BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 665
                                                                  Page 1

          Date of Hearing:  August 12, 2013

                       ASSEMBLY COMMITTEE ON NATURAL RESOURCES
                                Wesley Chesbro, Chair
                     SB 665 (Wolk) - As Amended:  August 5, 2013

           SENATE VOTE  :  26-12
           
          SUBJECT  :  Oil and gas: drilling:  wells

           SUMMARY  :  Increases the statutory amount for indemnity bonds  
          that an oil and gas well operator is required to file with the  
          Division of Oil, Gas and Geothermal Resources (DOGGR) for its  
          well operations.

           EXISTING LAW  :

          1)Requires the DOGGR to supervise the drilling, operation,  
            maintenance, and abandonment of wells and the operation,  
            maintenance, and removal or abandonment of tanks and  
            facilities attendant to oil and gas production, including  
            certain pipelines that are within an oil and gas field, so as  
            to prevent, as far as possible, damage to life, health,  
            property, and natural resources; damage to underground oil and  
            gas deposits from infiltrating water and other causes; loss of  
            oil, gas, or reservoir energy; and damage to underground and  
            surface waters suitable for irrigation or domestic purposes by  
            the infiltration of, or the addition of, detrimental  
            substances.

          2)Requires the operator of any oil and gas well, before  
            commencing the work of drilling the well, to file with DOGGR a  
            written notice of intention to commence drilling.  Prohibits  
            the commencement of drilling until approval is given by DOGGR.  
             If DOGGR fails to give the operator written response to the  
            notice within 10 working days from the date of receipt,  
            requires that failure to be considered an approval of the  
            notice.

          3)Requires an oil and gas well operator who engages in the  
            drilling, redrilling, deepening, or in any operation  
            permanently altering the casing, of a well to file with DOGGR  
            an individual indemnity bond for the well.  Requires the  
            indemnity bond to be $15,000 for each well less than 5,000  
            feet deep, $20,000 for each well at least 5,000 feet but less  








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            than 10,000 feet deep, and $30,000 for each well 10,000 or  
            more feet deep.  Requires the bond to be filed with DOGGR at  
            the time of the filing of the notice of intention to perform  
            work on the well. 

          4)Authorizes an oil and gas well operator who engages in the  
            drilling, redrilling, deepening, or in any operation  
            permanently altering the casing, of one or more wells at any  
            time, to file with DOGGR one blanket indemnity bond to cover  
            all of the operations in any of its wells in the state in lieu  
            of an individual indemnity bond for each operation.  Requires  
            the bond to be provided in one of the following amounts, as  
            applicable:

             a)   The sum of $250,000;

             b)   The sum of $100,000 for any operator having 50 or fewer  
               wells in the state; or

             c)   The sum of $1,000,000, which also includes the bond or  
               fee required for idle mines.

          5)Requires a person who engages in the drilling, redrilling,  
            deepening, or in any operation permanently altering the  
            casing, of one or more wells located on submerged lands under  
            ocean waters within the jurisdiction of this state, to file  
            with DOGGR a blanket indemnity bond for $250,000 to cover all  
            his or her operations in drilling, redrilling, deepening, or  
            permanently altering the casing in any of his or her wells  
            located on those submerged lands.  In addition to the $250,000  
            blanket indemnity bond, requires any person who operates one  
            or more wells that are located on tide or submerged lands  
            within the jurisdiction of this state to provide an additional  
            amount of security acceptable to DOGGR that covers the full  
            costs of plugging and abandoning all of the operator's wells.   


          6)Requires a person who engages in the operation of a Class II  
            commercial wastewater disposal well to file an indemnity bond  
            with DOGGR for $50,000 for each well so used.  Authorizes the  
            bond to be terminated and canceled and the surety be relieved  
            of all obligations thereunder when the well is properly  
            abandoned or another valid bond has been substituted therefor.

          7)Authorizes an individual or blanket indemnity bond for an oil  








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            and gas well(s) to be terminated and canceled and the surety  
            be relieved of all obligations thereunder when the well(s)  
            covered by such bond have been "properly completed" or  
            "properly abandoned" or another valid bond has been  
            substituted therefor.  Establishes that a well is "properly  
            completed" when it has been shown, to the satisfaction of  
            DOGGR, that the manner of producing oil or gas or injecting  
            fluids into the well is satisfactory and that the well has  
            maintained production of oil or gas or injection for a  
            continuous six-month period.  Establishes that a well is  
            "properly abandoned" when it has been shown, to the  
            satisfaction of DOGGR, that all proper steps have been taken  
            to isolate all oil-bearing or gas-bearing strata encountered  
            in the well, and to protect underground or surface water  
            suitable for irrigation or farm or domestic purposes from the  
            infiltration or addition of any detrimental substance and to  
            prevent subsequent damage to life, health, property, and other  
            resources.

           THIS BILL  :

          1)Increases the individual indemnity bond amount to $100,000 for  
            each well, regardless of well depth.

          2)Increases the amount of wells an operator must have to be  
            eligibile for a blanket indemnity bond to 20 or more wells.   
            Increases the blanket indemnity bond amount to $2,000,000,  
            regardless of number of wells.  Increases the blanket  
            indemnity bond amount for a bond that includes the bond or fee  
            required for idle wells to $5,000,000. 

