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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