SB 665 Senate Bill - Bill Analysis

BILL ANALYSIS с

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| SENATE COMMITTEE ON NATURAL RESOURCES AND WATER |
| Senator Fran Pavley, Chair |
| 2013-2014 Regular Session |
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BILL NO: SB 665 HEARING DATE: April 23, 2013
AUTHOR: Wolk URGENCY: No
VERSION: April 16, 2013 CONSULTANT: Katharine Moore
DUAL REFERRAL: No FISCAL: Yes
SUBJECT: Oil and gas: drilling: indemnity bonds.

BACKGROUND AND EXISTING LAW
The Division of Oil, Gas and Geothermal Resources (division) is
located within the California Natural Resources Agency and is
the state's oil and gas regulator. The division's Oil and Gas
Supervisor has broad authority to regulate the drilling,
operation, maintenance and abandonment of wells to prevent
damage to life, health, property and natural resources (Public
Resources Code (PRC) ї3106).

Existing law requires well operators to file individual well or
blanket indemnity or cash bonds with the division prior to
drilling, re-drilling, deepening, or certain other operations on
oil and gas or related wells. These include operating a Class
II commercial waste water disposal well and maintaining a well
that has been idle for five or more years. There are two types
of bonds - individual well bonds or blanket bonds covering
multiple wells. The bonds are to secure the state government
against all losses, charges and expenses incurred to obtain
compliance with the law. According to the division, bonds are
generally forfeited to the state when an operator fails to
appropriately plug and abandon a well and in specified other
circumstances (e.g. failing to clean up a spill).

The bond amounts are as follows (PRC її3204, 3205, 3205.1,
3205.2, 3206):
$15,000, $20,000 or $30,000 for individual onshore
wells. The amount depends upon the depth of the well
(deeper wells require the larger bond).
$100,000, $250,000 or $1,000,000 blanket bonds for
onshore wells. The $100,000 bond is for 50 or fewer wells,
and the $250,000 amount is for more than 50. The
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$1,000,000 blanket bond is for all wells and includes idle
well coverage.
$250,000 blanket bond for offshore wells.
$50,000 for an individual Class II commercial waste
water disposal well (one Class II commercial well may be
covered under either the $250,000 or $1,000,000 blanket
bond).
$5,000 for maintaining an individual well that has been
idle for 5 or more years, although there are specified
alternatives available in lieu of a bond.

In general, the division releases individual well bonds when the
well is plugged and abandoned or when its operations are in
compliance with the division's rules and regulations. These
bonds may be released when the well is "completed" which means
it has been in operation continuously for 6 months. By
contrast, for a Class II disposal well, the bond is released
only when the well is plugged and abandoned. For blanket bonds,
the bond is released when no wells need coverage. After the
release of the bond, the division retains the authority to
require an operator to fix a well and may also order the
abandonment of a well. Operators with a "substantial history"
of non-compliance may be required to file life-of-well bonds.
The division operates a well abandonment program to properly
shut down and abandon wells where there is no viable operator.

In 1998, the Legislature passed SB 1763 (Costa, c. 1068,
Statutes of 1998) which modified the bond amounts and types of
coverage provided by the bonds. The amount of the indemnity
bonds is set in statute. The bond amounts have not changed
since, although in 2010 SB 550 (Florez) sought to increase bond
amounts and modify the conditions governing the bonds.

PROPOSED LAW
This bill would:
Raise the individual oil and gas well bond to $100,000.
Raise the blanket well bond (not including idle wells)
to $2,000,000 and restrict the availability to operators
with 20 or more wells.
Raise the blanket well bond for all wells owned by an
operator and including idle wells to $5,000,000.
Raise the offshore blanket well bond to $1,000,000.

ARGUMENTS IN SUPPORT
According to the author, "these current bonding requirements
were enacted into law in 1999. It may now be necessary to
increase these requirements to ensure that adequate funds are
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available to address any environmental clean-up needs that may
arise when a well is drilled or redrilled."

The Natural Resources Defense Council concurs and adds "? the
bond is supposed to be protecting [the division] from having to
expend significant public funds when responding to oil and gas
drilling or production violations. The bonding requirement is a
good policy tool to attempt to shift the financial burden of
responding to such violations from the state to the oil and gas
drillers." They continue, "the problem is that the bonding
levels in California are too low and do not adequately protect
the public from expenditures to remedy violations related to oil
and gas wells." Additionally, "these increases are long overdue
and will better offset the state's costs for responding to oil
and gas well violations."

ARGUMENTS IN OPPOSITION
None received.