          3)Increases the class II commercial wastewater disposal well  
            indemnity bond amount to $100,000.

           FISCAL EFFECT  :  According to the Senate Appropriations  
          Committee, pursuant to Senate Rule 28.8, negligible state costs.




           COMMENTS  :  

           Purpose of the Bill.   According to the author, the purpose of  
          this bill is to update outdated indemnity bonds requirements "to  
          ensure that adequate funds are available to address any  








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          environmental clean-up needs that may arise when a well is  
          drilled or redrilled." 

           Background.   Pursuant the Public Resources Code, DOGGR is  
          responsible for supervising the drilling, operation,  
          maintenance, and abandonment of oil and gas wells in the state  
          so as to prevent, as far as possible, damage to life, health,  
          property, and natural resources, including underground and  
          surface waters suitable for irrigation or domestic purposes.  As  
          part of this duty, DOGGR is also required to permit the owners  
          or operators of a well to utilize all suitable methods and  
          practices known to the oil industry for the purpose of  
          increasing the ultimate recovery of underground hydrocarbons.

          For wells that inject fluids associated with oil and natural gas  
          production operations (Class II wells), DOGGR's authority stems  
          specifically from the Public Resources Code and the federal Safe  
          Drinking Water Act (SDWA).  The SDWA requires the United States  
          Environmental Protection Agency (U.S. EPA) to develop minimum  
          federal requirements for the UIC program, which is designed to  
          control the injection of wastes into "underground sources of  
          drinking water."  Under the SDWA, a state may have primary  
          enforcement responsibility if it adopts and implements a UIC  
          program that meets federal requirements.  DOGGR received primary  
          enforcement responsibility for Class II wells through an  
          agreement with the U.S. EPA in the early 1980s.  DOGGR maintains  
          this responsibility until either it transfers it back to the  
          U.S. EPA or the U.S. EPA determines that the state program is  
          not in compliance with the SDWA.

          Under DOGGR's Class II UIC primacy program, an oil and gas well  
          operator may demonstrate financial responsibility by filing an  
          individual indemnity or cash bond for each well drilled or a  
          blanket bond covering all well operations.  Individual bonds are  
          normally released after an injection well has injected fluids  
          for a six-month continuous period if DOGGR is satisfied that a  
          well is mechanically sound.  Blanket bonds are normally not  
          released until all of the operator's wells are abandoned or  
          until the operator specifically requests the release of a well  
          from bond coverage.  After the release of a bond, DOGGR still  
          has the authority to order an operator to perform remedial or  
          corrective work on a well.  

          The current bond amounts required for Class II wells were  
          established by legislation in 1998 (SB 1763, Costa).








                                                                  SB 665
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           U.S. EPA Audit.   In the spring of 2010, U.S. EPA undertook a  
          comprehensive review of DOGGR's implementation of the Class II  
          UIC primacy program.  The goals of this program evaluation were  
          to review how DOGGR oversees and manages the permitting,  
          drilling, operation, maintenance and plugging/abandonment of  
          Class II wells and to identify program implementation  
          recommendations.

          The final report for this review was released in 2011, which  
          indicated that there are several program deficiencies and areas  
          for improvement.  One issue raised in the report is whether the  
          required indemnity bond amounts for Class II wells are  
          sufficient.  The report concluded that the current bond  
          requirements, which, as mentioned above, were established in  
          1998, "are probably not adequate to cover the full cost to plug  
          and abandon a well when that becomes necessary.

          On November 16, 2012, DOGGR submitted an "Underground Injection  
          Control Action Plan" to the U.S. EPA in response to the 2011  
          report.  In this action plan, DOGGR stated that "[the bonding]  
          amounts are outdated and therefore insufficient."  The action  
          plan also state's DOGGR's desire to increase the bond to a  
          reasonable level.  The author of this bill has consulted DOGGR,  
          the surety bond industry, and has reviewed information from  
          other oil and gas producing states to arrive at the amounts  
          proposed in this bill.

           Orphan Well Program.   Members of the oil and gas industry assert  
          that the state's orphan well program is a sufficient backup plan  
          when there are well problems and a bond or the operator cannot  
          cover the costs of addressing the problems.  DOGGR, however, is  
          limited in how much it can spend each year on orphan wells and  
          has an orphan well wait list.  Moreover, excessively low bonding  
          amounts do not allow DOGGR quick access to abandonment and  
          remediation funds.  And insufficient bonding, or lack of  
          bonding, removes an incentive for operators to properly plug and  
          abandon wells.  Therefore, some marginal operators may decide it  
          is easier to walk away from a well rather than incur the  
          plugging and abandonment cost.   

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           








                                                                  SB 665
                                                                  Page 6

          Clean Water Action
          Environmental Working Group
          Natural Resources Defense Council
          Sierra Club California
           
            Opposition 
           
          California Independent Petroleum Association
          Vern Jones Oil & Gas Corporation


           Analysis Prepared by  :  Mario DeBernardo / NAT. RES. / (916)  
          319-2092