BILL ANALYSIS Ó 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 SB 665 Page 2 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 SB 665 Page 3 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 SB 665 Page 4 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 Page 5 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