS

Bankruptcy appears to provide a pathway for oil and gas companies to shift decommissioning responsibilities to the state and public. While recent legislative efforts have provided authority to CalGEM and the commission to seek additional funds for indemnification, it remains unclear that implementation has been consistent. In some instances, the commission is precluded from obtaining additional indemnification due to the original lease terms.

Venoco and Rincon Island bankruptcies. Venoco filed for Chapter 11 in Delaware, and Rincon Island filed for Chapter 7 in Texas. (There is a further discussion of federal bankruptcy by the Senate Judiciary Committee below.) According to the commission, the bankruptcy code prioritizes repayments to creditors, and administrative and attorney fees over satisfying lease obligations. In both bankruptcies, the commission’s costs to fulfill the lease terms were not prioritized.

State of decommissioning efforts. Full plugging-and-abandonment of the wells at Platform Holly should be completed in the fall of 2024, and an Environmental Impact Report (EIR) will subsequently be developed for decommissioning the platform. A draft EIR was recently released to address the next phase of decommissioning at Rincon Island. It is worth noting that the commission was able to negotiate with ExxonMobil – the predecessor lessee to Venoco – to require ExxonMobil to decommission Platform Holly and most of the related infrastructure and production facilities at its expense. However, at Rincon Island – due again to a bankruptcy – there was no viable predecessor lessee and the state will be responsible for all decommissioning costs.

Oil industry financial security. According to the commission, there have been nearly 40 bankruptcy filings by oil and gas lessees operating on the Outer Continental Shelf in the past 20 years. More than 260 oil and gas companies have filed for Chapter 11 bankruptcy since 2015. There are 11 remaining actively producing offshore oil and gas leases in California. Despite the state’s best efforts, a lessee could, in the future, file for bankruptcy and circumvent their decommissioning responsibilities, shifting hundreds of millions of dollars of well plug and abandonment and decommissioning costs to taxpayers.

The Senate Judiciary Committee has provided the following comment regarding bankruptcy. Bankruptcy is intended to provide certain insolvent debtors with a “fresh start.” (E.g., Grogan v. Garner (1991) 498 U.S. 279, 286.) Broadly speaking, bankruptcy gives persons and entities an orderly process in which the court oversees the distribution of the debtor’s assets to their various creditors. In a Chapter 11 bankruptcy case, the goal is to allow the debtor-entity to reorganize and resume business, which may involve a restructuring or discharge of the entity’s debts, or a change in the entity’s ownership or organizational structure. In a Chapter 7 case, the purpose is liquidation: a debtor-entity’s assets will be entirely liquidated, and an individual debtor’s assets will be distributed to the greatest extent possible in exchange for a discharge from all remaining liabilities. (See 11 U.S.C. § 727.)

Bankruptcy law is exclusively federal: the U.S. Constitution gives Congress the authority to “establish…uniform Laws on the subject of Bankruptcies throughout the United States.” (U.S. Const., art. I, § 8.) Congress, therefore, has the sole power to establish the priorities and exemptions that govern the bankruptcy process. (For example, child support, alimony, and most student loans cannot be discharged in bankruptcy (11 U.S.C. § 523), which significantly hinders the ability of individuals to obtain the intended “fresh start.”) Accordingly, as acknowledged by this resolution, only Congress has the authority to make the statutory changes necessary to ensure that priority is given to a debtor’s outstanding plug and abandonment and restoration obligations.

SUGGESTED AMENDMENTS: none

SUPPORT

Azul

California Coastal Protection Network

California Environmental Voters

California State Lands Commission

Environment California

Environmental Defense Center

Orange County Coastkeeper

Surfrider Foundation

OPPOSITION

None received

-- END --

1. A 2020 report by the California Council on Science and Technology (CCST) (Orphan wells in California) estimated total costs of plugging-and-abandonment of wells and the decommissioning of associated equipment of up to $9B. A 2023 report by the Carbon Tracker Initiative (There will be blood: Decommissioning California’s oil fields) estimated total costs – including inflation and site remediation – for all wells to be on the order of $22B. The assumptions made to estimate the costs vary between the two reports. ↑

2. Data are from the 2020 CCST report, Orphan wells in California. ↑