BILL ANALYSIS                                                                                                                                                                                                    



                                                                            



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                                    THIRD READING


          Bill No:  SB 665
          Author:   Wolk (D)
          Amended:  4/30/13
          Vote:     21

           
           SENATE NATURAL RESOURCES AND WATER COMMITTEE  :  7-2, 4/23/13
          AYES:  Pavley, Evans, Hueso, Jackson, Lara, Monning, Wolk
          NOES:  Cannella, Fuller

           SENATE APPROPRIATIONS COMMITTEE  :  Senate Rule 28.8


           SUBJECT :    Oil and gas:  drilling:  indemnity bonds

           SOURCE  :     Author


           DIGEST  :    This bill increases the statutory minimum amount for  
          indemnity bonds that companies engaged in oil and gas drilling  
          in California are required to file with the Division of Oil, Gas  
          and Geothermal Resources (DOGGR).

           ANALYSIS  :   Existing law requires an operator of an oil or gas  
          well, or a well located on submerged lands under ocean waters,  
          who engages in the drilling, redrilling, deepening, or in any  
          operation altering the casing, of any well, to file with the  
          State Oil and Gas Supervisor an indemnity bond in an amount  
          based on the depth of the well or a blanket indemnity bond in a  
          specified amount, but permits the operator, with the approval of  
          the supervisor, to make certain deposits in lieu of the bond.


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          This bill:




          1. Increases the statutory minimum amount for indemnity bonds  
             that companies engaged in oil and gas drilling in California  
             are required to file with DOGGR Oil & Gas Supervisor  
             (Supervisor), and to be filed with the Supervisor at the time  
             of the filing of the notice of intention to perform work on a  
             well, as specified.


          2. Increases the statutory minimum amount for indemnity bonds as  
             follows:


                   Raises the individual oil and gas well bond to  
                $100,000.


                   Raises the blanket cash bond or blanket surety bond  
                (not including idle wells) to $2,000,000 and restricts the  
                availability to operators with 20 or more wells.


                   Raises the blanket well bond for all wells owned by an  
                operator, including idle wells, to $5,000,000.

                   Raises the offshore blanket well bond to $1,000,000.

           Background
           
          The DOGGR is located within the California Natural Resources  
          Agency and is the state's oil and gas regulator.  The Supervisor  
          has broad authority to regulate the drilling, operation,  
          maintenance and abandonment of wells to prevent damage to life,  
          health, property and natural resources.

          Since 1939, the Legislature has required oil and gas well  
          operators to provide indemnity bonds whenever they drill,  
          redrill, deepen, or otherwise permanently alter a well.  These  
          bonds serve to ensure that any possible environmental damage  
          caused by the drilling can be repaired, particularly in the  

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          event that an operator becomes insolvent, deserts the well, or  
          is otherwise unavailable or incapable of cleaning up any damage  
          that may have been caused.  The bonds are returned to the well  
          operator when all drilling activities have ceased and the well  
          becomes operational.

          Well operators currently may fulfill this bonding requirement in  
          one of two ways.  They may post an individual bond for each  
          well, with the required amount varying depending on the depth of  
          the well.  This is because the possibility of blow-outs, aquifer  
          contamination, and other catastrophic accidents increases as  
          wells go deeper, due to increased pressure and temperature.

          The other option is to post a blanket indemnity bond for all the  
          wells an operator may be drilling, as well as for idle wells.   
          An idle well is a well that has not been used for a continuous  
          six-month period during the past five years.  For an operator  
          with 50 or fewer wells, a limited blanket bond with no idle well  
          coverage is $100,000; for an operator with over 50 wells it is  
          $250,000.  Current law also allows an operator to post a bond  
          for $1,000,000 to cover all idle well requirements, no matter  
          how many wells in California are being drilled by the operator.

          The current bonding levels have not been adjusted since 1998.   
          DOGGR acknowledged that the bond levels are too low in a  
          November 2012 letter to the U.S.  Environmental Protecting  
          Agency (EPA), in response to an EPA audit of DOGGR's oversight  
          of California's underground injection program.  

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

           SUPPORT  :   (Verified  5/13/13)

          Environmental Working Group
          Natural Resources Defense Council
          Sierra Club California

           OPPOSITION  :    (Verified  5/13/13)

          California Independent Petroleum Association

          ARGUMENTS IN SUPPORT  :    According to the author, "these current  
          bonding requirements were enacted into law in 1999.  It may now  

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          be necessary to increase these requirements to ensure that  
          adequate funds are 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  :    According to the California  
          Independent Petroleum Association, "A twenty fold increase in  
          bonding levels has not been justified. We are unaware of what  
          the problem is that the author is trying to fix or what the  
          justification is for such a high amount.  Bonding levels should  
          be based on actuarial figures, not made up for political  
          purposes.

          "There are over 300 oil and gas operators in the State of  
          California. Except for a handful, the rest are small family  
          operators who have had production passed down for generations.   
          Most have stripper wells making less than 10 barrels of  
          production per day.  Many with a small number of wells will  
          likely have to shut down operations or sell to bigger operations  
          that can handle the additional bonding load.  This would also  
          hit hard on natural gas producers that have seen historical low  
          prices for several years.

          "There are already several bonding requirements in place.  DOGGR  
          has the ability to require life of the well and life of the  
          facility bonds on operators who have a history of non-compliance  
          with regulations.  Industry supported legislation to address  
          orphan and idle wells and orphan facilities.  Operators pay into  
          a fund that is used to properly abandon wells and facilities in  
          the event there is no owner to assume responsibility."  
           

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          RM:d  5/15/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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