COMMENTS
This bill is a work-in-progress . Discussions between committee
staff and the author's office indicate that research is on-going
regarding aspects of the oil, gas and related well bonding
requirements, including, for example, appropriate bond release
conditions. The committee may wish to both direct staff to
continue working with the author and to hear this bill again
should substantive changes be made to this bill in the future.
Amendment 1 is a technical correction to replace language
inadvertently deleted.

The division acknowledges that the bond "amounts are outdated
and therefore insufficient." In the response to a recent audit
of part of the division's oil and gas and related well program
(described in more detail below), the division plainly states
this point.

In California, the division's data indicate wells were cleaned
up for as little as a few thousand dollars per well to as much
as $340,000.

The division provided tabulated data to legislative staff
detailing its well abandonment program from FY 1999/2000 through
the start of FY 2012/2013. In aggregate, the division plugged
and abandoned approximately 683 wells of which only 305 had
funds available to offset the division's expenses (e.g.
forfeited bonds or other settlements). Of these, only about 84
had sufficient funds available to fully cover the division's
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costs. Put another way, the cost to the division over this time
period was roughly $16 million and the division was able to
collect only about $2.6 million to defray these costs. The
existing arrangement does not pay all of its bills.

Time for existing blanket well bond providers to comply .
Previously, when blanket bond amounts were raised for smaller
operators, the operators were given 2 years to comply. The
committee may wish to retain that policy (Amendment 2).

Bond data for California . Data recently provided by the
division showed that the 480+ well owners or operators had 224
active bonds for the 50,000+ oil and gas and related wells in
California (2012 data). The total bond amount is about $40.4
million and fully half of the amount is comprised of the blanket
bonds carried by 20 large operators (e.g. Chevron and Aera,
among others). Small operators could have only one well covered
by a $10,000 - $30,000 bond. In contrast, Chevron, for example,
had 17,090 producing and 4,714 shut-in wells covered by its
single $1,000,000 bond in 2009.

Other state bonding requirements . There is a wide-range of both
individual and blanket bond amounts assessed at the state level.
Some states require individual bonds that increase with the
depth of the well and some do not. Some provide for blanket
bonds and, again, some do not. The terms of the blanket bonds
vary between states. Most states who have considered the issue
recently have raised their well bond amounts.

The bond amounts for individual wells vary from as little as
$500/well (Kentucky) to up to $250,000/well (New York). Wyoming
is reasonably typical at $10,000 - $20,000/well. Blanket bond
amounts, although generally higher, also cover a broad range
from $25,000 to $2,000,000 (New York).

In New York, stakeholders have proposed raising the individual
bond amount to $100,000 and the blanket to $5 million per
operator.

June 2011 US EPA audit of the division's underground injection
control (UIC) well program . The division operates the Class II
UIC program in California under a primacy agreement with the US
EPA. A 2011 audit by the US EPA noted several significant
deficiencies in the division's performance.

Relevant to this bill, the US EPA specifically indicated the
bond amounts for Class II commercial disposal wells "may not be
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adequate to cover the full cost to plug and abandon some
commercial Class II injection wells." Additionally, the US EPA
recommended using third-party estimates of plugging and
abandonment costs, as well as periodic review and adjustment of
bond amounts to ensure adequate funding to plug and abandon
wells. The audit further noted that the release after 6 months
of the bond is "inconsistent with federal UIC regulations which
require a well to be properly plugged and abandoned" before the
bond is released.

SUGGESTED AMENDMENTS

AMENDMENT 1
Page 2, between lines 22 and 23, add:

"The bond shall be filed with the supervisor at the time of
the filing of the notice of intention to perform work on
the well, as provided in Section 3203.The bond shall be
executed by the operator, as principal, and by an
authorized surety company, as surety, conditioned that the
principal named in the bond shall faithfully comply with
all the provisions of this chapter, in drilling,
redrilling, deepening, or permanently altering the casing
in any well or wells covered by the bond, and shall secure
the state against all losses, charges, and expenses
incurred by it to obtain such compliance by the principal
named in the bond."

AMENDMENT 2
Page 3, delete lines 16 - 29, inclusive and replace with:

"(a) the sum of two million dollars ($2,000,000), which
does not include the bond or fee required in Section 3206.
A blanket cash bond or blanket surety bond provided prior
to January 1, 2014 shall be increased to comply with this
subdivision on or before January 1, 2016."

SUPPORT
Environmental Working Group
Natural Resources Defense Council
Sierra Club California

OPPOSITION
None Received
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