BILL ANALYSIS                                                                                                                                                                                                    





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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) 3106).

          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 3204, 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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